================================================================================
UNITED STATES
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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 OCTOBER 26,
2007 IS 8,590,666
As filed with the Securities and Exchange Commission on October 30, 2007
================================================================================
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 30, 2007
and June 30, 2007............................................... 2
Condensed Consolidated Statements of Operations - Three months
ended September 30, 2007 and 2006............................... 3
Condensed Consolidated Statements of Cash Flows - Three months
ended September 30, 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................................ 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................. 16
Item 4. Controls and Procedures....................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 18
Item 6. Exhibits...................................................... 18
SIGNATURES............................................................... 18
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
2007 JUNE 30,
(Unaudited) 2007
------------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 9,872 $ 8,932
Marketable securities 5,343 5,296
Accounts receivable - State of Tennessee, net 1,427 1,455
Interest receivable 505 578
Other receivables 222 455
Prepaid expenses and other 480 511
Deferred income taxes 1,950 1,950
------- --------
Total current assets 19,799 19,177
Property and equipment, net 428 357
Goodwill 3,452 3,452
Marketable securities 7,540 7,475
Restricted assets 1,431 2,721
Other assets 586 586
------- --------
Total assets $33,236 $ 33,768
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Medical claims payable $ 1,545 $ 576
Accounts payable and accrued expenses 2,057 3,142
Accrued compensation and related benefits 523 896
Accrued rent 124 135
Unearned revenue -- 279
Other current liabilities 1,072 1,099
------- --------
Total current liabilities 5,321 6,127
Commitments and contingencies
------- --------
Total liabilities 5,321 6,127
Shareholders' equity
Preferred stock, 5,000,000 shares
authorized; none issued -- --
Common stock, no par, 15,000,000 shares
authorized; 8,590,666 and 8,588,211
issued and outstanding at
September 30, 2007 and June 30, 2007,
respectively 18,333 18,327
Paid in capital-stock options 736 607
Warrants 444 444
Retained earnings 8,376 8,303
Accumulated other comprehensive income
(loss), net of deferred federal income taxes 26 (40)
------- --------
Total shareholders' equity $27,915 $ 27,641
======= ========
Total $33,236 $ 33,768
======= ========
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
SEPTEMBER 30,
---------------------------
2007 2006
------------- -----------
REVENUES
Fixed administrative fees $3,706 $4,013
Medical premiums 2,082 --
Interest and other income 400 161
------ ------
Total revenues 6,188 4,174
EXPENSES
Medical services 1,864 --
Marketing, general and administrative 4,191 3,759
Depreciation and amortization 40 32
------ ------
Total expenses 6,095 3,791
------ ------
Earnings from operations before income taxes 93 383
Income tax expense 20 51
------ ------
NET EARNINGS $ 73 $ 332
====== ======
NET EARNINGS PER COMMON SHARE - BASIC
------ ------
Net earnings per common share $ 0.01 $ 0.04
====== ======
Weighted average shares outstanding 8,589 7,531
====== ======
NET EARNINGS PER COMMON SHARE - DILUTED
------ ------
Net earnings per common share $ 0.01 $ 0.04
====== ======
Weighted average shares outstanding 8,800 7,725
====== ======
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)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2007 2006
------------- -----------
OPERATING ACTIVITIES
Net earnings $ 73 $ 332
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 40 32
Stock compensation 129 22
Change in restricted assets 1,290 --
Net changes in other operating assets and
liabilities (441) (499)
------- -------
Net cash provided by (used in) operating
activities 1,091 (113)
INVESTING ACTIVITIES
Proceeds from maturity of marketable securities 1,500 --
Purchase of marketable securities (1,546) (12)
Purchase of property and equipment (111) (99)
Proceeds from sale of property and equipment -- 6
------- -------
Net cash used in investing activities (157) (105)
FINANCING ACTIVITIES
Proceeds from the exercise of stock options 6 8
------- -------
Net cash provided by financing activities 6 8
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 940 (210)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,932 4,316
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,872 $ 4,106
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 20 $ --
Unrealized gain on investment 66 88
======= =======
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
SEPTEMBER 30, 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 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 month period ended September 30, 2007 are not necessarily
indicative of the results of operations for the full fiscal year ending June 30,
2008. 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 September 30, 2006 financial statements have been
reclassified to conform to presentation adopted in the September 30, 2007
financial statements.
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are summarized as
follows (in thousands):
Three months ended
September 30,
---------------------------
2007 2006
------------- -----------
Net earnings $ 73 $332
Net unrealized holding gains, net of
deferred federal income taxes 66 88
---- ----
Comprehensive income $139 $420
---- ----
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2007 AND 2006
The components of accumulated other comprehensive income, included in
shareholders' equity at September 30, 2007 and June 30, 2007, 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.
NOTE 4 - EFFECTIVE TAX RATE
The Company's effective tax rate for the three months ended September 30, 2007
is 22% and differs from the statutory rate of 34%. This difference is primarily
the result of the utilization of net operating loss carryforwards.
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109 which clarifies the accounting for
uncertainty in tax positions. This interpretation requires that the Company
recognize in the financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective as of
the beginning of the Company's 2008 fiscal year, with the cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. The Company adopted FIN 48 effective July 1, 2007. There was no
adjustment required to retained earnings as the Company was not aware of any
material tax position taken or expected to be taken in a tax return in which the
tax law is subject to varied interpretations.
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2007 AND 2006
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 and were not at risk for medical costs. Through
successive contractual amendments, TennCare extended the ASO reimbursement
system applicable to UAHC-TN, through several contractual amendments effective
through June 30, 2005. Through an amendment with an effective date of July 1,
2005, TennCare implemented a modified risk arrangement ("MRA") with all its
contracted MCOs, including UAHC-TN, which are at risk for losing up to 10% of
administrative fee revenue and potentially could receive up to 15% incentive
bonus revenue based on performance relative to benchmarks. UAHC-TN received
notice from TennCare that it earned additional revenue of $0.2 million, $0.2
million, and $0.5 million, respectively, for its performance under the modified
risk arrangement for the first, second and fourth quarters of fiscal 2006. Such
additional revenue has been recorded. UAHC-TN expects to similarly earn
additional revenue for the third quarter of fiscal 2006 and additional revenues
for fiscal 2007. The Company would record such earnings only upon receipt of
final notification thereof from TennCare. Effective July 1, 2007, the evaluation
period for the MRA was changed from quarterly to annually, and the incentive
bonus pool was adjusted to 20% of administrative fee revenue.
NOTE 6 - 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 $0.13 million and $0.02 million for
the three months ended September 30, 2007 and 2006, respectively.
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2007 AND 2006
NOTE 7 - 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 original 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. The
other escrow account, in the original 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. TennCare and the Company reached agreement in
August 2007 to amend both escrow agreements. Under both amendments the escrow
accounts will terminate 30 days after the conclusion of such investigations,
unless the parties earlier agree otherwise. In addition, under one of the
amendments, the Company received $1,289,851 plus accumulated interest earnings
from the larger escrow account, leaving $1,010,149 in that account in
recognition of the potential level of claims' inaccuracy found on preliminary
review by the Tennessee Department of Commerce and Insurance. The escrow
accounts bear interest at a rate no lower than the prevailing commercial
interest rate for savings accounts at financial institutions in Nashville,
Tennessee. 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
SEPTEMBER 30, 2007 AND 2006
NOTE 8 - 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 9 - 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 October 15, 2007 there were approximately 795 enrollees in
UAHC-TN's Medicare Advantage Special Needs Plan ("our MA-SNP").
9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
SEPTEMBER 30, 2007 AND 2006
NOTE 10 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the three month periods ended September 30, 2007 and 2006, is as follows
(in thousands):
MANAGEMENT HMO & CORPORATE & CONSOLIDATED
COMPANIES (1) MANAGED PLAN (2) ELIMINATIONS COMPANY
------------- ---------------- ------------ ------------
SEPTEMBER 30, 2007
Revenues - external customers $ -- $ 5,788 $ -- $ 5,788
Revenues - intersegment 3,447 --- (3,447) --
Interest and other income 129 271 -- 400
-------- -------- -------- -------
Total revenues $ 3,576 $ 6,059 $ (3,447) $ 6,188
======== ======== ======== =======
Interest expense $ -- $ -- $ -- $ --
Earnings (loss) from operations (376) 449 -- 73
Segment assets 64,710 19,332 (50,806) 33,236
Purchase of equipment 111 -- -- 111
Depreciation and amortization 40 -- -- 40
======== ======== ======== =======
SEPTEMBER 30, 2006
Revenues - external customers $ -- $ 4,013 $ -- $ 4,013
Revenues - intersegment 3,518 -- (3,518) --
Interest and other income 61 100 -- 161
-------- -------- -------- -------
Total revenues $ 3,579 $ 4,113 $ (3,518) $ 4,174
======== ======== ======== =======
Interest expense $ -- $ -- $ -- $ --
Earnings from operations 3 329 -- 332
Segment assets 59,863 16,877 (51,290) 25,450
Purchase of equipment 99 -- -- 99
Depreciation and amortization 32 -- -- 32
======== ======== ======== =======
(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
SEPTEMBER 30, 2007 AND 2006
NOTE 11 - RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
The following are new accounting standards and interpretations that may be
applicable in the future to the Company:
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 February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities,"
("FASB 159"). This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. An entity shall
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. 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.
11
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 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 December 31, 2007. As of September
30, 2007, there were approximately 107,104 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 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 October 15, 2007 there were approximately 795 enrollees in
UAHC-TN's Medicare Advantage Special Needs Plan ("our MA-SNP").
12
Earnings before income taxes were $0.1 million and $0.4 million for the first
fiscal quarters ended September 30, 2007 and 2006, respectively. Net earnings
were $0.1 million, or $0.01 per basic share, for the quarter ended September 30,
2007, compared to net earnings of $0.3 million, or $0.04 per basic share, for
the quarter ended September 30, 2006. Such decrease in earnings of $0.2 million,
or $0.03 per basic share, is principally due to a decrease in Tenncare enrollees
and increase in marketing costs relating to our MA-SNP offset by the increase in
our MA-SNP revenues.
FOR THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2006
Total revenues increased $2.0 million (48%) to $6.2 million for the first fiscal
quarter ended September 30, 2007, compared to $4.2 million for the quarter ended
September 30, 2006. The increase was principally due to an increase in our
MA-SNP revenues offset by the decrease in TennCare revenues.
Fixed administrative fees related to TennCare's below-described ASO program were
$3.7 million for the quarter ended September 30, 2007, a decrease of $0.3
million (8%) from $4.0 million in the three months ended September 30, 2006. The
decrease is principally due to a decrease in TennCare enrollees.
Our MA-SNP medical premiums revenues were $2.1 million for the three months
ended September 30, 2007. Because our MA-SNP started effective January 1, 2007,
there were no MA-SNP medical premiums for the three months ended September 30,
2006.
Our MA-SNP per member per month ("PMPM") premium rate for the three months ended
September 30, 2007, was $1,161 for the three months ended September 30, 2007.
Total expenses increased $2.3 million (61%) to $6.1 million for the quarter
ended September 30, 2007, compared to $3.8 million for the quarter ended
September 30, 2006, principally due to medical expenses related to our MA-SNP,
which was launched in January 2007.
Medical expenses for our MA-SNP were $1.9 million for the three months ended
September 30, 2007. There were no medical expenses for our MA-SNP for the
comparable quarter a year earlier, because it had not yet started. The
percentage of such medical expenses to medical premiums revenues for our MA-SNP
-- the medical loss ratio ("MLR") -- was 89% for the three-month period ended
September 30, 2007.
Marketing, general and administrative expenses increased $0.4 million (11%) to
$4.2 million for the three months ended September 30, 2007 from $3.8 million for
the three months ended September 30, 2006. The increase was principally due to
additional marketing costs related to our MA-SNP.
Depreciation and amortization expense was $0.04 million for the three months
ended September 30, 2007, a slight increase from $0.03 million for the three
months ended September 30, 2006.
13
Income tax expense was $0.02 million for the three months ended September 30,
2007, a decrease from $0.05 million for the three months ended September 30,
2006. The Company's effective tax rate for the three months ended September 30,
2007 is 22% and differs from the statutory rate of 34%. This difference is
primarily the result of the utilization of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2007, the Company had (i) cash and cash equivalents and
short-term marketable securities of $15.2 million, compared to $14.2 million at
June 30, 2007; (ii) working capital of $14.5 million, compared to working
capital of $13.1 million at June 30, 2007; and (iii) a current assets-to-current
liabilities ratio of 3.72 to-1, compared to 3.13-to-1 at June 30, 2007. Net cash
provided by operating activities of $1.1 million was principally due to the
receipt of $1.3 million related to restricted assets returned to us from an
escrow account funded in August 2005. See Note 7 to our Unaudited Condensed
Consolidated Financial Statements, in Item 1 above for additional information.
Cash flow was $0.9 million for the three months ended September 30, 2007,
compared to $(0.2) million for the comparable period a year earlier. The
increase was principally due to the receipt of $1.3 million from related to
restricted assets as discussed above.
Accounts receivable from the state of Tennesee decreased by $0.03 million at
September 30, 2007 compared to June 30, 2007, primarily due to timing of cash
receipts from TennCare.
Property, plant and equipment increased by $0.07 million at September 30, 2007
compared to June 30, 2006, due to recording depreciation of $0.03 million offset
by equipment purchases 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 September
30, 2007. UAHC-TN had excess statutory net worth of approximately $6.4 million
at September 30, 2007.
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 and were not at risk for medical costs. Through
successive contractual amendments, TennCare extended the ASO reimbursement
system applicable to UAHC-TN, through several contractual amendments effective
through June 30, 2005. Through an amendment with an effective date of July 1,
2005, TennCare implemented a modified risk arrangement ("MRA") with all its
contracted MCOs, including UAHC-TN, which are at risk for losing up to 10% of
administrative fee revenue and potentially could receive up to 15% incentive
bonus revenue based on performance relative to benchmarks.
14
UAHC-TN received notice from TennCare that it earned additional revenue of $0.2
million, $0.2 million, and $0.5 million, respectively, for its performance under
the modified risk arrangement for the first, second and fourth quarters of
fiscal 2006. Such additional revenue has been recorded UAHC-TN expects to
similarly earn additional MRA revenue for the third quarter of fiscal 2006 and
additional MRA revenues for fiscal 2007. The Company will record such and any
other additional MRA earnings only upon receipt of final notification thereof
from TennCare. Effective July 1, 2007, the evaluation period for the MRA was
changed from quarterly to annually, and the incentive bonus pool was adjusted to
20% of administrative fee revenue.
The Company and 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 original 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. The other escrow
account, in the original 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. TennCare and the Company reached agreement in August 2007
to amend both escrow agreements. Under both amendments the escrow accounts will
terminate 30 days after the conclusion of such investigations, unless the
parties earlier agree otherwise. In addition, under one of the amendments, the
Company received $1,289,851 plus accumulated interest earnings from the larger
escrow account, leaving $1,010,149 in that account in recognition of the
potential level of claims' inaccuracy found on preliminary review by the
Tennessee Department of Commerce and Insurance. The escrow accounts bear
interest at a rate no lower than the prevailing commercial interest rate for
savings accounts at financial institutions in Nashville, Tennessee. 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.
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.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
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 September 30, 2007, and based on their evaluation, our
principal executive and principal financial officers have concluded that these
controls and procedures are effective as of September 30, 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
September 30, 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.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As we previously reported in our most recent Annual Report on Form 10-K, in the
consolidated two cases collectively called "In re United American Healthcare
Corporation Securities Litigation," Master File No. 2:2005cv72112(LPZ/RSW), the
United States District Court for the Eastern District of Michigan dismissed the
consolidated complaint against the Company and all other defendants with
prejudice on January 30, 2007. On March 1, 2007, the plaintiffs appealed the
dismissal order to the U.S. Court of Appeals for the Sixth Circuit, and both
sides have completed the filings of their appellate briefs.
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.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: October 30, 2007 By: /s/ William C. Brooks
------------------------------------
William C. Brooks
Chairman, President & Chief
Executive Officer
Dated: October 30, 2007 By: /s/ Stephen D. Harris
------------------------------------
Stephen D. Harris
Executive Vice President, Chief
Financial Officer & Treasurer
18