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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
June 30, 2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-11638
UNITED AMERICAN HEALTHCARE
CORPORATION
(Exact name of registrant as
specified in its charter)
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Michigan
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38-2526913
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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300 River Place, Suite 4950
Detroit, Michigan 48207
(Address of principal
executive offices) (Zip code)
Registrants telephone number, including area code:
(313) 393-4571
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, no par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15
(d) of the
Act Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ.
The aggregate market value of the common stock of the registrant
held by non-affiliates as of December 31, 2009, computed by
reference to the NASDAQ Capital Market closing price on such
date, was $6,225,211.
The number of outstanding shares of registrants common
stock as of August 25, 2010 was 9,772,156.
UNITED
AMERICAN HEALTHCARE CORPORATION
FORM 10-K
TABLE OF
CONTENTS
PART I
United American Healthcare Corporation (the Company
or UAHC) 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.
History
From November 1993 to June 2009, the Companys indirect,
wholly owned subsidiary, UAHC Health Plan of Tennessee, Inc.
(UAHC-TN), was a managed care organization in the
TennCare program, a State of Tennessee program that provided
medical benefits to Medicaid and working uninsured recipients.
On April 22, 2008, the Company learned that UAHC-TN would
no longer be authorized to provide managed care services as a
TennCare contractor when its present TennCare contract expired
on June 30, 2009. UAHC-TNs TennCare members
transferred to other managed care organizations on
November 1, 2008, after which UAHC-TN continued to perform
its remaining contractual obligations through its TennCare
contract expiration date of June 30, 2009. However, revenue
under this contract was only earned through October 31,
2008.
From January 2007 to December 2009, UAHC-TN served as a Medicare
Advantage qualified organization (the Medicare
contract) pursuant to a contract with the Centers for
Medicare & Medicaid Services. The contract authorized
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 to its eligible members in Shelby County, Tennessee
(including the City of Memphis), and to operate a Voluntary
Medicare Prescription Drug Plan. The Company did not seek
renewal of the Medicare contract, which expired
December 31, 2009. The Company is continuing to wind down
the Medicare business and expects to continue to incur costs
related to the Medicare business through December 31, 2010,
including labor, claim processing and the differential costs
related to Tennessee facility sublease. These costs are expected
to approximate $0.1 million to $0.2 million.
The discontinuance of the TennCare and Medicare contracts had a
material adverse effect on the Companys operations,
earnings, financial condition and cash flows in fiscal 2009 and
2010.
Acquisition
of Pulse Systems, LLC
On June 18, 2010, UAHC entered into a Securities Purchase
Agreement and a Warrant Purchase Agreement to acquire 100% of
the outstanding common units and warrants to purchase common
units of Pulse. The consideration paid to acquire the common
units and warrants of Pulse totaled approximately
$9.46 million, which consisted of (a) cash paid at
closing of $3.40 million, (b) a non-interest bearing
note payable of $1.75 million (secured by a subordinated
pledge of all the common units of Pulse),
(c) 1,608,039 shares of UAHC common stock determined
based on an initial value of $1.6 million, (d) an
estimated purchase price adjustment of $210,364 based on
targeted levels of net working capital, cash and debt of Pulse
at the acquisition date (e) and the funding of
$2.5 million for certain obligations of Pulse as discussed
below. The shares of UAHC common stock were issued on
July 12, 2010, upon approval by the UAHC board of directors
on July 7, 2010. The shares of UAHC common stock had a fair
value of $1.05 million as of June 30, 2010, and a fair
value of $884,000 on July 12, 2010, the date the shares
were issued and recorded. The Company also assumed Pulses
term loan to a bank of $4.25 million, after making a
payment at closing as discussed below.
In connection with the acquisition of the Pulse common units,
Pulse entered into a redemption agreement with the holders of
its preferred units to redeem the preferred units for
$3.99 million. Pulse is only allowed to redeem the
preferred units if UAHC makes additional cash equity
contributions to Pulse in an amount necessary to fully fund each
such redemption. UAHC funded an initial payment of
$1.75 million to the preferred unitholders on June 18,
2010. Pulse has agreed to redeem the remaining preferred units
over a two-year period ending in June 2012. Finally, as an
additional condition of closing, UAHC funded a $750,000 payment
toward Pulses outstanding term loan with a bank and
pledged all of the common units of Pulse to the bank as
additional security for the remaining $4.25 million
outstanding under the loan. The initial payment of
$1.75 million to the preferred unitholders and the
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$750,000 payment to the bank by UAHC are considered additional
consideration for the acquisition of Pulse. The funding of the
remaining redemption payments totaling $2.24 million and
the assumption of Pulses revolving and term loan are not
included in the $9.46 million purchase price listed above.
Pulse Systems is now a wholly owned subsidiary of UAHC and
represents substantially all of the ongoing operations of the
Company. Pulse Systems is located in Concord, California. Pulse
Systems was founded as Pulse Systems Corporation, a California
corporation, in 1998. In 2004, Pulse Systems was re-incorporated
as Pulse Systems, LLC, a Delaware limited liability corporation.
Since August 2007, Pulse has been managed by its current
President and Chief Executive Officer, Herbert J. Bellucci, who
has more than 25 years of experience in the medical device
industry.
The remaining sections of this Part I discuss the business
of Pulse Systems. The operating results of Pulse are only
included in the accompanying financial statements since the
acquisition date of June 18, 2010, and the financial
information disclosed in the following sections for Pulse for
any historical period are substantially prior to the acquisition.
Business
Pulse Systems is a provider of contract manufacturing services
to the medical device industry. Over the last twelve years,
Pulse has developed an expertise in laser-based metal
fabrication services, supplying precision components to
customers developing products for use in a wide range of medical
specialties, including cardiology, neurology, orthopedics,
gynecology, ophthalmology and urology. For the twelve months
ended June 30, 2010, approximately 57% of Pulses
total revenue was related to products with cardiovascular
applications. Components produced by Pulse Systems are used in
medical device applications such as cardiovascular stents, heart
valve replacements, arterial wound closures, spinal repairs,
breast biopsies and brain aneurysm repairs.
Pulse Systems specializes in the following contract
manufacturing services for the medical device industry:
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Laser Cutting. Pulses core business is
providing precision laser cutting of thin-wall metal tubes. For
the twelve months ended June 30, 2010, laser cutting
represented approximately 90% of Pulses total revenue.
Pulse has expertise in processing a variety of medical-grade
materials, such as stainless steel, certain nickel-titanium
alloys known as Nitinol, precious metals such as
platinum and gold (often used as radio-opaque location markers
for implants), as well as tantalum and cobalt chromium. Pulse
utilizes automated processing workstations which deliver precise
amounts of laser energy to vaporize metal materials in the
specific pattern required for the customers part. Laser
processing has technical advantages over other conventional
machining techniques in processing these thin, delicate
materials.
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Laser Welding. In addition to its laser
cutting capabilities, Pulse provides customers with laser
welding services for joining metal components into
sub-assemblies.
Pulse maintains a certified Class 10,000 (International
Organization for Standardization (ISO)
Class 7) cleanroom for its
sub-assembly
work. Similar to laser cutting, laser welding is performed by
highly accurate computer-controlled equipment and is
advantageous for use in medical device manufacturing because of
its precision. From a biocompatibility and cleanliness
perspective, the medical-grade materials of the components
themselves are melted by the laser energy to form the weld, so
no that additional materials or contaminants are introduced to
the finished product.
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Nitinol Processing. Pulse has developed
particular expertise in Nitinol heat-treating techniques, which
enable medical device developers to utilize the shape-memory
properties of the Nitinol material. In heat-treating Nitinol,
components are formed into a desired shape in a fixture, then
exposed to a precise transition temperature for a specific
amount of time. Heat-treated Nitinol components will retain
their desired shape while maintaining flexibility of the
spring-like material. This process is referred to as
shape-setting. Nitinol is often used in the design
of catheter-delivered implants which can assume a desired shape
when deployed inside the body.
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Surface Treatments. Pulse offers an array of
surface treatment options for medical device manufacturers to
meet specific design requirements:
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Electropolishing. Using electrical energy to
remove precise amounts of material from metal parts,
electropolishing produces bright, clean surfaces, and provides
the corrosion resistance required for long-term metallic
implants.
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Passivation. For certain materials, especially
stainless steel, chemical passivation techniques are used to
provide corrosion resistance.
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Grit-blasting. In situations where roughened
surfaces are desired, such as for bonding or overmolding, parts
are blasted with a stream of pressurized air carrying fine
particles of aluminum oxide grit to produce the required surface
roughness.
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Competition
The seven largest companies in the industry account for
approximately 49% of the approximately $1 billion market
for medical device contract manufacturing. Beyond the market
leaders, the medical device contract manufacturing industry is
highly fragmented, consisting of several thousand companies in
the United States, most of which are privately-held. Industry
directories list more than 5,000 companies that contribute
as contract manufacturers to serving the medical device
industry. Participants range from small individually-owned shops
to technical specialty firms (such as Pulse Systems) to large
multi-national companies providing
end-to-end
medical device design, fabrication, assembly, and packaging
services. Participants are primarily located in California,
Minnesota and Boston, Massachusetts. Certain of Pulses
customers also have the capability to manufacture similar
products in house, if they so choose.
Pulse Systems competes with a number of other suppliers who
provide similar contract manufacturing services to the medical
device industry. These competitors offer a range of
manufacturing services, each one differing in their mix of
capabilities and production capacity for each. The major
elements of competition in this industry are product quality,
customer service, technical capabilities, and ISO
certifications, as well as pricing. While price is an important
factor, it is not the only consideration for customers choosing
among the competitors in this industry. Pulse does not strive to
offer the lowest price, but rather the best overall value for
the customer.
Medical
Device Opportunity
Powerful demographic, economic, and technologic trends are
driving the development of new medical technologies. Major
contributing factors are the rapid growth in the world
population and the even faster growth of the population segment
over the age of sixty-five. Alongside the aging population trend
is the worldwide trend toward industrialization and the
associated improvement in personal incomes and quality of life
expectations. New medical technologies are emerging to meet the
challenges of the leading causes of death, which have captured
the imagination of technically astute surgeons, device
developers, and investors, and have spawned the emergence of
dozens of new medical device
start-up
companies with bold new product concepts, visionary leadership,
and strong capital investment.
The contract manufacturing industry provides services to medical
device companies that they cannot perform for themselves
economically, or do not wish to invest in for strategic reasons.
The trend in recent years has been toward selective outsourcing
of manufacturing processes to free up investment capital for
acquisition of new product technologies. The capital intensity
of certain manufacturing processes, such as laser cutting and
other metal fabrication, injection molding, and tubing
extrusion, among others, favors consolidation of these
investment-intensive manufacturing capabilities within specialty
firms, allowing economies of scale to be shared by multiple
customers.
Due to its ability to work collaboratively and responsively with
the small venture-backed
start-ups,
as well as its strategic geographical location near the center
of venture capital investment activity in the San Francisco
Bay Area of California, Pulse Systems seeks to benefit from
current demographic, economic, and technologic trends.
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Customers
Customers range in size from broadly-based multi-billion dollar
public companies to small venture-capital financed
start-ups.
However, most of the companies served by Pulse Systems tend to
be smaller
start-ups,
at least in the initial service period.
For the twelve months ended June 30, 2010, Pulse Systems
provided contract manufacturing services to 112 medical
device customers, with approximately 61% of revenue arising from
customers located in the San Francisco Bay Area. For the
twelve-months ended June 30, 2010, 2009 and 2008,
Pulses largest customer accounted for approximately 40%,
60% and 59% of its total revenue, respectively, and its second
largest customer accounted for approximately 19%, 10% and 7% of
its total revenue, respectively. For the twelve months ended
June 30, 2010, the ten largest customers accounted for 82%
of Pulses total revenue. Although such customers represent
a significant portion of Pulses business, we do not
believe the company is substantially dependent on any one
customer.
Pulse does not have any long-term contracts with its customers.
Although we obtain firm purchase orders from customers, such
customers do not typically make firm orders for delivery more
than 120 days in advance. In addition, such customers may
reschedule or cancel firm orders on short notice in accordance
with contractual terms. While firm purchase orders remain our
best predictor of future shipments in the near term, we do not
believe that the backlog of sales at any point time is a
meaningful measure of future long-term sales. As of
June 30, 2010, we had a sales backlog of approximately
$2.9 million.
Marketing
and Sales
Pulse Systems sells its contract manufacturing services directly
to medical device manufacturing companies who are responsible
for the engineering design, clinical development, regulatory
approval, and marketing and sales of the end products. In
selling its services, Pulse utilizes independent
manufacturers representatives, who are granted exclusive
regional territories and are paid a percentage commission for
the sales revenues generated in their territories. Our
manufacturing representatives are generally restricted from
representing competitors in our industry during their service
period to Pulse.
Pulse promotes its services nationally through several media as
well as its website (www.pulsesystems.com). We also advertise
selectively in certain medical device industry trade
publications, and we exhibit at several industry trade shows
annually. Referrals from satisfied customers are also a strong
factor in our selling, and we frequently receive unsolicited
requests for quotation.
Government
Regulations
Pulse Systems is subject to federal, state and local
environmental laws and regulations governing the emission,
discharge, use, storage and disposal of hazardous materials. We
are not aware of any material noncompliance with the
environmental laws currently applicable to our business and we
are not subject to any material claim for liability with respect
to noncompliance. Pulse is also subject to various other
environmental, health, safety, and labor laws as well as various
other directives and regulations. To the best of our knowledge,
the company is in compliance with all relevant laws and
regulations.
The FDA and related state and foreign governmental agencies
regulate many of our customers products as medical
devices, all of which are not directly related to our business
as currently conducted. In most cases, the U.S. Food and
Drug Administration (FDA) or foreign government
agency must approve or pre-clear those products prior to
commercialization.
Intellectual
Property
We have developed certain manufacturing know-how
that we consider proprietary, and which helps to differentiate
our services from those provided by others. Our engineering
staff is focused on the innovative application of manufacturing
technologies to meet our customers needs. However, Pulse
does not conduct any basic research and development outside of
specific tasks requested by its customers, and therefore has no
expenses in that area.
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Pulse Systems owns no patents, patent rights or trademarks.
Further, our business is not dependent on licensed technology
owned by others, except for certain proprietary technology
contained in capital equipment purchased with the appropriate
usage licenses and standard commercially available computer
software.
Quality
Assurance
Pulse Systems maintains a comprehensive quality assurance
program, which includes the control and documentation of
material specifications, operating procedures, equipment
maintenance, and quality control methods. Our quality systems
are based upon FDA requirements and ISO standards for medical
device manufacturers. We believe that our operations are in
substantial compliance with all applicable regulations. Pulse
Systems has obtained quality certification under the ISO
standards, ISO 13485:2003 and ISO 9001:2008. In order to ensure
compliance with regulatory requirements, we generally permit
periodic customer audits of our quality systems.
Materials
The principal raw materials used in products manufactured by
Pulse Systems, which are medical-grade stainless steel and
Nitinol tubing drawn to specific sizes, are either supplied by
our customers or are purchased per customer specifications in
conjunction with particular customer purchase orders. Such
materials are purchased from multiple suppliers, and are
generally readily available with reasonable delivery times.
Therefore, the company does not carry significant amounts of
uncommitted raw material inventory. On-hand inventories are
generally limited to raw materials and
work-in-process
related to contracted customer shipments.
Employees
As of June 30, 2010, the Company had 30 full-time
employees, including 25 full-time employees of Pulse. The
Companys employees do not belong to a collective
bargaining unit and management considers its relations with
employees to be good.
Further information about the Company and Pulse Systems can be
found on the Internet at www.uahc.com and
www.pulsesystems.com, respectively. The references to the
website addresses of the Company and Pulse are not intended to
function as a hyperlink and, except as specified herein, the
information contained on such websites are not part of this
Annual Report on
Form 10-K.
You should carefully consider each of the risks and
uncertainties described below and elsewhere in this Annual
Report on
Form 10-K,
as well as any amendments or updates reflected in subsequent
filings with the SEC. We believe these risks and uncertainties,
individually or in the aggregate, could cause our actual results
to differ materially from expected and historical results and
could materially and adversely affect our business operations,
results of operations, financial condition and liquidity.
Further, additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our
results and business operations.
Risks
Related to Our Business
The
existing global economic and financial market environment has
had and may continue to have a negative effect on our business
and operations.
The existing global economic and financial market environment
has caused, among other things, lower consumer and business
spending, lower consumer net worth, a general tightening in the
credit markets, and lower levels of liquidity, all of which has
had and may continue to have a negative effect on our business,
results of operations, financial condition and liquidity. Many
of our customers have been severely affected by the current
economic turmoil. Current or potential customers may no longer
be in business, may be unable to fund purchases or determine to
reduce purchases, all of which has and could continue to lead to
reduced demand for our products, reduced gross margins, and
increased customer payment delays or defaults. Further,
suppliers may not be able to supply us with needed raw materials
on a timely basis, may increase prices or go out of business,
which could result
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in our inability to meet consumer demand or affect our gross
margins. We are also limited in our ability to reduce costs to
offset the results of a prolonged or severe economic downturn
given certain fixed costs associated with our operations,
difficulties if we overstrained our resources, and our long-term
business approach that necessitates we remain in position to
respond when market conditions improve. The timing and nature of
any recovery in the credit and financial markets remains
uncertain, and there can be no assurance that market conditions
will significantly improve in the near future or that our
results will not continue to be materially and adversely
affected.
Such conditions make it very difficult to forecast operating
results, make business decisions and identify and address
material business risks. The foregoing conditions may also
impact the valuation of certain long-lived or intangible assets
that are subject to impairment testing, potentially resulting in
impairment charges which may be material to our financial
condition or results of operations. See Risks
Related to Financing Activities below for a discussion of
additional risks to our liquidity resulting from the current
economic and financial market environment.
Quality
problems with our processes, products and services could harm
our reputation for producing high quality products and erode our
competitive advantage.
Quality is extremely important to us and our customers due to
the serious and costly consequences of product failure. Many of
our customers require us to adopt and comply with specific
quality standards, and they periodically audit our performance.
Our quality certifications are critical to the marketing success
of our products and services. If we fail to meet these
standards, our reputation could be damaged, we could lose
customers and our sales could decline. Aside from specific
customer standards, our success depends generally on our ability
to manufacture to exact tolerances precision engineered
components, subassemblies and finished devices using multiple
materials. If our components fail to meet these standards or
fail to adapt to evolving standards, our reputation as a
manufacturer of high quality components could be harmed, our
competitive advantage could be damaged, and we could lose
customers and market share.
If we
experience decreasing prices for our products and services and
we are unable to reduce our expenses, our results of operations
will suffer.
We may experience decreasing prices for the products and
services we offer due to pricing pressure experienced by our
customers from managed care organizations and other third party
payers, increased market power of our customers as the medical
device industry consolidates, and increased competition among
medical manufacturing outsourcing service providers. If the
prices for our products and services decrease and we are unable
to reduce our expenses, our results of operations may be
materially adversely affected.
Because
a significant portion of our revenue comes from a few large
customers and customers in the San Francisco Bay Area, any
decrease in sales to these customers could harm our operating
results.
Our revenue and profitability are highly dependent on our
relationships with a limited number of large medical device
companies. For the twelve months ended June 30, 2010,
Pulses two largest and ten largest customers accounted for
approximately 59% and 82%, respectively, of Pulses total
revenue. In addition, for the twelve months ended June 30,
2010, approximately 61% of Pulses revenue related to
customers located in the San Francisco Bay Area. We are
likely to continue to experience a high degree of customer
concentration. The loss or a significant reduction of business
from any of our major customers or from customers in the
San Francisco Bay Area would adversely affect our results
of operations.
We
have limited contractual relationships with our customers and,
as a result, our customers may unilaterally reduce the purchase
of our products.
Pulse does not have any long-term contracts with its customers.
Although we obtain firm purchase orders from customers, such
customers do not typically make firm orders for delivery more
than 120 days in advance. In addition, such customers may
reschedule or cancel firm orders on short notice in accordance
with contractual terms for which we may have incurred
significant production costs. The loss of several customers or
the cancellation of existing firm orders could, in the
aggregate, materially adversely affect our operations and
financial condition.
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Many of our larger customers are multinational companies that
purchase large quantities of medical devices and have
centralized procurement departments. They generally enter into
outsourcing arrangements through a tender process that solicits
bids from several potential suppliers and selects the winning
bid based on several attributes, including price and service.
The significant negotiating leverage possessed by many of our
customers and potential customers limits our ability to
negotiate arrangements with favorable terms and creates pricing
pressure, reducing margins industry wide. In addition, our
customers may vary their order levels significantly from period
to period, and customers may not continue to place orders with
us in the future at the same levels as in prior periods. In the
event we lose any of our larger customers, we may not be able to
quickly replace that revenue source, which could harm our
financial results.
If our
customers fail to obtain, or experience significant delays in
obtaining, FDA clearances or approvals to commercially
distribute their products, our ability to sell our services
could suffer.
Many of our customers medical devices are subject to
rigorous regulatory pre-approval by the FDA and other federal,
state and foreign governmental authorities. Our customers are
typically responsible for obtaining the applicable regulatory
approval for the commercial distribution of our products. The
process of obtaining this approval, particularly from the FDA,
can be costly and time consuming, and there can be no assurance
that our customers will obtain the required approvals on a
timely basis, if at all. The FDA approval process can be
expensive and uncertain, requires detailed and comprehensive
scientific and other data, and generally takes between three
months and three years, or longer, depending on the product
classification. The commercial distribution of any products
developed by our customers that require regulatory clearance may
be delayed by the regulatory approval process. If our customers
fail to obtain, or experience significant delays in obtaining,
FDA clearances or approvals to commercially distribute their
products, our ability to sell our services could suffer.
We may
face competition from, and we may be unable to compete
successfully against, new entrants and established companies
with greater resources.
The market for outsourced manufacturing services to the medical
device industry is very competitive and includes seven companies
that account for approximately 49% of the approximately
$1 billion market, with thousands of companies accounting
for the remaining market share. As more medical device companies
seek to outsource more of the prototyping and manufacturing of
their products, we will face increasing competitive pressures to
grow our business in order to maintain our competitive position,
and we may encounter competition from and lose customers to
other companies with technological and manufacturing
capabilities similar to or better than ours. Some of our
potential competitors have greater name recognition, greater
operating revenues, larger customer bases, longer customer
relationships and greater financial, technical, personnel and
marketing resources than we have. Further, we believe that there
are few barriers to entry into many of our product markets. As a
result, we have experienced, and may continue to experience,
competition from new manufacturers. When new manufacturers enter
the market or existing manufacturers increase capacity, they
frequently reduce prices to achieve increased market share.
An increase in competition could result in material selling
price reductions or loss of our market share, which could
materially adversely affect our operations and financial
condition. There can be no assurance that we will be able to
compete successfully in the markets for our products or that
competition will not intensify.
If we
do not respond to changes in technology, our manufacturing
processes may become obsolete and we may experience reduced
sales and lose customers.
We use proprietary processes and sophisticated machining
equipment to meet the critical specifications of our customers.
Without the timely incorporation of new processes and
enhancements, particularly relating to quality standards and
cost-effective production, our manufacturing capabilities will
likely become outdated, which could cause us to lose customers
and result in reduced sales or profit margins. In addition, new
or revised technologies could render our existing technology
less competitive or obsolete or could reduce demand for our
products and services. It is also possible that finished medical
device products introduced by our customers may require fewer of
our components or may require components that we lack the
capabilities to manufacture or assemble. In addition,
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we may expend resources on developing technologies that do not
result in commercially viable processes for our business, which
could adversely impact our margins and operating results.
Our
business is subject to risks associated with a single
manufacturing facility.
We internally manufacture our own products at one production
facility in Concord, California. While we maintain insurance
covering our manufacturing and production facility, including
business interruption insurance, a catastrophic loss of the use
of all or a portion of our facilities due to accident, fire,
explosion, labor issues, weather conditions, other natural
disaster or otherwise, whether short or long-term, could have a
material adverse effect on our customer relationships and
financial results.
Our
business is subject to risks associated with manufacturing
processes.
Unexpected failures of our equipment and machinery may result in
production delays, revenue loss and significant repair costs,
injuries to our employees, and customer claims. Any interruption
in production capability may require us to make large capital
expenditures to remedy the situation, which could have a
negative impact on our profitability and cash flows. Our
business interruption insurance may not be sufficient to offset
the lost revenues or increased costs that we may experience
during a disruption of our operations.
Furthermore, our business involves complex manufacturing
processes and hazardous materials that can be dangerous to our
employees. We employ safety procedures in the design and
operation of our facilities and may be required to incur
additional expenditures for the development of additional safety
procedures in the future. There is a risk that an accident or
death could occur at our facilities despite such procedures. Any
accident could result in significant manufacturing delays,
disruption of operations, claims for damages resulting from
injuries or additional expenditures on safety procedures, which
could result in decreased sales and increased expenses. To date,
we have not incurred any such significant delays, disruptions or
claims. The potential liability resulting from any accident or
death, to the extent not covered by insurance, would require us
to use other resources to satisfy our obligations and could
cause our business to suffer.
We may
expand into new markets or new products and our expansion may
not be successful.
We may expand into new markets through the development of new
product applications based on our existing specialized
manufacturing capabilities and services. These efforts could
require us to make substantial investments, including
significant engineering and capital expenditures for new,
expanded or improved manufacturing facilities which would divert
resources from other aspects of our business. Expansion into new
markets and products may be costly without resulting in any
benefit to us. Specific risks in connection with expanding into
new markets include the inability to transfer our quality
standards into new products, the failure of customers in new
markets to accept our products and price competition in new
markets. If we choose to expand into new markets and are
unsuccessful, our financial condition could be adversely
affected and our business harmed.
We may
selectively pursue acquisitions in the future, but, because of
the uncertainty involved, we may not be able to identify
suitable acquisition candidates and may not successfully
integrate acquired businesses into our business and operations.
We are continuing to integrate Pulse Systems, which also entails
risk.
We may not be able to identify potential acquisition candidates
that could complement our business or may not be able to
negotiate acceptable terms for acquisition candidates we
identify. As a result, we may not be able to realize this
element of our growth strategy. In addition, even if we are
successful in acquiring any companies, such as Pulse Systems, we
may experience material negative consequences to our business,
financial condition or results of operations if we cannot
successfully integrate the operations of acquired businesses
with ours.
The integration of companies that have previously been operated
separately (such as Pulse) involves a number of risks,
including, but not limited to:
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difficulty in realizing anticipated financial or strategic
benefits of such acquisition;
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diversion of capital and potential dilution of stockholder
ownership;
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the risks related to increased indebtedness, as well as the risk
such financing will not be available on satisfactory terms or at
all;
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diversion of managements attention and other resources
from current operations, including potential strain on financial
and managerial controls and reporting systems and procedures;
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management of employee relations across facilities;
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difficulties in the assimilation of different corporate cultures
and practices, as well as in the assimilation and retention of
broad and geographically dispersed personnel and operations;
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difficulties and unanticipated expenses related to the
integration of departments, systems (including accounting
systems), technologies, books and records, procedures and
controls (including internal accounting controls, procedures and
policies), as well as in maintaining uniform standards,
including environmental management systems;
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assumption of known and unknown liabilities, some of which may
be difficult or impossible to quantify;
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inability to realize cost savings, sales increases or other
benefits that we anticipate from such acquisitions, either as to
amount or in the expected time frame;
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non-cash impairment charges or other accounting charges relating
to the acquired assets; and
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ability to maintain strong relationships with our and our
acquired companies customers after the acquisitions.
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If our integration efforts are not successful, we may not be
able to maintain the levels of revenues, earnings or operating
efficiency that we and the acquired companies achieved or might
achieve separately.
Our
inability to access additional capital could have a negative
impact on our growth strategy.
Our growth strategy will require additional capital for, among
other purposes, completing any acquisitions we enter into,
managing any acquired companies, acquiring new equipment and
maintaining the condition of existing equipment. If cash
generated internally is insufficient to fund capital
requirements, we will require additional debt or equity
financing. Adequate financing may not be available or, if
available, may not be available on terms satisfactory to us. If
we fail to obtain sufficient additional capital in the future,
we could be forced to curtail our growth strategy by reducing or
delaying capital expenditures and acquisitions, selling assets
or restructuring or refinancing our indebtedness. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources elsewhere in this report.
We are
subject to a variety of environmental, health and safety laws
that could be costly for us to comply with, and we could incur
liability if we fail to comply with such laws or if we are
responsible for releases of contaminants to the
environment.
Federal, state and local laws impose various environmental,
health and safety requirements on our operations, including with
respect to the management, handling, generation, emission,
release, discharge, manufacturing, transportation, storage, use
and disposal of hazardous substances and other materials used or
generated in the manufacturing of our products. If we fail to
comply with any present or future environmental, health and
safety laws, we could be subject to fines, corrective action,
other liabilities or the suspension of production. We could also
be subject to claims under such laws, including common law,
alleging the release of hazardous substances into the
environment.
Infringement
claims regarding patents or other intellectual property rights
by third parties could result in an adverse impact on our
operations, and could be costly and distracting to
management.
Although we do not believe that any of our products, services or
processes infringe the intellectual property rights of third
parties, historically, patent applications in the United States
have not been publicly disclosed until the patent is issued (or
as of recently, until publication, which occurs eighteen months
after filing), and we may not be aware of currently filed patent
applications that relate to our products or processes. If
patents later issue on these
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applications, we may in the future be notified that we are
infringing patent or other intellectual property rights of third
parties and we may be liable for infringement at that time. In
the event of infringement of patent or other intellectual
property rights, we may not be able to obtain licenses on
commercially reasonable terms, if at all, and we may end up in
litigation. The failure to obtain necessary licenses or other
rights or the occurrence of litigation arising out of
infringement claims could disrupt our business and impair our
ability to meet our customers needs which, in turn, could
have a negative effect on our financial condition and results of
operations. Infringement claims, even if not substantiated,
could result in significant legal and other costs and may be a
distraction to management. We also may be subject to significant
damages or injunctions against development and sale of our
products.
In addition, any infringement claims, significant charges or
injunctions against our customers products that
incorporate our components may result in our customers not
needing or having a reduced need for our capabilities and
services.
Our
earnings and financial condition could suffer if we or our
customers become subject to product liability claims or recalls.
We may also be required to spend significant time and money
responding to investigations or requests for information related
to end-products of our customers.
The manufacture and sale of products that incorporate components
manufactured or assembled by us expose us to potential product
liability claims and product recalls, including those that may
arise from misuse or malfunction of our components or use of our
components with components or systems not manufactured or sold
by us. Product liability claims or product recalls with respect
to our components or the end-products of our customers into
which our components are incorporated, whether or not such
problems related to the products and services we have provided
and regardless of their ultimate outcome, could require us to
pay significant damages or to spend significant time and money
in litigation or responding to investigations or requests for
information. We may also lose revenue from the sale of
components if the commercialization of a product that
incorporates our components or subassemblies is limited or
ceases as a result of such claims or recalls. Expenditures on
litigation or damages, to the extent not covered by insurance,
and declines in revenue could impair our earnings and our
financial condition. Also, if, as a result of claims or recalls
our reputation is harmed, we could lose customers, which would
also negatively affect our business.
In the future, we may be unable to maintain our existing
insurance coverage or to do so at reasonable cost and on
reasonable terms. In addition, if our insurance coverage is not
sufficient to cover any costs we may incur and we may be
required to pay damages if we are subject to product liability
claims or product recalls, we will have to use other resources
to satisfy our obligations.
A
substantial amount of our assets represents goodwill, and our
earnings will be reduced if our goodwill becomes
impaired.
As of June 30, 2010, goodwill of approximately
$10.0 million represented 48% of our total assets. Goodwill
is generated in acquisitions where the cost of an acquisition
exceeds the fair value of the net tangible and identifiable
intangible assets we acquire. Goodwill is subject to an
impairment analysis at least annually based on a comparison of
the fair value of the reporting unit to its carrying value. If
an impairment is indicated from this first step, the implied
fair value of the goodwill must be determined. We could be
required to recognize reductions in our earnings caused by the
impairment of goodwill, which if significantly impaired, could
materially and adversely affect our results of operations.
Our
business may suffer if we are unable to recruit and retain
senior management and experienced engineers and management
personnel that we need to compete in the medical device
industry.
Our operations are highly dependent on the efforts of William C.
Brooks, the Companys President and Chief Executive
Officer, Herb Bellucci, President and CEO of Pulse who has more
than 25 years of experience in the medical device industry,
and certain other senior executives who have been instrumental
in developing our business strategies and forging our business
relationships. The loss of the leadership, knowledge and
experience of
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Mr. Brooks, Mr. Bellucci and our other executive
officers could adversely affect our business. We do not
currently maintain key man insurance on any of our executive
officers.
In addition, our future success depends upon our ability to
attract, develop and retain highly skilled engineers. We may not
be successful in attracting new engineers or in retaining or
motivating our existing engineers, which may lead to increased
recruiting, relocation and compensation costs for such
personnel. These increased costs may reduce our profit margins.
Some of our manufacturing processes are highly technical in
nature. Our ability to maintain or expand existing business with
our customers and provide additional services to our existing
customers depends on our ability to hire and retain engineers
with the skills necessary to keep pace with continuing changes
in the medical device industry. We compete with other companies
in the medical device manufacturing industry to recruit
engineers.
We
depend on outside suppliers and subcontractors, and our
production and reputation could be harmed if they are unable to
meet our quality and volume requirements and alternative sources
are not available.
Our current internal capabilities do not include all elements
that are required to satisfy all of our customers
requirements. We may rely on third party suppliers,
subcontractors, and other outside sources for components or
services. Manufacturing problems may occur with these third
parties. A supplier may fail to supply components or services to
us on a timely basis, or may supply us with components or
services that do not meet our quality, quantity, or cost
requirements. If any of these problems occur, we may be unable
to obtain substitute sources of these components or services on
a timely basis or on terms acceptable to us, which could harm
our ability to deliver components or services to our customers
profitably or on time. In addition, if the processes that our
suppliers use to provide components or services are proprietary,
we may be unable to obtain comparable components from
alternative suppliers.
Prior
to its acquisition by the Company, Pulse Systems was not subject
to requirements to test its internal control over financial
reporting. If such controls are ineffective, it could have a
significant and adverse effect on our business and
reputation.
Section 404 of the Sarbanes Oxley Act of 2002 and rules and
regulations of the SEC thereunder require that companies who are
required to file reports under section 13(a) or 15(d) of
the Securities Exchange Act 1934 evaluate their internal
controls over financial reporting in order to allow management
to report on their internal controls over financial reporting.
Prior to its acquisition by the Company, Pulse Systems was not a
required to undertake such evaluation. Ensuring the
effectiveness of internal control over financial reporting may
entail significant costs and management time. Following the
integration of systems, if we are unable to certify as to the
effectiveness of our internal controls over financial reporting
including Pulse, there could be a negative reaction in the
financial markets due to a loss of confidence in the reliability
of our financial statements. In addition, we may be required to
incur costs to improve our internal control system and to hire
additional personnel. Any such action could negatively affect
our results of operations.
Our
operating results may fluctuate, which may make it difficult to
forecast our future performance.
Fluctuations in our operating results may cause uncertainty
concerning our performance and prospects or may result in our
failure to meet expectations. Our operating results have
fluctuated in the past and are likely to fluctuate significantly
in the future due to a variety of factors, which include, but
are not limited to:
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the fixed nature of a substantial percentage of our costs, which
results in our operations being sensitive to fluctuations in
sales;
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changes in the relative portion of our sales represented by our
various products, which could result in reductions in our
profits if the relative portion of our sales represented by
lower margin products increases;
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introduction and market acceptance of our customers new
products and changes in demand for our customers existing
products;
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the accuracy of our customers forecasts for future
production requirements;
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timing of orders placed by our principal customers that account
for a significant portion of our revenues;
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future price concessions as a result of pressure to compete;
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cancellations by customers which may result in recovery of only
our costs;
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the availability of raw materials, including stainless steel,
nitinol, platinum, tantalum, and gold;
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increased costs of raw materials, supplies or skilled labor;
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our effectiveness in managing our manufacturing
processes; and
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changes in the competitive and economic conditions generally, or
in our customers markets.
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Investors should not rely on results of operations in any past
period as an indication of what our results will be for any
future period.
Risks
Related to Our Industry
We may
not be able to grow our business if the trend by medical device
companies to outsource their manufacturing activities does not
continue or if our customers decide to manufacture internally
products that we currently provide.
Our contract manufacturing business has grown partly as a result
of the increase over the past several years in medical device
companies outsourcing these activities. We view the increasing
use of outsourcing by medical device companies as an important
component of our future growth strategy. While industry analysts
expect the outsourcing trend to increase, our current and
prospective customers continue to evaluate our capabilities
against the merits of internal production. Protecting
intellectual property rights and maximizing control over
regulatory compliance are among factors that may influence
medical device companies to keep production in-house. Any
substantial slowing of growth rates or decreases in outsourcing
by medical device companies could cause our sales to decline,
and we may be limited in our ability, or unable to continue, to
grow our business.
We and
our customers are subject to various regulations, as well as
political, economic and regulatory changes in the healthcare
industry or otherwise, that could force us to modify how we
price our components, manufacturing capabilities and services
and could harm our business.
The healthcare industry is highly regulated and is influenced by
changing political, economic and regulatory factors. Regulations
affecting the healthcare industry in general, and the medical
device industry in particular, are complex, change frequently
and have tended to become more stringent over time.
Specifically, the FDA and state and foreign governmental
agencies regulate many of our customers products and
approval/clearance is required for those products prior to
commercialization in the U.S. and certain foreign
jurisdictions. Some of our facilities are subject to inspection
by the FDA and other regulatory agencies for compliance with
regulations or regulatory requirements. Our failure to comply
with these regulations or regulatory requirements may result in
civil and criminal enforcement actions or fines and, in some
cases, the prevention or delay of our customers ability to
gain or maintain approval to market their products. Any failure
by us to comply with applicable regulations could also result in
the cessation of portions or all of our operations and
restrictions on our ability to continue or expand our operations.
The
recently enacted Affordable Healthcare for America Act includes
provisions that may adversely affect our business and results of
operations, including an excise tax on the sales of most medical
devices.
On March 21, 2010, the House of Representatives passed the
Affordable Health Care for America Act, which President Obama
signed into law on March 23, 2010. While we are continuing
to evaluate this legislation and its potential impact on the
Company, it may adversely affect our business and results of
operations, possibly materially.
Specifically, one of the new laws components is a 2.3%
excise tax on sales of most medical devices, starting in 2013.
This tax may put increased cost pressure on medical device
companies, including our customers, and may lead our customers
to reduce their orders for products we produce or to request
that we reduce the prices we charge for products we produce in
order to offset the tax.
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Our
business is indirectly subject to healthcare industry cost
containment measures and other industry trends affecting pricing
that could result in reduced sales of or prices for our
products.
Acceptance of our customers products by hospitals,
outpatient centers and physicians depend on, among other things,
reimbursement approval of third-party payers such as Medicaid,
Medicare and private insurers. The continuing efforts of
government, insurance companies and other payers of healthcare
costs to contain or reduce those costs could lead to lower
reimbursement rates or non-reimbursement for medical procedures
that use our products. If that were to occur, medical device
manufacturers might insist that we lower prices on products
related to the affected medical device or they might
significantly reduce or eliminate their purchases from us of
these related products, which could affect our profitability.
Consolidation
in the healthcare industry could have an adverse effect on our
revenues and results of operations.
Many healthcare industry companies, including medical device
companies, are consolidating to create new companies with
greater market power. As the healthcare industry consolidates,
competition to provide products and services to industry
participants will become more intense. These industry
participants may try to use their market power to negotiate
price concessions or reductions for medical devices that
incorporate components produced by us. If we are forced to
reduce our prices because of consolidation in the healthcare
industry, our revenues would decrease and our business,
financial condition and results of operations would suffer.
Inability
to obtain sufficient quantities of raw materials could cause
delays in our production.
Our business is dependent on a continuous supply of raw
materials. The raw materials needed for our business are
susceptible to fluctuations in price and availability due to
transportation costs, government regulations, price controls,
changes in economic climates or other unforeseen circumstances.
Failure to maintain our supply of raw materials could cause
production delays resulting in a loss of customers and a decline
in sales. Due to the supply and demand fundamentals of raw
materials used by us, we have occasionally experienced extended
lead times on purchases and deliveries from our suppliers.
Consequently, we have had to adjust our delivery schedule to
customers. In addition, fluctuations in the cost of raw
materials may increase our expenses and affect our operating
results. The principal raw materials used in our business
include stainless steel, nitinol, platinum, tantalum, cobalt
chromium, and electricity.
Risks
Relating to Financing Activities
Capital
markets have experienced a significant period of dislocation and
instability, which has had and could continue to have a negative
impact on the availability and cost of capital.
The general disruption in the U.S. capital markets has
impacted the broader financial and credit markets and reduced
the availability of debt and equity capital for the market as a
whole. These conditions could persist for a prolonged period of
time or worsen in the future. Our ability to access the capital
markets may be restricted at a time when we would like, or need,
to access those markets, which could have an impact on our
flexibility to react to changing economic and business
conditions. The resulting lack of available credit, increased
volatility in the financial markets and reduced business
activity could materially and adversely affect our business,
financial condition, results of operations and our ability to
obtain and manage our liquidity. In addition, the cost of debt
financing, and other important financing terms, may be
materially adversely impacted by these market conditions.
Credit
market developments may reduce availability under our credit
agreement.
Due to the volatile state of the credit markets during the past
few years, there is risk that lenders, even those with strong
balance sheets and sound lending practices, could fail or refuse
to honor their legal commitments and obligations under existing
credit commitments, including but not limited to: extending
credit up to the maximum permitted by a credit facility,
allowing access to additional credit features and otherwise
accessing capital
and/or
honoring loan commitments. If our lender(s) fail to honor their
legal commitments under our credit facility, it could be
difficult in the current environment to replace our credit
facility on similar terms. Although we believe that our
operating cash flow, access to capital markets and existing
credit facilities will give us the ability to satisfy our
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liquidity needs for at least the next 12 months, the
failure of any of the lenders under our credit facility may
impact our ability to finance our operating or investing
activities.
Pulse
and UAHC are subject to a number of restrictive debt covenants
which may restrict our business and financing
activities.
Our credit facility contains restrictive debt covenants that,
among other things, restrict Pulses
and/or
UAHCs ability to:
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borrow money;
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pay dividends and make distributions;
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make certain investments;
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repurchase stock;
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use assets as security in other transactions;
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create liens;
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enter into affiliate transactions;
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merge or consolidate; and
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transfer and sell assets.
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In addition, our credit facility also require us to maintain
certain financial tests. These restrictive covenants may limit
our ability to expand or to pursue our business strategies.
Furthermore, any indebtedness that we incur in the future may
contain similar or more restrictive covenants. Our ability to
comply with the restrictions contained in our credit facility
may be affected by changes in our business condition or results
of operations, adverse regulatory developments or other events
beyond our control. A failure to comply with these restrictions
could result in a default under our credit facility or any other
subsequent financing agreement, which could, in turn, cause any
of our debt to which a cross-acceleration or cross-default
provision applies to become immediately due and payable. If our
debt were to be accelerated, we cannot assure you that we would
be able to repay it. In addition, a default could give our
lenders the right to terminate any commitments that they had
made to provide us with additional funds.
Risks
Relating to Our Common Stock
Our
common stock may continue to be volatile and could decline
substantially.
The trading price of our common stock has been, and may continue
to be, volatile. From July 1, 2009 to June 30, 2010,
the trading price of our stock has ranged from $0.55 to $1.75.
We believe this volatility is due to, among other things, recent
financial performance, current expectations of our future
financial performance, delisting from the Nasdaq Capital Market
and the volatility of the stock market in general.
In particular, with respect to our new operations, there has
been significant volatility in the market price and trading
volume of securities of companies operating in the medical
device industry, which has often been unrelated to the operating
performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our
common stock.
Price declines in our common stock could result from general
market and economic conditions and a variety of other factors,
including:
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actual or anticipated fluctuations in our operating results;
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our announcements or our competitors announcements
regarding new products, significant contracts, acquisitions,
divestitures or strategic investments;
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loss of any of our key management or technical personnel;
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conditions affecting medical device manufacturers or the medical
device industry generally;
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product liability lawsuits against us or our customers;
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clinical trial results with respect to our customers
medical devices;
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changes in our growth rates or our competitors growth
rates;
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developments regarding our proprietary rights, or those of our
competitors;
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FDA and international actions with respect to the government
regulation of medical devices and third-party reimbursement
practices;
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public concern as to the safety of our products;
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changes in health care policy in the United States and
internationally;
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conditions in the financial markets in general or changes in
general economic conditions;
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our liquidity needs and constraints and our ability to raise
additional capital;
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changes in stock market analyst recommendations regarding our
common stock, other comparable companies or the medical device
industry generally, or lack of analyst coverage of our common
stock;
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sales of our common stock by our executive officers, directors
and five percent stockholders or stock issuances by the Company;
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changes in accounting standards, policies, guidance,
interpretations or principles; and
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announcement of financial restatements.
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Some companies that have had volatile market prices for their
securities have been subject to securities class action suits
filed against them. If a suit were to be filed against us,
regardless of the outcome, it could result in substantial costs
and a diversion of our managements attention and
resources. This could have a material adverse effect on our
business, results of operation and financial condition.
We
have recently been delisted from the Nasdaq Capital Market and
there is a limited trading volume for our common stock on the
OTCQB.
In July 2010, our common stock was delisted from the Nasdaq
Capital Market. Our common stock, which currently trades on the
OTCQB Marketplace, does not have substantial trading volume. As
a result, relatively small trades of our common stock may have a
significant impact on the price of our common stock and,
therefore, may contribute to the price volatility of our common
stock. Because of the limited trading volume in our common stock
and the price volatility of our common stock, you may be unable
to sell your shares of common stock when you desire or at the
price you desire. Moreover, the inability to sell your shares in
a declining market because of such illiquidity or at a price you
desire may substantially increase your risk of loss.
In addition, the delisting of our common stock from the Nasdaq
Capital Market could materially adversely affect our ability to
raise capital on terms acceptable to us or at all and adversely
affect institutional investor interest.
Our
articles of incorporation, our bylaws and Michigan law contain
provisions that could discourage another company from acquiring
us and may prevent attempts by our shareholders to replace or
remove our current management.
Provisions of Michigan corporation law, our articles of
incorporation and our bylaws may discourage, delay or prevent a
merger or acquisition that shareholders may consider favorable,
including transactions in which you might otherwise receive a
premium for your shares. In addition, these provisions may
frustrate or prevent any attempts by our shareholders to replace
or remove our current management by making it more difficult for
shareholders to replace or remove our board of directors. These
provisions include:
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providing for a classified board of directors with staggered
terms;
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requiring super majority stockholder voting to effect certain
amendments to our articles of incorporation and bylaws;
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eliminating the ability of shareholders to call special meetings
of shareholders;
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establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted on by shareholders at shareholder meetings;
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permitting the board of directors to amend, alter or repeal the
bylaws;
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limiting the ability of shareholders to act by written consent;
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limiting the ability of shareholders to remove
directors; and
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authorizing of the board of directors to issue, without
stockholder approval, shares of one or more series of preferred
stock with such terms as the board of directors may determine
and shares of our common stock.
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Our
common stock may be subject to penny stock rules,
which make it more difficult for you to dispose of your
shares.
Our common stock may be subject to the rules promulgated under
the Securities Exchange Act of 1934 relating to penny
stocks. These rules require brokers who sell securities
that are subject to the rules, and who sell to persons other
than established customers and institutional accredited
investors, to complete required documentation, make suitability
inquiries of investors and provide investors with information
concerning the risks of trading in the security. These
requirements would make it more difficult to buy or sell our
common stock in the open market and therefore reduce the market
liquidity of our common stock. As a result, an investor would
find it more difficult to dispose of, or obtain accurate
quotations for the price of, our common stock.
We do
not anticipate paying any cash dividends.
We presently do not anticipate that we will pay any dividends on
any of our capital stock in the foreseeable future. The payment
of dividends, if any, would be contingent upon our revenues and
earnings, if any, capital requirements, and general financial
condition. The payment of any dividends will be within the
discretion of our Board of Directors. We presently intend to
retain all earnings, if any, to implement our business plan;
accordingly, we do not anticipate the declaration of any
dividends in the foreseeable future.
We may
need additional capital, and the sale of additional shares or
other equity securities could result in additional dilution to
our stockholders.
We believe that our current cash and cash equivalents and
anticipated cash flow from operations will be sufficient to meet
our anticipated cash needs for the near future. We may, however,
require additional cash resources due to changed business
conditions or other future developments, including any
investments or acquisitions we may decide to pursue. If our
resources are insufficient to satisfy our cash requirements, we
will seek to sell additional equity or debt securities or
increase the size of our credit facility. The sale of additional
equity securities would result in additional dilution to our
stockholders.
Risks
Related to Our Prior Healthcare Management Business
If we
are unable to estimate incurred but not reported medical
benefits expense accurately, that could affect our reported
financial results.
Our medical benefits expense includes estimates of medical
claims incurred but not reported (IBNR). Together
with our internal and consulting actuaries, we estimate our
medical cost liabilities using actuarial methods based on
historical data adjusted for payment patterns, cost trends,
product mix, seasonality, utilization of healthcare services and
other relevant factors. Actual conditions could, however, differ
from those assumed in the estimation process. We continually
review and update our estimation methods and the resulting
reserves and make adjustments, if necessary, to medical benefits
expense when the criteria used to determine IBNR change and when
actual claim costs are ultimately determined. Due to the
uncertainties associated with the factors used in these
assumptions, the actual amount of medical benefits expense that
we incur may be materially more than the amount of IBNR
originally estimated. If our current or future estimates of IBNR
are inadequate, our reported results of
16
operations could be negatively impacted. Our limited ability to
estimate IBNR accurately could also affect our ability to take
timely corrective actions, exacerbating the extent of any
adverse effect on our results.
We are
required to comply with laws governing the transmission,
security and privacy of health information that require
significant compliance costs, and any failure to comply with
these laws could result in material criminal and civil
penalties.
Regulations under the Health Insurance Portability and
Accountability Act of 1996, commonly called HIPAA, require us to
comply with standards regarding the exchange of health
information within our Company and with third parties, including
healthcare providers, business associates and our members. These
regulations include: standards for common healthcare
transactions, including claims information, plan eligibility and
payment information; unique identifiers for providers and
employers; security; privacy; and enforcement. We conduct our
operations in an attempt to comply with all applicable HIPAA
requirements. Given the complexity of the HIPAA regulations, the
possibility that the regulations may change and the fact that
the regulations are subject to changing and sometimes
conflicting interpretation, our ongoing ability to comply with
the HIPAA requirements is uncertain. Additionally, the costs of
complying with any changes to the HIPAA regulations may have a
negative impact on our operations. Sanctions for failing to
comply with the HIPAA health information provisions include
criminal penalties and civil sanctions, including significant
monetary penalties. A failure by us to comply with state health
information laws that may be more restrictive than the HIPAA
regulations could result in additional penalties.
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.
Pulse leases approximately 9,000 square feet of office and
manufacturing space in Concord, California. The Company believes
that its current facilities provide sufficient space suitable
for all of its activities and that sufficient other space will
be available on reasonable terms, if needed.
The Company currently leases approximately 26,200 square
feet in Memphis, Tennessee, all of which is subleased relating
to its prior operations.
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ITEM 3.
|
LEGAL
PROCEEDINGS
|
The information required by this item is set forth under
Note 18 to the consolidated financial statements.
|
|
ITEM 4.
|
[REMOVED
AND RESERVED]
|
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Since July 12, 2010, our common stock is quoted under the
symbol UAHC on the OTCQB Marketplace, which is a
market tier for
over-the-counter-traded
U.S. companies that are registered and reporting with the
Securities and Exchange Commission (SEC) or a
U.S. banking or insurance regulator. The Companys
common stock was previously listed under the symbol
UAHC on the NASDAQ Capital Market.
The table below sets forth for the common stock the range of the
high and low sales prices per share on the NASDAQ Capital Market
for each quarter in the past two fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Sales Price
|
|
2009 Sales Price
|
Fiscal Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First
|
|
$
|
1.75
|
|
|
$
|
0.91
|
|
|
$
|
2.01
|
|
|
$
|
1.47
|
|
Second
|
|
$
|
1.06
|
|
|
$
|
0.85
|
|
|
$
|
1.95
|
|
|
$
|
1.04
|
|
Third
|
|
$
|
1.40
|
|
|
$
|
0.98
|
|
|
$
|
2.21
|
|
|
$
|
1.30
|
|
Fourth
|
|
$
|
1.20
|
|
|
$
|
0.55
|
|
|
$
|
1.72
|
|
|
$
|
1.16
|
|
17
As of August 26, 2010, the high and low bid quotations on
the OTCQB were $0.30 and $0.27 per share, respectively. These
quotations represent inter-dealer quotations, without adjustment
for retail markup, markdown or commission and may not represent
actual transactions.
As of August 26, 2010, there were approximately
105 shareholders of record of the Company. A substantially
greater number of holders are beneficial owners whose shares are
held of record by banks, brokers and other persons or entities.
The Company has not paid any cash dividends on its common stock
since its initial public offering in fiscal 1991 and does not
anticipate paying such dividends in the foreseeable future.
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations and other sections
of this report contains various forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These
forward-looking statements represent our expectations or beliefs
concerning future events, including statements regarding future
plans and strategy for our business, earnings and the
sufficiency of our cash balances and cash generated from
operating, investing, and financing activities for our future
liquidity and capital resource needs. We caution that although
forward-looking statements reflect our good faith beliefs and
reasonable judgment based upon current information, these
statements are qualified by important factors that could cause
actual results to differ materially from those in the
forward-looking statements, because of risks, uncertainties, and
factors including, but not limited, to: the recent acquisition
of Pulse and its integration into the Company; changes in the
medical device and healthcare industry; the wind down of the CMS
Medicare contract; the ongoing impacts of the
U.S. recession; the continuing impacts of the global credit
and financial crisis; and other changes in general economic
conditions. Other risks and uncertainties are detailed from time
to time in reports filed with or furnished to the SEC, and in
particular those set forth under Risk Factors in
Part 1 Item 1A in this annual report on
Form 10-K.
Given such uncertainties, you should not place undue reliance on
any such forward-looking statements. Except as required by law,
we may not update these forward-looking statements, even if new
information becomes available in the future.
Overview
This section discusses the Companys 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.
History
From November 1993 to June 2009, the Companys indirect,
wholly owned subsidiary, UAHC Health Plan of Tennessee, Inc.
(UAHC-TN), was a managed care organization in the
TennCare program, a State of Tennessee program that provided
medical benefits to Medicaid and working uninsured recipients.
On April 22, 2008, the Company learned that UAHC-TN would
no longer be authorized to provide managed care services as a
TennCare contractor when its present TennCare contract expired
on June 30, 2009. UAHC-TNs TennCare members
transferred to other managed care organizations on
November 1, 2008, after which UAHC-TN continued to perform
its remaining contractual obligations through its TennCare
contract expiration date of June 30, 2009. However, revenue
under this contract was only earned through October 31,
2008.
From January 2007 to December 2009, UAHC-TN served as a Medicare
Advantage qualified organization (the Medicare
contract) pursuant to a contract with the Centers for
Medicare & Medicaid Services (CMS). The
contract authorized 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 (SNP) to its eligible members in
Shelby County, Tennessee (including the City of Memphis), and to
operate a Voluntary Medicare Prescription Drug Plan. The Company
did not seek renewal of the Medicare contract, which expired
December 31, 2009. The Company is continuing to wind down
the Medicare business and expects to continue to incur costs
related to the
18
Medicare business through December 31, 2010, including
labor, claim processing and the differential costs related to
Tennessee facility sublease. The costs are expected to be
approximate $0.1 million to $0.2 million.
The discontinuance of the TennCare and Medicare contracts have
had a material adverse effect on the Companys operations,
earnings, financial condition and cash flows in fiscal 2009 and
2010.
Acquisition
of Pulse Systems, LLC
On June 18, 2010, the Company entered into a Securities
Purchase Agreement and a Warrant Purchase Agreement to acquire
100% of the outstanding common units and warrants to purchase
common units of Pulse. The consideration paid to acquire the
common units and warrants of Pulse totaled approximately
$9.46 million, which consisted of (a) cash paid at
closing of $3.40 million, (b) a non-interest bearing
note payable of $1.75 million (secured by a subordinated
pledge of all the common units of Pulse),
(c) 1,608,039 shares of UAHC common stock determined
based on an initial value of $1.6 million, (d) an
estimated purchase price adjustment of $210,364 based on
targeted levels of net working capital, cash and debt of Pulse
at the acquisition date (e) and the funding of
$2.5 million for certain obligations of Pulse as discussed
below. The shares of UAHC common stock were issued on
July 12, 2010, upon approval by the Companys board of
directors on July 7, 2010. The shares of UAHC common stock
had a fair value of $1.05 million as of June 30, 2010,
and a fair value of $884,000 on July 12, 2010, the date the
shares were issued and recorded. The Company also assumed
Pulses term loan to a bank of $4.25 million, after
making a payment at closing as discussed below.
In connection with the acquisition of the Pulse common units,
Pulse entered into a redemption agreement with the holders of
its preferred units to redeem the preferred units for
$3.99 million. Pulse is only allowed to redeem the
preferred units if the Company makes additional cash equity
contributions to Pulse in an amount necessary to fully fund each
such redemption. The Company funded an initial payment of
$1.75 million to the preferred unitholders on June 18,
2010. Pulse has agreed to redeem the remaining preferred units
over a two-year period ending in June 2012. Finally, as an
additional condition of closing, the Company funded a $750,000
payment toward Pulses outstanding term loan with a bank
and pledged all of the common units of Pulse to the bank as
additional security for the remaining $4.25 million
outstanding under the loan. The initial payment of
$1.75 million to the preferred unitholders and the $750,000
payment to the bank by the Company are considered additional
consideration for the acquisition of Pulse. The funding of the
remaining redemption payments totaling $2.24 million and
the assumption of Pulses revolving and term loan are not
included in the $9.46 million purchase price listed above.
Pulse Systems currently represents substantially all of the
ongoing operations of the Company. However, the operating
results of Pulse are only included in the discussion below and
the accompanying financial statements since the acquisition date
of June 18, 2010. In addition, Pulses fiscal year
previously ended on December 31; however, effective upon the
acquisition, Pulses fiscal year will end June 30
(beginning with the Companys fiscal year ended
June 30, 2010).
Review
of Consolidated Results of Operations Fiscal 2010
Compared to Fiscal 2009
Total revenues decreased $12.8 million (77%) to
$3.8 million for the fiscal year ended June 30, 2010
compared to $16.7 million for the fiscal year ended
June 30, 2009. The decrease in revenue is primarily
attributable to discontinuance of the TennCare contract and the
wind down of the Medicare contract, offset by $0.3 million
in Pulse contract manufacturing service revenue, which
represents Pulse revenue for the
12-day
period from the date of acquistion.
MA-SNP medical premiums revenues were $3.1 million for the
fiscal year ended June 30, 2010 compared to
$11.1 million for the fiscal year ended June 30, 2009,
all of which related to the Medicare contract. The decrease in
medical premiums results from the wind down of the Medicare
contract. Also, during fiscal year 2009, the medical premiums
included $0.8 million in additional revenue from a CMS
retroactive risk premium adjustment.
The retroactive risk premium adjustment for a given year
generally occurs during the third quarter of such year. This
initial settlement (the Initial CMS Settlement)
represents the updating of risk scores for the current year
based on updated diagnoses from the prior year. CMS then issues
a final retroactive risk premium adjustment settlement for that
year in the following calendar year (the Final CMS
Settlement).
19
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 amount. The Initial CMS Settlement
related to 2008 claims recorded in fiscal year 2009 was
$0.8 million. The Company will record revenue related to
2009 claims, if any, upon notification from CMS.
The net MA-SNP per member per month premium rate, based on an
average membership of 231 for the year ended June 30, 2010,
was $1,056 for that one-year period. The net MA-SNP per member
per month premium rate, based on an average membership of 699
for the year ended June 30, 2009, was $1,598 for that
one-year period.
There were no fixed administrative fees for the fiscal year
ended June 30, 2010, compared to fixed administrative fees
of $4.6 million for the fiscal year ended June 30,
2009. The decrease in fixed administrative fees is principally
due to the discontinuance of the TennCare contract.
Variable administrative fees resulting from the modified risk
arrangement (MRA) revenue were $0.3 million for the fiscal
year ended June 30, 2010 compared to $0.9 million for
the fiscal year ended June 30, 2009.
Total expenses were $9.3 million for the fiscal year ended
June 30, 2010, compared to $26.1 million for the prior
fiscal year, a decrease of $16.7 million (64%). The
decrease in total expenses was primarily the result of a
decrease in marketing, general and administrative expenses and
the legal reserve established in fiscal 2009 of
$3.1 million, net of an insurance recovery of
$0.2 million resulting from the litigation settlement
described in Note 14 Legal Settlement in
Part IV Financial Statements. The decrease was also offset
by costs attributable to Pulse operating results, including
costs of good sold of $0.1 million and marketing, general
and administrative costs of $0.1 million for the period
beginning June 18, 2010 through June 30, 2010.
Medical expenses for MA-SNP were $2.7 million during the
fiscal year ended June 30, 2010, a decrease of
$7.5 million from $10.2 million during the fiscal year
ended June 30, 2009. 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 85.8% for
the fiscal year ended June 30, 2010 compared to 90.6% for
the fiscal year ended June 30, 2009.
General and administrative expenses were $6.3 million for
the fiscal year ended June 30, 2010, as compared with
$12.6 million for the prior fiscal year, a decrease of
$6.3 million. The decrease was principally due to
reductions in labor costs, adminstrative costs and professional
services expenses resulting from the TennCare contract
expiration and the expiration of the Medicare contract as well
as the legal fees associated with the litigation as described
Note 14 Legal Settlement in Part IV
Financial Statements.
Provision for legal settlement totaled $3.1 million, net of
$0.2 million in an insurance recovery for fiscal year ended
June 30, 2009. Since 2005, the Company had been a defendant
in a lawsuit as described in Note 14 Legal
Settlement in Part IV Financial Statements.
Depreciation and amortization expense was constant at
$0.2 million for the fiscal year ended June 30, 2010
compared to fiscal year ended June 30, 2009.
Loss before income taxes was $5.4 million for the fiscal
year ended June 30, 2010 compared to loss before income
taxes of $8.7 million for the fiscal year ended
June 30, 2009. Such decrease in loss from operations of
$3.3 million, or $0.36 per basic share, is principally due
to the $3.2 reduction in the legal reserve as the litigation
settlement was paid during the first quarter of fiscal 2010.
Income tax benefit was $0 for the fiscal year ended
June 30, 2010 compared to a benefit of $5,000 for the prior
fiscal year. The Companys effective tax rate for the
fiscal year ended June 30, 2010 differs from the statutory
rate due to the change in the valuation allowance. The Company
increased its deferred tax asset valuation allowance due to
uncertainties in its expected utilization, as a result of the
expiration of the TennCare and the Medicare contracts.
20
Net loss was $5.4 million, or $(0.66) per basic share, for
the fiscal year ended June 30, 2010, compared to net loss
of $8.7 million, or $(1.02) per basic share, for the fiscal
year ended June 30, 2009, a decrease in the net loss of
$3.3 million (38%).
Review
of Consolidated Results of Operations Fiscal 2009
Compared to Fiscal 2008
Total revenues decreased $10.2 million (38%) to
$16.7 million for the fiscal year ended June 30, 2009
compared to $26.8 million for the fiscal year ended
June 30, 2008. The decrease in revenue is primarily
attributable to discontinuance of the TennCare contract.
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-TNs contract with CMS that began
January 1, 2007. The increase in medical premiums results
from additional revenue from a retroactive claims adjustment of
$0.8 million received from CMS in 2009, 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.
The net MA-SNP per member per month premium rate, based on an
average membership of 699 for the year ended June 30, 2009,
was $1,598 for that one-year period. The net MA-SNP per member
per month premium rate, based on an average membership of 767
for the year ended June 30, 2008, was $1,228 for that
one-year period.
Fixed administrative fees were $4.6 million for the fiscal
year ended June 30, 2009, a decrease of $9.9 million
(68%) from fixed administrative fees of $14.5 million for
the fiscal year ended June 30, 2008. The decrease in fixed
administrative fees is principally due to a decrease in members
resulting from the discontinuance of the TennCare contract.
Variable administrative fees resulting from the 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 $26.1 million 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 and the fiscal
year 2008 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 insurance recovery
of $0.2 million resulting from the litigation settlement
described in Note 14 Legal Settlement in
Part IV Financial Statements.
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. 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 Note 14 Legal Settlement in
Part IV Financial Statements.
Provision for legal settlement totaled $3.1 million, net of
$0.2 million in insurance recovery for fiscal year ended
June 30, 2009. There was no provision for legal settlement
recorded for fiscal year ended June 30, 2008, as the amount
was not determinable at the end of fiscal year ended
June 30, 2008. Subsequent to June 30, 2009, the
lawsuit was settled for $3.3 million and will be offset by
insurance recovery of $0.2 million.
21
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 before income taxes was $8.7 million for the fiscal
year ended June 30, 2009 compared to loss 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 $5,000 for the fiscal year ended
June 30, 2009 compared to expense of $2.1 million for
the prior fiscal year. The Companys effective tax rate for
the fiscal year ended June 30, 2009 differs from the
statutory rate. This difference was primarily due to the change
in the valuation allowance. The Company increased its deferred
tax asset valuation allowance due to uncertainties in its
expected utilization as a result of the expiration of the
TennCare contract and pending expiration of the Medicare
contract.
Net loss was $8.7 million, or $(1.02) per basic share, for
the fiscal year ended June 30, 2009, compared to net loss
of $4.0 million, or $(0.47) per basic share, for the fiscal
year ended June 30, 2008, an increase in the net loss of
$4.7 million (115%).
Liquidity
and Capital Resources
Capital resources, which for us is primarily cash from
operations and Pulse debt facility are required to maintain our
current operations and fund planned capital spending and other
commitments and contingencies. The Companys 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 wind down 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. To
the extent we need to refinance debt obligations, or fund major
capital improvements or acquisitions, we may need to access the
capital markets. Market conditions may continue to limit our
sources of funds for these activities and our ability to
refinance our debt obligations at present interest rate and
other terms.
On June 18, 2010, the Company entered into a Securities
Purchase Agreement and a Warrant Purchase Agreement to acquire
100% of the outstanding common units and warrants to purchase
common units of Pulse. The consideration paid to acquire the
common units and warrants of Pulse totaled approximately
$9.46 million, which consisted of (a) cash paid at
closing of $3.40 million, (b) a non-interest bearing
note payable of $1.75 million (secured by a subordinated
pledge of all the common units of Pulse),
(c) 1,608,039 shares of UAHC common stock determined
based on an initial value of $1.6 million, (d) an
estimated purchase price adjustment of $210,364 based on
targeted levels of net working capital, cash and debt of Pulse
at the acquisition date (e) and the funding of
$2.5 million for certain obligations of Pulse. The Company
also assumed Pulses outstanding term loan. See
Acquisition of Pulse Systems, LLC above
for additional discussion.
At June 30, 2010, the Company had (i) cash and cash
equivalents and short-term marketable securities of
$3.5 million, compared to $17.6 million at
June 30, 2009; (ii) negative working capital of
($1.0) million, compared to working capital of
$12.2 million at June 30, 2009; and (iii) a
current
assets-to-current
liabilities ratio of 0.89 to 1, compared to 2.72 to 1 at
June 30, 2009.
Net cash used in operating activities was $9.7 million in
fiscal 2010 compared to net cash used in operating activities of
$6.2 million in fiscal 2009. Cash used in operations is
primarily due to decreased revenue and income, resulting from
the expiration of the TennCare and Medicare contracts. Excluding
the impact of the Pulse acquisition, total receivables decreased
by $1.3 million at June 30, 2010 compared to
June 30, 2009, primarily due to the decrease in operating
activity associated with the expiration of the TennCare
contract, the $0.2 million in insurance recovery receivable
related to the legal settlement and $0.8 million related to
the CMS retroactive risk premium adjustment, offset by a $27,000
increase resulting from changes in Pulse net trade receivables.
Medical claims payable decreased by $2.1 million at
June 30, 2010 compared to June 30, 2009. The decrease
is primarily due to wind-down of the Medicare contract. Accounts
payable and accrued expenses decreased by $0.8 million at
22
June 30, 2010 compared to June 30, 2009, 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 decreased by $3.3 million resulting from
the litigation described in Note 14 Legal
Settlement in Part IV Financial Statements.
Cash provided by investing activities of $0.3 million was
primarily impacted by cash consideration paid in the Pulse
acquisition of $5.6 million, net of cash acquired. Cash
proceeds from the maturity of marketable securities of
$9.2 million was offset by cash purchases of maturity
securities of $3.3 million.
Net cash used in financing activities was $0.3 million and
resulted from notes payable payments made to the bank. Cash used
in financing activities of $1.0 million during fiscal year
2009 was due to a share repurchase program. On November 25,
2008, the Companys board of directors approved the share
repurchase program, authorizing the Company to repurchase up to
$1.0 million of the Companys outstanding common
stock. In 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 for a total of $981,370. No shares
were repurchased in fiscal 2010. Effective, November 13,
2009, the board of directors discontinued the share repurchase
program. As of such date, the Company had repurchased a total of
670,795 shares at an average price of $1.46 per share under
the share repurchase program.
The net decrease in total cash flow was $9.6 million for
the fiscal year ended June 30, 2010, compared to a net
increase in cash flow of $2.4 million for the prior fiscal
year.
The Companys wholly owned subsidiary, UAHC-TN, had a
required minimum net worth requirement using statutory
accounting practices of $1.5 million at June 30, 2010.
UAHC-TN had excess statutory net worth of approximately
$2.4 million at June 30, 2010. The net worth and
depository requirement was in effect through June 30, 2010.
At such time, UAHC-TN, must continue to maintain a depository
requirements of at least $0.9 million as statutory reserves
for its ongoing Medicare operations.
Source of
Liquidity
Following its acquisition by the Company, Pulse Systems remains
party to the Loan and Security Agreement, as amended (the
Loan Agreement), with Fifth Third Bank, which
currently relates to a revolving loan not to exceed
$1.0 million, of which no amounts were outstanding as of
the closing, and a $5.0 million term loan, with a remaining
balance of $3.98 million as of June 30, 2010. The
revolving loan matures June 30, 2011 and bears interest at
prime plus 4% or, at the option of Pulse Systems, Adjusted LIBOR
(the greater of LIBOR or 3%) plus 4%. The term loan interest
rate is 9.75%. The revolving loan and term loan are secured by a
lien on all of the assets of Pulse Systems.
The Loan Agreement contains financial covenants. In connection
with the acquisition and the execution of the Second Amendment
to the Loan and Security Agreement (the Amendment),
the lender waived the existing defaults under the Loan Agreement
arising from Pulse Systems failure to satisfy (a) the
Adjusted EBITDA (as defined therein) covenant as of
December 31, 2009 and March 31, 2010, (b) the
Funded Debt to Adjusted EBITDA covenant (as defined therein) as
of March 31, 2010, (c) the Fixed Charge Coverage Ratio
(as defined therein) as of December 31, 2009 and
March 31, 2010, and (d) to timely deliver audited
financial statements for the fiscal year ended December 31,
2009. In addition, the Amendment modified the definition of
Adjusted EBITDA, to among other things, add $750,000 to the
calculation to reflect the $750,000 contribution to capital made
by UAHC to Pulse Systems at closing which was applied to reduce
the amount of Pulse Systems debt.
In addition, UAHC has pledged its membership interests in Pulse
Systems to Fifth Third as additional security for the loans, as
set forth in the Membership Interest Pledge Agreement (the
Pledge Agreement). The Pledge Agreement restricts
the ability of UAHC to incur additional indebtedness, other than
the Seller Note and up to $1.0 million of unsecured working
capital financing. The Pledge Agreement also generally restricts
the payments of dividends or distributions on, and redemptions
of, UAHC common stock, except as permitted under the Standstill
Agreement, as amended.
23
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements of the Company and the Report of the
Independent Registered Public Accounting Firm thereon are filed
pursuant to this Item 8 and are included in this report in
Item 15 at
page F-1
of this Annual Report on
Form 10-K.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Under the supervision and with the participation of the
Companys management, including our Chief Executive Officer
and Chief Financial Officer, we have evaluated the effectiveness
of the design and operation of our disclosure controls and
procedures as defined in
Rule 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act), as of the end of the period covered
by this report. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were effective as of
June 30, 2010. This Annual Report on
Form 10-K
does not include an attestation report of the Companys
independent registered public accounting firm regarding internal
control over financial reporting. Managements report was
not subject to attestation by the Companys independent
registered public accounting firm pursuant to rules of the
Securities and Exchange Commission that permit the Company to
provide only managements report in this Annual Report on
Form 10-K.
On June 18, 2010, the Company acquired Pulse Systems, LLC.
Management has excluded from its assessment of the effectiveness
of internal control over financial reporting as of June 30,
2010 Pulses internal control over financial reporting
associated with total assets of $15.8 million and total
liabilities of $5.1 million included in the consolidated
balance sheet at June 30, 2010.
Managements
Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in
Rule 13a-15(f)
and
15d-15(f)
under the Exchange Act. The Companys internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the
United States. However all internal control systems, no matter
how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and reporting.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of June 30,
2010. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on such assessment,
management believes that the Company maintained effective
internal control over financial reporting as of June 30,
2010 based on those criteria.
On June 18, 2010, the Company acquired Pulse Systems, LLC.
Management has excluded from its assessment of the effectiveness
of internal control over financial reporting as of June 30,
2010 Pulses internal control over financial reporting
associated with total assets of $15.8 million
(approximately 78% of total consolidated assets at June 30,
2010) and total liabilities of $5.1 million
(approximately 47% of total consolidated liabilities at
June 30, 2010) that are included in the consolidated
balance sheet at June 30, 2010.
24
Changes
in Internal Control Over Financial Reporting
There were no changes in the Companys internal control
over financial reporting during the three months ended
June 30, 2010 that have materially affected, or are
reasonably likely to materially effect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Not applicable.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this item is set forth under the
following captions in our proxy statement to be filed with
respect to the annual meeting of stockholders to be held on
September 30, 2010, and at any adjournment or postponement
thereof (the Proxy Statement), all of which is
incorporated herein by reference:
Proposal 1 Election of Directors,
Appendix A Information Concerning
Participants in the Companys Solicitation of
Proxies, and Additional Information
Section 16(a) Beneficial Ownership Reporting
Compliance.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item is set forth under the
following captions in our Proxy Statement, all of which is
incorporated herein by reference: Executive Compensation
Tables, and Proposal 1 Election of
Directors.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this item is set forth under the
following captions in our Proxy Statement, all of which is
incorporated herein by reference: Additional
Information Equity Compensation Plans and
Security Ownership of Certain Beneficial Owners and
Management.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The information required by this item is set forth under the
following captions in our Proxy Statement, all of which is
incorporated herein by reference: Related Person
Transactions and Proposal 1
Election of Directors.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this item is set forth under the
following caption in our Proxy Statement, all of which is
incorporated herein by reference: Additional Finance and
Audit Committee Disclosure.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) (1) & (2) The financial statements listed in
the accompanying Index to Consolidated Financial Statements at
page F-1
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 is hereby incorporated by
reference into this Item 15.
(b) The list of exhibits filed with this report is set
forth in response to Item 15(a)(3).
25
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.
UNITED AMERICAN HEALTHCARE
CORPORATION (Registrant)
|
|
|
|
By:
|
/s/ William
C. Brooks
|
William C. Brooks
President and Chief Executive Officer
(Principal Executive Officer)
Dated: September 8, 2010
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 and in the capacities indicated,
each as of September 8, 2010.
|
|
|
|
|
Signature
|
|
Capacity
|
|
|
|
|
/s/ TOM
A. GOSS
Tom
A. Goss
|
|
Chairman
|
|
|
|
/s/ WILLIAM
C. BROOKS
William
C. Brooks
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ WILLIAM
L. DENNIS
William
L. Dennis
|
|
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
|
|
/s/ EMMETT
S. MOTEN, JR.
Emmett
S. Moten, Jr.
|
|
Secretary and Director
|
|
|
|
/s/ STEPHEN
D. HARRIS
Stephen
D. Harris
|
|
Director
|
|
|
|
/s/ RICHARD
M. BROWN, D.O.
Richard
M. Brown, D.O.
|
|
Director
|
|
|
|
/s/ DARREL
W. FRANCIS
Darrel
W. Francis
|
|
Director
|
|
|
|
/s/ RONALD
E. HALL, SR.
Ronald
E. Hall, Sr.
|
|
Director
|
26
Report
of Independent Registered Public Accounting Firm
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, 2010 and 2009, and the related consolidated
statements of operations, shareholders equity and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended June 30, 2010. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit
includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, 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, 2010 and 2009, and the results
of their operations and their cash flows for each of the years
in the three-year period ended June 30, 2010, in conformity
with accounting principles generally accepted in the United
States of America.
/s/ UHY LLP
Southfield, Michigan
September 8, 2010
F-2
United
American Healthcare Corporation and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,458
|
|
|
$
|
13,100
|
|
Marketable securities
|
|
|
|
|
|
|
4,475
|
|
Accounts receivable, net
|
|
|
954
|
|
|
|
1,458
|
|
Inventories
|
|
|
209
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
281
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,902
|
|
|
|
19,248
|
|
Property and equipment, net
|
|
|
895
|
|
|
|
134
|
|
Marketable securities restricted
|
|
|
900
|
|
|
|
2,370
|
|
Goodwill
|
|
|
9,983
|
|
|
|
|
|
Other intangibles, net
|
|
|
3,432
|
|
|
|
|
|
Other assets
|
|
|
486
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,598
|
|
|
$
|
22,238
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Long term debt, current portion and net of discount
|
|
$
|
2,710
|
|
|
$
|
|
|
Accounts payable
|
|
|
675
|
|
|
|
909
|
|
Accrued expenses
|
|
|
745
|
|
|
|
707
|
|
Accrued purchase price
|
|
|
1,255
|
|
|
|
|
|
Redeemable preferred member units at Pulse, current portion and
net of discount
|
|
|
393
|
|
|
|
|
|
Medical claims payable
|
|
|
84
|
|
|
|
2,160
|
|
Reserve for legal settlement
|
|
|
|
|
|
|
3,250
|
|
Other current liabilities
|
|
|
40
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,902
|
|
|
|
7,083
|
|
Long-term debt, less current portion
|
|
|
2,923
|
|
|
|
|
|
Redeemable preferred member units of Pulse, net of discount and
current portion
|
|
|
1,457
|
|
|
|
|
|
Capital lease obligation
|
|
|
204
|
|
|
|
|
|
Interest rate swap obligation
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,581
|
|
|
|
7,083
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, 5,000,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, no par, 15,000,000 shares authorized;
8,164,117 and 8,137,903 shares issued and outstanding at
June 30, 2010 and 2009, respectively
|
|
|
17,711
|
|
|
|
17,684
|
|
Additional paid-in capital stock options
|
|
|
1,703
|
|
|
|
1,480
|
|
Additional paid-in capital warrants
|
|
|
444
|
|
|
|
444
|
|
Accumulated deficit
|
|
|
(9,838
|
)
|
|
|
(4,444
|
)
|
Accumulated other comprehensive loss, net of tax
|
|
|
(3
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
10,017
|
|
|
|
15,155
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
20,598
|
|
|
$
|
22,238
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-3
United
American Healthcare Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical premiums
|
|
$
|
3,130
|
|
|
$
|
11,116
|
|
|
$
|
10,596
|
|
Variable administrative fees
|
|
|
345
|
|
|
|
944
|
|
|
|
1,718
|
|
Contract manufacturing services
|
|
|
343
|
|
|
|
|
|
|
|
|
|
Fixed administrative fees
|
|
|
|
|
|
|
4,599
|
|
|
|
14,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,818
|
|
|
|
16,659
|
|
|
|
26,833
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical services
|
|
|
2,688
|
|
|
|
10,181
|
|
|
|
9,550
|
|
Costs of contract manufacturing services
|
|
|
136
|
|
|
|
|
|
|
|
|
|
Marketing, general and administrative
|
|
|
6,322
|
|
|
|
12,593
|
|
|
|
16,897
|
|
Depreciation and amortization
|
|
|
168
|
|
|
|
183
|
|
|
|
211
|
|
Provision for legal settlement
|
|
|
|
|
|
|
3,100
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
3,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
9,314
|
|
|
|
26,057
|
|
|
|
30,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5,496
|
)
|
|
|
(9,398
|
)
|
|
|
(3,277
|
)
|
Interest and other income, net
|
|
|
102
|
|
|
|
688
|
|
|
|
1,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,394
|
)
|
|
|
(8,710
|
)
|
|
|
(1,902
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
(5
|
)
|
|
|
2,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,394
|
)
|
|
$
|
(8,705
|
)
|
|
$
|
(4,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(0.66
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
8,147
|
|
|
|
8,532
|
|
|
|
8,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-4
United
American Healthcare Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Additional
|
|
|
Retained
|
|
|
Accum.
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Paid-In
|
|
|
Earnings
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Capital-
|
|
|
Capital-
|
|
|
(Accum.)
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Warrants
|
|
|
Deficit)
|
|
|
Income (loss)
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance at June 30, 2007
|
|
|
8,588
|
|
|
$
|
18,327
|
|
|
$
|
607
|
|
|
$
|
444
|
|
|
$
|
8,303
|
|
|
$
|
(40
|
)
|
|
$
|
27,641
|
|
Issuance of common stock
|
|
|
146
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,042
|
)
|
|
|
|
|
|
|
(4,042
|
)
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
8,734
|
|
|
$
|
18,558
|
|
|
$
|
1,153
|
|
|
$
|
444
|
|
|
$
|
4,261
|
|
|
$
|
(77
|
)
|
|
$
|
24,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and retirement of common stock
|
|
|
(671
|
)
|
|
|
(982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(982
|
)
|
Issuance of common stock
|
|
|
75
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,705
|
)
|
|
|
|
|
|
|
(8,705
|
)
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
|
8,138
|
|
|
$
|
17,684
|
|
|
$
|
1,480
|
|
|
$
|
444
|
|
|
$
|
(4,444
|
)
|
|
$
|
(9
|
)
|
|
$
|
15,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
26
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,394
|
)
|
|
|
|
|
|
|
(5,394
|
)
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
|
8,164
|
|
|
$
|
17,711
|
|
|
$
|
1,703
|
|
|
$
|
444
|
|
|
$
|
(9,838
|
)
|
|
$
|
(3
|
)
|
|
$
|
10,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
United
American Healthcare Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,394
|
)
|
|
$
|
(8,705
|
)
|
|
$
|
(4,042
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
223
|
|
|
|
327
|
|
|
|
546
|
|
Depreciation and amortization
|
|
|
168
|
|
|
|
183
|
|
|
|
211
|
|
Director stock compensation
|
|
|
27
|
|
|
|
108
|
|
|
|
108
|
|
Change in fair value of interest rate swap
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Asset write off
|
|
|
|
|
|
|
421
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
3,452
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
137
|
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
1,950
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other receivables
|
|
|
1,388
|
|
|
|
560
|
|
|
|
470
|
|
Inventories
|
|
|
33
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
1
|
|
|
|
184
|
|
|
|
212
|
|
Medical claims payable
|
|
|
(2,076
|
)
|
|
|
(403
|
)
|
|
|
1,987
|
|
Accounts payable and accrued expenses
|
|
|
(757
|
)
|
|
|
(1,006
|
)
|
|
|
(1,416
|
)
|
Reserve for legal settlement
|
|
|
(3,250
|
)
|
|
|
3,250
|
|
|
|
|
|
Unearned revenue
|
|
|
|
|
|
|
|
|
|
|
(279
|
)
|
Restricted assets
|
|
|
|
|
|
|
|
|
|
|
2,300
|
|
Other current liabilities
|
|
|
(91
|
)
|
|
|
(1,216
|
)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(9,717
|
)
|
|
|
(6,160
|
)
|
|
|
5,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(3,275
|
)
|
|
|
(29,212
|
)
|
|
|
(17,049
|
)
|
Proceeds from sale of marketable securities
|
|
|
9,226
|
|
|
|
38,723
|
|
|
|
13,495
|
|
Acquisition of Pulse Systems, LLC, net of cash acquired
|
|
|
(5,613
|
)
|
|
|
|
|
|
|
|
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
23
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
3
|
|
|
|
(5
|
)
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
341
|
|
|
|
9,529
|
|
|
|
(3,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of long-term debt
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
123
|
|
Purchase and retirement of common stock
|
|
|
|
|
|
|
(982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(266
|
)
|
|
|
(982
|
)
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(9,642
|
)
|
|
|
2,387
|
|
|
|
1,781
|
|
Cash and cash equivalents at beginning of year
|
|
|
13,100
|
|
|
|
10,713
|
|
|
|
8,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,458
|
|
|
$
|
13,100
|
|
|
$
|
10,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
|
|
|
$
|
152
|
|
|
$
|
20
|
|
Interest paid
|
|
$
|
45
|
|
|
$
|
|
|
|
$
|
|
|
See accompanying notes to the consolidated financial statements.
F-6
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial Statements
June 30,
2010, 2009 and 2008
|
|
NOTE 1
|
DESCRIPTION
OF BUSINESS
|
United American Healthcare Corporation (the Company
or UAHC) was incorporated in Michigan on
December 1, 1983 and commenced operations in May 1985.
From November 1993 to June 2009, the Companys indirect,
wholly owned subsidiary, UAHC Health Plan of Tennessee, Inc.
(UAHC-TN), was a managed care organization in the
TennCare program, a State of Tennessee program that provided
medical benefits to Medicaid and working uninsured recipients.
On April 22, 2008, the Company learned that UAHC-TN would
no longer be authorized to provide managed care services as a
TennCare contractor when its present TennCare contract expired
on June 30, 2009. UAHC-TNs TennCare members
transferred to other managed care organizations on
November 1, 2008, after which UAHC-TN continued to perform
its remaining contractual obligations through its TennCare
contract expiration date of June 30, 2009. However, revenue
under this contract was only earned through October 31,
2008.
From January 2007 to December 2009, UAHC-TN served as a Medicare
Advantage qualified organization (the Medicare
contract) pursuant to a contract with the Centers for
Medicare & Medicaid Services (CMS). The
contract authorized 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 (SNP) to its eligible members in
Shelby County, Tennessee (including the City of Memphis), and to
operate a Voluntary Medicare Prescription Drug Plan. The Company
did not seek renewal of the Medicare contract, which expired
December 31, 2009. The Company is continuing to wind down
the Medicare business and expects to continue to incur costs
related to the Medicare business through December 31,2010,
including labor, claim processing and the differential costs
related to Tennessee facility sublease.
As a result of an in-depth strategic review, on June 18,
2010, UAHC acquired Pulse Systems, LLC (referred to as
Pulse Systems or Pulse or Pulse
Sellers) for consideration with a fair value of
$9.0 million, net of cash acquired and subject to certain
purchase price adjustments. With the acquisition of Pulse
Systems, LLC, on June 18, 2010 UAHC now provides contract
manufacturing services to the medical device industry, with a
focus on precision laser-cutting capabilities and the processing
of thin-wall tubular metal components,
sub-assemblies
and implants, primarily in the cardiovascular market.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
In June 2009, the Financial Accounting Standards Board
(FASB) issued FASB Accounting Standards Codification
(ASC) 105, Generally Accepted Accounting
Priniciples (GAAP), which establishes the ASC
as the sole source of authoritative generally accepted
accounting principles. Pursuant to the provisions of
ASC 105, the Company has updated references to GAAP in its
consolidated financial statements for the year ended
June 30, 2010. The adoption of ASC 105 did not impact
the Companys financial position or results of operations.
The accompanying consolidated financial statements of the
Company have been prepared in conformity with GAAP.
a. Principles of Consolidation. The
consolidated financial statements include the accounts of
United American Healthcare Corporation, its wholly owned
subsidiary, United American of Tennessee, Inc.
(UA-TN) and its wholly owned subsidiary Pulse
Systems, LLC. UAHC Health Plan of Tennessee, Inc. (formerly
called OmniCare Health Plan, Inc.) (UAHC-TN) is a
wholly owned subsidiary of UA-TN. 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 accounting principles generally accepted in the
United States of America which require 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
F-7
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
susceptible to change in the near term relate to the
determination of medical claims payable and the final allocation
of the purchase price for Pulse Systems to the assets acquired
and liabilities assumed.
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. Marketable Securities. Investments in
marketable securities are considered available for
sale securities and are primarily comprised of
certificates of deposit, U.S. Treasury notes, and debt
issues of municipalities. Marketable securities are carried at
fair value based upon published quotations of the underlying
securities, and certificates of deposit at cost, 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 are classified as current.
Interest and dividend income is recognized when earned. Realized
gains and losses on investments in marketable securities are
included in other 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 income taxes.
A summary of marketable securities as of June 30, 2010 and
2009 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
4,475
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
|
900
|
|
|
|
2,370
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
900
|
|
|
$
|
6,845
|
|
|
|
|
|
|
|
|
|
|
e. Accounts Receivable. Receivables at
June 30, 2010 and 2009 consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Trade receivables, net of allowance for doubtful accounts
|
|
$
|
910
|
|
|
$
|
|
|
Retroactive adjustments for Medicare revenue
|
|
|
|
|
|
|
834
|
|
Insurance recovery
|
|
|
|
|
|
|
425
|
|
Pharmacy rebate
|
|
|
25
|
|
|
|
118
|
|
Other
|
|
|
19
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
$
|
954
|
|
|
$
|
1,458
|
|
|
|
|
|
|
|
|
|
|
Trade receivables are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all
outstanding amounts on a monthly basis. The Company determines
the allowance for doubtful accounts by identifying trouble
accounts and by using historical experience applied to an aging
of accounts. The Company also determines the allowance for
doubtful accounts by regularly evaluating individual customer
receivables and considering a customers financial
condition and credit history and current economic conditions.
Trade receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are
recorded when received. The allowance for doubtful accounts was
$42,000 and $0 as of June 30, 2010 and 2009, respectively.
f. Property and Equipment. Property and
equipment are stated at cost, net of accumulated depreciation
and amortization. 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
F-8
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
equipment are as follows: furniture and fixtures
5 years; equipment 7 years; and computer
software 3 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. The Company uses accelerated methods for
income tax purposes.
g. Goodwill. Goodwill resulting from
business acquisitions is carried at cost. The carrying amount of
goodwill is tested for impairment at least annually at the
reporting unit level, as defined, and will only be reduced if it
is found to be impaired or is associated with assets sold or
otherwise disposed of.
As a result of the acquisition of Pulse, the Company recorded
Goodwill of $10.4 million. At June 30, 2010, goodwill
was adjusted to $10.0 million to reflect the change in fair
value of common stock payable at June 30, 2010. See
Note 7 below for additional discussion of the Pulse
transaction. The roll forward of goodwill is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
Management
|
|
|
HMO &
|
|
|
Manufacturing
|
|
|
|
Companies(1)
|
|
|
Managed Plan(2)
|
|
|
Services (Pulse)(3)
|
|
|
July 1, 2007 balance
|
|
$
|
|
|
|
$
|
3,452
|
|
|
$
|
|
|
2008 additions
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 balance
|
|
$
|
|
|
|
$
|
3,452
|
|
|
$
|
|
|
2009 additions
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 impairment
|
|
|
|
|
|
|
(3,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2010 additions
|
|
|
|
|
|
|
|
|
|
|
9,983
|
|
2010 impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Management Companies: United American Healthcare Corporation,
United American of Tennessee, Inc. |
|
(2) |
|
HMO and Managed Plan: UAHC Health Plan of Tennessee, Inc. |
|
(3) |
|
Pulse Systems: Provider of Contract Manufacturing Services to
the medical device industry |
In 2008, management assessed the remaining carrying amount of
previously recorded goodwill of $3.5 million and determined
that such amount was impaired in accordance with GAAP, as a
result of the TennCare contract termination as further discussed
in Note 13 below. Accordingly, goodwill impairment was
recorded for $3.5 million during the fiscal year ended
June 30, 2008. There was no goodwill impairment charges
recorded during fiscal years 2010 or 2009.
h. Long-Lived Assets. Long-lived assets
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 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
not impaired.
i. Medical Claims Payable. The Company
provides for medical claims incurred but not reported
(IBNR) for its Medicare Advantage members and the
cost of adjudicating claims primarily based on medical cost
estimates from historical data provided by the CMS and emerging
medical claims experience together with current factors using
accepted actuarial methods. Although considerable variability is
inherent in such estimates, management believes that these
reserves are adequate.
F-9
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
j. Revenue Recognition. Medical premiums
revenues are recognized in the month in which members are
entitled to receive healthcare services. Medical premiums
collected in advance are recorded as deferred revenues. Medical
premium revenue is subject to adjustment based on the health
risk of its members. The process for adjusting premiums is
referred to as the CMS risk adjustment payment methodology. Risk
adjustment payments are recognized in the period in which
UAHC-TN is notified thereof by CMS.
Under TennCares administrative services only
(ASO) arrangement, fixed administrative fee revenues
were recognized in the period the related services are
performed. In accordance with GAAP, when applicable, the
Companys revenue recognition policy has been adjusted to
reflect ASO revenue in which UAHC-TN assumed no risk for medical
claims. Variable administrative fee revenues are recognized in
the period in which UAHC-TN is notified thereof by TennCare. See
Note 13 for further discussion of TennCare and Medicare
revenue.
Contract manufacturing service revenue is recognized when title
to the product transfers, no remaining performance obligations
exist, the terms of the sale are fixed and collection is
probable, which generally occurs at shipment.
k. Medical Services Expense
Recognition. The Company contracts with various
healthcare providers for the provision of certain medical
services to its members and generally compensates those
providers on a capitated and
fee-for-service
basis. Such medical service 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. Pharmacy costs represent payments for
members prescription drug benefits. 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.
Valuation allowances are established when necessary to reduce
the deferred tax assets and liabilities to 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.
n. Earnings (Loss) Per Share. Basic net
loss per share excluding dilution has been computed by dividing
net loss by the weighted-average number of common shares
outstanding for the period. Diluted loss per share is computed
the same as basic except that the denominator also includes
shares issuable upon assumed exercise of stock options and
warrants. For the years ended June 30, 2010, 2009 and 2008,
the Company had outstanding stock options and warrants which
were not included in the computation of loss per share because
the shares would be anti-dilutive due to the net loss each
period. In connection with the Pulse acquisition, the Company
issued 1,608,039 shares of UAHC common stock subsequent to
year end. See Note 7 for additional information.
o. 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.
p. Inventories. Inventories are valued at
the lower of cost, on a
first-in,
first- out method, or market. Work in process and finished goods
include materials, labor and allocated overhead.
F-10
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Inventories consist of the following at June 30, 2010 and
2009, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw materials
|
|
$
|
61
|
|
|
$
|
|
|
Work in process
|
|
|
146
|
|
|
|
|
|
Finished goods
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
209
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
q. Other Intangibles. Intangibles assets
are amortized over their estimated useful lives using the
straight-line method.
The following is a summary of intangible assets subject to
amortization as of June 30, 2010 and 2009 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Customer list
|
|
$
|
3,027
|
|
|
$
|
|
|
Backlog
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles assets
|
|
|
3,456
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
3,432
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The backlog is amortized over a six month period and the
customer list is amortized over seven years. Amortization
expense was $24,000 for fiscal year 2010. There was no
amortization expense in 2009 and 2008. Amortization expense for
the next five years is as follows (in thousands):
|
|
|
|
|
2011
|
|
$
|
837
|
|
2012
|
|
|
432
|
|
2013
|
|
|
432
|
|
2014
|
|
|
432
|
|
2015 and beyond
|
|
|
1,299
|
|
|
|
|
|
|
|
|
$
|
3,432
|
|
|
|
|
|
|
r. Shipping and handling. Shipping and
handling costs are included in cost of goods sold.
s. Reclassifications. Certain items in
the prior periods consolidated financial statements, such as
receivables and certain accrued expenses have been reclassified
to conform to the June 30, 2010 presentation.
F-11
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
To prioritize the inputs the Company uses in measuring fair
value, the Company applies a three-tier fair value hierarchy.
These tiers include: Level 1, defined as observable inputs
such as quoted prices in active markets; Level 2, defined
as inputs other than quoted prices in active markets that are
either directly or indirectly observable; and Level 3,
reflects managements best estimate of what market
participants would use in pricing the asset or liability at the
measurement date. Consideration was given to the risk inherent
in the valuation technique and the risk inherent in the inputs
to the model. Determining which hierarchical level an asset or
liability falls within requires significant judgment. The
Company evaluates its hierarchy disclosures each quarter. The
following table summarizes the financial instruments measured at
fair value in the Consolidated Balance Sheet as of June 30,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Securities- long-term
|
|
$
|
900
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
900
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued purchase price
|
|
$
|
1,045
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,045
|
|
Interest rate swap
|
|
$
|
|
|
|
$
|
95
|
|
|
$
|
|
|
|
$
|
95
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Securities-short-term
|
|
$
|
4,475
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,475
|
|
Marketable Securities- long-term
|
|
$
|
2,370
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,370
|
|
Liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The Company uses an interest swap to manage the risk associated
with its floating long-term notes payable. As interest rates
changes, the differential paid or received is recognized in
interest expense for the period. In addition, the change in fair
value of the swaps is recognized as interest expense or income
during each reporting period. The fair value of the interest
rate swap was determined to be $95,000 using valuation models
rather than actual quotes. The fixed interest rate of the
interest rate swap is 4.78%. The Company has not designated
these interest rate swaps for hedge accounting.
As of June 30, 2010, the aggregate notional amount of the
swap agreements was $4.5 million, which will mature on
March 31, 2014. The notional amount of the swap will
decrease by $0.3 million each quarter or $1.2 million
each year. The Company is exposed to credit loss in the event of
nonperformance by the counterpart to the interest rate swap
agreements. The interest rate swaps are classified within
level 2 of the fair market measurements.
The amount of total gains for the period included in other
comprehensive income attributable to the change in unrealized
gains related to assets still held at June 30, 2010 was
$6,000. The total loss included in earnings for the year ended
June 30, 2010 related to the interest rate swap was $11,000.
|
|
NOTE 4
|
CONCENTRATION
OF RISK
|
During the year ended June 30, 2010, 2009 and 2008,
approximately 82%, 67% and 39%, respectively of the
Companys revenues were derived from one customer, CMS. In
addition, during the years ended June 30, 2010, 2009 and
2008, approximately 9%, 33% and 61%, respectively, of the
Companys revenues were derived from another customer,
TennCare. As discussed in Note 13 below, the non-renewal of
the contract with TennCare and the discontinuance of the
Medicare contract had a material effect on the operating results
of the Company.
F-12
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The Company from time to time may maintain cash balances with
financial institutions in excess of federally insured limits.
Management has deemed this as a normal business risk.
|
|
NOTE 5
|
PROPERTY
AND EQUIPMENT, NET
|
Property and equipment at each June 30 consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Furniture and fixtures
|
|
$
|
420
|
|
|
$
|
15
|
|
Machinery and Equipment
|
|
|
828
|
|
|
|
372
|
|
Computer software
|
|
|
126
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,374
|
|
|
|
471
|
|
Less accumulated depreciation and amortization
|
|
|
(479
|
)
|
|
|
(337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
895
|
|
|
$
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6
|
MEDICAL
CLAIMS PAYABLE
|
The Company has recorded a liability of $0.1 million and
$2.2 million at June 30, 2010 and 2009, respectively,
for unpaid medical claims incurred by former enrollees. The
medical claims liability incurred through June 30, 2010
represents the liability for services that have been performed
by providers for the Companys Medicare Advantage members.
Included in the incurred expense related to the current year are
medical claims reported to UAHC-TN as well as claims that have
been incurred but not yet reported to it, or IBNR.
The IBNR component is primarily based on medical cost estimates
from historical data provided by CMS and emerging medical claims
experience together with current factors. The IBNR reserve
estimated at June 30, 2010 and 2009 was derived by an
independent actuarial analysis. Each period, the Company
re-examines the previously established medical claims liability
estimates based on actual claim submissions and other relevant
changes in facts and circumstances. As the liability estimates
recorded in prior periods become more exact, the Company will
increase or decrease the amount of the estimates, and include
the changes in medical expenses in the period in which the
change is identified. The ultimate settlement of medical claims
may vary from the estimated amounts reported at June 30,
2010 and 2009, and the difference could be material.
The following table provides a reconciliation of the unpaid
claims as of June 30, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at beginning of fiscal year
|
|
$
|
2,160
|
|
|
$
|
2,563
|
|
|
|
|
|
|
|
|
|
|
Incurred claims related to current fiscal year and adjustments
to previously reported amounts
|
|
|
1,947
|
|
|
|
7,819
|
|
Less:
|
|
|
|
|
|
|
|
|
Paid claims related to current fiscal year
|
|
|
2,257
|
|
|
|
6,095
|
|
Paid claims related to prior fiscal years
|
|
|
1,766
|
|
|
|
2,127
|
|
|
|
|
|
|
|
|
|
|
Total paid claims
|
|
|
4,023
|
|
|
|
8,222
|
|
|
|
|
|
|
|
|
|
|
Balance at end of fiscal year
|
|
$
|
84
|
|
|
$
|
2,160
|
|
|
|
|
|
|
|
|
|
|
The current year incurred claims was adjusted for a reduction in
the actuarial valuation of IBNR.
On June 18, 2010, the Company entered into a Securities
Purchase Agreement and a Warrant Purchase Agreement to acquire
100% of the outstanding common units and warrants to purchase
common units of Pulse. The
F-13
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
consideration paid to acquire the common units and warrants of
Pulse totaled approximately $9.46 million, which consisted
of (a) cash paid at closing of $3.40 million,
(b) a non-interest bearing note payable of
$1.75 million (secured by a subordinated pledge of all the
common units of Pulse), (c) 1,608,039 shares of UAHC
common stock determined based on an initial value of
$1.6 million, (d) an estimated purchase price
adjustment of $210,364 based on targeted levels of net working
capital, cash and debt of Pulse at the acquisition date
(e) and the funding of $2.5 million for certain
obligations of Pulse as discussed below. The shares of UAHC
common stock were issued on July 12, 2010, upon approval by
the Companys board of directors on July 7, 2010 and,
therefore, were revalued at June 30, 2010. The shares of
UAHC common stock had a fair value of $1.05 million as of
June 30, 2010, which has been recorded as accrued purchase
price, and a fair value of $884,000 on July 12, 2010, the
date the shares were issued and recorded. The Company also
assumed Pulses term loan to a bank of $4.25 million,
after making a payment at closing as discussed below.
In connection with the acquisition of the Pulse common units,
Pulse entered into a redemption agreement with the holders of
its preferred units to redeem the preferred units for
$3.99 million. Pulse is only allowed to redeem the
preferred units if UAHC makes additional cash equity
contributions to Pulse in an amount necessary to fully fund each
such redemption. UAHC funded an initial payment of
$1.75 million to the preferred unitholders on June 18,
2010. Pulse has agreed to redeem the remaining preferred units
over a two-year period ending in June 2012. Finally, as an
additional condition of closing, UAHC funded a $750,000 payment
toward Pulses outstanding term loan with a bank and
pledged all of the common units of Pulse to the bank as
additional security for the remaining $4.25 million
outstanding under the loan. The initial payment of
$1.75 million to the preferred unitholders and the $750,000
payment to the bank by UAHC are considered additional
consideration for the acquisition of Pulse. The funding of the
remaining redemption payments totaling $2.24 million and
the assumption of Pulses revolving and term loans are not
included in the $9.46 million purchase price listed above.
On the date of acquisition, the Company recorded goodwill of
$10.4 million. At June 30, 2010, goodwill was adjusted
to $10.0 million to reflect the change in fair value of
common stock payable to the seller at June 30, 2010.
Goodwill will not be amortized and will be tested for impairment
quarterly or as circumstances require. It has not been
determined if tax elections will be made that would permit the
Company to amortize such goodwill for tax purposes.
F-14
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The allocation of the purchase price is preliminary as
management has not completed its valuation of all assets
acquired, primarily related to long-lived tangible and
intangible assets. As a result, the Company has recognized
estimated fair value amounts as of the acquisition date. A
summary of the preliminary purchase price allocation for the
acquisition of the Company is as follows (in thousands):
|
|
|
|
|
Cash
|
|
$
|
287
|
|
Accounts receivable
|
|
|
884
|
|
Inventories
|
|
|
242
|
|
Other current assets
|
|
|
67
|
|
Property and equipment
|
|
|
902
|
|
Amortizable intangible assets
|
|
|
3,456
|
|
Goodwill
|
|
|
10,433
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
16,271
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
215
|
|
Accrued expenses
|
|
|
321
|
|
Notes payable
|
|
|
4,250
|
|
Capital lease obligation
|
|
|
296
|
|
Interest rate swap
|
|
|
85
|
|
Redeemable preferred member units
|
|
|
1,850
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
7,017
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
9,254
|
|
|
|
|
|
|
The fair value of the consideration paid for the acquisition of
the net assets was as follows (in thousands):
|
|
|
|
|
Cash at closing
|
|
$
|
5,900
|
|
Note payable
|
|
|
1,649
|
|
UAHC common stock
|
|
|
1,495
|
|
Obligation for estimated purchase price adjustment
|
|
|
210
|
|
|
|
|
|
|
Total consideration
|
|
$
|
9,254
|
|
|
|
|
|
|
The obligation for estimated purchase price adjustment and the
common stock payable to Pulse shareholders are reflected as
accrued purchase price in the consolidated balance sheet at
June 30, 2010.
The financial information in the table below summarizes the
combined results of operations of UAHC and Pulse, on a pro forma
basis, as though the companies had been combined as of the
beginning of the periods presented. The pro forma financial
information is presented for informational purposes only and is
not indicative of the results of operations that would have been
achieved if the acquisition had taken place at the beginning of
the periods presented. Such pro forma financial information is
based on the historical financial statements of UAHC and Pulse.
This pro forma financial information is based on estimates and
assumptions, which have been made solely for purposes of
developing such pro forma information, including, without
limitation, purchase accounting adjustments.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Revenues
|
|
$
|
11,190
|
|
|
$
|
27,457
|
|
Net loss
|
|
$
|
(5,125
|
)
|
|
$
|
(8,305
|
)
|
The Company recognizes the impact of a tax position if that
position is more likely than not of being sustained on audit,
based on the technical merits of the position. The Company had
no unrecognized tax benefits as of June 30,
F-15
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
2010 and 2009. The Company expects no significant increases or
decreases in unrecognized tax benefits due to changes in tax
positions within one year of June 30, 2010. The Company has
no interest or penalties relating to income taxes recognized in
the consolidated statement of operations for the years ended
June 30, 2010, 2009 and 2008, or in the consolidated
balance sheet as of June 30, 2010 and 2009. The
Companys tax returns for fiscal 2006 and later remain
subject to examination by the Internal Revenue Service and the
respective states.
The components of income tax expense (benefit) for each year
ended June 30 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current expense (benefit)
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
190
|
|
Deferred expense (benefit)
|
|
|
(1,832
|
)
|
|
|
(3,001
|
)
|
|
|
517
|
|
Change in valuation allowance
|
|
|
1,832
|
|
|
|
3,001
|
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
2,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the provision for income taxes for each year
ended June 30 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income tax benefit at the statutory tax rate
|
|
$
|
(1,834
|
)
|
|
$
|
(2,962
|
)
|
|
$
|
(647
|
)
|
State and city income tax, net of federal effect
|
|
|
|
|
|
|
(43
|
)
|
|
|
136
|
|
Permanent differences
|
|
|
1
|
|
|
|
7
|
|
|
|
1,186
|
|
Change in valuation allowance
|
|
|
1,832
|
|
|
|
3,001
|
|
|
|
1,433
|
|
Other, net
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
2,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. As a result of the TennCare contract termination and
losses in recent years, management believes that the realization
of deferred tax assets does not meet the more likely than not
threshold for recognition.
F-16
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Components of the Companys deferred tax assets and
liabilities at each year ended June 30 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
39
|
|
|
$
|
79
|
|
Net operating loss carryforward of consolidated losses
|
|
|
7,636
|
|
|
|
4,024
|
|
Capital loss carryforward
|
|
|
1,360
|
|
|
|
1,360
|
|
Alternative minimum tax credit carryforward
|
|
|
735
|
|
|
|
735
|
|
Property and equipment
|
|
|
1
|
|
|
|
|
|
Medical claims payable
|
|
|
75
|
|
|
|
963
|
|
Reserve for legal settlement
|
|
|
|
|
|
|
1,054
|
|
Stock based compensation
|
|
|
572
|
|
|
|
496
|
|
Other
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
10,524
|
|
|
|
8,711
|
|
Deferred tax liabilities property and equipment
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
10,524
|
|
|
|
8,692
|
|
Valuation allowance
|
|
|
(10,524
|
)
|
|
|
(8,692
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, the net operating loss carryforward
for federal income tax purposes was approximately
$23 million and expire beginning 2022.
|
|
NOTE 9
|
SHARE
REPURCHASE PROGRAM
|
On November 25, 2008, the Companys board of directors
approved a share repurchase program, authorizing the Company to
repurchase up to $1.0 million of the Companys
outstanding common stock. The program allowed for the
Companys shares to be purchased at prevailing prices from
time to time at the discretion of management and in accordance
with applicable federal securities laws. In 2009, the Company
repurchased a total of 670,795 shares at an average price
of $1.46 per share under the share repurchase program for a
total of $981,370. No shares were repurchased in fiscal 2010.
Effective, November 13, 2009, the board of directors
discontinued the share repurchase program.
|
|
NOTE 10
|
BENEFIT,
OPTION PLANS AND WARRANTS
|
The Company offers a 401(k) retirement and savings plan that
covers substantially all of its Michigan and Tennessee
employees. Effective and since April 1, 2001, the Company
has matched 50% of an employees contribution up to 4% of
the employees salary under this plan. The Company also
offers a 401(k) retirement and savings plan that covers
substantially all of its Pulse employees. Under this plan, the
Company matches 100% of an employees contribution up to 3%
of the employees salary, then 50% of an employees
contribution on the next 2% of the employees salary.
Expenses related to the 401(k) plans were $19,783, $46,294 and
$81,190 for the fiscal years ended June 30, 2010, 2009 and
2008, 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. There were no employee contributions for each
of the fiscal years ended June 30, 2010, 2009 and 2008,
respectively.
F-17
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
On August 6, 1998, the Companys Board of Directors
adopted the 1998 Stock Option Plan (1998 Plan). The
1998 Plan was approved by the Companys shareholders on
November 12, 1998. The Company reserved an aggregate of
500,000 common shares for issuance upon exercise of options
under the 1998 Plan. On November 14, 2003 the
Companys shareholders approved an increase in the number
of common shares reserved for issuance pursuant to the exercise
of options granted under the amended plan from 500,000 to
1,000,000 shares, and extended the termination date of the
plan by five years to August 6, 2013. On November 5,
2004 the Companys shareholders approved an increase in the
number of common shares reserved for issuance pursuant to the
exercise of options granted under the amended plan from
1,000,000 to 1,500,000 shares.
Information regarding the stock options outstanding at
June 30, 2010, 2009 and 2008, are as follows (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Shares
|
|
|
Average Exercise
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Life
|
|
|
Exercisable
|
|
|
Price
|
|
|
Options outstanding at June 30, 2007
|
|
|
1,014
|
|
|
$
|
3.40
|
|
|
|
6.18 years
|
|
|
|
754
|
|
|
$
|
3.20
|
|
Granted
|
|
|
200
|
|
|
|
1.94
|
|
|
|
9.64 years
|
|
|
|
4
|
|
|
|
2.85
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
3.05
|
|
Exercised
|
|
|
(102
|
)
|
|
|
1.18
|
|
|
|
|
|
|
|
(102
|
)
|
|
|
1.18
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(10
|
)
|
|
|
2.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2008
|
|
|
1,102
|
|
|
$
|
3.35
|
|
|
|
6.46 years
|
|
|
|
779
|
|
|
$
|
3.06
|
|
Granted
|
|
|
25
|
|
|
|
1.43
|
|
|
|
9.42 years
|
|
|
|
4
|
|
|
|
1.43
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
2.93
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(75
|
)
|
|
|
1.63
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
1.63
|
|
Forfeited
|
|
|
(75
|
)
|
|
|
2.90
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
3.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009
|
|
|
977
|
|
|
$
|
3.46
|
|
|
|
5.87 years
|
|
|
|
785
|
|
|
$
|
3.77
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
2.61
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(64
|
)
|
|
|
1.83
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
1.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2010
|
|
|
913
|
|
|
$
|
3.58
|
|
|
|
4.86 years
|
|
|
|
831
|
|
|
$
|
3.76
|
|
The aggregate intrinsic value of options outstanding as of
June 30, 2010 was $0. The aggregate intrinsic value of
options exercisable as of June 30, 2010 was $0. Options for
303,792 common shares were available for grant under the amended
and restated 1998 Plan at the end of fiscal 2010.
In accordance with GAAP, the Company records compensation cost
relating to share-based payment transactions in the financial
statements. That cost is measured based on the fair value of the
equity or liability instruments issued. The Company recorded
stock option expense of $0.2 million, $0.3 million and
$0.5 million for fiscal 2010, 2009 and 2008, respectively.
F-18
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
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 2009 and 2008,
depending on the date of issuance:
|
|
|
Dividend yield
|
|
0%
|
Expected volatility
|
|
29% to 66%
|
Risk free interest rate
|
|
3.44% to 4.81%
|
Expected life
|
|
5.0 to 10.0 years
|
The options have terms ranging from 5.0 to 10.0 years and
typically vest quarterly over 3 years. Through March 2012,
total compensation expense to be recognized is expected to be
$0.1 million related to these options. The weighted average
grant-date fair value of options granted was $1.86 in fiscal
2009 and $1.54 in fiscal 2008. The total intrinsic value of
options exercised was $186,406 in fiscal 2008. The intrinsic
values were determined as of the date of exercise. There were no
grants in fiscal 2010, and there were no exercises in fiscal
2009 or 2010.
There are warrants also outstanding to purchase
99,999 shares of the Companys stock at an exercise
price of $8.50 per share and 50,000 shares with an exercise
price of $9.01. All of these warrants expire in December 2011.
The Companys long-term borrowings consist of the following
at June 30, 2010 (in thousands):
|
|
|
|
|
Notes payable to bank
|
|
$
|
3,984
|
|
Notes payable to former common shareholders of Pulse, net of
discount of $0.1 million
|
|
|
1,649
|
|
|
|
|
|
|
Total debt
|
|
|
5,633
|
|
Less: current portion
|
|
|
(2,710
|
)
|
|
|
|
|
|
Total long-term debt
|
|
$
|
2,923
|
|
|
|
|
|
|
Following its acquisition by the Company, Pulse Systems remains
party to the Loan and Security Agreement, as amended (the
Loan Agreement), with Fifth Third Bank, which
currently relates to a revolving loan not to exceed
$1.0 million, of which no amounts were outstanding as of
the closing or as of June 30, 2010, and a $5.0 million
term loan, with a remaining balance of $4.25 million as of
the closing and $3.98 million as of June 30, 2010. The
revolving loan matures June 30, 2011 and bears interest at
prime plus 4% or, at the option of Pulse Systems, Adjusted LIBOR
(the greater of LIBOR or 3%) plus 4%. The term loan interest is
payable monthly and is calculated based on a LIBOR base rate
plus an applicable margin, with $265,625 quarterly principal
payments due through March 2014. The term loan effective
interest rate is 9.75% as of June 30, 2010. Total interest
expense recorded in the consolidated statement of operations was
$15,000. The revolving loan and term loan are secured by a lien
on all of the assets of Pulse Systems.
The Loan Agreement contains financial covenants. In connection
with the acquisition and the execution of the Second Amendment
to the Loan and Security Agreement (the Amendment),
the lender waived the existing defaults under the Loan Agreement
arising from Pulse Systems failure to satisfy (a) the
Adjusted EBITDA (as defined therein) covenant as of
December 31, 2009 and March 31, 2010, (b) the
Funded Debt to Adjusted EBITDA covenant (as defined therein) as
of March 31, 2010, (c) the Fixed Charge Coverage Ratio
(as defined therein) as of December 31, 2009 and
March 31, 2010, and (d) to timely deliver audited
financial statements for the fiscal year ended December 31,
2009. In addition, the Amendment modified the definition of
Adjusted EBITDA, to among other things, add $750,000 to the
calculation to reflect the $750,000 contribution to capital made
by UAHC to Pulse Systems at closing which was applied to reduce
the amount of Pulse Systems debt.
In addition, UAHC has pledged its membership interests in Pulse
Systems to Fifth Third as additional security for the loans, as
set forth in the Membership Interest Pledge Agreement (the
Pledge Agreement). The Pledge Agreement restricts
the ability of UAHC to incur additional indebtedness, other than
the Seller Note and up to $1.0 million of unsecured working
capital financing. The Pledge Agreement also generally restricts
the payments of
F-19
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
dividends or distributions on, and redemptions of, UAHC common
stock, except as permitted under the Standstill Agreement, as
amended. See Note 18 for additional discussion of the
Standstill agreement.
The Company also has a promissory note in the principal amount
of $1.75 million made in favor of the Sellers with a stated
amount of $1.75 million payable on January 2, 2011.
The recorded amount of the promissory note at June 30, 2010
was $1.6 million calculated using a discount rate of 12%.
The promissory note is non-interest bearing and secured by a
pledge of the common units of Pulse Systems acquired by UAHC.
The Sellers security interest in the common units of Pulse
Systems is subordinate to that of Fifth Third. Approximately,
$1.2 million of the notes payable is allocable to Chicago
Venture Partners, L.P. Chicago Venture Partners, L.P. is 64.8%
owned by of John Fife, a related party, who has 13.8% beneficial
ownership in UAHC.
Schedule maturities of the long- term notes payable as of
June 30, 2010 are as follows (in thousands):
|
|
|
|
|
Fiscal 2011
|
|
$
|
2,710
|
|
Fiscal 2012
|
|
|
1,063
|
|
Fiscal 2013
|
|
|
1,063
|
|
Fiscal 2014
|
|
|
797
|
|
|
|
|
|
|
Total
|
|
|
5,633
|
|
Less: current portion
|
|
|
2,710
|
|
|
|
|
|
|
|
|
$
|
2,923
|
|
|
|
|
|
|
The Company leases its facilities and certain furniture and
equipment under operating leases expiring at various dates
through December 2010. 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.
As a result of the TennCare Contract expiration and the Medicare
contract expiration, the Company has subleased the Memphis,
Tennessee facility. See Note 13 for further discussion.
Rent expense for the years ended June 30, 2010, 2009 and
2008, totaled $0.1 million, $0.4 million and
$0.3 million, respectively. Based on the current
commitments, the Company will incur rent of $0.1 million
for fiscal year 2011. These commitments are net of sublease
income of $0.2 million for 2011.
The Company leases equipment under various noncancelable capital
leases which expire at various dates through July 2013. Lease
payments totaling $9,600 are payable monthly and include
interest at approximately 8 percent to 9 percent. The
leases are collateralized by the underlying assets. Minimum
future lease payments under the capital lease as of
June 30, 2010 are as follows (in thousands):
|
|
|
|
|
Fiscal 2011
|
|
$
|
92
|
|
Fiscal 2012
|
|
|
101
|
|
Fiscal 2013
|
|
|
96
|
|
Fiscal 2014
|
|
|
7
|
|
|
|
|
|
|
Total
|
|
|
296
|
|
Less: current portion
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
$
|
204
|
|
|
|
|
|
|
|
|
NOTE 13
|
TENNESSEE
OPERATIONS
|
UAHC-TN was for many consecutive years a managed care
organization in the TennCare program. On April 22, 2008,
the Company learned that UAHC-TN would no longer be authorized
to provide managed care
F-20
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
services as a TennCare contractor when its TennCare contract
expired. UAHC-TNs TennCare members transferred to other
managed care organizations on November 1, 2008, after which
UAHC-TN continued to perform its remaining contractual
obligations through its TennCare contract expiration date of
June 30, 2009. However, revenue under this contract was
only earned through October 31, 2008.
From January 2007 to December 2009, UAHC-TN served as a Medicare
contractor with CMS. The contract authorized UAHC-TN to offer a
SNP to its eligible members in Shelby County, Tennessee
(including the City of Memphis), and to operate a Voluntary
Medicare Prescription Drug Plan. The Company did not seek
renewal of the Medicare contract, which expired
December 31, 2009. The Company is continuing to wind down
the Medicare business and expects to continue to incur costs
related to the Medicare business through December 31, 2010,
including labor, claim processing and the differential costs
related to Tennessee facility sublease. The costs related to the
wind down of the Medicare contract are expected to be
approximately $0.1 million to $0.2 million.
The Company recognizes a liability for certain costs associated
with an exit or disposal activity and measures the liability
initially at its fair value in the period in which the liability
is incurred. The costs to be recognized include employee
termination benefits, lease termination and costs to relocate
the Companys facility. The following table summarizes
certain exit costs resulting from the TennCare contract
expiration and the expiration of the Medicare contract (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Expense
|
|
|
|
|
|
Balance at
|
|
Item
|
|
July 1, 2009
|
|
|
Adjustment*
|
|
|
Payments
|
|
|
June 30, 2010
|
|
|
Workforce reduction
|
|
$
|
142
|
|
|
|
(48
|
)
|
|
|
(94
|
)
|
|
$
|
|
|
Lease abandonment, net
|
|
|
17
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
159
|
|
|
|
(48
|
)
|
|
|
(105
|
)
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount includes forfeited employee retention benefits. |
The cumulative costs incurred through June 30, 2010
amounted to $1.1 million. These costs are included in
marketing, general and administrative expenses in our statement
of operations. Approximately $0.3 million of these costs
related to the Management Companies and $0.8 million relate
to the HMO & Managed Plan. In connection with the
discontinuance of the TennCare and Medicare contracts, the
Company reduced its workforce, subleased its leased Tennessee
facility to a third party effective April 2009 and ending
December 31, 2010. At June 30, 2010, the Company no
longer had a Tennessee office. The discontinuance of the
TennCare and Medicare contracts has had a material adverse
impact on the Companys operations and financial statements
in fiscal 2009 and 2010.
NOTE 14
LEGAL SETTLEMENT
The Company was a defendant with others in a lawsuit that
commenced in February 2005 in the Circuit Court for the
30th Judicial Circuit, in the County of Ingham, Michigan,
Case No. 05127CK, entitled Provider Creditors
Committee on behalf of Michigan Health Maintenance Organizations
Plans, Inc. v. United American Healthcare Corporation and
others, et al. On September 22, 2009, the Company
settled this litigation for $3.3 million and all claims
were dismissed against the Company and the individuals. The
Company recovered $0.2 million through insurance. In the
fourth quarter of 2009, the Company recorded a provision for
this legal settlement of $3.1 million, which is net of the
insurance reimbursement of $0.2 million in the fiscal year
2009 statement of operations. The related liability
$3.3 million was included in reserve for legal settlement
and the insurance reimbursement of $0.2 million was
included in the other receivables on the consolidated balance
sheet as of June 30, 2009.
|
|
NOTE 15
|
REDEEMABLE
PREFERRED MEMBER UNITS
|
In connection with the acquisition of Pulse, Pulse Systems also
entered into a Redemption Agreement, dated June 18,
2010 (the Redemption Agreement), with Pulse
Systems Corporation, the holder of all of the outstanding
preferred units in Pulse Systems. The aggregate redemption price
is $3.99 million for the preferred units, including
F-21
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
the accrued but unpaid return on such units, which reflects a
$0.83 million reduction from the actual outstanding amount
as of the date of the agreement. In addition, the 14% dividend
rate on the preferred units is eliminated, subject to
reinstatement if there is a default as explained in the next
sentence. If Pulse Systems fails to pay the entire
$3.99 million redemption price as required by the terms of
the redemption agreement, the $0.83 million discount is
eliminated and the preferred units will be entitled to a 14% per
annum cumulative (but not compounded) return, consistent with
the current terms of the preferred units. Pulse Systems
Corporation has agreed to the redemption of its preferred units
over a two-year period, commencing with a cash payment made at
closing of $1.75 million. On August 30, 2010, Pulse
Systems redeemed $40,000 of the preferred units and has agreed
to continue to redeem $40,000 each month for the next
21 months, with a final payment of $1.36 million in
June 2012. The obligations of Pulse Systems under the redemption
agreement are subordinate to its obligations under the Loan
Agreement and Pledge Agreement. In addition, the redemption
payments can be made only if UAHC makes additional cash equity
contributions to Pulse Systems in an amount necessary to fully
fund each such payment. The redeemable preferred units were
recorded in the consolidated balance sheet at fair value of
approximately $1.85 million, discounted using an interest
rate of 12%.
The future redemption payment schedule based on the contractual
amounts is as follows (in thousands):
|
|
|
|
|
Fiscal 2011
|
|
$
|
440
|
|
Fiscal 2012
|
|
|
1,800
|
|
|
|
|
|
|
Total
|
|
$
|
2,240
|
|
|
|
|
|
|
|
|
NOTE 16
|
UNAUDITED
SELECTED QUARTERLY FINANCIAL DATA
|
The following table presents selected quarterly financial data
for the fiscal years ended June 30, 2010 and 2009 (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,760
|
|
|
$
|
1,701
|
|
|
$
|
14
|
|
|
$
|
343
|
|
|
$
|
3,818
|
|
Net (loss)
|
|
|
(1,563
|
)
|
|
|
(1,127
|
)
|
|
|
(1,401
|
)
|
|
|
(1,303
|
)
|
|
|
(5,394
|
)
|
Net diluted loss per common share
|
|
$
|
(0.19
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.66
|
)
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
6,285
|
|
|
$
|
4,512
|
|
|
$
|
2,612
|
|
|
$
|
3,250
|
|
|
$
|
16,659
|
|
Net earnings (loss)
|
|
|
190
|
|
|
|
(1,364
|
)
|
|
|
(3,024
|
)
|
|
|
(4,507
|
)
|
|
|
(8,705
|
)
|
Net diluted earnings (loss) per common share
|
|
$
|
0.02
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(1.02
|
)
|
F-22
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
NOTE 17
|
SEGMENT
FINANCIAL INFORMATION
|
Summarized financial information for the Companys
principal operations for fiscal 2010, 2009 and 2008 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
HMO &
|
|
|
Manufacturing
|
|
|
Corporate &
|
|
|
Consolidated
|
|
|
|
Companies(1)
|
|
|
Managed Plan(2)
|
|
|
Services (Pulse)(3)
|
|
|
Eliminations
|
|
|
Company
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues external customers
|
|
$
|
|
|
|
$
|
3,475
|
|
|
$
|
343
|
|
|
$
|
|
|
|
$
|
3,818
|
|
Revenues intersegment
|
|
|
3,043
|
|
|
|
|
|
|
|
|
|
|
|
(3,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
3,043
|
|
|
$
|
3,475
|
|
|
$
|
343
|
|
|
$
|
(3,043
|
)
|
|
|
3,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
15
|
|
Earnings (loss) from operations
|
|
|
(577
|
)
|
|
|
(4,885
|
)
|
|
|
68
|
|
|
|
|
|
|
|
(5,394
|
)
|
Segment assets
|
|
|
37,445
|
|
|
|
3,869
|
|
|
|
15,847
|
|
|
|
(36,563
|
)
|
|
|
20,598
|
|
Depreciation and amortization
|
|
|
144
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues external customers
|
|
$
|
|
|
|
$
|
16,659
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,659
|
|
Revenues intersegment
|
|
|
12,592
|
|
|
|
|
|
|
|
|
|
|
|
(12,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
12,592
|
|
|
$
|
16,659
|
|
|
$
|
|
|
|
$
|
(12,592
|
)
|
|
$
|
16,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Loss from operations
|
|
|
(2,500
|
)
|
|
|
(6,205
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,705
|
)
|
Segment assets
|
|
|
47,936
|
|
|
|
12,842
|
|
|
|
|
|
|
|
(38,540
|
)
|
|
|
22,238
|
|
Purchase of equipment
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Depreciation and amortization
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues external customers
|
|
$
|
|
|
|
$
|
26,833
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
26,833
|
|
Revenues intersegment
|
|
|
15,696
|
|
|
|
|
|
|
|
|
|
|
|
(15,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
15,696
|
|
|
$
|
26,833
|
|
|
$
|
|
|
|
$
|
(15,696
|
)
|
|
$
|
26,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Earnings (loss) from operations
|
|
|
(5,228
|
)
|
|
|
1,186
|
|
|
|
|
|
|
|
|
|
|
|
(4,042
|
)
|
Segment assets
|
|
|
63,423
|
|
|
|
21,518
|
|
|
|
|
|
|
|
(54,144
|
)
|
|
|
30,797
|
|
Purchase of equipment
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
326
|
|
Depreciation and amortization
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Management Companies: United American Healthcare Corporation,
United American of Tennessee, Inc. |
|
(2) |
|
HMO and Managed Plan: UAHC Health Plan of Tennessee, Inc. The
HMO and Managed Plan earnings (loss) from operations includes
$5.7 million, $12.6 million and $15.7 million of
management fees paid to the management companies for fiscal
2010, 2009 and 2008, respectively. |
|
(3) |
|
Pulse Systems: Provider of Contract Manufacturing Services to
the medical device industry |
|
|
NOTE 18
|
COMMITMENTS &
CONTINGENCIES
|
Standstill
Agreement
On March 19, 2010, the Company and St. George Investments,
LLC (St. George), a 2.9% beneficial owner of the
Company, entered into a Voting and Standstill Agreement (the
Standstill Agreement). John M. Fife, a related party
and 13.8% beneficial owner of the Company, is the sole member of
St. George.
F-23
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The standstill and voting obligations described in the
Standstill Agreement continue until March 31, 2012, unless
earlier terminated if the Put (as defined below) is exercised or
if there is an event of default (as defined in the Standstill
Agreement). The Put can be exercised beginning on
October 1, 2011 and expires March 31, 2012. However,
as of March 19, 2010, the Put can be accelerated at any
time immediately upon the occurrence of certain events of
default.
The Company has the right to purchase all of the Shares (the
Call) and St. George has the right to require the
Company to purchase some or all of the Shares (the
Put). The Put price is $1.26. The Company may
exercise the Call at $1.14 per share, if the Call is
exercised on or prior to June 30, 2011. If the Call occurs
between July 1, 2011 and September 30, 2011, the Call
price is the same as the Put price. The Call expires upon the
earliest of September 30, 2011 and a Triggering
Event which is defined to mean the Companys
execution of a letter of intent for a business combination, the
Companys execution of definitive documents for a business
combination and the Companys public announcement of a
business combination. A business combination would include an
acquisition of the Company or by the Company.
St. George has granted to the Company the right, commencing
May 1, 2010, to require St. George to invest $600,000 in
the Company (the Capital Call). The Capital Call
expires upon the earlier of July 1, 2011 and the
Companys filing of a registration statement for St.
Georges shares. If the Capital Call is exercised, St.
George would be issued that number of shares of a newly
designated series of non-voting convertible preferred stock (the
Preferred Stock) based on the dollar volume weighted
average closing price of the Companys common stock for the
30 calendar days prior to the date of the issuance of the shares
of Preferred Stock; however, if there is a Triggering Event, the
calculation would be based on the 30 calendar pays prior to the
Triggering Event. The Preferred Stock would be convertible at
any time at the option of St. George into shares of the
Companys common stock at a ratio of 1:1, with such
conversion ratio subject to adjustment in the event of certain
stock splits or dividends or in the event of a business
combination or similar transaction. The Preferred Stock would
have a 3% per annum dividend which, at the option of the
Company, would be payable in cash or in additional shares of
Preferred Stock. The common shares acquired upon conversion of
the Preferred Stock is subject to the Companys Call right,
and the holder of the Preferred Stock has a Put right, on the
same terms and conditions as are applicable to the shares of
common stock beneficially owned by St. George. The terms of the
Preferred Stock are set forth in the Certificate of Designation
which is an exhibit to the Standstill Agreement. The Certificate
of Designation would be filed by the Company concurrently with
exercise of the Capital Call.
The Company has agreed to maintain certain reserves of its
unrestricted cash on its balance sheet, initially equal to 20%
of the Companys pro forma estimate of its 2010 fiscal year
end shareholders equity and then equal to the
Companys actual 2010 fiscal year-end shareholders
equity thereafter. The Companys
shareholders equity as of 2010 fiscal year end is
approximately $9.9 million, which requires a minimum
corresponding reserve of approximately 2.0 million. The
Standstill Agreement permits St. George and its assigns to own
up to 35% of the Companys issued and outstanding common
shares, which corresponds to a maximum reserve of $3.5 million.
On June 7, 2010, the Company entered into an Amendment to
the Standstill Agreement which permits the Company, at its
option, to eliminate the cash reserve provided that the Company
provides substitute collateral reasonably acceptable to St.
George.
Additionally, if the Capital Call was exercised (either at the
Companys option or due to a Triggering Event), the Company
would have to reserve cash to satisfy the put on the preferred
shares issued pursuant to the Capital Call, in addition to the
amounts reserved for the Companys put obligations on the
common stock. The reserve for the put on the preferred shares
cannot be calculated until the Capital Call is exercised because
although the price of the put on the preferred shares is set at
$1.26, the number of preferred shares issued pursuant to the
Capital Call is based upon the dollar volume weighted average
closing price of the Companys common stock for the 30
calendar days prior to the date of the issuance of the preferred
shares, or if there a Triggering Event, the calculation would be
based on the 30 calendar days prior to the Triggering Event.
Effective June 18, 2010, the closing date of the Pulse
F-24
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Systems acquisition, the Company entered into an agreement with
St. George and The Dove Foundation (a party joined to the
Standstill Agreement on June 7, 2010), whereby St. George
and The Dove Foundation agreed that the Pulse Systems
acquisition shall not be considered a Triggering
Event under the Standstill Agreement.
Lawsuit
On March 31, 2010, Strategic Turnaround Equity Partners,
L.P. (Cayman) (STEP) filed suit against the Company,
Thomas Goss (Chairman of the Companys Board), John Fife
and Fife affiliates (Fife) in the United States
District Court for the Eastern District of Michigan, Case
No. 10-cv-11305,
seeking an injunction against a proxy solicitation by the
Company, voting of Fife shares, and implementation of a Voting
and Standstill Agreement dated March 19, 2010 between the
Company and St. George Investments, LLC, one of the Fife
affiliates. STEP alleged that the Companys preliminary
proxy materials for the 2010 annual meeting of shareholders
violated Section 14(a) of the Securities Exchange Act of
1934, that Fife was prohibited from voting shares by virtue of a
provision in the Companys Articles of Incorporation and
that the Voting and Standstill Agreement violated the Articles
of Incorporation and Michigan law. On April 7, 2010, STEP
sought an order directing the holding of the Companys
annual meeting on April 23, 2010. On April 9, 2010,
the district court denied STEPs motion relating to the
April 23 meeting. On April 28, 2010, the Company filed a
motion to dismiss STEPs lawsuit. On May 6, 2010, STEP
filed a motion for summary judgment. A hearing on STEPs
motion for preliminary injunction, STEPs motion for
summary judgment, and the Companys motion to dismiss was
held on June 15, 2010.
On June 25, 2010, the Company filed a counter-complaint
against STEP and a third-party complaint against Galloway
Capital Management, LLC, Bruce Galloway, Gary L. Herman, Seth M.
Lukash, and Fred Zeidman, alleging violations of
Section 14(a) of the Securities Exchange Act of 1934. In
the third-party complaint, the Company also made a claim against
Bruce Galloway, alleging Mr. Galloway breached his
statutory and common-law fiduciary duties to the Company.
On June 28, 2010, the district court issued an opinion and
order on the parties respective motions. The district
court granted the Companys motion to dismiss in part,
holding that STEPs claim against the Company under
Section 14(a) of the Securities Exchange Act of 1934 failed
to state an actionable claim. Accordingly, the district court
dismissed this claim with prejudice. The district court
dismissed without prejudice the remainder of STEPs claims
against the Company for lack of subject-matter jurisdiction. The
district court further ordered that the Companys
counter-complaint and third-party complaint be stricken.
Therefore, the district court entered a judgment in favor of the
Company and the other defendants against STEP.
On July 2, 2010, STEP filed suit against the Company in the
Wayne County (Michigan) Circuit Court, Case
No. 10-007629-CZ,
seeking a mandatory injunction to order the Company to hold its
annual meeting on or before August 4, 2010, and to set a
record date of June 7, 2010. On July 6, 2010, STEP
filed a motion for mandatory injunction. On July 15, 2010,
the Company announced that its annual meeting would be set for
September 30, 2010, with a record date of September 1,
2010. The Company filed with the circuit court a brief in
opposition to STEPs motion for mandatory injunction. On
July 16, 2010, the circuit court held a hearing on
STEPs motion for mandatory injunction. On July 21,
2010, the circuit court entered an order that the Company will
hold its annual meeting on the date the Company selected
(September 30, 2010) and the record date will be the
date selected by the Company (September 1, 2010). The
circuit courts July 21, 2010 order resolved and
closed the case.
On August 17, 2010, STEP and Bruce Galloway filed suit
against the Company in the Wayne County (Michigan) Circuit
Court, Case
No. 10-009344-CZ,
seeking, among other things, a rescission of the Pulse Systems
acquisition and an injunction against the voting of shares
issued pursuant to the Pulse Systems acquisition. On
August 27, 2010, STEP and Mr. Galloway filed a motion
for preliminary injunction. The hearing on STEPs and
Mr. Galloways motion for preliminary injunction has
been noticed for September 17, 2010.
F-25
United
American Healthcare Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
NOTE 19
|
RECENTLY
ENACTED PRONOUNCEMENTS
|
From time to time, new accounting pronouncements are issued by
the Financial Accounting Standards Board (FASB) or
other standard setting bodies that are adopted by the Company as
of the effective dates. Unless otherwise discussed, Management
believes that the impact of recently issued standards that are
not yet effective will not have a material impact on the
Companys financial position or results of operations upon
adoption.
|
|
NOTE 20
|
SUBSEQUENT
EVENT
|
The Company has performed a review of events subsequent to the
balance sheet date.
F-26
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated Herein By
|
|
Filed
|
|
Number
|
|
Description of Document
|
|
Reference To
|
|
Herewith
|
|
|
|
2
|
.1
|
|
Securities Purchase Agreement, dated June 18, 2010, by and
among United American Healthcare Corporation, John M. Fife,
as the Seller Representative, Pulse Sellers, LLC, Pulse
Holdings, LLC, Chicago Venture Partners, L.P., Pulse Systems
Corporation, Demian Backs, Vince Barletta, Rodger Bell and
Merrill Weber
|
|
Exhibit 2.1 to Form 8-K filed June 24, 2010
|
|
|
|
|
|
2
|
.2
|
|
Amendment to Securities Purchase Agreement, dated July 12,
2010, by and among United American Healthcare Corporation,
Chicago Venture Partners, L.P., Pulse Systems Corporation,
Demian Backs, Vince Barletta, Rodger Bell and Merrill Weber
|
|
Exhibit 2.1 to Form 8-K filed July 16, 2010
|
|
|
|
|
|
2
|
.3
|
|
Warrant Purchase Agreement, dated June 18, 2010, by and
among United American Healthcare Corporation, Convergent
Capital Partners I, L.P., Main Street Equity Interests,
Inc., Medallion Capital, Inc. and Pacific Mezzanine
Fund, L.P.
|
|
Exhibit 2.2 to Form 8-K filed June 24, 2010
|
|
|
|
|
|
2
|
.4
|
|
Redemption Agreement, dated June 18, 2010, by and
between Pulse Systems, LLC and Pulse Systems Corporation
|
|
Exhibit 2.3 to Form 8-K filed June 24, 2010
|
|
|
|
|
|
3
|
.1
|
|
Restated Articles of Incorporation of Registrant
|
|
Exhibit 3.1 to the Registrants Form S-1 Registration
Statement under the Securities Act of 1933, as amended, declared
effective on April 23, 1991 (1991 S-1)
|
|
|
|
|
|
3
|
.2
|
|
Certificate of Amendment to the Articles of Incorporation of
Registrant
|
|
Exhibit 3.1(a) to 1991 S-1
|
|
|
|
|
|
3
|
.3
|
|
Amended and Restated Bylaws of United American Healthcare
Corporation
|
|
|
|
|
|
*
|
|
4
|
.1
|
|
Form of Common Share Certificate
|
|
Exhibit 4.2 to the Registrants 1995
Form 10-K
|
|
|
|
|
|
4
|
.2
|
|
Form of Common Stock Purchase Warrant, dated December 13,
2006, issued by United American Healthcare Corporation
|
|
Exhibit 4.1 to Form 8-K filed December 15, 2006
|
|
|
|
|
|
4
|
.3
|
|
Form of Registration Rights Agreement, dated December 13,
2006, by and among United American Healthcare Corporation and
certain investors
|
|
Exhibit 10.2 to Form 8-K filed December 15, 2006
|
|
|
|
|
|
4
|
.4
|
|
Loan and Security Agreement, dated March 31, 2009, as
amended by the First Amendment to the Loan and Security, dated
September 23, 2009, and by the Second Amendment to the Loan
and Security Agreement, dated June 18, 2010, each by and
between Fifth Third Bank and Pulse Systems, LLC
|
|
Exhibit 4.1 to Form 8-K filed June 24, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated Herein By
|
|
Filed
|
|
Number
|
|
Description of Document
|
|
Reference To
|
|
Herewith
|
|
|
|
4
|
.5
|
|
Membership Interest Pledge Agreement, dated June 18, 2010,
delivered by United American Healthcare Corporation to
Fifth Third Bank
|
|
Exhibit 4.2 to Form 8-K filed June 24, 2010
|
|
|
|
|
|
10
|
.1**
|
|
Summary of Director Compensation
|
|
|
|
|
|
*
|
|
10
|
.2
|
|
Contract #H6934, effective September 29, 2006, by and
between Centers for Medicare & Medicaid Services and
UAHC Health Plan of Tennessee, Inc. with its Attachment A and
Addendum D
|
|
Exhibit 10.1 to Form 8-K filed October 16, 2006
|
|
|
|
|
|
10
|
.3
|
|
Form of Purchase Agreement, dated as of December 13, 2006,
by and among United American Healthcare Corporation and
certain investors
|
|
Exhibit 10.1 to Form 8-K filed December 15, 2006
|
|
|
|
|
|
10
|
.4**
|
|
United American Healthcare Corporation Supplemental Executive
Retirement Plan, as amended and restated, effective as
of January 1, 2005 and dated November 9, 2006
|
|
Exhibit 10.1 to Form 10-Q filed January 25, 2007
|
|
|
|
|
|
10
|
.5**
|
|
Amended and Restated United American Healthcare Corporation 1998
Stock Option Plan
|
|
|
|
|
|
*
|
|
10
|
.6**
|
|
Retention and Severance Agreement, dated October 30, 2008,
by and between United American Healthcare Corporation and
William C. Brooks
|
|
Exhibit 10.68 to Form 10-Q for the Quarter Ended September 30,
2008, filed November 4, 2008
|
|
|
|
|
|
10
|
.7**
|
|
Retention and Severance Agreement, dated October 30, 2008,
by and between United American Healthcare Corporation and
Stephen D. Harris
|
|
Exhibit 10.69 to Form 10-Q for the Quarter Ended September 30,
2008, filed November 4, 2008
|
|
|
|
|
|
10
|
.8
|
|
Indemnification Agreement, dated October 30, 2008, by and
between United American Healthcare Corporation and William
C. Brooks
|
|
Exhibit 10.71 to Form 10-Q for the Quarter Ended September 30,
2008, filed November 4, 2008
|
|
|
|
|
|
10
|
.9
|
|
Indemnification Agreement, dated October 30, 2008, by and
between United American Healthcare Corporation and Stephen
D. Harris
|
|
Exhibit 10.72 to Form 10-Q for the Quarter Ended September 30,
2008, filed November 4, 2008
|
|
|
|
|
|
10
|
.10
|
|
Form of Indemnification Agreement, dated October 30, 2008,
by and between United American Healthcare Corporation and
each of its non-employee directors
|
|
Exhibit 10.74 to Form 10-Q for the Quarter Ended September 30,
2008, filed November 4, 2008
|
|
|
|
|
|
10
|
.11**
|
|
Employment Agreement, dated August 28, 2009, by and between
the United American Healthcare Corporation and Anita R.
Davis.
|
|
Exhibit 10.1 to Form 8-K filed August 31, 2009
|
|
|
|
|
|
10
|
.12**
|
|
Employment Agreement, dated January 16, 2010, by and
between United American Healthcare Corporation and William
L. Dennis
|
|
Exhibit 10.1 to Form 8-K filed January 21, 2010
|
|
|
|
|
|
10
|
.13
|
|
Voting and Standstill Agreement, dated March 19, 2010, by
and between United American Healthcare Corporation and St.
George Investments, LLC
|
|
Exhibit 10.1 to Form 8-K filed March 22, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated Herein By
|
|
Filed
|
|
Number
|
|
Description of Document
|
|
Reference To
|
|
Herewith
|
|
|
|
10
|
.14
|
|
Amendment to Voting and Standstill Agreement, dated June 7,
2010, by and between United American Healthcare Corporation and
St. George Investments, LLC
|
|
Exhibit 10.2 to Form 8-K filed June 24, 2010
|
|
|
|
|
|
10
|
.15
|
|
Agreement to Join the Voting and Standstill Agreement, dated
June 7, 2010, by and among The Dove Foundation, United
American Healthcare Corporation and St. George Investments, LLC
|
|
Exhibit 10.2 to Form 8-K filed June 24, 2010
|
|
|
|
|
|
10
|
.16
|
|
Acknowledgment and Waiver of Certain Provisions of the Voting
and Standstill Agreement, dated June 18, 2010, by and among
United American Healthcare Corporation, St. George Investments,
LLC and The Dove Foundation
|
|
Exhibit 10.2 to Form 8-K filed June 24, 2010
|
|
|
|
|
|
10
|
.17**
|
|
Employment Agreement, dated July 24, 2007, by and between
Pulse Systems, LLC and Herbert J. Bellucci
|
|
Exhibit 10.1 to Form 8-K filed June 24, 2010
|
|
|
|
|
|
21
|
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
*
|
|
23
|
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
*
|
|
31
|
.1
|
|
Certification of Chief Executive Officer under Section 302
of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
*
|
|
31
|
.2
|
|
Certification of Chief Financial Officer under Section 302
of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
*
|
|
32
|
.1
|
|
Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
|
|
|
|
|
|
*
|
|
32
|
.2
|
|
Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
|
|
|
|
|
|
*
|
|
|
|
** |
|
Indicates a management contract or compensatory arrangement
required to be filed |