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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 DECEMBER 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 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 JANUARY 26,
2003 WAS 7,219,545.
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As filed with the Securities and Exchange Commission on January 29, 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 - December 31, 2003
and June 30, 2003.............................................................. 1
Condensed Consolidated Statements of Operations - Three and Six Months
Ended December 31, 2003 and 2002............................................... 2
Condensed Consolidated Statements of Cash Flows - Six Months
Ended December 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............................................ 10
Item 3. Quantitative and Qualitative Disclosures
About Market risk.............................................................. 16
Item 4. Controls and Procedures.......................................................... 16
PART II.
Item 1. Legal Proceedings................................................................ 17
Item 5. Other Information................................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................................. 19
SIGNATURES........................................................................................ 20
PART I.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
2003 2003
(Unaudited)
------------ --------
ASSETS
Current assets
Cash and cash equivalents $ 6,748 $ 3,693
Marketable securities 1,000 1,000
Accounts receivable - State of Tennessee 1,063 1,213
Other receivables 1,189 1,495
Prepaid expenses and other 105 167
Deferred income taxes 308 570
-------- --------
Total current assets 10,413 8,138
Assets held for sale 800 800
Property and equipment, net 399 478
Goodwill 2,952 2,952
Marketable securities 2,170 2,160
Other assets 586 586
-------- --------
Total assets $ 17,320 $ 15,114
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 1,188 $ 1,108
Medical claims payable 506 591
Accounts payable and accrued expenses 3,536 2,796
Accrued compensation and related benefits 426 519
Other current liabilities 1,400 1,430
-------- --------
Total current liabilities 7,056 6,444
Long-term debt, less current portion -- 658
Accrued rent 667 872
-------- --------
Total liabilities 7,723 7,974
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par, 15,000,000 shares authorized; 7,219,545 and
7,034,247 issued and outstanding at December 31, 2003 and June 30,
2003, respectively 11,810 11,570
Accumulated deficit (2,226) (4,469)
Accumulated other comprehensive gain, net of income taxes 13 39
-------- --------
Total shareholders' equity 9,384 7,140
======== ========
$ 17,320 $ 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
REVENUES
Fixed administrative fees $ 5,092 $ 3,700 $ 10,166 $ 7,783
Medical premiums 77 3,883 446 6,575
Interest and other income 310 459 595 799
-------- -------- -------- --------
Total revenues 5,479 8,042 11,207 15,157
EXPENSES
Medical services 77 380 446 380
Marketing, general and administrative 3,915 4,137 7,830 7,911
Depreciation and amortization 57 79 120 160
Interest expense 18 42 38 96
-------- -------- -------- --------
Total expenses 4,067 4,638 8,434 8,547
-------- -------- -------- --------
Earnings from continuing operations before income
taxes 1,412 3,404 2,773 6,610
Income tax expense 83 203 532 631
-------- -------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS 1,329 3,201 2,241 5,979
DISCONTINUED OPERATIONS
Loss from discontinued operations -- (1,753) -- (2,127)
-------- -------- -------- --------
NET EARNINGS $ 1,329 $ 1,448 $ 2,241 $ 3,852
======== ======== ======== ========
NET EARNINGS PER COMMON SHARE - BASIC
Earnings from continuing operations $ 0.19 0.46 0.31 0.87
Discontinued operations -- (0.25) -- (0.31)
-------- -------- -------- --------
Net earnings per common share $ 0.19 0.21 0.31 0.56
======== ======== ======== ========
Weighted average shares outstanding 7,168 6,912 7,127 6,912
======== ======== ======== ========
NET EARNINGS PER COMMON SHARE - DILUTED
Earnings from continuing operations $ 0.19 $ 0.46 $ 0.31 $ 0.85
Discontinued operations -- (0.25) -- (0.30)
-------- -------- -------- --------
Net earnings per common share $ 0.19 $ 0.21 $ 0.31 $ 0.55
======== ======== ======== ========
Weighted average shares outstanding 7,220 6,931 7,180 7,015
======== ======== ======== ========
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)
SIX MONTHS ENDED
DECEMBER 31,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 2,241 $ 3,852
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Loss on disposal of assets -- 584
Realized loss on investment (26) --
Depreciation and amortization 120 504
Bad debt expense -- 847
Accrued rent (205) 581
Deferred income taxes 475 670
Stock awards 213 11
Net changes in operating assets and liabilities 1,053 (21,076)
-------- --------
Net cash provided by (used in) operating activities 3,658 (14,027)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchase) of marketable securities (10) 14,465
Purchase of property and equipment (42) (55)
-------- --------
Net cash provided by (used in) investing activities (52) 14,410
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made on long-term debt (578) (635)
Issuance of common stock 27 --
-------- --------
Net cash used in financing activities (551) (635)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,055 1,748
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,693 2,026
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,748 $ 3,774
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 35 $ 84
======== ========
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
DECEMBER 31, 2003 AND 2002
NOTE 1 - BASIS OF PREPARATION
The accompanying condensed consolidated financial statements include the
accounts of United American Healthcare Corporation and its wholly and
majority-owned subsidiaries, together referred to as the "Company". All
significant intercompany transactions and balances have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP) and with the instructions for
Form 10-Q and Rule 10-01 of Regulation S-X as they apply to interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the financial
position and results of operations have been included. The results of operations
for the three and six-month periods ended December 31, 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 Six months ended
December 31, December 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net earnings $ 1,329 $ 1,448 $ 2,241 $ 3,852
Unrealized holding gains, net of deferred
federal income taxes 13 (5) 13 (5)
-------- -------- -------- --------
Comprehensive income $ 1,342 $ 1,443 $ 2,254 $ 3,847
======== ======== ======== ========
The components of accumulated other comprehensive income, included in
shareholders' equity at December 31, 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
DECEMBER 31, 2003 AND 2002
NOTE 3 - LONG-TERM DEBT
The Company currently has a $1.2 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 December
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):
DECEMBER 31, JUNE 30,
2003 2003
===========================
Term loan $ 1,188 $ 1,766
Less debt payable within one year 1,188 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 six months ended December, 31, 2003 is
19% and differs from the statutory rate of 34%. This difference is the result of
the utilization of net operating loss carryforwards. In the second quarter of
fiscal 2003, the effective tax rate was 6%, principally impacted by the
Company's net operating loss carryforward position.
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 initially declared 18-month
stabilization period (July 1, 2002 through December 31, 2003), during which the
MCOs - including OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), an
MCO 75%-owned by
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2003 AND 2002
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. Through an amendment completed on December 19, 2003,
TennCare has extended through June 30, 2004, the ASO reimbursement system
applicable to OmniCare-TN. The State of Tennessee has commissioned and
anticipates receiving soon the final part of a two-part independent study of the
TennCare system by the consulting firm McKinsey & Company, which is expected to
identify potential changes to the present TennCare reimbursement system
following the stabilization period. That report is expected to be the basis for
the Tennessee Governor's presentation of proposed TennCare reforms to the
Tennessee legislature in February 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 December
31, 2003, an additional $0.4 million of such medical claims were processed, and
the same amount was recognized as revenue by Omnicare-TN.
The above-described December 19, 2003 contractual amendment also extended the
term of OmniCare-TN's TennCare contract to December 31, 2004, with provisions
for automatic one-year renewals thereafter in certain circumstances.
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
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2003 AND 2002
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, there was no goodwill impairment
recorded for the three and six-months ended December 31, 2003 and 2002.
NOTE 8 - DISCONTINUED OPERATIONS
The Company's longstanding management agreement with OmniCare Health Plan in
Michigan ("OmniCare-MI") ended effective November 1, 2002. Because of its
resulting workforce reduction, the Company made plans to sublease all of its
then principal office premises in Detroit, Michigan, to OmniCare-MI, retroactive
to November 1, 2002, and expiring at the lease end in May 2005, and to sell to
OmniCare-MI furniture, a telephone 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.
Summarized selected financial information for the discontinued operations is as
follows (in thousands):
Three months ended Six months ended
December 31, December 31,
------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------
Management fees $ - $ 825 $ - $ 3,395
Loss from discontinued operations
net of zero income taxes $ - $ (1,753) - (2,127)
------------------------------------------------------------
NOTE 9 - STOCK OPTION PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes a method of
accounting for stock-based compensation that recognizes compensation cost based
on the fair value of options at grant date. In lieu of applying this fair value
based method, a company may elect to disclose only the pro forma effects of such
application. The Company has adopted the disclosure-only provisions of SFAS No.
123. In December 2002, SFAS No. 148, "Stock-Based Compensation," was issued,
which requires that the Company illustrate the effect on net income and earnings
per share if it had applied the fair value principles included in SFAS No. 123
for both annual and interim financial
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2003 AND 2002
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 December 31, 2003 and 2002 would have been the pro
forma amounts indicated below (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------
Net earnings (loss):
As reported $ 1,329 $ 1,448 $ 2,241 $ 3,852
Pro forma $ 1,050 $ 1,425 $ 1,962 $ 3,829
Net earnings (loss) per share:
As reported:
Basic $ 0.19 $ 0.21 $ 0.31 $ 0.56
Diluted 0.19 0.21 0.31 0.55
------------------------------------------------------------
Pro forma:
Basic $ 0.15 $ 0.21 $ 0.28 $ 0.55
Diluted 0.15 0.21 0.28 0.55
------------------------------------------------------------
8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2003 AND 2002
NOTE 10 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the six-months ended December 31, 2003 and 2002, is as follows (in
thousands):
MANAGEMENT HMOs & CORPORATE & CONSOLIDATED
COMPANIES (1) MANAGED PLANS (2) ELIMINATIONS COMPANY
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 2003
Revenues - external customers $ - $ 10,612 $ - $ 10,612
Revenues - intersegment 9,150 - (9,150) -
Interest and other income 89 506 - 595
--------------------------------------------------------------------
Total revenues $ 9,239 $ 11,118 $ (9,150) $ 11,207
==============================================================================================================
Interest expense $ 38 $ $ $ 38
Earnings (loss) from continuing
operations 1,148 1,093 - 2,241
Loss from discontinued operations - - - -
Segment assets 36,222 11,248 (30,150) 17,320
Purchase of equipment 42 - - 42
Depreciation and amortization 120 - - 120
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 2002
Revenues - external customers $ - $ 14,358 $ - $ 14,358
Revenues - intersegment 6,229 - (6,229) -
Interest and other income 104 695 - 799
--------------------------------------------------------------------
Total revenues $ 6,333 $ 15,053 $ (6,229) $ 15,157
==============================================================================================================
Interest expense $ 96 $ - $ - $ 96
Earnings (loss) from continuing
operations (1,530) 7,509 - 5,979
Loss from discontinued operations (2,127) - - (2,127)
Segment assets 26,498 9,272 (21,129) 14,641
Purchase of equipment 55 - - 55
Depreciation and amortization 504 - - 504
- --------------------------------------------------------------------------------------------------------------
(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 December 31, 2003 there were approximately 130,000
enrollees in OmniCare-TN.
Total revenues decreased $2.6 million (32%) to $5.4 million for the quarter
ended December 31, 2003 compared to $8.0 million for the quarter ended December
31, 2002, and decreased $4.0 million (26%) to $11.2 million for the six months
ended December 31, 2003 compared to $15.2 million for the six months ended
December 31, 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
provides 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 December
31, 2003, $0.1 million of such medical claims were processed compared to $3.9
million for the quarter ended December 31, 2002, and the same amount was
recognized as revenue by Omnicare-TN.
10
Total expenses decreased $0.6 million (12%) to $4.1 million for the quarter
ended December 31, 2003 compared to $4.6 million for the quarter ended December
31, 2002, and decreased $0.1 million (1%) to $8.4 million for the six months
ended December 31, 2003 from $8.5 million for the six months ended December 31,
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 and
$3.4 million for the quarters ended December 31, 2003 and 2002, respectively.
Earnings from continuing operations were $1.1 million, or $0.16 per basic share,
for the quarter ended December 31, 2003 compared to earnings from continuing
operations of $3.2 million, or $0.46 per basic share, for the quarter ended
December 31, 2002. Such decrease in earnings from continuing operations of $2.1
million, or $0.30 per basic share, is principally 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
quarter ended December 31, 2003 compared to a loss of $1.8 million for the
quarter ended December 31, 2002, and there was no gain or loss recognized for
the six months ended December 31, 2003 compared to a loss of $2.1 million for
the six months ended December 31, 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.
Net earnings were $1.3 million, or $0.19 per basic share, for the three months
ended December 31, 2003 compared to net earnings of $1.4 million, or $0.21 per
basic share, for the three months ended December 31, 2002. The Company
recognized net earnings of $2.2 million, or $0.31 per basic share, for the six
months ended December 31, 2003 and net earnings of $3.9 million, or $0.56 per
basic share, for the period ended December 31, 2002. Such decrease in net
earnings of $1.7 million is primarily due to the amended TennCare contractual
risk agreement for OmniCare-TN discussed above.
11
FOR THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 2002
Medical premiums revenues were $0.08 million in the three months ended December
31, 2003, a decrease of $3.8 million (98%) from $3.9 million in the three months
ended December 31, 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 $0.08 million of
medical premium revenues represent fiscal 2002 claims processed and reimbursed
by TennCare in the second quarter of fiscal 2004.
Fixed administrative fees related to TennCare's ASO program were $5.1 million
for the quarter ended December 31, 2003, an increase of $1.4 million (38%) from
$3.7 million in the three months ended December 31, 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
initially declared 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. Through an amendment completed on
December 19, 2003, TennCare has extended through June 30, 2004, the ASO
reimbursement system applicable to OmniCare-TN. The State of Tennessee has
commissioned and anticipates receiving soon the final part of a two-part
independent study of the TennCare system by the consulting firm McKinsey &
Company, which is expected to identify potential changes to the present TennCare
reimbursement system following the 18-month stabilization period, that report is
expected to be the basis for the Tennessee Governor's presentation of proposed
TennCare reforms to the Tennessee legislature in February 2004.
The above-described December 19, 2003 contractual amendment also extended the
term of OmniCare-TN's TennCare contract to December 31, 2004, with provisions
for automatic one-year renewals thereafter in certain circumstances.
Medical services expenses were $0.08 million in the three months ended December
31, 2003, a decrease of $0.3 million (80%) from $0.4 million in the three months
ended December 31, 2002. The $0.08 million of medical services expenses
represent fiscal 2002 claims processed and reimbursed by TennCare in the second
quarter of fiscal 2004. Marketing, general and administrative expenses decreased
approximately $0.2 million (5%), to $3.9 million for the three months ended
December 31, 2003 from $4.1 million for the three months ended December 31,
2002. The decrease is principally due to
12
reduced advertising costs and TennCare's payment of premium tax as a result of
the ASO arrangement discussed above, offset by the costs of claims processing
associated with a membership increase.
Depreciation and amortization expense decreased $0.02 million (28%), to $0.06
million for the three months ended December 31, 2003 from $0.08 million for the
three months ended December 31, 2002.
Interest expense decreased $0.02 million (57%), to $0.02 million for the three
months ended December 31, 2003 from $0.04 million for the three months ended
December 31, 2002, due to debt reduction and decreases in the prime rate.
Income tax expense decreased $0.1 million (59%), to $0.1 million for the three
months ended December 31, 2003 from $0.2 million for the three months ended
December 31, 2002. The Company's effective tax rate for the three months ended
December, 31, 2003 is 6% and differs from the statutory rate of 34%. This
difference is the result of the utilization of net operating loss carryforwards.
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FOR SIX MONTHS ENDED DECEMBER 31, 2003 COMPARED TO
SIX MONTHS ENDED DECEMBER 31, 2002
Total revenues decreased $4.0 million (26%) to $11.2 million for the six months
ended December 31, 2003 from $15.2 million for the six months ended December 31,
2002 principally as the result of a change in the reimbursement system of
TennCare, as discussed above.
Medical premium revenues were $0.4 million for the six months ended December 31,
2003, a decrease of $6.1 million (93%) from medical premium revenues of $6.6
million for the six months ended December 31, 2002. The decrease came from
OmniCare-TN as the result of TennCare's changing its reimbursement system to an
ASO program for an initially declared 18-month stabilization period beginning
July 1, 2002, subsequently extended six-months through June 30, 2004.
Fixed administrative fees related to the ASO program were $10.2 million for the
six months ended December 31, 2003, an increase of $2.4 million (31%) from fixed
administrative fees of $7.8 million for the six months ended December 31, 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.
Total expenses were $8.4 million for the six months ended December 31, 2003,
compared to $8.5 million for the six months ended December 31, 2002, a decrease
of $0.1 million (1%). The decreases were principally due to the TennCare ASO
program for OmniCare-TN discussed above.
Because of TennCare's new ASO reimbursement system, medical services expenses
were $0.44 million in the six months ended December 31, 2003, an increase of
$0.06 million (17%), as compared with medical services expenses of $0.38 million
in the six months ended December 31, 2002. The $0.44 million of medical services
expenses represent fiscal 2002 claims processed and reimbursed by TennCare in
fiscal 2004.
Marketing, general and administrative expenses were $7.8 million for the
six-month period ended December 31, 2003, as compared with marketing, general
and administrative expenses of $7.9 million for the comparable period a year
earlier, a decrease of $0.1 million (1%). The decrease is principally due to
reduced advertising costs and TennCare's payment of premium tax as a result of
the ASO arrangement discussed above, offset by the costs of claims processing
associated with a membership increase.
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Depreciation and amortization expense decreased $0.04 million (25%), to $0.12
million for the six months ended December 31, 2003 from $0.16 million for the
six months ended December 31, 2002.
Interest expense decreased $0.06 million (60%), to $0.04 million for the six
months ended December 31, 2003 from $0.1 million for the six months ended
December 31, 2002, principally due to debt reduction.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, the Company had (i) cash and cash equivalents and
short-term marketable securities of $6.7 million, compared to $3.7 million at
June 30, 2003; (ii) working capital of $3.1 million, compared to working capital
of $1.7 million at June 30, 2003; and (iii) a current assets-to-current
liabilities ratio of 1.45-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 December
31, 2003 was $3.7 million provided from net operating activities. The principal
use of funds for the period was $0.6 million for debt repayment. Positive cash
flow was $3.1 million compared to $1.7 million for the comparable period a year
earlier.
Accounts receivable decreased by $0.5 million at December 31, 2003 compared to
June 30, 2003, primarily due to timing of cash receipts from TennCare.
Property, plant and equipment decreased by $0.08 million at December 31, 2003
compared to June 30, 2003, due to the recording of depreciation of $0.1 million
and fixed asset additions of $0.04 million.
Long-term debt decreased $0.6 million at December 31, 2003 compared to June 30,
2003. The Company currently has a $1.2 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 December
31, 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
15
compliance with bank financial covenants, and maintain minimum statutory net
worth requirements of OmniCare-TN.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Our management has evaluated, with the participation of our principal executive
and principal financial officers, the effectiveness of our disclosure controls
and procedures as of December 31, 2003, and based on their evaluation, our
principal executive and principal financial officers have concluded that these
controls and procedures are effective as of December 31, 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 December 31,
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.
16
PART II.
ITEM 1. LEGAL PROCEEDINGS
The parties have agreed to settle the pending action by Vanderbilt University
against OmniCare-TN in the Chancery Court for Davidson County, Tennessee
(described in the Company's Form 10-Q quarterly report for the period ended
December 31, 2002). The plaintiff's amended complaint alleged that OmniCare-TN
paid less than the plaintiff's full charges for health services provided by its
hospital and physician group to OmniCare-TN members. The plaintiff was not an
OmniCare-TN participating provider, and OmniCare-TN reimbursed the plaintiff at
non-participating provider rates. The amended complaint sought additional
reimbursement of the difference between the rates paid by OmniCare-TN and the
alleged reasonable value of the plaintiff's services to OmniCare-TN members.
Both parties have now entered into a written provider payor agreement for
medical services provided to OmniCare-TN members since September 1, 2003, and
they are working to finalize a written settlement agreement, which will be
subject to approval by the State of Tennessee, Bureau of TennCare. The parties
expect that upon TennCare's approval, such settlement agreement will be signed
and the lawsuit will be permanently dismissed.
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:
17
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.
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
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: January 29, 2004 By: /s/ William C. Brooks
--------------------------------
William C. Brooks
Chairman, President & Chief Executive
Officer
Dated: January 29, 2004 By: /s/ Stephen D. Harris
---------------------------
Stephen D. Harris
Chief Financial Officer & Treasurer
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EXHIBIT INDEX
31.1 Certifications of Chief Executive Officer pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
21