================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 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[ ]
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF OCTOBER 25,
2004 AS 7,442,557.
================================================================================
As filed with the Securities and Exchange Commission on October 28, 2004
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I.
Item 1. Unaudited Condensed Consolidated Financial Statements-
Condensed Consolidated Balance Sheets - September 30, 2004
and June 30, 2004............................................................. 1
Condensed Consolidated Statements of Operations - Three months
Ended September 30, 2004 and 2003............................................. 2
Condensed Consolidated Statements of Cash Flows - Three months
Ended September 30, 2004 and 2003............................................. 3
Notes to the Unaudited Condensed Consolidated Financial Statements.............. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................................. 15
Item 4. Controls and Procedures......................................................... 15
PART II.
Item 1. Legal Proceedings............................................................... 16
Item 5. Other Information............................................................... 16
Item 6. Exhibits........................................................................ 17
SIGNATURES.......................................................................................... 18
1
PART I.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
2004 JUNE 30,
(Unaudited) 2004
------------ --------
ASSETS
Current assets
Cash and cash equivalents $ 5,598 $ 7,767
Marketable securities 3,605 1,000
Accounts receivable - State of Tennessee 1,218 1,230
Other receivables 1,634 1,206
Prepaid expenses and other 126 147
Deferred income taxes 2,097 1,939
------- -------
Total current assets 14,278 13,289
Assets held for sale - 100
Property and equipment, net 269 323
Goodwill 3,452 3,452
Marketable securities 2,358 2,331
Other assets 586 586
------- -------
Total assets $20,943 $20,081
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 125 $ 847
Medical claims payable 341 406
Accounts payable and accrued expenses 746 1,140
Accrued compensation and related benefits 511 582
Accrued rent 1,223 837
Other current liabilities 1,535 1,384
------- -------
Total current liabilities 4,481 5,196
------- -------
Total liabilities 4,481 5,196
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued - -
Common stock, no par, 15,000,000 shares authorized; 7,442,557 and
7,418,519 issued and outstanding at September 30, 2004 and June 30,
2004, respectively 12,314 12,226
Retained earnings 4,168 2,702
Accumulated other comprehensive gain, net of income taxes (20) (43)
------- -------
Total shareholders' equity 16,462 14,885
======= =======
$20,943 $20,081
======= =======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
2
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
--------- --------
REVENUES
Fixed administrative fees $ 5,128 $ 5,074
Medical premiums 19 369
Interest and other income 261 285
--------- --------
Total revenues 5,408 5,728
EXPENSES
Medical services 19 369
Marketing, general and administrative 3,737 3,915
Depreciation and amortization 49 63
Interest expense 8 20
--------- --------
Total expenses 3,813 4,367
--------- --------
Earnings from continuing operations before income taxes 1,595 1,361
Income tax expense - 449
--------- --------
EARNINGS FROM CONTINUING OPERATIONS 1,595 912
DISCONTINUED OPERATIONS
Loss from discontinued operations (129) -
--------- --------
NET EARNINGS $ 1,466 $ 912
========= ========
NET EARNINGS PER COMMON SHARE - BASIC
Earnings from continuing operations $ 0.22 $ 0.13
Discontinued operations (0.02) 0.00
--------- --------
Net earnings per common share $ 0.20 $ 0.13
========= ========
Weighted average shares outstanding 7,391 6,939
========= ========
NET EARNINGS PER COMMON SHARE - DILUTED
Earnings from continuing operations $ 0.21 $ 0.13
Discontinued operations (0.02) 0.00
--------- --------
Net earnings per common share $ 0.19 $ 0.13
========= ========
Weighted average shares outstanding 7,443 6,953
========= ========
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 1,466 $ 912
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Realized loss on investment 23
Depreciation and amortization 49 63
Deferred income taxes (158) 239
Stock awards (183) 165
Net changes in operating assets and liabilities (388) 535
------- -------
Net cash provided by operating activities 809 1,914
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (2,632) (45)
Purchase of property and equipment - (35)
Proceeds from the sale of property and equipment 105 -
------- -------
Net cash used in investing activities (2,527) (80)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made on long-term debt (722) (287)
Issuance of common stock 271 27
------- -------
Net cash used in financing activities (451) (260)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS (2,169) 1,574
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,767 3,693
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,598 $ 5,267
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 8 $ 14
======= =======
Income taxes paid 58 0
======= =======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2004 AND 2003
NOTE 1 - BASIS OF PREPARATION
The accompanying condensed consolidated financial statements include the
accounts of United American Healthcare Corporation and its wholly and
majority-owned subsidiaries, together referred to as the "Company". All
significant intercompany transactions and balances have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP) and with the instructions for
Form 10-Q and Rule 10-01 of Regulation S-X as they apply to interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the financial
position and results of operations have been included. The results of operations
for the three-month period ended September 30, 2004 are not necessarily
indicative of the results of operations for the full fiscal year ended June 30,
2005. The accompanying condensed consolidated financial statements should be
read in conjunction with the notes to the financial statements contained in the
most recent annual report on Form 10-K.
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are summarized as
follows (in thousands):
Three months ended
September 30,
------------------
2004 2003
------- -----
Net earnings $ 1,466 $ 912
Unrealized holding gains (losses), net of deferred federal income taxes 23
------- -----
Comprehensive income $ 1,489 $ 912
------- -----
The components of accumulated other comprehensive income, included in
shareholders' equity at September 30, 2004 and June 30, 2004, include net
unrealized holding gains and losses, net of deferred federal income taxes.
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2004 AND 2003
NOTE 3 - LONG-TERM DEBT
The Company retired its term loan with Standard Federal Bank, N.A. on September
23, 2004.
The Company's remaining debt is as follows (in thousands):
SEPTEMBER 30, JUNE 30,
2004 2004
------------- --------
Term loan $ - $ 597
Promissory note 125 250
------ -----
Total debt 125 847
Less debt payable within one year 125 847
------ -----
Long-term debt, less current portion $ - $ -
====== =====
NOTE 4 - NET EARNINGS PER COMMON SHARE
Basic net earnings per share excluding dilution have been computed by dividing
net earnings by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share are computed using the treasury stock method
for outstanding stock options.
NOTE 5 - EFFECTIVE TAX RATE
The Company's effective tax rate for the three months ended September 30, 2004
is 0% and differs from the statutory rate of 34%. This difference is the result
of the utilization of net operating loss carryforwards.
NOTE 6 - CONTRACTUAL RISK AGREEMENT
Beginning July 1, 2002, TennCare, a State of Tennessee program that provides
medical benefits to Medicaid and working uninsured recipients, implemented an
18-month stabilization program which entailed changes to TennCare's contracts
with managed care organizations (" MCOs"), including the Company's subsidiary,
Omnicare Health Plan, Inc. in Tennessee ("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
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2004 AND 2003
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 above-described December 19, 2003 contractual amendment also extended the
term of OmniCare-TN's TennCare contract to December 31, 2004, with provisions
for automatic one-year renewals thereafter in certain circumstances.
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, the State of Tennessee agreed to pay OmniCare-TN up to $7.5 million
as necessary to meet its statutory net worth requirement as of June 30, 2002.
Pursuant to a further agreement with OmniCare-TN in October 2002, the State of
Tennessee agreed to pay additional funds to OmniCare-TN if future certified
actuarial data confirm they are needed by OmniCare-TN to meet its statutory net
worth requirement as of June 30, 2002.
OmniCare-TN received a permitted practice letter from the State of Tennessee to
include such $7.5 million receivable in its statutory net worth at June 30,
2002. Under generally accepted accounting principles, the $7.5 million
receivable and additional funds were not recorded in fiscal 2002 financial
statements but have been recorded as fiscal 2002 claims are processed. For the
three months ended September 30, 2004, an additional $0.02 million of such
medical claims were processed, and the same amount was recognized as revenue by
Omnicare-TN.
NOTE 7 - GOODWILL
Goodwill resulting from business acquisitions is carried at cost. Effective July
1, 2001, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
eliminates the amortization of 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, there was no goodwill impairment
recorded for the three months ended September 30, 2004 and 2003.
NOTE 8 - DISCONTINUED OPERATIONS
The Company's longstanding management agreement with OmniCare Health Plan in
Michigan ("OmniCare-MI") ended effective November 1, 2002. Because of its
resulting workforce reduction, the Company made plans to sublease all of its
then principal office
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2004 AND 2003
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 has occupied the premises and made its monthly
sublease rental payments continuously through September 30, 2004. Company
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. The Company has
recorded a contingent liability for the three months ended September 30, 2004 as
it relates to the sublease obligation.
Summarized selected financial information for the discontinued operations is as
follows (in thousands):
Three months ended
September 30,
------------------------
2004 2003
---------- ---------
Loss from discontinued operations net of zero income taxes $ (129) $ -
---------- ---------
NOTE 9 - STOCK OPTION PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes a method of
accounting for stock-based compensation that recognizes compensation cost based
on the fair value of options at grant date. In lieu of applying this fair value
based method, a company may elect to disclose only the pro forma effects of such
application. The Company has adopted the disclosure-only provisions of SFAS No.
123. In December 2002, SFAS No. 148, "Stock-Based Compensation," was issued,
which requires that the Company illustrate the effect on net income and earnings
per share if it had applied the fair value principles included in SFAS No. 123
for both annual and interim financial statements. Accordingly, if the Company
had elected to recognize compensation cost based on the fair value of the
options at grant date, the Company's earnings and earnings per share from
continuing operations, assuming dilution, for the three-month periods ended
September 30, 2004 and 2003 would have been the pro forma amounts indicated
below (in thousands, except per share amounts):
8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2004 AND 2003
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
2004 2003
-------- -------
Net earnings:
As reported $ 1,466 $ 912
Pro forma $ 1,466 $ 912
Net earnings per share:
As reported:
Basic $ 0.20 $ 0.13
Diluted 0.19 0.13
-------- -------
Pro forma:
Basic $ 0.20 $ 0.13
Diluted 0.19 0.13
-------- -------
9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2004 AND 2003
NOTE 10 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the three-month periods ended September 30, 2004 and 2003, is as follows
(in thousands):
MANAGEMENT HMOs & CORPORATE & CONSOLIDATED
COMPANIES (1) MANAGED PLANS (2) ELIMINATIONS COMPANY
------------- ----------------- ------------ -------
THREE MONTHS ENDED
SEPTEMBER 30, 2004
Revenues - external customers $ - $ 5,147 $ - $ 5,147
Revenues - intersegment 4,615 - (4,615) -
Interest and other income 75 186 - 261
-------- ------- -------- --------
Total revenues $ 4,690 $ 5,333 $ (4,615) $ 5,408
======== ======= ======== ========
Interest expense $ 8 $ - $ - $ 8
Earnings from continuing operations 1,174 421 - 1,595
Loss from discontinued operations (129) - - (129)
Segment assets 48,558 12,652 (40,267) 20,943
Purchase of equipment - - - -
Depreciation and amortization 49 - - 49
-------- ------- -------- --------
THREE MONTHS ENDED
SEPTEMBER 30, 2003
Revenues - external customers $ - $ 5,443 $ - $ 5,443
Revenues - intersegment 4,567 - (4,567) -
Interest and other income 40 245 - 285
-------- ------- -------- --------
Total revenues $ 4,607 $ 5,688 $ (4,567) $ 5,728
======== ======= ======== ========
Interest expense $ 20 $ - $ - $ 20
Earnings from continuing operations 492 420 - 912
Loss from discontinued operations - - - -
Segment assets 33,573 10,542 (28,131) 15,984
Purchase of equipment 35 - - 35
Depreciation and amortization 63 - - 63
-------- ------- -------- --------
(1) Management Companies: United American Healthcare Corporation and United
American of Tennessee, Inc.
(2) HMOs and Managed Plans: OmniCare Health Plan, Inc. of Tennessee.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
This Financial Review discusses the Company's results of operations, financial
position and liquidity. This discussion should be read in conjunction with the
consolidated financial statements and related notes thereto contained elsewhere
in this quarterly report.
The Company provides comprehensive management and consulting services to managed
care organizations, including health maintenance organizations ("HMOs") in
Tennessee and (until November 1, 2002) Michigan, with a targeted mix of Medicaid
and commercial enrollment. OmniCare Health Plan, in Michigan ("OmniCare-MI"), an
HMO then administered by the Company under a management agreement, was placed in
court-ordered rehabilitation proceedings on July 31, 2001, which relieved the
Company from further funding OmniCare-MI's capital deficiencies and which
continued its OmniCare-MI management agreement, with substantially reduced
management fee revenues from OmniCare-MI beginning August 1, 2001. In March
2002, upon the court-appointed Rehabilitator's filing a proposed rehabilitation
plan for OmniCare-MI, the Company announced it anticipated eventual termination
of the management agreement. Such termination occurred November 1, 2002, after
which the Company's only managed plan has been OmniCare Health Plan, Inc., in
Tennessee ("OmniCare-TN"), an HMO owned by the Company's wholly owned
subsidiary. As of September 30, 2004 there were approximately 130,000 enrollees
in OmniCare-TN.
Total revenues decreased $0.3 million (6%) to $5.4 million for the quarter ended
September 30, 2004, compared to $5.7 million for the quarter ended September 30,
2003, principally due to an to OmniCare-TN's contract with the State of
Tennessee, doing business as TennCare, amendment in September 2002, retroactive
to July 1, 2001 in some respects and to May 1, 2002 in other respects. In this
amendment, TennCare, a State of Tennessee program that provides medical benefits
to Medicaid and working uninsured and uninsurable recipients, agreed to pay
OmniCare-TN up to $7.5 million and additional funds as necessary to meet its
statutory net worth requirement as of June 30, 2002. OmniCare-TN received a
permitted practice letter from the State of Tennessee to include such $7.5
million receivable in its statutory net worth at June 30, 2002. Under GAAP, such
$7.5 million and additional funds were recorded in its fiscal 2003 and 2004
financial statements as fiscal 2002 claims were processed. For the quarter ended
September 30, 2004, $0.02 million of such medical claims were processed,
compared to $0.4 million for the quarter ended September 30, 2003, and the same
amount was recognized as revenue by Omnicare-TN.
Total expenses decreased $0.6 million (13%) to $3.8 million for the quarter
ended September 30, 2004, compared to $4.4 million for the quarter ended
September 30, 2003, principally due to the amended TennCare contractual risk
agreement for OmniCare-TN discussed above and a decrease in marketing, general
and administrative expenses.
11
Earnings from continuing operations before income taxes were $1.6 million and
$1.4 million for the quarters ended September 30, 2004 and 2003, respectively.
Earnings from continuing operations were $1.6 million, or $0.22 per basic share,
for the quarter ended September 30, 2004, compared to earnings from continuing
operations of $0.9 million, or $0.13 per basic share, for the quarter ended
September 30, 2003. Such increase in earnings from continuing operations of $0.7
million, or $0.09 per basic share, is principally due to a decrease in
marketing, general and administrative expenses and lower effective tax rate for
the period.
The Company recognized a loss of $0.1 million from discontinued operations for
the three months ended September 30, 2004 principally due to a contingent
liability relating to a sublease (further described below) partially offset by
the release of certain liabilities related to a patient care software system no
longer in use by the Company. For the three months ended September 30, 2003,
there was no gain or loss for discontinued operations. The recorded loss was the
result of the termination of the Company's longstanding management agreement
with OmniCare-MI, effective November 1, 2002. Because of its resulting workforce
reduction, the Company made plans to sublease all of its principal office
premises in Detroit, Michigan, to OmniCare-MI, retroactively to November, 1,
2002 and expiring at the lease end in May 2005. 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 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.
Net earnings were $1.4 million, or $0.20 per basic share, for the three months
ended September 30, 2004, compared to net earnings of $0.9 million, or $0.13 per
basic share, for the three months ended September 30, 2003, principally due to a
decrease in marketing, general and administrative expenses and lower effective
tax rate for the period.
12
FOR THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2003
Medical premium revenues were $0.02 million in the three months ended September
30, 2004, a decrease of $0.35 million (95%) from $0.4 million in the three
months ended September 30, 2003. Medical premiums revenues relate to an amended
contractual risk agreement in which TennCare agreed to pay OmniCare-TN up to
$7.5 million and additional funds as necessary to meet its statutory net worth
requirement as of June 30, 2002. Such $7.5 million and additional funds were
recorded in fiscal 2003 and 2004 financial statements as fiscal 2002 claims were
processed. The $0.02 million of medical premium revenues represent fiscal 2002
claims processed and reimbursed by TennCare in the first quarter of fiscal 2005.
Fixed administrative fees related to TennCare's below-described ASO program were
$5.1 million for the quarter ended September 30, 2004, an increase of $0.05
million (1%) from $5.07 million in the three months ended September 30, 2003.
Such fixed administrative fees are attributed to a change in the reimbursement
system of TennCare.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program,
which entailed changes to TennCare's contracts with managed care organization
("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. The
above-described December 19, 2003 contractual amendment also extended the term
of OmniCare-TN's TennCare contract to December 31, 2004, with provisions for
automatic one-year renewals thereafter in certain circumstances.
Medical services expenses were $0.02 million in the three months ended September
30, 2004. The $0.02 million of medical services expenses represent fiscal 2002
claims processed and reimbursed by TennCare in the first quarter of fiscal 2005
as explained in the first paragraph above.
Marketing, general and administrative expenses decreased approximately $0.2
million (5%), to $3.7 million for the three months ended September 30, 2004 from
$3.9 million for the three months ended September 30, 2003. The decrease is
principally due to certain accrued liabilities recorded in the first quarter of
fiscal 2004.
13
Depreciation and amortization expense decreased $0.01 million (22%), to $0.05
million for the three months ended September 30, 2004 from $0.06 million for the
three months ended September 30, 2003.
Interest expense decreased $0.01 million (60%), to $0.01 million for the three
months ended September 30, 2004 from $0.02 million for the three months ended
September 30, 2003, due to debt reduction.
Income tax expense decreased $0.4 million (100%), to $0.0 million for the three
months ended September 30, 2004 from $0.4 million for the three months ended
September 30, 2003. The Company's effective tax rate for the three months ended
September 30, 2004 is 0% and differs from the statutory rate of 34%. This
difference is the result of the utilization of net operating loss carryforwards.
14
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, the Company had (i) cash and cash equivalents and
short-term marketable securities of $9.2 million, compared to $8.8 million at
June 30, 2004; (ii) working capital of $9.8 million, compared to working capital
of $8.1 million at June 30, 2004; and (iii) a current assets-to-current
liabilities ratio of 3.19-to-1, compared to 2.56-to-1 at June 30, 2004. The
principal source of funds for the Company during the three-month period ended
September 30, 2004 was $0.8 million provided from net operating activities. The
principal use of funds for the three month period was $0.7 million for debt
repayment. Cash flow was $(2.1) million for the three months ended September 30,
2004, compared to $1.6 million for the comparable period a year earlier,
principally due to the purchase of short-term marketable securities.
Accounts receivable increased by $0.4 million at September 30, 2004 compared to
June 30, 2004, primarily due to timing of cash receipts from TennCare.
Property, plant and equipment decreased by $0.05 million at September 30, 2004
compared to June 30, 2004, due to recording depreciation of $0.05 million.
Long-term debt decreased $0.7 million at September 30, 2004 compared to June 30,
2004, principally due to the retirement of a term loan with Standard Federal
Bank, N.A. on September 23, 2004.
The Company's ability to generate adequate amounts of cash to meet its future
cash needs depends on a number of factors, particularly including its ability to
control administrative costs, related to the ASO arrangement for the TennCare
program and controlling corporate overhead costs. On the basis of the matters
discussed above, management believes at this time that the Company has the
ability to generate sufficient cash to adequately support its financial
requirements through the next twelve months, and maintain minimum statutory net
worth requirements of OmniCare-TN.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Our management has evaluated, with the participation of our principal executive
and principal financial officers, the effectiveness of our disclosure controls
and procedures as of September 30, 2004, and based on their evaluation, our
principal executive and principal financial officers have concluded that these
controls and procedures are effective as of September 30, 2004. There was no
change in our internal controls over financial reporting identified in
connection with such evaluation that occurred during our fiscal quarter ended
September 30, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file and submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
15
PART II.
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 5. OTHER INFORMATION
(a) On October 25, 2004, a newly formed wholly owned subsidiary of the Company,
Omni Health Care Plan of Georgia, Inc. ("Omni Health"), applied to the State of
Georgia Office of Insurance and Safety Fire Commission, Division of Regulatory
Services for a health maintenance organization ("HMO") license. It is
anticipated that at some future time the Georgia Department of Community Health
("DCH") may assign members of Georgia's Medicaid population to HMOs it will
select pursuant to a Request for Proposals ("RFP") process to be conducted by
DCH. Omni Health expects to respond to the RFP when received, and anticipates
commencing to operate an HMO in Georgia if it receives the license and if DCH
assigns sufficient Medicaid recipients to it to justify such new business
operation. There can be no assurance that each of these anticipated events will
occur or that Omni Health will operate an HMO in Georgia.
(b) CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage management to provide prospective
information about their companies without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statements. Certain
statements contained in this Form 10-Q quarterly report, including, without
limitation, statements containing the words "believes," "anticipates," "will,"
"could," "may," "might" and words of similar import, constitute "forward-looking
statements" within the meaning of this "safe harbor."
Such forward-looking statements are based on management's current expectations
and involve known and unknown risks, uncertainties and other factors, many of
which the Company is unable to predict or control, that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, 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.
16
6. Increased competition between current organizations, the entrance of
new competitors and the introduction of new products by new and
existing competitors.
7. Adverse publicity and media coverage.
8. Inability to carry out marketing and sales plans.
9. Loss or retirement of key executives.
10. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.
11. Adverse regulatory determinations resulting in loss or limitations
of licensure, certification or contracts with governmental payers.
12. Higher sales, administrative or general expenses occasioned by the
need for additional advertising, marketing, administrative or
management information systems expenditures.
13. Increases by regulatory authorities of minimum capital, reserve and
other financial solvency requirements.
14. Denial of accreditation by quality accrediting agencies, e.g., the
National Committee for Quality Assurance (NCQA).
15. Adverse results from significant litigation matters.
16. Inability to obtain satisfactory bank loan credit arrangements, if
needed.
17. Increased costs to comply with the Health Insurance Portability and
Accountability Act of 1996 (HIPAA).
ITEM 6. EXHIBITS
Exhibits
31.1 Certifications of Chief Executive Officer pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: October 28, 2004 By: /s/ William C. Brooks
--------------------------------
William C. Brooks
Chairman, President & Chief Executive
Officer
Dated: October 28, 2004 By: /s/ Stephen D. Harris
---------------------------
Stephen D. Harris
Chief Financial Officer & Treasurer
18
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
31.1 Certifications of Chief Executive Officer pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
19