The Company currently leases approximately 30,000 aggregate square feet in Detroit, Michigan and Memphis, Tennessee, from which it conducts its operations in Michigan and Tennessee. The principal offices of the Company are located at 300 River Place, Suite 4950, Detroit, Michigan, where it currently leases approximately 3,800 square feet of office space.
This discussion and the information elsewhere in this 10-K annual report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act that are subject to the safe harbor provisions created by that Act. Forward-looking statements can be identified by the use of terms such as "expects," "could," "may," "believes," "anticipates," "will" and other future tense and forward-looking terminology. 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.
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 2007 COMPARED TO 2006
UAHC-TN's results of operations for fiscal 2007 and 2006 are best understood in the context of certain earlier events involving several of TennCare's major contracted MCOs, which ceased doing business in fiscal 2002. Beginning in February, March and April 2002, UAHC-TN unexpectedly noticed increases in its claims payments, investigated, and found that approximately 9,500 new members added in September-December 2001 represented children with special needs with medical costs over 100% of the premiums received, and that many members transferred to UAHC-TN from failed MCOs also had medical costs in excess of UAHC-TN's premiums received. Beginning in April 2002, UAHC-TN wrote to TennCare seeking risk adjustments and reimbursements to compensate UAHC-TN for such medical expenses, including for actuarially estimated claims incurred but not yet reported to UAHC-TN.
accumulated interest earnings from the larger escrow account, leaving $1,010,148.76 in that account in recognition of the potential level of claims' inaccuracy found on preliminary review by the Tennessee Department of Commerce and Insurance. The escrow accounts bear interest at a rate no lower than the prevailing commercial interest rates for savings accounts at financial institutions in Nashville, Tennessee. All amounts (including interest earnings) credited to the escrow accounts will belong to the Company, except to the extent, if any, they are paid to TennCare to satisfy amounts determined to be owed to TennCare as provided in the escrow agreements. Both escrow agreements recite that TennCare does not at that time assert there has been any breach of UAHC-TN's TennCare contract and that the Company has funded the escrow accounts as a show of goodwill and good faith in working with TennCare.
As a result of a state regulatory audit of UAHC-TN's process claims since 2002, UAHC-TN was notified in late fiscal 2007 by the third party auditor that UAHC-TN may have incorrectly received an overpayment of $1.1 million for medical claims as a result of a discrepancy in the pricing methodology. As a result, UAHC-TN recorded a reserve of $1.1 million in the fourth quarter of fiscal 2007. In addition, based on a subsequent regulatory evaluation conducted by the Tennessee Department of Commerce and Insurance, it was determined that TennCare overpaid UAHC-TN $0.4 million in excess of UAHC-TN's statutory net worth requirement as of June 30, 2002, based on a 2002 contractual agreement. The Company recorded a reserve for this amount in the fourth quarter of fiscal 2007. These items have been reflected as "Provision for claims audit and other commitment" on our Consolidated Statements of Operations.
MA-SNP medical premiums revenues were $0.9 million for the fiscal year ended June 30, 2007, under UAHC-TN's contract with CMS that began January 1, 2007. There were no TennCare medical premiums revenues for the fiscal years ended June 30, 2007 and 2006.
Variable administrative fees resulting from MRA were $0.5 million for the fiscal year ended June 30, 2007 compared to $0.4 million for the fiscal year ended June 30, 2006. The $0.5 million MRA revenue received in fiscal 2007 relates to the fourth quarter of fiscal 2006. UAHC-TN received notice from TennCare that it earned additional MRA revenue of $0.2
million, $0.2 million, and $0.5 million, respectively, for its performance for the first, second and fourth quarters of fiscal 2006. Such additional revenue has been recorded, and UAHC-TN received in the fourth quarter of fiscal 2007 such $0.5 million of additional MRA revenue for the fourth quarter of fiscal 2006. UAHC-TN expects to similarly earn additional MRA revenue for the third quarter of fiscal 2006 and additional MRA revenues for fiscal 2007. The Company will record such and any other additional MRA earnings only upon receipt of final notification thereof from TennCare.
Total revenues were $18.1 million for the fiscal year ended June 30, 2006 compared to $22.1 million for the fiscal year ended June 30, 2005.
Fixed administrative fees related to the MRA program were $16.6 million for the fiscal year ended June 30, 2006, a decrease of $3.9 million (21%) from fixed administrative fees of $20.9 million for the prior fiscal year. The decrease in fixed administrative fees is principally due to a decrease in members. UAHC-TN received notice from TennCare that it earned additional MRA revenue of $0.2 million, $0.2 million, and $0.5 million, respectively, for its performance for the first, second and fourth quarters of fiscal 2006. Such additional revenue has been recorded, and UAHC-TN received in the fourth quarter of fiscal 2007 such $0.5 million of additional MRA revenue for the fourth quarter of fiscal 2006. UAHC-TN expects to similarly earn additional MRA revenue of approximately $0.2 million for the third quarter of fiscal 2006 and additional MRA revenues for fiscal 2007. The Company will record such and any other additional MRA earnings only upon receipt of final notification thereof from TennCare.
Because of TennCare's ASO reimbursement system, there were no medical services expenses in the fiscal year ended June 30, 2006, as compared with medical services expenses of $0.02 million in the fiscal year ended June 30, 2005. The $0.02 million of medical services expenses represent fiscal 2002 claims processed and reimbursed by TennCare in fiscal 2005 as explained in item 1 under the heading "MANAGED PLAN - Managed Plan Owned by the Company."
General and administrative expenses were $16.5 million for the fiscal year ended June 30, 2006, as compared with general and administrative expenses of $15.7 million for the prior fiscal year, an increase of $0.8 million (5%). The increase is principally due to legal fees associated with ongoing litigation, and an increase in claims processing costs.
Income tax expense decreased $0.5 million (78%), to $0.1 million for the fiscal year ended June 30, 2006 from $0.7 million for the fiscal year ended June 30, 2005. The Company's effective tax rate for the fiscal year ended June 30, 2006 is 9% and differs from the statutory rate of 34%. This difference is the result of the utilization of net operating loss carryforwards for which a valuation allowance had previously been applied.
There were no charges from discontinued operations for the fiscal year ended June 30, 2006. The Company recorded a liability in the first quarter of fiscal 2005 as it relates to an expired sublease obligation for its former office premises in Detroit, Michigan.
Net earnings were $1.4 million, or $0.18 per basic share, for the fiscal year ended June 30, 2006, compared to net earnings of $5.3 million, or $0.72 per basic share, for the prior fiscal year, a decrease of $3.9 million (74%). Such decrease in net earnings is principally due to a decrease in administrative fee revenue, coupled with an increase in general and administrative expenses as discussed above.
At June 30, 2007, the Company had (i) cash and cash equivalents and short-term marketable securities of $14.2 million, compared to $6.9 million at June 30, 2006; (ii) working capital of $13.1 million, compared to working capital of $7.8 million at June 30, 2006; and (iii) a current assets-to-current liabilities ratio of 3.13 to 1, compared to 3.46 to 1 at June 30, 2006.
Net cash from operating activities was $1.5 million in fiscal 2007 compared to net cash from operating activities of $1.2 million in fiscal 2006. Investing activities in fiscal 2007 included the purchase of marketable securities of $4.8 million and sales of $2.1 million.
Cash flow was $4.6 million for the fiscal year ended June 30, 2007, compared to $(5.5) million for the prior fiscal year. The increase was principally due to the sale of 1,000,000 newly issued shares of common stock and accompanying warrants for additional common shares in December 2006.
Accounts receivable increased by $0.6 million at June 30, 2007 compared to June 30, 2006, primarily due to an increase in interest receivable on new investments.
Property, plant and equipment increased by $0.2 million at June 30, 2007 compared to June 30, 2006, due to equipment purchases of $0.3 million offset by equipment sales.
Medical claims payable increased by $0.4 million at June 30, 2007 compared to June 30, 2006, which is directly related to MA-SNP plan activity that began January 1, 2007.
Accounts payable increased by $2.2 million at June 30, 2007 compared to June 30, 2006, principally due to a reserve against the restricted assets related to the claims audit escrow account and the overpayment related to UAHC-TN's statutory net worth requirement.
UAHC-TN's application for a commercial HMO license was approved on September 7, 2001. However, management is not yet actively pursuing that commercial business due to UAHC-TN's substantially increased enrollment from members TennCare assigned from defunct other plans, together with adapting to TennCare's stabilization program. Beginning July 1, 2002, TennCare implemented an 18-month stabilization program, which entailed changes to TennCare's contracts with MCOs, including UAHC-TN. During that period, MCOs were generally compensated for administrative services only (commonly called "ASO"), earned fixed administrative fees, were not at risk for medical costs in excess of targets established based on various factors, were subject to increased oversight, and could incur financial penalties for not achieving certain performance requirements. Through successive contractual amendments, TennCare extended the ASO reimbursement system applicable to UAHC-TN, first through June 30, 2004, then through December 31, 2004, and then through June 30, 2005. Through an amendment with an effective date of July 1, 2005, TennCare implemented a modified risk arrangement with all its contracted MCOs, including UAHC-TN, under which they are at risk for losing up to 10% of administrative fee revenue and may receive up to 15% incentive bonus revenue based on performance relative to benchmarks. TennCare also disenrolled approximately 100,000 non-medically needy adults who were not eligible for Medicaid from TennCare coverage statewide, and imposed benefit limits on the 396,000 adults left in the program who were eligible for Medicaid. As a result, UAHC-TN lost approximately 12,000 members during fiscal 2006. UAHC-TN received notice from TennCare that it earned additional MRA revenue of $0.2 million, $0.2 million, and $0.5 million, respectively, for its performance for the first, second and fourth quarters of fiscal 2006. Such additional revenue has been recorded , and UAHC-TN received in the fourth quarter of fiscal 2007 such $0.5 million of additional MRA revenue for the fourth quarter of fiscal 2006. UAHC-TN expects to similarly earn additional MRA revenue for the third quarter of fiscal 2006 and additional MRA revenues for fiscal 2007. The Company will record such and any other additional MRA earnings only upon receipt of final notification thereof from TennCare.
that may be determined by a pending audit of all UAHC-TN process claims since 2002. The other escrow account, in the original amount of $420,500, is security for any money damages that may be awarded to TennCare in the event of any future litigation between the parties in connection with certain pending investigations by state and federal authorities. TennCare and the Company reached agreement in August 2007 to amend both escrow agreements, and the Company has signed TennCare's written amendment documents and returned them to TennCare for its signature. Under both amendments, when also signed by TennCare, both escrow accounts will terminate 30 days after the conclusion of such investigations, unless the parties earlier agree otherwise. In addition, under one of the amendments, when signed by TennCare, the Company expects to be paid $1,289,851.24 plus accumulated interest earnings from the larger escrow account, leaving $1,010,148.76 in that account in recognition of the potential level of claims' inaccuracy found on preliminary review by the Tennessee Department of Commerce and Insurance. The escrow accounts bear interest at a rate no lower than the prevailing commercial interest rates for savings accounts at financial institutions in Nashville, Tennessee. All amounts (including interest earnings) credited to the escrow accounts will belong to the Company, except to the extent, if any, they are paid to TennCare to satisfy amounts determined to be owed to TennCare as provided in the escrow agreements. Both escrow agreements recite that TennCare does not at that time assert there has been any breach of UAHC-TN's TennCare contract and that the Company has funded the escrow accounts as a show of goodwill and good faith in working with TennCare.
As a result of a state regulatory audit of UAHC-TN's process claims since 2002, UAHC-TN was notified in late fiscal 2007 by the third party auditor that UAHC-TN may have incorrectly received an overpayment of $1.1 million for medical claims as a result of a discrepancy in pricing methodology. As a result, UAHC-TN recorded a reserve of $1.1 million in the fourth quarter of fiscal 2007.
In the first half of fiscal 2006, UAHC-TN was subject to a notice and order of administrative supervision issued by the Commissioner of the State of Tennessee's Department of Commerce and Insurance on April 20, 2005, which expired in accordance with its terms on December 31, 2005. The State of Tennessee in June 2006 extended UAHC-TN's TennCare contract through December 31, 2006, by an amendment to the contract effective as of July 1, 2006.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 108 ("SAB 108"). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company's balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has adopted SAB 108, with no impact on the Company's financial position or results of operations.
servicing assets and liabilities to be initially measured at fair value and either amortized over the period of estimated servicing income and assessed for impairment each reporting period, or measured at fair value each reporting period with changes in fair value reported in earnings the period in which changes occur. This standard is effective for fiscal years beginning after September 15, 2006. The Company is in the process of evaluating the expected effect of this pronouncement and is currently unable to determine the impact, if any, that it may have on its results of operations, financial position and cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FASB 157"). FASB 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of FASB 157, guidance for applying fair value was incorporated in several accounting pronouncements. FASB 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. FASB 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under FASB 157, fair value measurements are disclosed by level within that hierarchy. While FASB 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. FASB 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined the impact of adopting FASB 157 on its financial statements.