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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 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 Identification No.)
incorporation or organization)
300 RIVER PLACE, SUITE 4950
DETROIT, MICHIGAN 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 393-4571
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF OCTOBER 31,
2003 WAS 7,191,811
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As filed with the Securities and Exchange Commission on November 4, 2003
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I.
Item 1. Unaudited Condensed Consolidated Financial Statements-
Condensed Consolidated Balance Sheets - September 30, 2003 and
June 30, 2003...................................................... 1
Condensed Consolidated Statements of Operations - Three Months
Ended September 30, 2003 and 2002.................................. 2
Condensed Consolidated Statements of Cash Flows - Three Months
Ended September 30, 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.............................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market risk........... 15
Item 4. Controls and Procedures.............................................. 15
PART II.
Item 5. Other Information.................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................... 17
SIGNATURES............................................................................. 18
PART I.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, JUNE 30,
2003 2003
(Unaudited)
-----------------------------
ASSETS
Current assets
Cash and cash equivalents $ 5,267 $ 3,693
Marketable securities 1,000 1,000
Accounts Receivable - State of Tennessee 1,027 1,213
Other receivables 1,240 1,495
Refundable federal income taxes - -
Prepaid expenses and other 130 167
Deferred income taxes 331 570
----------------------------
Total current assets 8,995 8,138
Assets held for sale 800 800
Property and equipment, net 446 478
Goodwill 2,952 2,952
Marketable securities 2,205 2,160
Other assets 586 586
----------------------------
$ 15,984 $ 15,114
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 1,479 $ 1,108
Medical claims payable 591 591
Accounts payable and accrued expenses 3,003 2,796
Accrued compensation and related benefits 493 519
Other current liabilities 1,395 1,430
----------------------------
Total current liabilities 6,963 6,444
Long-term debt, less current portion - 658
Accrued rent 778 872
----------------------------
Total Liabilities 7,739 7,974
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued
Common stock, no par, 15,000,000 shares authorized; 7,191,811 and
7,034,247 issued and outstanding at September 30, 2003 and June 30,
2003, respectively 11,762 11,570
Retained deficit (3,556) (4,469)
Accumulated other comprehensive gain, net of income taxes 39 39
----------------------------
Total Shareholders' equity 8,245 7,140
============================
$ 15,984 $ 15,114
============================
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
SEPTEMBER 30,
2003 2002
----------------------------
REVENUES
Medical premiums $ 369 $ 2,692
Fixed administrative fees 5,074 4,083
Interest and other income 285 339
----------------------------
Total revenues 5,728 7,114
EXPENSES
Medical services 369 0
Marketing, general and administrative 3,915 3,775
Depreciation and amortization 63 81
Interest expense 20 54
----------------------------
Total expenses 4,367 3,910
----------------------------
Earnings before income taxes 1,361 3,204
Income tax expense 449 428
----------------------------
EARNINGS FROM CONTINUING OPERATIONS 912 2,776
DISCONTINUED OPERATIONS
Loss from discontinued operations - (374)
----------------------------
NET EARNINGS $ 912 $ 2,402
============================
NET EARNINGS PER COMMON SHARE - BASIC
Earnings from continuing operations 0.13 0.40
Loss from discontinued operations - (0.05)
----------------------------
Net earnings per common share $ 0.13 $ 0.35
Weighted average shares outstanding 7,086 6,911
NET EARNINGS PER COMMON SHARE - DILUTED
Earnings from continuing operations 0.13 0.39
Loss from discontinued operations -
(0.05)
----------------------------
Net earnings per common share $ 0.13 $ 0.34
Weighted average shares outstanding 7,110 7,091
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)
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 912 $ 2,402
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 63 339
Accrued rent (94) (43)
Deferred income taxes 239 435
Stock awards 165
Net changes in assets and liabilities 629 (18,191)
----------------------------
Net cash provided by (used in) operating activities 1,914 (15,058)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchase) of marketable securities (45) 15,922
Purchase of property and equipment (35) (39)
----------------------------
Net cash provided by (used in) investing activities (80) 15,883
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made on long-term debt (287) (266)
Issuance of common stock 27 -
----------------------------
Net cash used in financing activities (260) (266)
----------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,574 559
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,693 2,026
----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,267 $ 2,585
============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 14 $ 42
============================
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2003 AND 2002
NOTE 1 - BASIS OF PREPARATION
The accompanying consolidated financial statements include the accounts of
United American Healthcare Corporation and its wholly and majority-owned
subsidiaries, together referred to as the "Company". All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP) and with the instructions for
Form 10-Q and Rule 10-01 of Regulation S-X as they apply to interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the financial
position and results of operations have been included. The results of operations
for the three-month period ended September 30, 2003 are not necessarily
indicative of the results of operations for the full fiscal year ending June 30,
2004. The accompanying condensed consolidated financial statements should be
read in conjunction with the notes to the financial statements contained in the
most recent annual report on Form 10-K.
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are summarized as
follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2003 2002
============================
Net earnings $ 912 $ 2,402
Realized holding gains, net of deferred federal income taxes - -
============================
Comprehensive income $ 912 2,402
============================
The components of accumulated other comprehensive income, included in
shareholders' equity at September 30, 2003 and June 30, 2003, 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
SEPTEMBER 30, 2003 AND 2002
NOTE 3 - LONG-TERM DEBT
The Company currently has a $1.5 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 (4.00% at
September 30, 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):
SEPTEMBER 30, JUNE 30,
2003 2003
============================
Term loan $ 1,479 $ 1,766
Less debt payable within one year 1,479 1,108
----------------------------
Long-term debt, less current portion $ - $ 658
============================
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 first quarter of fiscal 2004 is equal
to the statutory rate of 34%. In the first quarter of fiscal 2003, the effective
tax rate was 12%, principally impacted by the Company's net operating loss
carryforward position and the release of certain tax liabilities that were
deemed no longer needed.
NOTE 6 - CONTRACTUAL RISK AGREEMENT
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
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2003 AND 2002
penalties for not achieving certain performance requirements. The State of
Tennessee's Finance Commissioner recently stated that a forthcoming report of
the consulting firm, McKinsey & Co., is expected to identify "all types of
options" for changes to the present TennCare reimbursement system following the
18-month stabilization period, and that such report will be the basis for a
TennCare presentation to the Tennessee legislature in January 2004.
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.
OmniCare-TN received a permitted practice letter from the State of Tennessee to
include such $7.5 million receivable in its statutory net worth at June 30,
2002. Under generally accepted accounting principles, the $7.5 million
receivable was not recorded in fiscal 2002 financial statements but has been
recorded as fiscal 2002 claims are processed. Based on an actuarial
determination, an additional $0.4 million of fiscal 2002 medical claims
liability was recorded during fiscal 2003. For the three months ended September
30, 2003, an additional $0.4 million of such medical claims were processed, and
the same amount was recognized as revenue by Omnicare TN.
NOTE 7 - GOODWILL
Goodwill resulting from business acquisitions is carried at cost. Effective July
1, 2001, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
eliminates the amortization of goodwill, but requires that the carrying amount
of goodwill be tested for impairment at least annually at the reporting unit
level, as defined, and will only be reduced if it is found to be impaired or is
associated with assets sold or otherwise disposed of.
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2003 AND 2002
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, there was no goodwill impairment
recorded for the three months ended September 30, 2003 and 2002.
NOTE 8 - DISCONTINUED OPERATIONS
The Company's longstanding management agreement with OmniCare-MI ended effective
November 1, 2002. Because of its resulting workforce reduction, the Company made
plans to sublease all of its then principal office premises in Detroit,
Michigan, to OmniCare-MI, retroactive to November 1, 2002, and expiring at the
lease end in May 2005, and to sell to OmniCare-MI furniture, a telephone system
and certain computer hardware and software that the Company chose to leave
there. Management now expects to complete the signing of the sublease and the
sale of assets by the third quarter of fiscal 2004. OmniCare-MI commenced its
occupancy of the premises on November 1, 2002 and the Company remained in a
portion of the premises until it moved its principal offices to new leased
premises in Detroit on February 3, 2003.
In connection with the November 1, 2002 termination of its OmniCare-MI
management agreement, the Company recorded a $0.4 million loss from discontinued
operations in the first quarter of fiscal 2003. Such loss was principally due to
a bad debt charge of $0.5 million recorded because management determined the
collectability of that amount of receivables from OmniCare-MI is doubtful.
Summarized selected financial information for the discontinued operations is as
follows:
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
=============================
Management fees $ - $ 2,570
----------------------------
Loss from discontinued operations net of zero income taxes $ - $ (374)
----------------------------
NOTE 9 - STOCK OPTION PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes a method of
accounting for stock-based compensation that recognizes compensation cost based
on the fair value of options at grant date. In lieu of applying this fair value
based method, a company may elect to disclose only the pro forma effects of such
application. The Company has adopted the disclosure-only provisions of SFAS No.
123. In December 2002, SFAS No. 148, "Stock-Based Compensation," was issued,
which requires that the Company illustrate the effect on net income and earnings
per share if it had applied
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2003 AND 2002
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 months ended September 30, 2003 and 2002 would have been
the pro forma amounts indicated below (in thousands, except per share amounts):
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2003 2002
===========================
Net earnings (loss):
As reported $ 912 $ 2,402
Pro forma $ 912 $ 2,402
Net earnings (loss) per share:
Basic and Dilutive as reported $ 0.13 $ 0.35
Basic and Dilutive Pro forma $ 0.13 $ 0.35
---------------------------
8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2003 AND 2002
NOTE 10 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the three months ended September 30, 2003 and 2002, is as follows (in
thousands):
- ----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MANAGEMENT HMOs & CORPORATE & CONSOLIDATED
SEPTEMBER 30, 2003 COMPANIES (1) MANAGED PLANS (2) ELIMINATIONS COMPANY
- ----------------------------------------------------------------------------------------------------
Revenues - external customers $ $ 5,443 $ $ 5,443
Revenues - intersegment 4,567 (4,567) -
Interest and other income 40 245 285
--------------------------------------------------------------
Total revenues $ 4,607 $ 5,688 $ (4,567) $ 5,728
===================================================================================================
Interest expense $ 20 $ $ $ 20
Earnings (loss) from continuing
operations 492 420
Loss from discontinued operations -
Segment assets 33,573 10,542 (28,131) 15,984
Purchase of equipment 35 - 35
Depreciation and amortization 63 - 63
- ---------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30, 2002
Revenues - external customers $ - $ 6,775 $ - $ 6,775
Revenues - intersegment 3,266 - (3,266) -
Interest and other income 64 275 - 339
--------------------------------------------------------------
Total revenues $ 3,330 $ 7,050 $ (3,266) $ 7,114
===================================================================================================
Interest expense $ 54 $ - $ - $ 54
Earnings (loss) from continuing
operations (415) 3,191 - 2,776
Loss from discontinued operations (374) (374)
Segment assets 24,546 7,049 (16,094) 15,501
Purchase of equipment 39 - - 39
Depreciation and amortization 81 - - 81
- ----------------------------------------------------------------------------------------------------
(1) Management Companies: United American Healthcare Corporation and United
American of Tennessee.
(2) HMOs and Managed Plans: OmniCare Health Plan, Inc. of Tennessee.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
This Financial Review discusses the Company's results of operations, financial
position and liquidity. This discussion should be read in conjunction with the
consolidated financial statements and related notes thereto contained elsewhere
in this quarterly report.
The Company provides comprehensive management and consulting services to managed
care organizations, including health maintenance organizations ("HMOs") in
Tennessee and (until November 1, 2002) Michigan, with a targeted mix of Medicaid
and commercial enrollment. OmniCare Health Plan, in Michigan ("OmniCare-MI"), an
HMO then administered by the Company under a management agreement, was placed in
court-ordered rehabilitation proceedings on July 31, 2001, which relieved the
Company from further funding OmniCare-MI's capital deficiencies and which
continued its OmniCare-MI management agreement, with substantially reduced
management fee revenues from OmniCare-MI beginning August 1, 2001. In March
2002, upon the court-appointed Rehabilitator's filing a proposed rehabilitation
plan for OmniCare-MI, the Company announced it anticipated eventual termination
of the management agreement. Such termination occurred November 1, 2002, after
which the Company's only managed plan has been OmniCare Health Plan, Inc., in
Tennessee ("OmniCare-TN"), an HMO, which is 75%-owned by the Company's wholly
owned subsidiary. As of September 30, 2003 there were approximately 130,000
enrollees in OmniCare-TN.
Total revenues decreased $1.4 million (20%), to $5.7 million for the quarter
ended September 30, 2003 compared to $7.1 million for the quarter ended
September 30, 2002, primarily due to a contractual amendment in September 2002,
retroactive to July 1, 2001 in some respects and to May 1, 2002 in other
respects. In this amendment, TennCare, a State of Tennessee program that
provider medical benefits to Medicaid and working uninsured and uninsurable
recipients, agreed to pay OmniCare-TN up to $7.5 million and additional funds as
necessary to meet its statutory net worth requirement as of June 30, 2002.
OmniCare-TN received a permitted practice letter from the State of Tennessee to
include such $7.5 million receivable in its statutory net worth at June 30,
2002. Under GAAP, such $7.5 million was recorded in its fiscal 2003 financial
statements as fiscal 2002 claims were processed. For the quarter ended September
30, 2003, $0.4 million of such medical claims were processed compared to $2.7
million for the quarter ended September 30, 2002, and the same amount was
recognized as revenue by Omnicare-TN.
10
Total expenses increased $0.5 million (13%), to $4.4 million for the quarter
ended September 30, 2003 compared to $3.9 million for the quarter ended
September 30, 2002, principally due to the amended TennCare contractual risk
agreement for OmniCare-TN discussed above. Earnings from continuing operations
before income taxes were $1.4 million for the quarter ended September 30, 2003,
a $1.8 million decrease (56%) from $3.2 million for the quarter ended September
30, 2002. Earnings from continuing operations were $0.9 million, or $0.13 per
basic share, for the quarter ended September 30, 2003 compared to $2.8 million,
or $0.40 per basic share, for the quarter ended September 30, 2002. The decrease
in earnings from continuing operations of $1.9 million, or $0.27 per basic
share, is primarily due to the amended TennCare contractual risk agreement for
OmniCare-TN discussed above.
The Company recognized no gain or loss from discontinued operations for the
three months ended September 30, 2003 compared to a loss of $0.4 million for the
three months ended September 30, 2002. 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 third quarter of fiscal 2004. 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, 2003. The loss from
discontinued operations recorded for the first quarter of fiscal 2003 was
principally due to a bad debt charge of $0.5 million recorded because management
determined the collectability of that amount of receivables from OmniCare-MI is
doubtful.
Net earnings were $0.9 million, or $0.13 per basic share, for the three months
ended September 30, 2003 compared to net earnings of $2.4 million, or $0.35 per
basic share, for the three months ended September 30, 2002. Such decrease in net
earnings is primarily due to the amended TennCare contractual risk agreement for
OmniCare-TN discussed above.
11
FOR THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2002
Medical premiums revenues were $0.4 million in the three months ended September
30, 2003, a decrease of $2.3 million (85%) from $2.7 million in the three months
ended September 30, 2002. Medical premiums revenues relate to an amended
contractual risk agreement in which TennCare agreed to pay OmniCare-TN up to
$7.5 million and additional funds as necessary to meet its statutory net worth
requirement as of June 30, 2002. Such $7.5 million was recorded in fiscal 2003
financial statements as fiscal 2002 claims were processed. The $0.4 million of
medical premium revenues represent fiscal 2002 claims processed and reimbursed
by TennCare in the first quarter of fiscal 2004.
Fixed administrative fees related to TennCare's ASO program were $5.1 million
for the quarter ended September 30, 2003, an increase of $1.0 million (24%) from
$4.1 million in the three months ended September 30, 2002. The increase in fixed
administrative fees is principally due to an increase in members and an increase
in reimbursement rates effective July 1, 2003. Such fixed administrative fees
are attributed to a change in the reimbursement system of TennCare. 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.) The State of
Tennessee's Finance Commissioner recently stated that a forthcoming report of
the consulting firm, McKinsey & Co., is expected to identify "all types of
options" for changes to the present TennCare reimbursement system following the
18-month stabilization period, and that such report will be the basis for a
TennCare presentation to the Tennessee legislature in January 2004.
Medical services expenses were $0.4 million in the three months ended September
30, 2003 and represent fiscal 2002 claims processed and reimbursed by TennCare
in the first quarter of fiscal 2004. There were no medical services expenses in
the three months ended September 30, 2002 because of the TennCare ASO
reimbursement system.
12
Marketing, general and administrative expenses increased approximately $0.1
million (3%), to $3.9 million for the three months ended September 30, 2003 from
$3.8 million for the three months ended September 30, 2002.
Depreciation and amortization expense decreased $0.02 million (25%), to $0.06
million for the three months ended September 30, 2003 from $0.08 million for the
three months ended September 30, 2002.
Interest expense decreased $0.03 million (60%), to $0.02 million for the three
months ended September 30, 2003 from $0.05 million for the three months ended
September 30, 2002, due to debt reduction and decreases in the prime rate.
Income tax expense increased $0.02 million (5%), to $0.45 million for the three
months ended September 30, 2003 from $0.43 million for the three months ended
September 30, 2002. The Company's effective tax rate for the first quarter of
2004 is equal to the statutory rate of 34%.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, the Company had (i) cash and cash equivalents and
short-term marketable securities of $6.3 million, compared to $4.7 million at
June 30, 2003; (ii) working capital of $1.9 million, compared to working capital
of $1.7 million at June 30, 2003; and (iii) a current assets-to-current
liabilities ratio of 1.28-to-1, compared to 1.26-to-1 at June 30, 2003. The
principal source of funds for the Company during the three months ended
September 30, 2003 was $2.0 million provided from net operating activities. The
principal use of funds for the period was $0.3 million for debt repayment.
Positive cash flow was $1.6 million compared to $0.5 million for the comparable
quarter a year earlier.
Accounts receivable decreased by $0.4 million at September 30, 2003 compared to
June 30, 2003, primarily due to timing of cash receipts from TennCare.
Property, plant and equipment decreased by $0.02 million at September 30, 2003
compared to June 30, 2003, due to the recording of depreciation of $0.06 million
and fixed asset additions of $0.04 million.
Long-term debt decreased $0.3 million at September 30, 2003 compared to June 30,
2003. The Company currently has a $1.5 million term loan with Standard Federal
Bank, N.A. repayable in monthly installments of principal and interest of $0.1
million,
13
with an interest rate equal to the bank's prime rate (4.00% at September 30,
2003) plus one percent per annum, and a maturity date of September 30, 2004.
The Company's ability to generate adequate amounts of cash to meet its future
cash needs depends on a number of factors, particularly including its ability to
control administrative costs, related to the ASO arrangement for the TennCare
program and controlling corporate overhead costs. On the basis of the matters
discussed above, management believes at this time that the Company has the
ability to generate sufficient cash to adequately support its financial
requirements through the next twelve months, maintain compliance with bank
financial covenants, and maintain minimum statutory net worth requirements of
OmniCare-TN.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 4. Controls and Procedures
Our management has evaluated, with the participation of our principal executive
and principal financial officers, the effectiveness of our disclosure controls
and procedures as of September 30, 2003, and based on their evaluation, our
principal executive and principal financial officers have concluded that these
controls and procedures are effective as of September 30, 2003. There was no
change in our internal control over financial reporting identified in connection
with such evaluation that occurred during our fiscal quarter ended September 30,
2003 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file and submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
15
PART II.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage management to provide prospective
information about their companies without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statements. Certain
statements contained in this Form 10-Q quarterly report, including, without
limitation, statements containing the words "believes," "anticipates," "will,"
"could," "may," "might" and words of similar import, constitute "forward-looking
statements" within the meaning of this "safe harbor."
Such forward-looking statements are based on management's current expectations
and involve known and unknown risks, uncertainties and other factors, many of
which the Company is unable to predict or control, that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors potentially include, among others,
the following:
1. Inability to increase premium rates commensurate with
increases in medical costs due to utilization, government
regulation, or other factors.
2. Discontinuation of, limitations upon, or restructuring of
government-funded programs, including but not limited to the
TennCare program.
3. 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. Increases in medical costs, including increases in utilization
and costs of medical services and the effects of actions by
competitors or groups of providers.
5. Adverse state and federal legislation and initiatives,
including: the State of Tennessee's limitations upon or
reductions in premium payments; prohibition or limitation of
capitated arrangements or financial incentives to providers;
federal and state benefit mandates (including mandatory length
of stay and emergency room coverage); limitations on the
ability to manage care and utilization; and any willing
provider or pharmacy laws.
6. Failure to obtain new customer bases or members or retain or
regain customer bases or members, or reductions in work force
by existing customers.
16
7. Increased competition between current organizations, the
entrance of new competitors and the introduction of new
products by new and existing competitors.
8. Adverse publicity and media coverage.
9. Inability to carry out marketing and sales plans.
10. Loss or retirement of key executives.
11. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.
12. Adverse regulatory determinations resulting in loss or
limitations of licensure, certification or contracts with
governmental payers.
13. Higher sales, administrative or general expenses occasioned by
the need for additional advertising, marketing, administrative
or management information systems expenditures.
14. Increases by regulatory authorities of minimum capital,
reserve and other financial solvency requirements.
15. Denial of accreditation by quality accrediting agencies, e.g.,
the National Committee for Quality Assurance (NCQA).
16. Adverse results from significant litigation matters.
17. Inability to maintain or obtain satisfactory bank loan credit
arrangements.
18. 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
31.1 Certifications of Chief Executive Officer pursuant
to Rule 13a-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant
to Rule 13a-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: November 4, 2003 By: /s/ William C. Brooks
--------------------------------
William C. Brooks
Chairman, President & Chief Executive
Officer
Dated: November 4, 2003 By: /s/ Stephen D. Harris
--------------------------------
Stephen D. Harris
Chief Financial Officer & Treasurer
18
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
31.1 Certifications of, Chief Executive Officer pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certifications of, Chief Financial Officer pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.