10-Q 1 p63984e10-q.txt 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000 COMMISSION FILE NUMBER 0-19393 LIFEMARK CORPORATION (Exact name of registrant as specified in its charter) ~~DELAWARE 36-3338328 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)~~

7600 NORTH 16TH STREET SUITE 150 PHOENIX, ARIZONA 85020 (Address of principal executive offices) (Zip Code) 602-331-5100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ There were 5,157,694 shares of common stock outstanding as of September 30, 2000. 2 TABLE OF CONTENTS

2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LIFEMARK CORPORATION CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements. 3 4 LIFEMARK CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

The accompanying notes are an integral part of these statements. 4 5 LIFEMARK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these statements. 5 6 LIFEMARK CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care Solutions, Inc., is a provider of health plan and care management service to high risk populations, including vulnerable, frail, elderly and chronically ill individuals on a national basis. Based in Phoenix, Arizona, Lifemark has regional offices in Arkansas, California, Indiana, Michigan, New Mexico and Texas. Two subsidiaries of the Company, Ventana Health Systems, Inc. ("Ventana") and Arizona Health Concepts, Inc. ("AHC"), derive substantially all of their revenues through contracts with the Arizona Health Care Cost Containment System Administration ("AHCCCSA") to provide specified long-term and primary care health services, respectively, to qualified members. The contract periods expire September 30, 2001 and September 30, 2002 for Ventana and AHC, respectively. In June 2000, Ventana was awarded a contract for Maricopa County which began on October 1, 2000 and expires September 30, 2003. Each contract provides for fixed monthly premiums, based on negotiated per capita enrollee rates. Ventana and AHC subcontract with nursing homes, hospitals, physicians, and other medical providers within Arizona to care for Arizona Health Care Cost Containment System ("AHCCCS") members. Effective July 17, 2000, Ventana and AHC began conducting business as Lifemark Health Plans. In October 2000, the Company decided to terminate the operations of AHC. Pursuant to the company's contract with AHCCCSA, a notification and transition will take place with the cessation of operations expected to occur by January 31, 2001. Management is currently in the process of formalizing its plans to effect this decision. AHC contributed revenues of $5,596,000 and $4,764,000 for the periods ended August 31, 2000 and 1999, respectively, and incurred net losses of $142,000 and $113,000, respectively, for the same periods. Lifemark of Texas, Inc., another subsidiary of the Company, derives substantially all of its revenue through a contract with Rio Grande HMO, Inc. ("RGHMO"), a subsidiary of Health Care Service Corporation ("HCSC"), to share financial risk in the State of Texas' STAR+PLUS program contract in Harris County, Texas. NOTE 2 - NET INCOME PER SHARE Net income per share - basic is computed by dividing net income by the weighted average number of common shares outstanding during each period. Net income per share assuming dilution is computed by dividing net income by the weighted average number of common shares outstanding during the period after giving effect to dilutive stock options and warrants and adjusted for dilutive common shares assumed to be issued on conversion of the Company's convertible loans. The following is the computation of the reconciliation of the numerators and denominators of net income per common share - basic and net income per common share - assuming dilution in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". 6 7

NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE Third party accounts and notes receivable and unbilled services consist of the following:

The amount due from RGHMO primarily represents revenue earned by Lifemark of Texas, Inc., which has contracted with RGHMO, a subsidiary of Health Care Services Corporation, as successor to Blue Cross Blue Shield of Texas. The amounts due from AHCCCSA primarily include billed and unbilled reinsurance, SOBRA and capitation receivables. 7 8 NOTE 4 - RESTRICTIONS ON FUND TRANSFERS Certain of the Company's operating subsidiaries are subject to state regulations, which require compliance with certain net worth, reserve and deposit requirements. To the extent the operating subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to the parent organization, Lifemark. Net assets of subsidiaries (after inter-company eliminations) which, at August 31, 2000, may not be transferred to Lifemark by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party are referred to as "Restricted Net Assets". Total Restricted Net Assets of these operating subsidiaries were $9,976,000 at August 31, 2000, with deposit and reserve requirements (performance bonds) representing $7,872,000 of the Restricted Net Assets and net worth requirements, in excess of deposit and reserve requirements, representing the remaining $2,104,000. NOTE 5 - BUSINESS SEGMENTS The Company's principal business segments are: - Health Plan Operations - Risk Contracts, which is engaged in the business of administering risk-based managed care plans and programs in two states. The segment is comprised of the operations of Ventana, AHC and Lifemark of Texas. - Health Plan Operations - Management Contracts, which is engaged in the management of managed care plans and programs in three states. The segment is comprised of the contracts with AlohaCare, Community Choice Michigan and Lovelace Community Health Plan. The Company has grouped all other services within the Diversified Services segment. This category consists of the operations in California and Indiana, as well as the operations of Lifemark at Home and Lifemark Care Connection. During fiscal year 2000, the Company modified the structure of its internal organization in a manner that caused the composition of its reportable segments to change. As such, segment information for previously reported periods has been restated to reflect this change. Following is a tabulation of business segment information for the three month periods ended August 31, 2000 and 1999. Corporate allocations have been provided on a consistent basis. Information concerning operations by business segment follows:

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NOTE 6 - SUBSEQUENT EVENTS On October 10, 2000, the Company announced that it will merge with EverCare, an operating unit of Ovations, which is a subsidiary of UnitedHealth Group. Lifemark shareholders will be entitled to receive shares of UnitedHealth Group Common Stock having a value of $63 million or $10.55 per Lifemark share on a fully diluted basis, so long as the average ten-day closing price of UnitedHealth Group stock immediately preceding the transaction close remains at or between $95.00 and $113.00 per share. In the event the average ten-day closing price of UnitedHealth Group stock immediately preceding the transaction close is above $113 per share, Lifemark shareholders will receive a total of 557,500 UnitedHealth Group shares and the merger consideration may thereby increase based on UnitedHealth Group's stock appreciation above $113.00. If the average ten-day closing price of UnitedHealth Group stock immediately preceding the transaction is at or between $88.00 and $95.00 per share, the value Lifemark shareholders will receive will decrease proportionately from $63 million or $10.55 per share to $60 million or $10.08 per share. If the average ten-day closing price of UnitedHealth Group Common Stock preceding the transaction close is below $88.00 per share, UnitedHealth Group has the option to pay $10.08 per share of merger consideration in either cash or shares of UnitedHealth Group Common Stock. The transaction is subject to approval by Lifemark's shareholders. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Lifemark Corporation ("Lifemark" or the "Company"), formerly Managed Care Solutions, Inc., is involved in a variety of health care programs, many of which serve indigent and Medicaid populations. Two subsidiaries of the Company, Ventana Health Systems, Inc. ("Ventana") and Arizona Health Concepts, Inc. ("AHC"), derive substantially all of their revenues through contracts with the Arizona Health Care Cost Containment System Administration ("AHCCCSA") to provide specified long-term and primary care health services, respectively, to qualified members. The contract periods expire September 30, 2000 and September 30, 2002 for Ventana and AHC, respectively. Each contract provides for fixed monthly premiums, based on negotiated per capita enrollee rates. Ventana and AHC subcontract with nursing homes, hospitals, physicians, and other medical providers within Arizona to care for members. In October 2000, the Company decided to terminate the operations of AHC. Pursuant to the company's contract with AHCCCSA, a notification and transition will take place with the cessation of operations expected to occur by January 31, 2001. Management is currently in the process of formalizing their plans to affect this decision. AHC contributed revenues of $3,596,000 and $4,764,000 for the periods ended August 31, 2000 and 1999, respectively, and incurred net losses of $142,000 and $113,000, respectively, for the same periods. Lifemark of Texas, Inc., another subsidiary of the Company, derives substantially all of its revenue through a contract with Rio Grande HMO, Inc. ("RGHMO"), a subsidiary of Health Care Service Corporation ("HCSC"), to share financial risk in the State of Texas' STAR+PLUS program contract in Harris County, Texas. The Company also provides contract management services to county and state governmental units and other health care organizations. The Company has nine contracts for services, with multi-year terms that contemplate continued renewals, which expire at various dates through the year 2005. RESULTS OF OPERATIONS Consolidated revenues for the three month period ended August 31, 2000 increased 127% over the same period of the previous year to $53,483,000. Direct cost of operations increased 158% over the comparable period of the previous fiscal year to $46,107,000. Direct cost of operations, as a percentage of revenue was 86% for the three month period ended August 31, 2000 versus 76% for the same period of the prior fiscal year. The increase in both revenues and direct costs of operations was primarily due to the financial risk-sharing agreement with RGHMO, as well as growth in enrollment in certain plans covered by management contracts and growth in membership of Ventana and AHC. Health Plan Operations-Risk Contracts. Revenues for the three month period ended August 31, 2000 related to health plan operations-risk contracts increased 259% to $44,418,000 from $12,372,000 from the comparable period of the prior fiscal year. The increase is primarily a result of the financial risk-sharing agreement with RGHMO, which accounted for $26,202,000 of the increase. Also contributing to the increase was the expansion of Ventana into Yuma and Coconino counties, which resulted in an increase of approximately $4,248,000 in revenues. Direct cost of operations for the three month periods ended August 31, 2000 and 1999 included $40,928,000 and $11,541,000, respectively, related to fees generated from risk contracts of health plans and programs. The primary contributor to the increase was the financial risk-sharing agreement with RGHMO, which accounted for $22,700,000, along with growth in enrollment in Ventana and AHC of 60% and 10%, respectively. Direct cost of operations for risk contracts as a percentage of related revenue was 92% for both the three month periods ended August 31, 2000 and 1999. 10 11 Health Plan Operation-Management Contracts. Revenues for the three month period ended August 31, 2000 related to health plan operations - management contracts decreased 34%, from $7,783,000 to $5,172,000 from the comparable period of the prior fiscal year. The decrease was primarily due to the transitional administrative service agreement with AlohaCare, as well as the modification of the contract with RGHMO under which such revenues became part of health plan operations-risk contracts. Direct cost of operations related to health plan operations-management contracts for the three month periods ended August 31, 2000 and 1999 were $2,501,000 and $4,088,000, respectively, representing a 39% decrease. Direct cost of operations as a percentage of related revenue were 48% and 53% for the three month periods ended August 31, 2000 and 1999, respectively. The decrease was largely due to the reduced costs associated with the transitional administrative services agreement with AlohaCare, and the financial risk-sharing agreement with RGHMO, under which those direct costs became part of health plan operations-risk contracts. Diversified Services. Diversified Services, which consists of the operations of Lifemark at Home, Lifemark Care Connection (formerly Advinet), and the contracts in California and Indiana, generated revenues of $3,893,000 and $3,454,000, for the three month periods ended August 31, 2000 and 1999, respectively. The increase of 13% is primarily due to the expansion of Lifemark at Home into Pinal County, along with increases in the other programs. Direct cost of operations related to Diversified Services for the three month periods ended August 31, 2000 and 1999 were $2,679,000 and $2,221,000, respectively, representing an increase of 21%. The principal reason for the increase is the growth in Lifemark at Home operations. Direct cost of operations as a percentage of related revenue was 69% and 64% for the three month periods ended August 31, 2000 and 1999, respectively. The increase is due to the growth in Lifemark at Home, which has a higher cost of operations when compared to the other diversified services. Marketing, Sales and Administrative. Marketing, sales and administrative expenses as a percentage of consolidated revenue for the three month period ended August 31, 2000 decreased from 23% to 12% from the comparable period of the prior year. The decrease in marketing, sales and administrative expenses for the three months ended August 31, 2000 compared with the same quarter of the prior year is primarily a result of Lifemark of Texas entering into the financial risk sharing agreement with RGHMO. Lifemark of Texas, similar to other health plan operations, typically experiences significantly less marketing, sales and administrative expenses as a percentage of related revenue in comparison to an administrative services contract. Interest Income. Interest income for the three month period ended August 31, 2000 was $843,000 versus $255,000 for the same period of the previous year. The increase from 1999 to 2000 is a result of increased levels of cash and investments and the RGHMO Contract. Interest Expense. Interest expense was $121,000 for the three month period ended August 31, 2000 compared to $100,000 for the comparable period of the prior fiscal year. Interest expense is primarily attributable to outstanding debt maintained by the Company which consists of notes with a bank, and the William Brown Trust in the principal amounts of $3,914,000 and $300,000, respectively at August 31, 2000. Income Taxes. Income tax expense was $826,000 and $165,000 for the three month periods ended August 31, 2000 and 1999, respectively. The effective tax rates were 43% and 44%. These rates were higher than the statutory rates for the respective periods, primarily due to the amortization of non-deductible goodwill expenses. Net Income. Net income for the three month periods ended August 31, 2000 and 1999 was $1,096,000 and $214,000, respectively. The primary reasons for the increase in profitability are the amendment in the RGHMO Administrative Services Agreement, under which terms it moved from a management agreement to a risk-sharing agreement, and increases in membership across certain health plans. 11 12 LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased $1,330,000 from $19,205,000 to $17,875,000 for the three months ended August 31, 2000. Operating activities generated $899,000 for the three month period ended August 31, 2000 versus $290,000 in the same period of the previous fiscal year. The primary sources of cash for the three month period ended August 31, 2000 were earnings before non-cash charges and an increase in accrued medical claims for Lifemark of Texas, Ventana and AHC offset by an increase in the amount due from Lifemark of Texas. The primary sources of cash for the three-month period ended August 31, 1999 were earnings before non-cash charges, increases in prepaids and other current assets, partially offset by the decrease in accrued compensation due to an incentive bonus payout. Investing activities used $1,973,000 for the three month period ended August 31, 2000 as compared to $471,000 for the same period of the previous fiscal year. During the three month period ended August 31, 2000, cash was used to purchase $926,000 in capital equipment and $1,092,000 was added to the amount held in restricted funds to meet the AHCCCSA's performance bond requirements with respect to Ventana's contract award in Maricopa County. During the three month period ended August 31, 1999, cash was used to purchase $767,000 of fixed assets and to increase assets securing performance bonds by $220,000, partially offset by cash generated from the maturity of short-term investments of $501,000. Financing activities used $256,000 for the three month period ended August 31, 2000 versus generating $251,000 for the same period of the prior fiscal year. Funds were used to reduce the principal balance on a note held by a bank, offset by the issuance of common stock pursuant to the stock option plan. Funds received pursuant to an interim funding agreement with a bank were the primary source of cash for the three month period ended August 31, 1999. Certain of the Company's operating subsidiaries are subject to state regulations, which require compliance with net worth, reserve and deposit requirements. To the extent the operating subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to Lifemark. Net assets of subsidiaries (after inter-company eliminations) which, at August 31, 2000, may not be transferred to Lifemark by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party are referred to as "Restricted Net Assets". Total Restricted Net Assets of these operating subsidiaries was $9,976,000 at August 31, 2000, with deposit and reserve requirements (performance bonds) representing $7,872,000 of the Restricted Net Assets and net worth requirements, in excess of deposit and reserve requirements, representing the remaining $2,104,000. The Company believes that its existing capital resources and cash flow generated from future operations will enable it to maintain its current level of operations and its planned operations, including capital expenditures, in fiscal year 2001. 12 13 FORWARD-LOOKING INFORMATION This report contains both historical and forward-looking information. Forward-looking statements include, but are not limited to, discussion of the Company's strategic goals, new contracts, possible expansion of existing plans, expected increase in certain expenses, and cash flow. These statements speak of the Company's plans, goals or expectations and refer to estimates. The forward-looking statements may be significantly impacted by risks and uncertainties, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). There can be no assurance that anticipated future results will be achieved because actual results may differ materially from those projected in the forward-looking statements. Readers are cautioned that a number of factors, which are described herein, could adversely affect the Company's ability to obtain these results. These include the effects of either federal or state health care reform or other legislation; changes in reimbursement system trends, the ability of care providers (including physician practice management groups) to comply with current contract terms; and renewal of the Company's contracts with various state and other governmental entities. Such factors also include the effects of other general business conditions, including but not limited to, government regulation, competition and general economic conditions. The cautionary statements made pursuant to the Reform Act herein and elsewhere by the Company should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of the Reform Act. The Company cannot always predict what factors would cause actual results to differ materially from those indicated by the forward-looking statements. In addition, readers are urged to consider statements that include the terms "believes", "belief", "expects", "plans", "objectives", "anticipates", "intends" or the like to be uncertain and forward-looking. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to the risk of fluctuating interest rates in the ordinary course of business on certain assets and liabilities including cash and cash equivalents, short-term investments and long-term debt. The Company's variable rate debt relates to the bank note as well as borrowings under their software financing arrangement, which are primarily vulnerable to movements in the prime rate. The Company does not expect changes in interest rates to have a significant effect on the Company's operations, cash flow or financial position. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were submitted to a vote of security holders during the Company's Annual Meeting of Stockholders held September 11, 2000.

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ITEM 5. OTHER INFORMATION On October 10, 2000, the Company issued a press release announcing the execution of an agreement and plan of merger among the Company, UnitedHealth Group Incorporated and a subsidiary of UnitedHealth Group. A copy of that press release is filed as Exhibit 99 to this report on Form 10-Q. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Administrative Services Agreement between the registrant and Lovelace Health Systems, Inc.* 10.2 Amendment to the Administrative Services Agreement between the registrant and Community Choice Michigan* 27 Financial Data Schedule 99 Press Release Issued October 10, 2000 (b) Reports on Form 8-K None * Confidential Treatment Requested 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LIFEMARK CORPORATION By: /s/ Rhonda E. Brede ----------------------------------- Rhonda E. Brede, President and Chief Executive Officer (Principal Executive Officer) By: /s/ Michael J. Kennedy ----------------------------------- Michael J. Kennedy, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Dated: October 16, 2000 15

LIFEMARK CORP /DE/ 10-Q