The following table shows consolidated financial data for fiscal years indicated:
The Company provides comprehensive management and consulting services to UAHC Health Plan of Tennessee, Inc. ("UAHC-TN"), a managed care organization ("MCO") which is a wholly owned second-tier subsidiary of United American Healthcare Corporation. Since November 1993, UAHC-TN has had a contract with the State of Tennessee for the State's "TennCare" program, to arrange for the financing and delivery of health care services on a capitated basis to eligible Medicaid beneficiaries and non-Medicaid individuals who lack access to private or employer sponsored health insurance or to another government health plan. As of June 30, 2008, UAHC-TN's total TennCare enrollment was 98,976 members, compared to 101,940 at June 30, 2007.
On April 22, 2008 we learned that UAHC-TN will cease providing managed care services as a TennCare contractor when its present TennCare contract expires. Revenue under this contract will be earned through October 31, 2008 as UAHC-TN's TennCare members are expected to transfer to other managed care organizations on November 1, 2008, after which UAHC-TN will perform its remaining contractual obligations through its TennCare contract expiration date of June 30, 2009. Revenue under this contract represented 57.6% and 88.8% of the Company's total revenues for the fiscal year ended June 30, 2008 and 2007, respectively. Total costs related to this contract discontinuance are estimated to range between $4.6 - $6.6 million, which includes claim processing costs, employee severance, lease termination costs and other corporate general administrative expenses beginning November 2008 through June 2009.
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 Special Needs Plan
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 2008 COMPARED TO 2007
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 became at risk for losing up to 10% of administrative fee revenue and could receive up to 15% incentive bonus revenue based on performance relative to benchmarks.
The larger escrow account, which has expired, was in the original amount of $2,300,000 and was security for repayment to TennCare of any overpayments to UAHC-TN that might be determined by a state regulatory audit of all UAHC-TN processed claims. UAHC-TN was notified in late fiscal 2007 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. In August 2007, the Company received $1,289,851 plus accumulated interest earnings back from the $2,300,000
escrow account. In November 2007, the remaining $1,010,149 account balance was paid to TennCare for claims discrepancies found in the audit by the Tennessee Department of Commerce and Insurance.
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.
Variable administrative fees resulting from the MRA were $1.7 million for the fiscal year ended June 30, 2008 compared to $0.5 million for the fiscal year ended June 30, 2007. Of the $1.7 million MRA revenue recorded in fiscal year 2008, $0.3 million MRA revenue received relates to the third quarter of fiscal 2006 and $1.4 million MRA revenue received relates to fiscal year 2007. The $0.5 million MRA revenue received in fiscal 2007 relates to the fourth quarter of fiscal 2006. Under the MRA, UAHC-TN is at risk to lose up to 10% of administrative fee
revenue and potentially could receive up to 15% incentive bonus revenue based on performance relative to benchmarks (through June 30, 2007). The Company's accounting policy is to recognize MRA revenues upon notification by TennCare that the revenue has been earned. Effective July 1, 2007, the evaluation period for the MRA was changed from quarterly to annually, and the incentive bonus pool was adjusted to 20% of administrative fee revenue.
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 below.
Medical expenses for MA-SNP (beginning January 1, 2007) were $9.6 million during the fiscal year ended June 30, 2008, an increase of $8.7 million from $0.9 million during the fiscal year ended June 30, 2007. 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. As UAHC-TN gains more claims experience for its Medicare Advantage members, less reliance will be placed on medical cost estimates based on historical data provided by CMS. The percentage of such medical expenses to medical premiums revenues for MA-SNP -- the medical loss ratio ("MLR") -- was 87.8% for the fiscal year ended June 30, 2008.
General and administrative expenses were $16.9 million for the fiscal year ended June 30, 2008, as compared with $16.6 million for the prior fiscal year, an increase of $0.3 million. The increase is principally due to marketing costs associated with the launch of our MA-SNP.
Loss from operations before income taxes was $1.9 million for the fiscal year ended June 30, 2008 compared to loss from operations before income taxes of $1.1 million for the fiscal year ended June 30, 2007. Such increase in loss from operations of $0.8 million, or $0.10 per basic share, 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.
Income tax expense was $2.1 million for the fiscal year ended June 30, 2008 compared to $0.1 million for the prior fiscal year. The Company's effective tax rate for the fiscal year ended June 30, 2008 differs from the statutory rate of 34%. This difference was primarily related to the change in the valuation allowance and an impairment charge against goodwill, which is not deductible for 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.
Total revenues were unchanged at $18.1 million for the fiscal year ended June 30, 2007 compared to $18.1 million for the fiscal year ended June 30, 2006. The increase in medical premiums revenues associated with UAHC-TN's Medicare Advantage SNP product ("MA SNP") as well as an increase in modified risk revenue were offset by a decrease in fixed administrative fees.
Total expenses were $19.1 million for the fiscal year ended June 30, 2007, compared to $16.6 million for the prior fiscal year, an increase of $2.5 million (15%). The increase is principally due to a reserve against the restricted assets related to the claims audit escrow account and marketing costs associated with the launch of our MA-SNP. See discussion of the claims audit escrow below under "Liquidity and Capital Resources below."
Medical expenses for MA-SNP (beginning January 1, 2007) were $0.9 million during the fiscal year ended June 30, 2007. Medical expenses generally consist of claim payments, pharmacy
General and administrative expenses were $16.6 million for the fiscal year ended June 30, 2007, as compared with $16.5 million for the prior fiscal year, an increase of $0.1 million. The increase is principally due to marketing costs associated with the launch of our MA-SNP.
Net loss was $1.1 million, or $(0.14) per basic share, for the fiscal year ended June 30, 2007, compared to net earnings of $1.4 million, or $0.18 per basic share, for the fiscal year ended June 30, 2006, a decrease of $2.4 million (181%). Such decrease in net earnings is principally due to a provision for claims audit and other commitment, a decrease in administrative fee revenue and an increase in general and administrative expenses as discussed above.
At June 30, 2008, the Company had (i) cash and cash equivalents and short-term marketable securities of $19.5 million, compared to $14.2 million at June 30, 2007; (ii) working capital of $15.3 million, compared to working capital of $13.1 million at June 30, 2007; and (iii) a current assets-to-current liabilities ratio of 3.38 to 1, compared to 3.13 to 1 at June 30, 2007.
purchase of $13.5 million of marketable securities and sales of $17.0 million of marketable securities.
Accounts receivable decreased by $0.4 million at June 30, 2008 compared to June 30, 2007, primarily due to timing of TennCare payments.
Property, plant and equipment increased by $0.1 million at June 30, 2008 compared to June 30, 2007, due to equipment purchases of $0.3 million offset by depreciation.
Medical claims payable increased by $2.0 million at June 30, 2008 compared to June 30, 2007, which is directly related to MA-SNP plan activity that began January 1, 2007.
Accounts payable decreased by $1.4 million at June 30, 2008 compared to June 30, 2007, principally due the payment of the claims audit and other commitments recorded in fiscal year 2007
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.
Under two escrow agreements between the Company and TennCare, on August 5, 2005 the Company funded two escrow accounts held by TennCare at the State Treasury. Both escrow agreements recited that TennCare did not at that time assert there had been any breach of
UAHC TN's TennCare contract and that the Company funded the escrow accounts as a show of goodwill and good faith in working with TennCare.
On April 22, 2008 we learned that UAHC-TN will cease providing managed care services as a TennCare contractor when its present TennCare contract expires. UAHC-TN's TennCare members are expected to transfer to other managed care organizations on November 1, 2008, after which UAHC-TN will perform its remaining contractual obligations through its TennCare contract expiration date of June 30, 2009. Revenue under this contract represented 60.5% and 93.9% of the Company's total revenues for the fiscal year ended June 30, 2008 and 2007, respectively. Management believes that the discontinuance of the TennCare contract will have a material impact on the Company's operations.
In a December 13, 2006 private placement transaction, the Company raised gross proceeds of $6.50 million through the sale of 1,000,000 newly issued shares of its common stock to certain institutional and other accredited investors at a price of $6.50 per share. The investors also received warrants to purchase 99,999 shares of the Company's common stock at an exercise price of $8.50 per share and expiring in December 2011. In addition, the Company agreed to pay the co-placement agents a transaction fee of $325,000 and warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $9.01 per share. The uses of the net proceeds from the private placement have been principally for start-up costs associated with the Company's Tennessee subsidiary's new Medicare Advantage contract with the Centers for Medicare & Medicaid Services, which became effective January 1, 2007. The remainder was to be used for working capital and general corporate purposes.
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 modified risk arrangement for the TennCare program that began 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. Total costs related to this contract discontinuance are estimated to range between $4.6 - $6.6 million, which includes claim processing costs, employee severance, lease termination costs and other corporate general administrative expenses beginning November 2008 through June 2009.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("FASB 159"). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. FASB 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided that the entity also elects to apply the provisions of FASB 157. The Company is continuing to evaluate the impact of this statement.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141(R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company has not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161"), which amends and expands the disclosure requirements of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative instruments. This statement applies to all entities and all derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has not yet determined the effect on our financial statements, if any, upon adoption of SFAS No. 161.
Also in May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60" ("SFAS 163"). SFAS 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS 163 on its financial statements but does not expect it to have an effect on the Company's financial position, results of operations or cash flows.
In June 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("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. We are assessing the potential impact of this FSP on our earnings per share calculation.