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 Company has subleased the Memphis, Tennessee facility.
This section discusses the Company’s results of operations, financial position and liquidity. This discussion should be read in conjunction with the consolidated financial statements and related notes thereto contained elsewhere in this annual report on Form 10-K.
had a material adverse effect on the Company’s operations, earnings, financial condition and cash flows.
On October 10, 2006, UAHC-TN entered into a contract with the Centers for Medicare & Medicaid Services (“CMS”) to act as a Medicare Advantage qualified organization. The contract authorizes UAHC-TN to serve members enrolled in both the Tennessee Medicaid and Medicare programs, commonly referred to as “dual-eligibles,” specifically to offer a Medicare Advantage Special Needs Plan (“MA-SNP”) to its eligible members in Shelby County, Tennessee (including the City of Memphis), and to operate a Voluntary Medicare Prescription Drug Plan, both beginning January 1, 2007. The contract term is through December 31, 2009, after which the Company will not seek renewal of the contract. After the discontinuance of the Medicare contract in December 2009, Medicare remaining cash outlay is estimated to be approximately $2.7 million, which includes trailing Medicare related claims, claims processing fees, labor and facility fees.
Since 2005, the Company has been a defendant in a lawsuit as described in Item 3. Legal Proceedings. Subsequent to June 30, 2009, the lawsuit was settled for $3.3 million, offset by an expected insurance recovery of $0.2 million. The Company has recorded a reserve of $3.1 million during fiscal 2009.
Review of Consolidated Results of Operations - 2009 Compared to 2008
MA-SNP medical premiums revenues were $11.1 million for the fiscal year ended June 30, 2009 compared to $10.6 million for the fiscal year ended June 30, 2008, under UAHC-TN’s contract with CMS that began January 1, 2007. The increase in medical premiums results from additional revenue from a retroactive claims adjustment received from CMS, as discussed below, partially offset by a decrease in the number of SNP members.
MA-SNP premium revenue is subject to adjustment based on the health risk of its members. This process for adjusting premiums is referred to as the CMS risk adjustment payment methodology. Under the risk adjustment payment methodology, managed care plans must capture, collect, and report diagnosis code information to CMS. After reviewing the respective submissions, CMS
establishes the payments to Medicare plans generally at the beginning of the calendar year and then adjusts premiums on two separate occasions on a retroactive basis.
Prior to fiscal 2009, the Company was unable to estimate the impact of either of these risk adjustment settlements primarily because of the lack of historical risk-based diagnosis code data and insufficient historical experience regarding risk premium settlement adjustments on which to base a reasonable estimate of future risk premium adjustments and, as such, recorded them upon notification from CMS of such amounts. The Initial CMS Settlement related to 2008 claims recorded in fiscal year 2009 was $0.8 million.
Variable administrative fees resulting from the modified risk arrangement (MRA) revenue were $0.9 million for the fiscal year ended June 30, 2009 compared to $1.7 million for the fiscal year ended June 30, 2008. The $0.9 million in MRA revenue recorded in the second quarter of fiscal year 2009 related to fiscal year 2008.
Total expenses were $26.1million for the fiscal year ended June 30, 2009, compared to $30.1 million for the prior fiscal year, a decrease of $4.1 million (13%) The decrease in total expenses was primarily the result of a decrease in marketing, general and administrative expenses coupled with the fact that fiscal year 2008 included a goodwill impairment charge of $3.5 million. The decrease in marketing, general and administrative expenses was offset by increased legal expenses and a legal reserve established of $3.1 million, net of an expected insurance recovery of $0.2 million resulting from the litigation settlement described in Part I. Item 3 “Legal Proceedings.”
Medical expenses for MA-SNP were $10.2 million during the fiscal year ended June 30, 2009, an increase of $0.6 million from $9.6 million during the fiscal year ended June 30, 2008. Medical expenses generally consist of claim payments, pharmacy costs, and estimates of future payments of claims provided for services rendered prior to the end of the reporting period (such estimates of medical claims incurred but not reported are also known as “IBNR”). The IBNR was primarily based on medical cost estimates from historical data provided by CMS and emerging medical claims experience together with current factors using accepted actuarial methods. The percentage of such medical expenses to medical premiums revenues for MA-SNP, referred to as the medical loss ratio, was 90.6% for the fiscal year ended June 30, 2009 compared to 87.8% for the fiscal year ended June 30, 2008.
General and administrative expenses were $12.6 million for the fiscal year ended June 30, 2009, as compared with $16.9 million for the prior fiscal year, a decrease of $4.3 million. The decrease was principally due to reductions in labor costs, adminstrative costs and professional services expenses resulting from the TennCare contract expiration partially offset by severance and labor related expenses and the legal fees associated with the litigation as described in Item 3. Legal Proceedings.
Depreciation and amortization expense decreased slightly to $0.1 million for the fiscal year ended June 30, 2009 compared to $0.2 million for the fiscal year ended June 30, 2008. The decrease results from the sale of fixed assets.
Loss from operations before income taxes was $8.7 million for the fiscal year ended June 30, 2009 compared to loss from operations before income taxes of $1.9 million for the fiscal year ended June 30, 2008. Such increase in loss from operations of $6.8 million, or $0.79 per basic share, is principally due to reduction in revenue resulting from the expiration of the TennCare contract and the increase in legal expenses associated with litigation and the reserve established for the legal settlement.
Income tax benefit was $0.005 million for the fiscal year ended June 30, 2009 compared to expense of $2.1 million for the prior fiscal year. The Company’s effective tax rate for the fiscal year ended June 30, 2009 differs from the statutory rate. This difference was primarily related to the change in the valuation allowance. As a result of the expiration of the TennCare contract and pending expiration of the Medicare contract, the Company increased its deferred tax asset valuation allowance due to uncertainties in its expected utilization.
Total revenues increased $9.9 million (58%) to $26.8 million for the fiscal year ended June 30, 2008 compared to $17.0 million for the fiscal year ended June 30, 2007. The increase in medical premiums revenues associated with MA-SNP as well as an increase in modified risk revenue were offset by a decrease in fixed administrative fees.
MA-SNP medical premiums revenues were $10.6 million for the fiscal year ended June 30, 2008 compared to $0.9 million for the fiscal year ended June 30, 2007, under UAHC-TN’s contract with CMS that began January 1, 2007. The increase in medical premiums is a result of increased membership.
The net MA-SNP per member per month premium rate, based on an average membership of 767 for the one year ended June 30, 2008, was $1,228 for that one-year period.
Total expenses were $30.1 million for the fiscal year ended June 30, 2008, compared to $19.1 million for the prior fiscal year, an increase of $11.0 million (57%). The increase is principally due to a goodwill impairment charge of $3.5 million and medical expenses related to our MA-SNP, which was launched in January 2007. See Note 2 to our Consolidated Financial Statements in Item 15 of this form 10-K.
tax purposes. As a result of the pending expiration of the TennCare contract, the Company increased its deferred tax asset valuation allowance due to uncertainties in its expected utilization.
Net loss was $4.0 million, or $(0.47) per basic share, for the fiscal year ended June 30, 2008, compared to net loss of $1.1 million, or $(0.14) per basic share, for the fiscal year ended June 30, 2007, an increase in the net loss of $2.9 million (262%).
Capital resources, which for us is primarily cash from operations, are required to maintain our current operations and fund planned capital spending and other commitments and contingencies. Capital resources may also be used for strategic alternatives which may include merger and/or acquisitions. We have no indebtedness as of June 30, 2009. The Company’s ability to maintain adequate amounts of cash to meet its future cash needs depends on a number of factors, particularly including its ability to control administrative costs related to the Medicare contract, and controlling corporate overhead costs. On the basis of the matters discussed above, management believes at this time that the Company has the sufficient cash to adequately support its financial requirements through the next twelve months, and maintain minimum statutory net worth requirements of UAHC-TN.
At June 30, 2009, the Company had (i) cash and cash equivalents and short-term marketable securities of $17.6 million, compared to $19.5 million at June 30, 2008; (ii) working capital of $12.2 million, compared to working capital of $15.3 million at June 30, 2008; and (iii) a current assets-to-current liabilities ratio of 2.72 to 1, compared to 3.38 to 1 at June 30, 2008.
Net cash used in operating activities was $6.2 million in fiscal 2009 compared to net cash provided by operating activities of $5.5 million in fiscal 2008. Cash used in operations is primarily due to decreased revenue and income, resulting from the expiration of the TennCare contract. Total cash and marketable securities decreased by $7.1 million at June 30, 2009 compared to June 30, 2008 primarily due to trailing costs related to the TennCare contract termination. Total accounts receivable decreased by $0.6 million at June 30, 2009 compared to June 30, 2008, primarily due to the decrease in operating activity associated with the expiration of the TennCare contract, offset by the $0.2 million in insurance recovery receivable related the legal settlement and $0.8 million receivable related to the CMS retroactive risk premium adjustment. Medical claims payable decreased by $0.4 million at June 30, 2009 compared to June 30, 2008. The decrease in primarily due to a decrease in members as of June 30, 2009 compared to June 30, 2008. Accounts payable and accrued expenses decreased by $0.5 million at June 30, 2009 compared to June 30, 2008, principally due to the decrease in operating activity associated with the expiration of the TennCare contract which was offset by increased legal fees related to litigation. The reserve for legal settlement increased by $3.3 million resulting from the litigation described in Item 3. Legal Proceedings included herein.
Cash used in financing activities of $1.0 million was primarily due to a share repurchase program. On November 25, 2008, the Company’s board of directors approved the share repurchase program, authorizing the Company to repurchase up to $1.0 million of the Company’s outstanding common stock. As of June 30, 2009, the Company had repurchased a total of 670,795 shares at an average price of $1.46 per share under the share repurchase program. At June 30, 2009, there was $18,630 available under the share repurchase program.
prohibited. If the Company completes an acquisition, the Company believes that SFAS No. 141(R) will have an effect on its financial statements. The Company will determine the effect of SFAS No. 141(R) at the time of any such acquisition.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share.” Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The Company is evaluating the impact, if any, that FSP EITF 03-6-1 will have on its financial statements.
In June 2009, FASB issued SFAS No. 168, “The FASB Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168” or “Codification”). When it becomes effective for financial statements covering periods ending after September 15, 2009, the Codification will be the single source of authoritative U.S. GAAP applicable to all non-governmental entities and will supersede all existing FASB, AICPA, and Emerging Issues Task Force (“EITF”) pronouncements and related literature (i.e. all codified literature will carry the same level of authority and non-codified GAAP literature will become non-authoritative). The Codification will also include relevant portions of authoritative SEC content relating to matters within the basic financial statements, which are considered as sources of authoritative GAAP for SEC registrants. As of July 1, 2009, the FASB no longer issues Statements, Interpretations, Staff Positions, or EITF abstracts. Irrespective of how they would have been issued under the previous structure, all changes to GAAP will henceforth be only in the form of Accounting Standards Updates, which will serve to update the Codification itself. When the Codification becomes effective, SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”, will be rendered irrelevant to give effect to the new GAAP hierarchy established in the Codification. SFAS 168 is effective for the Company’s fiscal quarter beginning July 1, 2009. Other than modifications to the currently required disclosures, the Company does not expect the adoption of SFAS 168 to have a significant impact on its financial position, results of operations or cash flows.
Presented beginning at page of this Annual Report on Form 10-K.