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 November 30, 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 (I.R.S. Employer incorporation or organization) 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 5,198,076 shares of common stock outstanding as of December 31, 2000. TABLE OF CONTENTS

Page ---- Part I ~~FINANCIAL~~Financial ~~INFORMATION~~Information Item 1. Financial Statements Consolidated Balance Sheets.........................................................~~.......~~ 3 Consolidated Statements of Income...................................................~~.......~~ 4 Consolidated Statements of Cash Flows...............................................~~.......~~ 5 Notes to Unaudited Consolidated Financial Statements.............................~~..........~~ 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................................................~~........~~11 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................~~........~~15 13 Part II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders........................................ 13 Item 5. Other Information.......................................................................... 14 Item 6. Exhibits and Reports on Form 8-K...................................................~~........ 14~~15

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

~~AUGUST~~Nov. 3130, 2000 ~~MAY~~May 31, 2000 ------------------ ---------------- (~~UNAUDITED~~Unaudited) ASSETS ------ Current Assets: Cash and cash equivalents, including restricted cash of $1215,~~925~~583,000 and $11,635,000, respectively $ 1719,~~875~~965,000 $ 19,205,000 Accounts and notes receivable and unbilled services, net 2325,~~669~~014,000 19,276,000 Deferred income taxes 1,~~260~~221,000 1,245,000 Prepaid expenses and other current assets ~~703~~782,000 729,000 ------------------ ---------------- Total current assets 4346,~~507~~982,000 40,455,000 Property and equipment, net 6,~~580~~763,000 6,331,000 Performance bonds 10,~~832~~878,000 9,740,000 Goodwill, net 21,~~006~~915,000 2,097,000 Other assets ~~258~~362,000 280,000 ------------------ ---------------- Total assets $ 6366,~~183~~900,000 $ 58,903,000 ================== ================ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts payable $ 1559,~~005,~~000 $ 912,000 Accrued medical claims 3033,~~877~~250,000 27,781,000 Risk pool payable ~~552~~1,254,000 455,000 Related party risk pool payable ~~149~~107,000 154,000 Accrued compensation 2,~~177~~831,000 2,889,000 Other accrued expenses 4,~~484~~353,000 3,610,000 Current portion of long-term debt 1,~~287~~300,000 1,273,000 ------------------ ---------------- Total current liabilities 4043,~~531~~654,000 37,074,000 Long-term debt 2,~~627~~309,000 2,941,000 Related party long-term debt 300,000 300,000 Deferred income taxes 5526,000 55,000 ------------------ ---------------- Total liabilities 4346,~~513~~289,000 40,370,000 ------------------ ---------------- Commitments and Contingencies -- -- Stockholders' Equity: Common stock, $0.01 par value Authorized - 10,000,000 shares Issued and outstanding - 5,~~156~~159,000 and 5,118,000 shares, respectively 52,000 51,000 Capital in excess of par value 17,~~255~~259,000 17,050,000 Stockholder notes receivable (~~719~~728,000) (708,000) Unearned compensation (~~154~~146,000) -- Retained earnings 34,~~236~~174,000 2,140,000 ------------------ ---------------- Total stockholders' equity 1920,~~670~~611,000 18,533,000 ------------------ ---------------- $ 6366,~~183~~900,000 $ 58,903,000 ================== ================

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

~~THREE~~Three ~~MONTHS~~Months ~~ENDED~~Ended Six Months Ended --------------------------------- ~~AUGUST~~--------------------------------- 31November 30, ~~AUGUST~~November 3130, November 30, November 30, 2000 1999 2000 1999 --------------- -------------- -------------- -------------- Revenues $ 5352,~~483~~225,000 $ 2324,~~609~~574,000 $ 105,708,000 $ 48,183,000 --------------- -------------- -------------- -------------- Direct cost of operations 4645,~~107~~058,000 1718,~~850~~764,000 91,520,000 36,614,000 Marketing, sales and administrative 65,~~176~~930,000 5,~~535~~073,000 11,751,000 10,608,000 --------------- -------------- -------------- -------------- Total costs and expenses 5250,~~283~~988,000 23,~~385~~837,000 103,271,000 47,222,000 --------------- -------------- -------------- -------------- Operating income 1,~~200~~237,000 ~~224~~737,000 2,437,000 961,000 --------------- -------------- -------------- -------------- Interest income ~~843~~856,000 ~~255~~266,000 1,699,000 521,000 Interest expense (~~121~~94,000) (~~100~~93,000) (215,000) (193,000) --------------- -------------- -------------- -------------- Net interest income ~~722~~762,000 ~~155~~173,000 1,484,000 328,000 --------------- -------------- -------------- -------------- Income before income taxes 1,~~922~~999,000 ~~379~~910,000 3,921,000 1,289,000 Provision for income taxes ~~826~~1,061,000 ~~165~~395,000 1,887,000 560,000 --------------- -------------- -------------- -------------- Net income $ 1938,~~096~~000 $ 515,000 $ ~~214~~2,034,000 $ 729,000 =============== ============== ============== ============== Net income per share - -basic $ 0.2219 $ 0.0411 $ 0.40 $ 0.15 =============== ============== ============== ============== Weighted average common shares outstanding - -basic 5,~~029~~060,000 4,808,000 5,047,000 4,808,000 =============== ============== ============== ============== Net income per share - -assuming dilution $ 0.1916 $ 0.0410 $ 0.35 $ 0.14 =============== ============== ============== ============== Weighted average common shares outstanding - -assuming dilution 5,~~634~~808,000 45,~~865~~683,000 5,728,000 5,700,000 =============== ============== ============== ==============

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

~~THREE~~Six ~~MONTHS~~Months ~~ENDED~~Ended ------------------------------------------ ~~AUGUST~~November 3130, ~~AUGUST~~November 3130, 2000 1999 ------------------- ------------------- Cash flows from operating activities: Net income $ 12,~~096~~034,000 $ ~~214~~729,000 Adjustments to reconcile net income to net cash provided by ~~(used in)~~ operating activities: Bad debt expense -- 78,000 Depreciation and amortization ~~738~~1,502,000 ~~536~~1,075,000 (Gain) loss on sale of property and equipment (1511,000) 75,000 Deferred income taxes (155,000) ~~(34~~197,000) Interest on long-term debt -- 78125,000 Interest on stockholder note receivable (1120,000) -- Stock based compensation 816,000 -- Changes in assets and liabilities: Accounts receivable and unbilled services (45,~~393~~738,000) ~~132~~516,000 Prepaid expenses and other current assets 26(53,000) ~~263~~(332,000) Accounts payable 93(353,000) (~~179~~191,000) Accrued medical claims 35,~~096~~469,000 ~~(201~~588,000) Risk pool payable 97799,000 ~~(24~~149,000) Related party risk pool payable (547,000) 239,000 Accrued compensation (~~712~~58,000) (~~493~~191,000) ~~Other~~Accrued ~~accrued~~ expenses ~~874~~743,000 ~~(143~~705,000) Other assets 22(82,000) ~~104~~94,000 ------------------ ------------------ Net cash provided by operating activities ~~899~~4,196,000 ~~290~~3,486,000 ------------------ ------------------ Cash flows from investing activities: Purchase of property and equipment (~~926~~1,786,000) (~~767~~1,855,000) Proceeds from sale of property and equipment 45,000 12285,000 ~~Maturity~~Proceeds from maturity/sale of short-term investments -- 501,000 ~~Issuance~~Proceeds offrom related party notes receivable - 181,000 Proceeds from maturity of assets securing performance bond - 31,233,000 Increase in assets securing performance bond (1,~~092~~138,000) (~~200~~3,631,000) ------------------ ------------------ Net cash used in investing activities (12,~~973~~879,000) (~~471~~3,286,000) ------------------ ------------------ Cash ~~flow~~flows from financing activities: Issuance of long-term debt 8194,000 ~~251~~562,000 Principal payment on long-term debt (~~381~~699,000) --(784,000) ~~Issuance~~Proceeds offrom common stock 44issuance 48,000 114,000 -- ---------------- ------------------ Net cash ~~provided by (~~used in) by financing activities (~~256~~557,000) ~~251~~(108,000) ------------------ ------------------ Net increase ~~(decrease)~~ in cash and cash equivalents (1760,~~330,~~000) 7092,000 Cash and cash equivalents, beginning of period 19,205,000 13,792,000 ------------------ ------------------ Cash and cash equivalents, end of period $ 1719,~~875~~965,000 $ 13,~~862~~884,000 ================== ==================

The accompanying notes are an integral part of these statements. 5 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 on February 28, 2001. AHC contributed revenues of $5,728,000 and $4,895,000 for the three month periods ended November 30, 2000 and 1999, respectively, and incurred direct costs of operations of $5,893,000 and $5,217,000, respectively. For the six months ended November 30, 2000 and 1999, AHC contributed revenues of $11,324,000 and $9,659,000, respectively, and incurred direct costs of operations of $11,706,000 and $10,079,000, respectively. 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. 6 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".

Three Months Ended ----------------------------------------------------------------------------- ~~August~~November 3130, 2000 ~~August~~November 3130, 1999 ------------------------------------- ------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Net income per common share, basic: Income available to common stockholders $1 938,~~096,~~000 5,~~156~~158,000 $ ~~214~~515,000 4,~~808~~932,000 ~~stockholders~~ Reduction in shares outstanding in connection with stockholder notes ~~receivables~~receivable and unvested restricted stock (6,000) (~~127~~98,000) -(3,000) -(124,000) ---------- ------------ ---------- ------------ Adjusted income available to common stockholders 1932,~~090,~~000 5,~~029~~060,000 $ 0.2219 ~~214~~512,000 4,808,000 $ 0.0411 ~~Effective~~Effect of dilutive securities: Stock options, warrants and restricted shares - ~~527~~670,000 - 5718,000 Convertible notes 3,000 78,000 -40,000 -857,000 ---------- ------------ ---------- ----------- Net income per common share, assuming dilution: Income available to common stockholders and assumed conversions $1 935,~~093,~~000 5,~~634~~808,000 $ 0.1916 $ ~~214~~552,000 45,~~865~~683,000 $ 0.0410 ========== ============ ========= ========== ============ =========

~~August~~Six 31Months Ended ----------------------------------------------------------------------------- November 30, 2000 ~~May~~November 3130, ~~2000~~1999 ------------------------------------- ------------------------------------- ~~Due~~Income ~~from~~Shares ~~Rio~~Per ~~Grande~~Share ~~HMO,~~Income ~~Inc.~~Shares $Per ~~18,215,000~~Share $(Numerator) 14(Denominator) Amount (Numerator) (Denominator) Amount --------- ----------- -------- --------- ----------- --------- Net income per common share,~~691,000~~ ~~Contract~~basic: ~~management~~Income ~~receivables~~available 3to common stockholders $2,~~434~~034,000 25,~~239~~157,000 ~~Due~~$ ~~from AHCCCSA 2~~729,~~027,~~000 24,~~098~~870,000 ~~Interest~~Reduction in shares outstanding in connection with stockholder notes receivable 15and unvested restricted stock (12,000) ~~208~~(110,000) ~~Other 12~~(3,000) 75(62,000) ---------- ------------ ---------- ------------ 23Adjusted income available to common shareholders 2,~~703~~022,000 195,~~311~~047,000 ~~Less~~$ ~~allowance~~0.40 ~~for~~726,000 ~~doubtful~~4,808,000 ~~accounts~~$ ~~(34~~0.15 Effect of dilutive securities: Stock options, warrants and restricted shares - 603,000) (- 35,000) Convertible notes 7,000 78,000 79,000 857,000 ---------- ------------ ---------- ------------ Net ~~current~~income ~~portion~~per ofcommon ~~accounts~~share, assuming dilution: Income available to common stockholders and ~~notes~~assumed ~~receivables~~conversions $2,029,000 235,~~669~~728,000 $ 190.35 $ 805,~~276~~000 5,700,000 $ 0.14 ========== =========== ========= ========== ============ =========

7 NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE -------------------------------------- Third party accounts and notes receivable and unbilled services consist of the following: Nov. 30, 2000 May 31, 2000 ------------------ ----------------- Due from Rio Grande HMO, Inc. $ 20,267,000 $ 14,691,000 Contract management receivables 2,918,000 2,239,000 Due from AHCCCSA 1,843,000 2,098,000 Interest receivable 15,000 208,000 Other 5,000 75,000 ------------------ ----------------- 25,048,000 19,311,000 Less allowance for doubtful accounts 34,000 35,000 ------------------ ----------------- Net accounts and notes receivable $ 25,014,000 $ 19,276,000 ================== ================= 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. 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 November 30, 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 $10,552,000 at November 30, 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 $2,680,000. NOTE 5 - BUSINESS SEGMENTS -------------------------- The Company's principal business segments are: o 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. o 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 and six month periods ended November 30, 2000 and 1999. Corporate allocations have been provided on a consistent basis. 8 Information concerning operations by business segment follows:

For the Three Months Ended ~~August~~November 3130, 2000 ----------------------------------------------------------------- Health Plan Operations -------------------------------- Risk Management Diversified Contracts Contracts Services Totals ------------- -------------- ------------ ------------- Total revenues from reportable segments $ 4442,~~418~~293,000 $ 510,~~299~~926,000 $ 4,~~381~~683,000 $ 5457,~~098~~902,000 Intersegment revenues - (~~127~~5,128,000) (~~488~~549,000) (~~615~~5,677,000) ------------- -------------- ------------ ------------- Total consolidated revenues $ 4442,~~418~~293,000 $ 5,~~172~~798,000 $ 34,~~893~~134,000 $ 5352,~~483~~225,000 ============= ============== ============ ============= Interest income $ ~~748~~778,000 $ 5342,000 $ 4236,000 $ ~~843~~856,000 Interest expense 4335,000 4433,000 3426,000 ~~121~~94,000 ------------- -------------- ----------- ------------- Net interest income $ ~~705~~743,000 $ 9,000 $ 810,000 $ ~~722~~762,000 ============= ============== ============ ============= Depreciation and amortization $ ~~218~~226,000 $ ~~336~~353,000 $ ~~184~~185,000 $ ~~738~~764,000 ============= ============== ============ ============= Segment income ~~(loss)~~ before taxes $ 1672,~~265,~~000 $ ~~686~~1,006,000 $ ~~(29~~321,000) $ 1,~~922~~999,000 Income tax expense ~~(benefit) 544~~322,000 ~~294~~560,000 ~~(12~~179,000) ~~826~~1,061,000 ------------- -------------- ------------ ------------- Net income ~~(loss)~~ $ ~~721~~350,000 $ ~~392~~446,000 $ ~~(17~~142,000) $ 1938,~~096,~~000 ============= ============== ============ ============= Expenditures for capital assets $ ~~274~~254,000 $ ~~421~~397,000 $ ~~231~~209,000 $ ~~926~~860,000 ============= ============== ============ ============= Segment total assets $ 5964,~~042~~876,000 $ 56,~~948~~435,000 $ 98,~~212~~293,000 $ 7479,~~202~~604,000 Intersegment assets (910,~~153~~526,000) - (12,~~866~~178,000) (1112,~~019~~704,000) ------------- -------------- ------------ ------------- Total assets $ 4954,~~889~~350,000 $ 56,~~948~~435,000 $ 76,~~346~~115,000 $ 6366,~~183~~900,000 ============= ============== ============ =============

For the Three Months Ended ~~August~~November 3130, 1999 ----------------------------------------------------------------- Health Plan Operations -------------------------------- Risk Management Diversified Contracts Contracts Services Totals ------------- -------------- ------------ ------------- Total revenues from reportable segments $ 12,~~372~~935,000 $ 9,~~185~~430,000 $ 34,~~805~~011,000 $ 2526,~~362~~376,000 Intersegment revenues - (1,~~402~~442,000) (~~351~~360,000) (1,~~753~~802,000) ------------- -------------- ------------ ------------- Total consolidated revenues $ 12,~~372~~935,000 $ 7,~~783~~988,000 $ 3,~~454~~651,000 $ 2324,~~609~~574,000 ============= ============== ============ ============= Interest income $ ~~199~~212,000 $ 3934,000 $ 1720,000 $ ~~255~~266,000 Interest expense 1314,000 6050,000 2729,000 ~~100~~93,000 ------------- -------------- ----------- ------------- Net interest income (expense) $ ~~186~~198,000 $ (2116,000) $ (109,000) $ ~~155~~173,000 ============= ============== ============ ============= Depreciation and amortization $ 9599,000 $ ~~303~~284,000 $ ~~138~~155,000 $ ~~536~~538,000 ============= ============== ============ ============= Segment income (loss) before taxes $ (~~108~~266,000) $ ~~565~~1,137,000 $ ~~(78~~39,000) $ ~~379~~910,000 Income tax expense (benefit) (47115,000) ~~246~~493,000 ~~(34~~17,000) ~~165~~395,000 ------------- -------------- ------------ ------------- Net income (loss) $ (61151,000) $ ~~319~~644,000 $ ~~(44~~22,000) $ ~~214~~515,000 ============= ============== ============ ============= Expenditures for capital assets $ ~~139~~200,000 $ ~~426~~574,000 $ ~~202~~314,000 $ ~~767~~1,088,000 ============= ============== ============ ============= Segment total assets $ 2933,~~518~~168,000 $ 78,~~573~~400,000 $ 64,~~683~~614,000 $ 4346,~~774~~182,000 Intersegment assets (98,~~084~~981,000) - (~~365~~466,000) (9,~~449~~447,000) ------------- -------------- ------------ ------------- Total assets $ 2024,~~434~~187,000 $ 78,~~573~~400,000 $ 64,~~318~~148,000 $ 3436,~~325~~735,000 ============= ============== ============ =============

~~DESCRIPTION~~For OFthe ~~MATTER~~Six ~~VOTES~~Months ~~CAST~~Ended ~~FOR~~November ~~AUTHORITY~~30, ~~WITHHELD~~2000 ----------------------------------------------------------------- Health Plan Operations -------------------------------- Risk Management Diversified Contracts Contracts Services Totals ------------- -------------- ~~ELECTION~~------------ OF------------- ~~DIRECTORS:~~Total ~~Rhonda~~revenues E.from ~~Brede~~reportable 4segments $ 86,~~251~~709,~~987~~000 ~~116~~$ 21,~~463~~482,000 ~~William~~$ G.9,066,000 ~~Brown~~$ 4117,~~260~~257,~~337~~000 ~~108~~Intersegment revenues - (10,~~122~~512,000) ~~Richard~~(1,037,000) C.(11,549,000) ~~Jelinek~~------------- 4-------------- ------------ ------------- Total consolidated revenues $ 86,~~260~~709,~~467~~000 ~~107~~$ 10,~~963~~970,000 ~~Henry~~$ M.8,029,000 ~~Kaldenbaugh~~$ 4105,~~260~~708,~~337~~000 ~~108~~============= ============== ============ ============= Interest income $ 1,~~113~~527,000 ~~John~~$ G.93,000 ~~Lingenfelter~~$ 479,~~260~~000 $ 1,~~328~~699,000 ~~108~~Interest expense 80,~~122~~000 ~~Risa~~75,000 ~~Lavizzo~~60,000 215,000 -~~Mourey~~------------ 4-------------- ----------- ------------- Net interest income $ 1,~~260~~447,~~337~~000 ~~108~~$ 18,~~113~~000 $ 19,000 $ 1,484,000 ============= ============== ============ ============= Depreciation and amortization $ 444,000 $ 688,000 $ 370,000 $ 1,502,000 ============= ============== ============ ============= Segment income before taxes $ 1,606,000 $ 1,664,000 $ 651,000 $ 3,921,000 Income tax expense 773,000 801,000 313,000 1,887,000 ------------- -------------- ------------ ------------- Net income $ 833,000 $ 863,000 $ 338,000 $ 2,034,000 ============= ============== ============ ============= Expenditures for capital assets $ 528,000 $ 818,000 $ 440,000 $ 1,786,000 ============= ============== ============ =============

~~VOTES~~For ~~CAST~~the ~~FOR~~Six ~~VOTES~~Months ~~CAST~~Ended ~~AGAINST~~November ~~AUTHORITY~~30, ~~WITHHELD~~1999 -------------- --------------------------------------------------- Health Plan Operations -------------------------------- ~~PROPOSALS:~~Risk ~~Proposal~~Management toDiversified ~~Approve~~Contracts ~~2000~~Contracts ~~Non~~Services Totals -~~Employee~~------------ ~~Director~~-------------- ~~Stock~~------------ ~~Plan~~------------- 2Total revenues from reportable segments $ 25,305,000 $ 18,615,~~032~~000 ~~335~~$ 7,~~236~~818,000 13$ 51,~~310~~738,000 ~~Proposal~~Intersegment torevenues ~~Approve~~- ~~1999~~(2,843,000) ~~Executive~~(712,000) ~~Stock~~(3,555,000) ~~Option~~------------- ~~and~~-------------- ~~Ownership~~------------ ~~Plan~~------------- 2Total consolidated revenues $ 25,~~599~~305,000 $ 15,772,000 $ 7,106,000 $ 48,183,000 ============= ============== ============ ============= Interest income $ 416,000 $ 66,000 $ 39,000 $ 521,000 Interest expense 30,000 103,000 60,000 193,000 ------------- -------------- ----------- ------------- Net interest income (expense) $ 386,000 $ (37,000) $ (21,000) $ 328,000 ~~361~~============= ============== ============ ============= Depreciation and amortization $ 205,~~748~~000 6$ 576,~~300~~000 ~~Proposal~~$ to294,000 ~~Amend~~$ ~~the~~1,075,000 ~~Employee~~============= ~~Stock~~============== ~~Purchase~~============ ~~Plan~~============= 2Segment income (loss) before taxes $ (216,~~810~~000) $ 1,~~797~~622,000 ~~151~~$ (117,~~465~~000) $ 1,~~314~~289,000 Income tax expense (benefit) (94,000) 705,000 (51,000) 560,000 ------------- -------------- ------------ ------------- Net income (loss) $ (122,000) $ 917,000 $ (66,000) $ 729,000 ============= ============== ============ ============= Expenditures for capital assets $ 339,000 $ 1,004,000 $ 512,000 $ 1,855,000 ============= ============== ============ =============

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, 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 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 on February 28, 2001. AHC contributed revenues of $5,728,000 and $4,895,000 for the three month periods ended November 30, 2000 and 1999, respectively, and incurred direct costs of operations of $5,893,000 and $5,217,000, respectively. For the six months ended November 30, 2000 and 1999, AHC contributed revenues of $11,324,000 and $9,659,000, respectively, and incurred direct costs of operations of $11,706,000 and $10,079,000, respectively. 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. On October 10, 2000, the Company announced that it has agreed to 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 is at or between $47.50 and $56.50 per share. In the event the average ten-day closing price of UnitedHealth Group stock immediately preceding the transaction close is above $56.50 per share, Lifemark shareholders will receive a total of approximately 1,115,000 UnitedHealth Group shares and the merger consideration may thereby increase based on UnitedHealth Group's stock appreciation above $56.50. If the average ten-day closing price of UnitedHealth Group stock immediately preceding the transaction is at or between $44.00 and $47.50 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 $44 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. The proposed merger is described in the proxy statement/prospectus which will be sent to Lifemark shareholders in connection with the upcoming meeting of shareholders to vote on the merger. The proxy statement/prospectus is included in the registration statement on Form S-4 filed by UnitedHealth Group with the Securities and Exchange Commission. Shareholders are urged to read the proxy statement/prospectus carefully. 11 Results of Operations Consolidated revenues for the three and six-month periods ended November 30, 2000 increased 113% and 119%, respectively, over the comparable periods of the previous fiscal year. For the three and six-month periods ended November 30, 2000, direct costs of operations increased 140% and 150%, respectively, over the same periods of the previous fiscal year. The increase in both revenues and expenses is primarily due to the financial risk-sharing agreement with RGHMO, as well as growth in enrollment in certain plans covered by management contracts and increases in membership for both Ventana and AHC. Health Plan Operations-Risk Contracts. Revenues for the three and six-month periods ended November 30, 2000, related to health plan operations-risk contracts increased 227% to $42,293,000 from $12,935,000 and 243% to $86,709,000 from $25,305,000, respectively, over the same periods of the previous fiscal year. The increases are primarily a result of the financial risk-sharing agreement with RGHMO, which accounted for $22,000,000 and $48,246,000, respectively, of the increases. Also contributing to the increases was the expansion of Ventana into Maricopa, Yuma and Coconino counties, which resulted in increases of $4,381,000 and $9,723,000, respectively. Direct costs of operations for the three and six-month periods ended November 30, 2000 included $39,285,000 and $80,504,000 respectively, related to revenues generated from risk contracts of health plans and programs, compared to $12,534,000 and $24,221,000 from the comparable periods of the previous fiscal year. The primary contributor to the increases was the financial risk sharing agreement with RGHMO, which accounted for $20,374,000 and $44,576,000 of the increases, respectively. The direct cost of operations for risk contracts as a percentage of related revenues for the three and six-month periods ended November 30, 2000 was 93%, compared to 97% and 96%, respectively, from the comparable periods of the previous fiscal year. The decreases primarily represent the change in a contractual relationship with RGHMO from a management services agreement to a financial risk-sharing agreement. Another contributor to the increase was growth in enrollment in Ventana and AHC of 87% and 10%, respectively from November 30, 1999, to November 30, 2000. Health Plan Operations-Management Contracts. Revenues for the three and six-month periods ended November 30, 2000 related to health plan operations-management contracts were $5,798,000 and $10,970,000, respectively, compared to $7,988,000 and $15,772,000 from the comparable periods of the previous fiscal year. The revenues from health plan operations-management contracts decreased 27% and 30%, respectively, from the comparable periods of the previous fiscal year. The decreases were primarily due to the cessation of the administrative services 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 costs of operations related to health plan operations-management contracts for the three and six-month periods ended November 30, 2000 were $2,720,000 and $5,202,000, respectively, versus $3,685,000 and $7,336,000 for the same periods of last fiscal year. As a percentage of related revenues, direct cost of operations related to health plan operations-management contracts was 47% for the three and six-month periods ended November 30, 2000, versus 46% and 47%, respectively, for the comparable periods of the previous fiscal year. The decrease in expenses was largely due to the financial risk-sharing agreement with RGHMO, under which those direct costs became a part of health plan operations-risk contracts, and the cessation of the administrative services agreement with AlohaCare. 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 $4,134,000 and $8,029,000, for the three and six-month periods ended November 30, 2000, respectively, compared to $3,651,000 and $7,106,000, from the corresponding periods of the previous fiscal year. The increases of 13% over the comparable periods from the previous fiscal year are primarily due to the expansion of Lifemark at Home into Pinal County. Direct cost of operations related to diversified services for the three and six- month periods ended November 30, 2000 were $3,053,000 and $5,814,000, respectively, compared to $2,544,000 and $5,057,000 from the corresponding periods of the previous fiscal year. As a percentage of related revenues, direct cost of operations related to diversified services was 74% and 72%, respectively, for the three and six-month periods ended November 30, 2000, and 70% and 71%, respectively, for the comparable periods of the previous fiscal year. The increase is due to the growth in Lifemark at Home, which has a higher direct cost of operations when compared to the other diversified services. 12 Marketing, Sales and Administrative. Marketing, sales and administrative expenses as a percentage of consolidated revenue was 11% for both the three and six-month periods ended November 30, 2000 versus 21% and 22%, respectively, for the corresponding periods of the previous year. The decrease in marketing, sales and administrative expenses for the three and six-month periods ended November 30, 2000, compared with the same periods of the previous 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. For the three and six-month periods ended November 30, 2000, approximately $300,000 and $700,000, respectively, of legal and advisory costs relating to the proposed merger with UnitedHealth Group are included in marketing, sales and administrative. Interest Income. Interest income for the three and six month periods ended November 30, 2000 was $856,000 and $1,699,000 versus $266,000 and $521,000 for the same periods of the prior fiscal year. The additional income is due to the growth of interest bearing cash and cash equivalents. Interest Expense. Interest expense was $94,000 and $215,000 for the three and six-month periods ended November 30, 2000, respectively, as compared to $93,000 and $193,000 for the same periods of the last fiscal year. Interest expense is primarily attributable to outstanding debt maintained by the Company, which consists of notes and capital leases with two banks and the William Brown Trust in principal amounts of $3,609,000 and $300,000, respectively. Income Taxes. Income tax expense was $1,061,000 and $1,887,000 for the three and six-month periods ended November 30, 2000. The effective tax rates were 53% and 48%, respectively, for both periods. These rates were higher than the statutory rates for the respective periods primarily due to the amortization of non-deductible goodwill expenses and the impact of non-deductible expenses relating to the proposed merger with UnitedHealth Group. During the three and six-month periods ended November 30, 1999, the effective tax rate was 43%. The rate was 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 and six-month periods ended November 30, 2000 and 1999 was $938,000 and $2,034,000, respectively, compared to $515,000 and $729,000, for the corresponding periods from the previous fiscal year. The primary reasons for the increase in profitability are the financial risk-sharing agreement with RGHMO, under which terms it moved from a management agreement to a risk-sharing agreement, and increases in membership across certain health plans, offset by approximately $300,000 and $700,000, respectively, of costs relating to the proposed merger with UnitedHealth Group. Liquidity and Capital Resources The Company's cash and cash equivalents increased to $19,965,000 at November 30, 2000 from $19,205,000 at May 31, 2000. Operating activities generated $4,196,000 for the six-month period ended November 30, 2000 versus $3,486,000 during the same period of the previous fiscal year. The primary reasons for the change in cash are earnings before non-cash charges, an increase in accrued expenses related to accrued merger costs, the RGHMO contract performance incentive and an increase in accrued medical claims offset by an increase in accounts receivable and unbilled services. The increase in accrued medical claims and the increase in accounts receivable and unbilled services both relate in part to the financial risk-sharing agreement with RGHMO. Investing activities used $2,879,000 for the six-month period ended November 30, 2000 as compared to $3,286,000 during the corresponding period of the prior fiscal year. Cash of $1,786,000 was used to purchase fixed assets during the six-month period ended November 30, 2000. Additional cash of $1,138,000 was used to increase the amount of performance bonds held by Ventana. The required level of performance bonds has increased due to the expansion of Ventana into three additional counties in Arizona, along with an increase in enrollment in existing counties. During the six-month period ended November 30, 1999, cash was used to purchase $1,855,000 of fixed assets and $3,631,000 was utilized to increase performance bonds related to the expansion of Ventana into additional counties. Financing activities used $557,000 and $108,000 for the six-month periods ended November 30, 2000 and 1999, respectively. The primary use of cash for the current period was a payment of $699,000 relating to outstanding convertible debt offset by the issuance of $94,000 of long-term debt and $48,000 received for 13 common stock pursuant to the Company's employee stock purchase plan. The primary use of cash for the six months ended November 30, 1999 was the principal payments on long-term debt of $784,000 offset by issuance of common stock which provided $114,000 and the issuance of $562,000 of long-term debt. 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 November 30, 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 $10,552,000 at November 30, 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 $2,680,000. 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. 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 and in the Company's Annual Report in Form 10-K for the year ended May 31, 2000, 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. 14 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K None 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: January 12, 2001 16

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