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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended June 30, 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES AS OF OCTOBER 9, 2002, COMPUTED BY REFERENCE TO THE NASDAQ
NATIONAL MARKET CLOSING PRICE ON SUCH DATE, WAS $7,878,845.
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF OCTOBER 9,
2002 WAS 6,911,268.
The following document (or portion thereof) has been incorporated by reference
in this Annual Report on Form 10-K: The definitive Proxy Statement for the 2002
Annual Meeting of Shareholders to be held on November 22, 2002 (Part III).
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As filed with the Securities and Exchange Commission on October 15, 2002
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business....................................................................................2
Item 2. Properties.................................................................................13
Item 3. Legal Proceedings..........................................................................14
Item 4. Submission of Matters to a Vote of Security Holders........................................14
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters ..................................................................................14
Item 6. Selected Financial Data....................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................15
Item 8. Financial Statements.......................................................................28
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................28
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................28
Item 11. Executive Compensation.....................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................29
Item 13. Certain Relationships and Related Transactions.............................................29
Item 14. Controls and Procedures....................................................................29
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................29
Financial Statements..........................................................................................F-1
PART I
ITEM 1. BUSINESS
GENERAL
United American Healthcare Corporation (the "Company") was incorporated in
Michigan on December 1, 1983 and commenced operations in May 1985. Unless the
context otherwise requires, all references to the Company indicated herein shall
mean United American Healthcare Corporation and its consolidated subsidiaries.
The Company provides comprehensive management and consulting services to managed
care organizations, including health maintenance organizations in Tennessee and
(until November 1, 2002) Michigan. The Company also arranges for the financing
of health care services and delivery of these services by primary care
physicians and specialists, hospitals, pharmacies and other ancillary providers
to commercial employer groups and government-sponsored populations in Tennessee
and (until November 1, 2002) Michigan.
Management and consulting services provided by the Company are generally to
health maintenance organizations with a targeted mix of Medicaid and
non-Medicaid/commercial enrollment. As of October 1, 2002, there were
approximately 203,000 enrollees in the two managed care organizations owned or
operated by the Company (the "Managed Plans"): approximately 120,000 enrollees
in OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), 75%-owned by the
Company's wholly owned subsidiary; and approximately 83,000 enrollees in
OmniCare Health Plan, in Michigan ("OmniCare-MI").
Pursuant to notice received from OmniCare-MI, the Company's management agreement
with OmniCare-MI will terminate November 1, 2002. On that date, the Company will
cease providing services to OmniCare-MI, and OmniCare-TN will be the Company's
only Managed Plan.
Management and consulting services provided by the Company include feasibility
studies for licensure, strategic planning, corporate governance, management
information systems, human resources, marketing, pre-certification, utilization
review programs, individual case management, budgeting, provider network
services, accreditation preparation, enrollment processing, claims processing,
member services and cost containment programs.
In 1985, the Company became one of the pioneers in arranging for the financing
and delivery of health care services to Medicaid recipients utilizing managed
care programs. Management believes the Company has gained substantial expertise
in understanding and serving the particular needs of the Medicaid population. As
of October 1, 2002, there were approximately 150,000 Medicaid enrollees in the
two Managed Plans.
The Company complements its Medicaid focus by targeting non-Medicaid/commercial
business in the same geographic markets. As of October 1, 2002, there were
approximately 53,000 non-Medicaid/commercial enrollees in the two Managed Plans.
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INDUSTRY
In an effort to control costs while assuring the delivery of quality health care
services, the public and private sectors have increasingly turned to managed
care solutions. As a result, the managed care industry, which includes health
maintenance organization ("HMO"), preferred provider organization ("PPO") and
prepaid health service plans, has grown substantially.
While the trend toward managed care solutions has traditionally been pursued
most aggressively by the private sector, the public sector has embraced the
trend in an effort to control the costs of health care provided to Medicaid
recipients. Consequently, many states are promoting managed care initiatives to
contain these rising costs and supporting programs that encourage or mandate
Medicaid beneficiaries to enroll in managed care plans.
MANAGED CARE PRODUCTS AND SERVICES
The Company has an ownership interest in and manages the operations of an HMO in
Tennessee, OmniCare-TN. The Company also manages the operations of an HMO in
which it has no ownership interest, OmniCare-MI, pursuant to a management
agreement which will terminate November 1, 2002. The Company previously
participated in the "County Care" plan under a contract with Urban Hospital Care
Plus, which expired on September 30, 2001 at the Company's election.
The Company also has had an ownership interest in three other HMOs which are no
longer part of its business: UltraMedix Healthcare Systems, Inc., in Florida
("UltraMedix"), OmniCare Health Plan of Louisiana, Inc., in Louisiana
("OmniCare-LA") and PhilCare Health Systems, Inc., in Pennsylvania ("PhilCare"),
each briefly described below in this Form 10-K annual report.
The following table shows the approximate membership in the Managed Plans
serviced by the Company as of October 1, 2002:
Non-Medicaid/
Medicaid Commercial Total
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Managed Plans
Owned:
OmniCare-TN 87,000 33,000 120,000
Managed:
OmniCare-MI* 63,000 20,000 83,000
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150,000 53,000 203,000
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* The Company will no longer manage OmniCare-MI, effective November 1,
2002.
The following table shows the Company's principal revenue sources in dollar
amounts and as a percentage of the Company's total revenues for the periods
indicated. Such data are not indicative of the relative contributions to the
Company's net earnings.
3
YEAR ENDED JUNE 30,
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2002 2001 2000
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(in thousands, except percentages)
Revenues
OmniCare-TN $ 160,608 90% $ 93,305 71% $ 77,005 71%
OmniCare-MI* 14,941 8% 26,394 20% 18,769 17%
County Care** 2,486 1% 9,699 7% 9,169 8%
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* The Company's gross revenues derived from OmniCare-MI are based on
management fees earned under a management agreement with OmniCare-MI,
which will terminate November 1, 2002.
** County Care was no longer a managed plan of the Company after
September 30, 2001.
MANAGED PLANS
The Company has entered into a long-term management agreement, through a wholly
owned subsidiary of the Company, with OmniCare-TN. In addition, the Company has
had a long-term management agreement with OmniCare-MI, which will terminate
November 1, 2002. Pursuant to these management agreements with OmniCare-TN and
OmniCare-MI, the Company provides management and consulting services associated
with the financing and delivery of health care services. Table A summarizes the
terms of these agreements. The Company also participated in the County Care plan
pursuant to an agreement to arrange for the delivery of health care services,
which expired September 30, 2001.
Services provided to the Managed Plans include strategic planning; corporate
governance; human resource functions; provider network services; provider
profiling and credentialing; premium rate setting and review; marketing services
(group and individual); accounting and budgeting functions; deposit,
disbursement and investment of funds; enrollment functions; collection of
accounts; claims processing; management information systems; utilization review;
and quality management.
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Table A- Summary of Terms of Agreements with the Managed Plans
Terms OmniCare-TN OmniCare-MI(1)
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(1) Duration:
(a) Effective dates:
(i) Commencement July 1, 1996 May 1, 1985
(ii) Expiration June 30, 2005 Nov. 1, 2002
(b) Term extension:
(i) Automatically renewable Yes - 4 successive No
5-year periods
(ii) Terms of renewal/ continuation 5 years N/A
(iii) Next review period January 1, 2005 N/A
(c) Termination:
(i) Without cause by the Plan at such
review dates Yes 90 Days
(ii) Either party with cause Yes 90 Days
(2) Fees paid to the Company:
(a) Percentage of revenues Yes Yes(2)
(b) Fixed premium rates No No
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(1) The Company's management agreement with OmniCare-MI was amended after the
Rehabilitator of OmniCare-MI was appointed by court order on July 31, 2001,
and will terminate November 1, 2002, pursuant to notice the Company has
received from OmniCare-MI.
(2) Fees paid to the Company were changed, however, to a cost-based fee, by
amendment dated December 14, 2001 and effective August 1, 2001.
Managed Plans Owned by the Company
OMNICARE-TN. OmniCare-TN was organized as a Tennessee corporation in October
1993, and is headquartered in Memphis, Tennessee. The Company was active in the
development of OmniCare-TN, and through the Company's wholly owned subsidiary,
United American of Tennessee, Inc., owns a 75% equity interest in OmniCare-TN; a
local partner owns the remaining 25%. OmniCare-TN began as a PPO contractor with
the Bureau of TennCare, a State of Tennessee program that provides medical
benefits to Medicaid and working uninsured and uninsurable recipients, and
operated as a full-risk prepaid health services plan until it obtained its
TennCare HMO license in March 1996. OmniCare-TN's TennCare HMO contract was
executed in October 1996, retroactive to the date of licensure.
In November 1993, OmniCare-TN contracted with TennCare as a Medicaid PPO to
arrange for the financing and delivery of health care services on a capitated
basis to eligible Medicaid beneficiaries and the Working Uninsured and
Uninsurable ("Non-Medicaid") individuals who lack access to private or employer
sponsored health insurance or to another government health plan. TennCare placed
an indefinite moratorium on Working Uninsured enrollment in December 1994;
however, such action did not affect persons enrolled in a plan prior to the
moratorium. In April 1997, enrollment was expanded to include the children of
the Working Uninsured up to age 18.
5
The contract between OmniCare-TN and State of Tennessee, doing business as
TennCare ("TennCare"), was renewed July 1, 2000 for a 42-month term, expiring
December 31, 2003. The new contract provided for increased capitation rates, but
eliminated the practice of providing retroactive payments to managed care
organizations for high cost chronic conditions of their members ("adverse
selection") and payments earmarked as adjustments for covered benefits. In
addition, the new contract required that at least 85% of capitation revenues
received by OmniCare-TN must be passed on to medical service providers.
OmniCare-TN was assigned approximately 6,000 members by TennCare in the second
half of fiscal 2000 as a result of three other managed care organizations, which
had contracts with TennCare, ceasing to serve their enrollees or being unable to
take on new enrollees. Medical services expenses for such new OmniCare-TN
members disproportionately exceeded OmniCare-TN's normal per member per month
("PMPM") experience and adversely affected its earnings for and since that
period. OmniCare-TN received from TennCare in fiscal 2001 an adverse selection
payment of $0.8 million for such fiscal 2000 expenses.
In June 2001, TennCare developed new risk-sharing options for its participating
managed care organizations (MCOs), including OmniCare-TN. OmniCare-TN entered
into its changed contract with TennCare effective July 1, 2001.
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. As of October 1, 2002,
OmniCare-TN's total enrollment was approximately 120,000 members, of whom 73%
were Medicaid enrollees and 27% were Non-Medicaid enrollees.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program
which entailed changes to TennCare's contracts with MCOs, including OmniCare-TN.
During that period, MCOs are generally compensated for administrative services
only (commonly called "ASO"), earn fixed administrative fees, are not at risk
for medical costs in excess of targets established based on various factors, are
subject to increased oversight, may earn limited additional administrative fees
based on certain performance measures as an incentive to manage medical costs
below the targets, and may incur financial penalties for not achieving certain
performance requirements. The limited variable administrative fees could reward
certain measurable MCO performance in the following areas; third party liability
recovery rates; early and periodic screening, diagnosis and treatment (EPSDT) of
children; multi-source prescription drug utilization; reduced appeals related to
provider access; and successful collaboration on an EPSDT initiative.
OmniCare-TN sought reimbursement from TennCare for exceptionally high medical
expenses incurred by new OmniCare-TN enrollees in fiscal year 2002, including
for actuarially estimated claims incurred but not yet reported to OmniCare-TN.
In response, TennCare amended its contract with OmniCare-TN in September 2002,
retroactive to July 1, 2001 in some respects and to May 1, 2002 in other
respects. The amendment states that OmniCare-TN's outside actuary certified the
plan required $7.5 million to meet its statutory net worth requirement for the
year
6
ended June 30, 2002 and that OmniCare-TN "is a viable HMO under contract with
TennCare on the same basis as other comparable HMOs in the program effective
July 1, 2002."
Pursuant to such contractual amendment: OmniCare-TN retroactively elected an
available risk option for the ten months from July 1, 2001 through April 30,
2002; TennCare retroactively agreed to reimburse OmniCare-TN on a no-risk ASO
basis for medical services effective beginning May 1, 2002, and TennCare agreed
to pay OmniCare-TN up to $7.5 million as necessary to meet its statutory net
worth requirement as of June 30, 2002. Pursuant to an agreement between TennCare
and OmniCare-TN in October 2002, TennCare further agreed to pay additional funds
to OmniCare-TN if future certified actuarial data confirm they are needed by
OmniCare-TN to meet that requirement.
OmniCare-TN's application for a commercial HMO license was approved on September
7, 2001. Management is not yet actively pursuing that commercial business,
however, due to OmniCare-TN's substantially increased enrollment from members
TennCare assigned from defunct other plans, together with adapting to TennCare's
18-month stabilization program.
COUNTY CARE. At the Company's election, its County Care contract expired
September 30, 2001. The contract did not provide significant earnings to the
Company, and its termination did not have a material effect on subsequent
operations of the Company. The Company had entered into the contract effective
April 1, 1999, with a nonprofit corporation which administered Wayne County,
Michigan's patient care management system. Under the contract, the Company
arranged for the delivery of health care services, including the assumption of
underwriting risk, on a capitated basis to certain enrollees residing in the
County who lacked access to health insurance or to another government health
plan. Wayne County, Michigan, includes Detroit and other cities and communities.
ULTRAMEDIX. Through a subsidiary, the Company owned 51% of UltraMedix, a Florida
HMO which became insolvent and was placed in liquidation by court order in early
1998. In April 1998, a Florida health care administration agency notified the
Company of intent to enforce its agreement to reimburse UltraMedix's contracted
Medicaid providers for certain services the Agency had paid for on enrollees'
behalf, limited to the surplus UltraMedix would have had to maintain absent such
agreement. The Company maintained a $6.4 million estimated medical claims
liability reserve for UltraMedix until March 31, 2000, when the Company reduced
the reserve by $5.6 million and offset that amount against medical services
expenses. At March 31, 2001, the Company eliminated the remaining reserve of
$0.8 million.
Managed Plan Operated by the Company
OMNICARE-MI. As further described below, OmniCare-MI will cease to be a Managed
Plan operated by the Company effective November 1, 2002.
OmniCare-MI is a not-for-profit, tax-exempt corporation headquartered in
Detroit, Michigan and serving southeastern Michigan, operating in Wayne,
Oakland, Macomb, Monroe and Washtenaw counties. Its history includes a number of
innovations that were adopted and proved successful for the industry. It was the
first network model HMO in the country and the first to capitate physician
services in an IPA-model HMO (an Independent Practice Association model HMO does
not employ physicians as staff, but instead contracts with associations or
groups of
7
independent physicians to provide services to HMO members). OmniCare-MI also
created and implemented the first known mental health capitation carve out in
1983.
OmniCare-MI's current enrollment is through companies that offer the health plan
coverage to employees and their family members, through individual enrollment
and through the State of Michigan's Medicaid program pursuant to an agreement
with the Michigan Department of Community Health, which makes HMO coverage
available to eligible Medicaid beneficiaries in certain counties and mandatory
in others.
As of October 1, 2002, total enrollment in OmniCare-MI was approximately 83,000,
of whom 24% were commercial members and 76% were Medicaid members.
On April 13, 2000 and June 30, 1998, the Company funded unsecured loans to
OmniCare-MI evidenced by surplus notes of $7.7 million and $4.6 million,
respectively, to enable OmniCare-MI to meet its minimum statutory requirements
for net worth and working capital. The $7.7 million loan consisted of $4.0
million in cash and conversion of $3.7 million of management fees owed to the
Company and the $4.6 million loan was in cash. Pursuant to the terms of the
surplus notes, interest and principal payments required approval by the Michigan
Office of Financial and Insurance Services and were repayable only from any
statutory surplus earnings of OmniCare-MI. Note interest was payable annually
and forfeited if not then paid. Interest income of $0.9 million, $1.1 million
and $0.5 million was forfeited for fiscal years 2002, 2001 and 2000,
respectively. The note principal had no stated maturity or repayment date. The
surplus notes were subordinated to all other claimants of OmniCare-MI. Based on
an analysis of OmniCare-MI's projected cash flows, the Company recorded
impairment losses on the valuation of the surplus notes which resulted in bad
debt expense of $6.9 million and $3.1 million for the years ended June 30, 2001
and 2000, respectively. On July 29, 2002, claims of all creditors holding
surplus notes from OmniCare-MI were permanently disallowed by the State circuit
court order which approved OmniCare-MI's amended rehabilitation plan.
On May 1, 2000, approximately 28,000 members of the Detroit Medical Center's
Medicaid managed care program were transferred to OmniCare-MI. The additional
membership generated management fee revenue of $4.0 million and $0.6 million in
fiscal years 2001 and 2000, respectively.
On July 14, 2000, the State of Michigan notified OmniCare-MI it was a successful
bidder in the bid process for increased Medicaid rates and continued eligibility
as an HMO providing coverage to enrollees of the State's Comprehensive Health
Care Program for Medicaid beneficiaries. OmniCare-MI accordingly was awarded a
rate increase and extension of its contract with the State to September 30,
2002, with a potential for three one-year extensions.
As a Michigan HMO, OmniCare-MI is subject to oversight by the State of
Michigan's Commissioner of the Office of Financial and Insurance Services (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 as Rehabilitator of OmniCare-MI. The
Order directed the Rehabilitator to administer all of OmniCare-MI's assets and
business while attempting to effectuate its rehabilitation, preserve its
provider network and maintain uninterrupted health care services to the greatest
extent possible. Pursuant to and since the Order, the Rehabilitator's appointed
special deputy, Bobby Jones, who
8
served some years ago as the Senior Vice President of OmniCare-MI, has served as
the Chief Executive Officer of OmniCare-MI.
The Order required the Company to continue performing all services under its
OmniCare-MI management agreement, which the Company has done. The Company has
received notice from OmniCare-MI that the management agreement will terminate
November 1, 2002. The notice was given pursuant to OmniCare-MI's amended
rehabilitation plan, which a Michigan circuit court judge approved on July 29,
2002. The Company earlier announced it anticipated the eventual termination of
the OmniCare-MI management agreement back in March 2002, after the Commissioner
filed a proposed rehabilitation plan for OmniCare-MI.
The OmniCare-MI management agreement was amended 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 (14%) of
premiums earned by OmniCare-MI to a cost-based fee, which was equivalent to
approximately 10% beginning in August 2001, subject to adjustment to
appropriately reflect the Company's actual costs of performing the management
agreement. The amendment continued unchanged the other basic terms of the
Company's management agreement with OmniCare-MI as summarized in Table A under
"Managed Plans" above.
Previous Managed Plan Ventures
OMNICARE-LA. OmniCare-LA was a Louisiana HMO organized in 1994, 100% owned by a
wholly owned subsidiary of the Company. In 1996, OmniCare-LA obtained its HMO
license, with the Company funding OmniCare-LA's statutory reserve and net worth
requirements through letters of credit and $1.0 million in cash deposited at
Louisiana banks. OmniCare-LA was in a pre-operational phase continually since
inception. The Company withdrew its $1.0 million statutory reserve, terminated
its letter of credit commitments and dissolved OmniCare-LA in May 2000.
PHILCARE. PhilCare was a Pennsylvania HMO organized in 1994, 49% owned by a
wholly owned subsidiary of the Company, United American of Pennsylvania, Inc.
("UA-PA"). In 1996, PhilCare obtained its HMO license, with the Company funding
PhilCare's statutory reserve and net worth requirements of $2.1 million through
cash deposited at a Pennsylvania bank. In fiscal 1998 the Company recorded a
full impairment loss against its $2.1 million investment. PhilCare was dissolved
in the Company's fiscal 2000. PhilCare assets were then distributed to UA-PA
pursuant to agreements under which UA-PA had contributed those assets, and the
Company recovered its $2.1 million investment in PhilCare, resulting in a gain
in that amount for the fiscal year ended June 30, 2000. The Company also had
rent obligations for Philadelphia office spaces which were substantially sublet
in fiscal 1998. The landlord assumed the subleases and released the Company from
its lease obligations effective September 9, 1999.
ADVICA HEALTH MANAGEMENT. In March 1993, the Company agreed with the HealthScope
company to form a health care management company to access the Medicaid eligible
population in metropolitan New York. HealthScope became a subsidiary of Advica
Health Management ("Advica"). In May 1997, the Company converted its interest in
Advica to $4.0 million of Advica preferred stock and a warrant for Advica common
stock. Treated as a "troubled debt
9
restructuring," the conversion resulted in a $2.3 million recorded net
investment in Advica. In fiscal 1998, the Company recognized a full impairment
loss on its investment that resulted in bad debt expense of $2.3 million.
Subsequently, the Company converted its Advica preferred stock and warrant to
Advica common stock. On November 8, 2000, XCare.net, an electronic commerce
service provider for health care businesses, purchased all of Advica's common
stock for $2.2 million, including cash and 70,000 XCare.net common shares. The
Company's interest in Advica converted to less than 3% of XCare.net common
shares and is deemed to be insignificant.
Self-Funded Benefit Plan
In 1993, the Company acquired Corporate Healthcare Financing, Inc. ("CHF"),
which served self-funded employers with customized employee welfare plan
arrangements and marketing, management and administrative services generally. In
September 1998, the Company sold all of the stock of CHF for $17.75 million,
comprised of cash and $15.75 million in buyer's notes. On August 16, 1999, the
Company received the final payment of principal and interest on the notes, net
of a $0.25 million discount to induce the buyer to prepay the notes.
GOVERNMENT REGULATION
The Company is subject to extensive federal and state health care and insurance
regulations designed primarily to protect enrollees in the Managed Plans,
particularly with respect to government sponsored enrollees. Such regulations
govern many aspects of the Company's business affairs and typically empower
state agencies to review management agreements with health care plans for, among
other things, reasonableness of charges. Among the other areas regulated by
federal and state law are licensure requirements, premium rate increases, new
product offerings, procedures for quality assurance, enrollment requirements,
covered benefits, service area expansion, provider relationships and the
financial condition of the managed plans, including cash reserve requirements
and dividend restrictions. There can be no assurances that the Company or its
Managed Plans will be granted the necessary approvals for new products or will
maintain federal qualifications or state licensure.
The licensing and operation of OmniCare-TN and OmniCare-MI are governed by the
respective states' statutes and regulations applicable to health maintenance
organizations. The licenses are subject to denial, limitation, suspension or
revocation if there is a determination that the plans are operating out of
compliance with the states' HMO statutes, failing to provide quality health
services, establishing rates that are unfair or unreasonable, failing to fulfill
obligations under outstanding agreements or operating on an unsound fiscal
basis. Unlike OmniCare-MI, OmniCare-TN is not a federally-qualified HMO and,
therefore, is not subject to the federal HMO Act.
Federal and state regulation of health care plans and managed care products is
subject to frequent change, varies from jurisdiction to jurisdiction and
generally gives responsible administrative agencies broad discretion. Laws and
regulations relating to the Company's business are subject to amendment and/or
interpretation in each jurisdiction. In particular, legislation mandating
managed care for Medicaid recipients is often subject to change and may not
initially be accompanied by administrative rules and guidelines. Changes in
federal or state governmental regulation could affect the Company's operations,
profitability and business prospects. While
10
the Company is unable to predict what additional government regulations, if any,
affecting its business may be enacted in the future or how existing or future
regulations may be interpreted, regulatory revisions may have a material adverse
effect on the Company.
INSURANCE
The Company presently carries comprehensive general liability, directors and
officers liability, property, business automobile, and workers' compensation
insurance. Management believes that coverage levels under these policies are
adequate in view of the risks associated with the Company's business. In
addition, the Managed Plans have professional liability insurance that covers
liability claims arising from medical malpractice. The individual Managed Plans
are required to pay the insurance premiums under the terms of the respective
management agreements. There can be no assurance as to the future availability
or cost of such insurance, or that the Company's business risks will be
maintained within the limits of such insurance coverage.
COMPETITION
The managed care industry is highly competitive. The Company directly competes
with other entities that provide health care plan management services, some of
which are nonprofit corporations and others which have significantly greater
financial and administrative resources. The Company primarily competes on the
basis of fee arrangements, cost effectiveness and the range and quality of
services offered to prospective health care clients. While the Company believes
that its experience gives it certain competitive advantages over existing and
potential new competitors, there can be no assurance that the Company will be
able to compete effectively in the future.
The Company competes with other HMOs, PPOs and insurance companies. The level of
this competition may affect, among other things, the operating revenues of the
Managed Plans and, therefore, the revenues of the Company. OmniCare-TN's primary
market competitors in western Tennessee are TLC, Better Health Plans and
TennCare Select. OmniCare-TN primarily competes on the basis of enrollments,
provider networks and other related plan features and criteria. Management
believes that OmniCare-TN is able to compete effectively with its primary market
competitors.
EMPLOYEES
The Company's ability to maintain its competitive position and expand its
business into new markets depends, in significant part, upon the maintenance of
its relationships with various existing senior officers, as well as its ability
to attract and retain qualified health care management professionals. The
Company neither has nor intends to pursue any long-term employment agreement
with any of its key personnel. Accordingly, there is no assurance that the
Company will be able to maintain such relationships or attract such
professionals.
The total number of employees at October 1, 2002 was 274 compared to 256 at
October 1, 2001. The Company's employees do not belong to a collective
bargaining unit and management considers its relations with employees to be
good.
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The Company anticipates that its above-stated total number of employees at
October 1, 2002 will decrease by 150 at November 1, 2002 in connection with the
termination of its OmniCare-MI management agreement. OmniCare-MI has informed
the Company that effective November 1, 2002, OmniCare-MI will commence employing
most of the current Company employees (excluding officers) who provide services
for OmniCare-MI. The Company has given termination notices, effective November
1, 2002, to its employees who provide services for OmniCare-MI but whom
OmniCare-MI will not employ; and the Company will have no severance payment
obligations to any of those employees.
MANAGEMENT INFORMATION SYSTEMS
The Company has been implementing over the past two years a strategic
information technology plan to enhance operations, support provider, member and
employer information requirements, and reduce costs. The Company intended to use
the software and hardware associated with this plan for OmniCare-MI initially,
but will not do that after its OmniCare-MI management agreement terminates
November 1, 2002. The Company now is evaluating whether such systems will be
utilized for OmniCare-TN, which has been outsourcing its claims processing
function to a third party by contract since the third quarter of fiscal 2001,
with pricing based on membership.
An initial phase of the strategic information technology plan provided for
automation of claims entry by scanning, imaging and electronic data interchange
software. This was completed and implemented for OmniCare-MI in the fourth
calendar quarter of 2000, with electronic data interchange completed in 2001.
Also pursuant to the strategic information technology plan, the Company
purchased a new patient care software system from OAO Health Care Systems, to
replace the claims processing and payment system it has been using for
OmniCare-MI. This purchase was intended to fulfill a requirement of the State of
Michigan's Office of Financial and Insurance Services to implement such a system
for OmniCare-MI. The new system is expected to operate in a real-time mode
enabling rapid response to information needs. It is intended to automate
activities associated with membership and enrollment, benefits management,
premium billing, member services, claims/encounter processing, medical
management, case management, quality management, referral management, provider
contracting, and HEDIS (Health Plan Employer Data and Information Set)
reporting.
As of June 30, 2002, the new patient care software system was not in use by the
Company. Management therefore determined it was prudent to record an impairment
loss equal to the $2.4 million remaining carrying value of the system in the
fourth quarter of fiscal 2002.
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-K annual report, including, without
limitation, statements
12
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.
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.
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. Adverse regulatory determinations resulting in loss or
limitations of licensure, certification or contracts with
governmental payors.
12. Higher sales, administrative or general expenses occasioned by
the need for additional advertising, marketing, administrative
or MIS expenditures.
13. Increases by regulatory authorities of minimum capital,
reserve and other financial solvency requirements.
14. Denial of accreditation by quality accrediting agencies, e.g.,
the National Committee for Quality Assurance (NCQA).
15. Adverse results from significant litigation matters.
16. Inability to maintain or obtain satisfactory bank loan credit
arrangements.
17. Increased costs to comply with the Health Insurance
Portability and Accountability Act of 1996 (HIPAA).
ITEM 2. PROPERTIES
The Company currently leases approximately 86,000 aggregate square feet from
which it conducts its operations in Michigan and Tennessee. The principal
offices of the Company are located at 1155 Brewery Park Boulevard, Suite 200,
Detroit, Michigan, where it currently leases
13
approximately 54,000 square feet of office space. Because of its workforce
reduction as a result of the November 1, 2002 termination of its OmniCare-MI
management agreement, the Company has arranged to sublease all of its present
Detroit office space to OmniCare-MI, effective November 1, 2002 and expiring at
the end of the lease in May 2005. The Company anticipates moving its principal
offices to smaller premises yet to be determined, with prompt public notice of
any new location when determined.
The Company believes that its current facilities provide sufficient space
suitable for all of its activities and that sufficient other space will be
available on reasonable terms, if needed.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Shares of the Company's Common Stock have been traded since May 16, 2002 on the
NASDAQ National Market with the symbol "UAHC." Prior thereto, shares of the
Company's Common Stock were traded since May 2, 2000 on the OTC Bulletin Board
with the symbol "UAH" and before then during fiscal year 2000 were traded on the
New York Stock Exchange with the symbol "UAH."
The table below sets forth for the Common Stock the range of the high and low
sales prices on the NASDAQ National Market or high and low bid quotations on the
OTC Bulletin Board, as applicable, for each quarter in the past two fiscal
years.
2002 SALES PRICE 2001 SALES PRICE
OR BID QUOTATION OR BID QUOTATION
---------------------------------- -------------------------------------
FISCAL QUARTER HIGH LOW HIGH LOW
--------------------------- ---------------------------------- -------------------------------------
First $1.63 $0.95 $0.688 $0.375
Second $5.18 $1.11 $2.938 $0.344
Third $7.50 $4.28 $3.719 $1.25
Fourth $6.38 $3.78 $1.89 $1.15
As of October 9, 2002, the closing price of the Common Stock was $1.14 per share
and there were approximately 196 shareholders of record of the Company.
The Company has not paid any cash dividends on its Common Stock since its
initial public offering in the fourth quarter of fiscal 1991 and does not
anticipate paying such dividends in the foreseeable future. The Company intends
to retain earnings for use in the operation and expansion of its business.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table shows consolidated financial data for the periods indicated:
--------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------------------
Operating Data (Year ended June 30): (in thousands, except per share data)
------------------------------------
Operating revenues $ 180,117 $ 131,724 $ 109,053 $ 93,522 $ 105,588
Earnings (loss) from continuing
operations (10,963) 1,229 984 575 (22,915)
Earnings (loss) from discontinued
operation, net of income taxes - - - - (2,581)
Net earnings (loss) (10,963) 1,229 984 575 (25,496)
Earnings (loss) per common share from
continuing operations - basic $ (1.60) $ 0.18 $ 0.15 $ 0.09 $ (3.48)
Net earnings (loss) per common share -
basic and diluted $ (1.60) $ 0.18 $ 0.15 $ 0.09 $ (3.88)
Weighted average common shares
outstanding - diluted 7,084 6,808 6,779 6,764 6,578
Balance Sheet Data (June 30):
-----------------------------
Cash and investments $ 18,810 $ 24,766 $ 10,569 $ 18,576 $ 14,690
Intangible assets, net 2,952 2,952 3,663 4,374 5,629
Net assets of discontinued operation - - - - 16,703
Total assets 33,336 41,657 34,809 49,251 58,684
Medical claims and benefits payable 24,495 19,815 11,245 19,810 20,004
Debt 2,869 3,492 4,345 13,112 22,444
Shareholders' equity 1,747 12,313 11,051 10,360 9,081
--------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Financial Review discusses the Company's results of operations, financial
position and liquidity. This discussion should be read in conjunction with the
consolidated financial statements and related notes thereto contained elsewhere
in this annual report.
The Company experienced significant changes in its Tennessee and Michigan
operations in the fiscal year ended June 30, 2002. OmniCare-TN's membership
increased from approximately 55,000 at June 30, 2001 to approximately 120,000 at
June 30, 2002, in a markedly changed reimbursement
15
environment for it and other managed care organizations in Tennessee.
OmniCare-MI was placed in court-ordered rehabilitation proceedings on July 31,
2001, which relieved the Company from further funding OmniCare-MI's capital
deficiencies and which continued its OmniCare-MI management agreement beyond
June 30, 2002, with substantially reduced management fee revenues from
OmniCare-MI beginning August 1, 2001. In March 2002, upon the court-appointed
Rehabilitator's filing a proposed rehabilitation plan for OmniCare-MI, the
Company announced it anticipated eventual termination of the management
agreement. Such termination will occur November 1, 2002, after which OmniCare-TN
will be the Company's only managed plan. These matters are more fully discussed
and analyzed below under the heading "Review of Consolidated Results of
Operations - 2002 Compared to 2001."
The following are earlier events which notably affected results of operations
for fiscal years covered by the consolidated financial statements contained
elsewhere in this annual report.
In September 1998, effective August 31, 1998, CHF was sold for $17.75 million,
comprised of cash and $15.75 million in buyer's notes. On August 16, 1999, the
Company was paid $8.5 million, the remaining principal balance of the notes and
accrued interest, net of a $0.25 million discount to induce the buyer to prepay
the notes. All proceeds were used to reduce the Company's bank indebtedness.
Pursuant to a stock repurchase plan of the Company's Board of Directors, 237,100
Company common shares were repurchased in the open market and retired in July
1999.
On April 13, 2000 and June 30, 1998, the Company funded unsecured loans to
OmniCare-MI evidenced by surplus notes of $7.7 million and $4.6 million,
respectively, to enable OmniCare-MI to meet minimum statutory requirements for
net worth and working capital. The $7.7 million loan consisted of $4.0 million
cash and conversion of $3.7 million of management fees owed to the Company.
Pursuant to the terms of the surplus notes, interest and principal payments
required approval by the State of Michigan's Office of Financial and Insurance
Services and were repayable only from any statutory surplus earnings of
OmniCare-MI. Note interest was payable annually and forfeited if not then paid.
Interest income of $0.9 million, $1.1 million and $0.5 million was forfeited for
fiscal 2002, 2001 and 2000, respectively. The note principal had no stated
maturity or repayment date. The surplus notes were subordinated to all other
claimants of OmniCare-MI. Based on an analysis of OmniCare-MI's projected cash
flows, the Company recorded impairment losses on the valuation of the surplus
notes which resulted in bad debt expense of $6.9 million and $3.1 million for
fiscal 2001 and 2000, respectively. On July 29, 2002, claims of all creditors
holding OmniCare-MI surplus notes were permanently disallowed by the State
circuit court order which approved OmniCare-MI's amended rehabilitation plan.
On July 14, 2000, the State of Michigan notified OmniCare-MI it was a successful
bidder in the bid process for increased Medicaid rates and continued eligibility
as an HMO providing coverage to enrollees of the State's Comprehensive Health
Care Program for Medicaid beneficiaries. OmniCare-MI accordingly was awarded a
rate increase and extension of its contract with the State to September 30,
2002, with a potential for three one-year extensions.
16
In April 1998, a Florida health care administration agency notified the Company
of intent to enforce its agreement to reimburse UltraMedix's contracted Medicaid
providers for certain services which the Agency had paid for on enrollees'
behalf, limited to the amount of surplus UltraMedix would have had to maintain
under the Medicaid contract absent such agreement. The Company established at
December 31, 1997 a $6.4 million estimated medical claims reserve for UltraMedix
and maintained it until March 31, 2000, when the Company concluded the
continuing reserve requirement should be $0.8 million, and therefore reduced the
$6.4 million reserve by $5.6 million and offset that amount against medical
services expenses. At March 31, 2001, the Company eliminated the remaining
reserve of $0.8 million.
In fiscal 1998, based on an evaluation of the net recoverable value of the
Company's investment in PhilCare, the Company recorded a full impairment loss
against its $2.1 million investment. PhilCare was dissolved in fiscal 2000.
PhilCare assets were then distributed to UA-PA pursuant to agreements under
which UA-PA contributed those assets, and the Company recovered its $2.1 million
investment in PhilCare, resulting in a gain in that amount for fiscal 2000.
Effective July 1, 2000, OmniCare-TN entered into a new 42-month contract with
the State of Tennessee's TennCare Program. The contract provided for an
approximate 4.5% increase in average premiums effective July 1, 2000 and a
further 4% increase effective July 1, 2001, with future increases to be
determined by the State of Tennessee. Such increases were 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.
On September 20, 2000, the Company made an additional cash contribution of $0.9
million to OmniCare-TN in exchange for additional preferred stock of
OmniCare-TN. The cash contribution was made to enable OmniCare-TN to meet
minimum statutory requirements for net worth.
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 2002 COMPARED TO 2001
OmniCare-TN Developments
Fiscal 2002 was a year of significant changes for OmniCare-TN and the other
managed care organizations ("MCOs") having contracts with TennCare, a State of
Tennessee program that provides medical benefits to Medicaid and working
uninsured and uninsurable recipients. In a climate of continually rising medical
costs, several of TennCare's major MCOs ceased doing business in fiscal 2002. In
contrast, TennCare has expressly regarded OmniCare-TN as one of TennCare's
viable MCOs.
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 failed plan's members to OmniCare-TN on February 15, 2002. As of October 1,
17
2002, OmniCare-TN's total enrollment was approximately 120,000 members, compared
to 55,000 at July 1, 2001.
OmniCare-TN's TennCare contract which was in effect on July 1, 2001 had been
renewed on July 1, 2000 for a 42-month term, expiring December 31, 2003. The new
contract provided for increased capitation rates, but eliminated the earlier
practice of providing retroactive payments to MCOs for high cost chronic
conditions of their members ("adverse selection") and payments earmarked as
adjustments for covered benefits.
In June 2001, TennCare developed new risk-sharing options for its MCOs,
including OmniCare-TN. OmniCare-TN entered into its changed contract with
TennCare effective July 1, 2001.
OmniCare-TN experienced a combination of circumstances in the fourth quarter of
fiscal 2002 which were unexpected and not foreseeable by management. Beginning
in February, March and April 2002, OmniCare-TN noticed increases in its claims
payments, investigated, and found that approximately 9,500 new members added in
September-December 2001 represented children with special needs with medical
costs over 100% of the premiums received, and that many members transferred to
OmniCare-TN from failed MCOs also had medical costs in excess of OmniCare-TN's
premiums received. Beginning in April 2002, OmniCare-TN wrote to TennCare
seeking risk adjustments and reimbursements to compensate OmniCare-TN for such
medical expenses, including for actuarially estimated claims incurred but not
yet reported to OmniCare-TN.
TennCare responded to its MCOs' situation generally and in some instances
individually. For all its contracted MCOs generally, TennCare changed its
reimbursement system to an administrative services only ("ASO") program for an
18-month stabilization period (July 1, 2002 through December 31, 2003), during
which the MCOs - including OmniCare-TN - have no medical cost risk (i.e., no
risk for medical losses), earn fixed administrative fees, are subject to
increased oversight, may earn limited additional administrative fees based on
certain performance measures as an incentive to manage medical costs below the
targets, and may incur financial penalties for not achieving certain performance
requirements. TennCare has stated it intends to return to a full-risk system
after the end of the 18-month stabilization period at January 1, 2004.
TennCare responded to OmniCare-TN's situation individually as well. TennCare
amended its contract with OmniCare-TN in September 2002, retroactive to July 1,
2001 in some respects and to May 1, 2002 in other respects. The amendment states
that OmniCare-TN's outside actuary certified the plan required $7.5 million to
meet its statutory net worth requirement for the year ended June 30, 2002 and
that OmniCare-TN "is a viable HMO under contract with TennCare on the same basis
as other comparable HMOs in the program effective July 1, 2002."
Pursuant to such contractual amendment: OmniCare-TN retroactively elected an
available risk option for the ten months from July 1, 2001 through April 30,
2002; TennCare retroactively agreed to reimburse OmniCare-TN on a no-risk ASO
basis for medical services effective beginning May 1, 2002, and TennCare agreed
to pay OmniCare-TN up to $7.5 million as necessary to meet its statutory net
worth requirement as of June 30, 2002. OmniCare-TN received a permitted practice
letter from the State of Tennessee to include such $7.5 million receivable in
its statutory net worth at June 30, 2002. Under generally accepted accounting
principles, such $7.5 million is not recorded in
18
the Company's fiscal 2002 financial statements but will be recorded in its
fiscal 2003 financial statements.
Pursuant to an agreement between TennCare and OmniCare-TN in early October 2002,
TennCare further agreed to pay additional funds to OmniCare-TN if future
certified actuarial data confirm they were needed by OmniCare-TN to meet its
statutory net worth requirement as of June 30, 2002.
OmniCare-MI Developments
As a Michigan HMO, OmniCare-MI is subject to oversight by the State of
Michigan's Commissioner of the Office of Financial and Insurance Services (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 as Rehabilitator of OmniCare-MI. The
Order directed the Rehabilitator to administer all of OmniCare-MI's assets and
business while attempting to effectuate its rehabilitation, preserve its
provider network and maintain uninterrupted health care services to the greatest
extent possible. Pursuant to and since the Order, the Rehabilitator's appointed
special deputy has served as the Chief Executive Officer of OmniCare-MI.
The Order beneficially relieved the Company from further funding OmniCare-MI's
capital deficiencies through unsecured loans and forgiving earned management
fees. The Order required the Company to continue performing all services under
its OmniCare-MI management agreement, which it will continue doing through
October 31, 2002. That agreement will terminate November 1, 2002 pursuant to
notice received from OmniCare-MI in accordance with its amended rehabilitation
plan, which a State circuit court judge approved on July 29, 2002.
The OmniCare-MI management agreement was amended on December 14, 2001, effective
August 1, 2001 (the second month of fiscal 2002). Pursuant to the amendment,
OmniCare-MI has paid all of its own expenses commencing as of August 1, 2002,
except for personnel, rent and depreciation, which the Company has continued to
pay. The amendment reduced the Company's management fee revenues from
OmniCare-MI beginning August 1, 2001, by changing the methodology for
determining the management fee from a fixed percentage (14%) of premiums earned
by OmniCare-MI to a cost-based fee, which was equivalent to approximately 10%
beginning in August 2001, subject to adjustment to reflect the Company's actual
costs of performing the management agreement.
Other Comparison of 2002 to 2001
Total revenues increased $48.4 million (37%) to $180.1 million in the fiscal
year ended June 30, 2002 from $131.7 million in the fiscal year ended June 30,
2001.
Medical premium revenues were $163.1 million in the fiscal year ended June 30,
2002, an increase of $60.0 million (58%) from medical premium revenues of $103.0
million in the fiscal year ended June 30, 2001.
19
Medical premium revenues for OmniCare-TN increased $67.3 million (72%), to
$160.6 million in the fiscal year ended June 30, 2002, from $93.3 million in the
fiscal year ended June 30, 2001. This was attributable in part to an increase in
member months, and in part to a decrease in the OmniCare-TN per member per month
revenue rate as described in the following paragraph. Member months increased
524,000 (86%) to 1,130,000 in the fiscal year ended June 30, 2002 from 606,000
in the fiscal year ended June 30, 2001, and accounted for a $74.4 million
increase in OmniCare-TN's medical premium revenues.
The total OmniCare-TN per member per month ("PMPM") revenue rate - based on an
average membership of 94,200 for the fiscal year ended June 30, 2002 compared to
50,500 for the fiscal year ended June 30, 2001 - was $142 PMPM for the fiscal
year ended June 30, 2002 compared to $154 PMPM for the fiscal year ended June
30, 2001, a decrease of $12 PMPM (8%), which accounted for a decrease of $7.1
million in OmniCare-TN's medical premium revenues.
Premium revenues from the County Care program totaled $2.5 million for the
fiscal year ended June 30, 2002, compared to $9.7 million for the fiscal year
ended June 30, 2001. The program operated for three months through its
expiration on September 30, 2001.
Management fees earned from OmniCare-MI were $14.9 million in the fiscal year
ended June 30, 2002, a decrease of $11.5 million (43%) from fees of $26.4
million in the fiscal year ended June 30, 2001. Effective August 1, 2001, the
management agreement was revised from a fixed 14% of OmniCare-MI revenues to a
cost-based fee that approximated 10%. The fee structure was further reduced in
the fourth quarter of fiscal 2002 because OmniCare-MI began paying most of its
general and administrative expenses directly.
Interest and other income decreased $0.2 million (10%) to $2.1 million in the
fiscal year ended June 30, 2002 from $2.3 million in the fiscal year ended June
30, 2002.
Total expenses were $190.2 million in the fiscal year ended June 30, 2002,
compared to $132.1 million in the fiscal year ended June 30, 2001, an increase
of $58.1 million (44%).
Medical services expenses were $155.1 million in the fiscal year ended June 30,
2002, an increase of $69.4 million (81%) from medical services expenses of $85.7
million in the fiscal year ended June 30, 2001.
Medical services expenses for OmniCare-TN increased $74.5 million (96%), to
$152.4 million in the fiscal year ended June 30, 2002 from $77.9 million in the
fiscal year ended June 30, 2001. The OmniCare-TN overall percentage of medical
services expenses to medical premium revenues - the medical loss ratio ("MLR") -
was 95% for the fiscal year ended June 30, 2002 and 85% for the fiscal year
ended June 30, 2001. The fiscal 2002 OmniCare-TN MLR includes an approximate 11%
increase due to a fourth quarter increase in the medical claims liability of
$11.2 million related to the assignment of new members by TennCare. The fiscal
2001 contract with TennCare required that a minimum of 85% of capitation
revenues be paid to medical service providers.
As a result of other MCOs which had contracts with TennCare ceasing to serve
their enrollees or being unable to take on new enrollees, OmniCare-TN was
assigned approximately 9,000 members
20
by TennCare in the first half of fiscal 2002 and an additional 40,000 members in
February 2002. Medical services expenses for such new OmniCare-TN members
disproportionately exceeded OmniCare-TN's normal PMPM experience and adversely
affected its earnings for the remainder of fiscal 2002. See "2002 Compared to
2001 -- OmniCare-TN Developments" above regarding TennCare's favorable response
to OmniCare-TN's requests for risk adjustments and reimbursements to compensate
it for such medical expenses.
Medical services expenses for County Care were $2.7 million in the fiscal year
ended June 30, 2002, a decrease of $5.1 million (65%) from medical services
expenses of $7.8 million in the fiscal year ended June 30, 2001. The County Care
MLR for the fiscal year ended June 30, 2002 was 108% compared to 88% for the
fiscal year ended June 30, 2001. County Care operations began with inception of
the contract in April 1999 and ceased, at the Company's election, upon the
contract's September 30, 2001 expiration.
Marketing, general and administrative expenses decreased $1.7 million (5%) to
$30.7 million in the fiscal year ended June 30, 2002 from $32.4 million in the
fiscal year ended June 30, 2001. This included, however, for OmniCare-TN, $2.0
million of increased claims costs and $1.3 million of increased premium taxes
due to OmniCare-TN's significant membership increases. Salaries and wages
decreased $1.4 million and promotion and advertising decreased $1.2 million as
part of OmniCare-MI's changed operations during its rehabilitation proceedings.
General and administrative costs decreased an additional $2.4 million after
OmniCare-MI began paying directly most of its general and administrative
expenses in the fourth quarter of fiscal year 2002.
Depreciation and amortization decreased $0.2 million (10%) to $1.8 million in
the fiscal year ended June 30, 2002 from $2.0 million in the fiscal year ended
June 30, 2001.
Interest expense decreased $0.2 million (46%) to $0.2 million in the fiscal year
ended June 30, 2002 from $0.4 million in the fiscal year ended June 30, 2001,
due to bank debt reduction of $0.6 million and a two percentage point decrease
in the prime rate for the majority of the fiscal year.
The Company recorded an impairment loss equal to the $2.4 million remaining
carrying value of the patient care software system which it had purchased to
fulfill a requirement of the State of Michigan's Office of Financial and
Insurance Services to implement such a system for OmniCare-MI. The system was
not in use at June 30, 2002 and will not be used by OmniCare-MI because its
management agreement with the Company will terminate November 1, 2002.
The Company recognized a loss before income taxes of $10.4 million for the year
ended June 30, 2002 compared to a $0.3 million loss before income taxes for the
year ended June 30, 2001. The net loss for the year ended June 30, 2002 was
$11.0 million, or $1.60 per share, compared to net earnings of $1.2 million, or
$0.18 per share, for the year ended June 30, 2001.
21
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 2001 COMPARED TO 2000
Total revenues increased $22.7 million (21%) to $131.7 million in the fiscal
year ended June 30, 2001 from $109.1 million in the fiscal year ended June 30,
2000.
Medical premium revenues were $103.0 million in the fiscal year ended June 30,
2001, an increase of $16.8 million (20%) from medical premium revenues of $86.2
million in the fiscal year ended June 30, 2000.
Medical premium revenues for OmniCare-TN increased $16.3 million (21%), to $93.3
million in the year fiscal ended June 30, 2001, from $77.0 million in the fiscal
year ended June 30, 2000. OmniCare-TN's premium rate increases accounted for
$5.2 million of the increase. Member months increased 82,000 (16%) to 606,000 in
the fiscal year ended June 30, 2001 from 524,000 in the fiscal year ended June
30, 2000, and accounted for a $12.3 million increase in premium revenues. Prior
to July 1, 2001, TennCare provided additional adverse selection payments to
managed care organizations for high cost chronic conditions of their members and
payments earmarked as adjustments for covered benefits. In the fiscal year ended
June 30, 2001, revenue adjustments for adverse selection and other covered
benefits for OmniCare-TN decreased $1.2 million compared to the prior fiscal
year. TennCare has ceased adverse selection payments as of July 1, 2001.
The total OmniCare-TN per member per month ("PMPM") revenue rate - based on an
average membership of 50,500 for the fiscal year ended June 30, 2001 compared to
43,700 for the fiscal year ended June 30, 2000 - was $154 PMPM for the fiscal
year ended June 30, 2001 compared to $147 PMPM for the fiscal year ended June
30, 2000, an increase of $7 PMPM (5%). The PMPM premium rate, based on the State
of Tennessee's estimate, increased 7%, to $151 PMPM for the fiscal year ended
June 30, 2001 from $141 PMPM for the fiscal year ended June 30, 2000, excluding
excess adverse selection payments and adjustments for covered benefits.
Premium revenues from the County Care program totaled $9.7 million for the
fiscal year ended June 30, 2001, compared to $9.2 million for the fiscal year
ended June 30, 2000.
On May 1, 2000, approximately 28,000 members of the Detroit Medical Center's
Medicaid managed care program were transferred to OmniCare-MI. The additional
membership generated management fee revenue of $4.0 million and $0.6 million in
fiscal 2001 and 2000, respectively.
Management fees earned from OmniCare-MI were $26.4 million in the fiscal year
ended June 30, 2001, an increase of $7.6 million (41%) from fees of $18.8
million in the fiscal year ended June 30, 2000. The $18.8 million of management
fees earned from OmniCare-MI in fiscal 2000 includes the portion of $3.7 million
which was converted into an unsecured loan to OmniCare-MI, evidenced by a
surplus note.
Interest and other income decreased $1.8 million (44%) to $2.3 million in the
fiscal year ended June 30, 2001 from $4.1 million in the fiscal year ended June
30, 2000. Other income for the fiscal year ended June 30, 2000 included a $2.1
million gain recorded on the Company's recovery of its $2.1 million investment
in PhilCare following PhilCare's dissolution.
22
Total expenses were $132.1 million in the fiscal year ended June 30, 2001,
compared to $107.5 million in the fiscal year ended June 30, 2000, an increase
of $24.6 million (23%).
Medical services expenses were $85.7 million in the fiscal year ended June 30,
2001, an increase of $15.4 million (22%) from medical services expenses of $70.3
million in the fiscal year ended June 30, 2000. As described in "Overview"
above, the Company established at December 31, 1997 and maintained until March
31, 2000 an estimated medical claims liability reserve of $6.4 million for
UltraMedix. At March 31, 2000, Company management concluded that the continuing
reserve requirement should be $0.8 million, and accordingly, the Company reduced
the reserve by $5.6 million and offset that amount against medical services
expenses. Without that reversal, medical services expenses would have been $75.9
million in the fiscal year ended June 30, 2000, an increase of $16.0 million
(27%), resulting in an overall percentage of medical services expenses to
medical premium revenues - the medical loss ratio ("MLR") - of 88% for
OmniCare-TN and County Care for fiscal 2000.
In December 2001, the Securities and Exchange Commission ("SEC") requested that
all registrants identify their most "critical accounting policies" in
management's discussion and analysis of financial condition and results of
operations. The SEC indicated that a "critical accounting policy" is one which
is both important to the portrayal of the company's financial condition and
results and requires management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Determining reportable medical claims
liability is a critical accounting policy of the Company. See Note 2i to the
consolidated financial statements contained elsewhere in this annual report.
Medical services expenses for OmniCare-TN increased $10.1 million (15%), to
$77.9 million in the fiscal year ended June 30, 2001 from $67.8 million in the
fiscal year ended June 30, 2000. The OmniCare-TN MLR was 85% for the fiscal year
ended June 30, 2001 and 88% for the fiscal year ended June 30, 2000. The fiscal
2000 OmniCare-TN MLR includes an approximate 4.5% increase due to a fourth
quarter increase in the medical claims liability of $3.4 million related to the
assignment of new members by TennCare. The fiscal 2001 contract with TennCare
requires that a minimum of 85% of capitation revenues be paid to medical service
providers. The fiscal 2000 OmniCare-TN MLR includes an approximate 3% reduction
due to offsets to medical services expenses related to the net recovery of $0.5
million in refundable advances made to a third party dental administrator and an
excess adverse selection payment of $1.0 million received in fiscal 1999 for the
period June 1997 and prior.
OmniCare-TN was assigned approximately 6,000 members by TennCare in the second
half of fiscal 2000 as a result of three other managed care organizations, which
had contracts with TennCare, ceasing to serve their enrollees or being unable to
take on new enrollees. Medical services expenses for such new OmniCare-TN
members disproportionately exceeded OmniCare-TN's normal PMPM experience and
adversely affected its earnings for and since that period. OmniCare-TN received
from TennCare in fiscal 2001 an adverse selection payment of $0.8 million for
such fiscal 2000 expenses.
Medical services expenses for County Care were $7.8 million in the fiscal year
ended June 30, 2001, a decrease of $0.3 million (4%) from medical services
expenses of $8.1 million in the fiscal year
23
ended June 30, 2000. The County Care MLR for the fiscal year ended June 30, 2001
was 88%. County Care operations began with inception of the contract in April
1999 and ceased, at the Company's election, after the contract's expiration on
September 30, 2001.
Marketing, general and administrative expenses increased $2.2 million (7%), to
$32.4 million in the fiscal year ended June 30, 2001, from $30.2 million in the
fiscal year ended June 30, 2000. The increase was due primarily to increases in
wages, benefits and temporary labor costs.
Depreciation and amortization decreased $1.4 million (42%), to $2.0 million in
the fiscal year ended June 30, 2001 from $3.4 million in the fiscal year ended
June 30, 2000. The Company had previously capitalized costs for internally
developed customized software. At June 30, 2001, these costs were fully
depreciated and accounted for $1.4 million of fiscal 2001 expense. The Company
purchased $3.0 million of property and equipment, the majority of which was not
yet placed in service and, therefore, did not have a significant effect on
depreciation expense in the fiscal year ended June 30, 2001.
Interest expense decreased $0.1 million (26%), to $0.4 million in the fiscal
year ended June 30, 2001 from $0.5 million in the fiscal year ended June 30,
2000, due to debt reduction of $0.9 million as well as decreases in the prime
rate.
Bad debt expense in the fiscal year ended June 30, 2001 totaled $11.5 million as
a result of writing off the $2.0 million advance and $2.6 million of management
fee receivable owed by OmniCare-MI and the remaining carrying value of surplus
notes of $6.9 million. Bad debt expense in the fiscal year ended June 30, 2000
totaled $3.1 million as a result of recording an impairment loss on the
valuation of the unsecured loan made to OmniCare-MI.
The Company recognized a loss before income taxes of $0.3 million and earnings
before income taxes of $1.6 million for the fiscal years ended June 30, 2001 and
2000, respectively, a decrease of $1.9 million (119%). Earnings net of income
taxes for the fiscal years ended June 30, 2001 and 2000 were $1.2 million and
$1.0 million, respectively, an increase of $0.2 million (20%).
Excluding the earlier described reversal in part of an UltraMedix medical claims
liability reserve, recording of bad debt expense against amounts owed to the
Company by OmniCare-MI and recovery of the investment in PhilCare, resulting in
a gain, the Company would have recognized earnings before income taxes for the
fiscal year ended June 30, 2001 of $10.4 million compared to a loss before
income taxes of $3.0 million for the fiscal year ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had (i) cash and cash equivalents and short-term
marketable securities of $18.8 million, compared to $24.8 million at June 30,
2001; (ii) negative working capital of $3.7 million, compared to positive
working capital of $3.6 million at June 30, 2001; and (iii) a current
assets-to-current liabilities ratio of 0.87-to-1, compared to 1.14-to-1 at June
30, 2001.
Net cash used in operating activities was $3.7 million in fiscal 2002 compared
to net cash provided of $17.9 million in fiscal 2001. Investing activities in
fiscal 2002 included the purchase of
24
equipment of $1.0 million and the purchase of marketable securities of $19.4
million, offset by proceeds from the sale or maturity of marketable securities
of $6.0 million. Debt repayments were $0.6 million in fiscal 2002. Cash and
marketable securities decreased by $6.0 million at June 30, 2002 compared to
June 30, 2001, due primarily to operating needs of $5.1 million, purchase of
fixed assets of $1.0 million and payment of debt of $0.6 million.
Accounts receivable increased by $1.9 million at June 30, 2002 compared to June
30, 2001, primarily due to money due from the State of Tennessee.
Property, plant and equipment decreased by $3.2 million at June 30, 2002
compared to June 30, 2001, due to the recording of an impairment loss on
software of $2.4 million, depreciation of $1.8 million and fixed asset additions
of $1.0 million.
Medical claims payable increased by $4.6 million over at June 30, 2002 compared
to June 30, 2001, which is directly related to the increased membership of
OmniCare-TN. Other accounts payable and accruals actually decreased by $1.5
million during fiscal 2002 as OmniCare-MI expenses were being paid.
Effective July 1, 2000, OmniCare-TN entered into a new 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 were 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.
On September 20, 2000, the Company made an additional cash contribution of $0.9
million to OmniCare-TN in exchange for additional preferred stock of OmniCare-TN
issued to the Company. The cash contribution was made to enable OmniCare-TN to
meet minimum statutory requirements for net worth, while allowing OmniCare-TN to
utilize the funds for working capital.
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. As of September 1,
2002, OmniCare-TN's total enrollment was approximately 120,000 members, almost
equally divided between Medicaid enrollees and Non-Medicaid enrollees.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program
which entailed changes to TennCare's contracts with MCOs, including OmniCare-TN.
During that period, MCOs are generally compensated for administrative services
only (commonly called "ASO"), earn fixed administrative fees, are not at risk
for medical costs in excess of targets established based on various factors, are
subject to increased oversight, may earn limited additional administrative fees
based on
25
certain performance measures as an incentive to manage medical costs below the
targets, and may incur financial penalties for not achieving certain performance
requirements. The limited variable administrative fees could reward certain
measurable MCO performance in the following areas; third party liability
recovery rates; early and periodic screening, diagnosis and treatment (EPSDT) of
children; multi-source prescription drug utilization; reduced appeals related to
provider access; and successful collaboration on an EPSDT initiative.
OmniCare-TN sought reimbursement from TennCare for exceptionally high medical
expenses incurred by new OmniCare-TN enrollees in fiscal year 2002, including
for actuarially estimated claims incurred but not yet reported to OmniCare-TN.
In response, TennCare amended its contract with OmniCare-TN in September 2002,
retroactive to July 1, 2001 in some respects and to May 1, 2002 in other
respects. The amendment states that OmniCare-TN's outside actuary certified the
plan required $7.5 million to meet its statutory net worth requirement for the
year ended June 30, 2002 and that OmniCare-TN "is a viable HMO under contract
with TennCare on the same basis as other comparable HMOs in the program
effective July 1, 2002."
OmniCare-TN received a permitted practice letter from the State of Tennessee to
include such $7.5 million receivable in its statutory net worth at June 30,
2002. Under generally accepted accounting principles, such $7.5 million is not
recorded in the Company's fiscal 2002 financial statements but will be recorded
in its fiscal 2003 financial statements.
Pursuant to an agreement between TennCare and OmniCare-TN in October 2002,
TennCare further agreed to pay additional funds to OmniCare-TN if future
certified actuarial data confirm they are needed by OmniCare-TN to meet its
statutory net worth requirement as of June 30, 2002. The ultimate settlement of
medical claims may vary from the estimated amounts reflected in the accrual.
Based on OmniCare-TN's significant membership growth, certain cost savings which
OmniCare-TN has implemented, the TennCare program's change to ASO effective
beginning May 1, 2002 for OmniCare-TN and OmniCare-TN's recently amended
TennCare contract, Company management believes that OmniCare-TN has weathered
the unusual circumstances of fiscal 2002 and expects OmniCare-TN will be in
compliance with its statutory net worth requirements through June 30, 2003 and
will have positive net earnings for fiscal 2003.
OmniCare-TN's application for a commercial HMO license was approved on September
7, 2001. Management is not yet actively pursuing that commercial business,
however, due to OmniCare-TN's substantially increased enrollment from members
TennCare assigned from defunct other plans, together with adapting to TennCare's
18-month stabilization program.
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 to effectuate its rehabilitation, preserve its provider network and
maintain uninterrupted health care
26
services to the greatest extent possible. Pursuant to and since the Order, the
Rehabilitator's appointed special deputy has acted as the Chief Executive
Officer of OmniCare-MI.
The Order beneficially relieved the Company from further funding OmniCare-MI's
capital deficiencies through unsecured loans and forgiving earned management
fees. The Order required the Company to continue performing all services under
its OmniCare-MI management agreement, which it will continue doing through
October 31, 2002. That agreement will terminate November 1, 2002 pursuant to
notice received from OmniCare-MI in accordance with its amended rehabilitation
plan, which a State circuit court judge approved on July 29, 2002.
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 (14%) of
premiums earned by OmniCare-MI to a cost-based fee, which was equivalent to
approximately 10% beginning in August 2001, subject to adjustment to
appropriately reflect the Company's actual costs of performing the management
agreement.
In the fourth quarter of fiscal 2002, OmniCare-MI began paying directly most of
its general and administrative expenses, thus reducing both the Company's
management fee revenue and marketing, general and administrative expense.
The Company has arranged for a sublease to OmniCare-MI of all of the Company's
leased premises in Detroit, Michigan, commencing November 1, 2002 and expiring
at the end of the lease in May 2005. This arrangement will cost the Company
approximately $40,000 per month through the remainder of the lease.
The Company currently has a $2.9 million term loan with Standard Federal Bank,
repayable in monthly installments of principal and interest of $0.1 million,
with an interest rate equal to the bank's prime rate (4.75% at June 30, 2002)
plus one percent per annum, and a maturity date of September 30, 2004. The loan
agreement is collateralized by a security interest in all of the Company's
personal property. The bank has waived the Company's compliance with certain
financial covenants for the fiscal quarter ended June 30, 2002, and the bank and
the Company have agreed to modify the loan agreement's debt service coverage and
net worth covenants for succeeding fiscal quarters.
The Company's ability to generate adequate amounts of cash to meet its future
cash needs depends on a number of factors, particularly including its ability to
control administrative costs related to managing medical costs for the TennCare
program and controlling corporate overhead costs. On the basis of the matters
discussed above, management believes at this time that the Company has the
ability to generate sufficient cash to adequately support its financial
requirements through June 30, 2003.
RECENTLY ENACTED PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued two new accounting
standards which may be applicable in the future to the Company. One of these is
Statement of Financial
27
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," and the other is SFAS No. 146, "Accounting for
Costs Associated With Exit or Disposal Activities."
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 also amends ARB No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Company plans
on adopting SFAS No. 144 during fiscal 2003, and management does not believe
that SFAS No. 144 will have a material effect on the financial statements of the
Company.
SFAS No. 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The Company plans on adopting SFAS No. 146 during fiscal year
2003, and management is in the process of determining the impact, if any, of
adopting SFAS No. 146.
ITEM 8. FINANCIAL STATEMENTS
Presented beginning at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with respect
to its Annual Meeting of Shareholders to be held on November 22, 2002.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with respect
to its Annual Meeting of Shareholders to be held on November 22, 2002.
28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with respect
to its Annual Meeting of Shareholders to be held on November 22, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with respect
to its Annual Meeting of Shareholders to be held on November 22, 2002.
ITEM 14. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of the Company
have evaluated the effectiveness of the Company's disclosure controls and
procedures within 90 days prior to the filing date of this Form 10-K annual
report and have concluded that such disclosure controls and procedures are
effective. Subsequent to the date of such evaluation, there have been neither
any significant changes in internal controls or in other factors that could
significantly affect internal controls nor any corrective actions with regard to
significant deficiencies and material weaknesses. See the certifications by the
Company's President and Chief Executive Officer and its Chief Financial Officer
under "Certifications" below.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) (1) & (2) The financial statements listed in the accompanying Index to
Consolidated Financial Statements at page F-1 are filed as part of this
Form 10-K report
3) The Exhibit Index lists the exhibits required by Item 601 of
Regulation S-K to be filed as a part of this Form 10-K report. The Exhibit
Index identifies those documents which are exhibits filed herewith or
incorporated by reference to (i) the Company's Form S-1 Registration
Statement under the Securities Act of 1933, as amended, declared effective
on April 23, 1991 (Commission File No. 33-36760); (ii) the Company's Form
10-K reports for its fiscal years ended June 30, 1993, 1994, 1995, 1996,
1997, 1998, 1999 and 2001; (iii) the Company's 10-K/A report filed October
14, 1996; (iv) the Company's Form 10-Q reports for its quarters ended March
31, 1996, September 30, 1996, December 31, 1996, March 31, 1997, March 31,
1998 and December 31, 1998; (v) the Company's Form 8-K reports filed with
the Commission August 8, 1991, April 23, 1993, May 24, 1993, January 29,
1996, April 19, 1996, October 30, 1997, January 20, 1998 and January 14,
2000; or (vi) the Company's Form 8-K/A report filed with the Commission
July 21, 1993 and November 12, 1997. The Exhibit Index is hereby
incorporated by reference into this Item 15.
29
No reports on Form 8-K were filed with respect to the last three months of
fiscal 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
UNITED AMERICAN HEALTHCARE CORPORATION (Registrant)
By /s/ Gregory H. Moses, Jr.
--------------------------------------------
President and Chief Executive Officer
(principal executive officer)
Date: October 15, 2002
By /s/ William E. Jackson, II
--------------------------------------------
Chief Financial Officer
(principal financial officer)
Date: October 15, 2002
30
CERTIFICATIONS
I, Gregory H. Moses, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of United American Healthcare
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ Gregory H. Moses, Jr.
--------------------------------------------
President and Chief Executive Officer
(principal executive officer)
31
CERTIFICATIONS
I, William E. Jackson, II, certify that:
1. I have reviewed this annual report on Form 10-K of United American Healthcare
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ William E. Jackson, II.
--------------------------------------------
Chief Financial Officer
(principal financial officer)
32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report...........................................................................F-2
Consolidated Balance Sheets as of June 30, 2002 and 2001...............................................F-3
Consolidated Statements of Operations for each of the years in the three-year period
Ended June 30, 2002...............................................................................F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income for
each of the years in the three-year period ended June 30, 2002....................................F-5
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended June 30, 2002................................................................................F-6
Notes to Consolidated Financial Statements.............................................................F-8
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
United American Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of United American
Healthcare Corporation and Subsidiaries as of June 30, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United American
Healthcare Corporation and Subsidiaries as of June 30, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Detroit, Michigan
October 11, 2002
F-2
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
--------------------------------------------
2002 2001
--------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 2,026 $ 21,985
Marketable securities 16,784 2,781
Premium receivables 1,794 436
Other receivables 2,856 2,289
Refundable income taxes 284 284
Prepaid expenses and other 621 649
Deferred income taxes 1,090 1,360
--------------------------------------------
Total current assets 25,455 29,784
Property and equipment, net 2,426 5,632
Intangible assets, net 2,952 2,952
Marketable securities 1,826 2,426
Deferred income taxes - 286
Other assets 677 577
--------------------------------------------
$ 33,336 $ 41,657
============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 1,032 $ 890
Medical claims payable 24,495 19,815
Accounts payable and accrued expenses 1,148 3,138
Accrued compensation and related benefits 788 1,093
Other current liabilities 1,784 1,226
--------------------------------------------
Total current liabilities 29,247 26,162
Long-term debt, less current portion 1,837 2,602
Accrued rent 505 580
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued - -
Common stock, no par, 15,000,000 shares authorized; 6,910,721 and
6,779,128 issued and outstanding at June 30, 2002 and 2001, respectively 11,407 11,188
Retained earnings (deficit) (9,675) 1,288
Accumulated other comprehensive gain (loss), net of deferred federal
income taxes 15 (163)
--------------------------------------------
1,747 12,313
--------------------------------------------
$ 33,336 $ 41,657
============================================
See accompanying notes to the consolidated financial statements.
F-3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
----------------------------------------------------
2002 2001 2000
----------------------------------------------------
REVENUES
Medical premiums $ 163,094 $ 103,004 $ 86,174
Management fees 14,941 26,394 18,769
Interest and other income 2,082 2,326 4,110
----------------------------------------------------
Total revenues 180,117 131,724 109,053
EXPENSES
Medical services 155,092 85,738 70,255
Marketing, general and administrative 30,743 32,437 30,224
Depreciation and amortization 1,800 1,953 3,345
Interest expense 216 401 539
Loss on disposal of assets 2,411 - -
Bad debt expense - 11,532 3,100
----------------------------------------------------
Total expenses 190,262 132,061 107,463
----------------------------------------------------
Earnings (loss) before income tax (10,145) (337) 1,590
Income tax expense (benefit) 818 (1,566) 606
----------------------------------------------------
Net earnings (loss) $ (10,963) $ 1,229 $ 984
----------------------------------------------------
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC
NET EARNINGS (LOSS) PER COMMON SHARE $ (1.60) $ 0.18 $ 0.15
====================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 6,839 6,779 6,779
====================================================
NET EARNINGS (LOSS) PER COMMON SHARE - DILUTED
NET EARNINGS (LOSS) PER COMMON SHARE $ (1.60) $ 0.18 $ 0.15
====================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 7,084 6,808 6,779
====================================================
See accompanying notes to the consolidated financial statements.
F-4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS)
NUMBER RETAINED ACCUMULATED
OF EARNINGS OTHER TOTAL
COMMON COMMON (ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES STOCK DEFICIT) INCOME (LOSS) EQUITY
-------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 6,948 $ 11,445 $ (925) $ (160) $ 10,360
Issuance of common stock 68 76 -- -- 76
Repurchase of common stock (237) (369) -- -- (369)
Comprehensive income:
Net earnings -- -- 984 -- 984
-------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 6,779 11,152 59 (160) 11,051
Issuance of stock options -- 36 -- -- 36
Comprehensive income:
Net earnings -- -- 1,229 -- 1,229
Unrealized loss on marketable
securities, net of tax of $5 -- -- -- (3) (3)
-------------------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- 1,229 (3) 1,226
-------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2001 6,779 11,188 1,288 (163) 12,313
Issuance of common stock 132 219 -- -- 219
Comprehensive income:
Net loss -- -- (10,963) -- (10,963)
Unrealized gain on marketable
securities -- -- -- 178 178
-------------------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- (10,963) 178 (10,785)
-------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 6,911 $ 11,407 $ (9,675) $ 15 $ 1,747
===========================================================================================
See accompanying notes to the consolidated financial statements.
F-5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
-----------------------------------------------------
2002 2001 2000
-----------------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $ (10,963) $ 1,229 $ 984
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities
Bad debt expense - 11,532 3,100
Loss (gain) on disposal of assets 2,411 (18) 18
(Gain) loss on liquidation of investment 166 - (2,105)
Depreciation and amortization 1,800 1,953 3,345
Accrued rent (75) (72) (48)
Deferred income taxes 556 (1,940) 447
Stock awards 50 - -
Changes in assets and liabilities
Premium receivables (1,358) 2,036 2,973
Management fee receivable - (2,008) (3,468)
Other receivables (567) (984) (879)
Refundable federal income taxes - (284) -
Prepaid expenses and other (72) (337) (22)
Medical claims payable 4,680 8,570 (8,565)
Accounts payable and accrued expenses (1,990) (2,601) 2,780
Accrued compensation and related benefits (305) 333 (513)
Other current liabilities 558 539 86
-----------------------------------------------------
Net cash provided by (used in) operating activities (5,109) 17,948 (1,867)
-----------------------------------------------------
INVESTING ACTIVITIES
Purchase of marketable securities (19,388) (1,265) (1,255)
Proceeds from the sale of marketable securities 5,997 921 125
Purchase of property and equipment (1,005) (3,044) (2,478)
Proceeds from the sale of property and equipment - 21 3
Proceeds from liquidation of investment - - 1,071
Issuance of surplus note - - (4,000)
Proceeds from collection of note receivable - - 8,432
-----------------------------------------------------
Net cash provided by (used in) investing activities (14,396) (3,367) 1,898
-----------------------------------------------------
FINANCING ACTIVITIES
Payments made on debt (623) (853) (8,767)
Repurchase of common stock - - (369)
Issuance of common stock 169 - 76
-----------------------------------------------------
Net cash used in financing activities (454) (853) (9,060)
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (19,959) 13,728 (9,029)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 21,985 8,257 17,286
-----------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,026 $ 21,985 $ 8,257
=====================================================
F-6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
YEAR ENDED JUNE 30,
-------------------------------------------------
2002 2001 2000
-------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 200 $ 401 $ 520
=================================================
Income taxes paid $ 250 $ 58 $ -
=================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Investing - Conversion of management
fee receivable into a surplus note $ - $ - $ 3,678
Investing - Receipt of marketable
securities on liquidation of investment $ - $ - $ 892
See accompanying notes to the consolidated financial statements.
F-7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
NOTE 1 - DESCRIPTION OF BUSINESS
BUSINESS. United American Healthcare Corporation, together with its wholly and
majority owned subsidiaries (collectively, the "Company"), is a multi-state
provider of health care services, including consulting services to managed care
organizations and the provision of health care services in Tennessee and
Michigan.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of United American Healthcare Corporation,
and its wholly owned operational subsidiary: United American of
Tennessee, Inc. ("UA-TN") and Subsidiary. OmniCare Health Plan,
Inc. ("OmniCare-TN") is a 75%-owned subsidiary of UA-TN. Also
included in the consolidated financial statements during
applicable periods are its non-operational wholly owned
subsidiaries: United American of Pennsylvania, Inc. ("UA-PA"),
Corporate Healthcare Financing, Inc. and Subsidiaries ("CHF"), and
United American of Louisiana, Inc. and Subsidiary ("UA-LA"); and
its non-operational 80%-owned subsidiary: United American of
Florida, Inc. ("UA-FL") and Subsidiary. UltraMedix Healthcare
Systems, Inc. ("UltraMedix") was a 51%-owned subsidiary of UA-FL.
The Company ceased activities related to UA-FL, UltraMedix and
UA-PA in fiscal 1998. The Company sold all of its CHF stock in
fiscal 1999. All significant intercompany transactions and
balances have been eliminated in consolidation.
B. USE OF ESTIMATES. The accompanying consolidated financial
statements have been prepared in conformity with accounting
principles generally accepted in the United States of America
which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those
estimates as more information becomes available and any such
difference could be significant. The most significant estimates
that are susceptible to change in the near term relate to the
determination of medical claims payable, realizability of deferred
tax assets and recoverability of intangible assets.
C. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
instruments purchased with original maturities of three months or
less to be cash equivalents.
D. FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash
and cash equivalents, receivables, marketable securities and debt
approximate fair values of these instruments at June 30, 2002 and
2001.
F-8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
E. MARKETABLE SECURITIES. Investments in marketable securities are
primarily comprised of U.S. Treasury notes, debt issues of
municipalities and foreign countries and common stocks all carried
at fair value, based upon published quotations of the underlying
securities, and six month certificates of deposit carried at cost
plus interest earned, which approximates fair value. Marketable
securities placed in escrow to meet statutory funding
requirements, although considered available for sale, are not
reasonably expected to be used in the normal operating cycle of
the Company and are classified as non-current. All other
securities available for sale are classified as current.
Premiums and discounts are amortized or accreted, respectively,
over the life of the related debt security as adjustment to yield
using the yield-to-maturity method. Interest and dividend income
is recognized when earned. Realized gains and losses on
investments in marketable securities are included in investment
income and are derived using the specific identification method
for determining the cost of the securities sold; unrealized gains
and losses on marketable securities are reported as a separate
component of shareholders' equity, net of deferred federal income
taxes.
F. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Expenditures and improvements, which add significantly to the
productive capacity or extend the useful life of an asset, are
capitalized. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the
related assets. Estimated useful lives of the major classes of
property and equipment are as follows: furniture and fixtures - 5
to 13 years; equipment - 5 years; and computer software - 2 to 5
years. Leasehold improvements are included in furniture and
fixtures and are amortized on a straight-line basis over the
shorter of the lease term or the estimated useful life, which
ranges from 5 to 13 years. The Company uses accelerated methods
for income tax purposes. See Note 15 for impairment loss on
valuation of patient care software system.
G. INTANGIBLE ASSETS. Intangible assets resulting from business
acquisitions are carried at cost. 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 year
ended June 30, 2002. Amortization expense of $0.7 million, or
$0.10 per share, was recorded for the years ended June 30, 2001
and 2000.
F-9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
H. LONG-LIVED ASSETS. Following the criteria set forth in SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," long-lived assets and
certain identifiable intangibles are reviewed by the Company for
events or changes in circumstances which would indicate that the
carrying value may not be recoverable. In making this
determination, the Company considers a number of factors,
including estimated future undiscounted cash flows associated with
long-lived assets, current and historical operating and cash flow
results and other economic factors. When any such impairment
exists, the related assets are written down to fair value. Based
upon its most recent analysis, the Company believes that
long-lived assets are recorded at their net recoverable values.
See Note 15.
I. MEDICAL CLAIMS PAYABLE. The Company provides for medical claims
incurred but not reported and the cost of adjudicating claims
based primarily on past experience, together with current factors,
using accepted actuarial methods. Although considerable
variability is inherent in such estimates, management believes
that these reserves are adequate.
J. REVENUE RECOGNITION. Medical premium revenues are recognized in
the month in which members are entitled to receive health care
services. Medical premiums collected in advance are recorded as
deferred revenues. Management fee revenues are recognized in the
period the related services are performed.
K. MEDICAL SERVICES EXPENSE RECOGNITION. The Company contracts with
various health care providers for the provision of certain medical
services to its members and generally compensates those providers
on a capitated and fee for service basis. The estimates for
medical claims payable are regularly reviewed and adjusted as
necessary, with such adjustments generally reflected in current
operations.
L. STOP LOSS INSURANCE. Stop loss insurance premiums are reported as
medical services expense, while the related insurance recoveries
are reported as deductions from medical services expense.
M. INCOME TAXES. Deferred income tax assets and liabilities are
recognized for the expected future tax consequences attributable
to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which these temporary differences are expected to be recovered
or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in
the period that involves the deferred tax assets and liabilities
in the amount expected to be realized. Valuation allowances are
established when necessary to reduce the deferred tax assets and
liabilities in the amount expected to be realized. The deferred
income tax provision or benefit generally reflects the net change
in deferred income tax assets and liabilities during the year. The
current income tax
F-10
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
provision reflects the tax consequences of revenues and expenses
currently taxable or deductible for the period.
N. STOCK BASED COMPENSATION. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company records compensation
expense for stock options only if the market price of the
Company's stock, on the date of grant, exceeds the amount an
individual must pay to acquire the stock, if dilutive.
O. EARNINGS PER SHARE. Basic net earnings per share excluding
dilution has been computed by dividing net earnings by the
weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed the same as basic
except that the denominator also includes shares issuable upon
assumed exercise of stock options. The computation of dilutive net
loss per share was anti-dilutive in the year ended June 30, 2002;
therefore, the amounts reported for basic and dilutive loss per
share are the same.
For the fiscal years ended June 30, 2002, June 30, 2001 and June
30, 2000, the Company had outstanding stock options of 38,000,
29,030 and zero common shares, respectively, having a dilutive
effect on earnings per share.
P. SEGMENT INFORMATION. The Company reports financial and descriptive
information about its reportable operating segments. Operating
segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by
the chief operating decision-maker in deciding how to allocate
resources and in assessing performance. Financial information is
reported on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to
segments.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
OMNICARE HEALTH PLAN, INC. OF TENNESSEE (OMNICARE-TN)
In February 1994, the Company and its wholly owned subsidiary, UA-TN, entered
into a long-term agreement to manage OmniCare-TN and, effective July 1994,
acquired a 50% equity interest in OmniCare-TN for $1.3 million in cash.
Effective January 31, 1996, the Company purchased an additional 25% of the
voting common stock and 100% of the preferred stock of OmniCare-TN. This
increased the Company's ownership in the voting common stock of OmniCare-TN to
75%. The purchase price for the additional common stock and preferred stock of
OmniCare-TN was $0.1 million and $10.9 million, respectively, of which $8.7
million was the conversion of OmniCare-TN debt to the Company into equity and
$2.3 million was paid in cash. In July 1998 and September 2000, the Company made
additional cash contributions of $0.75 million and $0.9 million, respectively,
to OmniCare-TN, in exchange for additional preferred stock of OmniCare-TN.
F-11
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
This acquisition was accounted for under the purchase method of accounting. The
excess of the purchase price over the fair value of the net assets acquired of
$7.4 million has been recorded as goodwill, and was amortized over ten years on
a straight-line basis until July 1, 2001. See Note 2g for further discussion.
Results of operations are included in the accompanying financial statements
effective with the date of purchase of the majority common stock ownership
interest. In fiscal 1999, goodwill was reduced by $0.5 million as a result of
the utilization of OmniCare-TN's net operating loss carryforwards ("NOL" or
"NOLs") generated prior to January 31, 1996. The remaining NOLs related to
OmniCare-TN were generated subsequent to January 31, 1996.
NOTE 4 - MARKETABLE SECURITIES
A summary of estimated fair value, which approximates amortized cost, of
marketable securities as of June 30, 2002 and 2001 is as follows (in thousands):
2002 2001
---- ----
Available for sale - Current:
Certificates of deposit $ 15,922 $ 2,753
Equity and other securities 862 28
------------------------------
16,784 2,781
------------------------------
Available for sale - Noncurrent:
Money market - 816
U.S. government obligations 1,826 1,610
------------------------------
1,826 2,426
------------------------------
$ 18,610 $ 5,207
==============================
Certain of the Company's operations are obligated by state regulations to
maintain a specified level of escrowed funds to assure the provision of
healthcare services to enrollees. To fulfill these statutory requirements, the
Company maintains funds in highly liquid escrowed investments, which amounted to
$1.8 million and $2.4 million at June 30, 2002 and 2001, respectively.
NOTE 5 - CONCENTRATION OF RISK
During the years ended June 30, 2002, 2001 and 2000, approximately 91%, 71% and
71%, respectively, of the Company's revenues were derived from a single
customer, TennCare, a State of Tennessee program that provides medical benefits
to Medicaid and Working Uninsured recipients. TennCare withholds 5% of the
Company's monthly capitation payment. TennCare remits the monthly withheld
amounts to the Company when certain informational filing requirements are met by
the Company. Amounts withheld by TennCare as of June 30, 2002 and 2001 totaled
$1.8 million and $0.4 million, respectively.
The Company has had a long-term management agreement with OmniCare Health Plan,
in Michigan ("OmniCare-MI"), which will terminate November 1, 2002. Pursuant to
the
F-12
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
management agreement, the Company has provided management and consulting
services to OmniCare-MI and was paid a percentage of revenues until August 1,
2001, and thereafter a cost-based fee, to manage the plan. Management fee
revenues from OmniCare-MI as a percentage of the Company's total revenues were
8%, 20% and 17% for the years ended June 30, 2002, 2001 and 2000, respectively.
See Note 11 for further discussion of the OmniCare-MI management agreement.
NOTE 6 - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
Property and equipment at each June 30 consists of the following (in thousands):
2002 2001
----------------------------------
Furniture and fixtures $ 2,234 $ 2,234
Equipment 11,729 11,214
Computer software 6,488 8,860
----------------------------------
20,451 22,308
Less accumulated depreciation and amortization 18,025 16,676
----------------------------------
$ 2,426 $ 5,632
==================================
See Note 15 for recording of impairment loss on valuation of the patient care
software system.
Intangible assets at each June 30 consists of the following (in thousands):
2002 2001
----------------------------------
Goodwill $ 6,972 $ 6,972
Less accumulated amortization 4,020 4,020
----------------------------------
$ 2,952 $ 2,952
==================================
NOTE 7 - SURPLUS NOTES RECEIVABLE
On April 13, 2000 and June 30, 1998, the Company funded unsecured loans to
OmniCare-MI, evidenced by surplus notes of $7.7 million and $4.6 million,
respectively, to enable OmniCare-MI to meet its minimum statutory requirements
for net worth and working capital. The $7.7 million loan consisted of $4.0
million in cash and conversion of $3.7 million of management fees owed to the
Company. Pursuant to the terms of the surplus notes, interest and principal
payments required approval by the State of Michigan's Office of Financial and
Insurance Services ("OFIS") and were payable only from any statutory surplus
earnings of OmniCare-MI. The fixed interest rate on the $7.7 million surplus
note was 8.5% per annum, and the interest rate on the $4.6 million surplus note
was the prime rate (4.75% at June 30, 2002). Interest was payable annually and
forfeited if not then paid. Interest income of $0.9 million, $1.1 million and
$0.5 million was forfeited for fiscal 2002, 2001 and 2000, respectively. The
principal on the notes had no stated maturity or repayment date. The surplus
notes were subordinated to all other claimants of OmniCare-MI.
F-13
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
On July 31, 2001, as a result of OmniCare-MI's deteriorating financial
condition, the Ingham County Circuit Court of the State of Michigan granted a
petition by the Commissioner of OFIS to place OmniCare-MI into rehabilitation
proceedings. It was expected that such proceedings would result eventually in a
court-approved rehabilitation plan for payment of OmniCare-MI's obligations to
creditors existing prior to July 31, 2001, dependent upon OmniCare-MI's
financial resources. Throughout fiscal 2001, the Company became aware of
OmniCare-MI's adverse financial condition. As a result, there existed an
inability to determine the probability of collection and the amount that would
be potentially realized on the surplus notes outstanding. Therefore, in the
third quarter of fiscal 2001, the Company recorded an impairment loss equal to
the remaining carrying value of the surplus notes receivable from OmniCare-MI,
resulting in $6.9 million of bad debt expense. In fiscal 2000, the Company
evaluated the net recoverable value of its surplus notes receivable from
OmniCare-MI, considering the estimate of OmniCare-MI's future undiscounted cash
flows and statutorily derived surplus earnings and repayments conditioned on
OFIS's approval. As a result of this evaluation, the Company recorded an
impairment loss on the valuation of the surplus notes, resulting in bad debt
expense of $3.1 million for the fiscal year ended June 30, 2000. On July 29,
2002, claims of all creditors holding surplus notes from OmniCare-MI were
permanently disallowed by the State circuit court order which approved
OmniCare-MI's amended rehabilitation plan.
NOTE 8 - LONG-TERM DEBT
The Company currently has a $2.9 million term loan with Standard Federal Bank
repayable in monthly installments of principal and interest of $0.1 million,
with an interest rate equal to the bank's prime rate (4.75% at June 30, 2002)
plus one percent per annum, and a maturity date of September 30, 2004. The loan
agreement is collateralized by a security interest in all of the Company's
personal property. The bank has waived the Company's compliance with certain
financial covenants for the fiscal quarter ended June 30, 2002, and the bank and
the Company have agreed to modify the loan agreement's debt service coverage and
net worth covenants for succeeding fiscal quarters.
The Company's outstanding debt at each June 30 is as follows (in thousands):
2002 2001
----------------------
Term loan $2,869 $3,492
Less debt payable within one year 1,032 890
----------------------
Long-term debt, less current portion $1,837 $2,602
======================
NOTE 9 - MEDICAL CLAIMS PAYABLE
The Company has recorded a liability of $24.5 million and $19.8 million at June
30, 2002 and 2001, respectively, for unpaid claims and medical claims incurred
by enrollees but not reported to the Company for payment by the health care
providers as of each date. The ultimate settlement of medical claims may vary
from the estimated amounts reported at June 30, 2002, 2001 and 2000.
F-14
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
The following table provides a reconciliation of the unpaid claims for the years
ended June 30, 2002, 2001 and 2000 (in thousands):
2002 2001 2000
---------------------------------------------------
Balance at beginning of fiscal year $ 19,815 $ 11,245 $ 19,810
Incurred losses as related to current year 157,953 87,396 75,878
Reserve reversal related to prior year (2,861) (1,658) (5,623)
---------------------------------------------------
Total losses incurred 155,092 85,738 70,255
Paid claims related to current year 132,734 67,581 65,437
Paid claims related to prior year 17,678 9,587 13,383
---------------------------------------------------
Total paid claims 150,412 77,168 78,820
---------------------------------------------------
Balance at end of fiscal year $ 24,495 $ 19,815 $ 11,245
===================================================
Under an agreement with an insurer, 80% of inpatient medical claim costs in
excess of $0.2 million up to $1.0 million per enrollee per year are paid by the
insurer. The reserve reversal related to prior years of $0.8 million and $5.6
million in fiscal 2001 and 2000, respectively, was attributable to UltraMedix
Healthcare Systems, Inc. (a Florida managed care organization which had been
managed under a long-term agreement by the Company and its majority-owned
subsidiary, UA-FL), which ceased operations and was placed in liquidation in
March 1998. Company management concluded at March 31, 2000 that the previously
established medical claims liability of $6.4 million should be reduced to $0.8
million, and subsequently concluded at March 31, 2001 that such reserve should
be zero.
NOTE 10 - INCOME TAXES
The components of income tax expense (benefit) for each year ended June 30 are
as follows (in thousands):
2002 2001 2000
-------------------------------------------
Continuing operations:
Current expense $ 262 $ 374 $ 159
Deferred expense (credit) (2,991) (238) 280
Change in valuation allowance 3,547 (1,702) 167
-------------------------------------------
$ 818 $(1,566) $ 606
===========================================
A reconciliation of the provision for income taxes for each year ended June 30
follows (in thousands):
F-15
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
-----------------------------------------
Income tax expense (benefit) at the statutory tax rate $(3,449) $ (114) $ 540
State and city income tax 299 237 115
Utilization of AMT credit - (284) -
Tax-exempt interest on municipal bonds (13) (13) (14)
Non-deductible goodwill amortization - 242 242
Utilization of NOL carryforward - - (446)
Valuation allowance 3,547 (1,702) 167
Other, net 434 68 2
-----------------------------------------
$ 818 $(1,566) $ 606
=========================================
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversals of deferred taxes, projected future taxable income, and tax
planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowance at June 30, 2002. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
As of June 30, 2002, the net operating loss carryforwards for federal income tax
purposes expire from 2011 to 2021.
Components of the Company's deferred tax assets and liabilities at each June 30
are (in thousands):
2002 2001
------------------------------
Deferred tax assets
Accrued rent $ 172 $ 198
Bad debt expense 1,360 1,360
Deferred compensation 185 236
Unrealized net depreciation on marketable securities - 85
Net operating loss carryforward of consolidated losses 3,812 4,832
Net operating loss carryforward of purchased subsidiary 4,998 1,646
Alternative minimum tax credit carryforward 403 403
Property and equipment 820 -
------------------------------
Total gross deferred tax assets 11,750 8,759
Valuation allowance (10,660) (7,113)
------------------------------
Net deferred tax asset $ 1,090 $ 1,646
==============================
F-16
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company has had a long-term management agreement with OmniCare-MI since
1985. OmniCare-MI was related to the Company via certain common officers and
directors until July 31, 2001. During the period of such relationship, the
agreement provided that: it would expire in December 2010; it was subject to
review every five years and could be terminated without cause by OmniCare-MI at
the time of the review or by either party with cause; the Company was required
to pay certain administrative expenses associated with its activity on behalf of
OmniCare-MI; and all costs associated with the management of OmniCare-MI were
expensed as incurred.
A court order issued on July 31, 2001 placed OmniCare-MI in rehabilitation.
Since that date, pursuant to the court order, the Company has continued to
perform the management agreement without interruption and no Company officers or
directors have been OmniCare-MI officers or directors. The Company and
OmniCare-MI amended the agreement effective as of August 1, 2001, reducing the
Company's management fee percentage from a fixed percentage (14%) of premiums
earned by OmniCare-MI to a cost-based fee beginning in August 2001, subject to
adjustment to appropriately reflect the Company's costs of performing the
contract, and continuing unchanged the agreement's other basic terms. The
management agreement will terminate November 1, 2002.
Health insurance for some of the Company's employees was provided by
OmniCare-MI. The expense was $0.6 million, $1.0 million and $0.6 million for the
years ended June 30, 2002, 2001 and 2000, respectively.
The Company has arranged, in October 2002, for a sublease to OmniCare-MI of all
of the Company's leased premises in Detroit, Michigan, commencing November 1,
2002 and expiring at the end of the lease in May 2005. This arrangement will
cost the Company approximately $40,000 per month through the remainder of the
lease.
NOTE 12 - BENEFIT AND OPTION PLANS
The Company offers a 401(k) retirement and savings plan that covers
substantially all of its employees. Effective April 1, 2001, the Company has
matched 50% of an employee's contribution up to 4% of the employee's salary.
Prior to April 1, 2001, the Company matched 1% of compensation. Expenses related
to the 401(k) plan were $94,000, $40,000 and $26,000 for the years ended June
30, 2002, 2001 and 2000, respectively.
The Company has reserved 200,000 common shares for its Employee Stock Purchase
Plan ("ESPP"), which became effective October 1996, and enables all eligible
employees of the Company to subscribe for shares of common stock on an annual
offering date at a purchase price which is the lesser of 85% of the fair market
value of the shares on the first day or the last day of the annual period.
Employee contributions for the years ended June 30, 2002 and 2001 were zero each
year.
F-17
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
On August 6, 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan ("1998 Plan"). The 1998 Plan was approved by the Company's
shareholders on November 12, 1998. The Company has an aggregate of 500,000
common shares reserved for issuance upon exercise of options under the 1998
Plan. On September 9, 1998, December 15, 1998, February 3, 1999, November 10,
1999, May 3, 2001 and November 30, 2002, nonqualified options for a total of
325,000, 26,000, 5,000, 8,000, 50,000 and 75,000 common shares, respectively,
were granted under the 1998 Plan. The exercise prices of the options range from
$0.63 to $5.08.
Independent of any stock option plan, on May 11, 1998 the Company granted
nonqualified stock options for 100,000 common shares to the Company's President
and reserved that number of common shares for issuance upon exercise of such
options. Such options expire May 11, 2003 and were fully exercisable beginning
May 11, 2000 at a price of $1.38 per share. In addition, a stock award of 6,993
shares was granted to the Company's President on February 2, 2002, valued at
$7.15 per share.
SFAS No. 123 prescribes a method of accounting for stock-based compensation that
recognizes compensation cost based on the fair value of options at grant date.
In lieu of applying this fair value based method, a company may elect to
disclose only the pro forma effects of such application. The Company has adopted
the disclosure-only provisions of SFAS No. 123. Accordingly, if the Company had
elected to recognize compensation cost based on the fair value of the options at
grant date, the Company's earnings and earnings per share from continuing
operations, assuming dilution, for fiscal 2002, 2001 and 2000 would have been
the pro forma amounts indicated below (in thousands, except per share amounts):
2002 2001 2000
-------------------------------------------------
Earnings (loss) from continuing operations:
As reported $ (10,963) $ 1,229 $ 984
Pro forma $ (11,207) $ 1,211 $ 979
Earnings (loss) from continuing operations per
share (Basic and Diluted):
As reported $ (1.60) $ 0.18 $ 0.15
Pro forma $ (1.64) $ 0.18 $ 0.15
-------------------------------------------------
The fair value of options at date of grant was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in fiscal 2002: dividend yield of 0%; expected volatility of 104.33%;
risk free interest rate of 5.35%; and expected life of 10 years. The effects of
applying SFAS No. 123 in the above pro forma disclosures are not necessarily
indicative of future amounts, because additional stock option awards could be
made in future years.
Information regarding the stock options for fiscal 2002, 2001 and 2000 follows
(in thousands except exercise prices and years):
F-18
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------------------
AVERAGE NUMBER OF WEIGHTED
WEIGHTED REMAINING SHARES AVERAGE
AVERAGE CONTRACTUAL LIFE EXERCISABLE AT EXERCISE
SHARES EXERCISE PRICE AT JUNE 30, 2002 JUNE 30, 2002 PRICE
--------------------------------------------------------------------------------------------
Options
outstanding at
June 30, 2000 458 $ 1.54 7.3 years 434 $ 1.56
Granted 50 0.63 9.0 years 50 0.63
Exercised - - - - -
Expired - - - - -
Forfeited (13) 1.23 - - -
--------------------------------------------------------------------------------------------
Options
outstanding at
June 30, 2001 495 $ 1.46 7.7 years 484 $ 1.46
Granted 75 5.08 9.3 years 75 5.08
Exercised (125) 0.63 - (125) 0.63
Expired - - - -
Forfeited (9) 1.25 - - -
--------------------------------------------------------------------------------------------
Options
outstanding at
June 30, 2002 436 $ 2.08 7.2 years 434 $ 2.08
--------------------------------------------------------------------------------------------
Options for 38,000 common shares were available for grant at the end of fiscal
2002.
NOTE 13 - LEASES
The Company leases its facilities and certain furniture and equipment under
operating leases expiring at various dates through May 2005. Terms of the
facility leases generally provide that the Company pay its pro rata share of all
operating expenses, including insurance, property taxes and maintenance.
Rent expense charged to operations for the years ended June 30, 2002, 2001 and
2000 totaled $1.9 million, $1.7 million and $1.6 million, respectively.
The Company has arranged for a sublease to OmniCare-MI of all of the Company's
leased premises in Detroit, Michigan, commencing November 1, 2002 and expiring
at the end of the lease in May 2005. This arrangement will cost the Company
approximately $40,000 per month through the remainder of the lease.
F-19
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
NOTE 14 - SUBSEQUENT EVENT AND LIQUIDITY
Subsequent to June 30, 2002, OmniCare-TN and the State of Tennessee, doing
business as TennCare, amended the Contractor Risk Agreement between them, in
September 2002. Pursuant to the amendment:
- Retroactively effective July 1, 2001 through April 30, 2002,
OmniCare-TN elected to operate under a shared risk arrangement, under
which gains or losses are shared with the State of Tennessee;
- retroactively effective beginning May 1, 2002, OmniCare-TN is
reimbursed under an administrative services only agreement with no
risk of medical loss; and
- the State of Tennessee agreed to pay OmniCare-TN up to $7.5 million
as necessary to meet its statutory net worth requirement as of June
30, 2002.
Pursuant to an agreement with OmniCare-TN in October 2002, the State of
Tennessee further agreed to pay additional funds to OmniCare-TN if future
certified actuarial data confirm they are needed by OmniCare-TN to meet its
statutory net worth requirement as of June 30, 2002.
OmniCare-TN received a permitted practice letter from the State of Tennessee to
include such $7.5 million receivable in its statutory net worth at June 30,
2002. Under generally accepted accounting principles, such $7.5 million is not
recorded in the Company's fiscal 2002 financial statements but will be recorded
in its fiscal 2003 financial statements.
Based on the foregoing, management believes that OmniCare-TN will be in
compliance with its statutory net worth requirements through June 30, 2003. In
addition, as discussed in Note 8, the Company's bank lender has waived the
Company's compliance with certain financial covenants for the fiscal quarter
ended June 30, 2002, and the bank and the Company have agreed to modify the loan
agreement's debt service coverage and net worth covenants for succeeding fiscal
quarters.
The Company's ability to generate adequate amounts of cash to meet its future
cash needs depends on a number of factors, particularly including its ability to
control administrative costs related to managing medical costs for the TennCare
program and controlling corporate overhead costs. On the basis of the matters
discussed above, management believes at this time that the Company has the
ability to generate sufficient cash to adequately support its financial
requirements through June 30, 2003.
NOTE 15 - LOSS ON DISPOSAL OF ASSETS
In the fourth quarter of fiscal 2002, the Company recorded an impairment loss
equal to the $2.4 million remaining carrying value of the patient care software
system which it had purchased to fulfill a requirement of the State of
Michigan's Office of Financial and Insurance Services to implement such a system
for OmniCare-MI. This software system was not in use at June 30, 2002 and will
F-20
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
not be used for OmniCare-MI because its management agreement with the Company
will terminate November 1, 2002.
NOTE 16 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The following table presents selected quarterly financial data for the years
ended June 30, 2002 and 2001 (in thousands, except per share data):
------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------------------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30, TOTAL
---------------------------------------------------------------------------------
2002
-----------------------------
Total revenues $ 54,000 $ 45,862 $ 38,678 $ 41,577 $ 180,117
Net earnings (loss) (14,414) 299 1,033 2,119 (10,963)
Net earnings (loss)
per common share
assuming dilution $ (2.10) $ 0.04 $ 0.15 $ 0.31 $ (1.60)
2001
-----------------------------
Total revenues $ 33,554 $ 34,019 $ 33,343 $ 30,808 $ 131,724
Net earnings (loss) 4,463 (5,838) 939 1,665 1,229
Net earnings (loss) per
common share
assuming dilution $ 0.65 $ (0.86) $ 0.14 $ 0.25 $ 0.18
---------------------------------------------------------------------------------------------------------------
In the quarter ended June 30, 2001, the Company made the following significant
adjustments: (i) reduced the valuation allowance previously recorded against a
portion net operating loss carryforwards, resulting in current and long-term
deferred tax assets totaling $1.6 million.
In the quarter ended June 30, 2002, the Company made the following significant
adjustments: (i) increase in medical expenses of $11.2 million due to an
increase in the medical loss ratio from 87% to 95% and (ii) loss of $2.4 million
for the write-down of a claims conversion system.
F-21
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
NOTE 17 - SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations is as
follows (in thousands):
------------------------------------------------------------------------------------------------------------------
MANAGEMENT HMOS & CORPORATE & CONSOLIDATED
2002 COMPANIES (1) MANAGED PLANS (2) ELIMINATIONS COMPANY
------------------------------------------------------------------------------------------------------------------
Revenues - external customers $ 14,941 $ 163,094 $ - $ 178,035
Revenues - intersegment 16,191 - (16,191) -
Interest and other income (13) 2,095 2,082
--------------------------------------------------------------------------
Total revenues $ 31,119 $ 165,189 $ (16,191) $ 180,117
==================================================================================================================
Interest expense $ 216 $ - $ - $ 216
Loss on disposal of assets 2,411 - - 2,411
Operating (losses) earnings (398) (9,747) - (10,145)
Segment assets 29,485 23,836 (19,985) 33,336
Purchase of equipment and
capitalized software 1,005 - - 1,005
Depreciation and amortization 1,800 - - 1,800
==================================================================================================================
2001
------------------------------------------------------------------------------------------------------------------
Revenues - external customers $ 26,394 $ 103,004 $ - $ 129,398
Revenues - intersegment 11,731 - (11,731) -
Interest and other income 571 1,862 (107) 2,326
--------------------------------------------------------------------------
Total revenues $ 38,696 104,866 $ (11,838) $ 131,724
==================================================================================================================
Interest expense $ 401 $ - $ - $ 401
Bad debt expense 11,532 - - 11,532
Operating (losses) earnings (4,767) 5,246 (817) (337)
Segment assets 30,194 29,714 (18,251) 41,657
Purchase of equipment and
capitalized software 3,044 - - 3,044
Depreciation and amortization 1,242 - 711 1,953
==================================================================================================================
2000
------------------------------------------------------------------------------------------------------------------
Revenues - external customers $ 18,769 $ 86,174 $ - $ 104,943
Revenues - intersegment 12,502 - (12,502) -
Interest and other income 3,064 1,419 (373) 4,110
--------------------------------------------------------------------------
Total revenues $ 34,335 $ 87,593 $ (12,875) $ 109,053
==================================================================================================================
Interest expense $ 539 $ - $ - $ 539
Bad debt expense 3,100 - - 3,100
Operating (losses) earnings (2,273) 4,574 (711) 1,590
Segment assets 28,350 13,813 (7,354) 34,809
Purchase of equipment and
capitalized software 2,478 - - 2,478
Depreciation and amortization 2,634 - 711 3,345
------------------------------------------------------------------------------------------------------------------
(1) Management Companies: United American Healthcare Corporation (2002, 2001,
2000), United American of Tennessee, Inc. (2002, 2001, 2000), United
American of Pennsylvania, Inc. (2000), and United American of Florida, Inc.
(2001, 2000).
(2) HMOs and Managed Plans: OmniCare Health Plan of Tennessee (2002, 2001, 2000)
and County Care (through September 30, 2001, 2000).
F-22
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
NOTE 18 - RECENTLY ENACTED PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued two new accounting
standards which may be applicable in the future to the Company. One of these is
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," and the other is SFAS No. 146,
"Accounting for Costs Associated With Exit or Disposal Activities."
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 also amends ARB No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Company plans
on adopting SFAS No. 144 during fiscal 2003, and management does not believe
that SFAS No. 144 will have a material effect on the financial statements of the
Company.
SFAS No. 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The Company plans on adopting SFAS No. 146 during fiscal year
2003, and management is in the process of determining the impact, if any, of
adopting SFAS No. 146.
F-23
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF DOCUMENT INCORPORATED HEREIN BY FILED
NUMBER REFERENCE TO HEREWITH
-----------------------------------------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation Exhibit 3.1 to the Registrant's Form S-1
of Registrant Registration Statement under the
Securities Act of 1933, as amended,
declared effective on April 23, 1991"
("1991 S-1")
3.1(a) Certificate of Amendment to the Exhibit 3.1(a) to 1991 S-1
Articles of Incorporation of
Registrant
3.2 Amended and Restated Bylaws of Exhibit 3.2 to the Registrant's 1993
Registrant Form 10-K
4.1 Incentive and Non-Incentive Stock Exhibit 4.1 to the Registrant's 1995
Option Plan of Registrant effective Form 10-K
March 25, 1991, as amended
4.2 Form of Common Share Certificate Exhibit 4.2 to the Registrant's 1995
Form 10-K
10.1 Employees' Retirement Plan for Exhibit 10.1 to 1991 S-1
Registrant dated May 1, 1985, with
First Amendment thereto and Summary
Plan Description therefore
10.2 Management Agreement between Exhibit 10.2 to 1991 S-1
Michigan Health Maintenance
Organization Plans, Inc. and
Registrant dated March 15, 1985, as
amended June 12, 1985
10.3 Management Agreement between U.A. Exhibit 10.3 to 1991 S-1
Health Care Corporation and
Personal Physician Care, Inc. dated
March 18, 1987
10.4 Amendment dated February 16, 1993 Exhibit 10.5 to the Registrant's 1995
to Management Agreement between Form 10-K
United American Healthcare
Corporation and Personal Physician
Care, Inc. dated March 18, 1987
10.5 Amendment dated June 16, 1994 to Exhibit 10.4 to the Registrant's 1994
Management Agreement between U.A. Form 10-K
Health Care Corporation and
Personal Physician Care, Inc. dated
March 18, 1987
10.6 Management Agreement between Exhibit 10.5 to Registrant's 1994 Form 10-K
OmniCare Health Plan, Inc. and
United American of Tennessee, Inc.
dated February 2, 1994
10.7 Management Agreement between Exhibit 10.6 to Registrant's 1994 Form 10-K
UltraMedix Health Care Systems,
Inc. and United American of
Florida, Inc. dated February 1, 1994
10.8 Amendment dated September 4, 1995 Exhibit 10.9 to the Registrant's 1995
to Management Agreement between Form 10-K
UltraMedix Healthcare Systems, Inc.
and United American of Florida,
Inc. dated February 1, 1995
10.9 Amendment dated September 20, 1995 Exhibit 10.10 to Registrant's 1995
to Management Agreement between Form 10-K
UltraMedix Health Care Systems,
Inc. and United American of
Florida, Inc. dated February 1, 1995
10.10 Lease Agreement between 1155 Form 8-K filed August 8, 1991
Brewery Park Limited Partnership
and Registrant dated July 24, 1991,
effective May 1, 1992
10.11 Amendment dated December 8, 1993 to Exhibit 10.8 to the Registrant's 1994
Lease agreement between 1155 Form 10-K
Brewery Park Limited Partnership
and Registrant dated July 24, 1991
10.12 Amendment dated April 15, 1993 to Exhibit 10.13 to Registrant's 1995
Lease Agreement between 1155 Form 10-K
Brewery Park Limited Partnership
and Registrant dated July 24, 1991
10.13 Lease Agreement between Baltimore Exhibit 10.7 to the Registrant's 1993
Center Associates Limited Form 10-K
Partnership and Corporate
Healthcare Financing, Inc. dated
August 24, 1988, as amended April
12, 1993, effective the later of
May 1, 1993 or the date premises
are ready for occupancy
10.14 Amendment dated May 11, 1994 Exhibit 10.11 to the Registrant's 1994
(effective June 30, 1994) to Lease Form 10-K
agreement between Baltimore Center
Associates Limited Partnership and
Corporate Healthcare Financing, Inc
10.15 Lease Agreement between CLW Realty Exhibit 10.2 to Registrant's 1994 Form 10-K
Asset Group, Inc., as agent for The
Prudential Insurance Company of
America and United American of
Florida dated May 31, 1994,
effective June 1, 1994
10.16 Lease Agreement between Fleming Exhibit 10.3 to Registrant's 1994 Form 10-K
Companies, Inc. and United American
of Tennessee dated June 30, 1994,
effective the date premises are
ready for occupancy
10.17 Lease Agreement between Exhibit 10.19 to Registrant's 1995 Form
International Business Machines 10-K
Corporation and Registrant dated
August 29, 1994
10.18 Amended and Restated Line of Credit Exhibit 10.20 to Registrant's 1995 Form
Facility Agreement between Michigan 10-K
National Bank and Registrant dated
March 14, 1995
10.19 Promissory notes between Michigan Exhibit 10.9 to the Registrant's 1993 Form
National Bank and Registrant dated 10-K
August 26, 1993
10.20 Asset Purchase Agreement between Form 8-K filed May 24, 1993 and Form 8-K/A
CHF, Inc., Healthcare Plan filed July 21, 1993
Management, Inc., CHF-HPM Limited
Partnership, Louis J. Nicholas and
Keith B. Sullivan and Registrant
dated May 7, 1993
10.21 Loan and Security Agreement between Exhibit 10.18 to Registrant's 1994 Form
UltraMedix Health Care Systems, 10-K
Inc. and United American of Florida
dated February 1, 1994
10.22 Amendment dated June 13, 1995 to Exhibit 10.26 to Registrant's 1995 Form
the Loan and Security Agreement 10-K
between UltraMedix Care Systems,
Inc. and United American of
Florida, Inc. dated February 1, 1994
10.23 Form of Stock Transfer Services Exhibit 10.19 to Registrant's 1994 Form
Agreement between Huntington 10-K
National Bank and Registrant
10.24 Employment Agreement between Julius Exhibit 10.15 to 1991 S-1
V. Combs, M.D. and Registrant dated
March 15, 1991
10.25 Employment Agreement between Ronald Exhibit 10.16 to 1991 S-1
R. Dobbins and Registrant dated
March 15, 1991
10.26 Employment Agreement between Louis Exhibit 10.22 to Registrant's 1994 Form
J. Nicholas and Corporate 10-K
Healthcare Financing, Inc. dated
May 7, 1993
10.27 First Amendment to Contingent Note Form 10-Q for the Quarter Ended March 31,
Promissory Note between CHF-HPM 1996, filed May 14, 1996
Limited Partnership and the
Registrant
10.28 Acquisition of majority interest in Form 8-K filed April 19, 1996
OmniCare Health Plan, Inc. of
Tennessee and UltraMedix Healthcare
Systems, Inc.
10.29 Injured Workers' Insurance Fund Form 10-K/A filed October 14, 1996, as
Contract No. IWIF 9-96 Managed Care amended
Contract with Statutory Benefits
Management Corporation dated June
19, 1996
10.30 Ernst & Young LLP Report of Exhibit 10.30 to Registrant's 1998 Form
Independent Auditors as of June 30, 10-K
1996
10.31 Renaissance Center Office Lease Form 10-Q for the Quarter Ended September
between Renaissance Center Venture 30, 1996, filed November 13, 1996
and Registrant
10.32 Purchase Agreement between Form 10-Q for the Quarter Ended December
Statutory Benefits Management 31, 1996, filed February 10, 1997
Corporation and Spectera, Inc.
10.33 Agreement of Purchase and Sale of Form 10-K filed October 14, 1997
Stock, between CHF Acquisition,
Inc. and the Registrant dated
September 12, 1997
10.34 Ernst & Young LLP Report of Form 10-K filed October 14, 1997
Independent Auditors as of June 30,
1997
10.35 Amended and Restated Business Loan Form 10-Q for the Quarter Ended
Agreement between Michigan National March 31, 1998, filed May 15, 1998
Bank and Registrant dated March 12,
1998 (effective as of February 1,
1998)
10.36 Business Loan Agreement Addendum Form 10-Q for the Quarter Ended
between Michigan National Bank and March 31, 1998, filed May 15, 1998
Registrant dated March 12, 1998
(effective as of February 1, 1998)
10.37 Promissory Note from Registrant to Form 10-Q for the Quarter Ended
Michigan National Bank dated March March 31, 1998, filed May 15, 1998
12, 1998 (effective as of February
1, 1998)
10.38 Employment Agreement between Exhibit 10.38 to Registrant's 1998
Gregory H. Moses, Jr. and Form 10-K
Registrant dated May 11, 1998
10.39 Amendment dated as of June 30, 1998 Exhibit 10.39 to Registrant's 1998
to Lease Agreement between 1155 Form 10-K
Brewery Park Limited Partnership
and Registrant dated June 24, 1991
10.40 Termination of Lease between Exhibit 10.40 to Registrant's 1998
Renaissance Holdings, Inc. Form 10-K
(successor to Renaissance Center
Venture) and Registrant dated June
24, 1998
10.41 United American Healthcare Exhibit 10.41 to Registrant's 1998
Corporation 1998 Stock Option Plan Form 10-K
10.42 Stock Purchase Agreement among Exhibit 10.42 to Registrant's 1998
Registrant, CHFA, Inc. and Form 10-K
Corporate Healthcare Financing,
Inc. dated August 31, 1998
10.43 Secured Promissory Note from CHFA, Exhibit 10.43 to Registrant's 1998
Inc. to Registrant dated August 31, Form 10-K
1998
10.44 Unsecured Promissory Note from Exhibit 10.44 to Registrant's 1998
CHFA, Inc. to Registrant dated Form 10-K
August 31, 1998
10.45 Guaranty Agreement of Louis J. Exhibit 10.45 to Registrant's 1998
Nicholas dated August 31, 1998 Form 10-K
10.46 Pledge Agreement between CHFA, Inc. Exhibit 10.46 to Registrant's 1998
and Registrant dated August 31, 1998 Form 10-K
10.47 Amendment of Business Loan Exhibit 10.47 to Registrant's 1998
Agreement between Registrant and Form 10-K
Michigan National Bank dated
September 1, 1998
10.48 Promissory Note of Registrant to Exhibit 10.48 to Registrant's 1998
Michigan National Bank dated Form 10-K
September 1, 1998
10.49 Pledge Agreement from Registrant to Exhibit 10.49 to Registrant's 1998
Michigan National Bank dated Form 10-K
September 1, 1998
10.50 Promissory Note from Registrant to Form 10-Q for the Quarter Ended December
UAH Securities Litigation Fund 31, 1998, filed February 16, 1999
dated December 11, 1998
10.51 Amendment of Promissory Note and Exhibit 10.51 to Registrant's 1999
Business Loan Agreement from Form 10-K
Michigan National Bank dated May 6,
1999
10.52 Provider Contract between Urban Exhibit 10.52 to Registrant's 1999
Hospital Care Plus and Registrant Form 10-K
dated April 1, 1999
10.53 Assignment and Assumption of Exhibit 10.53 to Registrant's 1999
Subleases and Security Deposits Form 10-K
between International Business
Machines Corporation and Registrant
dated September 9, 1999
10.54 Business Loan Agreement between Exhibit 10.54 to Registrant's 2001
Registrant and Michigan National Form 10-K
Bank dated September 25, 2000
10.55 Promissory Note of Registrant to Exhibit 10.55 to Registrant's 2001
Michigan National Bank dated Form 10-K
September 25, 2000
10.56 Security Agreement between Exhibit 10.56 to Registrant's 2001
Registrant and Michigan National
Bank dated September 25, 2000 Form 10-K
10.57 Amendment of Business Loan Form 10-Q for the Quarter Ended December
Agreement with Standard Federal 31, 2001, filed February 14, 2002
Bank N.A., dated November 29, 2001
and effective September 30, 2001.
10.58 Amended and Restated Promissory Form 10-Q for the Quarter Ended December
Note to Standard Federal Bank N.A., 31, 2001, filed February 14, 2002
dated November 29, 2001 and
effective September 30, 2001.
10.59 Amendment to Management Agreement Form 10-Q for the Quarter Ended December
with OmniCare Health Plan dated 31, 2001, filed February 14, 2002
December 14, 2001 and effective
August 1, 2001.
10.60 Amendment of Business Loan *
Agreement with Standard Federal
Bank N.A., dated October 11, 2002
16.1 Concurring Letter regarding change Form 8-K filed October 30, 1997
in Certifying Accountants dated
October 30, 1997, from Grant
Thornton LLP
16.2 Concurring Letter regarding change Form 8-K/A filed November 12, 1997
in Certifying Accountants dated
November 12, 1997, from Grant
Thornton LLP
16.3 Concurring Letter regarding change Form 8-K/A filed November 12, 1997
in Certifying Accountants dated
November 12, 1997, from Ernst &
Young LLP
16.4 Concurring Letter regarding change Form 8-K filed January 20, 1998
in Certifying Accountants dated
January 16, 1998, from Arthur
Andersen LLP
21 Subsidiaries of the Registrant *
99.1 Press Release dated January 12, 1998 Form 8-K filed January 20, 1998
99.2 Press Release dated January 6, 2000 Form 8-K filed January 14, 2000
99.3 Certification Pursuant to *
18 U.S.C. Section 1350