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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2007
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X].
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF MAY 1, 2007
IS 8,588,211.
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As filed with the Securities and Exchange Commission on May 3, 2007
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets - March 31, 2007
and June 30, 2006.......................................... 2
Condensed Consolidated Statements of Operations - Three and
Nine months ended March 31, 2007 and 2006.................. 3
Condensed Consolidated Statements of Cash Flows -Nine
months ended March 31, 2007 and 2006....................... 4
Notes to the Unaudited Condensed Consolidated Financial
Statements................................................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 20
Item 4. Controls and Procedures....................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 22
Item 6. Exhibits...................................................... 22
SIGNATURES............................................................... 23
1
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30,
2007 2006
----------- --------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 6,263 $ 4,316
Marketable securities 7,041 2,605
Accounts receivable - State of Tennessee, net 1,463 1,463
Other receivables 884 384
Prepaid expenses and other 313 265
Deferred income taxes 1,914 1,950
------- -------
Total current assets 17,878 10,983
Property and equipment, net 328 142
Goodwill 3,452 3,452
Marketable securities 7,475 7,342
Restricted assets 2,721 2,721
Other assets 586 586
------- -------
Total assets $32,440 $25,226
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Medical claims payable $ 343 $ 156
Accounts payable and accrued expenses 1,116 920
Accrued compensation and related benefits 466 732
Accrued rent 146 244
Other current liabilities 1,285 1,124
------- -------
Total current liabilities 3,356 3,176
------- -------
Total liabilities 3,356 3,176
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par, 15,000,000 shares authorized; 8,588,211 and
7,527,023 issued and outstanding at March 31, 2007 and June 30,
2006, respectively 18,311 12,541
Paid-in-capital - stock options 428 259
Warrants 444 --
Retained earnings 9,941 9,420
Accumulated other comprehensive loss, net of deferred federal income
taxes (40) (170)
------- -------
Total shareholders' equity $29,084 $22,050
======= =======
$32,440 $25,226
======= =======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
2
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------- -----------------
2007 2006 2007 2006
------- ------ ------- -------
REVENUES
Fixed administrative fees $ 3,833 $4,158 $11,795 $12,956
Medical premiums 372 -- 372 --
Interest and other income 345 121 780 322
------- ------ ------- -------
Total revenues 4,550 4,279 12,947 13,278
EXPENSES
Medical expenses 325 -- 325 --
Marketing, general and administrative 4,228 3,759 11,937 11,745
Depreciation and amortization 27 33 86 95
------- ------ ------- -------
Total expenses 4,580 3,792 12,348 11,840
------- ------ ------- -------
Earnings (loss) from operations before income taxes (30) 487 599 1,438
Income tax expense 9 54 78 162
------- ------ ------- -------
NET EARNINGS (LOSS) $ (39) $ 433 $ 521 $ 1,276
======= ====== ======= =======
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC
Net earnings (loss) per common share $ (0.00) $ 0.06 $ 0.07 $ 0.17
======= ====== ======= =======
Weighted average shares outstanding 8,579 7,476 7,941 7,467
======= ====== ======= =======
NET EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Net earnings (loss) per common share $ (0.00) $ 0.06 $ 0.06 $ 0.17
======= ====== ======= =======
Weighted average shares outstanding 8,579 7,607 8,284 7,598
======= ====== ======= =======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
-----------------
2007 2006
------- -------
OPERATING ACTIVITIES
Net earnings $ 521 $ 1,276
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 86 95
Deferred income taxes 36 (471)
Stock awards 108 --
Stock compensation expense 170 233
Net changes in operating assets and liabilities (368) (434)
------- -------
Net cash provided by operating activities 553 699
INVESTING ACTIVITIES
Purchase of marketable securities (4,439) (6,432)
Purchase of property and equipment (278) (84)
Proceeds from the sale of property and equipment 6 --
------- -------
Net cash used in investing activities (4,711) (6,516)
FINANCING ACTIVITIES
Net proceeds from sale of common stock 5,721 --
Proceeds from exercise of stock options 124 65
Proceeds from issuance of warrants 260 --
------- -------
Net cash provided by financing activities 6,105 65
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,947 (5,752)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,316 9,843
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,263 $ 4,091
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ -- $ 63
======= =======
NON-CASH INVESTING ACTIVITY
Unrealized gain (loss) on investment $ 130 $ (107)
======= =======
NON-CASH FINANCING ACTIVITY
Transaction fee paid with warrants $ 184 $ --
======= =======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
NOTE 1 - BASIS OF PREPARATION
General
The accompanying unaudited condensed consolidated financial statements include
the accounts of United American Healthcare Corporation and its wholly-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 nine months ended March 31, 2007 are not necessarily indicative of the
results of operations for the full fiscal year ending June 30, 2007. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the notes to the financial statements contained in the
Company's most recent annual report on Form 10-K.
Reclassifications
Certain amounts from the June 30, 2006 and March 31, 2006 financial statements
have been reclassified to conform to the presentation adopted in the March 31,
2007 financial statements.
NOTE 2 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of related tax, are
summarized as follows (in thousands):
Three
months Nine months
ended ended
March 31, March 31,
----------- -------------
2007 2006 2007 2006
---- ---- ---- ------
Net earnings (loss) $(39) $433 $521 $1,276
Unrealized holding gains (losses), net
of deferred federal income taxes 30 (35) 130 (107)
---- ---- ---- ------
Comprehensive income (loss) $ (9) $398 $651 $1,169
==== ==== ==== ======
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2007 AND 2006
The components of accumulated other comprehensive income (loss), included in
shareholders' equity at March 31, 2007 and June 30, 2006, include net unrealized
holding gains and losses, net of deferred federal income taxes.
NOTE 3 - 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. Options and warrants to purchase common stock
were outstanding as of March 31, 2007 but were not included in the computation
of diluted loss per common share because the shares would be antidilutive.
NOTE 4 - EFFECTIVE TAX RATE
Income tax expense decreased to $0.01 million for the three months ended March
31, 2007 compared to $0.05 million for the three months ended March 31, 2006. As
the Company incurred a loss before income taxes of $0.03 for the quarter ended
March 31, 2007, the Company's effective tax rate differs from the statutory rate
of 34%. This difference is the result of the utilization of net operating loss
carryforwards and state tax expense. The Company's effective tax rate for the
nine months ended March 31, 2007 is 13% and differs from the statutory rate of
34%. This difference is also the result of the utilization of net operating loss
carryforwards and state tax expense.
NOTE 5 - CONTRACTUAL RISK AGREEMENT
Beginning July 1, 2002, TennCare, a State of Tennessee program that provides
medical benefits to Medicaid and working uninsured recipients, implemented an
18-month stabilization program, which entailed changes to TennCare's contracts
with managed care organizations ("MCOs"), including the Company's subsidiary,
UAHC Health Plan of Tennessee, Inc ("UAHC-TN"). During that period, MCOs were
generally compensated for administrative services only (commonly called "ASO"),
earned fixed administrative fees, were not at risk for medical costs in excess
of targets established based on various factors, were subject to increased
oversight, and could incur financial penalties for not achieving certain
performance requirements. Through successive contractual amendments, TennCare
extended the ASO reimbursement system applicable to UAHC-TN through June 30,
2005. Through an amendment with an effective date of July 1, 2005, TennCare
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, which are at risk for losing up to 10% of administrative fee revenue
and may receive up to 15% incentive bonus revenue based on performance relative
to benchmarks. UAHC-TN has received notice from TennCare that it earned
additional revenue of $0.2 million for its performance under the modified risk
arrangement for each of the first and second quarters of fiscal 2006. Such
additional
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2007 AND 2006
revenue was recorded during fiscal 2006. UAHC-TN expects to similarly earn
additional revenue of approximately $0.2 million for each of the third and
fourth quarters of fiscal 2006. The Company has not recorded any such earnings
as of March 31, 2007, and would record such earnings in fiscal 2007 only upon
receipt of final notification thereof from TennCare.
Effective July 1, 2006, TennCare revised certain benchmarks to measure current
performance against performance in fiscal 2002, the last year of TennCare's full
risk arrangement, and revised other benchmarks based on prior year averages. As
a result, while UAHC-TN expects to earn additional revenue for its performance
under the modified risk arrangement for fiscal 2007, UAHC-TN expects it will be
less than in fiscal 2006 and the amount cannot yet be estimated. The Company has
not recorded any such earnings as of March 31, 2007, and would record such
earnings in fiscal 2007 only upon receipt of final notification thereof from
TennCare.
The Company also recorded an allowance of $0.3 million in fiscal 2006 for a
State of Tennessee receivable because management determined the collectibility
is doubtful.
NOTE 6 - 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 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 $3.5 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 or nine months ended March 31, 2007 and 2006.
NOTE 7 - STOCK OPTION PLANS
The Company has adopted SFAS No. 123(R), "Share-Based Payment," which is a
revision of SFAS No. 123, "Accounting for Stock Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," which
was issued in December 2004. The revisions are intended to provide investors and
other users of financial statements with more complete and neutral financial
information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued.
The Company recorded stock option expense of $0.06 and $0.08 million for the
three months ended March 31, 2007 and 2006, respectively, and $0.2 million for
each of the nine months ended March 31, 2007 and 2006.
Effective July 1, 2005, the Compensation Committee and Board of Directors
approved the immediate termination of certain non-vested stock options that had
been granted to
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2007 AND 2006
the Company's directors and officers for 124,167 common shares. The purpose of
the termination was to enable the Company to avoid recognizing compensation
expense associated with these options in future periods in its consolidated
statements of earnings, as a result of SFAS No. 123(R). The pre-tax charge
thereby avoided totaled approximately $650,581 which would have been recognized
over fiscal years 2006 through 2008, and, accordingly, the Compensation
Committee determined that the expense savings from the termination for these
particular option agreements outweighed the objective of incentive compensation
and retention.
NOTE 8 - RESTRICTED ASSETS
The Company and the Department of Finance and Administration of the State of
Tennessee, Bureau of TennCare ("TennCare") are parties to two escrow agreements
under which the Company funded, on August 5, 2005, two escrow accounts held by
TennCare at the State Treasury. One, in the amount of $2,300,000, is security
for repayment to TennCare of any overpayments to UAHC-TN that may be determined
by a pending audit of all UAHC-TN process claims since 2002; and the other, in
the amount of $420,500, is security for any money damages that may be awarded to
TennCare in the event of any future litigation between the parties in connection
with certain pending investigations by state and federal authorities. The escrow
accounts bear interest at a rate no lower than the prevailing commercial
interest rates for savings accounts at financial institutions in Nashville,
Tennessee. The escrow accounts will terminate August 5, 2007 or sooner in
certain events, except if litigation is pursued by either party, in which event
the escrow accounts will continue until the end of such litigation. All amounts
(including interest earnings) credited to the escrow accounts will belong to the
Company, except to the extent, if any, they are paid to TennCare to satisfy
amounts determined to be owed to TennCare as provided in the escrow agreements.
Both escrow agreements recite that TennCare does not at that time assert there
has been any breach of UAHC-TN's TennCare contract and that the Company has
funded the escrow accounts as a show of goodwill and good faith in working with
TennCare.
8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2007 AND 2006
NOTE 9 - PRIVATE PLACEMENT
In a December 13, 2006 private placement transaction, the Company raised gross
proceeds of $6.50 million through the sale of 1,000,000 newly issued shares of
its common stock to certain institutional and other accredited investors at a
price of $6.50 per share. The investors also received warrants to purchase
99,999 shares of the Company's common stock at an exercise price of $8.50 per
share and expiring in December 2011. In addition, the Company agreed to pay the
co-placement agents a transaction fee of $325,000 and warrants to purchase
50,000 shares of the Company's common stock at an exercise price of $9.01 per
share. The uses of the net proceeds from the private placement are principally
for start-up costs associated with the Company's Tennessee subsidiary's new
Medicare Advantage contract with the Centers for Medicare & Medicaid Services,
which became effective January 1, 2007, and also for working capital and general
corporate purposes.
NOTE 10 - MEDICARE CONTRACT
On October 10, 2006, UAHC-TN entered into a contract with the Centers for
Medicare & Medicaid Services (CMS) to act as a Medicare Advantage qualified
organization. The contract authorizes UAHC-TN to serve members enrolled in both
the Tennessee Medicaid and Medicare programs, commonly referred to as
"dual-eligibles," specifically to offer a Special Needs Plan ("SNP") to its
eligible members in Shelby County, Tennessee (including the City of Memphis),
and to operate a Voluntary Medicare Prescription Drug Plan, both beginning
January 1, 2007. The initial contract term is through December 31, 2007, after
which the contract may be renewed for successive one-year periods in accordance
with its terms. As of March 31, 2007 there were approximately 160 SNP enrollees
in UAHC-TN.
9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2007 AND 2006
NOTE 11 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the nine months ended March 31, 2007 and 2006, is as follows (in
thousands):
MANAGEMENT HMO &
COMPANIES MANAGED CORPORATE & CONSOLIDATED
(1) PLAN (2) ELIMINATIONS COMPANY
---------- -------- ------------ ------------
MARCH 31, 2007
Revenues - external customers $ -- $12,167 $ -- $12,167
Revenues - intersegment 10,374 -- (10,374) --
Interest and other income 309 471 -- 780
------- ------- -------- -------
Total revenues $10,683 $12,638 $(10,374) $12,947
======= ======= ======== =======
Earnings (loss) from operations $ (521) $ 1,042 $ -- $ 521
Segment assets 66,205 17,850 (51,615) 32,440
Purchase of equipment 278 -- -- 278
Depreciation and amortization 86 -- -- 86
======= ======= ======== =======
MARCH 31, 2006
Revenues - external customers $ -- $12,956 $ -- $12,956
Revenues - intersegment 11,625 -- (11,625) --
Interest and other income 81 241 -- 322
------- ------- -------- -------
Total revenues $11,706 $13,197 $(11,625) $13,278
======= ======= ======== =======
Earnings from operations $ 603 $ 673 $ -- $ 1,276
Segment assets 60,020 15,426 (50,438) 25,008
Purchase of equipment 84 -- -- 84
Depreciation and amortization 95 -- -- 95
======= ======= ======== =======
(1) Management Companies: United American Healthcare Corporation and United
American of Tennessee, Inc.
(2) HMO and Managed Plan: UAHC Health Plan of Tennessee, Inc.
10
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2007 AND 2006
NOTE 12 - RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board's ("FASB") Final Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"), was issued on July 13,
2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in the financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." This interpretation provides guidance on the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. Further, FIN 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transition. This interpretation is effective for fiscal years beginning after
December 15, 2006. The cumulative effects, if any, of applying FIN 48 will be
recorded as an adjustment to retained earnings as of the beginning of the period
of adoption. The Company is in the process of evaluating the expected effect of
this pronouncement and is currently unable to determine the impact, if any, that
it may have on its results of operations, financial position and cash flows.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108 ("SAB 108"). SAB 108 provides interpretive guidance
on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a potential current year misstatement. Prior
to SAB 108, companies might evaluate the materiality of financial statement
misstatements using either the income statement or balance sheet approach, with
the income statement approach focusing on new misstatements added in the current
year, and the balance sheet approach focusing on the cumulative amount of
misstatement present in a company's balance sheet. Misstatements that would be
material under one approach could be viewed as immaterial under another
approach, and not be corrected. SAB 108 now requires that companies view
financial statement misstatements as material if they are material according to
either the income statement or balance sheet approach. The Company has adopted
SAB 108, with no impact on the Company's financial position or results of
operations.
FASB's Statement No. 156, "Accounting for Servicing of Financial Assets" ("FASB
156"), amends FASB Statement No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
This standard requires all separately recognized servicing assets and
liabilities to be initially measured at fair value and either amortized over the
period of estimated servicing income and assessed for impairment each reporting
period, or measured at fair value each reporting period with changes in fair
value reported in earnings the period in which changes occur. This standard is
effective for fiscal years beginning after September 15, 2006. The Company is in
the process of evaluating the expected effect of this pronouncement and is
currently
11
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2007 AND 2006
unable to determine the impact, if any, that it may have on its results of
operations, financial position and cash flows.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("FASB 157"). FASB 157 enhances
existing guidance for measuring assets and liabilities using fair value. Prior
to the issuance of FASB 157, guidance for applying fair value was incorporated
in several accounting pronouncements. FASB 157 provides a single definition of
fair value, together with a framework for measuring it, and requires additional
disclosure about the use of fair value to measure assets and liabilities. FASB
157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets. Under FASB 157, fair
value measurements are disclosed by level within that hierarchy. While FASB 157
does not add any new fair value measurements, it does change current practice.
Changes to practice include: (1) a requirement for an entity to include its own
credit standing in the measurement of its liabilities; (2) a modification of the
transaction price presumption; (3) a prohibition on the use of block discounts
when valuing large blocks of securities for broker-dealers and investment
companies; and (4) a requirement to adjust the value of restricted stock for the
effect of the restriction even if the restriction lapses within one year. FASB
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Company has not determined the impact of adopting FASB 157 on its financial
statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans," ("FASB 158"), which amends FASB 87 and FASB 106 to
require recognition of the overfunded or underfunded status of pension and other
postretirement benefit plans on the balance sheet. Under FASB 158, gains and
losses, prior service costs and credits, and any remaining transition amounts
under FASB 87 and FASB 106 that have not yet been recognized through net
periodic benefit cost will be recognized in accumulated other comprehensive
income, net of tax effects, until they are amortized as a component of net
periodic cost. The measurement date - the date at which the benefit obligation
and plan assets are measured - is required to be the company's fiscal year end.
FASB 158 is effective for publicly-held companies for fiscal years ending after
December 15, 2006, except for the measurement date provisions, which are
effective for fiscal years ending after December 15, 2008. Adoption of this FASB
is not expected to have a material impact on the Company's financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities," ("FASB 159"). This statement permits entities to choose to measure
many financial instruments and certain other items at fair value. An entity
shall report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent
12
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2007 AND 2006
reporting date. This statement is effective as of the beginning of an entity's
first fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before November
15, 2007, provided the entity also elects to apply the provisions of FASB No.
157. The Company is continuing to evaluate the impact of this statement.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
You should read the following discussion and analysis of our financial condition
and results of operations together with our financial statements and the related
notes and other financial data included elsewhere in this report. Some of the
information contained in this discussion and analysis or set forth elsewhere in
this report, including information with respect to our plans and strategy for
our business, includes forward-looking statements that involve risks and
uncertainties. You should review the "Cautionary Statement Regarding
Forward-Looking Statements" section in Item 1 of our most recent Annual Report
on Form 10-K for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion and analysis.
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 UAHC
Health Plan of Tennessee, Inc. ("UAHC-TN"), a managed care organization ("MCO")
which is a wholly owned second-tier subsidiary of United American Healthcare
Corporation. Since November 1993, UAHC-TN has had a contract with the State of
Tennessee for the State's "TennCare" program, to arrange for the financing and
delivery of health care services on a capitated basis to eligible Medicaid
beneficiaries and non-Medicaid individuals who lack access to private or
employer sponsored health insurance or to another government health plan.
Through successive contractual amendments, UAHC-TN's TennCare contract has been
extended many times, most recently through June 30, 2007. As of March 31, 2007,
there were approximately 109,000 TennCare enrollees in UAHC-TN.
On October 10, 2006, UAHC-TN entered into a contract with the Centers for
Medicare & Medicaid Services (CMS) to act as a Medicare Advantage qualified
organization. The contract authorizes UAHC-TN to serve members enrolled in both
the Tennessee Medicaid and Medicare programs, commonly referred to as
"dual-eligibles," specifically to offer a Special Needs Plan ("SNP") to its
eligible members in Shelby County, Tennessee (including the City of Memphis),
and to operate a Voluntary Medicare Prescription Drug Plan, both beginning
January 1, 2007. The initial contract term is through December 31, 2007, after
which the contract may be renewed for successive one-year periods in accordance
with its terms. As of March 31, 2007 there were approximately 160 SNP enrollees
in UAHC-TN.
14
FOR THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2006
Total revenues increased $0.3 million (6%) to $4.6 million for the quarter ended
March 31, 2007, compared to $4.3 million for the quarter ended March 31, 2006,
principally due to medical premiums revenues associated with UAHC-TN's Medicare
Advantage SNP product ("MA-SNP").
Total expenses increased $0.8 million (21%) to $4.6 million for the quarter
ended March 31, 2007, compared to $3.8 million for the quarter ended March 31,
2006, principally due to marketing costs associated with the launch of MA-SNP.
As a result of increased marketing costs, the Company recognized a loss before
income taxes of $0.03 million for the quarter ended March 31, 2007. Earnings
before income taxes for the quarter ended March 31, 2006 were $0.5 million.
MA-SNP medical premiums revenues were $0.4 million for the three months ended
March 31, 2007. There were no TennCare medical premiums revenues for the three
months ended March 31, 2007 and 2006.
The MA-SNP per member per month ("PMPM") premium rate, based on an average
membership of 135 for the three months ended March 31, 2007, was $1,111 for the
three months ended March 31, 2007.
Fixed administrative fees related to TennCare's below-described ASO program were
$3.8 million for the quarter ended March 31, 2007, a decrease of $0.3 million
(8%) from $4.2 million in the three months ended March 31, 2006. Such decrease
in fixed administrative fees is attributable to a decrease in TennCare
membership.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program,
which entailed changes to TennCare's contracts with MCOs including UAHC-TN.
During that period, MCOs were generally compensated for administrative services
only (commonly called "ASO"), earned fixed administrative fees, were not at risk
for medical costs in excess of targets established based on various factors,
were subject to increased oversight, and could incur financial penalties for not
achieving certain performance requirements. Through subsequent amendments,
TennCare extended the ASO reimbursement system applicable to UAHC-TN through
June 30, 2005. Through an amendment with an effective date of July 1, 2005,
TennCare implemented a reduction in capitated administrative fees and
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, which are at risk for losing up to 10% of administrative fee revenue
and may receive up to 15% incentive bonus revenue based on performance relative
to benchmarks. UAHC-TN has received notice from TennCare that it earned
additional revenue of $0.2 million for its performance under the modified risk
arrangement for each of the first and second quarters of fiscal 2006. Such
additional revenue was recorded in fiscal 2006. UAHC-TN expects to similarly
earn additional revenue of approximately $0.2 million for each of the third and
fourth quarters of fiscal 2006. The Company has not recorded any such earnings
as of March 31, 2007, and would record such earnings in fiscal 2007 only upon
receipt of final notification thereof from TennCare.
15
Effective July 1, 2006, TennCare revised certain benchmarks to measure current
performance against performance in fiscal 2002, the last year of TennCare's full
risk arrangement, and revised other benchmarks based on prior year averages. As
a result, while UAHC-TN expects to earn additional revenue for its performance
under the modified risk arrangement for fiscal 2007, UAHC-TN expects it will be
less than in fiscal 2006 and the amount cannot yet be estimated. The Company has
not recorded any such earnings as of March 31, 2007, and would record such
earnings in fiscal 2007 only upon receipt of final notification thereof from
TennCare.
Medical expenses for MA-SNP were $0.3 million during the three months ended
March 31, 2007. The percentage of such medical expenses to medical premiums
revenues for MA-SNP -- the medical loss ratio ("MLR") -- was 87% for the
three-month period ended March 31, 2007.
Marketing, general and administrative expenses increased $0.4 million (12%) to
$4.2 million for the three months ended March 31, 2007 compared to $3.8 million
for the three months ended March 31, 2006. This increase is primarily
attributable to marketing expenses of $0.2 million for the launch of MA-SNP.
Depreciation and amortization expenses were unchanged at $0.03 million for the
three months ended March 31, 2007 compared to the same period in 2006.
Income tax expense decreased to $0.01 million for the three months ended March
31, 2007 compared to $0.05 million for the three months ended March 31, 2006. As
the Company incurred a loss before income taxes of $0.03 for the quarter ended
March 31, 2007, the Company's effective tax rate differs from the statutory rate
of 34%. This difference is the result of the utilization of net operating loss
carryforwards and state tax expense.
16
FOR NINE MONTHS ENDED MARCH 31, 2007 COMPARED TO
NINE MONTHS ENDED MARCH 31, 2006
MA-SNP medical premiums revenues were $0.4 million for the nine months ended
March 31, 2007. There were no TennCare medical premiums revenues for the nine
months ended March 31, 2007 and 2006.
The MA-SNP per member per month ("PMPM") premium rate, based on an average
membership of 135 for the nine months ended March 31, 2007, was $1,111 for the
nine months ended March 31, 2007.
Fixed administrative fees related to TennCare's below-described ASO program were
$11.8 million for the nine months ended March 31, 2007, a decrease of $1.2
million (9%) from $13.0 million for the nine months ended March 31, 2006. Such
decrease in fixed administrative fees is attributable to a decrease in TennCare
membership.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program,
which entailed changes to TennCare's contracts with MCOs, including UAHC-TN.
During that period, MCOs were generally compensated for administrative services
only (commonly called "ASO"), earned fixed administrative fees, were not at risk
for medical costs in excess of targets established based on various factors,
were subject to increased oversight, and could incur financial penalties for not
achieving certain performance requirements. Through subsequent amendments,
TennCare extended the ASO reimbursement system applicable to UAHC-TN through
June 30, 2005. Through an amendment with an effective date of July 1, 2005,
TennCare implemented a reduction in capitated administrative fees and
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, which are at risk for losing up to 10% of administrative fee revenue
and may receive up to 15% incentive bonus revenue based on performance relative
to benchmarks. UAHC-TN has received notice from TennCare that it earned
additional revenue of $0.2 million for its performance under the modified risk
arrangement for each of the first and second quarters of fiscal 2006. Such
additional revenue was recorded in fiscal 2006. UAHC-TN expects to similarly
earn additional revenue of approximately $0.2 million for each of the third and
fourth quarters of fiscal 2006. The Company has not recorded any such earnings
as of March 31, 2007, and would record such earnings in fiscal 2007 only upon
receipt of final notification thereof from TennCare.
Effective July 1, 2006, TennCare revised certain benchmarks to measure current
performance against performance in fiscal 2002, the last year of TennCare's full
risk arrangement, and revised other benchmarks based on prior year averages. As
a result, while UAHC-TN expects to earn additional revenue for its performance
under the modified risk arrangement for fiscal 2007, UAHC-TN expects it will be
less than in fiscal 2006 and the amount cannot yet be estimated. The Company has
not recorded any such earnings as of March 31, 2007, and would record such
earnings in fiscal 2007 only upon receipt of final notification thereof from
TennCare.
17
Medical expenses for MA-SNP were $0.3 million for the nine months ended
March 31, 2007. The percentage of such medical expenses to medical
premiums revenues for MA-SNP-- the medical loss ratio ("MLR") -- was 87% for the
nine months ended March 31, 2007.
Marketing, general and administrative expenses increased $0.2 million (2%) to
$11.9 million for the nine months ended March 31, 2007 from $11.7 million for
the nine months ended March 31, 2006. This increase is primarily attributable to
marketing expenses of $0.3 million for the launch of MA-SNP.
Depreciation and amortization expenses were $.09 million for the nine months
ended March 31, 2007, a slight decrease from $0.1 million for the nine months
ended March 31, 2006.
Income tax expense was $0.1 million for the nine months ended March 31, 2007,
compared to $0.2 million for the nine months ended March 31, 2006. The Company's
effective tax rate for the nine months ended March 31, 2007 is 13% and differs
from the statutory rate of 34%. This difference is the result of the utilization
of net operating loss carryforwards.
Net earnings were $0.5 million, or $0.07 per basic share, for the nine months
ended March 31, 2007, decreased from net earnings of $1.3 million, or $0.17 per
basic share, for the nine months ended March 31, 2006, principally due to a
decrease in administrative fee revenue.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2007, the Company had (i) cash and cash equivalents and short-term
marketable securities of $13.3 million, compared to $6.9 million at June 30,
2006; (ii) working capital of $14.5 million, compared to working capital of $7.8
million at June 30, 2006; and (iii) a current assets-to-current liabilities
ratio of 5.33-to-1, compared to 3.46-to-1 at June 30, 2006. The principal use of
funds for the most recent nine-month period was $4.4 million for the purchase of
marketable securities. Cash flow was $1.9 million for the nine months ended
March 31, 2007, compared to $(5.8) million for the comparable period a year
earlier. The increase was principally due to the sale of 1,000,000 newly issued
shares of common stock in December 2006.
Accounts receivable increased by $0.5 million at March 31, 2007 compared to June
30, 2006, primarily due to an increase in interest receivable.
Property, plant and equipment increased by $0.2 million at March 31, 2007
compared to June 30, 2006, due to equipment purchases of $0.3 million offset by
depreciation of $0.1 million.
The Company's wholly owned subsidiary, UAHC-TN, had a required minimum net worth
requirement using statutory accounting practices of $7.2 million at March 31,
2007. UAHC-TN had excess statutory net worth of approximately $4.9 million at
March 31, 2007.
18
Through an amendment with an effective date of July 1, 2005, TennCare
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, which are at risk for losing up to 10% of administrative fee revenue
and may receive up to 15% incentive bonus revenue based on performance relative
to benchmarks. TennCare also disenrolled non-medically needy adults who are not
eligible for Medicaid from TennCare coverage statewide, and imposed additional
benefit limits on the 396,000 adults left in the program who are eligible for
Medicaid. As a result, UAHC-TN lost approximately 12,000 members beginning in
the first quarter of fiscal 2006.
The Company and the Department of Finance and Administration of the State of
Tennessee, Bureau of TennCare ("TennCare") are parties to two escrow agreements
under which the Company funded, on August 5, 2005, two escrow accounts held by
TennCare at the State Treasury. One, in the amount of $2,300,000, is security
for repayment to TennCare of any overpayments to UAHC-TN that may be determined
by a pending audit of all UAHC-TN process claims since 2002; and the other, in
the amount of $420,500, is security for any money damages that may be awarded to
TennCare in the event of any future litigation between the parties in connection
with certain pending investigations by state and federal authorities. The escrow
accounts bear interest at a rate no lower than the prevailing commercial
interest rates for savings accounts at financial institutions in Nashville,
Tennessee. The escrow accounts will terminate August 5, 2007 or sooner in
certain events, except if litigation is pursued by either party, in which event
the escrow accounts will continue until the end of such litigation. All amounts
(including interest earnings) credited to the escrow accounts will belong to the
Company, except to the extent, if any, they are paid to TennCare to satisfy
amounts determined to be owed to TennCare as provided in the escrow agreements.
Both escrow agreements recite that TennCare does not at that time assert there
has been any breach of UAHC-TN's TennCare contract and that the Company has
funded the escrow accounts as a show of goodwill and good faith in working with
TennCare.
UAHC-TN is no longer subject to the notice and order of administrative
supervision that the Commissioner of the State of Tennessee's Department of
Commerce and Insurance had issued to it on April 20, 2005. That notice and order
expired in accordance with its terms on December 31, 2005. The State of
Tennessee extended UAHC-TN's TennCare contract through June 30, 2007, by an
amendment to the contract effective as of January 1, 2007.
In a December 13, 2006 private placement transaction, the Company raised gross
proceeds of $6.50 million through the sale of 1,000,000 newly issued shares of
its common stock to certain institutional and other accredited investors at a
price of $6.50 per share. The investors also received warrants to purchase
99,999 shares of the Company's common stock at an exercise price of $8.50 per
share and expiring in December 2011. In addition, the Company agreed to pay the
co-placement agents a transaction fee of $325,000 and warrants to purchase
50,000 shares of the Company's common stock at an exercise price of $9.01 per
share. The uses of the net proceeds from the private placement are principally
for start-up costs associated with the Company's Tennessee subsidiary's new
Medicare Advantage contract with the Centers for Medicare
19
& Medicaid Services, which became effective January 1, 2007, and also for
working capital and general corporate purposes.
The Company's ability to generate adequate amounts of cash to meet its future
cash needs depends on a number of factors, particularly including its ability to
control medical expenses associated with its Medicare Advantage Special Needs
Plan and administrative costs related to the modified risk 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, and maintain minimum statutory net
worth requirements of UAHC-TN.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
20
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 March 31, 2007, and based on their evaluation, our
principal executive and principal financial officers have concluded that these
controls and procedures are effective as of March 31, 2007. There was no change
in our internal controls over financial reporting identified in connection with
such evaluation that occurred during our fiscal quarter ended March 31, 2007
that has materially affected, or is reasonably likely to materially affect, our
internal controls 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.
Internal control over financial reporting is a process designed by, or under the
supervision of, our principal executive and principal financial officers, and
effected by our board of directors, management and other personnel, 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 and includes those policies and
procedures that: (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect our transactions and dispositions of
assets, (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
directors, and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PROVIDER CREDITORS COMMITTEE, ON BEHALF OF MICHIGAN HMO PLANS, INC. V. UNITED
AMERICAN HEALTHCARE CORPORATION AND OTHERS
On March 29, 2007, the Michigan Court of Appeals reversed the trial court's
order that had denied the Company's and its fellow defendants' motion for change
of venue. The Court of Appeals ruled in favor of the defendants, ordering the
case be transferred from the Ingham County Circuit Court to the Wayne County
Circuit Court, in Detroit, Michigan.
IN RE UNITED AMERICAN HEALTHCARE CORPORATION SECURITIES LITIGATION
Pursuant to a motion by the Company and the other defendants, the U.S. District
Court dismissed the consolidated complaint against all defendants with prejudice
on January 30, 2007. On March 1, 2007, the plaintiffs appealed that dismissal
order to the U.S. Court of Appeals for the Sixth Circuit. No appellate briefs
are due yet from any of the parties.
ITEM 6. 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.
22
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: May 3, 2007 By: /s/ William C. Brooks
------------------------------------
William C. Brooks
Chairman, President & Chief
Executive Officer
Dated: May 3, 2007 By: /s/ Stephen D. Harris
------------------------------------
Stephen D. Harris
Executive Vice President, Chief
Financial Officer & Treasurer
23