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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended June 30, 1999
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)
1155 BREWERY PARK BOULEVARD, SUITE 200
DETROIT, MICHIGAN 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 393-0200
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES AS OF SEPTEMBER 17, 1999, COMPUTED BY REFERENCE TO THE NYSE
CLOSING PRICE ON SUCH DATE, WAS $7,129,994.
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF SEPTEMBER
17, 1999 WAS 6,710,583.
The following document (or portion thereof) has been incorporated by reference
in this Annual Report on Form 10-K: The definitive Proxy Statement for the 1999
Annual Meeting of Shareholders to be held on November 11, 1999 (Part III).
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As filed with the Securities and Exchange Commission on September 28, 1999
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UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I............................................................................................. 2
Item 1. Business........................................................................... 2
Item 2. Properties.........................................................................20
Item 3. Legal Proceedings..................................................................21
Item 4. Submission of Matters to a Vote of Security Holders................................21
PART II............................................................................................22
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.............................................................22
Item 6. Selected Financial Data............................................................22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................23
Item 8. Financial Statements...............................................................33
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................33
PART III.......................................................................................... 34
Item 10. Directors and Executive Officers of the Registrant.................................34
Item 11. Executive Compensation.............................................................34
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................................34
Item 13. Certain Relationships and Related Transactions.....................................34
PART IV............................................................................................35
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................35
FINANCIAL STATEMENTS...............................................................................F-1
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PART I
ITEM 1. BUSINESS
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-K annual report, including, without
limitation, statements containing the words "believes", "anticipates", "will",
"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. See "Item 1.
Business--Cautionary Statement Regarding Forward-Looking Statements" below.
GENERAL
United American Healthcare Corporation (the "Company") was incorporated
in Michigan on December 1, 1983 and commenced operations in May 1985. Unless the
context otherwise requires, all references to the Company indicated herein shall
mean United American Healthcare Corporation and its consolidated subsidiaries.
The Company provides comprehensive management and consulting services
to managed care organizations, including health maintenance organizations in
Tennessee, 75% owned by the Company, in Michigan and, until February 26, 1998,
in Florida. The Company also arranges for the financing of health care services
and delivery of these services by primary care physicians and specialists,
hospitals, pharmacies and other ancillary providers to commercial employer
groups and government sponsored populations in Tennessee, Michigan and, until
February 26, 1998, Florida. Management and consulting services provided by the
Company are generally to health maintenance organizations with a targeted mix of
Medicaid and non-Medicaid/commercial enrollment. As of September 1, 1999, there
were approximately 137,000 enrollees in the managed care organizations owned or
operated by the Company.
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Management and consulting services provided by the Company include
feasibility studies for licensure, strategic planning, corporate governance,
management information systems, human resources, marketing, precertification,
utilization review programs, individual case management, budgeting, provider
network services, accreditation preparation, enrollment processing, claims
processing, member services and cost containment programs.
In 1985, the Company became one of the pioneers in arranging for the
financing and delivery of health care services to Medicaid recipients utilizing
managed care programs. Management believes the Company has gained substantial
expertise in understanding and serving the particular needs of the Medicaid
population. As of September 1, 1999, there were approximately 76,000 Medicaid
enrollees in the managed care organizations owned or managed by the Company,
OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), and Michigan Health
Maintenance Organization Plans, Inc., d/b/a OmniCare Health Plan, in Michigan
("OmniCare-MI"). The Company complements its Medicaid focus by targeting
non-Medicaid/commercial business in the same geographic markets, including its
contract with Urban Hospital Care Plus (the "County Care" plan). As of September
1, 1999, there were approximately 61,000 non-Medicaid/commercial enrollees in
OmniCare-MI, OmniCare-TN and County Care (collectively, the "Managed Plans").
The Company sold all of the stock of its wholly owned subsidiary,
Corporate Healthcare Financing, Inc. ("CHF"), on September 8, 1998, effective
August 31, 1998. See "Business--Self-Funded Benefit Plan" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" below. CHF designed customized
employee welfare plan arrangements for self-funded employers and provided
marketing, management and administrative services to self-funded employers
generally.
RESTRUCTURING PROGRAM AND MANAGEMENT CHANGES
In January 1998, as a result of significant operating losses, negative
working capital and a reduction in net worth, the Company announced a major
financial restructuring program which was designed to cut the Company's cash
losses and to position the Company for profitable operations. To oversee the
Company's restructuring efforts, the Company named a new Chairman of the Board
to serve in a non-executive capacity, with the day to day operations of the
Company continuing to be managed by its then current Chief Executive Officer and
then current President and Chief Operating Officer. The Company engaged Arthur
Andersen LLP to assist in the development and implementation of the financial
restructuring program.
The restructuring program encompassed Company plans to discontinue some
expansion projects, reduce non-core spending activities, reduce corporate
overhead, renegotiate its bank credit facilities, re-evaluate its investment in
affiliates and other assets and sell CHF.
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In May 1998, the Company announced three changes in management: (1) the
retirement of the then current Chief Executive Officer of the Company effective
August 6, 1998, including his immediate relinquishment of his operational
responsibilities, (2) the resignation of the then current President and Chief
Operating Officer of the Company and (3) the election of Gregory H. Moses, Jr.
as the new President and Chief Operating Officer of the Company. Mr. Moses, a
retired partner of the Coopers & Lybrand accounting firm, most recently had been
a consultant to a health maintenance organization in Detroit. He previously had
been partner-in-charge of the Coopers & Lybrand Healthcare Consulting Group in
New York and New Jersey for ten years, chairman of that firm's National
Healthcare Consulting Group for five years and its lead engagement partner with
respect to Mercy Health Services for seven years. In August 1998, Mr. Moses
additionally became the Chief Executive Officer of the Company and the Company's
Corporate Controller became its Treasurer and Interim Chief Financial Officer.
INDUSTRY
In an effort to control costs while assuring the delivery of quality
health care services, the public and private sectors in recent years have
increasingly turned to managed care solutions. As a result, the managed care
industry, which includes health maintenance organization ("HMO"), preferred
provider organization ("PPO") and prepaid health service plans, has grown
substantially.
While the trend toward managed care solutions has traditionally been
pursued most aggressively by the private sector, the public sector has recently
embraced the trend in an effort to control the costs of health care provided to
Medicaid recipients. Consequently, many states are promoting managed care
initiatives to contain these rising costs and supporting programs that encourage
or mandate Medicaid beneficiaries to enroll in managed care plans.
MANAGED CARE PRODUCTS AND SERVICES
The Company has an ownership interest in and manages the operations of
an HMO in Tennessee, OmniCare-TN. The Company also manages the operations of an
HMO in which it has no ownership interest, OmniCare-MI. In addition, the Company
owns and operates County Care.
The Company also had or has an ownership interest in three other HMOs:
UltraMedix Healthcare Systems, Inc., in Florida ("UltraMedix"); OmniCare Health
Plan of Louisiana, Inc., in Louisiana ("OmniCare-LA"); and PhilCare Health
Systems, Inc., in Pennsylvania ("PhilCare"). UltraMedix ceased operations and is
in the process of being liquidated (see "Business--Managed Plans Owned by the
Company--UltraMedix" below). OmniCare-LA was never operational and is in the
process of being dissolved. PhilCare, having declined to participate in
Pennsylvania's Medicaid managed care program because of program requirements
that would have made such participation unprofitable, subsequently, effective
April 1, 1998, entered into an Integrated Delivery System agreement with an
entity that arranges for the provision of health care services for its Medicaid
membership through contracts with health care providers. The Company's Board
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of Directors has determined, as part of the Company's financial restructuring
program, to withdraw from all involvement in Pennsylvania and to pursue
recouping its investment in PhilCare. Toward that end, however, with the support
of all of PhilCare's stockholders, the Company has made a presentation to the
Pennsylvania Department of Public Welfare proposing that the Company take over
the operation of PhilCare on an interim basis to try to improve PhilCare's
financial condition and business prospects; and the Department has not yet
responded to the proposal.
The following table shows the membership in the Managed Plans serviced
by the Company as of September 1, 1999:
Non-
Medicaid/
Medicaid Commercial Total
--------------- ----------------- --------------
Managed Plans
Owned:
OmniCare-TN 28,430 15,388 43,818
County Care - 8,385 8,385
Operated:
OmniCare-MI 47,344 37,279 84,623
--------------- ----------------- --------------
75,774 61,052 136,826
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The following table sets forth data with respect to the Company's
principal revenue sources in dollar amounts and as a percentage of the Company's
total revenues for the periods indicated. Such data are not indicative of the
relative contributions to the Company's net earnings.
Year ended June 30,
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1999 1998 1997 (1)
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(in thousands, except percentages)
OmniCare-TN $70,934 76% $63,520 60% $56,508 50%
OmniCare-MI 18,148 19% 24,986 24% 28,865 26%
County Care 2,273 2% - - - -
UltraMedix - - 15,062 14% 13,922 12%
(1) In 1997 the Company's discontinued operations in Ohio represented 9% of
the Company's total revenues.
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A substantial portion of the Company's gross revenues is derived
through its management agreement with OmniCare-MI. This management agreement is
long-term in nature, subject to review every five years with either automatic
continuation or elective termination. There can be no assurance that such
agreement will remain in effect or continue substantially under the same terms
and conditions. Effective June 1, 1998, the OmniCare-MI management agreement was
amended to reduce the management fee percentage charged by the Company to 14%
from 17%. Additionally, in fiscal 1999 the Company forgave $1.3 million in
management fees owed by OmniCare-MI. UltraMedix has been placed in receivership
for the purpose of its liquidation, pursuant to judicial consent orders entered
on February 26 and March 3, 1998. See "Managed Plan Operated By the Company" and
"Managed Plans Owned by the Company--UltraMedix" under "Managed Plans" below and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
MANAGED PLANS
The Company has entered into long-term management agreements with
OmniCare-MI and, through a wholly owned subsidiary of the Company, with
OmniCare-TN. Pursuant to these management agreements with OmniCare-MI and
OmniCare-TN, the Company provides management and consulting services associated
with the financing and delivery of health care services. The Company also owns
and operates the County Care plan pursuant to an agreement to arrange for the
delivery of health care services. Table A summarizes the terms of these
agreements.
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Table A- Summary of Terms of Agreements with the Managed Plans
Terms OmniCare-MI OmniCare-TN County Care
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(1) Duration:
(a) Effective dates:
(i) Commencement May 1, 1985 July 1, 1996 April 1, 1999
(ii) Expiration December 31, 2010 June 30, 2001 September 30, 1999
(b) Term extension:
(i) Automatically renewable No Yes - 4 successive Yes - unlimited
5-year periods
(ii) Terms of renewal/continuation Subject to review 5 years Successive
every 5 years 1-year terms
(iii) Next review period May 1, 2000 January 1, 2001 September 1, 2000
(c) Termination:
(i) Without cause by the Plan at such
reviews Yes Yes Yes
(ii) Either party with cause Yes Yes Yes
(2) Fees paid to the Company:
(a) Percentage of revenues Yes Yes No
(b) Fixed premium rates No No Yes
(3) Expenses incurred by the Company:
All administrative expenses necessary
to carry out and perform the functions
of the Plan, excluding:
(i) Audit No Yes No
(ii) Legal No Yes No
(iii) Marketing No No No
(iv) Certain other No Yes No
Services provided to the Managed Plans include strategic planning;
corporate governance; human resource functions; provider network services;
provider profiling and credentialing; premium rate setting and review; marketing
services (group and individual); accounting and budgeting functions; deposit,
disbursement and investment of funds; enrollment functions; collection of
accounts; claims processing; management information systems; utilization review;
and quality management.
Managed Plans Owned by the Company
OMNICARE-TN. OmniCare-TN was organized as a Tennessee corporation in
October 1993, and is headquartered in Memphis, Tennessee. The Company was active
in the development of OmniCare-TN and, through the Company's wholly owned
subsidiary, United American of Tennessee, Inc. ("UA-TN"), owns a 75% equity
interest in OmniCare-TN; a local partner owns the remaining 25%. OmniCare-TN
began as a PPO contractor in TennCare, a State of Tennessee program that
provides medical benefits to Medicaid and Working Uninsured recipients, and
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operated as a full-risk prepaid health services plan until it obtained its
TennCare HMO license in March 1996. OmniCare-TN's TennCare HMO contract was
executed in October 1996, retroactive to the date of licensure.
In November 1993, OmniCare-TN contracted with TennCare as a PPO, to
arrange for the financing and delivery of health care services on a capitated
basis to Medicaid eligibles and the Working Uninsured and Uninsurable
("Non-Medicaid") individuals who lack access to private or employer sponsored
health insurance or to another government health plan. The TennCare Bureau
placed an indefinite moratorium on Working Uninsured enrollment in December
1994; however, such action did not affect persons enrolled in a plan prior to
the moratorium. In April 1997, enrollment was expanded to include the children
of the Working Uninsured up to age 18. The TennCare contract was renewed on July
1, 1999 for an 18-month term, expiring December 31, 2000.
OmniCare-TN currently serves Shelby and Davidson counties in Tennessee
(which include the cities of Memphis and Nashville). As of September 1, 1999,
total enrollment was approximately 43,818 members, of which 28,430 (65%) and
15,388 (35%) represent Medicaid and Non-Medicaid enrollees, respectively. A
30-day open enrollment change period for all TennCare eligibles occurs once a
year in October.
The Plan's application for a commercial HMO license is pending. Plan
management has been in frequent communication with the State to eliminate any
further processing delays of the application and expects the issuance of the
license in the third quarter of fiscal 2000. However, there can be no assurance
that the license will be issued within this time period. Management believes
that the receipt of the commercial license and the Plan's efforts to expand its
provider network to the southwestern area of Tennessee would enable OmniCare-TN
to increase its enrollment by marketing its managed care products to the various
employer groups in the regions served.
COUNTY CARE. In Michigan, the County of Wayne encompasses Detroit and
certain other cities and communities. Urban Hospital Care Plus ("UHCP"), a
nonprofit corporation, administers the County's patient care management system.
Effective April 1, 1999, the Company entered into a contract with UHCP for the
Company to arrange for the delivery of health care services, including the
assumption of underwriting risk, on a capitated basis to certain enrollees
residing in Wayne County who lack access to private or employer-sponsored health
insurance or to another government health plan. The initial contract period was
for six months, with automatic renewal for successive periods of one year unless
terminated by either party as provided in the contract. At this time, it is
known that the contract will be renewed for a one-year period ending September
30, 2000. Although Company management does not expect significant net earnings
directly from the County Care contract, management believes that entering into
this contract is consistent with the Company's strategic objective of expanding
the client base and achieving size sufficient to enable the Company to negotiate
better rates, save on
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administrative costs and build profits. As of September 1, 1999, total County
Care enrollment was approximately 8,385.
ULTRAMEDIX. UltraMedix, a network model HMO headquartered in Tampa,
Florida, was founded as a Florida corporation in May 1992. Through its majority
owned subsidiary, United American of Florida, Inc. ("UA-FL"), the Company owns
51% of UltraMedix, with the remaining 49% owned by local shareholders. The March
3, 1998 court order, described below, placed UltraMedix and UA-FL in
liquidation.
As of December 31, 1997, UltraMedix was not in compliance with the
Florida Department of Insurance ("FDOI") statutory solvency requirement. The
FDOI requires that HMOs maintain a statutory reserve as determined in accordance
with statutory accounting practices of $0.5 million. UltraMedix's statutory
deficiency at December 31, 1997 was estimated at $4.5 million. As a result, on
January 30, 1998, the Company, UltraMedix and the Plan's third-party
administrator, UA-FL, signed and delivered to the FDOI a Stipulation and Consent
to Appointment of Receiver and Order of Liquidation entitling FDOI to obtain the
entry of an accompanying consent order by the applicable Florida court if the
Company did not cure UltraMedix's existing statutory reserve deficiency
(estimated at $4.5 million) by February 6, 1998. On February 26, 1998, the
deficiency had not been cured and pursuant to the FDOI's petition, the Florida
court entered such consent order.
Pursuant to the stipulation and consent order: UltraMedix and UA-FL
(the "Organizations") admitted that UltraMedix was statutorily insolvent as of
December 31, 1997; the Company paid $0.5 million to the FDOI to cover UltraMedix
claims incurred during and provider capitation payments due for the eight days
ended February 6, 1998, and funded the Organizations' ordinary business expenses
for the same period; the FDOI took control of the Organizations' bank accounts;
the Plan ceased enrolling new members; and the Organizations continued to
provide services to all of the Plan's subscribers and to process renewals on all
policies as they came due. Pursuant to the consent order, on February 26, 1998,
the Organizations were declared insolvent and the FDOI was appointed as Receiver
for the purposes of their liquidation.
On March 3, 1998, the Florida court entered a Consent Order of
Liquidation, Injunction and Notice of Stay, declaring that any further efforts
of the Receiver to rehabilitate the Organizations would be useless, ordering the
FDOI, as Receiver, to take possession of and liquidate all assets of the
Organizations and ordering the immediate cancellation of UltraMedix's authority
to provide health services as an HMO in Florida. On April 15, 1998, the Florida
Agency for Health Care Administration notified the Company of the Agency's
intent to enforce the Company's Guarantee Agreement, under which the Company had
agreed to reimburse UltraMedix's contracted Medicaid providers for authorized,
covered Medicaid services rendered to covered Medicaid enrollees, for which the
Agency had made payment on behalf of such enrollees, limited to an amount equal
to the amount of surplus UltraMedix would have been required to maintain under
the Medicaid contract in the absence of such Guarantee Agreement.
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Although the outcome cannot be predicted or reasonably estimated,
Company management expects that the ultimate resolution regarding the Guarantee
Agreement will not have a materially adverse effect on the Company's
consolidated financial position.
Managed Plan Operated by the Company
OMNICARE-MI. OmniCare-MI is a not-for-profit, tax-exempt corporation
headquartered in Detroit, Michigan and serving southeastern Michigan, operating
in Wayne, Oakland, Macomb, Monroe and Washtenaw counties. Its history includes a
number of innovations that were adopted and proved successful for the industry.
It was the first network model HMO in the country and the first to capitate
physician services in an IPA model HMO. OmniCare-MI also created and implemented
the first known mental health carve out in 1983.
OmniCare-MI enrollment is through over 1,300 companies that offer the
Plan to employees and their family members, through individual enrollment that
is open once a year for a 30-day period, and through the State's Medicaid
program pursuant to an agreement with the Michigan Department of Community
Health, which makes HMO coverage available to eligibles in certain counties and
mandatory in others. This annually renewable agreement was extended by mutual
agreement for an additional twelve months from January 1, 1999 to December 31,
1999. As of September 1, 1999, total enrollment in OmniCare-MI was approximately
84,623, of which 37,279 (44%) represent commercial members, including
approximately 7,411 point of service members, and approximately 47,344 (56%)
represent Medicaid members.
Among the major employers that offer OmniCare-MI, ranked by enrollment,
are: the City of Detroit, the Detroit Board of Education, the Federal
Government, the State of Michigan, Ford Motor Company and DaimlerChrysler AG,
the largest of which represents approximately 6% of OmniCare-MI's total
enrollment. These employers, in aggregate, represent approximately 25% of
OmniCare-MI's total enrollment. No other group exceeds 2% of the Plan's total
enrollment.
The State of Michigan, in an effort to reduce the cost of its Medicaid
program, competitively bid its Medicaid contracts, with an effective date of
July 1997. The affected southeastern Michigan counties include a significant
portion of the Plan's Medicaid enrollment. In May 1997, OmniCare-MI was notified
that it had been selected to participate in the State's program. Unsuccessful
bidders to the State's request for proposal legally challenged the initiative
and, as a result, the State did not assign the Medicaid eligibles to plans that
were awarded contracts, but nonetheless instituted the premium rate reduction
component of the new program effective July 1997. With the indefinite delay of
the assignment of approximately 90,000 eligible recipients to the selected
plans,and the implementation of the premium rate reductions of 20%, the
operating revenues of OmniCare-MI and the resulting management fee revenues to
the Company were adversely affected in fiscal 1998 and 1999.
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Newspaper stories in May 1998 reported that the Michigan Insurance
Bureau (the "Bureau") had obtained a sealed (confidential) court order on May 7,
1998 giving state regulators control over OmniCare-MI's assets. The Company
responded with a public statement on May 12, 1998, stating that OmniCare-MI was
not in receivership but was in active discussion with the Bureau regarding
compliance with certain regulatory issues, that all services to members of
OmniCare-MI would continue to be provided with no decrease in the quality of
care, and all providers would continue to be paid for their services, and that
both the Company and OmniCare-MI had completely restructured their top
management.
In June 1998, the Company funded a $4.6 million unsecured loan to
OmniCare-MI, evidenced by a surplus note, to enable OmniCare-MI to meet its
minimum requirements for net worth and working capital. Pursuant to the surplus
note, interest and principal repayments are subject to approval by the Bureau
and are payable only out of the statutory surplus earnings of OmniCare-MI. The
interest rate is at prime, payable annually and if not paid is forfeited.
Interest income of $0.4 million was forfeited for fiscal 1999. The principal has
no stated maturity or repayment date. The surplus note is subordinated to all
other claimants of OmniCare-MI. The Company recorded an impairment loss against
its investment in this surplus note based on its evaluation of the recoverable
value of such investment and accordingly recognized bad debt expense of $2.3
million for the year ended June 30, 1998. Additionally, in fiscal 1999 the
Company provided additional funding by forgiving $1.3 million in management fees
owed by OmniCare-MI, to enable OmniCare-MI to meet its statutory requirements
for net worth and working capital.
On July 1, 1998, the Bureau issued a public statement in which the
Michigan Commissioner of Insurance announced reaching accord with OmniCare-MI on
a four-month plan to revitalize the HMO and cited "three major positive
developments respecting OmniCare": an unsecured loan of $4.6 million by the
Company, the corrective action plan and the "experienced and capable leadership
of Gregory H. Moses."
The reduction of Medicaid rates and other factors were considered in
developing the OmniCare-MI corrective action plan, which has been implemented.
The corrective action plan included the reduction of medical costs through
renegotiation of hospital provider contracts, reduction of pharmacy costs and a
reduction in the management fee percentage paid to the Company from 17% to 14%,
effective June 1, 1998. In fiscal 1999 and 1998, the Company derived 19% and 24%
of its total revenues from its management agreement with OmniCare-MI,
respectively. Management believes that the continued viability of OmniCare-MI is
critical to the Company's future operations and concluded that the unsecured
loan, in the form of a surplus note, the $1.3 million forgiveness of management
fees in fiscal 1999 and the reduction in the management fee percentage were
necessary actions to strengthen the financial condition and viability of
OmniCare-MI.
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The Company, in its restructuring efforts and forecasts, has considered
the impact of the reduction in the management fee percentage. In fiscal 1999,
management fee revenues decreased approximately $4.2 million as a result of the
management fee percentage reduction.
In January 1999, the Company announced that OmniCare-MI had joined with
Blue Cross Blue Shield of Michigan (the "CasinoCare Venture") in proposals to
provide health care, dental and prescription drug benefits to employees of the
three planned casinos that are to bring casino gaming to Detroit. Two of the
casinos have selected the CasinoCare Venture to provide health care coverage to
their employees. Both casinos are building temporary facilities, currently
expected to open within the next five months. The Company estimates that over
the next several months approximately 3,000 employees (amounting to more than
7,000 members) will require health coverage and could generate medical premiums
of up to $0.9 million monthly ($11.2 million annually). The casinos' temporary
facilities are expected to be replaced by permanent riverfront facilities in
Detroit by 2002; and based upon the casinos' estimates, that up to 8,000
employees (amounting to more than 18,000 members) will then require health
coverage and could generate medical premiums of up to $2.3 million monthly
($28.0 million annually). The Company would receive a management fee based on
the medical premiums generated from those members who select the Company's
products.
In August 1999, OmniCare-MI received a "Commendable" accreditation
rating from the National Committee for Quality Assurance ("NCQA") through April
30, 2001. The NCQA is a nationally recognized independent, not-for-profit
organization that evaluates how well a health plan manages all parts of its
delivery system (physicians, hospitals, other providers and administrative
services) in order to continuously improve health care for its members. The
"Commendable" rating is granted to managed care organizations that deliver
high-quality care and service and whose systems for consumer protection and
quality improvement meet or exceed NCQA's requirements.
Other Managed Plan Ventures
OMNICARE-LA. OmniCare-LA, a network model HMO headquartered in New
Orleans, Louisiana, was organized as a Louisiana corporation in November 1994,
and is 100% owned by the Company's wholly owned subsidiary, United American of
Louisiana, Inc. (UA-LA) ("UA-LA"). The Plan was granted an HMO license by the
Louisiana Department of Insurance in June 1996. In connection therewith, the
Company funded OmniCare-LA's statutory reserve and net worth requirements
through letters of credit for $1.0 million and $1.0 million in cash deposited in
accounts at state banks in Louisiana. OmniCare-LA was in a pre-operational phase
since inception. Consistent with the Company's restructuring efforts, it has
ceased its operations in Louisiana, has withdrawn its $1.0 million statutory
reserve and liquidated OmniCare-LA, and is in the process of dissolving
OmniCare-LA, including the anticipated cancellation of its letter of credit
commitments.
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PHILCARE. PhilCare, a network model HMO headquartered in Philadelphia,
Pennsylvania, was organized as a Pennsylvania corporation in May 1994. PhilCare
is 49% owned by the Company's wholly owned subsidiary, United American of
Pennsylvania, Inc. ("UA-PA"), and 51% owned by local participants. In June 1996,
PhilCare obtained its HMO license, with the Company funding PhilCare's statutory
reserve and net worth requirements of $2.1 million through cash deposited at a
Pennsylvania bank.
PhilCare's initial business plan was to participate in Pennsylvania's
mandatory Medicaid pilot program, HealthChoices, which required the enrollment
of approximately 540,000 Medicaid recipients in five metropolitan Philadelphia
counties into HMOs. In October 1996, the Company announced its decision to
withdraw its support of PhilCare's participation in the HealthChoices program
because existing program requirements would have made the Company's
participation in the program unprofitable. Effective April 1, 1998, PhilCare
entered into an Integrated Delivery System ("IDS") agreement with an entity that
arranges for the provision of health care services for its Medicaid membership
through contracts with health care providers. The IDS agreement places the
entity in the position of bearing the risk, but as the contractor with the
Pennsylvania Department of Public Welfare (the state's regulatory agency for
HMOs), PhilCare is deemed responsible for compliance with all applicable rules
and regulations.
In 1998, the Company recorded a full impairment loss against its
investment in PhilCare based on its evaluation of the net recoverable value of
such investment. This resulted in bad debt expense of $2.1 million for the year
ended June 30, 1998. The Company's Board of Directors has determined to pursue
recouping the Company's investment in PhilCare. Toward that end, with the
support of all of PhilCare's stockholders, the Company has made a presentation
to the Pennsylvania Department of Public Welfare proposing that the Company take
over the operation of PhilCare on an interim basis to try to improve PhilCare's
financial condition and business prospects. There can be no assurance
whether the Department will approve such proposal or whether (or to what extent,
if any) the Company's interim operation of PhilCare would enhance the Company's
ability to recoup its investment in PhilCare.
Consistent with the Company's restructuring efforts, the Company ceased
all operational activities of UA-PA in fiscal 1998, except its rent obligations
for leased office spaces in Philadelphia which were substantially sublet. The
Company has reached an agreement with its landlord to assume the subleases and
release the Company from its lease obligations, effective September 9, 1999.
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ADVICA HEALTH MANAGEMENT. In March 1993, the Company reached an
agreement with New York-based HealthScope Administrative Services Corporation,
later known as HealthScope/United, Inc. ("HealthScope"), to form a health care
management company intended to gain access to one of the largest Medicaid
eligible populations in the United States. Pursuant to the agreement,
HealthScope became a wholly owned subsidiary of Advica Health Management
(formerly United/HealthScope, Inc.) ("Advica"), which was organized to engage in
development, consulting and contract management services for publicly funded
managed care programs in the metropolitan New York area.
In 1995, New York City officials announced a four-year initiative to
enroll over 1.7 million Medicaid recipients residing in New York City in managed
care plans. The staggered enrollment aspect of the program was necessitated by
an insufficient capacity to enroll all such recipients. This mandated initiative
began to be implemented in 1997. Advica management anticipates the phase-in
for its service areas in late 1999.
In May 1997, Advica's outstanding debt and preferred stock were
restructured to attract other investors. The Company converted its interest in
Advica, including loans, advances, accrued interest and the value of warrants
held by the Company, to one million shares of non-voting preferred stock of the
restructured Advica in the amount of $4.0 million, and a warrant to purchase
3,310 shares of Advica common stock, exercisable at any time at a nominal price,
representing approximately 3% of Advica's common shares on a fully diluted
basis. The conversion of the Company's loans to Advica into preferred stock was
treated as a "troubled debt restructuring" with the investment recorded at its
estimated fair value at the date of the restructuring. This resulted in bad debt
expense of $0.7 million for the year ended June 30, 1997 and, with $1.0 million
of bad debt expense in prior years, resulted in a net investment in Advica of
$2.3 million at June 30, 1997.
In fiscal 1998, based on Advica's adverse operating results, the
Company recognized a full impairment loss on such investment that resulted in
bad debt expense of $2.3 million for fiscal year 1998. Subsequently, in November
1998, the Company converted its preferred stock and warrant investment in Advica
to Advica common shares.
SELF-FUNDED BENEFIT PLAN
In 1993, the Company acquired CHF for approximately $16.2 million in
the form of cash, stock, a contingent note and the assumption of liabilities.
The contingent note was for $6.6 million and was earned out at both June 30,
1998 and June 30, 1997. CHF designed customized employee welfare plan
arrangements for self-funded employers and provided marketing, management and
administrative services to self-funded employers generally. Management believed
that its acquisition of CHF represented an opportunity to expand its traditional
business into the self-funded market that comprises a majority of the private
sector employers. A self-funded health benefit plan is one in which an employer
directly assumes the financial risk for its employees'
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health care costs by paying for employees' medical claims out of a separate fund
consisting of employee and/or employer contributions.
On September 8, 1998, CHFA, Inc., a corporation whose owners included
Louis J. Nicholas, the Chief Executive Officer of CHF and a former officer and
director of the Company, purchased all of the stock of CHF for $17.75 million,
comprised of $2.0 million in cash, a secured note for $13.25 million and an
unsecured note for $2.5 million. A regional investment banking firm issued a
fairness opinion supporting the reasonableness of the consideration to be
received by the Company for such sale. As required by the Company's line of
credit facility, the CHF sale was approved by the Company's bank lender and all
proceeds from the sale (including all payments on the two notes) were to be used
to reduce the Company's indebtedness to the bank.
The secured note was payable to the Company in four monthly
installments of $0.5 million each through December 1998 with the balance due in
January 1999, with options to extend the final payment to March 1999, plus
interest at the prime rate on short-term unsecured commercial borrowings. The
unsecured note was payable to the Company in two annual installments of $0.25
million with the balance due August 31, 2001, plus interest at 6% per annum.
In April 1999, the parties modified the secured note's payment terms,
extending its maturity date to August 31, 1999, requiring additional principal
and interest payments totaling $0.9 million to be paid over the extended period
and requiring an additional limited personal guarantee by Mr. Nicholas of $1.5
million of the principal of the secured note. Including payments on the secured
note, through June 30, 1999 the Company received $9.2 million of the CHF sale
price, plus $0.8 million of interest. On August 16, 1999, both notes were paid
in full with accrued interest, net of a $250,000 prepayment discount agreed to
by the Company. The final payment on the secured and unsecured notes was in the
aggregate amount of $8.5 million (including $0.1 million of interest earned
after June 30, 1999).
GOVERNMENT REGULATION
The Company is subject to extensive federal and state health care and
insurance regulations designed primarily to protect enrollees in the Managed
Plans, particularly with respect to government sponsored enrollees. Such
regulations govern many aspects of the Company's business affairs and typically
empower state agencies to review management agreements with health care plans
for, among other things, reasonableness of charges. Among the other areas
regulated by federal and state law are licensure requirements, premium rate
increases, new product offerings, procedures for quality assurance, enrollment
requirements, covered benefits, service area expansion, provider relationships
and the financial condition of the managed plans, including cash reserve
requirements and dividend restrictions. There can be no assurances that the
Company
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or its Managed Plans will be granted the necessary approvals for new products or
will maintain federal qualifications or state licensure.
The licensing and operation of OmniCare-MI and OmniCare-TN are governed
by the respective states' statutes and regulations applicable to health
maintenance organizations. The licenses are subject to denial, limitation,
suspension or revocation if there is a determination that the plans are
operating out of compliance with the states' HMO statutes, failing to provide
quality health services, establishing rates that are unfair or unreasonable,
failing to fulfill obligations under outstanding agreements or operating on an
unsound fiscal basis. Unlike OmniCare-MI, OmniCare-TN is not a
federally-qualified HMO and, therefore, is not subject to the federal HMO Act.
The County Care plan is governed by the Company's contract with Urban Hospital
Care Plus.
Federal and state regulation of health care plans and managed care
products is subject to frequent change, varies from jurisdiction to jurisdiction
and generally gives responsible administrative agencies broad discretion. Laws
and regulations relating to the Company's business are subject to amendment
and/or interpretation in each jurisdiction. In particular, legislation mandating
managed care for Medicaid recipients is often subject to change and may not
initially be accompanied by administrative rules and guidelines. Changes in
federal or state governmental regulation could affect the Company's operations,
profitability and business prospects. Currently OmniCare-MI is in active
discussions with state regulators regarding compliance with certain regulatory
issues. See "Managed Plan Operated By the Company" under "Managed Plans" above
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." While the Company is unable to
predict what additional government regulations, if any, affecting its business
may be enacted in the future or how existing or future regulations may be
interpreted, regulatory revisions may have a material adverse effect on the
Company.
INSURANCE
The Company presently carries comprehensive general liability,
directors and officers liability, property, business automobile, and workers'
compensation insurance. Management believes that coverage levels under these
policies are adequate in view of the risks associated with the Company's
business. In addition, the Managed Plans have professional liability insurance
that covers liability claims arising from medical malpractice. The individual
Managed Plans are required to pay the insurance premiums under the terms of the
respective management agreements. There can be no assurance as to the future
availability or cost of such insurance, or that the Company's business risks
will be maintained within the limits of such insurance coverage.
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COMPETITION
The managed care industry is highly competitive. The Company directly
competes with other entities that provide health care plan management services,
some of which are nonprofit corporations and others which have significantly
greater financial and administrative resources. The Company primarily competes
on the basis of fee arrangements, cost effectiveness and the range and quality
of services offered to prospective health care clients. While the Company
believes that its experience gives it certain competitive advantages over
existing and potential new competitors, there can be no assurance that the
Company will be able to compete effectively in the future.
The Company competes with other HMOs, PPOs and insurance companies. The
level of this competition may affect, among other things, the operating revenues
of the Managed Plans and, therefore, the revenues of the Company. The
predominant competitors in southeastern Michigan are Blue Cross Blue Shield of
Michigan, The Wellness Plan, Total Health Plan and Health Alliance Plan. The
predominant competitors in central and southwestern Tennessee are Access-Med
Plus and Blue Cross Blue Shield. The Company's Managed Plans primarily compete
on the basis of enrollee premiums, covered benefits, provider networks,
utilization limitations, enrollee co-payments and other related plan features
and criteria. Management believes that the Company's existing clients are able
to compete effectively with their primary market competitors in these areas.
EMPLOYEES
The Company's ability to maintain its competitive position and expand
its business into new markets depends, in significant part, upon the maintenance
of its relationships with various existing senior officers, as well as its
ability to attract and retain qualified health care management professionals.
Although the Company has an employment agreement with its current Chief
Executive Officer, it neither has nor intends to pursue employment agreements
with all of its key personnel. Accordingly, there is no assurance that the
Company will be able to maintain such relationships or attract such
professionals.
The total number of employees at September 1, 1999 was 286 compared to
214 at September 1, 1998. The Company's employees do not belong to a collective
bargaining unit and management considers its relations with employees to be
good.
MANAGEMENT INFORMATION SYSTEMS
Management believes that timely and relevant information is critical to
a managed care operation and utilizes its management information system ("MIS")
to process claims; analyze health care utilization; support provider, member and
employer requirements; and control administrative costs. The Company previously
initiated an MIS implementation plan intended to
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enhance its operations, reduce costs and improve customer service with the
development of a proprietary client/server information system, along with
complementary automation products including claims scanning, claims imaging,
electronic data interchange and various select technologies for enterprise-wide
installation. More recently, rather than filling its vacant Senior Director of
Management Information Systems position, the Company has engaged an experienced
systems consulting firm to direct the Company's MIS operations. Assisted by such
consultant, management is currently reassessing its MIS requirements and
developing a comprehensive MIS strategy for the Company.
YEAR 2000
The Company has developed and implemented a Year 2000 strategic plan to
address issues related to the potential impact of the Year 2000 on its
computerized systems and equipment. The plan addressed systems modification
requirements in the following primary areas: information systems, facilities,
payors and suppliers. The Company presently believes that with modifications to
software and hardware, the Year 2000 issue will not pose material problems for
the Company's own systems and equipment. The Company estimates that over 90% of
such modifications and conversions have been made to date. Management
anticipates that the remaining modifications and conversions will be completed
by October 4, 1999 and that the Company's primary computerized information
systems will be Year 2000 compliant by that date. However, if such modifications
are not made or are not completed timely, the Year 2000 issue could have a
material adverse impact on the Company's consolidated financial position.
Furthermore, the Company has initiated formal communications through
its Year 2000 "Readiness Disclosure Statement" with its significant suppliers
and large payors to determine the extent to which the Company may be vulnerable
to those third parties' failure to remediate their Year 2000 issues.
However, there can be no assurance that the systems of other companies on which
the Company relies will be timely converted, and the Company may be adversely
affected by the failure of a significant third party to become Year 2000
compliant.
The Company also has in process a Year 2000 contingency plan for
critical computerized information systems to mitigate potential delays or other
problems associated with such modifications or conversions deemed necessary by
management. The Company continues to bear some risk related to the Year 2000
issue due to its voluntary interaction with other entities not affiliated with
the Company (e.g., vendors and customers) who must address their own Year 2000
issues. The contingency plan is being implemented. For this reason, the Company
has been monitoring the Year 2000 issues of certain critical third parties with
which it interacts. The Company has asked such third parties to demonstrate, or
give some indication as to, their ability to become Year 2000 compliant. With
respect to any third party who appears unlikely to remedy its Year 2000 issues,
the Company intends to take appropriate steps to mitigate the exposure to the
risk posed by such third party's failure to timely address its Year 2000 issues.
However, due to the uncertainty inherent in both the Year 2000 problem and the
efforts of third parties to timely resolve their own Year 2000 issues, there can
be no assurances the Company's mitigation efforts will be successful or that the
failure of any third party or the Company to timely resolve its Year 2000 issues
will not have a material adverse impact on the Company's operations, operating
results or financial position.
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Both internal and external resources were utilized in the Company's
efforts to become Year 2000 compliant. During the year ended June 30, 1999, $0.8
million of costs were incurred by the Company in connection with its efforts to
become Year 2000 compliant. The total costs of the Company's efforts to become
Year 2000 compliant are not expected to exceed $1.6 million, of which
approximately 60% represents capital costs. Costs related to software
modifications have been, and will continue to be, expensed as incurred.
The costs expected to be incurred in connection with the Company's
efforts to become Year 2000 compliant, as well as the date by which the Company
is expected to be Year 2000 compliant, are based on management's best estimates.
Because such estimates were derived utilizing numerous assumptions as to future
events (including the availability of certain resources, third party
modifications and other factors), there can be no assurance that these estimates
will be achieved and such actual costs and date could differ materially from
those currently expected. Specific factors that might cause material differences
include, but are not limited to, the availability and costs of personnel trained
in this area, the ability to locate and correct all relevant computer codes and
similar uncertainties.
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-K annual report, including, without
limitation, statements containing the words "believes", "anticipates", "will",
"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 of OmniCare-MI to remain as a viable entity.
2. Inability to increase premium rates commensurate with increases in
medical costs due to utilization, government regulation, or other
factors.
3. Discontinuation of, limitations upon, or restructuring of
government-funded programs, including but not limited to the
TennCare program.
4. Increases in medical costs, including increases in utilization and
costs of medical
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services and the effects of actions by competitors or groups
of providers.
5. Adverse state and federal legislation and initiatives, including
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. The shift of employers from insured to self-funded coverage, resulting
in reduced operating margins to the Company.
7. Failure to obtain new customer bases or retain existing customer bases
or reductions in work force by existing customers; and failure to
sustain commercial enrollment to maintain an enrollment mix required by
government programs.
8. Termination of the OmniCare-MI management agreement.
9. Increased competition between current organizations, the entrance of new
competitors and the introduction of new products by new and existing
competitors.
10. Adverse publicity and media coverage.
11. Inability to carry out marketing and sales plans.
12. Loss or retirement of key executives.
13. Termination of provider contracts or renegotiations at less cost-
effective rates or terms of payment.
14. The selection by employers and individuals of higher co-payment/
deductible/coinsurance plans with relatively lower premiums or margins.
15. Adverse regulatory determinations resulting in loss or limitations of
licensure, certification or contracts with governmental payors.
16. Higher sales, administrative or general expenses occasioned by the need
for additional advertising, marketing, administrative or MIS
expenditures.
17. Increases by regulatory authorities of minimum capital, reserve and
other financial solvency requirements.
18. Denial of accreditation by quality accrediting agencies, e.g., the
National Committee for Quality Assurance (NCQA).
19. Adverse results from significant litigation matters.
20. Adverse impact from Year 2000 issues.
21. Inability to maintain continued New York Stock Exchange listing.
22. Inability to renegotiate bank loan agreement.
ITEM 2. PROPERTIES
The Company currently leases approximately 86,000 aggregate square feet from
which it conducts its operations in Michigan and Tennessee. The principal
offices of the Company are located at 1155 Brewery Park Boulevard, Suite 200,
Detroit, Michigan, where it currently leases approximately 54,000 square feet of
office space.
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The Company believes that its current facilities provide sufficient
space suitable for all of the Company's planned activities and that sufficient
additional space will be available on reasonable terms, if needed.
ITEM 3. LEGAL PROCEEDINGS
On February 26, 1998, pursuant to a Stipulation and Consent to
Appointment of Receiver and Order of Liquidation earlier signed and delivered to
the FDOI by the Company, UltraMedix and UA-FL, upon the FDOI's petition, the
Circuit Court of the Second Judicial Circuit, in and for Leon County, Florida
(the "Florida court") entered a consent order declaring UltraMedix and UA-FL
(the "Organizations") insolvent and appointing the FDOI as Receiver for the
purposes of their liquidation.
On March 3, 1998, the Florida court entered a Consent Order of
Liquidation, Injunction and Notice of Stay, declaring that any further efforts
of the Receiver to rehabilitate the Organizations would be useless, ordering the
Receiver to take possession of and liquidate all assets of the Organizations,
and ordering the immediate cancellation of UltraMedix's authority to provide
health services as an HMO in Florida. On April 15, 1998, the Florida Agency for
Health Care Administration notified the Company of the Agency's intent to
enforce the Company's Guarantee Agreement, under which the Company had agreed to
reimburse UltraMedix's contracted Medicaid providers for authorized, covered
Medicaid services rendered to covered Medicaid enrollees, for which the Agency
had made payment on behalf of such enrollees, limited to an amount equal to the
amount of surplus UltraMedix would have been required to maintain under the
Medicaid contract in the absence of such Guarantee Agreement.
A demand for arbitration was filed on December 1, 1998 with the
American Arbitration Association, entitled SunTel Services, Inc. v. United
American Healthcare Corporation. The claimant sought approximately $414,000 from
the Company for alleged breach of a lease agreement for telecommunications
equipment and related services. The Company, which had returned the leased
equipment from business locations it had closed, asserted a counterclaim. In
April 1999, the parties reached a settlement agreement and the arbitration
proceeding was dismissed in exchange for the Company's payment to the claimant
of $120,000 in cash and issuance to the claimant on April 14, 1999 of 67,369 new
shares of common stock of the Company valued at $80,000.
A demand for arbitration was filed on May 20, 1999 with the American
Arbitration Association by Ronald R. Dobbins, who had been President and Chief
Operating Officer of the Company until May 1998. The claimant seeks termination
benefits of approximately $650,000. No date has been set for the arbitration
hearing. The Company intends to vigorously defend this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The shares of the Company's Common Stock are traded on the New York
Stock Exchange under the symbol "UAH." The table below sets forth the range of
the highest and lowest sales prices for the past two fiscal years, as reported
by the Exchange.
1998 SALES PRICE 1999 SALES PRICE
------------------------------------- -------------------------------------
FISCAL QUARTER HIGH LOW HIGH LOW
--------------------------- ------------------------------------- -------------------------------------
First 7 7/8 5 1/16 2 5/16 1 1/8
Second 5 10/16 1 9/16 1 15/16 1
Third 2 14/16 1 11/16 1 7/16 1 1/16
Fourth 2 3/4 1 15/16 3/4
As of September 17, 1999, the closing price of the Common Stock on the
NYSE was $1.0625 per share and there were approximately 263 shareholders of
record of the Company.
The Company has not paid any cash dividends on its Common Stock since
its initial public offering in the fourth quarter of fiscal 1991 and does not
anticipate paying such dividends in the foreseeable future. The Company intends
to retain earnings for use in the operation and expansion of its business.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the periods indicated:
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
(in thousands, except per share data)
OPERATING DATA (YEAR ENDED JUNE 30):
Operating revenues $93,522 $ 105,588 $112,549 $92,379 $59,790
Earnings (loss) from continuing operations $ 575 $ (22,915) $ (5,260) $(3,657) $ 6,229
Discontinued operation, net of income taxes $ -- $ (2,581) $ 1,845 $ 909 $ 367
Net earnings (loss) $ 575 $ (25,496) $ (3,415) $(2,748) $ 6,596
Earnings (loss) per common share from continuing
operations $ 0.09 $ (3.48) $ (0.80) $ (0.56) $ 0.95
Net earnings (loss) per common share $ 0.09 $ (3.88) $ (0.52) $ (0.42) $ 1.01
Weighted average common shares outstanding -
diluted 6,764 6,578 6,553 6,561 6,561
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1999 1998 1997 1996 1995
-------------------------------------------------------------------------
(in thousands, except per share data)
BALANCE SHEET DATA (JUNE 30):
Cash and investments $18,576 $14,690 $17,442 $30,930 $17,537
Intangible assets, net 4,374 5,629 10,557 11,546 --
Net assets of discontinued operation -- 16,703 19,746 14,703 10,542
Total assets 49,251 58,684 79,662 93,239 57,614
Medical claims and benefits payable 19,810 20,004 11,632 25,678 --
Debt 13,112 22,444 23,868 21,654 10,474
Shareholders' equity 10,360 9,081 34,406 37,822 40,508
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company continues to implement the restructuring plan initiated in
fiscal 1998, which during fiscal 1999 has included changes in senior management,
sale of CHF, renegotiation of the bank credit facility, settlement of legal
proceedings and continued efforts to achieve further cost reductions and
maintain Company revenue.
In August 1998, the then Chief Executive Officer of the Company retired
and the Board of Directors elected Gregory H. Moses, Jr. as the new Chief
Executive Officer of the Company, and the Company's Corporate Controller became
its new Treasurer and Interim Chief Financial Officer.
In September 1998, effective as of August 31, 1998, CHF was sold for
$17.75 million, comprised of $2.0 million in cash and the buyer's secured and
unsecured notes for $13.25 million and $2.5 million, respectively. Including
payments on the secured note, $9.2 million of the sales price plus $0.8 million
of interest in cash was received through June 30, 1999. On August 16, 1999, the
Company was paid $8.5 million, the remaining principal balance of the secured
and unsecured notes and accrued interest thereon, net of a $250,000 discount
granted as an inducement for the buyer to prepay both notes. As required by the
Company's line of credit facility, the sale was approved by the bank and all
proceeds were used to reduce the Company's indebtedness to the bank.
In September 1998, the Company and its bank lender amended the
Company's loan agreement and promissory note to: (i) decrease the principal
amount to $20.94 million and (ii) require reductions in the outstanding balance
owed to the bank at scheduled future dates, including the permanent reduction of
the outstanding balance to the lesser of the then outstanding principal balance
or $8.0 million by April 15, 1999.
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In May 1999, the Company and its bank lender amended the Company's loan
agreement and promissory note requiring the Company to: (i) decrease the
principal sum to $16.6 million by September 1, 1999, (ii) permanently reduce the
bank's commitment to the lesser of the then outstanding principal balance or
$16.6 million by September 1, 1999, (iii) meet with the lender to establish
financial covenants for minimum net worth, debt service coverage ratio and
maximum debt to worth ratio prior to September 1, 1999, and (iv) obtain or
arrange for the return or cancellation of the existing $0.5 million letter of
credit provided by the Company on behalf of its wholly owned subsidiary, UA-LA
and its wholly owned subsidiary, OmniCare Health Plan of Louisiana, Inc., by
June 30, 1999. The bank subsequently granted the Company a waiver on items
(iii) and (iv) above, extending the date to October 1, 1999. The maturity date
of the line of credit is October 1, 1999. The bank and the Company have agreed
to negotiate the restructuring of the loan agreement and promissory note within
the next 90 days, and the bank has agreed to extend the maturity date during
this period.
Certain former senior officers and the Company were named defendants in
two shareholder lawsuits filed in the United States District Court for the
Eastern District of Michigan in August 1995. The court consolidated these
lawsuits into a single action. The consolidated action alleged that certain
senior officers and the Company issued reports and statements that violated
federal securities laws. The Company and the officers contended that all
material facts were disclosed during the period in question and that certain
material facts alleged not to have been disclosed were already available in the
financial marketplace. Nevertheless, management concluded that continued defense
of the litigation could have an adverse impact on the Company's financial
position. Continuation of this litigation would have also diverted management's
focus from operations. Based on these facts, management pursued settlement with
the plaintiffs.
On September 14, 1998, the parties agreed to a proposed settlement
requiring the release of all claims and damages sought by the plaintiffs in
exchange for (a) $2.0 million in cash from the Company's insurance carrier, (b)
a $625,000 promissory note of the Company payable in 15 equal monthly
installments beginning 13 months after entry of a final court order approving
the settlement, with interest at 4% per annum from the date of such order, and
(c) newly issued shares of common stock of the Company with an aggregate value
of $625,000 based on a share price equal to the greater of (i) the average
closing price of the Company's common stock for the period from July 20, 1998
through the third trading day preceding the court hearing on approval of the
settlement or (ii) $2.25.
In December 1998, final judgment was entered approving the Company's
shareholder lawsuit settlement and dismissing the action. Pursuant thereto, all
claims and damages sought by the plaintiffs were released in exchange for $2.0
million in cash from the Company's insurance carrier, a $625,000 promissory note
from the Company payable in 15 equal monthly installments beginning January 3,
2000, with interest at 4% per annum from December 11, 1998, and 277,777 new
shares of common stock of the Company valued at $625,000 and issued on March 29,
1999.
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A demand for arbitration was filed on December 1, 1998 against the
Company, seeking approximately $414,000 for alleged breach of a lease agreement
for telecommunications equipment and related services. In April 1999, the
parties reached a settlement agreement and the arbitration proceeding was
dismissed in exchange for the Company's paying the claimant $120,000 in cash and
issuing to the claimant 67,369 new shares of common stock of the Company valued
at $80,000.
Effective April 1, 1999, the Company entered into the County Care
contract to arrange for the delivery of health care services, including the
assumption of underwriting risk, on a capitated basis to certain enrollees
residing in Wayne County (Michigan) who lack access to private or employer
sponsored health insurance or to another government health plan. The initial
contract period was for six months, with automatic renewal for successive
periods of one year unless terminated by either party as provided in the
contract. It is known at this time that such renewal will occur for the first
successive one-year period beginning October 1, 1999. Although Company
management does not expect significant net earnings directly from the County
Care contract, management believes that entering into this contract is
consistent with the Company's strategic objective of expanding the client base
and achieving size sufficient to enable the Company to negotiate better rates,
save on administrative costs and build profits.
The Company has implemented the corrective action plan developed for
OmniCare Health Plan ("OmniCare-MI"), a plan operated by the Company in
Michigan. The corrective action plan included the reduction of medical costs
through renegotiation of hospital and provider contracts, a reduction in the
management fee percentage paid to the Company from 17% to 14% effective June 1,
1998 and a commitment to ensure OmniCare-MI meets its minimum statutory
requirements for net worth and working capital. In June 1998, the Company funded
a $4.6 million unsecured loan to OmniCare-MI, evidenced by a surplus note, to
enable OmniCare-MI to meet its minimum requirements for net worth and working
capital. Pursuant to the surplus note, interest and principal repayments are
subject to approval by the Michigan Insurance Bureau and are payable only out of
the statutory surplus earnings of OmniCare-MI. The interest is payable annually,
at prime, and if not paid is forfeited. Interest of $0.4 million was forfeited
for fiscal 1999. The principal has no stated maturity or repayment date. In
addition, in fiscal 1999 the Company provided additional funding by forgiving
$1.3 million in management fees owed by OmniCare-MI, to enable OmniCare-MI to
meet its statutory requirements for net worth and working capital.
OmniCare-MI recognized earnings of $0.6 million for the six months
ended June 30, 1999, compared to a loss of $9.5 million for the six months ended
June 30, 1998, a favorable change of $10.1 million. The change was due primarily
to renegotiated hospital provider contracts and the 3% reduction in the
management fee percentage. The stabilization efforts related to OmniCare-MI
continue, including pursuing joint ventures and other similar activities. The
management fee percentage reduction decreased the Company's management fee
revenues for fiscal 1999 by approximately $4.2 million.
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In January 1999, the Company announced that OmniCare-MI had joined with
Blue Cross Blue Shield of Michigan (the "CasinoCare Venture") in proposals to
provide health care, dental and prescription drug benefits to employees of the
three planned casinos that are to bring casino gaming to Detroit. Two of the
casinos have selected the CasinoCare Venture to provide health care coverage to
their employees. Both casinos are building temporary facilities, currently
expected to open within the next five months. The Company estimates that over
the next several months approximately 3,000 employees (amounting to more than
7,000 members) will require health coverage and could generate medical premiums
of up to $0.9 million monthly ($11.2 million annually). The casinos' temporary
facilities are expected to be replaced by permanent riverfront facilities in
Detroit by 2002; and based upon the casinos' estimates, up to 8,000 employees
(amounting to more than 18,000 members) will require health coverage and could
generate medical premiums of up to $2.3 million monthly ($28.0 million
annually). The Company would receive a management fee based on the medical
premiums generated from those members who select the Company's products.
The Company's common stock is listed on the New York Stock Exchange,
Inc. ("Exchange"). In 1998, the Exchange and the Company had communications
about the Company not meeting applicable listing standards, and the Company
consequently presented to the Exchange a definitive action plan for meeting
those standards within a reasonable period. In February 1999, the Exchange
notified the Company that, based on its review of the plan submitted by the
Company, the Exchange would continue the listing of the Company currently and
would review the Company's continued listing on a quarterly basis for compliance
with the plan submitted. In July 1999, the Exchange notified the Company of new
continued listing requirements and requested the Company to submit a revised
definitive action plan to demonstrate how the Company would meet the new
requirements over a 12-month period. The Company submitted its plan in September
1999. There can be no assurance as to the Company's continued listing on the
Exchange.
On May 6, 1999, the Company's Board of Directors authorized the
repurchase by the Company of up to 250,000 of the Company's common shares
(approximately 3.6% of the total outstanding common shares) in the open market.
At June 30, 1999, 12,900 shares had been repurchased by the Company, and the
additional 237,100 shares were repurchased in July 1999.
The Company's results of operations for fiscal 1999 have also been
impacted by the cost reductions implemented in fiscal 1998, including an
approximate 35% workforce reduction at the Company's corporate and Tennessee
operations, and the cessation of operations in Florida, Louisiana and
Pennsylvania. Payroll expenses at the corporate and Tennessee operations
decreased approximately $5.1 million for the year ended June 30, 1999, compared
to the same period one year earlier.
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Earnings from continuing operations before income taxes for the year
ended June 30, 1999 were $1.1 million compared to losses of $27.4 million for
fiscal 1998. The $28.5 million change from fiscal 1998 is due primarily to
corporate expense reductions of $12.5 million, increased earnings before income
taxes from the Company's Tennessee operations of $3.7 million and the end of
losses related to the Company's Florida operations of $11.7 million.
The Company's cash position was significantly improved with receipts
during the year ended June 30, 1999, of a federal income tax refund of
approximately $5.5 million, $4.0 million related to adverse selection
settlements (as explained below) and the net recovery of $0.5 million in
refundable advances made to a third party administrator.
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
Total revenues decreased $12.1 million (11%), from $105.6 million in
the year ended June 30, 1998 to $93.5 million in the year ended June 30, 1999.
Medical premium revenues were $73.2 million in the year ended June 30,
1999, a decrease of $5.4 million (7%) from medical premium revenues of $78.6
million in the year ended June 30, 1998. Medical premiums for OmniCare Health
Plan, Inc. in Tennessee ("OmniCare-TN"), a managed care organization owned 75%
by the Company, increased $7.4 million (12%), from $63.5 million in the year
ended June 30, 1998 to $70.9 million in the year ended June 30, 1999.
The State of Tennessee's TennCare Bureau provides settlement payments
to managed care organizations for high cost chronic conditions of their members
("adverse selection") and new medical technologies. OmniCare-TN received $5.9
million in adverse selection payments in the year ended June 30, 1999, of which
$1.8 million, $3.1 million and $1.0 million represented the service periods for
July 1998 to March 1999, July 1997 to June 1998 and June 1997 and prior,
respectively. Additionally, in fiscal 1999 OmniCare-TN recognized a one-time
adverse settlement adjustment of $1.2 million. For the year ended June 30, 1999,
OmniCare-TN medical premiums related to excess adverse selection payments, which
had been based on the State of Tennessee's estimate, increased by $4.0 million
(364%), from $1.1 million for fiscal 1998 to $5.1 million for fiscal 1999. The
OmniCare-TN per member per month ("PMPM") premium rate -- based on an average
membership of 45,000 for the year ended June 30, 1999 compared to 44,000 for the
year ended June 30, 1998 -- was $122 for the year ended June 30, 1999, compared
to $119 for the year ended June 30, 1998 (excluding excess adverse selection
payments), an increase of 2% or $3.4 million. The 4% increase in member months
accounted for $1.8 million of the OmniCare-TN increase.
Premium revenues from the County Care program which began in April 1999
totaled $2.3 million in fiscal 1999.
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UltraMedix Healthcare Systems, Inc. ("UltraMedix"), a Florida HMO
51%-owned by the Company, which ceased operations and was placed in liquidation
in March 1998, did not contribute any medical premium revenues in the year ended
June 30, 1999. Medical premium revenues from UltraMedix were $15.1 million in
the year ended June 30, 1998.
Management fees were $18.1 million in the year ended June 30, 1999, a
decrease of $6.9 million (28%) from fees of $25.0 million in the year ended June
30, 1998, and represent management fees earned from OmniCare-MI. The decrease is
due to the following: (i) reduction in the management fee percentage in June
1998 from 17% to 14%, which resulted in a decrease of $4.2 million; (ii) a
decrease in operating revenues of OmniCare-MI in fiscal 1999 due primarily to an
enrollment decrease of 6%, which resulted in a net decrease in management fees
of $1.6 million; and (iii) forgiveness of management fee revenues from
OmniCare-MI of $1.3 million.
Total expenses before income taxes from continuing operations totaled
$92.4 million in the year ended June 30, 1999, compared to $132.9 million in the
year ended June 30, 1998, a decrease of $40.5 million (30%).
Medical service expenses were $59.9 million in the year ended June 30,
1999, a decrease of $10.4 million (15%) from medical service expenses of $70.3
million in the year ended June 30, 1998. Medical service expenses for
OmniCare-TN increased $4.8 million (9%), from $53.0 million in the year ended
June 30, 1998 to $57.8 million in the year ended June 30, 1999. The percentage
of medical service expenses to medical premium revenues -- the medical loss
ratio ("MLR") -- was 82% for the year ended June 30, 1999 and 83% for the year
ended June 30, 1998 for OmniCare-TN. The fiscal 1999 OmniCare-TN MLR includes an
approximate 3% reduction due to offsets to medical service expenses related to
the net recovery of $0.5 million in refundable advances made to a third party
dental administrator and an excess adverse selection payment of $1.0 million for
the period June 1997 and prior.
Medical service expenses for County Care in fiscal 1999 were $2.1
million from inception of the contract in April 1999. The MLR for County Care is
estimated at 92%, a rate management believes is adequate to establish reserves
sufficient to cover anticipated program medical expenses.
UltraMedix, which ceased operations in March 1998, did not incur any
medical service expenses in the year ended June 30, 1999. Medical service
expenses for UltraMedix were $17.3 million in the year ended June 30, 1998.
Marketing, general and administrative expenses (MG&A) decreased $17.0
million (38%), from $44.3 million in the year ended June 30, 1998 to $27.3
million in the year ended June 30, 1999, due to the following corporate and
Tennessee activities: (i) employee downsizing in fiscal 1998 and early fiscal
1999 which significantly contributed to the decrease in salary expense of $5.1
million; (ii) expensing of $1.0 million of deferred HMO licensure-related costs
in Louisiana and Pennsylvania in fiscal 1998; (iii) a decrease in professional
service fees of $2.0 million related primarily to the fiscal
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1998 financial restructuring program; (iv) a decrease in promotion and
advertising expense of $2.6 million; and (v) a decrease of approximately $6.0
million related to UltraMedix and United American of Florida, Inc., the
Company's 80%-owned subsidiary, which ceased operations and were placed in
liquidation in March 1998.
Depreciation and amortization decreased $6.3 million (65%), from $9.7
million for the year ended June 30, 1998 to $3.4 million for fiscal 1999. Of the
decrease, $4.1 million is attributable to the write-off in fiscal 1998 of the
remaining intangibles related to the Company's purchase of UltraMedix due to the
liquidation of the Florida operation, $0.8 million related to the write-off or
revaluation of obsolete and other property and equipment in fiscal 1998 and $1.4
million is attributable to fully depreciated assets.
As a result of the foregoing, the Company recognized earnings from
continuing operations before income taxes of $1.1 million for the year ended
June 30, 1999, compared to a loss from continuing operations before income taxes
of $27.3 million for the year ended June 30, 1998, a $28.2 million change. Net
earnings from continuing operations were $0.6 million for the year ended June
30, 1999, compared to a net loss from continuing operations of $22.9 million for
the year ended June 30, 1998, a change of $23.5 million.
The discontinued operation contributed no earnings or loss for the year
ended June 30, 1999, compared to a net loss of $2.6 million for the year ended
June 30, 1998.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
Total revenues from continuing operations decreased $6.9 million
(6%), from $112.5 million in fiscal 1997 to $105.6 million in fiscal 1998.
Medical premium revenues were $78.6 million in fiscal 1998, an increase
of $8.2 million (12%) over medical premium revenues of $70.4 million in fiscal
1997. Medical premiums for OmniCare-TN increased $7.0 million (12%), from $56.5
million in fiscal 1997 to $63.5 million in fiscal 1998. Of the increase, $1.1
million relates to the TennCare Bureau's 1998 annual settlement to managed care
organizations for high cost chronic conditions of their members ("adverse
selection") and new medical technologies. The remaining OmniCare-TN increase of
$5.9 million is due to rate and enrollment increases. The OmniCare-TN per member
per month ("PMPM") premium rate -- based on an average membership of 44,000 for
the year ended June 30, 1998 compared to 43,000 for the prior fiscal year -- was
$119 in fiscal 1998, compared to $110 in fiscal 1997 (excluding excess adverse
selection payments), an increase of 8% or $4.7 million. The rate increase
included changes in the enrollment mix. A 2% increase in enrollment accounted
for the remaining $1.2 million increase.
Medical premiums for UltraMedix increased $1.2 million (9%), from $13.9
million in fiscal 1997 to $15.1 million in fiscal 1998.
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Management fees were $25.0 million in fiscal 1998, a decrease of $15.0
million (38%) from fees of $40.0 million in fiscal 1997. The operating revenues
of OmniCare-MI decreased in fiscal 1998 due primarily to a net decrease in
premium and enrollment rates of approximately 10% and 2%, respectively, which
contributed to the decrease in management fees to the Company of approximately
$4.2 million. The State Medicaid initiative in Michigan was the primary factor
in the reduced premium rates. Additionally, the reduction in the management fee
percentage in June 1998 resulted in a decrease of management fees of $0.4
million in fiscal 1998. The Company recognized a decrease in management fee
revenues of $10.4 million from fiscal 1997 to fiscal 1998, related to the
Personal Physician Care, Inc. ("PPC," an Ohio HMO) management agreement, which
was terminated in May 1997.
Total expenses before income taxes from continuing operations totaled
$132.9 million in fiscal 1998, compared to $119.0 million in fiscal 1997, an
increase of $13.9 million (12%).
Medical service expenses were $70.3 million in fiscal 1998, an increase
of $12.5 million (22%) over medical service expenses of $57.8 million in fiscal
1997. Medical service expenses for OmniCare-TN increased by $7.6 million (17%),
from $45.4 million in fiscal 1997 to $53.0 million in fiscal 1998. Medical
service expenses for UltraMedix increased $4.9 million (40%), from $12.4 million
in fiscal 1997 to $17.3 million in fiscal 1998. The percentage of medical
service expenses to medical premium revenues, or the medical loss ratio ("MLR"),
was 83% and 80% for OmniCare-TN in fiscal 1998 and 1997, respectively, and 115%
and 88% for UltraMedix in fiscal 1998 and 1997, respectively.
Marketing, general and administrative expenses ("MG&A") decreased $8.5
million (16%), from $52.8 million in fiscal 1997 to $44.3 million in fiscal
1998, due to the following: (i) termination of the PPC management agreement,
which resulted in a $9.1 million decrease; (ii) an increase in professional fees
of $4.6 million, related primarily to the financial restructuring program of
$3.0 million, expensing deferred HMO licensure-related cost in Louisiana and
Pennsylvania of $1.0 million and information system development and maintenance
of $0.6 million; (iii) a $2.3 million loss related to the liquidation of the
assets and certain liabilities of the Florida operations; (iv) a $1.3 million
decrease in occupancy-related cost, of which $0.6 million related to the
renegotiation of the Company's corporate office lease space which reduced
accrued rent; and (v) decreases in salary costs of $3.0 million, promotional and
advertising activities of $0.9 million, consumables of $0.5 million and travel
of $0.6 million.
Depreciation and amortization in fiscal 1998 was $9.7 million, compared
to $4.1 million in fiscal 1997, an increase of $5.6 million (137%). Of this
increase, $3.5 million was due to the write-off of the remaining goodwill
related to the Company's purchase of UltraMedix due to the liquidation order as
to UltraMedix in fiscal 1998. Additional increases included $0.3 million due to
the change in estimate of the remaining useful life of the Company's managed
care software and the write-off of certain property and equipment of
approximately $0.8 million.
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Bad debt expense increased $5.0 million (278%), from $1.8 million in
fiscal 1997 to $6.8 million in fiscal 1998. The increase related to impairment
losses established on certain of the Company's investments and the surplus note
receivable.
As a result of the foregoing, the Company recognized a loss from
continuing operations, before income taxes, of $27.4 million for fiscal 1998,
compared to a loss from continuing operations, before income taxes, of $6.5
million for fiscal 1997, a $20.9 million change. The loss from continuing
operations, net of income taxes, was $22.9 million for fiscal 1998, compared to
a loss from continuing operations, net of income taxes, of $5.3 million for
fiscal 1997, a change of $17.6 million. The federal statutory tax rate for
continuing operations for both periods was approximately 34%. Goodwill
amortization related to equity investments, the write-off of capital investments
not deductible for tax purposes and state income taxes resulted in an effective
tax rate of approximately 16% for fiscal 1998 compared to 19% for the prior
fiscal year.
The loss from discontinued operation, net of income taxes, was $2.6
million for fiscal 1998, compared to earnings of $1.9 million for fiscal 1997, a
change of $4.5 million. This is due primarily to increased contract servicing
costs and the reduction in the net carrying value of net assets to the net
realizable value of $2.5 million.
The net loss for fiscal 1998 was $25.5 million, or $3.88 per share,
compared to a net loss of $3.4 million, or $0.52 per share, for fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had (i) cash and cash equivalents and
short-term marketable securities of $18.6 million, compared to $14.7 million at
June 30, 1998; (ii) negative working capital of $1.7 million, compared to
negative working capital of $14.1 million at June 30, 1998; and (iii) a current
assets-to-current liabilities ratio of .96-to-1, compared to .64-to-1 at June
30, 1998. The principal sources of funds for the Company during the year ended
June 30, 1999 were $6.2 million provided from net operating activities,
including a federal income tax refund of $5.5 million, cash proceeds and
payments received on the secured note from the sale of CHF of $9.2 million and
proceeds from the sale of property and equipment of $0.1 million -- offset by
discontinued operations of $1.0 million, $10.0 million to repay bank debt and
the purchase of property and equipment of $0.7 million.
The stock of CHF was sold on September 8, 1998, effective as of August
31, 1998, for $17.75 million, comprised of $2.0 million in cash and the buyer's
secured and unsecured notes for $13.25 million and $2.5 million, respectively.
The secured note was payable to the Company in four monthly installments of $0.5
million each through December 1998 with the balance due in January 1999, with
options to extend the final payment to March 1999, plus interest at the prime
rate on short-term unsecured commercial borrowings. The unsecured note was
payable to the
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Company in two annual installments of $0.25 million with the balance due August
31, 2001, plus interest at 6% per annum. As required by the Company's line of
credit facility, the sale was approved by the bank and all proceeds from the
sale (including all payments on the two notes) were to be used to reduce the
Company's indebtedness to the bank.
In April 1999, the parties agreed to modify the secured note payment
terms, extending its maturity date to August 31, 1999, requiring additional
principal and interest payments totaling $0.9 million to be paid over the
extended period and requiring an additional limited personal guarantee by a
principal of the buyer for $1.5 million of the principal of the secured note. In
June 1999, as an inducement for the buyer to prepay both notes, the Company
agreed to a discount of $250,000 if by mid-August 1999 the buyer would pay to
the Company the balances of the secured and unsecured notes plus accrued and
unpaid interest.
Including payments on the secured note, $9.2 million of the sales
price, plus $0.8 million of interest, in cash was received through June 30,
1999. The remaining principal balance on the secured and unsecured notes and
accrued interest, net of the discount, in the sum of $8.5 million (including
$0.1 million of interest earned after June 30, 1999) was paid to the Company on
August 16, 1999.
In previous fiscal years, to satisfy applicable statutory requirements,
the Company provided $1.0 million in letters of credit on behalf of, and a $1.0
million capital contribution to, OmniCare-LA, and made a $2.1 million capital
contribution to PhilCare. The foregoing funds were provided by the Company from
its line of credit arrangement. Due to the cessation of its Louisiana
operations, the Company withdrew the $1.0 million capital contribution and is in
the process of cancelling its letter of credit commitments. The Company's Board
of Directors has determined to withdraw from all of its involvement in
Pennsylvania and to pursue recouping its investment in PhilCare. Toward that
end, however, with the support of all of PhilCare's stockholders, the Company
has made a presentation to the Pennsylvania Department of Public Welfare
proposing that the Company take over the operation of PhilCare on an interim
basis to try to improve PhilCare's financial condition and business prospects;
and the Department has not yet responded to the proposal.
In September 1998, the Company and its bank lender amended the
Company's loan agreement and promissory note to: (i) decrease the principal sum
to $20.94 million and (ii) require reductions in the outstanding balance owed to
the bank at scheduled future dates, including the permanent reduction of the
bank's commitment to the lesser of the then outstanding principal balance or
$8.0 million by April 15, 1999.
In May 1999, the Company and its bank lender amended the Company's loan
agreement and promissory note requiring the Company to: (i) decrease the
principal amount to $16.6 million by September 1, 1999, (ii) permanently reduce
the outstanding balance to the lesser of the then outstanding principal balance
or $16.6 million by September 1, 1999, (iii) meet with the lender to establish
financial covenants for minimum net worth, debt service coverage ratio, and
maximum debt to worth ratio prior to September 1, 1999, and (iv) obtain or
arrange for the return or cancellation of the existing $0.5 million letter of
credit provided by the Company on behalf of its wholly owned subsidiary, UA-LA
and its wholly owned subsidiary, OmniCare Health Plan of Louisiana, Inc., by
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June 30, 1999. The bank has granted the Company a waiver on items (iii) and
(iv), extending the date to October 1, 1999. The maturity date of the line of
credit is October 1, 1999. The bank and the Company have agreed to negotiate the
restructuring of the loan agreement and promissory note within the next 90 days,
and the bank has agreed to extend the maturity date during this period.
Pursuant to the promissory note, interest is payable monthly at the
bank's prime rate (7.75% at June 30, 1999) plus one percent.
The Company's restructuring efforts significantly contributed to the
$22.9 million loss from continuing operations in fiscal 1998. However, after
adjusting for non-cash activities and changes in assets and liabilities, the
Company generated positive cash flows from operations in fiscal 1998. The
Company's ability to generate adequate amounts of cash to meet its future cash
needs will depend on a number of factors, including the continued stabilization
of OmniCare-MI, continuation of its restructuring efforts and achieving
increased operational efficiencies at its Tennessee operation.
Management expects that the OmniCare-MI corrective action plan, which
has been implemented, will continue to stabilize that Plan. The Plan has
successfully renegotiated certain major hospital provider contracts, including
its most significant hospital contract, which was one of the major components of
the corrective action plan, the effects of which will reduce medical costs.
RECENTLY ENACTED PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information," is effective for fiscal
years beginning after December 15, 1997. This standard requires that an
enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision-maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments.
ITEM 8. FINANCIAL STATEMENTS
Presented beginning at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to United American Healthcare
Corporation definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the year covered by this Form 10-K
with respect to its Annual Meeting of Shareholders to be held on November 11,
1999.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to United American Healthcare
Corporation definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the year covered by this Form 10-K
with respect to its Annual Meeting of Shareholders to be held on November 11,
1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to United American Healthcare
Corporation definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the year covered by this Form 10-K
with respect to its Annual Meeting of Shareholders to be held on November 11,
1999. In addition, the Company's Board of Directors has adopted guidelines to
require that every director own at least 7,500 common shares of the Company by
December 31, 1999, and at least 15,000 common shares of the Company by June 30,
2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to United American Healthcare
Corporation definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the year covered by this Form 10-K
with respect to its Annual Meeting of Shareholders to be held on November 11,
1999.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) & (2) The financial statements listed in the accompanying Index
to Consolidated Financial Statements at page F-1 are filed as part of this Form
10-K report.
(3) The Exhibit Index lists the exhibits required by Item 601 of
Regulation S-K to be filed as a part of this Form 10-K report. The Exhibit Index
identifies those documents which are exhibits filed herewith or incorporated by
reference to (i) the Company's Form S-1 Registration Statement under the
Securities Act of 1933, as amended, declared effective on April 23, 1991
(Commission File No. 33-36760); (ii) the Company's Form 10-K reports for its
fiscal years ended June 30, 1993, 1994, 1995, 1996, 1997 and 1998; (iii) the
Company's 10-K/A report filed October 14, 1996; (iv) the Company's Form 10-Q
reports for its quarters ended March 31, 1996, September 30, 1996, December 31,
1996, March 31, 1997, March 31, 1998 and December 31, 1998; (v) the Company's
Form 8-K reports filed with the Commission August 8, 1991, April 23, 1993, May
24, 1993, January 29, 1996, April 19, 1996, October 30, 1997 and January 20,
1998; or (vi) the Company's Form 8-K/A report filed with the Commission July 21,
1993 and November 12, 1997. The Exhibit Index is hereby incorporated by
reference into this Item 14.
(b) No reports on Form 8-K were filed with respect to the last three
months of fiscal 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on September 28, 1999.
UNITED AMERICAN HEALTHCARE CORPORATION
(Registrant)
By: /s/GREGORY H. MOSES, JR.
------------------------
Gregory H. Moses, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on September 28, 1999.
SIGNATURE CAPACITY
/s/GREGORY H. MOSES, JR. President, CEO and Director
- ------------------------------------
Gregory H. Moses, Jr. (Principal Executive Officer)
/s/ANITA C.R. GORHAM Secretary and Director
- ------------------------------------
Anita C.R. Gorham
/s/PAUL G. SAMUELS Treasurer
- ------------------------------------
Paul G. Samuels (Principal Financial Officer and
Principal Accounting Officer)
/s/WILLIAM C. BROOKS Director
- ------------------------------------
William C. Brooks
/s/JULIUS V. COMBS, M.D. Director
- ------------------------------------
Julius V. Combs, M.D.
/s/WILLIAM B. FITZGERALD Director
- ------------------------------------
William B. Fitzgerald
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/s/DARREL W. FRANCIS Director
- -------------------------------------
Darrel W. Francis
/s/HARCOURT G. HARRIS, M.D. Director
- -------------------------------------
Harcourt G. Harris, M.D.
/s/PEARL M. HOLFORTY Director
- -------------------------------------
Pearl M. Holforty
/s/RONALD M. HORWITZ, Ph.D. Director
- -------------------------------------
Ronald M. Horwitz, Ph.D.
/s/EMMETT S. MOTEN, JR. Director
- -------------------------------------
Emmett S. Moten, Jr.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report...........................................................................F-2
Report of Independent Certified Public Accountants.....................................................F-3
Consolidated Balance Sheets as of June 30, 1999 and 1998...............................................F-4
Consolidated Statements of Operations for each of the
years in the three year period ended June 30, 1999....................................................F-5
Consolidated Statements of Shareholders' Equity and Comprehensive Income for each
of the years in the three year period ended June 30, 1999.............................................F-6
Consolidated Statements of Cash Flows for each of the
years in the three year period ended June 30, 1999....................................................F-7
Notes to Consolidated Financial Statements.............................................................F-9
F-1
40
INDEPENDENT AUDITORS' REPORT
Board of Directors
United American Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of United
American Healthcare Corporation and Subsidiaries as of June 30, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1999 and 1998 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of United American Healthcare Corporation and Subsidiaries as
of June 30, 1999 and 1998, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Detroit, Michigan
September 28, 1999
F-2
41
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
UNITED AMERICAN HEALTHCARE CORPORATION
We have audited the accompanying consolidated statements of operations,
shareholders' equity and comprehensive income and cash flows for the year ended
June 30, 1997 of United American Healthcare Corporation (a Michigan
corporation). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the financial statements of
OmniCare Health Plan, Inc. of Tennessee, a 75 percent owned subsidiary, which
statements reflect total assets of $12,751,000 as of June 30, 1997 and total
revenues of $57,384,000 for the year ended June 30, 1997. These statements were
audited by other independent auditors whose report thereon have been furnished
to us, and our opinion expressed herein, insofar as it relates to the amounts
included for OmniCare Health Plan, Inc. of Tennessee, is based solely on the
reports of the other independent auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the aforementioned report of other
independent auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of the
operations and the cash flows of United American Healthcare Corporation for the
year ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ GRANT THORNTON LLP
Southfield, Michigan
September 30, 1997
F-3
42
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
---------------------
1999 1998
---------------------
ASSETS
- ---------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents $17,286 $13,259
Marketable securities, available for sale 1,290 1,431
Premium receivables 5,445 2,723
Note receivable 8,432 -
Management fee receivable 2,932 781
Other receivables 223 1,035
Refundable federal income taxes - 5,453
Prepaid expenses and other 290 281
Deferred income taxes 227 594
--------------------
Total current assets 36,125 25,557
Property and equipment, net 4,001 6,098
Intangible assets, net 4,374 5,629
Surplus note receivable, net 2,300 2,300
Marketable securities 1,548 1,396
Deferred income taxes 326 417
Other assets 577 584
Net assets of discontinued operation -- 16,703
--------------------
$49,251 $58,684
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------
Current liabilities
Current portion of long-term debt $12,737 $14,444
Medical claims payable 19,810 20,004
Accounts payable and accrued expenses 2,959 3,549
Accrued compensation and related benefits 1,309 1,240
Other current liabilities 448 420
Deferred income taxes 514 --
--------------------
Total current liabilities 37,777 39,657
Long-term debt, less current portion 375 8,000
Accrued rent 700 935
Deferred income taxes 39 1,011
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par, 15,000,000 shares authorized; 6,947,683 and 6,578,356 issued and
outstanding at June 30, 1999 and 1998, respectively 11,445 10,715
Accumulated deficit (925) (1,500)
Accumulated other comprehensive loss, net of deferred federal income taxes (160) (134)
--------------------
10,360 9,081
--------------------
$49,251 $58,684
====================
See accompanying notes to the consolidated financial statements.
F-4
43
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
---------------------------------------
1999 1998 1997
---------------------------------------
REVENUES
Medical premiums $73,207 $ 78,582 $ 70,430
Management fees from related parties 18,148 24,986 40,033
Interest and other income 2,167 2,020 2,086
---------------------------------------
Total revenues 93,522 105,588 112,549
EXPENSES
Medical services 59,917 70,309 57,832
Marketing, general and administrative 27,291 44,336 52,755
Depreciation and amortization 3,449 9,679 4,069
Interest expense 1,708 1,796 1,360
Bad debt expense -- 6,825 1,844
Shareholder lawsuit settlement -- -- 1,150
---------------------------------------
Total expenses 92,365 132,945 119,010
---------------------------------------
Earning (loss) from continuing operations before income taxes 1,157 (27,357) (6,461)
Income tax expense (benefit) 582 (4,442) (1,201)
---------------------------------------
Earnings (loss) from continuing operations 575 (22,915) (5,260)
(Loss) earnings from discontinued operation, net of income taxes -- (2,581) 1,845
---------------------------------------
NET EARNINGS (LOSS) $ 575 $(25,496) $ (3,415)
=======================================
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC
EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS $ 0.09 $ (3.48) $ (0.80)
=======================================
NET EARNINGS (LOSS) PER COMMON SHARE $ 0.09 $ (3.88) $ (0.52)
=======================================
WEIGHTED AVERAGE SHARES OUTSTANDING 6,763 6,578 6,553
=======================================
NET EARNINGS (LOSS) PER COMMON SHARE - DILUTED
EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS $ 0.09 $ (3.48) $ (0.80)
=======================================
NET EARNINGS (LOSS) PER COMMON SHARE $ 0.09 $ (3.88) $ (0.52)
=======================================
WEIGHTED AVERAGE SHARES OUTSTANDING 6,764 6,578 6,553
=======================================
See accompanying notes to the consolidated financial statements.
F-5
44
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS)
RETAINED ACCUMULATED
NUMBER OF EARNINGS OTHER TOTAL
COMMON COMMON (ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES STOCK DEFICIT) INCOME (LOSS) EQUITY
----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 6,561 $10,625 $27,411 $(214) $37,822
Repurchase of common stock (25) (127) -- -- (127)
Comprehensive income:
Net loss -- -- (3,415) -- (3,415)
Unrealized gain on marketable
securities, net of tax of $0.1
million -- -- -- 126 126
----------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- (3,415) 126 (3,289)
----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 6,536 10,498 23,996 (88) 34,406
Issuance of common stock 42 217 -- -- 217
Comprehensive income:
Net loss -- -- (25,496) -- (25,496)
Unrealized loss on marketable
securities, net of tax of $0.1
million -- -- -- (46) (46)
----------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- (25,496) (46) (25,542)
----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 6,578 10,715 (1,500) (134) 9,081
Issuance of common stock 383 748 -- -- 748
Repurchase of common stock (13) (18) -- -- (18)
Comprehensive income:
Net earnings -- -- 575 -- 575
Unrealized loss on marketable
securities, net of tax of $ -
million -- -- -- (26) (26)
---------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- 575 (26) 549
---------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 6,948 $11,445 $(925) $(160) $10,360
=================================================================================
See accompanying notes to the consolidated financial statements.
F-6
45
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
-------------------------------------------
1999 1998 1997
-------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $ 575 $(25,496) $(3,415)
Adjustments to reconcile net earnings (loss) to net cash provided by (used
in) operating activities
Loss (earnings) from discontinued operation, net -- 2,581 (1,845)
Bad debt expense -- 6,825 1,844
(Gain) loss on disposal of assets (36) 305 (11)
Depreciation and amortization 3,449 9,679 4,069
Accrued rent (235) (664) 388
Deferred income taxes (credit) 494 1,085 (1,604)
Changes in assets and liabilities net of effects from acquisitions in 1997
(Increase) decrease in premium receivables (2,722) 2,552 (1,531)
(Increase) decrease in other receivables (1,339) 625 (342)
Decrease (increase) in refundable federal income taxes 5,453 (5,338) 1,407
(Increase) decrease in prepaid expenses and other (9) 306 37
Decrease in other assets 7 1,356 108
Decrease (increase) in intangible assets -- (241) 8
(Decrease) increase in medical claims payable (194) 8,372 (16,943)
Increase (decrease) in accounts payable and accrued expenses 660 78 3,563
Increase (decrease) in accrued compensation and related benefits 69 (858) 157
Increase in other current liabilities 28 40 380
-------------------------------------------
Net cash provided by (used in) operating activities 6,200 1,207 (13,730)
INVESTING ACTIVITIES
Purchase of marketable securities (2,436) (1,210) (3,551)
Proceeds from the sale of marketable securities 2,631 11,104 7,063
Purchase of property and equipment (682) (820) (3,276)
Proceeds from the sale of property and equipment 127 -- 400
Investments in and advances to affiliates -- -- 108
Investment in surplus note receivable -- (4,600) --
Proceeds from collection of note receivable 9,193 -- --
Cash used in discontinued operation (1,047) (797) (3,198)
-------------------------------------------
Net cash provided by (used in) investing activities 7,786 3,677 (2,454)
FINANCING ACTIVITIES
Borrowing under line of credit agreement -- 142 5,117
Payments made on long-term debt (9,957) (1,566) (2,903)
Repurchase of common stock (18) -- (127)
Issuance of common stock 16 217 --
-------------------------------------------
Net cash (used in) provided by financing activities (9,959) (1,207) 2,087
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,027 3,677 (14,097)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,259 9,582 23,679
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,286 $ 13,259 $ 9,582
===========================================
F-7
46
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
YEAR ENDED JUNE 30,
----------------------------------
1999 1998 1997
----------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,708 $1,751 $ 1,673
==================================
Income taxes paid $ -- $ 61 $ 1,150
==================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES - 1999
Investing - Issuance of note receivables in
connection with sale of discontinued operation $ 15,750 $ -- $ --
Financing - Conversion of current liability to common stock 625 -- --
Financing - Conversion of current liability to long-term debt 625 -- --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES - 1997
Investing - Acquisition of certain contract rights and assets
of Spectera, Inc. $ -- $ -- $(1,765)
Investing - Acquisition of certain liabilities of Spectera, Inc. -- -- 750
----------------------------------
Net investing activities of discontinued operation $ -- $ -- $(1,015)
==================================
See accompanying notes to the consolidated financial statements.
F-8
47
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------------
BUSINESS. United American Healthcare Corporation, together
with its wholly and majority owned subsidiaries (collectively,
the Company) is a multi-state provider of health care
services, including consulting services to managed care
organizations and the provision of health care services in
Tennessee, Michigan and, through February 26, 1998, in
Florida.
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
a. PRINCIPLES OF CONSOLIDATION. The consolidated financial
statements include the accounts of United American Healthcare
Corporation, and its wholly owned subsidiaries: U.A. Health
Care Corporation (UA-OH), United American of Tennessee, Inc.
and Subsidiary (UA-TN), United American of Louisiana, Inc. and
Subsidiary (UA-LA), United American of Pennsylvania, Inc.
(UA-PA), United American of Georgia, Inc. and Subsidiary
(UA-GA), United American of Illinois, Inc. and Subsidiary
(UA-ILL), ChoiceOne Preferred Provider Plan, Inc. (ChoiceOne),
and Corporate Healthcare Financing, Inc. and Subsidiaries
(CHF), and its 80% owned subsidiary United American of
Florida, Inc. and Subsidiary (UA-FL). OmniCare Health Plan
(OmniCare-TN) is a 75% owned subsidiary of UA-TN, and
UltraMedix Healthcare Systems, Inc. (UltraMedix) is a 51%
owned subsidiary of UA-FL. The Company ceased activities
related to UA-FL, UA-LA and UA-PA in fiscal 1998 and UA-OH,
UA-GA and UA-ILL in fiscal 1997. ChoiceOne was sold in
December 1997. All significant intercompany transactions and
balances have been eliminated in consolidation. Non-majority
investments in affiliates in which management has the ability
to exercise significant influence are recorded on the equity
method. As discussed in Note 4, CHF was sold in August 1998
and is presented as a discontinued operation.
b. USE OF ESTIMATES. The accompanying consolidated financial
statements have been prepared in conformity with generally
accepted accounting principles which requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates
as more information becomes available and any such difference
could be significant. The most significant estimates that are
susceptible to change in the near term relate to the
determination of medical claims payable.
c. CASH AND CASH EQUIVALENTS. The Company considers all highly
liquid instruments purchased with original maturities of three
months or less to be cash equivalents.
F-9
48
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
d. FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of
cash and cash equivalents, receivables and marketable
securities approximate fair values of these instruments at
June 30, 1999 and 1998.
e. MARKETABLE SECURITIES. Investments in marketable securities
are primarily comprised of U.S. Treasury notes, debt issuances
of municipalities and foreign countries and common stocks all
carried at fair value, based upon published quotations of the
underlying securities, and six month certificates of deposit
carried at cost plus interest earned, which approximates fair
value. Marketable securities placed in escrow to meet
statutory funding requirements, although considered available
for sale, are not reasonably expected to be used in the normal
operating cycle of the Company and are classified as
noncurrent. All other securities available for sale are
classified as current.
Premiums and discounts are amortized or accreted,
respectively, over the life of the related debt security as
adjustment to yield using the yield-to-maturity method.
Interest and dividend income is recognized when earned.
Realized gains and losses on investments in marketable
securities are included in investment income and are derived
using the specific identification method for determining the
cost of the securities sold; unrealized gains and losses on
marketable securities are reported as a separate component of
shareholders' equity, net of the provision for deferred
federal income taxes.
f. PROPERTY AND EQUIPMENT. Property and equipment are stated at
cost. Expenditures and improvements, which add significantly
to the productive capacity or extend the useful life of an
asset are capitalized. Depreciation and amortization are
computed using the straight-line method over the estimated
useful lives of the related assets. Estimated useful lives of
the major classes of property and equipment are as follows:
furniture and fixtures - 5 to 13 years; equipment - 5 years;
and computer software - 2 to 5 years. Leasehold improvements
are included in furniture and fixtures and are amortized on a
straight-line basis over the shorter of the lease term or the
estimated useful life, which ranges from 5 to 13 years. The
Company uses accelerated methods for income tax purposes. The
Company has internally developed customized software, and has
capitalized the related costs.
g. INTANGIBLE ASSETS. Intangible assets resulting from business
acquisitions are carried at cost and are currently being
amortized on a straight-line basis over their estimated useful
lives of 10 years.
h. LONG-LIVED ASSETS. Following the criteria set forth in
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of " (SFAS 121), long-lived
assets and certain identifiable intangibles are reviewed by
the Company for events or changes in circumstances, which
would indicate that the carrying value
F-10
49
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
may not be recoverable. In making this determination, the
Company considers a number of factors, including estimated
future undiscounted cash flows associated with long-lived
assets, current and historical operating and cash flow results
and other economic factors. When any such impairment exists
the related assets are written down to fair value. Based upon
its most recent analysis, the Company believes that long-lived
assets are recorded at their net recoverable values (see Notes
4, 8 and 9).
i. MEDICAL CLAIMS PAYABLE. The Company provides for medical
claims incurred but not reported and the cost of adjudicating
claims based primarily on past experience, together with
current factors, using accepted actuarial methods. Although
considerable variability is inherent in such estimates,
management believes that these reserves are adequate.
j. REVENUE RECOGNITION. Medical premium revenues are recognized
in the month in which members are entitled to receive health
care services. Medical premiums collected in advance are
recorded as deferred revenues. Management fee revenues are
recognized in the period the related services are performed.
k. MEDICAL SERVICES EXPENSE RECOGNITION. The Company contracts
with various health care providers for the provision of
certain medical services to its members and generally
compensates those providers on a capitated and fee for service
basis. The estimates for medical claims payable are regularly
reviewed and adjusted as necessary, with such adjustments
generally reflected in current operations.
l. REINSURANCE. Reinsurance premiums are reported as medical
services expense, while the related reinsurance recoveries are
reported as deductions from medical services expense.
m. INCOME TAXES. Deferred income tax assets and liabilities are
recognized for the expected future tax consequences
attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their
respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled. The
effect on deferred income tax assets and liabilities of a
change in tax rates is recognized in income in the period that
involves the deferred tax assets to the amount expected to be
realized. Valuation allowances are established when necessary
to reduce the deferred tax assets to the amount expected to be
realized. The deferred income tax provision or benefit
generally reflects the net change in deferred income tax
assets and liabilities during the year. The current income tax
provision reflects the tax consequences of revenues and
expenses currently taxable or deductible for the period.
F-11
50
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
n. STOCK BASED COMPENSATION. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company records compensation
expense for stock options only if the market price of the
Company's stock, on the date of grant, exceeds the amount an
individual must pay to acquire the stock, if dilutive.
o. EARNINGS (LOSS) PER SHARE. Basic net earnings (loss) per share
excluding dilution has been computed by dividing net earnings
(loss) by the weighted-average number of common shares
outstanding for the period. Diluted earnings (loss) per share
is computed the same as basic except that the denominator also
includes shares issuable upon assumed exercise of stock
options.
For the fiscal year ended June 30, 1999, the Company had
outstanding stock options for 847 common shares, having a
dilutive effect on earnings per share. The Company had
no outstanding stock options in the fiscal years ended June
30, 1998 and 1997.
p. COMPREHENSIVE INCOME. The Company has adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income
and its components. This Statement requires that all items
that are required as components of comprehensive income be
displayed in a financial statement.
q. SEGMENT INFORMATION. The Company has adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information." This Statement requires that an enterprise
report financial and descriptive information about its
reportable operating segments. Operating segments are
components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate
resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is
used internally for evaluating segment performance and
deciding how to allocate resources to segments.
r. RECLASSIFICATIONS. Certain reclassifications have been made to
prior years' financial statements' amounts to conform to the
current year classifications.
F-12
51
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------
NOTE 3 - LIQUIDITY AND RESTRUCTURING PROGRAM
- --------------------------------------------
During fiscal 1998, the Company experienced negative working
capital, a reduction in net worth and significant losses from
operations. As a result, on January 12, 1998, the Board of Directors of
the Company approved a restructuring plan designed to improve operating
efficiencies, eliminate cash losses and position the Company for
profitable operations. The restructuring program encompassed Company
plans to discontinue some expansion projects, reduce non-core spending
activities, reduce corporate overhead, renegotiate its bank credit
facility and evaluate the Company's investments in affiliates and other
assets. The Company recognized restructuring charges of approximately
$9.0 million in fiscal 1998. The Company's restructuring efforts
significantly contributed to the $22.9 million loss from continuing
operations in fiscal 1998. However, after adjusting for non-cash
activities and changes in assets and liabilities, the Company generated
positive cash flows from operations in fiscal 1998.
At June 30, 1999, the Company had (i) cash and cash
equivalents and short-term marketable securities of $18.6 million,
compared to $14.7 million at June 30, 1998; (ii) negative working
capital of $1.7 million, compared to negative working capital of $14.1
million at June 30, 1998; and (iii) a current assets-to-current
liabilities ratio of .96-to-1, compared to .64-to-1 at June 30, 1998.
The principal sources of funds for the Company during the year ended
June 30, 1999 were $6.3 million provided from net operating activities,
including a federal income tax refund of $5.5 million, cash proceeds
and payments received on the secured note from the sale of CHF of $9.2
million and proceeds from the sale of property and equipment of $0.1
million -- offset by discontinued operations of $1.0 million, $10.0
million to repay bank debt and the purchase of property and equipment
of $0.7 million.
The Company's ability to generate adequate amounts of cash to
meet its future cash needs depends on a number of factors, including
the stabilization of OmniCare-MI, continuation of its restructuring
efforts and achieving increased operational efficiencies at its
Tennessee operation.
- --------------------------------------
NOTE 4 - ACQUISITIONS AND DISPOSITIONS
- --------------------------------------
CORPORATE HEALTHCARE FINANCING, INC. (CHF)
On May 7, 1993, the Company acquired substantially all of the
assets and assumed certain liabilities of a Maryland limited
partnership, in a business combination accounted for as a purchase. The
cost at the time of the acquisition was approximately $9.6 million and
is included with net assets of discontinued operation in the June 30,
1998 balance sheet. Through August 31, 1998 and June 30, 1997, the
purchase price was increased as defined in the asset purchase agreement
by the maximum amount of $6.6 million. CHF provided administrative
services to self-funded employers and
F-13
52
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
employee welfare plans, including health benefit plan design and
development of workers' compensation and unemployment benefit programs.
Effective December 31, 1996, CHF acquired certain contract
rights and assets and assumed certain liabilities of Spectera, Inc. for
approximately $1.8 million in cash and debt. The excess purchase price
over the fair market value of the net assets acquired of approximately
$1.0 million has been charged to goodwill, and is included with net
assets of discontinued operation in the balance sheet at June 30, 1998.
The stock of CHF was sold on September 8, 1998, effective as
of August 31, 1998, for $17.75 million, comprised of $2.0 million in
cash and the buyer's secured and unsecured notes for $13.25 million and
$2.5 million, respectively, to an entity related to the Company through
certain common shareholders, including a former officer and director of
the Company. The secured note was payable to the Company in four
monthly installments of $0.5 million each on the last day of September
through December 1998 with the balance due in January 1999, with
options to extend the final payment to March 1999, plus interest at the
prime rate on short-term unsecured commercial borrowings. The unsecured
note was payable to the Company in two annual installments of $0.25
million with the balance due August 31, 2001, plus interest at 6% per
annum. As required by the Company's line of credit facility, the CHF
sale was approved by the Company's bank lender and all proceeds were
used to reduce the Company's indebtedness to the bank.
In April 1999, the parties agreed to modify the secured note
payment terms, extending its maturity date to August 31, 1999,
requiring additional principal and interest payments totaling $0.9
million to be paid over the extended period and requiring an additional
limited personal guarantee by a principal of the buyer of $1.5 million
of the principal of the secured note. Including payments on the secured
note, through June 30, 1999, the Company received $9.2 million of the
CHF sale price, plus $0.8 million of interest. In June 1999, as an
inducement for the buyer to prepay both notes, the Company agreed to a
discount of $250,000 if both notes were paid, with accrued interest, by
mid-August 1999.
Both notes were paid in full with accrued interest, net of the
discount, on August 16, 1999. The final payment on the secured and
unsecured notes was in the aggregate amount of $8.5 million (including
$0.1 million of interest earned after June 30, 1999).
In anticipation of this sale, the results of CHF prior to
September 1, 1998, have been reported as a discontinued operation in
the consolidated financial statements for the years ended June 30,
1999, 1998 and 1997.
The carrying value of CHF was written down by $2.5 million at
June 30, 1998, to the net realizable value of $17.75 million, and
represented the excess (deficit) of revenues over expenses of CHF
during that period. These adjustments are included in the expenses
F-14
53
of the discontinued operation to reflect an increase or reduction in
the net carrying value to the net realizable value of $17.75 million.
The net carrying value of the assets and liabilities of CHF have been
recorded in the June 30, 1998 consolidated balance sheet as net assets
of discontinued operation, except for cash and cash equivalents of
$1.0 million, which are included with cash and cash equivalents in the
consolidated balance sheet as of June 30, 1998.
Earnings (loss) from discontinued operation for the two months
ended August 31, 1998 and each of the twelve months ended June 30, 1998
and 1997 are summarized as follows (in thousands):
TWO TWELVE MONTHS ENDED
MONTHS ENDED JUNE 30,
AUGUST 31, ------------------------
1998 1998 1997
------------------------------------------
Total revenues $ 4,570 $ 21,949 $18,803
Total expenses 4,061 24,769 15,794
Income tax expense (benefit) 509 (239) 1,164
==========================================
Earnings (loss) from discontinued operation net of income
taxes $ -- $ (2,581) $ 1,845
==========================================
CHF and its subsidiaries' consolidated balance sheet at June
30, 1998 is summarized as follows (in thousands):
ASSETS
------------------------------------------------------------------------------------
Cash and cash equivalents $ 1,047
Commission, service fees and other receivables, net 10,602
Property and equipment, net 2,602
Intangible assets, net 5,239
Other assets 1,330
-------------
$20,820
=============
LIABILITIES AND SHAREHOLDER's Equity
------------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 1,597
Accrued compensation and related benefits 953
Payable to parent -
Debt payable within one year 200
Long-term debt 320
-------------
3,070
Shareholder's equity 17,750
-------------
$20,820
=============
F-15
54
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
ULTRAMEDIX HEALTHCARE SYSTEMS, INC. (ULTRAMEDIX)
In February 1994, the Company entered into a long-term
agreement to manage UltraMedix. As of January 1996, the Company's
ownership in the voting common stock of UltraMedix was 51%.
As of December 31, 1997, UltraMedix was not in compliance with
the Florida Department of Insurance's (FDOI) statutory solvency
requirement. UltraMedix's statutory deficiency at December 31, 1997 was
estimated at $4.5 million. As a result of the deficiency, on February
26, 1998, UltraMedix and the Plan's third-party administrator, United
American of Florida, Inc. (UA-FL), a Company subsidiary, were placed
into receivership, and on March 3, 1998, into liquidation, by the FDOI.
Through the date of the commencement of liquidation, the
results of these operations were included in the 1998 consolidated
results of operations of the Company, which included a net loss
totaling $9.3 million. In connection with the liquidation, the Company
wrote off goodwill and accumulated amortization of approximately $4.5
million and $1.0 million, respectively, and recognized a loss on the
liquidation of approximately $2.3 million.
On April 15, 1998, the Florida Agency for Health Care
Administration notified the Company of the Agency's intent to enforce
the Company's Guarantee Agreement, under which the Company had agreed
to reimburse UltraMedix's contracted Medicaid providers for authorized,
covered Medicaid services rendered to covered Medicaid enrollees, for
which the Agency had made payment on behalf of such enrollees, limited
to an amount equal to the amount of surplus UltraMedix would have been
required to maintain under the Medicaid contract in the absence of such
Guarantee Agreement.
OMNICARE HEALTH PLAN, INC. OF TENNESSEE (OMNICARE-TN)
In February 1994, the Company entered into a long-term
agreement to manage OmniCare-TN and effective July 1994 acquired a 50%
equity interest in OmniCare-TN for approximately $1.3 million in cash.
Effective January 31, 1996, the Company purchased an additional 25% of
the voting common stock, and 100% of the preferred stock, of
OmniCare-TN. This increased the Company's ownership in the voting
common stock of OmniCare-TN to 75%. The purchase price for the
additional common stock and preferred stock of OmniCare-TN was $0.1
million and $10.9 million, respectively, of which $8.7 million was the
conversion of OmniCare-TN debt to the Company to equity and $2.3
million was paid in cash.
This acquisition was accounted for under the purchase method
of accounting. The excess of the purchase price over the fair value of
the net assets acquired of approximately $7.4 million has been recorded
as goodwill, and is being amortized over ten years on a straight-line
basis. Results of operations are included in the accompanying financial
statements effective with the date of purchase of the majority
F-16
55
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
common stock ownership interest. Goodwill is reduced by the subsequent
utilization of OmniCare-TN's net operating losses generated prior to
January 31, 1996. In fiscal 1999, goodwill was reduced by $0.5 million
as a result of the utilization of OmniCare-TN's net operating loss
carryforwards (NOLs) generated prior to January 31, 1996. The
remaining net operating losses related to OmniCare-TN were generated
subsequent to January 31, 1996.
In July 1998, the Company made an additional cash contribution
of $0.75 million to OmniCare-TN, in exchange for additional preferred
stock of OmniCare-TN to be issued to the Company.
- ------------------------------
NOTE 5 - MARKETABLE SECURITIES
- ------------------------------
A summary of amortized cost, gross unrealized gain and loss
and estimated fair value of marketable securities as of June 30 was as
follows (in thousands):
GROSS UNREALIZED
--------------------------
ESTIMATED
AMORTIZED COST GAIN LOSS FAIR VALUE
--------------------------------------------------------
1999
Available for sale - Current:
Certificates of deposit $1,112 $ -- $ -- $ 1,112
Foreign government debt securities 25 -- -- 25
Equity securities 377 -- (224) 153
--------------------------------------------------------
1,514 -- (224) 1,290
Available for sale - Noncurrent:
Money market 170 -- -- 170
U.S. government obligations 1,401 -- (23) 1,378
--------------------------------------------------------
1,571 -- (23) 1,548
--------------------------------------------------------
$3,085 $ -- $(247) $2,838
========================================================
1998
Available for sale - Current:
Certificates of deposit $ 582 $ -- $ -- $ 582
Foreign government debt securities 25 -- -- 25
Equity securities 1,040 -- (216) 824
--------------------------------------------------------
1,647 -- (216) 1,431
Available for sale - Noncurrent:
U.S. government obligations 1,385 11 -- 1,396
--------------------------------------------------------
$3,032 $ 11 $ (216) $2,827
========================================================
F-17
56
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
At June 30, 1999, the statement value and estimated fair value
of fixed maturities, by contractual maturity, are shown below (in
thousands). Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
AMORTIZED ESTIMATED
COST FAIR VALUE
---------------------
Due in one year or less $ 2,513 $ 2,490
Due in one year through five years 25 25
---------------------
$ 2,538 $ 2,515
=====================
Certain of the Company's operations are obligated by state
regulations to maintain a specified level of escrowed funds to assure
the provision of healthcare services to enrollees. To fulfill these
statutory requirements, the Company maintains funds in highly liquid
escrowed investments, which amounted to $1.6 million and $1.4 million
at June 30, 1999 and 1998, respectively.
- -------------------------------
NOTE 6 - CONCENTRATION OF RISK
- -------------------------------
During the years ended June 30, 1999, 1998 and 1997
approximately 76%, 60% and 50%, respectively, of the Company's revenues
were derived from a single customer, TennCare, a State of Tennessee
program that provides medical benefits to Medicaid and Working
Uninsured recipients. TennCare withholds 10% of the Company's monthly
capitation payment. TennCare remits the monthly withheld amounts to the
Company when certain informational filing requirements are met by the
Company. Amounts withheld by TennCare as of June 30, 1999 and 1998
totaled approximately $3.7 million and $1.6 million, respectively. The
Company has recorded a receivable of approximately $1.7 million and
$1.1 million at June 30, 1999 and 1998, respectively, from the TennCare
program adverse selection pool. The receivable is based on tentative
information provided to the Company by the State of Tennessee.
The Company has entered into a long-term management agreement
with OmniCare-MI. Pursuant to the management agreement, the Company
provides management and consulting services to OmniCare-MI and is
generally paid a percentage of revenues to manage the plan. Management
fee revenues from OmniCare-MI as a percentage of the Company's total
revenues were 19%, 24% and 26% for the years ended June 30, 1999, 1998
and 1997, respectively.
F-18
57
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
- -----------------------------------------------------
NOTE 7 - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
- -----------------------------------------------------
Property and equipment at each June 30 consists of the
following (in thousands):
1999 1998
-----------------------
Furniture and fixtures $ 1,853 $ 2,390
Equipment 8,840 8,158
Computer software 6,347 6,347
-----------------------
17,040 16,895
Less accumulated depreciation and amortization 13,039 10,797
-----------------------
$ 4,001 $ 6,098
=======================
Intangible assets at each June 30 consists of the following (in thousands):
1999 1998
-----------------------
Goodwill $ 6,972 $ 7,466
Less accumulated amortization 2,598 1,837
-----------------------
$ 4,374 $ 5,629
=======================
- --------------------------------------------------
NOTE 8 - INVESTMENTS IN AND ADVANCES TO AFFILIATES
- --------------------------------------------------
Investments in and advances at June 30, 1999 and 1998 to
affiliates are comprised of the following (in thousands):
PhilCare Health Systems $ 2,100
Advica Health Management 2,300
Less impairment loss 4,400
----------
$ --
==========
In fiscal 1998, the Company recorded full impairment losses
against its investments in PhilCare and Advica. The establishment of
the impairment losses were based on the Company's evaluation of the net
recoverable value of such investments. This resulted in bad debt
expense of $4.4 million for the year ended June 30, 1998.
- --------------------------------
NOTE 9 - SURPLUS NOTE RECEIVABLE
- --------------------------------
On June 30, 1998 the Company funded a $4.6 million unsecured
loan to OmniCare-MI, evidenced by a surplus note, to enable OmniCare-MI
to meet its minimum statutory requirements for net worth and working
capital. Pursuant to the surplus note, interest and principal payments
are subject to approval by the Michigan Insurance Bureau (Bureau) and
shall be repaid only out of the statutory surplus earnings of
OmniCare-MI. The interest rate is at prime, payable annually and if not
paid annually is forfeited. Interest income of $0.4 million was
forfeited for fiscal 1999. The
F-19
58
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
principal has no stated maturity or repayment date. The surplus note is
subordinated to all other claimants of OmniCare-MI.
The Company recorded an impairment loss based on its
evaluation in fiscal 1998, which considered the estimate of
OmniCare-MI's future undiscounted cash flows and statutorily derived
surplus earnings and repayments conditioned on Bureau approval, of the
net recoverable value of its note receivable from OmniCare-MI. This
resulted in bad debt expense of $2.3 million for the year ended June
30, 1998.
- ------------------------
NOTE 10 - LONG TERM DEBT
- ------------------------
In September 1998, the Company and its bank lender amended the
Company's loan agreement and promissory note to: (i) decrease the line
of credit amount to $20.94 million and (ii) require reductions in the
outstanding balance owed to the bank at scheduled future dates,
including the permanent reduction of the outstanding balance to the
lesser of the then outstanding principal balance or $8.0 million by
April 15, 1999.
In May 1999, the Company and its bank lender amended the
Company's loan agreement and promissory note requiring the Company to:
(i) decrease the principal amount to $16.6 million by September 1,
1999, (ii) permanently reduce the outstanding balance to the lesser of
the then outstanding principal balance or $16.6 million by September 1,
1999, (iii) meet with the lender to establish financial covenants for
minimum net worth, debt service coverage ratio, and maximum debt to
worth ratio prior to September 1, 1999, and (iv) obtain or arrange for
the return or cancellation of the existing $0.5 million letter of
credit provided by the Company on behalf of its wholly owned
subsidiary, UA-LA and its wholly owned subsidiary, OmniCare Health Plan
of Louisiana, Inc. by June 30, 1999. The bank has granted the Company a
waiver on items (iii) and (iv), extending the date to October 1, 1999.
The maturity date of the line of credit is October 1, 1999. The bank
and the Company have agreed to negotiate the restructuring of the loan
agreement and promissory note within the next 90 days, and the bank has
agreed to extend the maturity date during this period. Pursuant to the
promissory note, interest is payable monthly at the bank's prime rate
(7.75% at June 30, 1999) plus one percent.
As part of a shareholder lawsuit settlement the Company agreed
to pay the plaintiffs in the form of a $625,000 promissory note from
the Company dated December 11, 1998, payable in 15 equal monthly
installments beginning January 3, 2000, with interest at 4% per annum.
The Company's outstanding debt at each June 30 is as follows
(in thousands):
1999 1998
----------------------------
Line of credit $12,487 $22,444
Promissory note 625 --
----------------------------
13,112 22,444
Less debt payable within one year 12,737 14,444
----------------------------
Long-term debt, less current portion $ 375 $ 8,000
============================
F-20
59
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
- --------------------------------
NOTE 11 - MEDICAL CLAIMS PAYABLE
- --------------------------------
The Company has recorded a liability of $19.8 million and
$20.0 million at June 30, 1999 and 1998, respectively, for unpaid
claims and medical claims incurred by enrollees but not reported to the
Company for payment by the health care providers as of each date. The
ultimate settlement of medical claims may vary from the estimated
amounts reported at June 30, 1999 and 1998.
The following table provides a reconciliation of the unpaid
claims for the years ended June 30, 1999 and 1998 (in thousands):
1999 1998
---------------------------
Balance at beginning of fiscal year $20,004 $11,632
Incurred loss as related to current year 59,916 68,245
Incurred losses related to prior year -- 2,064
---------------------------
Total losses incurred 59,916 70,309
Paid claims related to current year 47,442 48,241
Paid claims related to prior year 12,668 13,696
---------------------------
Total paid claims 60,110 61,937
---------------------------
Balance at end of fiscal year $19,810 $20,004
===========================
The $2.1 million unfavorable development in fiscal 1998 on
incurred losses related to prior years was primarily attributable to
UltraMedix ($3.4 million in 1998) and that plan's use of high cost
hospital providers and an increase in utilization driven by the plan's
rapid commercial membership growth. In fiscal 1998 OmniCare-TN's
stricter approach to reviewing authorizations and denying claims for
untimely filing and procedures that were not authorized or were not
medically necessary resulted in favorable developments of $1.4 million
on incurred losses related to prior years.
Under an agreement with its reinsurer, the Company is liable
for the first $100,000 in medical costs per enrollee per year.
Liability in excess of this amount is assumed by the reinsurer, subject
to a 20% deductible and limits on maximum cost per day of
hospitalization.
F-21
60
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
- ----------------------
NOTE 12 - INCOME TAXES
- ----------------------
The components of income tax expense (benefit) for each year
ended June 30 are as follows (in thousands):
1999 1998 1997
---------------------------------------
Continuing operations:
Current expense (benefit) $ 89 $(5,527) $ 403
Deferred expense (credit) 562 (1,996) (2,325)
Change in valuation allowance (69) 3,081 721
---------------------------------------
$ 582 $(4,442) $(1,201)
=======================================
Discontinued operation $ 509 $ (239) $ 1,164
=======================================
A reconciliation of the provision for income taxes for each
year ended June 30 follows (in thousands):
1999 1998 1997
--------------------------------------
Income tax expense (benefit) at the statutory tax rate $ 366 $(9,302) $(2,197)
State and city income tax 148 19 115
Tax-exempt interest on municipal bonds (37) (97) (138)
Non-deductible goodwill amortization 258 1,676 334
Other, net (96) 181 (28)
NOL reduction of goodwill 494 -- (8)
Valuation allowance (551) 3,081 721
--------------------------------------
$ 582 $(4,442) $(1,201)
======================================
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversals of deferred taxes, projected future taxable income,
and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these
deductible differences, net of the existing valuation allowance at June
30, 1999. The amount of the deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
F-22
61
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
Components of the Company's deferred tax assets and
liabilities at each June 30 are as follows (in thousands):
1999 1998
--------------------------
Deferred tax assets
Shareholder lawsuit settlement $ -- $ 379
Losses in unconsolidated affiliates 1,826 1,826
Accrued rent 238 318
Bad debt expense 2,856 2,856
Deferred compensation 152 130
Unrealized net depreciation on marketable securities 75 70
Other, net -- 10
Net operating loss carryforward of consolidated losses 1,036 700
Net operating loss carryforward of purchased subsidiary 2,331 3,234
--------------------------
Total gross deferred tax assets 8,514 9,523
Valuation allowance (7,961) (8,512)
--------------------------
Total net deferred tax assets 553 1,011
Deferred tax liabilities
Depreciation and amortization (39) (33)
Software development (514) (978)
-------------------------
Total gross deferred tax liabilities (553) (1,011)
--------------------------
Net deferred tax asset $ -- $ --
==========================
The valuation allowance balance at June 30, 1999 includes
allowances relating to net operating loss carryforwards (NOLs) of
OmniCare-TN, the purchased subsidiary, an entity which is consolidated
as of June 30, 1999, consolidated loss NOL carryforwards, valuation on
the realizability of net deferred assets and that portion of equity in
net losses and bad debt expense in affiliates which reduces the
Company's investments. As of June 30, 1999, the NOLs for federal income
tax purposes expire from 2009 to 2013.
Activity in the valuation allowance is as follows (in
thousands):
Balance at June 30, 1996 $ 4,718
Change in valuation allowance 721
NOLs of purchased subsidiary (8)
--------------
Balance at June 30, 1997 5,431
Change in valuation allowance 3,081
--------------
Balance at June 30, 1998 8,512
Change in valuation allowance (551)
--------------
Balance at June 30, 1999 $ 7,961
==============
The Company believes it is more likely than not that if a tax
deductible event occurs, the result will be a capital loss on that
portion of valuation allowance provided
F-23
62
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
for equity in net losses and bad debt expense in affiliates which
reduces the Company's investments. The capital loss is able to be
offset only by capital gains currently not generated by the Company.
- ------------------------------------
NOTE 13 - RELATED PARTY TRANSACTIONS
- ------------------------------------
The Company has entered into a long-term management agreement
with OmniCare-MI. OmniCare-MI is related to the Company via certain
common officers and directors. The agreement commenced in May 1985 and
expires in December 2010, is subject to review every five years and can
be terminated without cause by OmniCare-MI at the time of the review or
by either party with cause. Pursuant to the management agreement the
Company is generally paid a percentage of revenues to manage
OmniCare-MI. The Company is required to pay certain administrative
expenses associated with its activity on behalf of OmniCare-MI. All
costs associated with the management of OmniCare-MI are expensed as
incurred.
Health insurance for some of the Company's employees was
provided by the clients it manages. This expense was approximately $0.4
million, $1.0 million and $1.6 million for the years ended June 30,
1999, 1998 and 1997, respectively.
- ----------------------------------
NOTE 14 - BENEFIT AND OPTION PLANS
- ----------------------------------
The Company offers a 401(K) retirement and savings plan that
covers substantially all of its employees. The Company's maximum
matching contribution is 5% of compensation through January 1, 1998 and
1% thereafter. Company contributions to the 401(K) plan were
approximately $25,000, $400,000 and $600,000 for the years ended June
30, 1999, 1998 and 1997, respectively.
The Company has reserved 200,000 common shares for its
Employee Stock Purchase Plan (ESPP), which became effective October
1996, and enables all eligible employees of the Company to subscribe
for shares of common stock on an annual offering date at a purchase
price which is the lesser of 85% of the fair market value of the shares
on the first day or the last day of the annual period. Employee
contributions to the ESPP were approximately $53,000, $9,000 and
$200,000 for the years ended June 30, 1999, 1998 and 1997.
Previously, the Company had adopted a stock option plan (the
Old Stock Option Plan), under which a maximum of 331,250 common shares
had been reserved for issuance upon exercise of options granted under
the Old Stock Option Plan. The Old Stock Option Plan was terminated and
superseded by the Company's 1998 Stock Option Plan (1998 Plan) adopted
by its Board of Directors on August 6, 1998 and approved by the
Company's shareholders on November 12, 1998. No options were granted
under the Old Stock Option Plan. The Company has an aggregate of
500,000 common shares reserved for issuance upon exercise of options
under the 1998 Plan. On September 9, 1998,
F-24
63
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
December 15, 1998 and February 3, 1999, nonqualified options for a
total of 325,000, 26,000, and 5,000 common shares, respectively, were
granted under the 1998 Plan.
Independent of any stock option plan, on May 11, 1998 the
Company granted nonqualified stock options for 100,000 common shares to
the Company's President and Chief Operating Officer, and reserved that
number of common shares for issuance upon exercise of such options.
Such options expire May 11, 2003 and are exercisable beginning May 11,
1999 for up to 77,000 common shares and in full beginning May 11, 2000,
at a price of $1.38 per share.
SFAS 123 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 123. 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 (loss) and earnings (loss) per share
from continuing operations, assuming dilution, for 1999 and 1998, would
have been the pro forma amounts indicated below (in thousands, except
per share amounts):
1999 1998
------------------------------
Earnings (loss) from continuing operations:
As reported $ 575 $(22,915)
Pro forma $ 295 $(22,967)
Earning (loss) from continuing operations per share (Basic and
Diluted):
As reported $ 0.09 $ (3.48)
Pro forma $ 0.04 $ (3.49)
The fair value of options at date of grant was estimated using
the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1999: dividend yield of 0%;
expected volatility of 62.85%; risk free interest rate of 4.93%; and
expected life of 10 years. The effects of applying SFAS 123 in the
above pro forma disclosures are not necessarily indicative of future
amounts, because additional stock option awards could be made in future
years.
F-25
64
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
Information regarding the stock options for 1999 and 1998
follows (in thousands except prices):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------
NUMBER OF
WEIGHTED SHARES
AVERAGE AVERAGE EXERCISABLE WEIGHTED
EXERCISE REMAINING AT JUNE 30, AVERAGE
SHARES PRICE CONTRACTUAL LIFE 1999 EXERCISE PRICE
----------------------------------------------------------------------------
Options outstanding at June 30, 1997 - - - - -
Granted 100 $1.38 5.0 years - -
Exercised - - - - -
Expired - - - - -
Options outstanding at June 30, 1998 100 $1.38 5.0 years - -
Granted 355 $1.59 9.4 years 325 $1.63
Exercised - - - - -
Expired - - - - -
Options outstanding at June 30, 1999 455 $1.55 8.0 years 432 $1.56
Options for 45,000 common shares were available for grant at
the end of fiscal 1999.
- ----------------
NOTE 15 - LEASES
- ----------------
The Company leases its facilities and certain furniture and
equipment under operating leases expiring at various dates through May
2006. Terms of the facility leases generally provide that the Company
pay its pro rata share of all operating expenses, including insurance,
property taxes and maintenance.
Rent expense charged to operations for the years ended June
30, 1999, 1998 and 1997 totaled approximately $1.6 million, $2.2
million and $3.5 million, respectively.
Minimum future rental payments under all non-cancelable
operating leases having remaining terms in excess of one year as of
June 30, 1999 total $7.1 million as follows (in thousands):
2000-$1,540; 2001-$841; 2002-$777; 2003-$857; 2004-$854; thereafter
$744.
F-26
65
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
- ------------------------------
NOTE 16 - YEAR 2000 COMPLIANCE
- ------------------------------
The Company has developed and followed a plan to ensure all
modifications and conversions to its primary information systems are
implemented and thoroughly tested on a timely basis. The Company
estimates that over 90% of such modifications and conversions have been
made to date. Management anticipates that the remaining modifications
and conversions will be completed by October 4, 1999 and that the
Company's primary computerized information systems will be Year 2000
compliant by that date.
Although the Company is in the process of completing a
contingency plan for critical computerized information systems to
mitigate potential delays or other problems associated with such
modifications or conversions deemed necessary by management, the
Company continues to bear some risk related to the Year 2000 issue due
to its voluntary interaction with other entities not affiliated with
the Company (e.g., vendors and customers) who must address their own
Year 2000 issues. For this reason, the Company has been monitoring the
Year 2000 issues of certain third parties with which it interacts. The
Company has asked such third parties to demonstrate, or give some
indication as to, their ability to become Year 2000 compliant. With
respect to any third party who appears unlikely to remedy its Year 2000
issues, the Company intends to take appropriate steps to mitigate the
exposure to the risk posed by such third party's failure to timely
address its Year 2000 issues. However, due to the uncertainty inherent
in both the Year 2000 problem and the efforts of third parties to
timely resolve their own Year 2000 issues, there can be no assurances
the Company's mitigation efforts will be successful or that the failure
of any third party or the Company to timely resolve its Year 2000
issues will not have a material adverse impact on the Company's
operations, operating results or financial position.
Both internal and external resources were utilized in the
Company's efforts to become Year 2000 compliant. During the year ended
June 30, 1999, $0.8 million of costs were incurred by the Company in
connection with its efforts to become Year 2000 compliant. The total
costs of the Company's efforts to become Year 2000 compliant are not
expected to exceed $1.6 million, of which approximately 60% represents
capital costs. Costs related to software modifications have been, and
will continue to be, expensed as incurred.
The costs expected to be incurred in connection with the
Company's efforts to become Year 2000 compliant, as well as the date by
which the Company is expected to be Year 2000 compliant, are based on
management's best estimates. Because such estimates were derived
utilizing numerous assumptions as to future events (including the
availability of certain resources, third party modifications and other
factors), there can be no assurance that these estimates will be
achieved and such actual costs and date could differ materially from
those currently expected. Specific factors that might cause material
differences include, but are not limited to, the availability and costs
of personnel trained in
F-27
66
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
this area, the ability to locate and correct all relevant computer
codes and similar uncertainties.
- -----------------------
NOTE 17 - CONTINGENCIES
- -----------------------
On December 11, 1998, pursuant to notice duly given, the
United States District Court for the Eastern District of Michigan held
a hearing on the fairness of the previously reported proposed
settlement of two consolidated shareholder lawsuits which had been
filed in August 1995 against certain former senior officers and the
Company. Following the hearing, also on December 11, 1998, the court
entered a final judgment approving the settlement and dismissing the
case. Pursuant thereto, all claims and damages sought by the plaintiffs
were released in exchange for $2.0 million in cash from the Company's
insurance carrier, a $625,000 promissory note from the Company dated
December 11, 1998, payable in 15 equal monthly installments beginning
January 3, 2000, with interest at 4% per annum, and 277,777 new shares
of common stock of the Company valued at $625,000 (based on a
stipulated share price of $2.25 per share) and issued on March 29,
1999.
A demand for arbitration was filed on December 1, 1998 with
the American Arbitration Association, entitled SunTel Services, Inc. v.
United American Healthcare Corporation. The claimant sought
approximately $414,000 from the Company for alleged breach of a lease
agreement for telecommunications equipment and related services. The
Company, which had returned the leased equipment from business
locations it had closed, asserted a counterclaim. In April 1999, the
parties reached a settlement agreement and the arbitration proceeding
was dismissed in exchange for the Company's payment to the claimant of
$120,000 in cash and issuance to the claimant of 67,369 new shares of
common stock of the Company valued at $80,000.
A demand for arbitration was filed on May 20, 1999 with the
American Arbitration Association by Ronald R. Dobbins, who had been
President and Chief Operating Officer of the Company until May 1998.
The claimant seeks termination benefits of approximately $650,000. No
date has been set for the arbitration hearing. The Company intends to
vigorously defend this matter.
F-28
67
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
- -----------------------------------------------------
NOTE 18 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
- -----------------------------------------------------
The following table presents selected quarterly financial data
for the years ended June 30, 1999 and 1998 (in thousands, except per
share data):
JUNE MARCH DECEMBER SEPTEMBER TOTAL
------------- ------------- -------------- ---------------- ------------------
1999
Total revenues $25,459 $23,341 $22,370 $22,352 $ 93,522
Earnings from continuing
operations 34 267 154 120 575
Net earnings 34 267 154 120 575
Net earnings per common share
assuming dilution -- 0.04 0.02 0.02 0.09
1998
Total revenues $22,708 $26,656 $29,192 $27,032 $105,588
Loss from continuing operations (6,792) (7,080) (7,501) (1,542) (22,915)
Net loss (9,252) (6,878) (8,033) (1,333) (25,496)
Net loss per common share
assuming dilution (1.41) (1.05) (1.22) (0.20) (3.88)
In the quarter ended June 1999, the Company made the following
significant adjustments: (i) recognized a retroactive medical premium
rate increase from the State of Tennessee of $1.2 million, (ii)
recorded a $250,000 discount related to the accelerated payoff of the
CHF buyer's notes and (iii) recorded a $494,000 tax provision related
to preacquisition net operating losses for OmniCare-TN.
In the quarter ended June 1998, the Company made the following
significant adjustments: (i) recorded impairment losses against its
investment in PhilCare and its note receivable from OmniCare-MI, which
resulted in bad debt expense of $4.4 million, (ii) expensed $0.3
million of capitalized software development costs and changed the
estimate of the remaining useful life of the Company's internally
developed software which resulted in additional amortization expense of
$0.3 million, (iii) decreased rent expense by $0.6 million as a result
of rent concessions obtained on the Company's corporate headquarters,
(iv) expensed to medical expense $0.5 million established as a contra
liability related to the liquidation of UltraMedix, and (v) adjusted
the vacation accrual which resulted in a decrease of vacation expense
of $0.2 million.
F-29
68
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
- ---------------------------------------
NOTE 19 - SEGMENT FINANCIAL INFORMATION
- ---------------------------------------
Summarized financial information for the Company's principal operations
is as follows (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------------
Management HMOs & Self-Funded
1999 Companies (1) Managed Plans Benefit Corporate & Consolidated
(2) Plan (3) Eliminations Company
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues - external customers $ 18,148 $ 73,207 $ - $ - $ 91,355
Revenues - intersegment 9,932 - - (9,932) -
Interest and other income 1,516 - - (546) 2,167
-----------------------------------------------------------------------------------------
Total revenues $ 29,596 $ 74,404 $ - $ (10,478) $ 93,522
==================================================================================================================================
Interest expense $ 1,708 $ - $ - $ - $ 1,708
Bad debt expense - - - - -
Operating earnings (losses) (976) 2,893 - (760) 1,157
Segment assets 37,238 18,553 - (6,540) 49,251
Purchase of equipment and capitalized
software 682 - - - 682
Depreciation and amortization 2,688 - - 761 3,449
- ----------------------------------------------------------------------------------------------------------------------------------
1998
- ----------------------------------------
Revenues - external customers $ 24,986 $ 78,582 $ - $ - $ 103,568
Revenues - intersegment 12,423 135 - (12,558) -
Interest and other income 3,213 768 - (1,961) 2,020
-----------------------------------------------------------------------------------------
Total revenues $ 40,622 $ 79,485 $ - $ (14,519) $ 105,588
==================================================================================================================================
Interest expense $ 1,796 $ - $ - $ - $ 1,796
Bad debt expense 6,725 100 - - 6,825
Operating earnings (losses) (20,609) 5,614 - (1,134) (27,357)
Net loss from discontinued operation - - (2,581) - (2,581)
Segment assets 42,521 16,493 $ 16,703 (17,033) 58,684
Purchase of equipment and capitalized
software 820 - - - 820
Depreciation and amortization 8,289 257 - 1,133 9,679
- ----------------------------------------------------------------------------------------------------------------------------------
1997
- ----------------------------------------
Revenues - external customers $ 40,033 $ 70,430 $ - $ - $ 110,463
Revenues - intersegment 14,675 175 - (14,850) -
Interest and other income 3,328 1,162 - (2,404) 2,086
-----------------------------------------------------------------------------------------
Total revenues $ 58,036 $ 71,767 $ - $ (17,254) $ 112,549
==================================================================================================================================
Interest expense $ 1,360 $ - $ - $ - $ 1,360
Bad debt expense 728 1,116 - - 1,844
Operating (losses) (1,308) (4,678) - (475) (6,461)
Net earnings from discontinued
operation - - 1,845 - 1,845
Purchase of equipment and capitalized
software 3,276 - - - 3,276
Depreciation and amortization 3,546 57 - 466 4,069
- ----------------------------------------------------------------------------------------------------------------------------------
F-30
69
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999, 1998 AND 1997
(1) Management companies: United American Healthcare Corporation (1999, 1998,
1997), U.A. Health Care Corporation of Ohio (1997), United American of
Tennessee, Inc. (1999, 1998, 1997), United American of Louisiana, Inc.
(1998, 1997), United American of Pennsylvania, Inc. (1998, 1997), United
American of Georgia, Inc. (1998, 1997), United American of Illinois, Inc.
(1998, 1997), ChoiceOne Preferred Provider Plan, Inc. (1998, 1997), and
United American of Florida, Inc. (1998, 1997).
(2) HMOs and Managed Plans: OmniCare Health Plan of Tennessee (1999, 1998,
1997), UltraMedix Healthcare Systems, Inc. (1998, 1997), and County Care
(1999).
(3) Self-Funded Benefit Plan: Corporate Healthcare Financing, Inc. and
Subsidiaries (1998, 1997).
F-31
70
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF INCORPORATED HEREIN BY FILED
NUMBER DOCUMENT REFERENCE TO HEREWITH
------------------------------------------------------------------------------------------------------------------
3.1 Restated Articles of Exhibit 3.1 to the Registrant's Form S-1
Incorporation of Registrant Registration Statement under the Securities
Act of 1933, as amended, declared effective
on April 23, 1991 ("1991 S-1")
3.1(a) Certificate of Amendment to the Exhibit 3.1(a) to 1991 S-1
Articles of Incorporation of
Registrant
3.2 Amended and Restated Bylaws of Exhibit 3.2 to the Registrant's 1993 Form
Registrant 10-K
4.1 Incentive and Non-Incentive Stock Exhibit 4.1 to the Registrant's 1995 Form
Option Plan of Registrant 10-K
effective March 25, 1991, as
amended
4.2 Form of Common Share Certificate Exhibit 4.2 to the Registrant's 1995 Form
10-K
10.1 Employees' Retirement Plan for Exhibit 10.1 to 1991 S-1
Registrant dated May 1, 1985,
with First Amendment thereto and
Summary Plan Description therefor
10.2 Management Agreement between Exhibit 10.2 to 1991 S-1
Michigan Health Maintenance
Organization Plans, Inc. and
Registrant dated March 15, 1985,
as amended June 12, 1985
10.3 Management Agreement between U.A. Exhibit 10.3 to 1991 S-1
Health Care Corporation and
Personal Physician Care, Inc.
dated March 18, 1987
10.4 Amendment dated February 16, 1993 Exhibit 10.5 to the Registrant's 1995 Form
to 10-K
71
EXHIBIT DESCRIPTION OF INCORPORATED HEREIN BY FILED
NUMBER DOCUMENT REFERENCE TO HEREWITH
------------------------------------------------------------------------------------------------------------------
Management Agreement between
United American Healthcare
Corporation and Personal
Physician Care, Inc. dated March
18, 1987
10.5 Amendment dated June 16, 1994 to Exhibit 10.4 to the Registrant's 1994 Form
Management Agreement between U.A. 10-K
Health Care Corporation and
Personal Physician Care, Inc.
dated March 18, 1987
10.6 Management Agreement between Exhibit 10.5 to Registrant's 1994 Form 10-K
OmniCare Health Plan, Inc. and
United American of Tennessee,
Inc. dated February 2, 1994
10.7 Management Agreement between Exhibit 10.6 to Registrant's 1994 Form 10-K
UltraMedix Health Care Systems,
Inc. and United American of
Florida, Inc. dated February 1,
1994
10.8 Amendment dated September 4, 1995 Exhibit 10.9 to the Registrant's 1995 Form
to Management Agreement between 10-K
UltraMedix Healthcare Systems,
Inc. and United American of
Florida, Inc. dated February 1,
1995
72
EXHIBIT DESCRIPTION OF INCORPORATED HEREIN BY FILED
NUMBER DOCUMENT REFERENCE TO HEREWITH
------------------------------------------------------------------------------------------------------------------
10.9 Amendment dated September 20, Exhibit 10.10 to Registrant's 1995 Form 10-K
1995 to Management Agreement
between UltraMedix Health Care
Systems, Inc. and United American
of Florida, Inc. dated February
1, 1995
10.10 Lease Agreement between 1155 Form 8-K filed August 8, 1991
Brewery Park Limited Partnership
and Registrant dated July 24,
1991, effective May 1, 1992
10.11 Amendment dated December 8, 1993 Exhibit 10.8 to the Registrant's 1994 Form
to Lease agreement between 1155 10-K
Brewery Park Limited Partnership
and Registrant dated July 24, 1991
10.12 Amendment dated April 15, 1993 to Exhibit 10.13 to Registrant's 1995 Form 10-K
Lease Agreement between 1155
Brewery Park Limited Partnership
and Registrant dated July 24, 1991
10.13 Lease Agreement between Baltimore Exhibit 10.7 to the Registrant's 1993 Form
Center Associates Limited 10-K
Partnership and Corporate
Healthcare Financing, Inc. dated
August 24, 1988, as amended April
12, 1993, effective the later of
May 1, 1993 or the date premises
are ready for occupancy
73
EXHIBIT DESCRIPTION OF INCORPORATED HEREIN BY FILED
NUMBER DOCUMENT REFERENCE TO HEREWITH
------------------------------------------------------------------------------------------------------------------
10.14 Amendment dated May 11, 1994 Exhibit 10.11 to the Registrant's 1994
(effective June 30, 1994) to Form 10-K
Lease agreement between Baltimore
Center Associates Limited
Partnership and Corporate
Healthcare Financing, Inc
10.15 Lease Agreement between CLW Exhibit 10.2 to Registrant's 1994 Form 10-K
Realty Asset Group, Inc., as
agent for The Prudential
Insurance Company of America and
United American of Florida dated
May 31, 1994, effective June 1,
1994
10.16 Lease Agreement between Fleming Exhibit 10.3 to Registrant's 1994 Form 10-K
Companies, Inc. and United
American of Tennessee dated June
30, 1994, effective the date
premises are ready for occupancy
10.17 Lease Agreement between Exhibit 10.19 to Registrant's 1995 Form 10-K
International Business Machines
Corporation and Registrant dated
August 29, 1994
10.18 Amended and Restated Line of Exhibit 10.20 to Registrant's 1995 Form 10-K
Credit Facility Agreement between
Michigan National Bank and
Registrant dated March 14, 1995
10.19 Promissory notes between Michigan Exhibit 10.9 to the Registrant's 1993 Form
National Bank and Registrant 10-K
dated August 26, 1993
74
EXHIBIT DESCRIPTION OF INCORPORATED HEREIN BY FILED
NUMBER DOCUMENT REFERENCE TO HEREWITH
------------------------------------------------------------------------------------------------------------------
10.20 Asset Purchase Agreement between Form 8-K filed May 24, 1993 and Form 8-K/A
CHF, Inc., Healthcare Plan filed July 21, 1993
Management, Inc., CHF-HPM Limited
Partnership, Louis J. Nicholas
and Keith B. Sullivan and
Registrant dated May 7, 1993
10.21 Loan and Security Agreement Exhibit 10.18 to Registrant's 1994 Form 10-K
between UltraMedix Health Care
Systems, Inc. and United American
of Florida dated February 1, 1994
10.22 Amendment dated June 13, 1995 to Exhibit 10.26 to Registrant's 1995 Form 10-K
the Loan and Security Agreement
between UltraMedix Care Systems,
Inc. and United American of
Florida, Inc. dated February 1,
1994
10.23 Form of Stock Transfer Services Exhibit 10.19 to Registrant's 1994 Form 10-K
Agreement between Huntington
National Bank and Registrant
10.24 Employment Agreement between Exhibit 10.15 to 1991 S-1
Julius V. Combs, M.D. and
Registrant dated March 15, 1991
10.25 Employment Agreement between Exhibit 10.16 to 1991 S-1
Ronald R. Dobbins and Registrant
dated March 15, 1991
75
EXHIBIT DESCRIPTION OF INCORPORATED HEREIN BY FILED
NUMBER DOCUMENT REFERENCE TO HEREWITH
------------------------------------------------------------------------------------------------------------------
10.26 Employment Agreement between Exhibit 10.22 to Registrant's 1994 Form 10-K
Louis J. Nicholas and Corporate
Healthcare Financing, Inc. dated
May 7, 1993
10.27 First Amendment to Contingent Form 10-Q for the Quarter Ended March 31,
Note Promissory Note between 1996, filed May 14, 1996
CHF-HPM Limited Partnership and
the Registrant
10.28 Acquisition of majority interest Form 8-K filed April 19, 1996
in OmniCare Health Plan, Inc. of
Tennessee and UltraMedix
Healthcare Systems, Inc.
10.29 Injured Workers' Insurance Fund Form 10-K/A filed October 14, 1996, as
Contract No. IWIF 9-96 Managed amended
Care Contract with Statutory
Benefits Management Corporation
dated June 19, 1996
10.30 Ernst & Young LLP Report of Exhibit 10.30 to Registrant's 1998 Form 10-K
Independent Auditors as of June
30, 1996
10.31 Renaissance Center Office Lease Form 10-Q for the Quarter Ended September
between Renaissance Center 30, 1996, filed November 13, 1996
Venture and Registrant
10.32 Purchase Agreement between Form 10-Q for the Quarter Ended December
Statutory Benefits Management 31, 1996, filed February 10, 1997
Corporation and Spectera, Inc.
76
EXHIBIT DESCRIPTION OF INCORPORATED HEREIN BY FILED
NUMBER DOCUMENT REFERENCE TO HEREWITH
------------------------------------------------------------------------------------------------------------------
10.33 Agreement of Purchase and Sale of Form 10-K filed October 14, 1997
Stock, dated September 12, 1997
between CHF Acquisition, Inc. and
the Registrant
10.34 Ernst & Young LLP Report of Form 10-K filed October 14, 1997
Independent Auditors as of June
30, 1997
10.35 Amended and Restated Business Form 10-Q for the Quarter Ended
Loan Agreement between Michigan March 31, 1998, filed May 15, 1998
National
Bank and Registrant dated March
12, 1998 (effective as of
February 1, 1998)
10.36 Business Loan Agreement Addendum Form 10-Q for the Quarter Ended
between Michigan National Bank March 31, 1998, filed May 15, 1998
and Registrant dated March 12,
1998 (effective as of February 1,
1998)
10.37 Promissory Note dated March 12, Form 10-Q for the Quarter Ended
1998 (effective as of February 1, March 31, 1998, filed May 15, 1998
1998) from Registrant to Michigan
National Bank
10.38 Employment Agreement between Exhibit 10.38 to Registrant's 1998
Gregory H. Moses, Jr. and Form 10-K
Registrant dated May 11, 1998
10.39 Amendment dated as of June 30, Exhibit 10.39 to Registrant's 1998
1998 to Lease Agreement between Form 10-K
1155 Brewery Park Limited
Partnership and Registrant dated
June 24, 1991
77
EXHIBIT DESCRIPTION OF INCORPORATED HEREIN BY FILED
NUMBER DOCUMENT REFERENCE TO HEREWITH
------------------------------------------------------------------------------------------------------------------
10.40 Termination of Lease dated June Exhibit 10.40 to Registrant's 1998
24, 1998 between Renaissance Form 10-K
Holdings, Inc. (successor to
Renaissance Center Venture) and
Registrant
10.41 United American Healthcare Exhibit 10.41 to Registrant's 1998
Corporation 1998 Stock Option Plan Form 10-K
10.42 Stock Purchase Agreement among Exhibit 10.42 to Registrant's 1998
Registrant, CHFA, Inc. and Form 10-K
Corporate Healthcare Financing,
Inc. dated August 31, 1998
10.43 Secured Promissory Note dated Exhibit 10.43 to Registrant's 1998
August 31, 1998 from CHFA, Inc. Form 10-K
to Registrant
10.44 Unsecured Promissory Note dated Exhibit 10.44 to Registrant's 1998
August 31, 1998 from CHFA, Inc. Form 10-K
to Registrant
10.45 Guaranty Agreement of Louis J. Exhibit 10.45 to Registrant's 1998
Nicholas dated August 31, 1998 Form 10-K
10.46 Pledge Agreement between CHFA, Exhibit 10.46 to Registrant's 1998
Inc. and Registrant dated August Form 10-K
31, 1998
10.47 Amendment of Business Loan Exhibit 10.47 to Registrant's 1998
Agreement between Registrant and Form 10-K
Michigan National Bank dated
September 1, 1998
10.48 Promissory Note dated September Exhibit 10.48 to Registrant's 1998
1, 1998 of Registrant to Michigan Form 10-K
National Bank
78
EXHIBIT DESCRIPTION OF INCORPORATED HEREIN BY FILED
NUMBER DOCUMENT REFERENCE TO HEREWITH
------------------------------------------------------------------------------------------------------------------
10.49 Pledge Agreement dated September Exhibit 10.49 to Registrant's 1998
1, 1998 from Registrant to Form 10-K
Michigan National Bank
10.50 Promissory Note dated December Form 10-Q filed February 16, 1999
11, 1998 from Registrant to UAH
Securities Litigation Fund
10.51 Amendment of Promissory Note and *
Business Loan Agreement from
Michigan Nation Bank dated May 6,
1999
10.52 Provider Contract between Urban
Hospital Care Plus and Registrant
dated April 1, 1999 *
10.53 Assignment and Assumption of
Subleases and Security Deposits
between International Business *
Machines Corporation and Registrant
dated September 9, 1999
16.1 Concurring Letter regarding Form 8-K filed October 30, 1997
change in Certifying Accountants
dated October 30, 1997, from
Grant Thornton LLP
16.2 Concurring Letter regarding Form 8-K/A filed November 12, 1997
change in Certifying Accountants
dated November 12, 1997, from
Grant Thornton LLP
16.3 Concurring Letter regarding Form 8-K/A filed November 12, 1997
change in Certifying Accountants
dated November 12, 1997, from
Ernst & Young LLP
79
EXHIBIT DESCRIPTION OF INCORPORATED HEREIN BY FILED
NUMBER DOCUMENT REFERENCE TO HEREWITH
------------------------------------------------------------------------------------------------------------------
16.4 Concurring Letter regarding Form 8-K filed January 20, 1998
change in Certifying Accountants
dated January 16, 1998, from
Arthur Andersen LLP
21 Subsidiaries of the Registrant *
27 Financial Data Schedule *
99.1 Press Release dated January 12, Form 8-K filed January 20, 1998
1998