================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 001-11638
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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES AS OF DECEMBER 31, 2007, COMPUTED BY REFERENCE TO THE NASDAQ
CAPITAL MARKET CLOSING PRICE ON SUCH DATE, WAS $19,076,372
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF AUGUST 27,
2008 WAS 8,734,214.
Portions of the registrant's Proxy Statement for its 2008 Annual Meeting of
Shareholders have been incorporated by reference in Part III of this Annual
Report of Form 10-K.
================================================================================
As filed with the Securities and Exchange Commission on September 4, 2008
I. UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................ 1
Item 1A. Risk Factors.................................................... 10
Item 1B. Unresolved Staff Comments....................................... 19
Item 2. Properties...................................................... 19
Item 3. Legal Proceedings............................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............. 20
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters......................................................... 21
Item 6. Selected Financial Data......................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 23
Item 8. Consolidated Financial Statements............................... 34
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 34
Item 9a. Controls and Procedures......................................... 35
Item 9b. Other Information............................................... 35
PART II
Item 10. Directors and Executive Officers of the Registrant.............. 36
Item 11. Executive Compensation.......................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 36
Item 13. Certain Relationships and Related Transactions.................. 36
Item 14. Principal Accounting Fees and Services.......................... 36
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K........................................................ 37
Financial Statements..................................................... F-1
PART I
ITEM 1. BUSINESS
GENERAL
United American Healthcare Corporation (the "Company" or "UAHC") was
incorporated in Michigan on December 1, 1983 and commenced operations in May
1985. Unless the context otherwise requires, all references to the Company
indicated herein shall mean United American Healthcare Corporation and its
consolidated subsidiaries.
The Company provides comprehensive management and consulting services to a
managed care organization in Tennessee. The Company also arranges for the
financing of health care services and delivery of these services by primary care
physicians and specialists, hospitals, pharmacies and other ancillary providers
to commercial employer groups and government-sponsored populations in Tennessee.
Management and consulting services provided by the Company are and have been
generally to health maintenance organizations with a targeted mix of Medicaid
and non-Medicaid/commercial enrollment. Management and consulting services
provided by the Company include feasibility studies for licensure, strategic
planning, corporate governance, management information systems, human resources,
marketing, pre-certification, utilization review programs, individual case
management, budgeting, provider network services, accreditation preparation,
enrollment processing, claims processing, member services and cost containment
programs.
UAHC's efforts are concentrated on low-income families and people with
disabilities in select geographic markets. The Company has specialized in the
Medicaid market for over 20 years and its management team has decades of
experience in this sector. Management believes the Company has gained
substantial expertise in understanding and serving the particular needs of the
Medicaid population. As of August 18, 2008, there were 98,976 TennCare enrollees
in UAHC Health Plan of Tennessee, Inc. ("UAHC-TN"), owned by the Company's
wholly owned subsidiary.
In the fiscal year ended June 30, 2008 and its two preceding fiscal years, the
Company derived a majority of its revenues from UAHC-TN's managed care services
in the West Grand Region of Tennessee under a contract with the State of
Tennessee, Bureau of TennCare ("TennCare"). In early 2008, TennCare issued a
Request for Proposals and conducted a selection process that resulted in
TennCare contracts for only two other organizations to provide managed care
services in the West Grand Region. Consequently, UAHC-TN will have no TennCare
contract when its present contract expires on June 30, 2009. Revenue under this
contract will be earned through October 31, 2008 as it is expected that
UAHC-TN's TennCare members will transfer to the other organizations on November
1, 2008, and that UAHC-TN will perform its remaining TennCare obligations
through the contract expiration date. Management believes that the
discontinuance of the TennCare contract will have a material impact on the
Company's operations.
1
On October 10, 2006, UAHC-TN entered into a contract with the Centers for
Medicare & Medicaid Services (CMS) to act as a Medicare Advantage qualified
organization. The contract authorizes UAHC-TN to serve members enrolled in both
the Tennessee Medicaid and Medicare programs, commonly referred to as
"dual-eligibles," specifically to offer a Special Needs Plan ("SNP") to its
eligible members in Shelby County, Tennessee (including the City of Memphis),
and to operate a Voluntary Medicare Prescription Drug Plan, both beginning
January 1, 2007. The current contract term is through December 31, 2008, after
which the contract may be renewed for successive one-year periods in accordance
with its terms. As of August 18, 2008 there were approximately 845 Medicare
Advantage enrollees in UAHC-TN.
INDUSTRY
In an effort to control costs while assuring the delivery of quality health care
services, the public and private sectors have increasingly turned to managed
care solutions. As a result, the managed care industry, which includes health
maintenance organization ("HMO"), preferred provider organization ("PPO") and
prepaid health service plans, has grown substantially. While the trend toward
managed care solutions was traditionally pursued most aggressively by the
private sector, the public sector has embraced the trend in an effort to control
the costs of health care provided to Medicaid recipients. Consequently, many
states are promoting managed care initiatives to contain these rising costs and
supporting programs that encourage or mandate Medicaid beneficiaries to enroll
in managed care plans. Under the Medicare Modernization Act of 2003 ("MMA"), the
federal government expanded managed care for publicly sponsored programs by
allowing Medicare Advantage plans to offer special needs plans that cover dual
eligibles. These special needs plans allow for coordinated care for a specific
segment of the Medicare population, thus providing the opportunity for improved
quality of care and cost management.
MANAGED CARE PRODUCTS AND SERVICES
The Company owns and manages the operations of an HMO in Tennessee, UAHC-TN. The
following table shows the approximate number of UAHC-TN members served by the
Company in the indicated service categories as of August 18, 2008:
TennCare Medicare Total
-------- -------- ------
98,976 845 99,821
UAHC-TN is the Company's principal revenue source. The following table shows the
Company's revenues from UAHC-TN in dollar amounts and as a percentage of the
Company's total revenues for the fiscal years indicated. Such data are not
necessarily indicative of UAHC TN's contributions to the Company's net earnings.
2
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------
REVENUES 2008 2007 2006
-------- --------------- --------------- ---------------
(in thousands, except percentages)
UAHC-TN $27,756 98.4% $17,667 97.8% $17,923 99.7%
MANAGED PLAN
The Company has entered into a long-term management agreement, through a wholly
owned subsidiary of the Company, with UAHC-TN. Pursuant to this management
agreement, the Company provides to UAHC-TN management and consulting services
associated with the financing and delivery of health care services.
Services provided to UAHC-TN include strategic planning; corporate governance;
human resource functions; provider network services; provider profiling and
credentialing; premium rate setting and review; marketing services (group and
individual); accounting and budgeting functions; deposit, disbursement and
investment of funds; enrollment functions; collection of accounts; claims
processing; management information systems; utilization review; and quality
management.
UAHC-TN has a Medicaid contract and a Medicare contract with agencies of the
State of Tennessee and the United States, respectively. The amount of premiums
and/or fees that UAHC TN receives is established by the contracts, although it
varies according to specific government programs and may also vary according to
demographic factors, including a member's age, gender and health status.
MANAGED PLAN OWNED BY THE COMPANY
MEDICAID
UAHC-TN was organized as a Tennessee corporation in October 1993, and is
headquartered in Memphis, Tennessee. The Company was active in the development
of UAHC-TN, and through the Company's wholly owned subsidiary, United American
of Tennessee, Inc., wholly owns UAHC-TN. UAHC-TN began as a PPO contractor with
the Bureau of TennCare, a State of Tennessee program that provides medical
benefits to Medicaid and working uninsured and uninsurable recipients, and
operated as a full-risk prepaid health services plan until it obtained its
TennCare HMO license in March 1996. UAHC-TN's TennCare HMO contract was executed
in October 1996, retroactive to the date of licensure.
Through an amendment with an effective date of July 1, 2005, TennCare
implemented a modified risk arrangement ("MRA") with all its contracted MCOs,
including UAHC-TN, under which they became at risk for losing up to 10% of
administrative fee revenue and could receive up to 15% incentive bonus revenue
based on performance relative to benchmarks. UAHC-TN received notice from
TennCare that it earned additional revenue of $1.1 million for its performance
under the MRA for fiscal 2006, representing a 7% bonus revenue payout. Such
additional revenue has been recorded, of which $0.3 million was recorded in
fiscal 2006, $0.5
3
million was recorded in fiscal 2007, and $0.3 million was recorded in the second
quarter of fiscal 2008. UAHC-TN also earned and received additional revenue of
$1.4 million for fiscal 2007, representing a 9% bonus revenue payout, and the
Company has recorded such additional MRA earnings in the third quarter of fiscal
2008, when UAHC-TN was notified by TennCare of the amount. Effective July 1,
2007, the evaluation period for the MRA was changed from quarterly to annually,
and the incentive bonus pool was adjusted to 20% of administrative fee revenue.
As of August 18, 2008, UAHC TN's total TennCare enrollment was 98,976 members.
On April 22, 2008, TennCare disclosed its decision to award new TennCare
contracts to two organizations, not including the Company's subsidiary, UAHC-TN,
as the culmination of TennCare's selection process pursuant to its Request for
Proposals for managed care services to be provided in the West Grand Region of
Tennessee. Consequently, revenue under this contract will be earned through
October 31, 2008 as it is expected that UAHC -TN's TennCare members will
transfer to other managed care organizations on November 1, 2008, after which
UAHC-TN will perform its remaining contractual obligations through its TennCare
contract expiration date of June 30, 2009. Management believes that the
discontinuance of the TennCare contract will have a material impact on the
Company's operations.
MEDICARE
On October 10, 2006, UAHC-TN entered into a contract with the Centers for
Medicare & Medicaid Services ("CMS") to act as a Medicare Advantage qualified
organization. The contract authorizes UAHC-TN to serve members enrolled in both
the Tennessee Medicaid and Medicare programs, commonly referred to as
"dual-eligibles," specifically to offer a Special Needs Plan ("SNP") to its
eligible members in Shelby County, Tennessee (including the City of Memphis),
and to operate a Voluntary Medicare Prescription Drug Plan, both beginning
January 1, 2007. The current contract term is through December 31, 2008, after
which the contract may be renewed for successive one-year periods in accordance
with its terms.
In December 2003 Congress passed the Medicare Prescription Drug, Improvement and
Modernization Act, which is known as the Medicare Modernization Act ("MMA"). The
MMA increased the amounts payable to Medicare Advantage plans such as ours, and
expanded Medicare beneficiary healthcare options by, among other things, adding
a Medicare Part D prescription drug benefit beginning in 2006.
One of the goals of the MMA was to reduce the costs of the Medicare program by
increasing participation in the Medicare Advantage program. Effective January 1,
2004, the MMA increased Medicare Advantage statutory payment rates, generally
increasing payments per member to Medicare Advantage plans. Medicare Advantage
plans are required to use these increased payments to improve the healthcare
benefits that are offered, to reduce premiums or to strengthen provider
networks. Management believes that these MMA reforms, including in particular
the increased reimbursement rates to Medicare Advantage plans, have allowed and
will continue to allow Medicare Advantage plans to offer more comprehensive and
attractive benefits, including better preventive care benefits, while also
reducing out-of-pocket expenses for beneficiaries.
4
As part of the MMA, effective January 1, 2006, every Medicare recipient was able
to select a prescription drug plan through Medicare Part D. Financing for
Medicare Part D comes from beneficiary premium payments, state contributions and
general revenues. The monthly premium paid by enrollees is set to cover 25.5% of
the cost for standard drug coverage. CMS subsidizes the remaining 74.5%, based
on bids submitted to CMS by plans for their expected benefits payments. Plans
can receive additional risk-adjusted payments for high cost enrollees and
reinsurance payments for 80% of costs above the catastrophic threshold. A Part D
plan's total potential losses or profits are limited by risk-sharing
arrangements with the federal government. Additional subsidies are provided for
dual-eligible beneficiaries and specified low-income beneficiaries.
Under the standard Part D drug coverage for 2007, beneficiaries enrolled in a
stand-alone prescription drug plan ("PDP") pay a $265 annual deductible and 25%
coinsurance up to an initial coverage limit of $2,400 in total drug costs,
followed by a coverage gap (the so-called "doughnut hole") where enrollees pay
100% of their drug costs until they have spent $3,850 out of pocket. After the
beneficiary has incurred $3,850 in out-of-pocket drug expenses, 95% of the
beneficiary's remaining out-of-pocket drug costs for that year are covered by
the plan or the federal government. Medicare Advantage prescription drug
("MA-PD") plans are not required to mirror these limits, but are required to
provide, at a minimum, coverage that is actuarially equivalent to the standard
drug coverage delineated in the MMA. The deductible, co-pay and coverage amounts
will be adjusted by CMS on an annual basis. As additional incentive to enroll in
a Part D prescription drug plan, CMS imposes a cumulative penalty added to a
beneficiary's monthly Part D plan premium in an amount equal to 1% of the
applicable premium for each month between the date of a beneficiary's enrollment
deadline and the beneficiary's actual enrollment. This penalty amount is passed
through the plan to the government. Each Medicare Advantage plan is required to
offer a Part D drug prescription plan as part of its benefits. UAHC-TN currently
offers prescription drug benefits through its PDP and through its MA-PD plan.
DUAL-ELIGIBLE BENEFICIARIES. A "dual-eligible" beneficiary is a person who is
eligible for both Medicare, because of age or other qualifying status, and
Medicaid, because of economic status. Health plans that serve dual-eligible
beneficiaries receive a higher premium from CMS for dual-eligible members.
Currently, CMS pays a higher premium for a dual-eligible beneficiary because a
dual-eligible member generally has a higher risk score corresponding to his or
her higher medical costs. By managing utilization and implementing disease
management programs, many Medicare Advantage plans can profitably care for
dual-eligible members. The MMA provides Part D subsidies and reduced or
eliminated deductibles for certain low-income beneficiaries, including
dual-eligible individuals.
BIDDING PROCESS. Although Medicare Advantage plans have continued to be paid on
a capitated, or per member per month ("PMPM") basis, as of January 1, 2006, CMS
has used a new rate calculation system for Medicare Advantage plans. The new
system is based on a competitive bidding process that allows the federal
government to share in any cost savings achieved by Medicare Advantage plans. In
general, the statutory payment rate for each county, which is primarily based on
CMS's estimated per beneficiary fee-for-service expenses, was relabeled as
5
the "benchmark" amount, and local Medicare Advantage plans are required to
annually submit bids that reflect the costs they expect to incur in providing
the base Medicare Part A and Part B benefits in their applicable service areas.
If the bid is less than the benchmark for that year, Medicare is required to pay
the plan its bid amount, risk-adjusted based on its risk scores, plus a rebate
equal to 75% of the amount by which the benchmark exceeds the bid, resulting in
an annual adjustment in reimbursement rates. Plans are required to use the
rebate to provide beneficiaries with extra benefits, reduced cost sharing or
reduced premiums, including premiums for MA-PD and other supplemental benefits.
CMS has the right to audit the use of these proceeds. The remaining 25% of the
excess amount is required to be retained in the statutory Medicare trust fund.
If a Medicare Advantage plan's bid is greater than the benchmark, the plan will
be required to charge a premium to enrollees equal to the difference between the
bid amount and the benchmark, which is expected to make such plans less
competitive.
ANNUAL ENROLLMENT AND LOCK-IN. Prior to the MMA, Medicare beneficiaries were
permitted to enroll in a Medicare managed care plan or change plans at any point
during the year. Since January 1, 2006, Medicare beneficiaries have had defined
enrollment periods, similar to commercial plans, in which they can select a
Medicare Advantage plan, stand-alone PDP or traditional fee-for-service
Medicare. For 2008 and subsequent years, the annual enrollment period for a PDP
is from November 15 through December 31 of each year, and enrollment in Medicare
Advantage plans occurs from November 15 through March 31 of the subsequent year.
Enrollment on or prior to December 31 will be effective as of January 1 of the
following year and enrollment on or after January 1 and within the enrollment
period will be effective as of the first day of the month following the date on
which the enrollment occurred. After these defined enrollment periods end,
generally only seniors turning 65 during the year, Medicare beneficiaries who
permanently relocate to another service area, dual-eligible beneficiaries and
others who qualify for special needs plans and employer group retirees will be
permitted to enroll in or change health plans during that plan year.
We are currently considering several potential strategic alternatives for
UAHC-TN's Medicare Advantage plan, including partnerships or potential sale of
plan assets. As of August 18, 2008 there were approximately 845 Medicare
Advantage enrollees in UAHC-TN.
MANAGED PLAN PREVIOUSLY OPERATED BY THE COMPANY
For many years prior to November 1, 2002, UAHC managed a health maintenance
organization in Michigan called Omni Care Health Plan ("OmniCare-MI").
OmniCare-MI ceased to be a managed plan operated by the Company effective
November 1, 2002.
While managed by the Company, OmniCare-MI was a not-for-profit, tax-exempt
corporation headquartered in Detroit, Michigan and serving southeastern
Michigan, operating in Wayne, Oakland, Macomb, Monroe and Washtenaw counties.
Its history included a number of innovations that were adopted and proved
successful for the industry. While managed by the Company, it was the first
network model HMO in the country and the first to capitate physician services in
an IPA-model HMO (an Independent Practice Association model HMO does not
6
employ physicians as staff, but instead contracts with associations or groups of
independent physicians to provide services to HMO members). OmniCare-MI also
created and implemented the first known mental health capitation carve out in
1983.
While managed by the Company, OmniCare-MI's enrollment was through companies
that offered the health plan coverage to employees and their family members,
through individual enrollment and through the State of Michigan's Medicaid
program pursuant to an agreement with the Michigan Department of Community
Health, which made HMO coverage available to eligible Medicaid beneficiaries in
certain counties and mandatory in others.
As a Michigan HMO, OmniCare-MI was subject to oversight by the State of
Michigan's Commissioner of the Office of Financial and Insurance Services (the
"Commissioner"). On July 31, 2001, pursuant to a motion by the Commissioner, a
State circuit court judge entered an order of rehabilitation of OmniCare-MI (the
"Order") and appointed the Commissioner as Rehabilitator of OmniCare-MI. The
Order directed the Rehabilitator to administer all of OmniCare-MI's assets and
business while attempting to effectuate its rehabilitation, preserve its
provider network and maintain uninterrupted health care services to the greatest
extent possible.
The Order required the Company to continue performing all services under its
OmniCare-MI management agreement, which the Company did until that agreement's
termination on November 1, 2002, pursuant to OmniCare-MI's court-approved
rehabilitation plan.
7
GOVERNMENT REGULATION
The Company is and/or has been subject to extensive federal and state health
care and insurance regulations designed primarily to protect enrollees in our
managed plans, particularly with respect to government sponsored enrollees. Such
regulations govern many aspects of the Company's business affairs and typically
empower state agencies to review management agreements with health care plans
for, among other things, reasonableness of charges. Among the other areas
regulated by federal and state law are licensure requirements, premium rate
increases, new product offerings, procedures for quality assurance, enrollment
requirements, covered benefits, service area expansion, provider relationships
and the financial condition of the managed plans, including cash reserve
requirements and dividend restrictions. There can be no assurances that the
Company or UAHC-TN will be granted the necessary approvals for new products or
will maintain federal qualifications or state licensure.
The licensing and operation of UAHC-TN are governed by the Tennessee statutes
and regulations applicable to health maintenance organizations. The licenses are
subject to denial, limitation, suspension or revocation if there is a
determination that the plan is operating out of compliance with the state's HMO
statute, failing to provide quality health services, establishing rates that are
unfair or unreasonable, failing to fulfill obligations under outstanding
agreements or operating on an unsound fiscal basis. UAHC-TN is not a
federally-qualified HMO and, therefore, is not subject to the federal HMO Act.
Federal and state regulation of health care plans and managed care products is
subject to frequent change, varies from jurisdiction to jurisdiction and
generally gives responsible administrative agencies broad discretion. Laws and
regulations relating to the Company's business are subject to amendment and/or
interpretation in each jurisdiction. In particular, legislation mandating
managed care for Medicaid recipients is often subject to change and may not
initially be accompanied by administrative rules and guidelines. Changes in
federal or state governmental regulation could affect the Company's operations,
profitability and business prospects. While the Company is unable to predict
what additional government regulations, if any, affecting its business may be
enacted in the future or how existing or future regulations may be interpreted,
regulatory revisions may have a material adverse effect on the Company.
INSURANCE
The Company presently carries comprehensive general liability, directors and
officers' liability, property, business automobile, and workers' compensation
insurance. Management believes that coverage levels under these policies are
adequate in view of the risks associated with the Company's business. In
addition, UAHC-TN has (and OmniCare-MI while managed by the Company had)
professional liability insurance that covers liability claims arising from
medical malpractice. UAHC-TN is required to pay the professional liability
insurance premiums under the terms of the Company's management agreement. There
can be no assurance as to the future availability or cost of such insurance, or
that the Company's business risks will be maintained within the limits of such
insurance coverage.
8
COMPETITION
The managed care industry is highly competitive. The Company directly competes
with other entities that provide health care plan management services, some of
which are nonprofit corporations and others, which have significantly greater
financial and administrative resources. The Company primarily competes on the
basis of fee arrangements, cost effectiveness and the range and quality of
services offered to prospective health care clients. While the Company believes
that its experience gives it certain competitive advantages over existing and
potential new competitors, there can be no assurance that the Company will be
able to compete effectively in the future.
The Company competes with other HMOs, PPOs and insurance companies. The level of
this competition may affect, among other things, the operating revenues of
UAHC-TN and, therefore, the revenues of the Company. UAHC-TN's Medicaid primary
market competitors in western Tennessee are TLC Family Health Plan, Unison
Health Plan, and TennCare Select. (As stated above in the fifth paragraph under
the caption "GENERAL" in this Item 1, it is expected that UAHC-TN's entire
TennCare population will transfer to other MCOs on November 1, 2008 and the
TennCare contract for its current Medicaid business in western Tennessee will
expire on June 30, 2009 and not be extended or renewed. UAHC-TN's Medicare
primary market competitors in western Tennessee are Healthspring, Unison and
Windsor. UAHC-TN primarily competes on the basis of enrollment, provider
networks and other related plan features and criteria. Management believes that
UAHC-TN is able to compete effectively with its primary Medicare market
competitors.
EMPLOYEES
The Company's ability to maintain its competitive position and expand its
business into new markets depends, in significant part, upon the maintenance of
its relationships with various existing senior officers, as well as its ability
to attract and retain qualified health care management professionals. The
Company neither has nor intends to pursue any long-term employment agreement
with any of its key personnel. Accordingly, there is no assurance that the
Company will be able to maintain such relationships or attract such
professionals.
The total number of employees of the Company at August 1, 2008 was 99 compared
to 115 at August 1, 2007. As a result of the pending termination of the TennCare
contract, Management expects a substantial decrease in the total number of
employees. The Company's employees do not belong to a collective bargaining unit
and management considers its relations with employees to be good.
9
ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this Form 10-K annual report are some of the
principal risks and uncertainties that could cause our actual business results
to differ materially from any forward-looking statements contained in this
report. These risk factors should be considered in addition to our cautionary
comments concerning forward-looking statements in this report. If any of the
following risks actually occurs, our business, financial condition or results of
operations could be adversely affected. In such event, the trading price of our
common stock could decline. In the following portion of this Item 1A, the words
"we," "us" and "our" sometimes specifically mean and refer to our subsidiary
UAHC-TN, when the context so indicates. Such factors potentially include, among
others, the following:
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM OUR TENNCARE OPERATIONS,
WHICH WILL SUBSTANTIALLY END OCTOBER 31, 2008. THE DISCONTINUANCE OF OUR
TENNCARE CONTRACT WILL HAVE MATERIAL IMPACT ON OUR OPERATIONS. UNTIL THEN,
LEGISLATIVE OR REGULATORY ACTIONS, ECONOMIC CONDITIONS OR OTHER FACTORS THAT
ADVERSELY AFFECT THOSE OPERATIONS COULD MATERIALLY REDUCE OUR REVENUES AND
PROFITS.
For the year ended June 30, 2008, our TennCare operations accounted for 57.6% of
our total revenues. On April 22, 2008, the Department of Finance and
Administration of the State of Tennessee, Bureau of TennCare ("TennCare"),
disclosed its decision to award new TennCare contracts to two organizations, not
including our subsidiary, UAHC-TN, as the culmination of TennCare's selection
process pursuant to its Request for Proposals for managed care services to be
provided in the West Grand Region of Tennessee. Consequently, revenue under this
contract will be earned through October 31, 2008 as it is expected that
UAHC-TN's TennCare members will transfer to other managed care organizations on
November 1, 2008, and that UAHC-TN will perform its remaining contractual
obligations through its TennCare contract expiration date of June 30, 2009.
Management believes that the discontinuance of the TennCare contract will have
material impact on the Company's operations.
REDUCTIONS IN FUNDING FOR GOVERNMENT HEALTHCARE PROGRAMS COULD SUBSTANTIALLY
REDUCE OUR PROFITABILITY.
Substantially all of the healthcare services we offer are through
government-sponsored programs, such as Medicaid and Medicare. As a result, our
profitability is dependent, in large part, on continued funding for government
healthcare programs at or above current levels. Future Medicaid premium rate
levels may be affected by continued government efforts to contain medical costs
or state and federal budgetary constraints.
Changes in Medicaid funding, for example, may lead to reductions in the number
of persons enrolled in or eligible for Medicaid, reductions in the amount of
reimbursement or elimination of coverage for certain benefits. Reductions in
Medicaid payments could reduce our profitability if we are unable to reduce our
related expenses. Reductions in payments under Medicare or the other programs
under which we offer health and prescription drug plans could similarly reduce
our profitability.
10
CMS'S RISK ADJUSTMENT PAYMENT SYSTEM AND BUDGET NEUTRALITY FACTORS MAKE OUR
REVENUE AND PROFITABILITY DIFFICULT TO PREDICT AND COULD RESULT IN MATERIAL
RETROACTIVE ADJUSTMENTS TO OUR RESULTS OF OPERATIONS.
The Centers for Medicare & Medicaid Services ("CMS") has implemented a risk
adjustment payment system for Medicare health plans to improve the accuracy of
payments and establish incentives for Medicare plans to enroll and treat less
healthy Medicare beneficiaries. CMS is phasing in this payment methodology with
a risk adjustment model that bases a portion of the total CMS reimbursement
payments on various clinical and demographic factors that include: hospital
inpatient diagnoses; diagnosis data from ambulatory treatment settings,
including hospital outpatient facilities and physician visits; gender; age; and
Medicaid eligibility. CMS requires that all managed care companies capture,
collect and submit the necessary diagnosis code information to CMS twice a year
for reconciliation with CMS's internal database. As a result, it is difficult to
predict with any certainty our future revenue or profitability. In addition, our
SNP risk scores for any period may result in favorable or unfavorable
adjustments to the payments we receive from CMS and our Medicare premium
revenue.
Payments to Medicare Advantage plans are also adjusted by a "budget neutrality"
factor that Congress and CMS implemented in 2003 to prevent overall reductions
in health plan payments while at the same time directing risk-adjusted payments
to plans with more chronically ill enrollees. In general, this adjustment
favorably impacted payments to Medicare Advantage plans. In February 2006, the
President signed legislation that reduced federal funding for Medicare Advantage
plans by approximately $6.5 billion over five years. Among other changes, the
legislation provided for an accelerated phase-out of budget neutrality for
risk-adjusted payments made to Medicare Advantage plans. These legislative
changes will in general result in reduced payments to Medicare Advantage plans.
IF WE ARE UNABLE TO ESTIMATE INCURRED BUT NOT REPORTED MEDICAL BENEFITS EXPENSE
ACCURATELY, THAT COULD AFFECT OUR REPORTED FINANCIAL RESULTS.
Our medical benefits expense includes estimates of medical claims incurred but
not reported ("IBNR"). Together with our internal and consulting actuaries, we
estimate our medical cost liabilities using actuarial methods based on
historical data adjusted for payment patterns, cost trends, product mix,
seasonality, utilization of healthcare services and other relevant factors.
Actual conditions could, however, differ from those assumed in the estimation
process. We continually review and update our estimation methods and the
resulting reserves and make adjustments, if necessary, to medical benefits
expense when the criteria used to determine IBNR change and when actual claim
costs are ultimately determined. Due to the uncertainties associated with the
factors used in these assumptions, the actual amount of medical benefits expense
that we incur may be materially more than the amount of IBNR originally
estimated. If our future estimates of IBNR are inadequate, our reported results
of operations could be negatively impacted. Our limited ability to estimate IBNR
accurately could also affect our ability to take timely corrective actions,
exacerbating the extent of any adverse effect on our results.
11
OUR RECORDS MAY CONTAIN INACCURATE INFORMATION REGARDING THE RISK ADJUSTMENT
SCORES OF OUR MEMBERS, WHICH COULD CAUSE US TO OVERSTATE OR UNDERSTATE OUR
REVENUE.
We maintain claims and encounter data that support the risk adjustment scores of
our members, which partly determine the revenue we are entitled to for them.
These data are submitted to us based on medical charts and diagnosis codes
prepared by providers of medical care. Inaccurate coding by medical providers
and inaccurate records for new members in our plan could result in inaccurate
premium revenue and risk adjustment payments, which are subject to correction or
update in later periods. Payments that we receive in connection with such
corrected or updated information may be reflected in financial statements for
periods subsequent to the period in which the revenue was earned. We may also
find that our data regarding our members' risk adjustment scores, when
reconciled, require that we refund a portion of the revenue that we received.
THE COMPETITIVE BIDDING PROCESS MAY ADVERSELY AFFECT OUR PROFITABILITY.
Payments for local and regional Medicare Advantage plans are based on a
competitive bidding process that may decrease the amount of premiums paid to us
or cause us to increase the benefits we offer without a corresponding increase
in premiums. As a result of the competitive bidding process, in order to
maintain our current level of profitability, in the future we may need to reduce
benefits or charge our members an additional premium, either of which could make
our health plan less attractive to members and adversely affect our membership.
WE DERIVE ALL OF OUR MEDICARE REVENUES FROM OUR SNP OPERATIONS, AND LEGISLATIVE
OR REGULATORY ACTIONS, ECONOMIC CONDITIONS OR OTHER FACTORS THAT ADVERSELY
AFFECT THOSE OPERATIONS COULD MATERIALLY REDUCE OUR REVENUES AND PROFITS.
Because special needs plans (each a "SNP") are relatively new to Medicare and to
the health insurance market generally, we do not know whether we will be able to
sustain our SNP operation's profitability over the long-term, and our failure to
do so could have an adverse effect on our results of operations. Factors that
could affect our SNP operations include legislative, regulatory, intensity of
competition, and utilization of benefit risks. In addition, Medicare
beneficiaries who are dual-eligibles generally are able to disenroll and choose
another SNP at any time, and certain Medicare beneficiaries also have a limited
ability to disenroll from the SNP they initially select and choose a different
SNP. We may not be able to retain the auto-assigned members or those members who
affirmatively choose our SNP, and we may not be able to attract new SNP members.
FINANCIAL ACCOUNTING FOR THE MEDICARE PART D BENEFITS IS COMPLEX AND REQUIRES
DIFFICULT ESTIMATES AND ASSUMPTIONS.
The Medicare Prescription Drug Improvement and Modernization Act of 2003 ("MMA")
provides for "risk corridors" designed to limit to some extent the losses SNPs
would incur if their actual costs are higher than estimated in their bids
submitted to CMS. For example, in 2008, Medicare drug plans will bear all gains
and losses of up to 5% of their expected costs and will retain 50% of the gains
or be reimbursed 50% of the loss between 5% and 10% and will retain
12
20% of the gain or be reimbursed 20% of the loss in excess of 10%. As the risk
corridors are designed to be symmetrical, a plan whose actual costs are below
its expected costs is required to reimburse CMS based on a methodology similar
to that set forth above. Reconciliation payments for estimated upfront federal
reinsurance payments, or in some cases the entire amount of reinsurance
payments, for Medicare beneficiaries who reach the drug benefits catastrophic
threshold are made retroactively on an annual basis, which could expose plans to
upfront costs in providing the benefit.
The accounting and regulatory guidance regarding the proper method of accounting
for Medicare Part D, particularly as it relates to the timing of revenue and
expense recognition, taken together with the complexity of the Part D product
may lead to variability in our reporting of quarter-to-quarter earnings related
to Medicare Part D.
IF STATE REGULATORS DO NOT APPROVE PAYMENTS BY OUR HEALTH PLAN TO US, OUR
BUSINESS AND GROWTH STRATEGY COULD BE MATERIALLY IMPAIRED OR WE COULD BE
REQUIRED TO INCUR INDEBTEDNESS TO FUND THESE STRATEGIES.
Our health plan subsidiary, UAHC-TN, is subject to laws and regulations that
limit the amount of dividends and distributions it can pay to us for purposes
other than to pay income taxes related to its earnings. These laws and
regulations also limit the amount of management fees UAHC-TN may pay to its
affiliates, including our management subsidiary, United American of Tennessee,
Inc., without prior approval of, or notification to, state regulators. If the
regulators were to deny or significantly restrict our subsidiary's requests to
pay dividends to us or to pay management and other fees to its affiliate, the
funds available to us would be limited, which could impair our ability to
implement our business and growth strategies.
WE ARE REQUIRED TO COMPLY WITH LAWS GOVERNING THE TRANSMISSION, SECURITY AND
PRIVACY OF HEALTH INFORMATION THAT REQUIRE SIGNIFICANT COMPLIANCE COSTS, AND ANY
FAILURE TO COMPLY WITH THESE LAWS COULD RESULT IN MATERIAL CRIMINAL AND CIVIL
PENALTIES.
Regulations under the Health Insurance Portability and Accountability Act of
1996, commonly called HIPAA, require us to comply with standards regarding the
exchange of health information within our Company and with third parties,
including healthcare providers, business associates and our members. These
regulations include standards for common healthcare transactions, including
claims information, plan eligibility and payment information; unique identifiers
for providers and employers; security; privacy; and enforcement. We conduct our
operations in an attempt to comply with all applicable HIPAA requirements. Given
the complexity of the HIPAA regulations, the possibility that the regulations
may change and the fact that the regulations are subject to changing and
sometimes conflicting interpretation, our ongoing ability to comply with the
HIPAA requirements is uncertain. Additionally, the costs of complying with any
changes to the HIPAA regulations may have a negative impact on our operations.
Sanctions for failing to comply with the HIPAA health information provisions
include criminal penalties and civil sanctions, including significant monetary
penalties. A failure by us to comply with state health information laws that may
be more restrictive than the HIPAA regulations could result in additional
penalties.
13
IF OUR MEDICARE CONTRACT IS NOT EXTENDED OR IS TERMINATED, OUR BUSINESS WOULD BE
MATERIALLY IMPAIRED.
We provide services to our Medicare eligible members through our Medicare
Advantage contract with CMS. The current contract term expires December 31,
2008. UAHC-TN expects to receive notice of the extension of the terms of the
Medicare Advantage contract from CMS before that date. The contract is
terminable for cause if we breach a material provision of the contract or
violate relevant laws or regulations. If the contract were terminated or not
extended, or if we were unable to successfully rebid or compete for the
contracts, our business would be materially impaired.
BECAUSE OUR PREMIUMS ARE ESTABLISHED BY CONTRACT AND CANNOT BE MODIFIED DURING
THE CONTRACT TERM, OUR PROFITABILITY WILL LIKELY BE REDUCED OR WE COULD CEASE TO
BE PROFITABLE IF WE ARE UNABLE TO MANAGE OUR MEDICAL EXPENSES EFFECTIVELY.
Our SNP revenue is generated by premiums consisting of monthly payments per
member that are established by the contract with CMS for our Medicare Advantage
plan. If our medical expenses exceed our estimates, except in very limited
circumstances or as a result of risk score adjustments for Medicare member
health acuity, we will be unable to increase the premiums we receive under the
contract during its then-current term. As a result, our profitability depends,
to a significant degree, on our ability to adequately predict and effectively
manage our medical expenses related to the provision of healthcare services.
Relatively small changes in our medical loss ratio can create significant
changes in our financial results. Accordingly, failure to adequately predict and
control medical expenses or to make reasonable estimates and maintain adequate
accruals for incurred but not reported (IBNR) claims could have a material
adverse effect on our financial condition, results of operations or cash flows.
COMPETITION IN OUR MEDICARE ADVANTAGE SERVICE AREA MAY LIMIT OUR ABILITY TO
MAINTAIN OR ATTRACT MEMBERS, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
We operate in a competitive environment subject to significant changes as a
result of business consolidations, evolving Medicare products, new strategic
alliances and aggressive marketing practices by other managed care organizations
that compete with us for members. Our principal competitors for contracts,
members and providers in our local service area include national, regional and
local managed care organizations that serve Medicare. Many managed care
companies and other new Part D plan participants have greater financial and
other resources, larger enrollments, broader ranges of products and benefits,
broader geographical coverage, more established reputations in the national
market and our market, greater market share, larger contracting scale and lower
costs than us. Our failure to maintain or attract members to our Medicare
Advantage health plan as a result of such competition could adversely affect our
results of operations.
A FAILURE TO INCREASE OUR SNP MEMBERSHIP COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
A failure to increase our SNP membership could adversely affect our results of
operations. In addition to competition, factors that potentially could
contribute to the loss of, or failure to attract and retain, members include:
14
- negative accreditation results or loss of licenses or contracts to
offer Medicare Advantage plans;
- negative publicity and news coverage relating to us or the managed
healthcare industry generally;
- litigation or threats of litigation against us;
- automatic disenrollment, whether intentional or inadvertent, as a
result of members choosing another plan; and
- our inability to market to and re-enroll members who enroll with our
competitors because of the new annual enrollment and lock-in
provisions under the MMA.
A DISRUPTION IN OUR HEALTHCARE PROVIDER NETWORKS COULD HAVE AN ADVERSE EFFECT ON
OUR OPERATIONS AND PROFITABILITY.
Our operations and profitability are dependent in part on our ability to
contract with healthcare providers and provider networks on favorable terms. In
any particular service area, healthcare providers or provider networks might
refuse to contract with us, demand higher payments or take other actions that
could result in higher healthcare costs, disruption of benefits to our members
or difficulty in meeting our regulatory or accreditation requirements. If
healthcare providers refuse to contract with us, use their market position to
negotiate favorable contracts or place us at a competitive disadvantage, then
our ability to market products or to be profitable in our service area could be
adversely affected. Our provider networks could also be disrupted by the
financial insolvency of a large provider group. Any disruption in our provider
network could result in a loss of membership or higher healthcare costs.
WE RELY ON THE ACCURACY OF LISTS PROVIDED BY CMS REGARDING THE ELIGIBILITY OF A
PERSON TO PARTICIPATE IN OUR PLAN, AND ANY INACCURACIES IN THOSE LISTS COULD
CAUSE CMS TO RECOUP PREMIUM PAYMENTS FROM US WITH RESPECT TO MEMBERS WHO ARE NOT
OURS, WHICH COULD REDUCE OUR REVENUE AND PROFITABILITY.
Premium payments that we receive from CMS are based upon eligibility lists
produced by federal and local governments. From time to time, CMS may require us
to reimburse it for any premiums that we received from CMS based on eligibility
and dual-eligibility lists that CMS later discovers contained individuals who
were not in fact residing in our service area or eligible for any
government-sponsored program or were eligible for a different premium category
or a different program. We may have already provided services to these
individuals. In addition to CMS's potential recoupment of premiums previously
paid, we also are at risk that CMS might fail to pay us for members for whom we
are entitled to payment. Our profitability would be reduced as a result of such
failure to receive payment from CMS if we had made related payments to providers
and were unable to recoup such payments from them.
15
OUTSOURCED SERVICE PROVIDERS MAY MAKE MISTAKES AND SUBJECT US TO FINANCIAL LOSS
OR LEGAL LIABILITY.
We outsource certain of the functions associated with providing managed care and
management services, including claims processing. The service providers to whom
we outsource these functions and provide data could inadvertently or incorrectly
adjust, revise, omit or transmit the data in a manner that could create
inaccuracies in our risk adjustment information, cause us to overstate or
understate our revenue, cause us to authorize incorrect payment levels to
members of our provider networks, or violate certain laws and regulations, such
as HIPAA.
NEGATIVE PUBLICITY REGARDING THE MANAGED HEALTHCARE INDUSTRY GENERALLY OR THE
COMPANY IN PARTICULAR COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS OR
BUSINESS.
Negative publicity regarding the managed healthcare industry generally or the
Company in particular may result in increased regulation and legislative review
of industry practices that further increase our costs of doing business and
adversely affect our results of operations by:
- requiring us to change our products and services;
- increasing the regulatory burdens under which we operate;
- adversely affecting our ability to market our products or services; or
- adversely affecting our ability to attract and retain members.
WE ARE DEPENDENT UPON OUR EXECUTIVE OFFICERS, AND THE LOSS OF ANY ONE OR MORE OF
THEM AND THEIR MANAGED CARE EXPERTISE COULD ADVERSELY AFFECT OUR BUSINESS.
Our operations are highly dependent on the efforts of William C. Brooks, our
President and Chief Executive Officer, and certain other senior executives who
have been instrumental in developing our business strategies and forging our
business relationships. The Company neither has nor intends to pursue any
long-term employment agreement with any of its key personnel. Accordingly, there
is no assurance that the Company will be able to maintain such relationships or
attract such professionals. Although we believe we could replace any executive
we lose, the loss of the leadership, knowledge and experience of Mr. Brooks and
our other executive officers could adversely affect our business. Moreover,
replacing one or more of our executives may be difficult or may require an
extended period of time. We do not currently maintain key man insurance on any
of our executive officers.
VIOLATION OF THE LAWS AND REGULATIONS APPLICABLE TO US COULD EXPOSE US TO
LIABILITY, REDUCE OUR REVENUE AND PROFITABILITY OR OTHERWISE ADVERSELY AFFECT
OUR OPERATIONS AND OPERATING RESULTS.
The federal and state agencies administering the laws and regulations applicable
to us have broad discretion to enforce them. We are subject on an ongoing basis
to various governmental reviews, audits and investigations to verify our
compliance with our contracts, licenses and applicable laws and regulations. An
adverse review, audit or investigation could result in any of the following:
16
- loss of our right to participate in the Medicare program;
- loss of our license to act as an HMO or to otherwise provide a
service;
- forfeiture or recoupment of amounts we have been paid pursuant to our
contracts;
- imposition of significant civil or criminal penalties, fines or other
sanctions on us and our key employees;
- damage to our reputation in existing and potential markets;
- increased restrictions on marketing our products and services; and
- inability to obtain approval for future products and services,
geographic expansions or acquisitions.
CLAIMS RELATING TO MEDICAL MALPRACTICE AND OTHER LITIGATION COULD CAUSE US TO
INCUR SIGNIFICANT EXPENSES.
From time to time, we are party to various litigation matters, some of which
seek monetary damages. Managed care organizations may be sued directly for
alleged negligence, including in connection with the credentialing of network
providers or for alleged improper denials or delay of care. In addition, our
providers involved in medical care decisions may be exposed to the risk of
medical malpractice claims. Although our network providers are independent
contractors, claimants sometimes allege that a managed care organization should
be held responsible for alleged provider malpractice, and some courts have
permitted that theory of liability.
Similar to other managed care companies, we may also be subject to other claims
of our members in the ordinary course of business, including claims of improper
marketing practices by our independent and employee sales agents and claims
arising out of decisions to deny or restrict reimbursement for services.
We cannot predict with certainty the eventual outcome of any pending litigation
or potential future litigation, and there can be no assurance that we will not
incur substantial expense in defending future lawsuits or indemnifying third
parties with respect to the results of such litigation. The loss of even one of
these claims, if it results in a significant damage award, could have a material
adverse effect on our business. In addition, our exposure to potential liability
under punitive damage or other theories could significantly decrease our ability
to settle these claims on reasonable terms.
We maintain errors and omissions insurance and other insurance coverage that we
believe are adequate based on industry standards. Potential liabilities may not
be covered by insurance, our insurers may dispute coverage or may be unable to
meet their obligations or the amount of our insurance coverage and related
reserves may be inadequate.
There can be no assurance that we will be able to obtain insurance coverage in
the future, or that insurance will continue to be available on a cost-effective
basis, if at all. Moreover, even if
17
claims brought against us are unsuccessful or without merit, we would have to
defend ourselves against such claims. The defense of any such actions may be
time-consuming and costly and may distract our management's attention. As a
result, we might incur significant expenses and might be unable to effectively
operate our business.
IF WE ARE UNABLE OR FAIL TO PROPERLY MAINTAIN EFFECTIVE AND SECURE MANAGEMENT
INFORMATION SYSTEMS, SUCCESSFULLY UPDATE OR EXPAND PROCESSING CAPABILITY OR
DEVELOP NEW CAPABILITIES TO MEET OUR BUSINESS NEEDS, THAT COULD RESULT IN
OPERATIONAL DISRUPTIONS AND OTHER ADVERSE CONSEQUENCES.
Our business depends significantly on effective and secure information systems.
The information gathered and processed by our management information systems
assists us in, among other things, marketing and sales tracking, billing, claims
processing, medical management, medical care cost and utilization trending,
financial and management accounting, reporting, planning and analysis. These
information systems and applications require continual maintenance, upgrading
and enhancement to meet our operational needs and handle our expansion and
growth. Any inability or failure to properly maintain management information
systems or related disaster recovery programs, successfully update or expand
processing capability or develop new capabilities to meet our business needs in
a timely manner could result in operational disruptions, loss of existing
members, difficulty in attracting new members or in implementing our growth
strategies, disputes with members and providers, regulatory problems, increases
in administrative expenses, loss of our ability to produce timely and accurate
reports, and other adverse consequences. To the extent a failure in maintaining
effective information systems occurs, we may need to contract for these services
with third-party management companies, which could be on less favorable terms to
us and could significantly disrupt our operations and information flow.
Furthermore, our business requires the secure transmission of confidential
information over public networks. Because of the confidential health information
we store and transmit, security breaches could expose us to a risk of regulatory
action, litigation and possible liability and loss. Our security measures may be
inadequate to prevent security breaches and our business operations and
profitability could be adversely affected by cancellation of contracts, loss of
members and potential criminal and civil sanctions if they are not prevented.
IF WE ARE UNABLE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL
REPORTING, INVESTORS COULD LOSE CONFIDENCE IN THE RELIABILITY OF OUR FINANCIAL
STATEMENTS, WHICH COULD RESULT IN A DECLINE IN THE PRICE OF OUR COMMON STOCK.
Because of our status as a public company, we are required to enhance and test
our financial, internal and management control systems to meet obligations
imposed by the Sarbanes-Oxley Act of 2002. We have worked and are working with
our independent legal, accounting and financial advisors to identify those areas
in which changes should be made to our financial and management control systems.
These areas include corporate governance, corporate control, internal audit,
disclosure controls and procedures, and financial reporting and accounting
systems. Consistent with the Sarbanes-Oxley Act and the rules and regulations of
the SEC, management's assessment of our internal controls over financial
reporting is required in this
18
Annual Report on Form 10-K and the audit opinion of the Company's independent
registered accounting firm as to the effectiveness of our controls will be first
required in connection with the Company's filing of its Annual Report on Form
10-K for the fiscal year ending June 30, 2010. If we are unable to timely
identify, implement and conclude that we have effective internal controls over
financial reporting, investors could lose confidence in the reliability of our
financial statements, which could result in a decrease in the value of our
common stock. Our assessment of our internal controls over financial reporting
may also uncover weaknesses or other issues with these controls that could also
result in adverse investor reaction.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company currently leases approximately 30,000 aggregate square feet in
Detroit, Michigan and Memphis, Tennessee, from which it conducts its operations
in Michigan and Tennessee. The principal offices of the Company are located at
300 River Place, Suite 4950, Detroit, Michigan, where it currently leases
approximately 3,800 square feet of office space.
The Company believes that its current facilities provide sufficient space
suitable for all of its activities and that sufficient other space will be
available on reasonable terms, if needed.
ITEM 3. LEGAL PROCEEDINGS
On March 17, 2006, the United States District Court for the Eastern District of
Michigan consolidated two cases collectively called "In re United American
Healthcare Corporation Securities Litigation," Master File No.
2:2005cv72112(LPZ/RSW). The complaints had been filed on May 27, 2005 and June
16, 2005 by Gregory Zaluski and William Coleman, respectively, against the
Company and certain of its present and past officers. The plaintiffs, each on
behalf of himself and all others similarly situated, alleged that in the period
from May 26, 2000 through April 22, 2005, the Company made materially false and
misleading statements in violation of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder, with the alleged result of artificially
inflating the market price of the Company's stock during that period. Both
complaints alleged that as a direct result of facts publicly disclosed by the
Company in April 2005, the Company's stock price dropped by about $3.39. Each
plaintiff claimed to represent a class consisting of others who purchased the
Company's stock during the specified period. The plaintiffs sought to recover
damages on behalf of themselves and the proposed class. Pursuant to a motion by
the Company and the other defendants, the U.S. District Court dismissed the
consolidated complaint against all defendants with prejudice on January 30,
2007. On March 1, 2007, the plaintiffs appealed the dismissal order to the U.S.
Court of Appeals for the Sixth Circuit (the "Sixth Circuit"). On May 27, 2008,
the Sixth Circuit issued an opinion and order affirming the District Court's
dismissal of the
19
consolidated complaint. On June 10, 2008, the plaintiffs filed a petition for
rehearing en banc with the Sixth Circuit. On August 22, 2008, the Sixth Circuit
denied the plaintiffs' petition.
The Company is a defendant with others in a lawsuit that commenced in February
2005 in the Circuit Court for the 30th Judicial Circuit, in the County of
Ingham, Michigan, Case No. 05127CK, entitled "Provider Creditors Committee on
behalf of Michigan Health Maintenance Organizations Plans, Inc. v. United
American Health Care Corporation and others, et al." The complaint seeks damages
in excess of $62 million from the Company and other defendants based on
allegations that the Company breached its management agreement with OmniCare
Health Plan in Michigan ("OmniCare-MI") and that the Company's actions as the
management company of OmniCare-MI resulted in such alleged damages. The Company
filed an answer and affirmative defenses and a motion for partial summary
disposition seeking dismissal of numerous counts; and the defendants filed a
joint motion for change of venue and for partial summary disposition seeking
dismissal of numerous counts. The trial judge denied the change-of-venue motion
but ordered a stay of the case pending appeal of that decision to the Michigan
Court of Appeals. On March 29, 2007, the Michigan Court of Appeals reversed the
trial court's order that had denied the motion for change of venue. The Court of
Appeals ruled in favor of the defendants, ordering the transfer of the case from
the Ingham County Circuit Court to the Wayne County Circuit Court in Detroit,
Michigan. After such transfer, the new trial judge dismissed some defendants
from the case in May 2008. The plaintiff filed a Third Amended Complaint on
August 15, 2008, detailing certain previously-pleaded allegations against the
remaining defendants, including the Company. Active discovery is ongoing, and
the Company continues to vigorously defend the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Shares of the Company's common stock are traded on the NASDAQ Capital Market
under the trading symbol "UAHC".
The table below sets forth for the Common Stock the range of the high and low
sales prices per share on the NASDAQ Capital Market for each quarter in the past
two fiscal years.
2008 SALES PRICE 2007 SALES PRICE
---------------- ----------------
FISCAL QUARTER HIGH LOW HIGH LOW
-------------- ----- ----- ----- -----
First $4.72 $3.42 $6.61 $2.77
Second $4.19 $2.53 $9.50 $5.80
Third $2.82 $2.01 $8.53 $4.65
Fourth $3.14 $1.36 $5.30 $3.70
As of August 27, 2008, the closing price of the Common Stock was $1.68 per share
and there were approximately 99 shareholders of record of the Company.
The Company has not paid any cash dividends on its Common Stock since its
initial public offering in fiscal 1991 and does not anticipate paying such
dividends in the foreseeable future. The Company intends to retain earnings for
use in the operation and expansion of its business.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table shows consolidated financial data for fiscal years
indicated:
2008 2007 2006 2005 2004
------- ------- ------- ------- -------
(in thousands, except per share data)
Operating Data (Year ended June 30):
Operating revenues $28,208 $18,065 $18,114 $22,079 $22,084
Earnings (loss) from continuing operations (4,042) (1,117) 1,373 5,474 7,871
Loss from discontinued operation, net of
income taxes -- -- -- (129) (700)
Net earnings (loss) (4,042) (1,117) 1,373 5,345 7,171
Earnings (loss) per common share from
continuing operations - basic $ (0.47) $ (0.14) $ 0.18 $ 0.74 $ 1.09
Net earnings (loss) per common share - basic $ (0.47) $ (0.14) $ 0.18 $ 0.72 $ 0.99
Net earnings (loss) per common share -
diluted $ (0.47) $ (0.14) $ 0.18 $ 0.69 $ 0.99
Weighted average common shares outstanding -
diluted 8,666 8,103 7,628 7,674 7,266
Balance Sheet Data (June 30):
Cash and investments $19,487 $14,228 $ 6,921 $13,573 $ 8,767
Goodwill -- 3,452 3,452 3,452 3,452
Total assets 30,797 33,768 25,226 24,235 20,081
Medical claims and benefits payable 2,563 576 156 172 406
Debt -- -- -- -- 847
Shareholders' equity 24,339 27,641 22,050 20,483 14,885
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Financial Review discusses the Company's results of operations, financial
position and liquidity. This discussion should be read in conjunction with the
consolidated financial statements and related notes thereto contained elsewhere
in this annual report.
This discussion and the information elsewhere in this 10-K annual report contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act that are subject to the safe harbor provisions created by
that Act. Forward-looking statements can be identified by the use of terms such
as "expects," "could," "may," "believes," "anticipates," "will" and other future
tense and forward-looking terminology. 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.
The Company provides comprehensive management and consulting services to UAHC
Health Plan of Tennessee, Inc. ("UAHC-TN"), a managed care organization ("MCO")
which is a wholly owned second-tier subsidiary of United American Healthcare
Corporation. Since November 1993, UAHC-TN has had a contract with the State of
Tennessee for the State's "TennCare" program, to arrange for the financing and
delivery of health care services on a capitated basis to eligible Medicaid
beneficiaries and non-Medicaid individuals who lack access to private or
employer sponsored health insurance or to another government health plan. As of
June 30, 2008, UAHC-TN's total TennCare enrollment was 98,976 members, compared
to 101,940 at June 30, 2007.
On April 22, 2008 we learned that UAHC-TN will cease providing managed care
services as a TennCare contractor when its present TennCare contract expires.
Revenue under this contract will be earned through October 31, 2008 as UAHC-TN's
TennCare members are expected to transfer to other managed care organizations on
November 1, 2008, after which UAHC-TN will perform its remaining contractual
obligations through its TennCare contract expiration date of June 30, 2009.
Revenue under this contract represented 57.6% and 88.8% of the Company's total
revenues for the fiscal year ended June 30, 2008 and 2007, respectively. Total
costs related to this contract discontinuance are estimated to range between
$4.6 - $6.6 million, which includes claim processing costs, employee severance,
lease termination costs and other corporate general administrative expenses
beginning November 2008 through June 2009.
On October 10, 2006, UAHC-TN entered into a contract with the Centers for
Medicare & Medicaid Services (CMS) to act as a Medicare Advantage qualified
organization. The contract authorizes UAHC-TN to serve members enrolled in both
the Tennessee Medicaid and Medicare programs, commonly referred to as
"dual-eligibles," specifically to offer a Special Needs Plan
23
("SNP") to its eligible members in Shelby County, Tennessee (including the City
of Memphis), and to operate a Voluntary Medicare Prescription Drug Plan, both
beginning January 1, 2007. The contract term is through December 31, 2008, after
which the contract may be renewed for successive one-year periods in accordance
with its terms.
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 2008 COMPARED TO 2007
UAHC-TN DEVELOPMENTS
UAHC-TN's results of operations for fiscal 2008 and 2007 are best understood in
the context of certain earlier events involving several of TennCare's major
contracted MCOs, which ceased doing business in fiscal 2002. Beginning in
February, March and April 2002, UAHC-TN unexpectedly noticed increases in its
claims payments, investigated, and found that approximately 9,500 new members
added in September-December 2001 represented children with special needs with
medical costs over 100% of the premiums received, and that many members
transferred to UAHC-TN from failed MCOs also had medical costs in excess of
UAHC-TN's premiums received. Beginning in April 2002, UAHC-TN wrote to TennCare
seeking risk adjustments and reimbursements to compensate UAHC-TN for such
medical expenses, including for actuarially estimated claims incurred but not
yet reported to UAHC-TN.
TennCare responded to its MCOs' situation generally and in some instances
individually. For all its contracted MCOs generally, TennCare changed its
reimbursement system to an administrative services only ("ASO") program for an
18-month stabilization period (July 1, 2002 through December 31, 2003), during
which the MCOs - including UAHC-TN - had no medical cost risk (i.e., no risk for
medical losses), earned fixed administrative fees and were subject to increased
oversight. 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
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, under which they became at risk for losing up to 10% of administrative
fee revenue and could receive up to 15% incentive bonus revenue based on
performance relative to benchmarks.
Under two escrow agreements between the Company and TennCare, on August 5, 2005
the Company funded two escrow accounts held by TennCare at the State Treasury.
Both escrow agreements recited that TennCare did not at that time assert there
had been any breach of UAHC TN's TennCare contract and that the Company funded
the escrow accounts as a show of goodwill and good faith in working with
TennCare.
The larger escrow account, which has expired, was in the original amount of
$2,300,000 and was security for repayment to TennCare of any overpayments to
UAHC-TN that might be determined by a state regulatory audit of all UAHC-TN
processed claims. UAHC-TN was notified in late fiscal 2007 that UAHC-TN may have
incorrectly received an overpayment of $1.1 million for medical claims as a
result of a discrepancy in the pricing methodology. In August 2007, the Company
received $1,289,851 plus accumulated interest earnings back from the $2,300,000
24
escrow account. In November 2007, the remaining $1,010,149 account balance was
paid to TennCare for claims discrepancies found in the audit by the Tennessee
Department of Commerce and Insurance.
The other escrow account, in the original 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 account will terminate 30 days
after the conclusion of such investigations, unless the parties earlier agree
otherwise. The escrow account bears interest at a rate no lower than the
prevailing commercial interest rate for savings accounts at financial
institutions in Nashville, Tennessee. All amounts (including interest earnings)
credited to the escrow account 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 agreement.
In addition, based on a subsequent regulatory evaluation conducted by the
Tennessee Department of Commerce and Insurance, it was determined that TennCare
overpaid UAHC-TN $0.4 million in excess of UAHC-TN's statutory net worth
requirement as of June 30, 2002, based on a 2002 contractual agreement. The
Company recorded a reserve in fiscal 2007 and subsequently paid this amount in
fiscal 2008. These items have been reflected as "Provision for claims audit and
other commitment" on our Consolidated Statements of Operations.
SPECIFIC COMPARISONS OF 2008 TO 2007
Total revenues increased $10.1 million (56%) to $28.2 million for the fiscal
year ended June 30, 2008 compared to $18.1 million for the fiscal year ended
June 30, 2007. The increase in medical premiums revenues associated with
UAHC-TN's Medicare Advantage SNP product ("MA SNP") as well as an increase in
modified risk revenue were offset by a decrease in fixed administrative fees.
MA-SNP medical premiums revenues were $10.6 million for the fiscal year ended
June 30, 2008 compared to $0.9 million for the fiscal year ended June 30, 2007,
under UAHC-TN's contract with CMS that began January 1, 2007. The increase in
medical premiums is a result of increased membership.
The net MA-SNP per member per month ("PMPM") premium rate, based on an average
membership of 767 for the one year ended June 30, 2008, was $1,228 for that
one-year period.
Fixed administrative fees related to the MRA program were $14.5 million for the
fiscal year ended June 30, 2008, a decrease of $1.0 million (7%) from fixed
administrative fees of $15.5 million for the fiscal year ended June 30, 2007.
The decrease in fixed administrative fees is principally due to a decrease in
members.
Variable administrative fees resulting from the MRA were $1.7 million for the
fiscal year ended June 30, 2008 compared to $0.5 million for the fiscal year
ended June 30, 2007. Of the $1.7 million MRA revenue recorded in fiscal year
2008, $0.3 million MRA revenue received relates to the third quarter of fiscal
2006 and $1.4 million MRA revenue received relates to fiscal year 2007. The $0.5
million MRA revenue received in fiscal 2007 relates to the fourth quarter of
fiscal 2006. Under the MRA, UAHC-TN is at risk to lose up to 10% of
administrative fee
25
revenue and potentially could receive up to 15% incentive bonus revenue based on
performance relative to benchmarks (through June 30, 2007). The Company's
accounting policy is to recognize MRA revenues upon notification by TennCare
that the revenue has been earned. Effective July 1, 2007, the evaluation period
for the MRA was changed from quarterly to annually, and the incentive bonus pool
was adjusted to 20% of administrative fee revenue.
Total expenses were $30.1 million for the fiscal year ended June 30, 2008,
compared to $19.1 million for the prior fiscal year, an increase of $11.0
million (57%). The increase is principally due to a goodwill impairment charge
of $3.5 million and medical expenses related to our MA-SNP, which was launched
in January 2007. See Note 2 to our Consolidated Financial Statements in Item 15
below.
Medical expenses for MA-SNP (beginning January 1, 2007) were $9.6 million during
the fiscal year ended June 30, 2008, an increase of $8.7 million from $0.9
million during the fiscal year ended June 30, 2007. Medical expenses generally
consist of claim payments, pharmacy costs, and estimates of future payments of
claims provided for services rendered prior to the end of the reporting period
(such estimates of medical claims incurred but not reported are also known as
"IBNR"). The IBNR was primarily based on medical cost estimates from historical
data provided by CMS and emerging medical claims experience together with
current factors using accepted actuarial methods. As UAHC-TN gains more claims
experience for its Medicare Advantage members, less reliance will be placed on
medical cost estimates based on historical data provided by CMS. The percentage
of such medical expenses to medical premiums revenues for MA-SNP -- the medical
loss ratio ("MLR") -- was 87.8% for the fiscal year ended June 30, 2008.
General and administrative expenses were $16.9 million for the fiscal year ended
June 30, 2008, as compared with $16.6 million for the prior fiscal year, an
increase of $0.3 million. The increase is principally due to marketing costs
associated with the launch of our MA-SNP.
Depreciation and amortization expense increased $0.1 million to $0.2 million for
the fiscal year ended June 30, 2008 compared to $0.1 million for the fiscal year
ended June 30, 2007.
Loss from operations before income taxes was $1.9 million for the fiscal year
ended June 30, 2008 compared to loss from operations before income taxes of $1.1
million for the fiscal year ended June 30, 2007. Such increase in loss from
operations of $0.8 million, or $0.10 per basic share, is principally due to a
goodwill impairment charge of $3.5 million and medical expenses related to our
MA-SNP, which was launched in January 2007.
Income tax expense was $2.1 million for the fiscal year ended June 30, 2008
compared to $0.1 million for the prior fiscal year. The Company's effective tax
rate for the fiscal year ended June 30, 2008 differs from the statutory rate of
34%. This difference was primarily related to the change in the valuation
allowance and an impairment charge against goodwill, which is not deductible for
tax purposes. As a result of the pending expiration of the TennCare contract,
the Company increased its deferred tax asset valuation allowance due to
uncertainties in its expected utilization.
26
Net loss was $4.0 million, or $(0.47) per basic share, for the fiscal year
ended June 30, 2008, compared to net loss of $1.1 million, or $(0.14) per basic
share, for the fiscal year ended June 30, 2007, an increase in the net loss of
$2.9 million (262%). The increased net loss is principally due to the goodwill
impairment charge of $3.5 million recorded in the third quarter of fiscal 2008
and deferred tax expense resulting from the pending expiration of the TennCare
contract as further discussed in Note 12 to our Consolidated Financial
Statements in Item 15 below. The decrease was offset by the increase in the
variable administrative fees and Medicare premiums related to our MA SNP.
Excluding the goodwill impairment charge and the increase of the deferred tax
asset valuation allowance, net income would have been $1.4 million for fiscal
year ended June 30, 2008.
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 2007 TO 2006
Total revenues were unchanged at $18.1 million for the fiscal year ended June
30, 2007 compared to $18.1 million for the fiscal year ended June 30, 2006. The
increase in medical premiums revenues associated with UAHC-TN's Medicare
Advantage SNP product ("MA SNP") as well as an increase in modified risk revenue
were offset by a decrease in fixed administrative fees.
MA-SNP medical premiums revenues were $0.9 million for the fiscal year ended
June 30, 2007, under UAHC-TN's contract with CMS that began January 1, 2007.
There were no TennCare medical premiums revenues for the fiscal years ended June
30, 2007 and 2006.
The net MA-SNP per member per month ("PMPM") premium rate, based on an average
membership of 155 for the six months ended June 30, 2007, was $979 for that
six-month period.
Fixed administrative fees related to the MRA program were $15.5 million for the
fiscal year ended June 30, 2007, a decrease of $1.1 million (6%) from fixed
administrative fees of $16.6 million for the fiscal year ended June 30, 2006.
The decrease in fixed administrative fees is principally due to a decrease in
members.
Variable administrative fees resulting from MRA were $0.5 million for the fiscal
year ended June 30, 2007 compared to $0.4 million for the fiscal year ended June
30, 2006. The $0.5 million MRA revenue received in fiscal 2007 relates to the
fourth quarter of fiscal 2006. UAHC-TN received notice from TennCare that it
earned additional MRA revenue of $0.2 million, $0.2 million, and $0.5 million,
respectively, for its performance for the first, second and fourth quarters of
fiscal 2006.
Total expenses were $19.1 million for the fiscal year ended June 30, 2007,
compared to $16.6 million for the prior fiscal year, an increase of $2.5 million
(15%). The increase is principally due to a reserve against the restricted
assets related to the claims audit escrow account and marketing costs associated
with the launch of our MA-SNP. See discussion of the claims audit escrow below
under "Liquidity and Capital Resources below."
Medical expenses for MA-SNP (beginning January 1, 2007) were $0.9 million during
the fiscal year ended June 30, 2007. Medical expenses generally consist of claim
payments, pharmacy
27
costs, and estimates of future payments of claims provided for services rendered
prior to the end of the reporting period (such estimates of medical claims
incurred but not reported are also known as "IBNR"). The IBNR was primarily
based on medical cost estimates from historical data provided by CMS and
emerging medical claims experience together with current factors using accepted
actuarial methods. As UAHC-TN gains more claims experience for its Medicare
Advantage members, less reliance will be placed on medical cost estimates based
on historical data provided by CMS. The percentage of such medical expenses to
medical premiums revenues for MA-SNP -- the medical loss ratio ("MLR") -- was
90% for the fiscal year ended June 30, 2007.
General and administrative expenses were $16.6 million for the fiscal year ended
June 30, 2007, as compared with $16.5 million for the prior fiscal year, an
increase of $0.1 million. The increase is principally due to marketing costs
associated with the launch of our MA-SNP.
Depreciation and amortization expense remained constant at $0.1 million for the
fiscal years ended June 30, 2007 and June 30, 2006.
Loss from operations before income taxes was $1.1 million for the fiscal year
ended June 30, 2007 compared to earnings from operations before income taxes of
$1.5 million for the fiscal year ended June 30, 2006. Such decrease in earnings
from operations of $2.6 million, or $0.32 per basic share, is principally due to
a provision for claims audit and other commitment, a decrease in administrative
fee revenue and an increase in general and administrative expenses related to
the launch of our MA-SNP.
Income tax expense was $0.1 million for the fiscal year ended June 30, 2007
compared to $0.1 million for the prior fiscal year. The Company's effective tax
rate for the fiscal year ended June 30, 2007 differs from the statutory rate of
34%. This difference is the result of various book-tax differences that result
in taxable income that differs from the book loss.
Net loss was $1.1 million, or $(0.14) per basic share, for the fiscal year ended
June 30, 2007, compared to net earnings of $1.4 million, or $0.18 per basic
share, for the fiscal year ended June 30, 2006, a decrease of $2.4 million
(181%). Such decrease in net earnings is principally due to a provision for
claims audit and other commitment, a decrease in administrative fee revenue and
an increase in general and administrative expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2008, the Company had (i) cash and cash equivalents and short-term
marketable securities of $19.5 million, compared to $14.2 million at June 30,
2007; (ii) working capital of $15.3 million, compared to working capital of
$13.1 million at June 30, 2007; and (iii) a current assets-to-current
liabilities ratio of 3.38 to 1, compared to 3.13 to 1 at June 30, 2007.
Net cash from operating activities was $5.5 million in fiscal 2008 compared to
net cash from operating activities of $1.5 million in fiscal 2007. Investing
activities in fiscal 2008 included the
28
purchase of $13.5 million of marketable securities and sales of $17.0 million of
marketable securities.
Cash flow was $1.8 million for the fiscal year ended June 30, 2008, compared to
$4.6 million for the prior fiscal year.
Cash and marketable securities increased by $5.3 million at June 30, 2008
compared to June 30, 2007 primarily due to the purchase of marketable
securities.
Accounts receivable decreased by $0.4 million at June 30, 2008 compared to June
30, 2007, primarily due to timing of TennCare payments.
Property, plant and equipment increased by $0.1 million at June 30, 2008
compared to June 30, 2007, due to equipment purchases of $0.3 million offset by
depreciation.
Medical claims payable increased by $2.0 million at June 30, 2008 compared to
June 30, 2007, which is directly related to MA-SNP plan activity that began
January 1, 2007.
Accounts payable decreased by $1.4 million at June 30, 2008 compared to June 30,
2007, principally due the payment of the claims audit and other commitments
recorded in fiscal year 2007
The Company's wholly owned subsidiary, UAHC-TN, had a required minimum net worth
requirement using statutory accounting practices of $7.2 million at June 30,
2008. UAHC-TN had excess statutory net worth of approximately $7.6 million at
June 30, 2008. The net worth and depository requirement will be in effect
through the contract termination date of June 30, 2009, or sooner, if so
approved by the Tennessee Department of Commerce and Insurance. At such time,
UAHC-TN, must continue to maintain net worth requirements of at least $1.5
million as statutory reserves for its ongoing Medicare operations.
UAHC-TN's application for a commercial HMO license was approved on September 7,
2001. However, management is not yet actively pursuing that commercial business.
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
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, under which they became at risk for losing up to 10% of administrative
fee revenue and could receive up to 15% incentive bonus revenue based on
performance relative to benchmarks.
Under two escrow agreements between the Company and TennCare, on August 5, 2005
the Company funded two escrow accounts held by TennCare at the State Treasury.
Both escrow agreements recited that TennCare did not at that time assert there
had been any breach of
29
UAHC TN's TennCare contract and that the Company funded the escrow accounts as a
show of goodwill and good faith in working with TennCare.
The larger escrow account, which has expired, was in the original amount of
$2,300,000 and was security for repayment to TennCare of any overpayments to
UAHC-TN that might be determined by a state regulatory audit of all UAHC-TN
processed claims. UAHC-TN was notified in late fiscal 2007 that UAHC-TN may have
incorrectly received an overpayment of $1.1 million for medical claims as a
result of a discrepancy in the pricing methodology. In August 2007, the Company
received $1,289,851 plus accumulated interest earnings back from the $2,300,000
escrow account. In November 2007, the remaining $1,010,149 account balance was
paid to TennCare for claims discrepancies found in the audit by the Tennessee
Department of Commerce and Insurance.
The other escrow account, in the original 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 account will terminate 30 days
after the conclusion of such investigations, unless the parties earlier agree
otherwise. The escrow account bears interest at a rate no lower than the
prevailing commercial interest rate for savings accounts at financial
institutions in Nashville, Tennessee. All amounts (including interest earnings)
credited to the escrow account 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 agreement.
On April 22, 2008 we learned that UAHC-TN will cease providing managed care
services as a TennCare contractor when its present TennCare contract expires.
UAHC-TN's TennCare members are expected to transfer to other managed care
organizations on November 1, 2008, after which UAHC-TN will perform its
remaining contractual obligations through its TennCare contract expiration date
of June 30, 2009. Revenue under this contract represented 60.5% and 93.9% of the
Company's total revenues for the fiscal year ended June 30, 2008 and 2007,
respectively. Management believes that the discontinuance of the TennCare
contract will have a material impact on the Company's operations.
In a December 13, 2006 private placement transaction, the Company raised gross
proceeds of $6.50 million through the sale of 1,000,000 newly issued shares of
its common stock to certain institutional and other accredited investors at a
price of $6.50 per share. The investors also received warrants to purchase
99,999 shares of the Company's common stock at an exercise price of $8.50 per
share and expiring in December 2011. In addition, the Company agreed to pay the
co-placement agents a transaction fee of $325,000 and warrants to purchase
50,000 shares of the Company's common stock at an exercise price of $9.01 per
share. The uses of the net proceeds from the private placement have been
principally for start-up costs associated with the Company's Tennessee
subsidiary's new Medicare Advantage contract with the Centers for Medicare &
Medicaid Services, which became effective January 1, 2007. The remainder was to
be used for working capital and general corporate purposes.
30
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 that began July 1, 2005, 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. Total costs related to this
contract discontinuance are estimated to range between $4.6 - $6.6 million,
which includes claim processing costs, employee severance, lease termination
costs and other corporate general administrative expenses beginning November
2008 through June 2009.
RECENTLY ENACTED PRONOUNCEMENTS
The following are new accounting standards and interpretations that may be
applicable in the future to the Company:
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("FASB 157"). FASB 157 enhances existing
guidance for measuring assets and liabilities using fair value. Prior to the
issuance of FASB 157, guidance for applying fair value was incorporated in
several accounting pronouncements. FASB 157 provides a single definition of fair
value, together with a framework for measuring it, and requires additional
disclosure about the use of fair value to measure assets and liabilities. FASB
157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets. Under FASB 157, fair
value measurements are disclosed by level within that hierarchy. While FASB 157
does not add any new fair value measurements, it does change what had been
current practice. Such changes include: (1) a requirement for an entity to
include its own credit standing in the measurement of its liabilities; (2) a
modification of the transaction price presumption; (3) a prohibition on the use
of block discounts when valuing large blocks of securities for broker-dealers
and investment companies; and (4) a requirement to adjust the value of
restricted stock for the effect of the restriction even if the restriction
lapses within one year. FASB 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company has not determined the impact of adopting FASB
157 on its financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
("FASB 159"). This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. An entity shall
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. FASB 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided that the entity also
elects to apply the provisions of FASB 157. The Company is continuing to
evaluate the impact of this statement.
31
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
SFAS No. 141(R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 160 clarifies
that a noncontrolling interest in a subsidiary should be reported as equity in
the consolidated financial statements. The calculation of earnings per share
will continue to be based on income amounts attributable to the parent. SFAS No.
141(R) and SFAS No. 160 are effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early adoption is prohibited. The
Company has not yet determined the effect on our consolidated financial
statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51 ("SFAS 160"),
which establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No.
160 clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS No. 160 also requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. SFAS No.
160 also provides guidance when a subsidiary is deconsolidated and requires
expanded disclosures in the consolidated financial statements that clearly
identify and distinguish between the interests of the parent's owners and the
interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company is currently evaluating the impact this
statement will have on its financial position and results of operations.
In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date
of FASB Statement No. 157 ("FSP 157-2"), which delays the effective date of SFAS
157 for nonfinancial assets and nonfinancial liabilities. Therefore, the Company
has delayed application of SFAS 157 to its nonfinancial assets and nonfinancial
liabilities, which include assets and liabilities acquired in connection with a
business combination, goodwill, intangible assets and asset retirement
obligations, until January 1, 2009. The Company is currently evaluating the
impact of SFAS 157 for nonfinancial assets and liabilities on the Company's
financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities ("SFAS 161"), which amends and expands the
disclosure requirements of FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), with the intent to provide
users of financial statements with an enhanced understanding of: (a) how and why
an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
32
interpretations; and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance and cash flows.
SFAS 161 requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative instruments. This
statement applies to all entities and all derivative instruments. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company has not yet determined the effect
on our financial statements, if any, upon adoption of SFAS No. 161.
In May, 2008, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 162, "The Hierarchy of Generally
Accepted Accounting Principles," ("SFAS No. 162"). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60
days following the SEC's approval of the Public Company Accounting Oversight
Board's amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles." The FASB has stated
that it does not expect SFAS No. 162 will result in a change in current
practice. The application of SFAS No. 162 will have no effect on the Company's
financial position, results of operations or cash flows.
Also in May 2008, the FASB issued SFAS No. 163, "Accounting for Financial
Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60"
("SFAS 163"). SFAS 163 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. SFAS 163 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and all interim periods within those fiscal years. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS 163 on
its financial statements but does not expect it to have an effect on the
Company's financial position, results of operations or cash flows.
In May 2008, FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (Including Partial Cash
Settlement) ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt
securities that, upon conversion, may be settled by the issuer fully or
partially in cash. FSP APB 14-1 specifies that issuers of such instruments
should separately account for the liability and equity components in a manner
that will reflect the entity's nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP APB 14-1 is effective for
financial statements issued for fiscal years after December 15, 2008, and must
be applied on a retrospective basis. Early adoption is not permitted. We are
assessing the potential impact of this FSP on our convertible debt issuances.
In June 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities ("FSP EITF
03-6-1"). FSP EITF 03-6-1 addresses
33
whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in
the earnings allocation in computing earnings per share under the two-class
method as described in SFAS No. 128, Earnings per Share. Under the guidance of
FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of
earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and all prior-period earnings per share data presented shall
be adjusted retrospectively. Early application is not permitted. We are
assessing the potential impact of this FSP on our earnings per share
calculation.
In June 2008, FASB ratified EITF No. 07-5, Determining Whether an Instrument (or
an Embedded Feature) is Indexed to an Entity's Own Stock ("EITF 07-5"). EITF
07-5 provides that an entity should use a two-step approach to evaluate whether
an equity-linked financial instrument (or embedded feature) is indexed to its
own stock, including evaluating the instrument's contingent exercise and
settlement provisions. EITF 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008. Early application is not
permitted. We are assessing the potential impact of this EITF on our financial
condition and results of operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Presented beginning at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as defined in rule 13a-15 and 15d-15 under the Exchange
Act within 90 days of the filing date of this Report. Based on their evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that
these controls and procedures are effective as of June 30, 2008.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no significant changes in the Company's internal controls over
financial reporting during the three months ended June 30, 2008 that have
materially affected, or are reasonably likely to materially effect, our internal
controls over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Rule 13a-15 (f) under the Securities Exchange Act of 1934. The Company's
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles in the United States. However all internal
control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
reporting.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of June 30, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO") in Internal Control-Integrated Framework. Based on
our assessment, management believes that the Company maintained effective
internal control over financial reporting as of June 30, 2008 based on those
criteria.
This Annual Report on Form 10-K does not include an attestation report of the
Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's independent registered public accounting firm
pursuant to rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the fiscal year covered by this Form 10-K with
respect to its Annual Meeting of Shareholders to be held on November 7, 2008.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the fiscal year covered by this Form 10-K with
respect to its Annual Meeting of Shareholders to be held on November 7, 2008.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the fiscal year covered by this Form 10-K with
respect to its Annual Meeting of Shareholders to be held on November 7, 2008.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the fiscal year covered by this Form 10-K with
respect to its Annual Meeting of Shareholders to be held on November 7, 2008.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the fiscal year covered by this Form 10-K with
respect to its Annual Meeting of Shareholders to be held on November 7, 2008 is
the information set forth in such proxy statement under the headings "Audit
Fees" and "Audit Committee's Pre-Approval Policies and Procedures."
36
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) (1) & (2) The financial statements listed in the accompanying Index to
Consolidated Financial Statements at page F-1 are filed as part of this Form
10-K report.
(3) The Exhibit Index lists the exhibits required by Item 601 of Regulation S-K
to be filed as a part of this Form 10-K report. The Exhibit Index identifies
those documents which are exhibits filed herewith or incorporated by reference
to (i) the Company's Form S-1 Registration Statement under the Securities Act of
1933, as amended, declared effective on April 23, 1991 (Commission File No.
33-36760); (ii) the Company's Form 10-K reports for its fiscal years ended June
30, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2001, and 2002; (iii) the
Company's 10-K/A report filed October 14, 1996; (iv) the Company's Form 10-Q
reports for its quarters ended March 31, 1996, September 30, 1996, December 31,
1996, March 31, 1997, March 31, 1998, December 31, 1998, December 31, 2001,
September 30, 2002, December 31, 2002, March 31, 2005 and January 25, 2007; (v)
the Company's Form 8-K reports filed with the Commission August 8, 1991, April
23, 1993, May 24, 1993, January 29, 1996, April 19, 1996, October 30, 1997,
January 20, 1998, January 14, 2000, March 5, 2003, April 15, 2003, November 22,
2004, January 11, 2005, February 7, 2005, April 21, 2005, April 28, 2005,
October 16, 2006 and December 15, 2006; or (vi) the Company's Form 8-K/A reports
filed with the Commission July 21, 1993, November 12, 1997, March 10, 2003, and
April 22, 2005. The Exhibit Index is hereby incorporated by reference into this
Item 15.
Reports on Form 8-K
1) The Company filed a Current Report on Form 8-K on March 25, 2008
reporting that the State of Tennessee, Bureau of TennCare issued a
Request for Proposals for managed care services to be provided in the
East Grand Region and the West Grand Region of Tennessee.
2) The Company filed a Current Report on Form 8-K on April 22, 2008
reporting that the Department of Finance and Administration of the
State of Tennessee, Bureau of TennCare publicly disclosed its decision
to award new TennCare contracts to two named organizations, not
including the Company's subsidiary, UAHC Health Plan of Tennessee,
Inc, as the culmination of TennCare's selection process pursuant to
its Request for Proposals for managed care services to be provided in
the East Grand Region and the West Grand Region of Tennessee.
3) The Company filed a Current Report on Form 8-K on June 25, 2008
reporting that the Company's Board of Directors amended and restated
the Company's bylaws.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION (REGISTRANT)
SIGNATURE CAPACITY
--------- --------
/s/ WILLIAM C. BROOKS Chairman, President and CEO
-------------------------- (Principal Executive Officer)
William C. Brooks
/s/ STEPHEN D. HARRIS Executive Vice President, Chief Financial Officer,
-------------------------- Treasurer and Director
Stephen D. Harris (Principal Financial Officer and Principal
Accounting Officer)
/s/ EMMETT S. MOTEN, JR. Secretary and Director
--------------------------
Emmett S. Moten, Jr.
/s/ RICHARD M. BROWN, D.O. Director
--------------------------
Richard M. Brown, D.O.
/s/ DARREL W. FRANCIS Director
--------------------------
Darrel W. Francis
/s/ TOM A. GOSS Director
--------------------------
Tom A. Goss
/s/ RONALD E. HALL, SR. Director
--------------------------
Ronald E. Hall, Sr.
/s/ EDDIE R. MUNSON Director
--------------------------
Eddie R. Munson
Date: September 4, 2008
38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of June 30, 2008 and 2007................. F-3
Consolidated Statements of Operations for each of the years in the
three-year period ended June 30, 2008................................. F-4
Consolidated Statements of Shareholders' Equity and Comprehensive
Income (Loss) for each of the years in the three-year period
ended June 30, 2008................................................... F-5
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended June 30, 2008................................. F-6
Notes to Consolidated Financial Statements............................... F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
United American Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of United American
Healthcare Corporation and Subsidiaries as of June 30, 2008 and 2007, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended June 30, 2008. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United American
Healthcare Corporation and Subsidiaries as of June 30, 2008 and 2007, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2008, in conformity with accounting principles
generally accepted in the United States of America.
/s/ UHY LLP
Southfield, Michigan
September 4, 2008
F-2
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
-----------------
2008 2007
------- -------
ASSETS
Current assets
Cash and cash equivalents $10,713 $ 8,932
Marketable securities 8,774 5,296
Accounts receivable - State of Tennessee, net 1,093 1,455
Interest receivable 551 578
Other receivables 374 455
Prepaid expenses and other 299 511
Deferred income taxes -- 1,950
------- -------
Total current assets 21,804 19,177
Property and equipment, net 472 357
Goodwill -- 3,452
Marketable securities 7,514 7,475
Restricted assets 421 2,721
Other assets 586 586
------- -------
$30,797 $33,768
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Medical claims payable $ 2,563 $ 576
Accounts payable and accrued expenses 1,726 3,142
Accrued compensation and related benefits 896 896
Accrued rent 90 135
Unearned revenue -- 279
Other current liabilities 1,183 1,099
------- -------
Total current liabilities 6,458 6,127
------- -------
Total liabilities 6,458 6,127
Commitments and contingencies
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par, 15,000,000 shares authorized;
8,734,214 and 8,588,211 shares issued and outstanding
at June 30, 2008 and June 30, 2007, respectively 18,558 18,327
Paid-in capital - stock options 1,153 607
Warrants 444 444
Retained earnings 4,261 8,303
Accumulated other comprehensive loss, net of deferred
federal income taxes (77) (40)
------- -------
Total shareholders' equity 24,339 27,641
------- -------
$30,797 $33,768
======= =======
See accompanying notes to the consolidated financial statements.
F-3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
---------------------------
2008 2007 2006
------- ------- -------
REVENUES
Fixed administrative fees $14,519 $15,543 $16,628
Variable administrative fees 1,718 502 361
Medical premiums 10,596 921 --
Interest and other income 1,375 1,099 1,125
------- ------- -------
Total revenues 28,208 18,065 18,114
EXPENSES
Medical services 9,550 891 --
Marketing, general and administrative 16,897 16,580 16,472
Depreciation and amortization 211 122 128
Goodwill impairment 3,452 -- --
Provision for claims audit and other commitment -- 1,526 --
------- ------- -------
Total expenses 30,110 19,119 16,600
------- ------- -------
Earnings (loss) from operations before income taxes (1,902) (1,054) 1,514
Income tax expense 2,140 63 141
------- ------- -------
Net earnings (loss) $(4,042) $(1,117) $ 1,373
======= ======= =======
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC
------- ------- -------
Net earnings (loss) per common share $ (0.47) $ (0.14) $ 0.18
======= ======= =======
Weighted average shares outstanding 8,666 8,103 7,478
======= ======= =======
NET EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Net earnings (loss) per common share $ (0.47) $(0.14) $ 0.18
======= ======= =======
Weighted average shares outstanding 8,666 8,103 7,628
======= ======= =======
See accompanying notes to the consolidated financial statements.
F-4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
PAID IN ACCUMULATED
COMMON STOCK CAPITAL OTHER TOTAL
--------------- - STOCK RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT OPTIONS WARRANTS EARNINGS INCOME (LOSS) EQUITY
------ ------- ------- -------- -------- ------------- -------------
BALANCE AT JUNE 30, 2005 7,450 $12,476 $ -- $ -- $ 8,047 $ (40) $20,483
Issuance of common stock 77 65 65
Comprehensive income:
Net earnings 1,373 1,373
Stock option expense 259 259
Unrealized loss on marketable
securities (130) (130)
------- ----- -------
Total comprehensive income 1,373 (130) 1,243
----- ------- ------ ---- ------- ----- -------
BALANCE AT JUNE 30, 2006 7,527 $12,541 $ 259 $ -- $9,420 $(170) 22,050
----- ------- ------ ---- ------- ----- -------
Issuance of common stock 1,061 5,786 5,786
Comprehensive income:
Net loss (1,117) (1,117)
Stock option expense 348 348
Issuance of warrants 444 444
Unrealized gain on marketable
securities 130 130
------- ----- -------
Total comprehensive loss (1,117) 130 (987)
----- ------- ------ ---- ------- ----- -------
BALANCE AT JUNE 30, 2007 8,588 $18,327 $ 607 $444 $ 8,303 $ (40) $27,641
----- ------- ------ ---- ------- ----- -------
Issuance of common stock 146 231 231
Comprehensive income:
Net loss (4,042) (4,042)
Stock option expense 546 546
Unrealized loss on marketable
securities (37) (37)
------- ----- -------
Total comprehensive loss (4,042) (37) (4,079)
----- ------- ------ ---- ------- ----- -------
BALANCE AT JUNE 30, 2008 8,734 $18,558 $1,153 $444 $ 4,261 $ (77) $24,339
===== ======= ====== ==== ======= ===== =======
See accompanying notes to the consolidated financial statements.
F-5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
----------------------------
2008 2007 2006
-------- ------- -------
OPERATING ACTIVITIES
Net earnings (loss) $ (4,042) $(1,117) $ 1,373
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Loss on disposal of assets -- -- 4
Goodwill impairment 3,452 -- --
Depreciation and amortization 211 122 128
Deferred income taxes 1,950 -- --
Stock awards 108 108 --
Stock compensation 546 348 259
Changes in assets and liabilities
Accounts receivable - State of Tennessee, net 362 8 (103)
Other receivables 108 (649) 199
Prepaid expenses and other 212 (246) (93)
Medical claims payable 1,987 420 (16)
Accounts payable and accrued expenses (1,416) 2,222 (176)
Accrued rent (45) (109) 9
Unearned revenue (279) 279 --
Restricted assets 2,300
Accrued compensation and related benefits -- 164 21
Other current liabilities 84 (25) (414)
-------- ------- -------
Net cash provided by operating activities 5,538 1,525 1,191
-------- ------- -------
INVESTING ACTIVITIES
Purchase of marketable securities (17,049) (4,794) (6,688)
Proceeds from sale of marketable securities 13,495 2,100 --
Proceeds from the sale of property and equipment -- 6 --
Purchase of property and equipment (326) (343) (95)
-------- ------- -------
Net cash used in investing activities (3,880) (3,031) (6,783)
-------- ------- -------
FINANCING ACTIVITIES
Net proceeds from sale of common stock -- 5,721 --
Proceeds from exercise of stock options 123 141 65
Proceeds for issuance of warrants -- 260 --
-------- ------- -------
Net cash provided by financing activities 123 6,122 65
-------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,781 4,616 (5,527)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,932 4,316 9,843
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,713 $ 8,932 $ 4,316
======== ======= =======
F-6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
YEAR ENDED JUNE 30,
-------------------
2008 2007 2006
---- ---- -----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 20 $ -- $ 63
NON-CASH INVESTING ACTIVITY:
Unrealized gain (loss) on investment $(37) $130 $(130)
NON-CASH FINANCING ACTIVITY:
Transaction fee paid with warrants $ -- $184 $ --
See accompanying notes to the consolidated financial statements.
F-7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
NOTE 1 - DESCRIPTION OF BUSINESS
United American Healthcare Corporation, together with its wholly owned
subsidiaries (collectively, the "Company"), is a provider of health care
services, including consulting services to managed care organizations and the
provision of health care services in Tennessee.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of United American Healthcare Corporation, and
its wholly owned operational subsidiary: United American of Tennessee,
Inc. ("UA-TN") and Subsidiary. UAHC Health Plan of Tennessee, Inc.
(formerly called OmniCare Health Plan, Inc.) ("UAHC-TN") is a wholly
owned subsidiary of UA-TN. All significant intercompany transactions
and balances have been eliminated in consolidation.
B. USE OF ESTIMATES. The accompanying consolidated financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States of America which require management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results
could differ from those estimates as more information becomes
available and any such difference could be significant. The most
significant estimates that are susceptible to change in the near term
relate to the determination of medical claims payable.
C. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
instruments purchased with original maturities of three months or less
to be cash equivalents.
D. FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and
cash equivalents, receivables, marketable securities and debt
approximate fair values of these instruments at June 30, 2008 and
2007.
F-8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
E. MARKETABLE SECURITIES. Investments in marketable securities are
primarily comprised of U.S. Treasury notes and debt issues of
municipalities all carried at fair value, based upon published
quotations of the underlying securities, and six-month certificates of
deposit carried at cost plus interest earned, which approximates fair
value. Marketable securities placed in escrow to meet statutory
funding requirements, although considered available for sale, are not
reasonably expected to be used in the normal operating cycle of the
Company and are classified as non-current. All other securities
available for sale are classified as current.
Premiums and discounts are amortized or accreted, respectively, over
the life of the related debt security as adjustment to yield using the
yield-to-maturity method. Interest and dividend income is recognized
when earned. Realized gains and losses on investments in marketable
securities are included in investment income and are derived using the
specific identification method for determining the cost of the
securities sold; unrealized gains and losses on marketable securities
are reported as a separate component of shareholders' equity, net of
the provision for deferred federal income taxes.
F. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. Accounts
receivable at June 30, 2008 and 2007 consisted primarily of State of
Tennessee receivables, interest receivables and provider receivables.
The Company performs an analysis of collectibility on its accounts
receivables. An allowance is established for the estimated amount that
may not be collectible. There was no allowance for doubtful accounts
as of June 30, 2008. As of June 30, 2007, the Company had an allowance
for doubtful accounts of $274,000.
G. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Expenditures and improvements, which add significantly to the
productive capacity or extend the useful life of an asset, are
capitalized. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related
assets. Estimated useful lives of the major classes of property and
equipment are as follows: furniture and fixtures - 5 to 13 years;
equipment - 5 years; and computer software - 2 to 5 years. Leasehold
improvements are included in furniture and fixtures and are amortized
on a straight-line basis over the shorter of the lease term or the
estimated useful life, which ranges from 5 to 13 years. The Company
uses accelerated methods for income tax purposes.
H. GOODWILL. Goodwill resulting from business acquisitions was 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
F-9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
associated with assets sold or otherwise disposed of. Management
evaluates the carrying value of goodwill quarterly.
Management has assessed the remaining carrying amount of previously
recorded goodwill of $3.5 million and determined that such amount has
been impaired in accordance with SFAS No. 142 as a result of UAHC-TN's
ceasing to provide managed care services in the TennCare West Grand
Region of Tennessee when its present TennCare contract will expire, as
further discussed in Note 12 below. Accordingly, goodwill impairment
was recorded for $3.5 million during the fiscal year ended June 30,
2008. There were no goodwill impairment charges recorded during fiscal
year June 30, 2007 and 2006.
I. LONG-LIVED ASSETS. Following the criteria set forth in SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
long-lived assets and certain identifiable intangibles are reviewed by
the Company for events or changes in circumstances which would
indicate that the carrying value may not be recoverable. In making
this determination, the Company considers a number of factors,
including estimated future undiscounted cash flows associated with
long-lived assets, current and historical operating and cash flow
results and other economic factors. When any such impairment exists,
the related assets are written down to fair value. Based upon its most
recent analysis, the Company believes that long-lived assets are
recorded at their net recoverable values.
J. MEDICAL CLAIMS PAYABLE. The Company provides for medical claims
incurred but not reported ("IBNR") for its Medicare Advantage members
and the cost of adjudicating claims primarily based on medical cost
estimates from historical data provided by CMS and emerging medical
claims experience together with current factors using accepted
actuarial methods. As the Company gains more claims experience for our
Medicare Advantage members, less reliance will be placed on medical
cost estimates based on historical data provided by CMS. Although
considerable variability is inherent in such estimates, management
believes that these reserves are adequate.
K. REVENUE RECOGNITION. Medical premiums revenues are recognized in the
month in which members are entitled to receive health care services.
Medical premiums collected in advance are recorded as deferred
revenues. Management fee revenues are recognized in the period the
related services are performed. In accordance with generally accepted
accounting principles ("GAAP"), when applicable, the Company's revenue
recognition policy has been adjusted to reflect TennCare's
administrative services only ("ASO") arrangement in which UAHC-TN
assumed no risk for medical claims. Modified risk arrangement revenues
are recognized in the period in which UAHC-TN is notified thereof by
TennCare. See Note 12 for further discussion.
F-10
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
L. MEDICAL SERVICES EXPENSE RECOGNITION. The Company contracts with
various health care providers for the provision of certain medical
services to its members and generally compensates those providers on a
capitated and fee for service basis. Such medical service expenses
generally consist of claim payments, pharmacy costs, and estimates of
future payments of claims provided for services rendered prior to the
end of the reporting period. Pharmacy costs represent payments for
members' prescription drug benefits. The estimates for medical claims
payable are regularly reviewed and adjusted as necessary, with such
adjustments generally reflected in current operations.
M. STOP LOSS INSURANCE. Stop loss insurance premiums are reported as
medical services expense, while the related insurance recoveries are
reported as deductions from medical services expense.
N. INCOME TAXES. Deferred income tax assets and liabilities are
recognized for the expected future tax consequences attributable to
differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or settled.
The effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in income in the period that involves the
deferred tax assets and liabilities in the amount expected to be
realized. Valuation allowances are established when necessary to
reduce the deferred tax assets and liabilities in the amount expected
to be realized. The deferred income tax provision or benefit generally
reflects the net change in deferred income tax assets and liabilities
during the year. The current income tax provision reflects the tax
consequences of revenues and expenses currently taxable or deductible
for the period.
O. EARNINGS (LOSS) PER SHARE. Basic net earnings (loss) per share
excluding dilution has been computed by dividing net earnings (loss)
by the weighted-average number of common shares outstanding for the
period. Diluted earnings (loss) per share is computed the same as
basic except that the denominator also includes shares issuable upon
assumed exercise of stock options or warrants. As of June 30, 2008 and
2007, the Company had outstanding stock options and warrants which
were not included in the computation of loss per share because the
shares would be anti-dilutive. As of June 30, 2006, the Company had
outstanding stock options totaling 149,844 having a dilutive effect on
earnings per share.
F-11
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
P. SEGMENT INFORMATION. The Company reports financial and descriptive
information about its reportable operating segments. Operating
segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources
and in assessing performance. Financial information is reported on the
basis that it is used internally for evaluating segment performance
and deciding how to allocate resources to segments.
Q. RECLASSIFICATIONS. Certain items in the prior periods consolidated
financial statements have been reclassified to conform to the June 30,
2008 presentation.
NOTE 3 - MARKETABLE SECURITIES
A summary of estimated fair value, which approximates amortized cost, of
marketable securities as of June 30, 2008 and 2007 is as follows (in thousands):
2008 2007
------- -------
Available for sale - Current:
Certificates of deposit $ 8,774 $ 5,296
Available for sale - Noncurrent:
U.S. government obligations 7,514 7,475
------- -------
$16,288 $12,771
======= =======
Certain of the Company's operations are obligated by state regulations to
maintain a specified level of escrowed funds to assure the provision of
healthcare services to enrollees. To fulfill these statutory requirements, the
Company maintains funds in highly liquid escrowed investments, which amounted to
$7.5 million at June 30, 2008 and 2007, respectively. These are different from
the escrow accounts described in Note 13. Accumulated unrealized losses
associated with these investments were $0.07 million and $0.04 million at June
30, 2008 and 2007, respectively. The decline is considered temporary as the
investments are required to be held to maturity under current statutory deposit
requirements of the State of Tennessee.
NOTE 4 - CONCENTRATION OF RISK
During the years ended June 30, 2008, 2007 and 2006, approximately 57.6%, 88.8%
and 93.7%, respectively, of the Company's revenues were derived from a single
customer, TennCare, a State of Tennessee program that provides medical benefits
to Medicaid and Working Uninsured recipients. As discussed in Note 12 below, the
non-renewal of the contract with TennCare will materially affect the
profitability and financial stability of the Company.
F-12
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
The Company from time to time may maintain cash balances with financial
institutions in excess of federally insured limits. Management has deemed this
as a normal business risk.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at each June 30 consists of the following (in thousands):
2008 2007
------- -------
Furniture and fixtures $ 870 $ 868
Equipment 1,462 1,273
Computer software 376 241
------- -------
2,708 2,382
Less accumulated depreciation and amortization (2,236) (2,025)
------- -------
$ 472 $ 357
======= =======
NOTE 6 - MEDICAL CLAIMS PAYABLE
The Company has recorded a liability of $2.6 million and $0.6 million at June
30, 2008 and 2007, respectively, for unpaid claims and medical claims incurred
by enrollees. The medical claims liability incurred through fiscal 2008
represents the liability for services that have been performed by providers for
the Company's Medicare Advantage members. Included in the incurred losses
related to the current year are medical claims reported to UAHC-TN as well as
claims that have been incurred but not yet reported to IT, or "IBNR". The IBNR
component is primarily based on medical cost estimates from historical data
provided by CMS and emerging medical claims experience together with current
factors. As the Company gains more claims experience for our Medicare Advantage
members, less reliance will be placed on medical cost estimates based on
historical data provided by CMS. The IBNR reserve estimated at June 30, 2008 and
2007 was derived by an independent actuarial analysis. Each period, the Company
re-examines the previously established medical claims liability estimates based
on actual claim submissions and other relevant changes in facts and
circumstances. As the liability estimates recorded in prior periods become more
exact, the Company will increase or decrease the amount of the estimates, and
include the changes in medical expenses in the period in which the change is
identified. The ultimate settlement of medical claims may vary from the
estimated amounts reported at June 30, 2008 and 2007.
F-13
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
The following table provides a reconciliation of the unpaid claims as of June
30, 2008, 2007 and 2006 (in thousands):
2008 2007
------ ------
Balance at beginning of fiscal year $ 576 $ 156
------ ------
Incurred losses related to current fiscal year 7,453 745
Incurred losses related to prior fiscal year 181 (45)
------ ------
Total losses incurred 7,634 700
Paid claims related to current fiscal year 3,755 280
Paid claims related to prior fiscal year 1,892 --
------ ------
Total paid claims 5,647 280
------ ------
Balance at end of fiscal year $2,563 $ 576
====== ======
NOTE 7 - INCOME TAXES
The components of income tax expense (benefit) for each year ended June 30 are
as follows (in thousands):
2008 2007 2006
------ ------ ------
Income taxes:
Current expense $ 190 $ 63 $ 141
Deferred expense (benefit) 517 (551) 249
Change in valuation allowance 1,433 551 (249)
------ ------ ------
$2,140 $ 63 $ 141
====== ====== ======
A reconciliation of the provision for income taxes for each year ended June 30
follows (in thousands):
2008 2007 2006
------ ----- -----
Income tax expense at the statutory tax rate $ (647) $(358) $ 515
State and city income tax, net of federal benefit 136 22 73
Permanent differences 1,186 15 9
Change in valuation allowance 1,433 551 (249)
True ups and other, net 32 (167) (207)
------ ----- -----
$2,140 $ 63 $ 141
====== ===== =====
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.
F-14
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
Management considers the scheduled reversals of deferred taxes, projected future
taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will not realize
the benefits of these deductible differences as of June 30, 2008. The Company's
valuation allowance has been increased given that its subsidiary, UAHC Health
Plan of Tennessee, Inc. ("UAHC-TN"), will cease providing managed care services
in the TennCare West Grand Region of Tennessee when its present TennCare
contract expires as further discussed in Note 12 below. During fiscal 2008, the
Company recorded deferred tax expense of $2.0 million.
As of June 30, 2008, the net operating loss carryforwards for federal income tax
purposes expire from 2011 to 2021. Components of the Company's deferred tax
assets and liabilities at each June 30 are (in thousands):
2008 2007
------- -------
Deferred tax assets
Accrued rent $ 30 $ 46
Bad debt expense -- 93
Write down of investment -- 1,360
Deferred/accrued compensation 202 185
Net operating loss carryforward of consolidated losses 1,973 2,942
Capital loss carryforward 1,360 --
Alternative minimum tax credit carryforward 677 679
Property and equipment 15 27
Medical claims payable 1,049 158
Provision for claims audit and other commitment -- 519
Stock awards 385 199
------- -------
Total gross deferred tax assets 5,691 6,208
Valuation allowance (5,691) (4,258)
Total gross deferred tax liabilities -- --
------- -------
Net deferred tax asset $ -- $ 1,950
======= =======
F-15
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
NOTE 8 - PRIVATE PLACEMENT
In a December 13, 2006 private placement transaction, the Company raised gross
proceeds of $6.50 million through the sale of 1,000,000 newly issued shares of
its common stock to certain institutional and other accredited investors at a
price of $6.50 per share. The investors also received warrants to purchase
99,999 shares of the Company's common stock at an exercise price of $8.50 per
share and expiring in December 2011. In addition, the Company agreed to pay the
co-placement agents a transaction fee of $325,000 and warrants to purchase
50,000 shares of the Company's common stock at an exercise price of $9.01 per
share. The net proceeds from the private placement were to be used principally
for start-up costs associated with the Company's Tennessee subsidiary's new
Medicare Advantage contract with the Centers for Medicare & Medicaid Services,
which became effective January 1, 2007. The remainder was to be used for working
capital and general corporate purposes.
NOTE 9 - NON-RECURRING CHARGES
As a result of a state regulatory audit of UAHC-TN's processed claims, UAHC-TN
was notified in late fiscal 2007 that UAHC-TN may have incorrectly received an
overpayment of $1.1 million for medical claims as a result of a discrepancy in
pricing methodology. As a result, UAHC-TN recorded a reserve of $1.1 million in
the fourth quarter of fiscal 2007. In addition, based on a subsequent regulatory
evaluation conducted by the Tennessee Department of Commerce and Insurance, it
was determined that TennCare overpaid UAHC-TN $0.4 million in excess of
UAHC-TN's statutory net worth requirement as of June 30, 2002 based on a 2002
contractual agreement further discussed in Note 12. The Company recorded a
charge for this amount in the fourth quarter of fiscal 2007. These items have
been reflected as "Provision for claims audit and other commitment" on our
fiscal 2007 Consolidated Statement of Operations and recorded under accounts
payable and accrued expenses on our Consolidated Balance Sheets. These amounts
were paid during fiscal year 2008.
NOTE 10 - BENEFIT AND OPTION PLANS
The Company offers a 401(k) retirement and savings plan that covers
substantially all of its employees. Effective and since April 1, 2001, the
Company has matched 50% of an employee's contribution up to 4% of the employee's
salary. Expenses related to the 401(k) plan were $81,190, $80,930 and $55,757
for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.
The Company has reserved 200,000 common shares for its Employee Stock Purchase
Plan ("ESPP"), which became effective October 1996, and enables all eligible
employees of the Company to subscribe for shares of common stock on an annual
offering date at a purchase price which is the lesser of 85% of the fair market
value of the shares on the first day or the last day of
F-16
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
the annual period. Employee contributions for each of the fiscal years ended
June 30, 2008, 2007 and 2006 were $0, $2,428 and $7,775, respectively.
On August 6, 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan ("1998 Plan"). The 1998 Plan was approved by the Company's
shareholders on November 12, 1998. The Company reserved an aggregate of 500,000
common shares for issuance upon exercise of options under the 1998 Plan. On
November 14, 2003 the Company's shareholders approved an increase in the number
of common shares reserved for issuance pursuant to the exercise of options
granted under the amended plan from 500,000 to 1,000,000 shares, and extended
the termination date of the plan by 5 years to August 6, 2013. On November 5,
2004 the Company's shareholders approved an increase in the number of common
shares reserved for issuance pursuant to the exercise of options granted under
the amended plan from 1,000,000 to 1,500,000 shares. On September 9, 1998,
December 15, 1998, February 3, 1999, November 10, 1999, May 3, 2001 November 30,
2001, May 8, 2003, December 4, 2003, April 29, 2004, November 5, 2004, December
2, 2004, November 5, 2004, December 2, 2004, November 4, 2005, April 24, 2006,
November 3, 2006, February 22, 2007, November 2, 2007 and March 11, 2008
nonqualified options for a total of 325,000, 26,000, 5,000, 8,000, 50,000,
75,000, 25,000, 196,500, 280,000, 45,000, 153,000, 45,000, 153,000, 15,000,
200,500, 95,000, 50,600, 45,000 and 155,000 common shares, respectively, were
granted under the amended and restated 1998 Plan. The exercise prices of the
options range from $0.63 to $6.24.
On March 1, 2003, the Company granted nonqualified stock options for 100,000
common shares (outside the 1998 Plan) to the Company's President and CEO and
reserved that number of common shares for issuance upon exercise of such
options. Such options were fully exercised in November 2007.
F-17
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
Information regarding the stock options outstanding at June 30, 2008, 2007 and
2006 are as follows (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------
AVERAGE
WEIGHTED REMAINING NUMBER OF WEIGHTED
AVERAGE CONTRACTUAL SHARES AVERAGE
SHARES EXERCISE PRICE LIFE EXERCISABLE EXERCISE PRICE
------ -------------- ----------- ----------- --------------
Options
outstanding at
June 30, 2005 902 $3.30 7.32 years 628 $2.84
Granted 216 2.89 9.80 years 3 2.10
Exercisable -- -- -- 115 4.11
Exercised (40) 1.64 -- (40) 1.64
Expired -- -- -- -- --
Forfeited (124) 4.73 -- -- --
----- ----- ---------- ---- -----
Options
outstanding at
June 30, 2006 954 $3.09 6.79 years 706 $3.12
Granted 146 5.98 8.10 years 16 6.05
Exercisable -- -- -- 76 3.14
Exercised (44) 2.74 -- (44) 2.74
Expired -- -- -- -- --
Forfeited (42) 5.92 -- -- --
----- ----- ---------- ---- -----
Options
outstanding at
June 30, 2007 1,014 $3.40 6.18 years 754 $3.20
Granted 200 1.94 9.64 years 4 2.85
Exercisable -- -- 123 3.05
Exercised (102) 1.18 -- (102) 1.18
Expired
Forfeited (10) 2.95 -- -- --
----- ----- ---------- ---- -----
Options
outstanding at
June 30, 2008 1,102 $3.35 6.46 years 779 $3.06
----------
Options for 15,300 common shares were available for grant under the amended and
restated 1998 Plan at the end of fiscal 2008.
F-18
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
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 is
measured based on the fair value of the equity or liability instruments issued.
The Company recorded stock option expense of $0.5 million, $0.3 million and $0.3
million for fiscal 2008, 2007 and 2006, respectively.
The fair value of options at date of grant was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in fiscal 2008, 2007, and 2006, depending on the date of issuance:
dividend yield of 0%; expected volatility ranging from 29% to 66%; risk free
interest rate ranging from 3.44% to 4.81%; and expected life ranging from 5.0 to
10.0 years. The options have terms ranging from 5.0 to 10.0 years and typically
vest quarterly over 3 years. Through March 2012, the total compensation expense
is expected to be $0.7 million related to these options. The weighted average
fair value for options granted during fiscal 2008 is $1.54.
F-19
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
NOTE 11 - LEASES
The Company leases its facilities and certain furniture and equipment under
operating leases expiring at various dates through December 2010. Terms of the
facility leases generally provide that the Company pay its pro rata share of all
operating expenses, including insurance, property taxes and maintenance.
Rent expense for the years ended June 30, 2008, 2007 and 2006 totaled $0.3
million, $0.4 million and $0.4 million, respectively. Based on the current
commitments, the Company estimates rent expense of $0.4 million for each of its
fiscal years through 2011.
NOTE 12 - 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-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 extended
its contract with UAHC-TN through June 30, 2006 and implemented a modified risk
arrangement ("MRA") with all its contracted MCOs, including UAHC-TN, which
became at risk for losing up to 10% of administrative fee revenue and could
receive up to 15% incentive bonus revenue based on performance relative to
benchmarks. UAHC-TN received notice from TennCare that it earned additional
revenue of $1.1 million for its performance under the MRA for fiscal 2006,
representing a 7% bonus revenue payout. Such additional revenue has been
recorded, of which $0.3 was recorded in fiscal 2006, $0.5 million was recorded
in fiscal 2007, and $0.3 million was recorded in the second quarter of fiscal
2008. UAHC-TN also earned and received additional revenue of $1.4 million for
fiscal 2007, representing a 9% bonus revenue payout, and the Company has
recorded such additional MRA earnings in the third quarter of fiscal 2008, when
UAHC-TN was notified by TennCare of the amount. Effective July 1, 2007, the
evaluation period for the MRA was changed from quarterly to annually, and the
incentive bonus pool was adjusted to 20% of administrative fee revenue.
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
F-20
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
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. 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 were processed. Based on a
subsequent regulatory evaluation, it was determined that TennCare paid UAHC-TN
$0.4 million in excess of UAHC-TN's statutory net worth requirement as of June
30, 2002. The Company recorded a charge for this amount in the fourth quarter of
fiscal year 2007 and reflected it as "Provision for claims audit and other
commitment" on our Consolidated Statements of Operations.
On April 22, 2008 we learned that UAHC-TN will cease providing managed care
services as a TennCare contractor when its present TennCare contract expires.
UAHC-TN's TennCare members are expected to transfer to other managed care
organizations on November 1, 2008, after which UAHC-TN will perform its
remaining contractual obligations through its TennCare contract expiration date
of June 30, 2009. However, revenue under this contract will only be earned
through October 31, 2008. Revenue under this contract represented 57.6% and
88.8% of the Company's total revenues for the fiscal year ended June 30, 2008
and 2007, respectively. Management believes that the discontinuance of the
TennCare contract will have a material impact on the Company's operations.
NOTE 13 - RESTRICTED ASSETS
Under two escrow agreements between the Company and TennCare on August 5, 2005
the Company funded two escrow accounts held by TennCare at the State Treasury.
Both escrow agreements recited that TennCare did not assert there had been any
breach of UAHC-TN's TennCare contract and that the Company funded the escrow
accounts as a show of goodwill and good faith in working with TennCare.
The larger escrow account, which has expired was in the original amount of
$2,300,000 and was security for repayment to TennCare of any overpayments to
UAHC-TN that might be determined by an audit of all UAHC-TN processed claims. In
August 2007, the Company received $1,289,851 plus accumulated interest earnings
back from that account. In November 2007, the remaining $1,010,149 account
balance was paid to TennCare for claims discrepancies found in the review by the
Tennessee Department of Commerce and Insurance.
The other escrow account, in the original 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 account will terminate 30 days
after the conclusion of such investigations, unless the parties earlier agree
otherwise. The escrow account bears interest at a rate no lower than the
prevailing commercial interest rate for savings accounts at financial
institutions in Nashville, Tennessee. All amounts (including interest earnings)
credited to the escrow account will belong
F-21
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
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
agreement.
NOTE 14 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The following table presents selected quarterly financial data for the fiscal
years ended June 30, 2008 and 2007 (in thousands, except per share data):
THREE MONTHS ENDED
-------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, TOTAL
--------- -------- --------- -------- --------
2008
Total revenues $6,188 $7,048 $ 8,275 $ 6,697 $28,208
Net earnings (loss) 73 256 (3,770) (601) (4,042)
Net earnings (loss)
per common share
assuming dilution $ 0.01 $ 0.03 $ (0.43) $ (0.08) $ (0.47)
2007
Total revenues $4,174 $4,223 $ 4,550 $ 5,118 $18,065
Net earnings (loss) 332 228 (39) (1,638) (1,117)
Net earnings (loss)
per common share
assuming dilution $ 0.04 $ 0.03 $ (0.00) $ (0.19) $ (0.14)
The net loss in the third quarter of fiscal 2008 is primarily attributable to
the goodwill impairment charge and increase in the deferred tax asset valuation
allowance recorded during the quarter. Please refer to Note 2 for further
discussion.
The net loss in the fourth quarter of fiscal 2007 is primarily attributable to
non-recurring charges recorded in the fourth quarter of fiscal 2007. Please
refer to Note 9 for further discussion.
F-22
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
NOTE 15 - SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations for
fiscal 2008, 2007 and 2006 is as follows (in thousands):
MANAGEMENT HMO & CORPORATE & CONSOLIDATED
COMPANIES (1) MANAGED PLAN (2) ELIMINATIONS COMPANY
------------- ---------------- ------------ ------------
2008
Revenues - external customers $ -- $26,833 $ -- $ 26,833
Revenues - intersegment 15,696 -- (15,696) --
Interest and other income 452 923 -- 1,375
-------- ------- -------- --------
Total revenues $ 16,148 $27,756 $(15,696) $ 28,208
-------- ------- -------- --------
Interest expense $ -- $ -- $ -- $ --
Earnings (loss) from operations (5,228) 1,186 -- (4,042)
Segment assets 63,423 21,518 (54,144) 30,797
Purchase of equipment 326 -- -- 326
Depreciation and amortization 211 -- -- 211
2007
Revenues - external customers $ -- $16,966 $ -- $ 16,966
Revenues - intersegment 14,162 -- (14,162) --
Interest and other income 398 701 -- 1,099
-------- ------- -------- --------
Total revenues $ 14,560 $17,667 $(14,162) $ 18,065
-------- ------- -------- --------
Interest expense $ -- $ -- $ -- $ --
Earnings (loss) from operations (1,532) 415 -- (1,117)
Segment assets 64,273 20,017 (50,522) 33,768
Purchase of equipment 343 -- -- 343
Depreciation and amortization 122 -- -- 122
2006
Revenues - external customers $ -- $16,989 $ -- $ 16,989
Revenues - intersegment 15,161 -- (15,161) --
Interest and other income 191 934 -- 1,125
-------- ------- -------- --------
Total revenues $ 15,352 $17,923 $(15,161) $ 18,114
-------- ------- -------- --------
Interest expense $ -- $ -- $ -- $ --
Earnings from operations 342 1,031 -- 1,373
Segment assets 60,386 16,116 (51,276) 25,226
Purchase of equipment 95 -- -- 95
Depreciation and amortization 128 -- -- 128
(1) Management Companies: United American Healthcare Corporation, United
American of Tennessee, Inc.
(2) HMO and Managed Plan: UAHC Health Plan of Tennessee, Inc.
F-25
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
NOTE 16 - RECENTLY ENACTED PRONOUNCEMENTS
The following are new accounting standards and interpretations that may be
applicable in the future to the Company:
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("FASB 157"). FASB 157 enhances existing
guidance for measuring assets and liabilities using fair value. Prior to the
issuance of FASB 157, guidance for applying fair value was incorporated in
several accounting pronouncements. FASB 157 provides a single definition of fair
value, together with a framework for measuring it, and requires additional
disclosure about the use of fair value to measure assets and liabilities. FASB
157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets. Under FASB 157, fair
value measurements are disclosed by level within that hierarchy. While FASB 157
does not add any new fair value measurements, it does change what had been
current practice. Such changes include: (1) a requirement for an entity to
include its own credit standing in the measurement of its liabilities; (2) a
modification of the transaction price presumption; (3) a prohibition on the use
of block discounts when valuing large blocks of securities for broker-dealers
and investment companies; and (4) a requirement to adjust the value of
restricted stock for the effect of the restriction even if the restriction
lapses within one year. FASB 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company has not determined the impact of adopting FASB
157 on its financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
("FASB 159"). This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. An entity shall
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. FASB 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided that the entity also
elects to apply the provisions of FASB 157. The Company is continuing to
evaluate the impact of this statement.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
SFAS No. 141(R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 160 clarifies
that a noncontrolling interest in a subsidiary should be reported as equity in
the consolidated financial statements. The calculation of earnings per share
will continue to be based on income amounts attributable to the parent. SFAS No.
141(R) and SFAS No. 160 are effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early adoption is
F-26
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
prohibited. The Company has not yet determined the effect on our consolidated
financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51 ("SFAS 160"),
which establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No.
160 clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS No. 160 also requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. SFAS No.
160 also provides guidance when a subsidiary is deconsolidated and requires
expanded disclosures in the consolidated financial statements that clearly
identify and distinguish between the interests of the parent's owners and the
interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company is currently evaluating the impact this
statement will have on its financial position and results of operations.
In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date
of FASB Statement No. 157 ("FSP 157-2"), which delays the effective date of SFAS
157 for nonfinancial assets and nonfinancial liabilities. Therefore, the Company
has delayed application of SFAS 157 to its nonfinancial assets and nonfinancial
liabilities, which include assets and liabilities acquired in connection with a
business combination, goodwill, intangible assets and asset retirement
obligations, until January 1, 2009. The Company is currently evaluating the
impact of SFAS 157 for nonfinancial assets and liabilities on the Company's
financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities ("SFAS 161"), which amends and expands the
disclosure requirements of FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), with the intent to provide
users of financial statements with an enhanced understanding of: (a) how and why
an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance and cash flows.
SFAS 161 requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative instruments. This
statement applies to all entities and all derivative instruments. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company has not yet determined the effect
on our financial statements, if any, upon adoption of SFAS No. 161. In May,
2008, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 162, "The Hierarchy of Generally
Accepted
F-27
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
Accounting Principles," ("SFAS No. 162"). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board's
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." The FASB has stated that it does not
expect SFAS No. 162 will result in a change in current practice. The application
of SFAS No. 162 will have no effect on the Company's financial position, results
of operations or cash flows.
Also in May 2008, the FASB issued SFAS No. 163, "Accounting for Financial
Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60"
("SFAS 163"). SFAS 163 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. SFAS 163 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and all interim periods within those fiscal years. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS 163 on
its financial statements but does not expect it to have an effect on the
Company's financial position, results of operations or cash flows.
In May 2008, FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (Including Partial Cash
Settlement) ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt
securities that, upon conversion, may be settled by the issuer fully or
partially in cash. FSP APB 14-1 specifies that issuers of such instruments
should separately account for the liability and equity components in a manner
that will reflect the entity's nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP APB 14-1 is effective for
financial statements issued for fiscal years after December 15, 2008, and must
be applied on a retrospective basis. Early adoption is not permitted. We are
assessing the potential impact of this FSP on our convertible debt issuances.
In June 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities ("FSP EITF
03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting, and
therefore need to be included in the earnings allocation in computing earnings
per share under the two-class method as described in SFAS No. 128, Earnings per
Share. Under the guidance of FSP EITF 03-6-1, unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings-per-share pursuant to the two-class method. FSP EITF
03-6-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and all prior-period earnings per share data presented
shall be adjusted retrospectively. Early application is not permitted. We are
assessing the potential impact of this FSP on our earnings per share
calculation.
F-28
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008, 2007 AND 2006
In June 2008, FASB ratified EITF No. 07-5, Determining Whether an Instrument (or
an Embedded Feature) Is Indexed to an Entity's Own Stock ("EITF 07-5"). EITF
07-5 provides that an entity should use a two-step approach to evaluate whether
an equity-linked financial instrument (or embedded feature) is indexed to its
own stock, including evaluating the instrument's contingent exercise and
settlement provisions. EITF 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008. Early application is not
permitted. We are assessing the potential impact of this EITF on our financial
condition and results of operations.
F-29
EXHIBIT INDEX
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------- ------------------------------------- ------------------------------------------- --------
3.1 Restated Articles of Incorporation Exhibit 3.1 to the Registrant's Form S-1
of Registrant Registration Statement under the
Securities Act of 1933, as amended,
declared effective on April 23, 1991
("1991 S-1")
3.1(a) Certificate of Amendment to the Exhibit 3.1(a) to 1991 S-1
Articles of Incorporation of
Registrant
3.2 Amended and Restated Bylaws of Exhibit 3.2 to the Registrant's 1993
Registrant Form 10-K
3.3 Amended and Restated Bylaws of Exhibit 3.1 to Form 8-K filed June 25, 2008
Registrant
4.1 Incentive and Non-Incentive Stock Exhibit 4.1 to the Registrant's 1995
Option Plan of Registrant effective Form 10-K
March 25, 1991, as amended
4.2 Form of Common Share Certificate Exhibit 4.2 to the Registrant's 1995
Form 10-K
4.3 Form of Common Stock Purchase Exhibit 4.1 to Form 8-K filed December 15,
Warrant dated as of December 13, 2006
2006, issued by the Company
4.4 Form of Registration Rights Exhibit 10.2 to Form 8-K filed December 15,
Agreement dated as of December 13, 2006
2006 among United American
Healthcare Corporation and certain
investors
10.1 Employees' Retirement Plan for Exhibit 10.1 to 1991 S-1
Registrant dated May 1, 1985, with
First Amendment thereto and Summary
Plan Description therefore
10.2 Management Agreement between Exhibit 10.2 to 1991 S-1
Michigan Health Maintenance
Organization Plans, Inc. and
Registrant dated March 15, 1985, as
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------- ------------------------------------- ------------------------------------------- --------
amended June 12, 1985
10.3 Management Agreement between U.A. Exhibit 10.3 to 1991 S-1
Health Care Corporation and
Personal Physician Care, Inc. dated
March 18, 1987
10.4 Amendment dated February 16, 1993 Exhibit 10.5 to the Registrant's 1995
to Management Agreement between Form 10-K
United American Healthcare
Corporation and Personal Physician
Care, Inc. dated March 18, 1987
10.5 Amendment dated June 16, 1994 to Exhibit 10.4 to the Registrant's 1994
Management Agreement between U.A. Form 10-K
Health Care Corporation and
Personal Physician Care, Inc. dated
March 18, 1987
10.6 Management Agreement between Exhibit 10.5 to Registrant's 1994 Form 10-K
OmniCare Health Plan, Inc. and
United American of Tennessee, Inc.
dated February 2, 1994
10.7 Management Agreement between Exhibit 10.6 to Registrant's 1994 Form 10-K
UltraMedix Health Care Systems,
Inc. and United American of
Florida, Inc. dated February 1, 1994
10.8 Amendment dated September 4, 1995 Exhibit 10.9 to the Registrant's 1995
to Management Agreement between Form 10-K
UltraMedix Healthcare Systems, Inc.
and United American of Florida,
Inc. dated February 1, 1995
10.9 Amendment dated September 20, 1995 Exhibit 10.10 to Registrant's 1995
to Management Agreement between Form 10-K
UltraMedix Health Care Systems,
Inc. and United
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------- ------------------------------------- ------------------------------------------- --------
American of Florida, Inc. dated
February 1, 1995
10.10 Lease Agreement between 1155 Form 8-K filed August 8, 1991
Brewery Park Limited Partnership
and Registrant dated July 24, 1991,
effective May 1, 1992
10.11 Amendment dated December 8, 1993 to Exhibit 10.8 to the Registrant's 1994
Lease agreement between 1155 Form 10-K
Brewery Park Limited Partnership
and Registrant dated July 24, 1991
10.12 Amendment dated April 15, 1993 to Exhibit 10.13 to Registrant's 1995
Lease Agreement between 1155 Form 10-K
Brewery Park Limited Partnership
and Registrant dated July 24, 1991
10.13 Lease Agreement between Baltimore Exhibit 10.7 to the Registrant's 1993
Center Associates Limited Form 10-K
Partnership and Corporate
Healthcare Financing, Inc. dated
August 24, 1988, as amended April
12, 1993, effective the later of
May 1, 1993 or the date premises
are ready for occupancy
10.14 Amendment dated May 11, 1994 Exhibit 10.11 to the Registrant's 1994
(effective June 30, 1994) to Lease Form 10-K
agreement between Baltimore Center
Associates Limited Partnership and
Corporate Healthcare Financing, Inc
10.15 Lease Agreement between CLW Realty Exhibit 10.2 to Registrant's 1994 Form 10-K
Asset Group, Inc., as agent for The
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------- ------------------------------------- ------------------------------------------- --------
Prudential Insurance Company of
America and United American of
Florida dated May 31, 1994,
effective June 1, 1994
10.16 Lease Agreement between Fleming Exhibit 10.3 to Registrant's 1994 Form 10-K
Companies, Inc. and United American
of Tennessee dated June 30, 1994,
effective the date premises are
ready for occupancy
10.17 Lease Agreement between Exhibit 10.19 to Registrant's 1995
International Business Machines Form 10-K
Corporation and Registrant dated
August 29, 1994
10.18 Amended and Restated Line of Credit Exhibit 10.20 to Registrant's 1995
Facility Agreement between Michigan Form 10-K
National Bank and Registrant dated
March 14, 1995
10.19 Promissory notes between Michigan Exhibit 10.9 to the Registrant's 1993
National Bank and Registrant dated Form 10-K
August 26, 1993
10.20 Asset Purchase Agreement between Form 8-K filed May 24, 1993 and Form 8-K/A
CHF, Inc., Healthcare Plan filed July 21, 1993
Management, Inc., CHF-HPM Limited
Partnership, Louis J. Nicholas and
Keith B. Sullivan and Registrant
dated May 7, 1993
10.21 Loan and Security Agreement between Exhibit 10.18 to Registrant's 1994
UltraMedix Health Care Systems, Form 10-K
Inc. and United American of Florida
dated February 1, 1994
10.22 Amendment dated June 13, 1995 to Exhibit 10.26 to Registrant's 1995
the Loan and Security Agreement Form 10-K
between
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------- ------------------------------------- ------------------------------------------- --------
UltraMedix Care Systems, Inc. and
United American of Florida, Inc.
dated February 1, 1994
10.23 Form of Stock Transfer Services Exhibit 10.19 to Registrant's 1994
Agreement between Huntington Form 10-K
National Bank and Registrant
10.24 Employment Agreement between Julius Exhibit 10.15 to 1991 S-1
V. Combs, M.D. and Registrant dated
March 15, 1991
10.25 Employment Agreement between Ronald Exhibit 10.16 to 1991 S-1
R. Dobbins and Registrant dated
March 15, 1991
10.26 Employment Agreement between Louis Exhibit 10.22 to Registrant's 1994
J. Nicholas and Corporate Form 10-K
Healthcare Financing, Inc. dated
May 7, 1993
10.27 First Amendment to Contingent Note Form 10-Q for the Quarter Ended March 31,
Promissory Note between CHF-HPM 1996, filed May 14, 1996
Limited Partnership and the
Registrant
10.28 Acquisition of majority interest in Form 8-K filed April 19, 1996
OmniCare Health Plan, Inc. of
Tennessee and UltraMedix Healthcare
Systems, Inc.
10.29 Injured Workers' Insurance Fund Form 10-K/A filed October 14, 1996, as
Contract No. IWIF 9-96 Managed Care amended
Contract with Statutory Benefits
Management Corporation dated
June 19, 1996
10.30 Ernst & Young LLP Report of Exhibit 10.30 to Registrant's 1998
Independent Auditors as of June 30, Form 10-K
1996
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
------- ------------------------------------- ------------------------------------------- --------
10.31 Renaissance Center Office Lease Form 10-Q for the Quarter Ended September
between Renaissance Center Venture 30, 1996, filed November 13, 1996
and Registrant
10.32 Purchase Agreement between Form 10-Q for the Quarter Ended December
Statutory Benefits Management 31, 1996, filed February 10, 1997
Corporation and Spectera, Inc.
10.33 Agreement of Purchase and Sale of Form 10-K filed October 14, 1997
Stock, between CHF Acquisition,
Inc. and the Registrant dated
September 12, 1997
10.34 Ernst & Young LLP Report of Form 10-K filed October 14, 1997
Independent Auditors as of June 30,
1997
10.35 Amended and Restated Business Loan Form 10-Q for the Quarter Ended
Agreement between Michigan National March 31, 1998, filed May 15, 1998
Bank and Registrant dated March 12,
1998 (effective as of February 1,
1998)
10.36 Business Loan Agreement Addendum Form 10-Q for the Quarter Ended
between Michigan National Bank and March 31, 1998, filed May 15, 1998
Registrant dated March 12, 1998
(effective as of February 1, 1998)
10.37 Promissory Note from Registrant to Form 10-Q for the Quarter Ended
Michigan National Bank dated March March 31, 1998, filed May 15, 1998
12, 1998 (effective as of February
1, 1998)
10.38 Employment Agreement between Exhibit 10.38 to Registrant's 1998
Gregory H. Moses, Jr. and Form 10-K
Registrant dated May 11, 1998
10.39 Amendment dated as of June 30, 1998 Exhibit 10.39 to Registrant's 1998
to Lease Agreement between 1155 Form 10-K
Brewery Park Limited Partnership
and Registrant dated June 24, 1991
10.40 Termination of Lease between Exhibit 10.40 to Registrant's 1998
Renaissance Holdings, Inc. Form 10-K
(successor to Renaissance Center
Venture) and Registrant dated June
24, 1998
10.41 United American Healthcare Exhibit 10.41 to Registrant's 1998
Corporation 1998 Stock Option Plan Form 10-K
10.42 Stock Purchase Agreement among Exhibit 10.42 to Registrant's 1998
Registrant, CHFA, Inc. and Corporate Form 10-K
Healthcare Financing, Inc. dated
August 31, 1998
10.43 Secured Promissory Note from CHFA, Exhibit 10.43 to Registrant's 1998
Inc. to Registrant dated August 31, Form 10-K
1998
10.44 Unsecured Promissory Note from CHFA, Exhibit 10.44 to Registrant's 1998
Inc. to Registrant dated August 31, Form 10-K
1998
10.45 Guaranty Agreement of Louis J. Exhibit 10.45 to Registrant's 1998
Nicholas dated August 31, 1998 Form 10-K
10.46 Pledge Agreement between CHFA, Inc. Exhibit 10.46 to Registrant's 1998
and Registrant dated August 31, 1998 Form 10-K
10.47 Amendment of Business Loan Agreement Exhibit 10.47 to Registrant's 1998
between Registrant and Michigan Form 10-K
National Bank dated September 1, 1998
10.48 Promissory Note of Registrant to Exhibit 10.48 to Registrant's 1998
Michigan National Bank dated Form 10-K
September 1, 1998
10.49 Pledge Agreement from Registrant to Exhibit 10.49 to Registrant's 1998
Michigan National Bank dated Form 10-K
September 1, 1998
10.50 Promissory Note from Registrant to Form 10-Q for the Quarter Ended December
UAH Securities Litigation Fund dated 31, 1998, filed February 16, 1999
December 11, 1998
10.51 Amendment of Promissory Note and Exhibit 10.51 to Registrant's 1999
Business Loan Form 10-K
Agreement from Michigan National Bank
dated May 6, 1999
10.52 Provider Contract between Urban Exhibit 10.52 to Registrant's 1999
Hospital Care Plus and Registrant Form 10-K
dated April 1, 1999
10.53 Assignment and Assumption of Exhibit 10.53 to Registrant's 1999
Subleases and Security Deposits Form 10-K
between International Business
Machines Corporation and Registrant
dated September 9, 1999
10.54 Business Loan Agreement between Exhibit 10.54 to Registrant's 2001
Registrant and Michigan National Form 10-K
Bank dated September 25, 2000
10.55 Promissory Note of Registrant to Exhibit 10.55 to Registrant's 2001
Michigan National Bank dated Form 10-K
September 25, 2000
10.56 Security Agreement between Exhibit 10.56 to Registrant's 2001
Registrant and Michigan National Form 10-K
Bank dated September 25, 2000
10.57 Amendment of Business Loan Agreement Form 10-Q for the Quarter Ended December
with Standard Federal Bank N.A., 31, 2001, filed February 14, 2002
dated November 29, 2001 and
effective September 30, 2001.
10.58 Amended and Restated Promissory Note Form 10-Q for the Quarter Ended December
to Standard Federal Bank N.A., dated 31, 2001, filed February 14, 2002
November 29, 2001 and effective
September 30, 2001.
10.59 Amendment to Management Agreement Form 10-Q for the Quarter Ended December
with OmniCare Health Plan dated 31, 2001, filed February 14, 2002
December 14, 2001 and effective
August 1, 2001.
10.60 Amendment of Business Loan Agreement Exhibit 10.60 to Registrant's 2002
with Standard Federal Bank N.A., Form 10-K
dated October 11, 2002
10.61 Amendment of Business Loan Agreement Form 10-Q for the Quarter Ended September
with Standard Federal Bank N.A., 30, 2002, filed November 13, 2003
dated October 11, 2002 and effective
September 30, 2002
10.62 Letter amendment of Business Loan Form 10-Q for the Quarter Ended December
Agreement with Standard Federal Bank 31, 2002, filed May 13, 2003
N.A., dated February 5, 2003
10.63 United American Healthcare Form 8-K filed January 11, 2005
Corporation Supplemental Executive
Retirement Plan
10.64 Severance Agreement dated as of Form 10-Q filed April 28, 2005
April 15, 2005 between United
American of Tennessee, Inc and Osbie
L. Howard
10.65 Contract #H6934 effective September Exhibit 10.1 to Form 8-K filed October
29, 2006 between Centers for 16, 2006
Medicare & Medicaid Services and
UAHC Health Plan of Tennessee, Inc.
with its Attachment A and Addendum D
10.66 Form of Purchase Agreement dated as Exhibit 10.1 to Form 8-K filed December
of December 13, 2006 among United 15, 2006
American Healthcare Corporation and
certain investors
10.67 United American Healthcare Exhibit 10.1 to Form 10-Q filed January
Corporation Supplemental Executive 25, 2007
Retirement Plan, as amended and
restated effective as of January 1,
2005, signed on November 9, 2006
16.1 Concurring Letter regarding change Form 8-K filed October 30, 1997
in Certifying Accountants dated
October
30, 1997, from Grant Thornton LLP
16.2 Concurring Letter regarding change Form 8-K/A filed November 12, 1997
in Certifying Accountants dated
November 12, 1997, from Grant
Thornton LLP
16.3 Concurring Letter regarding change Form 8-K/A filed November 12, 1997
in Certifying Accountants dated
November 12, 1997, from Ernst &
Young LLP
16.4 Concurring Letter regarding change Form 8-K filed January 20, 1998
in Certifying Accountants dated
January 16, 1998, from Arthur
Andersen LLP
16.5 Letter of KPMG LLP dated March 5, Form 8-KA filed March 10, 2003
2003 to the Securities and Exchange
Commission.
16.6 Letter dated November 22, 2004, from Form 8-K filed November 22, 2004
Follmer Rudzewicz PLC to the
Securities and Exchange Commission
21 Subsidiaries of the Registrant
23.1 Consent of Registered Independent *
Public Accounting Firm
31.1 Certification of Chief Executive *
Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial *
Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive *
Officer Pursuant to 18 U.S.C.
Section 1350
32.2 Certification of Chief Financial *
Officer Pursuant to 18 U.S.C.
Section 1350
99.1 Press Release dated January 12, 1998 Form 8-K filed January 20, 1998
99.2 Press Release dated January Form 8-K filed January 14, 2000
6, 2000
99.3 Press release dated April 15, 2005. Form 8-K filed April 15, 2005
99.3 Press release dated April 21, 2005. Form 8-K filed April 21, 2005
99.4 Notice of Administrative Supervision Form 8-K/A filed April 21, 2005
issued by the Commissioner of the
State of Tennessee Department of
Commerce and Insurance, dated April
20, 2005.