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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 SEPTEMBER 30, 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
incorporation or organization) Identification No.)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF NOVEMBER 3,
2005 IS 7,475,235.
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As filed with the Securities and Exchange Commission on November 4, 2005
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
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PART I.
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets - September 30, 2005
and June 30, 2005................................................. 2
Condensed Consolidated Statements of Operations -Three months
ended September 30, 2005 and 2004................................. 3
Condensed Consolidated Statements of Cash Flows - Three months
ended September 30, 2005 and 2004................................. 4
Notes to the Unaudited Condensed Consolidated Financial Statements... 5
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............................................................. 19
SIGNATURES ........................................................................... 20
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,
2005 JUNE 30,
(Unaudited) 2005
------------- --------
ASSETS
Current assets
Cash and cash equivalents $ 3,337 $ 9,843
Marketable securities 2,605 3,730
Accounts receivable - State of Tennessee 1,240 1,360
Other receivables 487 583
Prepaid expenses and other 197 172
Deferred income taxes 2,169 1,950
------- -------
Total current assets 10,035 17,638
Property and equipment, net 150 179
Goodwill 3,452 3,452
Marketable securities 7,110 2,380
Restricted Assets 2,721 --
Other assets 586 586
------- -------
Total assets $24,054 $24,235
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Medical claims payable $ 156 $ 172
Accounts payable and accrued expenses 904 1,096
Accrued compensation and related benefits 446 711
Accrued rent 135 235
Other current liabilities 1,529 1,538
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Total current liabilities 3,170 3,752
------- -------
Total liabilities 3,170 3,752
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par, 15,000,000 shares authorized; 7,471,835 and
7,450,235 issued and outstanding at September 30, 2005 and June 30,
2005, respectively
12,583 12,476
Retained earnings 8,448 8,047
Accumulated other comprehensive loss, net of income taxes (147) (40)
------- -------
Total shareholders' equity 20,884 20,483
======= =======
$24,054 $24,235
======= =======
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,
------------------
2005 2004
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REVENUES
Fixed administrative fees $4,490 5,128
Medical premiums -- 19
Interest and other income 18 261
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Total revenues 4,508 5,408
EXPENSES
Medical services -- 19
General and administrative 4,018 3,737
Depreciation and amortization 33 49
Interest expense -- 8
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Total expenses 4,051 3,813
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Earnings from continuing operations before income taxes 457 1,595
Income tax expense 54 --
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EARNINGS FROM CONTINUING OPERATIONS 403 1,595
DISCONTINUED OPERATIONS
Loss from discontinued operations -- (129)
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NET EARNINGS $ 403 $1,466
====== ======
NET EARNINGS PER COMMON SHARE - BASIC
Earnings from continuing operations $ 0.05 $ 0.22
Loss from discontinued operations -- (0.02)
------ ------
Net earnings per common share $ 0.05 $ 0.20
====== ======
Weighted average shares outstanding 7,459 7,391
====== ======
NET EARNINGS PER COMMON SHARE - DILUTED
Earnings from continuing operations $ 0.05 $ 0.21
Loss from discontinued operations -- (0.02)
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Net earnings per common share $ 0.05 $ 0.19
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Weighted average shares outstanding 7,583 7,443
====== ======
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,
------------------
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 403 $ 1,466
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Net unrealized gain (loss) on investment (107) 23
Depreciation and amortization 33 49
Deferred income taxes (219) (158)
Stock awards -- (183)
Stock compensation expense 76 --
Net changes in operating assets and liabilities (391) (388)
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Net cash provided by (used in) operating activities (205) 809
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (6,326) (2,632)
Purchase of property and equipment (5) --
Proceeds from the sale of property and equipment -- 105
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Net cash used in investing activities (6,331) (2,527)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made on long-term debt -- (722)
Issuance of common stock 30 271
------- -------
Net cash provided by (used in) financing activities 30 (451)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,506) (2,169)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,843 7,767
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 3,337 $ 5,598
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ -- $ 8
======= =======
Income taxes paid $ 30 $ 58
======= =======
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, 2005 AND 2004
NOTE 1 - BASIS OF PREPARATION
The accompanying unaudited 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, 2005 are not necessarily
indicative of the results of operations for the full fiscal year ending June 30,
2006. The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the notes to the financial statements
contained in the Company's 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,
------------------
2005 2004
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Net earnings $ 403 $1,466
Net unrealized holding gains (losses), net of deferred
federal income taxes (107) 23
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Comprehensive income $ 296 $1,489
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The components of accumulated other comprehensive income, included in
shareholders' equity at September 30, 2005 and June 30, 2005, 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, 2005 AND 2004
NOTE 3 - 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 4 - EFFECTIVE TAX RATE
The Company's effective tax rate for the three months ended September 30, 2005
is 12% and differs from the statutory rate of 34%. This difference is the result
of the utilization of net operating loss carryforwards.
NOTE 5 - 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,
now called UAHC Health Plan of Tennessee, Inc. ("UAHC-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 successive contractual amendments,
TennCare extended the ASO reimbursement system applicable to UAHC-TN, first
through June 30, 2004, then through December 31, 2004, and then through June 30,
2005. Through an amendment with an effective date of July 1, 2005, TennCare has
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, which are at risk for losing up to 10% of administrative fee revenue
and may receive up to 15% incentive bonus revenue based on performance relative
to benchmarks.
In September 2002, UAHC-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 UAHC-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 UAHC-TN in October 2002, the State of
Tennessee agreed to pay additional funds to UAHC-TN if future certified
actuarial data confirm they are needed by UAHC-TN to meet its statutory net
worth requirement as of June 30, 2002.
UAHC-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 in subsequent fiscal years as fiscal 2002
claims are processed.
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2005 AND 2004
NOTE 6 - 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, 2005 and 2004.
NOTE 7 - DISCONTINUED OPERATIONS
The Company's longstanding management agreement with OmniCare Health Plan in
Michigan ("OmniCare-MI"), ended effective November 1, 2002. Because of its
resulting workforce reduction, the Company made plans to sublease all of its
then principal office premises in Detroit, Michigan, to OmniCare-MI, retroactive
to November 1, 2002, and expiring at the lease end in May 2005, and to sell to
OmniCare-MI furniture, a telephone system and certain computer hardware and
software that the Company chose to leave there. 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, the sale of
assets did not occur, and the Company recorded a loss from discontinued
operations of $0.7 million in fiscal year 2004. Due to the subsequent
liquidation of OmniCare-MI, 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. 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.
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2005 AND 2004
Summarized selected financial information for the discontinued operations is as
follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2005 2004
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Loss from discontinued operations net of zero income taxes $-- $(129)
--- -----
NOTE 8 - STOCK OPTION PLANS
The Company has adopted SFAS No. 123(R), "Share-Based Payment", which is a
revision of SFAS No. 123 "Accounting for Stock Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees", which
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.
Effective July 1, 2005 the Compensation Committee and Board of Directors
approved the immediate termination of 115,922 non-vested stock options to the
Company's directors and officers. The purpose of the termination was to enable
the Company to avoid recognizing compensation expense associated with these
options in future periods in its consolidated statements of earnings, as a
result of SFAS 123R. The pre-tax charge to be avoided totals approximately
$650,581 which would have been recognized over fiscal years 2006 through 2008,
and, accordingly, the Compensation Committee determined that the expense savings
for these particular option agreements outweighed the objective of incentive
compensation and retention.
Prior to fiscal year 2005, the Company adopted the disclosure-only provisions of
SFAS No. 123. Accordingly, if the Company had elected to recognize compensation
cost based on the fair value of the options at grant date, the Company's
earnings and earnings per share from continuing operations, assuming dilution,
for the three-month periods ended September 30, 2004 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, 2005 AND 2004
Three months ended
September 30,
2004
------------------
Net earnings:
As reported $1,466
Pro forma $1,466
Net earnings per share:
As reported:
Basic $ 0.20
Diluted 0.19
------
Pro forma:
Basic $ 0.20
Diluted 0.19
------
NOTE 9 - RESTRICTED ASSETS
The Company and the Department of Finance and Administration of the State of
Tennessee, Bureau of TennCare ("TennCare") are parties to two escrow agreements
under which the Company has funded, on August 5, 2005, two escrow accounts held
by TennCare at the State Treasury. One, in the amount of $2,300,000, is security
for repayment to TennCare of any overpayments to UAHC-TN that may be determined
by a pending audit of all UAHC-TN process claims since 2002; and the other, in
the amount of $420,500, is security for any money damages that may be awarded to
TennCare in the event of any future litigation between the parties in connection
with certain pending investigations by state and federal authorities. The escrow
accounts bear interest at a rate no lower than the prevailing commercial
interest rates for savings accounts at financial institutions in Nashville,
Tennessee. The escrow accounts will terminate August 5, 2007 or sooner in
certain events, except if litigation is pursued by either party, in which event
the escrow accounts will continue until the end of such litigation. All amounts
(including interest earnings) credited to the escrow accounts will belong to the
Company, except to the extent, if any, they are paid to TennCare to satisfy
amounts determined to be owed to TennCare as provided in the escrow agreements.
Both escrow agreements recite that TennCare does not at this time assert there
has been any breach of UAHC-TN's TennCare contract and that the Company has
funded the escrow accounts as a show of goodwill and good faith in working with
TennCare.
9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2005 AND 2004
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, 2005 and 2004, is as follows
(in thousands):
HMOS &
MANAGEMENT MANAGED CORPORATE & CONSOLIDATED
COMPANIES (1) PLANS (2) ELIMINATIONS COMPANY
------------- --------- ------------ ------------
SEPTEMBER 30, 2005
Revenues - external customers $ -- $ 4,490 $ -- $ 4,490
Revenues - intersegment 4,041 -- (4,041) --
Interest and other income (17) 35 -- 18
------- ------- -------- -------
Total revenues $ 4,024 $ 4,525 $ (4,041) $ 4,508
======= ======= ======== =======
Interest expense $ -- $ -- $ -- $ --
Earnings from continuing operations (362) -- -- (362)
Loss from discontinued operations -- -- -- --
Segment assets 59,021 14,683 (49,652) 24,052
Purchase of equipment -- -- -- --
Depreciation and amortization 33 -- -- 33
------- ------- -------- -------
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
======= ======= ======== =======
(1) Management Companies: United American Healthcare Corporation and United
American of Tennessee, Inc.
(2) HMOs and Managed Plans: UAHC Health Plan of Tennessee, Inc.
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. ("UAHC-TN"), an HMO owned by the Company's wholly owned subsidiary. As of
October 31, 2005 there were approximately 123,500 enrollees in UAHC-TN.
Total revenues decreased $0.9 million (17%) to $4.5 million for the quarter
ended September 30, 2005, compared to $5.4 million for the quarter ended
September 30, 2004, principally due to an amendment to UAHC-TN's contract with
the State of Tennessee, doing business as TennCare. Through that amendment with
an effective date of July 1, 2005, TennCare has implemented a reduction in
capitated administrative fees and a modified risk arrangement with
all its contracted managed care organizations (" MCOs"), including UAHC-TN,
which are at risk for losing up to 10% of administrative fee revenue and may
receive up to 15% incentive bonus revenue based on performance relative to
benchmarks.
Total expenses increased $0.2 million (6%) to $4.1 million for the quarter ended
September 30, 2005, compared to $3.8 million for the quarter ended September 30,
2004 principally due to an increase in costs associated with the administrative
supervision order for UAHC-TN discussed further in "Liquidity and Capital
Resources" below, legal fees associated with ongoing litigation, and an increase
in claims processing costs.
Earnings from continuing operations before income taxes were $0.5 million and
$1.6 million for the quarters ended September 30, 2005 and 2004, respectively.
Earnings from continuing operations were $0.4 million, or $0.05 per basic share,
for the quarter ended September 30, 2005, compared to earnings from continuing
operations of $1.6 million, or $0.22 per basic share, for the quarter ended
September 30, 2004. Such decrease in earnings from continuing operations of $1.2
million, or $0.17 per basic share, is
11
principally due to a decrease in administrative fee revenue, coupled with an
increase in general and administrative expenses discussed above.
There were no charges from discontinued operations for the three months ended
September 30, 2005. The Company recorded a liability in the first quarter of
fiscal year 2005 as it relates to an expired sublease obligation for its former
office premises in Detroit, Michigan.
Net earnings were $0.4 million, or $0.05 per basic share, for the three months
ended September 30, 2005, compared to net earnings of $1.5 million, or $0.20 per
basic share, for the three months ended September 30, 2004, principally due to a
decrease in administrative fee revenue, coupled with an increase in general and
administrative expenses discussed above.
12
FOR THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2004
There were no medical premiums revenues in the three months ended September 30,
2005, a decrease of $0.02 million (100%) from $0.02 million in the three
months ended September 30, 2004. Medical premiums revenues relate to an amended
contractual risk agreement in which TennCare agreed to pay UAHC-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 subsequent fiscal year financial statements as fiscal 2002 claims
were processed.
Fixed administrative fees related to TennCare's below-described ASO program were
$4.5 million for the quarter ended September 30, 2005, a decrease of $0.6
million (12%) from $5.1 million in the three months ended September 30, 2004.
Such fixed administrative fees are attributed to a change in the reimbursement
system of TennCare, effective July 1, 2005.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program,
which entailed changes to TennCare's contracts with MCOs including UAHC-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 subsequent amendments,
TennCare extended the ASO reimbursement system applicable to UAHC-TN through
June 30, 2005. Through an amendment with an effective date of July 1, 2005,
TennCare has implemented a reduction in capitated administrative fees and has
implemented a modified risk arrangement with all its contracted
MCOs, including UAHC-TN, which are at risk for losing up to 10% of
administrative fee revenue and may receive up to 15% incentive bonus revenue
based on performance relative to benchmarks.
There were no medical services expenses in the three months ended September 30,
2005. The $0.02 million of medical services expenses in the three months ended
September 30, 2004 represent fiscal 2002 claims processed and reimbursed by
TennCare in the first quarter of fiscal 2005 as explained in the first paragraph
above.
General and administrative expenses increased approximately $0.3 million (8%),
to $4.0 million for the three months ended September 30, 2005 from $3.7 million
for the three months ended September 30, 2004. The increase was principally due
to an increase in costs associated with the administrative supervision order for
UAHC-TN discussed further in "Liquidity and Capital Resources" below, legal fees
associated with ongoing litigation, and an increase in claims processing costs.
13
Depreciation and amortization expense decreased $ 0.02 million (33%), to $0.03
million for the three months ended September 30, 2005 from $0.05 million for the
three months ended September 30, 2004.
Income tax expense increased $0.05 million for the three months ended September
30, 2005 from the comparable period a year earlier. There was no income tax
expense recorded for the three months ended September 30, 2004. The Company's
effective tax rate for the three months ended September 30, 2005 is 12% 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, 2005, the Company had (i) cash and cash equivalents and
short-term marketable securities of $5.9 million, compared to $13.6 million at
June 30, 2005; (ii) working capital of $6.9 million, compared to working capital
of $13.9 million at June 30, 2005; and (iii) a current assets-to-current
liabilities ratio of 3.17-to-1, compared to 4.70-to-1 at June 30, 2005. The
principal use of funds for such most recent three month period was $6.3 million
for the purchase of marketable securities. Cash flow was $(6.5) million for the
three months ended September 30, 2005, compared to $(2.2) million for the
comparable period a year earlier, principally due to the purchase of short-term
marketable securities.
Accounts receivable decreased by $0.2 million at September 30, 2005 compared to
June 30, 2005, primarily due to timing of cash receipts from TennCare.
Property, plant and equipment decreased by $0.03 million at September 30, 2005
compared to June 30, 2005, due to recording depreciation of $0.03 million.
The Company's wholly owned subsidiary, UAHC-TN, had a required minimum net worth
requirement using statutory accounting practices of $7.3 million at June 30,
2005. UAHC-TN had excess statutory net worth of $5.1 million at September 30,
2005.
UAHC-TN's application for a commercial HMO license in Tennessee was approved on
September 7, 2001. Management is not yet actively pursuing that commercial
business, however, due to UAHC-TN's substantially increased enrollment from
members TennCare assigned from defunct other plans, together with adapting to
TennCare's stabilization program and reforms.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program,
which entailed changes to TennCare's contracts with MCOs, including UAHC-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 successive contractual
amendments, TennCare extended the ASO reimbursement system applicable to
UAHC-TN, first through June 30, 2004, then through December 31, 2004, and then
through June 30, 2005. Through an amendment with an effective date of July 1,
2005, TennCare has implemented a modified risk arrangement with all its
contracted MCOs, including UAHC-TN, which are at risk for losing up to 10% of
administrative fee revenue and may receive up to 15% incentive bonus revenue
based on performance relative to benchmarks. TennCare has also begun
disenrollment of non-medically needy adults who are not eligible for Medicaid
from TennCare coverage statewide, and impose benefit limits on the 396,000
adults left in the program who are eligible for Medicaid. The plans are expected
to preserve full coverage for the 612,000 children on the program. As a result,
UAHC-TN expects to lose only
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approximately 12,000 members beginning in the first quarter of fiscal year 2006,
being its only working uninsured and uninsurable adult members.
The Company and the Department of Finance and Administration of the State of
Tennessee, Bureau of TennCare ("TennCare") are parties to two escrow agreements
under which the Company has funded, on August 5, 2005, two escrow accounts held
by TennCare at the State Treasury. One, in the amount of $2,300,000, is security
for repayment to TennCare of any overpayments to UAHC-TN that may be determined
by a pending audit of all UAHC-TN process claims since 2002; and the other, in
the amount of $420,500, is security for any money damages that may be awarded to
TennCare in the event of any future litigation between the parties in connection
with certain pending investigations by state and federal authorities. The escrow
accounts bear interest at a rate no lower than the prevailing commercial
interest rates for savings accounts at financial institutions in Nashville,
Tennessee. The escrow accounts will terminate August 5, 2007 or sooner in
certain events, except if litigation is pursued by either party, in which event
the escrow accounts will continue until the end of such litigation. All amounts
(including interest earnings) credited to the escrow accounts will belong to the
Company, except to the extent, if any, they are paid to TennCare to satisfy
amounts determined to be owed to TennCare as provided in the escrow agreements.
Both escrow agreements recite that TennCare does not at this time assert there
has been any breach of UAHC-TN's TennCare contract and that the Company has
funded the escrow accounts as a show of goodwill and good faith in working with
TennCare.
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,
UAHC-TN was 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."
UAHC-TN received no prior notice of the notice and order of administrative
supervision and had no opportunity to respond to its factual assertions. UAHC-TN
and the Company are fully 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.
The administrative supervision order prohibits UAHC-TN from taking certain
actions, including making any payments, without the approval of the
Commissioner's appointed Administrative Supervisor during the supervision. It is
important to recognize that administrative supervision is significantly
different than receivership and that UAHC-TN is not in receivership.
The administrative supervision notice asserted a number of findings of fact
which the Commissioner stated formed the basis for her order. UAHC-TN and the
Company do not agree with many of those findings. The notice also asserted that
its findings of fact described potential grounds for termination of UAHC-TN's
TennCare contract. Although we acknowledge that any such termination would have
a material adverse
16
effect on UAHC-TN and the Company, we do not agree that those findings are
accurate. Moreover, the State of Tennessee in August 2005 extended UAHC-TN's
TennCare contract through June 30, 2006, by an amendment to the contract
effective as of July 1, 2005.
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 modified risk 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-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, 2005, 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, 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
September 30, 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
None.
ITEM 5. OTHER INFORMATION
(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."
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.
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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).
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.
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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: November 4, 2005 By: /s/ William C. Brooks
------------------------------------
William C. Brooks
Chairman, President & Chief
Executive Officer
Dated: November 4, 2005 By: /s/ Stephen D. Harris
------------------------------------
Stephen D. Harris
Chief Financial Officer & Treasurer
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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.
21