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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2004
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 [ ]
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF APRIL 26,
2004 AS 7,402,213.
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As filed with the Securities and Exchange Commission on April 29, 2004
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I.
Item 1. Unaudited Condensed Consolidated Financial Statements-
Condensed Consolidated Balance Sheets - March 31, 2004
and June 30, 2003........................................................... 1
Condensed Consolidated Statements of Operations - Three and Nine months
Ended March 31, 2004 and 2003............................................... 2
Condensed Consolidated Statements of Cash Flows - Nine months
Ended March 31, 2004 and 2003............................................... 3
Notes to the Unaudited Condensed Consolidated Financial Statements............ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................... 15
Item 4. Controls and Procedures....................................................... 15
PART II.
Item 1. Legal Proceedings............................................................. 17
Item 5. Other Information............................................................. 17
Item 6. Exhibits and Reports on Form 8-K.............................................. 19
SIGNATURES.................................................................................. 20
PART I.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30,
2004 2003
-------------------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 8,011 $ 3,693
Marketable securities 1,000 1,000
Accounts receivable - State of Tennessee 1,081 1,213
Other receivables 1,191 1,495
Prepaid expenses and other 81 167
Deferred income taxes 32 570
-------------------------
Total current assets 11,396 8,138
Assets held for sale 800 800
Property and equipment, net 359 478
Goodwill 2,952 2,952
Marketable securities 2,188 2,160
Other assets 586 586
-------------------------
Total assets $ 18,281 $ 15,114
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 894 $ 1,108
Medical claims payable 473 591
Accounts payable and accrued expenses 3,183 2,796
Accrued compensation and related benefits 536 519
Other current liabilities 1,420 1,430
-------------------------
Total current liabilities 6,506 6,444
Long-term debt, less current portion - 658
Accrued rent 555 872
-------------------------
Total liabilities 7,061 7,974
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued - -
Common stock, no par, 15,000,000 shares authorized; 7,292,813 and
7,034,247 issued and outstanding at March 31, 2004 and June
30, 2003, respectively 12,020 11,570
Accumulated deficit (832) (4,469)
Accumulated other comprehensive gain, net of income taxes 32 39
-------------------------
Total shareholders' equity 11,220 7,140
=========================
$ 18,281 $ 15,114
=========================
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
1
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-----------------------------------------------
2004 2003 2004 2003
-----------------------------------------------
REVENUES
Fixed administrative fees $ 5,095 $ 3,417 $ 15,261 $ 11,200
Medical premiums 56 777 502 7,352
Interest and other income 396 523 991 1,315
-----------------------------------------------
Total revenues 5,547 4,717 16,754 19,867
EXPENSES
Medical services 56 - 502 380
Marketing, general and administrative 3,627 3,798 11,457 11,710
Depreciation and amortization 56 69 176 229
Interest expense 13 24 51 120
-----------------------------------------------
Total expenses 3,752 3,891 12,186 12,439
-----------------------------------------------
Earnings from continuing operations before income taxes 1,795 826 4,568 7,428
Income tax expense 398 298 930 929
-----------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 1,397 528 3,638 6,499
DISCONTINUED OPERATIONS
Loss from discontinued operations - - - (2,127)
-----------------------------------------------
NET EARNINGS $ 1,397 $ 528 $ 3,638 $ 4,372
===============================================
NET EARNINGS PER COMMON SHARE - BASIC
Earnings from continuing operations $ 0.19 0.08 0.51 $ 0.94
Discontinued operations 0.00 0.00 0.00 (0.31)
-----------------------------------------------
Net earnings per common share $ 0.19 0.08 0.51 $ 0.63
===============================================
Weighted average shares outstanding 7,222 6,939 7,158 6,920
===============================================
NET EARNINGS PER COMMON SHARE - DILUTED
Earnings from continuing operations $ 0.19 $ 0.08 $ 0.50 $ 0.93
Discontinued operations 0.00 0.00 0.00 (0.31)
-----------------------------------------------
Net earnings per common share $ 0.19 $ 0.08 $ 0.50 $ 0.62
===============================================
Weighted average shares outstanding 7,290 6,953 7,225 6,967
===============================================
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
2
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
2004 2003
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 3,638 $ 4,372
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Loss on disposal of assets - 584
Gain on sale of equipment - (7)
Realized loss on investment (7) 3
Depreciation and amortization 176 573
Bad debt expense - 847
Accrued rent (317) 475
Deferred income taxes 538 840
Stock awards 378 66
Net changes in operating assets and liabilities 797 (20,971)
----------------------
Net cash provided by (used in) operating activities 5,203 (13,218)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchase) of marketable securities (28) 16,474
Purchase of property and equipment (57) (58)
----------------------
Net cash provided by (used in) investing activities (85) 16,416
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made on long-term debt (872) (914)
Issuance of common stock 72 -
----------------------
Net cash used in financing activities (800) (914)
----------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,318 2,284
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,693 2,026
----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,011 $ 4,310
======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 48 $ 111
======================
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2004 AND 2003
NOTE 1 - BASIS OF PREPARATION
The accompanying condensed consolidated financial statements include the
accounts of United American Healthcare Corporation and its wholly and
majority-owned subsidiaries, together referred to as the "Company". All
significant intercompany transactions and balances have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP) and with the instructions for
Form 10-Q and Rule 10-01 of Regulation S-X as they apply to interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the financial
position and results of operations have been included. The results of operations
for the three and nine-month periods ended March 31, 2004 are not necessarily
indicative of the results of operations for the full fiscal year ending June 30,
2004. The accompanying condensed consolidated financial statements should be
read in conjunction with the notes to the financial statements contained in the
most recent annual report on Form 10-K.
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are summarized as
follows (in thousands):
Three months ended Nine months ended
March 31, March 31,
---------------------------------------
2004 2003 2004 2003
---------------------------------------
Net earnings $1,397 $ 528 $3,638 $4,372
Unrealized holding gains, net of deferred federal income taxes 32 3 32 3
---------------------------------------
Comprehensive income $1,429 $ 531 $3,670 $4,375
=======================================
The components of accumulated other comprehensive income, included in
shareholders' equity at March 31, 2004 and June 30, 2003, include net unrealized
holding gains and losses, net of deferred federal income taxes.
4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2004 AND 2003
NOTE 3 - LONG-TERM DEBT
The Company currently has a $0.9 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 (4.00% at March
31, 2004) 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 is as follows (in thousands):
MARCH 31, JUNE 30,
2004 2003
-------------------
Term loan $ 894 $1,766
Less debt payable within one year 894 1,108
-----------------
Long-term debt, less current portion $ - $ 658
=================
NOTE 4 - NET EARNINGS PER COMMON SHARE
Basic net earnings per share excluding dilution have been computed by dividing
net earnings by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share are computed using the treasury stock method
for outstanding stock options.
NOTE 5 - EFFECTIVE TAX RATE
The Company's effective tax rate for the nine months ended March 31, 2004 is 20%
and differs from the statutory rate of 34%. This difference is the result of the
utilization of net operating loss carryforwards. In the third quarter of fiscal
2003, the effective tax rate was 13%, principally impacted by the Company's net
operating loss carryforward position.
NOTE 6 - CONTRACTUAL RISK AGREEMENT
For all its contracted managed care organizations ("MCOs"), the State of
Tennessee, doing business as TennCare, changed its reimbursement system to an
administrative services only ("ASO") program for an initially declared 18-month
stabilization period (July 1, 2002 through December 31, 2003), during which the
MCOs - including OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), an
MCO 75%-owned by the Company's wholly owned subsidiary - have no medical cost
risk (i.e., no risk for medical losses), earn fixed administrative fees, are
subject to increased oversight, and may incur financial penalties for not
achieving certain performance requirements. Through an amendment completed on
December 19, 2003, TennCare has extended through June 30, 2004, the ASO
reimbursement system applicable to OmniCare-TN. There has been no specific
indication yet of what TennCare reimbursement system will
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2004 AND 2003
apply after that date to OmniCare-TN. However, on February 17, 2004, Tennessee
Governor Phil Bredesen presented his multi-year strategy to reform the TennCare
system to a joint convention of the General Assembly (the Tennessee
legislature). The plan in some respects requires approval by the General
Assembly. Among other things, the plan would generally make no cuts in the
TennCare system's enrollment or in benefits for children, pregnant women and the
disabled (approximately 74.5% of OmniCare-TN's membership), but would institute
co-pays and reduced services for one-third of the TennCare system's membership,
(the largely able-bodied adults) and certain prescription drug limits for all
TennCare members.
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 and additional funds were not recorded in fiscal 2002 financial
statements but have been recorded as fiscal 2002 claims are processed. Based on
an actuarial determination, an additional $0.4 million of fiscal 2002 medical
claims liability was recorded during fiscal 2003. For the nine months ended
March 31, 2004, an additional $0.5 million of such medical claims were
processed, and the same amount was recognized as revenue by Omnicare-TN.
The above-described December 19, 2003 contractual amendment also extended the
term of OmniCare-TN's TennCare contract to December 31, 2004, with provisions
for automatic one-year renewals thereafter in certain circumstances.
NOTE 7 - 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
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2004 AND 2003
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, there was no goodwill impairment
recorded for the nine-months ended March 31, 2004 and 2003.
NOTE 8 - DISCONTINUED OPERATIONS
The Company's longstanding management agreement with OmniCare Health Plan in
Michigan ("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 expects to complete
the signing of the sublease and the sale of assets by the fourth quarter of
fiscal 2004. OmniCare-MI has occupied the premises and made its monthly sublease
rental payments continuously since November 1, 2002.
Summarized selected financial information for the discontinued operations is as
follows (in thousands):
Three months ended Nine months ended
March 31, March 31,
--------------------------------------
2004 2003 2004 2003
--------------------------------------
Management fees $ - $ - $ - $ 3,395
Loss from discontinued operations net of zero income taxes $ - $ - - (2,127)
--------------------------------------
NOTE 9 - STOCK OPTION PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes a method of
accounting for stock-based compensation that recognizes compensation cost based
on the fair value of options at grant date. In lieu of applying this fair value
based method, a company may elect to disclose only the pro forma effects of such
application. The Company has adopted the disclosure-only provisions of SFAS No.
123. In December 2002, SFAS No. 148, "Stock-Based Compensation," was issued,
which requires that the Company illustrate the effect on net income and earnings
per share if it had applied the fair value principles included in SFAS No. 123
for both annual and interim financial statements. 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 the three and nine months
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2004 AND 2003
ended March 31, 2004 and 2003 would have been the pro forma amounts indicated
below (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------
Net earnings:
As reported $ 1,397 $ 528 $ 3,638 $ 4,372
Pro forma $ 1,118 $ 454 $ 3,359 $ 4,275
Net earnings per share:
As reported:
Basic $ 0.19 $ 0.08 $ 0.51 $ 0.63
Diluted 0.19 0.04 0.50 0.63
---------------------------------------------------
Pro forma:
Basic $ 0.15 $ 0.05 $ 0.47 $ 0.62
Diluted 0.15 0.05 0.46 0.61
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8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2004 AND 2003
NOTE 10 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the nine-months ended March 31, 2004 and 2003, is as follows (in
thousands):
HMOs &
MANAGEMENT MANAGED PLANS CORPORATE & CONSOLIDATED
COMPANIES (1) (2) ELIMINATIONS COMPANY
-------------------------------------------------------------------
NINE MONTHS ENDED
MARCH 31, 2004
Revenues - external customers $ - $ 15,763 $ - $ 15,763
Revenues - intersegment 13,735 - (13,735) -
Interest and other income 159 832 - 991
-------------------------------------------------------------------
Total revenues $ 13,894 $ 16,595 $ (13,735) $ 16,754
===================================================================
Interest expense $ 51 $ - $ - $ 51
Earnings (loss) from continuing operations 2,031 1,607 - 3,638
Loss from discontinued operations - - - -
Segment assets 39,806 11,795 (33,320) 18,281
Purchase of equipment 57 - - 57
Depreciation and amortization 176 - - 176
==================================================================================================================
NINE MONTHS ENDED
MARCH 31, 2003
Revenues - external customers $ - $ 18,552 $ - $ 18,552
Revenues - intersegment 10,092 - (10,092) -
Interest and other income 177 1,138 - 1,315
-------------------------------------------------------------------
Total revenues $ 10,269 $ 19,690 $ (10,092) $ 19,867
==================================================================================================================
Interest expense $ 120 $ - $ - $ 120
Earnings (loss) from continuing operations (1,487) 7,985 - 6,499
Loss from discontinued operations (2,127) - - (2,127)
Segment assets 26,640 8,840 (21,255) 14,225
Purchase of equipment 58 - - 58
Depreciation and amortization 573 - - 573
==================================================================================================================
(1) Management Companies: United American Healthcare Corporation and United
American of Tennessee.
(2) HMOs and Managed Plans: OmniCare Health Plan, Inc. of Tennessee.
9
ITEM 2. 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 quarterly 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. 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. As of March 31, 2004 there were approximately 130,000
enrollees in OmniCare-TN.
Total revenues increased $0.8 million (18%) to $5.5 million for the quarter
ended March 31, 2004 compared to $4.7 million for the quarter ended March 31,
2003, principally due to an increase in members and an increase in reimbursement
rates effective July 1, 2003. For the nine months ended March 31, 2004 total
revenues decreased $3.1 million (16%) to $16.8 million compared to $19.9 million
for the nine months ended March 31, 2003, primarily due to a contractual
amendment in September 2002, retroactive to July 1, 2001 in some respects and to
May 1, 2002 in other respects. In this amendment, TennCare, a State of Tennessee
program that provides medical benefits to Medicaid and working uninsured and
uninsurable recipients, agreed to pay OmniCare-TN up to $7.5 million and
additional funds 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 GAAP, such $7.5 million and additional funds were
recorded in its fiscal 2003 and 2004 financial statements as fiscal 2002 claims
were processed. For the quarter ended March 31, 2004, $0.1 million of such
medical claims were processed compared to $0.8 million for the quarter ended
March 31, 2003, and the same amount was recognized as revenue by Omnicare-TN.
Total expenses decreased $0.1 million (4%) to $3.8 million for the quarter ended
March 31, 2004 compared to $3.9 million for the quarter ended March 31, 2003,
and decreased $0.2 million (2%) to $12.2 million for the nine months ended March
31, 2004 from $12.4 million for the nine months ended March 31, 2003,
principally due to the amended TennCare contractual risk agreement for
OmniCare-TN discussed above.
10
Earnings from continuing operations before income taxes were $1.8 million and
$0.8 million for the quarters ended March 31, 2004 and 2003, respectively.
Earnings from continuing operations were $1.4 million, or $0.19 per basic share,
for the quarter ended March 31, 2004 compared to earnings from continuing
operations of $0.5 million, or $0.08 per basic share, for the quarter ended
March 31, 2003. Such increase in earnings from continuing operations of $0.9
million, or $0.11 per basic share, is principally due to an increase in members
and an increase in reimbursement rates effective July 1, 2003.
The Company recognized no gain or loss from discontinued operations for the
three months ended March 31, 2004 and March 31, 2003. For the nine months ended
March 31, 2004 there was no gain or loss recorded compared to a loss of $2.1
million for the nine months ended March 31, 2003. The recorded loss was the
result of the termination of the Company's longstanding management agreement
with OmniCare-MI, effective November 1, 2002. Because of its resulting workforce
reduction, the Company made plans to sublease all of its principal office
premises in Detroit, Michigan, to OmniCare-MI, retroactively 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 expects both parties will finalize
and sign the sublease, and close the sale of such assets, in the fourth quarter
of fiscal 2004. Meanwhile, OmniCare-MI has occupied the premises and made its
monthly sublease rental payments continuously since November 1, 2002.
Net earnings were $1.4 million, or $0.19 per basic share, for the three months
ended March 31, 2004 compared to net earnings of $0.5 million, or $0.08 per
basic share, for the three months ended March 31, 2003, principally due to an
increase in members and an increase in reimbursement rates effective July 1,
2003. The Company recognized net earnings of $3.6 million, or $0.51 per basic
share, for the nine months ended March 31, 2004 and net earnings of $4.4
million, or $0.63 per basic share, for the comparable period ended March 31,
2003. Such decrease in net earnings of $0.8 million is primarily due to the
amended TennCare contractual risk agreement for OmniCare-TN discussed above.
11
FOR THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2003
Medical premiums revenues were $0.06 million in the three months ended March 31,
2004, a decrease of $0.7 million (93%) from $0.8 million in the three months
ended March 31, 2003. Medical premiums revenues relate to an amended contractual
risk agreement in which TennCare agreed to pay OmniCare-TN up to $7.5 million
and additional funds as necessary to meet its statutory net worth requirement as
of June 30, 2002. Such $7.5 million and additional funds were recorded in fiscal
2003 and 2004 financial statements as fiscal 2002 claims were processed. The
$0.06 million of medical premium revenues represent fiscal 2002 claims processed
and reimbursed by TennCare in the third quarter of fiscal 2004.
Fixed administrative fees related to TennCare's ASO program were $5.1 million
for the quarter ended March 31, 2004, an increase of $1.7 million (49%) from
$3.4 million in the three months ended March 31, 2003. The increase in fixed
administrative fees is principally due to an increase in members and an increase
in reimbursement rates effective July 1, 2003. Such fixed administrative fees
are attributed to a change in the reimbursement system of TennCare.
For all its contracted managed care organizations ("MCOs"), TennCare changed its
reimbursement system to an administrative services only ("ASO") program for an
initially declared 18-month stabilization period (July 1, 2002 through March 31,
2004), during which the MCOs, including OmniCare-TN, have no medical cost risk
(i.e., no risk for medical losses), earn fixed administrative fees, are subject
to increased oversight, and may incur financial penalties for not achieving
certain performance requirements. Through an amendment completed on December 19,
2003, TennCare has extended through June 30, 2004, the ASO reimbursement system
applicable to OmniCare-TN. There has been no specific indication yet of what
TennCare reimbursement system will apply after that date to OmniCare-TN.
However, on February 17, 2004, Tennessee Governor Phil Bredesen presented his
multi-year plan to reform the TennCare system to a joint convention of the
General Assembly (the Tennessee legislature). The plan in some respects requires
approval by the General Assembly. Among other things, the plan would generally
make no cuts in the TennCare system's enrollment or in benefits for children,
pregnant women and the disabled (approximately 74.5% of OmniCare-TN's
membership), but would institute co-pays and reduced services for one-third of
the TennCare system's membership (the largely able-bodied adults) and certain
prescription drug limits for all TennCare members.
The above-described December 19, 2003 contractual amendment also extended the
term of OmniCare-TN's TennCare contract to December 31, 2004, with provisions
for automatic one-year renewals thereafter in certain circumstances.
12
Medical services expenses were $0.06 million in the three months ended March 31,
2004. The $0.06 million of medical services expenses represent fiscal 2002
claims processed and reimbursed by TennCare in the third quarter of fiscal 2004
as explained in the first paragraph under the above heading "For Three Months
Ended March 31, 2004 Compared to Three Months Ended March 31, 2003."
Marketing, general and administrative expenses decreased approximately $0.2
million (4%), to $3.6 million for the three months ended March 31, 2004 from
$3.8 million for the three months ended March 31, 2003. The decrease is
principally due to TennCare's payment of premium tax as a result of the ASO
arrangement discussed above, offset by the costs of claims processing associated
with a membership increase.
Depreciation and amortization expense decreased $0.01 million (19%), to $0.06
million for the three months ended March 31, 2004 from $0.07 million for the
three months ended March 31, 2003.
Interest expense decreased $0.01 million (46%), to $0.01 million for the three
months ended March 31, 2004 from $0.02 million for the three months ended March
31, 2003, due to debt reduction.
Income tax expense increased $0.1 million (34%), to $0.4 million for the three
months ended March 31, 2004 from $0.3 million for the three months ended March
31, 2003. The Company's effective tax rate for the three months ended March 31,
2004 is 22% and differs from the statutory rate of 34%. This difference is the
result of the utilization of net operating loss carryforwards.
13
FOR NINE MONTHS ENDED MARCH 31, 2004 COMPARED TO
NINE MONTHS ENDED MARCH 31, 2003
Total revenues decreased $3.1 million (16%), to $16.8 million for the nine
months ended March 31, 2004 from $19.9 million for the nine months ended March
31, 2003 principally as the result of a change in the reimbursement system of
TennCare, as discussed above.
Medical premium revenues were $0.5 million for the nine months ended March 31,
2004, a decrease of $6.9 million (93%) from medical premium revenues of $7.4
million for the nine months ended March 31, 2003. The decrease came from
OmniCare-TN as the result of TennCare's changing its reimbursement system to an
ASO program for an initially declared 18-month stabilization period beginning
July 1, 2002, subsequently extended six-months through June 30, 2004.
Fixed administrative fees related to the ASO program were $15.3 million for the
nine months ended March 31, 2004, an increase of $4.1 million (36%) from fixed
administrative fees of $11.2 million for the nine months ended March 31, 2003.
The increase in fixed administrative fees is principally due to an increase in
members and an increase in reimbursement rates effective July 1, 2003.
Total expenses were $12.2 million for the nine months ended March 31, 2004,
compared to $12.4 million for the nine months ended March 31, 2003, a decrease
of $0.2 million (2%). The decreases were principally due to the TennCare ASO
program for OmniCare-TN discussed above.
Because of TennCare's new ASO reimbursement system, medical services expenses
were $0.5 million in the nine months ended March 31, 2004, an increase of $0.1
million (32%), as compared with medical services expenses of $0.38 million in
the nine months ended March 31, 2003. The $0.5 million of medical services
expenses represent fiscal 2002 claims processed and reimbursed by TennCare in
fiscal 2004 as explained in the first paragraph under the above heading "For
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31,
2003."
Marketing, general and administrative expenses were $11.5 million for the
nine-month period ended March 31, 2004, as compared with marketing, general and
administrative expenses of $11.7 million for the comparable period a year
earlier, a decrease of $0.2 million (2%). The decrease is principally due to
TennCare's payment of premium tax as a result of the ASO arrangement discussed
above, offset by the costs of claims processing associated with a membership
increase.
Depreciation and amortization expense decreased $0.05 million (23%), to $0.18
million for the nine months ended March 31, 2004 from $0.23 million for the nine
months ended March 31, 2003.
Interest expense decreased $0.07 million (58%), to $0.05 million for the nine
months ended March 31, 2004 from $0.12 million for the nine months ended March
31, 2003, principally due to debt reduction.
14
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company had (i) cash and cash equivalents and short-term
marketable securities of $9.0 million, compared to $4.7 million at June 30,
2003; (ii) working capital of $4.9 million, compared to working capital of $1.7
million at June 30, 2003; and (iii) a current assets-to-current liabilities
ratio of 1.75-to-1, compared to 1.26-to-1 at June 30, 2003. The principal source
of funds for the Company during the nine months ended March 31, 2004 was $5.2
million provided from net operating activities. The principal use of funds for
the nine month period was $0.9 million for debt repayment. Positive cash flow
was $4.3 million for the nine months ended March 31, 2004 compared to $2.3
million for the comparable period a year earlier.
Accounts receivable decreased by $0.4 million at March 31, 2004 compared to June
30, 2003, primarily due to timing of cash receipts from TennCare.
Property, plant and equipment decreased by $0.1 million at March 31, 2004
compared to June 30, 2003, due to the recording of depreciation of $0.2 million
and fixed asset additions of $0.06 million.
Long-term debt decreased $0.9 million at March 31, 2004 compared to June 30,
2003. The Company currently has a $0.9 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 (4.00% at March
31, 2004) plus one percent per annum, and a maturity date of September 30, 2004.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Our management has evaluated, with the participation of our principal executive
and principal financial officers, the effectiveness of our disclosure controls
and procedures as of March 31, 2004, and based on their evaluation, our
principal executive and principal financial officers have concluded that these
controls and procedures are effective as of March 31, 2004. There was no change
in our internal control over financial reporting identified in connection with
such evaluation that occurred during our fiscal quarter
15
ended March 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file and submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
16
PART II.
ITEM 1. LEGAL PROCEEDINGS
A previously reported action by Vanderbilt University against OmniCare-TN in the
Chancery Court for Davidson County, Tennessee, was settled pursuant to a
settlement agreement signed by the parties and approved by the State of
Tennessee, Bureau of TennCare, on April 15, 2004. The plaintiff was not an
OmniCare-TN participating provider, and OmniCare-TN had reimbursed it at
nonparticipating provider rates for health services provided by its hospital and
physician group to OmniCare-TN members. The plaintiff's action sought additional
reimbursement of the difference between the rates paid by OmniCare-TN and the
alleged reasonable value of the plaintiff's services to OmniCare-TN members. The
settlement had no material adverse effect on the Company's financial condition.
A previously reported lawsuit entitled 1155 Brewery Park, LLC v. United American
Healthcare Corporation was dismissed without prejudice by a stipulated court
order on March 31, 2004, pursuant to a signed Settlement Agreement and Mutual
Full and Final Release between the parties. The lawsuit was primarily for
partial rent under the lease of the Company's former office in Detroit. Upon the
Company's making its agreed monthly payments through the lease end in May 2005,
the lawsuit is to be dismissed with prejudice. The settlement had no material
adverse effect on the Company's financial condition.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage management to provide prospective
information about their companies without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statements. Certain
statements contained in this Form 10-Q quarterly 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,
17
performance or achievements expressed or implied by such forward-looking
statements. Such factors potentially include, among others, the following:
1. Inability to increase premium rates commensurate with increases in
medical costs due to utilization, government regulation, or other
factors.
2. Discontinuation of, limitations upon, or restructuring of
government-funded programs, including but not limited to the TennCare
program.
3. Increases in medical costs, including increases in utilization and
costs of medical services and the effects of actions by competitors or
groups of providers.
4. Adverse state and federal legislation and initiatives, including: 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.
5. Failure to obtain new customer bases or members or retain or regain
customer bases or members, or reductions in work force by existing
customers.
6. Increased competition between current organizations, the entrance of
new competitors and the introduction of new products by new and
existing competitors.
7. Adverse publicity and media coverage.
8. Inability to carry out marketing and sales plans.
9. Loss or retirement of key executives.
10. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.
11. Adverse regulatory determinations resulting in loss or limitations of
licensure, certification or contracts with governmental payers.
12. Higher sales, administrative or general expenses occasioned by the
need for additional advertising, marketing, administrative or
management information systems expenditures.
13. Increases by regulatory authorities of minimum capital, reserve and
other financial solvency requirements.
14. Denial of accreditation by quality accrediting agencies, e.g., the
National Committee for Quality Assurance (NCQA).
15. Adverse results from significant litigation matters.
16. Inability to maintain or obtain satisfactory bank loan credit
arrangements.
17. Increased costs to comply with the Health Insurance Portability and
Accountability Act of 1996 (HIPAA).
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certifications of Chief Executive Officer pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: April 29, 2004 By: /s/ William C. Brooks
--------------------------------
William C. Brooks
Chairman, President & Chief
Executive Officer
Dated: April 29, 2004 By: /s/ Stephen D. Harris
--------------------------------
Stephen D. Harris
Chief Financial Officer &
Treasurer
20
Exhibit Index
No. Description
---- -----------------------------------------------------------------------
31.1 Certifications of Chief Executive Officer pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
21