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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, 2000
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 15, 2000, COMPUTED BY REFERENCE TO THE OTC
BULLETIN BOARD CLOSING PRICE ON SUCH DATE, WAS $3,389,564.
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF SEPTEMBER
15, 2000 WAS 6,779,128.
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 2000
Annual Meeting of Shareholders to be held on November 15, 2000 (Part III).
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As filed with the Securities and Exchange Commission on September 28, 2000
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UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business................................................................1
Item 2. Properties.............................................................17
Item 3. Legal Proceedings......................................................17
Item 4. Submission of Matters to a Vote of Security Holders....................18
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters................................................................19
Item 6. Selected Financial Data................................................20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................20
Item 8. Financial Statements...................................................33
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................33
PART III
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
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,"
"could," "may," "might" and words of similar import, constitute "forward-looking
statements" within the meaning of this "safe harbor."
Such forward-looking statements are based on management's current expectations
and involve known and unknown risks, uncertainties and other factors, many of
which the Company is unable to predict or control, that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. 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, 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, 2000, there were approximately 158,000 enrollees
in the managed care organizations owned or operated by the Company.
Management and consulting services provided by the Company include feasibility
studies for licensure, strategic planning, corporate governance, management
information systems, human resources, marketing, pre-certification, utilization
review programs, individual case
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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, 2000, there were approximately 99,000 Medicaid enrollees in the
managed care organizations owned or managed by the Company, OmniCare Health
Plan, Inc., in Tennessee ("OmniCare-TN"), 75%-owned by the Company's wholly
owned subsidiary, 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, 2000, there were approximately 59,000
non-Medicaid/commercial enrollees in OmniCare-MI, OmniCare-TN and County Care
(collectively, the "Managed Plans").
RESTRUCTURING PROGRAM AND MANAGEMENT CHANGES
In January 1998, the Company initiated a restructuring program to address
significant operating losses, negative working capital and a reduction in net
worth. The restructuring program encompassed Company plans to change management,
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 the Company's subsidiary,
Corporate Healthcare Financing, Inc.
The changes in management in 1998 included: (1) the retirement of the then
current Chief Executive Officer of the Company, (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 in May 1998. 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.
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.
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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 has been
dissolved. PhilCare declined to participate in Pennsylvania's Medicaid managed
care program because of program requirements that would have made such
participation unprofitable. See "Business--Other Managed Plan
Ventures--OmniCare-LA" and " -PhilCare" below.
The following table shows the membership in the Managed Plans serviced by the
Company as of September 1, 2000:
Non-Medicaid/
Medicaid Commercial Total
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Managed Plans
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Owned:
OmniCare-TN 32,014 16,622 48,636
County Care - 8,146 8,146
Managed:
OmniCare-MI 67,295 34,280 101,575
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99,309 59,048 158,357
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The following table shows 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.
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YEAR ENDED JUNE 30,
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2000 1999 1998
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(in thousands, except percentages)
Revenues
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OmniCare-TN $77,005 71% $70,934 76% $63,520 60%
OmniCare-MI 18,769 17% 18,148 19% 24,986 24%
County Care 9,169 8% 2,273 2% -- --
UltraMedix -- -- -- -- 15,062 14%
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%. In
addition, in fiscal 1999 the Company forgave $1.3 million of management fees
owed by OmniCare-MI, and in fiscal 2000 the Company converted $3.7 million of
management fees owed by OmniCare-MI to an unsecured loan to OmniCare-MI
evidenced by a surplus note. UltraMedix was placed in receivership and in
liquidation pursuant to judicial consent orders entered on February 26 and March
3, 1998. See "Managed Plan Operated By the Company-OmniCare-MI" 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.
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.
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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 Dec. 31, 2010 June 30, 2001 Sept. 30, 2001
(b) Term extension:
(i) Automatically renewable No Yes - 4 successive Yes - unlimited
5-year periods
(ii) Terms of renewal/ Subject to review 5 years Successive
continuation every 5 years 1-year terms
(iii) Next review period May 1, 2005 January 1, 2001 September 1, 2001
(c) Termination:
(i) Without cause by the Plan
at such review dates 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
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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., owns a 75% equity interest in OmniCare-TN; a
local partner owns the remaining 25%. OmniCare-TN began as a PPO contractor with
the Bureau of TennCare ("TennCare"), a State of Tennessee program that provides
medical benefits to Medicaid and working uninsured and uninsurable recipients,
and 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.
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In November 1993, OmniCare-TN contracted with TennCare as a Medicaid PPO to
arrange for the financing and delivery of health care services on a capitated
basis to eligible Medicaid beneficiaries 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. TennCare 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, 2000 for a 42-month term, expiring
December 31, 2003. The new contract provides for increased capitation rates, but
eliminates the practice of providing retroactive payments to managed care
organizations for high cost chronic conditions of their members ("adverse
selection") and payments earmarked as adjustments for covered benefits. In
addition, the new contract requires that at least 85% of capitation revenues
received by OmniCare-TN must be passed on to medical providers.
OmniCare-TN was assigned approximately 6,000 members by TennCare in the second
half of fiscal 2000 as a result of three other managed care organizations, which
had contracts with TennCare, ceasing to serve their enrollees or being unable to
take on new enrollees. Medical services expenses for such new OmniCare-TN
members disproportionately exceeded OmniCare-TN's normal per member per month
("PMPM") experience and adversely affected its earnings for and since that
period. OmniCare-TN is seeking an adverse selection payment from TennCare,
retroactive for such fiscal 2000 expenses, but there can be no assurance what
the outcome of its request will be.
OmniCare-TN is currently licensed in and serves Shelby and Davidson counties in
Tennessee (which include the cities of Memphis and Nashville). OmniCare-TN also
has members in 11 other counties in Tennessee, all of whom were assigned to it
by TennCare as described in the preceding paragraph. As of September 1, 2000,
total enrollment was approximately 48,636 members, of which 32,014 (66%) and
16,622 (34%) represent Medicaid and Non-Medicaid enrollees, respectively.
OmniCare-TN's application for a commercial HMO license is pending. OmniCare-TN
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 fiscal 2001. 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 OmniCare-TN'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
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Wayne County who lack access to private or employer-sponsored health insurance
or to another government health plan. The current contract period is through
September 30, 2001, with automatic renewal for successive periods of one year
unless terminated by either party as provided in the contract. 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. As of September 1, 2000, total
County Care enrollment was approximately 8,146 members.
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 owned 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 reserve
deficiency at December 31, 1997 was estimated at $4.5 million. As a result, on
January 30, 1998, the Company, UltraMedix and its third-party administrator,
UA-FL, signed and delivered to the FDOI a Stipulation and Consent to Appointment
of Receiver and Order of Liquidation entitling the 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 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;
UltraMedix ceased enrolling new members; and the Organizations continued to
provide services to all of the UltraMedix 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 ("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
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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.
Until March 31, 2000, the Company maintained a $6.4 million estimated medical
claims liability for UltraMedix, which had been established at December 31,
1997. At March 31, 2000, Company management concluded that the continuing
reserve requirement should be $0.8 million and accordingly, the Company reduced
the $6.4 million reserve by $5.6 million and offset that amount against medical
services expenses.
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 (an Independent Practice Association
model HMO does not employ physicians as staff, but instead contracts with
associations or groups of independent physicians to provide services to HMO
members). OmniCare-MI also created and implemented the first known mental health
capitation carve out in 1983.
OmniCare-MI's current enrollment is through approximately 1,100 companies that
offer the health plan coverage to employees and their family members, through
individual enrollment that is open once a year for a 30-day period, and through
the State of Michigan's Medicaid program pursuant to an agreement with the
Michigan Department of Community Health, which makes HMO coverage available to
eligible Medicaid beneficiaries in certain counties and mandatory in others.
Among the major employers that offer OmniCare-MI, ranked by enrollment, are: the
City of Detroit, the Federal Government, the Detroit Board of Education, 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 20% of OmniCare-MI's total
enrollment. No other group exceeds 2% of the Plan's total enrollment.
As of September 1, 2000, total enrollment in OmniCare-MI was approximately
101,575 of which 34,280 (34%) are commercial members, including approximately
5,584 point-of-service members, and approximately 67,295 (66%) represent
Medicaid members.
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
OmniCare-MI's Medicaid enrollment. Unsuccessful bidders to the State's request
for proposal legally challenged the initiative and, as a result, the State did
not assign the eligible Medicaid beneficiaries to plans that were awarded
contracts, but nonetheless instituted the premium rate reduction component of
the new program
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effective July 1997. With the delay of the assignment of approximately 90,000
eligible Medicaid beneficiaries 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.
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. 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 plan
to revitalize the HMO and cited "three major positive developments respecting
OmniCare": an unsecured loan of $4.6 million by the Company in June 1998, the
corrective action plan and the "experienced and capable leadership of Gregory H.
Moses."
On April 13, 2000 and June 30, 1998, the Company funded unsecured loans to
OmniCare-MI, evidenced by surplus notes of $7.7 million and $4.6 million,
respectively, to enable OmniCare-MI to meet its minimum statutory requirements
for net worth and working capital. The $7.7 million loan consisted of $4.0
million in cash and conversion of $3.7 million of management fees owed to the
Company. Pursuant to the terms of the surplus notes, interest and principal
payments are subject to approval by the Bureau and shall be repaid only out of
the statutory surplus earnings of OmniCare-MI. The interest rate on the $7.7
million surplus note is fixed at 8.5%, while the interest rate on the $4.6
million surplus note is at the prime rate (9.5% at June 30, 2000). Interest is
payable annually and if not paid annually is forfeited. Interest income of $0.5
and $0.4 million was forfeited for fiscal 2000 and 1999, respectively. The
principal on the notes has no stated maturity or repayment date. The surplus
notes are subordinated to all other claimants of OmniCare-MI. Based on an
analysis of OmniCare-MI's projected future cash flows, the Company recorded
impairment losses on the valuation of the surplus notes. The impairment losses
resulted in bad debt expense of $3.1 million and $2.3 million for the years
ended June 30, 2000 and 1998, respectively. In addition, in fiscal 1999, the
Company provided additional funding by forgiving $1.3 million in management fees
owed to the Company by OmniCare-MI to enable OmniCare-MI to meet its minimum
statutory requirements for net worth and working capital.
During 1998, OmniCare-MI developed a corrective action plan and began to
implement strategic initiatives, which included the reduction of medical costs
through renegotiating its hospital and physician provider contracts, and the
reduction of the management fee percentage paid to the Company from 17% to 14%
effective June 1, 1998. The 1998 corrective action plan was effective in
reducing costs for OmniCare-MI's Medicaid members, but not as effective in
regard to OmniCare-MI's point-of-service members. In 2000, OmniCare-MI developed
a revised corrective action plan, including the development of new underwriting
guidelines, implementation of new renewal rates representing an average
per-member premium
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increase of 40% and instituting pharmacy and office visit co-pays for all member
groups. In addition, OmniCare-MI is taking measures to further manage its
medical costs through renegotiations of hospital contracts, and cost reduction
efforts in the areas of pharmacy, catastrophic case management and behavioral
health.
The Company, in its restructuring efforts and forecasts, has considered the
impact of the reduction in the management fee percentage. In fiscal 2000,
management fee revenues increased 4% over the prior year. In fiscal 1999,
management fee revenues decreased approximately $4.2 million, compared to fiscal
1998, as a result of the management fee percentage reduction.
Management believes that the continued viability of OmniCare-MI is critical to
the Company's future operations and concluded that the unsecured loans, in the
form of surplus notes, 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.
In June 1999, OmniCare-MI joined with Blue Cross Blue Shield of Michigan (the
"CasinoCare Venture") in successful proposals to provide health care, dental and
prescription drug benefits to employees of two new Detroit casinos. There are
currently approximately 5,000 CasinoCare Venture members receiving health
coverage, generating medical premiums of approximately $0.8 million monthly. The
casinos' present facilities may be replaced by larger facilities in Detroit as
early as 2004, and based on the casinos' estimates, the replacement facilities,
when built and open, will have up to 8,000 employees (amounting to more than
18,000 members) requiring health coverage, which could generate medical premiums
of up to $2.3 million monthly ($28.0 million annually). The Company receives a
management fee based on the medical premiums generated from those members who
select the Company's products. There can be no assurance that the CasinoCare
Venture will be able to increase its covered membership as a result of the
proposed larger facilities.
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 plans that demonstrate levels of service and clinical
quality that meet or exceed NCQA's rigorous requirements for consumer protection
and quality improvement.
On May 1, 2000, the Company and OmniCare-MI commenced their previously announced
strategic partnership with the Detroit Medical Center ("DMC"), a major health
care provider system in southeastern Michigan. The alliance is intended to
strengthen their respective core businesses and improve the quality of care and
services for their patients and members. In addition, it was announced that DMC
and OmniCare-MI would develop a joint marketing campaign designed to increase
OmniCare-MI's membership and DMC's facility utilization rate.
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In the strategic partnership's first phase, on May 1, 2000 approximately 28,000
members of DMC's Medicaid managed care program were transferred to OmniCare-MI,
and DMC's seven hospitals and approximately 3,000 affiliated physicians now
serve as part of OmniCare-MI's provider network. During fiscal 2000, the
additional membership generated management fee revenue of $0.6 million. It is
anticipated that management fee revenue earned on the increased Medicaid
membership will grow to approximately $7.0 million in fiscal 2001 with a
minimal increase in cost.
On July 14, 2000, the State of Michigan notified OmniCare-MI that it was one of
the successful bidders in the State's extensive bid process for increased
Medicaid rates and continued eligibility as an HMO providing coverage to
enrollees of the State's Comprehensive Health Care Program for Medicaid
beneficiaries. As a result, OmniCare-MI has been awarded a rate increase and an
extension of its contract with the State to September 30, 2002, with the
potential for three one-year extensions. Management believes that the awarded
rate increase could increase OmniCare-MI's annual Medicaid revenue by
approximately 11% on average, resulting in approximately $1.5 million of
additional management fee revenue to the Company in fiscal 2001. In addition,
because the unsuccessful bidders' Medicaid enrollees must change to a successful
bidder in their region, management believes that OmniCare-MI's volume of
Medicaid enrollees could significantly increase, generating additional
management fee revenue for the Company in and after fiscal 2001. There can be no
assurance, however, of any such increase in OmniCare-MI's membership.
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"). OmniCare-LA 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
continually since inception. Consistent with the Company's restructuring
efforts, the Company has ceased its operations in Louisiana, withdrawn its $1.0
million statutory reserve, terminated its letter of credit commitments and
dissolved OmniCare-LA.
PHILCARE. PhilCare, a network model HMO headquartered in Philadelphia,
Pennsylvania, was organized as a Pennsylvania corporation in May 1994. PhilCare
was 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.
Effective April 1, 1998, PhilCare entered into an Integrated Delivery System
("IDS") agreement with Pennsylvania Healthmate, Inc. ("Healthmate"), an entity
that arranges for the provision of health care services for its Medicaid
membership through contracts with health care providers. The IDS agreement
placed the entity in the position of bearing the risk, but as the contractor
with
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the Pennsylvania Department of Public Welfare (the state's regulatory agency for
HMOs), PhilCare was deemed responsible for compliance with all applicable rules
and regulations. Based on an evaluation of the net recoverable value of the
Company's investment in PhilCare, in fiscal 1998 the Company recorded a full
impairment loss against its $2.1 million investment.
In February 2000, Healthmate was sold, and the buyer agreed to assume
Healthmate's liabilities. As a result of the Healthmate sale, on June 22, 2000,
PhilCare's Board of Directors and shareholders approved the voluntary
dissolution of PhilCare. PhilCare was dissolved under applicable law in the
Company's fiscal 2000. As a result of the dissolution, assets of PhilCare were
distributed to UA-PA, pursuant to agreements under which UA-PA contributed those
assets, and the Company recovered its $2.1 million investment in PhilCare,
resulting in a gain in that amount for the fiscal year ended June 30, 2000.
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. In fiscal 2000, the Company reached an agreement with its
landlord, which assumed the subleases and released the Company from its lease
obligations, effective September 9, 1999.
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 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 resulting in a net investment in
Advica of $2.3 million.
In fiscal 1998, based on Advica's adverse operating results, the Company
recognized a full impairment loss on its 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 Corporate Healthcare Financing, Inc. ("CHF") for
approximately $16.2 million in the form of cash, stock, a contingent note and
the assumption
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of liabilities. CHF designed customized employee welfare plan arrangements for
self-funded employers and provided marketing, management and administrative
services to self-funded employers generally.
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
$0.25 million 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.
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 or its
Managed Plans will be granted the necessary approvals for new products or will
maintain federal qualifications or state licensure.
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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 UHCP.
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. OmniCare-MI is currently in continuing
discussions with state regulators regarding compliance with certain regulatory
issues. See "Managed Plan Operated By the Company--OmniCare-MI" under "Managed
Plans" above. 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.
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.
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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 fiscal 2000 in southeastern Michigan are Blue Cross Blue Shield
of Michigan, The Wellness Plan, Total Health Plan and Health Alliance Plan. The
competitors in central and southwestern Tennessee are Access Med Plus, TLC,
Xantus 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 Managed Plans 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, 2000 was 319 compared to 286 at
September 1, 1999. 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
The Company is well under way in implementing its new strategic information
technology plan, intended to enhance operations, support provider, member and
employer information requirements, and reduce costs. An initial phase providing
for automation of claims entry by scanning, imaging and electronic data
interchange was completed and implemented in the fourth quarter of fiscal 2000.
The Company has purchased a new state-of-the-art computer system to replace its
claims processing and payment system. The new system, expected to be in service
early in calendar year 2001, will include many features and capabilities that
must now be performed manually or in a mode that is not very responsive to
Company needs. The new system will operate in a real-time mode enabling rapid
response to information needs. The system will automate activities associated
with membership and enrollment, benefits management, premium billing, member
services, claims/encounter processing, medical management, case management,
quality management, referral management, provider contracting, and HEDIS (Health
Plan Employer Data and Information Set) reporting.
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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,"
"could," "may," "might" and words of similar import, constitute "forward-looking
statements" within the meaning of this "safe harbor."
Such forward-looking statements are based on management's current expectations
and involve known and unknown risks, uncertainties and other factors, many of
which the Company is unable to predict or control, that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors potentially include, among others,
the following:
1. Inability 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 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.
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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. Inability to maintain or obtain satisfactory bank loan credit
arrangements.
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.
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 insolvent and
appointing the FDOI as Receiver ("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.
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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
Shares of the Company's Common Stock have been traded since May 2, 2000 on the
OTC Bulletin Board with the symbol "UAHC," and earlier, during fiscal years 1999
and 2000, were traded on the New York Stock Exchange with the symbol "UAH"
through May 1, 2000.
The table below sets forth for the Common Stock the range of the high and low
sales prices on the New York Stock Exchange for each quarter in the past two
fiscal years. (For the fourth quarter of fiscal 2000, the range of the high and
low bid quotations on the OTC Bulletin Board from and after May 2, 2000 was
neither higher nor lower than the high and low sales prices, respectively, shown
in the table below.)
2000 SALES PRICE 1999 SALES PRICE
---------------------------------- -------------------------------------
FISCAL QUARTER HIGH LOW HIGH LOW
--------------------------- ---------------------------------- -------------------------------------
First $ 1.812 $ 0.937 $ 2.312 $ 1.125
Second 1.437 0.875 1.937 1.000
Third 1.437 1.000 1.437 1.062
Fourth 1.250 0.250 1.937 0.750
As of September 15, 2000, the closing price of the Common Stock was $0.50 per
share and there were approximately 240 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following table shows consolidated financial data for the periods indicated:
- ----------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------
Operating Data (Year ended June 30): (in thousands, except per share data)
- ------------------------------------
Operating revenues $ 109,053 $ 93,522 $ 105,588 $ 112,549 $ 92,379
Earnings (loss) from
continuing operations 984 575 (22,915) (5,260) (3,657)
Earnings (loss) from
discontin-ued operation, net
of income taxes -- -- (2,581) 1,845 909
Net earnings (loss) 984 575 (25,496) (3,415) (2,748)
Earnings (loss) per common
share from continuing
operations - basic and
diluted $ 0.15 $ 0.09 $ (3.48) $ (0.80) $ (0.56)
Net earnings (loss) per
common share - basic and
diluted $ 0.15 $ 0.09 $ (3.88) $ (0.52) $ (0.42)
Weighted average common
shares outstanding - diluted 6,779 6,764 6,578 6,553 6,561
Balance Sheet Data (June 30):
- -----------------------------
Cash and investments $ 10,569 $ 18,576 $ 14,690 $ 17,442 $ 30,930
Intangible assets, net 3,663 4,374 5,629 10,557 11,546
Net assets of discontinued
operation -- -- 16,703 19,746 14,703
Total assets 34,809 49,251 58,684 79,662 93,239
Medical claims and benefits
payable 11,245 19,810 20,004 11,632 25,678
Debt 4,345 13,112 22,444 23,868 21,654
Shareholders' equity 11,051 10,360 9,081 34,406 37,822
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
After implementation of the restructuring plan initiated in fiscal 1998, which
included changes in senior management, sale of the Company's subsidiary, CHF,
renegotiation of the bank credit facility and settlement of legal proceedings,
the Company continues its efforts to achieve
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further cost reductions and maintain Company revenue, as well as pursue
worthwhile mergers and joint ventures.
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 sale 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 $0.25 million discount granted as
an inducement for the buyer to prepay both notes. As required by the Company's
bank line of credit facility, the sale was approved by the Company's bank lender
and all proceeds were used to reduce the Company's indebtedness to the bank.
On September 25, 2000, the Company replaced its $4.0 million bank line of
credit, originally due July 1, 2000, with a new $4.0 million term loan from the
same bank lender. The term loan requires monthly installments of approximately
$85,000, based upon a five-year amortization, through September 30, 2001 when
the remaining unpaid principal of approximately $3.4 million will be due. As a
result of this refinancing, principal due subsequent to June 30, 2001 is
classified as long-term debt in the "Consolidated Balance Sheets" at June 30,
2000. See Notes 10 and 16 in "Notes to Consolidated Financial Statements" for
further discussion of the refinancing of the line of credit.
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 $0.625 million
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 $0.625 million
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 per share.
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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 $0.625 million promissory note from
the Company payable in 15 equal monthly installments through March 2001, with
interest at 4% per annum from December 11, 1998, and 277,777 new shares of
common stock of the Company valued at $0.625 million and issued on March 29,
1999.
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 current contract period is
through September 30, 2001, with automatic renewal for successive periods of one
year unless terminated by either party as provided in the contract. Although
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.
On May 6, 1999, the Company's Board of Directors authorized the repurchase and
retirement 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, and the remaining 237,100 shares were
repurchased in July 1999.
The Company has implemented a corrective action plan, developed in 1998 and
revised in 2000, for OmniCare-MI. The corrective action plan implemented in 1998
included strategic initiatives to reduce medical costs through renegotiating its
hospital and physician provider contracts, and the reduction of the management
fee percentage paid to the Company from 17% to 14% effective June 1, 1998. The
1998 corrective action plan was effective in reducing costs for OmniCare-MI's
Medicaid members, but not as effective in regard to OmniCare-MI's
point-of-service members. The management fee percentage reduction decreased the
Company's management fee revenue for fiscal 1999 by approximately $4.2 million
compared to fiscal 1998.
The Company's revised corrective action plan for OmniCare-MI, developed in 2000,
includes the development of new underwriting guidelines, implementation of new
renewal rates representing an average per-member premium increase of 40% and
institution of pharmacy and office visit co-pays for all member groups. In
addition, OmniCare-MI is taking measures to further manage its medical costs
through renegotiations of hospital contracts, and cost reduction efforts in the
areas of pharmacy, castastrophic case management and behavioral health.
On April 13, 2000 and June 30, 1998, the Company funded unsecured loans to
OmniCare-MI, evidenced by surplus notes of $7.7 million and $4.6 million,
respectively, to enable OmniCare-MI to meet its minimum statutory requirements
for net worth and working capital. The $7.7
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million loan consisted of $4.0 million in cash and conversion of $3.7 million of
management fees owed to the Company. Pursuant to the terms of the surplus notes,
interest and principal payments are subject to approval by the Bureau and shall
be repaid only out of the statutory surplus earnings of OmniCare-MI. The
interest rate on the $7.7 million surplus note is fixed at 8.5% per annum, while
the interest rate on the $4.6 million surplus note is at the prime rate (9.5% at
June 30, 2000). Interest is payable annually and if not paid annually is
forfeited. Interest income of $0.5 and $0.4 million was forfeited for fiscal
2000 and 1999, respectively. The principal on the notes has no stated maturity
or repayment date. The surplus notes are subordinated to all other claimants of
OmniCare-MI. Based on an analysis of OmniCare-MI's projected future cash flows,
the Company recorded impairment losses on the valuation of the surplus notes.
The impairment losses resulted in bad debt expense of $3.1 million and $2.3
million for the years ended June 30, 2000 and 1998, respectively. In addition,
during fiscal 1999, the Company forgave $1.3 million in management fees owed by
OmniCare-MI to enable OmniCare-MI to meets its minimum statutory requirements
for net worth and working capital.
The continued stabilization efforts related to OmniCare-MI continue, including
pursuing joint ventures and other similar activities. In June 1999, OmniCare-MI
joined with Blue Cross Blue Shield of Michigan to provide health care, dental
and prescription drug benefits to employees of two new Detroit casinos. There
are currently approximately 5,000 CasinoCare Venture members receiving health
coverage and generating medical premiums of approximately $0.8 million monthly.
The casinos' present facilities may be replaced by larger facilities in Detroit
as early as 2004; and based upon the casinos' estimates, the replacement
facilities, when built and open, will have up to 8,000 employees (amounting to
more than 18,000 members) requiring health coverage, which could generate
medical premiums of up to $2.3 million monthly ($28.0 million annually). The
Company receives a management fee based on the medical premiums generated from
those members who select the Company's products. There can be no assurance that
the CasinoCare Venture will be able to increase its covered membership as a
result of the proposed larger facilities.
On May 1, 2000, the Company and OmniCare-MI commenced their previously announced
strategic partnership with DMC, a major health care provider system in
southeastern Michigan. The alliance is intended to strengthen their respective
core businesses and improve the quality of care and services for their patients
and members. In addition, it was announced that DMC and OmniCare-MI will develop
a joint marketing campaign designed to increase OmniCare-MI's membership and
DMC's facility utilization rate.
In the strategic partnership's first phase, on May 1, 2000 approximately 28,000
members of DMC's Medicaid managed care program were transferred to OmniCare-MI,
and DMC's seven hospitals and approximately 3,000 affiliated physicians now
serve as part of OmniCare-MI's provider network. During fiscal 2000, the
additional membership generated management fee revenue of $0.6 million.
Management anticipates that management fee revenue from the increased Medicaid
membership will grow to approximately $7.0 million in fiscal 2001 with a minimal
increase in cost.
On July 14, 2000, the State of Michigan notified OmniCare-MI that it was one of
the successful bidders in the State's extensive bid process for increased
Medicaid rates and
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continued eligibility as an HMO providing coverage to enrollees of the State's
Comprehensive Health Care Program for Medicaid beneficiaries. As a result,
OmniCare-MI has been awarded a rate increase, effective October 1, 2000, and an
extension of its contract with the State through September 30, 2002, with the
potential for three one-year extensions. Management estimates that the awarded
rate increase could increase OmniCare-MI's annual Medicaid revenue by
approximately 11% on average, resulting in approximately $1.5 million of
additional management fee revenue to the Company in fiscal 2001. In addition,
because the unsuccessful bidders' Medicaid enrollees must change to a successful
bidder in their region, management believes that OmniCare-MI's volume of
Medicaid enrollees could significantly increase, generating additional
management fee revenue for the Company in and after fiscal 2001. There can be no
assurance, however, of any such increase in OmniCare-MI's membership.
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.
Until March 31, 2000, the Company maintained a $6.4 million estimated medical
claims liability for UltraMedix, which had been established at December 31,
1997. At March 31, 2000, Company management concluded that the continuing
reserve requirement should be $0.8 million, and accordingly, the Company reduced
the $6.4 million reserve by $5.6 million and offset that amount against medical
services expenses.
Effective April 1, 1998, PhilCare entered into an IDS agreement with Healthmate,
an entity that arranges for the provision of health care services for its
Medicaid membership through contracts with health care providers. The IDS
agreement placed 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 was deemed responsible for compliance with
all applicable rules and regulations. Based on an evaluation of the net
recoverable value of the Company's investment in PhilCare, the Company recorded
a full impairment loss against its $2.1 million investment, in the fiscal year
ended June 30, 1998.
In February 2000, Healthmate was sold, and the buyer agreed to assume
Healthmate's liabilities. As a result of the Healthmate sale, on June 22, 2000,
PhilCare's Board of Directors and shareholders approved the voluntary
dissolution of PhilCare. PhilCare was dissolved under applicable law in the
Company's fiscal 2000. As a result of the dissolution, assets of PhilCare were
distributed to UA-PA pursuant to agreements under which UA-PA contributed those
assets, and the Company recovered its $2.1 million investment in PhilCare,
resulting in a gain in that amount for the fiscal year ended June 30, 2000.
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Effective July 1, 2000, OmniCare-TN entered into a new 42-month contract with
the State of Tennessee's TennCare Program. The provisions of the contract
provide for an approximate 4.5% increase in average premiums through January 1,
2001, with future increases to be determined by the State of Tennessee. Such
increases are in lieu of the quarterly adverse selection payments previously
made by TennCare to compensate managed care organizations for substantial
adverse costs incurred due to the nature of the services they offer and their
treatment of a high risk population. Management expects that the net effect of
the increase in the monthly premiums and the elimination of the adverse
selection payments will improve monthly cash flow in fiscal 2001.
On September 20, 2000, the Company made an additional cash contribution of $0.9
million to OmniCare-TN in exchange for additional preferred stock of OmniCare-TN
to be issued to the Company. The cash contribution was made to enable
OmniCare-TN to meet minimum statutory requirements for net worth.
The Company recognized earnings before income taxes of $1.6 million and $1.2
million for the years ended June 30, 2000 and 1999, respectively, an increase of
$0.4 million (33%). Earnings net of income taxes for the years ended June 30,
2000 and 1999 were $1.0 million and $0.6 million, respectively, an increase of
$0.4 million (67%). Excluding the earlier described reversal in part of an
UltraMedix medical claims liability reserve, recording of bad debt expense
against amounts owed to the Company by OmniCare-MI and recovery of the
investment in PhilCare, resulting in a gain, the Company would have recognized a
loss before income taxes of $3.0 million for the fiscal year ended June 30,
2000.
YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999
Total revenues increased $15.6 million (17%), to $109.1 million in the year
ended June 30, 2000 from $93.5 million in the year ended June 30, 1999.
Medical premium revenues were $86.2 million in the year ended June 30, 2000, an
increase of $13.0 million (18%) from medical premium revenues of $73.2 million
in the year ended June 30, 1999.
Medical premium revenues for OmniCare-TN increased $6.1 million (9%), to $77.0
million in the year ended June 30, 2000, from $70.9 million in the year ended
June 30, 1999. OmniCare-TN's premium rate increases accounted for $3.1 million
of the increase. Member months decreased 16,000 (3%) to 524,000 in the year
ended June 30, 2000 from 540,000 in the year ended June 30, 1999, and accounted
for a $2.4 million decrease in premium revenues. TennCare provides additional
adverse selection payments to managed care organizations for high cost chronic
conditions of their members and payments earmarked as adjustments for covered
benefits. In the year ended June 30, 2000, revenue adjustments for adverse
selection and other covered benefits increased $4.5 million. OmniCare-TN adverse
selection revenue related to fiscal 1999, recognized in the year ended June 30,
2000, accounted for $0.9 million of the revenue increase.
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The total OmniCare-TN PMPM revenue rate - based on an average membership of
43,700 for the year ended June 30, 2000 compared to 45,000 for the year ended
June 30, 1999 - was $147 for the year ended June 30, 2000 compared to $131 for
the year ended June 30, 1999, an increase of $16 (12%). The PMPM premium rate,
based on the State of Tennessee's estimate, increased 5%, to $129 for the year
ended June 30, 2000 from $122 for the year ended June 30, 1999, excluding excess
adverse selection payments and adjustments for covered benefits.
Premium revenues from the County Care program totaled $9.2 million for the year
ended June 30, 2000, compared to $2.3 million for the year ended June 30, 1999.
The $6.9 million (300%) increase is a result of the Company having only
participated in the County Care program three months of fiscal 1999 versus a
full year of participation in fiscal 2000.
Management fees earned from OmniCare-MI were $18.8 million in the year ended
June 30, 2000, an increase of $0.7 million (4%) from fees of $18.1 million in
the year ended June 30, 1999. Excluding the earlier described forgiveness in
fiscal 1999 of $1.3 million of management fee revenue, management fees earned in
the fiscal year ended June 30, 2000 would have decreased $0.6 million (3%)
compared to management fees of $19.4 million for the year ended June 30, 1999.
The $18.8 million of management fees earned from OmniCare-MI in fiscal 2000
includes the portion of $3.7 million which was converted into an unsecured loan
to OmniCare-MI, evidenced by a surplus note.
Interest and other income increased $1.9 million (86%) to $4.1 million in the
year ended June 30, 2000 from $2.2 million in the year ended June 30, 1999.
Other income increased $2.5 million as a result of a $2.1 million gain recorded
on the Company's recovery of its $2.1 million investment in PhilCare upon
PhilCare's dissolution and $0.4 million for fees received for management of the
Women, Infants and Children program for the City of Detroit. Interest income
decreased $0.6 million due primarily to the retirement of the CHF
interest-bearing notes in August 1999.
Total expenses were $107.5 million in the year ended June 30, 2000, compared to
$92.4 million in the year ended June 30, 1999, an increase of $15.1 million
(16%).
Medical services expenses were $70.3 million in the year ended June 30, 2000, an
increase of $10.4 million (17%) from medical services expenses of $59.9 million
in the year ended June 30, 1999. As described in "Overview" above, the Company
established at December 31, 1997 and maintained until March 31, 2000 an
estimated medical claims liability reserve of $6.4 million for UltraMedix. At
March 31, 2000, Company management concluded that the continuing reserve
requirement should be $0.8 million, and accordingly, the Company reduced the
reserve by $5.6 million and offset that amount against medical services
expenses. Without that reversal, medical services expenses would have been $75.9
million in the year ended June 30, 2000, an increase of $16.0 million (27%),
resulting in an overall percentage of medical services expenses to medical
premium revenues - the medical loss ratio ("MLR") - of 88% for OmniCare-TN and
County Care for fiscal 2000.
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Medical services expenses for OmniCare-TN increased $10.0 million (17%), to
$67.8 million in the year ended June 30, 2000 from $57.8 million in the year
ended June 30, 1999. The OmniCare-TN MLR was 88% for the year ended June 30,
2000 and 82% for the year ended June 30, 1999. The fiscal 2000 OmniCare-TN MLR
includes an approximate 4.5% increase due to a fourth quarter increase in the
medical claims liability of $3.4 million related to the assignment of new
members by TennCare. The fiscal 1999 OmniCare-TN MLR includes an approximate 3%
reduction due to offsets to medical services 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 received
in fiscal 1999 for the period June 1997 and prior.
OmniCare-TN was assigned approximately 6,000 members by TennCare in the second
half of fiscal 2000 as a result of three other managed care organizations, which
had contracts with TennCare, ceasing to serve their enrollees or being unable to
take on new enrollees. Medical services expenses for such new OmniCare-TN
members disproportionately exceeded OmniCare-TN's normal PMPM experience and
adversely affected its earnings for and since that period. OmniCare-TN is
seeking an adverse selection payment from TennCare, retroactive for such fiscal
2000 expenses, but there can be no assurance what the outcome of its request
will be.
Medical services expenses for County Care were $8.1 million in the year ended
June 30, 2000, an increase of $6.0 million (286%) from medical services expenses
of $2.1 million in the year ended June 30, 1999. The increase is a result of the
Company having only participated in the County Care program three months in
fiscal 1999 versus a full year of participation in fiscal 2000. The County Care
MLR for the year ended June 30, 2000 was 88%. County Care operations began with
inception of the contract in April 1999.
Marketing, general and administrative expenses increased $2.9 million (11%), to
$30.2 million in the year ended June 30, 2000, from $27.3 million in the year
ended June 30, 1999. The increase was due primarily to increases in wages and
benefits of $1.8 million and increases in temporary labor costs of $0.9 million.
Depreciation and amortization remained relatively constant at $3.4 million for
the years ended June 30, 2000 and 1999. The Company had previously capitalized
costs for internally developed customized software. At June 30, 2000, these
costs were fully depreciated and accounted for approximately $1.4 million of
fiscal 2000 expense. The Company purchased $2.5 million of property and
equipment, the majority of which was placed in service in the last quarter of
fiscal 2000 and therefore did not have a significant effect on depreciation
expense in the year ended June 30, 2000.
Interest expense decreased $1.2 million (68%), to $0.5 million in the year ended
June 30, 2000 from $1.7 million in the year ended June 30, 1999, due to
reduction of outstanding debt from $13.1 million at June 30, 1999 to $4.3
million at June 30, 2000.
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Bad debt expense in the year ended June 30, 2000 totaled $3.1 million as a
result of recording an impairment loss on the valuation of the unsecured loan
made to OmniCare-MI.
The Company recognized earnings before income taxes of $1.6 million and $1.2
million for the years ended June 30, 2000 and 1999, respectively, an increase of
$0.4 million (33%). Earnings net of income taxes for the years ended June 30,
2000 and 1999 were $1.0 million and $0.6 million, respectively, an increase of
$0.4 million (67%). Excluding the earlier described reversal in part of an
UltraMedix medical claims liability reserve, recording of bad debt expense
against amounts owed to the Company by OmniCare-MI and recovery of the
investment in PhilCare, resulting in a gain, the Company would have recognized a
loss before income taxes of $3.0 million for the fiscal year ended June 30,
2000.
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.
OmniCare-TN medical premium revenues 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. 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. In addition, OmniCare-TN recognized
a one-time adverse selection payment of $1.2 million in fiscal 1999. For the
year ended June 30, 1999, OmniCare-TN medical premium revenues 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 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 fiscal 1999 medical premium revenue increase.
Premium revenues from the County Care program, which began in April 1999,
totaled $2.3 million in fiscal 1999.
UltraMedix, 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.
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Management fees earned from OmniCare-MI 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. 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 services expenses were $59.9 million in the year ended June 30, 1999, a
decrease of $10.4 million (15%) from medical services expenses of $70.3 million
in the year ended June 30, 1998.
Medical services 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 OmniCare-TN MLR was 82% for the year ended June 30, 1999 and
83% for the year ended June 30, 1998. The fiscal 1999 OmniCare-TN MLR includes
an approximate 3% reduction due to offsets to medical services 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
received in fiscal 1999 for the period June 1997 and prior.
Medical services expenses for County Care in fiscal 1999 were $2.1 million from
inception of the contract in April 1999. The MLR for County Care was estimated
at 92%, a rate management believed adequate to establish reserves sufficient to
cover anticipated program medical expenses.
UltraMedix, which ceased operations in March 1998, did not incur any medical
services expenses in the year ended June 30, 1999. Medical services expenses for
UltraMedix were $17.3 million in the year ended June 30, 1998.
Marketing, general and administrative expenses 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 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
UA-FL, which ceased operations and were placed in liquidation in March 1998.
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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, 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 $27.4 million for the
year ended June 30, 1998, a $28.5 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 did not contribute 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.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, the Company incurred operating losses in the last three
quarters, excluding the effect of revised estimates of the medical claims
payable of $5.6 million in the third quarter. At June 30, 2000, the Company had
(i) cash and cash equivalents and short-term marketable securities of $10.6
million, compared to $18.6 million at June 30, 1999; (ii) negative working
capital of $2.3 million, compared to negative working capital of $1.7 million at
June 30, 1999; and (iii) a current assets-to-current liabilities ratio of
.88-to-1, compared to .96-to-1 at June 30, 1999. The principal uses of funds for
the year ended June 30, 2000 were $1.9 million used in operating activities,
repayment of $8.5 million of bank debt from the same amount of cash proceeds
received on the notes from the sale of CHF, a $4.0 million cash infusion to
OmniCare-MI, purchases of property and equipment of $2.5 million, repurchase of
common stock of $0.4 million and purchases of marketable securities of $1.3
million. In addition, the Company's investing activities included the funding of
an additional $3.7 million unsecured loan to OmniCare-MI through conversion of
management fees owed to the Company, and receipt of approximately $2.1 million
of cash and U.S. Treasury obligations on the dissolution of PhilCare.
The stock of CHF was sold effective 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. Including payments on the
secured note, $9.2 million of the sale 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 a prepayment discount,
in the sum of $8.5 million 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 funds were
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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 terminated its letter of credit commitments. PhilCare
was dissolved under applicable law in the Company's fiscal 2000. As a result of
the dissolution, assets of PhilCare were distributed to UA-PA pursuant to
agreements under which UA-PA contributed those assets, and the Company recovered
its investment in PhilCare, receiving approximately $2.1 million of cash and
U.S. Treasury obligations during fiscal 2000.
The Company's restructuring decisions 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 also
generated positive cash flows from operations in fiscal 1999.
Management's plans to address the current negative working capital and improve
operating results and cash flow include the following:
Management expects that the OmniCare-MI corrective action plan, as revised in
2000, will continue to stabilize that Plan. OmniCare-MI has successfully
renegotiated certain major hospital provider contracts, including its most
significant hospital contract. On July 14, 2000, the State of Michigan notified
OmniCare-MI that it was one of the successful bidders in the State's extensive
bid process for increased Medicaid rates and continued eligibility as an HMO
providing coverage to enrollees of the State's Comprehensive Health Care Program
for Medicaid beneficiaries. As a result, OmniCare-MI has been awarded a rate
increase, effective October 1, 2000, and an extension of its contract with the
State through September 30, 2002, with the potential for three one-year
extensions. Management estimates that the awarded rate increase could increase
OmniCare-MI's annual Medicaid revenue by approximately 11% on average, resulting
in approximately $1.5 million of additional management fee revenue to the
Company in fiscal 2001. In addition, because the unsuccessful bidders' Medicaid
enrollees must change to a successful bidder in their region, management
believes that OmniCare-MI's volume of Medicaid enrollees could significantly
increase, generating additional management fee revenue for the Company in and
after fiscal 2001. There can be no assurance, however, of any such increase in
OmniCare-MI's membership.
On May 1, 2000, the Company and OmniCare-MI commenced their previously announced
strategic partnership with DMC, a major health care provider system in
southeastern Michigan. The alliance is intended to strengthen their respective
core businesses and improve the quality of care and services for their patients
and members. In addition, it was announced that DMC and OmniCare-MI would
develop a joint marketing campaign designed to increase OmniCare-MI's membership
and DMC's facility utilization rate.
In the strategic partnership's first phase, on May 1, 2000 approximately 28,000
members of DMC's Medicaid managed care program were transferred to OmniCare-MI,
and DMC's seven hospitals and approximately 3,000 affiliated physicians now
serve as part of OmniCare-MI's provider network. During fiscal 2000, the
additional membership generated management fee revenue of $0.6 million. It is
anticipated that management fee revenue earned on the increased
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Medicaid membership will grow to approximately $7.0 million in fiscal 2001, with
a minimal increase in cost.
Effective July 1, 2000, OmniCare-TN entered into a new 42-month contract with
the State of Tennessee's TennCare Program. The provisions of the contract
provide for an approximate 4.5% increase in average premiums through January 1,
2001, with future increases to be determined by the State of Tennessee. Such
increases are in lieu of the quarterly adverse selection payments previously
made by TennCare to compensate managed care organizations for substantial
adverse costs incurred due to the nature of the services they offer and their
treatment of a high risk population. Management expects that the net
effect of the increase in the monthly premiums and the elimination of the
adverse selection payments will improve monthly cash flow in fiscal 2001.
On September 20, 2000, the Company made an additional cash contribution of $0.9
million to OmniCare-TN in exchange for additional preferred stock of OmniCare-TN
to be issued to the Company. The cash contribution was made to enable
OmniCare-TN to meet minimum statutory requirements for net worth, while allowing
OmniCare-TN to utilize the funds for working capital.
On September 25, 2000, the Company replaced its $4.0 million bank line of
credit, originally due July 1, 2000, with a $4.0 million term loan from the same
bank lender. The term loan requires monthly installments of approximately
$85,000, based upon a five-year amortization, through September 30, 2001 when
the remaining unpaid principal of approximately $3.4 million will be due. As a
result of this refinancing, principal due subsequent to June 30, 2001 is
classified as long-term debt in the "Consolidated Balance Sheets" at June 30,
2000. See Notes 10 and 16 in "Notes to Consolidated Financial Statements" for
further discussion of the refinancing of the line of credit.
The Company's ability to generate adequate amounts of cash to meet its future
cash needs depends on a number of factors noted above, including the continued
stabilization of OmniCare-MI and the ability of the Company to control medical
costs related to the TennCare program. Based on these factors, management
believes it has the ability to generate sufficient cash to meet its current
liabilities.
RECENTLY ENACTED PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities," SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivatives
and Certain Hedging Activities" are effective for fiscal years beginning after
June 15, 2000. These Statements establish accounting and reporting standards for
derivative instruments and hedging activities and require that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Management has determined that the
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requirements of SFAS Nos. 133, 137 and 138 will not have a significant impact on
the financial statements of the Company.
Statement of Position ("SOP") 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," is
effective for fiscal years beginning after June 15, 1999. SOP 98-7 requires that
when an insurance contract does not provide for indemnification of the insured,
or when a reinsurance contract does not indemnify against loss relating to
insurance risk, the contract should be accounted for as a deposit. Management
has determined that the requirements of SOP 98-7 will not have a significant
impact on the financial statements of the Company.
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 15, 2000.
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 15, 2000.
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 15, 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 15, 2000.
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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, 1997,1998 and 1999; (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, January 20, 1998 and January 14,
2000; 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.
No reports on Form 8-K were filed with respect to the last three months of
fiscal 2000.
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, 2000.
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, 2000.
35
38
SIGNATURE CAPACITY
--------- --------
/s/GREGORY H. MOSES, JR. President, CEO and Director
- -------------------------------- (Principal Executive Officer)
Gregory H. Moses, Jr.
/s/ANITA C.R. GORHAM Secretary and Director
- --------------------------------
Anita C.R. Gorham
/s/WILLIAM E. JACKSON, II Chief Financial Officer
- -------------------------------- (Principal Financial Officer and
William E. Jackson, II 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
/s/DARREL W. FRANCIS Director
- --------------------------------
Darrel W. Francis
/s/TOM A. GOSS Director
- --------------------------------
Tom A. Goss
/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.
/s/LINDA A. WATTERS Director
- --------------------------------
Linda A. Watters
36
39
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF DOCUMENT INCORPORATED HEREIN BY FILED
NUMBER REFERENCE TO HEREWITH
---------- ------------------------------------- -------------------------------------------- --------------
3.1 Restated Articles of Incorporation Exhibit 3.1 to the Registrant's Form S-1
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 effective 10-K
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 Management Agreement between 10-K
United American Healthcare
Corporation and Personal Physician
Care, Inc. dated March 18, 1987
37
40
EXHIBIT DESCRIPTION OF DOCUMENT INCORPORATED HEREIN BY FILED
NUMBER REFERENCE TO HEREWITH
---------- ------------------------------------- -------------------------------------------- --------------
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
10.9 Amendment dated September 20, 1995 Exhibit 10.10 to Registrant's 1995 Form
to Management Agreement between 10-K
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 to Exhibit 10.8 to the Registrant's 1994 Form
Lease agreement between 1155 10-K
Brewery Park Limited Partnership
and Registrant dated July 24, 1991
38
41
EXHIBIT DESCRIPTION OF DOCUMENT INCORPORATED HEREIN BY FILED
NUMBER REFERENCE TO HEREWITH
---------- ------------------------------------- -------------------------------------------- --------------
10.12 Amendment dated April 15, 1993 to Exhibit 10.13 to Registrant's 1995 Form
Lease Agreement between 1155 10-K
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
10.14 Amendment dated May 11, 1994 Exhibit 10.11 to the Registrant's 1994
(effective June 30, 1994) to Lease Form 10-K
agreement between Baltimore Center
Associates Limited Partnership and
Corporate Healthcare Financing, Inc
10.15 Lease Agreement between CLW Realty Exhibit 10.2 to Registrant's 1994 Form 10-K
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
International Business Machines 10-K
Corporation and Registrant dated
August 29,
39
42
EXHIBIT DESCRIPTION OF DOCUMENT INCORPORATED HEREIN BY FILED
NUMBER REFERENCE TO HEREWITH
---------- ------------------------------------- -------------------------------------------- --------------
1994
10.18 Amended and Restated Line of Credit Exhibit 10.20 to Registrant's 1995 Form
Facility Agreement between Michigan 10-K
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 dated 10-K
August 26, 1993
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 between Exhibit 10.18 to Registrant's 1994 Form
UltraMedix Health Care Systems, 10-K
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
the Loan and Security Agreement 10-K
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
Agreement between Huntington 10-K
National Bank and Registrant
10.24 Employment Agreement between Julius Exhibit 10.15 to 1991 S-1
V. Combs, M.D. and Registrant dated
March 15, 1991
10.25 Employment Agreement between Ronald Exhibit 10.16 to 1991 S-1
R. Dobbins
40
43
EXHIBIT DESCRIPTION OF DOCUMENT INCORPORATED HEREIN BY FILED
NUMBER REFERENCE TO HEREWITH
---------- ------------------------------------- -------------------------------------------- --------------
and Registrant dated March 15, 1991
10.26 Employment Agreement between Louis Exhibit 10.22 to Registrant's 1994 Form
J. Nicholas and Corporate 10-K
Healthcare Financing, Inc. dated
May 7, 1993
10.27 First Amendment to Contingent Note Form 10-Q for the Quarter Ended March 31,
Promissory Note between CHF-HPM 1996, filed May 14, 1996
Limited Partnership and the
Registrant
10.28 Acquisition of majority interest in Form 8-K filed April 19, 1996
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 Care amended
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
Independent Auditors as of June 10-K
30, 1996
10.31 Renaissance Center Office Lease Form 10-Q for the Quarter Ended September
between Renaissance Center Venture 30, 1996, filed November 13, 1996
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.
10.33 Agreement of Purchase and Sale of Form 10-K filed October 14, 1997
Stock, between CHF Acquisition,
Inc. and the Registrant dated
September 12, 1997
10.34 Ernst & Young LLP Report of Form 10-K filed October 14, 1997
Independent Auditors as
41
44
EXHIBIT DESCRIPTION OF DOCUMENT INCORPORATED HEREIN BY FILED
NUMBER REFERENCE TO HEREWITH
---------- ------------------------------------- -------------------------------------------- --------------
of June 30, 1997
10.35 Amended and Restated Business Loan Form 10-Q for the Quarter Ended
Agreement between Michigan National March 31, 1998, filed May 15, 1998
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 and March 31, 1998, filed May 15, 1998
Registrant dated March 12, 1998
(effective as of February 1, 1998)
10.37 Promissory Note from Registrant to Form 10-Q for the Quarter Ended
Michigan National Bank dated March March 31, 1998, filed May 15, 1998
12, 1998 (effective as of February
1, 1998)
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, 1998 Exhibit 10.39 to Registrant's 1998
to Lease Agreement between 1155 Form 10-K
Brewery Park Limited Partnership
and Registrant dated June 24, 1991
10.40 Termination of Lease between Exhibit 10.40 to Registrant's 1998
Renaissance Holdings, Inc. Form 10-K
(successor to Renaissance Center
Venture) and Registrant dated June
24, 1998
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.
42
45
EXHIBIT DESCRIPTION OF DOCUMENT INCORPORATED HEREIN BY FILED
NUMBER REFERENCE TO HEREWITH
---------- ------------------------------------- -------------------------------------------- --------------
dated August 31, 1998
10.43 Secured Promissory Note from CHFA, Exhibit 10.43 to Registrant's 1998
Inc. to Registrant dated August 31, Form 10-K
1998
10.44 Unsecured Promissory Note from Exhibit 10.44 to Registrant's 1998
CHFA, Inc. to Registrant dated Form 10-K
August 31, 1998
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, Inc. Exhibit 10.46 to Registrant's 1998
and Registrant dated August 31, 1998 Form 10-K
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 of Registrant to Exhibit 10.48 to Registrant's 1998
Michigan National Bank dated Form 10-K
September 1, 1998
10.49 Pledge Agreement from Registrant to Exhibit 10.49 to Registrant's 1998
Michigan National Bank dated Form 10-K
September 1, 1998
10.50 Promissory Note from Registrant to Form 10-Q for the Quarter Ended December
UAH Securities Litigation Fund 31, 1998, filed February 16, 1999
dated December 11, 1998
10.51 Amendment of Promissory Note and Exhibit 10.51 to Registrant's 1999
Business Loan Agreement from Form 10-K
Michigan National Bank dated May 6,
1999
10.52 Provider Contract between Urban Exhibit 10.52 to Registrant's 1999
Hospital Care Plus and Registrant Form 10-K
dated April 1, 1999
43
46
EXHIBIT DESCRIPTION OF DOCUMENT INCORPORATED HEREIN BY FILED
NUMBER REFERENCE TO HEREWITH
---------- ------------------------------------- -------------------------------------------- --------------
10.53 Assignment and Assumption of Exhibit 10.53 to Registrant's 1999
Subleases and Security Deposits Form 10-K
between International Business
Machines Corporation and Registrant
dated September 9, 1999
10.54 Business Loan Agreement between *
Registrant and Michigan National
Bank dated September 25, 2000
10.55 Promissory Note of Registrant to *
Michigan National Bank dated
September 25, 2000
10.56 Security Agreement between *
Registrant and Michigan National
Bank dated September 25, 2000
16.1 Concurring Letter regarding change Form 8-K filed October 30, 1997
in Certifying Accountants dated
October 30, 1997, from Grant
Thornton LLP
16.2 Concurring Letter regarding change Form 8-K/A filed November 12, 1997
in Certifying Accountants dated
November 12, 1997, from Grant
Thornton LLP
16.3 Concurring Letter regarding change Form 8-K/A filed November 12, 1997
in Certifying Accountants dated
November 12, 1997, from Ernst &
Young LLP
16.4 Concurring Letter regarding change Form 8-K filed January 20, 1998
in Certifying Accountants dated
January 16, 1998, from Arthur
Andersen LLP
21 Subsidiaries of the Registrant *
27 Financial Data Schedule *
44
47
EXHIBIT DESCRIPTION OF DOCUMENT INCORPORATED HEREIN BY FILED
NUMBER REFERENCE TO HEREWITH
---------- ------------------------------------- -------------------------------------------- --------------
99.1 Press Release dated January 12, 1998 Form 8-K filed January 20, 1998
99.2 Press Release dated January Form 8-K filed January 14, 2000
6, 2000
45
48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report................................................................. F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999..................................... F-3
Consolidated Statements of Operations for each of the
years in the three-year period ended June 30, 2000.......................................... F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income for each
of the years in the three-year period ended June 30, 2000.................................... F-5
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended June 30, 2000........................................... F-6
Notes to Consolidated Financial Statements................................................... F-8
F-1
49
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, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 2000. These consolidated 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 auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United American
Healthcare Corporation and Subsidiaries as of June 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Detroit, Michigan
September 26, 2000
F-2
50
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
----------------------
2000 1999
----------------------
ASSETS
Current assets
Cash and cash equivalents $ 8,257 $ 17,286
Marketable securities 2,312 1,290
Premium receivables 2,472 5,445
Note receivable -- 8,432
Management fee receivable 2,700 2,932
Other receivables 1,222 223
Prepaid expenses and other 312 290
Deferred income taxes -- 227
-------- --------
Total current assets 17,275 36,125
Property and equipment, net 3,846 4,001
Intangible assets, net 3,663 4,374
Surplus notes receivable, net 6,900 2,300
Marketable securities 2,548 1,548
Deferred income taxes -- 326
Other assets 577 577
-------- --------
$ 34,809 $ 49,251
======== ========
LIABILITIES AND SHAREHOLDERS' Equity
Current liabilities
Current portion of long-term debt $ 791 $ 12,737
Medical claims payable 11,245 19,810
Accounts payable and accrued expenses 5,739 2,959
Accrued compensation and related benefits 796 1,309
Other current liabilities 981 448
Deferred income taxes -- 514
-------- --------
Total current liabilities 19,552 37,777
Long-term debt, less current portion 3,554 375
Accrued rent 652 700
Deferred income taxes -- 39
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued
Common stock, no par, 15,000,000 shares authorized; 6,779,128 and 6,947,683 issued
and outstanding at June 30, 2000 and 1999, respectively 11,152 11,445
Retained earnings (deficit) 59 (925)
Accumulated other comprehensive loss, net of deferred federal income taxes (160) (160)
-------- --------
11,051 10,360
-------- --------
$ 34,809 $ 49,251
======== ========
See accompanying notes to the consolidated financial statements.
F-3
51
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
----------------------------------------------
2000 1999 1998
----------------------------------------------
REVENUES
Medical premiums $ 86,174 $ 73,207 $ 78,582
Management fees from related parties 18,769 18,148 24,986
Interest and other income 4,110 2,167 2,020
--------- --------- ---------
Total revenues 109,053 93,522 105,588
EXPENSES
Medical services 70,255 59,917 70,309
Marketing, general and administrative 30,224 27,291 44,336
Depreciation and amortization 3,345 3,449 9,679
Interest expense 539 1,708 1,796
Bad debt expense 3,100 -- 6,825
--------- --------- ---------
Total expenses 107,463 92,365 132,945
--------- --------- ---------
Earnings (loss) from continuing operations before income taxes 1,590 1,157 (27,357)
Income tax expense (benefit) 606 582 (4,442)
--------- --------- ---------
Earnings (loss) from continuing operations 984 575 (22,915)
Loss from discontinued operation, net of income taxes -- -- (2,581)
--------- --------- ---------
Net earnings (loss) $ 984 $ 575 $ (25,496)
========= ========= =========
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC
EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS $ 0.15 $ 0.09 $ (3.48)
========= ========= =========
NET EARNINGS (LOSS) PER COMMON SHARE $ 0.15 $ 0.09 $ (3.88)
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,779 6,763 6,578
========= ========= =========
NET EARNINGS (LOSS) PER COMMON SHARE - DILUTED
EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS $ 0.15 $ 0.09 $ (3.48)
========= ========= =========
NET EARNINGS (LOSS) PER COMMON SHARE $ 0.15 $ 0.09 $ (3.88)
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,779 6,764 6,578
========= ========= =========
See accompanying notes to the consolidated financial statements
F-4
52
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS)
NUMBER OF RETAINED ACCUMULATED TOTAL
COMMON COMMON EARNINGS OTHER SHAREHOLDERS'
SHARES STOCK (ACCUMULATED COMPREHENSIVE EQUITY
DEFICIT) INCOME (LOSS)
------------------------------------------------------------------------------
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 $100 -- -- -- (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 $ - -- -- -- (26) (26)
-------- -------- -------- -------- --------
Total comprehensive income (loss) -- -- 575 (26) 549
-------- -------- -------- -------- --------
BALANCE AT JUNE 30, 1999 6,948 11,445 (925) (160) 10,360
Issuance of common stock 68 76 -- -- 76
Repurchase of common stock (237) (369) -- -- (369)
Comprehensive income,
Net earnings -- -- 984 -- 984
-------- -------- -------- -------- --------
BALANCE AT JUNE 30, 2000 6,779 $ 11,152 $ 59 $ (160) $ 11,051
======== ======== ======== ======== ========
See accompanying notes to the consolidated financial statements.
F-5
53
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
---------------------------------------------
2000 1999 1998
---------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $ 984 $ 575 $(25,496)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities
Loss from discontinued operation, net -- -- 2,581
Bad debt expense 3,100 -- 6,825
Loss (gain) on disposal of assets 18 (36) 305
Gain on liquidation of investment (2,105) -- --
Depreciation and amortization 3,345 3,449 9,679
Accrued rent (48) (235) (664)
Deferred income taxes -- 494 1,085
Changes in assets and liabilities
Premium receivables 2,973 (2,722) 2,552
Management fee receivable (3,468) -- --
Other receivables (879) (1,339) 625
Refundable federal income taxes -- 5,453 (5,338)
Prepaid expenses and other (22) (9) 306
Other assets -- 7 1,356
Intangible assets -- -- (241)
Medical claims payable (8,565) (194) 8,372
Accounts payable and accrued expenses 2,780 660 78
Accrued compensation and related benefits (513) 69 (858)
Other current liabilities 533 28 40
-------- -------- --------
Net cash (used in) provided by operating activities (1,867) 6,200 1,207
-------- -------- --------
INVESTING ACTIVITIES
Purchase of marketable securities (1,255) (2,436) (1,210)
Proceeds from the sale of marketable securities 125 2,631 11,104
Purchase of property and equipment (2,478) (682) (820)
Proceeds from the sale of property and equipment 3 127 --
Proceeds from liquidation of investment 1,071 -- --
Issuance of surplus note (4,000) -- (4,600)
Proceeds from collection of note receivable 8,432 9,193 --
Cash used in discontinued operation -- (1,047) (797)
-------- -------- --------
Net cash provided by investing activities 1,898 7,786 3,677
-------- -------- --------
FINANCING ACTIVITIES
Borrowing under line of credit agreement -- -- 142
Payments made on long-term debt (8,767) (9,957) (1,566)
Repurchase of common stock (369) (18) --
Issuance of common stock 76 16 217
-------- -------- --------
Net cash used in financing activities (9,060) (9,959) (1,207)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (9,029) 4,027 3,677
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17,286 13,259 9,582
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,257 $ 17,286 $ 13,259
======== ======== ========
F-6
54
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
YEAR ENDED JUNE 30,
--------------------------------------
2000 1999 1998
--------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 520 $ 1,708 $ 1,751
======= ======= =======
Income taxes paid $ -- $ -- $ 61
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Investing - Conversion of management
fee receivable into a surplus note $ 3,678 $ -- $ --
Investing - Receipt of marketable
securities on liquidation of investment 892 -- --
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 --
See accompanying notes to the consolidated financial statements.
F-7
55
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
- --------------------------------------------------------------
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 operational subsidiary:
United American of Tennessee, Inc. ("UA-TN") and Subsidiary.
OmniCare Health Plan, Inc. ("OmniCare-TN") is a 75%-owned
subsidiary of UA-TN. Also included in the consolidated
financial statements are its non-operational wholly owned
subsidiaries: United American of Pennsylvania, Inc. ("UA-PA"),
Corporate Healthcare Financing, Inc. and Subsidiaries ("CHF"),
and United American of Louisiana, Inc. and Subsidiary
("UA-LA"); and its non-operational 80%-owned subsidiary:
United American of Florida, Inc. ("UA-FL") and Subsidiary.
UltraMedix Healthcare Systems, Inc. ("UltraMedix") was a
51%-owned subsidiary of UA-FL. The Company ceased activities
related to UA-FL, UltraMedix and UA-PA in fiscal 1998. As
discussed in Note 4, CHF was sold in August 1998 and is
presented as a discontinued operation. All significant
intercompany transactions and balances have been eliminated in
consolidation.
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.
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, 2000 and 1999.
F-8
56
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
E. MARKETABLE SECURITIES. Investments in marketable securities
are primarily comprised of U.S. Treasury notes, debt issues 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
non-current. 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 in which
the related costs were capitalized. These costs were fully
depreciated during fiscal 2000.
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," 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 may not be recoverable. In making this
determination, the Company considers a number of factors,
including estimated future undiscounted cash flows
F-9
57
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
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. STOP LOSS INSURANCE. Stop loss insurance premiums are reported
as medical services expense, while the related insurance
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 and liabilities in the amount
expected to be realized. Valuation allowances are established
when necessary to reduce the deferred tax assets and
liabilities in 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-10
58
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
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 years ended June 30, 2000 and June 30, 1999 the
Company had outstanding stock options of zero and 847 common
shares, respectively, having a dilutive effect on earnings per
share. The Company had no outstanding stock options in the
fiscal year ended June 30, 1998.
P. SEGMENT INFORMATION. The Company reports 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. Financial information is reported on the basis
that it is used internally for evaluating segment performance
and deciding how to allocate resources to segments.
- ------------------------------------------------------------------
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 decisions 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 and 1999.
During fiscal 2000, the Company incurred operating losses in the last three
quarters, excluding the effect of revised estimates that decreased medical
claims payable by $5.6 million in the third quarter. In addition, the Company
used $1.9 million of cash from operating activities in fiscal 2000, compared to
$6.2 million of cash generated from operating activities in fiscal 1999. At June
30, 2000, the Company had (i) cash and cash equivalents and short-term
F-11
59
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
marketable securities of $10.6 million, compared to $18.6 million at June 30,
1999; (ii) negative working capital of $2.3 million, compared to negative
working capital of $1.7 million at June 30, 1999; and (iii) a current
assets-to-current liabilities ratio of .88-to-1, compared to .96-to-1 at June
30, 1999. The Company's principal uses of cash for financing and investing
activities during fiscal 2000 were repayment of $8.5 million of bank debt from
the same amount of cash proceeds received on the notes from the sale of CHF, a
$4.0 million cash infusion to OmniCare-MI, purchases of property and equipment
of $2.5 million, repurchase of common stock of $0.4 million and purchases of
marketable securities of $1.3 million. In addition, the Company received
approximately $2.1 million of cash and U.S. Treasury obligations on the
dissolution of PhilCare.
Management's plans to address the current negative working capital and improve
operating results and cash flow include the following:
In May 2000, the Company and OmniCare-MI commenced a strategic partnership with
the Detroit Medical Center ("DMC"), a major health care provider system in
southeastern Michigan. On May 1, 2000, approximately 28,000 members of DMC's
Medicaid managed care program were transferred to OmniCare-MI, and DMC's seven
hospitals and approximately 3,000 affiliated physicians now serve as part of
OmniCare-MI's provider network. The additional membership generated $0.6 million
of management fees in the final two months of fiscal 2000. Management expects
additional management fees and operating cash flow in fiscal 2001 related to
these new members, with a minimal increase in cost.
On July 14, 2000, the State of Michigan notified OmniCare-MI that it was one of
the successful bidders in the State's extensive bid process for increased
Medicaid rates and continued eligibility as an HMO providing coverage to
enrollees of the State's Comprehensive Health Care Program for Medicaid
beneficiaries. As a result, OmniCare-MI has been awarded a rate increase,
effective October 1, 2000, and an extension of its contract with the State
through September 30, 2002, with the potential for three one-year extensions.
Management estimates that the awarded rate increase could increase OmniCare-MI's
annual Medicaid revenue by approximately 11% on average. Management expects that
the increased premium rates will generate additional management fees and
operating cash flow in fiscal 2001.
Effective July 1, 2000, OmniCare-TN entered into a new 42-month contract with
the State of Tennessee's Bureau of TennCare ("TennCare"), a State of Tennessee
program that provides medical benefits to Medicaid and working uninsured and
uninsurable recipients. The provisions of the contract provide for an
approximate 4.5% increase in average premiums through January 1, 2001, with
future increases to be determined by the State of Tennessee. Such increases are
in lieu of the quarterly adverse selection payments previously made by TennCare
to compensate managed care organizations for substantial adverse costs incurred
due to the nature of the services they offer and their treatment of a high risk
population. Management expects that the net effect of the increase in the
monthly premiums and the elimination of the adverse selection payments will
improve monthly cash flow in fiscal 2001.
F-12
60
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
On September 25, 2000, the Company replaced its $4.0 million bank line of
credit, originally due July 1, 2000, with a $4.0 million term loan from the same
bank lender. The term loan requires monthly installments of approximately
$85,000, based upon a five-year amortization, through September 30, 2001 when
the remaining unpaid principal of approximately $3.4 million will be due. As a
result of this refinancing, principal due subsequent to June 30, 2001 is
classified as long-term debt in the "Consolidated Balance Sheets" at June 30,
2000. See Notes 10 and 16 for further discussion of the refinancing of the line
of credit.
The Company's ability to generate adequate amounts of cash to meet its future
cash needs depends on a number of factors noted above, including the continued
stabilization of OmniCare-MI and the ability of the Company to control medical
costs related to the TennCare program. Based on these factors, management
believes it has the ability to generate sufficient cash to meet its current
liabilities.
- --------------------------------------------------------------------
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. Through August 31, 1998, the purchase price was
increased as defined in the asset purchase agreement by the maximum amount of
$6.6 million. 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. CHF provided administrative services to
self-funded employers and employee welfare plans, including health benefit plan
design and development of workers' compensation and unemployment benefit
programs.
The stock of CHF was sold effective 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
F-13
61
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
$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 $0.25 million 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.
As a result 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 and 1998.
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 of
expenses over revenues of CHF during that period. These adjustments are included
in the expenses of the discontinued operation to reflect an increase or
reduction in the net carrying value to the net realizable value of $17.75
million.
Results from discontinued operation, net of income taxes, for the two months
ended August 31, 1998 and the twelve months ended June 30, 1998 are summarized
as follows (in thousands):
TWO MONTHS TWELVE MONTHS
ENDED AUGUST 31, ENDED JUNE 30,
-----------------------------------------
1998 1998
-----------------------------------------
Total revenues $ 4,570 $ 21,949
Total expenses 4,061 24,769
Income tax expense (benefit) 509 (239)
--------- ---------
Earnings (loss) from discontinued
operation, net of income taxes $ -- $ (2,581)
========= =========
ULTRAMEDIX HEALTHCARE SYSTEMS, INC. (ULTRAMEDIX)
In February 1994, the Company and its majority owned subsidiary, UA-FL, 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
F-14
62
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
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,
UA-FL, 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 and its wholly owned subsidiary, UA-TN, 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 into equity and
$2.3 million was paid in cash. 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.
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 common stock ownership interest. In fiscal 1999, goodwill was reduced
by $0.5 million as a result of the utilization of OmniCare-TN's net operating
loss carryforwards ("NOL" or "NOLs") generated prior to January 31, 1996. The
remaining NOLs related to OmniCare-TN were generated subsequent to January 31,
1996.
F-15
63
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
- ----------------------------------------------------------
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, 2000 and 1999 was as follows (in
thousands):
GROSS UNREALIZED
AMORTIZED --------------------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------------------------------------------------------
2000
Available for sale - Current:
Certificates of deposit $ 1,664 $ -- $ -- $ 1,664
Foreign government debt securities 25 -- -- 25
U.S. government obligations 595 -- -- 595
Equity securities 252 -- (224) 28
------- ------- ------- -------
2,536 -- (224) 2,312
Available for sale - Noncurrent:
Money market 772 -- -- 772
U.S. government obligations 1,776 -- -- 1,776
------- ------- ------- -------
2,548 -- -- 2,548
------- ------- ------- -------
$ 5,084 $ -- $ (224) $ 4,860
======= ======= ======= =======
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
======= ======= ======= =======
At June 30, 2000, the financial statement carrying 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 less than one year $ 2,259 $ 2,259
Due in one year through five years 1,801 1,801
---------- -----------
$ 4,060 $ 4,060
========== ===========
F-16
64
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
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
$2.3 million and $1.6 million at June 30, 2000 and 1999, respectively.
- -----------------------------------------------------------
NOTE 6 - CONCENTRATION OF RISK
- -----------------------------------------------------------
During the years ended June 30, 2000, 1999 and 1998, approximately 71%, 76%, and
60%, 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, 2000 and 1999 totaled
approximately $0.9 million and $3.7 million, respectively. The Company has
recorded a receivable of approximately $1.6 million and $1.7 million at June 30,
2000 and 1999, respectively, from the TennCare program adverse selection pool.
The Company has entered into a long-term management agreement with Michigan
Health Maintenance Organization Plans, Inc., d/b/a OmniCare Health Plan, in
Michigan ("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 17%, 19% and
24% for the years ended June 30, 2000, 1999 and 1998, respectively.
- -----------------------------------------------------------------------
NOTE 7 - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
- -----------------------------------------------------------------------
Property and equipment at each June 30 consists of the following (in thousands):
2000 1999
-------------------------
Furniture and fixtures $ 2,233 $ 1,853
Equipment 10,703 8,840
Computer software 6,347 6,347
--------- ---------
19,283 17,040
Less accumulated depreciation and amortization 15,437 13,039
--------- ---------
$ 3,846 $ 4,001
========= =========
F-17
65
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
Intangible assets at each June 30 consists of the following (in thousands):
2000 1999
---------------------------
Goodwill $ 6,972 $ 6,972
Less accumulated amortization 3,309 2,598
---------- ----------
$ 3,663 $ 4,374
========== ==========
- ---------------------------------------------------------------
NOTE 8 - INVESTMENTS IN AND ADVANCES TO AFFILIATES
- ---------------------------------------------------------------
Investments in and advances to affiliates at each June 30 are comprised of the
following (in thousands):
2000 1999
------------------------
PhilCare Health Systems $ -- $ 2,100
Advica Health Management 2,300 2,300
---------- ---------
2,300 4,400
Less impairment loss 2,300 4,400
---------- ---------
$ -- $ --
========== =========
In fiscal 1998, the Company recorded full impairment losses against its
investments in PhilCare and Advica. The establishment of the impairment losses
was based on the Company's evaluation of the net recoverable value of such
investments, and resulted in bad debt expense of $4.4 million for the year ended
June 30, 1998.
On June 22, 2000, PhilCare's Board of Directors and shareholders approved the
voluntary dissolution of PhilCare. As a result of the dissolution, assets of
PhilCare were distributed to UA-PA, pursuant to agreements under which UA-PA
contributed those assets, and the Company recovered its $2.1 million investment
in PhilCare, resulting in a gain in that amount included in other income in the
accompanying consolidated statement of operations for the fiscal year ended June
30, 2000.
- --------------------------------------------------------------
NOTE 9 - SURPLUS NOTES RECEIVABLE
- --------------------------------------------------------------
On April 13, 2000 and June 30, 1998, the Company funded unsecured loans to
OmniCare-MI, evidenced by surplus notes of $7.7 million and $4.6 million,
respectively, to enable OmniCare-MI to meet its minimum statutory requirements
for net worth and working capital. The $7.7 million loan consisted of $4.0
million in cash and conversion of $3.7 million of management fees owed to the
Company. Pursuant to the terms of the surplus notes, 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 on the $7.7 million surplus note is fixed at 8.5% per annum, while
the interest rate on the $4.6 million surplus note is at the prime rate (9.5% at
June 30, 2000). Interest is payable annually
F-18
66
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
and if not paid annually is forfeited. Interest income of $0.5 and $0.4 million
was forfeited for fiscal 2000 and 1999, respectively. The principal on the notes
has no stated maturity or repayment date. The surplus notes are subordinated to
all other claimants of OmniCare-MI.
The Company evaluated the net recoverable value of its notes receivable from
OmniCare-MI considering the estimate of OmniCare-MI's future undiscounted cash
flows and statutorily derived surplus earnings and repayments conditioned on
Bureau approval. As a result of this evaluation, the Company recorded impairment
losses on the valuation of the surplus notes. The impairment losses resulted in
bad debt expense of $3.1 million and $2.3 million for the years ended June 30,
2000 and 1998, respectively.
- -----------------------------------------------
NOTE 10 - LONG TERM DEBT
- -----------------------------------------------
On September 25, 2000, the Company entered into a new loan agreement, promissory
note and security agreement with its bank lender. The new loan agreement
replaced the outstanding bank line of credit balance, originally due July 1,
2000, with a $4.0 million term loan with monthly installments of principal and
interest of approximately $85,000, based upon a five-year amortization. The term
loan has an interest rate equal to the bank's prime rate (9.5% at June 30, 2000)
plus one percent per annum. The maturity date of the new term loan is September
30, 2001, at which time the remaining unpaid principal of approximately $3.4
million will be due. The new loan agreement is collateralized by a security
interest in all of the Company's personal property. As a result of this
refinancing, principal due subsequent to June 30, 2001 is classified as
long-term debt in the accompanying balance sheets at June 30, 2000. See Note 16
- - Subsequent Events.
Pursuant to a December 11, 1998 consent judgment entered in a United States
District Court, which settled two consolidated shareholder lawsuits for $2.0
million cash paid by an insurer, 277,777 newly issued shares of the Company's
Common Stock, and a promissory note, the Company has an outstanding promissory
note in the original principal amount of $0.625 million. The note is payable in
15 equal monthly installments from January 2000 through March 2001 with interest
at 4% per annum.
The Company's outstanding debt at each June 30 is as follows (in thousands):
2000 1999
---------------------------
Term loan $ 3,970 $ 12,487
Promissory note 375 625
---------- ----------
4,345 13,112
Less debt payable within one year 791 12,737
---------- ----------
Long-term debt, less current portion $ 3,554 $ 375
========== ==========
F-19
67
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
- -------------------------------------------------------------
NOTE 11 - MEDICAL CLAIMS PAYABLE
- -------------------------------------------------------------
The Company has recorded a liability of $9.6 million and $19.8 million at June
30, 2000 and 1999, 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, 2000 and 1999.
The following table provides a reconciliation of the unpaid claims for the years
ended June 30, 2000 and 1999 (in thousands):
2000 1999
----------------------------
Balance at beginning of fiscal year $ 19,810 $ 20,004
Incurred losses as related to current year 75,878 59,916
Reserve reversal related to prior year (5,623) --
---------- ----------
Total losses incurred 70,255 59,916
Paid claims related to current year 65,437 47,442
Paid claims related to prior year 13,383 12,668
---------- ----------
Total paid claims 78,820 60,110
---------- ----------
Balance at end of fiscal year $ 11,245 $ 19,810
========== ==========
Under an agreement with an insurer, 80% of inpatient medical claim costs in
excess of $0.2 million up to $1.0 million per enrollee per year are paid by the
insurer. The $5.6 million reserve reversal in fiscal 2000 related to prior years
was attributable to UltraMedix which ceased operations and was placed in
liquidation in March 1998. At March 31, 2000, Company management concluded that
the previously established medical claims liability of $6.4 million should be
reduced to $0.8 million.
- -------------------------------------------
NOTE 12 - INCOME TAXES
- -------------------------------------------
The components of income tax expense (benefit) for each year ended June 30 are
as follows (in thousands):
2000 1999 1998
--------------------------------
Continuing operations:
Current expense (benefit) $ 159 $ 89 $ (5,527)
Deferred expense (credit) 280 562 (1,996)
Change in valuation allowance 167 (69) 3,081
-------- ------- ---------
$ 606 $ 582 $ (4,442)
======== ======= =========
Discontinued operation $ -- $ 509 $ (239)
======== ======= =========
F-20
68
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
A reconciliation of the provision for income taxes for each year ended June 30
follows (in thousands):
2000 1999 1998
----------------------------------------
Income tax expense (benefit) at the statutory tax
rate $ 540 $ 366 $(9,302)
State and city income tax 115 148 19
Tax-exempt interest on municipal bonds (14) (37) (97)
Non-deductible goodwill amortization 242 258 1,676
Utilization of NOL carryforward (446) -- --
NOL reduction of goodwill -- 494 --
Valuation allowance 167 (551) 3,081
Other, net 2 (96) 181
------- ------- -------
$ 606 $ 582 $(4,442)
======= ======= =======
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, 2000. 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.
As of June 30, 2000, the NOLs for federal income tax purposes expire from 2011
to 2014.
F-21
69
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
Components of the Company's deferred tax assets and liabilities at each June 30
are (in thousands):
2000 1999
--------------------------
Deferred tax assets
Accrued rent $ 222 $ 238
Bad debt expense 3,196 2,856
Deferred compensation 131 152
Unrealized net depreciation on marketable securities 75 75
Net operating loss carryforward of consolidated losses 1,171 1,617
Net operating loss carryforward of purchased subsidiary 3,075 2,331
Losses in unconsolidated affiliates 258 1,245
------- -------
Total gross deferred tax assets 8,128 8,514
Valuation allowance (8,128) (7,961)
------- -------
Total net deferred tax assets -- 553
Deferred tax liabilities
Depreciation and amortization -- (39)
Software development -- (514)
------- -------
Total gross deferred tax liabilities -- (553)
------- -------
Net deferred tax asset (liability) $ -- $ --
======= =======
Activity in the valuation allowance is as follows (in thousands):
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
Change in valuation allowance 167
--------
Balance at June 30, 2000 $ 8,128
========
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 for bad debt expense in affiliates which reduces the Company's
investments. The capital loss can only be offset by capital gains.
- ---------------------------------------------------------------------
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
F-22
70
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
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
OmniCare-MI. The expense was approximately $0.6 million, $0.4 million and $1.0
million for the years ended June 30, 2000, 1999 and 1998, 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 1% of compensation since January 1, 1998 and 5% previously. Expenses related
to the 401(k) plan were approximately $26,000, $25,000 and $400,000 for the
years ended June 30, 2000, 1999 and 1998, 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 and $9,000 for the
years ended June 30, 1999 and 1998. There were no employee contributions for the
year ended June 30, 2000.
On August 6, 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan ("1998 Plan"). The 1998 Plan was approved by the Company's
shareholders on November 12, 1998. The Company has an aggregate of 800,000
common shares reserved for issuance upon exercise of options under the 1998
Plan. On September 9, 1998, December 15, 1998, February 3, 1999 and November 10,
1999, nonqualified options for a total of 325,000, 26,000, 5,000 and 8,000
common shares, respectively, were granted under the 1998 Plan. The exercise
prices of the options range from $1.19 to $1.63.
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
were fully exercisable beginning May 11, 2000 at a price of $1.38 per share.
SFAS No. 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 No. 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
F-23
71
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
from continuing operations, assuming dilution, for 2000, 1999 and 1998 would
have been the pro forma amounts indicated below (in thousands, except per share
amounts):
2000 1999 1998
-----------------------------------
Earnings (loss) from continuing operations:
As reported $ 984 $ 575 $ (22,915)
Pro forma $ 979 $ 295 $ (22,967)
Earnings (loss) from continuing operations per
share (Basic and Diluted):
As reported $ 0.15 $ 0.09 $ (3.48)
Pro forma $ 0.15 $ 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 2000: dividend yield of 0%; expected volatility of 67.09%; risk free
interest rate of 6.00%; and expected life of 10 years. The effects of applying
SFAS No. 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.
Information regarding the stock options for fiscal 2000, 1999 and 1998 follows
(in thousands except share prices):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------
AVERAGE
WEIGHTED REMAINING NUMBER OF WEIGHTED
SHARES AVERAGE CONTRACTUAL LIFE SHARES AVERAGE
EXERCISE PRICE LIFE AT JUNE EXERCISABLE AT EXERCISE
30, 2000 JUNE 30, 2000 PRICE
-----------------------------------------------------------------------------------
Options 100 $ 1.38 2.9 years 100 $ 1.38
outstanding at
June 30, 1998
Granted 355 1.60 8.4 years 331 1.62
Exercised -- -- -- -- --
Expired -- -- -- -- --
Forfeited -- -- -- -- --
-------- ------- ----------- ------ -------
Options
outstanding at
June 30, 1999 455 $ 1.55 8.0 years 402 $ 1.56
Granted 8 1.19 9.4 years -- --
Exercised -- -- -- -- --
Expired -- -- -- -- --
Forfeited (5) 1.25 -- -- --
-------- ------- ----------- ------ -------
Options
outstanding at
June 30, 2000 458 $ 1.54 8.3 years 431 $ 1.56
Options for 342,000 common shares were available for grant at the end of fiscal
2000.
F-24
72
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
- ------------------------------
NOTE 15 - LEASES
- ------------------------------
The Company leases its facilities and certain furniture and equipment under
operating leases expiring at various dates through May 2005. 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, 2000, 1999 and
1998 totaled approximately $1.6 million, $1.6 million and $2.2 million,
respectively.
Minimum future rental payments under all non-cancelable operating leases having
remaining terms in excess of one year as of June 30, 2000 total $6.4 million as
follows (in thousands): 2001-$1,272; 2002-$1,273; 2003-$1,333; 2004-$1,306;
2005-$1,225; none thereafter.
- ----------------------------------------------------
NOTE 16 - SUBSEQUENT EVENTS
- ----------------------------------------------------
On September 20, 2000, the Company made a additional cash contribution of $0.9
million to OmniCare-TN in exchange for additional preferred stock of OmniCare-TN
to be issued to the Company. The cash contribution was made to enable
OmniCare-TN to meet minimum statutory requirements for net worth.
On September 25, 2000, the Company entered into a new loan agreement, promissory
note and security agreement with its bank lender. The new loan agreement
replaced the outstanding bank line of credit balance, originally due July 1,
2000, with a $4.0 million term loan with monthly installments of principal and
interest of approximately $85,000, based upon a five-year amortization. The term
loan has an interest rate equal to the bank's prime rate (9.5% at June 30, 2000)
plus one percent per annum. The maturity date of the new term loan is September
30, 2001, at which time the remaining unpaid principal of approximately $3.4
million will be due. As a result of this refinancing, principal due subsequent
to June 30, 2001 is classified as long-term debt in the accompanying balance
sheets at June 30, 2000. See Note 10 - Long Term Debt.
F-25
73
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
- -------------------------------------------------------------------------
NOTE 17 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
- -------------------------------------------------------------------------
The following table presents selected quarterly financial data for the years
ended June 30, 2000 and 1999 (in thousands, except per share data):
-----------------------------------------------------------------------------------------------------
JUNE MARCH DECEMBER SEPTEMBER TOTAL
-----------------------------------------------------------------------
2000
Total revenues $ 31,187 $ 27,104 $ 25,559 $ 25,203 $ 109,053
Net earnings (loss) (2,391) 3,414 (346) 307 984
Net earnings (loss)
common share
assuming dilution $ (0.35) $ 0.50 $ (0.05) $ 0.05 $ 0.15
1999
Total revenues $ 25,459 $ 23,341 $ 22,370 $ 22,352 $ 93,522
Net earnings 34 267 154 120 575
Net earnings per
common share
assuming dilution $ -- $ 0.04 $ 0.02 $ 0.02 $ 0.09
---------- ---------- ----------- --------- -----------
In the quarter ended June 30, 2000, the Company made the following significant
adjustments: (i) recorded an increase to medical claims liability of $3.4
million; (ii) recorded a gain of $2.1 million on the recovery of its $2.1
million investment in PhilCare; and (iii) recorded additional bad debt expense
of $1.6 million on the $7.7 million surplus note due from OmniCare-MI.
In the quarter ended June 30, 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 $0.25 million discount
related to the accelerated payoff of the CHF buyer's notes; and (iii) recorded a
$0.5 million tax provision related to preacquisition net operating losses for
OmniCare-TN.
F-26
74
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
- ----------------------------------------------------------
NOTE 18 - SEGMENT FINANCIAL INFORMATION
- ----------------------------------------------------------
Summarized financial information for the Company's principal operations is as
follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------
MANAGEMENT HMOS & SELF-FUNDED CORPORATE & CONSOLIDATED
COMPANIES MANAGED PLANS BENEFIT PLAN ELIMINATIONS COMPANY
2000 (1) (2) (3)
- -------------------------------------------------------------------------------------------------------------------
Revenues - external customers $ 18,769 $ 86,174 $ $ $104,943
Revenues - intersegment 12,502 -- -- (12,502) --
Interest and other income 3,064 1,419 -- (373) 4,110
-------- -------- ------- -------- --------
Total revenues $ 34,335 $ 87,593 $ -- $(12,875) $109,053
======== ======== ======= ======== ========
Interest expense $ 539 $ -- $ -- $ -- $ 539
Bad debt expense 3,100 -- -- -- 3,100
Operating (losses) earnings (2,273) 4,574 -- (711) 1,590
Segment assets 28,350 13,813 -- (7,354) 34,809
Purchase of equipment and
capitalized software 12,478 -- -- -- 12,478
Depreciation and amortization 2,634 -- -- 711 3,345
-------- -------- ------- -------- --------
1999
- ----------------------------------
Revenues - external customers $ 18,148 $ 73,207 $ -- $ -- $ 91,355
Revenues - intersegment 9,932 -- -- (9,932) --
Interest and other income 1,516 1,197 -- (546) 2,167
-------- -------- ------- -------- --------
Total revenues $ 29,596 $ 74,404 $ -- $(10,478) $ 93,522
======== ======== ======= ======== ========
Interest expense $ 1,708 $ -- $ -- $ -- $ 1,708
Operating (losses) earnings (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 losses (20,609) (5,614) -- (1,134) (27,357)
Net loss from discontinued
operation -- -- (2,581) -- (2,581)
Purchase of equipment and
capitalized software 820 -- -- -- 820
Depreciation and amortization 8,289 257 -- 1,133 9,679
======== ========= ======= ======== =========
(1) Management Companies: United American Healthcare Corporation (2000, 1999,
1998), United American of Tennessee, Inc. (2000, 1999, 1998), United
American of Louisiana, Inc. (1999, 1998), United American of Pennsylvania,
Inc. (2000, 1999, 1998), and United American of Florida, Inc. (2000, 1999,
1998).
(2) HMOs and Managed Plans: OmniCare Health Plan of Tennessee (2000, 1999,
1998), County Care (2000, 1999), and UltraMedix Healthcare Systems, Inc.
(1998)
(3) Self-Funded Benefit Plan: Corporate Healthcare Financing, Inc. and
Subsidiaries (1998).
F-27
75
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
Exhibit 10.54 Business Loan Agreement
Exhibit 10.55 Promissory Note
Exhibit 10.56 Security Agreement
Exhibit 21 Subsidiaries of Registrants
Exhibit 27 Financial Data Schedule