1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
Commission File Number: 000-18839
_______________________________
UNITED AMERICAN HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
_______________________________
Michigan 38-2526913
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1155 Brewery Park Boulevard, Suite 200
Detroit, Michigan 48207
(313) 393-0200
(Address, including zip code, and telephone number,
including area code of registrant's principal executive offices)
--------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, 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 amendments to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of the
filing.
$54,948,000
(Based upon the closing price of the registrant's
common shares on the NYSE on September 20, 1996)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
As of September 20, 1996, there were
6,560,941 Common Shares outstanding
Documents incorporated by reference: Not Applicable
2
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I ............................................................................................ 1
Item 1. Business .............................................................................. 1
Item 2. Properties ............................................................................ 19
Item 3. Legal Proceedings ..................................................................... 20
Item 4. Submission Of Matters To A Vote Of Security Holders .................................. 20
PART II .......................................................................................... 21
Item 5. Market For The Registrant's Common Equity And Related Stockholder Matters ............ 21
Item 6. Selected Financial Data ............................................................... 22
Item 7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations ....................................... 23
Item 8. Financial Statements .................................................................. 32
Item 9. Changes In And Disagreements With
Accountants On Accounting And Financial Disclosure ................................. 32
PART III .......................................................................................... 33
Item 10. Directors And Executive Officers Of The Registrant .................................... 33
Item 11. Executive Compensation ............................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................ 38
Item 13. Certain Relationships And Related Transactions ....................................... 39
PART IV .......................................................................................... 42
Item 14. Exhibits And Reports On Form 8-K ..................................................... 42
EXHIBITS ......................................................................................... E-1
FINANCIAL STATEMENTS .............................................................................. F-1
3
PART I
THE COMPANY
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 indicated herein to the Company
shall mean United American Healthcare Corporation and its consolidated
subsidiaries. The Company's executive offices are located at 1155 Brewery Park
Blvd., Suite 200, Detroit, Michigan 48207 and its telephone number is (313)
393-0200.
ITEM 1. BUSINESS
GENERAL
The Company provides comprehensive management and consulting services
to managed care organizations, some of which are health maintenance
organizations owned by the Company, located in Michigan, Ohio, Tennessee,
Florida, Pennsylvania, and Louisiana; further the Company provides
administrative services to self-funded employers nationally. The Company also
arranges for the financing and delivery of health care services by primary care
physicians and specialists, hospitals, pharmacies and other ancillary providers
to commercial employer groups and government sponsored populations. 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. Administrative services provided to
self-funded employers for employee welfare plans include health benefit plan
design and development of workers' compensation and unemployment benefit
programs. As of August 1, 1996, there were approximately 217,000 enrollees in
the managed care organizations either owned and/or managed by the Company and
an estimated 538,000 lives covered in the self-funded health plans utilizing
the Company's services.
Management and consulting services provided by the Company include
feasibility studies for licensure, strategic planning, corporate governance,
management information systems, human resources, marketing, precertification,
utilization review programs, individual case management, budgeting, provider
network services, accreditation preparation, enrollment processing, claims
processing, member services, cost containment programs and customized health
care programs involving various public and private third party payors.
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 August 1, 1996, there were approximately 131,000 Medicaid
enrollees in the managed care organizations and/or owned or managed by the
Company (the "Managed Plans"). The Company complements its Medicaid focus by
targeting non-Medicaid/commercial business in the same geographic markets. As
of August 1, 1996, there were approximately 86,000 non-Medicaid/ commercial
enrollees in the Managed Plans.
1
4
The Company, through its subsidiary, CHF, pursues self-funded business by
designing customized, cost-effective employee welfare plan arrangements for
self-funded employers and by providing marketing, management and administrative
services to self-funded employers generally. The Company believes its
acquisition of CHF allowed it to strategically diversify into a large market
not traditionally served by managed care plans. As of August 1, 1996, CHF's
client base included approximately 31,000 self-funded employer groups in 47
states, with an estimated 538,000 covered lives. For the year ended June 30,
1996 approximately 10% of the Company's total revenues were attributable to CHF
business.
INDUSTRY
In an effort to control costs while assuring the delivery of quality
health care services, the public and private sectors have, in recent years,
increasingly turned to managed care solutions. As a result, the managed care
industry, which includes HMOs, PPOs, prepaid health service plans and employer
self-funded health benefit plans, has grown substantially.
While the trend toward managed care solutions has traditionally been
pursued most aggressively by the private sector, the public sector has recently
embraced the trend in an effort to control the costs of health care provided to
Medicaid recipients. Consequently, many states are promoting managed care
initiatives to contain these rising costs, and supporting programs that
encourage or mandate Medicaid beneficiaries to enroll in managed care plans.
In the private sector, the effort to control corporate costs arising from
or related to health care continues to drive large employers to create
self-funded benefit plans. For example, approximately 90% of companies with
over 500 employees utilize self-funded benefit plans. These benefit plans,
utilize administrative and claims processing services often provided by third
parties, and may include group life, dental, and long and short term disability
products, which offer a viable alternative to purchased managed care programs.
STRATEGY
The Company continually evaluates the results of its current products and
opportunities to expand its business. Its ongoing strategy is to strengthen
its position as a multi-state provider of effective and innovative managed care
solutions to the health care industry. The key elements of the Company's
strategy are as follows:
INTERNAL GROWTH IN MANAGED PLANS. The Company intends to achieve internal
growth by increasing non-Medicaid/commercial and Medicaid enrollment in the
Managed Plans through: (i) the development of new managed care products, and
(ii) implementation of a proprietary client server information system to manage
plan operations. The Company believes that this client server information system
will allow it to increase efficiency and an overall ability to control costs for
its clients and their products. In addition, as the Company pursues additional
commercial business, the Company believes it will be able to use its established
provider network, on-site management information systems and administrative
staff to more effectively compete. See "Business -
2
5
Management Information System."
CAPITALIZE ON MANAGED CARE MEDICAID EXPERTISE. The Company intends to
capitalize on its substantial Medicaid managed care expertise by entering new
markets in major metropolitan areas with large Medicaid populations,
particularly in states with mandatory enrollment initiatives. The Company
intends to establish strategic alliances with local participants in such
markets in order to enhance the likelihood of successful market penetration.
The Company also intends to acquire or create managed care plans in its
targeted markets. In such new markets, the Company's objective is to enter into
long-term management agreements with, and to realize benefits associated with
equity ownership in, the managed care plans.
The Company believes that its practice of initially focusing on the
Medicaid market segment allows it more rapidly to develop an enrollment base,
accelerate its realization of management fees and generate sufficient cash
flows to fund the managed plan's expansion into commercial markets. Central to
the Company's long term strategy is to develop managed care plans with a
targeted mix of Medicaid and non-Medicaid/commercial business, which allows the
Company to benefit from the inherent strengths of each market while lessening
the risks of operating in either market exclusively.
SELF-FUNDED BENEFIT PLANS. Through CHF, the Company believes it has gained
a strategic presence in the self-funded benefit plan market. The Company
intends to continue to design and implement customized health care benefit
plans for self-funded employers and associations, and to expand the range of
services offered to employers. For example, the Company has expanded its
marketing and consulting services to assist employers in controlling the cost
of workers' and unemployment compensation programs. The Company expects to
realize additional synergistic benefits by cross-selling its other managed care
products and services to self-funded employers.
The Company believes that its combined management/equity strategy enhances
its ability to penetrate new markets and diversify its business opportunities.
In particular, the Company believes the continued implementation of this
strategy will allow it to (i) respond rapidly to multiple state-sponsored
Medicaid managed care initiatives, (ii) capitalize on its Medicaid expertise
within the managed care industry, and (iii) enhance its local presence through
plan ownership and risk assumption.
MANAGED CARE PRODUCTS AND SERVICES
The Company has an ownership interest in four HMOs: OmniCare Health Plan,
Inc. in Tennessee ("OmniCare-TN"), Ultramedix Healthcare Systems, Inc. in
Florida ("Ultramedix"), PhilCare Health Systems, Inc. in Pennsylvania
("PhilCare") and OmniCare Health Plan, Inc. in Louisiana ("OmniCare-LA").
PhilCare and OmniCare-LA currently have no membership due to their recent entry
into the market. The Company also manages the operations of two additional
HMOs: Michigan Health Maintenance Organization Plans, Inc., d/b/a OmniCare
Health Plan, Michigan, ("OmniCare-MI") and Personal Physician Care, Inc. in
Ohio ("PPC").
3
6
The following table shows the membership in the Managed Plans serviced by
the Company at August 1, 1996:
Non- Medicaid/
Medicaid Commercial Total
-------- ---------- -----
Managed Plans
- -------------
Owned :
OmniCare-TN 26,396 21,781* 48,177
Ultramedix 9,355 404 9,759
------- ------ -------
35,751 22,185 57,936
Operated:
OmniCare-MI 48,379 53,885 102,264
PPC 46,808 10,151 56,959
------- ------ -------
95,187 64,036 159,223
------- ------ -------
Total Managed Plans 130,938 86,221 217,159
======= ====== =======
* Represents Working Uninsured, categorized as non-Medicaid.
The following table sets forth data with respect to the Company's
principal revenue sources in dollar amounts and as a percentage of the
Company's total revenues for the periods indicated. Such data is not indicative
of the relative contributions to the Company's net earnings:
Year Ended June 30,
-------------------------------------------------------------------
1996 1995 1994
---- ---- ----
(in thousands, except percentages)
MANAGED PLANS
OmniCare-TN..................................... $42,717 41% $15,681 23% $3,831 8%
OmniCare-MI..................................... 30,275 29 30,563 45 26,530 59
Ultramedix...................................... 9,003 9 5,020 7 1,303 3
PPC............................................. 8,434 8 6,716 10 5,551 12
SELF-FUNDED BENEFIT PLANS
CHF............................................. 10,611 10 8,732 13 6,845 15
ChoiceOne ...................................... 126 * 79 * 36 *
* Less than 1.0%
A substantial portion of the Company's gross revenues are derived through
its management agreements with OmniCare-MI and PPC, Managed Plans in which the
Company has no equity interest. These two management agreements are long term
in nature but are subject to review every five years with either automatic
continuation or termination. There can be no assurance that such agreements
will remain in effect or continue substantially on the same terms and
conditions.
4
7
Financial information relating to industry segments is included in Note N
to the Consolidated Financial Statements, on page F-22 of this Form 10-K report
and is hereby incorporated by reference.
MANAGED PLANS
The Company has entered into long-term management agreements with the
Managed Plans, either directly or through its subsidiaries. The Company had
the right to acquire up to an 72.6% equity interest in United/HealthScope,
Inc. HealthScope/United a wholly owned subsidiary of United/HealthScope, has
entered into management agreements to manage multiple health care plans in the
New York City metropolitan area, and in the State of Connecticut. The Company
is currently negotiating a sale of its interest in United/HealthScope to an
outside investor. In addition, the Company is pursuing managed care
opportunities in Georgia and Illinois, and intends to retain significant equity
interests in plans in such states if feasible.
Pursuant to the management agreements with the Managed Plans, the Company
provides management and consulting services associated with the financing and
delivery of health care services. The Company seeks to enter into similar
arrangements for other managed care organizations. Table A summarizes the
terms of the management agreements.
5
8
Table A- Summary of Terms of Management Agreements with the Managed Plans
Managed Plans
-------------------------------------------------------------------------
Terms OmniCare-MI PPC OmniCare-TN Ultramedix
- ---------------------------------- ---------------- --------- ----------- ----------
(1) Duration:
(a) Effective dates:
(i) Commencement May 1, 1985 August 1, 1987 February 1, 1994 February 1, 1994
(ii) Expiration December 31, 2010 August 1, 2007 February 1, 1999 February 1, 1999
(b) Extension:
(i) Automatically renewable No No Yes - 4 successive Yes - 4 successive
5 year periods 5 year periods
(ii) Terms of renewal/continuation Subject to review Subject to review 5 years 5 years
every 5 years every 5 years
(iii) Next review period May 1, 2000 August 1, 1997 February 1, 1999 February 1, 1999
(c) Termination:
(i) Without cause by the plan at such
reviews Yes Yes Yes Yes
(ii) Either party with cause Yes Yes Yes Yes
(2) Fees paid to the Company:
(a) Percentage of revenues Yes Yes Yes* Yes
(b) Reimbursement of cost incurred to manage
the Plan No No No Yes
(3) Expenses incurred by the Company:
(a) All administrative expenses necessary to
carry out and perform the functions of the
plan, excluding:
(i) Audit Yes Yes No Yes
(ii) Legal No Yes No Yes
(iii) Marketing No No No Yes
(iv) Certain medical related No No No No
(v) Rent No Yes No No
(vi) Certain other Yes Yes No Yes
* The Company has the right to share in the retention savings realized by the Plan under the TennCare contract.
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 (groups and individuals), accounting and budget functions,
deposit, disbursement and investment of funds, enrollment functions, collection
of accounts, claims processing, management information systems, utilization
review, and quality management.
6
9
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 its wholly owned
subsidiary, United American Healthcare of Tennessee ("UA-TN"), currently owns a
75% equity interest in OmniCare-TN. The remaining 25% is owned by a local
partner. OmniCare-TN began as a PPO contractor in the TennCare program, and
operated as a full-risk prepaid health services plan until it obtained its
TennCare HMO license in March 1996. Based on discussions with the State of
Tennessee, the plan's TennCare HMO contract is expected to be executed in the
second quarter of 1997, retroactive to the date of licensure. As a PPO, the
plan had previously operated under a PPO contract. Further, the plan's
application for a commercial HMO license is pending.
In November 1993, OmniCare-TN entered into a PPO contract with the State
of Tennessee pursuant to the State's mandatory health care program, TennCare,
to arrange for the financing and delivery of health care services on a
capitated basis, to Medicaid eligibles and the Working Uninsured
("Non-Medicaid"), individuals who lack access to private or employer sponsored
health insurance or to another government health plan. The TennCare Bureau
placed an indefinite moratorium on Working Uninsured enrollment in December
1994, however, such action did not affect persons enrolled in a plan prior to
the moratorium. This annually renewable contract will next be reviewed on or
before December 31, 1996 and management expects it to be renewed for an
additional 12 month term.
OmniCare-TN currently serves Shelby and Davidson counties in Tennessee
(which include the cities of Memphis and Nashville). Total enrollment as of
August 1, 1996, was approximately 48,177 members, of which 26,396 (55%) and
21,781 (45%) represent Medicaid and Working Uninsured enrollees, respectively.
The greatest opportunity for enrollment gains is during the thirty day
enrollment change period which occurs once a year in October. Management
projects an increase in its TennCare membership of 10-15% during the current
change period due to indications from its largest competitor of an intention to
reduce TennCare enrollment by approximately 136,000 members. Additionally, the
receipt of a commercial license will give OmniCare-TN the ability to market its
managed care products to the various employer groups in the regions served.
The State of Tennessee, in an effort to reduce the cost of its Medicaid
program, is moving toward competitively bidding the TennCare contract. The
State has preliminarily indicated that it has decided not to issue a Request
for Proposal for the 1998 waiver year, but may continue to consider the bid
process.
7
10
ULTRAMEDIX. Ultramedix Healthcare Systems, Inc., a network model HMO
headquartered in Tampa, Florida, was founded as a Florida corporation in May
1992. The Company through its majority owned subsidiary, United American
Healthcare of Florida ("UA-FL"), owns 51% of Ultramedix. The remaining 49% of
the plan is owned by local shareholders. Ultramedix was in the development
stage through August 1993, at which time the plan entered into a contract with
the Florida Agency for Health Care Administration ("AHCA") to arrange for the
financing and delivery of health care services to the Medicaid population in 12
counties in the State of Florida on a capitated basis. In July 1994, the
Agency entered into a new one-year contract with Ultramedix, and expanded its
service area to include 23 counties located in the central and southeastern
area of the State of Florida. As of September 1, 1996, Ultramedix was
operating in 17 counties. The contract will next be reviewed on or before June
30, 1997.
Ultramedix's application with the Florida Department of Insurance for a
Certificate of Authority to operate as an HMO was approved on October 20, 1995
and enables Ultramedix to pursue HMO business in the commercial market. Prior
to this approval, Ultramedix operated as a prepaid health service plan serving
the Medicaid population exclusively. Additionally, UA-FL received a license to
operate as a third party administrator on October 20, 1995.
To assure compliance by Ultramedix with regulatory requirements of a 75/25
Medicaid to commercial enrollment mix, AHCA placed a moratorium on Medicaid
enrollment by Ultramedix coupled with a request that Ultramedix submit a work
plan to disenroll its Medicaid population by July 1, 1996. As a result, the
plan experienced a decrease in Medicaid membership since that time, due
primarily to the loss of member eligibility and voluntary disenrollments. AHCA
renewed the plan's contract in July 1996 and has allowed the plan to resume
marketing to the Medicaid population, effective October 2, 1996, up to a
maximum Medicaid enrollment of 12,000 members. As of August 1, 1996, total
enrollment was 9,759 members, of which 96% or approximately 9,355 were Medicaid
members and 4% or 404 were commercial members. The Department of Insurance
("DOI") requested a cash infusion of approximately $1.3 million from Ultramedix
on October 3, 1996 to cure a minimum capital/surplus deficiency. The Company
is currently working with the DOI to resolve this issue.
To develop its commercial membership, Ultramedix is aggressively marketing
an individual plan, three small group plans through the Florida Community
Health Purchasing Alliances ("CHPAs"), three small group plans outside the
CHPAs, and a large group plan to potential commercial subscribers in its
service areas. The plan is also developing a point of service product. In June
1996, the plan entered into agreements with three broker agencies to market its
individual commercial product, and in July 1996, with the largest CHPA
membership broker in the State of Florida to market its CHPA products. In
August 1996, the plan filed affidavits with AHCA to expand its commercial
service area to include the counties of Sarasota, DeSoto, Charlotte, and
Osceola and expects to be able to add the five counties in the Jacksonville
area in the near future. Ultramedix expects to meet the 75/25 mix in early
calendar 1997.
AHCA, in an effort to reduce the cost of the State of Florida's Medicaid
program, is moving toward competitively bidding its Medicaid health services
contracts. This initiative will
8
11
mandate the enrollment of Medicaid recipients into MCOs or into the State's
Medipass program. The award date announcing selected contractor(s) is expected
in 1997, but may be postponed. It is expected that the initial contract period
will be up to 30 months and renewable annually thereafter. Existing MCO's
currently serving this market, as well as new entrants, will be eligible to bid.
In July 1996, the State of Florida had 1,531,238 individuals eligible for
Medicaid, of which 384,141 (25.1 %) were enrolled in MCOs. Preparation of a
successful competitive bid is of the highest priority for Ultramedix. The
implementation of the new client server system technology, increased focus on
quality assurance (in August 1996 the plan filed an application for
certification by the National Committee for Quality Assurance), expansion of the
provider network, and Ultramedix's selection in January 1996 as the "Best Health
Plan" in west central Florida by Medical Business (Gulf Coast Edition) an
industry publication, are all factors behind the Company's belief that the plan
will be competitive and successful in the ACHA bidding process. However, if the
plan is not a successful bidder, it is likely it will lose its current Medicaid
membership which could have an adverse effect on the Company.
Managed Plans Operated By the Company
OMNICARE-MI. OmniCare-MI, a Michigan nonprofit, tax-exempt Corporation,
commenced operations in December 1973 as a network model HMO headquartered in
Detroit, Michigan. It is licensed in the State of Michigan and certified as a
federally-qualified HMO.
Enrollees of OmniCare-MI are enrolled either individually, directly
through their employers, or, with respect to Medicaid recipients, indirectly
through the Michigan Department of Social Services pursuant to an agreement
therewith to arrange for specified health care services to qualified Medicaid
recipients. This agreement, which must be renewed annually, was extended by
mutual agreement for an additional year, from January 1, 1996 through December
31, 1996. As of August 1, 1996, OmniCare-MI's total enrollment was
approximately 102,264, of which 8,278 were OmniCarePlus (point-of-service)
members. Approximately 53%, or 53,885 enrollees, including OmniCarePlus
enrollees, were from employer groups located principally in southeastern
Michigan and approximately 47%, or 48,379 enrollees, were Medicaid recipients.
As of August 1, 1996, OmniCare-MI had agreements with approximately 145
major employer groups with 25 employees or more to offer OmniCare-MI products
as an option to employees, the largest of which represents approximately 6% of
OmniCare-MI's total enrollment. These employer groups, ranked by enrollment,
include: City of Detroit, U.S. Government, Ford Motor Co., Detroit Board of
Education, State of Michigan, General Motors Corporation, Detroit Edison,
Comerica Bank, Chrysler Corp., Wayne County, and NBD Bank, N.A.
HMO growth in the State of Michigan has been fairly consistent over the
last several years. Currently, in excess of 20% of the State's population is
enrolled in HMOs and the plan expects future growth and new HMO entrants in the
market. To effectively market its products, OmniCare-MI expects a decrease in
commercial rates as mirrored by the national trends in the commercial sector.
This trend will place significant pressure on the plan to improve its enrollment
growth rates and cost containment measures.
9
12
The plan's strategy to increase its market share is to introduce two new
products as well as increase Medicaid enrollment. The two new products are a
small group product and a Medicare risk product. Implementation of this small
group product is targeted for the first quarter of 1997. Historically, this
market has been serviced by indemnity products, PPOs, etc. Management believes
that a product utilizing managed care concepts to reduce cost for small groups
should perform well and appeal to the market as a result of competitive
pricing.
The plan expects to roll out its Medicare risk product in mid 1997 in
response to a national trend to enroll Medicare recipients in managed care.
In southeastern Michigan, one HMO is currently approved to market to this
population. Although the utilization patterns of the Medicare market are high,
the plan believes with a 300% average increase in revenue per member for this
market as compared to the traditional HMO member, and the fact that this market
has existed in primarily a fee for service environment, that there are
considerable opportunities for growth and savings by implementing managed care
concepts.
The State of Michigan, in an effort to reduce the cost of its Medicaid
program, is competitively bidding its Medicaid contracts to be effective during
early 1997. The affected southeastern Michigan counties include a significant
portion of the plan's Medicaid enrollment. It is estimated that approximately
165,000 recipients will have the opportunity to voluntarily select a "qualified
health plan". OmniCare-MI is projecting that it will retain its existing
membership, and be in a position to increase its Medicaid membership. The
State of Michigan is also contemplating carving out certain services and funds
traditionally included in calculations to determine the Medicaid capitation
rates paid to HMOs in Michigan. As a result of the proposed carve-outs, the
average revenue per member paid to OmniCare-MI by the State of Michigan will
decrease and thus management fees to the Company could be affected. While the
Company is unable to predict the outcome of the proposed contract bid, if the
plan is an unsuccessful bidder, the outcome would have a material adverse
effect on the Company's business.
PPC. PPC commenced operations as a nonprofit, network model HMO licensed
in the State of Ohio on July 31, 1987, and converted to a for-profit HMO in
April 1993. PPC is headquartered in Cleveland, Ohio. PPC members are enrolled
either directly through their employers or, with respect to Medicaid
recipients, indirectly through the Ohio Department of Human Services pursuant
to an agreement to arrange for specified health care services to qualified
Medicaid recipients. This agreement expires on June 30, 1997, but may be
extended by mutual agreement of the parties.
As of August 1, 1996, PPC's total enrollment was approximately 56,959
enrollees located principally in northeastern Ohio. Approximately 82%, or
46,808 enrollees were Medicaid recipients and approximately 18%, or 10,151
enrollees, represented commercial enrollees. PPC presently has agreements with
approximately 25 employer groups with 25 employees or more to offer PPC
products as an option to employees, the largest of which represents less than 5%
of PPC's total enrollment. The five largest employer groups, ranked by
enrollment are: State of Ohio, Metro Health Medical Center, City of Cleveland,
Regional Transit Authority, and St. Luke's Medical Center.
10
13
Medical Center.
The State of Ohio began implementation of its OhioCare program on July
1, 1996. This program mandates that Medicaid recipients enroll into HMOs to
receive health care benefits. The state is implementing this program in phases
by selecting seven counties for participation prior to a statewide mandate. A
significant portion of PPC's current enrollment resides in two of the mandated
counties. The plan expects to retain this membership and has been approved to
expand its participation into a third county. The plan anticipates a
substantial increase in its enrollment over the next 12 months due to the
conversion of the affected Medicaid eligible population to mandated HMO
enrollment, increased marketing activity and expansion into new service areas.
Other Managed Plan Ventures
HEALTHSCOPE/UNITED, INC. In March, 1993, the Company reached an agreement
with New York-based HealthScope Administrative Services Corporation, now known
as HealthScope/United, Inc. ("HealthScope"), to form a health care management
company 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 United/HealthScope, Inc. ("UHI"). Currently, HealthScope
has entered into management agreements with four health care plans, three in
the New York City metropolitan area and one in the State of Connecticut. The
Company presently owns less than one percent of UHI, but has the right,
pursuant to a warrant, to acquire up to a 72.6% interest of UHI on or before
March 8, 1998, for approximately $1,000. The Company has committed to lend up
to $4.3 million to HealthScope, and has advanced approximately $4.2 million
against this commitment.
In 1995 New York City officials announced a four-year initiative to enroll
over 1,700,000 Medicaid recipients residing in New York City in managed care
plans. The staggered enrollment aspect of the program was necessitated by an
insufficient capacity to enroll all such recipients. As of September 1, 1996,
there were approximately 400,000 Medicaid recipients already enrolled in
managed care plans. As of July 28, 1995, all health plans in New York City
were required to suspend direct enrollment activities relative to the eligible
Medicaid population. This moratorium was lifted in August, 1996. The State is
currently negotiating with the federal government to initiate mandatory
Medicaid enrollment in New York City and other areas of the State. HealthScope
management expects the enrollment assignment to begin in January 1997.
HealthScope provides administrative and marketing services to Medicaid
managed care plans. In August 1993, HealthScope received approval from the State
of New York Department of Health to enter into a management agreement with
Catholic Medical Center of Brooklyn and Queens, Inc. ("CMC"). Subsequently, CMC
obtained a prepaid health services plan license effective October 1, 1993 for a
plan called Fidelis Care. Under a contract negotiated with the City of New York
Human Resources Administration, Fidelis Care began marketing to a pool of
650,000 Medicaid eligible members. As of September 1, 1996, Fidelis Care had
approximately 18,000 members.
11
14
In addition, HealthScope has entered into a Management Services Agreement
dated March 1, 1995, with OLM/Soundview Prepaid Health Services Plan
Corporation, serving the Medicaid population of the Bronx. The plan commenced
marketing efforts in April 1995 and as of September 1, 1996, had approximately
1,800 members. HealthScope and the plan have mutually decided to terminate the
contract effective the fall of 1996. HealthScope is currently in the final
stages of negotiations to provide management services to a new health plan
sponsored by three hospitals in New York City that will serve the boroughs of
Manhattan and the Bronx. The plan anticipates serving members beginning in
March, 1997.
HealthScope, through its wholly owned subsidiary HealthScope/United of
Long Island, Inc., entered into an administrative services agreement effective
November 1, 1994, pursuant to which HealthScope provides administrative
services to the Suffolk County Department of Health Services Prepaid Health
Services Plan. As of September 1, 1996, the plan had approximately 6,200
members.
HealthScope has executed one management agreement in Connecticut with the
Bridgeport Health Plan. Mandatory Medicaid enrollment in Connecticut began on
October 1, 1995, in Hartford and New Haven Counties and in the entire State of
Connecticut on February 1, 1996. The Company believes Bridgeport Health Plan
will benefit by the mandatory Medicaid enrollment process. Mandatory
enrollment began in Bridgeport in February, 1996 and the plan has a current
membership of approximately 3,800.
In May 1996, UHI initiated a private placement memorandum seeking
potential equity investors to fund future cash flow needs. A private investment
firm expressed an interest in making a significant investment in UHI and
has completed preliminary due diligence. The Company is currently considering
an offer from this entity to purchase its equity interest in UHI, including the
value of the warrants and the assumption or payoff of the outstanding
indebtedness owed by UHI to the Company. The parties are currently negotiating
terms of the agreement and it is the Company's expectation that the transaction
will be finalized in the near future. The third party investor has loaned UHI
$350,000 in partial consideration for which, UAHC agreed, to subordinate its
secured position to the extent thereof. Further, the third party intends to
lend UHI an additional $1,150,000 in the near future. However, neither party
has committed to consummate a transaction and there can be no assurances that
such a transaction will be consummated. If funding of future cash flow needs
is not obtained by HealthScope, this could have a material adverse effect on
the Company in connection with its ability to collect its receivables from
HealthScope.
PHILCARE. PhilCare Health Systems, Inc., a network model HMO headquartered
in Philadelphia, Pennsylvania, was organized as a Pennsylvania corporation in
May 1994 and is 49% owned by the Company's wholly owned subsidiary, United
American Healthcare of Pennsylvania ("UA-PA"), with the remaining 51% owned by
local participants. PhilCare was developed to participate in Pennsylvania's
mandatory Medicaid pilot program, HealthChoices, and in June 1996, obtained its
HMO license. In connection therewith, the Company funded PhilCare's applicable
statutory reserve and net worth requirements through $2,100,000 in cash
deposited at a state bank
12
15
in Pennsylvania in June, 1996. Management of the Company is
presently evaluating its alternatives to funding future cash flow requirements
of PhilCare and there can be no assurances that such funding authorization will
be given.
The HealthChoices program requires the mandatory enrollment of
approximately 540,000 Medicaid recipients in five metropolitan Philadelphia
counties into HMOs which represents approximately one third of the
Commonwealth's entire Medicaid population. Of the total eligible population in
the five county area, approximately 360,000 are currently enrolled in managed
care plans, and with the HealthChoices initiative, HMO enrollment will involve
approximately 180,000 remaining eligible Medicaid recipients. Pennsylvania's
waiver application submitted to the Health Care Financing Administration
("HCFA") to operate HealthChoices was approved.
PhilCare was among six HMOs selected to participate in the HealthChoices
program. Of the six selected HMOs, five are considering contracts in the
HealthChoices program. Provided that a mutually acceptable contract is entered
into, the contract length will be for a three year period with the
option for two one year extensions. The total state funding for the
HealthChoices program is an estimated $1-2 billion annually over the five year
period. Other selected HMO participants include Keystone Mercy Health Plan,
Healthcare Management Alternatives, Oxford Health Plans, and Health
Partners.
The Pennsylvania Department of Public Welfare ("DPW"), the governing
agency for the program, expects HealthChoices to start on January 1, 1997, but
those qualified for the program will have the ability to choose an HMO in
October 1996 during the pre-enrollment process. Direct marketing to Medicaid
recipients will not be allowed under the program. Eligible recipients not
selecting an HMO will be assigned to a plan based upon the HMO's ranking in the
selection process. If contract negotiations are successful, Management
anticipates first year Medicaid enrollment of 5%-6% of the total HealthChoices'
Medicaid eligible population.
Successful negotiations are, in part, dependent upon resolution of the
DPW's demand that the Company guarantee PhilCare's performance under the
contract. Although negotiations continue, under present circumstances, the
Company is unwilling to sign a guarantee for PhilCare's performance under the
agreement. No assurances can be given that PhilCare will enter into a contract
with DPW.
Ratings used by the State to determine the monthly premium received by the
plan was very competitive, and cost containment will become very important if
the plan is to achieve favorable financial results. Were it to participate, the
Company believes its experience and core competency of managing Medicaid
populations will allow it to provide quality health care and remain financially
viable.
OMNICARE-LA. OmniCare Health Plan of Louisiana, Inc., 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 Healthcare of Louisiana ("UA-LA"). The plan was
granted an HMO license by the Louisiana Department of Insurance on June 14,
1996. In connection therewith, the Company funded OmniCare-LA's applicable
statutory reserve and net worth requirements through a $1,000,000 letter of
credit
13
16
and $1,000,000 in cash deposited in accounts at state banks in
Louisiana. It is anticipated that HMO ownership will be offered to other
investors. The plan is currently in a pre-operational phase.
The Louisiana managed care market is in its infancy. Overall HMO
penetration is 7% in the State and 14% in metropolitan New Orleans while
national figures for HMO penetration are higher. Small businesses dominate the
market where employers are exploring the savings potential of managed care.
The Company developed UA-LA and OmniCare-LA to primarily pursue opportunities
in New Orleans and Baton Rouge for the commercial and Medicaid HMO markets, and
to pursue third party administrator business. Although Louisiana does not
currently have a mandatory Medicaid program, a waiver request to HCFA is being
considered. A pilot project is expected in 1997 for the estimated 240,000
Medicaid recipients that reside in the New Orleans area. If offered, the
Company will compete with several newcomers along with larger plans including:
Principal, Aetna, Community Health Network, Oschner/Sisters of Charity,
MaxiCare, Cigna and Travelers. Combined enrollment for the named plans is
approximately 150,000. Although there is no guarantee, management projects
commercial enrollment of 4,200 at June 30, 1997.
OTHER VENTURES. In fiscal 1995, the Company, in anticipation of business
opportunities in several states, incorporated subsidiaries, UA-GA and UA-IL.
The subsidiaries are currently in a start up mode. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources and Recent Initiatives."
SELF-FUNDED BENEFIT PLANS
A self-funded health benefits plan is one in which an employer directly
assumes the financial risk for its employees' health care costs by paying for
employees' medical claims out of a separate fund consisting of employee and/or
employer contributions. Self-funded plans may contract with unrelated parties
such as a third party administrator ("TPA") to provide claims processing and
other administrative services to the plan. The Company is licensed as a TPA in
Michigan, Florida, Tennessee, and Louisiana. Self-funded plans may also use
stop-loss and risk pools to manage the extent of their financial risk for
health care costs.
The Company believes that its acquisition of CHF in 1993 represents an
opportunity to expand its traditional business into the self-funded market which
comprises a majority of the private sector employers. CHF's market niche is
unique. CHF designs comprehensive health benefit plans for self-funded employer
groups with 50 to 5,000 employees, and then arranges for related insurance
coverage between the groups and the insurers. CHF's current product line
principally consists of services offered to fully reinsured, partially
self-funded benefit plans, which, in addition to primary health care coverage,
include coverage for dental, vision, life, accidental death and dismemberment,
and short and long-term disability insurance. CHF's position in the marketplace
and strategic relationships with prominent reinsurance companies, TPAs, and PPOs
should allow it to continue designing cost effective benefit packages to
employers in the future. CHF does not bear any health care cost risk. As of
August 1, 1996, CHF had assisted approximately 181 self-funded benefit plans
with an estimated 56,250 covered lives in 47 states.
14
17
To assist larger self-funded employer groups to respond to the increasing
cost of workers' compensation, CHF formed Statutory Benefits Management
Corporation ("SBMC") and United American Network Systems, Inc. ("UANS") as
wholly owned subsidiaries in October 1993 and March 1994, respectively. SBMC
provides marketing, consulting and administrative services to self-funded
benefit plans to control the cost of workers' and unemployment compensation to
employer groups and associations with 500 to 5,000 employees. Cost reductions
for employer groups is achieved through evaluating services to provide the most
cost effective alternative and by emphasizing risk management and loss control.
In June 1996, SBMC was awarded a contract to provide its innovative
managed care services to the Injured Workers' Insurance Fund ("IWIF"). The
IWIF is the largest provider of workers' compensation insurance in the State of
Maryland and covers over 30,000 businesses with approximately 420,000
employees, approximately one-quarter of Maryland's work force. SBMC expects
this contract to produce a minimum of $7 million a year in revenue in addition
to incentive bonuses, if the savings generated for the IWIF exceed baseline
costs. The contract is for a three year period with the option of three
successive one-year renewals.
The goal of this program is to reduce administrative costs, improve
employee productivity and increase the cost advantage of employee benefit
dollars through a complete "turn-key" plan for IWIF, thus minimizing the
economic impact of on-the-job injuries. Services provided by SBMC to IWIF,
among other services, will include: plan design, electronic data interchange,
24 hour per day 7 day a week rapid reporting and early response system, and
medical case management. The Company believes this major contract will lead to
additional contracts with insurance companies and other large self-funded
workers' compensation groups. As of August 1, 1996, SBMC had assisted
approximately 30,368 employer groups and associations representing
approximately 480,000 covered lives.
UANS is a health services integrator that provides employer groups of
1,000 or more employees with a combination of custom designed managed health
care products and services, including access to provider networks, utilization
review, case management, claims technology, and underwriting. As of August 1,
1996 UANS had assisted one employer group representing 1,200 covered lives.
OTHER VENTURES AND PRODUCTS
CHOICEONE. ChoiceOne, a national PPO and wholly owned subsidiary of the
Company, was created in 1993. ChoiceOne directly contracts in 15 states and
leases access to existing provider networks in 32 states. The national network
consists of approximately 2,700 hospitals, 186,000 physicians and 10,000
ancillary providers. ChoiceOne is compensated by receiving either a per member
access fee or a percentage of the savings realized from accessing the ChoiceOne
network. As of August 1, 1996, ChoiceOne had approximately 243,000 members
representing 141 payers. ChoiceOne's nine employees operate principally from
offices located in Fort Worth, Texas and the Company's headquarters in Detroit,
Michigan.
15
18
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 plan, including cash reserve
requirements and dividend restrictions. There can be no assurance that the
Company or its Managed Plans will be granted the necessary approvals for new
products, or be able to maintain federal qualifications or state licensure, or
increase premiums at rates equal to or in excess of increases in its health
care costs.
The licensing and operation of OmniCare-MI, PPC, OmniCare-TN, Ultramedix,
PhilCare and OmniCare-LA are governed by those states' respective statutes and
regulations applicable to health maintenance organizations. The Managed Plans'
licenses are subject to denial, limitation, suspension or revocation if there
is a determination that the plans are operating out of compliance with the
state's 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. With the
exception of OmniCare-MI, the other plans are not federally-qualified HMOs and,
therefore, are not subject to the federal HMO Act.
Federal and state regulations of health care plans and managed care
products are subject to frequent change, vary from jurisdiction to jurisdiction
and generally give 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. 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, director's and
officer's, property, business automobile, and worker's compensation insurance
coverage. Management believes that coverage levels under these policies are
adequate in view of the risks associated with the Company's business. The
management agreements with OmniCare-MI, PPC, OmniCare-TN and Ultramedix each
require the respective Managed Plan to maintain general liability insurance,
naming the Company as an additional insured. The Company or the Managed Plan is
required to pay the insurance premiums under the terms of the respective
management agreements. In addition,
16
19
the Managed Plans have professional liability insurance which may cover
liability claims arising from medical malpractice, with the Company named as an
additional insured. No assurance can be given, however, 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 and more experience than the
Company in providing such management services. 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 the Company
will be able to compete effectively in the future.
The Company competes with other HMOs, PPOs and insurance companies. The
level of this competition may affect, among other things, the operating
revenues of the Managed Plans, and therefore, the revenues of the Company. The
predominant competitors in southeastern Michigan are The Wellness Plan, Total
Health Plan and physician sponsored plans in the Medicaid market, and Health
Alliance Plan, Blue Care Network - SEM, PPO of Michigan and Blue Preferred Plan
in the commercial market. The predominant competitor in the northeastern Ohio
Medicaid market is Total Health Care Plan. The predominant competitors in the
northeastern Ohio commercial market are Kaiser Permanente and QualChoice. The
Company anticipates that new plans will begin competing for Medicaid business
in Ohio. The predominant competitors in the Medicaid market in central and
southwestern Tennessee are Access-Med Plus and Blue Cross/Blue Shield. The
predominant competitors in the Medicaid market in central and the southeastern
Florida are PCA Century Medical, CAC Ramsay, Physician's Care Plan, HealthCare
USA and Stay Well in the Medicaid market. The Company's Managed Plans primarily
compete on the basis of enrollee premiums, covered benefits, provider networks,
utilization limitations, enrollee co-payments and other related plan features
and criteria. Management believes that the Company's existing clients are able
to compete effectively with their primary market competitors in these areas.
EMPLOYEES
The Company's ability to maintain its competitive position and expand its
business into new markets depends, in significant part, upon the maintenance of
its relations with various existing senior officers, as well as its ability to
attract and retain qualified health care management professionals. Although the
Company has employment agreements with several senior executives, it does not
have, nor does it intend 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 to attract such professionals.
17
20
As of August 31, 1996, the Company had 698 full and part-time employees.
The Company's employees do not belong to a collective bargaining unit and
management considers its relations with employees to be good.
MANAGEMENT INFORMATION SYSTEM
The Company believes that timely and relevant information is critical to a
managed care operation, and utilizes its management information system to
process claims, analyze health care utilization, support provider, member and
employer requirements and control administrative costs. The Company believes
that its management information system has enabled it to establish highly
efficient claims processing and information retrieval capabilities.
The Company has initiated a systems implementation plan to enhance its
operations, reduce costs, and improve customer service. Its development of a
proprietary client-server information system along with a select set of
complementary automation products, which include claims scanning, claims
imaging, electronic data interchange, and various select technologies is in the
final stages for enterprise wide installation. Functional enhancements from
the existing system include premium invoicing, claim review and processing,
case management, provider credentialing, financial reporting, and process
re-engineering. The emphasis has been the migration to open architectures that
facilitate the exchange of information with clients and vendors, flexibility to
meet and introduce industry trends, shorten staff training cycles, and increase
overall operational efficiencies.
In January 1996, this proprietary system and the Company's client-server
financial system were successfully installed at OmniCare-TN. Subsequent to the
implementation, the health plan experienced significant improvements, as
anticipated, from the robust features offered by the new technology design.
This health care system is also currently being installed at Ultramedix, with
implementation expected to be completed in November 1996. The Company expects
to leverage the knowledge and resources gained from the installation of this
product in Tennessee and other sites when it installs this product at
OmniCare-MI in early 1997 and future sites to maximize synergy among its
operations.
The success of this client-server information technology has created an
opportunity to investigate the commercial appeal of this highly sophisticated
managed care information system. The Company will continue to analyze the
health care market in order to position this product for commercial sales in
1997. The target market will be HMOs, hospitals with managed care programs,
TPAs and others. In early 1997 the Company's management information system
operations will be relocated to another site to facilitate a company wide
disaster/recovery plan, technical education facility, and autonomy to fully
explore the opportunity of commercial sales of the client-server information
technology.
18
21
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies 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. The Company desires to take advantage of this "safe harbor" and,
accordingly, hereby identifies the following important factors which could
cause the Company's actual financial and enrollment results to differ
materially from any such results which might be projected, forecasted, estimated
or budgeted by the Company in forward-looking statements.
1. Inability to increase premiums and prospective or retroactive
reductions to premium rates commensurate with increases in medical
costs due to utilization, government regulation, or other factors.
2. Discontinuance of, limitations on or restructure of governmental-
funded programs.
3. Increases in medical cost, including increases in utilization and
costs of medical services and the effects of actions by competitors or
groups of providers.
4. Adverse state and federal legislation and initiatives, including
limitations on or reductions of 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.
5. The shift of employers from insured to self-funded coverage resulting
in reduced margins to the Company.
6. Failure to obtain new customer bases, retain existing customer bases
or reductions in work force by existing customers; failure to sustain
commercial enrollment to maintain an enrollment mix required by
government programs.
7. Termination of managment agreements by the Managed Plans;
8. Increased competition between current organizations and the entrance
of new competitors; and the introduction of new products by new and
existing competitors.
9. Adverse publicity and media coverage.
10. Inability to carry out marketing and sales plans.
11. Loss or retirement of key executives.
19
22
12. Governmental financial assessments or taxes to subsidize
uncompensated care, other insurance carriers, or academic medical
institutions.
13. Termination of provider contracts or renegotiation at less
cost-effective rates or terms of payment.
14. The selection by employers and individuals of higher
co-payment/deductible/coinsurance plans with relatively lower premiums
or margins.
15. The impact upon the Company's medical loss ratio of greater net
enrollment in higher medical loss ratio lines of business such as
Medicare and Medicaid.
16. Adverse regulatory determinations resulting in loss or limitations of
licensure, certification or contracts with governmental payors.
17. Higher sales, administrative or general expenses occasioned by the
need for additional advertising, marketing, administrative, or
management information systems expenditures.
18. Increases by regulatory authorities of minimum capital, reserve and
other financial solvency requirements.
19. Denial of accreditation by quality accrediting agencies, e.g.,
National Committee for Quality Assurance (NCQA).
20. Adverse results from significant litigation matters.
21. Interest rates causing a reduction of investment income, or in the
market value of interest rate sensitive investments.
The foregoing cautionary statements pursuant to the Private Litigation
Securities Reform Act of 1995 should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
effective date of said Act, and should be read in conjunction with other
sections of this filing, including Management's Discussion and Analysis of
Financial Condition and Results of Operations.
ITEM 2. PROPERTIES
The Company has leased an aggregate of approximately 224,000 square feet
from which it conducts its principal operations. The Company has leased space
in Michigan, Tennessee, Maryland, Florida, New York, Texas, Pennsylvania,
Louisiana, and Georgia. The principal offices of the Company are located at
1155 Brewery Park Boulevard, Suite 200, Detroit, Michigan, where it has leased
approximately 64,000 square feet of office space. The Company intends to house
its management information department in 16,079 square feet of leased office
space in the
20
23
Renaissance Center, Detroit, Michigan. Due to delays in establishing
operations in Pennsylvania, the Company is finalizing negotiations to sub-lease
approximately 12,000 of the 67,000 square feet it has leased in Philadelphia,
Pennsylvania to third parties. There can be no assurance that the Company will
be successful in reducing this rent obligation.
The Company believes that its facilities will 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
As previously reported by the Company, certain senior officers and the
Company are named defendants in two shareholder lawsuits filed in the United
States District Court for the Eastern District of Michigan (the "Court") on
August 23 and August 24, 1995. In September 1996, these lawsuits were
consolidated as one action by the Court. The Company is aware that plantiffs
intend to seek class status. The complaints contain common allegations that
certain senior officers and the Company issued reports and statements which
violated federal securities laws. The Company and the officers contend that all
material facts were disclosed during the alleged period and that whatever
material facts they did not disclose, if any, were already available in the
financial market place. The defendants' motion to dismiss the complaints,
filed in March 1996, was denied in September 1996. Company management believes
that it is too early to form an opinion regarding the potential financial
impact of the lawsuits. An unfavorable outcome in excess of insurance policy
limit could have a potential adverse impact on the Company's financial
statements. The Company has agreed to indemnify the named officers from
monetary exposure in connection with the lawsuit, subject to reimbursement by
any named officer in the event he is found not to be entitled to such
indemnification.
The Company previously reported on an investigation being conducted by the
U.S. Attorney in the Western District of Tennessee, in cooperation with a
federal grand jury and the United States Postal Inspector's Office, and by the
Tennessee Bureau of Investigation, of the State of Tennessee's TennCare program
and OmniCare-TN's marketing practices. The Company and OmniCare-TN have not
been charged with any wrongdoing and are cooperating in these investigations.
The Company does not intend to provide further reports on this investigation
unless it results in a claim or proceeding against the Company or progresses in
such a manner as to have, in the opinion of management, a material adverse
effect on the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's holders of
common shares (the Company's only voting securities) during the fourth quarter
of the fiscal year ended June 30, 1996.
21
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Shares are traded on the NYSE under the symbol "UAH." The
following table sets forth for the periods indicated the high and low closing
price for the Common Shares on the NYSE, as reported by the NYSE for each
quarter since July 1, 1994:
High Low
--------- ---------
Fiscal Year 1995
- ----------------
First Quarter $ 29 $16 3/8
Second Quarter 29 1/2 23 1/2
Third Quarter 28 1/2 19
Fourth Quarter 21 1/2 14 1/2
Fiscal Year 1996
- ----------------
First Quarter 19 1/8 10 7/8
Second Quarter 11 7/8 9 1/8
Third Quarter 15 5/8 9 3/4
Fourth Quarter 15 1/8 9 7/8
As of September 20, 1996, the closing price of the Common Shares on the
NYSE was $8 3/8 per share and there were approximately 196 record holders of
the Common Shares.
The Company has not paid any cash dividends since its initial public
offering in the fourth quarter of fiscal 1991, retaining all earnings to
support its growth strategy. The Company currently anticipates that it will
retain all of its earnings for use in the operation and expansion of its
business for the foreseeable future.
22
25
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
period indicated:
Year Ended June 30,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- --------
(in thousands, except Per Common Share amounts)
Operating Statement Data:
Revenues:
Management fees from related
parties $55,906 $57,940 $37,251 $27,583 $24,299
Commission and service fees 10,737 8,851 6,845 750 -
Medical premiums 34,523 - - - -
Wayne County capitation fees (1) - - - - 9,606
Interest and other income 1,870 1,796 1,184 703 965
--------- --------- --------- --------- --------
Total revenues 103,036 68,587 45,280 29,036 34,870
Expenses:
Medical services 29,901 - - - -
Salaries, fringe benefits and
payroll taxes 31,676 25,221 17,733 11,429 10,035
Promotion and advertising 5,722 3,598 4,324 3,421 3,066
Depreciation and amortization 4,331 2,645 1,472 703 382
Contract settlement 9,685 - - - -
Interest expense 1,087 482 314 27 -
General, administrative and other
operating expenses 21,680 21,779 9,943 6,525 5,523
Wayne County medical expenses (1) - - - - 9,180
Equity in net losses of
unconsolidated affiliates 652 2,816 89 - -
--------- --------- --------- --------- --------
Total expenses 104,734 56,541 33,876 22,105 28,186
--------- --------- --------- --------- --------
(Loss) earnings before income tax
expense (1,698) 12,046 11,404 6,931 6,684
Income tax expense 1,050 5,450 4,022 2,272 2,101
--------- --------- --------- --------- --------
Net (loss) earnings $(2,748) $ 6,596 $ 7,382 $4,659 $4,583
Net (loss) earnings Per Common
Share $ (0.42) $ 1.01 $ 1.13 $ 0.73 $ 0.72
Dividends Per Common Share $ - $ - $ - $ - $ -
Weighted average Common Shares
outstanding 6,561 6,561 6,561 6,363 6,325
23
26
June 30
-----------------------------------------------------
1996 1995 1994 1993 1992
------- -------- ------- ------- -------
Balance Sheet Data:
Working capital $ 9,310 $15,302 $10,855 $12,430 $12,827
Current assets 43,941 22,376 16,985 15,372 16,230
Intangible assets (net) 19,540 5,398 4,922 5,357 -
Total assets 93,077 57,755 45,579 32,798 23,644
Current liabilities 34,631 7,074 6,130 2,942 3,403
Long-term debt 18,742 9,074 4,433 2,500 -
Stockholders' equity 37,822 40,508 34,189 26,806 20,174
(1) The Company's contract with Wayne County was discontinued April 30, 1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
In 1996, the Company acquired additional ownership in previously
unconsolidated affiliates which affect the year to year comparability of its
consolidated financial position and results of operations. On January 29 and
31, 1996, the Company purchased an additional 20.6% and 25% of the voting
common stock, and 100% of the preferred stock, of Ultramedix and OmniCare-TN,
respectively. This increased the Company's ownership in the voting common
stock of Ultramedix and OmniCare-TN to 51% and 75%, respectively. The
acquisitions were accounted for under the purchase method of accounting and
accordingly, these now majority-owned entities are included in the Company's
consolidated financial results. Overall revenues, excluding the effect of
consolidation, increased $6.1 million (9%) due to increased management fees of
$4.2 million (7%) and increased commission and service fee revenues of $1.9
million (21%). The owned Managed Plans experienced a medical loss ratio of
approximately 87%. Excluding HMO medical services, expenses increased $18.6
million (32%). Marketing, general and administrative, depreciation and
amortization and interest expense increased $8.5 million, $1.7 million and $.6
million, respectively and the net contract settlement expense was $9.7 million.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Total revenues increased $34.4 million (50%) from $68.6 million in 1995 to
$103.0 million in 1996.
HMO medical premium revenues were $34.5 million, of which $28.7 million
and $5.8 million related to OmniCare-TN and Ultramedix, respectively. The
average per member per
24
27
month ("PMPM") premium rate for OmniCare-TN and Ultramedix was
approximately $105 and $98, respectively. Based on historical annual contract
adjustments by the respective state agencies, management expects nominal premium
rate increases for the existing OmniCare-TN and Ultramedix membership in 1997.
Management fees were $55.9 million in 1996, a decrease of $2.0 million
(4%) over fees of $57.9 million in 1995, due, in part, to the operated Managed
Plans and included: (i) increased operating revenues of OmniCare-MI due
primarily to an increase in the enrollment rates of approximately 4% offset by
an approximate 1% decrease in the premium rates, which resulted in increased
management fees of approximately $.9 million; (ii) increased operating revenues
of PPC due to increased enrollment of approximately 26%, which resulted in
increased management fees of approximately $1.8 million, and (iii) decreased
management fees of $.5 million from approximately $1.3 million in 1995 to $.8
million for 1996 related to the Company's administration of OmniCare-MI's
coordination of benefits ("COB") program. Management expectations are that the
recently enacted Medicaid initiative in Ohio will continue to favorably affect
PPC's 1997 enrollment, OmniCare-MI will recognize nominal enrollment gains, and
premium rates for the current membership for OmniCare-MI will decline based on
recently proposed state initiative carving out certain medical services while
PPC's rates will remain relatively constant in 1997.
The change in management fees was also due, in part, to the owned Managed
Plans and included: (i) a decrease of management fees under the Ultramedix
management agreement of $1.8 million (36%) from $5.0 million in 1995 to $3.2
million in 1996 due to increased cost reimbursed operating expenses of $1.0
million, offset by the post acquisition consolidation elimination of management
fees of $2.8 million, and (ii) a decrease of management fees under the
OmniCare-TN management agreement of $1.6 million (10%) from $15.6 million in
1995 to $14.0 million in 1996 due to: (a) an approximate 29% decrease in
enrollee member months that resulted in a decrease in enrollment from
approximately 63,000 members at June 30, 1995 to approximately 48,000 members
at June 30, 1996, due primarily to (i) the Bureau of TennCare's termination of
coverage for Working Uninsured who were delinquent in the payment of their
premiums to the State under the TennCare program, (ii) the Bureau of TennCare's
disenrollment of approximately 3,400 members in April 1996 indicating that the
action was taken because questionnaires to members were returned undeliverable.
OmniCare-TN is contesting this disenrollment with TennCare on the basis that
the disenrollment was in violation of the contract between TennCare and
OmniCare-TN, and (iii) the Bureau's determination that approximately 4,500
enrollees were ineligible in December 1994. The enrollment decrease resulted
in an approximate $4.6 million decrease in management fees to the Company, (b)
a decrease in management fees due to the change in the net management fee
percentage charged to the plan of approximately $4.3 million; (c) an
approximate 12% rate increase of which 4% is due to rate increases from the
state and 8% due to changes in the Plans membership mix. At September 1, 1995,
63% of the Plan's membership was Working Uninsured, compared to 45% at August
1, 1996. The increased rates resulted in increased management fees to the
Company of approximately $1.9 million, and (d) post acquisition consolidation
elimination of management fees of $3.4 million. These changes resulted in a
decrease in management fees to UA-TN of approximately $10.4 million.
25
28
Management fees to UA-TN were further impacted during the quarter ended
June 1996 by an agreement reached between UA-TN and OmniCare-TN during that
quarter but, effective November 1995, pursuant to which OmniCare-TN agreed to
reimburse UA-TN approximately $8.7 million for start-up costs and other
expenses incurred for the period January 1994 through September 1995 which were
unrelated to OmniCare-TN's TennCare business and which were over and above the
amounts which OmniCare-TN could reimburse UA-TN out of the capitation payments
received by OmniCare-TN under the TennCare contract. Further, UA-TN agreed to
convert its claim for these additional amounts owed to it by OmniCare-TN into
approximately 8.7 million shares of preferred stock of OmniCare-TN as complete
and final settlement of such obligation. Despite the fact that UA-TN and
OmniCare-TN each took certain actions relating to this settlement agreement,
the transaction was not sufficiently documented so as to allow recognition of
same on the Company's financial statements for the quarter ended December 31,
1995, resulting in a reduction of management fee revenues by the Company during
such quarter. See further discussion under contract settlement expense.
Commission and service fees relate primarily to the activities of CHF and
represent contract renewals and new contracts. Commission and service fees were
$10.7 million in 1996, a $1.9 million (21%) increase over fees of $8.8 million
in 1995. Approximately $1.4 million of the increase is due to the net increase
in the number of groups (109 to 140) and approximately $.2 of the increase is
due to the increase in the net average revenues per group ($46,000 to $48,000)
for CHF. Management expects the new IWIF contract to generate approximately $7
million a year over the life of the contract in revenue beginning in 1997.
Interest and other income in 1996 was $1.9 million, an increase of $.1
million (4%) over income of $1.8 million in 1995.
Total expenses in 1996 were $104.7 million, an increase of $48.2 (85%)
over expenses of $56.5 million in 1995.
Medical service expenses of $29.9 million relate to the owned Managed Plan
and was $24.5 million and $5.4 million for OmniCare-TN and Ultramedix,
respectively. The percentage of premium revenues to medical services or the
medical loss ratio ("MLR") post acquisition was 86% and 93% for OmniCare-TN and
Ultramedix, respectively. Ultimately the plans' profitability will be
dependent on the plans' ability to control health care costs. In 1997
management believes that the MLR could increase at OmniCare-TN due primarily to
the change in the membership mix from Working Uninsured to the higher utilizing
Medicaid segment, and expects a decrease in the MLR for Ultramedix as a result
of an expected increased membership base to spread the medical risk and the
renegotiations of provider contracts. The installation of the health care
client-server software at OmniCare-TN and the current installation at
Ultramedix could mitigate the expected increase in medical cost.
Marketing, general and administrative expenses ("MG&A") increased $8.5
million (17%) from $50.6 million in 1995 to $59.1 million in 1996. MG&A as
percentage of management fees and/or commissions and service fees for the
management of PPC remained constant at 97% for
26
29
1996 and 1995 and for CHF decreased 3% from 78% in 1995 to 76% in 1996.
MG&A as percentage of management fees for the management of OmniCare-MI,
increased approximately 30%, from 32% in 1995 to 41% in 1996, due primarily to
increased payroll and promotional efforts to expand the provider network,
product development and preparation for NCQA accreditation reviews.
MG&A for the Company's owned Managed Plans, OmniCare-TN and Ultramedix,
increased from $11.7 million in 1995 to $13.8 million in 1996, an increase of
$2.1 million (18%) and excludes a $2.2 million valuation allowance established
to adjust the carrying value of the Company's investments, advances and notes
receivable from related parties to their estimated fair value in 1995.
Approximately $1.2 million of the $2.1 million increase relates to
consolidating the expenses of the owned Managed Plans, $1.6 million to
increased payroll and $.9 million to increased promotional activities, offset
by a decrease in professional services, primarily computer access fees, of $1.8
million.
The Company's development costs in Pennsylvania, Louisiana, Georgia and
Illinois accounted for approximately $.4 million of the total MG&A increase.
Salary related expenses at the Company's corporate office increased
approximately $.9 million from 1995 to 1996 or 17% and the valuation allowance
established to adjust the carrying value of the Company's notes receivable from
HealthScope to their estimated fair value at June 30, 1996 increased
approximately $1 million. Overall the Company's payroll and related expenses
represented 54% and 50% of MG&A in 1996 and 1995, respectively. The
approximate $6.5 million increase in salaries from $25.2 million in 1995 to
$31.7 million (26%) is due substantially to the increase in the number of
employees from 610 at June 30, 1995 to 690 at June 30, 1996 and an approximate
5-7% increase in the average salary.
Depreciation and amortization in 1996 was $4.3 million, an increase of
$1.7 (64%) from $2.6 million in 1995. The increase was due to depreciation
taken on approximately $7.0 million of furniture and equipment acquired over
the past twenty-four months and the amortization of goodwill related to
acquisitions of approximately $.9 million.
The $.6 million (126%) increase in interest expense from $.5 million in
1995 to $1.1 million in 1996, was due primarily to interest cost on the term
loan agreements and increased borrowings against the line of credit.
Contract settlement expense was $9.7 million in 1996. This expense
represents a one-time non-recurring net charge to adjust management fee revenues
and its effect on other related accounts based on the provisions of the revised
management agreement as approved by the State of Tennessee in November 1995,
retroactive to January 1, 1994. The contract settlement charge represents the
effect of retroactively applying the provisions of the revised management
agreement from January 1, 1994 to September 30, 1995. The effect on management
fee revenues for the period January 1, 1994 to September 30, 1995, as adjusted
in December 1995, was a reduction in management fees of approximately $11.7
million, offset by a decrease in goodwill of approximately $.6 million related
to the Company's 50% equity ownership in OmniCare-TN at the
27
30
time. Additionally, the contract settlement charge was reduced by the $1.4
million reversal of the valuation allowance established in June 1995
representing a charge to adjust the carrying value of the Company's investments,
advances and notes receivable from and related to OmniCare-TN to their estimated
fair values at June 30, 1995. The Company subsequently acquired a majority
interest in OmniCare-TN. See additional discussion under management fee
revenues.
Equity in unconsolidated affiliates net losses decreased $2.2 million,
from $2.8 million in 1995 to $.7 million in 1996, due to the Company's
recognition of its share of the losses as a shareholder of OmniCare-TN (50%)
and Ultramedix (30.4%) through January 1996, at which time the Company acquired
a majority interest in these plans.
As a result of the foregoing, the Company recognized losses before income
taxes of $1.7 million in 1996 compared to earnings before income taxes of $12.0
million in 1995, a $13.7 million decrease. The effective tax rate increased
from approximately 45% to 162% for the respective twelve months ended June 30,
primarily because losses in affiliates and goodwill amortization related to
equity investments were not fully tax deductible, and state and local income
taxes.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
Total revenues in 1995 were $68.6 million, an increase of $23.3 million
(51%) over revenues of $45.3 million in 1994.
Management fees were $57.9 million in 1995, an increase of $20.7 million
(56%) over fees of $37.3 million in 1994, in part, to: (i) increased operating
revenues of OmniCare-MI due primarily to increased enrollment and premium rates
of 8% and 4%, respectively, which resulted in increased management fees of
approximately $2.8 million, (ii) increased operating revenues of PPC due
primarily to increased enrollment offset by a decrease in premium rates of 22%
and 2%, respectively, which resulted in increased management fees of
approximately $1.2 million, (iii) a net decrease in management fees of
approximately $.1 million due to OmniCare-MI's recognition of retroactive rate
adjustments in 1994, and (iv) an increase in management fees of $1.2 million
from approximately $.7 million in 1994 to $1.9 million in 1995 related to the
Company's administration of OmniCare-MI's COB program.
The Company's management of Ultramedix also contributed to the increase in
management fees. Under the Ultramedix management agreement, which became
effective February 1, 1994, the Company was reimbursed the administrative cost
to manage the plan plus a percentage of the Plan's income before income taxes
and extraordinary expenses. Effective February 1995, the management agreement
was amended to provide the Company with reimbursement of the administrative
cost to manage the plan plus 3/4 of 1% of the plan's gross revenues. In 1995
the Company recognized $5.0 million in management fees compared to $1.3 million
in 1994, an increase of $3.7 million.
The Company's management of OmniCare-TN also contributed to the increase
in
28
31
management fees. Management fees in 1995 were $15.6 million, an increase of
$11.8 million over fees of $3.8 million in 1994. The OmniCare-TN management
agreement with UA-TN was effective for five months in 1994 compared to 12
months in 1995. In November 1994, the TennCare Bureau notified the Company that
management fees charged under the original management agreement, effective
February 1, 1994, exceeded the guidelines of the TennCare contract. In April
1995, the Company submitted a revised management agreement to the TennCare
Bureau. In June 1995, the State notified the Company of its rejection of such
revised agreement. The Company submitted a second revised management agreement
which was approved by the State in November 1995, retroactive to January 1994.
However, the Company has continued its dispute with the State of Tennessee
regarding the issue of whether such management fee should be assessed to gross
or net capitation. The Company has raised other issues with the State of
Tennessee which include (i) the imposition by the State of Tennessee of premium
taxes on gross capitation payments, (ii) the deduction of charity and local
government charges from gross capitation of approximately 27% deducted by and
payable to the State of Tennessee. OmniCare-TN intends to continue to pursue
these issues with the State of Tennessee.
The Company proposed to the Board of Directors of OmniCare-TN that a
second Promissory Note payable solely from future non-TennCare related revenues
to UA-TN be issued for the amount of any accrued management fees not otherwise
payable under the second revised management agreement, or from interest
earnings and OmniCare-TN's share of savings not required to be returned to the
State of Tennessee under TennCare regulations. On October 5, 1995, the Board
of Directors of OmniCare-TN, approved such additional Promissory Note up to an
aggregate principal amount of $6.0 million to be repaid solely from future
non-TennCare related revenues.
OmniCare-TN and other managed care organizations who have contracted with
the State of Tennessee under the TennCare program were audited by the State of
Tennessee Comptroller Division of Audit. The findings by the Comptroller
Division of Audit included a finding regarding OmniCare-TN marketing practices.
Identified capitation payments of $78,206 were made to OmniCare-TN for
improperly enrolled individuals from January 1994 through July 1995. See
"Legal Proceedings."
Commission and service fees related primarily to the activities of CHF,
representing contract renewals and new contracts in 1995, were $8.9 million, an
increase of $2.0 million (29%) over fees of $6.8 million in 1994. The increase
was due to a 26% increase in the number of groups (121 to 152) and a 2%
increase in the average revenues per group.
Interest and other income in 1995 was $1.8 million, an increase of $.6
(52%) over income of $1.2 million in 1994. Approximately $.3 million (51%) of
the increase was due to interest income on notes due from OmniCare-TN and
Ultramedix of $.2 million and $.1 million, respectively.
Total expenses in 1995 were $56.5 million, an increase of $22.7 million
(67%) over expenses of $33.9 million in 1994.
29
32
MG&A increased $18.5 million (58%) from $32.1 million in 1994 to $50.6
million in 1995, and represented approximately 71% and 74% as a percentage of
total revenues in 1994 and 1995, respectively. The Company's activities in
Tennessee and Florida represented approximately $4.5 million of the increase,
due primarily to 12 months of operations in 1995 compared to approximately 5
months in 1994. Overall the Company's $7.5 million increase in salaries from
$17.7 million in 1994 to $25.2 million in 1995 (42%) was due substantially to
the increase in the number of employees from 456 at June 30, 1994 to 610 at
June 30, 1995 and an approximate 5-7% increase in the average salary.
The Company's development costs in Pennsylvania, Louisiana, Georgia and
Illinois accounted for approximately $1.5 million of the total MG&A increase.
Also included in the MG&A increase was $.5 million representing a charge to
earnings in connection with an estimate of the effect of potential OmniCare-TN
enrollment adjustments, and $1.8 million representing a charge to adjust the
carrying value of the Company's investments, advances and notes receivable from
related parties to their estimated fair value at June 30, 1995.
The $1.2 million (80%) increase in depreciation and amortization from $1.5
million in 1994 to $2.6 million in 1995 was due to depreciation taken on
approximately $5.3 million of furniture and equipment acquired over the past
twenty-four months and the amortization of goodwill related to investments in
affiliates of approximately $.6 million
The $.2 million (54%) increase in interest expense from $.3 million in
1994 to $.5 million in 1995, was due primarily to interest cost on the term
loan agreement entered into in August 1993 and increased borrowings against the
line of credit.
Equity in unconsolidated affiliates net losses of $2.8 million in 1995 was
due to the Company's recognition of its share of the losses as a shareholder of
OmniCare-TN (50%) and Ultramedix (30.4%) of $2.6 million and $.2 million,
respectively. Net equity losses in 1994 were $.1 million and related to the
Company's investment in Ultramedix. The effective dates of the Company's
investments in Ultramedix and OmniCare-TN were March 1994 and July 1994,
respectively.
As a result of the foregoing, earnings before income taxes increased $.6
million (6%) from $11.4 million in 1994 to $12.0 million in 1995. The effective
tax rate increased from approximately 35% to 43% for the respective twelve
months ended June 30, primarily because the losses in affiliates and goodwill
amortization related to equity investments were not fully tax deductible.
YEAR ENDED JUNE 30, 1994 COMPARED TO YEAR ENDED JUNE 30, 1993
The most significant changes between 1994 and 1993 were primarily due to
the activities of the newly formed subsidiaries UA-FL and UA-TN in Janauary and
February of 1994, and twelve months versus approximately two months of activity
for CHF.
Total revenues in 1994 were $45.3 million, an increase of $16.2 million
(56%) over
30
33
revenues of $29.0 million in 1993.
Management fees in 1994 were $37.3 million, an increase of $9.7 million
(35%) from $27.6 million in 1993, primarily due to the following factors: (1)
OmniCare-MI and PPC experienced operating revenue increases due to average
increases in both enrollment and rates of 8% and 11%, respectively, which
resulted in increased management fees of approximately $4.9 million; (2)
Ultramedix's reimbursement of administrative costs to UA-FL, which resulted in
management fees of $1.3 million; and (3) operating revenues of OmniCare-TN,
based on an average net capitation rate and total enrollee months of
approximately $86 and 201,000, respectively, resulted in management fees to
UA-TN of approximately $3.8 million.
CHF commission and service fees increased $6.1 million from $.7 million
for the period May 7, 1993 to June 30, 1993, to $6.8 million in 1994. 1993
revenues represented contract renewals for the month of June 1993. The 1994
activity is based on contract renewals of approximately 130 groups with 25 or
more employees. The Company's revenue recognition policy is to recognize the
contract period revenue in the effective month of coverage.
Interest and other income increased $.5 million (68%) from $.7 million in
1993 to $1.2 million in 1994, primarily due to increases in both average
investment balances and interest rates.
Total expenses in 1994 were $33.9 million, an increase of $11.8 million
(53%) over expenses of $22.1 million in 1993.
MG&A increased $10.7 million (50%) from $21.4 million in 1993 to $32.1
million in 1994, and represented approximately 74% and 71% as a percentage of
total revenues in 1993 and 1994, respectively. Overall the Company's $6.3
million increase in salaries from $11.4 million in 1993 to $17.7 million in
1994 (55%) was due substantially to the increase in the number of employees
from 308 at June 30, 1993 to 456 at June 30, 1994. The Company's expansion
efforts in Maryland (CHF), UA-FL and UA-TN contributed significantly to the
remaining MG&A increase.
The $.8 million (109%) increase in depreciation and amortization from $.7
million in 1993 to $1.5 million in 1994, was due to the increase in the
amortization of intangibles related to the CHF acquisition of $.5 million, and
depreciation on approximately $4.3 million of furniture and equipment acquired
over the past three years.
Interest expense increased $.3 million from $.03 million in 1993 to $.3
million in 1994. The increase was due to long term borrowings in late 1993
being outstanding for the entire year in 1994.
Equity in unconsolidated affiliates net losses of $.09 million in 1994 was
due to the Company's recognition of its share in the loss as a shareholder of
Ultramedix (30.4%). The effective date of the Company's investment in
Ultramedix was March 1994.
31
34
As a result of the foregoing, earnings before income taxes increased $4.5
million (65%) from $6.9 million in 1993 to $11.4 million in 1994. The effective
tax rate increased from approximately 33% to 35% for the respective twelve
months ended June 30.
RECENTLY ENACTED PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 114 - "Accounting
by Creditors for Impairment of a Loan" and SFAS No. 118 - "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures" are
effective for the Company's fiscal year beginning July 1, 1995. The Company
earlier adopted SFAS Nos. 114 and 118 in the determination of certain
allowances at June 30, 1995.
SFAS No. 121 - "Accounting for the Impairment of Long Lived Assets and for
Long-Lived Assets to Be Disposed Off" and SFAS 123 - "Accounting for Stock
Based Compensation" are effective for fiscal years beginning after December 15,
1995. Management believes that the adoption of SFAS Nos. 121 and 123 will not
have a material effect on the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had (i) cash and cash equivalents and
short-term marketable securities of $27.3 million compared to $13.5 million at
June 30, 1995, (ii) working capital of $9.3 million compared to $15.1 million
at June 30, 1995, and (iii) a current assets to current liabilities ratio of
1.3-to-1 and 3.1-to-1 at June 30, 1996 and June 30, 1995, respectively. The
adoption of SFAS No. 115 resulted in a $.3 million pre-tax valuation
adjustment, reducing the cost of marketable securities to market value. The
principal sources of funds for the Company during the twelve months ended June
30, 1996 were long-term borrowings of $13.6 million, net sales of marketable
securities of $4.1 million, and $9.7 million provided from net operating
activities, offset by furniture and equipment additions of $3.5 million, loans
to related parties of $2.3 million, $8.3 million used to invest in and advance
funds to affiliates, increases in intangible and sundry assets of $3.3 million
and $.2 million, respectively, development costs of $2.1 million, and
$2.4 million to repay long term debt.
The Company has agreed to allow Ultramedix and HealthScope/United, Inc. to
borrow up to $3.6 million and $4.3 million, respectively. As of June 30, 1996,
$4.2 million had been advanced to HealthScope/United Inc. under these
arrangements. The Company has set up allowances of $1.1 million for
HealthScope to adjust the carrying values of investments, advances and notes
receivables from these related parties to their estimated fair values.
In November 1995, the Company entered into an agreement amending an
earlier loan agreement that increased the line of credit and converted prior
borrowings under a line of credit to a term loan. Based on the revised
agreement, the Company has a $20 million unsecured line-of-credit commitment
that expires in November 1997 and bears interest at prime or 1% over the one,
two, three or nine month LIBOR rate. The Company's outstanding borrowings at
June 30, 1996
32
35
were $13,579,163.
As noted above the Company in November 1995, entered into an agreement
converting $6.1 million in borrowings under a line of credit to a term loan.
This term loan bears interest at prime or 1.25% over the one, two, three or nine
month LIBOR rate. The monthly principal payable is approximately $126,000, with
the loan due in November 1999. The outstanding balance at June 30, 1996 is
$5.0 million.
In August 1993, the Company entered into a $7.0 million bank term loan
agreement. The term loan bears interest at prime or 1.5% over the nine month
LIBOR rate, not to exceed a total rate of 6.5% per annum. The monthly
principal payable is approximately $.1 million with the loan due in August 1998.
Covenants of the term loan agreement provide for certain net worth and
financial ratio requirements. At June 30, 1996, the Company was in violation
of a covenant which sets a floor on a debt service coverage ratio. The Company
obtained a waiver for this provision from the lending institution. The loan is
collateralized by all the assets of the Company. The Company's outstanding
borrowings at June 30, 1996 was $3.0 million.
The Company provided a $1 million letter of credit on behalf of
OmniCare-LA and a $1 million capital contribution to OmniCare-LA and a
$2.1 million capital contribution to PhilCare, in satisfaction of applicable
statutory requirements. In addition, the Company funded $4.1 million on behalf
of OmniCare of Georgia, Inc. in satisfaction of applicable reserve and net worth
requirements. The foregoing funds were provided by the Company, from the line
of credit arrangement. The Company anticipates additional funding requirements
for its initiatives in Illinois, Georgia, Louisiana and Pennsylvania in the
approximate aggregate amount of $7.6 million, to be applied toward the
establishment of statutory reserves and payment of operational costs. There
can be no assurance that the Company will fund these requirements. The source
for these funding requirements is anticipated to be a combination of cash
reserves and debt borrowings.
The total cost of the management information client server project at June
30, 1996 is approximately $4.2 million. Capital costs to fund the project are
significantly completed. See "Business - Management Information System."
The Company anticipates that additional cash flow and working capital may
be necessitated by business expansion needs (including potential acquisitions)
and new marketing program requirements. The Company has submitted and expects to
continue to submit proposals to governmental, quasi-governmental and private
entities to provide managed care services. Management believes that, as it
continues to pursue other contractual relationships, the Company's cash
reserves, marketable securities, cash flows from operations and proceeds from
borrowings will be sufficient to enable the Company to continue to develop its
operations, support its anticipated business expansion and satisfy its working
capital needs for the foreseeable future.
RECENT INITIATIVES
The Company is pursuing initiatives in the following states, all of which
are in various
33
36
stages of mandating managed care programs for the Medicaid population. The
Company is assisting with the formation, licensing and ownership of plans in
each such state.
In October 1994, the Company formed the wholly owned subsidiary, United
American Healthcare of Georgia, Inc. ("UA-GA") and OmniCare Health Plan of
Georgia, Inc. ("OmniCare-GA"), to pursue business opportunities initially in 19
metropolitan Atlanta counties. Application for a commercial Certificate of
Authority to operate as a licensed HMO has been submitted to the Department of
Human Resources ("DOHR") and the DOI for review. DOHR has granted approval for
two counties. Management is resolving other licensing issues with the DOI. In
connection therewith, the Company has funded OmniCare-GA's statutory reserve
and net worth requirements in the aggregate amount of $4.1 million and
anticipates licensure to occur in the near future; however, no assurance can be
given that the license will be granted.
Georgia's Medicaid office has begun a seven phase state-wide initiative
initially in five metro Atlanta counties. Marketing and enrollment will be
performed by an independent group contracted by the state. Eligibles must
choose an HMO or be assigned to the State's managed care program called Georgia
Better Health Care. There are approximately 210,000 eligibles in the Atlanta
area. The program for 19 Atlanta counties is expected to begin in September
1996. Only one HMO has been approved for the Medicaid program with other
applications in process.
The Company has also formed, as wholly owned subsidiaries, United American
Healthcare of Illinois, Inc. ("UA-IL") and OmniCare Health Plan of Illinois,
Inc. ("OmniCare-IL") to participate in the creation and management of an HMO
for the Illinois Medicaid initiative called MediPlan Plus and to pursue
commercial opportunities, initially in the metropolitan Chicago area. The
Company has had discussions with potential partners in the area. The HMO
licensing application has been drafted; completion is dependent upon partner
selection. The application will require approximately $2.0 million to satisfy
applicable statutory requirements, which the Company would intend to fund.
EFFECTS OF INFLATION
For at least the last three years, health care costs have been rising and
are reasonably expected by management to continue to rise at rates higher than
the consumer price index. Management believes, however, that the Company's cost
controls, risk management programs and related procedures will allow the Company
to substantially mitigate the effects of inflation.
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements, notes and the report of the
independent certified public accountants thereon are presented beginning at
page F-1 of this Form 10-K and are hereby incorporated by reference into this
Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
34
37
There were no changes in accountants or disagreements on accounting or
financial disclosure matters in fiscal years 1996 and 1995.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors and Executive Officers. Information
concerning the directors and executive officers of the Company set forth below
is as of September 20, 1996:
NAME AGE POSITION HELD
---- --- -------------
Julius V. Combs, M.D. 65 Chairman & Chief Executive Officer
Ronald R. Dobbins 61 President & Chief Operating Officer
Anita C. R. Gorham 55 Secretary
Osbie Howard 53 Senior Vice President, UA-Tennessee
Bobby L. Jones 45 Senior Vice President, OmniCare
Management Group
Louis J. Nicholas 57 Senior Vice President, Chief Executive
Officer, C H F
Wilton A. Savage 53 Senior Vice President, UA-Ohio
Jagannathan Vanaharam 55 Senior Vice President, Finance and
Treasurer
John S. Zaleskie 54 Senior Vice President, UA-Florida
Margaret Marchak, Esq. 40 Vice President, Legal Affairs
Francisco Ramos 39 Vice President, Management Information
Systems
William C. Sharp, M.D. 46 Vice President, Medical Services
Karl D. Gregory, Ph. D. 65 Director (2)
Harcourt G. Harris, M.D. 68 Director
Emmett S. Moten, Jr. 52 Director (2)
Mervyn H. Sternberg 62 Director (1)
Richard P. Sutkin 61 Director (2)
Richard T. White, Esq. 51 Director
(1) Mr. Sternberg resigned as Director of the Company effective October 1,
1996.
(2) As required by Michigan law, directors Gregory, Sutkin and
Moten have been designated "independent directors" by the Board.
There are no family relationships among executive officers or other
significant employees. None of the executive officers, except as described
below, are a party to or otherwise involved in any legal proceedings adverse to
the Company or its subsidiaries. Dr. Combs, Mr. Dobbins and Mr. Vanaharam are
named as defendants in the shareholder lawsuit pending against the Company.
See "Legal Proceedings." The following information indicates the business
experience of each
35
38
officer and director during the prior five years:
Julius V. Combs, M.D. has been the Company's Chairman of the Board and
Chief Executive Officer, as well as a director, of the Company since its
inception. His current term as a director expires at the Annual Meeting of
Shareholders to be held in 1996. He is Chairman of the Company's Executive
Committee, and is a member of the Company's Compensation and Finance,
Investment and Planning committees. Dr. Combs is also a director and Vice
Chairman of Ultramedix, Chairman Emeritus of the Board of Trustees of
OmniCare-MI, and President and director of OmniCare-TN. He is a member of the
governing board of the American Association of Health Plans. Dr. Combs was in
private medical practice from 1964 to September 1995.
Ronald R. Dobbins has been President and Chief Operating Officer, as well
as a director, of the Company since its inception. His current term expires at
the Annual Meeting of Shareholders to be held in 1996. Mr. Dobbins is Chairman
of the Company's Finance, Investment and Planning committee and a member of the
Company's Executive and Compensation committees. Mr. Dobbins is also President
of OmniCare-MI, as well as a member of its Board of Trustees. He is also a
director of Ultramedix and a director of OmniCare-TN. He is a member of the
Southeastern Region Board of Directors of Michigan National Bank and Golden
State Mutual Life Insurance Company. He is a member of the governing board of
the American Association of Health Plans.
Anita C. R. Gorham has been the Secretary and a director of the Company
since 1984. Her current term expires at the Annual Meeting of Shareholders to
be held in 1998. She is Chairwoman of the Company's Compensation committee. Ms.
Gorham is a member of the Board of Trustees of OmniCare-MI. She is also
currently an Adjunct Faculty member at Central Michigan University and Detroit
College of Business.
Osbie Howard joined OmniCare-TN in May 1995 as Executive Director and in
October 1995 was appointed Senior Vice President of the Company. Mr. Howard
previously served as Treasurer of the City of Memphis, a position he held since
January 1992. From June 1979 to April 1988 Mr. Howard was executive vice
president of the Tennessee Valley Center for Minority Economic Development and
from April 1988 to January 1992 he was an officer with a real estate
development, property management and financial services concern.
Bobby L. Jones has been Senior Vice President since 1989. Mr. Jones is
also the Executive Director/Chief Operating Officer of OmniCare-MI. Mr. Jones
has held various positions of increased responsibility since joining the
Company in 1985. Prior thereto, Mr. Jones was employed by OmniCare-MI from 1979
to 1985 in accounting and operations capacities. Mr. Jones is licensed by the
Michigan Insurance Bureau as an administrative services manager for TPA
activities.
Louis J. Nicholas joined the Company in May 1993 as a Senior Vice
President and a director of the Company, following the Company's acquisition of
CHF-HPM Limited Partnership. His current term expires at the Annual Meeting of
Shareholders to be held in 1997. Mr. Nicholas is also the Chairman, President
and Chief Executive Officer and a director of CHF, director and Vice President
of SBMC and a director of UANS. He was formerly the sole shareholder of CHF,
Inc.,
36
39
the general partner of CHF-HPM Limited Partnership. Mr. Nicholas founded
CHF, Inc. in 1988.
Wilton A. Savage joined the Company in August 1991 as Vice President and
Director of UA-OH. He also currently serves as the Executive Director of
PPC-Ohio. Mr. Savage became a Senior Vice President in 1993. He is also a
shareholder of Personal Physician Care, Inc. He was formerly employed by the
Warner & Swasey Company and its numerous predecessor organizations for 16
years. Mr. Savage served on a variety of financial assignments at Warner &
Swasey and served as the Vice President of Finance since 1985.
Jagannathan Vanaharam became Senior Vice President, Finance in 1991 and
Treasurer in 1990. From 1985 to 1990 Mr. Vanaharam was the Vice President,
Finance. From 1976 to 1985 Mr. Vanaharam served in various accounting
capacities with OmniCare-MI and is currently a director and treasurer of
OmniCare-TN and Ultramedix.
John S. Zaleskie joined Ultramedix in September 1995 as Executive Director
and in October 1995 was appointed Senior Vice President of the Company. Mr.
Zaleskie previously served Ultramedix as Vice President of Corporate
Administration, Personnel and Management Information Systems from March 1993 to
February 1994 before joining Information Network Corporation, a provider of
administrative and claims systems for managed care organizations, as director
of sales and marketing. Prior to this Mr. Zaleskie served over a 33-year
period in a variety of marketing and management positions with IBM Corporation.
Margaret M. Marchak, Esq. joined the Company in June, 1995, as Vice
President, Legal Affairs. Prior thereto, Ms. Marchak was employed as Assistant
Corporate Counsel with Mercy Health Services from 1990-1995. Ms. Marchak is a
member of the State Bar of Michigan and has been practicing for 13 years,
specifically in health care law. She is a member of the Board of Directors of
the Michigan Society of Healthcare Attorneys.
Francisco Ramos joined the Company in 1992 as Chief Information Officer and
became Vice President Management Infomation Services in 1994. He was formerly
employed by Information Associates, subsidiary of Dun & Bradstreet Software,
after an extensive career with Young and Rubicam that spanned 10 years. Mr.
Ramos has seved in various management capacities of corporate technology and
possess over 17 years of information systems experience.
William C. Sharp, M.D. joined the Company in May 1993 as Vice President,
Medical Services. From 1990 to 1993 he was the Medical Director for the
Company's CountyCare and TPA/PPO programs on a consulting basis. Dr. Sharp has
also been involved in the private practice of medicine for 15 years,
specializing in internal medicine. He is also an Assistant Professor at Wayne
State University Medical School, Department of Internal Medicine. Dr. Sharp is
also a Fellow of the American College of Physicians and of the American College
of Medical Quality.
Karl D. Gregory, Ph.D. has been a director of the Company since 1986. His
current term expires at the Annual Meeting of Shareholders to be held in 1996.
He is a member of the Company's Audit, and Finance, Investment and Planning,
and Nominating committees. Since 1968, he has been employed as a Professor of
Economics and Management at Oakland University School of Business
Administration in Rochester, Michigan. He retired as a Distinguished Professor
Emeritus in August 1996. He is a director of Karl D. Gregory & Associates, a
consulting firm located in Southfield, Michigan.
Harcourt G. Harris, M.D. has been a director of the Company since 1985.
His current term
37
40
expires at the Annual Meeting of Shareholders to be held in
1998. He is a member of the Company's Executive committee. He is also Chairman
of the Board of Trustees of OmniCare-MI. Dr. Harris, now retired, had been
involved in the private practice of medicine for 30 years, specializing in
internal medicine.
Emmett S. Moten, Jr. has been a director of the Company since 1988. His
current term expires at the Annual Meeting of Shareholders to be held in 1997.
He is a member of the Company's Audit, Compensation and Finance, Investment and
Planning committees. Since July 1988, he has been Vice President of Development
for Little Caesar Enterprises, Inc., a national fast food franchise concern.
Prior to assuming this position, Mr. Moten was Director of the Community &
Economic Development Department for the City of Detroit for almost ten years.
Richard P. Sutkin has been a director of the Company since 1987. His
current term expires at the Annual Meeting of Shareholders to be held in 1998.
He is Chairman of the Company's Audit committee and a member of its Finance,
Investment and Planning committee. From February 1991 to December 1991, Mr.
Sutkin was an Executive Vice President of Meadowbrook Insurance Group. Mr.
Sutkin previously had been President of Sutkin & Co., a commercial and
industrial insurance agency located in Birmingham, Michigan since 1965. He is a
Chartered Property Casualty Underwriter and currently acts as an insurance
industry consultant specializing in litigation support.
Mervyn H. Sternberg, Esq., has served as a director of the Company from
1984 to August 1990, and resumed his service as such in September 1990. He is a
member of the Company's Finance, Investment and Planning committee. He is also a
member of the Board of Trustees of OmniCare-MI. Mr. Sternberg is licensed by the
Michigan Insurance Bureau as an administrative services manager for TPA
activities. Mr. Sternberg has been engaged in the private practice of law and
was licensed to practice law in 1957. He was Vice President, Business Planning
and Development for the Michigan Healthcare Corporation from 1987 to March 30,
1995. Mr. Sternberg resigned from the Board of Directors effective October 1,
1996.
Richard T. White, Esq. was Vice President, General Counsel to December,
1995 and has served as a director of the Company since 1984. His current term
expires at the Annual Meeting of Shareholders to be held in 1996. He is also a
member of the Company's Compensation Committee. Since January 1996, Mr. White
is Vice President, Secretary and General Counsel of AAA Michigan in Dearborn,
Michigan and prior to that, was a principal shareholder in, and a member of,
the law firm of Lewis, White & Clay, P.C. in Detroit. He is licensed to
practice law in the State of Michigan and the District of Columbia, and is
licensed by the Michigan Insurance Bureau as an administrative services manager
for TPA activities. He has been engaged in the private practice of law since
1970.
There are currently three vacancies on the Board of Directors. The Board
of Directors intends to fill these vacancies upon identification of suitable
candidates in accordance with the Company's Bylaws.
38
41
ITEM 11. EXECUTIVE COMPENSATION
Each of the Directors of the Company receives $250 for each Board of
Directors' and committee meetings attended. In addition, each director who is
not also an employee of the Company receives an annual stipend of $15,000, as
compensation for director services. Directors are also entitled to
reimbursement for reasonable out-of-pocket expenses incurred when on Company
business in their capacities as directors.
The following Summary Compensation Table sets forth the annual salary,
bonus and all other compensation awarded to the Company's Chief Executive
Officer and its four most highly compensated executive officers whose
respective salary and bonus exceeded $100,000.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- -----------------------------
AWARDS PAYOUTS
---------- -------
OTHER
ANNUAL RESTRICTED ALL OTHER
NAME AND PRINCIPAL COMPENSA- STOCK OPTIONS/ LTIP/ COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION($)(1) AWARDS SARS PAYOUTS TION($)(2)
JULIUS V. COMBS, M.D. 1996 295,392 176,800 -- -- -- -- 7,500
Chairman of the Board, 1995 292,712 -- -- -- -- -- 7,997
Chief Executive Officer 1994 268,449 157,248 -- -- -- -- 11,274
and Director
RONALD R. DOBBINS 1996 295,392 163,200 -- -- -- -- 7,500
President, Chief 1995 292,712 -- -- -- -- -- 8,377
Operating Officer 1994 266,024 131,040 -- -- -- -- 13,580
and Director
LOUIS J. NICHOLAS 1996 426,556 -- 45,874 -- -- -- 7,500
Senior Vice President, 1995 384,760 -- 49,928 -- -- -- 7,500
Chief Executive 1994 310,000 -- 28,140 -- -- -- 7,500
Officer,
CHF and Director
WILLIAM C. SHARP, M.D. 1996 178,651 -- -- -- -- -- 7,500
Vice President, 1995 182,484 -- -- -- -- -- 4,375
Medical Services 1994 182,067 25,000 -- -- -- -- --
BOBBY L. JONES 1996 170,591 -- -- -- -- -- 7,500
Senior Vice President, 1995 165,991 -- -- -- -- -- 7,537
OmniCare Management 1994 149,005 36,225 -- -- -- -- 9,805
Group
39
42
Group
(1) Life insurance premiums paid for Mr. Nicholas in 1996, 1995
and 1994 was $37,118, $41,172 and $24,855, respectively.
(2) Represents the Company's annual contribution to the 401(K)
Savings Plan.
STOCK OPTION PLAN
The Company has adopted a stock option plan (the "Plan"), under which
531,250 common shares are presently reserved for issuance upon exercise of
options granted under the Plan. No options have been granted under the Plan.
In August 1996, the Company's Board of Directors approved a decrease in such
reservation to 331,250 common shares, subject to shareholder approval at the
1996 annual shareholders' meeting. The decrease was necessitated by the
Board's adoption of an Employee Stock Purchase Plan which will be submitted for
shareholder approval at the 1996 Annual Meeting. The 200,000 shares originally
reserved for use in connection with the Plan will be reserved for use in
connection with the Employee Stock Purchase Plan. Under the Plan, incentive
stock options may be granted to employees, and non-incentive stock options may
be granted to employees, directors and such other persons as the Board of
Directors (or a committee appointed by the Board) determines will contribute to
the Company's success, at exercise prices equal to at least 100% of the fair
market value of the common shares on the date of grant. In addition to
administering the Plan, the Board (or the committee) determines the number of
common shares subject to each option, the term of each non-incentive stock
option, and the time or times when the non-incentive stock option becomes
exercisable, though in no event may the option be exercisable prior to one year
after the date of grant. Incentive stock options are granted for a term of
five years, and are exercisable cumulatively at the rate of 25% per year
commencing one year after the date of grant.
401(K) SAVINGS PLAN
The Company sponsors a retirement plan intended to be qualified under
Section 401(k) of the Internal Revenue Code of 1986, as amended. All employees
over age 21, other than non-resident aliens, are eligible to participate in the
plan. Employees may contribute to the plan on a tax-deferred basis up to 15%
of their total salary. Under the plan, the Company makes matching
contributions on each employee's behalf up to a maximum of 5% of each
employee's total salary. As of June 30, 1996, 326 employees had elected to
participate in the plan. For the fiscal year ended June 30, 1996, the Company
contributed $609,000 to the plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of September 20,
1996, concerning the beneficial ownership of Common Shares held by (i) each
shareholder known by the Company to own more than 5% of the Common Shares, (ii)
each director of the Company, (iii) each principal officer of the Company, and
(iv) all directors and officers as a group. Except as otherwise noted, each of
the persons named below possess sole voting and investment power with
40
43
respect to all shares set forth opposite his or her name.
COMMON SHARES
BENEFICIALLY OWNED
------------------------
NAME OF
BENEFICIAL OWNER NUMBER PERCENT
Julius V. Combs, M.D. (3)(5)(8) 432,143 6.6%
Ronald R. Dobbins (3)(5) 345,105 5.3
Louis J. Nicholas (3)(7) 190,188 2.9
Richard T. White (1) 94,129 1.4
Karl D. Gregory, Ph.D. (1)(6) 43,856 *
Richard P. Sutkin (1) 33,856 *
Harcourt G. Harris, M.D. (1) 33,607 *
Anita C. R. Gorham (3) 23,436 *
Emmett S. Moten, Jr. (1) 16,327 *
Jagannathan Vanaharam (2) 107,120 1.6
Bobby L. Jones (2) 33,436 *
William C. Sharp, M.D. (2)(6) 4,000 *
John S. Zaleski (2)(5) 1,000 *
Osbie Howard (2)(5) 250 *
Wilton A. Savage (2) 250 *
Richard M. Brown, M.D. (4)(6) 411,727 6.3
All directors and officers as a group
(15 persons) 1,358,703 21
- ---------------
* Percentage of common shares beneficially owned does not
exceed 1% of the total common shares outstanding.
(1) Beneficial owner is a director of the Company.
(2) Beneficial owner is an officer of the Company.
(3) Beneficial owner is a director and an Officer of the Company.
(4) Dr. Brown's address is 1200 Ardmoor, Birmingham, Michigan
48010.
(5) The address for the listed person is 1155 Brewery Park
Boulevard, Suite 200, Detroit, Michigan 48207.
(6) Reflects all shares held of record in the name of a trust
having as its Trustee the shareholder indicated.
(7) 47,545 common shares are held of record in the name of
CHF-HPM Limited Partnership, a Maryland limited partnership, of
which Phase V, Inc., a Maryland corporation, is the General Partner.
Louis J. Nicholas is the sole shareholder of Phase V, Inc. Mr.
Nicholas disclaims beneficial ownership in such common shares for
purposes of Section 16 under the Exchange Act. The remaining 142,643
shares are held by Mr. Nicholas directly.
(8) 13,692 Common Shares are held in the name of a trust having Dr. Combs
as its Trustee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The ownership, operation and management of the Company involve various
potential conflicts of interest, including the relationships and transactions
described below. Management of the Company believes that these agreements and
transactions have been on terms that are as fair to
41
44
the Company as could have been obtained from unaffiliated parties.
COMMON OFFICERS AND DIRECTORS. As indicated in the chart below, certain
officers and directors of the Company are also members of the Board of
Trustees/Directors and officers of OmniCare-MI, PPC, OmniCare-TN, and
Ultramedix. Consequently, such individuals are likely to influence the
operation of the Company and negotiations and arrangements between the Company
and these entities, including the respective management agreements. Conflicts
of interest may arise relating to matters that are presented to the Company's
Board of Directors for consideration and with respect to which the Company and
OmniCare-MI, PPC, OmniCare-TN and Ultramedix may have differing interests,
including matters relating to the management agreements.
NAME UAHC OMNICARE-MI PPC OMNICARE-TN ULTRAMEDIX
- --------------------- ---- ----------- --- ----------- ----------
Julius V. Combs, M.D. Chairman, Chairman -- President, Vice
CEO, Emeritus, Director Chairman,
Director Trustee Director
Ronald R. Dobbins President, President, -- Director Director
COO, Trustee
Director
Harcourt Harris, M.D. Director Chairman, -- -- --
Trustee
Anita C.R. Gorham Secretary, Trustee -- -- --
Director
Bobby L. Jones Senior Vice COO, -- -- --
President Trustee
Wilton A. Savage(1) Senior Vice -- Executive -- --
President Director
Jagannathan Vanaharam Senior Vice -- -- Director, Director,
President Treasurer Treasurer
- ---------------
(1) Mr. Savage is also a shareholder of PPC-Ohio, owning 7.8% of the
issued and outstanding shares of the same.
MANAGEMENT AGREEMENTS. The Company's management agreements with the
Managed Plans were negotiated between related entities. However, the
management agreements were reviewed, revised and approved by the respective
Managed Plans' full Boards. Evaluation of the Company's activities under the
OmniCare-MI management agreement are made by the Management Review Committee
composed of members of the OmniCare-MI Board. No Board member of OmniCare-MI
with any interest in the Company is permitted to sit on the Management Review
Committee. There presently is no comparable committee that reviews the
Company's performance under the other Managed Plans' management agreements.
COMMON OWNERSHIP. The Company has an ownership interest in certain of the
Managed Plans, namely OmniCare-TN and Ultramedix. At June 30, 1996, the Company
owned a 75% interest in OmniCare-TN and a 51% interest in Ultramedix. In
addition, the Company owns less than 1% of the issued and outstanding common
stock of UHI, but has a warrant to acquire up to
42
45
72.6% of UHI, exercisable on or before March 8, 1998. In addition, the Company
currently owns a 49% interest in PhilCare, and a 100% interest in OmniCare-LA.
AFFILIATIONS WITH PRIMARY CARE PROVIDERS. An officer of the Company is also
affiliated with primary care providers contracting with OmniCare-MI. Dr. Sharp,
Vice President, Medical Services of the Company, also practices medicine with
M.C. Physicians Association, P.C., a primary care provider contracting with
OmniCare-MI.
HEALTH INSURANCE BENEFITS FOR COMPANY EMPLOYEES. Health care benefits for
some employees of the Company are provided through OmniCare-MI, and PPC. For
the fiscal year ended June 30, 1996, the Company paid premiums of approximately
$1,477,000 for such benefits.
EMPLOYMENT AGREEMENTS. The Company has entered into five year employment
agreements with Dr. Combs, Chief Executive Officer, and Mr. Dobbins, President
and Chief Operating Officer expiring March 1996, subject to automatic renewal
for successive one-year terms, unless terminated by the Company or the executive
upon 90 days' notice prior to the end of the initial term or the renewal terms,
as the case may be. Under their respective employment agreements, Dr. Combs and
Mr. Dobbins currently receive an annual base salary of approximately $327,957,
plus an annual bonus to be based upon performance specifications and/or goals to
be agreed upon by the Company and the executive, with the bonus payable to Dr.
Combs for any year of employment to be not less than 30%, nor more than 60%, of
his base salary for such year, and the bonus payable to Mr. Dobbins to be not
less than 25%, nor more than 50%, of his base salary for such year. No bonus is
payable to the executive for any year in which he is employed by the Company for
fewer than six months and any bonus will be pro rated to the extent the
executive is employed less than the full year. A bonus accrual equal to amounts
approved by the Executive Compensation Committee of the Board of Directors have
been established for Dr. Combs and Mr. Dobbins in 1996.
Under each employment agreement the executive may, upon giving 30 days
written notice, terminate the agreement in the event there is a change of
control or ownership (as defined in the employment agreement) of the Company and
the executive's powers and duties significantly change or the executive has good
reason (as defined in the employment agreement) to terminate or, as a result of
the change of control or ownership, the executive is unable to exercise or
perform his powers, functions and duties. In the event of such termination, the
executive will receive (i) all monies earned under any Company long-term
incentive plan, (ii) a lump sum severance payment equal to his base salary for
36 months at the rate payable at the time notice of termination was given, and
(iii) the bonus that he would otherwise be entitled to for the year in which his
employment is terminated. Based upon the executive's current base salary, the
Company estimates that the lump sum severance payment payable to Dr. Combs and
Mr. Dobbins under this provision would be approximately $1.1 million, for 1996.
In the event the executive terminates his employment due to a breach of his
employment agreement by the Company, he will receive earned and unpaid salary
accrued to the date of termination, together with any bonus that would otherwise
be payable to him for the year in which
43
46
the agreement is terminated.
In the event the executive's employment is terminated without cause by the
Company, the executive will receive his base salary until the last day of the
24th full calendar month immediately following such termination, but in no event
will the executive be entitled to such payments following his normal retirement
date, defined as the August 31st nearest to the date on which the executive
attains the age of 65.
In the event the executive's employment is terminated for cause, death or
disability, the executive (or his estate) will receive earned and unpaid salary
accrued to the date of termination but shall not be entitled to any bonus which
might otherwise be payable to the executive for the year in which his employment
is terminated.
Dr. Combs and Mr. Dobbins have each agreed that for the longer of (i) 12
months from the date of termination of his employment agreement, or (ii) the
period during which the executive receives payments under his employment
agreement, plus the 12 months immediately following expiration of such period,
he will not engage in the development of a managed health care product or
service nor render services similar or related to those which he rendered as an
employee of the Company in any county in which the Company provides any managed
health care product or service or within any contiguous county.
The Company is also party to an employment agreement by and between CHF
and Louis J. Nicholas (the "Executive") dated as May 7, 1993, pursuant to which
it agreed to: (i) refrain from impeding the Executive's ability to operate CHF
in a prudent manner consistent with maximizing a return for purposes of the
Contingent Promissory Note; (ii) elect the Executive to its Board of Directors
and as a Senior Vice President; (iii) pay liquidated damages if the Executive
is terminated without good cause or good reason, as those terms are defined
therein; and (iv) provide Board of Directors review of a termination of the
Executive for good cause by CHF. In addition, the employment agreement
provides the Company with the right to cease payments under the Contingent
Promissory Note in the event of a material breach of the agreement by the
Executive.
CHARITABLE FOUNDATION. For the fiscal year June 30, 1996, the Company made
$150,000 in contributions to United American Healthcare Foundation, a Michigan
non profit corporation that assists minority organizations involved in the
promotion of health and education. Dr. Combs, Mr. Dobbins, Dr. Francis Kornegay
and Mr. Milton Watson, shareholders of the Company, are directors of the
foundation. Dr. Combs and Mr. Dobbins are not compensated for their services as
directors of the foundation.
44
47
PART IV
ITEM 14. EXHIBITS 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 at page E-1 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 for its
fiscal year ended June 30, 1992, (iii) the Company's Form 10-K for its fiscal
year ended June 30, 1993, (iv) the Company's Form 10-K for its fiscal year
ended June 30, 1994, (v) the Company's Form 8-K filed with the Commission
August 8, 1991, (vi) the Company's Form 8-K filed with the Commission April 23,
1993, (vii) the Company's Form 8-K filed with the Commission May 24, 1993,
(viii) the Company's Form 8-K/A filed with the Commission July 21, 1993, (ix)
the Company's Form 8-K filed with the Commission January 29, 1996 or (x) the
Company's Form 10-Q for its quarter ended March 31, 1996. The Exhibit Index is
hereby incorporated by reference into this Item 14.
(b) No reports on Form 8-K were filed with respect to the last three
months of fiscal 1996.
45
48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants...........................F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995.....................F-3
Consolidated Statements of Operations for each of the three
years in the period ended June 30, 1996...................................F-4
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 30, 1996......................F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1996...................................F-6
Notes to Consolidated Financial Statements...................................F-8
F - 1
49
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
UNITED AMERICAN HEALTHCARE CORPORATION
We have audited the accompanying consolidated balance sheets of United
American Healthcare Corporation (a Michigan corporation) and Subsidiaries as of
June 30, 1996 and 1995, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1996. These financial statements are the responsibility of the management of
United American Healthcare Corporation. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of OmniCare Health Plan, Inc. of Tennessee for the period
ended June 30, 1996 (included in the consolidated financial statements as
described in Note C), which statements reflect revenues of 28 percent of
consolidated revenues and assets of 26 percent of consolidated assets in 1996.
These statements were audited by other independent auditors whose report thereon
has been furnished to us, and our opinion expressed herein, insofar as it
relates to these amounts included for OmniCare Health Plan, Inc. of Tennessee,
is based solely on the report of the other independent auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 our audits and the report of other auditors provide a
reasonable basis for our opinion.
As discussed in Note P to the consolidated financial statements, the
Company and certain of its officers are named as defendants in a consolidated
lawsuit alleging violations of anti-fraud provisions of federal securities laws.
In our opinion, based on our audits and the aforementioned report of other
independent auditors, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
American Healthcare Corporation and Subsidiaries as of June 30, 1996 and 1995
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended June 30, 1996 in
conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Detroit, Michigan
October 8, 1996
F - 2
50
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30, 1996 JUNE 30, 1995
- --------------------------------------------------- ------------- -------------
CURRENT ASSETS
Cash and cash equivalents (note A7) $22,962,655 $ 6,197,656
Restricted cash (note D) 716,696 -
Marketable securities (notes A4 and B) 4,348,682 7,267,887
Accounts receivable
Commission and service fees 6,445,753 4,917,021
Capitation (note E) 4,729,913 -
Related parties (note G) 656,934 776,247
Recoverable premium taxes 786,527 -
Other 1,278,145 628,432
----------- -----------
13,897,272 6,321,700
Refundable federal income tax 846,114 1,810,414
Deferred income taxes (note I) 315,511 108,649
Prepaid expenses and other 854,521 669,284
----------- -----------
Total current assets 43,941,451 22,375,590
FURNITURE AND EQUIPMENT- AT COST (NOTE A5) 12,789,499 9,255,156
Less accumulated depreciation and amortization (5,364,082) (3,486,344)
----------- -----------
7,425,417 5,768,812
INTANGIBLE ASSETS (NOTE A6) 21,914,170 6,595,864
Less accumulated amortization (2,373,817) (1,197,591)
----------- -----------
19,540,353 5,398,273
INVESTMENTS IN AND ADVANCES
TO AFFILIATES (NOTES C AND F) 2,100,000 2,545,561
OTHER ASSETS
Marketable securities (notes A4 and B) 2,902,744 4,071,117
Long-term accounts and notes receivable - related
parties (note G) 2,991,388 7,718,111
Statutory reserves (note D) 7,863,553 5,100,000
Software costs, net of amortization (note A9) 3,997,352 2,395,036
Sundry 2,314,441 1,884,965
Deferred income taxes (note I) - 497,862
----------- -----------
20,069,478 21,667,091
----------- -----------
$93,076,699 $57,755,327
=========== ===========
LIABILITIES JUNE 30, 1996 JUNE 30, 1995
- -------------------------------------------------- ------------- -------------
CURRENT LIABILITIES
Current portion of long-term debt (note K) $ 2,912,500 $ 1,400,000
Accounts payable - trade 3,411,046 2,328,724
Medical claims payable (note A3) 25,677,806 -
Accrued liabilities
Related parties (note C) 297,984 1,250,000
Salaries and wages 889,076 790,427
Vacation and sick pay 1,172,202 1,003,239
Payroll and other taxes 270,390 301,374
----------- -----------
2,629,652 3,345,040
----------- ----------
Total current liabilities 34,631,004 7,073,764
LONG-TERM Debt, LESS CURRENT
PORTION (NOTE K) 18,741,664 9,074,437
ACCRUED RENT (NOTE J) 1,240,830 1,099,011
DEFERRED INCOME TAXES (NOTE I) 641,000 -
CONTINGENCIES AND COMMITMENTS
(NOTES C, J AND P) - -
STOCKHOLDERS' EQUITY
Preferred shares - authorized,
5,000,000 shares; none issued - -
Common shares - authorized,
15,000,000 shares; issued
6,560,941 shares 10,625,382 10,625,382
Retained earnings 27,411,032 30,159,190
Unrealized net holding losses
on marketable securities (214,213) (276,457)
----------- -----------
37,822,201 40,508,115
----------- -----------
$93,076,699 $57,755,327
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
51
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
--------------------------------------------
1996 1995 1994
------------ ----------- -----------
REVENUES
Management fees from related parties (note G) $ 55,906,022 $57,940,488 $37,251,185
Medical premiums (note A2) 34,522,651 - -
Commission and service fees (note A2) 10,737,392 8,850,937 6,844,752
Interest and other income (note G) 1,870,126 1,795,788 1,184,467
------------ ----------- -----------
Total revenues 103,036,191 68,587,213 45,280,404
EXPENSES
Medical services (note A3) 29,900,532 - -
Marketing, general and administrative (note G) 59,078,603 50,598,853 32,001,968
Depreciation and amortization 4,331,460 2,644,935 1,471,799
Interest expense 1,086,715 481,799 313,568
Contract settlement 9,684,974 - -
Equity in net loss of
unconsolidated affliates (note F) 652,065 2,815,912 88,801
------------ ----------- -----------
Total expenses 104,734,349 56,541,499 33,876,136
------------ ----------- -----------
(Loss) earnings before income tax expense (1,698,158) 12,045,714 11,404,268
Income tax expense (note I) 1,050,000 5,450,000 4,022,000
------------ ----------- -----------
Net (loss) earnings $ (2,748,158) $ 6,595,714 $ 7,382,268
============ =========== ===========
Net (loss) earnings per common share (note L) $ (.42) $ 1.01 $ 1.13
============ =========== ===========
The accompanying notes are an integral part of these statements.
F-4
52
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized net
Number of holding loss
common Common Retained on marketable
shares shares earnings securities Total
--------- ----------- ----------- ----------- -----------
Balance at June 30, 1993 6,560,941 $10,625,382 $16,181,208 $ - $26,806,590
Net earnings - - 7,382,268 - 7,382,268
--------- ----------- ----------- --------- -----------
Balance at June 30, 1994 6,560,941 10,625,382 23,563,476 - 34,188,858
Net earnings - - 6,595,714 - 6,595,714
Unrealized net holding loss on marketable securities - - - (276,457) (276,457)
--------- ----------- ----------- --------- -----------
Balance at June 30, 1995 6,560,941 10,625,382 30,159,190 (276,457) 40,508,115
Net (loss) - - (2,748,158) - (2,748,158)
Unrealized net holding gain on marketable securities - - - 62,244 62,244
--------- ----------- ----------- --------- -----------
Balance at June 30, 1996 6,560,941 $10,625,382 $27,411,032 $(214,213) $37,822,201
========= =========== =========== ========= ===========
The accompanying notes are an integral part of these statements.
F-5
53
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
------------------------------------------
1996 1995 1994
----------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings $(2,748,158) $ 6,595,714 $ 7,382,268
Adjustments to reconcile net (loss) earnings to
net cash provided from operating activities
Bad debt expense 596,390 2,300,000 -
Depreciation 1,892,771 1,417,802 1,471,799
Amortization 2,438,689 1,227,133 -
Accrued rent 141,819 271,976 396,142
Contract settlement 9,684,974 - -
Loss on disposal of furniture and equipment 62,427 - 12,225
Deferred income taxes (credit) 912,000 (358,000) (219,000)
Equity in net losses of unconsolidated affiliates 652,065 2,815,912 88,807
Changes in assets and liabilities
Decrease in restricted cash 439,823 - -
(Increase) decrease in accounts receivable (1,416,112) (1,594,443) (2,965,317)
(Decrease) increase in refundable income taxes 964,300 (1,810,414) 329,631
(Increase) decrease in prepaid expenses and other (185,237) (443,545) 46,302
(Increase) in long-term accounts receivable - (1,872,774) -
(Increase) in statutory reserves (81,481) (5,100,000) -
(Decrease) increase in accounts payable (332,891) (157,714) 592,482
Increase (decrease) in accrued liabilities (715,388) 1,200,442 1,136,890
(Decrease) in medical claims payable (2,624,859) - -
(Decrease) increase in federal income taxes - (98,673) 98,673
----------- ----------- ------------
Total adjustments 12,429,290 (2,202,298) 988,634
----------- ----------- ------------
Net cash provided from operating activities 9,681,132 4,393,416 8,370,902
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities 4,183,264 5,583,719 7,190,140
Purchase of marketable securities - (387,195) (10,706,643)
Purchase of furniture and equipment (3,545,015) (3,489,293) (1,854,376)
Increase in intangible assets (3,024,943) (1,039,722) -
Investments in and advances to affiliates (8,267,234) (2,698,196) (2,046,648)
Increase in sundry assets (254,615) (344,945) (860,293)
Increase in software development costs (2,087,127) (1,951,249) (443,787)
Increase in long-term notes receivable (1,763,898) (1,685,500) (4,310,321)
Acquisition of business, net of cash acquired 10,663,708 - -
----------- ----------- ------------
Net cash (used in) investing activities (4,095,860) (6,012,381) (13,031,928)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit 13,588,060 6,041,104 -
Borrowings under long-term debt - - 7,000,000
Payments made on long-term debt (2,408,333) (1,400,000) (3,816,667)
----------- ----------- ------------
Net cash provided from financing activities 11,179,727 4,641,104 3,183,333
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents 16,764,999 3,022,139 (1,477,693)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,197,656 3,175,517 4,653,216
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $22,962,655 $ 6,197,656 $ 3,175,523
=========== =========== ============
F - 6
54
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
YEAR ENDED JUNE 30,
-----------------------------------------------------
1996 1995 1994
------------ ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for
Interest $ 1,116,000 $ 524,000 $ 358,000
============ ========== ==========
Income taxes $ 328,000 $3,594,000 $2,275,000
============ ========== ==========
Non cash investing activities for 1996 represents the acquisition of majority
equity interests in OmniCare Health Plan, Inc. of Tennessee and Ultramedix
Healthcare Systems, Inc. and includes assets acquired and liabilities
assumed.
Fair value of assets acquired $(33,174,471) $ - $ -
Cash acquired 20,327,595 - -
Liabilities assumed 23,510,584 - -
------------ ---------- ----------
$ 10,663,708 $ - $ -
============ ========== ==========
F - 7
The accompanying notes are an integral part of these statements.
55
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES
- ---------------------------------------
A summary of the Company's significant accounting policies
applied in the preparation of the accompanying financial statements
follows.
1. BUSINESS AND BASIS OF PRESENTATION
The Company is a multi-state provider of healthcare services,
including consulting services to managed care organizations and the
provision of healthcare services in Tennessee and Florida.
Additionally, the Company designs customized self-funded benefit plans
for employers.
The accompanying consolidated financial statements include
United American Healthcare Corporation, its 100% owned
subsidiaries, U.A. Health Care Corporation ("UA-OH"), United American
of Tennessee, Inc. and Subsidiary ("UA-TN"), United American
of Louisiana, Inc. and Subsidiary ("UA-LA"), United American
Pennsylvania, Inc. ("UA-PA"), United American of Georgia, Inc. and
Subsidiary ("UA-GA"), United American of Illinois, Inc. and
Subsidiary ("UA-ILL"), ChoiceOne Preferred Provider Plan, Inc.
("ChoiceOne"), and Corporate Healthcare Financing, Inc. and
Subsidiaries ("CHF"), and its 80% owned subsidiary United American of
Florida, Inc. and Subsidiary ("UA-FL"). Majority stock ownership
interests were acquired in OmniCare Health Plan, Inc. of Tennessee
("OmniCare-TN") and Ultramedix Health Care Systems, Inc.
("Ultramedix") (collectively, the "owned HMO's") effective in January
1996. Previously, the Company had held non-majority stock ownership
interests in these two entities, which had been accounted for on the
equity method. Intercompany transactions and balances have been
eliminated.
Non-majority investments in affiliates in which management has
the ability to exercise significant influence are recorded on the
equity method.
2. REVENUE RECOGNITION
Commission and service fees consist primarily of a percentage of
premiums billed to employers by third party administrators and
insurance companies and administration charges to self-funded employer
groups. The Company's policy is to recognize the contract period
revenue in the effective month of coverage, less any estimated
remaining costs to service the policy and when administrative services
are rendered.
F - 8
56
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------
2. REVENUE RECOGNITION - CONTINUED
Medical premium revenues are recognized in the month in which
members are entitled to receive health care services.
3. MEDICAL SERVICES EXPENSE RECOGNITION
The owned HMOs contract with various health care providers for
the provision of certain medical services to its members. The HMOs
compensate those providers on a capitated and fee for service basis.
The Company provides for medical claims incurred but unreported
and the cost of adjudicating claims based primarily on past
experience, together with current factors, using accepted actuarial
methods. Estimates are adjusted as changes in these factors occur and
such adjustments are reported in the year of determination. Although
considerable variability is inherent in such estimates, management
believes that these reserves are adequate.
4. INVESTMENTS
The Company's securities are classified in the available for sale
category, which consists of those securities which the Company intends
to hold for an indefinite period of time but not necessarily to
maturity, and are carried at estimated fair value. Unrealized gains
and losses related to securities available for sale, net of applicable
income taxes, are reported as a separate component of stockholders'
equity.
5. DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided in amounts sufficient
to relate the cost of depreciable assets to operations over their
estimated service lives or over the life of the related leases. The
Company uses the straight-line method for financial statement
purposes, with estimated useful lives ranging from five to thirteen
years and accelerated methods for income tax purposes.
6. INTANGIBLE ASSETS
Intangible assets consist of values assigned to assets of
acquired businesses (see Note C) and are amortized on a straight-line
basis.
F - 9
57
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------
6. INTANGIBLE ASSETS - CONTINUED
Recoverability of the value of the intangibles is assessed by a
periodic comparison of the carrying value to the undiscounted
future cash flows expected to result from the use of the assets and
their eventual disposition.
Intangible assets consist of the following:
JUNE 30, ESTIMATED
-------------------------- ---------
1996 1995 LIVES
------------- ----------- ---------
Customer list $ 9,218,807 $ 5,895,864 10 years
Covenant not to compete 700,000 700,000 9.5 years
Goodwill 11,995,363 - 10 years
----------- -----------
21,914,170 6,595,864
Less accumulated (2,373,817) (1,197,591)
amortization ----------- -----------
$19,540,353 $ 5,398,273
=========== ===========
7. CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company
considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents.
8. FINANCIAL INSTRUMENTS
The fair value of the Company's investments in marketable
securities is set forth at note B. The Company considers the
carrying value of its other financial instruments to approximate
their fair value.
9. SOFTWARE COSTS
Software costs are primarily expenses incurred in connection
with the development of a proprietary client server computer
information software application to support the management services
provided by the Company. The software development was substantially
completed in December 1995, and the Company began amortizing the
application on a straight-line method over the estimated useful life
of five years. Accumulated amortization as of June 30, 1996 was
$484,811.
F 10
58
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
- ---------------------------------------------------
10. NEW FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 114 -
"Accounting by Creditors for Impairment of a Loan" and SFAS No.
118 - "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" are effective for the Company's fiscal
year beginning July 1, 1995. The Company earlier adopted SFAS Nos.
114 and 118 in the determination of certain allowances at June 30,
1995.
SFAS No 121 - "Accounting for the Impairment of Long Lived
Assets and for Long-Lived Assets to Be Disposed Of" and SFAS 123 -
"Accounting for Stock Based Compensation" are effective for fiscal
years beginning after December 15, 1995. Management believes that
the adoption of SFAS Nos. 121 and 123 will not have a material
effect on the Company's consolidated financial statements.
11. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles 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 and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
12. RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 balances
to conform to the current period classifications.
NOTE B - MARKETABLE SECURITIES
- ------------------------------
Following is a summary of marketable securities as of June 30, 1996:
FAIR VALUE AMORTIZED COST
---------------- --------------
Obligations of individual states and
political subdivisions $7,139,259 $7,304,011
Obligations of foreign governments 25,000 25,000
Equity securities 87,167 254,393
---------------- --------------
$7,251,426 $7,583,404
================ ==============
F-11
59
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE B - MARKETABLE SECURITIES - CONTINUED
- ------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
HOLDING GAINS HOLDING LOSSES
------------- --------------
Obligations of individual states and
political subdivisions $ - $164,753
Equity securities - 167,225
--------------- -----------------
$ - $331,978
=============== =================
Following is a summary of marketable securities as of June 30, 1995:
FAIR VALUE AMORTIZED COST
---------------- --------------
Obligations of individual states and
political subdivisions $11,270,217 $11,484,943
Obligations of foreign governments 25,000 25,000
Equity securities 43,787 254,380
---------------- --------------
$11,339,004 $11,764,323
================ ==============
GROSS GROSS
UNREALIZED UNREALIZED
HOLDING GAINS HOLDING LOSSES
------------- --------------
Obligations of individual states and
political subdivisions $ - $214,726
Equity securities - 210,593
---------------- ---------------
$ - $425,319
================ ===============
As of June 30, 1996, investments in debt securities mature as follows:
WITHIN 1 YEAR 1- 5 YEARS 5-10 YEARS THEREAFTER
------------- ---------- ---------- ----------
Obligations of individual states and
political subdivisions $4,333,851 $2,040,408 $ - $765,000
Obligations of foreign governments - 25,000 - -
------------- ---------- ---------- ----------
$4,333,851 $2,065,408 $ - $765,000
============= ========== ========== ==========
F-12
60
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE C - ACQUISITIONS
- ---------------------
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 $9,582,000.
Through June 30, 1996 and 1995, the purchase price was cumulatively
increased by $4,476,076 and $1,153,133, respectively, pursuant to a
contingent promissory note that, depending upon CHF's earnings (as
defined in the agreement) over seven years from the acquisition date,
could increase the purchase price by a maximum amount of $6,598,000. At
June 30, 1996 and 1995, approximately $298,000 and $1,250,000 was accrued
under the terms of this note.
OMNICARE-TN
In February 1994, the Company entered into a long-term agreement to
manage OmniCare-TN and effective July 1994 acquired a 50% equity interest
in OmniCare-TN for approximately $1,274,000 in cash. The excess purchase
price over the Company's equity interest in the net assets at the
effective date of acquisition of approximately $4,100,000 is being
amortized over ten years on a straight-line basis.
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 $100,000 and
$10,900,000, respectively, of which $8,680,666 was the conversion of
OmniCare-TN debt to the Company to equity and $2,319,334 in cash. The
acquisition was accounted for under the purchase method of accounting.
Results of operations are included in the accompanying financial
statements effective with the date of purchase through June 30, 1996. The
excess purchase price over the fair value of the net assets acquired of
approximately $3,325,000 has been recorded as goodwill, and is being
amortized over ten years on a straight-line basis.
F-13
61
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE C - ACQUISITIONS - CONTINUED
- ---------------------------------
ULTRAMEDIX
In February 1994, the Company entered into a long-term agreement to
manage Ultramedix and acquired a 30.4% equity interest in Ultramedix for
approximately $1,437,000 in cash, and also acquired a five year warrant
to acquire up to a 51% total equity interest in Ultramedix. The excess
purchase price over the Company's equity interest in the net assets of
Ultramedix at the date of acquisition of approximately $1,690,000 is
being amortized over ten years.
Effective January 29, 1996, the Company purchased an additional
20.6% of the voting common stock, and 100% of the preferred stock, of
Ultramedix. This increased the Company's ownership in the voting common
stock of Ultramedix to 51%. The purchase price for the additional common
stock and preferred stock of Ultramedix was approximately $1,931,000 in
cash. The acquisition was accounted for under the purchase method of
accounting. Results of operations are included in the accompanying
financial statements effective with the date of purchase through June 30,
1996. The excess purchase price over the fair value of the net assets
acquired of approximately $2,875,000 has been recorded as goodwill, and
is being amortized over ten years on a straight-line basis.
The unaudited pro forma results of operations which follow assume
that the OmniCare-TN and Ultramedix acquisitions had occurred at the
beginning of the earliest period presented. In addition to combining the
historical results of operations of the companies, the pro forma
calculations include adjustments for the estimated effect on the
Company's historical results of operations for amortization related to
the acquisition.
The comparative pro forma results of operations do not purport to be
indicative of the results which would actually have been obtained had the
acquisitions occurred on the dates indicated or which may be obtained in
the future.
YEAR ENDED JUNE 30,
----------------------------------------
1996 1995
------------------ -------------------
Total revenue $136,474,000 $147,454,000
Net (loss) earnings $ (3,961,000) $ 3,954,000
(Loss) earnings per common share $ (.60) $ .60
F-14
62
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE D - RESTRICTED CASH AND STATUTORY RESERVES
- -----------------------------------------------
Certain of the Company's subsidiaries 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.
The Company's subsidiary, Ultramedix, is also required by state
regulations to maintain a specified level of restricted cash for its
members' protection.
NOTE E - CONCENTRATION OF RISK
- ------------------------------
During the year ended June 30, 1996 approximately 28% of the
Company's revenues were derived from a single customer, TennCare, a State
of Tennessee program which provides medical benefits to Medicaid and
Working Uninsured recipients. TennCare withholds 10% of the Company's
monthly capitation payment. If certain informational filing requirements
are met by the Company, TennCare remits the amount withheld. Amounts
withheld by TennCare as of June 30, 1996 total approximately $1,011,000.
The Company has not been informed of any deficiency in its filing
requirements, and in the opinion of management, all withheld amounts will
be remitted in the normal course of business.
NOTE F - INVESTMENTS IN AND ADVANCES TO AFFILIATES
- --------------------------------------------------
Investments in and advances to affiliates consist of the following:
JUNE 30,
------------------------------
1996 1995
---------------- ------------
Ultramedix $ - $ 2,995,561
OmniCare - TN - 746,958
PhilCare 2,100,000 -
Less valuation allowance - (1,196,958)
---------- -----------
$2,100,000 $ 2,545,561
========== ===========
The investments in and advances to Ultramedix and OmniCare-TN at
June 30, 1995 represent the Company's initial purchase of a non-majority
interest of their stock and advances to the affiliates, less the
Company's portion of their losses. As discussed in Note C, during 1996
the Company acquired a majority interest in these affiliates, and
beginning the effective dates of purchase of the majority interest, the
equity method of accounting ceased and the entities are consolidated for
financial reporting purposes.
F-15
63
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE F - INVESTMENTS IN AND ADVANCES TO AFFILIATES - CONTINUED
- --------------------------------------------------------------
PhilCare Health Systems, Inc. ("PhilCare") an HMO, was developed to
participate in Pennsylvania's mandatory Medicaid pilot program which
provides for managed care services on a prepaid capitated basis to the
Medicaid population in selected counties in the Commonwealth of
Pennsylvania. In May 1994, the Company acquired at book value a 49%
equity interest in PhilCare for approximately $1,000 in cash. In June
1996, the Company paid $2,100,000 in cash for 100% of PhilCare's
preferred shares. PhilCare has had deminimus revenue and expense
activity since inception.
NOTE G - RELATED PARTY TRANSACTIONS
- -----------------------------------
The Company has entered into long-term management agreements with
Michigan Health Maintenance Organization Plans, Inc. ("OmniCare-MI"),
Personal Physician Care, Inc. ("PPC"), OmniCare-TN, and Ultramedix,
hereafter referred to as the "Managed Plans". Pursuant to the management
agreements, the Company provides management and consulting services to
the Managed Plans. These entities are related via common officers and
directors. Intercompany transactions with OmniCare-TN and Ultramedix
since the Company acquired its majority ownership interests in January
1996 have been eliminated.
The commencement and expiration dates of these agreements follows:
Commencement Expiration
-------------- ----------
OmniCare-MI May 1985 December 2010
PPC August 1987 August 2007
OmniCare-TN February 1994 February 1999
Ultramedix February 1994 February 1999
All of the agreements are subject to review every five years and can
be terminated without cause by the Managed Plans at the time of the
review or by either party with cause.
Pursuant to the management agreements the Company is generally paid
a percentage of revenues and/or reimbursed the administrative cost to
manage the Plans. Management fee revenue is recognized in the month it is
earned, based on the Managed Plans' reported operating revenues. The
Company is required to pay certain administrative expenses associated
with its activity on behalf of these Managed Plans. All costs associated
with the management of these Plans are expensed as incurred. Under the
terms of the management agreement, the Company occupies space that is
leased and paid for by PPC.
F-16
64
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE G - RELATED PARTY TRANSACTIONS - CONTINUED
- -----------------------------------------------
The following table shows management fee revenue from the Managed
Plans as a percentage of the Company's total revenues.
YEAR ENDED JUNE 30,
-------------------------
1996 1995 1994
------- ------- -------
OmniCare-MI 29% 45% 59%
OmniCare-TN 14 23 8
PPC 8 10 12
Ultramedix 3 7 3
Accounts and notes receivable-related parties are due from the
following:
JUNE 30, 1996 JUNE 30, 1995
-------------------------- ---------------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
---------- ---------- ---------- ---------
HealthScope $144,965 $ 4,064,830 $ - $ 3,988,329
OmniCare-TN - - - 4,832,824
OmniCare - MI 455,828 - 286,575 -
Ultramedix - - 41,567 -
PPC 56,141 - 39,148 -
Others - - 257,288 -
Less valuation allowance - (1,073,442) - (1,103,042)
---------- ----------- ----------- -----------
$656,934 $ 2,991,388 $ 776,247 $ 7,718,111
========== =========== =========== ===========
The Company has provided a valuation allowance to reflect its
estimate of the fair value of these assets at June 30, 1996 and 1995,
considering existing circumstances. It is possible that a change in the
estimate will occur in the near term.
HealthScope was organized in March 1993 to engage in development,
consulting and contract management services for publicly-funded managed
care programs in the metropolitan New York area. Through June 1996 and
1995, the Company lent HealthScope a total of approximately $4,210,000
and $4,140,000 under various agreements. Pursuant to these agreements,
the Company has an option to purchase up to a 72.6% equity interest in
HealthScope, and can designate four of its seven Board members. The
principal balance is due in March 1998, and interest ranging from 2% to
3% over prime is due to the Company annually in March. The Company
recognized interest revenue of approximately $448,000 during the year
ended June 30, 1995, and none for the year ended June 30, 1996, when the
Company changed to the cash basis of interest revenue recognition for
this receivable.
F-17
65
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE G - RELATED PARTY TRANSACTIONS - CONTINUED
- -----------------------------------------------
Health insurance for some of the Company's employees was provided by
the Managed Plans. This expense was approximately $1,477,000, $1,110,000
and $1,030,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
A director of the Company also served as a director and shareholder
of the Company's legal counsel until December 1995. Legal costs to this
law firm through December 1995 totalled approximately $567,000, and was
$688,000 and $279,000 for the years ended June 30, 1995 and 1994,
respectively. Pursuant to the management agreement, certain of these
legal expenses were incurred on behalf of OmniCare-MI.
NOTE H - BENEFIT AND OPTION PLANS
- ---------------------------------
The Company offers a 401(K) retirement and savings plan which covers
substantially all of its employees. The Company's maximum matching
contribution is 5% of compensation. Company contributions to the 401(K)
plan were approximately $609,000, $464,000 and $392,000 for the years
ended June 30, 1996, 1995, and 1994, respectively.
The Company has a stock option plan with 531,250 common shares
reserved for issuance upon exercise of options. No options have been
granted through June 30, 1996.
NOTE I - INCOME TAXES
- ---------------------
The components of income tax expense are as follows:
YEAR ENDED JUNE 30,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Current $ 138,000 $5,808,000 $4,241,000
Deferred (credit) 912,000 (358,000) (219,000)
----------- ---------- ----------
$1,050,000 $5,450,000 $4,022,000
=========== ========== ==========
F-18
66
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE I - INCOME TAXES - CONTINUED
- ---------------------------------
A reconciliation of the provision for income taxes follows:
YEAR ENDED JUNE 30,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Expected expense (credit) at the
statutory rate $ (696,000) $3,894,000 $3,877,000
State and city income tax 348,000 947,000 384,000
Tax exempt interest (165,000) (221,000) (223,000)
Non-deductible goodwill amortization 235,000 221,000 -
Meals and entertainment 128,000 85,000 -
Other 74,000 (33,000) (16,000)
Valuation allowance 1,126,000 557,000 -
---------- ---------- ----------
$1,050,000 $5,450,000 $4,022,000
========== ========== ==========
A valuation allowance was provided on that portion of the equity in
net losses in affiliates which reduces the Company's investment, as the
Company believes it is more likely than not that if a tax deductible
event occurs, the result will be a capital loss, which is able to be
offset only by capital gains currently not generated by the Company.
The valuation allowance balance at June 30, 1996 includes allowances
relating to net loss carryforwards ("NOLs") of OmniCare-TN and
Ultramedix, entities which are consolidated as of June 30, 1996. As of
June 30, 1996, these subsidiaries have NOLs for federal income tax
purposes of approximately $5,537,000, which expire through the year 2011.
As of June 30, 1996, these subsidiaries have NOLs for federal income
tax purposes of approximately $5,537,000, which expire through the year
2011.
Components of the Company's deferred tax assets and liability are as
follows:
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
Deferred tax assets:
Amortization of intangible assets $ 213,000 $ 143,000
Equity in net losses of affiliates 1,882,000 985,000
Rent 273,000 231,000
Bad debt expense 694,000 795,000
Compensation 315,511 108,649
Net unrealized holding loss 115,000 148,862
Net operating loss carryforward of
subsidiaries purchased in 1996 5,537,000 -
---------- ----------
Gross deferred tax assets 9,029,000 2,411,511
---------- ----------
Deferred tax liabilities:
Depreciation and amortization (400,000) (230,000)
Software development (1,430,000) (838,000)
Licensure costs (305,000) (180,000)
---------- ----------
Gross deferred tax liabilities (2,135,000) (1,248,000)
Valuation allowance (7,220,000) (557,000)
---------- ----------
Net deferred tax (liability) asset $ (325,489) $ 606,511
========== ==========
Activity in the valuation allowance is as follows:
Balance at July 1, 1994 $ -
Charges to operations 557,000
----------
Balance June 30, 1995 557,000
Charged to operations 1,126,000
NOLs of purchased subsidiaries 5,537,000
----------
Balance at June 30, 1996 $7,220,000
==========
The portion of the valuation allowance attributable to purchased NOLs that are
subsequently utilized as tax benefits will reduce goodwill of the acquired
companies.
F-19
67
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE J - LEASES
- ---------------
The Company leases its facilities and various furniture and
equipment under operating leases expiring at various dates through June
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,
1996, 1995 and 1994 totalled approximately $4,121,000, $2,748,000 and
$1,613,000, respectively.
Minimum future rental payments under all noncancellable operating
leases having remaining terms in excess of one year as of June 30, 1996
are as follows:
JUNE 30,
1997 $ 3,372,000
1998 3,282,000
1999 2,862,000
2000 2,674,000
2001 1,997,000
Thereafter 4,967,000
------------
$19,154,000
============
F-20
68
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE K - LONG TERM DEBT
- -----------------------
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
Maximum $20,000,000 unsecured line of credit,
expiring in November 1997, bearing interest at prime
or 1% over the one, two, three or nine-month LIBOR
rate. $13,579,163 $ 6,041,104
Unsecured line of credit borrowings converted to a
term loan in November 1995, requiring monthly
principal payments of approximately $126,000, with
the final due date in November 1999, and bearing
interest at prime or 1.25% over the one, two, three
or nine-month LIBOR rate. 5,041,667 -
Term loan requiring monthly principal payments of
approximately $117,000, with final due date in
August 1998, and bearing interest at prime or 1.5%
over the six-month LIBOR rate. The loan is
collateralized by all assets of the Company.
Covenants of the loan agreement provide for certain
net worth and financial ratio requirements. The
Company has entered into an agreement which caps the
loan's interest rate at 5% per annum. The $122,000
cost of the cap is being amortized over the term of
the loan. 3,033,334 4,433,333
------------- -------------
21,654,164 10,474,437
Less current portion 2,912,500 1,400,000
------------- -------------
Non-current portion of long-term debt $18,741,664 $ 9,074,437
============= =============
Debt principal matures as follows:
YEAR ENDED
JUNE 30,
----------
1997 $ 2,912,500
1998 16,491,663
1999 1,745,834
2000 504,167
------------
$21,654,164
============
At June 30, 1996, the Company was in violation of a covenant which
sets a floor on a debt service coverage ratio. The Company obtained a
waiver for this provision from the lending institution.
The Company provided a $1,000,000 letter of credit on behalf of
OmniCare-LA in satisfaction of appliciable statutory requirements.
F-21
69
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE L - NET (LOSS) EARNINGS PER SHARE
- --------------------------------------
Net (loss) earnings per share is based on the weighted average
number of shares of common stock outstanding during each period. The
number of shares used in the computation of (loss) earnings per share is
6,560,941 for the years ended June 30, 1996, 1995 and 1994.
NOTE M - MANAGED PLANS
- ----------------------
The following table sets forth summarized financial data of the
Managed Plans in which the Company has no equity interest. This
information was derived from audited financial statements, as of their
respective year-ends.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
-------------- --------------- ----------------
OmniCare-MI:
Current assets $39,160,000 $45,528,000 $36,983,000
Noncurrent assets 1,621,000 2,040,000 2,277,000
Current liabilities 24,347,000 31,336,000 24,333,000
Fund balance 16,434,000 16,232,000 14,927,000
Revenues 172,574,000 159,546,000 141,993,000
Expenses 172,371,000 158,241,000 140,780,000
Revenues over expenses 203,000 1,305,000 1,213,000
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
-------------- --------------- ----------------
PPC:
Current assets $14,350,000 $ 9,168,000 $ 9,626,000
Noncurrent assets 649,000 495,000 397,000
Current liabilities 11,637,000 6,981,000 8,261,000
Retained earnings 3,362,000 2,682,000 1,762,000
Revenues 50,945,000 45,003,000 24,434,000
Expenses 49,937,000 43,318,000 22,730,000
Earnings before income taxes 1,008,000 1,685,000 1,704,000
Net earnings 663,000 1,073,000 977,000
F-22
70
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE N - SEGMENT DATA
- ---------------------
YEAR ENDED JUNE 30,
---------------------------------------------------------
1996 1995 1994
------------- ------------ ------------
Revenues:
Managed Plans $ 91,485,739 $ 58,400,080 $ 37,251,185
Customized Health Care Programs 10,785,648 8,875,492 6,844,752
Corporate and Unallocated 764,804 1,311,641 1,184,467
------------- ------------ ------------
$ 103,036,191 $ 68,587,213 $ 45,280,404
============= ============ ============
(Loss) Earnings Before Income Tax Expense:
Managed Plans $ (1,042,206) $ 12,893,226 $ 9,771,800
Customized Health Care Programs (655,952) (847,512) 1,632,468
Corporate and Unallocated - - -
------------- ------------ -------------
$ (1,698,158) $ 12,045,714 $ 11,404,268
============= ============= ============
Depreciation and Amortization:
Managed Plans $ 3,340,464 $ 1,880,264 $ 824,282
Customized Health Care Programs Plans 990,996 764,671 647,517
------------- ------------ -------------
$ 4,331,460 $ 2,644,935 $ 1,471,799
============= ============ ============
Capital Expenditures:
Managed Plans $ 3,072,416 $ 3,292,716 $ 1,417,958
Customized Health Care Programs 472,599 196,577 436,418
------------- ------------ -------------
$ 3,545,015 $ 3,489,293 $ 1,854,376
============= ============ ============
Total Identifiable Assets:
Managed Plans $ 48,184,304 $ 21,770,856 $ 10,962,454
Customized Health Care Programs 17,268,664 11,460,347 9,851,933
Corporate and Unallocated 27,073,731 24,524,124 24,764,548
------------- ------------ ------------
$ 93,076,699 $ 57,755,327 $ 45,578,935
============= ============ ============
NOTE O - UNAUDITED SELECTED FINANCIAL DATA
- ------------------------------------------
The following table presents unaudited selected quarterly financial
data:
THREE MONTHS ENDED
---------------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, 30,
1996 1996 1995 1995
--------------- ------------ ------------ ------------------
Revenues $42,053,627 $27,776,523 $15,341,384 $17,864,657
Expenses 43,113,055 28,610,505 17,616,382 16,444,407
----------- ----------- ----------- -----------
Net (loss) earnings $(1,059,428) $ (833,982) $(2,274,998) $ 1,420,250
=========== =========== =========== ===========
Net (loss) earnings per common
share $ (0.16) $ (0.13) $ (0.35) $ 0.22
F-23
71
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE O - UNAUDITED SELECTED FINANCIAL DATA - CONTINUED
- ------------------------------------------------------
THREE MONTHS ENDED
----------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1995 1995 1994 1994
------------ ------------ ------------ --------------
Revenues $17,863,704 $17,753,896 $16,694,818 $16,274,795
Expenses 18,570,314 15,606,469 14,121,055 13,693,661
----------- ----------- ----------- --------------
Net earnings (loss) $ (706,610) $ 2,147,427 $ 2,573,763 $2,581,134
=========== =========== =========== ==============
Net earnings (loss) per common
share $ (0.10) $ .33 $ .39 $ 0.39
Management fees to UA-TN were impacted during the quarter ended June
1996 by an agreement reached between UA-TN and OmniCare-TN during that
quarter, but effective November 1995, pursuant to which OmniCare-TN
agreed to reimburse UA-TN approximately $8,680,000 for start-up costs and
other expenses incurred for the period January 1994 through September
1995 which were unrelated to OmniCare-TN's TennCare business and which
were over and above the amounts which OmniCare-TN could reimburse UA-TN
out of the capitation payments received by OmniCare-TN under the TennCare
contract. Further, UA-TN agreed to convert its claim for these
additional amounts owed to it by OmniCare-TN into approximately 8,680,000
shares of preferred stock of OmniCare-TN as complete and final settlement
of such obligation.
Also during the quarter ended June 30, 1996, the Company provided a
valuation allowance of approximately $773,000 to reflect its estimate of
the fair value of notes recivable from HealthScope at June 30, 1996 and
increased the incurred but not reported medical liabilities for Ultramedix
and OmniCare-TN by $2,300,000.
During the quarter ended June 30, 1995, the Company recognized
approximately $1,500,000 of equity in the net loss of OmniCare-TN,
principally due to OmniCare-TN's reversal of previously recognized
deferred tax benefits. In addition, the Company recognized $2,300,000 of
bad debt expense in the fourth quarter. Also during the quarter ended
June 30, 1995, the Company recognized approximately $700,000 of
previously deferred costs in connection with its expansion activities,
and reversed bonuses previously accrued of approximately $450,000.
F-24
72
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1996, 1995 AND 1994
NOTE P - CONTINGENCIES
- ----------------------
As previously reported by the Company, the Company is a named
defendant in two shareholder lawsuits filed in the United States District
Court for the Eastern District of Michigan (the "Court") on August 23 and
August 24, 1995 which in September 1996 were consolidated as one action
by the Court. The complaints contain common allegations that certain
senior officers and the Company issued reports and statements which
violated federal securities laws. The Company and the officers contend
that all material facts were disclosed during the alleged period and that
whatever material facts they did not disclose, if any, were already
available in the financial market place. The defendant's motion to
dismiss the complaints, filed in March 1996, was denied in September
1996. The Company intends to vigorously defend itself against the
allegations set forth in the compliants. Company management believes
that it is too early to form an opinion regarding the potential
financial impact of the lawsuit. An unfavorable outcome could have a
material impact on the Company's financial statements. The Company has
agreed to indemnify the named officers from monetary exposure in
connection with the lawsuit, subject to reimbursement by any named
officer in the event he is found not to be entitled to such
indemnification.
The Company is aware that the previously reported investigation
being conducted by the U.S. Attorney in the Western District of
Tennessee, in cooperation with a federal grand jury and the United States
Postal Inspector's Office, and by the Tennessee Bureau of Investigation,
of the State of Tennessee's TennCare program and OmniCare-TN's marketing
practices, is continuing. The Company and OmniCare-TN have not been
charged with any wrongdoing and are cooperating in these investigations.
The Company cannot predict the ultimate outcome of these investigation or
the potential financial impact on its business, if any.
F-25
73
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 the 14th day of
October, 1996.
UNITED AMERICAN HEALTHCARE CORPORATION
By: /s/ Jagannathan Vanaharam
-------------------------------
Jagannathan Vanaharam
Senior Vice President-Treasurer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities and on the
date indicated.
/s/ JULIUS V. COMBS, M.D. Chief Executive Officer October 14, 1996
- ------------------------
Julius V. Combs, M.D. (Principal Executive Officer)
/s/ ANITA C.R. GORHAM Secretary October 14, 1996
- --------------------
Anita C.R. Gorham
/s/JAGANNATHAN VANAHARAM Senior Vice President-Treasurer October 14, 1996
- ------------------------
Jagannathan Vanaharam (Principal Financial Officer)
/s/PAUL G. SAMUELS Corporate Controller October 14, 1996
- ------------------
Paul G. Samuels (Principal Accounting Officer)
/s/JULIUS V. COMBS, M.D. Director October 14, 1996
- ------------------------
Julius V. Combs, M.D.
/s/RONALD R. DOBBINS Director October 14, 1996
- --------------------
Ronald R. Dobbins
/s/ANITA C.R. GORHAM Director October 14, 1996
- --------------------
Anita C.R. Gorham
74
/s/EMMETT S. MOTEN, JR. Director October 14, 1996
- -----------------------
Emmett S. Moten, Jr.
/s/ HARCOURT G. HARRIS, M.D. Director October 14, 1996
- ----------------------------
Harcourt G. Harris, M.D.
/s/KARL D. GREGORY, Ph.D. Director October 14, 1996
- -------------------------
Karl D. Gregory, Ph.D.
/s/RICHARD T. WHITE Director October 14, 1996
- -------------------
Richard T. White
/s/LOUIS J. NICHOLAS Director October 14, 1996
- --------------------
Louis J. Nicholas
/s/ Director October 14, 1996
- --------------------
Richard P. Sutkin
75
EXHIBIT INDEX
FILED
HEREWITH
EXHIBIT INCORPORATED HEREIN BY SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO PAGE NO.
- ------ ----------------------- ------------ ----------
3.1 Restated Articles of Exhibit 3.1 to the
Incorporation of Registrant. Registrant's Form S-1
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. Registrant's 1993 10-K
4.1 Incentive and Non-Incentive Exhibit 4.1 to the
Stock Option Plan of Registrant Registrant's 1995 10-K
effective March 25, 1991, as
amended.
4.2 Form of Common Share Certificate. Exhibit 4.2 to the
Registrant's 1995 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 Exhibit 10.3 to 1991 S-1
U.A. Health Care Corporation and
Personal Physician Care, Inc.
dated March 18, 1987.
10.5 Amendment dated February 16, Exhibit 10.5 to the
1993 to Management Agreement Registrant's 1995 10-K
between United American
Healthcare Corporation and
Personal Physician Care, Inc.
dated March 18, 1987.
10.6 Amendment dated June 16, 1994 to Exhibit 10.4 to the
Management Agreement between Registrant's 1994 10-K
U.A. Health Care Corporation and
Personal Physician Care, Inc.
dated March 18, 1987.
10.7 Management Agreement between Exhibit 10.5 to Registrant's
OmniCare Health Plan, Inc. and 1994 Form 10-K
United American of Tennessee,
Inc. dated February 2, 1994.
10.8 Management Agreement between Exhibit 10.6 to Registrant's
Ultramedix Health Care Systems, 1994 Form 10-K
Inc.
E-1
76
FILED
HEREWITH
EXHIBIT INCORPORATED HEREIN BY SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO PAGE NO.
- ------ ----------------------- ------------ ----------
and United American of
Florida, Inc. dated February 1,
1994.
10.9 Amendment dated September 4, Exhibit 10.9 to the
1995 to Management Agreement Registrant's 1995 10-K
between Ultramedix Healthcare
Systems, Inc. and United
American of Florida, Inc. dated
February 1, 1995.
10.10 Amendment dated September 20, Exhibit 10.10 to
1995 to Management Agreement Registrant's 1995 10-K
between Ultramedix Health Care
Systems, Inc. and United
American of Florida, Inc. dated
February 1, 1995.
10.11 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.
10.12 Amendment dated December 8, 1993 Exhibit 10.8 to the
to Lease agreement between 1155 Registrant's 1994 10-K
Brewery Park Limited Partnership
and Registrant dated July 24,
1991.
10.13 Amendment dated April 15, 1993 Exhibit 10.13 to
to Lease Agreement between 1155 Registrant's 1995 10-K
Brewery Park Limited Partnership
and Registrant dated July 24,
1991.
10.14 Lease Agreement between Allied Exhibit 10.5 to the
Associates Limited Partnership Registrant's 1992 10-K
and Personal Physician Care,
Inc. dated January 8, 1992,
effective January 1, 1992.
10.15 Lease Agreement between Exhibit 10.7 to the
Baltimore Center Associates Registrant's 1993 10-K
Limited 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.
10.16 Amendment dated May 11, 1994 Exhibit 10.11 to the
(effective June 30, 1994) to Registrant's 1994 10-K
Lease agreement between
Baltimore Center Associates
Limited Partnership and
Corporate Healthcare Financing,
Inc.
10.17 Lease Agreement between CLW Exhibit 10.2 to Registrant's
Realty Asset Group, Inc., as 1994 Form 10-K
agent for The Prudential
Insurance Company of America and
United American of Florida dated
May 31, 1994, effective
E-2
77
FILED
HEREWITH
EXHIBIT INCORPORATED HEREIN BY SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO PAGE NO.
- ------ ----------------------- ------------ ----------
June 1, 1994.
10.18 Lease Agreement between Fleming Exhibit 10.3 to Registrant's
Companies, Inc. and United 1994 Form 10-K
American of Tennessee dated June
30, 1994, effective the date
premises are ready for
occupancy.
10.19 Lease Agreement between Exhibit 10.19 to
International Business Machines Registrant's 1995 10-K
Corporation and Registrant dated
August 29, 1994.
10.20 Amended and Restated Line of Exhibit 10.20 to
Credit Facility Agreement Registrant's 1995 10-K
between Michigan National Bank
and Registrant dated March 14,
1995.
10.21 Promissory notes between Exhibit 10.9 to the
Michigan National Bank and Registrant's 1993 10-K
Registrant dated August 26,
1993.
10.22 Loan Agreement between Form 8-K filed April 23, 1993
Registrant and
United/HealthScope, Inc. dated
March 9, 1993.
10.23 Loan agreement between Exhibit 10.23 to
Registrant and Registrant's 1995 10-K
United/HealthScope, Inc. dated
September 21, 1994.
10.24 Asset Purchase Agreement between Form 8-K filed May 24, 1993
CHF, Inc., Healthcare Plan and Form 8-K/A filed July
Management, Inc., CHF-HPM 21, 1993
Limited Partnership, Louis J.
Nicholas and Keith B. Sullivan
and Registrant dated May 7,
1993.
10.25 Loan and Security Agreement Exhibit 10.18 to
between Ultramedix Health Care Registrant's 1994 Form 10-K
Systems, Inc. and United
American of Florida dated
February 1, 1994.
10.26 Amendment dated June 13, 1995 to Exhibit 10.26 to
the Loan and Security Agreement Registrant's 1995 10-K
between Ultramedix Care Systems,
Inc. and United American of
Florida, Inc. dated February 1,
1994.
10.27 Form of Stock Transfer Services Exhibit 10.19 to
Agreement between Huntington Registrant's 1994 Form 10-K
National Bank and Registrant.
10.28 Employment Agreement between Exhibit 10.15 to 1991 S-1
Julius V. Combs, M.D. and
Registrant dated March 15, 1991.
10.29 Employment Agreement between Exhibit 10.16 to 1991 S-1
Ronald R. Dobbins and Registrant
E-3
78
FILED
HEREWITH
EXHIBIT INCORPORATED HEREIN BY SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO PAGE NO.
- ------ ----------------------- ------------ ----------
dated March 15, 1991.
10.30 Employment agreement between Exhibit 10.22 to
Louis J. Nicholas and Corporate Registrant's 1994 Form 10-K
Healthcare Financing, Inc. dated
May 7, 1993.
10.31 First Amendment to Contingent Form 10-Q filed May 14, 1996
Note Promissory Note between
CHF-HPM Limited Partnership and
the Registrant
10.32 Acquisition of majority interest Form 8-K filed April 19, 1996
in OmniCare Health Plan, Inc. of
Tennessee and Ultramedix
Healthcare Systems, Inc.
10.33 Injured Workers' Insurance Fund
Contract No. IWIF 9-96 Managed
Care Contract with Stautory
Benefits Management Corporation
dated June 19, 1996.
10.34 Ernst & Young LLP
Report of Independent
Auditors
E-4