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As filed with the Securities and Exchange Commission on May 12, 2003
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2003
Commission File Number: 000-18839
UNITED AMERICAN HEALTHCARE CORPORATION
(Exact Name of Registrant as Specified in Charter)
MICHIGAN 38-2526913
(State or other jurisdiction of (I.R.S. Employer incorporation
Identification No.) or organization)
300 RIVER PLACE SUITE 4700
DETROIT, MICHIGAN 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 393-4571
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF MAY 8, 2003
WAS 6,968,184.
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UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. PAGE
Item 1. Unaudited Condensed Consolidated Financial Statements -
Condensed Consolidated Balance Sheets - March 31, 2003
and June 30, 2002......................................................................1
Condensed Consolidated Statements of Operations - Three Months and Nine Months
Ended March 31, 2003 and 2002..........................................................2
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended March 31, 2003 and 2002..........................................................3
Notes to the Unaudited Condensed Consolidated Financial Statements.......................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................12
Item 4. Controls and Procedures.................................................................21
PART II.
Item 1. Legal Proceedings.......................................................................22
Item 2. Changes in Securities and Use of Proceeds...............................................22
Item 3. Defaults Upon Senior Securities.........................................................22
Item 4. Submission of Matters to a Vote of Security Holders.....................................22
Item 5. Other Information.......................................................................22
Item 6. Exhibits and Reports on Form 8-K........................................................25
Signatures..................................................................................................26
PART I.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30,
2003 2002
-----------------------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents 4,310 2,026
Marketable securities - 16,784
Accounts receivable - State of Tennessee 1,023 1,794
Other receivables 1,220 2,856
Refundable income taxes - 284
Prepaid expenses and other 269 621
Deferred income taxes 250 1,090
-----------------------------
Total current assets 7,072 25,455
Property and equipment held for sale 800 -
Property and equipment, net 538 2,426
Goodwill, net 2,952 2,952
Marketable securities 2,136 1,826
Other assets 727 677
-----------------------------
$ 14,225 33,336
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 1,108 1,032
Medical claims payable 986 24,495
Accounts payable and accrued expenses 2,547 1,148
Accrued compensation and related benefits 335 788
Other current liabilities 1,234 1,784
-----------------------------
Total current liabilities 6,210 29,247
Long-term debt, less current portion 847 1,837
Accrued rent 980 505
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -
Common stock, no par, 15,000,000 shares authorized; 6,968,184 and 11,473 11,407
6,911,268 shares issued and outstanding at March 31, 2003 and June 30,
2002, respectively
Retained deficit (5,303) (9,675)
Accumulated other comprehensive income, net of income taxes 18 15
-----------------------------
Total shareholders' equity 6,188 1,747
-----------------------------
$ 14,225 $ 33,336
=============================
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
1
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------
REVENUES
Medical premiums $ 777 $ 42,156 $ 7,352 $111,201
Fixed administrative fees 3,417 -- 11,200 --
Gain on sale of assets 7 -- 7 --
Interest and other income 516 523 1,308 1,116
------------------------------------------------------
Total revenues 4,717 42,679 19,867 112,317
EXPENSES
Medical services -- 37,186 380 95,954
Marketing, general and administrative 3,798 4,713 11,710 13,720
Depreciation and amortization 69 84 229 235
Interest expense 24 49 120 173
------------------------------------------------------
Total expenses 3,891 42,032 12,439 110,082
------------------------------------------------------
Earnings from continuing operations before income 826 647 7,428 2,235
taxes
Income tax expense 298 348 929 1,170
------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 528 299 6,499 1,065
DISCONTINUED OPERATIONS (NOTE 9)
(Loss) gain from discontinued operations -- -- (2,127) 2,366
------------------------------------------------------
NET EARNINGS 528 299 4,372 3,431
======================================================
NET EARNINGS PER COMMON SHARE - BASIC
Earnings from continuing operations $ 0.08 0.04 0.94 0.16
Discontinued operations $ 0.00 0.00 (0.31) 0.34
------------------------------------------------------
Net earnings per common share $ 0.08 0.04 $ 0.63 0.50
======================================================
Weighted average shares outstanding 6,939 6,854 6,920 6,811
======================================================
NET EARNINGS PER COMMON SHARE - DILUTED
Earnings from continuing operations $ 0.08 0.04 0.93 $ 0.15
Discontinued operations 0.00 0.00 (0.31) 0.34
Net earnings per common share 0.08 0.04 0.62 0.49
======================================================
Weighted average shares outstanding 6,953 7,171 6,967 7,012
======================================================
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
2
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
2003 2002
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 4,372 $ 3,431
Adjustments to reconcile net earnings to net cash provided by operating
activities
Loss on disposal of assets 584 3
Gain on sale of equipment (7) --
Realized loss on investment 3 166
Depreciation and amortization 573 1,456
Bad debt expense 847 --
Accrued rent 475 (56)
Stock awards 66 50
Deferred income taxes 840 1,140
Net changes in assets and liabilities (20,971) (7,410)
---------------------------
Net cash used in operating activities (13,218) (1,220)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchase) of marketable securities 16,474 (9,146)
Purchase of property and equipment (58) (936)
---------------------------
Net cash provided by (used in) investing activities 16,416 (10,082)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made on long-term debt (914) (448)
Issuance of common stock -- 165
---------------------------
Net cash used in financing activities (914) (283)
---------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,284 (11,585)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,026 21,985
---------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,310 $ 10,400
===========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 111 $ 164
===========================
Income taxes paid $ -- $ 110
===========================
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
NOTE 1 - BASIS OF PREPARATION
The accompanying consolidated financial statements include the accounts of
United American Healthcare Corporation and its majority-owned subsidiary
together referred to as the "Company." All significant intercompany transactions
and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in conformity with accounting principles generally
accepted in the United States of America and with the instructions for Form 10-Q
and Rule 10-01 of Regulation S-X as they apply to interim financial information.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the financial
position and results of operations have been included. The results of operations
for the nine-month period ended March 31, 2003 are not necessarily indicative of
the results of operations for the full fiscal year ending June 30, 2003. Audited
June 30, 2002 financial statements, with accompanying footnotes, can be found in
the Company's most recent annual report on Form 10-K.
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are summarized as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------------
Net earnings $ 528 $ 299 $ 4,372 $ 3,431
Realized holding gains, net of deferred federal
income taxes 3 - 3 166
----------------------------------------------------------
Comprehensive income $ 531 $ 299 $ 4,375 $ 3,597
----------------------------------------------------------
The components of accumulated other comprehensive income, included in
shareholders' equity at March 31, 2003 and June 30, 2002, include net unrealized
holding gains and (losses), net of deferred federal income taxes.
4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
MARCH 31, 2002 AND 2001
NOTE 3 - LONG TERM DEBT
The Company currently has a $2.0 million term loan with Standard Federal Bank,
N.A. It is repayable in monthly installments of principal and interest of $0.1
million, with an interest rate equal to the bank's prime rate (4.25% at March
31, 2003) plus one percent per annum, and a maturity date of September 30, 2004.
The loan agreement is collateralized by a security interest in all of the
Company's personal property.
The Company's outstanding debt is as follows (in thousands):
MARCH 31, JUNE 30,
2003 2002
===========================
Term loan $ 1,955 $ 2,869
Less debt payable within one year 1,108 1,032
===========================
Long-term debt, less current portion $ 847 $ 1,837
===========================
NOTE 4 - NET EARNINGS PER COMMON SHARE
Basic net earnings per share excluding dilution have been computed by dividing
net earnings by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share are computed using the treasury stock method
for outstanding stock options.
NOTE 5 - EFFECTIVE TAX RATE
The Company's effective tax rate for the nine months ended March, 31, 2003 is
15% and differs from the statutory rate of 34%. This difference is primarily a
result of the utilization of net operating loss carryforwards which reduced the
effective tax rate by 17 percentage points. Furthermore, the write-off of
certain tax liabilities that management deemed to be no longer needed reduced
the effective tax rate by 1 percentage point.
NOTE 6 - CHANGE IN TENNCARE CONTRACT
For all its contracted managed care organizations ("MCOs"), the State of
Tennessee, doing business as TennCare, changed its reimbursement system to an
administrative services only ("ASO") program for an 18-month stabilization
period (July 1, 2002 through December 31, 2003), during which the MCOs -
including OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), a MCO 75%
owned by the Company's wholly owned subsidiary - have no medical cost risk
(i.e., no risk for medical losses), earn fixed administrative fees, are subject
to increased oversight, and may incur financial penalties for not achieving
certain performance requirements.
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
MARCH 31, 2002 AND 2001
Another feature TennCare included in establishing the ASO program was that MCOs
may earn limited additional administrative fees based on certain performance
measures as an incentive to manage medical costs below the targets. Management
has for some time believed that OmniCare-TN has qualified for incentive payments
under that program, awaiting notification from TennCare that the incentive
payment criteria have been met and when the payments would be made. However, the
Governor of Tennessee and Tenncare representatives have since publicly stated in
discussions with the Tennessee legislature and elsewhere that no incentive
payments will be made because of that state's and TennCare's budget situation.
TennCare has stated it intends to return to a full-risk system after the end of
the 18-month stabilization period at January 1, 2004.
NOTE 7 - CONTRACTUAL RISK AGREEMENT
In September 2002, OmniCare-TN and the State of Tennessee, doing business as
TennCare, amended the Contractor Risk Agreement between them. Pursuant to the
amendment:
- - Retroactively effective July 1, 2001 through April 30, 2002, OmniCare-TN
elected to operate under a shared risk arrangement, under which gains or losses
are shared with the State of Tennessee;
- - retroactively effective beginning May 1, 2002, OmniCare-TN is reimbursed under
an administrative services only agreement with no risk of medical loss; and
- - the State of Tennessee agreed to pay OmniCare-TN up to $7.5 million as
necessary to meet its statutory net worth requirement as of June 30, 2002.
Pursuant to a further agreement with OmniCare-TN in October 2002, the State of
Tennessee agreed to pay additional funds to OmniCare-TN if future certified
actuarial data confirm they are needed by OmniCare-TN to meet its statutory net
worth requirement as of June 30, 2002.
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
MARCH 31, 2002 AND 2001
OmniCare-TN received a permitted practice letter from the State of Tennessee to
include such $7.5 million receivable in its statutory net worth at June 30,
2002. Under generally accepted accounting principles, such $7.5 million was not
recorded in the Company's fiscal 2002 financial statements but is recorded in
its fiscal 2003 financial statements as fiscal 2002 claims are processed. Based
on an actuarial determination, an additional $0.4 million of fiscal 2002 medical
claims liability was recorded as of March 31, 2003 and the same aggregate amount
will be reimbursed by the State of Tennessee pursuant to the State's TennCare
amendment and further agreement discussed above in this Note 7. The change in
the estimated reimbursement from the State of Tennessee and the corresponding
change in the medical claims liability should offset, still resulting in $7.5
million of net earnings in fiscal year 2003. As of March 31, 2003, $7.4 million
of such medical claims were processed, and the same aggregate amount was
recognized as revenue by OmniCare TN.
Based on the foregoing as well as continuing operations under the ASO
arrangement in fiscal 2003, management believes that OmniCare-TN will remain in
compliance with its statutory net worth requirements through June 30, 2003.
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
MARCH 31, 2002 AND 2001
NOTE 8 - LIQUIDITY
The Company's ability to generate adequate earnings and cash to meet its future
cash needs depends on a number of factors, which include the following:
- TennCare's assignment of 19,857 additional TennCare enrollees to
OmniCare-TN with an effective date of June 1, 2003 (confirmed to
OmniCare-TN on April 30, 2003).
- OmniCare-TN's expected re-enrollment, in some instances retroactively
to July 1, 2002, of some of its approximately 7,900 working uninsured
or uninsurable members whom TennCare disenrolled in an eligibility
reverification process that dropped approximately 166,000 TennCare
enrollees statewide since July 1, 2002. In December 2002, a U.S.
District Court judge in Tennessee ruled that such process was flawed.
In March 2003, TennCare and Tennessee Governor Phil Bredesan announced
that all disenrolled members will have a year-long grace period until
March 31, 2004 to prove if they actually meet the eligibility
requirements and thereby have their wrongful disenrollment cancelled
and their enrollment restored retroactively.
- The Company's ability to control administrative costs related to
managing medical costs for the TennCare program and corporate overhead
costs.
The outcome of the above matters could have an impact on the Company's ability
to successfully meet ongoing obligations. The Company expected to earn limited
additional administrative fees under the current TennCare reimbursement system
based on certain performance measures as an incentive to manage medical costs
below the targets. However, the Governor of Tennessee and Tenncare
representatives have since publicly stated in discussions with the Tennessee
legislature and elsewhere that no incentive payments will be made because of
that state's and TennCare's budget situation. On the basis of the 19,857
additional new OmniCare-TN members effective June 1, 2003 and the matters
discussed in Note 7 of the unaudited condensed consolidated financial
statements, management believes at this time that the Company has the ability to
generate sufficient earnings and cash to adequately support its financial
requirements through the next twelve months, maintain compliance with bank
financial covenants, and maintain minimum statutory net worth requirements of
OmniCare-TN.
8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
MARCH 31, 2002 AND 2001
NOTE 9 - DISCONTINUED OPERATIONS
The Company's longstanding management agreement with OmniCare Health Plan, in
Michigan ("OmniCare-MI"), ended effective November 1, 2002. Because of its
resulting workforce reduction, the Company made plans to sublease all of its
principal office premises in Detroit, Michigan, to OmniCare-MI, retroactive to
November 1, 2002, and expiring at the lease end in May 2005, and to sell to
OmniCare-MI furniture, a telephone system and certain computer hardware and
software that the Company chose to leave there. Management expects both parties
will finalize and sign the sublease, and close the sale of such assets, in the
fourth quarter of fiscal 2003. OmniCare-MI commenced its occupancy of the
premises on November 1, 2002 and the Company remained in a portion of the
premises until it moved its principal offices to new leased premises in Detroit
on February 3, 2002.
In connection with the November 1, 2002 termination of its OmniCare-MI
management agreement, the Company recorded a $1.8 million loss from discontinued
operations in the second quarter of fiscal 2003. Such loss was due in part to:
(i) a $0.6 million write-down of assets held for sale in excess of the
anticipated selling price for the pending sale of assets described above; (ii)
the above-described sublease, which is expected to cost the Company
approximately $0.04 million per month through the remainder of the lease, ending
in May 2005, resulting in a loss of $1.2 million recorded in the second quarter
of fiscal 2003, which was offset by a $0.6 million write-down of a deferred rent
liability associated with the original lease; and (iii) a bad debt charge of
$0.3 million recorded because management determined the collectability of that
amount of receivables from OmniCare-MI is doubtful. The recorded charges
discussed above were offset by management fees from OmniCare-MI of $0.8 million.
NOTE 10 - GOODWILL
Goodwill resulting from business acquisitions is carried at cost. Effective July
1, 2001, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
eliminates the amortization of goodwill, but requires that the carrying amount
of goodwill be tested for impairment at least annually at the reporting unit
level, as defined, and will only be reduced if it is found to be impaired or is
associated with assets sold or otherwise disposed of.
Management has assessed the remaining carrying amount of previously recorded
goodwill of $3.0 million and determined that such amount is not impaired in
accordance with SFAS No. 142. Accordingly, goodwill amortization was not
recorded for the nine months ended March 31, 2003 and 2002.
9
NOTE 11 -- STOCK OPTION PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes a method of
accounting for stock-based compensation that recognizes compensation cost based
on the fair value of options at grant date. In lieu of applying this fair value
based method, a company may elect to disclose only the pro forma effects of such
application. The Company has adopted the disclosure-only provisions of SFAS No.
123. In December 2002, SFAS No. 148, "Stock-Based Compensation," was issued,
which requires that the Company illustrate the effect on net income and earnings
per share if it applied the fair value principles included in SFAS No. 123 for
both annual and interim financial statements. Accordingly, if the Company had
elected to recognize compensation cost based on the fair value of the options at
grant date, the Company's earnings and earnings per share from continuing
operations, assuming dilution, for the three and nine months ended 2003 and 2002
would have been the pro forma amounts indicated below (in thousands, except per
share amounts:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------
Net earnings (loss):
As reported $ 528 $ 299 $ 4,372 $ 3,431
Pro forma $ 454 $ 289 $ 4,275 $ 3,187
Net earnings (loss) per share:
Basic as reported $ 0.08 $ 0.04 $ 0.63 $ 0.50
Dilutive as reported $ 0.04 $ 0.04 $ 0.63 $ 0.49
Basic Pro forma $ 0.05 $ 0.04 $ 0.62 $ 0.47
Dilutive Pro forma $ 0.05 $ 0.04 $ 0.61 $ 0.45
-------------------------------------------------------------
10
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
MARCH 31, 2002 AND 2001
NOTE 12 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations as of
and for the nine months ended March 31, 2003 and 2002, is as follows (in
thousands):
- ----------------------------------------------------------------------------------------------------------------
Management HMOs &
Companies Managed Plans Corporate & Consolidated
MARCH 31, 2003 (1) (2) Eliminations Company
- ----------------------------------------------------------------------------------------------------------------
Revenues - external customers $ $ 18,552 $ $ 18,552
Revenues - intersegment 10,092 (10,092)
Interest and other income 177 1,138 1,315
------------------------------------------------------------------
Total revenues $ 10,269 $ 19,690 $ (10,092) $ 19,867
================================================================================================================
Interest expense $ 120 $ - $ - $ 120
Earnings (loss) from continued
operations (1,487) 7,985 - 6,499
Loss from discontinued operations (2,127) (2,127)
Segment assets 26,640 8,840 (21,255) 14,225
Purchase of equipment 58 - - 58
Depreciation and amortization 573 - - 573
- ----------------------------------------------------------------------------------------------------------------
Management HMOs &
Companies Managed Plans Corporate & Consolidated
MARCH 31, 2002 (1) (2) Eliminations Company
- ----------------------------------------------------------------------------------------------------------------
Revenues - external customers $ - $ 111,201 $ - $ 111,201
Revenues - intersegment 10,969 - (10,969) -
Interest and other income (loss) (68) 1,184 - 1,116
------------------------------------------------------------------
Total revenues $ 10,901 $ 112,385 $ (10,969) $ 112,317
================================================================================================================
Interest expense $ 173 $ - $ - $ 173
Earnings (loss) from continued
operations 420 1,815 - 2,235
Gain from discontinued operations 2,366 2,366
Segment assets 28,044 26,415 (15,026) 39,433
Purchase of equipment 939 - - 939
Depreciation and amortization 235 - - 235
- ----------------------------------------------------------------------------------------------------------------
(1) Management Companies: United American Healthcare Corporation and United
American of Tennessee, Inc.
(2) HMOs and Managed Plans: OmniCare Health Plan, Inc. of Tennessee and County
Care.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
This Financial Review discusses the Company's results of operations, financial
position and liquidity. This discussion should be read in conjunction with the
consolidated financial statements and related notes thereto contained elsewhere
in this quarterly report.
The Company provides comprehensive management and consulting services to managed
care organizations, including health maintenance organizations ("HMOs") in
Tennessee and (until November 1, 2002) Michigan, with a targeted mix of Medicaid
and commercial enrollment. OmniCare Health Plan, in Michigan ("OmniCare-MI"), an
HMO then administered by the Company under a management agreement, was placed in
court-ordered rehabilitation proceedings on July 31, 2001, which relieved the
Company from further funding OmniCare-MI's capital deficiencies and which
continued its OmniCare-MI management agreement, with substantially reduced
management fee revenues from OmniCare-MI beginning August 1, 2001. In March
2002, upon the court-appointed Rehabilitator's filing a proposed rehabilitation
plan for OmniCare-MI, the Company announced it anticipated eventual termination
of the management agreement. Such termination occurred November 1, 2002, after
which the Company's only managed plan is OmniCare Health Plan, Inc., in
Tennessee ("OmniCare-TN"), an HMO which is 75% owned by the Company's wholly
owned subsidiary. Accordingly, the consolidated financial statements have been
restated to present the operations related to managing OmniCare-MI as a
discontinued operation. As of March 31, 2003, there were approximately 112,250
enrollees in OmniCare-TN.
Total revenues decreased $37.9 million (89%) to $4.7 million for the quarter
ended March 31, 2003 compared to $42.7 million for the quarter ended March 31,
2002, and decreased $92.5 million (82%) to $19.9 million for the nine months
ended March 31, 2003 compared to $112.3 million for the nine months ended March
31, 2002, principally as the result of a change in the reimbursement system of
TennCare, a State of Tennessee program that provides medical benefits to
Medicaid and working uninsured and uninsurable recipients. For all its
contracted managed care organizations ("MCOs"), TennCare changed its
reimbursement system to an administrative services only ("ASO") program for an
18-month stabilization period (July 1, 2002 through December 31, 2003), during
which the MCOs - including OmniCare-TN - have no medical cost risk (i.e., no
risk for medical losses), earn fixed administrative fees, are subject to
increased oversight, and may incur financial penalties for not achieving certain
performance requirements. (Incidentally, such ASO period began May 1, 2002 for
OmniCare-TN pursuant to an amendment to its TennCare contract.) TennCare has
stated it intends to return to a full-risk system after the end of the 18-month
stabilization period at January 1, 2004.
12
Total expenses decreased $38.1 million (91%) to $3.9 million for the quarter
ended March 31, 2003 compared to $42.0 million for the quarter ended March 31,
2002, and decreased $97.7 million (89%) to $12.4 million for the nine months
ended March 31, 2003 from $110.1 million for the nine months ended March 31,
2002. The decreases were principally due to the TennCare ASO program in effect
for OmniCare-TN since May 1, 2002, as described above.
Earnings from continuing operations before income taxes were $0.8 million and
$0.6 million for the quarters ended March 31, 2003 and 2002, respectively.
Earnings from continuing operations were $0.5 million, or $0.08 per basic share,
for the quarter ended March 31, 2003 compared to earnings from continuing
operations of $0.3 million, or $0.04 per basic share, for the quarter ended
March 31, 2002. Such increase in earnings from continuing operations of $0.2
million, or $0.04 per basic share, is principally due to OmniCare-TN's
contractual amendment with TennCare, described in the next paragraph below.
The Company recognized earnings from continuing operations before income taxes
of $7.4 million for the nine months ended March 31, 2003 and earnings from
continuing operations of $6.5 million, or $0.94 per basic share, for that
period. For the nine months ended March 31, 2002, earnings from continuing
operations before income taxes were $2.2 million and earnings from continuing
operations were $1.1 million, or $0.16 per basic share. Such increase in
earnings from continuing operations of $5.4 million, or $0.78 per basic share,
is principally due to a contractual amendment in September 2002, retroactive to
July 1, 2001 in some respects and to May 1, 2002 in other respects, as more
fully described in Note 7 of the unaudited condensed consolidated financial
statements in this quarterly report. In the amendment, TennCare agreed to pay
OmniCare-TN up to $7.5 million as necessary to meet its statutory net worth
requirement as of June 30, 2002. OmniCare-TN received a permitted practice
letter from the State of Tennessee to include such $7.5 million receivable in
its statutory net worth at June 30, 2002. Under generally accepted accounting
principles, such $7.5 million was not recorded in the Company's fiscal 2002
financial statements but will be recorded in its fiscal 2003 financial
statements as fiscal 2002 claims are processed. Based on an actuarial
determination, an additional $0.4 million of medical claims liability was
recorded as of December 31, 2002 and the same aggregate amount will be
reimbursed by the State of Tennessee pursuant to the TennCare contractual
amendment. The change in the estimated reimbursement from the State of Tennessee
and the corresponding change in the medical claims liability should offset,
still resulting in $7.5 million of net earnings in fiscal year 2003. As of March
31, 2003, $7.4 million of such medical claims were processed, and the same
aggregate amount was recognized as revenue by OmniCare-TN.
The Company recognized no gain or loss from discontinued operations for the
three months ended March 31, 2003 and March 31, 2002. For the nine months ended
March 31, 2003 the company recognized a loss from discontinued operations of
$2.1 million compared to a gain of $2.4 million for the nine months ended March
31, 2002, a change
13
of $4.5 million. The recorded loss was the result of the termination of
the Company's longstanding management agreement with OmniCare-MI, effective
November 1, 2002. Because of its resulting workforce reduction, the Company made
plans to sublease all of its principal office premises in Detroit, Michigan, to
OmniCare-MI, retroactively to November, 1, 2002 and expiring at the lease end in
May 2005, and to sell to OmniCare-MI furniture, a telephone system and certain
computer hardware and software that the Company chose to leave there. Management
expects both parties will finalize and sign the sublease, and close the sale of
such assets, in the fourth quarter of fiscal 2003. Meanwhile, OmniCare-MI
commenced its occupancy of the premises on November 1, 2002 and the Company
remained in a portion of the premises until it moved its principal offices to
new leased premises in Detroit on February 3, 2002. Such loss was due in part
to: (i) a $0.6 million write-down of net assets in excess of the anticipated
selling price for the pending sale of assets described above; (ii) the above
described sublease, which is expected to cost the Company approximately $0.04
million per month through the remainder of the lease, ending in May 2005,
resulting in a net loss of $0.6 million recorded in the second quarter of fiscal
2003; and (iii) a bad debt charge of $0.3 million recorded because management
determined the collectability of that amount of receivables from OmniCare-MI is
doubtful. The recorded charges discussed above were offset by management fees of
$0.8 million.
Net earnings were $0.5 million, or $0.08 per basic share, for the three months
ended March 31, 2003 compared to net earnings of $0.3 million, or $0.04 per
basic share, for the three months ended March 31, 2002. The Company recognized
net earnings of $4.4 million, or $0.63 per basic share, for the nine months
ended March 31, 2003 and net earnings of $3.4 million, or $0.50 per basic share,
for the period ended March 31, 2002. Such increase in net earnings is
principally due to OmniCare-TN's contractual amendment with TennCare, described
above.
14
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2002
Medical premium revenues were $0.8 million in the three months ended March 31,
2003, a decrease of $41.4 million (98%) from $42.2 million in the three months
ended March 31, 2002. Such $0.8 million of medical premium revenues in the
second quarter of fiscal 2003 represent the disbursed portion of the above $7.5
million TennCare commitment actually reimbursed by the State of Tennessee in the
that fiscal quarter. The decrease from the prior year came from OmniCare-TN as
the result of TennCare's changing its reimbursement system to an ASO program for
an 18-month stabilization period beginning July 1, 2002, as described under
"Overview" above. Fixed administrative fees related to the ASO program were $3.4
million for the quarter ended March 31, 2003.
Because of TennCare's new ASO reimbursement system, there were no medical
services expenses in the three months ended March 31, 2003, as compared with
medical services expenses of $37.2 million in the three months ended March 31,
2002. The percentage of medical services expenses to medical premium revenues --
the medical loss ratio ("MLR") -- was 87% for the three-month period ended March
31, 2002 for OmniCare-TN. Effective July 1, 2000, OmniCare-TN's new contract
with TennCare required a minimum of 85% of capitated revenue to be paid to
medical service providers.
Marketing, general and administrative expenses decreased approximately $0.9
million (19%), to $3.8 million for the three months ended March 31, 2003 from
$4.7 million for the three months ended March 31, 2002. The decrease is
principally due to reduced advertising costs and TennCare's payment of premium
tax as a result of the ASO arrangement referred to above, offset by the costs of
claims processing associated with a membership increase.
Depreciation and amortization expense decreased $0.015 million (18%), to $0.069
million for the three months ended March 31, 2003 from $0.084 million for the
three months ended March 31, 2002. The decrease was due to the full depreciation
of certain assets.
Interest expense decreased $0.025 million (51%), to $0.024 million for the three
months ended March 31, 2003 from $0.049 million for the three months ended March
31, 2002, due to debt reduction and decreases in the prime rate.
Income tax expense decreased $0.05 million (14%), to $0.3 million for the three
months ended March 31, 2003 from $0.35 million for the three months ended March
31, 2002. The Company's effective tax rate for the nine months ended March, 31,
2003 is 15% and differs from the statutory rate of 34%. This difference is
primarily a result of the utilization of net operating loss carryforwards which
reduced the effective tax rate by 17 percentage points. Furthermore, the release
of certain tax liabilities that were deemed to be no longer needed reduced the
effective tax rate by 1 percentage point.
15
The Company recognized earnings from continuing operations before income taxes
of $0.8 million for the three months ended March 31, 2003, compared to earnings
before income taxes of $0.6 million for the three months ended March 31, 2002.
Earnings from continuing operations were $0.5 million, or $0.08 per basic share,
for the three months ended March 31, 2003, compared to earnings from continuing
operations of $0.3 million, or $0.4 per basic share, for the three months ended
March 31, 2002, an increase of $0.2 million, or $0.04 per basic share. The
increase in earnings is primarily due to the amendment to OmniCare-TN's TennCare
contract in September 2002, retroactive to July 1, 2001 in some respects and to
May 1, 2002 in other respects, as described under "Overview" above. In the
amendment, the State of Tennessee agreed to pay OmniCare-TN up to $7.5 million
as necessary to meet its statutory net worth requirement as of June 30, 2002.
OmniCare-TN received a permitted practice letter from the State of Tennessee to
include such $7.5 million receivable in its statutory net worth at June 30,
2002. Under generally accepted accounting principles, such $7.5 million was not
recorded in the Company's fiscal 2002 financial statements but will be recorded
in its fiscal 2003 financial statements as fiscal 2002 claims are processed.
Based on an actuarial determination, an additional $0.4 million of medical
claims liability was recorded as of December 31, 2002 and the same aggregate
amount will be reimbursed by the State of Tennessee pursuant to the TennCare
contractual amendment. The change in the estimated reimbursement from the State
of Tennessee and the corresponding change in the medical claims liability should
offset, still resulting in $7.5 million of net earnings in fiscal year 2003.
Medical claims of $0.8 million were processed for the three months ended March
31, 2003, and the same aggregate amount was recognized as revenue by OmniCare
TN.
The Company recognized no gain or loss from discontinued operations for the
three months ended March 31, 2003 and March 31, 2002 as the result of the
termination of the Company's longstanding management agreement with OmniCare-MI,
effective November 1, 2002. See "Overview" above for more detailed discussion
and analysis of such loss from discontinued operations.
Net earnings were $0.5 million, or $0.08 per basic share, for the three months
ended March 31, 2003 compared to net earnings of $0.3 million, or $0.04 per
basic share, for the three months ended March 31, 2002. Such increase in net
earnings is principally due to OmniCare-TN's contractual amendment with TennCare
offset by the loss from discontinued operations, described above.
16
NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO
NINE MONTHS ENDED MARCH 31, 2002
Total revenues decreased $92.5 million (82%) to $19.9 million for the nine
months ended March 31, 2003 from $112.3 million for the nine months ended March
31, 2002 principally as the result of a change in the reimbursement system of
TennCare referred to above.
Medical premium revenues were $7.4 million for the nine months ended March 31,
2003, a decrease of $103.8 million (93%) from medical premium revenues of $111.2
million for the nine months ended March 31, 2002. The decrease came from
OmniCare-TN as the result of TennCare's changing its reimbursement system to an
ASO program for an 18-month stabilization period beginning July 1, 2002. Fixed
administrative fees related to the ASO program were $11.2 million for the nine
months ended March 31, 2003.
Total expenses were $12.4 million for the nine months ended March 31, 2003,
compared to $110.1 million for the nine months ended March 31, 2002, a decrease
of $97.7 million (89%). The decreases were principally due to the TennCare ASO
program for OmniCare-TN referred to above.
Because of TennCare's new ASO reimbursement system, medical services expenses
were $0.4 million in the nine months ended March 31, 2003, a decrease of $95.5
million, as compared with medical services expenses of $96.0 million in the nine
months ended March 31, 2002. The percentage of medical services expenses to
medical premium revenues (MLR) was 86% for the nine-month period ended March 31,
2002 for OmniCare-TN.
Marketing, general and administrative expenses were $11.7 million for the
nine-month period ended March 31, 2003, as compared with marketing, general and
administrative expenses of $13.7 million for the comparable period a year
earlier, a decrease of $2.0 million (15%). The decrease is principally due to
reduced advertising costs and TennCare's payment of premium tax as a result of
the ASO arrangement referred to above, offset by the costs of claims processing
associated with a membership increase.
Depreciation and amortization expense decreased $0.006 million (3%), to $0.229
million for the nine months ended March 31, 2003 from $0.235 million for the
nine months ended March 31, 2002. The decrease was due primarily to the full
depreciation of certain assets.
Interest expense decreased $0.05 million (31%), to $0.12 million for the nine
months ended March 31, 2003 from $0.17 million for the nine months ended March
31, 2002, principally due to debt reduction and decreases in the prime rate.
As a result of the foregoing, the Company recognized earnings from continuing
operations before income taxes of $7.4 million for the nine months ended March
31, 2003
17
and earnings from continuing operations of $6.5 million, or $0.94 per basic
share. For the nine months ended March 31, 2002, earnings from continuing
operations before income taxes were $2.2 million and earnings from continuing
operations were $1.1 million, or $0.16 per basic share.
The Company recognized a loss from discontinued operations of $2.1 million for
the nine months ended March 31, 2003 as compared to a gain of $2.4 million for
the nine months ended March 31, 2002, a change of $4.5 million. The recorded
loss was the result of the termination of the Company's longstanding management
agreement with OmniCare-MI, effective November 1, 2002. See "Overview" above for
a more detailed discussion and analysis of such loss from discontinued
operations.
Net earnings were $4.4 million, or $0.63 per basic share, for the nine months
ended March 31, 2003 compared to net earnings of $3.4 million, or $0.50 per
basic share, for the nine months ended March 31, 2002. Such increase in net
earnings is principally due to OmniCare-TN's contractual amendment with TennCare
offset by the loss from discontinued operations, described above.
18
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had (i) cash and cash equivalents and short-term
marketable securities of $4.3 million, compared to $18.8 million at June 30,
2002; (ii) working capital of $0.9 million, compared to a working capital
deficit of $(3.8) million at June 30, 2002; and (iii) a current
assets-to-current liabilities ratio of 1.14-to-1, compared to 0.87-to-1 at June
30, 2002. The principal source of cash and cash equivalents for the Company
during the nine months ended March 31, 2003 was $16.4 million provided from net
investing activities. The principal uses of cash and cash equivalents for the
period were $23.5 million for payment of medical claims and $0.9 million for
debt repayment. Positive cash flow was $2.3 million compared to negative cash
flow of $(11.6) million for the comparable nine-month period a year earlier.
Accounts receivable decreased by $2.4 million at March 31, 2003 compared to June
30, 2002, primarily because of TennCare's new ASO reimbursement system referred
to above.
Property, plant and equipment decreased by $1.9 million at March 31, 2003
compared to June 30, 2002, due an impairment charge associated with a pending
sale of certain furniture, equipment and software and the recording of
depreciation of $0.6 million.
Medical claims payable decreased by $23.5 million at March 31, 2003 compared to
June 30, 2002, which is directly related to the payment of OmniCare-TN medical
claims processed during the period, and TennCare's new ASO reimbursement system.
Long-term debt decreased $0.9 million at March 31, 2003 compared to June 30,
2002. The Company currently has a $2.0 million term loan with Standard Federal
Bank, N.A. repayable in monthly installments of principal and interest of $0.1
million, with an interest rate equal to the bank's prime rate (4.25% at March
31, 2003) plus one percent per annum, and a maturity date of September 30, 2004.
The Company's ability to generate adequate earnings and cash to meet its future
cash needs depends on a number of factors, which include the following:
- TennCare's assignment of 19,857 additional TennCare enrollees to
OmniCare-TN with an effective date of June 1, 2003 (confirmed to
OmniCare-TN on April 30, 2003).
- OmniCare-TN's expected re-enrollment, in some instances retroactively
to July 1, 2002, of some of its approximately 7,900 working uninsured
or uninsurable members whom TennCare disenrolled in an eligibility
reverification process that dropped approximately 166,000 TennCare
enrollees statewide since July 1, 2002.
19
In December 2002, a U.S. District Court judge in Tennessee ruled that
such process was flawed. In March 2003, TennCare and Tennessee Governor
Phil Bredesan announced that all disenrolled members will have a
year-long grace period until March 31, 2004 to prove if they actually
meet the eligibility requirements and thereby have their wrongful
disenrollment cancelled and their enrollment restored retroactively.
- The Company's ability to control administrative costs related to
managing medical costs for the TennCare program and corporate overhead
costs.
The outcome of the above matters could have an impact on the Company's ability
to successfully meet ongoing obligations. The Company expected to earn limited
additional administrative fees under the current TennCare reimbursement system
based on certain performance measures as an incentive to manage medical costs
below the targets. However, the Governor of Tennessee and TennCare
representatives have since publicly stated in discussions with the Tennessee
legislature and elsewhere that no incentive payments will be made because of
that state's and TennCare's budget situation. On the basis of the 19,857
additional new OmniCare-TN members effective June 1, 2003 and the matters
discussed in Note 7 of the unaudited condensed consolidated financial statements
in this quarterly report, management believes at this time that the Company has
the ability to generate sufficient earnings and cash to adequately support its
financial requirements through the next twelve months, maintain compliance with
bank financial covenants, and maintain minimum statutory net worth requirements
of OmniCare-TN.
20
ITEM 4. CONTROLS AND PROCEDURES
The Company's President and Chief Executive Officer, William C. Brooks, and the
Company's Chief Financial Officer, Stephen D. Harris, have evaluated the
Company's internal controls and disclosure controls systems within 90 days of
the filing of this report. Messrs. Brooks and Harris have concluded that the
Company's disclosure controls systems are functioning effectively to provide
reasonable assurance that the Company can meet its disclosure obligations. The
Company's disclosure controls system and reporting process are designed to
ensure that information required to be disclosed by the Company in the reports
that it files with or submits to the Commission is recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms. Since Messrs. Brooks' and Harris' most recent review of the
Company's internal controls systems, there have been no significant changes in
internal controls or in other factors that could significantly affect these
controls.
21
PART II.
ITEM 1. LEGAL PROCEEDINGS
On April 17, 2003, the Chancery Court for Madison County, Tennessee, entered an
Agreed Order of Dismissal dismissing with prejudice the entire action entitled
Jackson-Madison County General Hospital District, Plaintiff and
Counter-Defendant, v. OmniCare Health Plan, Inc. (i.e., OmniCare-TN), Defendant
and Counter-Plaintiff. Pursuant to the Order and a Mutual Settlement Agreement
and Release between the parties, both parties mutually released each other from
all liability in the matter, with Jackson-Madison County General Hospital
District responsible for court costs.
There have been no new material developments in the action by Vanderbilt
University against OmniCare-TN described in the Company's Form 10-Q quarterly
report for the period ended December 31, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
ITEM 5. OTHER INFORMATION
Gregory H. Moses, Jr., a director of the Company, died March 17, 2003. Mr. Moses
served as President and Chief Executive Officer of the Company until his
retirement November 22, 2002.
On April 11, 2003, Linda A. Watters resigned as a director of the Company
because of her appointment by Michigan Governor Jennifer Granholm as the state's
new Commissioner of the Office of Financial and Insurance Services, effective
that date. The resignation was required to avoid any possible appearance of a
conflict of interest and was not the result of any disagreement with the
Company. Ms. Watters served on the Company's Board of Directors since 2000, and
she currently was Co-Chairperson of the Board's Finance and Audit Committee. The
Committee continues to be chaired by its other Co-Chairperson, Darrel W.
Francis.
22
On May 8, 2003, the Board of Directors elected Osbie Howard as a director of
the Company, filling the vacancy created by the death of Mr. Moses. Mr. Howard
will serve the remainder of that term, until the annual meeting of shareholders
in 2005. Mr. Howard is Senior Vice President of the Company's wholly-owned
subsidiary, United American of Tennessee, Inc. and also President of
OmniCare-TN. Also on May 8, 2003, the Board of Directors amended the Company's
Bylaws to reduce the minimum size of the Board from ten to nine directors, and
the Board by resolution fixed the current size of the Board at nine directors.
Accordingly, there are currently no vacancies on the nine-member Board of
Directors.
In addition, the Company has taken a strategic look at its corporate governance.
In accordance with recommendations of its Governance Committee, on May 8, 2003
the Board adopted (i) a statement of Corporate Governance Principles, (ii) a
Code of Ethics for Senior Financial Officers, (iii) a Code of Business Conduct
and Ethics for its directors, officers and employees, (iv) a Conflict of
Interest Policy, (v) a Governance Committee Charter and (vi) a Compensation
Committee Charter, and ratified its previously adopted Finance and Audit
Committee Charter. The Company's CEO and CFO have signed the code of ethics for
senior financial officers. The Board has taken the above actions to ensure that
UAHC was proactively ahead of the curve on all of the current governance
activities.
On the advice of an independent consultant, the Company's Compensation Committee
has previously formalized the evaluation process for the President and Chief
Executive Officer and other key executives of the Company. The Company also has
established a policy to pay its Directors their periodic stipend as compensation
for Director services in shares of Common Stock of the Company rather than cash.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage management to provide prospective
information about their companies without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statements. Certain
statements contained in this Form 10-Q report, including, without limitation,
statements containing the words "believes," "anticipates," "will," "could,"
"may," "might" and words of similar import constitute "forward-looking
statements" within the meaning of this "safe harbor."
Such forward-looking statements are based on management's current expectations
and involve known and unknown risks, uncertainties and other factors, many of
which the Company is unable to predict or control, that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors potentially include, among others,
the following:
23
1. Inability to increase premium rates commensurate with increases in medical
costs due to utilization, government regulation, or other factors.
2. Discontinuation of, limitations upon, or restructuring of government-funded
programs, including but not limited to the TennCare program.
3. The potential reenrollment of some of the approximately 7,900 OmniCare TN
members disenrolled by TennCare since July 1, 2002 pursuant to its
court-challenged eligibility reverification process that disenrolled
approximately 166,000 TennCare members statewide.
4. Delays in or nonoccurrence of TennCare's anticipated assignment of
additional TennCare enrollees to OmniCare-TN.
5. Increases in medical costs, including increases in utilization and costs of
medical services and the effects of actions by competitors or groups of
providers.
6. Adverse state and federal legislation and initiatives, including: the State
of Tennessee's nonpayment of earned incentive compensation; limitations
upon or reductions in premium payments; prohibition or limitation of
capitated arrangements or financial incentives to providers; federal and
state benefit mandates (including mandatory length of stay and emergency
room coverage); limitations on the ability to manage care and utilization;
and any willing provider or pharmacy laws.
7. Failure to obtain new customer bases or members or retain or regain
customer bases or members, or reductions in work force by existing
customers.
8. Increased competition between current organizations, the entrance of new
competitors and the introduction of new products by new and existing
competitors.
9. Adverse publicity and media coverage.
10. Inability to carry out marketing and sales plans.
11. Loss or retirement of key executives.
12. Termination of provider contracts or renegotiations at less cost-effective
rates or terms of payment.
13. The selection by employers and individuals of higher co-payment/deductible/
coinsurance plans with relatively lower premiums or margins.
14. Adverse regulatory determinations resulting in loss or limitations of
licensure, certification or contracts with governmental payors.
15. Higher sales, administrative or general expenses occasioned by the need for
additional advertising, marketing, administrative or management information
systems expenditures.
16. Increases by regulatory authorities of minimum capital, reserve and other
financial solvency requirements.
17. Denial of accreditation by quality accrediting agencies, e.g., the National
Committee for Quality Assurance (NCQA).
18. Adverse results from significant litigation matters.
19. Inability to maintain or obtain satisfactory bank loan credit arrangements.
24
20. Increased costs to comply with the Health Insurance Portability and
Accountability Act of 1996 (HIPAA).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of William C. Brooks, Chief Executive Officer of the
Company, as required by Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Stephen D. Harris, Chief Financial Officer of the
Company, as required by Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
1) The Company filed a Current Report on Form 8-K on March 5, 2003,
announcing a change in its certifying accountant.
2) The Company filed a Current Report on Form 8-K/A on March 10,
2003, supplementing its above-described filing to attach as an
exhibit a letter from its former certifying accountant.
3) The Company filed a Current Report on Form 8-K on April 15, 2003,
announcing two vacancies on its Board of Directors, one by
resignation (due to the director's appointment by Michigan's
Governor as the state's Commissioner of the Office of Financial
and Insurance Services) and the other by death.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: May 12, 2003 By: /s/ William C. Brooks
-------------------------
William C. Brooks
President & Chief Executive Officer
Dated: May 12, 2003 By: /s/ Stephen D. Harris
-------------------------
Chief Financial Officer & Treasurer
26
I, William C. Brooks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United American
Healthcare Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ William C. Brooks
--------------------------------------------
President and Chief Executive Officer
(principal executive officer)
27
I, Stephen D. Harris, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United American
Healthcare Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Stephen D. Harris
---------------------------------
Chief Financial Officer
(principal financial officer)
28
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002