================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED DECEMBER 31, 2003 Commission File Number: 000-18839 UNITED AMERICAN HEALTHCARE CORPORATION (Exact Name of Registrant as Specified in Charter) MICHIGAN 38-2526913 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 300 RIVER PLACE, SUITE 4950 DETROIT, MICHIGAN 48207 (Address of principal executive offices) (Zip Code) Registrant's 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 (Title of Class) 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 [X] No [ ] THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF JANUARY 26, 2003 WAS 7,219,545. ================================================================================ As filed with the Securities and Exchange Commission on January 29, 2003 UNITED AMERICAN HEALTHCARE CORPORATION FORM 10-Q TABLE OF CONTENTS PAGE PART I. Item 1. Unaudited Condensed Consolidated Financial Statements- Condensed Consolidated Balance Sheets - December 31, 2003 and June 30, 2003.............................................................. 1 Condensed Consolidated Statements of Operations - Three and Six Months Ended December 31, 2003 and 2002............................................... 2 Condensed Consolidated Statements of Cash Flows - Six Months Ended December 31, 2003 and 2002............................................... 3 Notes to the Unaudited Condensed Consolidated Financial Statements............... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 10 Item 3. Quantitative and Qualitative Disclosures About Market risk.............................................................. 16 Item 4. Controls and Procedures.......................................................... 16 PART II. Item 1. Legal Proceedings................................................................ 17 Item 5. Other Information................................................................ 17 Item 6. Exhibits and Reports on Form 8-K................................................. 19 SIGNATURES........................................................................................ 20 PART I. ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, JUNE 30, 2003 2003 (Unaudited) ------------ -------- ASSETS Current assets Cash and cash equivalents $ 6,748 $ 3,693 Marketable securities 1,000 1,000 Accounts receivable - State of Tennessee 1,063 1,213 Other receivables 1,189 1,495 Prepaid expenses and other 105 167 Deferred income taxes 308 570 -------- -------- Total current assets 10,413 8,138 Assets held for sale 800 800 Property and equipment, net 399 478 Goodwill 2,952 2,952 Marketable securities 2,170 2,160 Other assets 586 586 -------- -------- Total assets $ 17,320 $ 15,114 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 1,188 $ 1,108 Medical claims payable 506 591 Accounts payable and accrued expenses 3,536 2,796 Accrued compensation and related benefits 426 519 Other current liabilities 1,400 1,430 -------- -------- Total current liabilities 7,056 6,444 Long-term debt, less current portion -- 658 Accrued rent 667 872 -------- -------- Total liabilities 7,723 7,974 Shareholders' equity Preferred stock, 5,000,000 shares authorized; none issued -- -- Common stock, no par, 15,000,000 shares authorized; 7,219,545 and 7,034,247 issued and outstanding at December 31, 2003 and June 30, 2003, respectively 11,810 11,570 Accumulated deficit (2,226) (4,469) Accumulated other comprehensive gain, net of income taxes 13 39 -------- -------- Total shareholders' equity 9,384 7,140 ======== ======== $ 17,320 $ 15,114 ======== ======== See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 1 UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------- ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- REVENUES Fixed administrative fees $ 5,092 $ 3,700 $ 10,166 $ 7,783 Medical premiums 77 3,883 446 6,575 Interest and other income 310 459 595 799 -------- -------- -------- -------- Total revenues 5,479 8,042 11,207 15,157 EXPENSES Medical services 77 380 446 380 Marketing, general and administrative 3,915 4,137 7,830 7,911 Depreciation and amortization 57 79 120 160 Interest expense 18 42 38 96 -------- -------- -------- -------- Total expenses 4,067 4,638 8,434 8,547 -------- -------- -------- -------- Earnings from continuing operations before income taxes 1,412 3,404 2,773 6,610 Income tax expense 83 203 532 631 -------- -------- -------- -------- EARNINGS FROM CONTINUING OPERATIONS 1,329 3,201 2,241 5,979 DISCONTINUED OPERATIONS Loss from discontinued operations -- (1,753) -- (2,127) -------- -------- -------- -------- NET EARNINGS $ 1,329 $ 1,448 $ 2,241 $ 3,852 ======== ======== ======== ======== NET EARNINGS PER COMMON SHARE - BASIC Earnings from continuing operations $ 0.19 0.46 0.31 0.87 Discontinued operations -- (0.25) -- (0.31) -------- -------- -------- -------- Net earnings per common share $ 0.19 0.21 0.31 0.56 ======== ======== ======== ======== Weighted average shares outstanding 7,168 6,912 7,127 6,912 ======== ======== ======== ======== NET EARNINGS PER COMMON SHARE - DILUTED Earnings from continuing operations $ 0.19 $ 0.46 $ 0.31 $ 0.85 Discontinued operations -- (0.25) -- (0.30) -------- -------- -------- -------- Net earnings per common share $ 0.19 $ 0.21 $ 0.31 $ 0.55 ======== ======== ======== ======== Weighted average shares outstanding 7,220 6,931 7,180 7,015 ======== ======== ======== ======== See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 2 UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) SIX MONTHS ENDED DECEMBER 31, 2003 2002 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 2,241 $ 3,852 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Loss on disposal of assets -- 584 Realized loss on investment (26) -- Depreciation and amortization 120 504 Bad debt expense -- 847 Accrued rent (205) 581 Deferred income taxes 475 670 Stock awards 213 11 Net changes in operating assets and liabilities 1,053 (21,076) -------- -------- Net cash provided by (used in) operating activities 3,658 (14,027) CASH FLOWS FROM INVESTING ACTIVITIES Sale (purchase) of marketable securities (10) 14,465 Purchase of property and equipment (42) (55) -------- -------- Net cash provided by (used in) investing activities (52) 14,410 CASH FLOWS FROM FINANCING ACTIVITIES Payments made on long-term debt (578) (635) Issuance of common stock 27 -- -------- -------- Net cash used in financing activities (551) (635) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,055 1,748 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,693 2,026 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,748 $ 3,774 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 35 $ 84 ======== ======== See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 3 UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 2003 AND 2002 NOTE 1 - BASIS OF PREPARATION The accompanying condensed consolidated financial statements include the accounts of United American Healthcare Corporation and its wholly and majority-owned subsidiaries, together referred to as the "Company". All significant intercompany transactions and balances have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations have been included. The results of operations for the three and six-month periods ended December 31, 2003 are not necessarily indicative of the results of operations for the full fiscal year ending June 30, 2004. The accompanying condensed consolidated financial statements should be read in conjunction with the notes to the financial statements contained in the most recent annual report on Form 10-K. NOTE 2 - COMPREHENSIVE INCOME The components of comprehensive income, net of related tax, are summarized as follows (in thousands): Three months ended Six months ended December 31, December 31, ------------------- ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net earnings $ 1,329 $ 1,448 $ 2,241 $ 3,852 Unrealized holding gains, net of deferred federal income taxes 13 (5) 13 (5) -------- -------- -------- -------- Comprehensive income $ 1,342 $ 1,443 $ 2,254 $ 3,847 ======== ======== ======== ======== The components of accumulated other comprehensive income, included in shareholders' equity at December 31, 2003 and June 30, 2003, include net unrealized holding gains and losses, net of deferred federal income taxes. 4 UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 2003 AND 2002 NOTE 3 - LONG-TERM DEBT The Company currently has a $1.2 million term loan with Standard Federal Bank, N.A. repayable in monthly installments of principal and interest of $0.1 million, with an interest rate equal to the bank's prime rate (4.00% at December 31, 2003) plus one percent per annum, and a maturity date of September 30, 2004. The loan agreement is collateralized by a security interest in all of the Company's personal property. The Company's outstanding debt is as follows (in thousands): DECEMBER 31, JUNE 30, 2003 2003 =========================== Term loan $ 1,188 $ 1,766 Less debt payable within one year 1,188 1,108 --------------------------- Long-term debt, less current portion $ - $ 658 =========================== NOTE 4 - NET EARNINGS PER COMMON SHARE Basic net earnings per share excluding dilution have been computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted earnings per share are computed using the treasury stock method for outstanding stock options. NOTE 5 - EFFECTIVE TAX RATE The Company's effective tax rate for the six months ended December, 31, 2003 is 19% and differs from the statutory rate of 34%. This difference is the result of the utilization of net operating loss carryforwards. In the second quarter of fiscal 2003, the effective tax rate was 6%, principally impacted by the Company's net operating loss carryforward position. NOTE 6 - CONTRACTUAL RISK AGREEMENT For all its contracted managed care organizations ("MCOs"), the State of Tennessee, doing business as TennCare, changed its reimbursement system to an administrative services only ("ASO") program for an initially declared 18-month stabilization period (July 1, 2002 through December 31, 2003), during which the MCOs - including OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), an MCO 75%-owned by 5 UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 2003 AND 2002 the Company's wholly owned subsidiary - have no medical cost risk (i.e., no risk for medical losses), earn fixed administrative fees, are subject to increased oversight, and may incur financial penalties for not achieving certain performance requirements. Through an amendment completed on December 19, 2003, TennCare has extended through June 30, 2004, the ASO reimbursement system applicable to OmniCare-TN. The State of Tennessee has commissioned and anticipates receiving soon the final part of a two-part independent study of the TennCare system by the consulting firm McKinsey & Company, which is expected to identify potential changes to the present TennCare reimbursement system following the stabilization period. That report is expected to be the basis for the Tennessee Governor's presentation of proposed TennCare reforms to the Tennessee legislature in February 2004. In September 2002, OmniCare-TN and the State of Tennessee, doing business as TennCare, amended the Contractor Risk Agreement between them. Pursuant to the amendment: - Retroactively effective July 1, 2001 through April 30, 2002, OmniCare-TN elected to operate under a shared risk arrangement, under which gains or losses are shared with the State of Tennessee; - retroactively effective beginning May 1, 2002, OmniCare-TN is reimbursed under an administrative services only agreement with no risk of medical loss; and - the State of Tennessee agreed to pay OmniCare-TN up to $7.5 million as necessary to meet its statutory net worth requirement as of June 30, 2002. Pursuant to a further agreement with OmniCare-TN in October 2002, the State of Tennessee agreed to pay additional funds to OmniCare-TN if future certified actuarial data confirm they are needed by OmniCare-TN to meet its statutory net worth requirement as of June 30, 2002. OmniCare-TN received a permitted practice letter from the State of Tennessee to include such $7.5 million receivable in its statutory net worth at June 30, 2002. Under generally accepted accounting principles, the $7.5 million receivable was not recorded in fiscal 2002 financial statements but has been recorded as fiscal 2002 claims are processed. Based on an actuarial determination, an additional $0.4 million of fiscal 2002 medical claims liability was recorded during fiscal 2003. For the three months ended December 31, 2003, an additional $0.4 million of such medical claims were processed, and the same amount was recognized as revenue by Omnicare-TN. The above-described December 19, 2003 contractual amendment also extended the term of OmniCare-TN's TennCare contract to December 31, 2004, with provisions for automatic one-year renewals thereafter in certain circumstances. NOTE 7 - GOODWILL Goodwill resulting from business acquisitions is carried at cost. Effective July 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 eliminates the amortization of 6 UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 2003 AND 2002 goodwill, but requires that the carrying amount of goodwill be 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. Management has assessed the remaining carrying amount of previously recorded goodwill of $3.0 million and determined that such amount is not impaired in accordance with SFAS No. 142. Accordingly, there was no goodwill impairment recorded for the three and six-months ended December 31, 2003 and 2002. NOTE 8 - DISCONTINUED OPERATIONS The Company's longstanding management agreement with OmniCare Health Plan in Michigan ("OmniCare-MI") ended effective November 1, 2002. Because of its resulting workforce reduction, the Company made plans to sublease all of its then principal office premises in Detroit, Michigan, to OmniCare-MI, retroactive to November 1, 2002, and expiring at the lease end in May 2005, and to sell to OmniCare-MI furniture, a telephone system and certain computer hardware and software that the Company chose to leave there. Management now expects to complete the signing of the sublease and the sale of assets by the third quarter of fiscal 2004. OmniCare-MI commenced its occupancy of the premises on November 1, 2002 and the Company remained in a portion of the premises until it moved its principal offices to new leased premises in Detroit on February 3, 2003. Summarized selected financial information for the discontinued operations is as follows (in thousands): Three months ended Six months ended December 31, December 31, ------------------------------------------------------------ 2003 2002 2003 2002 ------------------------------------------------------------ Management fees $ - $ 825 $ - $ 3,395 Loss from discontinued operations net of zero income taxes $ - $ (1,753) - (2,127) ------------------------------------------------------------ NOTE 9 - STOCK OPTION PLANS SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes a method of accounting for stock-based compensation that recognizes compensation cost based on the fair value of options at grant date. In lieu of applying this fair value based method, a company may elect to disclose only the pro forma effects of such application. The Company has adopted the disclosure-only provisions of SFAS No. 123. In December 2002, SFAS No. 148, "Stock-Based Compensation," was issued, which requires that the Company illustrate the effect on net income and earnings per share if it had applied the fair value principles included in SFAS No. 123 for both annual and interim financial 7 UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 2003 AND 2002 statements. Accordingly, if the Company had elected to recognize compensation cost based on the fair value of the options at grant date, the Company's earnings and earnings per share from continuing operations, assuming dilution, for the three months ended December 31, 2003 and 2002 would have been the pro forma amounts indicated below (in thousands, except per share amounts): THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------ 2003 2002 2003 2002 ------------------------------------------------------------ Net earnings (loss): As reported $ 1,329 $ 1,448 $ 2,241 $ 3,852 Pro forma $ 1,050 $ 1,425 $ 1,962 $ 3,829 Net earnings (loss) per share: As reported: Basic $ 0.19 $ 0.21 $ 0.31 $ 0.56 Diluted 0.19 0.21 0.31 0.55 ------------------------------------------------------------ Pro forma: Basic $ 0.15 $ 0.21 $ 0.28 $ 0.55 Diluted 0.15 0.21 0.28 0.55 ------------------------------------------------------------ 8 UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 2003 AND 2002 NOTE 10 - UNAUDITED SEGMENT FINANCIAL INFORMATION Summarized financial information for the Company's principal operations, as of and for the six-months ended December 31, 2003 and 2002, is as follows (in thousands): MANAGEMENT HMOs & CORPORATE & CONSOLIDATED COMPANIES (1) MANAGED PLANS (2) ELIMINATIONS COMPANY -------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED DECEMBER 31, 2003 Revenues - external customers $ - $ 10,612 $ - $ 10,612 Revenues - intersegment 9,150 - (9,150) - Interest and other income 89 506 - 595 -------------------------------------------------------------------- Total revenues $ 9,239 $ 11,118 $ (9,150) $ 11,207 ============================================================================================================== Interest expense $ 38 $ $ $ 38 Earnings (loss) from continuing operations 1,148 1,093 - 2,241 Loss from discontinued operations - - - - Segment assets 36,222 11,248 (30,150) 17,320 Purchase of equipment 42 - - 42 Depreciation and amortization 120 - - 120 -------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED DECEMBER 31, 2002 Revenues - external customers $ - $ 14,358 $ - $ 14,358 Revenues - intersegment 6,229 - (6,229) - Interest and other income 104 695 - 799 -------------------------------------------------------------------- Total revenues $ 6,333 $ 15,053 $ (6,229) $ 15,157 ============================================================================================================== Interest expense $ 96 $ - $ - $ 96 Earnings (loss) from continuing operations (1,530) 7,509 - 5,979 Loss from discontinued operations (2,127) - - (2,127) Segment assets 26,498 9,272 (21,129) 14,641 Purchase of equipment 55 - - 55 Depreciation and amortization 504 - - 504 -------------------------------------------------------------------------------------------------------------- (1) Management Companies: United American Healthcare Corporation and United American of Tennessee. (2) HMOs and Managed Plans: OmniCare Health Plan, Inc. of Tennessee. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW This Financial Review discusses the Company's results of operations, financial position and liquidity. This discussion should be read in conjunction with the consolidated financial statements and related notes thereto contained elsewhere in this quarterly report. The Company provides comprehensive management and consulting services to managed care organizations, including health maintenance organizations ("HMOs") in Tennessee and (until November 1, 2002) Michigan, with a targeted mix of Medicaid and commercial enrollment. OmniCare Health Plan, in Michigan ("OmniCare-MI"), an HMO then administered by the Company under a management agreement, was placed in court-ordered rehabilitation proceedings on July 31, 2001, which relieved the Company from further funding OmniCare-MI's capital deficiencies and which continued its OmniCare-MI management agreement, with substantially reduced management fee revenues from OmniCare-MI beginning August 1, 2001. In March 2002, upon the court-appointed Rehabilitator's filing a proposed rehabilitation plan for OmniCare-MI, the Company announced it anticipated eventual termination of the management agreement. Such termination occurred November 1, 2002, after which the Company's only managed plan has been OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), an HMO, which is 75%-owned by the Company's wholly owned subsidiary. As of December 31, 2003 there were approximately 130,000 enrollees in OmniCare-TN. Total revenues decreased $2.6 million (32%) to $5.4 million for the quarter ended December 31, 2003 compared to $8.0 million for the quarter ended December 31, 2002, and decreased $4.0 million (26%) to $11.2 million for the six months ended December 31, 2003 compared to $15.2 million for the six months ended December 31, 2002, primarily due to a contractual amendment in September 2002, retroactive to July 1, 2001 in some respects and to May 1, 2002 in other respects. In this amendment, TennCare, a State of Tennessee program that provides medical benefits to Medicaid and working uninsured and uninsurable recipients, agreed to pay OmniCare-TN up to $7.5 million and additional funds as necessary to meet its statutory net worth requirement as of June 30, 2002. OmniCare-TN received a permitted practice letter from the State of Tennessee to include such $7.5 million receivable in its statutory net worth at June 30, 2002. Under GAAP, such $7.5 million was recorded in its fiscal 2003 financial statements as fiscal 2002 claims were processed. For the quarter ended December 31, 2003, $0.1 million of such medical claims were processed compared to $3.9 million for the quarter ended December 31, 2002, and the same amount was recognized as revenue by Omnicare-TN. 10 Total expenses decreased $0.6 million (12%) to $4.1 million for the quarter ended December 31, 2003 compared to $4.6 million for the quarter ended December 31, 2002, and decreased $0.1 million (1%) to $8.4 million for the six months ended December 31, 2003 from $8.5 million for the six months ended December 31, 2002. principally due to the amended TennCare contractual risk agreement for OmniCare-TN discussed above. Earnings from continuing operations before income taxes were $1.4 million and $3.4 million for the quarters ended December 31, 2003 and 2002, respectively. Earnings from continuing operations were $1.1 million, or $0.16 per basic share, for the quarter ended December 31, 2003 compared to earnings from continuing operations of $3.2 million, or $0.46 per basic share, for the quarter ended December 31, 2002. Such decrease in earnings from continuing operations of $2.1 million, or $0.30 per basic share, is principally due to the amended TennCare contractual risk agreement for OmniCare-TN discussed above. The Company recognized no gain or loss from discontinued operations for the quarter ended December 31, 2003 compared to a loss of $1.8 million for the quarter ended December 31, 2002, and there was no gain or loss recognized for the six months ended December 31, 2003 compared to a loss of $2.1 million for the six months ended December 31, 2002. The recorded loss was the result of the termination of the Company's longstanding management agreement with OmniCare-MI, effective November 1, 2002. Because of its resulting workforce reduction, the Company made plans to sublease all of its principal office premises in Detroit, Michigan, to OmniCare-MI, retroactively to November, 1, 2002 and expiring at the lease end in May 2005, and to sell to OmniCare-MI furniture, a telephone system and certain computer hardware and software that the Company chose to leave there. Management expects both parties will finalize and sign the sublease, and close the sale of such assets, in the third quarter of fiscal 2004. Meanwhile, OmniCare-MI commenced its occupancy of the premises on November 1, 2002 and the Company remained in a portion of the premises until it moved its principal offices to new leased premises in Detroit on February 3, 2003. Net earnings were $1.3 million, or $0.19 per basic share, for the three months ended December 31, 2003 compared to net earnings of $1.4 million, or $0.21 per basic share, for the three months ended December 31, 2002. The Company recognized net earnings of $2.2 million, or $0.31 per basic share, for the six months ended December 31, 2003 and net earnings of $3.9 million, or $0.56 per basic share, for the period ended December 31, 2002. Such decrease in net earnings of $1.7 million is primarily due to the amended TennCare contractual risk agreement for OmniCare-TN discussed above. 11 FOR THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2002 Medical premiums revenues were $0.08 million in the three months ended December 31, 2003, a decrease of $3.8 million (98%) from $3.9 million in the three months ended December 31, 2002. Medical premiums revenues relate to an amended contractual risk agreement in which TennCare agreed to pay OmniCare-TN up to $7.5 million and additional funds as necessary to meet its statutory net worth requirement as of June 30, 2002. Such $7.5 million was recorded in fiscal 2003 financial statements as fiscal 2002 claims were processed. The $0.08 million of medical premium revenues represent fiscal 2002 claims processed and reimbursed by TennCare in the second quarter of fiscal 2004. Fixed administrative fees related to TennCare's ASO program were $5.1 million for the quarter ended December 31, 2003, an increase of $1.4 million (38%) from $3.7 million in the three months ended December 31, 2002. The increase in fixed administrative fees is principally due to an increase in members and an increase in reimbursement rates effective July 1, 2003. Such fixed administrative fees are attributed to a change in the reimbursement system of TennCare. For all its contracted managed care organizations ("MCOs"), TennCare changed its reimbursement system to an administrative services only ("ASO") program for an initially declared 18-month stabilization period (July 1, 2002 through December 31, 2003), during which the MCOs, including OmniCare-TN, have no medical cost risk (i.e., no risk for medical losses), earn fixed administrative fees, are subject to increased oversight, and may incur financial penalties for not achieving certain performance requirements. Through an amendment completed on December 19, 2003, TennCare has extended through June 30, 2004, the ASO reimbursement system applicable to OmniCare-TN. The State of Tennessee has commissioned and anticipates receiving soon the final part of a two-part independent study of the TennCare system by the consulting firm McKinsey & Company, which is expected to identify potential changes to the present TennCare reimbursement system following the 18-month stabilization period, that report is expected to be the basis for the Tennessee Governor's presentation of proposed TennCare reforms to the Tennessee legislature in February 2004. The above-described December 19, 2003 contractual amendment also extended the term of OmniCare-TN's TennCare contract to December 31, 2004, with provisions for automatic one-year renewals thereafter in certain circumstances. Medical services expenses were $0.08 million in the three months ended December 31, 2003, a decrease of $0.3 million (80%) from $0.4 million in the three months ended December 31, 2002. The $0.08 million of medical services expenses represent fiscal 2002 claims processed and reimbursed by TennCare in the second quarter of fiscal 2004. Marketing, general and administrative expenses decreased approximately $0.2 million (5%), to $3.9 million for the three months ended December 31, 2003 from $4.1 million for the three months ended December 31, 2002. The decrease is principally due to 12 reduced advertising costs and TennCare's payment of premium tax as a result of the ASO arrangement discussed above, offset by the costs of claims processing associated with a membership increase. Depreciation and amortization expense decreased $0.02 million (28%), to $0.06 million for the three months ended December 31, 2003 from $0.08 million for the three months ended December 31, 2002. Interest expense decreased $0.02 million (57%), to $0.02 million for the three months ended December 31, 2003 from $0.04 million for the three months ended December 31, 2002, due to debt reduction and decreases in the prime rate. Income tax expense decreased $0.1 million (59%), to $0.1 million for the three months ended December 31, 2003 from $0.2 million for the three months ended December 31, 2002. The Company's effective tax rate for the three months ended December, 31, 2003 is 6% and differs from the statutory rate of 34%. This difference is the result of the utilization of net operating loss carryforwards. 13 FOR SIX MONTHS ENDED DECEMBER 31, 2003 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2002 Total revenues decreased $4.0 million (26%) to $11.2 million for the six months ended December 31, 2003 from $15.2 million for the six months ended December 31, 2002 principally as the result of a change in the reimbursement system of TennCare, as discussed above. Medical premium revenues were $0.4 million for the six months ended December 31, 2003, a decrease of $6.1 million (93%) from medical premium revenues of $6.6 million for the six months ended December 31, 2002. The decrease came from OmniCare-TN as the result of TennCare's changing its reimbursement system to an ASO program for an initially declared 18-month stabilization period beginning July 1, 2002, subsequently extended six-months through June 30, 2004. Fixed administrative fees related to the ASO program were $10.2 million for the six months ended December 31, 2003, an increase of $2.4 million (31%) from fixed administrative fees of $7.8 million for the six months ended December 31, 2002. The increase in fixed administrative fees is principally due to an increase in members and an increase in reimbursement rates effective July 1, 2003. Total expenses were $8.4 million for the six months ended December 31, 2003, compared to $8.5 million for the six months ended December 31, 2002, a decrease of $0.1 million (1%). The decreases were principally due to the TennCare ASO program for OmniCare-TN discussed above. Because of TennCare's new ASO reimbursement system, medical services expenses were $0.44 million in the six months ended December 31, 2003, an increase of $0.06 million (17%), as compared with medical services expenses of $0.38 million in the six months ended December 31, 2002. The $0.44 million of medical services expenses represent fiscal 2002 claims processed and reimbursed by TennCare in fiscal 2004. Marketing, general and administrative expenses were $7.8 million for the six-month period ended December 31, 2003, as compared with marketing, general and administrative expenses of $7.9 million for the comparable period a year earlier, a decrease of $0.1 million (1%). The decrease is principally due to reduced advertising costs and TennCare's payment of premium tax as a result of the ASO arrangement discussed above, offset by the costs of claims processing associated with a membership increase. 14 Depreciation and amortization expense decreased $0.04 million (25%), to $0.12 million for the six months ended December 31, 2003 from $0.16 million for the six months ended December 31, 2002. Interest expense decreased $0.06 million (60%), to $0.04 million for the six months ended December 31, 2003 from $0.1 million for the six months ended December 31, 2002, principally due to debt reduction. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2003, the Company had (i) cash and cash equivalents and short-term marketable securities of $6.7 million, compared to $3.7 million at June 30, 2003; (ii) working capital of $3.1 million, compared to working capital of $1.7 million at June 30, 2003; and (iii) a current assets-to-current liabilities ratio of 1.45-to-1, compared to 1.26-to-1 at June 30, 2003. The principal source of funds for the Company during the three months ended December 31, 2003 was $3.7 million provided from net operating activities. The principal use of funds for the period was $0.6 million for debt repayment. Positive cash flow was $3.1 million compared to $1.7 million for the comparable period a year earlier. Accounts receivable decreased by $0.5 million at December 31, 2003 compared to June 30, 2003, primarily due to timing of cash receipts from TennCare. Property, plant and equipment decreased by $0.08 million at December 31, 2003 compared to June 30, 2003, due to the recording of depreciation of $0.1 million and fixed asset additions of $0.04 million. Long-term debt decreased $0.6 million at December 31, 2003 compared to June 30, 2003. The Company currently has a $1.2 million term loan with Standard Federal Bank, N.A. repayable in monthly installments of principal and interest of $0.1 million, with an interest rate equal to the bank's prime rate (4.00% at December 31, 2003) plus one percent per annum, and a maturity date of September 30, 2004. The Company's ability to generate adequate amounts of cash to meet its future cash needs depends on a number of factors, particularly including its ability to control administrative costs, related to the ASO arrangement for the TennCare program and controlling corporate overhead costs. On the basis of the matters discussed above, management believes at this time that the Company has the ability to generate sufficient cash to adequately support its financial requirements through the next twelve months, maintain 15 compliance with bank financial covenants, and maintain minimum statutory net worth requirements of OmniCare-TN. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 4. CONTROLS AND PROCEDURES Our management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures as of December 31, 2003, and based on their evaluation, our principal executive and principal financial officers have concluded that these controls and procedures are effective as of December 31, 2003. There was no change in our internal control over financial reporting identified in connection with such evaluation that occurred during our fiscal quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. 16 PART II. ITEM 1. LEGAL PROCEEDINGS The parties have agreed to settle the pending action by Vanderbilt University against OmniCare-TN in the Chancery Court for Davidson County, Tennessee (described in the Company's Form 10-Q quarterly report for the period ended December 31, 2002). The plaintiff's amended complaint alleged that OmniCare-TN paid less than the plaintiff's full charges for health services provided by its hospital and physician group to OmniCare-TN members. The plaintiff was not an OmniCare-TN participating provider, and OmniCare-TN reimbursed the plaintiff at non-participating provider rates. The amended complaint sought additional reimbursement of the difference between the rates paid by OmniCare-TN and the alleged reasonable value of the plaintiff's services to OmniCare-TN members. Both parties have now entered into a written provider payor agreement for medical services provided to OmniCare-TN members since September 1, 2003, and they are working to finalize a written settlement agreement, which will be subject to approval by the State of Tennessee, Bureau of TennCare. The parties expect that upon TennCare's approval, such settlement agreement will be signed and the lawsuit will be permanently dismissed. ITEM 5. OTHER INFORMATION CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage management to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statements. Certain statements contained in this Form 10-Q quarterly report, including, without limitation, statements containing the words "believes," "anticipates," "will," "could," "may," "might" and words of similar import, constitute "forward-looking statements" within the meaning of this "safe harbor." Such forward-looking statements are based on management's current expectations and involve known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors potentially include, among others, the following: 17 1. Inability to increase premium rates commensurate with increases in medical costs due to utilization, government regulation, or other factors. 2. Discontinuation of, limitations upon, or restructuring of government-funded programs, including but not limited to the TennCare program. 3. The potential reenrollment of some of the approximately 7,900 OmniCare TN members disenrolled by TennCare since July 1, 2002 pursuant to its court-challenged eligibility reverification process that disenrolled approximately 166,000 TennCare members statewide. 4. Increases in medical costs, including increases in utilization and costs of medical services and the effects of actions by competitors or groups of providers. 5. Adverse state and federal legislation and initiatives, including: the State of Tennessee's limitations upon or reductions in premium payments; prohibition or limitation of capitated arrangements or financial incentives to providers; federal and state benefit mandates (including mandatory length of stay and emergency room coverage); limitations on the ability to manage care and utilization; and any willing provider or pharmacy laws. 6. Failure to obtain new customer bases or members or retain or regain customer bases or members, or reductions in work force by existing customers. 7. Increased competition between current organizations, the entrance of new competitors and the introduction of new products by new and existing competitors. 8. Adverse publicity and media coverage. 9. Inability to carry out marketing and sales plans. 10. Loss or retirement of key executives. 11. Termination of provider contracts or renegotiations at less cost-effective rates or terms of payment. 12. Adverse regulatory determinations resulting in loss or limitations of licensure, certification or contracts with governmental payers. 13. Higher sales, administrative or general expenses occasioned by the need for additional advertising, marketing, administrative or management information systems expenditures. 14. Increases by regulatory authorities of minimum capital, reserve and other financial solvency requirements. 15. Denial of accreditation by quality accrediting agencies, e.g., the National Committee for Quality Assurance (NCQA). 16. Adverse results from significant litigation matters. 17. Inability to maintain or obtain satisfactory bank loan credit arrangements. 18 18. Increased costs to comply with the Health Insurance Portability and Accountability Act of 1996 (HIPAA). ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certifications of Chief Executive Officer pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certifications of Chief Financial Officer pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED AMERICAN HEALTHCARE CORPORATION Dated: January 29, 2004 By: /s/ William C. Brooks -------------------------------- William C. Brooks Chairman, President & Chief Executive Officer Dated: January 29, 2004 By: /s/ Stephen D. Harris --------------------------- Stephen D. Harris Chief Financial Officer & Treasurer 20 EXHIBIT INDEX 31.1 Certifications of Chief Executive Officer pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certifications of Chief Financial Officer pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 21