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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2005
Commission File Number: 000-18839
UNITED AMERICAN HEALTHCARE CORPORATION
(Exact Name of Registrant as Specified in Charter)
MICHIGAN 38-2526913
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
300 RIVER PLACE, SUITE 4950
DETROIT, MICHIGAN 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 393-4571
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF APRIL 25,
2005 AS 7,457,042.
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As filed with the Securities and Exchange Commission on April 28, 2005
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I.
Item 1. Unaudited Condensed Consolidated Financial Statements -
Condensed Consolidated Balance Sheets - March 31, 2005
and June 30, 2004................................................................................. 1
Condensed Consolidated Statements of Operations - Three and Nine Months
Ended March 31, 2005 and 2004..................................................................... 2
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended March 31, 2005 and 2004..................................................................... 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................................................................................. 17
Item 4. Controls and Procedures............................................................................. 17
PART II.
Item 1. Legal Proceedings................................................................................... 18
Item 5. Other Information................................................................................... 18
Item 6. Exhibits............................................................................................ 20
SIGNATURES.......................................................................................................... 21
PART I.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30,
2005 2004
(Unaudited)
---------- --------
ASSETS
Current assets
Cash and cash equivalents $ 8,150 $ 7,767
Marketable securities 3,605 1,000
Accounts receivable - State of Tennessee 1,279 1,230
Other receivables 1,500 1,206
Prepaid expenses and other 159 147
Deferred income taxes 2,050 1,939
------ ------
Total current assets 16,743 13,289
Assets held for sale -- 100
Property and equipment, net 185 323
Goodwill 3,452 3,452
Marketable securities 2,312 2,331
Other assets 586 586
------- -------
Total assets $23,278 $20,081
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ -- $ 847
Medical claims payable 226 406
Accounts payable and accrued expenses 557 1,140
Accrued compensation and related benefits 452 582
Accrued rent 627 837
Other current liabilities 1,387 1,384
------ ------
Total current liabilities 3,249 5,196
------ ------
Total liabilities 3,249 5,196
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par, 15,000,000 shares authorized; 7,457,042 and 12,476 12,226
7,418,519 shares issued and outstanding at March 31, 2005 and June
30, 2004, respectively
Retained earnings 7,612 2,702
Accumulated other comprehensive loss, net of income taxes (59) (43)
------- -------
Total shareholders' equity $20,029 $14,885
======= =======
$23,278 $20,081
======= =======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
1
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ --------------------
2005 2004 2005 2004
------ ------ -------- -------
REVENUES
Fixed administrative fees $5,201 $5,095 $15,582 $15,261
Medical premiums -- 56 22 502
Interest and other income 372 396 776 991
------ ------ -------- -------
Total revenues 5,573 5,547 16,380 16,754
EXPENSES
Medical services -- 56 22 502
Marketing, general and administrative 3,705 3,627 10,863 11,457
Depreciation and amortization 40 56 134 176
Interest expense -- 13 8 51
------ ------ -------- -------
Total expenses 3,745 3,752 11,027 12,186
------ ------ -------- -------
Earnings from continuing operations before income
taxes 1,828 1,795 5,353 4,568
Income tax expense 312 398 312 930
------ ------ -------- -------
EARNINGS FROM CONTINUING OPERATIONS 1,516 1,397 5,041 3,638
DISCONTINUED OPERATIONS
Loss from discontinued operations -- -- (129) --
------ ------ -------- -------
NET EARNINGS $1,516 $1,397 $ 4,912 $ 3,638
====== ====== ======== =======
NET EARNINGS PER COMMON SHARE - BASIC
Earnings from continuing operations $ 0.20 $ 0.19 $ 0.68 $ 0.51
Discontinued operations 0.00 -- (0.02) --
------ ------ -------- -------
Net earnings per common share $ 0.20 $ 0.19 $ 0.66 $ 0.51
====== ====== ======== =======
Weighted average shares outstanding 7,435 7,222 7,412 7,158
====== ====== ======== =======
NET EARNINGS PER COMMON SHARE - DILUTED
Earnings from continuing operations $ 0.20 $ 0.19 $ 0.67 $ 0.50
Discontinued operations 0.00 -- (0.02) --
------ ------ -------- -------
Net earnings per common share $ 0.20 $ 0.19 $ 0.65 $ 0.50
====== ====== ======== =======
Weighted average shares outstanding 7,516 7,290 7,488 7,225
====== ====== ======== =======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
2
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 4,912 $ 3,638
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Realized (loss) gain on investment (16) (7)
Depreciation and amortization 134 176
Accrued rent -- (317)
Deferred income taxes (111) 538
Stock awards 219 378
Net changes in operating assets and liabilities (1,455) 797
------- -------
Net cash provided by operating activities 3,683 5,203
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (2,586) (28)
Purchase of property and equipment -- (57)
Proceeds from the sale of property and equipment 102 --
------- -------
Net cash used in investing activities (2,484) (85)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made on long-term debt (847) (872)
Issuance of common stock 31 72
------- -------
Net cash used in financing activities (816) (800)
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 383 4,318
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,767 3,693
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,150 $ 8,011
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 8 $ 48
======= =======
Income taxes paid 337 --
======= =======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2005 AND 2004
NOTE 1 - BASIS OF PREPARATION
The accompanying condensed consolidated financial statements include the
accounts of United American Healthcare Corporation and its wholly 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 nine-month period ended March 31, 2005 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 Nine months ended
March 31, December 31,
------------------ -------------------
2005 2004 2005 2004
------ ------ ------ ------
Net earnings $1,516 $1,397 $4,912 $3,638
Unrealized holding gains, net of deferred
federal income taxes (31) 19 (16) (7)
------ ------ ------ ------
Comprehensive income $1,485 $1,416 $4,896 $3,631
====== ====== ====== ======
The components of accumulated other comprehensive income, included in
shareholders' equity at March 31, 2005 and June 30, 2004, include net unrealized
holding gains and losses, net of deferred federal income taxes.
4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2005 AND 2004
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):
MARCH 31, 2005 JUNE 30, 2004
-------------- -------------
Term loan $ -- $ 597
Promissory note -- 250
------ -----
Total debt -- 847
Less debt payable within one year -- 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 nine months ended March 31, 2005 and
2004 is 6% and 20%, respectively, which differs from the statutory rate of 34%.
This difference is the result of the utilization of net operating loss
carryforwards for which a valuation allowance had previously been applied.
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,
UAHC Health Plan of Tennessee, Inc. (formerly called Omnicare Health Plan, Inc.)
("UAHC Health Plan"). 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 successive contractual amendments, TennCare extended the
ASO
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2005 AND 2004
reimbursement system applicable to UAHC Health Plan, first through June 30,
2004, December 31, 2004, and then through December 31, 2005.
In September 2002, UAHC Health Plan 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 UAHC Health Plan 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 UAHC Health Plan in October 2002, the
State of Tennessee agreed to pay additional funds to UAHC Health Plan if future
certified actuarial data confirm they are needed by UAHC Health Plan to meet its
statutory net worth requirement as of June 30, 2002.
UAHC Health Plan 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
nine months ended March 31, 2005, an additional $0.02 million of such medical
claims were processed, and the same amount was recognized as revenue by UAHC
Health Plan.
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 March 31, 2005 and 2004.
NOTE 8 - DISCONTINUED OPERATIONS
The Company's longstanding management agreement with OmniCare Health Plan in
Michigan ("OmniCare-MI") ended effective November 1, 2002. Because of its
resulting workforce reduction, the Company made plans to sublease all of its
then principal office premises in Detroit, Michigan, to OmniCare-MI, retroactive
to November 1, 2002, and expiring at the lease end in May 2005, and to sell to
OmniCare-MI furniture, a telephone
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2005 AND 2004
system and certain computer hardware and software that the Company chose to
leave there.
The Company renegotiated sublease terms with Michigan HMO (formerly doing
business as OmniCare Health Plan in Michigan), which continued to occupy and pay
rent for reduced space in such premises. Michigan HMO's occupancy of and rent
obligation for the subleased premises ceased on February 28, 2005, sooner than
the primary lease end in May 2005. The Company recorded a liability in the first
quarter of fiscal year 2005 as it relates to the sublease obligation.
Summarized selected financial information for the discontinued operations is as
follows (in thousands):
Three months ended Nine months ended
March 31, March 31,
---------------------- -----------------------
2005 2004 2005 2004
----- ------- --------- ------
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 and nine-month periods
ended March 31, 2005 and 2004 would have been the pro forma amounts indicated
below (in thousands, except per share amounts):
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2005 AND 2004
Three months ended Nine months ended
March 31, March 31,
------------------ -------------------------
2005 2004 2005 2004
------- ------- -------- -------
Net earnings:
As reported $ 1,516 $ 1,397 $ 4,912 $ 3,638
Pro forma 1,516 1,118 4,324 3,359
Net earnings per share:
As reported:
Basic $ 0.20 $ 0.19 $ 0.66 $ 0.51
Diluted 0.20 0.19 0.66 0.50
------- ------- -------- -------
Pro forma:
Basic $ 0.20 $ 0.15 $ 0.58 $ 0.47
Diluted 0.20 0.15 0.58 0.46
------- ------- -------- -------
8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2005 AND 2004
NOTE 10 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the nine-month periods ended March 31, 2005 and 2004, is as follows (in
thousands):
HMOS &
NINE MONTHS ENDED MANAGEMENT MANAGED CORPORATE & CONSOLIDATED
MARCH 31, 2005 COMPANIES (1) PLANS (2) ELIMINATIONS COMPANY
-------------- ------------- --------- ------------ -------
Revenues - external customers $ -- $15,604 $ -- $ 15,604
Revenues - intersegment 14,024 -- (14,024) --
Interest and other income 302 474 -- 776
-------- ------- -------- --------
Total revenues $ 14,326 $16,078 $(14,024) $ 16,380
======== ======= ======== ========
Interest expense $ 8 $ -- $ -- $ 8
Earnings from continuing operations 559 -- -- 559
Loss from discontinued operations (129) -- -- (129)
Segment assets 54,620 13,573 (44,916) 23,277
Purchase of equipment -- -- -- --
Depreciation and amortization 134 -- -- 134
======== ======= ======== ========
NINE MONTHS ENDED
MARCH 31, 2004
--------------
Revenues - external customers $ -- $15,763 $ -- $ 15,763
Revenues - intersegment 13,735 -- (13,735) --
Interest and other income 159 832 -- 991
-------- ------- -------- --------
Total revenues $ 13,894 $16,595 $(13,735) $ 16,754
======== ======= ======== ========
Interest expense $ 51 $ -- $ -- $ 51
Earnings from continuing operations 2,031 1,607 -- 3,638
Loss from discontinued operations -- -- -- --
Segment assets 39,806 11,795 (33,320) 18,281
Purchase of equipment 57 -- -- 57
Depreciation and amortization 176 -- -- 176
======== ======= ======== ========
(1) Management Companies: United American Healthcare Corporation and United
American of Tennessee, Inc.
(2) HMOs and Managed Plans: UAHC Health Plan, Inc. of Tennessee.
9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 2005 AND 2004
NOTE 11 - RECENTLY ENACTED PRONOUNCEMENTS
SFAS No. 123(R) "Share-Based Payment", which is a replacement to SFAS No. 123
"Accounting for Stock Based Compensation" and supercedes APB Opinion No. 25
"Accounting for Stock Issued to Employees", was issued in December 2004. The
revisions are intended to provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS No. 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No. 123, as originally issued in 1995,
established a preferable fair-value-based method of accounting for share-based
payment transactions with employees. However, that Statement permitted entities
the option of continuing to apply the guidance in APB Opinion No. 25, as long as
the footnotes to financial statements disclosed what net income would have been
had the preferable fair-value-based method been used. Publicly traded entities
(other than those filing as small business issuers) will be required to apply
SFAS No. 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. The Company is currently evaluating the financial statement
impact of the adoption of SFAS No. 123(R).
SFAS No. 151 "Inventory Costs," which amends ARB No. 43 Chapter 4, "Inventory
Pricing," was issued in November 2004. The amendments made by SFAS No. 151
provides clarity relating to abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage), which should be recognized as
current-period charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The adoption of this standard is expected to have no effect
on the Corporation's financial condition or results of operations.
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 UAHC Health Plan of Tennessee,
Inc. (formerly called OmniCare Health Plan, Inc.) ("UAHC Health Plan"), an HMO
owned by the Company's wholly owned subsidiary. As of March 31, 2005 there were
approximately 130,000 enrollees in UAHC Health Plan.
Total revenues were $5.6 million for the quarter ended March 31, 2005, compared
to $5.5 million for the quarter ended March 31, 2004. For the nine months ended
March 31, 2005 total revenues decreased $0.4 million (2%) to $16.4 million
compared to $16.8 million for the nine months ended March 31, 2004, principally
due to UAHC Health Plan's contract with the State of Tennessee, doing business
as TennCare, as amended 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 UAHC Health Plan up
to $7.5 million and additional funds as necessary to meet its statutory net
worth requirement as of June 30, 2002. UAHC Health Plan 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 through fiscal
2005 financial statements as fiscal 2002 claims were processed. For the nine
months ended March 31, 2005, $0.02 million of such medical claims were
processed, compared to $0.5 million for the nine months ended March 31, 2004,
and the same amount was recognized as revenue by UAHC Health Plan.
Total expenses were $3.7 million for the quarter ended March 31, 2005, compared
to $3.8 million for the quarter ended March 31, 2004, and decreased $1.2 million
(10%) to $11.0 million for the nine months ended March 31, 2005 from $12.2
million for the nine months ended March 31, 2004, principally due to the amended
TennCare contractual risk agreement for UAHC Health Plan discussed above and a
decrease in marketing, general and administrative expenses.
11
Earnings from continuing operations before income taxes were $1.8 million and
$1.8 million for the quarters ended March 31, 2005 and 2004, respectively.
Earnings from continuing operations were $1.5 million, or $0.20 per basic share,
for the quarter ended March 31, 2005, compared to earnings from continuing
operations of $1.4 million, or $0.19 per basic share, for the quarter ended
March 31, 2004. Such increase in earnings from continuing operations of $0.1
million, or $0.01 per basic share, is principally due to a lower effective tax
rate for the period.
The Company recognized no gain or loss from discontinued operations for the
three months ended March 31, 2005 and March 31, 2004. For the nine months ended
March 31, 2005 the Company recognized a loss of $0.1 million from discontinued
operations, principally due to a 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 nine
months ended March 31, 2004, 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, the Company renegotiated sublease
terms with Michigan HMO (formerly doing business as OmniCare Health Plan in
Michigan), which continued to occupy and pay rent for reduced space in such
premises through February 28, 2005, sooner than the primary lease end in May
2005. The Company recorded a liability in the first quarter of fiscal year 2005
as it relates to the sublease obligation.
Net earnings were $1.5 million, or $0.20 per basic share, for the three months
ended March 31, 2005, compared to net earnings of $1.4 million, or $0.19 per
basic share, for the three months ended March 31, 2004, an increase of $0.1
million (9%). The Company recognized net earnings of $4.9 million, or $0.66 per
basic share, for the nine months ended March 31, 2005 and net earnings of $3.6
million, or $0.51 per basic share, for the comparable period ended March 31,
2004. Such increase in net earnings is principally due to a decrease in
marketing, general and administrative expenses and a lower effective tax rate
for the period.
12
FOR THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2004
There were no medical premiums revenues recorded in the three months ended March
31, 2005 compared to $0.06 million in the three months ended March 31, 2004.
Medical premiums revenues relate to an amended contractual risk agreement in
which TennCare agreed to pay UAHC Health Plan 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
through fiscal 2005 financial statements as fiscal 2002 claims were processed.
Fixed administrative fees related to TennCare's below-described ASO program were
$5.2 million for the quarter ended March 31, 2005, an increase of $0.1 million
(2%) from $5.1 million in the three months ended March 31, 2004. 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 UAHC Health Plan. 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 successive contractual amendments, TennCare
extended the ASO reimbursement system applicable to UAHC Health Plan, first
through June 30, 2004, and then through December 31, 2004. TennCare has provided
UAHC Health Plan a further written amendment extending through December 31,
2005, the ASO reimbursement system applicable to UAHC Health Plan. However,
based on information our management received from TennCare in late January 2005,
we now expect TennCare will implement a modified risk arrangement with all its
contracted MCOs, including UAHC Health Plan, possibly as soon as July 1, 2005.
We do not yet know the specific terms or effective date of that expected risk
sharing arrangement.
On January 10, 2005, Tennessee Governor Bredesen announced plans to modify the
TennCare program, subject to needed federal approval, due to financial and legal
constraints. He announced plans to drop approximately 323,000 adults who are not
eligible for Medicaid from TennCare coverage statewide, and to impose benefit
limits on the 396,000 adults left in the program who are eligible for Medicaid.
The Governor said his plans would maintain "a reasonable level of benefits" for
those adults and preserve full coverage for the 612,000 children on the program.
As a result, UAHC Health Plan expects to lose only approximately 12,000 of its
present 130,000 members over a 12-month period beginning in mid-2005, being its
only working uninsured and uninsurable adult members.
In addition, in mid-April 2005, a TennCare spokesman confirmed that the State of
Tennessee plans to negotiate contract changes to reduce its TennCare payments to
its eight contracted MCOs (including UAHC Health Plan) by an average of 10%,
effective July 1, 2005. It is not now possible to predict, however, what actual
effect that may have on UAHC Health Plan.
13
There were no medical services expenses recorded in the three months ended March
31, 2005 compared to $0.6 million of medical services expenses recorded for the
three months ended March 31, 2004, which represent fiscal 2002 claims processed
and reimbursed by TennCare in fiscal 2005 as explained in the third paragraph
above.
Marketing, general and administrative expenses increased approximately $0.1
million (2%), to $3.7 million for the three months ended March 31, 2005 from
$3.6 million for the three months ended March 31, 2004. The increase is
principally due to an increase in business development expenses.
Depreciation and amortization expense decreased $0.02 million (29%), to $0.04
million for the three months ended March 31, 2005 from $0.06 million for the
three months ended March 31, 2004.
There was no interest expense for the three months ended March 31, 2005,
compared to interest expense of $0.01 million for the three months ended March
31, 2004, due to the elimination of the Company's outstanding term loan with
Standard Federal Bank N.A.
Income tax expense decreased $0.1 million (22%), to $0.3 million for the three
months ended March 31, 2005 from $0.4 million for the three months ended March
31, 2004. The Company's effective tax rate for the three months ended March 31,
2005 is 17% and differs from the statutory rate of 34%. This difference is the
result of the utilization of net operating loss carryforwards for which a
valuation allowance had previously been applied.
14
FOR NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO
NINE MONTHS ENDED MARCH 31, 2004
Total revenues decreased $0.4 million (2%), to $16.4 million for the nine months
ended March 31, 2005 from $16.8 million for the nine months ended March 31, 2004
principally as the result of a change in the reimbursement system of TennCare,
as discussed above.
Medical premiums revenues were $0.02 million for the nine months ended March 31,
2005, a decrease of $0.5 million (96%) from medical premiums revenues of $0.5
million for the nine months ended March 31, 2004. The decrease came from UAHC
Health Plan 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, 2005.
Fixed administrative fees related to the ASO program were $15.6 million for the
nine months ended March 31, 2005, an increase of $0.3 million (2%) from fixed
administrative fees of $15.3 million for the nine months ended March 31, 2004.
The increase in fixed administrative fees is principally due to a slight
increase in members.
Total expenses were $11.0 million for the nine months ended March 31, 2005,
compared to $12.2 million for the nine months ended March 31, 2004, a decrease
of $1.2 million (10%). The decreases were principally due to the TennCare ASO
program for UAHC Health Plan discussed above.
Because of TennCare's new ASO reimbursement system, medical services expenses
were $0.02 million in the nine months ended March 31, 2005, a decrease of $0.5
million (96%), as compared with medical services expenses of $0.5 million in the
nine months ended March 31, 2004. The $0.02 million of medical services expenses
represent fiscal 2002 claims processed and reimbursed by TennCare in fiscal 2005
as explained in the first paragraph under the above heading "For Three Months
Ended March 31, 2005 Compared to Three Months Ended March 31, 2004."
Marketing, general and administrative expenses were $10.9 million for the
nine-month period ended March 31, 2005, as compared with marketing, general and
administrative expenses of $11.5 million for the comparable period a year
earlier, a decrease of $0.6 million (5%). The decrease is principally due to
certain accrued liabilities recorded in the first and second quarter of fiscal
2004.
Depreciation and amortization expense decreased $0.02 million (24%), to $0.1
million for the nine months ended March 31, 2005 from $0.18 million for the nine
months ended March 31, 2004.
Interest expense decreased $0.08 million (84%), to $0.008 million for the nine
months ended March 31, 2005 from $0.05 million for the nine months ended March
31, 2004, principally due to debt reduction.
15
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, the Company had (i) cash and cash equivalents and short-term
marketable securities of $11.8 million, compared to $8.8 million at June 30,
2004; (ii) working capital of $13.5 million, compared to working capital of $8.1
million at June 30, 2004; and (iii) a current assets-to-current liabilities
ratio of 5.15-to-1, compared to 2.56-to-1 at June 30, 2004. The principal source
of funds for the Company during the nine-month period ended March 31, 2005 was
$3.7 million provided from net operating activities. The principal use of funds
for the nine month period was $2.6 million for purchase of marketable securities
and $0.8 million for debt repayment. Cash flow was $0.5 million for the nine
months ended March 31, 2005, compared to $4.3 million for the comparable period
a year earlier, principally due to the purchase of short-term marketable
securities.
Accounts receivable increased by $0.3 million at March 31, 2005 compared to June
30, 2004, primarily due to timing of cash receipts from TennCare.
Property, plant and equipment decreased by $0.1 million at March 31, 2005
compared to June 30, 2004, due to recording depreciation of $0.1 million.
Long-term debt decreased $0.8 million at March 31, 2005 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 wholly owned subsidiary, UAHC Health Plan, had a required minimum
net worth requirement using statutory accounting practices of $6.7 million at
March 31, 2005. UAHC Health Plan had excess statutory net worth of $5.6 million
at March 31, 2005.
As we reported more fully in a Form 8-K Report filed April 21, 2005 (as amended
by two Forms 8-K/A filed at 6:00 a.m. on April 22, 2005):
(i) Pursuant to a Notice of Administrative Supervision issued by the
Commissioner of the State of Tennessee's Department of Commerce and Insurance on
April 20, 2005, to our subsidiary, UAHC Health Plan (filed as an exhibit with
the first above-described Form 8-K/A), UAHC Health Plan has been placed under
administrative supervision of the Commissioner and "has until December 31, 2005
to demonstrate to the Commissioner's satisfaction" that its "continued operation
and business, absent the supervision or other oversight by the Commissioner, is
not hazardous, financially or operationally, to its enrollees, its creditors or
the public."
The entry of the order and its restrictions could negatively impact UAHC Health
Plan and the Company. Both companies are cooperating with the State of Tennessee
in accordance with the terms of the order, and we do not currently anticipate
any material developments during the supervision period.
(ii) The order prohibits UAHC Health Plan from taking certain actions,
including making any payments, without the approval of the Commissioner's
appointed Administrative Supervisor during the supervision.
16
(iii) The notice asserts a number of findings of fact which the Commissioner
states form the basis for her order. Neither UAHC Health Plan nor the Company
had prior notice of the findings of fact. UAHC Health Plan and the Company do
not agree with many of those findings. The notice also asserts that these
disputed findings of fact describe potential grounds for termination of UAHC
Health Plan's TennCare contract.
The Company's ability to generate adequate amounts of cash to meet its future
cash needs depends on a number of factors, particularly including no material
adverse effects from the adminstrative supervision, the Company's 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 UAHC Health Plan.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Our management has evaluated, with the participation of our principal executive
and principal financial officers, the effectiveness of our disclosure controls
and procedures as of March 31, 2005, and based on their evaluation, our
principal executive and principal financial officers have concluded that these
controls and procedures are effective as of March 31, 2005. There was no change
in our internal controls over financial reporting identified in connection with
such evaluation that occurred during our fiscal quarter ended March 31, 2005
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.
17
PART II.
ITEM 1. LEGAL PROCEEDINGS
On April, 22, 2005, a lawsuit was filed in the Circuit Court of Tennessee for
the Thirteenth Judicial Court, Case No. CT-002213-05, entitled Briggette Green
v. OmniCare Health Plan, Inc., now known as UAHC Health Plan of Tennessee, Inc.;
United American of Tennessee, Inc.; United American Healthcare Corporation. The
plaintiff, a former employee of OmniCare Health Plan, Inc. (now called UAHC
Health Plan of Tennessee, Inc.), seeks damages of $1,500,000 and other relief
from the defendants based on allegations that she was discharged from her job in
violation of the State's whistle blower protection act. We and our two Tennessee
subsidiaries that are our co-defendants believe the lawsuit is without
merit and intend to file an answer denying those allegations and to vigorously
defend the lawsuit.
In addition, reference is made to these previous reports in which legal
proceedings have been earlier reported in our current fiscal year ending June
30, 2005:
Form 8-K filed April 21, 2005, as amended by two Forms 8-K/A both filed at 6:00
a.m. on April 22, 2005, regarding a Notice of Administrative Supervision issued
by the Commissioner of the State of Tennessee Department of Commerce and
Insurance to UAHC Health Plan of Tennessee, Inc., Respondent.
Form 8-K filed March 22, 2005 regarding a new lawsuit entitled Felicia Corbin
Johnson v. OmniCare Health Plan, Inc, et al.
Form 8-K filed February 7, 2005 regarding a lawsuit entitled Provider Creditors
Committee on behalf of Michigan Health Maintenance Organizations Plans, Inc.,
f/k/a OmniCare Health Plan v. United American Health Care Corporation, et al.
Form 10-K filed August 26, 2004 regarding a court order that resulted in the
lawsuit described immediately above.
ITEM 5. OTHER INFORMATION
We reported on a severance agreement with Osbie Howard in our Form 8-K filed
April 15, 2005, which agreement is attached as Exhibit 10.63 hereto.
(a) 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."
18
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.
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).
19
ITEM 6. EXHIBITS
Exhibits
10.63 Severance Agreement dated as of April 15, 2005 between United American
Tennessee, Inc. and Osbie Howard.
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.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: April 28, 2005 By: /s/ William C. Brooks
---------------------------------------
William C. Brooks
Chairman, President & Chief Executive
Officer
Dated: April 28, 2005 By: /s/ Stephen D. Harris
---------------------------------------
Stephen D. Harris
Chief Financial Officer & Treasurer
21
EXHIBIT INDEX
NO. EXHIBITS
--- --------
10.63 Severance Agreement dated as of April 15, 2005 between United American
Tennessee, Inc. and Osbie Howard.
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.
22