November 1, 2002) Michigan, with a targeted mix of Medicaid and commercial enrollment. OmniCare Health Plan, in Michigan ("OmniCare-MI"), an HMO then administered by the Company under a management agreement, was placed in court-ordered rehabilitation proceedings on July 31, 2001, which relieved the Company from further funding OmniCare-MI's capital deficiencies and which continued its OmniCare-MI management agreement, with substantially reduced management fee revenues from OmniCare-MI beginning August 1, 2001. In March 2002, upon the court-appointed Rehabilitator's filing a proposed rehabilitation plan for OmniCare-MI, the Company announced it anticipated eventual termination of the management agreement. Such termination occurred November 1, 2002, after which the Company's only managed plan has been UAHC Health Plan, Inc. (formerly called OmniCare Health Plan, Inc.) ("UAHC-TN"), an HMO which is owned by the Company's wholly owned subsidiary. Accordingly, the consolidated financial statements in this annual report have been restated to present the operations related to managing OmniCare-MI as a discontinued operation.
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 2006 COMPARED TO 2005
UAHC-TN's results of operations for fiscal 2006 and 2005 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.
TennCare responded to its MCOs' situation generally and in some instances individually. For all its contracted MCOs generally, TennCare changed its reimbursement system to an administrative services only ("ASO") program for an 18-month stabilization period (July 1, 2002 through December 31, 2003), during which the MCOs - including UAHC-TN - had no medical cost risk
(i.e., no risk for medical losses), earned fixed administrative fees and were subject to increased oversight. 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.
Fixed administrative fees related to the ASO program were $17.0 million for the fiscal year ended June 30, 2006, a decrease of $3.9 million (19%) from fixed administrative fees of $20.9
Total expenses were $16.6 million for the fiscal year ended June 30, 2006, compared to $16.0 million for the fiscal year ended June 30, 2005, an increase of $0.6 million (4%). The increase is principally due to legal fees associated with ongoing litigation, and an increase in claims processing costs.
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 Plans - 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 comparable period a year earlier, a 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, 2005 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. See "OVERVIEW" above for more detailed discussion and analysis of such loss from discontinued operations.
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 fiscal year ended June 30, 2005, 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.
Because of TennCare's ASO reimbursement system, medical services expenses were $0.02 million in the fiscal year ended June 30, 2005, a decrease of $0.48 million (96%), as compared with medical services expenses of $0.5 million in the fiscal year ended June 30, 2004. 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 Plans - Managed Plan Owned by the Company."
Depreciation and amortization expense decreased $0.05 million (22%), to $0.17 million for the fiscal year ended June 30, 2005 from $0.23 million for the fiscal year ended June 30, 2004.
The Company recognized a loss of $0.1 million from discontinued operations for the fiscal year ended June 30, 2005, principally due to a liability relating to a sublease, partially offset by the release of certain liabilities related to a patient care software system no longer in use by the Company. For the fiscal year ended June 30, 2004, the Company recognized a loss from discontinued operatons of $0.7 million. The charges for discontinued operations are the result of the termination of the Company's longstanding management agreement with OmniCare-MI, effective November 1, 2002. See "OVERVIEW" above for more detailed discussion and analysis of such loss from discontinued operations.
Net earnings were $5.3 million, or $0.72 per basic share, for the fiscal year ended June 30, 2005, compared to net earnings of $7.2 million, or $0.99 per basic share, for the fiscal year ended June 30, 2004, a decrease of $1.9 million (26%). Such decrease in net earnings is principally due to an increase in marketing, general and administrative expenses and a higher effective tax rate for the period.
At June 30, 2006, the Company had (i) cash and cash equivalents and short-term marketable securities of $6.9 million, compared to $13.5 million at June 30, 2005; (ii) working capital of $7.8 million, compared to working capital of $13.9 million at June 30, 2005; and (iii) a current assets-to-current liabilities ratio of 3.46 to-1, compared to 4.70-to-1 at June 30, 2005.
Cash and marketable securities decreased by $6.6 million at June 30, 2006 compared to June 30, 2005 due primarily to the purchase of marketable securities.
state and federal authorities. 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. The escrow accounts will terminate August 5, 2007 or sooner in certain events, except if litigation is pursued by either party, in which event the escrow accounts will continue until the end of such litigation. 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.
The Company's ability to generate 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 new modified risk arrangement for the TennCare program beginning July 1, 2005 and controlling corporate overhead costs. On the basis of the matters discussed above, management believes at this time that the Company has the ability to generate sufficient cash to adequately support its financial requirements through the next twelve months, and maintain minimum statutory net worth requirements of UAHC-TN.
SFAS No. 123(R), "Share-Based Payment," which is a replacement to SFAS No. 123 "Accounting for Stock Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," was issued in December 2004. The revisions are intended to provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123, as originally issued in 1995, established a preferable fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB Opinion No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the