ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage management to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statements. Certain statements contained in this Form 10-K annual report, including, without limitation, statements containing the words "believes," "anticipates," "will," "could," "may," "might" and words of similar import, constitute "forward-looking statements" within the meaning of this "safe harbor."
Such forward-looking statements are based on management's current expectations and involve known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. See "Item 1. Business--Cautionary Statement Regarding Forward-Looking Statements" below.
GENERAL
United American Healthcare Corporation (the "Company") was incorporated in Michigan on December 1, 1983 and commenced operations in May 1985. Unless the context otherwise requires, all references to the Company indicated herein shall mean United American Healthcare Corporation and its consolidated subsidiaries.
The Company provides comprehensive management and consulting services to managed care organizations, including health maintenance organizations in Tennessee, in Michigan and, until February 26, 1998, in Florida. The Company also arranges for the financing of health care services and delivery of these services by primary care physicians and specialists, hospitals, pharmacies and other ancillary providers to commercial employer groups and government sponsored populations in Tennessee, Michigan and, until February 26, 1998, Florida. Management and consulting services provided by the Company are generally to health maintenance organizations with a targeted mix of Medicaid and non-Medicaid/commercial enrollment. As of September 1, 2000, there were approximately 158,000 enrollees in the managed care organizations owned or operated by the Company.
Management and consulting services provided by the Company include feasibility studies for licensure, strategic planning, corporate governance, management information systems, human resources, marketing, pre-certification, utilization review programs, individual case
management, budgeting, provider network services, accreditation preparation, enrollment processing, claims processing, member services and cost containment programs.
In 1985, the Company became one of the pioneers in arranging for the financing and delivery of health care services to Medicaid recipients utilizing managed care programs. Management believes the Company has gained substantial expertise in understanding and serving the particular needs of the Medicaid population. As of September 1, 2000, there were approximately 99,000 Medicaid enrollees in the managed care organizations owned or managed by the Company, OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), 75%-owned by the Company's wholly owned subsidiary, and Michigan Health Maintenance Organization Plans, Inc., d/b/a OmniCare Health Plan, in Michigan ("OmniCare-MI"). The Company complements its Medicaid focus by targeting non-Medicaid/commercial business in the same geographic markets, including its contract with Urban Hospital Care Plus (the "County Care" plan). As of September 1, 2000, there were approximately 59,000 non-Medicaid/commercial enrollees in OmniCare-MI, OmniCare-TN and County Care (collectively, the "Managed Plans").
RESTRUCTURING PROGRAM AND MANAGEMENT CHANGES
In January 1998, the Company initiated a restructuring program to address significant operating losses, negative working capital and a reduction in net worth. The restructuring program encompassed Company plans to change management, discontinue some expansion projects, reduce non-core spending activities, reduce corporate overhead, renegotiate its bank credit facilities, re-evaluate its investment in affiliates and other assets and sell the Company's subsidiary, Corporate Healthcare Financing, Inc.
The changes in management in 1998 included: (1) the retirement of the then current Chief Executive Officer of the Company, (2) the resignation of the then current President and Chief Operating Officer of the Company and (3) the election of Gregory H. Moses, Jr. as the new President and Chief Operating Officer of the Company in May 1998. Mr. Moses, a retired partner of the Coopers & Lybrand accounting firm, most recently had been a consultant to a health maintenance organization in Detroit. He previously had been partner-in-charge of the Coopers & Lybrand Healthcare Consulting Group in New York and New Jersey for ten years, chairman of that firm's National Healthcare Consulting Group for five years and its lead engagement partner with respect to Mercy Health Services for seven years. In August 1998, Mr. Moses additionally became the Chief Executive Officer of the Company.
INDUSTRY
In an effort to control costs while assuring the delivery of quality health care services, the public and private sectors in recent years have increasingly turned to managed care solutions. As a result, the managed care industry, which includes health maintenance organization ("HMO"), preferred provider organization ("PPO") and prepaid health service plans, has grown substantially.
While the trend toward managed care solutions has traditionally been pursued most aggressively by the private sector, the public sector has recently embraced the trend in an effort to control the costs of health care provided to Medicaid recipients. Consequently, many states are promoting managed care initiatives to contain these rising costs and supporting programs that encourage or mandate Medicaid beneficiaries to enroll in managed care plans.
MANAGED CARE PRODUCTS AND SERVICES
The Company has an ownership interest in and manages the operations of an HMO in Tennessee, OmniCare-TN. The Company also manages the operations of an HMO in which it has no ownership interest, OmniCare-MI. In addition, the Company owns and operates County Care.
The Company also had or has an ownership interest in three other HMOs: UltraMedix Healthcare Systems, Inc., in Florida ("UltraMedix"); OmniCare Health Plan of Louisiana, Inc., in Louisiana ("OmniCare-LA"); and PhilCare Health Systems, Inc., in Pennsylvania ("PhilCare"). UltraMedix ceased operations and is in the process of being liquidated. See "Business--Managed Plans Owned by the Company--UltraMedix" below. OmniCare-LA was never operational and has been dissolved. PhilCare declined to participate in Pennsylvania's Medicaid managed care program because of program requirements that would have made such participation unprofitable. See "Business--Other Managed Plan Ventures--OmniCare-LA" and " -PhilCare" below.
The following table shows the membership in the Managed Plans serviced by the Company as of September 1, 2000:
The following table shows the Company's principal revenue sources in dollar amounts and as a percentage of the Company's total revenues for the periods indicated. Such data are not indicative of the relative contributions to the Company's net earnings.
A substantial portion of the Company's gross revenues is derived through its management agreement with OmniCare-MI. This management agreement is long-term in nature, subject to review every five years with either automatic continuation or elective termination. There can be no assurance that such agreement will remain in effect or continue substantially under the same terms and conditions. Effective June 1, 1998, the OmniCare-MI management agreement was amended to reduce the management fee percentage charged by the Company to 14% from 17%. In addition, in fiscal 1999 the Company forgave $1.3 million of management fees owed by OmniCare-MI, and in fiscal 2000 the Company converted $3.7 million of management fees owed by OmniCare-MI to an unsecured loan to OmniCare-MI evidenced by a surplus note. UltraMedix was placed in receivership and in liquidation pursuant to judicial consent orders entered on February 26 and March 3, 1998. See "Managed Plan Operated By the Company-OmniCare-MI" and "Managed Plans Owned by the Company-UltraMedix" under "Managed Plans" below and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."
Managed Plans
The Company has entered into long-term management agreements with OmniCare-MI and, through a wholly owned subsidiary of the Company, with OmniCare-TN. Pursuant to these management agreements with OmniCare-MI and OmniCare-TN, the Company provides management and consulting services associated with the financing and delivery of health care services. The Company also owns and operates the County Care plan pursuant to an agreement to arrange for the delivery of health care services. Table A summarizes the terms of these agreements.
Services provided to the Managed Plans include strategic planning; corporate governance; human resource functions; provider network services; provider profiling and credentialing; premium rate setting and review; marketing services (group and individual); accounting and budgeting functions; deposit, disbursement and investment of funds; enrollment functions; collection of accounts; claims processing; management information systems; utilization review; and quality management.
Table A- Summary of Terms of Agreements with the Managed Plans
Managed Plans Owned by the Company
OMNICARE-TN. OmniCare-TN was organized as a Tennessee corporation in October 1993, and is headquartered in Memphis, Tennessee. The Company was active in the development of OmniCare-TN, and through the Company's wholly owned subsidiary, United American of Tennessee, Inc., owns a 75% equity interest in OmniCare-TN; a local partner owns the remaining 25%. OmniCare-TN began as a PPO contractor with the Bureau of TennCare ("TennCare"), a State of Tennessee program that provides medical benefits to Medicaid and working uninsured and uninsurable recipients, and operated as a full-risk prepaid health services plan until it obtained its TennCare HMO license in March 1996. OmniCare-TN's TennCare HMO contract was executed in October 1996, retroactive to the date of licensure.
In November 1993, OmniCare-TN contracted with TennCare as a Medicaid PPO to arrange for the financing and delivery of health care services on a capitated basis to eligible Medicaid beneficiaries and the Working Uninsured and Uninsurable ("Non-Medicaid") individuals who lack access to private or employer sponsored health insurance or to another government health plan. TennCare placed an indefinite moratorium on Working Uninsured enrollment in December 1994; however, such action did not affect persons enrolled in a plan prior to the moratorium. In April 1997, enrollment was expanded to include the children of the Working Uninsured up to age 18.
The TennCare contract was renewed on July 1, 2000 for a 42-month term, expiring December 31, 2003. The new contract provides for increased capitation rates, but eliminates the practice of providing retroactive payments to managed care organizations for high cost chronic conditions of their members ("adverse selection") and payments earmarked as adjustments for covered benefits. In addition, the new contract requires that at least 85% of capitation revenues received by OmniCare-TN must be passed on to medical providers.
OmniCare-TN was assigned approximately 6,000 members by TennCare in the second half of fiscal 2000 as a result of three other managed care organizations, which had contracts with TennCare, ceasing to serve their enrollees or being unable to take on new enrollees. Medical services expenses for such new OmniCare-TN members disproportionately exceeded OmniCare-TN's normal per member per month ("PMPM") experience and adversely affected its earnings for and since that period. OmniCare-TN is seeking an adverse selection payment from TennCare, retroactive for such fiscal 2000 expenses, but there can be no assurance what the outcome of its request will be.
OmniCare-TN is currently licensed in and serves Shelby and Davidson counties in Tennessee (which include the cities of Memphis and Nashville). OmniCare-TN also has members in 11 other counties in Tennessee, all of whom were assigned to it by TennCare as described in the preceding paragraph. As of September 1, 2000, total enrollment was approximately 48,636 members, of which 32,014 (66%) and 16,622 (34%) represent Medicaid and Non-Medicaid enrollees, respectively.
OmniCare-TN's application for a commercial HMO license is pending. OmniCare-TN management has been in frequent communication with the State to eliminate any further processing delays of the application and expects the issuance of the license in fiscal 2001. However, there can be no assurance that the license will be issued within this time period. Management believes that the receipt of the commercial license and OmniCare-TN's efforts to expand its provider network to the southwestern area of Tennessee would enable OmniCare-TN to increase its enrollment by marketing its managed care products to the various employer groups in the regions served.
COUNTY CARE. In Michigan, the County of Wayne encompasses Detroit and certain other cities and communities. Urban Hospital Care Plus ("UHCP"), a nonprofit corporation, administers the County's patient care management system. Effective April 1, 1999, the Company entered into a contract with UHCP for the Company to arrange for the delivery of health care services, including the assumption of underwriting risk, on a capitated basis to certain enrollees residing in
Wayne County who lack access to private or employer-sponsored health insurance or to another government health plan. The current contract period is through September 30, 2001, with automatic renewal for successive periods of one year unless terminated by either party as provided in the contract. Although Company management does not expect significant net earnings directly from the County Care contract, management believes that entering into this contract is consistent with the Company's strategic objective of expanding the client base and achieving size sufficient to enable the Company to negotiate better rates, save on administrative costs and build profits. As of September 1, 2000, total County Care enrollment was approximately 8,146 members.
ULTRAMEDIX. UltraMedix, a network model HMO headquartered in Tampa, Florida, was founded as a Florida corporation in May 1992. Through its majority owned subsidiary, United American of Florida, Inc. ("UA-FL"), the Company owned 51% of UltraMedix, with the remaining 49% owned by local shareholders. The March 3, 1998 court order, described below, placed UltraMedix and UA-FL in liquidation.
As of December 31, 1997, UltraMedix was not in compliance with the Florida Department of Insurance ("FDOI") statutory solvency requirement. The FDOI requires that HMOs maintain a statutory reserve as determined in accordance with statutory accounting practices of $0.5 million. UltraMedix's statutory reserve deficiency at December 31, 1997 was estimated at $4.5 million. As a result, on January 30, 1998, the Company, UltraMedix and its third-party administrator, UA-FL, signed and delivered to the FDOI a Stipulation and Consent to Appointment of Receiver and Order of Liquidation entitling the FDOI to obtain the entry of an accompanying consent order by the applicable Florida court if the Company did not cure UltraMedix's existing statutory reserve deficiency by February 6, 1998. On February 26, 1998, the deficiency had not been cured and pursuant to the FDOI's petition, the Florida court entered such consent order.
Pursuant to the stipulation and consent order: UltraMedix and UA-FL (the "Organizations") admitted that UltraMedix was statutorily insolvent as of December 31, 1997; the Company paid $0.5 million to the FDOI to cover UltraMedix claims incurred during and provider capitation payments due for the eight days ended February 6, 1998, and funded the Organizations' ordinary business expenses for the same period; the FDOI took control of the Organizations' bank accounts; UltraMedix ceased enrolling new members; and the Organizations continued to provide services to all of the UltraMedix subscribers and to process renewals on all policies as they came due. Pursuant to the consent order, on February 26, 1998, the Organizations were declared insolvent and the FDOI was appointed as Receiver ("Receiver")for the purposes of their liquidation.
On March 3, 1998, the Florida court entered a Consent Order of Liquidation, Injunction and Notice of Stay declaring that any further efforts of the Receiver to rehabilitate the Organizations would be useless, ordering the FDOI, as Receiver, to take possession of and liquidate all assets of the Organizations and ordering the immediate cancellation of UltraMedix's authority to provide health services as an HMO in Florida.
On April 15, 1998, the Florida Agency for Health Care Administration notified the Company of the Agency's intent to enforce the Company's Guarantee Agreement, under which the
Company had agreed to reimburse UltraMedix's contracted Medicaid providers for authorized, covered Medicaid services rendered to covered Medicaid enrollees, for which the Agency had made payment on behalf of such enrollees, limited to an amount equal to the amount of surplus UltraMedix would have been required to maintain under the Medicaid contract in the absence of such Guarantee Agreement.
Until March 31, 2000, the Company maintained a $6.4 million estimated medical claims liability for UltraMedix, which had been established at December 31, 1997. At March 31, 2000, Company management concluded that the continuing reserve requirement should be $0.8 million and accordingly, the Company reduced the $6.4 million reserve by $5.6 million and offset that amount against medical services expenses.
Managed Plan Operated by the Company
OMNICARE-MI. OmniCare-MI is a not-for-profit, tax-exempt corporation headquartered in Detroit, Michigan and serving southeastern Michigan, operating in Wayne, Oakland, Macomb, Monroe and Washtenaw counties. Its history includes a number of innovations that were adopted and proved successful for the industry. It was the first network model HMO in the country and the first to capitate physician services in an IPA-model HMO (an Independent Practice Association model HMO does not employ physicians as staff, but instead contracts with associations or groups of independent physicians to provide services to HMO members). OmniCare-MI also created and implemented the first known mental health capitation carve out in 1983.
OmniCare-MI's current enrollment is through approximately 1,100 companies that offer the health plan coverage to employees and their family members, through individual enrollment that is open once a year for a 30-day period, and through the State of Michigan's Medicaid program pursuant to an agreement with the Michigan Department of Community Health, which makes HMO coverage available to eligible Medicaid beneficiaries in certain counties and mandatory in others. Among the major employers that offer OmniCare-MI, ranked by enrollment, are: the City of Detroit, the Federal Government, the Detroit Board of Education, the State of Michigan, Ford Motor Company and DaimlerChrysler AG, the largest of which represents approximately 6% of OmniCare-MI's total enrollment. These employers, in aggregate, represent approximately 20% of OmniCare-MI's total enrollment. No other group exceeds 2% of the Plan's total enrollment.
As of September 1, 2000, total enrollment in OmniCare-MI was approximately 101,575 of which 34,280 (34%) are commercial members, including approximately 5,584 point-of-service members, and approximately 67,295 (66%) represent Medicaid members.
The State of Michigan, in an effort to reduce the cost of its Medicaid program, competitively bid its Medicaid contracts, with an effective date of July 1997. The affected southeastern Michigan counties include a significant portion of the OmniCare-MI's Medicaid enrollment. Unsuccessful bidders to the State's request for proposal legally challenged the initiative and, as a result, the State did not assign the eligible Medicaid beneficiaries to plans that were awarded contracts, but nonetheless instituted the premium rate reduction component of the new program
effective July 1997. With the delay of the assignment of approximately 90,000 eligible Medicaid beneficiaries to the selected plans, and the implementation of the premium rate reductions of 20%, the operating revenues of OmniCare-MI and the resulting management fee revenues to the Company were adversely affected in fiscal 1998 and 1999.
Newspaper stories in May 1998 reported that the Michigan Insurance Bureau (the "Bureau") had obtained a sealed (confidential) court order on May 7, 1998 giving state regulators control over OmniCare-MI's assets. The Company responded with a public statement on May 12, 1998, stating that OmniCare-MI was not in receivership but was in active discussion with the Bureau regarding compliance with certain regulatory issues, that all services to members of OmniCare-MI would continue to be provided with no decrease in the quality of care, and all providers would continue to be paid for their services, and that both the Company and OmniCare-MI had completely restructured their top management. On July 1, 1998, the Bureau issued a public statement in which the Michigan Commissioner of Insurance announced reaching accord with OmniCare-MI on a plan to revitalize the HMO and cited "three major positive developments respecting OmniCare": an unsecured loan of $4.6 million by the Company in June 1998, the corrective action plan and the "experienced and capable leadership of Gregory H. Moses."
On April 13, 2000 and June 30, 1998, the Company funded unsecured loans to OmniCare-MI, evidenced by surplus notes of $7.7 million and $4.6 million, respectively, to enable OmniCare-MI to meet its minimum statutory requirements for net worth and working capital. The $7.7 million loan consisted of $4.0 million in cash and conversion of $3.7 million of management fees owed to the Company. Pursuant to the terms of the surplus notes, interest and principal payments are subject to approval by the Bureau and shall be repaid only out of the statutory surplus earnings of OmniCare-MI. The interest rate on the $7.7 million surplus note is fixed at 8.5%, while the interest rate on the $4.6 million surplus note is at the prime rate (9.5% at June 30, 2000). Interest is payable annually and if not paid annually is forfeited. Interest income of $0.5 and $0.4 million was forfeited for fiscal 2000 and 1999, respectively. The principal on the notes has no stated maturity or repayment date. The surplus notes are subordinated to all other claimants of OmniCare-MI. Based on an analysis of OmniCare-MI's projected future cash flows, the Company recorded impairment losses on the valuation of the surplus notes. The impairment losses resulted in bad debt expense of $3.1 million and $2.3 million for the years ended June 30, 2000 and 1998, respectively. In addition, in fiscal 1999, the Company provided additional funding by forgiving $1.3 million in management fees owed to the Company by OmniCare-MI to enable OmniCare-MI to meet its minimum statutory requirements for net worth and working capital.
During 1998, OmniCare-MI developed a corrective action plan and began to implement strategic initiatives, which included the reduction of medical costs through renegotiating its hospital and physician provider contracts, and the reduction of the management fee percentage paid to the Company from 17% to 14% effective June 1, 1998. The 1998 corrective action plan was effective in reducing costs for OmniCare-MI's Medicaid members, but not as effective in regard to OmniCare-MI's point-of-service members. In 2000, OmniCare-MI developed a revised corrective action plan, including the development of new underwriting guidelines, implementation of new renewal rates representing an average per-member premium
increase of 40% and instituting pharmacy and office visit co-pays for all member groups. In addition, OmniCare-MI is taking measures to further manage its medical costs through renegotiations of hospital contracts, and cost reduction efforts in the areas of pharmacy, catastrophic case management and behavioral health.
The Company, in its restructuring efforts and forecasts, has considered the impact of the reduction in the management fee percentage. In fiscal 2000, management fee revenues increased 4% over the prior year. In fiscal 1999, management fee revenues decreased approximately $4.2 million, compared to fiscal 1998, as a result of the management fee percentage reduction.
Management believes that the continued viability of OmniCare-MI is critical to the Company's future operations and concluded that the unsecured loans, in the form of surplus notes, the $1.3 million forgiveness of management fees in fiscal 1999 and the reduction in the management fee percentage were necessary actions to strengthen the financial condition and viability of OmniCare-MI.
In June 1999, OmniCare-MI joined with Blue Cross Blue Shield of Michigan (the "CasinoCare Venture") in successful proposals to provide health care, dental and prescription drug benefits to employees of two new Detroit casinos. There are currently approximately 5,000 CasinoCare Venture members receiving health coverage, generating medical premiums of approximately $0.8 million monthly. The casinos' present facilities may be replaced by larger facilities in Detroit as early as 2004, and based on the casinos' estimates, the replacement facilities, when built and open, will have up to 8,000 employees (amounting to more than 18,000 members) requiring health coverage, which could generate medical premiums of up to $2.3 million monthly ($28.0 million annually). The Company receives a management fee based on the medical premiums generated from those members who select the Company's products. There can be no assurance that the CasinoCare Venture will be able to increase its covered membership as a result of the proposed larger facilities.
In August 1999, OmniCare-MI received a "Commendable" accreditation rating from the National Committee for Quality Assurance ("NCQA") through April 30, 2001. The NCQA is a nationally recognized independent, not-for-profit organization that evaluates how well a health plan manages all parts of its delivery system (physicians, hospitals, other providers and administrative services) in order to continuously improve health care for its members. The "Commendable" rating is granted to managed care plans that demonstrate levels of service and clinical quality that meet or exceed NCQA's rigorous requirements for consumer protection and quality improvement.
On May 1, 2000, the Company and OmniCare-MI commenced their previously announced strategic partnership with the Detroit Medical Center ("DMC"), a major health care provider system in southeastern Michigan. The alliance is intended to strengthen their respective core businesses and improve the quality of care and services for their patients and members. In addition, it was announced that DMC and OmniCare-MI would develop a joint marketing campaign designed to increase OmniCare-MI's membership and DMC's facility utilization rate.
In the strategic partnership's first phase, on May 1, 2000 approximately 28,000 members of DMC's Medicaid managed care program were transferred to OmniCare-MI, and DMC's seven hospitals and approximately 3,000 affiliated physicians now serve as part of OmniCare-MI's provider network. During fiscal 2000, the additional membership generated management fee revenue of $0.6 million. It is anticipated that management fee revenue earned on the increased Medicaid membership will grow to approximately $7.0 million in fiscal 2001 with a minimal increase in cost.
On July 14, 2000, the State of Michigan notified OmniCare-MI that it was one of the successful bidders in the State's extensive bid process for increased Medicaid rates and continued eligibility as an HMO providing coverage to enrollees of the State's Comprehensive Health Care Program for Medicaid beneficiaries. As a result, OmniCare-MI has been awarded a rate increase and an extension of its contract with the State to September 30, 2002, with the potential for three one-year extensions. Management believes that the awarded rate increase could increase OmniCare-MI's annual Medicaid revenue by approximately 11% on average, resulting in approximately $1.5 million of additional management fee revenue to the Company in fiscal 2001. In addition, because the unsuccessful bidders' Medicaid enrollees must change to a successful bidder in their region, management believes that OmniCare-MI's volume of Medicaid enrollees could significantly increase, generating additional management fee revenue for the Company in and after fiscal 2001. There can be no assurance, however, of any such increase in OmniCare-MI's membership.
Other Managed Plan Ventures
OMNICARE-LA. OmniCare-LA, a network model HMO headquartered in New Orleans, Louisiana, was organized as a Louisiana corporation in November 1994, and is 100% owned by the Company's wholly owned subsidiary, United American of Louisiana, Inc. ("UA-LA"). OmniCare-LA was granted an HMO license by the Louisiana Department of Insurance in June 1996. In connection therewith, the Company funded OmniCare-LA's statutory reserve and net worth requirements through letters of credit for $1.0 million and $1.0 million in cash deposited in accounts at state banks in Louisiana. OmniCare-LA was in a pre-operational phase continually since inception. Consistent with the Company's restructuring efforts, the Company has ceased its operations in Louisiana, withdrawn its $1.0 million statutory reserve, terminated its letter of credit commitments and dissolved OmniCare-LA.
PHILCARE. PhilCare, a network model HMO headquartered in Philadelphia, Pennsylvania, was organized as a Pennsylvania corporation in May 1994. PhilCare was 49% owned by the Company's wholly owned subsidiary, United American of Pennsylvania, Inc. ("UA-PA"), and 51% owned by local participants. In June 1996, PhilCare obtained its HMO license, with the Company funding PhilCare's statutory reserve and net worth requirements of $2.1 million through cash deposited at a Pennsylvania bank.
Effective April 1, 1998, PhilCare entered into an Integrated Delivery System ("IDS") agreement with Pennsylvania Healthmate, Inc. ("Healthmate"), an entity that arranges for the provision of health care services for its Medicaid membership through contracts with health care providers. The IDS agreement placed the entity in the position of bearing the risk, but as the contractor with
the Pennsylvania Department of Public Welfare (the state's regulatory agency for HMOs), PhilCare was deemed responsible for compliance with all applicable rules and regulations. Based on an evaluation of the net recoverable value of the Company's investment in PhilCare, in fiscal 1998 the Company recorded a full impairment loss against its $2.1 million investment.
In February 2000, Healthmate was sold, and the buyer agreed to assume Healthmate's liabilities. As a result of the Healthmate sale, on June 22, 2000, PhilCare's Board of Directors and shareholders approved the voluntary dissolution of PhilCare. PhilCare was dissolved under applicable law in the Company's fiscal 2000. As a result of the dissolution, assets of PhilCare were distributed to UA-PA, pursuant to agreements under which UA-PA contributed those assets, and the Company recovered its $2.1 million investment in PhilCare, resulting in a gain in that amount for the fiscal year ended June 30, 2000.
The Company ceased all operational activities of UA-PA in fiscal 1998, except its rent obligations for leased office spaces in Philadelphia which were substantially sublet. In fiscal 2000, the Company reached an agreement with its landlord, which assumed the subleases and released the Company from its lease obligations, effective September 9, 1999.
ADVICA HEALTH MANAGEMENT. In March 1993, the Company reached an agreement with New York-based HealthScope Administrative Services Corporation, later known as HealthScope/United, Inc. ("HealthScope"), to form a health care management company intended to gain access to one of the largest Medicaid eligible populations in the United States. Pursuant to the agreement, HealthScope became a wholly owned subsidiary of Advica Health Management (formerly United/HealthScope, Inc.) ("Advica"), which was organized to engage in development, consulting and contract management services for publicly funded managed care programs in the metropolitan New York area.
In May 1997, Advica's outstanding debt and preferred stock were restructured to attract other investors. The Company converted its interest in Advica, including loans, advances, accrued interest and the value of warrants held by the Company, to one million shares of non-voting preferred stock of the restructured Advica in the amount of $4.0 million, and a warrant to purchase 3,310 shares of Advica common stock, exercisable at any time at a nominal price, representing approximately 3% of Advica's common shares on a fully diluted basis. The conversion of the Company's loans to Advica into preferred stock was treated as a "troubled debt restructuring" with the investment recorded at its estimated fair value at the date of the restructuring resulting in a net investment in Advica of $2.3 million.
In fiscal 1998, based on Advica's adverse operating results, the Company recognized a full impairment loss on its investment that resulted in bad debt expense of $2.3 million for fiscal year 1998. Subsequently, in November 1998, the Company converted its preferred stock and warrant investment in Advica to Advica common shares.
SELF-FUNDED BENEFIT PLAN
In 1993, the Company acquired Corporate Healthcare Financing, Inc. ("CHF") for approximately $16.2 million in the form of cash, stock, a contingent note and the assumption
of liabilities. CHF designed customized employee welfare plan arrangements for self-funded employers and provided marketing, management and administrative services to self-funded employers generally.
On September 8, 1998, CHFA, Inc., a corporation whose owners included Louis J. Nicholas, the Chief Executive Officer of CHF and a former officer and director of the Company, purchased all of the stock of CHF for $17.75 million, comprised of $2.0 million in cash, a secured note for $13.25 million and an unsecured note for $2.5 million. A regional investment banking firm issued a fairness opinion supporting the reasonableness of the consideration to be received by the Company for such sale. As required by the Company's line of credit facility, the CHF sale was approved by the Company's bank lender and all proceeds from the sale (including all payments on the two notes) were to be used to reduce the Company's indebtedness to the bank.
The secured note was payable to the Company in four monthly installments of $0.5 million each through December 1998 with the balance due in January 1999, with options to extend the final payment to March 1999, plus interest at the prime rate on short-term unsecured commercial borrowings. The unsecured note was payable to the Company in two annual installments of $0.25 million with the balance due August 31, 2001, plus interest at 6% per annum.
In April 1999, the parties modified the secured note's payment terms, extending its maturity date to August 31, 1999, requiring additional principal and interest payments totaling $0.9 million to be paid over the extended period and requiring an additional limited personal guarantee by Mr. Nicholas of $1.5 million of the principal of the secured note. Including payments on the secured note, through June 30, 1999 the Company received $9.2 million of the CHF sale price, plus $0.8 million of interest.
On August 16, 1999, both notes were paid in full with accrued interest, net of a $0.25 million prepayment discount agreed to by the Company. The final payment on the secured and unsecured notes was in the aggregate amount of $8.5 million.
GOVERNMENT REGULATION
The Company is subject to extensive federal and state health care and insurance regulations designed primarily to protect enrollees in the Managed Plans, particularly with respect to government sponsored enrollees. Such regulations govern many aspects of the Company's business affairs and typically empower state agencies to review management agreements with health care plans for, among other things, reasonableness of charges. Among the other areas regulated by federal and state law are licensure requirements, premium rate increases, new product offerings, procedures for quality assurance, enrollment requirements, covered benefits, service area expansion, provider relationships and the financial condition of the managed plans, including cash reserve requirements and dividend restrictions. There can be no assurances that the Company or its Managed Plans will be granted the necessary approvals for new products or will maintain federal qualifications or state licensure.
The licensing and operation of OmniCare-MI and OmniCare-TN are governed by the respective states' statutes and regulations applicable to health maintenance organizations. The licenses are subject to denial, limitation, suspension or revocation if there is a determination that the plans are operating out of compliance with the states' HMO statutes, failing to provide quality health services, establishing rates that are unfair or unreasonable, failing to fulfill obligations under outstanding agreements or operating on an unsound fiscal basis. Unlike OmniCare-MI, OmniCare-TN is not a federally-qualified HMO and, therefore, is not subject to the federal HMO Act. The County Care plan is governed by the Company's contract with UHCP.
Federal and state regulation of health care plans and managed care products is subject to frequent change, varies from jurisdiction to jurisdiction and generally gives responsible administrative agencies broad discretion. Laws and regulations relating to the Company's business are subject to amendment and/or interpretation in each jurisdiction. In particular, legislation mandating managed care for Medicaid recipients is often subject to change and may not initially be accompanied by administrative rules and guidelines. Changes in federal or state governmental regulation could affect the Company's operations, profitability and business prospects. OmniCare-MI is currently in continuing discussions with state regulators regarding compliance with certain regulatory issues. See "Managed Plan Operated By the Company--OmniCare-MI" under "Managed Plans" above. While the Company is unable to predict what additional government regulations, if any, affecting its business may be enacted in the future or how existing or future regulations may be interpreted, regulatory revisions may have a material adverse effect on the Company.
INSURANCE
The Company presently carries comprehensive general liability, directors and officers liability, property, business automobile, and workers' compensation insurance. Management believes that coverage levels under these policies are adequate in view of the risks associated with the Company's business. In addition, the Managed Plans have professional liability insurance that covers liability claims arising from medical malpractice. The individual Managed Plans are required to pay the insurance premiums under the terms of the respective management agreements. There can be no assurance as to the future availability or cost of such insurance, or that the Company's business risks will be maintained within the limits of such insurance coverage.
COMPETITION
The managed care industry is highly competitive. The Company directly competes with other entities that provide health care plan management services, some of which are nonprofit corporations and others which have significantly greater financial and administrative resources. The Company primarily competes on the basis of fee arrangements, cost effectiveness and the range and quality of services offered to prospective health care clients. While the Company believes that its experience gives it certain competitive advantages over existing and potential new competitors, there can be no assurance that the Company will be able to compete effectively in the future.
The Company competes with other HMOs, PPOs and insurance companies. The level of this competition may affect, among other things, the operating revenues of the Managed Plans and, therefore, the revenues of the Company. The predominant competitors in fiscal 2000 in southeastern Michigan are Blue Cross Blue Shield of Michigan, The Wellness Plan, Total Health Plan and Health Alliance Plan. The competitors in central and southwestern Tennessee are Access Med Plus, TLC, Xantus and Blue Cross Blue Shield. The Company's Managed Plans primarily compete on the basis of enrollee premiums, covered benefits, provider networks, utilization limitations, enrollee co-payments and other related plan features and criteria. Management believes that the Company's Managed Plans are able to compete effectively with their primary market competitors in these areas.
EMPLOYEES
The Company's ability to maintain its competitive position and expand its business into new markets depends, in significant part, upon the maintenance of its relationships with various existing senior officers, as well as its ability to attract and retain qualified health care management professionals. Although the Company has an employment agreement with its current Chief Executive Officer, it neither has nor intends to pursue employment agreements with all of its key personnel. Accordingly, there is no assurance that the Company will be able to maintain such relationships or attract such professionals.
The total number of employees at September 1, 2000 was 319 compared to 286 at September 1, 1999. The Company's employees do not belong to a collective bargaining unit and management considers its relations with employees to be good.
MANAGEMENT INFORMATION SYSTEMS
The Company is well under way in implementing its new strategic information technology plan, intended to enhance operations, support provider, member and employer information requirements, and reduce costs. An initial phase providing for automation of claims entry by scanning, imaging and electronic data interchange was completed and implemented in the fourth quarter of fiscal 2000.
The Company has purchased a new state-of-the-art computer system to replace its claims processing and payment system. The new system, expected to be in service early in calendar year 2001, will include many features and capabilities that must now be performed manually or in a mode that is not very responsive to Company needs. The new system will operate in a real-time mode enabling rapid response to information needs. The system will automate activities associated with membership and enrollment, benefits management, premium billing, member services, claims/encounter processing, medical management, case management, quality management, referral management, provider contracting, and HEDIS (Health Plan Employer Data and Information Set) reporting.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage management to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statements. Certain statements contained in this Form 10-K annual report, including, without limitation, statements containing the words "believes," "anticipates," "will," "could," "may," "might" and words of similar import, constitute "forward-looking statements" within the meaning of this "safe harbor."
Such forward-looking statements are based on management's current expectations and involve known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors potentially include, among others, the following:
1. Inability of OmniCare-MI to remain as a viable entity. 2. Inability to increase premium rates commensurate with increases in medical costs due to utilization, government regulation, or other factors. 3. Discontinuation of, limitations upon, or restructuring of government-funded programs, including but not limited to the TennCare program. 4. Increases in medical costs, including increases in utilization and costs of medical services and the effects of actions by competitors or groups of providers. 5. Adverse state and federal legislation and initiatives, including limitations upon or reductions in premium payments; prohibition or limitation of capitated arrangements or financial incentives to providers; federal and state benefit mandates (including mandatory length of stay and emergency room coverage); limitations on the ability to manage care and utilization; and any willing provider or pharmacy laws. 6. The shift of employers from insured to self-funded coverage, resulting in reduced operating margins to the Company. 7. Failure to obtain new customer bases or retain existing customer bases or reductions in work force by existing customers; and failure to sustain commercial enrollment to maintain an enrollment mix required by government programs. 8. Termination of the OmniCare-MI management agreement. 9. Increased competition between current organizations, the entrance of new competitors and the introduction of new products by new and existing competitors. 10. Adverse publicity and media coverage. 11. Inability to carry out marketing and sales plans. 12. Loss or retirement of key executives. 13. Termination of provider contracts or renegotiations at less cost-effective rates or terms of payment.
14. The selection by employers and individuals of higher co-payment/deductible/ coinsurance plans with relatively lower premiums or margins. 15. Adverse regulatory determinations resulting in loss or limitations of licensure, certification or contracts with governmental payors. 16. Higher sales, administrative or general expenses occasioned by the need for additional advertising, marketing, administrative or MIS expenditures. 17. Increases by regulatory authorities of minimum capital, reserve and other financial solvency requirements. 18. Denial of accreditation by quality accrediting agencies, e.g., the National Committee for Quality Assurance (NCQA). 19. Adverse results from significant litigation matters. 20. Inability to maintain or obtain satisfactory bank loan credit arrangements.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently leases approximately 86,000 aggregate square feet from which it conducts its operations in Michigan and Tennessee. The principal offices of the Company are located at 1155 Brewery Park Boulevard, Suite 200, Detroit, Michigan, where it currently leases approximately 54,000 square feet of office space.
The Company believes that its current facilities provide sufficient space suitable for all of the Company's planned activities and that sufficient additional space will be available on reasonable terms, if needed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On February 26, 1998, pursuant to a Stipulation and Consent to Appointment of Receiver and Order of Liquidation earlier signed and delivered to the FDOI by the Company, UltraMedix and UA-FL, upon the FDOI's petition, the Circuit Court of the Second Judicial Circuit, in and for Leon County, Florida (the "Florida court") entered a consent order declaring UltraMedix and UA-FL insolvent and appointing the FDOI as Receiver ("Receiver") for the purposes of their liquidation.
On March 3, 1998, the Florida court entered a Consent Order of Liquidation, Injunction and Notice of Stay, declaring that any further efforts of the Receiver to rehabilitate the Organizations would be useless, ordering the Receiver to take possession of and liquidate all assets of the Organizations, and ordering the immediate cancellation of UltraMedix's authority to provide health services as an HMO in Florida. On April 15, 1998, the Florida Agency for Health Care Administration notified the Company of the Agency's intent to enforce the Company's Guarantee Agreement, under which the Company had agreed to reimburse UltraMedix's contracted Medicaid providers for authorized, covered Medicaid services rendered to covered Medicaid enrollees, for which the Agency had made payment on behalf of such enrollees, limited to an amount equal to the amount of surplus UltraMedix would have been required to maintain under the Medicaid contract in the absence of such Guarantee Agreement.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Shares of the Company's Common Stock have been traded since May 2, 2000 on the OTC Bulletin Board with the symbol "UAHC," and earlier, during fiscal years 1999 and 2000, were traded on the New York Stock Exchange with the symbol "UAH" through May 1, 2000.
The table below sets forth for the Common Stock the range of the high and low sales prices on the New York Stock Exchange for each quarter in the past two fiscal years. (For the fourth quarter of fiscal 2000, the range of the high and low bid quotations on the OTC Bulletin Board from and after May 2, 2000 was neither higher nor lower than the high and low sales prices, respectively, shown in the table below.)
As of September 15, 2000, the closing price of the Common Stock was $0.50 per share and there were approximately 240 shareholders of record of the Company.
The Company has not paid any cash dividends on its Common Stock since its initial public offering in the fourth quarter of fiscal 1991 and does not anticipate paying such dividends in the foreseeable future. The Company intends to retain earnings for use in the operation and expansion of its business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table shows consolidated financial data for the periods indicated:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
After implementation of the restructuring plan initiated in fiscal 1998, which included changes in senior management, sale of the Company's subsidiary, CHF, renegotiation of the bank credit facility and settlement of legal proceedings, the Company continues its efforts to achieve
further cost reductions and maintain Company revenue, as well as pursue worthwhile mergers and joint ventures.
In September 1998, effective as of August 31, 1998, CHF was sold for $17.75 million, comprised of $2.0 million in cash and the buyer's secured and unsecured notes for $13.25 million and $2.5 million, respectively. Including payments on the secured note, $9.2 million of the sale price plus $0.8 million of interest in cash was received through June 30, 1999. On August 16, 1999, the Company was paid $8.5 million, the remaining principal balance of the secured and unsecured notes and accrued interest thereon, net of a $0.25 million discount granted as an inducement for the buyer to prepay both notes. As required by the Company's bank line of credit facility, the sale was approved by the Company's bank lender and all proceeds were used to reduce the Company's indebtedness to the bank.
On September 25, 2000, the Company replaced its $4.0 million bank line of credit, originally due July 1, 2000, with a new $4.0 million term loan from the same bank lender. The term loan requires monthly installments of approximately $85,000, based upon a five-year amortization, through September 30, 2001 when the remaining unpaid principal of approximately $3.4 million will be due. As a result of this refinancing, principal due subsequent to June 30, 2001 is classified as long-term debt in the "Consolidated Balance Sheets" at June 30, 2000. See Notes 10 and 16 in "Notes to Consolidated Financial Statements" for further discussion of the refinancing of the line of credit.
Certain former senior officers and the Company were named defendants in two shareholder lawsuits filed in the United States District Court for the Eastern District of Michigan in August 1995. The court consolidated these lawsuits into a single action. The consolidated action alleged that certain senior officers and the Company issued reports and statements that violated federal securities laws. The Company and the officers contended that all material facts were disclosed during the period in question and that certain material facts alleged not to have been disclosed were already available in the financial marketplace. Nevertheless, management concluded that continued defense of the litigation could have an adverse impact on the Company's financial position. Continuation of this litigation would have also diverted management's focus from operations. Based on these facts, management pursued settlement with the plaintiffs.
On September 14, 1998, the parties agreed to a proposed settlement requiring the release of all claims and damages sought by the plaintiffs in exchange for (a) $2.0 million in cash from the Company's insurance carrier, (b) a $0.625 million promissory note of the Company payable in 15 equal monthly installments beginning 13 months after entry of a final court order approving the settlement, with interest at 4% per annum from the date of such order, and (c) newly issued shares of common stock of the Company with an aggregate value of $0.625 million based on a share price equal to the greater of (i) the average closing price of the Company's common stock for the period from July 20, 1998 through the third trading day preceding the court hearing on approval of the settlement or (ii) $2.25 per share.
In December 1998, final judgment was entered approving the Company's shareholder lawsuit settlement and dismissing the action. Pursuant thereto, all claims and damages sought by the plaintiffs were released in exchange for $2.0 million in cash from the Company's insurance carrier, a $0.625 million promissory note from the Company payable in 15 equal monthly installments through March 2001, with interest at 4% per annum from December 11, 1998, and 277,777 new shares of common stock of the Company valued at $0.625 million and issued on March 29, 1999.
Effective April 1, 1999, the Company entered into the County Care contract to arrange for the delivery of health care services, including the assumption of underwriting risk, on a capitated basis to certain enrollees residing in Wayne County (Michigan) who lack access to private or employer sponsored health insurance or to another government health plan. The current contract period is through September 30, 2001, with automatic renewal for successive periods of one year unless terminated by either party as provided in the contract. Although management does not expect significant net earnings directly from the County Care contract, management believes that entering into this contract is consistent with the Company's strategic objective of expanding the client base and achieving size sufficient to enable the Company to negotiate better rates, save on administrative costs and build profits.
On May 6, 1999, the Company's Board of Directors authorized the repurchase and retirement of up to 250,000 of the Company's common shares (approximately 3.6% of the total outstanding common shares) in the open market. At June 30, 1999, 12,900 shares had been repurchased, and the remaining 237,100 shares were repurchased in July 1999.
The Company has implemented a corrective action plan, developed in 1998 and revised in 2000, for OmniCare-MI. The corrective action plan implemented in 1998 included strategic initiatives to reduce medical costs through renegotiating its hospital and physician provider contracts, and the reduction of the management fee percentage paid to the Company from 17% to 14% effective June 1, 1998. The 1998 corrective action plan was effective in reducing costs for OmniCare-MI's Medicaid members, but not as effective in regard to OmniCare-MI's point-of-service members. The management fee percentage reduction decreased the Company's management fee revenue for fiscal 1999 by approximately $4.2 million compared to fiscal 1998.
The Company's revised corrective action plan for OmniCare-MI, developed in 2000, includes the development of new underwriting guidelines, implementation of new renewal rates representing an average per-member premium increase of 40% and institution of pharmacy and office visit co-pays for all member groups. In addition, OmniCare-MI is taking measures to further manage its medical costs through renegotiations of hospital contracts, and cost reduction efforts in the areas of pharmacy, castastrophic case management and behavioral health.
On April 13, 2000 and June 30, 1998, the Company funded unsecured loans to OmniCare-MI, evidenced by surplus notes of $7.7 million and $4.6 million, respectively, to enable OmniCare-MI to meet its minimum statutory requirements for net worth and working capital. The $7.7
million loan consisted of $4.0 million in cash and conversion of $3.7 million of management fees owed to the Company. Pursuant to the terms of the surplus notes, interest and principal payments are subject to approval by the Bureau and shall be repaid only out of the statutory surplus earnings of OmniCare-MI. The interest rate on the $7.7 million surplus note is fixed at 8.5% per annum, while the interest rate on the $4.6 million surplus note is at the prime rate (9.5% at June 30, 2000). Interest is payable annually and if not paid annually is forfeited. Interest income of $0.5 and $0.4 million was forfeited for fiscal 2000 and 1999, respectively. The principal on the notes has no stated maturity or repayment date. The surplus notes are subordinated to all other claimants of OmniCare-MI. Based on an analysis of OmniCare-MI's projected future cash flows, the Company recorded impairment losses on the valuation of the surplus notes. The impairment losses resulted in bad debt expense of $3.1 million and $2.3 million for the years ended June 30, 2000 and 1998, respectively. In addition, during fiscal 1999, the Company forgave $1.3 million in management fees owed by OmniCare-MI to enable OmniCare-MI to meets its minimum statutory requirements for net worth and working capital.
The continued stabilization efforts related to OmniCare-MI continue, including pursuing joint ventures and other similar activities. In June 1999, OmniCare-MI joined with Blue Cross Blue Shield of Michigan to provide health care, dental and prescription drug benefits to employees of two new Detroit casinos. There are currently approximately 5,000 CasinoCare Venture members receiving health coverage and generating medical premiums of approximately $0.8 million monthly. The casinos' present facilities may be replaced by larger facilities in Detroit as early as 2004; and based upon the casinos' estimates, the replacement facilities, when built and open, will have up to 8,000 employees (amounting to more than 18,000 members) requiring health coverage, which could generate medical premiums of up to $2.3 million monthly ($28.0 million annually). The Company receives a management fee based on the medical premiums generated from those members who select the Company's products. There can be no assurance that the CasinoCare Venture will be able to increase its covered membership as a result of the proposed larger facilities.
On May 1, 2000, the Company and OmniCare-MI commenced their previously announced strategic partnership with DMC, a major health care provider system in southeastern Michigan. The alliance is intended to strengthen their respective core businesses and improve the quality of care and services for their patients and members. In addition, it was announced that DMC and OmniCare-MI will develop a joint marketing campaign designed to increase OmniCare-MI's membership and DMC's facility utilization rate.
In the strategic partnership's first phase, on May 1, 2000 approximately 28,000 members of DMC's Medicaid managed care program were transferred to OmniCare-MI, and DMC's seven hospitals and approximately 3,000 affiliated physicians now serve as part of OmniCare-MI's provider network. During fiscal 2000, the additional membership generated management fee revenue of $0.6 million. Management anticipates that management fee revenue from the increased Medicaid membership will grow to approximately $7.0 million in fiscal 2001 with a minimal increase in cost.
On July 14, 2000, the State of Michigan notified OmniCare-MI that it was one of the successful bidders in the State's extensive bid process for increased Medicaid rates and
continued eligibility as an HMO providing coverage to enrollees of the State's Comprehensive Health Care Program for Medicaid beneficiaries. As a result, OmniCare-MI has been awarded a rate increase, effective October 1, 2000, and an extension of its contract with the State through September 30, 2002, with the potential for three one-year extensions. Management estimates that the awarded rate increase could increase OmniCare-MI's annual Medicaid revenue by approximately 11% on average, resulting in approximately $1.5 million of additional management fee revenue to the Company in fiscal 2001. In addition, because the unsuccessful bidders' Medicaid enrollees must change to a successful bidder in their region, management believes that OmniCare-MI's volume of Medicaid enrollees could significantly increase, generating additional management fee revenue for the Company in and after fiscal 2001. There can be no assurance, however, of any such increase in OmniCare-MI's membership.
On April 15, 1998, the Florida Agency for Health Care Administration notified the Company of the Agency's intent to enforce the Company's Guarantee Agreement, under which the Company had agreed to reimburse UltraMedix's contracted Medicaid providers for authorized, covered Medicaid services rendered to covered Medicaid enrollees, for which the Agency had made payment on behalf of such enrollees, limited to an amount equal to the amount of surplus UltraMedix would have been required to maintain under the Medicaid contract in the absence of such Guarantee Agreement.
Until March 31, 2000, the Company maintained a $6.4 million estimated medical claims liability for UltraMedix, which had been established at December 31, 1997. At March 31, 2000, Company management concluded that the continuing reserve requirement should be $0.8 million, and accordingly, the Company reduced the $6.4 million reserve by $5.6 million and offset that amount against medical services expenses.
Effective April 1, 1998, PhilCare entered into an IDS agreement with Healthmate, an entity that arranges for the provision of health care services for its Medicaid membership through contracts with health care providers. The IDS agreement placed the entity in the position of bearing the risk, but as the contractor with the Pennsylvania Department of Public Welfare (the state's regulatory agency for HMOs), PhilCare was deemed responsible for compliance with all applicable rules and regulations. Based on an evaluation of the net recoverable value of the Company's investment in PhilCare, the Company recorded a full impairment loss against its $2.1 million investment, in the fiscal year ended June 30, 1998.
In February 2000, Healthmate was sold, and the buyer agreed to assume Healthmate's liabilities. As a result of the Healthmate sale, on June 22, 2000, PhilCare's Board of Directors and shareholders approved the voluntary dissolution of PhilCare. PhilCare was dissolved under applicable law in the Company's fiscal 2000. As a result of the dissolution, assets of PhilCare were distributed to UA-PA pursuant to agreements under which UA-PA contributed those assets, and the Company recovered its $2.1 million investment in PhilCare, resulting in a gain in that amount for the fiscal year ended June 30, 2000.
Effective July 1, 2000, OmniCare-TN entered into a new 42-month contract with the State of Tennessee's TennCare Program. The provisions of the contract provide for an approximate 4.5% increase in average premiums through January 1, 2001, with future increases to be determined by the State of Tennessee. Such increases are in lieu of the quarterly adverse selection payments previously made by TennCare to compensate managed care organizations for substantial adverse costs incurred due to the nature of the services they offer and their treatment of a high risk population. Management expects that the net effect of the increase in the monthly premiums and the elimination of the adverse selection payments will improve monthly cash flow in fiscal 2001.
On September 20, 2000, the Company made an additional cash contribution of $0.9 million to OmniCare-TN in exchange for additional preferred stock of OmniCare-TN to be issued to the Company. The cash contribution was made to enable OmniCare-TN to meet minimum statutory requirements for net worth.
The Company recognized earnings before income taxes of $1.6 million and $1.2 million for the years ended June 30, 2000 and 1999, respectively, an increase of $0.4 million (33%). Earnings net of income taxes for the years ended June 30, 2000 and 1999 were $1.0 million and $0.6 million, respectively, an increase of $0.4 million (67%). Excluding the earlier described reversal in part of an UltraMedix medical claims liability reserve, recording of bad debt expense against amounts owed to the Company by OmniCare-MI and recovery of the investment in PhilCare, resulting in a gain, the Company would have recognized a loss before income taxes of $3.0 million for the fiscal year ended June 30, 2000.
YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999
Total revenues increased $15.6 million (17%), to $109.1 million in the year ended June 30, 2000 from $93.5 million in the year ended June 30, 1999.
Medical premium revenues were $86.2 million in the year ended June 30, 2000, an increase of $13.0 million (18%) from medical premium revenues of $73.2 million in the year ended June 30, 1999.
Medical premium revenues for OmniCare-TN increased $6.1 million (9%), to $77.0 million in the year ended June 30, 2000, from $70.9 million in the year ended June 30, 1999. OmniCare-TN's premium rate increases accounted for $3.1 million of the increase. Member months decreased 16,000 (3%) to 524,000 in the year ended June 30, 2000 from 540,000 in the year ended June 30, 1999, and accounted for a $2.4 million decrease in premium revenues. TennCare provides additional adverse selection payments to managed care organizations for high cost chronic conditions of their members and payments earmarked as adjustments for covered benefits. In the year ended June 30, 2000, revenue adjustments for adverse selection and other covered benefits increased $4.5 million. OmniCare-TN adverse selection revenue related to fiscal 1999, recognized in the year ended June 30, 2000, accounted for $0.9 million of the revenue increase.
The total OmniCare-TN PMPM revenue rate - based on an average membership of 43,700 for the year ended June 30, 2000 compared to 45,000 for the year ended June 30, 1999 - was $147 for the year ended June 30, 2000 compared to $131 for the year ended June 30, 1999, an increase of $16 (12%). The PMPM premium rate, based on the State of Tennessee's estimate, increased 5%, to $129 for the year ended June 30, 2000 from $122 for the year ended June 30, 1999, excluding excess adverse selection payments and adjustments for covered benefits.
Premium revenues from the County Care program totaled $9.2 million for the year ended June 30, 2000, compared to $2.3 million for the year ended June 30, 1999. The $6.9 million (300%) increase is a result of the Company having only participated in the County Care program three months of fiscal 1999 versus a full year of participation in fiscal 2000.
Management fees earned from OmniCare-MI were $18.8 million in the year ended June 30, 2000, an increase of $0.7 million (4%) from fees of $18.1 million in the year ended June 30, 1999. Excluding the earlier described forgiveness in fiscal 1999 of $1.3 million of management fee revenue, management fees earned in the fiscal year ended June 30, 2000 would have decreased $0.6 million (3%) compared to management fees of $19.4 million for the year ended June 30, 1999. The $18.8 million of management fees earned from OmniCare-MI in fiscal 2000 includes the portion of $3.7 million which was converted into an unsecured loan to OmniCare-MI, evidenced by a surplus note.
Interest and other income increased $1.9 million (86%) to $4.1 million in the year ended June 30, 2000 from $2.2 million in the year ended June 30, 1999. Other income increased $2.5 million as a result of a $2.1 million gain recorded on the Company's recovery of its $2.1 million investment in PhilCare upon PhilCare's dissolution and $0.4 million for fees received for management of the Women, Infants and Children program for the City of Detroit. Interest income decreased $0.6 million due primarily to the retirement of the CHF interest-bearing notes in August 1999.
Total expenses were $107.5 million in the year ended June 30, 2000, compared to $92.4 million in the year ended June 30, 1999, an increase of $15.1 million (16%).
Medical services expenses were $70.3 million in the year ended June 30, 2000, an increase of $10.4 million (17%) from medical services expenses of $59.9 million in the year ended June 30, 1999. As described in "Overview" above, the Company established at December 31, 1997 and maintained until March 31, 2000 an estimated medical claims liability reserve of $6.4 million for UltraMedix. At March 31, 2000, Company management concluded that the continuing reserve requirement should be $0.8 million, and accordingly, the Company reduced the reserve by $5.6 million and offset that amount against medical services expenses. Without that reversal, medical services expenses would have been $75.9 million in the year ended June 30, 2000, an increase of $16.0 million (27%), resulting in an overall percentage of medical services expenses to medical premium revenues - the medical loss ratio ("MLR") - of 88% for OmniCare-TN and County Care for fiscal 2000.
Medical services expenses for OmniCare-TN increased $10.0 million (17%), to $67.8 million in the year ended June 30, 2000 from $57.8 million in the year ended June 30, 1999. The OmniCare-TN MLR was 88% for the year ended June 30, 2000 and 82% for the year ended June 30, 1999. The fiscal 2000 OmniCare-TN MLR includes an approximate 4.5% increase due to a fourth quarter increase in the medical claims liability of $3.4 million related to the assignment of new members by TennCare. The fiscal 1999 OmniCare-TN MLR includes an approximate 3% reduction due to offsets to medical services expenses related to the net recovery of $0.5 million in refundable advances made to a third party dental administrator and an excess adverse selection payment of $1.0 million received in fiscal 1999 for the period June 1997 and prior.
OmniCare-TN was assigned approximately 6,000 members by TennCare in the second half of fiscal 2000 as a result of three other managed care organizations, which had contracts with TennCare, ceasing to serve their enrollees or being unable to take on new enrollees. Medical services expenses for such new OmniCare-TN members disproportionately exceeded OmniCare-TN's normal PMPM experience and adversely affected its earnings for and since that period. OmniCare-TN is seeking an adverse selection payment from TennCare, retroactive for such fiscal 2000 expenses, but there can be no assurance what the outcome of its request will be.
Medical services expenses for County Care were $8.1 million in the year ended June 30, 2000, an increase of $6.0 million (286%) from medical services expenses of $2.1 million in the year ended June 30, 1999. The increase is a result of the Company having only participated in the County Care program three months in fiscal 1999 versus a full year of participation in fiscal 2000. The County Care MLR for the year ended June 30, 2000 was 88%. County Care operations began with inception of the contract in April 1999.
Marketing, general and administrative expenses increased $2.9 million (11%), to $30.2 million in the year ended June 30, 2000, from $27.3 million in the year ended June 30, 1999. The increase was due primarily to increases in wages and benefits of $1.8 million and increases in temporary labor costs of $0.9 million.
Depreciation and amortization remained relatively constant at $3.4 million for the years ended June 30, 2000 and 1999. The Company had previously capitalized costs for internally developed customized software. At June 30, 2000, these costs were fully depreciated and accounted for approximately $1.4 million of fiscal 2000 expense. The Company purchased $2.5 million of property and equipment, the majority of which was placed in service in the last quarter of fiscal 2000 and therefore did not have a significant effect on depreciation expense in the year ended June 30, 2000.
Interest expense decreased $1.2 million (68%), to $0.5 million in the year ended June 30, 2000 from $1.7 million in the year ended June 30, 1999, due to reduction of outstanding debt from $13.1 million at June 30, 1999 to $4.3 million at June 30, 2000.
Bad debt expense in the year ended June 30, 2000 totaled $3.1 million as a result of recording an impairment loss on the valuation of the unsecured loan made to OmniCare-MI.
The Company recognized earnings before income taxes of $1.6 million and $1.2 million for the years ended June 30, 2000 and 1999, respectively, an increase of $0.4 million (33%). Earnings net of income taxes for the years ended June 30, 2000 and 1999 were $1.0 million and $0.6 million, respectively, an increase of $0.4 million (67%). Excluding the earlier described reversal in part of an UltraMedix medical claims liability reserve, recording of bad debt expense against amounts owed to the Company by OmniCare-MI and recovery of the investment in PhilCare, resulting in a gain, the Company would have recognized a loss before income taxes of $3.0 million for the fiscal year ended June 30, 2000.
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
Total revenues decreased $12.1 million (11%), from $105.6 million in the year ended June 30, 1998 to $93.5 million in the year ended June 30, 1999.
Medical premium revenues were $73.2 million in the year ended June 30, 1999, a decrease of $5.4 million (7%) from medical premium revenues of $78.6 million in the year ended June 30, 1998.
OmniCare-TN medical premium revenues increased $7.4 million (12%), from $63.5 million in the year ended June 30, 1998 to $70.9 million in the year ended June 30, 1999. OmniCare-TN received $5.9 million in adverse selection payments in the year ended June 30, 1999, of which $1.8 million, $3.1 million and $1.0 million represented the service periods for July 1998 to March 1999, July 1997 to June 1998 and June 1997 and prior, respectively. In addition, OmniCare-TN recognized a one-time adverse selection payment of $1.2 million in fiscal 1999. For the year ended June 30, 1999, OmniCare-TN medical premium revenues related to excess adverse selection payments, which had been based on the State of Tennessee's estimate, increased by $4.0 million (364%), from $1.1 million for fiscal 1998 to $5.1 million for fiscal 1999.
The OmniCare-TN PMPM premium rate -- based on an average membership of 45,000 for the year ended June 30, 1999 compared to 44,000 for the year ended June 30, 1998 -- was $122 for the year ended June 30, 1999, compared to $119 for the year ended June 30, 1998 (excluding excess adverse selection payments), an increase of 2% or $3.4 million. The 4% increase in member months accounted for $1.8 million of the OmniCare-TN fiscal 1999 medical premium revenue increase.
Premium revenues from the County Care program, which began in April 1999, totaled $2.3 million in fiscal 1999.
UltraMedix, which ceased operations and was placed in liquidation in March 1998, did not contribute any medical premium revenues in the year ended June 30, 1999. Medical premium revenues from UltraMedix were $15.1 million in the year ended June 30, 1998.
Management fees earned from OmniCare-MI were $18.1 million in the year ended June 30, 1999, a decrease of $6.9 million (28%) from fees of $25.0 million in the year ended June 30, 1998. The decrease is due to the following: (i) reduction in the management fee percentage in June 1998 from 17% to 14%, which resulted in a decrease of $4.2 million; (ii) a decrease in operating revenues of OmniCare-MI in fiscal 1999 due primarily to an enrollment decrease of 6%, which resulted in a net decrease in management fees of $1.6 million; and (iii) forgiveness of management fee revenues from OmniCare-MI of $1.3 million.
Total expenses before income taxes from continuing operations totaled $92.4 million in the year ended June 30, 1999, compared to $132.9 million in the year ended June 30, 1998, a decrease of $40.5 million (30%).
Medical services expenses were $59.9 million in the year ended June 30, 1999, a decrease of $10.4 million (15%) from medical services expenses of $70.3 million in the year ended June 30, 1998.
Medical services expenses for OmniCare-TN increased $4.8 million (9%), from $53.0 million in the year ended June 30, 1998 to $57.8 million in the year ended June 30, 1999. The OmniCare-TN MLR was 82% for the year ended June 30, 1999 and 83% for the year ended June 30, 1998. The fiscal 1999 OmniCare-TN MLR includes an approximate 3% reduction due to offsets to medical services expenses related to the net recovery of $0.5 million in refundable advances made to a third party dental administrator and an excess adverse selection payment of $1.0 million received in fiscal 1999 for the period June 1997 and prior.
Medical services expenses for County Care in fiscal 1999 were $2.1 million from inception of the contract in April 1999. The MLR for County Care was estimated at 92%, a rate management believed adequate to establish reserves sufficient to cover anticipated program medical expenses.
UltraMedix, which ceased operations in March 1998, did not incur any medical services expenses in the year ended June 30, 1999. Medical services expenses for UltraMedix were $17.3 million in the year ended June 30, 1998.
Marketing, general and administrative expenses decreased $17.0 million (38%), from $44.3 million in the year ended June 30, 1998 to $27.3 million in the year ended June 30, 1999, due to the following corporate and Tennessee activities: (i) employee downsizing in fiscal 1998 and early fiscal 1999 which significantly contributed to the decrease in salary expense of $5.1 million; (ii) expensing of $1.0 million of deferred HMO licensure-related costs in Louisiana and Pennsylvania in fiscal 1998; (iii) a decrease in professional service fees of $2.0 million related primarily to the fiscal 1998 financial restructuring program; (iv) a decrease in promotion and advertising expense of $2.6 million; and (v) a decrease of approximately $6.0 million related to UltraMedix and UA-FL, which ceased operations and were placed in liquidation in March 1998.
Depreciation and amortization decreased $6.3 million (65%), from $9.7 million for the year ended June 30, 1998 to $3.4 million for fiscal 1999. Of the decrease, $4.1 million is attributable to the write-off in fiscal 1998 of the remaining intangibles related to the Company's purchase of UltraMedix due to the liquidation of the Florida operation, $0.8 million related to the write-off or revaluation of obsolete and other property and equipment in fiscal 1998 and $1.4 million is attributable to fully depreciated assets.
As a result, the Company recognized earnings from continuing operations before income taxes of $1.1 million for the year ended June 30, 1999, compared to a loss from continuing operations before income taxes of $27.4 million for the year ended June 30, 1998, a $28.5 million change. Net earnings from continuing operations were $0.6 million for the year ended June 30, 1999, compared to a net loss from continuing operations of $22.9 million for the year ended June 30, 1998, a change of $23.5 million.
The discontinued operation did not contribute earnings or loss for the year ended June 30, 1999, compared to a net loss of $2.6 million for the year ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, the Company incurred operating losses in the last three quarters, excluding the effect of revised estimates of the medical claims payable of $5.6 million in the third quarter. At June 30, 2000, the Company had (i) cash and cash equivalents and short-term marketable securities of $10.6 million, compared to $18.6 million at June 30, 1999; (ii) negative working capital of $2.3 million, compared to negative working capital of $1.7 million at June 30, 1999; and (iii) a current assets-to-current liabilities ratio of .88-to-1, compared to .96-to-1 at June 30, 1999. The principal uses of funds for the year ended June 30, 2000 were $1.9 million used in operating activities, repayment of $8.5 million of bank debt from the same amount of cash proceeds received on the notes from the sale of CHF, a $4.0 million cash infusion to OmniCare-MI, purchases of property and equipment of $2.5 million, repurchase of common stock of $0.4 million and purchases of marketable securities of $1.3 million. In addition, the Company's investing activities included the funding of an additional $3.7 million unsecured loan to OmniCare-MI through conversion of management fees owed to the Company, and receipt of approximately $2.1 million of cash and U.S. Treasury obligations on the dissolution of PhilCare.
The stock of CHF was sold effective August 31, 1998, for $17.75 million, comprised of $2.0 million in cash and the buyer's secured and unsecured notes for $13.25 million and $2.5 million, respectively. Including payments on the secured note, $9.2 million of the sale price, plus $0.8 million of interest, in cash was received through June 30, 1999. The remaining principal balance on the secured and unsecured notes and accrued interest, net of a prepayment discount, in the sum of $8.5 million was paid to the Company on August 16, 1999.
In previous fiscal years, to satisfy applicable statutory requirements, the Company provided $1.0 million in letters of credit on behalf of, and a $1.0 million capital contribution to, OmniCare-LA, and made a $2.1 million capital contribution to PhilCare. The funds were
provided by the Company from its line of credit arrangement. Due to the cessation of its Louisiana operations, the Company withdrew the $1.0 million capital contribution and terminated its letter of credit commitments. PhilCare was dissolved under applicable law in the Company's fiscal 2000. As a result of the dissolution, assets of PhilCare were distributed to UA-PA pursuant to agreements under which UA-PA contributed those assets, and the Company recovered its investment in PhilCare, receiving approximately $2.1 million of cash and U.S. Treasury obligations during fiscal 2000.
The Company's restructuring decisions significantly contributed to the $22.9 million loss from continuing operations in fiscal 1998. However, after adjusting for non-cash activities and changes in assets and liabilities, the Company generated positive cash flows from operations in fiscal 1998. The Company also generated positive cash flows from operations in fiscal 1999.
Management's plans to address the current negative working capital and improve operating results and cash flow include the following:
Management expects that the OmniCare-MI corrective action plan, as revised in 2000, will continue to stabilize that Plan. OmniCare-MI has successfully renegotiated certain major hospital provider contracts, including its most significant hospital contract. On July 14, 2000, the State of Michigan notified OmniCare-MI that it was one of the successful bidders in the State's extensive bid process for increased Medicaid rates and continued eligibility as an HMO providing coverage to enrollees of the State's Comprehensive Health Care Program for Medicaid beneficiaries. As a result, OmniCare-MI has been awarded a rate increase, effective October 1, 2000, and an extension of its contract with the State through September 30, 2002, with the potential for three one-year extensions. Management estimates that the awarded rate increase could increase OmniCare-MI's annual Medicaid revenue by approximately 11% on average, resulting in approximately $1.5 million of additional management fee revenue to the Company in fiscal 2001. In addition, because the unsuccessful bidders' Medicaid enrollees must change to a successful bidder in their region, management believes that OmniCare-MI's volume of Medicaid enrollees could significantly increase, generating additional management fee revenue for the Company in and after fiscal 2001. There can be no assurance, however, of any such increase in OmniCare-MI's membership.
On May 1, 2000, the Company and OmniCare-MI commenced their previously announced strategic partnership with DMC, a major health care provider system in southeastern Michigan. The alliance is intended to strengthen their respective core businesses and improve the quality of care and services for their patients and members. In addition, it was announced that DMC and OmniCare-MI would develop a joint marketing campaign designed to increase OmniCare-MI's membership and DMC's facility utilization rate.
In the strategic partnership's first phase, on May 1, 2000 approximately 28,000 members of DMC's Medicaid managed care program were transferred to OmniCare-MI, and DMC's seven hospitals and approximately 3,000 affiliated physicians now serve as part of OmniCare-MI's provider network. During fiscal 2000, the additional membership generated management fee revenue of $0.6 million. It is anticipated that management fee revenue earned on the increased
Medicaid membership will grow to approximately $7.0 million in fiscal 2001, with a minimal increase in cost.
Effective July 1, 2000, OmniCare-TN entered into a new 42-month contract with the State of Tennessee's TennCare Program. The provisions of the contract provide for an approximate 4.5% increase in average premiums through January 1, 2001, with future increases to be determined by the State of Tennessee. Such increases are in lieu of the quarterly adverse selection payments previously made by TennCare to compensate managed care organizations for substantial adverse costs incurred due to the nature of the services they offer and their treatment of a high risk population. Management expects that the net effect of the increase in the monthly premiums and the elimination of the adverse selection payments will improve monthly cash flow in fiscal 2001.
On September 20, 2000, the Company made an additional cash contribution of $0.9 million to OmniCare-TN in exchange for additional preferred stock of OmniCare-TN to be issued to the Company. The cash contribution was made to enable OmniCare-TN to meet minimum statutory requirements for net worth, while allowing OmniCare-TN to utilize the funds for working capital.
On September 25, 2000, the Company replaced its $4.0 million bank line of credit, originally due July 1, 2000, with a $4.0 million term loan from the same bank lender. The term loan requires monthly installments of approximately $85,000, based upon a five-year amortization, through September 30, 2001 when the remaining unpaid principal of approximately $3.4 million will be due. As a result of this refinancing, principal due subsequent to June 30, 2001 is classified as long-term debt in the "Consolidated Balance Sheets" at June 30, 2000. See Notes 10 and 16 in "Notes to Consolidated Financial Statements" for further discussion of the refinancing of the line of credit.
The Company's ability to generate adequate amounts of cash to meet its future cash needs depends on a number of factors noted above, including the continued stabilization of OmniCare-MI and the ability of the Company to control medical costs related to the TennCare program. Based on these factors, management believes it has the ability to generate sufficient cash to meet its current liabilities.
RECENTLY ENACTED PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities," SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivatives and Certain Hedging Activities" are effective for fiscal years beginning after June 15, 2000. These Statements establish accounting and reporting standards for derivative instruments and hedging activities and require that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Management has determined that the
requirements of SFAS Nos. 133, 137 and 138 will not have a significant impact on the financial statements of the Company.
Statement of Position ("SOP") 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," is effective for fiscal years beginning after June 15, 1999. SOP 98-7 requires that when an insurance contract does not provide for indemnification of the insured, or when a reinsurance contract does not indemnify against loss relating to insurance risk, the contract should be accounted for as a deposit. Management has determined that the requirements of SOP 98-7 will not have a significant impact on the financial statements of the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Presented beginning at page of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to United American Healthcare Corporation definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to its Annual Meeting of Shareholders to be held on November 15, 2000.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to United American Healthcare Corporation definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to its Annual Meeting of Shareholders to be held on November 15, 2000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to United American Healthcare Corporation definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to its Annual Meeting of Shareholders to be held on November 15, 2000.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to United American Healthcare Corporation definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to its Annual Meeting of Shareholders to be held on November 15, 2000.
PART IV
ITEM 14.
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 are filed as part of this Form 10-K report.
(3) The Exhibit Index lists the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-K report. The Exhibit Index identifies those documents which are exhibits filed herewith or incorporated by reference to (i) the Company's Form S-1 Registration Statement under the Securities Act of 1933, as amended, declared effective on April 23, 1991 (Commission File No. 33-36760); (ii) the Company's Form 10-K reports for its fiscal years ended June 30, 1993, 1994, 1995, 1996, 1997,1998 and 1999; (iii) the Company's 10-K/A report filed October 14, 1996; (iv) the Company's Form 10-Q reports for its quarters ended March 31, 1996, September 30, 1996, December 31, 1996, March 31, 1997, March 31, 1998 and December 31, 1998; (v) the Company's Form 8-K reports filed with the Commission August 8, 1991, April 23, 1993, May 24, 1993, January 29, 1996, April 19, 1996, October 30, 1997, January 20, 1998 and January 14, 2000; or (vi) the Company's Form 8-K/A report filed with the Commission July 21, 1993 and November 12, 1997. The Exhibit Index is hereby incorporated by reference into this Item 14.
No reports on Form 8-K were filed with respect to the last three months of fiscal 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on September 28, 2000.
UNITED AMERICAN HEALTHCARE CORPORATION (Registrant)
By: /s/GREGORY H. MOSES, JR. ------------------------ Gregory H. Moses, Jr. President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on September 28, 2000.
SIGNATURE CAPACITY --------- --------
/s/GREGORY H. MOSES, JR. President, CEO and Director - -------------------------------- (Principal Executive Officer) Gregory H. Moses, Jr.
/s/ANITA C.R. GORHAM Secretary and Director - -------------------------------- Anita C.R. Gorham
/s/WILLIAM E. JACKSON, II Chief Financial Officer - -------------------------------- (Principal Financial Officer and William E. Jackson, II Principal Accounting Officer)
/s/WILLIAM C. BROOKS Director - -------------------------------- William C. Brooks
/s/JULIUS V. COMBS, M.D. Director - -------------------------------- Julius V. Combs, M.D.
/s/WILLIAM B. FITZGERALD Director - -------------------------------- William B. Fitzgerald
/s/DARREL W. FRANCIS Director - -------------------------------- Darrel W. Francis
/s/TOM A. GOSS Director - -------------------------------- Tom A. Goss
/s/HARCOURT G. HARRIS, M.D. Director - -------------------------------- Harcourt G. Harris, M.D.
/s/PEARL M. HOLFORTY Director - -------------------------------- Pearl M. Holforty
/s/RONALD M. HORWITZ, Ph.D. Director - -------------------------------- Ronald M. Horwitz, Ph.D.
/s/EMMETT S. MOTEN, JR. Director - -------------------------------- Emmett S. Moten, Jr.
/s/LINDA A. WATTERS Director - -------------------------------- Linda A. Watters
EXHIBIT INDEX
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Board of Directors United American Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of United American Healthcare Corporation and Subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United American Healthcare Corporation and Subsidiaries as of June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Detroit, Michigan September 26, 2000
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes to the consolidated financial statements.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes to the consolidated financial statements
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (IN THOUSANDS)
See accompanying notes to the consolidated financial statements.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (IN THOUSANDS)
See accompanying notes to the consolidated financial statements.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
- -------------------------------------------------------------- NOTE 1 - DESCRIPTION OF BUSINESS - --------------------------------------------------------------
BUSINESS. United American Healthcare Corporation, together with its wholly and majority owned subsidiaries (collectively, the "Company"), is a multi-state provider of health care services, including consulting services to managed care organizations and the provision of health care services in Tennessee, Michigan and, through February 26, 1998, in Florida.
- ----------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -----------------------------------------------------------------------
A. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of United American Healthcare Corporation, and its wholly owned operational subsidiary: United American of Tennessee, Inc. ("UA-TN") and Subsidiary. OmniCare Health Plan, Inc. ("OmniCare-TN") is a 75%-owned subsidiary of UA-TN. Also included in the consolidated financial statements are its non-operational wholly owned subsidiaries: United American of Pennsylvania, Inc. ("UA-PA"), Corporate Healthcare Financing, Inc. and Subsidiaries ("CHF"), and United American of Louisiana, Inc. and Subsidiary ("UA-LA"); and its non-operational 80%-owned subsidiary: United American of Florida, Inc. ("UA-FL") and Subsidiary. UltraMedix Healthcare Systems, Inc. ("UltraMedix") was a 51%-owned subsidiary of UA-FL. The Company ceased activities related to UA-FL, UltraMedix and UA-PA in fiscal 1998. As discussed in Note 4, CHF was sold in August 1998 and is presented as a discontinued operation. All significant intercompany transactions and balances have been eliminated in consolidation.
B. USE OF ESTIMATES. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates as more information becomes available and any such difference could be significant. The most significant estimates that are susceptible to change in the near term relate to the determination of medical claims payable.
C. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents.
D. FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and cash equivalents, receivables and marketable securities approximate fair values of these instruments at June 30, 2000 and 1999.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
E. MARKETABLE SECURITIES. Investments in marketable securities are primarily comprised of U.S. Treasury notes, debt issues of municipalities and foreign countries and common stocks all carried at fair value, based upon published quotations of the underlying securities, and six month certificates of deposit carried at cost plus interest earned, which approximates fair value. Marketable securities placed in escrow to meet statutory funding requirements, although considered available for sale, are not reasonably expected to be used in the normal operating cycle of the Company and are classified as non-current. All other securities available for sale are classified as current.
Premiums and discounts are amortized or accreted, respectively, over the life of the related debt security as adjustment to yield using the yield-to-maturity method. Interest and dividend income is recognized when earned. Realized gains and losses on investments in marketable securities are included in investment income and are derived using the specific identification method for determining the cost of the securities sold; unrealized gains and losses on marketable securities are reported as a separate component of shareholders' equity, net of the provision for deferred federal income taxes.
F. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Expenditures and improvements, which add significantly to the productive capacity or extend the useful life of an asset, are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives of the major classes of property and equipment are as follows: furniture and fixtures - 5 to 13 years; equipment - 5 years; and computer software - 2 to 5 years. Leasehold improvements are included in furniture and fixtures and are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life, which ranges from 5 to 13 years. The Company uses accelerated methods for income tax purposes. The Company has internally developed customized software in which the related costs were capitalized. These costs were fully depreciated during fiscal 2000.
G. INTANGIBLE ASSETS. Intangible assets resulting from business acquisitions are carried at cost and are currently being amortized on a straight-line basis over their estimated useful lives of 10 years.
H. LONG-LIVED ASSETS. Following the criteria set forth in Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," long-lived assets and certain identifiable intangibles are reviewed by the Company for events or changes in circumstances which would indicate that the carrying value may not be recoverable. In making this determination, the Company considers a number of factors, including estimated future undiscounted cash flows
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
associated with long-lived assets, current and historical operating and cash flow results and other economic factors. When any such impairment exists, the related assets are written down to fair value. Based upon its most recent analysis, the Company believes that long-lived assets are recorded at their net recoverable values. See Notes 4, 8 and 9.
I. MEDICAL CLAIMS PAYABLE. The Company provides for medical claims incurred but not reported and the cost of adjudicating claims based primarily on past experience, together with current factors, using accepted actuarial methods. Although considerable variability is inherent in such estimates, management believes that these reserves are adequate.
J. REVENUE RECOGNITION. Medical premium revenues are recognized in the month in which members are entitled to receive health care services. Medical premiums collected in advance are recorded as deferred revenues. Management fee revenues are recognized in the period the related services are performed.
K. MEDICAL SERVICES EXPENSE RECOGNITION. The Company contracts with various health care providers for the provision of certain medical services to its members and generally compensates those providers on a capitated and fee for service basis. The estimates for medical claims payable are regularly reviewed and adjusted as necessary, with such adjustments generally reflected in current operations.
L. STOP LOSS INSURANCE. Stop loss insurance premiums are reported as medical services expense, while the related insurance recoveries are reported as deductions from medical services expense.
M. INCOME TAXES. Deferred income tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that involves the deferred tax assets and liabilities in the amount expected to be realized. Valuation allowances are established when necessary to reduce the deferred tax assets and liabilities in the amount expected to be realized. The deferred income tax provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year. The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible for the period.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
N. STOCK BASED COMPENSATION. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company records compensation expense for stock options only if the market price of the Company's stock, on the date of grant, exceeds the amount an individual must pay to acquire the stock, if dilutive.
O. EARNINGS (LOSS) PER SHARE. Basic net earnings (loss) per share excluding dilution has been computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed the same as basic except that the denominator also includes shares issuable upon assumed exercise of stock options.
For the fiscal years ended June 30, 2000 and June 30, 1999 the Company had outstanding stock options of zero and 847 common shares, respectively, having a dilutive effect on earnings per share. The Company had no outstanding stock options in the fiscal year ended June 30, 1998.
P. SEGMENT INFORMATION. The Company reports financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Financial information is reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments.
- ------------------------------------------------------------------ NOTE 3 - LIQUIDITY AND RESTRUCTURING PROGRAM - ------------------------------------------------------------------
During fiscal 1998, the Company experienced negative working capital, a reduction in net worth and significant losses from operations. As a result, on January 12, 1998, the Board of Directors of the Company approved a restructuring plan designed to improve operating efficiencies, eliminate cash losses and position the Company for profitable operations. The restructuring program encompassed Company plans to discontinue some expansion projects, reduce non-core spending activities, reduce corporate overhead, renegotiate its bank credit facility and evaluate the Company's investments in affiliates and other assets. The Company recognized restructuring charges of approximately $9.0 million in fiscal 1998. The Company's restructuring decisions significantly contributed to the $22.9 million loss from continuing operations in fiscal 1998. However, after adjusting for non-cash activities and changes in assets and liabilities, the Company generated positive cash flows from operations in fiscal 1998 and 1999.
During fiscal 2000, the Company incurred operating losses in the last three quarters, excluding the effect of revised estimates that decreased medical claims payable by $5.6 million in the third quarter. In addition, the Company used $1.9 million of cash from operating activities in fiscal 2000, compared to $6.2 million of cash generated from operating activities in fiscal 1999. At June 30, 2000, the Company had (i) cash and cash equivalents and short-term
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
marketable securities of $10.6 million, compared to $18.6 million at June 30, 1999; (ii) negative working capital of $2.3 million, compared to negative working capital of $1.7 million at June 30, 1999; and (iii) a current assets-to-current liabilities ratio of .88-to-1, compared to .96-to-1 at June 30, 1999. The Company's principal uses of cash for financing and investing activities during fiscal 2000 were repayment of $8.5 million of bank debt from the same amount of cash proceeds received on the notes from the sale of CHF, a $4.0 million cash infusion to OmniCare-MI, purchases of property and equipment of $2.5 million, repurchase of common stock of $0.4 million and purchases of marketable securities of $1.3 million. In addition, the Company received approximately $2.1 million of cash and U.S. Treasury obligations on the dissolution of PhilCare.
Management's plans to address the current negative working capital and improve operating results and cash flow include the following:
In May 2000, the Company and OmniCare-MI commenced a strategic partnership with the Detroit Medical Center ("DMC"), a major health care provider system in southeastern Michigan. On May 1, 2000, approximately 28,000 members of DMC's Medicaid managed care program were transferred to OmniCare-MI, and DMC's seven hospitals and approximately 3,000 affiliated physicians now serve as part of OmniCare-MI's provider network. The additional membership generated $0.6 million of management fees in the final two months of fiscal 2000. Management expects additional management fees and operating cash flow in fiscal 2001 related to these new members, with a minimal increase in cost.
On July 14, 2000, the State of Michigan notified OmniCare-MI that it was one of the successful bidders in the State's extensive bid process for increased Medicaid rates and continued eligibility as an HMO providing coverage to enrollees of the State's Comprehensive Health Care Program for Medicaid beneficiaries. As a result, OmniCare-MI has been awarded a rate increase, effective October 1, 2000, and an extension of its contract with the State through September 30, 2002, with the potential for three one-year extensions. Management estimates that the awarded rate increase could increase OmniCare-MI's annual Medicaid revenue by approximately 11% on average. Management expects that the increased premium rates will generate additional management fees and operating cash flow in fiscal 2001.
Effective July 1, 2000, OmniCare-TN entered into a new 42-month contract with the State of Tennessee's Bureau of TennCare ("TennCare"), a State of Tennessee program that provides medical benefits to Medicaid and working uninsured and uninsurable recipients. The provisions of the contract provide for an approximate 4.5% increase in average premiums through January 1, 2001, with future increases to be determined by the State of Tennessee. Such increases are in lieu of the quarterly adverse selection payments previously made by TennCare to compensate managed care organizations for substantial adverse costs incurred due to the nature of the services they offer and their treatment of a high risk population. Management expects that the net effect of the increase in the monthly premiums and the elimination of the adverse selection payments will improve monthly cash flow in fiscal 2001.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
On September 25, 2000, the Company replaced its $4.0 million bank line of credit, originally due July 1, 2000, with a $4.0 million term loan from the same bank lender. The term loan requires monthly installments of approximately $85,000, based upon a five-year amortization, through September 30, 2001 when the remaining unpaid principal of approximately $3.4 million will be due. As a result of this refinancing, principal due subsequent to June 30, 2001 is classified as long-term debt in the "Consolidated Balance Sheets" at June 30, 2000. See Notes 10 and 16 for further discussion of the refinancing of the line of credit.
The Company's ability to generate adequate amounts of cash to meet its future cash needs depends on a number of factors noted above, including the continued stabilization of OmniCare-MI and the ability of the Company to control medical costs related to the TennCare program. Based on these factors, management believes it has the ability to generate sufficient cash to meet its current liabilities.
- -------------------------------------------------------------------- NOTE 4 - ACQUISITIONS AND DISPOSITIONS - --------------------------------------------------------------------
CORPORATE HEALTHCARE FINANCING, INC. (CHF)
On May 7, 1993, the Company acquired substantially all of the assets and assumed certain liabilities of a Maryland limited partnership, in a business combination accounted for as a purchase. The cost at the time of the acquisition was approximately $9.6 million. Through August 31, 1998, the purchase price was increased as defined in the asset purchase agreement by the maximum amount of $6.6 million. Effective December 31, 1996, CHF acquired certain contract rights and assets and assumed certain liabilities of Spectera, Inc. for approximately $1.8 million in cash and debt. CHF provided administrative services to self-funded employers and employee welfare plans, including health benefit plan design and development of workers' compensation and unemployment benefit programs.
The stock of CHF was sold effective August 31, 1998, for $17.75 million, comprised of $2.0 million in cash and the buyer's secured and unsecured notes for $13.25 million and $2.5 million, respectively, to an entity related to the Company through certain common shareholders, including a former officer and director of the Company. The secured note was payable to the Company in four monthly installments of $0.5 million each on the last day of September through December 1998 with the balance due in January 1999, with options to extend the final payment to March 1999, plus interest at the prime rate on short-term unsecured commercial borrowings. The unsecured note was payable to the Company in two annual installments of $0.25 million with the balance due August 31, 2001, plus interest at 6% per annum. As required by the Company's line of credit facility, the CHF sale was approved by the Company's bank lender and all proceeds were used to reduce the Company's indebtedness to the bank.
In April 1999, the parties agreed to modify the secured note payment terms, extending its maturity date to August 31, 1999, requiring additional principal and interest payments totaling
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
$0.9 million to be paid over the extended period and requiring an additional limited personal guarantee by a principal of the buyer of $1.5 million of the principal of the secured note. Including payments on the secured note, through June 30, 1999, the Company received $9.2 million of the CHF sale price, plus $0.8 million of interest. In June 1999, as an inducement for the buyer to prepay both notes, the Company agreed to a discount of $0.25 million if both notes were paid, with accrued interest, by mid-August 1999.
Both notes were paid in full with accrued interest, net of the discount, on August 16, 1999. The final payment on the secured and unsecured notes was in the aggregate amount of $8.5 million.
As a result of this sale, the results of CHF prior to September 1, 1998 have been reported as a discontinued operation in the consolidated financial statements for the years ended June 30, 1999 and 1998.
The carrying value of CHF was written down by $2.5 million at June 30, 1998, to the net realizable value of $17.75 million, and represented the excess of expenses over revenues of CHF during that period. These adjustments are included in the expenses of the discontinued operation to reflect an increase or reduction in the net carrying value to the net realizable value of $17.75 million.
Results from discontinued operation, net of income taxes, for the two months ended August 31, 1998 and the twelve months ended June 30, 1998 are summarized as follows (in thousands):
ULTRAMEDIX HEALTHCARE SYSTEMS, INC. (ULTRAMEDIX)
In February 1994, the Company and its majority owned subsidiary, UA-FL, entered into a long-term agreement to manage UltraMedix. As of January 1996, the Company's ownership in the voting common stock of UltraMedix was 51%.
As of December 31, 1997, UltraMedix was not in compliance with the Florida Department of Insurance's ("FDOI") statutory solvency requirement. UltraMedix's statutory deficiency at
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
December 31, 1997 was estimated at $4.5 million. As a result of the deficiency, on February 26, 1998, UltraMedix and the Plan's third-party administrator, UA-FL, were placed into receivership, and on March 3, 1998, into liquidation, by the FDOI.
Through the date of the commencement of liquidation, the results of these operations were included in the 1998 consolidated results of operations of the Company, which included a net loss totaling $9.3 million. In connection with the liquidation, the Company wrote off goodwill and accumulated amortization of approximately $4.5 million and $1.0 million, respectively, and recognized a loss on the liquidation of approximately $2.3 million.
On April 15, 1998, the Florida Agency for Health Care Administration notified the Company of the Agency's intent to enforce the Company's Guarantee Agreement, under which the Company had agreed to reimburse UltraMedix's contracted Medicaid providers for authorized, covered Medicaid services rendered to covered Medicaid enrollees, for which the Agency had made payment on behalf of such enrollees, limited to an amount equal to the amount of surplus UltraMedix would have been required to maintain under the Medicaid contract in the absence of such Guarantee Agreement.
OMNICARE HEALTH PLAN, INC. OF TENNESSEE (OMNICARE-TN)
In February 1994, the Company and its wholly owned subsidiary, UA-TN, entered into a long-term agreement to manage OmniCare-TN and, effective July 1994, acquired a 50% equity interest in OmniCare-TN for approximately $1.3 million in cash. Effective January 31, 1996, the Company purchased an additional 25% of the voting common stock and 100% of the preferred stock of OmniCare-TN. This increased the Company's ownership in the voting common stock of OmniCare-TN to 75%. The purchase price for the additional common stock and preferred stock of OmniCare-TN was $0.1 million and $10.9 million, respectively, of which $8.7 million was the conversion of OmniCare-TN debt to the Company into equity and $2.3 million was paid in cash. In July 1998, the Company made an additional cash contribution of $0.75 million to OmniCare-TN, in exchange for additional preferred stock of OmniCare-TN to be issued to the Company.
This acquisition was accounted for under the purchase method of accounting. The excess of the purchase price over the fair value of the net assets acquired of approximately $7.4 million has been recorded as goodwill, and is being amortized over ten years on a straight-line basis. Results of operations are included in the accompanying financial statements effective with the date of purchase of the majority common stock ownership interest. In fiscal 1999, goodwill was reduced by $0.5 million as a result of the utilization of OmniCare-TN's net operating loss carryforwards ("NOL" or "NOLs") generated prior to January 31, 1996. The remaining NOLs related to OmniCare-TN were generated subsequent to January 31, 1996.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
- ---------------------------------------------------------- NOTE 5 - MARKETABLE SECURITIES - ----------------------------------------------------------
A summary of amortized cost, gross unrealized gain and loss and estimated fair value of marketable securities as of June 30, 2000 and 1999 was as follows (in thousands):
At June 30, 2000, the financial statement carrying value and estimated fair value of fixed maturities, by contractual maturity, are shown below (in thousands). Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
Certain of the Company's operations are obligated by state regulations to maintain a specified level of escrowed funds to assure the provision of healthcare services to enrollees. To fulfill these statutory requirements, the Company maintains funds in highly liquid escrowed investments, which amounted to $2.3 million and $1.6 million at June 30, 2000 and 1999, respectively.
- ----------------------------------------------------------- NOTE 6 - CONCENTRATION OF RISK - -----------------------------------------------------------
During the years ended June 30, 2000, 1999 and 1998, approximately 71%, 76%, and 60%, respectively, of the Company's revenues were derived from a single customer, TennCare, a State of Tennessee program that provides medical benefits to Medicaid and Working Uninsured recipients. TennCare withholds 10% of the Company's monthly capitation payment. TennCare remits the monthly withheld amounts to the Company when certain informational filing requirements are met by the Company. Amounts withheld by TennCare as of June 30, 2000 and 1999 totaled approximately $0.9 million and $3.7 million, respectively. The Company has recorded a receivable of approximately $1.6 million and $1.7 million at June 30, 2000 and 1999, respectively, from the TennCare program adverse selection pool.
The Company has entered into a long-term management agreement with Michigan Health Maintenance Organization Plans, Inc., d/b/a OmniCare Health Plan, in Michigan ("OmniCare-MI"). Pursuant to the management agreement, the Company provides management and consulting services to OmniCare-MI and is generally paid a percentage of revenues to manage the plan. Management fee revenues from OmniCare-MI as a percentage of the Company's total revenues were 17%, 19% and 24% for the years ended June 30, 2000, 1999 and 1998, respectively.
- ----------------------------------------------------------------------- NOTE 7 - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS - -----------------------------------------------------------------------
Property and equipment at each June 30 consists of the following (in thousands):
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
Intangible assets at each June 30 consists of the following (in thousands):
- --------------------------------------------------------------- NOTE 8 - INVESTMENTS IN AND ADVANCES TO AFFILIATES - ---------------------------------------------------------------
Investments in and advances to affiliates at each June 30 are comprised of the following (in thousands):
In fiscal 1998, the Company recorded full impairment losses against its investments in PhilCare and Advica. The establishment of the impairment losses was based on the Company's evaluation of the net recoverable value of such investments, and resulted in bad debt expense of $4.4 million for the year ended June 30, 1998.
On June 22, 2000, PhilCare's Board of Directors and shareholders approved the voluntary dissolution of PhilCare. As a result of the dissolution, assets of PhilCare were distributed to UA-PA, pursuant to agreements under which UA-PA contributed those assets, and the Company recovered its $2.1 million investment in PhilCare, resulting in a gain in that amount included in other income in the accompanying consolidated statement of operations for the fiscal year ended June 30, 2000.
- -------------------------------------------------------------- NOTE 9 - SURPLUS NOTES RECEIVABLE - --------------------------------------------------------------
On April 13, 2000 and June 30, 1998, the Company funded unsecured loans to OmniCare-MI, evidenced by surplus notes of $7.7 million and $4.6 million, respectively, to enable OmniCare-MI to meet its minimum statutory requirements for net worth and working capital. The $7.7 million loan consisted of $4.0 million in cash and conversion of $3.7 million of management fees owed to the Company. Pursuant to the terms of the surplus notes, interest and principal payments are subject to approval by the Michigan Insurance Bureau ("Bureau") and shall be repaid only out of the statutory surplus earnings of OmniCare-MI. The interest rate on the $7.7 million surplus note is fixed at 8.5% per annum, while the interest rate on the $4.6 million surplus note is at the prime rate (9.5% at June 30, 2000). Interest is payable annually
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
and if not paid annually is forfeited. Interest income of $0.5 and $0.4 million was forfeited for fiscal 2000 and 1999, respectively. The principal on the notes has no stated maturity or repayment date. The surplus notes are subordinated to all other claimants of OmniCare-MI.
The Company evaluated the net recoverable value of its notes receivable from OmniCare-MI considering the estimate of OmniCare-MI's future undiscounted cash flows and statutorily derived surplus earnings and repayments conditioned on Bureau approval. As a result of this evaluation, the Company recorded impairment losses on the valuation of the surplus notes. The impairment losses resulted in bad debt expense of $3.1 million and $2.3 million for the years ended June 30, 2000 and 1998, respectively.
- ----------------------------------------------- NOTE 10 - LONG TERM DEBT - -----------------------------------------------
On September 25, 2000, the Company entered into a new loan agreement, promissory note and security agreement with its bank lender. The new loan agreement replaced the outstanding bank line of credit balance, originally due July 1, 2000, with a $4.0 million term loan with monthly installments of principal and interest of approximately $85,000, based upon a five-year amortization. The term loan has an interest rate equal to the bank's prime rate (9.5% at June 30, 2000) plus one percent per annum. The maturity date of the new term loan is September 30, 2001, at which time the remaining unpaid principal of approximately $3.4 million will be due. The new loan agreement is collateralized by a security interest in all of the Company's personal property. As a result of this refinancing, principal due subsequent to June 30, 2001 is classified as long-term debt in the accompanying balance sheets at June 30, 2000. See Note 16 - - Subsequent Events.
Pursuant to a December 11, 1998 consent judgment entered in a United States District Court, which settled two consolidated shareholder lawsuits for $2.0 million cash paid by an insurer, 277,777 newly issued shares of the Company's Common Stock, and a promissory note, the Company has an outstanding promissory note in the original principal amount of $0.625 million. The note is payable in 15 equal monthly installments from January 2000 through March 2001 with interest at 4% per annum.
The Company's outstanding debt at each June 30 is as follows (in thousands):
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
- ------------------------------------------------------------- NOTE 11 - MEDICAL CLAIMS PAYABLE - -------------------------------------------------------------
The Company has recorded a liability of $9.6 million and $19.8 million at June 30, 2000 and 1999, respectively, for unpaid claims and medical claims incurred by enrollees but not reported to the Company for payment by the health care providers as of each date. The ultimate settlement of medical claims may vary from the estimated amounts reported at June 30, 2000 and 1999.
The following table provides a reconciliation of the unpaid claims for the years ended June 30, 2000 and 1999 (in thousands):
Under an agreement with an insurer, 80% of inpatient medical claim costs in excess of $0.2 million up to $1.0 million per enrollee per year are paid by the insurer. The $5.6 million reserve reversal in fiscal 2000 related to prior years was attributable to UltraMedix which ceased operations and was placed in liquidation in March 1998. At March 31, 2000, Company management concluded that the previously established medical claims liability of $6.4 million should be reduced to $0.8 million.
- ------------------------------------------- NOTE 12 - INCOME TAXES - -------------------------------------------
The components of income tax expense (benefit) for each year ended June 30 are as follows (in thousands):
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
A reconciliation of the provision for income taxes for each year ended June 30 follows (in thousands):
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred taxes, projected future taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at June 30, 2000. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
As of June 30, 2000, the NOLs for federal income tax purposes expire from 2011 to 2014.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
Components of the Company's deferred tax assets and liabilities at each June 30 are (in thousands):
Activity in the valuation allowance is as follows (in thousands):
The Company believes it is more likely than not that if a tax deductible event occurs, the result will be a capital loss on that portion of valuation allowance provided for bad debt expense in affiliates which reduces the Company's investments. The capital loss can only be offset by capital gains.
- --------------------------------------------------------------------- NOTE 13 - RELATED PARTY TRANSACTIONS - ---------------------------------------------------------------------
The Company has entered into a long-term management agreement with OmniCare-MI. OmniCare-MI is related to the Company via certain common officers and directors. The agreement commenced in May 1985 and expires in December 2010, is subject to review every five years and can be terminated without cause by OmniCare-MI at the time of the review or by either party with cause. Pursuant to the management agreement the Company is generally paid a percentage of revenues to manage OmniCare-MI. The Company is required to pay
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
certain administrative expenses associated with its activity on behalf of OmniCare-MI. All costs associated with the management of OmniCare-MI are expensed as incurred.
Health insurance for some of the Company's employees was provided by OmniCare-MI. The expense was approximately $0.6 million, $0.4 million and $1.0 million for the years ended June 30, 2000, 1999 and 1998, respectively.
- -------------------------------------------------------------- NOTE 14 - BENEFIT AND OPTION PLANS - --------------------------------------------------------------
The Company offers a 401(k) retirement and savings plan that covers substantially all of its employees. The Company's maximum matching contribution is 1% of compensation since January 1, 1998 and 5% previously. Expenses related to the 401(k) plan were approximately $26,000, $25,000 and $400,000 for the years ended June 30, 2000, 1999 and 1998, respectively.
The Company has reserved 200,000 common shares for its Employee Stock Purchase Plan ("ESPP"), which became effective October 1996, and enables all eligible employees of the Company to subscribe for shares of common stock on an annual offering date at a purchase price which is the lesser of 85% of the fair market value of the shares on the first day or the last day of the annual period. Employee contributions to the ESPP were approximately $53,000 and $9,000 for the years ended June 30, 1999 and 1998. There were no employee contributions for the year ended June 30, 2000.
On August 6, 1998, the Company's Board of Directors adopted the 1998 Stock Option Plan ("1998 Plan"). The 1998 Plan was approved by the Company's shareholders on November 12, 1998. The Company has an aggregate of 800,000 common shares reserved for issuance upon exercise of options under the 1998 Plan. On September 9, 1998, December 15, 1998, February 3, 1999 and November 10, 1999, nonqualified options for a total of 325,000, 26,000, 5,000 and 8,000 common shares, respectively, were granted under the 1998 Plan. The exercise prices of the options range from $1.19 to $1.63.
Independent of any stock option plan, on May 11, 1998 the Company granted nonqualified stock options for 100,000 common shares to the Company's President and Chief Operating Officer, and reserved that number of common shares for issuance upon exercise of such options. Such options expire May 11, 2003 and were fully exercisable beginning May 11, 2000 at a price of $1.38 per share.
SFAS No. 123 prescribes a method of accounting for stock-based compensation that recognizes compensation cost based on the fair value of options at grant date. In lieu of applying this fair value based method, a company may elect to disclose only the pro forma effects of such application. The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, if the Company had elected to recognize compensation cost based on the fair value of the options at grant date, the Company's earnings (loss) and earnings (loss) per share
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
from continuing operations, assuming dilution, for 2000, 1999 and 1998 would have been the pro forma amounts indicated below (in thousands, except per share amounts):
The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2000: dividend yield of 0%; expected volatility of 67.09%; risk free interest rate of 6.00%; and expected life of 10 years. The effects of applying SFAS No. 123 in the above pro forma disclosures are not necessarily indicative of future amounts, because additional stock option awards could be made in future years.
Information regarding the stock options for fiscal 2000, 1999 and 1998 follows (in thousands except share prices):
Options for 342,000 common shares were available for grant at the end of fiscal 2000.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
- ------------------------------ NOTE 15 - LEASES - ------------------------------
The Company leases its facilities and certain furniture and equipment under operating leases expiring at various dates through May 2005. Terms of the facility leases generally provide that the Company pay its pro rata share of all operating expenses, including insurance, property taxes and maintenance.
Rent expense charged to operations for the years ended June 30, 2000, 1999 and 1998 totaled approximately $1.6 million, $1.6 million and $2.2 million, respectively.
Minimum future rental payments under all non-cancelable operating leases having remaining terms in excess of one year as of June 30, 2000 total $6.4 million as follows (in thousands): 2001-$1,272; 2002-$1,273; 2003-$1,333; 2004-$1,306; 2005-$1,225; none thereafter.
- ---------------------------------------------------- NOTE 16 - SUBSEQUENT EVENTS - ----------------------------------------------------
On September 20, 2000, the Company made a additional cash contribution of $0.9 million to OmniCare-TN in exchange for additional preferred stock of OmniCare-TN to be issued to the Company. The cash contribution was made to enable OmniCare-TN to meet minimum statutory requirements for net worth.
On September 25, 2000, the Company entered into a new loan agreement, promissory note and security agreement with its bank lender. The new loan agreement replaced the outstanding bank line of credit balance, originally due July 1, 2000, with a $4.0 million term loan with monthly installments of principal and interest of approximately $85,000, based upon a five-year amortization. The term loan has an interest rate equal to the bank's prime rate (9.5% at June 30, 2000) plus one percent per annum. The maturity date of the new term loan is September 30, 2001, at which time the remaining unpaid principal of approximately $3.4 million will be due. As a result of this refinancing, principal due subsequent to June 30, 2001 is classified as long-term debt in the accompanying balance sheets at June 30, 2000. See Note 10 - Long Term Debt.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
- ------------------------------------------------------------------------- NOTE 17 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA - -------------------------------------------------------------------------
The following table presents selected quarterly financial data for the years ended June 30, 2000 and 1999 (in thousands, except per share data):
In the quarter ended June 30, 2000, the Company made the following significant adjustments: (i) recorded an increase to medical claims liability of $3.4 million; (ii) recorded a gain of $2.1 million on the recovery of its $2.1 million investment in PhilCare; and (iii) recorded additional bad debt expense of $1.6 million on the $7.7 million surplus note due from OmniCare-MI.
In the quarter ended June 30, 1999, the Company made the following significant adjustments: (i) recognized a retroactive medical premium rate increase from the State of Tennessee of $1.2 million; (ii) recorded a $0.25 million discount related to the accelerated payoff of the CHF buyer's notes; and (iii) recorded a $0.5 million tax provision related to preacquisition net operating losses for OmniCare-TN.
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998
- ---------------------------------------------------------- NOTE 18 - SEGMENT FINANCIAL INFORMATION - ----------------------------------------------------------
Summarized financial information for the Company's principal operations is as follows (in thousands):
(1) Management Companies: United American Healthcare Corporation (2000, 1999, 1998), United American of Tennessee, Inc. (2000, 1999, 1998), United American of Louisiana, Inc. (1999, 1998), United American of Pennsylvania, Inc. (2000, 1999, 1998), and United American of Florida, Inc. (2000, 1999, 1998). (2) HMOs and Managed Plans: OmniCare Health Plan of Tennessee (2000, 1999, 1998), County Care (2000, 1999), and UltraMedix Healthcare Systems, Inc. (1998) (3) Self-Funded Benefit Plan: Corporate Healthcare Financing, Inc. and Subsidiaries (1998).
Exhibit Index -------------