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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, 2003
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)
300 RIVER PLACE, SUITE 4950
DETROIT, MICHIGAN 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 393-4571
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b-2 of the Act). Yes [ ] No [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES AS OF SEPTEMBER 19, 2003, COMPUTED BY REFERENCE TO THE NASDAQ
SMALLCAP MARKET CLOSING PRICE ON SUCH DATE, WAS $23,081,707.
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF SEPTEMBER
19, 2003 WAS 7,190,563.
Portions of the registrant's Proxy Statement for its 2003 Annual Meeting of
Shareholders have been incorporated by reference in Part III of this Annual
Report of Form 10-K.
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 2003
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business....................................................................................1
Item 2. Properties.................................................................................11
Item 3. Legal Proceedings..........................................................................11
Item 4. Submission of Matters to a Vote of Security Holders........................................12
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters ..................................................................................13
Item 6. Selected Financial Data....................................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................14
Item 8. Financial Statements.......................................................................26
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................26
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................26
Item 11. Executive Compensation.....................................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................26
Item 13. Certain Relationships and Related Transactions.............................................27
Item 14. Principal Accounting Fees and Services.....................................................27
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................27
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 a
managed care organization in Tennessee, and previously to other health
maintenance organizations in other states, principally (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 previously (until
November 1, 2002) Michigan.
Management and consulting services provided by the Company are and have been
generally to health maintenance organizations with a targeted mix of Medicaid
and non-Medicaid/commercial enrollment. As of September 1, 2003, there were
130,080 enrollees in OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"),
75%-owned by the Company's wholly owned subsidiary.
Pursuant to notice received from OmniCare Health Plan in Michigan (OmniCare-MI),
the Company's management agreement with OmniCare-MI terminated November 1, 2002.
On that date, the Company ceased providing services to OmniCare-MI, and
OmniCare-TN became 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.
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.
2
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 managed the operations of an HMO in
which it had no ownership interest, OmniCare-MI, pursuant to a management
agreement, which terminated November 1, 2002.
The Company previously participated in the "County Care" plan in Michigan 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 number of OmniCare-TN members serviced
by the Company as of September 1, 2003:
Medicaid Non--Medicaid Total
-------- ------------- -----
113,535 16,545 130,080
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.
YEAR ENDED JUNE 30,
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2003 2002 2001
---- ---- ----
(in thousands, except percentages)
Revenues
OmniCare-TN $ 24,314 87% $160,608 90% $ 93,305 71%
OmniCare-MI* 3,395 12% 14,941 8% 26,394 20%
County Care** -- -- 2,486 1% 9,699 7%
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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 terminated
November 1, 2002, reflected as a discontinued operation in the consolidated
financial statements contained elsewhere in this annual report.
** County Care was no longer a managed plan of the Company after September 30,
2001.
3
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 had
a long-term management agreement with OmniCare-MI, which terminated November 1,
2002. Pursuant to these management agreements, the Company provides to
OmniCare-TN and provided to OmniCare-MI management and consulting services
associated with the financing and delivery of health care services. Table A
summarizes the terms of these agreements.
Services provided to OmniCare-TN and previously OmniCare-MI (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.
Table A- Summary of Terms of Agreements with the Managed Plans
Terms OmniCare-TN OmniCare-MI(1)
----- ----------- --------------
(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 N/A
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 Yes N/A
review dates
(ii) Either party with cause Yes N/A
(2) Fees paid to the Company:
(a) Percentage of revenues Yes Yes(2)
(b) Fixed premium rates No No
(3) Expenses incurred by the Company:
All administrative expenses necessary to
carry out and perform the functions of the
Plan, excluding:
(i) Audit Yes No
(ii) Legal Yes No
(iii) Marketing No No
(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
terminated November 1, 2002, pursuant to notice the Company 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.
4
MANAGED PLAN 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 the State of Tennessee, doing
business as TennCare ("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.
The contract between OmniCare-TN and 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.
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.
5
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, and may incur financial penalties for not
achieving certain performance requirements. The program was initially designed
to permit MCOs also to earn limited additional administrative fees based on
certain performance measures as an incentive to manage medical costs below the
targets, but that component of the program was subsequently omitted in practice.
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."
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.
Under generally accepted accounting principles, the $7.5 million receivable was
not recorded in fiscal 2002 financial statements but has been recorded in fiscal
2003 financial statements. Based on an actuarial determination, an additional
$0.4 million of fiscal 2002 medical claims liability was recorded during fiscal
2003. In all, fiscal 2002 medical claims of $7.9 million were processed in the
fiscal year ended June 30, 2003, and the same aggregate amount was recognized as
revenue by OmniCare-TN.
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.
As of September 1, 2003, OmniCare-TN's total enrollment was 130,080 members, of
whom 87% were Medicaid enrollees and 13% were Non-Medicaid enrollees.
MANAGED PLAN OPERATED BY THE COMPANY
OMNICARE-MI. As further described below, OmniCare-MI ceased to be a Managed Plan
operated by the Company effective November 1, 2002.
6
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. While
managed by the Company, 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 independent physicians to provide
services to HMO members). OmniCare-MI also created and implemented the first
known mental health capitation carve out in 1983.
While managed by the Company, OmniCare-MI's enrollment was through companies
that offered 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 made HMO coverage available to eligible Medicaid beneficiaries in
certain counties and mandatory in others.
On April 13, 2000, the Company funded an unsecured loan to OmniCare-MI evidenced
by a surplus note of $7.7 million to enable OmniCare-MI to meet its minimum
statutory requirement for net worth and working capital. The 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 note, 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 and $1.1 million on that and a similar earlier
surplus note was forfeited for fiscal years 2002 and 2001, 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 for the year ended June 30, 2001. 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 in fiscal year 2001.
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.
The Order required the Company to continue performing all services under its
OmniCare-MI management agreement, which the Company did until that agreement's
termination on November 1, 2002, pursuant to OmniCare-MI's court-approved
rehabilitation plan.
7
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% of premiums earned 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.
GOVERNMENT REGULATION
The Company is and/or has been 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 OmniCare-TN will be granted the necessary approvals for new products
or will maintain federal qualifications or state licensure.
The licensing and operation of OmniCare-TN are governed by the Tennessee
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 plan is operating out of compliance with the state's
HMO statute, 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. 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 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
8
coverage levels under these policies are adequate in view of the risks
associated with the Company's business. In addition, the Managed Plans
(including OmniCare-MI while managed by the Company) have professional liability
insurance that covers liability claims arising from medical malpractice.
OmniCare-TN is required to pay the insurance premiums under the terms of the
Company's management agreement. 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
OmniCare-TN 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 September 1, 2003 was 112 compared to 274 at
October 1, 2002. The Company's employees do not belong to a collective
bargaining unit and management considers its relations with employees to be
good. The above-stated total number of employees at September 1, 2003 decreased
by 169 at November 1, 2002 in connection with the termination of its OmniCare-MI
management agreement, when OmniCare-MI commenced employing most of the Company
employees (excluding officers) who provide services for OmniCare-MI. The Company
gave termination notices, effective November 1, 2002, to its employees who
provided services for OmniCare-MI but whom OmniCare-MI did not employ; and the
Company had no severance payment obligations to any of those employees.
9
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 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. The potential reenrollment of some of the approximately 7,900
OmniCare TN members disenrolled by TennCare since July 1, 2002
pursuant to its court-challenged eligibility reverification
process that disenrolled approximately 166,000 TennCare
members statewide.
4. Increases in medical costs, including increases in utilization
and costs of medical services and the effects of actions by
competitors or groups of providers.
5. Adverse state and federal legislation and initiatives,
including: the State of Tennessee's 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.
6. Failure to obtain new customer bases or members or retain or
regain customer bases or members, or reductions in work force
by existing customers.
7. Increased competition between current organizations, the
entrance of new competitors and the introduction of new
products by new and existing competitors.
8. Adverse publicity and media coverage.
9. Inability to carry out marketing and sales plans.
10. Loss or retirement of key executives.
11. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.
12. Adverse regulatory determinations resulting in loss or
limitations of licensure, certification or contracts with
governmental payors.
10
13. Higher sales, administrative or general expenses occasioned by
the need for additional advertising, marketing, administrative
or management information systems expenditures.
14. Increases by regulatory authorities of minimum capital,
reserve and other financial solvency requirements.
15. Denial of accreditation by quality accrediting agencies, e.g.,
the National Committee for Quality Assurance (NCQA).
16. Adverse results from significant litigation matters.
17. Inability to maintain or obtain satisfactory bank loan credit
arrangements.
18. Increased costs to comply with the Health Insurance
Portability and Accountability Act of 1996 (HIPAA).
ITEM 2. PROPERTIES
The Company currently leases approximately 34,000 aggregate square feet from
which it conducts its operations in Michigan and Tennessee. In addition, the
Company has arranged a sublease of all its former premises (approximately 54,000
square feet) in Detroit, Michigan, to OmniCare-MI, retroactive to November 1,
2002 and expiring at its lease end in May 2005. The principal offices of the
Company are located at 300 River Place, Suite 4950, Detroit, Michigan, where it
currently leases approximately 2,000 square feet of office space.
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
On April 17, 2003, the Chancery Court for Madison County, Tennessee, entered an
Agreed Order of Dismissal dismissing with prejudice the entire action entitled
Jackson-Madison County General Hospital District, Plaintiff and
Counter-Defendant, v. OmniCare Health Plan, Inc. (i.e., OmniCare-TN), Defendant
and Counter-Plaintiff. Pursuant to the Order and a Mutual Settlement Agreement
and Release between the parties, both parties mutually released each other from
all liability in the matter, with Jackson-Madison County General Hospital
District responsible for court costs.
An action by Vanderbilt University in the Chancery Court for Davidson County,
Tennessee: The plaintiff's complaint, filed February 18, 2002, alleged that
OmniCare-TN breached a contract by paying less than the plaintiff's full charges
for health services provided by its hospital and physician group to OmniCare-TN
members. The plaintiff was not an OmniCare-TN participating provider, and
OmniCare-TN reimbursed the plaintiff at non-participating provider rates. The
complaint sought additional reimbursement of the difference between the rates
paid by OmniCare-TN and 100% of the plaintiff's billed charges. On May 28, 2002,
the court denied the plaintiff's motion for partial summary judgment on the
issue of liability and further held there was no enforceable contract as a
matter of law. On July 31, 2002, the plaintiff amended the complaint to add an
equitable claim based on quantum meruit/implied contract, seeking payment of the
reasonable value of its services to OmniCare-
11
TN members. OmniCare-TN answered the amended complaint on August 30, 2002,
stating that it has paid the plaintiff in full for any services provided and
asserting affirmative defenses, including that no express or implied contract
existed between the parties. On July 7, 2003, the court entered an amended
scheduling order setting a November 28, 2003 deadline for pretrial discovery and
a trial date in April 2004.
A lawsuit entitled 1155 Brewery Park, LLC v. United American Healthcare
Corporation was filed June 30, 2003 in the Circuit Court for the County of Wayne
in Michigan, for partial rent under the lease of the Company's former office
space in Detroit plus service fees, interest and attorney fees allegedly due.
The Company has filed an answer and affirmative defenses to the complaint, and
discovery has not yet begun in the case. The Company recognized a charge in the
second quarter of fiscal year 2003 for all such partial rent through the lease
end in May 2005 (see Note 13 to the consolidated financial statements in this
annual report). Management expects that the eventual outcome of the lawsuit will
not materially adversely affect the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
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 on the Nasdaq SmallCap
Market since January 2, 2003, under the trading symbol "UAHC". Prior thereto,
shares of the Company's Common Stock were traded since May 16, 2002 on the
NASDAQ National Market. Shares of the Company's Common Stock earlier were traded
on the OTC Bulletin Board 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 SmallCap or National Market or high and low bid
quotations on the OTC Bulletin Board, as applicable, for each quarter in the
past two fiscal years.
2003 SALES PRICE 2002 SALES PRICE
OR BID QUOTATION OR BID QUOTATION
------------------------------ ------------------------------
FISCAL QUARTER HIGH LOW HIGH LOW
-------------- ---- --- ---- ---
First $ 4.80 $ 1.80 $ 1.63 $ 0.95
Second $ 2.14 0.88 $ 5.18 $ 1.11
Third $ 1.18 0.76 $ 7.50 $ 4.28
Fourth 2.05 0.96 $ 6.38 $ 3.78
As of September 19, 2003, the closing price of the Common Stock was $3.21 per
share and there were approximately 201 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.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table shows consolidated financial data for the periods indicated:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Operating Data (Year ended June 30): (in thousands, except per share data)
-----------------------------------
Operating revenues $ 24,530 $ 165,176 $ 105,330 $ 90,284 $ 75,374
Earnings (loss) from continuing
operations 7,333 (9,259) 4,562 3,881 (816)
Earnings (loss) from discontinued (2,127) (1,704) (3,333) (2,897) 1,391
operation, net of income taxes
Net earnings (loss) 5,206 (10,963) 1,229 984 575
Earnings (loss) per common share from
continuing operations - basic $ 1.06 $ (1.35) $ 0.67 $ 0.57 $ (0.12)
Net earnings (loss) per common share --
basic and diluted $ 0.75 $ (1.60) $ 0.18 $ 0.15 $ 0.09
Weighted average common shares
outstanding -- diluted 6,950 6,839 6,808 6,779 6,764
Balance Sheet Data (June 30):
-----------------------------
Cash and investments 4,963 $ 18,810 $ 24,766 $ 10,569 $ 18,576
Intangible assets, net 2,952 2,952 2,952 3,663 4,374
Total assets 15,114 33,336 41,657 34,809 49,251
Medical claims and benefits payable 591 24,495 19,815 11,245 19,810
Debt 1,766 2,869 3,492 4,345 13,112
Shareholders' equity 7,140 1,747 12,313 11,051 10,360
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 provides comprehensive management and consulting services to managed
care organizations, including health maintenance organizations ("HMOs") in
Tennessee and (until November 1, 2002) Michigan, with a targeted mix of Medicaid
and commercial enrollment.
14
OmniCare Health Plan, in Michigan ("OmniCare-MI"), an HMO then administered by
the Company under a management agreement, 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, 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 occurred November 1, 2002, after which
the Company's only managed plan has been OmniCare Health Plan, Inc., in
Tennessee ("OmniCare-TN"), an HMO which is 75% owned by the Company's wholly
owned subsidiary. Accordingly, the consolidated financial statements in this
annual report have been restated to present the operations related to managing
OmniCare-MI as a discontinued operation.
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 and
are subject to increased oversight. 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, the Company funded an unsecured loan to OmniCare-MI evidenced
by a surplus note of $7.7 million to enable OmniCare-MI to meet its minimum
statutory requirement for net worth and working capital. The 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 note, 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 and $1.1 million on that and a similar earlier
surplus note was forfeited for fiscal years 2002 and 2001, 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 for the year ended June 30, 2001. 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.
15
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.
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, a Pennsylvania HMO that was 49% owned by a
wholly owned subsidiary of the Company, 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 such subsidiary pursuant to agreements
under which it 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 - 2003 COMPARED TO 2002
OMNICARE-TN DEVELOPMENTS
It should be noted initially in this discussion that 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
16
MCOs ceased doing business in fiscal 2002. In contrast, TennCare has expressly
regarded OmniCare-TN as one of TennCare's viable MCOs.
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 and are subject to
increased oversight. Under such ASO program as originally established, the
Company expected to earn limited additional administrative fees, based on
certain performance measures as an incentive to manage medical costs below the
targets. However, the Governor of Tennessee and Tenncare representatives later
publicly stated in discussions with the Tennessee legislature and elsewhere that
no incentive payments would be made because of that state's and TennCare's
budget situation. TennCare stated at the inception of the ASO program that it
intends to return to a full risk system after the end of the 18-month
stabilization period at January 1, 2004. This remains the Company's current
understanding of TennCare's intention in this regard.
TennCare responded to OmniCare-TN's situation individually as well. In September
2002, OmniCare-TN and the State of Tennessee, doing business as TennCare,
amended the Contractor Risk Agreement between them. 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 a further agreement with OmniCare-TN in October 2002, the State of
Tennessee 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.
17
Under generally accepted accounting principles, such $7.5 million was not
recorded in the Company's fiscal 2002 financial statements but has been recorded
in its fiscal 2003 financial statements as fiscal 2002 claims were processed.
Based on an actuarial determination, an additional $0.4 million of fiscal 2002
medical claims liability was recorded during fiscal 2003. In all, fiscal 2002
medical claims of $7.9 million were processed, in the fiscal year ended June 30,
2003, and the aggregate amount was recognized as revenue by OmniCare-TN.
Beginning July 1, 2002 TennCare disenrolled approximately 166,000 enrollees
statewide in an eligibility reverification process. In December 2002, a U.S.
District Court judge in Tennessee ruled that such process was flawed. In March
2003, TennCare and Tennessee Governor Phil Bredesan announced that all
disenrolled members will have a year-long grace period until March 31, 2004 to
prove if they actually meet the eligibility requirements and thereby have their
wrongful disenrollment cancelled and their enrollment restored retroactively.
OmniCare-TN expects re-enrollment, in some instances retroactively to July 1,
2002, of some of its approximately 7,900 affected working uninsured or
uninsurable members.
As of June 30, 2003, OmniCare-TN's total enrollment was 130,080 members,
compared to 120,000 at October 1, 2002. The increase in members is attributed to
the assignment of 19,857 members by TennCare on June 1, 2002 offset by the loss
of approximately 7,900 members as discussed in the previous paragraph.
OMNICARE-MI DEVELOPMENTS
It should be noted initially in this discussion that the Company's longstanding
management agreement with OmniCare-MI ended effective November 1, 2002. The
consolidated financial statements have been restated to present the operations
related to managing OmniCare-MI as a discontinued operation.
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, through the management
agreement's termination date, the Rehabilitator's appointed special deputy
served as the Chief Executive Officer of OmniCare-MI.
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 paid all of its own expenses commencing as of August 1, 2002, except
for personnel, rent and depreciation, which the Company 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-
18
based fee, which was equivalent to approximately 10% of premiums earned
beginning in August 2001, subject to adjustment to reflect the Company's actual
costs of performing the management agreement.
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 continued through October 31, 2002.
That agreement terminated 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.
Because of its resulting workforce reduction, the Company made plans to sublease
all of its then principal office premises in Detroit, Michigan, to OmniCare-MI,
retroactive to November 1, 2002, and expiring at the lease end in May 2005, and
to sell to OmniCare-MI furniture, a telephone system and certain computer
hardware and software that the Company chose to leave there. Management had
expected both parties to finalize and sign the sublease, and close the sale of
such assets, in the fourth quarter of fiscal 2003, but that has been delayed due
to the unique circumstance explained in the next paragraph below. OmniCare-MI
commenced its occupancy of the premises on November 1, 2002 and the Company
remained in a portion of the premises until it moved its principal offices to
new leased premises in Detroit on February 3, 2002.
On April 11, 2003, the Governor of Michigan appointed Linda A. Watters as the
new Commissioner of the Office of Financial and Insurance Services. Ms. Watters
had served on the Company's Board of Directors continually since 2000 and
resigned that office on the same date she became the new Commissioner (as
required to avoid any possible appearance of a conflict of interest and not as
the result of any disagreement with the Company). Because of the new
Commissioner's prior association with the Company, the State circuit court judge
who retained jurisdiction over OmniCare-MI's rehabilitation proceedings then
required that a designated independent person replace the Rehabilitator's (i.e.,
Commissioner's) special deputy who had been dealing with the sublease and assets
purchase, which personnel change on OmniCare-MI's part accounts for the delay in
signing the sublease and closing the assets sale. Management now expects to
complete the signing of the sublease and the sale of assets in the next several
months.
In connection with the November 1, 2002 termination of its OmniCare-MI
management agreement, the Company recorded a $1.8 million loss from discontinued
operations in the second quarter of fiscal 2003. Such loss was due in part to:
(i) a $0.6 million write-down of assets held for sale in excess of the
anticipated selling price for the pending sale of assets described above; (ii)
the above-described sublease, which is expected to cost the Company
approximately $0.04 million per month through the remainder of the lease, ending
in May 2005, resulting in a loss of $1.2 million recorded in the second quarter
of fiscal 2003, which was offset by a $0.6 million write-down of a deferred rent
liability associated with the original lease; and (iii) a bad debt charge of
$0.3 million recorded because management determined the collectability of that
amount of receivables from OmniCare-MI is doubtful. The recorded charges
discussed above were offset by management fees from OmniCare-MI of $0.8 million.
19
OTHER COMPARISON OF 2003 TO 2002
Medical premium revenues were $7.9 million in the fiscal year ended June 30,
2003, a decrease of $155.3 million (95%) from $163.1 million in the fiscal year
ended June 30, 2002. Such $7.9 million of medical premium revenues in fiscal
2003 represent the fiscal 2002 medical claims processed and disbursed pursuant
to the TennCare commitment discussed above. The decrease from the prior year
came from OmniCare-TN as the result of TennCare's changing its reimbursement
system to an ASO program for an 18-month stabilization period beginning July 1,
2002, as described under "Overview" above. Fixed administrative fees related to
the ASO program were $14.8 million for the fiscal year ended June 30, 2003.
Interest and other income decreased $0.2 million (10%) to $1.9 million in the
fiscal year ended June 30, 2003 from $2.1 million in the fiscal year ended June
30, 2002.
Because of TennCare's new ASO reimbursement system, medical services expenses
were $0.4 million in the fiscal year ended June 30, 2003 and relate totally to
fiscal 2002 claims, as compared with medical services expenses of $155.0 million
in the fiscal year ended June 30, 2002. The percentage of medical services
expenses to medical premium revenues -- the medical loss ratio ("MLR") -- was
95% for the fiscal year ended June 30, 2002 for OmniCare-TN due to the
assignment of 49,000 members in fiscal 2002 that disproportionately exceeded
Omni-TN's normal medical services expense experience.
Marketing, general and administrative expenses decreased approximately $2.3
million (13%), to $15.7 million in the fiscal year ended June 30, 2003 from
$18.0 million in the fiscal year ended June 30, 2002. The decrease is
principally due to reduced advertising costs and TennCare's payment of premium
tax as a result of the ASO arrangement referred to above.
Depreciation and amortization expense decreased $0.02 million (8%), to $0.3
million in the fiscal year ended June 30, 2003 from $0.32 million in the fiscal
year ended June 30, 2002.
Interest expense decreased $0.08 million (35%), to $0.14 million in the fiscal
year ended June 30, 2003 from $0.22 million in the fiscal year ended June 30,
2002, due to debt reduction of $1.1 million and decreases in the prime rate.
Total expenses were $16.6 million in the fiscal year ended June 30, 2003,
compared to $173.6 million in the fiscal year ended June 30, 2002, a decrease of
$157.1 million (90%).
Income tax expense decreased $0.2 million (21%), to $0.6 million in the fiscal
year ended June 30, 2003 from $0.8 million in the fiscal year ended June 30,
2002. The Company's effective tax rate for the fiscal year ended June 30, 2003
was 8% and differs from the statutory rate of 34%. This difference is primarily
a result of the utilization of net operating loss carryforwards which reduced
the effective tax rate by 25 percentage points. Furthermore, the release of
certain tax liabilities that management deemed to be no longer needed reduced
the effective tax rate by 1 percentage point.
20
The Company recognized earnings from continuing operations before income taxes
of $8.0 million in the fiscal year ended June 30, 2003, compared to a loss
before income taxes of $8.4 million in the fiscal year ended June 30, 2002.
Earnings from continuing operations were $7.3 million, or $1.06 per basic share,
in the fiscal year ended June 30, 2003, compared to a loss from continuing
operations of $9.3 million, or $1.35 per basic share, in the fiscal year ended
June 30, 2002, an increase of $16.6 million, or $2.41 per basic share. The
increase in earnings is primarily due to the amendment to OmniCare-TN's TennCare
contract in September 2002, retroactive to July 1, 2001 in some respects and to
May 1, 2002 in other respects, as described under "Overview" above. In the
amendment, 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.
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, the $7.5 million
receivable was not recorded in fiscal 2002 financial statements but has been
recorded in fiscal 2003 financial statements. Based on an actuarial
determination, an additional $0.4 million of fiscal 2002 medical claims
liability was recorded during fiscal 2003. The change in the estimated
reimbursement from the State of Tennessee offset the corresponding change in the
medical claims liability, still resulting in $7.5 million of net earnings in
fiscal year 2003. In all, fiscal 2002 medical claims of $7.9 million were
processed in the fiscal year ended June 30, 2003, and the same aggregate amount
was recognized as revenue by OmniCare-TN.
The Company recognized a loss from discontinued operations of $2.1 million in
the fiscal year ended June 30, 2003 compared to a loss from discontinued
operations of $1.7 million in the fiscal year ended June 30, 2002 as the result
of the termination of the Company's longstanding management agreement with
OmniCare-MI, effective November 1, 2002. See "Overview" above for more detailed
discussion and analysis of such loss from discontinued operations.
Net earnings were $5.2 million, or $0.75 per basic share, in the fiscal year
ended June 30, 2003 compared to a net loss of $11.0 million, or $1.60 per basic
share, in the fiscal year ended June 30, 2002. Such increase in net earnings is
principally due to OmniCare-TN's contractual amendment with TennCare offset by
the loss from discontinued operations, described above.
REVIEW OF CONSOLIDATED RESULTED OPERATIONS - 2002 COMPARED TO 2001
Total revenues increased $59.8 million (57%) to $165.1 million in the fiscal
year ended June 30, 2002 from $105.3 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.
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
21
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. In fiscal 2002, such revenues were only in the three months
ended September 30, 2001, when the County Care contract expired, at the
Company's election.
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, 2001.
Total expenses were $173.6 million in the fiscal year ended June 30, 2002,
compared to $102.3 million in the fiscal year ended June 30, 2001, an increase
of $71.3 million (70%).
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.
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 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.
22
Marketing, general and administrative expenses increased $2.8 million (18%) to
$18.0 million in the fiscal year ended June 30, 2002 from $15.2 million in the
fiscal year ended June 30, 2001. This included, however, for OmniCare-TN, $2.0
million of increased claims processing costs and $1.3 million of increased
premium taxes due to OmniCare-TN's significant membership increases.
Depreciation and amortization decreased $0.6 million (67%) to $0.3 million in
the fiscal year ended June 30, 2002 from $1.0 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 points decrease
in the prime rate for the majority of fiscal year 2002.
The Company recognized a loss from discontinued operations of $1.7 million in
the fiscal year ended June 30, 2002 compared to a loss from discontinued
operations of $3.3 million in the fiscal year ended June 30, 2001 as the result
of the termination of the Company's longstanding management agreement with
OmniCare-MI, effective November 1, 2002. The loss in fiscal year 2002 is
primarily attributed to an impairment loss equal to the $2.4 million remaining
carrying value of the patient care software system which the Company 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 Company management recognized that
the system would not be used by OmniCare-MI because its management agreement
with the Company would terminate November 1, 2002.
The Company recognized a loss from continuing operations before income taxes of
$8.4 million for the year ended June 30, 2002 compared to earnings from
continuing operations before income taxes of $3.0 million 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had (i) cash and cash equivalents and short-term
marketable securities of $4.7 million, compared to $18.8 million at June 30,
2002; (ii) positive working capital of $1.7 million, compared to negative
working capital of $3.7 million at June 30, 2002; and (iii) a current
assets-to-current liabilities ratio of 1.26-to-1.0, compared to 0.87-to-1 at
June 30, 2002.
Net cash used in operating activities was $12.6 million in fiscal 2003 compared
to net cash used in operating activities of $5.1 million in fiscal 2002.
Investing activities in fiscal 2003 included the purchase of equipment of $0.07
million and the purchase of marketable securities of $0.3 million, offset by
proceeds from the sale or maturity of marketable securities of $15.8 million.
Debt repayments were $1.1 million in fiscal 2003.
Cash and marketable securities decreased by $ 14.1 million at June 30, 2003
compared to June 30, 2002, due primarily to operating needs of $12.6 million and
debt repayments of $1.1 million.
23
Accounts receivable decreased by $2.0 million at June 30, 2003 compared to June
30, 2002, primarily because of TennCare's new ASO reimbursement system referred
to above.
Property, plant and equipment decreased by $1.9 million at June 30, 2003
compared to June 30, 2002, due an impairment charge associated with a pending
sale of certain furniture, equipment and software and the recording of
depreciation of $0.3 million.
Medical claims payable decreased by $23.9 million at June 30, 2003 compared to
June 30, 2002, which is directly related to the payment of OmniCare-TN fiscal
2002 medical claims processed during the period, and TennCare's new ASO
reimbursement system.
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. 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. Under generally accepted
accounting principles, the $7.5 million receivable was not recorded in fiscal
2002 financial statements but has been recorded in fiscal 2003 financial
statements. Based on an actuarial determination, an additional $0.4 million of
fiscal 2002 medical claims liability was recorded during fiscal 2003. In all,
fiscal 2002 medical claims of $7.9 million were processed in the fiscal year
ended June 30, 2003, and the same aggregate amount was recognized as revenue by
OmniCare-TN.
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.
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, and may incur financial penalties for not
achieving certain performance requirements. Under such ASO program as originally
established, the Company expected to earn limited additional administrative
fees, based on certain performance measures as an incentive to manage medical
costs below the targets. However, the Governor of Tennessee and Tenncare
representatives later publicly stated in discussions with the Tennessee
legislature and
24
elsewhere that no incentive payments would be made because of that state's and
TennCare's budget situation. TennCare stated at the inception of the ASO program
that it intends to return to a full risk system after the end of the 18-month
stabilization period at January 1, 2004. This remains the Company's current
understanding of TennCare's intention in this regard.
The Company has arranged for a sublease to OmniCare-MI of all of the Company's
leased premises in Detroit, Michigan, retroactive to 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 $1.8 million term loan with Standard Federal Bank,
N.A. repayable in monthly installments of principal and interest of $0.1
million, with an interest rate equal to the bank's prime rate (4.25% at June 30,
2003) 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 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 the ASO arrangement 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 the next twelve months, maintain compliance with bank
financial covenants, and maintain minimum statutory net worth requirements of
OmniCare-TN.
RECENTLY ENACTED PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued the following new
accounting standards and interpretations, which may be applicable in the future
to the Company:
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," amends SFAS No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
Company has adopted SFAS 148 according to the disclosure-only provisions of SFAS
No. 123 and has implemented disclosure for all interim periods beginning March
31, 2003 of pro-forma earnings per share if the Company had elected to recognize
compensation cost based on the fair value of the options at grant date.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity," provides standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. The Statement is effective for financial instruments
entered into or modified after May 31, 2003 and for pre-existing instruments as
of the beginning of the first interim period beginning after June 15, 2003. The
adoption of this standard had no effect on the Corporation's financial condition
or results of operations.
25
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others an interpretation of
SFAS No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," was
issued in November 2002. FIN 45 clarifies the requirements of SFAS No. 5,
"Accounting for Contingencies," relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. The adoption of FIN
45 related to initial recognition and measurement of guarantees did not have an
impact on the net income or equity of the Company.
FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB
51," was issued. The primary objectives of FIN 46 are to provide guidance on the
identification and consolidation of variable interest entities, or VIE's, which
are entities for which control is achieved through means other than through
voting rights. The Company has completed an analysis of FIN 46 and has
determined that it does not have any VIEs.
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 except as previously reported on Forms 8-K and 8-K/A on March 5 and 10,
2003.
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 14, 2003.
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 14, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
26
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 14, 2003.
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 14, 2003.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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 14, 2003 is the
information set forth in such proxy statement under the headings "Audit Fees"
and "Audit Committee Pre-Approval Policies and Procedures."
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, January
14, 2000, March 5, 2003 and April 15, 2003; or (vi) the Company's Form 8-K/A
reports filed with the Commission July 21, 1993, November 12, 1997 and March 10,
2003. The Exhibit Index is hereby incorporated by reference into this Item 15.
Reports on Form 8-K
1) The Company filed a Current Report on Form 8-K on
March 5, 2003, announcing a change in its certifying
accountant.
2) The Company filed a Current Report on Form 8-K/A on
March 10, 2003, supplementing its above-described
filing to attach as an exhibit a letter from its
former certifying accountant.
3) The Company filed a Current Report on Form 8-K on
April 15, 2003, announcing two vacancies on its Board
of Directors, one by resignation (due to the
director's appointment by Michigan's Governor as the
state's Commissioner of the Office of Financial and
Insurance Services) and the other by death.
27
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/ William C. Brooks
--------------------------------------------
Chairman, President and Chief Executive Officer
(principal executive officer)
Date: September 24, 2003
By /s/ Stephen D. Harris
--------------------------------------------
Chief Financial Officer
(principal financial officer)
Date: September 24, 2003
SIGNATURE CAPACITY
--------- --------
/s/WILLIAM C. BROOKS Chairman, President and CEO
-------------------------------- (Principal Executive Officer)
William C. Brooks
/s/EMMETT S. MOTEN, JR. Secretary and Director
--------------------------------
Emmett S. Moten, Jr.
/s/STEPHEN D. HARRIS Chief Financial Officer
-------------------------------- (Principal Financial Officer and Principal
Stephen D. Harris Accounting Officer)
/s/OSBIE HOWARD Director
--------------------------------
Osbie Howard
/s/RICHARD M. BROWN, D.O. Director
--------------------------------
Richard M. Brown, D.O.
/s/WILLIAM B. FITZGERALD Director
--------------------------------
William B. Fitzgerald
/s/DARREL W. FRANCIS Director
--------------------------------
Darrel W. Francis
/s/TOM A. GOSS Director
--------------------------------
Tom A. Goss
/s/RONALD E. HALL, SR. Director
--------------------------------
Ronald E. Hall, Sr.
/s/PETER F. HURST, JR. Director
--------------------------------
Peter F. Hurst, Jr.
(This page intentionally left blank.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Reports.................................................................................F-2
Consolidated Balance Sheets as of June 30, 2003 and 2002......................................................F-4
Consolidated Statements of Operations for each of the years in the three-year period
Ended June 30, 2003......................................................................................F-5
Consolidated Statements of Shareholders' Equity and Comprehensive Income for
each of the years in the three-year period ended June 30, 2003...........................................F-6
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended June 30, 2003.......................................................................................F-7
Notes to Consolidated Financial Statements....................................................................F-9
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
United American Healthcare Corporation:
We have audited the accompanying consolidated balance sheet of United American
Healthcare Corporation and Subsidiaries as of June 30, 2003 and the related
consolidated statement of operations, shareholders' equity and comprehensive
income, and cash flows for the year ended June 30, 2003. 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 audit.
We conducted our audit 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 audit provides 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, 2003, and the results of
their operations and their cash flows for the year ended June 30, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
/s/Follmer Rudzewicz PLC
Southfield, Michigan
August 25, 2003
F-2
Independent Auditors' Report
The Board of Directors
United American Healthcare Corporation
We have audited the accompanying consolidated balance sheet of United American
Healthcare Corporation and Subsidiaries as of June 30, 2002, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the two-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
consolidated 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 the results of
their operations and their cash flows for each of the years in the two-year
period ended June 30, 2002 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in note 16 to the consolidated financial statements, the Company
has restated the 2002 and 2001 consolidated financial statements to reflect
certain discontinued operations.
/s/KPMG LLP
Detroit, Michigan
October 11, 2002, except for note 16, as to
which the date is September 23, 2003
F-3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
-----------------------
2003 2002
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 3,693 $ 2,026
Marketable securities 1,000 16,784
Accounts Receivable -- State of Tennessee 1,213 1,794
Other receivables 1,495 2,856
Refundable income taxes -- 284
Prepaid expenses and other 167 621
Deferred income taxes 570 1,090
-------- --------
Total current assets 8,138 25,455
Assets held for sale 800 --
Property and equipment, net 478 2,426
Goodwill 2,952 2,952
Marketable securities 2,160 1,826
Other assets 586 677
-------- --------
$ 15,114 $ 33,336
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 1,108 $ 1,032
Medical claims payable 591 24,495
Accounts payable and accrued expenses 2,796 1,148
Accrued compensation and related benefits 519 788
Other current liabilities 1,430 1,784
-------- --------
Total current liabilities 6,444 29,247
Long-term debt, less current portion 658 1,837
Accrued rent 872 505
-------- --------
Total Liabilities 7,974 31,589
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued - -
Common stock, no par, 15,000,000 shares authorized; 7,034,249 and
6,910,721 shares issued and outstanding at June 30, 2003 and 2002,
respectively 11,570 11,407
Retained deficit (4,469) (9,675)
Accumulated other comprehensive income, net of deferred federal income
taxes 39 15
-------- --------
Total Shareholders' Equity 7,140 1,747
-------- --------
$ 15,114 $ 33,336
======== ========
See accompanying notes to the consolidated financial statements
F-4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
---------------------------------------------
2003 2002 2001
---- ---- ----
REVENUES
Medical premiums $ 7,841 $ 163,094 $ 103,004
Fixed administrative fees 14,750 -- --
Interest and other income 1,939 2,082 2,326
--------- --------- ---------
Total revenues 24,530 165,176 105,330
EXPENSES
Medical services 434 155,092 85,738
Marketing, general and administrative 15,680 17,989 15,234
Depreciation and amortization 296 320 961
Interest expense 140 216 401
--------- --------- ---------
Total expenses 16,550 173,617 102,334
--------- --------- ---------
Earnings (loss) from continuing operations before income taxes 7,980 (8,441) 2,996
Income tax expense (benefit) 647 818 (1,566)
--------- --------- ---------
Earnings (loss) from continuing operations 7,333 (9,259) 4,562
DISCONTINUED OPERATIONS
Loss from discontinued operations (2,127) (1,704) (3,333)
--------- --------- ---------
Net earnings (loss) $ 5,206 $ (10,963) $ 1,229
========= ========= =========
NET EARNINGS (LOSS) PER COMMON SHARE -- BASIC
Earnings (loss) from continuing operations 1.06 (1.35) 0.67
Loss from discontinued operations (0.31) (0.25) (0.49)
--------- --------- ---------
Net earnings (loss) per common share $ 0.75 $ (1.60) $ 0.18
========= ========= =========
Weighted average shares outstanding 6,941 6,839 6,779
========= ========= =========
NET EARNINGS (LOSS) PER COMMON SHARE -- DILUTED
Earnings (loss) from continuing operations 1.06 (1.35) 0.67
Loss from discontinued operations (0.31) (0.25) (0.49)
--------- --------- ---------
Net earnings (loss) per common share $ 0.75 $ (1.60) $ 0.18
========= ========= =========
Weighted average shares outstanding 6,950 6,839 6,808
========= ========= =========
See accompanying notes to the consolidated financial statements.
F-5
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, 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
------- ------- ------- ------- -------
Issuance of common stock 148 163 -- -- 163
Comprehensive income:
Net earnings -- -- 5,206 -- 5,206
Unrealized gain on marketable
securities -- -- -- 24 24
------- ------- ------- ------- -------
Total comprehensive income -- -- 5,206 24 5,230
------- ------- ------- ------- -------
BALANCE AT JUNE 30, 2003 7,059 $11,570 $(4,469) $ 39 $ 7,140
======= ======= ======= ======= =======
See accompanying notes to the consolidated financial statements.
F-6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
--------------------------------------------
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES
Net earnings (loss) $ 5,206 $(10,963) $ 1,229
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Bad debt expense 847 -- 11,532
Loss (gain) on disposal of assets 577 2,411 (18)
Loss on liquidation of investment 24 166 --
Depreciation and amortization 640 1,800 1,953
Accrued rent 367 (75) (72)
Deferred income taxes 520 556 (1,940)
Stock awards 127 50 --
Changes in assets and liabilities
Accounts receivable-State of Tennessee 581 (1,358) 2,036
Management fee receivable -- -- (2,008)
Other receivables 514 (567) (984)
Refundable federal income taxes 284 -- (284)
Prepaid expenses and other 454 (72) (337)
Other assets 91 -- --
Medical claims payable (23,904) 4,680 8,570
Accounts payable and accrued expenses 1,648 (1,990) (2,601)
Accrued compensation and related benefits (269) (305) 333
Other current liabilities (354) 558 539
-------- -------- --------
Net cash provided by (used in) operating activities (12,647) (5,109) 17,948
-------- -------- --------
INVESTING ACTIVITIES
Purchase of marketable securities (334) (19,388) (1,265)
Proceeds from the sale of marketable securities 15,784 5,997 921
Purchase of property and equipment (68) (1,005) (3,044)
Proceeds from the sale of property and equipment -- 21
-------- -------- --------
Net cash provided by (used in) investing activities 15,382 (14,396) (3,367)
-------- -------- --------
FINANCING ACTIVITIES
Payments made on debt (1,104) (623) (853)
Repurchase of common stock -- -- --
Issuance of common stock 36 169 --
-------- -------- --------
Net cash used in financing activities (1,068) (454) (853)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,667 (19,959) 13,728
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,026 21,985 8,257
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,693 $ 2,026 $ 21,985
======== ======== ========
F-7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
YEAR ENDED JUNE 30,
-----------------------------------------
2003 2002 2001
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 133 $ 200 $ 401
----- ----- -----
Income taxes paid $ -- $ 250 $ 58
----- ----- -----
See accompanying notes to the consolidated financial statements.
F-8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
NOTE 1 - DESCRIPTION OF BUSINESS
United American Healthcare Corporation, together with its wholly and majority
owned subsidiary (collectively, the "Company"), is a provider of health care
services, including consulting services to managed care organizations and the
provision of health care services in Tennessee and previously (until November 1,
2002) 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 are its non-operational wholly owned
subsidiary, United American of Florida, Inc. ("UA-FL") and its
51% owned subsidiary, UltraMedix Healthcare Systems, Inc.
("UltraMedix"). The Company ceased activities related to UA-FL
and UltraMedix in fiscal 1998. 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.
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, 2003 and 2002.
F-9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
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 the provision for 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.
G. GOODWILL. Goodwill resulting from business acquisitions is
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 impairment was not recorded for the
years ended June 30, 2003 and 2002. Amortization expense of
approximately $0.7 million, or $0.10 per share, was recorded
for the year ended June 30, 2001. Had the provisions of SFAS
142 been applied for the year ended June 30, 2001, the
Company's net earnings would have been $1.9 million or $0.28
per share for that year.
F-10
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
H. LONG-LIVED ASSETS. Following the criteria set forth in
Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets," 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.
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.
Per generally accepted accounting principles ("GAAP"), the
Company's revenue recognition policy has been adjusted for
Fiscal 2003 to reflect TennCare's administrative services only
("ASO") arrangement in which OmniCare-TN assumes no risk for
medical claims. See Note 14 for further discussion.
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
F-11
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
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 provision
reflects the tax consequences of revenues and expenses
currently taxable or deductible for the period.
N. STOCK BASED COMPENSATION. The Company has adopted SFAS No. 148
and 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. See Note 12 for further discussion.
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.
For the fiscal years ended June 30, 2003, June 30, 2002 and
June 30, 2001 the Company had outstanding stock options of
9,241, 0, and 29,030 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.
Q. RECLASSIFICATION. Certain 2002 and 2001 amounts have been
reclassified to conform with the 2003 presentation, which
present the operations related to managing OmniCare-MI as a
discontinued operation. Such reclassifications have no effect
on net earnings (loss) as originally presented for those
years. See Note 16 for further discussion.
NOTE 3 - ACQUISITIONS
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
F-12
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
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.
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, 2003 and 2002 is as follows (in thousands):
2003 2002
---- ----
Available for sale -- Current:
Certificates of deposit $ 1,000 $15,922
Equity and other securities -- 862
------- -------
1,000 16,784
------- -------
Available for sale -- Noncurrent:
U.S. government obligations 2,160 1,826
------- -------
2,160 1,826
------- -------
$ 3,160 $18,610
======= =======
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
$2.2 million and $1.8 million at June 30, 2003 and 2002, respectively.
NOTE 5 - CONCENTRATION OF RISK
F-13
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
During the years ended June 30, 2003, 2002 and 2001, approximately 87%, 91% 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. Prior to the current
administrative services only arrangement discussed in Note 14, TennCare withheld
5% of the Company's monthly capitation payment, which withheld amounts were
distributed to the Company when certain informational filing requirements were
met by the Company. Amounts withheld by TennCare as of June 30, 2003 and 2002
totaled approximately $0.0 million and $1.8 million, respectively. There are no
withholdings by TennCare under the current administrative services only
arrangement.
The Company had a long-term management agreement with OmniCare Health Plan, in
Michigan ("OmniCare-MI"), which terminated on November 1, 2002. Pursuant to the
management agreement, the Company provided management and consulting services to
OmniCare-MI and was paid a percentage of revenues until August 1, 2001 and
thereafter cost-based fee, from OmniCare-MI as a percentage of the Company's
total revenues were 8%, 20% and 17% for the years ended June 30, 2003, 2002 and
2001, respectively. See Note 11 for further discussion of the OmniCare-MI
management agreement.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at each June 30 consists of the following (in thousands):
2003 2002
---- ----
Furniture and fixtures $ 863 $ 2,234
Equipment 2,636 11,729
Computer software 177 6,488
------- -------
3,676 20,451
Less accumulated depreciation and amortization 3,198 18,025
------- -------
$ 478 $ 2,426
======= =======
See Note 16 for discussion on assets held for sale.
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
F-14
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
$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 and $1.1 million was forfeited for fiscal 2002 and 2001, 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.
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. 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 $1.8 million term loan with Standard Federal Bank,
N.A. It is repayable in monthly installments of principal and interest of $0.1
million, with an interest rate equal to the bank's prime rate (4.25% at June 30,
2003) 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 Company's outstanding debt at each June 30 is as follows (in thousands):
2003 2002
---- ----
Term loan $1,766 $2,869
Less debt payable within one year 1,108 1,032
------ ------
Long-term debt, less current portion $ 658 $1,837
====== ======
NOTE 9 -- MEDICAL CLAIMS PAYABLE
The Company has recorded a liability of $0.6 million and $24.5 million at June
30, 2003 and 2002, respectively, for unpaid claims and medical claims incurred
by enrollees. The ultimate
F-15
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
settlement of medical claims may vary from the estimated amounts reported at
June 30, 2003, 2002 and 2001.
The following table provides a reconciliation of the unpaid claims for the years
ended June 30, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
---- ---- ----
Balance at beginning of fiscal year $ 24,495 $ 19,815 $ 11,245
Incurred losses as related to current year -- 157,953 87,396
Incurred loss related to prior year 434 -- --
Reserve reversal related to prior year -- (2,861) (1,658)
--------- --------- ---------
Total losses incurred 434 155,092 85,738
Paid claims related to current year -- 132,734 67,581
Paid claims related to prior year 24,338 17,678 9,587
--------- --------- ---------
Total paid claims 24,338 150,412 77,168
--------- --------- ---------
Balance at end of fiscal year $ 591 $ 24,495 $ 19,815
========= ========= =========
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 year of $0.8 million in fiscal
2001 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, 2001 that the previously established medical claims liability of $0.8
million 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):
2003 2002 2001
---- ---- ----
Continuing operations:
Current expense $ 127 $ 262 $ 374
Deferred expense (credit) 1,592 (2,991) (238)
Change in valuation allowance (1,072) 3,547 (1,702)
------- ------- -------
$ 647 $ 818 $(1,566)
======= ======= =======
F-16
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
A reconciliation of the provision for income taxes for each year ended June 30
follows (in thousands):
2003 2002 2001
---- ---- ----
Income tax expense (benefit) at the statutory tax rate $ 1,990 $(3,449) $ (114)
State and city income tax 177 299 237
Utilization of AMT credit -- -- (284)
Tax-exempt interest on municipal bonds -- (13) (13)
Non-deductible goodwill amortization -- -- 242
Utilization of NOL carryforward -- -- --
Valuation allowance (1,072) 3,547 (1,702)
Other, net (448) 434 68
------- ------- -------
$ 647 $ 818 $(1,566)
======= ======= =======
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, 2003. 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, 2003, the NOLs 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):
2003 2002
---- ----
Deferred tax assets
Accrued rent $ 297 $ 172
Bad debt expense 1,360 1,360
Deferred compensation 135 185
Net operating loss carryforward of consolidated losses 5,381 3,812
Net operating loss carryforward of purchased subsidiary 1,563 4,998
Alternative minimum tax credit carryforward 403 403
Property and equipment 1,018 820
-------- --------
Total gross deferred tax assets 10,157 11,750
Valuation allowance (9,587) (10,660)
-------- --------
Total gross deferred tax liabilities -- --
-------- --------
Net deferred tax asset $ 570 $ 1,090
======== ========
F-17
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company had a long-term management agreement with OmniCare-MI from 1985
until November 1, 2002. 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.
Pursuant to the court order, the Company continued to perform the management
agreement without interruption and no Company officers or directors were any
longer 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
terminated November 1, 2002.
Health insurance for some of the Company's employees was provided by
OmniCare-MI. The expense was $0.03 million, $0.6 million and $1.0 million for
the years ended June 30, 2003, 2002 and 2001, respectively.
The Company then arranged in October 2002 for a sublease to OmniCare-MI of all
of the Company's leased former office premises in Detroit, Michigan, commencing
November 1, 2002 and expiring at the end of the lease in May 2005. This
arrangement has and 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 $45,653, $94,000 and $40,000 for the years ended June
30, 2003, 2002 and 2001, 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 each of the years ended June 30, 2003 and 2002 were
zero.
F-18
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
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 reserved an aggregate of 500,000
common shares 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 November 30, 2001, and May 8, 2003 nonqualified options for a total of
325,000, 26,000, 5,000, 8,000, 50,000, 75,000, and 25,000 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 prior
President and reserved that number of common shares for issuance upon exercise
of such options. Such options expired on May 11, 2003 without being exercised.
On March 1, 2003, the Company granted nonqualified stock options for 100,000
common shares to the Company's President and CEO and reserved that number of
common shares for issuance upon exercise of such options. Such options expire
March 1, 2008 and are fully exercisable beginning March 1, 2005 at a price of
$1.10 per share.
SFAS No. 148 and SFAS No. 123 prescribes a method of accounting and disclosure
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 SFAS No. 148 and 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 2003, 2002 and 2001 would have been the pro forma amounts
indicated below (in thousands, except per share amounts):
2003 2002 2001
---- ---- ----
Earnings (loss) from continuing operations:
Net earnings as reported $ 7,333 $(9,259) $ 4,562
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 74 244 18
Pro forma net earnings $ 7,259 $(9,503) $ 4,544
Earnings (loss) from continuing operations per share (Basic
and Diluted):
As reported $ 1.06 $ (1.35) $ 0.67
Pro forma $ 1.04 $ (1.39) $ 0.67
------- ------- -------
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 2003: dividend yield of 0%; expected volatility of 90.58%; risk
free interest rate of 3.77%; 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.
F-19
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
Information regarding the stock options for fiscal 2003, 2002 and 2001 follows
(shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------
WEIGHTED
WEIGHTED AVERAGE NUMBER OF AVERAGE
AVERAGE REMAINING SHARES EXERCISE
SHARES EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE PRICE
------ -------------- ---------------- ----------- -----
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
Granted 155 1.27 6.8 years 1 $5.28
Exercised (38) 0.96 -- (38) --
Expired (100) 1.38 -- (100) --
Forfeited (2) 1.25 -- (2) --
------ ----- --------- ------ -----
Options
outstanding at
June 30, 2003 451 $2.03 7.2 years 295 $2.42
------ ----- --------- ------ -----
Options for 13,000 common shares were available for grant under the 1998 Plan at
the end of fiscal 2003.
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 for the years ended June 30, 2003, 2002 and 2001 totaled $1.9
million, $1.7 million and $1.6 million, respectively. Based on current
commitments, the Company anticipates rent expense of $0.5 million for fiscal
years 2004 and 2005.
The Company has arranged for a sublease to OmniCare-MI of all of the Company's
leased former office premises in Detroit, Michigan, commencing November 1, 2002
and expiring at the
F-20
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
end of the lease in May 2005. This arrangement has and will cost the Company
approximately $40,000 per month through the remainder of the lease. The Company
recognized a charge of $0.6 million in the second quarter of fiscal 2003
relating to this sublease, which is included in discontinued operations.
NOTE 14 -- CONTRACTUAL RISK AGREEMENT
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, 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.
In September 2002, OmniCare-TN and the State of Tennessee, doing business as
TennCare, amended the Contractor Risk Agreement between them. 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 a further agreement with OmniCare-TN in October 2002, the State of
Tennessee 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, the $7.5 million
receivable was not recorded in fiscal 2002 financial statements but has been
recorded in fiscal 2003 financial statements. Based on an actuarial
determination, an additional $0.4 million of fiscal 2002 medical claims
liability was recorded during fiscal 2003. In all, fiscal 2002 medical claims of
$7.9 million were processed in the fiscal year ended June 30, 2003, and the same
aggregate amount was recognized as revenue by OmniCare TN pursuant to the
State's TennCare amendment and further agreement discussed above in this Note
14.
F-21
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
NOTE 15 -- LIQUIDITY
The Company's ability to generate adequate earnings and cash to meet its future
cash needs depends on a number of factors, which include the following:
- OmniCare-TN's expected re-enrollment, in some instances retroactively
to July 1, 2002, of some of its approximately 7,900 working uninsured
or uninsurable members whom TennCare disenrolled in an eligibility
reverification process that dropped approximately 166,000 TennCare
enrollees statewide since July 1, 2002. In December 2002, a U.S.
District Court judge in Tennessee ruled that such process was flawed.
In March 2003, TennCare and Tennessee Governor Phil Bredesan announced
that all disenrolled members will have a year-long grace period until
March 31, 2004 to prove if they actually meet the eligibility
requirements and thereby have their wrongful disenrollment cancelled
and their enrollment restored retroactively.
- The Company's ability to control administrative costs related to
managing medical costs for the TennCare program and corporate overhead
costs.
The outcome of the above matters could have an impact on the Company's ability
to successfully meet ongoing obligations. The Company had expected to earn
limited additional administrative fees under the current TennCare reimbursement
system as originally established, based on certain performance measures as an
incentive to manage medical costs below the targets. However, the Governor of
Tennessee and TennCare representatives later publicly stated in discussions with
the Tennessee legislature and elsewhere that no incentive payments would be made
because of that state's and TennCare's budget situation. On the basis of the
19,857 additional new OmniCare-TN members effective June 1, 2003, the premium
rate increase effective July 1, 2003, and the matters discussed in Note 14,
management believes at this time that the Company has the ability to generate
sufficient earnings and cash to adequately support its financial requirements
through the next twelve months, maintain compliance with bank financial
covenants, and maintain minimum statutory net worth requirements of OmniCare-TN.
NOTE 16 -- DISCONTINUED OPERATIONS
The Company's longstanding management agreement with OmniCare-MI, ended
effective November 1, 2002. Because of its resulting workforce reduction, the
Company made plans to sublease all of its then principal office premises in
Detroit, Michigan, to OmniCare-MI, retroactive to November 1, 2002, and expiring
at the lease end in May 2005, and to sell to OmniCare-MI furniture, a telephone
system and certain computer hardware and software that the Company chose to
leave there. Management now expects to complete the signing of the sublease and
the sale of assets by the third quarter of fiscal 2004. OmniCare-MI commenced
its occupancy of the premises on November 1, 2002 and the Company remained in a
portion of the premises until it moved its principal offices to new leased
premises in Detroit on February 3, 2002.
In connection with the November 1, 2002 termination of its OmniCare-MI
management agreement, the Company recorded a $1.8 million loss from discontinued
operations in the second quarter of fiscal 2003. Such loss was due in part to:
(i) a $0.6 million write-down of assets held for sale in
F-22
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
excess of the anticipated selling price for the pending sale of assets described
above; (ii) the above-described sublease, which is expected to cost the Company
approximately $0.04 million per month through the remainder of the lease, ending
in May 2005, resulting in a loss of $1.2 million recorded in the second quarter
of fiscal 2003, which was offset by a $0.6 million write-down of a deferred rent
liability associated with the original lease; and (iii) a bad debt charge of
$0.3 million recorded because management determined the collectability of that
amount of receivables from OmniCare-MI is doubtful. The recorded charges
discussed above were offset by management fees from OmniCare-MI of $0.8 million.
The loss in fiscal year 2002 of $1.7 million is primarily attributed to an
impairment loss equal to the $2.4 million remaining carrying value of the
patient care software system which the Company 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 Company management recognized that the system would not be
used by OmniCare-MI because its management agreement with the Company would
terminate November 1, 2002.
Summarized selected financial information for the discontinued operations is as
follows:
2003 2002 2001
---- ---- ----
Management fees revenue $ 3,395 $ 14,941 $ 26,394
-------- -------- --------
Loss from discontinued operations net of zero income taxes $ (2,127) $ (1,704) $ (3,333)
======== ======== ========
NOTE 17- UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The following table presents selected quarterly financial data for the years
ended June 30, 2003 and 2002 (in thousands, except per share data):
THREE MONTHS ENDED
---------------------------------------------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30, TOTAL
-------- --------- -------- --------- -----
2003
Total revenues $ 4,657 4,717 8,042 7,114 24,530
Net earnings 828 528 1,448 2,402 5,206
Net earnings
per common share
assuming dilution $ 0.12 0.08 0.21 0.34 0.75
2002
Total revenues $ 52,859 $ 42,679 $ 33,715 $ 35,923 $ 165,176
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)
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-23
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
NOTE 18 -- SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations is as
follows (in thousands):
MANAGEMENT HMOS & CORPORATE & CONSOLIDATED
2003 COMPANIES (1) MANAGED PLANS (2) ELIMINATIONS COMPANY
---- ------------- ----------------- ------------ ------------
Revenues -- external customers $ -- 22,591 -- 22,591
Revenues -- intersegment 13,291 -- (13,291) --
Interest and other income 231 1,708 -- 1,939
--------- --------- --------- ---------
Total revenues $ 13,522 24,299 (13,291) 24,530
========= ========= ========= =========
Interest expense $ 140 -- -- 140
Earnings (loss) from continuing (2,211) 9,544 -- 7,333
operations
Loss from discontinued operations (2,127) -- -- (2,127)
Segment assets 30,416 9,987 (25,289) 15,114
Purchase of equipment 68 -- -- 68
Depreciation and amortization 296 -- -- 640
========= ========= ========= =========
2002
Revenues -- external customers $ -- $ 163,094 $ -- $ 163,094
Revenues -- intersegment 16,191 -- (16,191) --
Interest and other income (13) 2,095 -- 2,082
--------- --------- --------- ---------
Total revenues $ 16,178 $ 165,189 $ (16,191) $ 165,176
========= ========= ========= =========
Interest expense $ 216 $ -- $ -- $ 216
Earnings (loss) from continuing 639 (9,898) -- (9,259)
operations
Loss from discontinued operations (1,704) -- -- (1,704)
Segment assets 29,485 23,836 (19,985) 33,336
Purchase of equipment 1,005 -- -- 1,005
Depreciation and amortization 320 -- -- 320
========= ========= ========= =========
2001
Revenues -- external customers -- $ 103,004 $ -- $ 103,004
Revenues -- intersegment $ 11,731 -- (11,731) --
Interest and other income 571 1,862 (107) 2,326
--------- --------- --------- ---------
Total revenues 12,302 104,866 $ (11,838) $ 105,330
========= ========= ========= =========
Interest expense $ 401 -- -- 401
Earnings (loss) from continuing (1,458) 6,837 (817) 4,562
operations
Loss from discontinued operations (3,333) -- -- (3,333)
Segment assets 30,194 29,714 (18,251) 41,657
Purchase of equipment 3,044 -- -- 3,044
Depreciation and amortization 961 -- -- 961
========= ========= ========= =========
(1) Management Companies: United American Healthcare Corporation (2003, 2002,
2001), United American of Tennessee, Inc. (2003, 2002, 2001), and United
American of Florida, Inc. (2001).
(2) HMOs and Managed Plans: OmniCare Health Plan of Tennessee (2003, 2002, 2001)
and County Care (through September 30, 2001).
F-24
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
NOTE 19 - RECENTLY ENACTED PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued the following new
accounting standards and interpretations, which may be applicable in the future
to the Company:
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," amends SFAS No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
Company has adopted SFAS 148 according to the disclosure-only provisions of SFAS
No. 123 and has implemented disclosure for all interim periods beginning March
31, 2003 of pro-forma earnings per share if the Company had elected to recognize
compensation cost based on the fair value of the options at grant date.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity," provides standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. The Statement is effective for financial instruments
entered into or modified after May 31, 2003 and for pre-existing instruments as
of the beginning of the first interim period beginning after June 15, 2003. The
adoption of this standard had no effect on the Corporation's financial condition
or results of operations.
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others an interpretation of
SFAS No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," was
issued in November 2002. FIN 45 clarifies the requirements of SFAS No. 5,
"Accounting for Contingencies," relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. The adoption of FIN
45 related to initial recognition and measurement of guarantees did not have an
impact on the net income or equity of the Company.
FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB
51," was issued. The primary objectives of FIN 46 are to provide guidance on the
identification and consolidation of variable interest entities, or VIE's, which
are entities for which control is achieved through means other than through
voting rights. The Company has completed an analysis of FIN 46 and has
determined that it does not have any VIEs.
F-25
EXHIBIT INDEX
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT 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, 199"
("1991 "-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 Form
Registrant 10-K
4.1 Incentive and Non-Incentive Stock Exhibit 4.1 to the Registrant's 1995 Form
Option Plan of Registrant effective 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 Form
to Management Agreement between 10-K
United American Healthcare
Corporation and Personal Physician
Care, Inc. dated
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
March 18, 1987
10.5 Amendment dated June 16, 1994 to Exhibit 10.4 to the Registrant's 1994 Form
Management Agreement between U.A. 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 Form
to Management Agreement between 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 Form
to Management Agreement between 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 Form
Lease agreement between 1155 10-K
Brewery Park Limited Partnership
and
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
Registrant dated July 24, 1991
10.12 Amendment dated April 15, 1993 to Exhibit 10.13 to Registrant's 1995 Form
Lease Agreement between 1155 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 Form
Center Associates Limited 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
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
occupancy
Lease Agreement between Exhibit 10.19 to Registrant's 1995 Form
10.17 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
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
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 Form 10-K filed October 14,
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
Sale of Stock, between CHF 1997
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,
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
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
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
December 11, 1998
10.51 Amendment of Promissory Exhibit 10.51 to Registrant's 1999
Note and Business Loan Agreement Form 10-K
from 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 Form 10-K
Bank dated September 25, 2000
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
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
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 Exhibit 10.60 to Registrant's 2002
Agreement with Standard Federal Bank Form 10-K
N.A., dated October 11,
2002
10.61 Amendment of Business Loan Form 10-Q for the Quarter Ended September
Agreement with Standard Federal 30, 2002, filed November 13, 2003
Bank N.A., dated October 11, 2002
and effective September 30, 2002
10.62 Letter amendment of Business Loan Form 10-Q for the Quarter Ended December
Agreement with Standard Federal 31, 2002, filed May 13, 2003
Bank N.A., dated February 5, 2003
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
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
16.4 Concurring Letter regarding change Form 8-K filed January 20, 1998
in Certifying Accountants dated
January 16, 1998, from Arthur
Andersen LLP
16.5 Letter of KPMG LLP dated March 5, Form 8-KA filed March 10, 2003
2003 to the Securities and Exchange
Commission.
21 Subsidiaries of the Registrant *
31.1 Certification of Chief Executive *
Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial *
Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive *
Officer Pursuant to 18 U.S.C.
Section 1350
32.2 Certification of Chief Financial *
Officer Pursuant to 18 U.S.C.
Section 1350
99.1 Press Release dated January 12, 1998 Form 8-K filed January 20, 1998
99.2 Press Release dated January Form 8-K filed January 14, 2000
6, 2000