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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, 2004
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 24,
2005 AS 7,432,310.
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As filed with the Securities and Exchange Commission on January 27, 2005
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, 2004 and June 30, 2004......................1
Condensed Consolidated Statements of Operations -Three and Six Months Ended
December 31, 2004 and 2003.....................................................................2
Condensed Consolidated Statements of Cash Flows - Six Months Ended December 31, 2004
and 2003.......................................................................................3
Notes to the Unaudited Condensed Consolidated Financial Statements...............................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........11
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................16
Item 4. Controls and Procedures.........................................................................16
PART II.
Item 1. Legal Proceedings...............................................................................18
Item 5. Other Information...............................................................................18
Item 6. Exhibits........................................................................................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,
2004 2004
(Unaudited)
------------------------
ASSETS
Current assets
Cash and cash equivalents $ 6,644 $ 7,767
Marketable securities 3,605 1,000
Accounts receivable - State of Tennessee 1,253 1,230
Other receivables 1,668 1,206
Prepaid expenses and other 170 147
Deferred income taxes 2,227 1,939
------------------------
Total current assets 15,567 13,289
Assets held for sale - 100
Property and equipment, net 224 323
Goodwill 3,452 3,452
Marketable securities 2,347 2,331
Other assets 586 586
------------------------
Total assets $ 22,176 $ 20,081
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 125 $ 847
Medical claims payable 337 406
Accounts payable and accrued expenses 309 1,140
Accrued compensation and related benefits 508 582
Accrued rent 1,223 837
Other current liabilities 1,290 1,384
------------------------
Total current liabilities 3,792 5,196
------------------------
Total liabilities 3,792 5,196
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -
Common stock, no par, 15,000,000 shares authorized; 7,431,310 and 7,418,519 shares
issued and outstanding at December 31, 2004 and June 30, 2004, respectively 12,314 12,226
Retained earnings 6,098 2,702
Accumulated other comprehensive loss, net of income taxes (28) (43)
------------------------
Total shareholders' equity 18,384 14,885
========================
$ 22,176 $ 20,081
========================
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,
---------------------------------------------
2004 2003 2004 2003
---------------------------------------------
REVENUES
Fixed administrative fees $ 5,253 $ 5,092 $ 10,381 $ 10,166
Medical premiums 2 77 21 446
Interest and other income 144 310 405 595
-------- -------- -------- --------
Total revenues 5,399 5,479 10,807 11,207
EXPENSES
Medical services 3 77 22 446
Marketing, general and administrative 3,421 3,915 7,158 7,830
Depreciation and amortization 45 57 94 120
Interest expense - 18 8 38
-------- -------- -------- --------
Total expenses 3,469 4,067 7,282 8,434
-------- -------- -------- --------
Earnings from continuing operations before income taxes 1,930 1,412 3,525 2,773
Income tax expense - 83 - 532
-------- -------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS 1,930 1,329 3,525 2,241
DISCONTINUED OPERATIONS
Loss from discontinued operations - - 129 -
-------- -------- -------- --------
NET EARNINGS $ 1,930 $ 1,329 $ 3,396 $ 2,241
======== ======== ======== ========
NET EARNINGS PER COMMON SHARE - BASIC
Earnings from continuing operations $ 0.26 $ 0.19 $ 0.48 $ 0.31
Discontinued operations 0.00 - (0.02) -
-------- -------- -------- --------
Net earnings per common share $ 0.26 $ 0.19 $ 0.46 $ 0.31
======== ======== ======== ========
Weighted average shares outstanding 7,409 7,168 7,400 7,127
======== ======== ======== ========
NET EARNINGS PER COMMON SHARE - DILUTED
Earnings from continuing operations $ 0.26 $ 0.19 $ 0.47 $ 0.31
Discontinued operations 0.00 - (0.02) -
-------- -------- -------- --------
Net earnings per common share $ 0.26 $ 0.19 $ 0.45 $ 0.31
======== ======== ======== ========
Weighted average shares outstanding 7,486 7,220 7,476 7,180
======== ======== ======== ========
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,
2004 2003
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 3,396 $ 2,241
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Realized (loss) gain on investment 15 (26)
Depreciation and amortization 94 120
Accrued rent - (205)
Deferred income taxes (288) 262
Stock awards 57 213
Net changes in operating assets and liabilities (1,190) 1,053
--------------------
Net cash provided by operating activities 2,084 3,658
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (2,621) (10)
Purchase of property and equipment (42)
Proceeds from the sale of property and equipment 105 -
--------------------
Net cash used in investing activities (2,516) (52)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made on long-term debt (722) (578)
Issuance of common stock 31 27
--------------------
Net cash used in financing activities (691) (551)
--------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,123) 3,055
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,767 3,693
--------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,644 $ 6,748
====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 8 $ 35
====================
Income taxes paid 281 -
====================
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, 2004 AND 2003
NOTE 1 - BASIS OF PREPARATION
The accompanying condensed consolidated financial statements include the
accounts of United American Healthcare Corporation and its wholly 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 six-month period ended December 31, 2004 are not necessarily indicative
of the results of operations for the full fiscal year ended June 30, 2005. 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,
-----------------------------------------
2004 2003 2004 2003
-----------------------------------------
Net earnings $ 1,930 $ 1,329 $ 3,396 $ 2,241
Unrealized holding gains, net of
deferred federal income taxes 5 13 28 13
-----------------------------------------
Comprehensive income $ 1,935 $ 1,342 $ 3,424 $ 2,254
=========================================
The components of accumulated other comprehensive income, included in
shareholders' equity at December 31, 2004 and June 30, 2004, 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, 2004 AND 2003
NOTE 3 - LONG-TERM DEBT
The Company retired its term loan with Standard Federal Bank, N.A. on September
23, 2004.
The Company's remaining debt is as follows (in thousands):
DECEMBER 31, 2004 JUNE 30, 2004
=================================
Term loan $ - $ 597
Promissory note 125 250
---------------------------------
Total debt 125 847
Less debt payable within one year 125 847
---------------------------------
Long-term debt, less current portion $ - $ -
=================================
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, 2004 and
2003 is 0% and 19%, respectively, which differs from the statutory rate of 34%.
This difference is the result of the utilization of net operating loss
carryforwards for which a valuation allowance had previously been applied.
NOTE 6 - CONTRACTUAL RISK AGREEMENT
Beginning July 1, 2002, TennCare, a State of Tennessee program that provides
medical benefits to Medicaid and working uninsured recipients, implemented an
18-month stabilization program which entailed changes to TennCare's contracts
with managed care organizations (" MCOs"), including the Company's subsidiary,
Omnicare Health Plan, Inc. in Tennessee ("OmniCare-TN"). During that period,
MCOs were generally compensated for administrative services only (commonly
called "ASO"), earned fixed administrative fees, were not at risk for medical
costs in excess of targets established based on various factors, were subject to
increased oversight, and could incur financial penalties for not achieving
certain performance requirements. Through successive
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2004 AND 2003
contractual amendments,TennCare extended the ASO reimbursement system applicable
to OmniCare, first through June 30, 2004, and then through December 31, 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, 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 and additional funds were not recorded in fiscal 2002 financial
statements but have been recorded as fiscal 2002 claims are processed. For the
six months ended December 31, 2004, an additional $0.02 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.
Management has assessed the remaining carrying amount of previously recorded
goodwill of $3.5 million and determined that such amount is not impaired in
accordance with SFAS No. 142. Accordingly, there was no goodwill impairment
recorded for the three months ended December 31, 2004 and 2003.
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.
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2004 AND 2003
The Company has renegotiated sublease terms with Michigan HMO (formerly doing
business as OmniCare Health Plan in Michigan), which continues to occupy and pay
rent for reduced space in such premises. Company management now expects that
Michigan HMO's occupancy of the subleased premises will cease on or about
February 28, 2005, which is sooner than the primary lease end in May 2005. The
Company recorded a liability in the first quarter of fiscal year 2005 as it
relates to the sublease obligation.
Summarized selected financial information for the discontinued operations is as
follows (in thousands):
Three months ended Six months ended
December 31, December 31,
-------------------------------------------
2004 2003 2004 2003
-------------------------------------------
Loss from discontinued operations
net of zero income taxes $ - $ - $ (129) $ -
-------------------------------------------
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 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 six-month periods
ended December 31, 2004 and 2003 would have been the pro forma amounts indicated
below (in thousands, except per share amounts):
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2004 AND 2003
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------------
2004 2003 2004 2003
------------------------------------------
Net earnings:
As reported $ 1,930 $ 1,329 $ 3,396 $ 2,241
Pro forma $ 1,342 $ 1,050 $ 2,808 $ 1,962
Net earnings per share:
As reported:
Basic $ 0.26 $ 0.19 $ 0.46 $ 0.31
Diluted 0.26 0.19 0.45 0.31
------------------------------------------
Pro forma:
Basic $ 0.18 $ 0.15 $ 0.38 $ 0.28
Diluted 0.18 0.15 0.38 0.28
------------------------------------------
8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2004 AND 2003
NOTE 10 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the six-month periods ended December 31, 2004 and 2003, is as follows
(in thousands):
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED MANAGEMENT HMOS & CORPORATE & CONSOLIDATED
DECEMBER 31, 2004 COMPANIES(1) MANAGED PLANS(2) ELIMINATIONS COMPANY
- -----------------------------------------------------------------------------------------------------
Revenues - external customers $ - $ 10,403 $ - $ 10,403
Revenues - intersegment 9,343 - (9,343) -
Interest and other income 147 257 - 404
--------------------------------------------------------------
Total revenues $ 9,490 $ 10,660 $ (9,343) $ 10,807
==============================================================
Interest expense $ 8 $ - $ - $ 8
Earnings from continuing operations 2,742 783 - 3,525
Loss from discontinued operations (129) - - (129)
Segment assets 51,632 13,027 (42,483) 22,176
Purchase of equipment - - - -
Depreciation and amortization 94 - - 94
==============================================================
SIX MONTHS ENDED
DECEMBER 31, 2004
-----------------
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 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
==============================================================
(1) Management Companies: United American Healthcare Corporation and United
American of Tennessee, Inc.
(2) HMOs and Managed Plans: OmniCare Health Plan, Inc. of Tennessee.
9
- --------------------------------------------------------------------------------
NOTE 11 -- RECENTLY ENACTED PRONOUNCEMENTS
- --------------------------------------------------------------------------------
SFAS No. 123(R) "Share-Based Payment", which is a replacement to SFAS No. 123
"Accounting for Stock Based Compensation" and supercedes APB Opinion No. 25
"Accounting for Stock Issued to Employees", was issued in December 2004. The
revisions are intended to provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS No. 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No. 123, as originally issued in 1995,
established a preferable fair-value-based method of accounting for share-based
payment transactions with employees. However, that Statement permitted entities
the option of continuing to apply the guidance in APB Opinion No. 25, as long as
the footnotes to financial statements disclosed what net income would have been
had the preferable fair-value-based method been used. Publicly traded entities
(other than those filing as small business issuers) will be required to apply
SFAS No. 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. The Company is currently evaluating the financial statement
impact of the adoption of SFAS No. 123(R).
SFAS No. 151 "Inventory Costs," which amends ARB No. 43 Chapter 4, "Inventory
Pricing," was issued in November 2004. The amendments made by SFAS No. 151
provides clarity relating to abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage), which should be recognized as
current-period charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The adoption of this standard is expected to have no effect
on the Corporation's financial condition or results of operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
This Financial Review discusses the Company's results of operations, financial
position and liquidity. This discussion should be read in conjunction with the
consolidated financial statements and related notes thereto contained elsewhere
in this quarterly report.
The Company provides comprehensive management and consulting services to managed
care organizations, including health maintenance organizations ("HMOs") in
Tennessee and (until November 1, 2002) Michigan, with a targeted mix of Medicaid
and commercial enrollment. OmniCare Health Plan, in Michigan ("OmniCare-MI"), an
HMO then administered by the Company under a management agreement, was placed in
court-ordered rehabilitation proceedings on July 31, 2001, which relieved the
Company from further funding OmniCare-MI's capital deficiencies and which
continued its OmniCare-MI management agreement, with substantially reduced
management fee revenues from OmniCare-MI beginning August 1, 2001. In March
2002, upon the court-appointed Rehabilitator's filing a proposed rehabilitation
plan for OmniCare-MI, the Company announced it anticipated eventual termination
of the management agreement. Such termination occurred November 1, 2002, after
which the Company's only managed plan has been OmniCare Health Plan, Inc., in
Tennessee ("OmniCare-TN"), an HMO owned by the Company's wholly owned
subsidiary. As of December 31, 2004 there were approximately 133,000 enrollees
in OmniCare-TN.
Total revenues decreased $0.08 million (1%) to $5.4 million for the quarter
ended December 31, 2004, compared to $5.5 million for the quarter ended December
31, 2003. For the six months ended December 31, 2004 total revenues decreased
$0.4 million (4%) to $10.8 million compared to $11.2 million for the six months
ended December 31, 2003, principally due to OmniCare-TN's contract with the
State of Tennessee, doing business as TennCare, as amended 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 and additional funds were recorded in its
fiscal 2003 and 2004 financial statements as fiscal 2002 claims were processed.
For the six months ended December 31, 2004, $0.02 million of such medical claims
were processed, compared to $0.4 million for the six months ended December 31,
2003, and the same amount was recognized as revenue by Omnicare-TN.
Total expenses decreased $0.6 million (15%) to $3.5 million for the quarter
ended December 31, 2004, compared to $4.1 million for the quarter ended December
31, 2003, and decreased $1.1 million (14%) to $7.3 million for the six months
ended December 31, 2004 from $8.4 million for the six months ended December 31,
2003, principally due to
11
the amended TennCare contractual risk agreement for OmniCare-TN discussed above
and a decrease in marketing, general and administrative expenses.
Earnings from continuing operations before income taxes were $1.9 million and
$1.4 million for the quarters ended December 31, 2004 and 2003, respectively.
Earnings from continuing operations were $1.9 million, or $0.26 per basic share,
for the quarter ended December 31, 2004, compared to earnings from continuing
operations of $1.3 million, or $0.19 per basic share, for the quarter ended
December 31, 2003. Such increase in earnings from continuing operations of $0.6
million, or $0.07 per basic share, is principally due to a decrease in
marketing, general and administrative expenses and a lower effective tax rate
for the period.
The Company recognized no gain or loss from discontinued operations for the
three months ended December 31, 2004 and December 31, 2003. For the six months
ended December 31, 2004 the Company recognized a loss of $0.1 million from
discontinued operations, principally due to a liability relating to a sublease
(further described below) partially offset by the release of certain liabilities
related to a patient care software system no longer in use by the Company. For
the six months ended December 31, 2003, there was no gain or loss for
discontinued operations. 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. Due to the subsequent sale of OmniCare-MI members to Coventry of
Michigan approved on May 10, 2004 and effective October 1, 2004. The Company has
renegotiated sublease terms with Michigan HMO (formerly doing business as
OmniCare Health Plan in Michigan), which continues to occupy and pay rent for
reduced space in such premises. Company management now expects that Michigan
HMO's occupancy of the subleased premises will cease on or around February 28,
2005, sooner than the primary lease end in May 2005. The Company recorded a
liability in the first quarter of fiscal year 2005 as it relates to the sublease
obligation.
Net earnings were $1.9 million, or $0.26 per basic share, for the three months
ended December 31, 2004, compared to net earnings of $1.3 million, or $0.19 per
basic share, for the three months ended December 31, 2003 an increase of $0.6
million (45%). The Company recognized net earnings of $3.4 million, or $0.46 per
basic share, for the six months ended December 31, 2004 and net earnings of $2.2
million, or $0.31 per basic share, for the comparable period ended December 31,
2003. Such increase in net earnings is principally due to a decrease in
marketing, general and administrative expenses and a lower effective tax rate
for the period.
12
FOR THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 2003
Medical premiums revenues were $0.002 million in the three months ended December
31, 2004, a 97% decrease from $0.08 million in the three months ended December
31, 2003. 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 and additional funds were recorded in fiscal
2003 through fiscal 2005 financial statements as fiscal 2002 claims were
processed. The $0.002 million of medical premiums revenues represent fiscal 2002
claims processed and reimbursed by TennCare in the second quarter of fiscal
2005.
Fixed administrative fees related to TennCare's below-described ASO program were
$5.3 million for the quarter ended December 31, 2004, an increase of $0.2
million (3%) from $5.1 million in the three months ended December 31, 2003. Such
fixed administrative fees are attributed to a change in the reimbursement system
of TennCare.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program,
which entailed changes to TennCare's contracts with managed care organization
("MCOs"), including OmniCare-TN. During that period, MCOs were generally
compensated for administrative services only (commonly called "ASO"), earned
fixed administrative fees, were not at risk for medical costs in excess of
targets established based on various factors, were subject to increased
oversight, and could incur financial penalties for not achieving certain
performance requirements. Through successive contractual amendments, TennCare
extended the ASO reimbursement system applicable to OmniCare-TN, first through
June 30, 2004, and then through December 31, 2004.
In our current report on Form 8-K dated December 15, 2004, we reported that
TennCare had recently provided OmniCare-TN a further written amendment that
OmniCare-TN signed and sent back to be signed by TennCare, extending through
December 31, 2005, the ASO reimbursement system applicable to OmniCare-TN.
However, based on information our management received from TennCare in late
January 2005, we now expect TennCare will not sign that amendment and instead
will implement a modified risk arrangement with all its contracted MCOs,
including OmniCare-TN, possibly as soon as July 1, 2005. We do not yet know the
specific terms or effective date of that expected risk sharing arrangement.
On January 10, 2005, Tennessee Governor Bredesen announced plans to modify the
TennCare program, subject to needed federal approval, due to financial and legal
constraints. He announced plans to drop approximately 323,000 adults who are not
eligible for Medicaid from TennCare coverage statewide, and to impose benefit
limits on the 396,000 adults left in the program who are eligible for Medicaid.
The Governor said his plans would maintain "a reasonable level of benefits" for
those adults and preserve full coverage for the 612,000 children on the program.
As a result, OmniCare-TN expects to lose only approximately 12,000 of its
present 133,000 members over a 12-
13
month period beginning in mid-2005, being its only working uninsured and
uninsurable adult members.
Medical services expenses were $0.002 million in the three months ended December
31, 2004. The $0.002 million of medical services expenses represent fiscal 2002
claims processed and reimbursed by TennCare in fiscal 2005 as explained in the
third paragraph above.
Marketing, general and administrative expenses decreased approximately $0.5
million (13%), to $3.4 million for the three months ended December 31, 2004 from
$3.9 million for the three months ended December 31, 2003. The decrease is
principally due to certain accrued liabilities recorded in the second quarter of
fiscal 2004 and subsequently reversed in the fourth quarter of fiscal 2004.
Depreciation and amortization expense decreased $0.01 million (21%), to $0.05
million for the three months ended December 31, 2004 from $0.06 million for the
three months ended December 31, 2003.
There was no interest expense for the three months ended December 31, 2004,
compared to interest expense of $0.02 million for the three months ended
December 31, 2003, due to the elimination of the Company's outstanding term loan
with Standard Federal Bank N.A.
Income tax expense decreased $0.1 million (100%), to $0.0 million for the three
months ended December 31, 2004 from $0.1 million for the three months ended
December 31, 2003. The Company's effective tax rate for the three months ended
December 31, 2004 is 0% and differs from the statutory rate of 34%. This
difference is the result of the utilization of net operating loss carryforwards
for which a valuation allowance had previously been applied.
14
FOR SIX MONTHS ENDED DECEMBER 31, 2004 COMPARED TO
SIX MONTHS ENDED DECEMBER 31, 2003
Total revenues decreased $0.4 million (4%), to $10.8 million for the six months
ended December 31, 2004 from $11.2 million for the six months ended December 31,
2003 principally as the result of a change in the reimbursement system of
TennCare, as discussed above.
Medical premiums revenues were $0.02 million for the six months ended December
31, 2004, a decrease of $0.4 million (95%) from medical premiums revenues of
$0.4 million for the six months ended December 31, 2003. 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 through December 31, 2005.
Fixed administrative fees related to the ASO program were $10.4 million for the
six months ended December 31, 2004, an increase of $0.2 million (2%) from fixed
administrative fees of $10.2 million for the six months ended December 31, 2003.
The increase in fixed administrative fees is principally due to a slight
increase in members.
Total expenses were $7.3 million for the six months ended December 31, 2004,
compared to $8.4 million for the six months ended December 31, 2003, a decrease
of $1.1 million (14%). 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 $0.02 million in the six months ended December 31, 2004, a decrease of $0.4
million (95%), as compared with medical services expenses of $0.44 million in
the six months ended December 31, 2003. The $0.02 million of medical services
expenses represent fiscal 2002 claims processed and reimbursed by TennCare in
fiscal 2005 as explained in the first paragraph under the above heading "For
Three Months Ended December 31, 2004 Compared to Three Months Ended December 31,
2003."
Marketing, general and administrative expenses were $7.2 million for the
six-month period ended December 31, 2004, as compared with marketing, general
and administrative expenses of $7.8 million for the comparable period a year
earlier, a decrease of $0.6 million (9%). The decrease is principally due to
certain accrued liabilities recorded in the first and second quarter of fiscal
2004.
Depreciation and amortization expense decreased $0.02 million (22%), to $0.1
million for the six months ended December 31, 2004 from $0.12 million for the
six months ended December 31, 2003.
Interest expense decreased $0.08 million (79%), to $0.008 million for the six
months ended December 31, 2004 from $0.04 million for the six months ended
December 31, 2003, principally due to debt reduction.
15
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, the Company had (i) cash and cash equivalents and
short-term marketable securities of $10.2 million, compared to $8.8 million at
June 30, 2004; (ii) working capital of $11.8 million, compared to working
capital of $8.1 million at June 30, 2004; and (iii) a current assets-to-current
liabilities ratio of 4.11-to-1, compared to 2.56-to-1 at June 30, 2004. The
principal source of funds for the Company during the six-month period ended
December 31, 2004 was $1.8 million provided from net operating activities. The
principal use of funds for the six month period was $0.7 million for debt
repayment. Cash flow was $(1.1) million for the six months ended December 31,
2004, compared to $3.1 million for the comparable period a year earlier,
principally due to the purchase of short-term marketable securities.
Accounts receivable increased by $0.5 million at December 31, 2004 compared to
June 30, 2004, primarily due to timing of cash receipts from TennCare.
Property, plant and equipment decreased by $0.1 million at December 31, 2004
compared to June 30, 2004, due to recording depreciation of $0.1 million.
Long-term debt decreased $0.7 million at December 31, 2004 compared to June 30,
2004, principally due to the retirement of a term loan with Standard Federal
Bank, N.A. on September 23, 2004.
The Company's wholly owned subsidiary, OmniCare-TN, had a required minimum net
worth requirement using statutory accounting practices of $7.2 million at June
30, 2004. OmniCare-TN had excess statutory net worth of $3.1 million at June 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, 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, 2004, 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, 2004. There was no
change in our internal controls over
16
financial reporting identified in connection with such evaluation that occurred
during our fiscal quarter ended December 31, 2004 that has materially affected,
or is reasonably likely to materially affect, our internal controls over
financial reporting.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file and submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
17
PART II.
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 5. OTHER INFORMATION
(a) CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage management to provide
prospective information about their companies without fear of litigation
so long as those statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
projected in the statements. Certain statements contained in this Form
10-Q quarterly report, including, without limitation, statements
containing the words "believes," "anticipates," "will," "could," "may,"
"might" and words of similar import, constitute "forward-looking
statements" within the meaning of this "safe harbor."
Such forward-looking statements are based on management's current
expectations and involve known and unknown risks, uncertainties and other
factors, many of which the Company is unable to predict or control, that
may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors potentially include, among others, the following:
1. Inability to increase premium rates commensurate with increases in
medical costs due to utilization, government regulation, or other
factors.
2. Discontinuation of, limitations upon, or restructuring of
government-funded programs, including but not limited to the
TennCare program.
3. Increases in medical costs, including increases in utilization and
costs of medical services and the effects of actions by competitors
or groups of providers.
4. Adverse state and federal legislation and initiatives, including:
the State of Tennessee's limitations upon or reductions in premium
payments; prohibition or limitation of capitated arrangements or
financial incentives to providers; federal and state benefit
mandates (including mandatory length of stay and emergency room
coverage); limitations on the ability to manage care and
utilization; and any willing provider or pharmacy laws.
18
5. Failure to obtain new customer bases or members or retain or regain
customer bases or members, or reductions in work force by existing
customers.
6. Increased competition between current organizations, the entrance of
new competitors and the introduction of new products by new and
existing competitors.
7. Adverse publicity and media coverage.
8. Inability to carry out marketing and sales plans.
9. Loss or retirement of key executives.
10. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.
11. Adverse regulatory determinations resulting in loss or limitations
of licensure, certification or contracts with governmental payers.
12. Higher sales, administrative or general expenses occasioned by the
need for additional advertising, marketing, administrative or
management information systems expenditures.
13. Increases by regulatory authorities of minimum capital, reserve and
other financial solvency requirements.
14. Denial of accreditation by quality accrediting agencies, e.g., the
National Committee for Quality Assurance (NCQA).
15. Adverse results from significant litigation matters.
16. Inability to obtain satisfactory bank loan credit arrangements, if
needed.
17. Increased costs to comply with the Health Insurance Portability and
Accountability Act of 1996 (HIPAA).
ITEM 6. EXHIBITS
Exhibits
31.1 Certifications of Chief Executive Officer pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
19
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 27, 2005 By: /s/ William C. Brooks
-------------------------------
William C. Brooks
Chairman, President & Chief Executive
Officer
Dated: January 27, 2005 By: /s/ Stephen D. Harris
---------------------------
Stephen D. Harris
Chief Financial Officer & Treasurer
20
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-31.1 Certification of Chief Executive Officer pursuant to Section 302
EX-31.2 Certification of Chief Financial Officer pursuant to Section 302
EX-32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
COVER SEC Cover Letter