================================================================================
As filed with the Securities and Exchange Commission on May 15, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2002
Commission File Number: 000-18839
UNITED AMERICAN HEALTHCARE CORPORATION
(Exact Name of Registrant as Specified in Charter)
MICHIGAN 38-2526913
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1155 BREWERY PARK BOULEVARD, SUITE 200
DETROIT, MICHIGAN 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 393-0200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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
----- -----
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF MAY 14, 2002
WAS 6,900,721.
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UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. PAGE
Item 1. Unaudited Condensed Consolidated Financial Statements-
Condensed Consolidated Balance Sheets - March 31, 2002
and June 30, 2001...........................................................1
Condensed Consolidated Statements of Operations - Three and Nine Months
Ended March 31, 2002 and 2001...............................................2
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended March 31, 2002 and 2001...............................................3
Notes to the Unaudited Condensed Consolidated Financial Statements........... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................8
PART II.
Item 1. Legal Proceedings............................................................15
Item 2. Changes in Securities and Use of Proceeds....................................15
Item 3. Defaults Upon Senior Securities..............................................15
Item 4. Submission of Matters to a Vote of Security Holders..........................15
Item 5. Other Information............................................................15
Item 6. Exhibits and Reports on Form 8-K.............................................17
SIGNATURES...................................................................................18
PART I.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30,
2002 2001
-------------------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 10,400 $ 21,985
Marketable securities 12,734 2,781
Premium receivables 1,718 436
Other receivables 2,562 2,289
Refundable federal income tax 330 284
Prepaid expenses and other 641 649
Deferred income taxes 220 1,360
-------------------------
Total current assets 28,605 29,784
Property and equipment, net 5,153 5,632
Intangible assets, net 2,952 2,952
Marketable securities 1,807 2,426
Deferred income taxes 286 286
Other assets 630 577
-------------------------
$ 39,433 $ 41,657
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 731 $ 890
Medical claims payable 14,980 19,815
Accounts payable and accrued expenses 1,870 3,138
Accrued compensation and related benefits 911 1,093
Other current liabilities 1,979 1,226
-------------------------
Total current liabilities 20,471 26,162
Long-term debt, less current portion 2,313 2,602
Accrued rent 524 580
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par, 15,000,000 shares authorized; 6,900,721 and
6,779,128 issued and outstanding at March 31, 2002 and June 30,
2001, respectively 11,403 11,188
Retained earnings 4,719 1,288
Accumulated other comprehensive income (loss), net of income taxes 3 (163)
-------------------------
16,125 12,313
-------------------------
$ 39,433 $ 41,657
=========================
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
1
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
----------------------------------------------
REVENUES
Medical premiums $ 42,156 $ 26,349 $ 111,201 $ 76,532
Management fees 3,183 7,108 13,800 20,019
Interest and other income 523 562 1,116 1,619
----------------------------------------------
Total revenues 45,862 34,019 126,117 98,170
EXPENSES
Medical services 37,186 21,030 95,954 63,309
Marketing, general and administrative 7,637 8,345 23,933 24,627
Depreciation and amortization 343 490 1,456 1,459
Interest expense 49 94 173 318
Bad debt expense -- 10,532 -- 11,532
----------------------------------------------
Total expenses 45,215 40,491 121,516 101,245
----------------------------------------------
Earnings (loss) before income taxes 647 (6,472) 4,601 (3,075)
Income tax expense (benefit) 348 (634) 1,170 158
----------------------------------------------
NET EARNINGS (LOSS) $ 299 $ (5,838) $ 3,431 $ (3,233)
===============================================
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC
Net earnings per common share $ 0.04 $ (0.86) $ 0.50 $ (0.48)
===============================================
Weighted average shares outstanding 6,854 6,779 6,811 6,779
===============================================
NET EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Net earnings per common share $ 0.04 $ (0.86) $ 0.49 $ (0.48)
===============================================
Weighted average shares outstanding 7,171 6,937 7,012 6,781
===============================================
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
2
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
2002 2001
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 3,431 $ (3,233)
Adjustments to reconcile net earnings to net cash provided by operating
activities
Loss (gain) on disposal of assets 3 (17)
Realized loss on investment 166 --
Depreciation and amortization 1,456 1,459
Bad debt expense -- 11,532
Accrued rent (56) (36)
Stock awards 50 --
Deferred income taxes 1,140 --
Changes in assets and liabilities (7,410) 5,225
--------------------
Net cash (used in) provided by operating activities (1,220) 14,930
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (14,757) (1,225)
Proceeds from sale or maturity of marketable securities 5,611 496
Purchase of property and equipment (936) (2,272)
Proceeds from disposal of equipment -- 21
--------------------
Net cash (used in) provided by investing activities (10,082) (2,980)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made on long-term debt (448) (683)
Issuance of common stock 165 --
--------------------
Net cash used in financing activities (283) (683)
--------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,585) 11,267
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,985 8,257
--------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,400 $ 19,524
====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 164 $ 318
====================
Income taxes paid $ 110 $ 63
====================
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 1 - BASIS OF PREPARATION
The accompanying consolidated financial statements include the accounts of
United American Healthcare Corporation and all of its majority-owned
subsidiaries, together referred to as the "Company." All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in conformity with accounting principles generally
accepted in the United States of America and with the instructions for Form 10-Q
and Rule 10-01 of Regulation S-X as they apply to interim financial information.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the financial
position and results of operations have been included. The results of operations
for the nine-month period ended March 31, 2002 are not necessarily indicative of
the results of operations for the full fiscal year ending June 30, 2002. Audited
June 30, 2001 financial statements, with accompanying footnotes, can be found in
the Company's most recent annual report on Form 10-K.
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are summarized as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
----------------------------------------------
Net earnings (loss) $ 299 $ (5,838) $ 3,431 $ (3,233)
Realized holding gains, net of deferred
federal income taxes - - 166 -
----------------------------------------------
Comprehensive income (loss) $ 299 $ (5,838) $ 3,597 $ (3,233)
==============================================
The components of accumulated other comprehensive income, included in
shareholders' equity at March 31, 2002 and June 30, 2001, include net unrealized
holding gains and (losses), net of deferred federal income taxes.
4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
MARCH 31, 2002 AND 2001
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
OMNICARE HEALTH PLAN, INC. OF TENNESSEE (OMNICARE-TN)
In September 2000, the Company purchased $0.9 million of preferred stock of
OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), a managed care
organization 75% owned by the Company's wholly owned subsidiary, to enable
OmniCare-TN to meet minimum statutory requirements for net worth.
NOTE 4 - LONG TERM DEBT
On November 29, 2001, the Company amended its loan agreement, promissory note
and security agreement with its bank lender. The amended loan agreement is a
three-year term loan with monthly installments of principal and interest of
approximately $103,000. The term loan has an interest rate equal to the bank's
prime rate (4.75% at March 31, 2002) plus one percent per annum. The effective
date of the amended term loan is September 30, 2001 and it matures September 30,
2004. The loan agreement is collateralized by a security interest in all of the
Company's personal property.
The Company's outstanding debt is as follows (in thousands):
MARCH 31, JUNE 30,
2002 2001
----------------------------
Term loan $ 3,044 $ 3,492
Less debt payable within one year 731 890
----------------------------
Long-term debt, less current portion $ 2,313 $ 2,602
============================
NOTE 5 - NET EARNINGS PER COMMON SHARE
Basic net earnings per share excluding dilution have been computed by dividing
net earnings by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share are computed using the treasury stock method
for outstanding stock options.
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
MARCH 31, 2002 AND 2001
NOTE 6 - MEDICAL SERVICES EXPENSES
At March 31, 2001, Company management concluded that the Company's estimated
medical claims liability reserve for UltraMedix Healthcare Systems, Inc.
("UltraMedix"), a Florida HMO managed and 51%-owned by the Company's
majority-owned subsidiary United American of Florida, Inc. ("UA-FL"), no longer
was required, and that reserve of $0.8 million, or $0.11 per share, was reversed
against medical services expenses (which excluding such reversal would have been
$21.8 million and $64.1 million for the three and nine months ended March 31,
2001, respectively). UA-FL and UltraMedix had ceased operations and were placed
in liquidation in March 1998.
NOTE 7 - RECENTLY ENACTED PRONOUNCEMENT
Effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
eliminates the amortization of goodwill, but requires that the carrying amount
of goodwill be tested for impairment at least annually at the reporting unit
level, as defined, and will only be reduced if it is found to be impaired or is
associated with assets sold or otherwise disposed of.
Management has assessed the remaining carrying amount of previously recorded
goodwill of $3.0 million and determined that such amount is not impaired in
accordance with SFAS No. 142. Accordingly, goodwill amortization was not
recorded for the three-month and nine-month periods ended March 31, 2002.
Amortization expense of approximately $0.2 million, or $0.03 per share, was
recorded for the quarter ended March 31, 2001, and of approximately $0.5
million, or $0.08 per share, was recorded for the nine months ended March 31,
2001.
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
MARCH 31, 2002 AND 2001
NOTE 8 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the nine months ended March 31, 2002 and 2001, is as follows (in
thousands):
Management HMOs &
Companies Managed Corporate & Consolidated
MARCH 31, 2002 (1) Plans (2) Eliminations Company
------------------------------------------------------------------------------------
Revenues - external customers $ 13,800 $ 111,201 $ $ 125,001
Revenues - intersegment 10,969 -- (10,969) --
Interest and other income (68) 1,184 -- 1,116
----------------------------------------------------
Total revenues $ 24,701 $ 112,385 $ (10,969) $ 126,117
====================================================================================
Interest expense 173 $ -- $ -- $ 173
Operating earnings 2,786 1,815 -- 4,601
Segment assets 28,044 26,415 (15,026) 39,433
Purchase of equipment 936 -- -- 936
Depreciation and amortization 1,456 -- -- 1,456
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MARCH 31, 2001
-------------------------------
Revenues - external customers $ 20,019 $ 76,532 $ -- $ 96,551
Revenues - intersegment 8,802 -- (8,802) --
Interest and other income 395 1,224 -- 1,619
----------------------------------------------------
Total revenues $ 29,216 $ 77,756 $ (8,802) 98,170
====================================================================================
Interest expense $ 318 $ -- $ -- $ 318
Operating earnings (losses) (6,588) 4,046 (533) (3,075)
Segment assets 26,962 25,227 (14,964) 37,225
Purchase of equipment 2,272 -- -- 2,272
Depreciation and amortization 926 -- 533 1,459
------------------------------------------------------------------------------------
(1) Management Companies: United American Healthcare Corporation and United
American of Tennessee.
(2) HMOs and Managed Plans: OmniCare Health Plan, Inc. of Tennessee and County
Care (through September 30, 2001).
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company provides comprehensive management and consulting services to managed
care organizations, including two health maintenance organizations, OmniCare
Health Plan, Inc. ("OmniCare-TN") in Tennessee and OmniCare Health Plan
("OmniCare-MI") in Michigan, with a targeted mix of Medicaid and commercial
enrollment. The Company also had a contract through September 30, 2001, to
arrange for the delivery of healthcare services on a capitated basis to certain
enrollees residing in Wayne County, Michigan ("County Care") who lacked access
to private or employer sponsored health insurance or to another government
health plan. The following table shows the number of members in the managed
plans serviced by the Company. OmniCare-TN's increased membership is explained
under "Liquidity and Capital Resources" in this Item 2, below.
MARCH 31,
-------------------------
2002 2001
-------------------------
Owned
OmniCare-TN* 121,000 48,000
County Care - 8,000
Managed
OmniCare-MI 90,000 99,000
-------------------------
TOTAL 211,000 155,000
=========================
_______
*75% owned by the Company.
Total revenues increased $11.9 million (35%) to $45.9 million for the quarter
ended March 31, 2002, compared to $34.0 million for the quarter ended March 31,
2001, and increased $27.9 million (29%) to $126.1 million for the nine months
ended March 31, 2002, compared to $98.2 million for the nine months ended March
31, 2001. The increases were principally the result of increased OmniCare-TN
membership, offset by reduced management fees beginning August 1, 2002,
resulting from amendments to the management contract with OmniCare-MI.
Total expenses increased $4.7 million (12%) to $45.2 million for the quarter
ended March 31, 2002 compared to $40.5 million for the quarter ended March 31,
2001, and increased $20.3 million (20%) to $121.5 million for the nine months
ended March 31, 2002 from $101.2 million for the nine months ended March 31,
2001. The increases were principally in medical services expenses from the
increased number of members and from a portion of the added members who had
higher medical costs. There was no bad debt expense for the periods in 2002.
Total expenses for the prior periods included
8
bad debt expense of $10.5 million and $11.5 million for the three months and
nine months ended March 31, 2001, respectively,
Earnings before income taxes were $0.6 million for the quarter ended March 31,
2002, a $7.1 million increase from a loss of $6.5 million for the quarter ended
March 31, 2001. Net earnings were $0.3 million, or $0.04 per basic and diluted
share, for the quarter ended March 31, 2002, an increase of $6.1 million, or
$0.90 per basic and diluted share, compared to a net loss of $5.8 million, or
$0.86 per basic and diluted share, for the quarter ended March 31, 2001. Such
increase is principally due to the recording of bad debt expense of $10.5
million in the quarter ended March 31, 2001.
The Company recognized earnings before income taxes of $4.6 million and net
earnings of $3.4 million, or $0.50 per basic share and $0.49 per diluted share,
for the nine months ended March 31, 2002. For the nine months ended March 31,
2001, the loss before income taxes was $3.1 million and the net loss was $3.2
million, or $0.48 per basic and diluted share. This change is primarily the
result of the bad debt expense in the quarter ended March 31, 2001, offset by
increased medical services expenses in the period ended March 31, 2002.
NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO
NINE MONTHS ENDED MARCH 31, 2001
Medical premium revenues were $111.2 million in the nine months ended March 31,
2002, an increase of $34.7 million (45%) from $76.5 million in the nine months
ended March 31, 2001. The increase came from OmniCare-TN, a managed care
organization owned 75% by the Company. Effective July 1, 2000, OmniCare-TN
entered into a 42-month contract with the State of Tennessee's Bureau of
TennCare ("TennCare"), a State of Tennessee program that provides medical
benefits to Medicaid and working uninsured and uninsurable recipients. The
increase is principally attributed to additional member months in the nine-month
period ended March 31, 2002 compared to the nine-month period ended March 31,
2001.
The OmniCare-TN per member per month ("PMPM") premium rate -- based on an
average membership of 85,300 for the nine months ended March 31, 2002 compared
to 49,400 for the nine months ended March 31, 2001 -- was $140 for the nine
months ended March, 2002, compared to $153 for the nine months ended March 31,
2001, a decrease of $13 (9%). The decrease in the PMPM revenue rate is
attributed to a change in the mix of membership.
Premium revenues from the County Care contract totaled $2.5 million and $7.2
million for the nine-month periods ended March 31, 2002 and 2001, respectively.
Medical services expenses for County Care were $2.7 million and $6.4 million for
the nine-month periods ended March 31, 2002 and 2001, respectively. In the
nine-month period
9
ended March 31, 2002, medical services expenses include $0.5 million for
expected remaining County Care claims, an after-tax impact of approximately $0.3
million or $0.05 per share. From its inception, management has not anticipated
significant net earnings from this contract, and at the Company's election, the
County Care contract expired on September 30, 2001. Accordingly, the County Care
contract was in effect for only the first three months of the nine-month period
ended March 31, 2002 compared to having been in effect for all of the nine-month
period ended March 31, 2001.
Management fees from OmniCare-MI were $13.8 million in the nine months ended
March 31, 2002, a decrease of $6.2 million (31%) from management fees of $20.0
million in the nine months ended March 31, 2001. The decrease is primarily
attributable to amendments to the management contract with OmniCare-MI beginning
August 1, 2001 (see "Liquidity and Capital Resources" below).
Medical services expenses were $96.0 million in the nine months ended March 31,
2002, an increase of $32.6 million (52%) from medical services expenses of $63.3
million in the nine months ended March 31, 2001. The increase resulted primarily
from the significantly expanded total OmniCare-TN membership and a portion of
the added members who had higher medical costs.
The ratio of medical services expenses to medical premium revenues (the medical
loss ratio or "MLR") for OmniCare-TN was 86% and 85% for the nine-month periods
ended March 31, 2002 and 2001, respectively. Certain categories of the new
membership in the nine-month period ended March 31, 2002 had higher medical
costs which resulted in an increase in the MLR from the comparable period a year
earlier. The after-tax impact of the increased MLR was approximately $0.6
million or $0.08 per share. The current contract with TennCare provides for a
minimum of 85% of capitated revenue to be paid to medical services providers.
Marketing, general and administrative expenses decreased approximately $0.7
million (3%), to $23.9 million for the nine months ended March 31, 2002 from
$24.6 million for the nine months ended March 31, 2001. The decrease is
principally due to reduced advertising and labor costs, offset by the costs of
outsourcing of claims processing by OmniCare-TN that began in February 2001.
Interest expense decreased $0.1 million (33%), to $0.2 million for the nine
months ended March 31, 2002 from $0.3 million for the nine months ended March
31, 2001, due to debt reduction and a decrease in the prime rate.
Bad debt expense was $11.5 million for the nine months ended March 31, 2001.
This included $10.5 million of bad debt expense recorded at March 31, 2001,
consisting of (i) $2.6 million of current year management fees earned by the
Company but not paid by
10
OmniCare-MI and a $2.0 million prior advance to OmniCare-MI of which $1.0
million was previously reserved, and (ii) a reserve of $6.9 million for the
remaining carrying value of surplus notes receivable from OmniCare-MI. The
Company recorded the above amounts based on significant losses generated by
OmniCare-MI and an evaluation of its future cash flows.
The Company recognized earnings before income taxes of $4.6 million for the nine
months ended March 31, 2002, compared to a loss before income taxes of $3.1
million for the nine months ended March 31, 2001. Net earnings were $3.4
million, or $0.50 per basic share and $0.49 per diluted share, for the nine
months ended March 31, 2002, compared to a net loss of $3.2 million, or $0.48
per basic and diluted share, for the nine months ended March 31, 2001, an
increase of $6.7 million, or $0.98 per basic and diluted share.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2001
Total revenues increased $11.8 million (35%) from $34.0 million in the three
months ended March 31, 2001 to $45.9 million in the three months ended March 31,
2002.
Medical premium revenues were $42.2 million in the three months ended March 31,
2002, an increase of $15.8 million (60%) from $26.3 million in the three months
ended March 31, 2001. The increase came from OmniCare-TN and is primarily
attributable to its significantly increased membership in the three-month period
ended March 31, 2002 compared to the three-month period ended March 31, 2001.
The OmniCare-TN per member per month ("PMPM") premium rate -- based on an
average membership of 100,800 for the three months ended March 31, 2002 compared
to 50,000 for the three months ended March 31, 2001 -- was $140 for the three
months ended March 31, 2002, compared to $153 for the three months ended March
31, 2001, a decrease of $13 (8%). The decrease in the PMPM premium rate is
attributed to a change in the mix of membership.
Premium revenues from the County Care contract in Wayne County, Michigan were
zero and $2.5 million for the three-month periods ended March 31, 2002 and 2001,
respectively. Medical services expenses for County Care were $0.5 million and
$2.2 million for the three-month periods ended March 31, 2002 and 2001,
respectively. In the three-month period ended March 31, 2002, medical services
expenses include $0.5 million for expected remaining County Care claims, an
after tax impact of approximately $0.3 million or $0.05 per basic and diluted
share. From its inception, management had not anticipated significant net
earnings from this contract and, at the Company's election, the County Care
contract expired on September 30, 2001.
11
Management fees from OmniCare-MI were $3.2 million in the three months ended
March 31, 2002, a decrease of $3.9 million (55%) from fees of $7.1 million in
the three months ended March 31, 2001. The decrease is primarily attributable to
amendments to the management contract with OmniCare-MI beginning August 1, 2001
(see "Liquidity and Capital Resources" below).
Medical services expenses were $37.2 million in the three months ended March 31,
2002, an increase of $16.2 million (77%) from medical services expenses of $21.0
million in the three months ended March 31, 2001. The increase resulted
primarily from the significantly expanded total OmniCare-TN membership and a
portion of the added members who had higher medical costs.
The MLR for OmniCare-TN was 87% and 85% for the three-month periods ended March
31, 2002 and 2001, respectively. Certain categories of the new membership in the
three-month period ended March 31, 2002 had higher medical costs which resulted
in an increase in the MLR from the comparable period. The after-tax impact of
the increased MLR was approximately $0.6 million, or $0.08 per basic and diluted
share. Effective July 1, 2001 the new contract with TennCare has provided for a
minimum of 85% of capitated revenue to be paid to medical services providers.
Marketing, general and administrative expenses decreased approximately $0.7
million (9%), to $7.6 million for the three months ended March 31, 2002 from
$8.3 million for the three months ended March 31, 2001. The decrease is
principally due to reduced staffing and advertising costs, offset by the costs
of outsourcing of claims processing by OmniCare-TN that began in February 2001.
Depreciation and amortization expense decreased $0.2 million (40%), to $0.3
million for the three months ended March 31, 2002 from $0.5 million for the
three months ended March 31, 2001, primarily due to the cessation of
amortization of goodwill in accordance with Statement of Financial Accounting
Standards No. 142.
Bad debt expense was $10.5 million for the three months ended March 31, 2001
consisting of (i) $2.6 million of management fees earned by the Company but not
paid by OmniCare-MI and a $2.0 million prior advance to OmniCare-MI of which
$1.0 million was previously reserved and (ii) a reserve of $6.9 million for the
remaining carrying value of surplus notes receivable from OmniCare-MI. The
Company recorded the above amounts at March 31, 2001, based on significant
losses generated by OmniCare-MI and an evaluation of its future cash flows.
The Company recognized earnings before income taxes of $0.6 million for the
three months ended March 31, 2002, compared to a loss before income taxes of
$6.5 million for the three months ended March 31, 2001. Net earnings were $0.3
million, or $0.04 per basic and diluted share, for the three months ended March
31, 2002, compared to a
12
net loss of $5.8 million, or $0.86 per basic and diluted share, for the three
months ended March 31, 2001, an increase of $6.1 million, or $0.90 per share.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had (i) cash and cash equivalents and short-term
marketable securities of $23.1 million, compared to $24.8 million at June 30,
2001; (ii) working capital of $8.1 million, compared to working capital of $3.6
million at June 30, 2001; and (iii) a current assets-to-current liabilities
ratio of 1.40-to-1, compared to 1.14-to-1 at June 30, 2001. The principal source
of funds for the Company during the nine months ended March 31, 2002 was $5.6
million in proceeds from the sale or maturity of marketable securities. The
principal uses of funds for the period were $1.2 million for operating
activities, $14.7 million to purchase marketable securities, $0.9 million for
capital expenditures and $1.9 million for debt repayment. The reduction of cash
and cash equivalents of $11.6 million for the nine months ended March 31, 2002
is directly attributable to the net increase in marketable securities of $9.1
million in such period.
The maturity date for the Company's amended bank term loan is September 30,
2004.
Effective July 1, 2000, OmniCare-TN entered into a 42-month contract with the
State of Tennessee's TennCare Program. The contract provided for an approximate
4.5% increase in average premiums at July 1, 2000 and a further 4% increase at
July 1, 2001 with future increases to be determined by the State of Tennessee.
Such increases are in lieu of the quarterly adverse selection payments
previously made by TennCare to compensate managed care organizations for
substantial adverse costs incurred due to the nature of the services they offer
and their treatment of a high risk population.
At June 30, 2001, OmniCare-TN was licensed in and served Shelby and Davidson
Counties in Tennessee (which include the cities of Memphis and Nashville,
respectively). Effective July 1, 2001, OmniCare-TN received approval from
TennCare to expand its service area to western Tennessee and to withdraw from
Davidson County. Additionally, a significant competitor of OmniCare-TN ceased
doing business in October 2001, and TennCare assigned approximately 40,000 of
that plan's members to OmniCare-TN on February 15, 2002. The combined effects of
such assigned new members, the service area expansion to western Tennessee and
the withdrawal from Davidson County have resulted in a 120% increase in
OmniCare-TN's membership, from 55,000 members at June 30, 2001 to 121,000
members at March 31, 2002.
OmniCare-TN's application for a commercial HMO license was approved on September
7, 2001. Management believes that the receipt of the commercial license and
OmniCare-TN's efforts to expand its provider network to Shelby County (western
Tennessee) will enable OmniCare-TN to increase its enrollment by marketing its
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managed care products to the various employer groups in the new regions served.
Management anticipates such increased enrollment beginning after fiscal 2002.
As a Michigan HMO, OmniCare-MI is subject to oversight by the Commissioner of
the Office of Financial & Insurance Services of the State of Michigan (the
"Commissioner"). On July 31, 2001, pursuant to a motion by the Commissioner, a
State circuit court judge entered an order of rehabilitation of OmniCare-MI (the
"Order") and appointed the Commissioner to serve as Rehabilitator of
OmniCare-MI. The Order directed the Rehabilitator to administer all of
OmniCare-MI's assets and business while attempting to reform or revitalize
OmniCare-MI by any means so as to effectuate its rehabilitation, preserve its
provider network and maintain uninterrupted health care services to the greatest
extent possible. Pursuant to the Order, the Rehabilitator's appointed special
deputy, Bobby Jones (the "Special Deputy Rehabilitator"), who served some years
ago as the Company's Senior Vice President and Executive Director of
OmniCare-MI, is now acting as the Chief Executive Officer of OmniCare-MI.
The Order expressly required the Company to continue performing all services
under its management agreement with OmniCare-MI until further order of the
court, and the Company has continued to perform the management agreement without
interruption. The management agreement was amended on December 14, 2001,
effective August 1, 2001. The amendment reduced the Company's management fee
revenues from OmniCare-MI beginning August 1, 2001, by changing the methodology
for determining the Company's management fee from a fixed percentage of revenues
(14%) to a cost-based fee, beginning in August 2001, subject to adjustment from
time to time to appropriately reflect the Company's actual costs of performing
the management agreement.
On March 15, 2002, the Commissioner submitted to the court a rehabilitation plan
for OmniCare-MI, which requires approval by the court. The submitted plan
observes that the management agreement between OmniCare-MI and the Company is
terminable with or without cause on 90 days' prior notice. The plan indicates an
intent to terminate the management agreement with the Company as early as
September 1, 2002, and the Company does not expect to oppose such termination.
The actual date of such termination would depend on when the rehabilitation plan
is approved and on other practical, operational factors described in the plan,
and possibly could be some time later than September 1, 2002.
The Company's ability to generate adequate amounts of cash to meet its future
cash needs will depend on a number of factors, including the ability of the
Company to efficiently operate its owned and managed plans and control medical
costs. Based on these factors, management believes it has the ability to
generate sufficient cash to meet its current liabilities.
14
PART II.
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage management to provide prospective
information about their companies without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statements. Certain
statements contained in this Form 10-Q report, including, without limitation,
statements containing the words "believes," "anticipates," "will," "could,"
"may," "might" and words of similar import constitute "forward-looking
statements" within the meaning of this "safe harbor."
Such forward-looking statements are based on management's current expectations
and involve known and unknown risks, uncertainties and other factors, many of
which the Company is unable to predict or control, that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors potentially include, among others,
the following:
1. Inability to increase premium rates commensurate with
increases in medical costs due to utilization, government
regulation, or other factors.
15
2. Discontinuation of, limitations upon, or restructuring of
government-funded programs, including but not limited to the
TennCare program.
3. Increases in medical costs, including increases in utilization
and costs of medical services and the effects of actions by
competitors or groups of providers.
4. Adverse state and federal legislation and initiatives,
including limitations upon or reductions in premium payments;
prohibition or limitation of capitated arrangements or
financial incentives to providers; federal and state benefit
mandates (including mandatory length of stay and emergency
room coverage); limitations on the ability to manage care and
utilization; and any willing provider or pharmacy laws.
5. Failure to obtain new customer bases or retain existing
customer bases or reductions in work force by existing
customers; and failure to sustain commercial enrollment to
maintain an enrollment mix required by government programs.
6. Increased competition between current organizations, the
entrance of new competitors and the introduction of new
products by new and existing competitors.
7. Adverse publicity and media coverage.
8. Inability to carry out marketing and sales plans.
9. Loss or retirement of key executives.
10. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.
11. The selection by employers and individuals of higher
co-payment/deductible/ coinsurance plans with relatively lower
premiums or margins.
12. Adverse regulatory determinations resulting in loss or
limitations of licensure, certification or contracts with
governmental payors.
13. Higher sales, administrative or general expenses occasioned by
the need for additional advertising, marketing, administrative
or MIS expenditures.
14. Increases by regulatory authorities of minimum capital,
reserve and other financial solvency requirements.
15. Denial of accreditation by quality accrediting agencies, e.g.,
the National Committee for Quality Assurance (NCQA).
16. Adverse results from significant litigation matters.
17. Increased costs to comply with the Health Insurance
Portability and Accountability Act of 1996 (HIPPA)
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: May 15, 2002 By: /s/ Gregory H. Moses, Jr.
-------------------------------------
Gregory H. Moses, Jr.
President & Chief Executive Officer
Dated: May 15, 2002 By: /s/ William E. Jackson, II
-------------------------------------
William E. Jackson, II
Chief Financial Officer
18