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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 fiscal year ended June 30, 1998
Commission file number: 000-18839
UNITED AMERICAN HEALTHCARE CORPORATION
(Exact name of registrant as specified in charter)
MICHIGAN 38-2526913
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1155 BREWERY PARK BOULEVARD, SUITE 200
DETROIT, MICHIGAN 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 393-0200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES AS OF SEPTEMBER 17, 1998, COMPUTED BY REFERENCE TO THE NYSE
CLOSING PRICE ON SUCH DATE, WAS $9,867,534.
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF SEPTEMBER
17, 1998 WAS 6,578,356.
The following document (or portion thereof) has been incorporated by reference
in this Annual Report on Form 10-K: The definitive Proxy Statement for the
1998 Annual Meeting of Shareholders to be held on November 12, 1998 (Part III).
As filed with the Securities and Exchange Commission on September 28, 1998
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UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I..................................................................................2
Item 1. Business................................................................... 2
Item 2. Properties.................................................................20
Item 3. Legal Proceedings..........................................................20
Item 4. Submission of Matters to a Vote of Security Holders........................22
PART II................................................................................22
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters...22
Item 6. Selected Financial Data....................................................22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................23
Item 8. Financial Statements.......................................................33
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure.....................................33
PART III...............................................................................34
Item 10. Directors and Executive Officers of the Registrant.........................34
Item 11. Executive Compensation.....................................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management.............34
Item 13. Certain Relationships and Related Transactions.............................34
PART IV................................................................................34
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............34
FINANCIAL STATEMENTS..................................................................F-1
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage management to provide
prospective information about their companies without fear of litigation so
long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in the
statements. Certain statements contained in this Form 10-K annual report,
including, without limitation, statements containing the words "believes",
"anticipates", "will", "may", "might", and words of similar import, constitute
"forward-looking statements" within the meaning of this "safe harbor".
Such forward-looking statements are based on management's current
expectations and involve known and unknown risks, uncertainties and other
factors, many of which the Company is unable to predict or control, that may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. See "Item 1-Business
- - Cautionary Statement Regarding Forward-Looking Statements".
GENERAL
United American Healthcare Corporation (the "Company") was incorporated in
Michigan on December 1, 1983 and commenced operations in May 1985. Unless the
context otherwise requires, all references to the Company indicated herein shall
mean United American Healthcare Corporation and its consolidated subsidiaries.
The Company provides comprehensive management and consulting services to
managed care organizations, including health maintenance organizations in
Tennessee, 75% owned by the Company, in Michigan and, until February 26, 1998,
in Florida. The Company also arranges for the financing of health care services
and delivery of these services by primary care physicians and specialists,
hospitals, pharmacies and other ancillary providers to commercial employer
groups and government sponsored populations in Tennessee and, until February 26,
1998, Florida. Management and consulting services provided by the Company are
generally to health maintenance organizations with a targeted mix of Medicaid
and non-Medicaid/commercial enrollment. As of September 1, 1998, there were
approximately 142,000 enrollees in the managed care organizations owned or
managed by the Company.
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Management and consulting services provided by the Company include
feasibility studies for licensure, strategic planning, corporate governance,
management information systems, human resources, marketing, precertification,
utilization review programs, individual case management, budgeting, provider
network services, accreditation preparation, enrollment processing, claims
processing, member services and cost containment programs.
In 1985, the Company became one of the pioneers in arranging for the
financing and delivery of health care services to Medicaid recipients utilizing
managed care programs. Management believes the Company has gained substantial
expertise in understanding and serving the particular needs of the Medicaid
population. As of September 1, 1998, there were approximately 79,000 Medicaid
enrollees in the managed care organizations owned or managed by the Company,
OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), and Michigan Health
Maintenance Organization Plans, Inc., d/b/a OmniCare Health Plan, in Michigan
("OmniCare-MI" and, collectively with OmniCare-TN, the "Managed Plans"). The
Company complements its Medicaid focus by targeting non-Medicaid/commercial
business in the same geographic markets. As of September 1, 1998, there were
approximately 63,000 non-Medicaid/commercial enrollees in the Managed Plans.
The Company sold all of the stock of its wholly owned subsidiary, Corporate
Healthcare Financing, Inc. ("CHF"), on September 8, 1998, culminating a year's
effort to sell CHF. See "Business - Self-Funded Benefit Plans" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources". CHF designs customized employee
welfare plan arrangements for self-funded employers and provides marketing,
management and administrative services to self-funded employers generally. As
of August 1, 1998, CHF's client base included approximately 345 accounts in 47
states, with an estimated 629,000 covered lives.
RESTRUCTURING PROGRAM AND MANAGEMENT CHANGES
On January 12, 1998, as a result of significant operating losses, negative
working capital and a reduction in net worth, the Company announced a major
financial restructuring program which was designed to cut the Company's cash
losses and to position the Company for profitable operations. To oversee the
Company's restructuring efforts, the Company named a new Chairman of the Board
to serve in a non-executive capacity, with the day to day operations of the
Company continuing to be managed by its then current Chief Executive Officer and
then current President and Chief Operating Officer. The Company engaged Arthur
Andersen LLP to assist in the development and implementation of the financial
restructuring program and named Thomas J. Allison as Interim Chief Financial
Officer of the Company. Mr. Allison concurrently was also the head of Arthur
Andersen LLP's Chicago-based Corporate Recovery Services Group.
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The restructuring program encompassed Company plans to discontinue some
expansion projects, reduce non-core spending activities, reduce corporate
overhead, renegotiate its bank credit facilities, re-evaluate its investment in
affiliates and other assets and sell CHF.
On May 12, 1998, the Company announced three changes in management: (1)
the retirement of the then current Chief Executive Officer of the Company
effective August 6, 1998, including his immediate relinquishment of his
operational responsibilities, (2) the resignation of the then current President
and Chief Operating Officer of the Company and (3) the election of Gregory H.
Moses, Jr. as the new President and Chief Operating Officer of the Company. Mr.
Moses, a retired partner of the Coopers & Lybrand accounting firm, most recently
had been a consultant to a health maintenance organization in Detroit. He
previously had been partner-in-charge of the Coopers & Lybrand Healthcare
Consulting Group in New York and New Jersey for ten years, chairman of that
firm's National Healthcare Consulting Group for five years and its lead
engagement partner with respect to Mercy Health Services for seven years. In
August 1998, Mr. Moses additionally became the Chief Executive Officer of the
Company, the Company's Corporate Controller became its Treasurer and its Interim
Chief Financial Officer (replacing Mr. Allison, who had resigned that position)
and the Company appointed a new Senior Director of Management Information
Systems.
INDUSTRY
In an effort to control costs while assuring the delivery of quality
health care services, the public and private sectors in recent years have
increasingly turned to managed care solutions. As a result, the managed care
industry, which includes health maintenance organization ("HMO"), preferred
provider organization ("PPO") and prepaid health service plans, has grown
substantially.
While the trend toward managed care solutions has traditionally been
pursued most aggressively by the private sector, the public sector has recently
embraced the trend in an effort to control the costs of health care provided to
Medicaid recipients. Consequently, many states are promoting managed care
initiatives to contain these rising costs and supporting programs that
encourage or mandate Medicaid beneficiaries to enroll in managed care plans.
MANAGED CARE PRODUCTS AND SERVICES
The Company has an ownership interest in and manages the operations of an
HMO in Tennessee, OmniCare-TN. The Company also manages the operations of an
HMO in which it has no ownership interest, OmniCare-MI.
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The Company also had or has an ownership interest in three other HMOs:
UltraMedix Healthcare Systems, Inc., in Florida ("UltraMedix"); OmniCare Health
Plan of Louisiana, Inc., in Louisiana ("OmniCare-LA"); and PhilCare Health
Systems, Inc., in Pennsylvania ("PhilCare"). UltraMedix ceased operations and
is in the process of being liquidated (see "Business-Managed Plans Owned by the
Company - UltraMedix" below). OmniCare-LA was never operational and is in the
process of being liquidated and dissolved. PhilCare, having declined to
participate in Pennsylvania's Medicaid managed care program because of program
requirements that would have made such participation unprofitable, subsequently,
effective April 1, 1998, entered into an Integrated Delivery System agreement
with an entity that arranges for the provision of health care services for its
Medicaid membership through contracts with health care providers. The Company's
Board of Directors has determined, as part of the Company's financial
restructuring program, to withdraw from all involvement in Pennsylvania and to
pursue recouping its investment in PhilCare.
The following table shows the membership in the Managed Plans serviced by
the Company as of September 1, 1998:
Non -
Medicaid/
Medicaid Commercial Total
-------- ---------- -----
Managed Plans
- -------------
Owned :
OmniCare-TN 29,367 16,605 45,972
Operated:
OmniCare-MI 49,912 46,075 95,987
------------------------------------------
79,279 62,680 141,959
==========================================
The following table sets forth data with respect to the Company's
principal revenue sources in dollar amounts and as a percentage of the
Company's total revenues for the periods indicated. Such data are not
indicative of the relative contributions to the Company's net earnings.
Year ended June 30,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(in thousands, except percentages)
OmniCare-TN $63,520 60% $56,508 50% $42,717 46%
OmniCare-MI 24,986 24% 28,865 26% 30,275 33%
UltraMedix 15,062 14% 13,922 12% 9,003 10%
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A substantial portion of the Company's gross revenues is derived through
its management agreement with OmniCare-MI. This management agreement is
long-term in nature, subject to review every five years with either automatic
continuation or elective termination. There can be no assurance that such
agreement will remain in effect or continue substantially under the same terms
and conditions. Effective June 1, 1998, the OmniCare-MI management agreement
was amended to reduce the management fee percentage charged by the Company.
UltraMedix has been placed in receivership for the purpose of its liquidation,
pursuant to judicial consent orders entered on February 26 and March 3, 1998.
See "Managed Plan Operated By the Company" and "Managed Plans Owned by the
Company - "UltraMedix" under "Managed Plans" below and "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources".
MANAGED PLANS
The Company has entered into long-term management agreements with
OmniCare-MI and, through a wholly owned subsidiary of the Company, with
OmniCare-TN. Pursuant to these management agreements with the Managed Plans,
the Company provides management and consulting services associated with the
financing and delivery of health care services. Table A summarizes the terms of
the management agreements.
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Table A- Summary of Terms of Management Agreements with the Managed Plans
Managed Plans
------------------------------------------
Terms OmniCare-MI OmniCare-TN
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(1) Duration:
(a) Effective dates:
(i) Commencement May 1, 1985 February 1, 1994
(ii) Expiration December 31, 2010 February 1, 1999
(b) Extension:
(i) Automatically renewable No Yes - 4 successive
5-year periods
(ii) Terms of renewal/continuation Subject to review 5 years
every 5 years
(iii) Next review period May 1, 2000 February 1, 1999
(c) Termination:
(i) Without cause by the Plan at such Yes Yes
reviews
(ii) Either party with cause Yes Yes
(2) Fees paid to the Company:
(a) Percentage of revenues Yes Yes
(b) Reimbursement of cost incurred to manage the
Plan No No
(3) Expenses incurred by the Company:
All administrative expenses necessary to
carry out and perform the functions of
the Plan, excluding:
(i) Audit No Yes
(ii) Legal No Yes
(iii) Marketing No No
(iv) Certain other No Yes
Services provided to the Managed Plans include strategic planning;
corporate governance; human resource functions; provider network services;
provider profiling and credentialing; premium rate setting and review;
marketing services (group and individual); accounting and budgeting functions;
deposit, disbursement and investment of funds; enrollment functions; collection
of accounts; claims processing; management information systems; utilization
review; and quality management.
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Managed Plans Owned by the Company
OMNICARE-TN. OmniCare-TN was organized as a Tennessee corporation in
October 1993, and is headquartered in Memphis, Tennessee. The Company was
active in the development of OmniCare-TN and, through the Company's wholly owned
subsidiary, United American of Tennessee, Inc. ("UA-TN"), owns a 75% equity
interest in OmniCare-TN; a local partner owns the remaining 25%. OmniCare-TN
began as a PPO contractor in TennCare, a State of Tennessee program that
provides medical benefits to Medicaid and Working Uninsured recipients, and
operated as a full-risk prepaid health services plan until it obtained its
TennCare HMO license in March 1996. OmniCare-TN's TennCare HMO contract was
executed in October 1996, retroactive to the date of licensure.
In November 1993, OmniCare-TN contracted with TennCare as a PPO, to
arrange for the financing and delivery of health care services on a capitated
basis to Medicaid eligibles and the Working Uninsured and Uninsurable
("Non-Medicaid") individuals who lack access to private or employer sponsored
health insurance or to another government health plan. The TennCare Bureau
placed an indefinite moratorium on Working Uninsured enrollment in December
1994; however, such action did not affect persons enrolled in a plan prior to
the moratorium. In April 1997, enrollment was expanded to include the children
of the Working Uninsured up to age 18. The annually renewable TennCare contract
was renewed on July 1, 1998 for an additional 12-month term. Consistent with
past contract renewals, Plan management expects an approximate 3% increase in
premium rates.
OmniCare-TN currently serves Shelby and Davidson counties in Tennessee
(which include the cities of Memphis and Nashville). As of September 1, 1998,
total enrollment was approximately 45,972 members, of which 29,367 (64%) and
16,605 (36%) represent Medicaid and Non-Medicaid enrollees, respectively. A
30-day open enrollment change period for all TennCare eligibles occurs once a
year in October. Plan management expects a net 3%-5% increase in enrollment in
fiscal 1999 resulting from the change in individuals' Medicaid eligibility
status and net enrollment gains during the open enrollment period.
The Plan's application for a commercial HMO license is pending. Plan
management has been in frequent communication with the State to eliminate any
further processing delays of the application and expects the issuance of the
license in the third quarter of fiscal 1999. However, there can be no assurance
that the license will be issued within this time period. Management believes
that the receipt of the commercial license and the Plan's efforts to expand its
provider network to the southwestern area of Tennessee would enable OmniCare-TN
to increase its enrollment by marketing its managed care products to the various
employer groups in the regions served.
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ULTRAMEDIX. UltraMedix, a network model HMO headquartered in Tampa,
Florida, was founded as a Florida corporation in May 1992. Through its
majority owned subsidiary, United American of Florida, Inc. ("UA-FL"), the
Company owns 51% of UltraMedix, with the remaining 49% owned by local
shareholders. The March 3, 1998 court order, described below, placed
UltraMedix and UA-FL in liquidation.
As of December 31, 1997, UltraMedix was not in compliance with the Florida
Department of Insurance ("FDOI") statutory solvency requirement. The FDOI
requires that HMOs maintain a statutory reserve as determined in accordance
with statutory accounting practices of $.5 million. UltraMedix's statutory
deficiency at December 31, 1997 was estimated at $4.5 million. As a result, on
January 30, 1998, the Company, UltraMedix and the Plan's third-party
administrator, UA-FL, signed and delivered to the FDOI a Stipulation and
Consent to Appointment of Receiver and Order of Liquidation entitling FDOI to
obtain the entry of an accompanying consent order by the applicable Florida
court if the Company did not cure UltraMedix's existing statutory reserve
deficiency (estimated at $4.5 million) by February 6, 1998. On February 26,
1998, the deficiency had not been cured and pursuant to the FDOI's petition,
the Florida court entered such consent order.
Pursuant to the stipulation and consent order: UltraMedix and UA-FL (the
"Organizations") admitted that UltraMedix was statutorily insolvent as of
December 31, 1997; the Company paid $.5 million to the FDOI to cover UltraMedix
claims incurred during and provider capitation payments due for the eight days
ended February 6, 1998, and funded the Organizations' ordinary business
expenses for the same period; the FDOI took control of the Organizations' bank
accounts; the Plan ceased enrolling new members; and the Organizations
continued to provide services to all of the Plan's subscribers and to process
renewals on all policies as they came due. Pursuant to the consent order, on
February 26, 1998, the Organizations were declared insolvent and the FDOI was
appointed as Receiver for the purposes of their liquidation.
On March 3, 1998, the Florida court entered a Consent Order of Liquidation,
Injunction and Notice of Stay, declaring that any further efforts of the
Receiver to rehabilitate the Organizations would be useless, ordering the FDOI,
as Receiver, to take possession of and liquidate all assets of the Organizations
and ordering the immediate cancellation of UltraMedix's authority to provide
health services as an HMO in Florida. On April 15, 1998, the Florida Agency for
Health Care Administration notified the Company of the Agency's intent to
enforce the Company's Guarantee Agreement, under which the Company had agreed to
reimburse UltraMedix's contracted Medicaid providers for authorized, covered
Medicaid services rendered to covered Medicaid enrollees, for which the Agency
had made payment on behalf of such enrollees, limited to an amount equal to the
amount of surplus UltraMedix would have been required to maintain under the
Medicaid contract in the absence of such Guarantee Agreement. Although the
outcome cannot be predicted or reasonably estimated, Company management expects
that the ultimate resolution regarding the Guarantee Agreement will not have a
materially adverse effect on the Company's consolidated financial position.
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Managed Plan Operated by the Company
OMNICARE-MI. OmniCare-MI is a not-for-profit, tax-exempt corporation
headquartered in Detroit, Michigan and serving southeastern Michigan, operating
in Wayne, Oakland, Macomb, Monroe and Washtenaw counties. Its history includes
a number of innovations that were adopted and proved successful for the
industry. It was the first network model HMO in the country and the first to
capitate physician services in an IPA model HMO. OmniCare-MI also created and
implemented the first known mental health carve out in 1983.
OmniCare-MI enrollment is through 900 companies that offer the Plan to
employees and their family members, through individual enrollment that is open
once a year for a 30-day period, and through the State's Medicaid program
pursuant to an agreement with the Michigan Department of Community Health,
which makes HMO coverage available to eligibles in certain counties and
mandatory in others. This annually renewable agreement was extended by mutual
agreement for an additional twelve months from January 1, 1998 to December 31,
1998. As of September 1, 1998, total enrollment in OmniCare-MI was
approximately 95,987, of which 46,075 (48%) represent commercial members,
including approximately 8,274 point of service members and approximately 49,912
(52%) represent Medicaid members.
Among the major employers that offer OmniCare-MI, ranked by enrollment,
are: the City of Detroit, the Federal Government, the Detroit Board of
Education, Ford Motor Company, the State of Michigan, General Motors
Corporation, Chrysler Corporation, Detroit Edison, Wayne County and Comerica
Bank, the largest of which represents approximately 7% of OmniCare-MI's total
enrollment. No other group exceeds 5% of the Plan's total enrollment.
HMO growth in the State of Michigan has remained fairly static over the
last several years. HMO enrollment penetration has remained in the 20% range
during that period. However, management believes that this dormancy will not
continue as public acceptance of HMOs is growing and employer encouragement is
increasing as they realize that HMOs cost less and provide quality care.
The State of Michigan, in an effort to reduce the cost of its Medicaid
program, competitively bid its Medicaid contracts, with an effective date of
July 1997. The affected southeastern Michigan counties include a significant
portion of the Plan's Medicaid enrollment. In May 1997, OmniCare-MI was
notified that it had been selected to participate in the State's program.
Unsuccessful bidders to the State's request for proposal legally challenged the
initiative and, as a result, the State did not assign the Medicaid eligibles to
plans that were awarded contracts, but nonetheless
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instituted the rate reduction component of the new program effective July 1997.
With the indefinite delay of the assignment of approximately 90,000 eligible
recipients to the selected plans, and the implementation of the rate reductions
of 20%, the operating revenues of OmniCare-MI and the resulting management fee
revenues to the Company were adversely affected in fiscal 1998. There can be no
assurance that OmniCare-MI can control health care costs at the rate of the
premium reductions.
Newspaper stories in May 1998 reported that the Michigan Insurance Bureau
(the "Bureau") had obtained a sealed (confidential) court order on May 7, 1998
giving state regulators control over OmniCare-MI's assets. The Company
responded with a public statement on May 12, 1998, stating that OmniCare-MI was
not in receivership but was in active discussion with the Bureau regarding
compliance with certain regulatory issues, that all services to members of
OmniCare-MI would continue to be provided, with no decrease in the quality of
care, and all providers would continue to be paid for their services, and that
both the Company and OmniCare-MI had completely restructured their top
management.
In June 1998, the Company funded a $4.6 million unsecured loan to
OmniCare-MI, evidenced by a surplus note, to enable OmniCare-MI to meet its
minimum requirements for net worth and working capital. Pursuant to the
surplus note, interest and principal repayments are subject to approval by the
Bureau and are payable only out of the statutory surplus earnings of
OmniCare-MI. The interest rate is at prime, payable annually and if not paid
is forfeited. The principal has no stated maturity or repayment date. The
surplus note is subordinated to all other claimants of OmniCare-MI. The
Company recorded an impairment loss against its investment in this surplus note
based on its evaluation of the recoverable value of such investment and
accordingly, recognized bad debt expense of $2.3 million for the year ended
June 30, 1998.
On July 1, 1998, the Bureau issued a public statement in which the
Michigan Commissioner of Insurance announced reaching accord with OmniCare-MI
on a four-month plan to revitalize the HMO and cited "three major positive
developments respecting OmniCare": an unsecured loan of $4.6 million by the
Company, the corrective action plan and the "experienced and capable leadership
of Gregory H. Moses."
The reduction of Medicaid rates and other factors were considered in
developing the OmniCare-MI corrective action plan, which is in the process of
implementation. The corrective action plan includes the reduction of medical
costs through renegotiation of hospital provider contracts, reduction of
pharmacy costs and a reduction in the management fee percentage paid to the
Company from 17% to 14%, effective June 1, 1998. In fiscal 1998, the Company
derived 24% of its total revenues from its management agreement with
OmniCare-MI. Management believes that the continued viability of OmniCare-MI is
critical to the Company's future operations and concluded that the unsecured
loan, in the form of a surplus note, and reduction in the management fee
percentage were necessary actions to strengthen the financial condition and
continued viability of OmniCare-MI.
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The Company, in its restructuring efforts and forecasts, has considered the
impact of the reduction in the management fee percentage. Based on the fiscal
1998 level of operating revenues of OmniCare-MI, the pro forma impact of this
reduction if applicable for all of that year would have been a reduction in
management fee revenues of approximately $4.0 million or $.40 earnings per
share.
Other Managed Plan Ventures
OMNICARE-LA. OmniCare-LA, a network model HMO headquartered in New
Orleans, Louisiana, was organized as a Louisiana corporation in November 1994,
and is 100% owned by the Company's wholly owned subsidiary, United American of
Louisiana, Inc. (UA-LA) ("UA-LA"). The Plan was granted an HMO license by the
Louisiana Department of Insurance in June 1996. In connection therewith, the
Company funded OmniCare-LA's statutory reserve and net worth requirements
through letters of credit for $1.0 million and $1.0 million in cash deposited
in accounts at state banks in Louisiana. OmniCare-LA was in a pre-operational
phase since inception. Consistent with the Company's restructuring efforts, it
has ceased its operations in Louisiana and withdrawn its $1.0 million statutory
reserve and is in the process of liquidating and dissolving OmniCare-LA,
including the anticipated cancellation of its letter of credit commitments.
PHILCARE. PhilCare, a network model HMO headquartered in Philadelphia,
Pennsylvania, was organized as a Pennsylvania corporation in May 1994.
PhilCare is 49% owned by the Company's wholly owned subsidiary, United American
of Pennsylvania, Inc. ("UA-PA"), and 51% owned by local participants. In June
1996, PhilCare obtained its HMO license, with the Company funding PhilCare's
statutory reserve and net worth requirements of $2.1 million through cash
deposited at a Pennsylvania bank.
PhilCare's initial business plan was to participate in Pennsylvania's
mandatory Medicaid pilot program, HealthChoices, which required the enrollment
of approximately 540,000 Medicaid recipients in five metropolitan Philadelphia
counties into HMOs. In October 1996, the Company announced its decision to
withdraw its support of PhilCare's participation in the HealthChoices program
because existing program requirements would have made the Company's
participation in the program unprofitable. Effective April 1, 1998, PhilCare
entered into an Integrated Delivery System ("IDS") agreement with an entity that
arranges for the provision of health care services for its Medicaid membership
through contracts with health care providers. The IDS agreement places the
entity in the position of bearing the risk, but as the contractor with the
Pennsylvania Department of Public Welfare, the state's regulatory agency for
HMOs, PhilCare is looked upon as being responsible for compliance with all
applicable rules and regulations.
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In 1998, the Company recorded a full impairment loss against its
investment in PhilCare based on its evaluation of the net recoverable value of
such investment. This resulted in bad debt expense of $2.1 million for the
year ended June 30, 1998. The Company's Board of Directors has determined to
pursue recouping its investment in PhilCare.
Consistent with the Company's restructuring efforts, the Company has
ceased all operational activities of UA-PA, except its rent obligations for
leased office space in Philadelphia which has been substantially sublet
(80%) and with respect to which the Company continues to seek subtenants for
the remaining space. The Company is currently negotiating with its landlord to
assume the subleases and release the Company from its lease obligations, but
Company management is unable to predict the outcome of such discussions.
ADVICA HEALTH MANAGEMENT. In March 1993, the Company reached an agreement
with New York-based HealthScope Administrative Services Corporation, later
known as HealthScope/United, Inc. ("HealthScope"), to form a health care
management company intended to gain access to one of the largest Medicaid
eligible populations in the United States. Pursuant to the agreement,
HealthScope became a wholly owned subsidiary of Advica Health Management
(formerly United/HealthScope, Inc.) ("Advica"), which was organized to engage
in development, consulting and contract management services for publicly funded
managed care programs in the metropolitan New York area.
In 1995, New York City officials announced a four-year initiative to
enroll over 1.7 million Medicaid recipients residing in New York City in
managed care plans. The staggered enrollment aspect of the program was
necessitated by an insufficient capacity to enroll all such recipients. This
mandated initiative began to roll out in early 1997. Advica management
anticipated the phase-in for its service areas in early 1998, but as of
September 1998, the rollout to Advica's service areas has not yet begun.
Through May 1997, outstanding amounts owed to the Company from Advica
totaled approximately $4.9 million. In May 1997, Advica's outstanding debt and
preferred stock were restructured to attract other investors. The Company
converted its interest in Advica, including advances, accrued interest and the
value of warrants held by the Company, to one million shares of non-voting
preferred stock of the restructured Advica in the amount of $4.0 million, and a
warrant to purchase 3,310 shares of Advica common stock, exercisable at any
time at a nominal price, representing approximately 3% of Advica's common
shares on a fully diluted basis.
The conversion of the Company's loans to Advica to preferred stock was
treated as a "troubled debt restructuring" with the investment recorded at its
estimated fair value at the date of the restructuring. This resulted in bad
debt expense of $.7 million for the year ended June 30, 1997. Subsequently,
based on Advica's current and historical operating results as of June 30, 1998,
the Company recognized a full impairment loss on such
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investment that resulted in bad debt expense of $2.3 million for fiscal year
1998.
SELF-FUNDED BENEFIT PLANS
In 1993, the Company acquired CHF for approximately $16.2 million in the
form of cash, stock, a contingent note and the assumption of liabilities. The
contingent note was for $6.6 million and was earned out at both June 30, 1998
and June 30, 1997. CHF designs customized employee welfare plan arrangements
for self-funded employers and provides marketing, management and administrative
services to self-funded employers generally. Management believed that its
acquisition of CHF represented an opportunity to expand its traditional
business into the self-funded market that comprises a majority of the private
sector employers. A self-funded health benefit plan is one in which an
employer directly assumes the financial risk for its employees' health care
costs by paying for employees' medical claims out of a separate fund consisting
of employee and/or employer contributions.
On September 12, 1997, the Company's Board of Directors approved the
proposed stock sale of CHF for $30 million in cash to an entity related to the
Company by certain common shareholders contingent on the buyer securing
financing. The buyer was unable to obtain financing, resulting in the
termination of the proposed sale.
Subsequently, on May 14, 1998, the Company's Board of Directors approved a
new proposed stock sale of CHF to a privately held national employee leasing
company for $15.25 million in net cash plus $2.5 million of the proposed
buyer's preferred stock, bearing a 6% annual preferred dividend payable in
stock for three years and, thereafter, a 14% annual preferred dividend payable
in cash. This proposed transaction was also not consummated.
With the approval of the Company's Board of Directors, the Company
reopened discussions with the principals of the first prospective buyer,
including Louis J. Nicholas, the Chief Executive Officer of CHF and a former
officer and director of the Company. On August 6, 1998, the Company's Board
of Directors approved the terms of a new proposed CHF stock sale. Pursuant
thereto, on September 8, 1998, CHFA, Inc., a corporation owned by Mr. Nicholas
and others, purchased all of the stock of CHF for $17.75 million, comprised of
$2 million in cash, a secured note for $13.25 million and an unsecured note for
$2.5 million. A regional investment banking firm issued a fairness opinion
supporting the reasonableness of the consideration to be received by the
Company for such sale.
The secured note is payable to the Company in four monthly installments of
$.5 million each on the last day of September through December 1998 with the
balance due in January 1999, with options to extend the final payment to March
1999, plus interest at the prime rate on short-term unsecured commercial
borrowings. The unsecured note is payable to the Company in two annual
installments of $.25 million with the balance due August 31, 2001. The security
for the secured note includes a pledge of the stock of CHF and a
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limited personal guarantee of Mr. Nicholas. The proceeds from the sale of CHF
have been and will be used to reduce debt and provide security for the Company's
bank indebtedness.
OTHER VENTURE AND PRODUCT
CHOICEONE. In December 1997, the Company completed the stock sale of its
wholly owned subsidiary, ChoiceOne, a multi-state PPO created in 1993, for $.2
million in cash. The sale resulted from the Company's re-evaluating its
strategic objectives and determining that ChoiceOne was not a core business
segment. While owned by the Company, ChoiceOne was 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, 1997, ChoiceOne had
approximately 228,000 members representing 154 payors.
GOVERNMENT REGULATION
The Company is subject to extensive federal and state health care and
insurance regulations designed primarily to protect enrollees in the Managed
Plans, particularly with respect to government sponsored enrollees. Such
regulations govern many aspects of the Company's business affairs and typically
empower state agencies to review management agreements with health care plans
for, among other things, reasonableness of charges. Among the other areas
regulated by federal and state law are licensure requirements, premium rate
increases, new product offerings, procedures for quality assurance, enrollment
requirements, covered benefits, service area expansion, provider relationships
and the financial condition of the managed plans, including cash reserve
requirements and dividend restrictions. There can be no assurances that the
Company or its Managed Plans will be granted the necessary approvals for new
products or will maintain federal qualifications or state licensure.
The licensing and operation of OmniCare-MI, OmniCare-TN, UltraMedix,
PhilCare and OmniCare-LA are governed by the respective states' 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
states' HMO statutes, failing to provide quality health services, establishing
rates that are unfair or unreasonable, failing to fulfill obligations under
outstanding agreements or operating on an unsound fiscal basis. Except for
OmniCare-MI, the plans are not federally-qualified HMOs and, therefore, are not
subject to the federal HMO Act.
Federal and state regulation of health care plans and managed care products
is subject to frequent change, varies from jurisdiction to jurisdiction and
generally gives responsible administrative agencies broad discretion. Laws and
regulations relating to the Company's business are subject to amendment and/or
interpretation in each jurisdiction. In particular, legislation mandating
managed care for Medicaid recipients
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is often subject to change and may not initially be accompanied by
administrative rules and guidelines. Changes in federal or state governmental
regulation could affect the Company's operations, profitability and business
prospects. Currently OmniCare-MI is in active discussions with state regulators
regarding compliance with certain regulatory issues. See "Managed Plan
Operated By the Company" under "Managed Plans" above and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources". While the Company is unable to
predict what additional government regulations, if any, affecting its business
may be enacted in the future or how existing or future regulations may be
interpreted, regulatory revisions may have a material adverse effect on the
Company.
INSURANCE
The Company presently carries comprehensive general liability, directors
and officers liability, property, business automobile, and workers'
compensation insurance. Management believes that coverage levels under these
policies are adequate in view of the risks associated with the Company's
business. The management agreements with OmniCare-MI and OmniCare-TN require,
and with UltraMedix required, the respective managed plans to maintain general
liability insurance, naming the Company as an additional insured. The Company
or the individual managed plans are or were required to pay the insurance
premiums under the terms of the respective management agreements. In addition,
the Managed Plans have professional liability insurance that covers liability
claims arising from medical malpractice, with the Company named as an additional
insured. There can be no assurance as to the future availability or cost of
such insurance, or that the Company's business risks will be maintained within
the limits of such insurance coverage.
COMPETITION
The managed care industry is highly competitive. The Company directly
competes with other entities that provide health care plan management services,
some of which are nonprofit corporations and others which have significantly
greater financial and administrative resources. The Company primarily competes
on the basis of fee arrangements, cost effectiveness and the range and quality
of services offered to prospective health care clients. While the Company
believes that its experience gives it certain competitive advantages over
existing and potential new competitors, there can be no assurance that the
Company will be able to compete effectively in the future.
The Company competes with other HMOs, PPOs and insurance companies. The
level of this competition may affect, among other things, the operating
revenues of the Managed Plans and, therefore, the revenues of the Company. The
predominant competitors in southeastern Michigan are Blue Cross/Blue Shield of
Michigan, The Wellness Plan, Total Health Plan and Health Alliance Plan. The
predominant competitors in central and southwestern Tennessee are Access-Med
Plus and Blue Cross/Blue Shield. The Company's Managed Plans primarily compete
on the basis of
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enrollee premiums, covered benefits, provider networks, utilization limitations,
enrollee co-payments and other related plan features and criteria. Management
believes that the Company's existing clients are able to compete effectively
with their primary market competitors in these areas.
EMPLOYEES
The Company's ability to maintain its competitive position and expand its
business into new markets depends, in significant part, upon the maintenance of
its relationships with various existing senior officers, as well as its ability
to attract and retain qualified health care management professionals. Although
the Company has an employment agreement with its current Chief Executive
Officer, it neither has, nor intends to pursue employment agreements with all of
its key personnel. Accordingly, there is no assurance that the Company will be
able to maintain such relationships or attract such professionals.
Consistent with the Company's restructuring efforts, the total number of
employees was reduced from 427 at August 1, 1997 to 214 at September 1, 1998.
Of this 50% reduction in staff, approximately 44% was due to the Company's
cessation of its operations in Florida, Pennsylvania and Louisiana, and 56% was
attributable to a reduction in staffing, including attrition, of its corporate
and Tennessee operations. Management believes that the maintenance of the
current staff with nominal projected increases will allow it to complete its
restructuring efforts and stabilize operations in fiscal 1999. The Company's
employees do not belong to a collective bargaining unit and management
considers its relations with employees to be good.
MANAGEMENT INFORMATION SYSTEMS
Management believes that timely and relevant information is critical to a
managed care operation and utilizes its management information system ("MIS")
to process claims; analyze health care utilization; support provider, member
and employer requirements; and control administrative costs. The Company
previously initiated an MIS implementation plan intended to enhance its
operations, reduce costs and improve customer service with the development of a
proprietary client/server information system, along with complementary
automation products including claims scanning, claims imaging, electronic data
interchange and various select technologies for enterprise-wide installation.
The Company experienced substantial changes in its MIS personnel in recent
months, and appointed a new Senior Director of Management Information Systems in
August 1998. Management is currently reassessing its MIS requirements and
developing a comprehensive MIS strategy for the Company.
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YEAR 2000
The Company is in the process of developing plans to address issues
related to the potential impact of the Year 2000 on its computerized systems
and equipment. The plans in development will address systems modification
requirements in the following primary areas: information systems, facilities,
payors and suppliers. While the financial impact of making the required
systems changes has not yet been quantified, it is not expected to have a
material effect on the Company's financial condition and results of operations.
The Company presently believes that with such modifications to software and
hardware, which are expected to be completed by the end of 1999, the Year 2000
issue will not pose material problems. However, if such modifications are not
made or are not completed timely, the Year 2000 issue could have a material
adverse impact on the Company's consolidated financial position.
Furthermore, the Company has initiated formal communications with its
significant suppliers and large payors to determine the extent to which the
Company may be vulnerable to those third parties' failure to remediate their
own Year 2000 issues. However, there can be no assurances that the systems of
other companies on which the Company relies will be timely converted and the
Company may be adversely affected by the failure of a significant third party to
become Year 2000 compliant.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage management to provide
prospective information about their companies without fear of litigation so
long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in the
statements. Certain statements contained in this Form 10-K annual report,
including, without limitation, statements containing the words "believes",
"anticipates", "will", "may", "might", and words of similar import, constitute
"forward-looking statements" within the meaning of this "safe harbor".
Such forward-looking statements are based on management's current
expectations and involve known and unknown risks, uncertainties and other
factors, many of which the Company is unable to predict or control, that may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
potentially include, among others, the following:
1. Inability of the buyer of CHF to comply with the terms of
its secured and unsecured notes and the resultant impact on bank
agreements.
2. Inability of OmniCare-MI to remain as a viable entity.
3. Inability to increase premiums rates commensurate with
increases in medical costs due to utilization, government
regulation, or other factors.
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4. Discontinuation of, limitations upon or restructuring of
government-funded programs, including but not limited to the
TennCare program.
5. Increases in medical costs, including increases in
utilization and costs of medical services and the effects of actions
by competitors or groups of providers.
6. Adverse state and federal legislation and initiatives,
including limitations upon or reductions in premium payments;
prohibition or limitation of capitated arrangements or financial
incentives to providers; federal and state benefit mandates
(including mandatory length of stay and emergency room coverage);
limitations on the ability to manage care and utilization; and any
willing provider or pharmacy laws.
7. The shift of employers from insured to self-funded coverage,
resulting in reduced operating margins to the Company.
8. 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.
9. Termination of the OmniCare-MI management agreement.
10. Increased competition between current organizations and the
entrance of new competitors and the introduction of new products by
new and existing competitors.
11. Adverse publicity and media coverage.
12. Inability to carry out marketing and sales plans.
13. Loss or retirement of key executives.
14. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.
15. The selection by employers and individuals of higher
co-payment/deductible/coinsurance plans with relatively lower
premiums or margins.
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
MIS 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., the National Committee for Quality Assurance (NCQA).
20. Adverse results from significant litigation matters.
21. Adverse impact from Year 2000 issues.
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ITEM 2. PROPERTIES
The Company currently leases approximately 86,000 aggregate square feet
from which it conducts its operations in Michigan and Tennessee. The principal
offices of the Company are located at 1155 Brewery Park Boulevard, Suite 200,
Detroit, Michigan, where it currently leases approximately 54,000 square feet of
office space. In conjunction with the Company's restructuring efforts, it
vacated 10,000 square feet at its corporate headquarters and all of its 16,000
square feet of leased office space in the Renaissance Center, Detroit,
Michigan, which housed its management information system operations. In
consideration for negotiated lease concessions received by the Company,
including rental reductions and being allowed to vacate leased space, the
Company has agreed, among other things, that it will issue to its headquarters
landlord 22,500 unregistered shares of common stock of the Company.
The Company is a tenant of approximately 67,000 square feet of office
space it is not using in Philadelphia, Pennsylvania. The Company has sublet
80% of such premises to third parties for rent substantially equal to its own
and is attempting to sublease all or nearly all of the remaining space and is
currently negotiating with its landlord for a release from the Company's rental
obligations. Company management is unable to predict the outcome of these
negotiations.
The Company believes that its current facilities provide sufficient space
suitable for all of the Company's planned activities and that sufficient
additional space will be available on reasonable terms, if needed.
ITEM 3. LEGAL PROCEEDINGS
SHAREHOLDER LAWSUIT
As previously reported by the Company, certain former senior officers and
the Company were named defendants in two shareholder lawsuits filed in the
United States District Court for the Eastern District of Michigan (the "Court")
in August 1995. The Court consolidated these lawsuits into a single action.
The consolidated action alleged that certain senior officers and the Company
issued reports and statements that violated federal securities laws. The
Company and the officers contend that all material facts were disclosed during
the period in question and that certain material facts alleged not to have been
disclosed were already available in the financial marketplace.
Nevertheless, management concluded that continued defense of the litigation
was depleting the available insurance pool and that an unfavorable outcome in
excess of insurance policy limits potentially could have an adverse impact on
the Company's financial position. Continuation of this litigation would have
also diverted management's focus from operations. Based on these facts,
management pursued settlement with the plaintiffs. In January 1998, the parties
agreed to a proposed settlement requiring the release of all claims and damages
sought by the plaintiffs and
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payment by the Company of $3.25 million, of which the Company anticipates the
insurance carrier to pay $2.1 million, which proposed settlement was subject
to federal court approval.
In late April 1998, the Company informed the plaintiffs' counsel and the
Court that the Company would not be able to fully fund its portion of the
tentative settlement amount. On September 14, 1998, the parties agreed to a
restructured proposed settlement requiring the release of all claims and
damages sought by the plaintiffs in exchange for (a) $2.0 million in cash from
the Company's insurance carrier, (b) a $625,000 promissory note of the Company
payable in 15 equal monthly installments beginning 13 months after entry of a
final court order approving the settlement, with interest at 4% per annum from
the date of such order, and (c) newly issued shares of common stock of the
Company with an aggregate value of $625,000 based on a share price equal to the
greater of (i) the average closing price of the Company's common stock for the
period from July 20, 1998 through the third trading day preceding the court
hearing on approval of the settlement and (ii) $2.25.
The pending settlement is subject to federal court approval following a
court hearing on the fairness of the proposed settlement, expected to be
scheduled for November 30, 1998. 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.
RECEIVERSHIP AND LIQUIDATION OF UA-FL AND ULTRAMEDIX
On February 26, 1998, pursuant to a Stipulation and Consent to Appointment
of Receiver and Order of Liquidation earlier signed and delivered to the FDOI
by the Company, UltraMedix and UA-FL, upon the FDOI's petition, the Circuit
Court of the Second Judicial Circuit, in and for Leon County, Florida (the
"Florida court") entered a consent order declaring UltraMedix and UA-FL (the
"Organizations") insolvent and appointing the FDOI as Receiver for the purposes
of their liquidation.
On March 3, 1998, the Florida court entered a Consent Order of
Liquidation, Injunction and Notice of Stay, declaring that any further efforts
of the Receiver to rehabilitate the Organizations would be useless, ordering the
Receiver to take possession of and liquidate all assets of the Organizations,
and ordering the immediate cancellation of UltraMedix's authority to provide
health services as an HMO in Florida. On April 15, 1998, the Florida Agency for
Health Care Administration notified the Company of the Agency's intent to
enforce the Company's Guarantee Agreement, under which the Company had agreed to
reimburse UltraMedix's contracted Medicaid providers for authorized, covered
Medicaid services rendered to covered Medicaid enrollees, for which the Agency
had made payment on behalf of such enrollees, limited to an amount equal to the
amount of surplus UltraMedix would have been required to maintain under the
Medicaid contract in the absence of such Guarantee Agreement.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The shares of the Company's Common Stock are traded on the New York Stock
Exchange under the symbol "UAH." The table below sets forth the range of the
highest and lowest sales prices for the past two fiscal years, as reported by
the Exchange.
1997 SALES PRICE 1998 SALES PRICE
FISCAL QUARTER HIGH LOW HIGH LOW
- -------------- -------- -------- -------- --------
First 11 5/8 8 7 7/8 5
Second 8 1/8 5 1/2 5 9/16 1 9/16
Third 6 1/4 4 1/4 2 13/16 1 1/16
Fourth 6 3/8 4 2 3/4
As of September 17, 1998, the closing price of the Common Stock on the
NYSE was $1.50 per share and there were approximately 265 shareholders of
record of the Company.
The Company has not paid any cash dividends on its Common Stock since its
initial public offering in the fourth quarter of fiscal 1991 and does not
anticipate paying such dividends in the foreseeable future. The Company
intends to retain earnings for use in the operation and expansion of
its business.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the periods indicated:
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
(in thousands, except per share data)
OPERATING DATA (YEAR ENDED JUNE 30):
Operating revenues $105,588 $112,549 $92,379 $59,790 $38,435
(Loss) earnings from continuing operations $(22,915) $ (5,260) $(3,657) $ 6,229 $ 6,470
Discontinued operation, net of income taxes $ (2,581) $ 1,845 $ 909 $ 367 $ 912
Net (loss) earnings $(25,496) $ (3,415) $(2,748) $ 6,596 $ 7,382
(Loss) earnings per common share from
continuing operations $ (3.48) $ (0.80) $ (0.56) $ 0.95 $ 0.99
Net (loss) earnings per common share $ (3.88) $ (0.52) $ (0.42) $ 1.01 $ 1.13
Weighted average common shares outstanding 6,578 6,553 6,561 6,561 6,561
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1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
BALANCE SHEET DATA (JUNE 30):
Cash and investments $ 14,690 $ 17,442 $30,930 $17,537 $20,136
Intangible assets, net 5,629 10,557 11,546 - -
Net assets of discontinued operation 16,703 19,746 14,703 10,542 9,150
Total assets 58,684 79,662 93,239 57,614 44,778
Medical claims and benefits payable 20,004 11,632 25,678 - -
Debt 22,444 23,868 21,654 10,474 5,833
Shareholders' equity 9,081 34,406 37,822 40,508 34,189
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
On January 12, 1998, as a result of significant operating losses, negative
working capital and a reduction in net worth, the Company announced a major
financial restructuring program which was designed to cut the Company's cash
losses and position the Company for profitable operations. To oversee the
Company's restructuring efforts, the Company named a new Chairman of the Board
to serve in a non-executive capacity, with the day to day operations of the
Company continuing to be managed by its then current Chief Executive Officer
and then current President and Chief Operating Officer. The Company engaged
Arthur Andersen LLP to assist in the development and implementation of the
financial restructuring program and named as Interim Chief Financial Officer of
the Company, the individual who was also the head of Arthur Andersen LLP's
Chicago-based Corporate Recovery Services Group.
The restructuring program encompassed Company plans to discontinue some
expansion projects, reduce non-core spending activities, reduce corporate
overhead, renegotiate its bank credit facilities, re-evaluate its investment in
affiliates and other assets and sell CHF.
On May 12, 1998, the Company announced three changes in management: (1)
the retirement of the then current Chief Executive Officer of the Company
effective August 6, 1998, including his immediate relinquishment of his
operational responsibilities, (2) the resignation of the then current President
and Chief Operating Officer of the Company and (3) the election of Gregory H.
Moses, Jr. as the new President and Chief Operating Officer of the Company. In
August 1998, Mr. Moses additionally became the Chief Executive Officer of the
Company, the Company's Corporate Controller became its new Treasurer and
Interim Chief Financial Officer and the Company appointed a new Senior Director
of Management Information Systems.
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Restructuring actions completed include the change in senior management,
the sale of CHF for $17.75 million, the cessation of operations in Florida,
Louisiana and Pennsylvania, renegotiations of the bank credit facility and of
the proposed shareholder lawsuit settlement, employee downsizing, cancellation
of certain facility leases, reduction of corporate overhead, establishing
impairment losses on the Company's investments in affiliates and the write-off
of certain property and equipment.
The pre-tax effect of these restructuring efforts included: a) employee
downsizing, including attrition, at the Company's Corporate and Tennessee
operations of approximately 120 persons, or approximately 35% of the work force
at those locations, resulting in savings during fiscal 1998 of $1.8 million and
with annualized savings estimated at $5.7 million, and the recognition of $.2
million of severance expenses; b) renegotiation of the Company's corporate
office lease space which resulted in the reduction of accrued rent by $.6
million; c) expensing $.7 million and $.3 million of deferred HMO
licensure-related costs in Louisiana and Pennsylvania, respectively; d)
establishing impairment losses of $2.3 million and $2.1 million on the
Company's investments in Advica and PhilCare, respectively; e) the
write-off of certain property and equipment of $.8 million; and f) professional
fees related to the restructuring efforts and the sale of CHF, of $3.0 million.
The net of these efforts resulted in a pre-tax loss of approximately $9.0
million in fiscal 1998.
Additionally, the Company recognized $12.2 million in losses related to
the operations and subsequent cessation of the Company's Florida operations.
Newspaper stories in May 1998 reported that the Michigan Insurance Bureau
(the "Bureau") had obtained a sealed (confidential) court order on May 7, 1998
giving state regulators control over OmniCare-MI's assets. The Company
responded with a public statement on May 12, 1998, stating that OmniCare-MI was
not in receivership, but was in active discussion with the Bureau regarding
compliance with certain regulatory issues. On July 1, 1998, the Bureau issued
a public statement in which the Michigan Commissioner of Insurance announced
reaching accord with OmniCare-MI on a four-month plan to revitalize the HMO and
cited "three major positive developments respecting OmniCare": the Company's
cash infusion of $4.6 million, the corrective action plan and the "experienced
and capable leadership of Gregory H. Moses."
In June 1998, the Company funded a $4.6 million unsecured loan to
OmniCare-MI, evidenced by a surplus note, to enable OmniCare-MI to meet its
minimum
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requirements for net worth and working capital. Pursuant to the surplus note,
interest and principal repayments are subject to approval by the Bureau and are
payable only out of the statutory surplus earnings of OmniCare-MI. The
interest rate is at prime, payable annually and if not paid is forfeited. The
principal has no stated maturity or repayment date. The surplus note is
subordinated to all other claimants of OmniCare-MI. The Company recorded an
impairment loss against its investment in this surplus note based on its
evaluation of the recoverable value of such investment and accordingly,
recognized bad debt expense of $2.3 million for the year ended June 30, 1998.
The State of Michigan, in an effort to reduce the cost of its Medicaid
program, competitively bid its Medicaid contracts, with an effective date of
July 1997. The affected southeastern Michigan counties include a significant
portion of the Medicaid enrollment for OmniCare-MI. OmniCare-MI was selected
to participate in the State's program. It was anticipated that approximately
90,000 additional eligible recipients would be assigned to the selected plans.
The membership increase was expected to help offset the rate reductions under
the program. Unsuccessful bidders to the State's request for proposal legally
challenged the initiative and, as a result, the State did not assign the
Medicaid eligible recipients to plans that were awarded contracts, but did
institute the rate reduction component of the new program effective July 1997.
With the indefinite delay of the assignment of the eligible recipients and
with Medicaid rate reductions of 20%, the operating revenues of OmniCare-MI and
the resulting management fees to the Company decreased in fiscal 1998. The
effect of the rate reductions on management fees from OmniCare-MI was an
approximately $3.0 million decrease.
The reduction of Medicaid rates and other factors were considered in
developing the OmniCare-MI corrective action plan, which is in the process of
implementation. The corrective action plan includes the reduction of medical
costs through renegotiation of hospital provider contracts, reduction of
pharmacy costs and a reduction in the management fee percentage paid to the
Company. In fiscal 1998, the Company derived 24% of its total revenues from its
management agreement with OmniCare-MI. Management believes that the continued
viability of OmniCare-MI is critical to the Company's future operations and
concluded that the unsecured loan, in the form of a surplus note, and reduction
in the management fee percentage were necessary actions to strengthen the
financial condition and support the continued viability of OmniCare-MI.
The Company reported a fiscal 1998 loss from continuing operations of $22.9
million, or $3.48 per share. Including discontinued operation, the loss totaled
$25.5 million, or $3.88 per share. The effect of the Company's restructuring
efforts, losses from and subsequent cessation of its Florida operation and other
asset impairment charges represented approximately $17 million of the loss from
continuing operations, or $2.56 per share.
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YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
Total revenues from continuing operations decreased $6.9 million (6.1%),
from $112.5 million in fiscal 1997 to $105.6 million in fiscal 1998.
Medical premium revenues were $78.6 million in fiscal 1998, an increase of
$8.2 million (12%) over medical premium revenues of $70.4 million in fiscal
1997. Medical premiums for OmniCare-TN increased $7.0 million (12%), from
$56.5 million in 1997 to $63.5 million in fiscal 1998. Of the increase, $1.1
million relates to the TennCare Bureau's 1998 annual settlement to managed
care organizations for high cost chronic conditions of their membership and new
medical technologies. The remaining OmniCare-TN increase of $5.9 million is
due to rate and enrollment increases. The per member per month ("PMPM") premium
rate - based on an average membership of 44,000 compared to 43,000 for the
prior year excluding the effects of the adverse selection and medical
technologies settlement - was $119 in fiscal 1998, compared to $110 in fiscal
1997, an increase of 8% or $4.7 million. The rate increase included changes in
the enrollment mix. A 2% increase in enrollment accounted for the remaining
$1.2 million increase.
Medical premiums for UltraMedix increased $1.2 million (9%), from $13.9
million in fiscal 1997 to $15.1 million in fiscal 1998.
Management fees were $25.0 million in fiscal 1998, a decrease of $15.0
million (38%) from fees of $40.0 million in fiscal 1997. The operating
revenues of OmniCare-MI decreased in fiscal 1998 due primarily to a net
decrease in premium and enrollment rates of approximately 10% and 2%,
respectively, which contributed to the decrease in management fees to the
Company of approximately $4.2 million. As noted in the overview, the State
Medicaid initiative in Michigan was the primary factor in the reduced premium
rates. Additionally, the reduction in the management fee percentage in June
1998 resulted in a decrease of management fees of $.4 million. The Company
recognized a decrease in management fee revenues from fiscal 1997 of $10.4
million, related to the PPC management agreement, which was terminated in May
1997.
Total expenses before income taxes from continuing operations totaled
$132.9 million in fiscal 1998, compared to $119.0 million in fiscal 1997, an
increase of $13.9 million (12%).
Medical service expenses were $70.3 million in fiscal 1998, an increase of
$12.5 million (22%) over medical service expenses of $57.8 million for fiscal
1997. Medical expenses for OmniCare-TN increased by $7.6 million (17%), from
$45.4 million for fiscal 1997 to $53.0 million in fiscal 1998. Medical
expenses for UltraMedix increased $4.9 million (40%), from $12.4 million in
fiscal 1997 to $17.3 million in fiscal 1998. The percentage of medical service
expenses to medical premium revenues, or the medical loss ratio ("MLR"), was 83%
and 80% for OmniCare-TN in
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28
fiscal 1998 and 1997, respectively, and 115% and 88% for UltraMedix in fiscal
1998 and 1997, respectively.
Marketing, general and administrative expenses ("MG&A") decreased $8.5
million (16%), from $52.8 million in fiscal 1997 to $44.3 million in fiscal
1998, due to the following: (i) termination of the PPC management agreement,
which resulted in a $9.1 million decrease; (ii) an increase in professional
fees of $4.6 million, related primarily to the financial restructuring program
of $3.0 million, expensing deferred HMO licensure-related cost in Louisiana and
Pennsylvania of $1.0 million and information system development and maintenance
of $.6 million; (iii) a $2.3 million loss related to the liquidation of the
assets and certain liabilities of the Florida operations; (iv) a $1.3 million
decrease in occupancy related cost, of which $.6 million related to the
renegotiation of the Company's corporate office lease space which reduced
accrued rent; and (v) decreases in salary costs of $3.0 million, promotional and
advertising activities of $.9 million, consumables of $.5 million and travel of
$.6 million.
Depreciation and amortization in fiscal 1998 was $9.7 million, compared to
$4.1 million in fiscal 1997, an increase of $5.6 million (137%). Of this
increase, $3.5 million was due to the write-off of the remaining goodwill
related to the Company's purchase of UltraMedix due to the liquidation order as
to UltraMedix in fiscal 1998. Also see Notes 4 and 7 to the audited
Consolidated Financial Statements. Additional increases included $.3 million
due to the change in estimate of the remaining useful life of the Company's
managed care software, and the write-off of certain property and equipment of
approximately $.8 million.
Bad debt expense increased $5.0 million (278%), from $1.8 million in
fiscal 1997 to $6.8 million in fiscal 1998. The increase related to impairment
losses established on certain of the Company's investments and surplus note
receivable.
As a result of the foregoing, the Company recognized a loss from
continuing operations, before income taxes, of $27.4 million for fiscal 1998,
compared to a loss from continuing operations, before income taxes, of $6.5
million for fiscal 1997, a $20.9 million change. The loss from continuing
operations, net of income taxes, was $22.9 million for fiscal 1998, compared to
a loss from continuing operations, net of income taxes, of $5.3 million for
fiscal 1997, a change of $17.6 million. The federal statutory tax rate for
continuing operations for both periods was approximately 34%. Goodwill
amortization related to equity investments, the write-off of capital
investments not deductible for tax purposes and state income taxes resulted in
an effective tax rate of approximately 16% for fiscal 1998 compared to 19% for
the prior fiscal year.
The loss from discontinued operation, net of income taxes, was $2.6 million
for fiscal 1998, compared to earnings of $1.9 million for 1997, a change of $4.5
million. This is due primarily to increased contract servicing costs and the
reduction in the net carrying value of net assets to the net realizable value of
$2.5 million.
27
29
The net loss for fiscal 1998 was $25.5 million, or $3.88 per share,
compared to a net loss of $3.4 million, or $0.52 per share, for fiscal 1997.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Total revenues from continuing operations increased $20.1 million (22%),
from $92.4 million in fiscal 1996 to $112.5 million in fiscal 1997.
Medical premium revenues were $70.4 million in fiscal 1997, an increase of
$35.9 million (104%) over medical premium revenues of $34.5 million in fiscal
1996. Medical premiums for OmniCare-TN increased $27.8 million (97%), from
$28.7 million in fiscal 1996 to $56.5 million in fiscal 1997. The net increase
is due to 12 months of activity in fiscal 1997 compared to 5 months in fiscal
1996, offset by a net decrease in member months. The enrollment for OmniCare-TN
was approximately 40,100 at June 30, 1997, compared to approximately 48,200 at
June 30, 1996, a decrease of 8,100 members or 17%. The State of Tennessee's
disenrollment of approximately 7,000 members in the quarter ending December
1996 was the primary reason for the decrease. This action was taken by the
State based upon the return of undeliverable questionnaires mailed to members,
which the State requested for continued participation.
Medical premiums for UltraMedix increased $8.1 million (140%), from $5.8
million in fiscal 1996 to $13.9 million in fiscal 1997. The net increase is due
to 12 months of activity in fiscal 1997 compared to 5 months in fiscal 1996.
UltraMedix's enrollment at June 30, 1997 was approximately 18,100, an increase
of 7,000 (63%) from the June 30, 1996 enrollment of approximately 11,100
members. UltraMedix made significant enrollment gains in the commercial market
since approval of its HMO license in October 1995. The increase in the
commercial market was due in part to the State of Florida's unsuccessful
initiative to mandate the enrollment of Medicaid eligibles into managed care
organizations. UltraMedix was selected to participate in this program and the
contract award would have capped UltraMedix's Medicaid enrollment, including
existing members, at approximately 48,000 during the contract period. Because
of legal challenges from unsuccessful bidders to the State's request for
proposal, the initiative was halted indefinitely. To minimize the uncertainty
related to rate reductions contemplated by the initiative, UltraMedix retargeted
its marketing efforts to expand its commercial business. This contributed to
the change in UltraMedix's enrollment mix from 98%:2% (Medicaid-to-commercial)
as of June 1996, to 53%:47% as of June 1997. As of September 1997, the mix was
46%:54%.
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30
The average PMPM premium rate in fiscal 1997 for OmniCare-TN was $110 and
for UltraMedix, $98.
Management fees were $40.0 million in fiscal 1997, a decrease of $15.9
million (28%) from fees of $55.9 million in fiscal 1996. $8.5 million of the
decrease was due to the purchase of majority ownership interests in UltraMedix
and OmniCare-TN in January 1996, resulting in the consolidation of these
entities, including the elimination of inter-company management fees. $8.7
million of the decrease was due to an agreement reached in June 1996 between
the Company and OmniCare-TN, pursuant to which OmniCare-TN agreed to reimburse
the Company approximately $8.7 million for start-up costs and other expenses
incurred for the period January 1994 through September 1995.
Operating revenues of OmniCare-MI decreased in fiscal 1997 due primarily
to a net decrease in enrollment rates of approximately 2%, which resulted in
decreased management fees to the Company of approximately $1.4 million. These
decreases were offset by a $2.0 million increase in management fees from PPC,
attributable primarily to increased PPC enrollment of approximately 52%, offset
by a decrease in premium rates of approximately 15% and 11 months of management
fees in fiscal 1997 compared to 12 months in fiscal 1996.
The Company's management agreement with PPC was terminated pursuant to
binding arbitration, effective May 31, 1997, based in part on a dispute between
the parties with respect to the payment of non-emergent transportation costs
for enrollees as a marketing expense to be incurred under the management
agreement.
OmniCare-MI was notified in May 1997 that it had been selected to
participate in the State of Michigan's initiative to mandate Medicaid
enrollment into managed care organizations. Similar to the initiative in
Florida, the State's initiative was legally challenged by unsuccessful bidders
responding to the State's request for proposal. Because of these legal
challenges, the State did not assign the Medicaid eligibles to plans that were
awarded contracts in the bid process, but did, however, institute the rate
reduction component of this new program effective July 1997.
Total expenses before income taxes from continuing operations totaled
$119.0 million in 1997, compared to $95.8 million in fiscal 1996, an increase of
$23.2 million or 24%.
Of the total medical service expenses of $57.8 million in fiscal 1997,
$45.4 million relates to OmniCare-TN and $12.4 million to UltraMedix, an
increase of $27.9 million (93%) over medical service expenses of $29.9 million
in fiscal 1996. The MLR was 80% for OmniCare-TN and 88% for UltraMedix in
fiscal 1997. The OmniCare-TN MLR for fiscal 1997 was positively affected by the
State of Tennessee's $2.4 million settlement to adjust the amount of claims
saving paid and/or
29
31
accrued to the State of Tennessee prior to OmniCare-TN obtaining its TennCare
HMO license and the recognition of duplicate claims paid to providers.
Marketing, general and administrative expenses (MG&A) increased $2.7
million (5%), from $50.1 million in fiscal 1996 to $52.8 million in fiscal
1997, due to the following: (i) MG&A for the Company's operation of PPC
increased $1.0 million, but PPC-related MG&A as a percentage of management fee
revenues decreased 9% from 95% in fiscal 1996 to 86% in fiscal 1997, due
primarily to the mandated Medicaid initiative that increased enrollment without
a corresponding marketing effort; (ii) MG&A for corporate headquarters,
including the cost to operate OmniCare-MI, increased $1.9 million, and MG&A as
a percentage of management fee revenues increased 9%, from 93% in 1996 to 102%
in fiscal 1997, due to several factors, including: (a) a $1.4 million decrease
in management fees from OmniCare-MI; (b) an average 5% salary rate increase,
and (c) a $.3 million adjustment to increase rent expense in fiscal 1997
calculated as the difference between the lease obligations of the Company and
the estimated rental income from sub-tenants for the remaining life of the
Company's lease in Pennsylvania; and (iii) a net decrease of approximately
$.2 million related to the Company's Florida and Tennessee operations.
Equity in net losses of unconsolidated affiliates decreased approximately
$.7 million, from $.7 million in fiscal 1996 to zero in fiscal 1997, due to the
Company's acquisition of a majority interest in OmniCare-TN and UltraMedix in
January 1996.
Depreciation and amortization in fiscal 1997 was $4.1 million, compared to
$3.4 million in fiscal 1996, an increase of $.7 million (21%). The increase
was due primarily to the amortization of goodwill related to acquisitions and
computer software.
Interest expense increased approximately $.3 million (27%), from $1.1
million in fiscal 1996 to $1.4 million in fiscal 1997, due to increased
borrowings against the line of credit.
Of the bad debt expense of $1.8 million in fiscal 1997, $1.1 million
relates to a valuation reserve established to estimate the net recovery of $1.2
million in refundable advances made by OmniCare-TN to a third party
administrator. The third party administrator has denied the obligation and, as
a result, the Company is pursuing legal action to collect the receivable. The
balance of the fiscal 1997 bad debt expense is due to an additional write-down
of approximately $.7 million recorded to reduce the Company's $4.0 million
investment in Advica. Prior year Advica reserves totaled $1.1 million. As the
investment was capital in nature, no tax credits have been taken against the
cumulative reserve of $1.8 million.
The contract settlement expense recorded in December 1995 of $9.7 million
represented a one-time adjustment to management fee revenues and its effect on
other related accounts based on the provisions of the revised management
agreement between UA-TN and OmniCare-TN, as approved by the State of Tennessee
in November 1995,
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32
retroactive to January 1994. Despite the fact that OmniCare-TN agreed to
reimburse the Company approximately $8.7 million in June 1996 for the start-up
and other costs incurred by the Company between January 1994 and September
1995, the transaction was not sufficiently documented to allow recognition of
the same on the Company's financial statements in December 1995.
For fiscal 1997, the estimated Company expense related to the then
proposed shareholder class action lawsuit settlement, net of insurance
coverage, was $1.15 million. The proposed settlement was subject to federal
court approval. See also "Legal Proceedings".
As a result of the foregoing, the Company recognized a loss from continuing
operations before income taxes of $6.5 million in fiscal 1997, compared to a
loss from continuing operations before income taxes of $3.4 million in fiscal
1996, a $3.1 million change. The federal statutory tax rate for continuing
operations for fiscal 1997 and fiscal 1996 was approximately 34%. Goodwill
amortization related to equity investments, equity losses from unconsolidated
affliates, losses related to capital investments not deductible for tax
purposes and state income taxes resulted in an effective tax rate of
approximately 19% in fiscal 1997. These differences resulted in tax expense on
the fiscal 1996 loss. The net loss from continuing operations in fiscal 1997
was $5.3 million, compared to a net loss from continuing operations of $3.7
million in fiscal 1996, a change of $1.6 million.
Earnings from discontinued operation, net of income taxes, were $1.8
million in fiscal 1997, compared to $.9 million in fiscal 1996, an increase of
$.9 million. This change is due primarily to a contract entered into with the
State of Maryland's Injured Workers' Insurance Fund in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had (i) cash and cash equivalents and
short-term marketable securities of $14.7 million, compared to $17.4 million at
June 30, 1997; (ii) working capital of negative $14.1 million, compared to
negative $13.0 million at June 30, 1997; and (iii) a current assets-to-current
liabilities ratio of .64-to-1, compared to .67-to-1 at June 30, 1997. The
principal sources of funds for the Company during fiscal 1998 were $1.2 million
provided from net operating activities, net sales of marketable securities of
$9.9 million, debt borrowings of $.1 million and proceeds from the issuance of
common stock of $.2 million--offset by furniture and equipment additions of $.8
million, investing cash used in discontinued operation of $.8 million, $1.6
million to repay long-term debt and $4.6 million to fund an unsecured loan
evidenced by a surplus note issued by OmniCare-MI.
In previous fiscal years, to satisfy applicable statutory requirements,
the Company provided $1.0 million in letters of credit on behalf of, and a $1.0
million capital contribution to, OmniCare-LA, and made a $2.1 million capital
contribution to
31
33
\
PhilCare. The foregoing funds were provided by the Company from its line of
credit arrangement. Due to the cessation of its Louisiana operations, the
Company withdrew the $1.0 million capital contribution and is in the process of
cancelling its letter of credit commitments. The Company's Board of Directors
has determined to withdraw from all of its involvement in Pennsylvania and to
pursue recouping its investment in PhilCare.
On September 8, 1998, the Company sold the stock of CHF for $17.75
million, comprised of $2 million in cash, a secured note for $13.25 million and
an unsecured note for $2.5 million. The secured note is payable to the Company
in four monthly installments of $.5 million each on the last day of September
through December 1998 with the balance due in January 1999, with options to
extend the final payment to March 1999, plus interest at the prime rate on
short-term unsecured commercial borrowings. The unsecured note is payable to
the Company in two annual installments of $.25 million with the balance due
August 31, 2001, plus interest at 6% per annum. The security for the secured
note includes a pledge of the stock of CHF and a limited personal guarantee of
Louis J. Nicholas, a principal of the buyer. The proceeds from the sale of CHF
have been and will be used to reduce debt and provide security for the
Company's bank indebtedness.
On March 12, 1998, effective as of February 1, 1998, the Company entered
into an amended loan agreement and promissory note for a $22.9 million line of
credit facility with its current bank lender. On September 1, 1998, the
Company and the bank amended the loan agreement and promissory note to decrease
the line of credit amount to $20.94 million and modify other terms. The
purposes of the line of credit facility as of February 1, 1998 were to (i)
renew and increase the existing line of credit to pay off outstanding term
loans with the same bank and (ii) guarantee the payment of an existing $.5
million letter of credit. The agreement requires the permanent reduction of
the outstanding balance and the line of credit facility (a) at October 15, 1998
to $20.44 million, (b) at November 15, 1998 to $19.94 million, (c) at December
15, 1998 to $19.44 million, (d) at January 15, 1999 to $18.44 million, (e) at
February 15, 1999 to $17.94 million and (f) at April 15, 1999 to the lesser of
the then outstanding principal balance or $8 million, and the cancellation of
the $.5 million letter of credit by January 1, 1999. The maturity date of the
line of credit facility is October 1, 1999.
The line of credit facility is secured by all of the Company's rights,
title and interest in the secured and unsecured promissory notes of the
purchaser of the stock of CHF representing part of the purchase price for such
stock (which purchaser has covenanted with the bank to make all payments on
such notes directly to the bank for credit against the Company's indebtedness
to the bank) and in the pledged CHF stock and other documents related to such
purchase. Financial covenants for minimum net worth, debt service coverage
ratio, and maximum debt to worth ratio will be established prior to March 1,
1999.
32
34
The Company is unable at this time to assess the capital requirements, if
any, related to the final disposition of UltraMedix.
The Company's restructuring efforts significantly contributed to the $22.9
million loss from continuing operations in fiscal 1998. However, after
adjusting for non-cash activities and changes in assets and liabilities, the
Company generated positive cash flows from operations in fiscal 1998. The
Company's ability to generate adequate amounts of cash to meet its future cash
needs will depend on a number of factors, including the stabilization of
OmniCare-MI, continuation of its restructuring efforts, achieving increased
operational efficiencies at its Tennessee operation and the collection of the
CHF sale proceeds.
Management believes that the negative working capital, excluding the $6.3
million in medical claims liability established for UltraMedix and including
long term debt at June 30, 1998 of $15.8 million, can be funded from the CHF
sale proceeds and operations in fiscal 1999. Management further expects that
the OmniCare-MI corrective action plan, which is in the process of
implementation, will stabilize that Plan and eliminate the need for future cash
infusions from the Company. Omnicare-MI has successfully renegotiated certain
major hospital provider contracts,including its most significant hospital
contract, which was one of the major components of the corrective action plan,
the effects of which will reduce medical costs.
RECENTLY ENACTED PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), was issued in June, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. This Statement requires that all items that are required as
components of comprehensive income be displayed in a financial statement.
Management does not expect the adoption of SFAS 130 will have a significant
impact on the financial statement disclosures of the Company.
ITEM 8. FINANCIAL STATEMENTS
Presented beginning at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None that has not been previously reported.
33
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with
respect to its Annual Meeting of Shareholders to be held on November 12, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with
respect to its Annual Meeting of Shareholders to be held on November 12, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with
respect to its Annual Meeting of Shareholders to be held on November 12, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to United American Healthcare Corporation
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with
respect to its Annual Meeting of Shareholders to be held on November 12, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) & (2) The financial statements listed in the accompanying Index to
Consolidated Financial Statements at page F-1 are filed as part of this Form
10-K report.
(3) The Exhibit Index lists the exhibits required by Item 601 of
Regulation S-K to be filed as a part of this Form 10-K report. The Exhibit
Index identifies those documents which are exhibits filed herewith or
incorporated by reference to (i) the Company's Form S-1 Registration Statement
under the Securities Act of 1933, as amended, declared effective on April 23,
1991 (Commission File No. 33-36760), (ii) the Company's Form 10-K for its
fiscal years ended June 30, 1993, 1994, 1995, 1996 and 1997; (iii) the
Company's Form 10-Q for its quarters ended March 31, 1996;
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36
September 30, 1996; March 31, 1997 and March 31, 1998 (iv) the Company's Form
8-Ks filed with the Commission August 8, 1991; April 23, 1993; May 24, 1993;
January 29, 1996; April 19, 1996; October 30, 1997 and January 12, 1998; or (v)
the Company's Form 8-K/A filed with the Commission July 21, 1993 and November
12, 1997. The Exhibit Index is hereby incorporated by reference into this Item
14.
(b) No reports on Form 8-K were filed with respect to the last
three months of fiscal 1998.
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37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on September 28, 1998.
UNITED AMERICAN HEALTHCARE
CORPORATION
(Registrant)
By: /s/GREGORY H. MOSES, JR.
-------------------------------------
Gregory H. Moses, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on September 28, 1998.
SIGNATURE CAPACITY
--------- --------
/s/GREGORY H. MOSES, JR. President, CEO and Director
- ------------------------
Gregory H. Moses, Jr. (Principal Executive Officer)
/s/ANITA C.R. GORHAM Secretary and Director
- --------------------
Anita C.R. Gorham
/s/PAUL G. SAMUELS Treasurer
- ------------------
Paul G. Samuels (Principal Financial Officer and
Principal Accounting Officer)
/s/WILLIAM C. BROOKS Director
- --------------------
William C. Brooks
/s/JULIUS V. COMBS, M.D. Director
- ------------------------
Julius V. Combs, M.D.
/s/WILLIAM B. FITZGERALD Director
- ------------------------
William B. Fitzgerald
/s/DARREL W. FRANCIS Director
- --------------------
Darrel W. Francis
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38
/s/HARCOURT G. HARRIS, M.D. Director
- ---------------------------
Harcourt G. Harris, M.D.
/s/PEARL M. HOLFORTY Director
- --------------------
Pearl M. Holforty
/s/RONALD M. HORWITZ, Ph.D. Director
- ---------------------------
Ronald M. Horwitz, Ph.D.
/s/EMMETT S. MOTEN, JR. Director
- -----------------------
Emmett S. Moten, Jr.
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39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report................................................F-2
Report of Independent Certified Public Accountants..........................F-3
Consolidated Balance Sheets as of June 30, 1998 and 1997....................F-4
Consolidated Statements of Operations for each of the
years in the three year period ended June 30, 1998.......................F-5
Consolidated Statements of Shareholders' Equity for each
of the years in the three year period ended June 30, 1998................F-6
Consolidated Statements of Cash Flows for each of the
years in the three year period ended June 30, 1998.......................F-7
Notes to Consolidated Financial Statements..................................F-9
F-1
40
INDEPENDENT AUDITORS' REPORT
Board of Directors
United American Healthcare Corporation:
We have audited the accompanying consolidated balance sheet of United
American Healthcare Corporation and Subsidiaries as of June 30, 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of United American Healthcare Corporation and Subsidiaries as of June
30, 1998, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Detroit, Michigan
September 28, 1998
F-2
41
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
UNITED AMERICAN HEALTHCARE CORPORATION
We have audited the accompanying consolidated balance sheet of United American
Healthcare Corporation (a Michigan corporation) and Subsidiaries as of June 30,
1997 and the related consolidated statements of operations, shareholders' equity
and cash flows for the years ended June 30, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of OmniCare Health Plan,
Inc. of Tennessee, a 75 percent owned subsidiary, which statements reflect total
assets of $12,751,000 as of June 30, 1997 and total revenues of $57,384,000 and
$29,247,000 for the periods ended June 30, 1997 and 1996, respectively. These
statements were audited by other independent auditors whose reports thereon have
been furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for OmniCare Health Plan, Inc. of Tennessee, is based
solely on the reports of the other independent auditors.
We conducted our 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 that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the aforementioned reports of other
independent auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
United American Healthcare Corporation and Subsidiaries as of June 30, 1997, and
the results of their operations and their cash flows for each of the two years
in the period ended June 30, 1997, in conformity with generally accepted
accounting principles.
/s/ GRANT THORNTON LLP
Southfield, Michigan
September 30, 1997
F-3
42
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
-------------------------
1998 1997
-------------------------
ASSETS
--------------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents $13,259 $ 9,582
Marketable securities 1,431 7,860
Premium receivables 2,723 5,275
Other receivables 1,816 2,441
Refundable federal income taxes 5,453 115
Prepaid expenses and other 281 587
Deferred income taxes 594 746
-------------------------
Total current assets 25,557 26,606
Property and equipment, net 6,098 10,100
Intangible assets, net 5,629 10,557
Investments in and advances to affiliates, net - 4,400
Surplus note receivable, net 2,300 -
Marketable securities 1,396 3,937
Deferred income taxes 417 2,376
Other assets 584 1,940
Net assets of discontinued operation 16,703 19,746
-------------------------
$58,684 $79,662
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------
Current liabilities
Current portion of long-term debt $14,444 $21,851
Medical claims payable 20,004 11,632
Accounts payable and accrued expenses 3,549 3,642
Accrued compensation and related benefits 1,240 2,098
Other current liabilities 420 380
-------------------------
Total current liabilities 39,657 39,603
Long-term debt, less current portion 8,000 2,017
Accrued rent 935 1,599
Deferred income taxes 1,011 2,037
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued - -
Common stock, no par, 15,000,000 shares authorized; 6,578,356
and 6,535,941 issued and outstanding in 1998 and 1997 10,715 10,498
Retained earnings (deficit) (1,500) 23,996
Unrealized net loss on marketable securities (134) (88)
-------------------------
9,081 34,406
-------------------------
$58,684 $79,662
=========================
See accompanying notes to the consolidated financial statements.
F-4
43
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
----------------------------------------------
1998 1997 1996
----------------------------------------------
REVENUES
Medical premiums $78,582 $70,430 $34,523
Management fees from related parties 24,986 40,033 55,906
Interest and other income 2,020 2,086 1,950
----------------------------------------------
Total revenues 105,588 112,549 92,379
EXPENSES
Medical services 70,309 57,832 29,901
Marketing, general and administrative 44,336 52,755 50,077
Depreciation and amortization 9,679 4,069 3,370
Equity in net losses of unconsolidated affiliates - - 652
Interest expense 1,796 1,360 1,087
Bad debt expense 6,825 1,844 980
Contract settlement - - 9,685
Shareholder lawsuit settlement - 1,150 -
------------------------------- --------------
Total expenses 132,945 119,010 95,752
----------------------------------------------
Loss from continuing operations before income taxes (27,357) (6,461) (3,373)
Income tax expense (benefit) (4,442) (1,201) 284
----------------------------------------------
Loss from continuing operations (22,915) (5,260) (3,657)
(Loss) earnings from discontinued operation, net of income taxes (2,581) 1,845 909
----------------------------------------------
NET LOSS $(25,496) $(3,415) $(2,748)
==============================================
NET LOSS PER COMMON SHARE (BASIC AND DILUTED)
LOSS PER COMMON SHARE FROM CONTINUING OPERATION $(3.48) $(0.80) $(0.56)
==============================================
NET LOSS PER COMMON SHARE $(3.88) $(0.52) $(0.42)
==============================================
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC AND DILUTED) 6,578 6,553 6,561
==============================================
See accompanying notes to the consolidated financial statements.
F-5
44
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
UNREALIZED
NUMBER NET GAIN
OF RETAINED (LOSS) ON TOTAL
COMMON COMMON EARNINGS MARKETABLE SHAREHOLDERS'
SHARES STOCK (DEFICIT) SECURITIES EQUITY
--------------------------------------------------------------------------------------
BALANCES AT JUNE 30, 1995 6,561 $10,625 $30,159 $(276) $40,508
Net loss - - (2,748) - (2,748)
Unrealized net gain
on marketable securities - - - 62 62
--------------------------------------------------------------------------------------
BALANCES AT JUNE 30, 1996 6,561 10,625 27,411 (214) 37,822
Net loss - - (3,415) - (3,415)
Unrealized net gain
on marketable securities - - - 126 126
Purchase of common stock (25) (127) - - (127)
--------------------------------------------------------------------------------------
BALANCES AT JUNE 30, 1997 6,536 10,498 23,996 (88) 34,406
Net loss - - (25,496) - (25,496)
Unrealized net loss
on marketable securities - - - (46) (46)
Issuance of common stock 42 217 - - 217
--------------------------------------------------------------------------------------
BALANCES AT JUNE 30, 1998 6,578 $10,715 $(1,500) $(134) $ 9,081
======================================================================================
See accompanying notes to the consolidated financial statements.
F-6
45
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
--------------------------------------------
1998 1997 1996
--------------------------------------------
OPERATING ACTIVITIES
Net loss $(25,496) $(3,415) $(2,748)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Loss (earnings)from discontinued operation, net 2,581 (1,845) (909)
Bad debt expense 6,825 1,844 980
Loss (gain) on disposal of assets 305 (11) (23)
Depreciation and amortization 9,679 4,069 3,370
Accrued rent (664) 388 155
Contract settlement - - 9,685
Deferred income taxes (credit) 1,085 (1,604) 656
Equity in net losses of unconsolidated affiliates - - 652
Changes in assets and liabilities net of effects from acquisitions
in 1997 and 1996
Decrease (increase) in premium receivables 2,552 (1,531) 716
Decrease (increase) in other receivables 625 (342) (469)
(Increase) decrease in refundable federal income taxes (5,338) 1,407 649
Decrease (increase) in prepaid expenses and other 306 37 (123)
Decrease in other assets 1,356 108 -
(Increase) decrease in intangible assets (241) 8 -
Increase (decrease) in medical claims payable 8,372 (16,943) (2,625)
Increase (decrease) in accounts payable and accrued expenses 78 3,563 (203)
(Decrease) increase in accrued compensation and related benefits (858) 157 484
Increase (decrease) in other current liabilities 40 380 (254)
--------------------------------------------
Net cash provided by (used in) operating activities 1,207 (13,730) 9,993
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired - - 10,664
Purchase of marketable securities (1,210) (3,551) (81)
Proceeds from the sale and maturity of marketable securities 11,104 7,063 4,183
Purchase of property and equipment (820) (3,276) (4,839)
Proceeds from the sale of property and equipment - 400 -
Investments in and advances to affiliates - 108 (8,267)
Increase in other assets - - (336)
Investment in surplus note receivable (4,600) - -
Increase in long term note receivable - - (1,764)
Cash used in discontinued operation (797) (3,198) (3,252)
--------------------------------------------
Net cash provided by (used in) investing activities 3,677 (2,454) (3,692)
FINANCING ACTIVITIES
Borrowing under line of credit agreement 142 5,117 13,588
Payments made on long-term debt (1,566) (2,903) (2,408)
Issuance (repurchase) of common stock 217 (127) -
--------------------------------------------
Net cash (used in) provided by financing activities (1,207) 2,087 11,180
--------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,677 (14,097) 17,481
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,582 23,679 6,198
--------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $13,259 $9,582 $23,679
============================================
F-7
46
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
YEAR ENDED JUNE 30,
--------------------------------------
1998 1997 1996
--------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $1,751 $ 1,673 $ 989
======================================
Income taxes paid $ 61 $ 1,150 $ 815
======================================
Supplemental schedule of non-cash investing activities for fiscal 1997
represents the acquisition of certain contract rights and assets and assumed
certain liabilities of Spectera, Inc., and is included with net cash flows used
in investing activities of discontinued operation; and for 1996 represents the
acquisition of majority interests in OmniCare Health Plan, Inc. of Tennessee and
UltraMedix Healthcare Systems, Inc. as follows:
Fair value of assets acquired $ - $(1,765) $(33,174)
Cash acquired - - 20,327
Liabilities assumed - 750 23,511
--------------------------------------
$ - $(1,015) $ 10,664
======================================
See accompanying notes to the consolidated financial statements.
F-8
47
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
- ----------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
- ----------------------------------
BUSINESS. United American Healthcare Corporation, together with its
wholly and majority owned subsidiaries (collectively, the Company) is
a multi-state provider of health care services, including consulting
services to managed care organizations and the provision of health
care services in Tennessee and, through February 26, 1998, in Florida.
The Company operates in a single segment.
- -----------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------
a. PRINCIPLES OF CONSOLIDATION. The consolidated financial
statements include the accounts of United American Healthcare
Corporation, and its wholly owned subsidiaries: U.A. Health Care
Corporation (UA-OH), United American of Tennessee, Inc. and
Subsidiary (UA-TN), United American of Louisiana, Inc. and Subsidiary
(UA-LA), United American of Pennsylvania, Inc. (UA-PA), United
American of Georgia, Inc. and Subsidiary (UA-GA), United American of
Illinois, Inc. and Subsidiary (UA-ILL), ChoiceOne Preferred Provider
Plan, Inc. (ChoiceOne), and Corporate Healthcare Financing, Inc. and
Subsidiaries (CHF),and its 80% owned subsidiary United American of
Florida, Inc. and Subsidiary (UA-FL). OmniCare Health Plan
(OmniCare-TN) is a 75% owned subsidiary of UA-TN.
The Company ceased activities related to UA-FL, UA-LA and UA-PA in
fiscal 1998 and UA-OH, UA-GA and UA-ILL in fiscal 1997. ChoiceOne was
sold in December 1997. All significant intercompany transactions and
balances have been eliminated in consolidation. Non-majority
investments in affiliates in which management has the ability to
exercise significant influence are recorded on the equity method. As
discussed in Note 4, CHF is presented as a discontinued operation and
was sold subsequent to year end.
b. USE OF ESTIMATES. The accompanying consolidated financial statements
have been prepared in conformity with generally accepted accounting
principles which requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Actual results could differ
from those estimates as more information becomes available and any
such difference could be significant. The most significant estimates
that are susceptible to change in the near term relate to the
determination of medical claims payable.
c. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
instruments purchased with original maturities of three months or
less to be cash equivalents.
F-9
48
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
d. FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and
cash equivalents, receivables and marketable securities approximate
fair values of these instruments at June 30, 1998 and 1997.
e. MARKETABLE SECURITIES. Investments in marketable securities are
primarily comprised of U.S. Treasury notes, debt issuances of
municipalities and foreign countries and common stocks all carried at
fair value, based upon published quotations of the underlying
securities and six month certificates of deposit carried at cost plus
interest earned, which approximates fair value. Marketable securities
placed in escrow to meet statutory funding requirements, although
considered available for sale, are not reasonably expected to be used
in the normal operating cycle of the Company and are classified as
noncurrent. All other securities available for sale are classified as
current.
Premiums and discounts are amortized or accreted, respectively, over
the life of the related debt security as adjustment to yield using
the yield-to-maturity method. Interest and dividend income is
recognized when earned. Realized gains and losses on investments in
marketable securities are included in investment income and are
derived using the specific identification method for determining the
cost of the securities sold; unrealized gains and losses on
marketable securities are reported as a separate component of
shareholders' equity, net of the provision for deferred federal
income taxes.
f. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Expenditures and improvements, which add significantly to the
productive capacity or extend the useful life of an asset are
capitalized. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related
assets. Estimated useful lives of the major classes of property and
equipment are as follows: furniture and fixtures - 5 to 13 years;
equipment - 5 years and computer software - 2 to 5 years. Leasehold
improvements are included in furniture and fixtures and are amortized
on a straight-line basis over the shorter of the lease term or the
estimated useful life, which ranges from 5 to 13 years. The Company
uses accelerated methods for income tax purposes. The Company has
internally developed customized software, and has capitalized the
related costs.
g. INTANGIBLE ASSETS. Intangible assets resulting from business
acquisitions are carried at cost and are currently being amortized on
a straight-line basis over their estimated useful lives of 10 years.
h. LONG-LIVED ASSETS. Following the criteria set forth in Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of " (SFAS 121), long-lived assets and certain identifiable
intangibles are reviewed by the Company for events or changes in
circumstances, which would indicate that the carrying value may
F-10
49
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
not be recoverable. In making this determination, the Company
considers a number of factors, including estimated future
undiscounted cash flows associated with long-lived assets, current
and historical operating and cash flow results and other economic
factors. When any such impairment exists the related assets are
written down to fair value. Based upon its most recent analysis, the
Company believes that long-lived assets are recorded at their net
recoverable values (see Notes 4, 8 and 9).
i. MEDICAL CLAIMS PAYABLE. The Company provides for medical claims
incurred but not reported and the cost of adjudicating claims based
primarily on past experience, together with current factors, using
accepted actuarial methods. Although considerable variablity is
inherent in such estimates, management believes that these reserves
are adequate.
j. REVENUE RECOGNITION. Medical premium revenues are recognized in the
month in which members are entitled to receive health care services.
Medical premiums collected in advance are recorded as deferred
revenues. Management fee revenues are recognized in the period the
related services are performed.
k. MEDICAL SERVICES EXPENSE RECOGNITION. The Company contracts with
various health care providers for the provision of certain medical
services to its members and generally compensates those providers on
a capitated and fee for service basis. The estimates for medical
claims payable are regularly reviewed and adjusted as necessary,
with such adjustments generally reflected in current operations.
l. REINSURANCE. Reinsurance premiums are reported as medical services
expense, while the related reinsurance recoveries are reported as
deductions from medical services expense.
m. INCOME TAXES. Deferred income tax assets and liabilities are
recognized for the expected future tax consequences attributable to
differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or settled.
The effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in income in the period that involves the
deferred tax assets to the amount expected to be realized. Valuation
allowances are established when necessary to reduce the deferred tax
assets to the amount expected to be realized.
F-11
50
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
The deferred income tax provision or benefit generally reflects the
net change in deferred income tax assets and liabilities during the
year. The current income tax provision reflects the tax consequences
of revenues and expenses currently taxable or deductible for the
period.
n. STOCK BASED COMPENSATION. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). The Company
records compensation expense for stock options only if the market
price of the Company's stock, on the date of grant, exceeds the
amount an individual must pay to acquire the stock, if dilutive.
o. LOSS PER SHARE. The Company has adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). In
accordance with SFAS 128, basic net loss per share excluding dilution
has been computed by dividing net loss by the weighted-average number
of common shares outstanding for the period. Diluted loss per share
is computed the same as basic except that the denominator also
includes shares issuable upon assumed exercise of stock options.
For the fiscal year ended June 30, 1998, the Company did not have any
outstanding securities having a dilutive effect on loss per share. If
the Company were to recognize net earnings in the future, stock
options for 100,000 common shares issued and outstanding could have a
potentially dilutive effect on earnings per share.
p. RECENT ACCOUNTING PRONOUNCEMENTS. Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), was
issued in June, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components. This
Statement requires that all items that are required as components of
comprehensive income be displayed in a financial statement.
Management does not expect the adoption of SFAS 130 to have a
significant impact on the financial statement disclosures of the
Company.
q. RECLASSIFICATIONS. Certain reclassifications have been made to prior
years' financial statements' amounts to conform to the current year
classifications.
- --------------------------------------------
NOTE 3 - LIQUIDITY & RESTRUCTURING PROGRAM
- --------------------------------------------
During fiscal 1998, the Company experienced negative working
capital, a reduction in net worth and significant losses from
operations, primarily related to a number of non-recurring items
including: $12.2 million related to the losses from and subsequent
cessation of its Florida operations (see Note 4); and the following
charges related to the retructuring program: impairment losses on
certain investments totaling $4.4 million; professional fees of $3.0
million; write off of certain non-operating assets totaling $.8
million; and $1.0 million related to the cessation of its Louisiana and
Pennsylvania operations. Additionally, an unsecured loan, evidenced by
a surplus note, totaling $4.6 million was made to the Company's managed
plan client, Michigan Health Maintenance Organization Plans, Inc.,
d/b/a OmniCare Health Plan, Inc. (OmniCare-MI) (see Note 9).
On January 12, 1998 the Board of Directors of the Company approved
a restructuring plan designed to improve operating efficiencies,
eliminate cash losses and position the Company for profitable
operations. The restructuring program encompassed Company plans to
discontinue some expansion projects, reduce non-core spending
activities, reduce corporate overhead, renegotiate its bank credit
facility and evaluate the Company's investments in affiliates and other
assets. The Company recognized restructuring charges of approximately
$9 million in fiscal 1998.
F-12
51
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
The Company has been engaged in continuous efforts to implement
its restructuring plan and effectuate significant internal changes
which together include: the sale of CHF and use of proceeds thereon to
reduce outstanding debt to $8 million by April 15, 1999 (see Notes 4
and 10); reduction of management fees charged to OmniCare-MI and
OmniCare-TN which is expected to reduce the need for additional cash
outlays to meet minimum statutory capital requirements; implementing
significant cost savings measures to continue to reduce overhead,
including advertising and promotion, divesting non-operating ancillary
components of the organization which require disproportionate
utilization of management and operational resources; renegotiated
leases; and significant restructuring of key management positions.
Additional activities, which are in process and are important for
the overall success of the restructuring program, include management's
efforts to achieve further cost reductions and maintain the Company's
net revenues. The primary source of future net revenues is expected to
include those from healthcare plans owned or operated by the Company.
If the projected net revenues from these health care plans are not
maintained, without mitigation by further cost reductions, it would
represent a significant adverse development for the Company and its
restructuring plan.
The Company's ability to generate adequate amounts of cash to meet
its future cash needs will depend on a number of factors, including the
stabilization of OmniCare-MI, continuation of its restructuring
efforts, achieving increased operational efficiencies at its Tennessee
operations and the collection of the CHF sale proceeds (see Notes 4 and
10).
- ----------------------------------------
NOTE 4 - ACQUISITIONS AND DISPOSITIONS
- ----------------------------------------
CORPORATE HEALTHCARE FINANCING, INC. (CHF)
CHF provides administrative services to self-funded employers
and employee welfare plans, including health benefit plan design and
development of workers' compensation and unemployment benefit programs.
On May 7, 1993, CHF 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
F-13
52
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
time of the acquisition was approximately $9.6 million and is included
with net assets of discontinued operation in the accompanying balance
sheets. Through June 30, 1998 and 1997, the purchase price was
increased as defined in the asset purchase agreement by the maximum
amount of $6.6 million.
Effective December 31, 1996, CHF acquired certain contract
rights and assets and assumed certain liabilities of Spectera, Inc. for
approximately $1.8 million in cash and debt. The excess purchase price
over the fair market value of the net assets acquired of approximately
$1.0 million has been charged to goodwill, and is included with net
assets of discontinued operation in the accompanying balance sheet.
On August 6, 1998, the Company's Board of Directors approved
the stock sale of CHF to an entity related to the Company through
certain common shareholders, including a former officer and director of
the Company. On September 8, 1998, such sale occurred for $17.75
million, comprised of $2 million in cash, a secured note for $13.25
million and an unsecured note for $2.5 million. The secured note is
payable to the Company in four monthly installments of $.5 million each
on the last day of September through December 1998 with the balance due
in January 1999, with options to extend the final payment to March
1999, plus interest at the prime rate on short-term unsecured
commercial borrowings. The unsecured note is payable to the Company in
two annual installments of $.25 million with the balance due August 31,
2001, plus interest at 6% per annum. As discussed in Note 10, the
Company's line of credit facility required (1) approval by the bank of
the sale of CHF and (2) use of proceeds to reduce the indebtedness to
the bank. In anticipation of this sale, the results of CHF and its
subsidiaries are reported as a discontinued operation in the
consolidated financial statements for all periods presented.
The assets and liabilities of CHF were written down by $2.5
million, which has been reflected in the loss from discontinued
operation in fiscal 1998, to reflect a reduction in the net carrying
value to the net realizable value of CHF. The net carrying value of the
assets and liabilities of CHF have been recorded in the accompanying
consolidated balance sheets as net assets of discontinued operation,
except for cash and cash equivalents of $1 million and $.8 million,
which are included with cash and cash equivalents in the accompanying
consolidated balance sheets as of June 30, 1998 and 1997, respectively.
(Loss) earnings from discontinued operation for each year
ended June 30 are summarized as follows (in thousands):
1998 1997 1996
---------------------------------------
Total revenues $21,949 $18,803 $10,661
Total expenses 24,530 16,958 9,752
---------------------------------------
(Loss) earnings from discontinued operation (1) $(2,581) $ 1,845 $ 909
=======================================
(1) Net of income tax (benefit) of $(239), $1,164 and $766 in
1998, 1997 and 1996, respectively.
F-14
53
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
CHF and its subsidiaries' consolidated balance sheets at each
June 30 are summarized as follows (in thousands):
1998 1997
--------------------------
ASSETS
-------------------------------------------------------------------
Cash and cash equivalents $ 1,047 $ 804
Commission, service fees and other receivables, net 10,602 9,927
Property and equipment, net 2,602 2,126
Intangible assets, net 5,239 9,217
Other assets 1,330 982
--------------------------
$20,820 $ 23,056
==========================
LIABILITIES AND SHAREHOLDER'S EQUITY
-------------------------------------------------------------------
Accounts payable and accrued expenses $ 1,597 $ 1,221
Accrued compensation and related benefits 953 628
Payable to parent - 2,201
Debt payable within one year 200 197
Long-term debt 320 461
--------------------------
3,070 4,708
Shareholder's equity 17,750 18,348
--------------------------
$ 20,820 $ $23,056
==========================
PRO FORMA EFFECTS OF THE CHF SALE
On a pro forma basis, the CHF sale would have decreased the
fiscal 1998 loss from continuing operations by approximately $1.0
million ($1.5 million pretax), or $0.15 per share. Approximately $.9
million represents interest income on the balance due from the sale and
approximately $.1 million represents a reduction of interest expense
resulting from the repayment of debt. On a pro forma basis, the impact
on the June 30, 1998 Consolidated Balance Sheet would be the reduction
of debt by approximately $2 million and the increase in note receivable
by $15.25 million.
ULTRAMEDIX HEALTHCARE SYSTEMS, INC. (ULTRAMEDIX)
In February 1994, the Company entered into a long-term
agreement to manage UltraMedix and acquired a 30.4% equity interest for
approximately $1.4 million in cash. Effective January 29, 1996, the
Company purchased an additional 20.6% of the voting common stock, and
100% of the preferred stock, of UltraMedix. The purchase price for the
additional common stock and preferred stock of UltraMedix was
approximately $1.9 million in cash. This increased the Company's
ownership in the voting common stock of UltraMedix to 51%.
F-15
54
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
This acquisition was accounted for under the purchase method
of accounting. The excess of the purchase price over the fair value of
the net assets acquired was approximately $4.5 million and was recorded
as goodwill. Results of operations are included in the accompanying
financial statements effective with the date of purchase of the
majority common stock ownership interest.
As of December 31, 1997, UltraMedix was not in compliance with
the Florida Department of Insurance's (FDOI) statutory solvency
requirement. UltraMedix's statutory deficiency at December 31, 1997 was
estimated at $4.5 million. As a result of the deficiency, on February
26, 1998, UltraMedix and the Plan's third-party administrator, United
American of Florida, Inc. (UA-FL), a Company subsidiary, were placed
into receivership, and on March 3, 1998, into liquidation, by the FDOI.
Through the date of the commencement of liquidation, the
results of these operations were included in the consolidated results
of operations of the Company, which included a net loss totaling $ 9.3
million. In connection with the liquidation, the Company wrote off
goodwill and accumulated amortization of approximately $4.5 million and
$1.0 million, respectively, and recognized a loss on the liquidation of
approximately $2.3 million.
On April 15, 1998, the Florida Agency for Health Care
Administration notified the Company of the Agency's intent to enforce
the Company's Guarantee Agreement, under which the Company had agreed
to reimburse UltraMedix's contracted Medicaid providers for authorized,
covered Medicaid services rendered to covered Medicaid enrollees, for
which the Agency had made payment on behalf of such enrollees, limited
to an amount equal to the amount of surplus UltraMedix would have been
required to maintain under the Medicaid contract in the absence of such
Guarantee Agreement.
OMNICARE HEALTH PLAN, INC. OF TENNESSEE (OMNICARE-TN)
In February 1994, the Company entered into a long-term
agreement to manage OmniCare-TN and effective July 1994 acquired a 50%
equity interest in OmniCare-TN for approximately $1.3 million in cash.
Effective January 31, 1996, the Company purchased an additional 25% of
the voting common stock, and 100% of the preferred stock, of
OmniCare-TN. This increased the Company's ownership in the voting
common stock of OmniCare-TN to 75%. The purchase price for the
additional common stock and preferred stock of OmniCare-TN was $.1
million and $10.9 million, respectively, of which $8.7 million was the
conversion of OmniCare-TN debt to the Company to equity and $2.3
million was paid in cash.
This acquisition was accounted for under the purchase method
of accounting. The excess of the purchase price over the fair value of
the net assets acquired of approximately $7.4 million has been recorded
as goodwill, and is being amortized over ten years on a straight-line
basis. Results of operations are included in the accompanying financial
statements effective with the date of purchase of the majority
F-16
55
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
common stock ownership interest. Goodwill is reduced by the subsequent
utilization of OmniCare-TN's net operating losses.
In July 1998, the Company made an additional cash contribution
of $.75 million to OmniCare-TN, in exchange for additional preferred
stock of OmniCare-TN to be issued to the Company.
- -------------------------------
NOTE 5 - MARKETABLE SECURITIES
- -------------------------------
A summary of amortized cost, gross unrealized gain and loss
and estimated fair value of marketable securities as of June 30 was as
follows (in thousands):
AMORTIZED GROSS UNREALIZED ESTIMATED
COST -------------------------- FAIR VALUE
GAIN LOSS
-------------------------------------------------------------
1998
Available for sale -Current:
Certificates of deposit $ 582 $ - $ - $ 582
U.S. government obligations
Foreign government debt securities 25 25
Equity securities 1,040 - (216) 824
------------------ ------------ ------------- ---------------
1,647 - (216) 1,431
Available for sale - Noncurrent:
U.S. government obligations 1,385 11 - 1,396
------------------ ------------ ------------- ---------------
$3,032 $11 $(216) $ 2,827
================== ============ ============= ===============
1997
Available for sale - Current:
U.S. government obligations $ 532 $ 3 $ - $ 535
Foreign government debt securities 25 - - 25
Municipalities and local agencies 6,935 41 - 6,976
Equity securities 504 - (180) 324
------------------ ------------ ------------- ---------------
7,996 44 (180) 7,860
Available for sale - Noncurrent:
Certificates of deposit 500 67 - 567
U.S. government obligations 2,954 416 - 3,370
------------------ ------------ ------------- ---------------
3,454 483 - 3,937
------------------ ------------ ------------- ---------------
$11,450 $527 $ (180) $11,797
================== ============ ============= ===============
At June 30, 1998, the statement value and estimated fair value
of fixed maturities, by contractual maturity, are shown below (in
thousands). Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------------------------
Due in one year or less $1,967 $1,978
Due in one year through five years 25 25
-------------------------------
$1,992 $2,003
===============================
F-17
56
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
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, which amounted to $1.4 million and $3.9 million
at June 30, 1998 and 1997, respectively.
- -------------------------------
NOTE 6 - CONCENTRATION OF RISK
- -------------------------------
During the years ended June 30, 1998, 1997 and 1996
approximately 60%, 50% and 31%, respectively, of the Company's revenues
were derived from a single customer, TennCare, a State of Tennessee
program that provides medical benefits to Medicaid and Working
Uninsured recipients. TennCare withholds 10% of the Company's monthly
capitation payment. TennCare remits the monthly withheld amounts to the
Company when certain informational filing requirements are met by the
Company. Amounts withheld by TennCare as of June 30, 1998 and 1997
totaled approximately $1.6 million and $1.8 million, respectively. The
Company has recorded a receivable of approximately $1.1 million and $.8
million at June 30, 1998 and 1997, respectively, from the TennCare
program adverse selection pool. The receivable is based on tentative
information provided to the Company by the State of Tennessee.
The Company has entered into a long-term management agreement
with OmniCare-MI. Pursuant to the management agreement, the Company
provides management and consulting services to OmniCare-MI and is
generally paid a percentage of revenues to manage the plan. Management
fee revenues from OmniCare-MI as a percentage of the Company's total
revenues were 24%, 26% and 33% for 1998, 1997 and 1996, respectively.
- ------------------------------------------------------
NOTE 7 - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
- ------------------------------------------------------
Property and equipment at each June 30 consists of the
following (in thousands):
1998 1997
-------------------------
Furniture and fixtures $2,390 $2,092
Equipment 8,158 9,185
Computer software 6,347 6,402
-------------------------
16,895 17,679
Less accumulated depreciation and amortization (10,797) (7,579)
-------------------------
$6,098 $10,100
=========================
Intangible assets at each June 30 consists of the following
(in thousands):
1998 1997
-------------------------
Goodwill $7,466 $11,987
Less accumulated amortization (1,837) (1,430)
-------------------------
$5,629 $10,557
=========================
F-18
57
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
- ---------------------------------------------------
NOTE 8 - INVESTMENTS IN AND ADVANCES TO AFFILIATES
- ---------------------------------------------------
Investments in and advances at each June 30 to affiliates are
comprised of the following (in thousands):
1998 1997
--------------------------
PhilCare Health Systems $2,100 $2,100
Advica Health Management 2,300 2,300
Less impairment loss (4,400) -
--------------------------
$ - $4,400
==========================
In May 1994, the Company acquired at book value a 49% equity
interest in PhilCare Health Systems, Inc. (PhilCare), a start-up HMO in
Philadelphia, Pennsylvania for approximately $1,000 in cash. In
connection therewith, the Company funded PhilCare's applicable
statutory reserve and net worth requirements of $2.1 million in cash.
Advica Health Management (formerly United/HealthScope, Inc.)
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 May 1997, outstanding
amounts owed to the Company from Advica totaled approximately $4.9
million. In May 1997, Advica's outstanding debt and preferred stock
were restructured. The Company converted its interest in Advica,
including advances, accrued interest and the value of warrants held by
the Company, to one million shares of non-voting preferred stock of the
restructured Advica with a par value of $4 million and a warrant to
purchase 3,310 shares of Advica common stock, exercisable at any time
at a nominal price. The conversion of the Company's loans to Advica to
preferred stock was treated as a "troubled debt restructuring" and the
investment was recorded at its estimated fair value at the date of the
restructuring of $2.3 million. This resulted in bad debt expense of $.7
million for the year ended June 30, 1997.
In fiscal 1998, the Company recorded full impairment losses
against its investments in PhilCare and Advica. The establishment of
the impairment losses were based on the Company's evaluation of the net
recoverable value of such investments. This resulted in bad debt
expense of $4.4 million for the year ended June 30, 1998.
- ---------------------------------
NOTE 9 - SURPLUS NOTE RECEIVABLE
- ---------------------------------
In June 1998 the Company funded a $4.6 million unsecured loan
to OmniCare-MI, evidenced by a surplus note, to enable OmniCare-MI to
meet its minimum statutory requirements for net worth and working
capital. Pursuant to the surplus note, interest and principal payments
are subject to approval by the Michigan Insurance Bureau (Bureau) and
shall be repaid only out of the statutory surplus earnings of
OmniCare-MI.
F-19
58
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
The interest rate is at prime, payable annually and if not paid
annually is forfeited. The principal has no stated maturity or
repayment date. The surplus note is subordinated to all other claimants
of OmniCare-MI.
The Company recorded an impairment loss based on its
evaluation, which considered the estimate of OmniCare-MI's future
undiscounted cash flows and statutorily derived surplus earnings and
repayments conditioned on Bureau approval, of the net recoverable
value of its note receivable from OmniCare-MI. This resulted in bad
debt expense of $2.3 million for the year ended June 30, 1998.
- -------------------------
NOTE 10 - LONG TERM DEBT
- -------------------------
On March 12, 1998, effective as of February 1, 1998, the
Company entered into an amended loan agreement and promissory note for
a $22.9 million line of credit facility with its current bank lender.
On September 1, 1998, the Company and the bank amended the loan
agreement and promissory note to decrease the line of credit amount to
$20.94 million and modify other terms. The purposes of the line of
credit facility as of February 1, 1998 were to (i) renew and increase
the existing line of credit to pay off outstanding term loans with the
same bank and (ii) guarantee the payment of an existing $.5 million
letter of credit. The agreement requires the permanent reduction of the
outstanding balance and the line of credit facility (a) at October 15,
1998 to $20.44 million, (b) at November 15, 1998 to $19.94 million, (c)
at December 15, 1998 to $19.44 million, (d) at January 15, 1999 to
$18.44 million, (e) at February 15, 1999 to $17.94 million and (f) at
April 15, 1999 to the lesser of the then outstanding principal balance
or $8 million, and the cancellation of the $.5 million letter of credit
by January 1, 1999. The maturity date of the line of credit facility is
October 1, 1999.
The Company's outstanding debt at each June 30 is as follows
(in thousands):
1998 1997
-----------------------------
Line of credit $22,444 $19,356
Term loans - 4,512
-----------------------------
22,444 23,868
Less debt payable within one year (14,444) (21,851)
-----------------------------
Long-term debt, less current portion $ 8,000 $2,017
=============================
Pursuant to the promissory note, interest is payable monthly
at the bank's prime rate (8.5% at June 30, 1998) through August 31,
1998, and thereafter, at the bank's prime rate plus one percent.
The line of credit facility is secured by all of the Company's
rights, title and interest in the secured and unsecured promissory
notes of the purchaser of the stock of CHF representing part of the
purchase price for such stock (which purchaser has covenanted with the
bank to make all payments on such notes directly to the bank for credit
against the Company's indebtedness to the bank) and in the pledged CHF
stock
F-20
59
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
and other documents related to such purchase. Financial covenants for
minimum net worth, debt service coverage ratio, and maximum debt to
worth ratio will be established prior to March 1, 1999.
On May 13, 1998, the bank conditionally approved the Company's
request for a waiver of a restrictive covenant in their loan agreement,
subject to requirements that the Company has accepted, including that
(i) any default by OmniCare-MI, a plan operated by the Company, under
any arrangement made by it with the Michigan insurance regulators would
be a cross-default under the Company's indebtedness to the bank, and
(ii) the Company will use its best efforts to cause its wholly owned
subsidiary, United American of Pennsylvania, Inc. to pledge to the bank
whatever interest it has in or to preferred stock of PhilCare Health
Systems, Inc.
At June 30, 1998 and 1997 the Company had provided a $1
million letter of credit ($.5 million issued under the line of credit
facility) on behalf of its wholly owned subsidiary, United American of
Louisiana, Inc. (UA-LA) and its wholly owned subsidiary, OmniCare
Health Plan of Louisiana, Inc.
- ---------------------------------
NOTE 11 - MEDICAL CLAIMS PAYABLE
- ---------------------------------
The Company has recorded a liability of $20.0 million and
$11.6 million at June 30, 1998 and 1997, respectively, for medical
claims incurred by enrollees but not reported to the Company for
payment by the health care providers as of each date. The ultimate
settlement of medical claims may vary from the estimated amounts
reported at June 30, 1998 and 1997.
The following table provides a reconciliation of the unpaid
claims for the years ended June 30, 1998 and 1997 (in thousands):
1998 1997
----------------------------
Balance at beginning of fiscal year $11,632 $25,678
Incurred loss related to current year 68,245 55,444
Incurred loss related to prior year 2,064 2,388
----------------------------
Total loss incurred 70,309 57,832
Paid claims related to current year 48,241 43,813
Paid claims related to prior year 13,696 18,547
Claims savings related to prior year - 9,518
----------------------------
Total paid claims 61,937 71,878
----------------------------
Balance at end of fiscal year $20,004 $11,632
============================
F-21
60
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
The $2.1 million and $2.4 million unfavorable development in
fiscal 1998 and fiscal 1997 on incurred loss related to prior years,
respectively, was primarily attributable to UltraMedix ($3.4 million in
1998 and $1.3 million in 1997) and that plan's use of high cost
hospital providers and an increase in utilization driven by the plan's
rapid commercial membership growth. The fiscal 1998 loss was offset by
OmniCare-TN's stricter approach to reviewing authorizations and denying
claims for untimely filing and procedures that were not authorized or
were not medically necessary. In addition to the UltraMedix loss, the
fiscal 1997 loss was further increased due to OmniCare-TN allowing
providers an extended amount of time to file claims and to get all
previously unfiled claims reported to the Company.
Under an agreement with its reinsurer, the Company is liable
for the first $50,000 in medical costs per enrollee per year. Liability
in excess of this amount is assumed by the reinsurer, subject to a 20%
deductible and limits on maximum cost per day of hospitalization.
- -----------------------
NOTE 12 - INCOME TAXES
- -----------------------
The components of income tax expense (benefit) for each year
ended June 30 are as follows (in thousands):
1998 1997 1996
--------------------------------------
Continuing operations:
Current expense (benefit) $ (5,527) $ 403 $ (372)
Deferred expense (credit) 1,085 (1,604) 656
--------------------------------------
$ (4,442) $ (1,201) $ 284
======================================
Discontinued operation $ (239) $ 1,164 $ 766
======================================
A reconciliation of the provision for income taxes for each
year ended June 30 follows (in thousands):
1998 1997 1996
---------------------------------------
Income tax benefit at the statutory tax rate $(9,302) $(2,197) $(1,147)
State and city income tax 19 115 99
Tax-exempt interest on municipal bonds (97) (138) (165)
Non-deductible goodwill amortization 1,676 334 235
Other, net 181 (28) 136
NOL reduction of goodwill - (8) -
Valuation allowance 3,081 721 1,126
---------------------------------------
$(4,442) $(1,201) $ 284
=======================================
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary
F-22
61
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
differences become deductible. Management considers the scheduled
reversals of deferred taxes, projected future taxable income, and tax
planning strategies in making this assessment.
In order to fully realize the deferred tax assets, the Company
will need to generate future taxable income of approximately $2.1
million prior to the expiration of the net operating loss carryforwards
in 2013. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these
deductible differences, net of the existing valuation allowance at June
30, 1998. The amount of the deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
Components of the Company's deferred tax assets and
liabilities at each June 30 are as follows (in thousands):
1998 1997
-------------------------
Deferred tax assets
Shareholder lawsuit settlement $ 379 $ 391
Losses in unconsolidated affiliates 1,826 3,629
Accrued rent 318 395
Bad debt expense 2,856 734
Deferred compensation 130 331
Unrealized net depreciation on marketable securities 70 46
Other, net 10 -
Net operating loss carryforward of consolidated losses 700 -
Net operating loss carryforward of purchased subsidiary 5,736 5,529
-------------------------
Total gross deferred tax assets 12,025 11,055
Valuation allowance (11,014) (7,933)
-------------------------
Total net deferred tax assets 1,011 3,122
Deferred tax liabilities
Depreciation and amortization (33) (348)
Software development (978) (1,422)
Licensure costs - (267)
-------------------------
Total gross deferred tax liabilities (1,011) (2,037)
-------------------------
Net deferred tax asset $ - $ 1,085
=========================
The valuation allowance balance at June 30, 1998 includes
allowances relating to net loss carryforwards (NOLs) of OmniCare-TN,
the purchased subsidiary, an entity which is consolidated as of June
30, 1998, consolidated loss NOL carryforwards, valuation on the
realizability of net deferred assets and that portion of equity in net
losses and bad debt expense in affiliates which reduces the Company's
investments. As of June 30, 1998, the purchased subsidiary had NOLs for
federal income tax purposes of approximately $5.7 million that expire
from 2009 to 2013.
F-23
62
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
Activity in the valuation allowance is as follows (in
thousands):
Balance at June 30, 1995 $557
Change in valuation allowance 1,126
NOLs of purchased subsidiary 5,537
------------
Balance at June 30, 1996 7,220
Change in valuation allowance 721
Use of NOLs of purchased subsidiary (8)
------------
Balance at June 30, 1997 7,933
Change in valuation allowance 3,081
------------
Balance at June 30, 1998 $11,014
============
The Company believes it is more likely than not that if a tax
deductible event occurs, the result will be a capital loss on that
portion of valuation allowance provided for equity in net losses and
bad debt expense in affiliates which reduces the Company's investments.
The capital loss is able to be offset only by capital gains currently
not generated by the Company. The portion of the valuation allowance
attributable to NOLs that are subsequently utilized will reduce
goodwill of the acquired companies.
- -------------------------------------
NOTE 13 - RELATED PARTY TRANSACTIONS
- -------------------------------------
The Company has entered into a long-term management agreement
with OmniCare-MI. OmniCare-MI is related to the Company via certain
common officers and directors. The agreement commenced in May 1985 and
expires in December 2010, is subject to review every five years and can
be terminated without cause by OmniCare-MI at the time of the review or
by either party with cause. Pursuant to the management agreement the
Company is generally paid a percentage of revenues to manage
OmniCare-MI. The Company is required to pay certain administrative
expenses associated with its activity on behalf of OmniCare-MI. All
costs associated with the management of OmniCare-MI are expensed as
incurred.
Health insurance for some of the Company's employees was
provided by the clients it manages. This expense was approximately $1.0
million, $1.6 million and $1.5 million for the years ended June 30,
1998, 1997 and 1996, respectively.
- -----------------------------------
NOTE 14 - BENEFIT AND OPTION PLANS
- -----------------------------------
The Company offers a 401(K) retirement and savings plan that
covers substantially all of its employees. The Company's maximum
matching contribution is 5% of compensation through January 1, 1998 and
1% thereafter. Company contributions to the 401(K) plan were
approximately $.4 million, $.6 million, and $.5 million for the years
ended June 30, 1998, 1997 and 1996, respectively.
F-24
63
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
The Company has reserved 200,000 common shares for its
Employee Stock Purchase Plan (ESPP), which became effective October
1996, and enables all eligible employees of the Company to subscribe
for shares of common stock on an annual offering date at a purchase
price which is the lesser of 85% of the fair market value of the shares
on the first day or the last day of the annual period. Employee
contributions to the ESPP were approximately $9,000 for 1998 and $.2
million for 1997.
The Company has adopted a stock option plan (the Old Stock
Option Plan), under which a maximum of 331,250 common shares are
presently reserved for issuance upon exercise of options granted under
the Old Stock Option Plan. No options have been granted under the Old
Stock Option Plan through June 30, 1998. The Old Stock Option Plan
shall be terminated and superseded upon shareholder approval of the
Company's 1998 Stock Option Plan (1998 Plan) adopted by its Board of
Directors on August 6, 1998. The Company has an aggregate of 500,000
common shares reserved for issuance upon exercise of options under both
stock option plans. On September 9, 1998, nonqualified options for a
total of 325,000 common shares were granted under the 1998 Stock Option
Plan, subject to requisite shareholder approval of such Plan which
management will seek at the annual meeting of shareholders in
November 1998. Such options expire September 9, 2008 and are fully
exercisable beginning March 10, 1999, at a price of $1.625 per share.
Independent of any stock option plan, on May 11, 1998 the
Company issued nonqualified stock options for 100,000 common shares to
Gregory H. Moses, Jr. in connection with his employment as its new
President and Chief Operating Officer, and reserved that number of
common shares for issuance upon exercise of such options. Such options
expire May 11, 2003 and are exercisable beginning May 11, 1999 for up
to 77,000 common shares and in full beginning May 11, 2000, at a price
of $1.38 per share.
SFAS 123 prescribes a method of accounting for stock-based
compensation that recognizes compensation cost based on the fair value
of options at grant date. In lieu of applying this fair value based
method, a company may elect to disclose only the pro forma effects of
such application. The Company has adopted the disclosure-only
provisions of SFAS 123. Accordingly, if the Company had elected to
recognize compensation cost based on the fair value of the options at
grant date, the Company's net loss and loss per share from continuing
operations, assuming dilution for 1998, would have been the pro forma
amounts indicated below (in thousands, except per share amounts):
Net loss from continuing operations:
As reported $(22,915)
Pro forma $(22,967)
Net loss from continuing operations per share
F-25
64
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
(Basic and Diluted):
As reported $(3.48)
Pro forma $(3.49)
The fair value of options at date of grant was estimated using
the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998: dividend yield of 0%;
expected volatility of 60.56%; risk free interest rate of 5.65%; and
expected life of 5 years. The effects of applying SFAS 123 in the above
pro forma disclosures are not necessarily indicative of future amounts,
because additional stock option awards could be made in future years.
Information regarding the stock options for 1998 follows (in
thousands except prices):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------
NUMBER OF
WEIGHTED AVERAGE SHARES WEIGHTED
AVERAGE REMAINING EXERCISABLE AVERAGE
EXERCISE CONTRACTUAL AT JUNE EXERCISE
SHARES PRICE LIFE 30, 1998 PRICE
-----------------------------------------------------------------------------
Options outstanding at June 30, 1997 - - - - -
Granted 100 $1.38 5 years - -
Exercised - - - - -
Expired - - - - -
Options outstanding at June 30, 1998 100 $1.38 5 years - -
The exercise price for all options outstanding at end of year
was $1.38. Options available for grant, at end of year was 331,250.
The weighted average fair value of options granted during the year was
$1.38.
- ------------------
NOTE 15 - LEASES
- ------------------
The Company leases its facilities and certain furniture and
equipment under operating leases expiring at various dates through May
2005. Terms of the facility leases generally provide that the Company
pay its pro rata share of all operating expenses, including insurance,
property taxes and maintenance.
Rent expense charged to operations for the years ended June
30, 1998, 1997 and 1996 totaled approximately $3.3 million, $3.5
million, and $3.0 million, respectively.
Minimum future rental payments under all non-cancelable
operating leases having remaining terms in excess of one year as of
June 30, 1998, net of sublease rentals, total $7.1 million as follows
(in thousands): 1999-$1,247; 2000-$1,439; 2001-$1,092; 2002-$847;
2003-$850; thereafter $1,629.
F-26
65
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
- -------------------------------
NOTE 16 - YEAR 2000 COMPLIANCE
- -------------------------------
The Company is in the process of developing plans to address
issues related to the potential impact of the Year 2000 on its
computerized systems and equipment. The plans in development will
address systems modification requirements in the following primary
areas: information systems, facilities, payors and suppliers. While the
financial impact of making the required systems changes has not yet
been quantified, it is not expected to have a material effect on the
Company's financial condition and results of operations. The Company
presently believes that with such modifications to software and
hardware, which are expected to be completed by the end of 1999, the
Year 2000 issue will not pose material problems. However, if such
modifications are not made or are not completed timely, the Year 2000
issue could have a material adverse impact on the Company's
consolidated financial position.
Furthermore, the Company has initiated formal communications
with its significant suppliers and large payors to determine the extent
to which the Company may be vulnerable to those third parties' failure
to remediate their own Year 2000 issues. However, there can be no
assurances that the systems of other companies on which the Company
relies will be timely converted and the Company may be adversely
affected by the failure of a significant third party to become Year
2000 compliant.
- ------------------------
NOTE 17 - CONTINGENCIES
- ------------------------
As previously reported by the Company, certain former senior
officers and the Company are named as defendants in two shareholder
lawsuits filed in the United States District Court for the Eastern
District of Michigan (the Court) in August 1995. The Court consolidated
these lawsuits into a single action. In January 1998, the parties
agreed to a proposed settlement requiring the release of all claims and
damages sought by the plaintiffs and payment by the Company of $3.25
million, of which the Company anticipates the insurance carrier to pay
approximately $2.1 million. The Company recorded an expense for the
balance of $1.15 million as of June 30, 1997.
In late April 1998, the Company informed the plaintiffs'
counsel and the Court that the Company would not be able to fully fund
its portion of the tentative settlement amount. In September 1998, the
parties agreed to a restructured proposed settlement requiring the
release of all claims and damages sought by the plaintiffs in exchange
for (a) $2.0 million in cash from the Company's insurance carrier, (b)
a $625,000 promissory note of the Company payable in 15 equal monthly
installments beginning 13 months after entry of a final court order
approving the settlement, with interest at 4% per annum from the
date of such order, and (c) newly issued shares of common
stock of the Company with an aggregate value of $625,000 based on a
share price equal to the greater of (i) the average closing price of
the Company's common stock for the period from July 20, 1998 through
the third trading day preceding the court hearing on approval of the
settlement and (ii) $2.25.
F-27
66
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
The pending settlement is subject to federal court approval
following a court hearing on the fairness of the proposed settlement,
expected to be scheduled for November 30, 1998. 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.
- -------------------------------------------------------
NOTE 18 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
- -------------------------------------------------------
The following table presents selected quarterly financial
data for the years ended June 30, 1998 and 1997 (in thousands, except
per share data):
JUNE MARCH DECEMBER SEPTEMBER TOTAL
---------------------------------------------------------------------------
1998
Total revenues $22,708 $26,656 $29,192 $27,032 $105,588
Loss from continuing
operations (6,792) (7,080) (7,501) (1,542) (22,915)
Net loss (9,252) (6,878) (8,033) (1,333) (25,496)
Net loss per common
share assuming
dilution (1.41) (1.05) (1.22) (0.20) (3.88)
1997
Total revenues $29,573 $28,030 $26,457 $28,489 $112,549
Loss from continuing
operations (3,660) (17) (1,033) (550) (5,260)
Net (loss) earnings (3,953) 416 114 8 (3,415)
Net (loss) earnings per
common share
assuming dilution (0.60) 0.06 0.02 0.00 (0.52)
In the quarter ended June 1998, the Company made the following
significant adjustments: (i) recorded impairment losses against its
investment in PhilCare and its note receivable from OmniCare-MI, which
resulted in bad debt expense of $4.4 million, (ii) expensed $.3
million of capitalized software development costs and changed the
estimate of the remaining useful life of the Company's internally
developed software which resulted in additional amortization expense of
$.3 million, (iii) decreased rent expense by $.6 million as a result of
rent concessions obtain on the Company's corporate headquarters, (iv)
expensed to medical expense $.5 million established as a contra
liability related to the liquidation of UltraMedix, and (v) adjusted
the vacation accrual which resulted in a decrease of vacation expense
of $.2 million.
F-28
67
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998, 1997 AND 1996
In the quarter ended June 1997, the Company recorded a tentative
settlement of the consolidated class action shareholder lawsuit for
$1.15 million. The Company also recorded bad debt expense in the
amount of $1.1 million related to the valuation of an account
receivable of OmniCare-TN and $.7 million for an impairment loss on its
investment in Advica. Additionally, during the quarter, a $.3 million
rent expense estimate was established for the difference between the
Company's lease obligation and the expected sub-lease rental income
over the remaining life of the lease related to the Company's lease in
Pennsylvania. Also during the quarter, the Company increased the
incurred but not reported medical liabilities for UltraMedix and
OmniCare-TN by $1.4 million.
F-29
68
EXHIBIT INDEX
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------ ----------------------- ------------ --------
3.1 Restated Articles of Incorporation Exhibit 3.1 to the Registrant's Form S-1
of Registrant Registration Statement under the Securities
Act of 1933, as amended, declared effective
on April 23, 1991 ("1991 S-1")
3.1(a) Certificate of Amendment to the Exhibit 3.1(a) to 1991 S-1
Articles of Incorporation of
Registrant
3.2 Amended and Restated Bylaws of Exhibit 3.2 to the Registrant's
Registrant 1993 Form 10-K
4.1 Incentive and Non-Incentive Stock Exhibit 4.1 to the Registrant's
Option Plan of Registrant effective 1995 Form 10-K
March 25, 1991, as amended
4.2 Form of Common Share Certificate Exhibit 4.2 to the Registrant's
1995 Form 10-K
10.1 Employees' Retirement Plan for Exhibit 10.1 to 1991 S-1
Registrant dated May 1, 1985, with
First Amendment thereto and Summary
Plan Description therefor
10.2 Management Agreement between Exhibit 10.2 to 1991 S-1
Michigan Health Maintenance
Organization Plans, Inc. and
Registrant dated March 15, 1985, as
amended June 12, 1985
10.3 Management Agreement between U.A. Exhibit 10.3 to 1991 S-1
Health Care Corporation and
Personal Physician Care, Inc. dated
March 18, 1987
10.4 Amendment dated February 16, 1993 Exhibit 10.5 to the Registrant's
to Management Agreement between 1995 Form 10-K
United American Healthcare
Corporation and Personal Physician
Care, Inc. dated March 18, 1987
1
69
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------ ----------------------- ------------ --------
10.5 Amendment dated June 16, 1994 to Exhibit 10.4 to the Registrant's
Management Agreement between U.A. 1994 Form 10-K
Health Care Corporation and
Personal Physician Care, Inc. dated
March 18, 1987
10.6 Management Agreement between Exhibit 10.5 to Registrant's 1994 Form 10-K
OmniCare Health Plan, Inc. and
United American of Tennessee, Inc.
dated February 2, 1994
10.7 Management Agreement between Exhibit 10.6 to Registrant's 1994 Form 10-K
UltraMedix Health Care Systems,
Inc. and United American of
Florida, Inc. dated February 1,
1994
10.8 Amendment dated September 4, 1995 Exhibit 10.9 to the Registrant's
to Management Agreement between 1995 Form 10-K
UltraMedix Healthcare Systems, Inc.
and United American of Florida,
Inc. dated February 1, 1995
10.9 Amendment dated September 20, 1995 Exhibit 10.10 to Registrant's 1995
to Management Agreement between Form 10-K
UltraMedix Health Care Systems,
Inc. and United American of
Florida, Inc. dated February 1,
1995
10.10 Lease Agreement between 1155 Form 8-K filed August 8, 1991
Brewery Park Limited Partnership
and Registrant dated July 24, 1991,
effective May 1, 1992
10.11 Amendment dated December 8, 1993 to Exhibit 10.8 to the Registrant's
Lease agreement between 1155 1994 Form 10-K
Brewery Park Limited Partnership
and Registrant dated July 24, 1991
10.12 Amendment dated April 15, Exhibit 10.13 to Registrant's 1995
2
70
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------ ----------------------- ------------ --------
1993 to Lease Agreement between Form 10-K
1155 Brewery Park Limited
Partnership and Registrant dated
July 24, 1991
10.13 Lease Agreement between Baltimore Exhibit 10.7 to the Registrant's
Center Associates Limited 1993 Form 10-K
Partnership and Corporate
Healthcare Financing, Inc. dated
August 24, 1988, as amended April
12, 1993, effective the later of
May 1, 1993 or the date premises
are ready for occupancy
10.14 Amendment dated May 11, 1994 Exhibit 10.11 to the Registrant's
(effective June 30, 1994) to Lease 1994 Form 10-K
agreement between Baltimore Center
Associates Limited Partnership and
Corporate Healthcare Financing,
Inc
10.15 Lease Agreement between CLW Realty Exhibit 10.2 to Registrant's 1994 Form 10-K
Asset Group, Inc., as agent for The
Prudential Insurance Company of
America and United American of
Florida dated May 31, 1994,
effective June 1, 1994
10.16 Lease Agreement between Fleming Exhibit 10.3 to Registrant's 1994 Form 10-K
Companies, Inc. and United American
of Tennessee dated June 30, 1994,
effective the date premises are
ready for occupancy
10.17 Lease Agreement between Exhibit 10.19 to Registrant's 1995
International Business Machines Form 10-K
Corporation and Registrant dated
August 29, 1994
10.18 Amended and Restated Line of Credit Exhibit 10.20 to Registrant's 1995
3
71
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------ ----------------------- ------------ --------
Facility Agreement between Michigan Form 10-K
National Bank and Registrant dated
March 14, 1995
10.19 Promissory notes between Michigan Exhibit 10.9 to the Registrant's
National Bank and Registrant dated 1993 Form 10-K
August 26, 1993
10.20 Asset Purchase Agreement between Form 8-K filed May 24, 1993 and Form 8-K/A
CHF, Inc., Healthcare Plan filed July 21, 1993
Management, Inc., CHF-HPM Limited
Partnership, Louis J. Nicholas and
Keith B. Sullivan and Registrant
dated May 7, 1993
10.21 Loan and Security Agreement between Exhibit 10.18 to Registrant's 1994 Form 10-K
UltraMedix Health Care Systems,
Inc. and United American of Florida
dated February 1, 1994
10.22 Amendment dated June 13, 1995 to Exhibit 10.26 to Registrant's 1995
the Loan and Security Agreement Form 10-K
between UltraMedix Care Systems,
Inc. and United American of
Florida, Inc. dated February 1,
1994
10.23 Form of Stock Transfer Services Exhibit 10.19 to Registrant's 1994 Form 10-K
Agreement between Huntington
National Bank and Registrant
10.24 Employment Agreement between Julius Exhibit 10.15 to 1991 S-1
V. Combs, M.D. and Registrant dated
March 15, 1991
10.25 Employment Agreement between Ronald Exhibit 10.16 to 1991 S-1
R. Dobbins and Registrant dated
March 15, 1991
10.26 Employment Agreement between Louis Exhibit 10.22 to Registrant's 1994
J. Nicholas and Form 10-K
4
72
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------ ----------------------- ------------ --------
Corporate Healthcare Financing,
Inc. dated May 7, 1993
10.27 First Amendment to Contingent Note Form 10-Q for the Quarter Ended March 31,
Promissory Note between CHF-HPM 1996, filed May 14, 1996
Limited Partnership and the
Registrant
10.28 Acquisition of majority interest in Form 8-K filed April 19, 1996
OmniCare Health Plan, Inc. of
Tennessee and UltraMedix Healthcare
Systems, Inc.
10.29 Injured Workers' Insurance Fund Form 10-K/A filed October 14, 1996, as amended
Contract No. IWIF 9-96 Managed Care
Contract with Statutory Benefits
Management Corporation dated June
19, 1996
10.30 Ernst & Young LLP Report of *
Independent Auditors as of June
30, 1996
10.31 Renaissance Center Office Lease Form 10-Q for the Quarter Ended September
between Renaissance Center Venture 30, 1996, filed November 13, 1996
and Registrant
10.32 Purchase Agreement between Form 10-Q for the Quarter Ended December
Statutory Benefits Management 31, 1996, filed February 10, 1997
Corporation and Spectera, Inc.
10.33 Agreement of Purchase and Sale of Form 10-K filed October 14, 1997
Stock, dated September 12, 1997
between CHF Acquisition, Inc. and
the Registrant
10.34 Ernst & Young LLP Report of Form 10-K filed October 14, 1997
Independent Auditors as of June
30, 1997
10.35 Amended and Restated Business Loan Form 10-Q for the Quarter Ended
Agreement between Michigan National March 31, 1998, filed May 15, 1998
Bank and Registrant dated March 12,
1998 (effective as of February 1,
1998)
5
73
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------ ----------------------- ------------ --------
10.36 Business Loan Agreement Addendum Form 10-Q for the Quarter Ended
between Michigan National Bank and March 31, 1998, filed May 15, 1998
Registrant dated March 12, 1998
(effective as of February 1, 1998)
10.37 Promissory Note dated March 12, Form 10-Q for the Quarter Ended
1998 (effective as of February 1, March 31, 1998, filed May 15, 1998
1998) from Registrant to Michigan
National Bank
10.38 Employment Agreement between
Gregory H. Moses, Jr. and
Registrant dated May 11, 1998 *
10.39 Amendment dated as of June 30, 1998
to Lease Agreement between 1155
Brewery Park Limited Partnership
and Registrant dated June 24, 1991 *
10.40 Termination of Lease dated
June 24, 1998 between Renaissance
Holdings, Inc. (successor to
Renaissance Center Venture) and
Registrant *
10.41 United American Healthcare
Corporation 1998 Stock Option Plan *
10.42 Stock Purchase Agreement among
Registrant, CHFA, Inc. and
Corporate Healthcare Financing,
Inc. dated August 31, 1998 *
10.43 Secured Promissory Note
dated August 31, 1998 from CHFA,
Inc.to Registrant *
6
74
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------ ----------------------- ------------ --------
10.44 Unsecured Promissory Note dated
August 31, 1998 from CHFA, Inc.
to Registrant *
10.45 Guaranty Agreement of Louis J.
Nicholas dated August 31, 1998 *
10.46 Pledge Agreement between CHFA, Inc.
and Registrant dated August 31,
1998 *
10.47 Amendment of Business Loan
Agreement between Registrant and
Michigan National Bank dated
September 1, 1998 *
10.48 Promissory Note dated September 1,
1998 of Registrant to Michigan
National Bank *
10.49 Pledge Agreement dated September 1,
1998 from Registrant to Michigan
National Bank *
16.1 Concurring Letter regarding change Form 8-K filed October 30, 1997
in Certifying Accountants dated
October 30, 1997, from Grant
Thornton LLP
16.2 Concurring Letter regarding change Form 8-K/A filed November 12, 1997
in Certifying Accountants dated
November 12, 1997, from Grant
Thornton LLP.
16.3 Concurring Letter regarding change Form 8-K/A filed November 12, 1997
in Certifying Accountants dated
November 12, 1997, from Ernst &
Young LLP.
16.4 Concurring Letter regarding change Form 8-K filed January 20, 1998
in Certifying Accountants dated
January 16, 1998, from Arthur
Andersen LLP.
7
75
EXHIBIT INCORPORATED HEREIN BY FILED
NUMBER DESCRIPTION OF DOCUMENT REFERENCE TO HEREWITH
- ------ ----------------------- ------------ --------
21 Subsidiaries of the Registrant *
27 Financial Date Schedule *
99.1 Press Release dated January 12, 1998 Form 8-K filed January 20, 1998
8