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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, 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 [ ]
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 AUGUST 23, 2004, COMPUTED BY REFERENCE TO THE NASDAQ
SMALLCAP MARKET CLOSING PRICE ON SUCH DATE, WAS $31,235,543.
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF AUGUST 23,
2004 WAS 7,419,369.
Portions of the registrant's Proxy Statement for its 2004 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 August 26, 2004*
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business.................................................................................... 2
Item 2. Properties.................................................................................. 11
Item 3. Legal Proceedings........................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......................................... 13
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........................................................................ 24
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................................ 24
Item 9A. Controls and Procedures..................................................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 25
Item 11. Executive Compensation...................................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 25
Item 13. Certain Relationships and Related Transactions.............................................. 26
Item 14. Principal Accounting Fees and Services...................................................... 26
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 26
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 August 1, 2004, there were 129,484
enrollees in OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), 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
1
care industry, which includes health maintenance organization ("HMO"), preferred
provider organization ("PPO") and prepaid health service plans, has grown
substantially.
While the trend toward managed care solutions has traditionally been pursued
most aggressively by the private sector, the public sector has embraced the
trend in an effort to control the costs of health care provided to Medicaid
recipients. Consequently, many states are promoting managed care initiatives to
contain these rising costs and supporting programs that encourage or mandate
Medicaid beneficiaries to enroll in managed care plans.
MANAGED CARE PRODUCTS AND SERVICES
The Company owns 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 August 1, 2004:
Medicaid Non - Medicaid Total
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112,894 16,590 129,484
2
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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2004 2003 2002
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(in thousands, except percentages)
Revenues
OmniCare-TN $ 21,921 99.3% $ 24,314 87% $ 160,608 90%
OmniCare-MI* - - 3,395 12% 14,941 8%
County Care** - - - - 2,486 1%
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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, and is reflected as a discontinued operation in the
consolidated financial statements.
** County Care was no longer a managed plan of the Company after September 30,
2001.
MANAGED PLANS
The Company has entered into a long-term management agreement, through a wholly
owned subsidiary of the Company, with OmniCare-TN. In addition, the Company 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.
3
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 review dates Yes N/A
(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., wholly owns OmniCare-TN. 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.
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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 were generally compensated for administrative services
only (commonly called "ASO"), earned fixed administrative fees, were not at risk
for medical costs in excess of targets established based on various factors,
were subject to increased oversight, and could incur financial penalties for not
achieving certain performance requirements. Through an amendment completed on
December 19, 2003, TennCare extended the ASO reimbursement system applicable to
OmniCare-TN through June 30, 2004. A subsequent amendment completed on June 25,
2004 further extended the ASO reimbursement system applicable to OmniCare-TN
through December 31, 2004. There has been no specific indication yet of what
TennCare reimbursement system will apply after that date to OmniCare-TN.
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 stated 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 confirmed they were 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 was 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 to it from defunct other plans.
As of August 1, 2004, OmniCare-TN's total enrollment was 129,050 members, of
whom 87% were Medicaid enrollees and 13% were Non-Medicaid enrollees.
6
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.
While managed by the Company, OmniCare-MI was 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 included 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.
As a Michigan HMO, OmniCare-MI has been 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.
7
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.
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.
8
INSURANCE
The Company presently carries comprehensive general liability, directors and
officers liability, property, business automobile, and workers' compensation
insurance. Management believes that coverage levels under these policies are
adequate in view of the risks associated with the Company's business. In
addition, OmniCare-TN has (and OmniCare-MI while managed by the Company had)
professional liability insurance that covers liability claims arising from
medical malpractice. OmniCare-TN is required to pay the professional liability
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 enrollment,
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 August 1, 2004 was 119 compared to 112 at
September 1, 2003. The Company's employees do not belong to a collective
bargaining unit and management considers its relations with employees to be
good.
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. 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.
10
13. Increases by regulatory authorities of minimum capital, reserve and
other financial solvency requirements.
14. Denial of accreditation by quality accrediting agencies, e.g., the
National Committee for Quality Assurance (NCQA).
15. Adverse results from significant litigation matters.
16. Inability to maintain or obtain satisfactory bank loan credit
arrangements.
17. Increased costs to comply with the Health Insurance Portability and
Accountability Act of 1996 (HIPAA).
ITEM 2. PROPERTIES
The Company currently leases approximately 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 June 17, 2004, a Circuit Court judge for the 30th Judicial Circuit, in Ingham
County, Michigan, conducted a hearing and approved a report and recommendation
filed by the court-appointed Special Deputy Rehabilitator of OmniCare-MI, in
case no. 98-88265-CR, to which the Company is not a party. The Company provided
services for many years to OmniCare-MI under a management agreement that
terminated November 1, 2002. The approved report and recommendation were filed
May 14, 2004 and requested that any potential cause of action against the
Company "resulting from its actions as the management company" of OmniCare-MI be
assigned to the creditors of OmniCare-MI who filed timely objections to its
first amended Rehabilitation Plan. (The court approved that Plan on July 29,
2002.)
At the June 17th hearing, the judge acknowledged the Company's arguments
opposing the recommendation, declared he was not prejudging any claims which
creditors of OmniCare-MI might pursue against the Company, and stated he would
enter an appropriate order to implement the Special Deputy Rehabilitator's
recommendation. On August 20, 2004, the judge entered an order assigning jointly
to "those persons that are health care providers/creditors" of OmniCare-MI any
"rights and/or claims for damages of any kind" of OmniCare-MI against the
Company in connection with the management of OmniCare-MI. The order required
establishment of a creditors committee to make all decisions whether to pursue
any claim and regarding any litigation of any claim. The order approved paying
$50,000 of OmniCare-MI's assets for legal expenses to investigate the merits of
pursuing any litigation and, if litigation is pursued, up to $150,000 more of
OmniCare-MI's assets therefore, subject to required semiannual accountings to
11
the court. No such claim has been asserted against the Company, and it is
premature and not possible to predict what subsequent proceedings and claims, if
any, might ensue, or the magnitude or outcome of such claims, if any.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Shares of the Company's common stock have been traded 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 per share on the NASDAQ SmallCap or National Market for each
quarter in the past two fiscal years.
2004 SALES PRICE 2003 SALES PRICE
---------------- ----------------
FISCAL QUARTER HIGH LOW HIGH LOW
-------------- ---- --- ---- ---
First $3.25 $1.52 $4.80 $1.80
Second $4.15 $2.57 $2.14 $0.88
Third $5.32 $3.33 $1.18 $0.76
Fourth $6.44 $3.70 $2.05 $0.96
As of August 23, 2004, the closing price of the Common Stock was $4.21 per share
and there were approximately 120 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:
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands, except per share data)
Operating Data (Year ended June 30):
Operating revenues $ 22,084 $ 24,530 $ 165,176 $ 105,330 $ 90,284
Earnings (loss) from continuing
operations 7,871 7,333 (9,259) 4,562 3,881
Earnings (loss) from discontinued
operation, net of income taxes (700) (2,127) (1,704) (3,333) (2,897)
Net earnings (loss) 7,171 5,206 (10,963) 1,229 984
Earnings (loss) per common share from
continuing operations - basic $ 1.09 $ 1.06 $ (1.35) $ 0.67 $ 0.57
Net earnings (loss) per common share -
basic and diluted $ 0.99 $ 0.75 $ (1.60) $ 0.18 $ 0.15
Weighted average common shares
outstanding - diluted 7,266 6,950 6,839 6,808 6,779
Balance Sheet Data (June 30):
Cash and investments $ 8,767 $ 4,693 $ 18,810 $ 24,766 $ 10,569
Goodwill 3,452 2,952 2,952 2,952 3,663
Total assets 20,081 15,114 33,336 41,657 34,809
Medical claims and benefits payable 406 591 24,495 19,815 11,245
Debt 847 1,766 2,869 3,492 4,345
Shareholders' equity 14,886 7,140 1,747 12,313 11,051
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 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 were generally compensated for administrative services
only (commonly called "ASO"), earned fixed administrative fees, were not at risk
for medical costs in excess of targets established based on various factors,
were subject to increased oversight, and could incur financial penalties for not
achieving certain performance requirements. Through an amendment completed on
December 19, 2003, TennCare extended the ASO reimbursement system applicable to
OmniCare-TN through June 30, 2004. A subsequent amendment completed on June
25,2004, further extended the ASO reimbursement system applicable to OmniCare-TN
through December 31, 2004. There has been no specific indication yet of what
TennCare reimbursement system will apply after that date to OmniCare-TN. These
matters are more fully discussed and analyzed below under the heading "Review of
Consolidated Results of Operations - 2004 Compared to 2003."
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.
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
Effective July 1, 2001, OmniCare-TN entered into a new 42-month contract with
the State of Tennessee's TennCare Program. The contract provided for an
automatic renewal for calendar year 2005 with an expiration date of December 31,
2005 with future premium increases to be determined by the State of Tennessee.
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 2004 COMPARED TO 2003
OMNICARE-TN DEVELOPMENTS
OmniCare-TN's results of operations for fiscal 2003 are best understood in the
context of certain events preceding that fiscal year involving several of
TennCare's major contracted MCOs, which ceased doing business in fiscal 2002.
Beginning in February, March and April 2002, OmniCare-TN unexpectedly 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. Through an amendment completed on December 19, 2003,
TennCare extended the ASO reimbursement system applicable to OmniCare-TN through
June 30, 2004. A subsequent amendment completed on June 25, 2004, further
extended the ASO reimbursement system applicable to OmniCare-TN through December
31, 2004. There has been no specific indication yet of what TennCare
reimbursement system will apply after that date to OmniCare-TN.
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 has been reimbursed
under an administrative services only agreement with no risk of medical loss;
and
16
- 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.
Under generally accepted accounting principles, the $7.5 million receivable was
not recorded in fiscal 2002 financial statements but was 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. For the year ended June 30, 2004, an additional $0.5
million of such medical claims were processed, and the same amount was
recognized as revenue by Omnicare-TN.
On May 25, 2004, and effective as of January 1, 2004, the Company's wholly owned
subsidiary, United American of Tennessee, Inc. ("UA-TN"), which already owned
75% of the outstanding stock of OmniCare-TN, purchased the remaining 25% of the
outstanding common stock of OmniCare-TN. OmniCare-TN thereby became a wholly
owned subsidiary of UA-TN and a wholly owned second-tier subsidiary of the
Company. The 25% minority interest was purchased under a longstanding option
agreement for $500,000 evidenced by a Company promissory note payable by
December 31, 2004.
As of June 30, 2004, OmniCare-TN's total enrollment was 129,484 members,
compared to 130,080 at June 30, 2003.
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
17
management fee revenues from OmniCare-MI beginning August 1, 2001, by changing
the methodology for determining the management fee from a fixed percentage (14%)
of premiums earned by OmniCare-MI to a cost-based fee, which was equivalent to
approximately 10% 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. 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, 2003. 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 was delayed as a result of the
appointment by the Governor of Michigan of Linda A. Watters as the new
Commissioner of the Office of Financial and Insurance Services on April 11,
2003. 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. Meanwhile, due to the subsequent sale of
OmniCare-MI members to Coventry of Michigan approved on May 10, 2004 and
effective October 1, 2004, Company management now does not expect to complete
the sale of assets and accordingly has recorded a loss from discontinued
operations of $0.7 million in the fourth quarter of fiscal year 2004. While
OmniCare-MI has been regularly paying monthly rent under such de facto sublease
with the Company, based on preliminary discussions management now expects that
OmniCare-MI's occupancy of the subleased premises will diminish at some unknown
future date and then cease at some unknown later date, but sooner than the
primary lease end in May 2005. Those events would increase the Company's rent
expense under that lease, but management cannot currently predict the timing and
amount thereof.
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 expected sale of assets described above; (ii)
the above-described sublease, with an expected cost to the Company of
approximately $0.04
18
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 was doubtful. The recorded charges discussed above
were offset by management fees from OmniCare-MI of $0.8 million.
Specific Comparisons of 2004 to 2003
Total revenues decreased $2.4 million (10%), to $22.1 million for the fiscal
year ended June 30, 2004 from $24.5 million for the fiscal year ended June 30,
2003, principally as the result of the change in the reimbursement system of
TennCare, discussed above.
Medical premium revenues were $0.5 million for the fiscal year ended June 30,
2004, a decrease of $7.3 million (93%) from medical premium revenues of $7.8
million for the fiscal year ended June 30, 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 through December 31, 2004.
Fixed administrative fees related to the ASO program were $20.4 million for the
fiscal year ended June 30, 2004, an increase of $5.6 million (38%) from fixed
administrative fees of $14.8 million for the fiscal year ended June 30, 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 $15.3 million for the fiscal year ended June 30, 2004,
compared to $16.6 million for the year ended June 30, 2003, a decrease of $1.3
million (8%). 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 fiscal year ended June 30, 2004, an increase of $0.1
million (23%) as compared with medical services expenses of $0.4 million in the
fiscal year ended June 30, 2003. The $0.5 million of medical services expenses
represent fiscal 2002 claims processed and reimbursed by TennCare in fiscal 2004
as explained under the above heading "OmniCare-TN Developments."
Marketing, general and administrative expenses were $14.5 million for the fiscal
year ended June 30, 2004, as compared with marketing, general and administrative
expenses of $15.7 million for the comparable period a year earlier, a decrease
of $1.2 million (8%). 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 $0.07 million (23%), to $0.23
million for the fiscal year ended June 30, 2004 from $0.3 million for the fiscal
year ended June 30, 2003.
19
Interest expense decreased $0.08 million (60%), to $0.06 million for the fiscal
year ended June 30, 2004 from $0.14 million for the fiscal year ended June 30,
2003, principally due to debt reduction.
Income tax expense decreased $1.7 million (269%), to $(1.1) million in the
fiscal year ended June 30, 2004 from $0.6 million in the fiscal year ended June
30, 2003. The Company's effective tax rate for the fiscal year ended June 30,
2003 was (16)% and differs from the statutory rate of 34%. This difference is
primarily a result of the utilization of net operating loss carryforwards.
Earnings from continuing operations before income taxes were $6.8 million and
$8.0 million for the fiscal years ended June 30, 2004 and 2003, respectively.
Such decrease in earnings from continuing operations of $1.2 million is
principally due to the fiscal 2002 contractual risk agreement discussed above.
Earnings from continuing operations were $7.9 million, or $1.09 per basic share,
for the fiscal year ended June 30, 2004 compared to earnings from continuing
operations of $7.3 million, or $1.06 per basic share, for the fiscal year ended
June 30, 2003. Such increase in earnings from continuing operations of $0.5
million, or $0.03 per basic share, is principally due to the recognition of a
deferred tax asset, an increase in members and an increase in reimbursement
rates effective July 1, 2003.
The Company recognized a loss from discontinued operations of $0.7 million in
the fiscal year ended June 30, 2004 compared to a loss from discontinued
operations of $2.1 million in the fiscal year ended June 30, 2003 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 $7.2 million, or $0.99 per basic share, for the fiscal year
ended June 30, 2004 compared to net earnings of $5.2 million, or $0.75 per basic
share, for the fiscal year ended June 30, 2003, principally due to the
utilization of net operating loss carryforwards, an increase in members and an
increase in reimbursement rates effective July 1, 2003.
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 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,
20
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.
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
21
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 was 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, the Company had (i) cash and cash equivalents and short-term
marketable securities of $8.8 million, compared to $4.7 million at June 30,
2003; (ii) working capital of $8.1 million, compared to working capital of $1.7
million at June 30, 2003; and (iii) a current assets-to-current liabilities
ratio of 2.56-to-1, compared to 1.26-to-1 at June 30, 2003.
Net cash from operating activities was $5.0 million in fiscal 2004 compared to
net cash used in operating activities of $12.6 million in fiscal 2003. Investing
activities in fiscal 2004 included the purchase of equipment of $0.07 million,
the purchase of marketable securities of $0.2 million, and the issuance of a
promissory note for $0.5 million. Debt repayments were $1.4 million in fiscal
2004.
Cash and marketable securities increased by $4.1 million at June 30, 2004
compared to June 30, 2003 due primarily to operating activities.
Accounts receivable decreased by $0.3 million at June 30, 2004 compared to June
30, 2003, primarily due to the elimination of the pharmacy rebate program and
reduction in reinsurance receivables.
22
Property, plant and equipment decreased by $0.2 million at June 30, 2004
compared to June 30, 2003, due to the recording of depreciation of $0.2 million.
Medical claims payable decreased by $0.2 million at June 30, 2004 compared to
June 30, 2003, which is directly related to the payment of outstanding medical
claims.
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
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"), earned fixed administrative fees, were not at risk
for medical costs in excess of targets established based on various factors,
were subject to increased oversight, and could incur financial penalties for not
achieving certain performance requirements. Through an amendment completed on
December 19, 2003, TennCare extended the ASO reimbursement system applicable to
OmniCare-TN through June 30, 2004. A subsequent amendment completed on June 25,
2004, further extended the ASO reimbursement system applicable to OmniCare-TN
through December 31, 2004. There has been no specific indication yet of what
TennCare reimbursement system will apply after that date to OmniCare-TN.
The Company's de facto sublease to OmniCare-MI of all of the Company's leased
premises in Detroit, Michigan, from November 1, 2002 to the end of the lease in
May 2005 has cost the Company approximately $40,000 per month through the
remainder of the lease. While OmniCare-MI has been regularly paying monthly rent
under such de facto sublease with the Company, based on preliminary discussions
management now expects that OmniCare-MI's occupancy of the subleased premises
will diminish at some unknown future date and then cease at some unknown later
date, but sooner than the primary lease end in May 2005. Those events would
increase the Company's rent expense under that lease, but management cannot
currently predict the timing and amount thereof.
The Company currently has a $0.6 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 (4.0% at June 30,
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 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.
23
RECENTLY ENACTED PRONOUNCEMENTS
The following are new accounting standards and interpretations that may be
applicable in the future to the Company:
SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging
Activities" amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. The Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The adoption of this standard had no effect on the Corporation's
financial condition or results of operations.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" was revised in December 2003. The revisions to SFAS132 are intended to
improve financial statement disclosures for defined benefit plans by requiring
more detail about plan assets, benefit obligations, cash flows, benefit costs
and other relevant quantitative and qualitative information. The revisions are
effective for fiscal years after December 15, 2003. The adoption of this
standard had no effect on the Corporation's financial condition or results of
operations.
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition", was issued by
the Securities and Exchange Commission ("SEC") in December 2003. SAB No. 104
revises and rescinds certain sections of SAB No. 101 in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. Accordingly there is no impact
the Corporation's financial condition or results of operations as a result of
the issuance of SAB No. 104.
FIN 46R, a revision to FIN 46, "Consolidation of Variable Interest Entities",
was issued in December 2003. FIN 46R clarifies some of the provisions of FIN 46
and exempts certain entities from its requirements. FIN 46R is effective at the
end of the first interim period ending after March 15, 2004. Entities that have
adopted FIN 46 prior to this effective date can continue to apply the provisions
of FIN 46 until the effective date of FIN 46R. The adoption of FIN 46R had no
effect on the Corporation's financial condition or results of operations.
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.
24
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this Report, and,
based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that these controls and procedures are effective. There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended (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 the Company in the reports that we file
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
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 5, 2004.
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 5, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with respect
to its Annual Meeting of Shareholders to be held on November 5, 2004.
25
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 5, 2004.
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 5, 2004 is the
information set forth in such proxy statement under the headings "Audit Fees"
and "Audit Committees 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, 2001 and 2002; (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, December 31, 1998, December 31, 2001, September 30,
2002 and December 31, 2002; (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 June 1, 2004,
reporting the purchase of the remaining 25% of the outstanding
common stock of Omnicare-TN and a scheduled court hearing regarding
a petition filed by the Special Deputy Rehabilitator of OmniCare-MI
recommending that the "Court assign the potential cause of action
against UAHC [the Company] resulting from its actions as the
management company of OmniCare-MI to the creditors of OmniCare-MI
who filed timely objections to the first amended Rehabilitation
Plan."
2) The Company filed a Current Report on Form 8-K on June 23, 2004,
reporting the extension of the ASO reimbursement system for
OmniCare-TN through December 31, 2004, and that a court approved a
report and recommendation filed by the Special Deputy Rehabilitator
of OmniCare-MI.
26
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)
SIGNATURE CAPACITY
--------- --------
/s/ WILLIAM C. BROOKS Chairman, President and CEO
------------------------------- (Principal Executive Officer)
William C. Brooks
/s/ STEPHEN D. HARRIS Chief Financial Officer
------------------------------- (Principal Financial Officer and
Stephen D. Harris Principal Accounting Officer)
/s/ EMMETT S. MOTEN, JR. Secretary and Director
-------------------------------
Emmett S. Moten, Jr.
/s/ OSBIE HOWARD Director
-------------------------------
Osbie Howard
/s/ RICHARD M. BROWN, D.O. Director
-------------------------------
Richard M. Brown, D.O.
/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.
Date: August 26, 2004
27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm................................... F-2
Report of Independent Registered Public Accounting Firm................................... F-3
Consolidated Balance Sheets as of June 30, 2004 and 2003.................................. F-4
Consolidated Statements of Operations for each of the years in the three-year period
Ended June 30, 2004.................................................................. F-5
Consolidated Statements of Shareholders' Equity and Comprehensive Income for
each of the years in the three-year period ended June 30, 2004....................... F-6
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended June 30, 2004.................................................................. F-7
Notes to Consolidated Financial Statements................................................ F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
United American Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of United American
Healthcare Corporation and Subsidiaries as of June 30, 2004 and 2003, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Follmer Rudzewicz PLC
Southfield, Michigan
August 5, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
United American Healthcare Corporation
We have audited the consolidated statements of operations, stockholders' equity
and comprehensive income, and cash flows of United American Healthcare
Corporation and Subsidiaries for the year 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 audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 results of their operations and their cash
flows for the year ended June 30, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 14 to the consolidated financial statements, the Company
has restated the 2002 consolidated financial statements to reflect certain
discontinued operations.
/s/ KPMG LLP
Detroit, Michigan
October 11, 2002, except for note 14, 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,
---------------------
2004 2003
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 7,767 $ 3,693
Marketable securities 1,000 1,000
Accounts receivable - State of Tennessee 1,230 1,213
Other receivables 1,206 1,495
Prepaid expenses and other 147 167
Deferred income taxes 1,939 570
-------- --------
Total current assets 13,289 8,138
Assets held for sale 100 800
Property and equipment, net 323 478
Goodwill 3,452 2,952
Marketable securities 2,331 2,160
Other assets 586 586
-------- --------
$ 20,081 $ 15,114
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt $ 847 $ 1,108
Medical claims payable 406 591
Accounts payable and accrued expenses 1,140 2,516
Accrued compensation and related benefits 582 519
Accrued rent 837 280
Other current liabilities 1,384 1,430
-------- --------
Total current liabilities 5,196 6,444
Long-term debt, less current portion - 658
Accrued rent - 872
-------- --------
Total Liabilities 5,196 7,974
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued - -
Common stock, no par, 15,000,000 shares authorized; 7,418,519 and
6,910,721 shares issued and outstanding at June 30, 2004 and 2003,
respectively 12,226 11,570
Retained earnings (deficit) 2,702 (4,469)
Accumulated other comprehensive (loss) income, net of deferred federal
income taxes (43) 39
-------- --------
Total shareholders' equity 14,885 7,140
-------- --------
$ 20,081 $ 15,114
======== ========
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,
----------------------------------
2004 2003 2002
-------- -------- --------
REVENUES
Fixed administrative fees $ 20,391 $ 14,750 $ -
Medical premiums 532 7,841 163,094
Interest and other income 1,161 1,939 2,082
-------- -------- --------
Total revenues 22,084 24,530 165,176
EXPENSES
Medical services 532 434 155,092
Marketing, general and administrative 14,483 15,680 17,989
Depreciation and amortization 227 296 320
Interest expense 66 140 216
-------- -------- --------
Total expenses 15,308 16,550 173,617
-------- -------- --------
Earnings (loss) from continuing operations before income taxes 6,776 7,980 (8,441)
Income tax expense (benefit) (1,095) 647 818
-------- -------- --------
Earnings (loss) from continuing operations 7,871 7,333 (9,259)
DISCONTINUED OPERATIONS
Loss from discontinued operations (700) (2,127) (1,704)
-------- -------- --------
Net earnings (loss) $ 7,171 $ 5,206 $(10,963)
======== ======== ========
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC
Earnings (loss) from continuing operations $ 1.09 $ 1.06 $ (1.35)
Loss from discontinued operations (0.10) (0.31) (0.25)
-------- -------- --------
Net earnings (loss) per common share $ 0.99 $ 0.75 $ (1.60)
======== ======== ========
Weighted average shares outstanding 7,207 6,941 6,839
======== ======== ========
NET EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Earnings (loss) from continuing operations $ 1.08 $ 1.06 $ (1.35)
Loss from discontinued operations (0.10) (0.31) (0.25)
-------- -------- --------
Net earnings (loss) per common share $ 0.98 $ 0.75 $ (1.60)
======== ======== ========
Weighted average shares outstanding 7,266 6,950 6,839
======== ======== ========
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)
RETAINED ACCUMULATED
EARNINGS OTHER TOTAL
COMMON STOCK (ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT DEFICIT) INCOME (LOSS) EQUITY
------ -------- ------------ ------------- -------------
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
====== ======== ============ ============= =============
Issuance of common stock 360 $ 656 $ $ $ 656
Comprehensive income:
Net earnings - - 7,171 - 7,171
Unrealized loss on marketable
securities - - - (82) (82)
------ -------- ------------ ------------- -------------
Total comprehensive income (loss) - - 7,171 (82) 7,089
------ -------- ------------ ------------- -------------
BALANCE AT JUNE 30, 2004 7,419 $ 12,226 $ 2,702 $ (43) $ 14,885
====== ======== ============ ============= =============
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,
------------------------------
2004 2003 2002
-------- -------- --------
OPERATING ACTIVITIES
Net earnings (loss) $ 7,171 $ 5,206 $(10,963)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Bad debt expense - 847 -
Loss on disposal of assets 700 577 2,411
Loss (gain) on liquidation of investment (82) 24 166
Depreciation and amortization 227 640 1,800
Deferred income taxes (1,369) 520 556
Stock awards 385 127 50
Changes in assets and liabilities
Accounts receivable- State of Tennessee (17) 581 (1,358)
Other receivables 289 514 (567)
Refundable federal income taxes - 284 -
Prepaid expenses and other 20 454 (72)
Other assets - 91 -
Medical claims payable (185) (23,904) 4,680
Accounts payable and accrued expenses (1,376) 1,648 (1,990)
Accrued rent (315) 367 (75)
Accrued compensation and related benefits 63 (269) (305)
Other current liabilities (46) (354) 558
-------- -------- --------
Net cash provided by (used in) operating activities 5,465 (12,647) (5,109)
-------- -------- --------
INVESTING ACTIVITIES
Purchase of marketable securities (171) (334) (19,388)
Proceeds from the sale of marketable securities - 15,784 5,997
Purchase of property and equipment (72) (68) (1,005)
-------- -------- --------
Net cash provided by (used in) investing activities (243) 15,382 (14,396)
-------- -------- --------
FINANCING ACTIVITIES
Payments made on debt (1,419) (1,104) (623)
Issuance of common stock 271 36 169
-------- -------- --------
Net cash used in financing activities (1,148) (1,068) (454)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 4,074 1,667 (19,959)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,693 2,026 21,985
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,767 $ 3,693 $ 2,026
======== ======== ========
F-7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
YEAR ENDED JUNE 30,
------------------------------
2004 2003 2002
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 63 $ 133 $ 200
======== ======== ========
Income taxes paid $ - $ - $ 250
======== ======== ========
Non-cash financing activity - Promissory note and
goodwill recorded upon purchase of minority interest 500 - -
======== ======== ========
See accompanying notes to the consolidated financial statements.
F-8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
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 wholly owned subsidiary of UA-TN. 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, 2004 and
2003.
F-9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
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 $3.5 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, 2004, 2003
and 2002.
F-10
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
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 and 2004 to reflect TennCare's
administrative services only ("ASO") arrangement in which
OmniCare-TN assumes no risk for medical claims. See Note 13 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
F-11
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
deferred income tax assets and liabilities of a change in tax rates
is recognized in income in the period that involves the deferred tax
assets and liabilities in the amount expected to be realized.
Valuation allowances are established when necessary to reduce the
deferred tax assets and liabilities in the amount expected to be
realized. The deferred income tax provision or benefit generally
reflects the net change in deferred income tax assets and
liabilities during the year. The current income tax 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. 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
2004, 2003 and 2002 would have been the pro forma amounts indicated
below (in thousands, except per share amounts):
2004 2003 2002
-------- -------- ----------
Net earnings as reported $ 7,171 $ 5,206 $ (10,963)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects 1,047 74 244
Pro forma net earnings $ 6,124 $ 5,132 $ (11,207)
Earnings (loss) per share:
As reported - Basic $ 0.99 $ 0.75 $ (1.60)
As reported - Diluted 0.98 0.75 (1.60)
Pro forma (Basic and Diluted) $ 0.84 $ 0.74 $ (1.64)
-------- -------- ----------
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 2004: dividend yield
of 0%; expected volatility of 57.18%; risk free interest rate of
4.47%; and expected life of 9.5 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.
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
F-12
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
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, 2004, June 30, 2003 and June 30,
2002 the Company had outstanding stock options of 59,448, 9,241, and
0, 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 fiscal 2002 amounts have been reclassified
to comform with the fiscal 2004 and 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 14 for
further discussion.
F-13
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
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 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.
On May 25, 2004, and effective as of January 1, 2004, the Company's wholly owned
subsidiary, United American of Tennessee, Inc. ("UA-TN"), which already owned
75% of the outstanding stock of OmniCare-TN, purchased the remaining 25% of the
outstanding common stock of OmniCare-TN. OmniCare-TN thereby became a wholly
owned subsidiary of UA-TN and a wholly owned second-tier subsidiary of the
Company. The 25% minority interest was purchased under a longstanding option
agreement for $0.5 evidenced by a Company promissory note payable by December
31, 2004. 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 $0.5 million has been recorded as goodwill.
F-14
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
NOTE 4 - MARKETABLE SECURITIES
A summary of estimated fair value, which approximates amortized cost, of
marketable securities as of June 30, 2004 and 2003 is as follows (in thousands):
2004 2003
-------- --------
Available for sale - Current:
Certificates of deposit $ 1,000 $ 1,000
Equity and other securities - -
-------- --------
1,000 1,000
Available for sale - Noncurrent:
U.S. government obligations 2,331 2,160
-------- --------
$ 3,331 $ 3,160
======== ========
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
$2.3 million and $2.2 million at June 30, 2004 and 2003, respectively.
NOTE 5 - CONCENTRATION OF RISK
During the years ended June 30, 2004, 2003 and 2002, approximately 100%, 87% and
91%, 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 13, 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. There are no withholdings by TennCare under the current
administrative services only arrangement for the years ended June 30, 2004 and
2003.
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% and 20% for the years ended June 30, 2003 and 2002,
respectively. See Note 10 for further discussion of the OmniCare-MI management
agreement.
F-15
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at each June 30 consists of the following (in thousands):
2004 2003
-------- --------
Furniture and fixtures $ 878 $ 863
Equipment 2,665 2,636
Computer software 202 177
-------- --------
3,745 3,676
Less accumulated depreciation and amortization 3,422 3,198
-------- --------
$ 323 $ 478
======== ========
See Note 14 for discussion on assets held for sale.
NOTE 7 - LONG TERM DEBT
The Company currently has a $0.6 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 (4.0% at June 30,
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 at each June 30 is as follows
(in thousands):
2004 2003
-------- --------
Term loan $ 597 $ 1,766
Promissory note 250 -
-------- --------
Total debt 847 1,766
Less debt payable within one year 847 1,108
-------- --------
Long-term debt, less current portion $ - $ 658
======== ========
NOTE 8 - MEDICAL CLAIMS PAYABLE
The Company has recorded a liability of $0.4 million, $0.6 million, and $24.5
million at June 30, 2004, 2003, and 2002 respectively, for unpaid claims and
medical claims incurred by enrollees. The ultimate settlement of medical claims
may vary from the estimated amounts reported at June 30, 2004, 2003 and 2002.
The following table provides a reconciliation of the unpaid claims for the years
ended June 30, 2004, 2003 and 2002 (in thousands):
F-16
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
2004 2003 2002
-------- -------- --------
Balance at beginning of fiscal year $ 591 $ 24,495 $ 19,815
Incurred losses related to current year - - 157,953
Incurred loss related to prior year 532 434 -
Reserve reversal related to prior year - - (2,861)
-------- -------- --------
Total losses incurred 532 434 155,092
Paid claims related to current year - - 132,734
Paid claims related to prior year 717 24,338 17,678
-------- -------- --------
Total paid claims 717 24,338 150,412
-------- -------- --------
Balance at end of fiscal year $ 406 $ 591 $ 24,495
======== ======== ========
F-17
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
NOTE 9 - INCOME TAXES
The components of income tax expense (benefit) for each year ended June 30 are
as follows (in thousands):
2004 2003 2002
-------- -------- --------
Continuing operations:
Current expense $ 275 $ 127 $ 262
Deferred expense (credit) 408 1,592 (2,991)
Change in valuation allowance (1,778) (1,072) 3,547
-------- -------- --------
$ (1,095) $ 647 $ 818
======== ======== ========
A reconciliation of the provision for income taxes for each year ended June 30
follows (in thousands):
2004 2003 2002
-------- -------- --------
Income tax expense (benefit) at the statutory
tax rate $ 2,073 $ 1,990 $ (3,449)
State and city income tax 313 177 299
Utilization of AMT credit - - -
Tax-exempt interest on municipal bonds - - (13)
Utilization of NOL carryforward (1,462) - -
Valuation allowance (1,778) (1,072) 3,547
Other, net (241) (448) 434
-------- -------- --------
$ (1,095) $ 647 $ 818
======== ======== ========
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, 2004. 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.
F-18
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
As of June 30, 2004, 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):
2004 2003
-------- --------
Deferred tax assets
Accrued rent $ 150 $ 297
Bad debt expense 1,360 1,360
Deferred compensation 149 135
Net operating loss carryforward of consolidated losses 4,863 5,381
Net operating loss carryforward of purchased subsidiary 598 1,563
Alternative minimum tax credit carryforward 392 403
Property and equipment 2,247 1,018
Unrealized loss on marketable securities (11)
-------- --------
Total gross deferred tax assets 9,748 10,157
Valuation allowance (7,809) (9,587)
-------- --------
Total gross deferred tax liabilities - -
-------- --------
Net deferred tax asset $ 1,939 $ 570
======== ========
NOTE 10 - 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 and $0.6 million for the years ended
June 30, 2003 and 2002 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 cost the Company
F-19
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
approximately $40,000 per month. While OmniCare-MI has been regularly paying
monthly rent under such de facto sublease with the Company, based on preliminary
discussions management now expects that OmniCare-MI's occupancy of the subleased
premises will diminish at some unknown future date and then cease at some
unknown later date, but sooner than the primary lease end in May 2005. Those
events would increase the Company's rent expense under that lease, but
management cannot currently predict the timing and amount thereof.
NOTE 11 - 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 $65,862, $45,653 and $94,000 for the years ended June
30, 2004, 2003 and 2002, 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, 2004 and 2003 were
$7,812 and $527, respectively.
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
November 14, 2003 the Company's shareholders approved an increase in the number
of common shares reserved for issuance pursuant to the exercise of options
granted under the amended plan from 500,000 to 1,000,000 shares, and extended
the termination date of the plan by 5 years to August 6, 2013. On September 9,
1998, December 15, 1998, February 3, 1999, November 10, 1999, May 3, 2001
November 30, 2001, May 8, 2003, December 4, 2003, and April 29, 2004
nonqualified options for a total of 325,000, 26,000, 5,000, 8,000, 50,000,
75,000, 25,000, 196,500 and 280,000 common shares, respectively, were granted
under the amended and restated 1998 Plan. The exercise prices of the options
range from $0.63 to $5.28.
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 (outside the 1998 Plan) 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.
F-20
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
Information regarding the stock options for fiscal 2004, 2003 and 2002 follows
(shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED AVERAGE NUMBER OF WEIGHTED
AVERAGE REMAINING SHARES AVERAGE
SHARES EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
------ -------------- ---------------- ----------- --------------
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
Granted 477 3.37 9.6 years 120 2.09
Exercisable - - - 32 1.48
Exercised (143) 1.56 - (143) -
Expired - - - - -
Forfeited (5) 1.72 - - -
------ -------------- ---------------- ----------- --------------
Options
outstanding at
June 30, 2004 780 $ 2.94 8.0 years 304 $ 2.65
------ -------------- ---------------- ----------- --------------
Options for 38,500 common shares were available for grant under the amended and
restated 1998 Plan at the end of fiscal 2004.
NOTE 12 - LEASES
The Company leases its facilities and certain furniture and equipment under
operating leases expiring at various dates through February 2006. 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, 2004, 2003 and 2002 totaled $0.6
million, $1.9 million and $1.7 million, respectively. Based on the current
commitments, the Company estimates rent expense of $0.6 million for fiscal years
2005 and 2006.
F-21
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
The Company's de facto 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, has cost the Company approximately
$40,000 per month through the remainder of the lease. The Company recognized a
charge 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 is included in discontinued operations. While OmniCare-MI
has been regularly paying monthly rent under such de facto sublease with the
Company, based on preliminary discussions management now expects that
OmniCare-MI's occupancy of the subleased premises will diminish at some unknown
future date and then cease at some unknown later date, but sooner than the
primary lease end in May 2005. Those events would increase the Company's rent
expense under that lease, but management cannot currently predict the timing and
amount thereof.
NOTE 13 - 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 were generally compensated for administrative services
only (commonly called "ASO"), earned fixed administrative fees, were not at risk
for medical costs in excess of targets established based on various factors,
were subject to increased oversight, and could incur financial penalties for not
achieving certain performance requirements. Through an amendment completed on
December 19, 2003, TennCare extended the ASO reimbursement system applicable to
OmniCare-TN through June 30, 2004. A subsequent amendment completed on June 25,
2004, further extended the ASO reimbursement system applicable to OmniCare-TN
through December 31, 2004. There has been no specific indication yet of what
TennCare reimbursement system will apply after that date to OmniCare-TN.
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 has been 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
F-22
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
accounting principles, the $7.5 million receivable was not recorded in fiscal
2002 financial statements but was 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.
For the year ended June 30, 2004, an additional $0.5 million of such medical
claims were processed, and the same amount was recognized as revenue by
OmniCare-TN pursuant to the State's TennCare amendment and further agreement
discussed above in this Note 13.
NOTE 14 - 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. 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, 2003.
Management expected to complete the signing of the sublease and the sale of
assets by the third quarter of fiscal 2004; however, due to the subsequent sale
of OmniCare-MI members to Coventry of Michigan approved on May 10, 2004 and
effective October 1, 2004, management now does not expect to complete the sale
of assets and has recorded a loss from discontinued operations of $0.7 million
in the fourth quarter of fiscal year 2004. While OmniCare-MI has been regularly
paying monthly rent under such de facto sublease with the Company, based on
preliminary discussions management now expects that OmniCare-MI's occupancy of
the subleased premises will diminish at some unknown future date and then cease
at some unknown later date, but sooner than the primary lease end in May 2005.
Those events would increase the Company's rent expense under that lease, but
management cannot currently predict the timing and amount thereof.
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 expected sale of assets described above; (ii)
the above-described sublease, with an expected cost to the Company of
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 was doubtful. The recorded charges
discussed above were offset by management fees from OmniCare-MI of $0.8 million.
F-23
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
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:
2004 2003 2002
---- ---- ----
Management fees $ - $ 3,395 $ 14,941
-------- -------- --------
Loss from discontinued operations net of zero income taxes $ (700) $ (2,127) $ (1,704)
======== ======== ========
F-24
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
NOTE 15 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The following table presents selected quarterly financial data for the years
ended June 30, 2004 and 2003 (in thousands, except per share data):
THREE MONTHS ENDED
-------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, TOTAL
--------- -------- --------- -------- -----
2004
Total revenues $ 5,728 5,479 5,547 5,330 22,084
Net earnings 912 1,329 1,397 3,533 7,171
Net earnings per common
share assuming dilution $ 0.13 0.19 0.19 0.48 0.98
2003
Total revenues $ 7,114 8,042 4,717 4,657 24,530
Net earnings 2,402 1,448 528 828 5,206
Net earnings per common
share assuming dilution $ 0.34 0.21 0.08 0.12 0.75
F-25
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
NOTE 16 - SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations is as
follows (in thousands):
HMOs &
MANAGEMENT MANAGED PLANS CORPORATE & CONSOLIDATED
COMPANIES (1) (2) ELIMINATIONS COMPANY
------------- --- ------------ -------
2004
Revenues - external customers $ - $ 20,923 $ - $ 20,923
Revenues - intersegment 18,352 - (18,352) -
Interest and other income 163 998 - 1,161
---------- ---------- ----------- ----------
Total revenues $ 18,515 $ 21,921 $ (18,352) $ 22,084
========== ========== =========== ==========
Interest expense $ 66 $ - $ - $ 66
Earnings from continuing operations 4,967 2,904 - 7,871
Loss from discontinued operations (700) - - (700)
Segment assets 44,633 12,175 (36,727) 20,081
Purchase of equipment 72 - - 72
Depreciation and amortization 227 - - 227
========== ========== =========== ==========
2003
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
operations (2,211) 9,544 - 7,333
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 (loss) (13) 2,095 - 2,082
---------- ---------- ----------- ----------
Total revenues $ 16,178 $ 165,189 $ (16,191) $ 165,176
========== ========== =========== ==========
Interest expense $ 216 $ - $ - $ 216
Earnings (loss) from continuing
operations 639 (9,898) - (9,259)
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
========== ========== =========== ==========
(1) Management Companies: United American Healthcare Corporation, United
American of Tennessee, Inc.
(2) HMOs and Managed Plans: OmniCare Health Plan of Tennessee (2004, 2003,
2002) and County Care (through September 30, 2001).
F-26
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
NOTE 17 - RECENTLY ENACTED PRONOUNCEMENTS
The following are new accounting standards and interpretations that may be
applicable in the future to the Company:
SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging
Activities" amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. The Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The adoption of this standard had no effect on the Corporation's
financial condition or results of operations.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" was revised in December 2003. The revisions to SFAS132 are intended to
improve financial statement disclosures for defined benefit plans by requiring
more detail about plan assets, benefit obligations, cash flows, benefit costs
and other relevant quantitative and qualitative information. The revisions are
effective for fiscal years after December 15, 2003. The adoption of this
standard had no effect on the Corporation's financial condition or results of
operations.
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition", was issued by
the Securities and Exchange Commission ("SEC") in December 2003. SAB No. 104
revises and rescinds certain sections of SAB No. 101 in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. Accordingly there is no impact
the Corporation's financial condition or results of operations as a result of
the issuance of SAB No. 104.
FIN 46R, a revision to FIN 46, "Consolidation of Variable Interest Entities",
was issued in December 2003. FIN 46R clarifies some of the provisions of FIN 46
and exempts certain entities from its requirements. FIN 46R is effective at the
end of the first interim period ending after March 15, 2004. Entities that have
adopted FIN 46 prior to this effective date can continue to apply the provisions
of FIN 46 until the effective date of FIN 46R. The adoption of FIN 46R had no
effect on the Corporation's financial condition or results of operations.
F-27
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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 Registr'nt's 1995 Form
to Management Agreement between 10-K
United American Healthcare
Corporation and Personal Physician
Care, Inc. dated March 18, 1987
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
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 Registr'nt'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 Registrant dated July 24, 1991
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
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 occupancy
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
10.17 Lease Agreement between Exhibit 10.19 to Registrant's 1995 Form
International Business Machines 10-K
Corporation and Registrant dated
August 29, 1994
10.18 Amended and Restated Line of Credit Exhibit 10.20 to Registrant's 1995 Form
Facility Agreement between Michigan 10-K
National Bank and Registrant dated
March 14, 1995
10.19 Promissory notes between Michigan Exhibit 10.9 to the Registrant's 1993 Form
National Bank and Registrant dated 10-K
August 26, 1993
10.20 Asset Purchase Agreement between Form 8-K filed May 24, 1993 and Form 8-K/A
CHF, Inc., Healthcare Plan filed July 21, 1993
Management, Inc., CHF-HPM Limited
Partnership, Louis J. Nicholas and
Keith B. Sullivan and Registrant
dated May 7, 1993
10.21 Loan and Security Agreement between Exhibit 10.18 to Registrant's 1994 Form
UltraMedix Health Care Systems, 10-K
Inc. and United American of Florida
dated February 1, 1994
10.22 Amendment dated June 13, 1995 to Exhibit 10.26 to Registrant's 1995 Form
the Loan and Security Agreement 10-K
between UltraMedix Care Systems,
Inc. and United American of
Florida, Inc. dated February 1, 1994
10.23 Form of Stock Transfer Services Exhibit 10.19 to Registrant's 1994 Form
Agreement between Huntington 10-K
National Bank and Registrant
10.24 Employment Agreement between Julius Exhibit 10.15 to 1991 S-1
V. Combs, M.D. and Registrant dated
March 15, 1991
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
10.25 Employment Agreement between Ronald Exhibit 10.16 to 1991 S-1
R. Dobbins and Registrant dated
March 15, 1991
10.26 Employment Agreement between Louis Exhibit 10.22 to Registrant's 1994 Form
J. Nicholas and Corporate 10-K
Healthcare Financing, Inc. dated
May 7, 1993
10.27 First Amendment to Contingent Note Form 10-Q for the Quarter Ended March 31,
Promissory Note between CHF-HPM 1996, filed May 14, 1996
Limited Partnership and the
Registrant
10.28 Acquisition of majority interest in Form 8-K filed April 19, 1996
OmniCare Health Plan, Inc. of
Tennessee and UltraMedix Healthcare
Systems, Inc.
10.29 Injured Workers' Insurance Fund Form 10-K/A filed October 14, 1996, as
Contract No. IWIF 9-96 Managed Care amended
Contract with Statutory Benefits
Management Corporation dated June
19, 1996
10.30 Ernst & Young LLP Report of Exhibit 10.30 to Registrant's 1998 Form
Independent Auditors as of June 30, 10-K
1996
10.31 Renaissance Center Office Lease Form 10-Q for the Quarter Ended September
between Renaissance Center Venture 30, 1996, filed November 13, 1996
and Registrant
10.32 Purchase Agreement between Form 10-Q for the Quarter Ended December
Statutory Benefits Management 31, 1996, filed February 10, 1997
Corporation and Spectera, Inc.
10.33 Agreement of Purchase and Sale of Form 10-K filed October 14, 1997
Stock, between CHF Acquisition,
Inc. and the Registrant dated
September 12, 1997
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
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
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
10.40 Termination of Lease between Exhibit 10.40 to Registrant's 1998
Renaissance Holdings, Inc. Form 10-K
(successor to Renaissance Center
Venture) and Registrant dated June
24, 1998
10.41 United American Healthcare Exhibit 10.41 to Registrant's 1998
Corporation 1998 Stock Option Plan Form 10-K
10.42 Stock Purchase Agreement among Exhibit 10.42 to Registrant's 1998
Registrant, CHFA, Inc. and Form 10-K
Corporate Healthcare Financing,
Inc. dated August 31, 1998
10.43 Secured Promissory Note from CHFA, Exhibit 10.43 to Registrant's 1998
Inc. to Registrant dated August 31, Form 10-K
1998
10.44 Unsecured Promissory Note from Exhibit 10.44 to Registrant's 1998
CHFA, Inc. to Registrant dated Form 10-K
August 31, 1998
10.45 Guaranty Agreement of Louis J. Exhibit 10.45 to Registrant's 1998
Nicholas dated August 31, 1998 Form 10-K
10.46 Pledge Agreement between CHFA, Inc. Exhibit 10.46 to Registrant's 1998
and Registrant dated August 31, 1998 Form 10-K
10.47 Amendment of Business Loan Exhibit 10.47 to Registrant's 1998
Agreement between Registrant and Form 10-K
Michigan National Bank dated
September 1, 1998
10.48 Promissory Note of Registrant to Exhibit 10.48 to Registrant's 1998
Michigan National Bank dated Form 10-K
September 1, 1998
10.49 Pledge Agreement from Registrant to Exhibit 10.49 to Registrant's 1998
Michigan National Bank dated Form 10-K
September 1, 1998
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
10.50 Promissory Note from Registrant to Form 10-Q for the Quarter Ended December
UAH Securities Litigation Fund 31, 1998, filed February 16, 1999
dated December 11, 1998
10.51 Amendment of Promissory Note and Exhibit 10.51 to Registrant's 1999
Business Loan Agreement from Form 10-K
Michigan National Bank dated May 6,
1999
10.52 Provider Contract between Urban Exhibit 10.52 to Registrant's 1999
Hospital Care Plus and Registrant Form 10-K
dated April 1, 1999
10.53 Assignment and Assumption of Exhibit 10.53 to Registrant's 1999
Subleases and Security Deposits Form 10-K
between International Business
Machines Corporation and Registrant
dated September 9, 1999
10.54 Business Loan Agreement between Exhibit 10.54 to Registrant's 2001
Registrant and Michigan National Form 10-K
Bank dated September 25, 2000
10.55 Promissory Note of Registrant to Exhibit 10.55 to Registrant's 2001
Michigan National Bank dated Form 10-K
September 25, 2000
10.56 Security Agreement between Exhibit 10.56 to Registrant's 2001
Registrant and Michigan National 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 November 29, 2001 and
effective September 30, 2001.
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------ ----------------------- ------------ --------
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
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.
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
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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 6, 2000 Form 8-K filed January 14, 2000