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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2007
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
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
incorporation or organization) Identification No.)
300 RIVER PLACE, SUITE 4950
DETROIT, MICHIGAN 48207
(Address of principal executive offices) (Zip Code)
None
(Former name, former address and former fiscal year, if changed
since last report)
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, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
[ ] Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer
[ ] Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X].
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF FEBRUARY 1,
2008 IS 8,690,666
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As filed with the Securities and Exchange Commission on February 7, 2008
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - December 31, 2007
and June 30, 2007.......................................... 2
Condensed Consolidated Statements of Operations - Three months
and six months ended December 31, 2007 and 2006............ 3
Condensed Consolidated Statements of Cash Flows - Six months
ended December 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........................ 12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.......................................... 18
Item 4. Controls and Procedures....................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 19
Item 6. Exhibits...................................................... 19
SIGNATURES............................................................... 20
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
2007 2007
------------ --------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $10,174 $ 8,932
Marketable securities 6,666 5,296
Accounts receivable - State of Tennessee, net 1,705 1,455
Interest receivable 532 578
Other receivables 235 455
Prepaid expenses and other 323 511
Deferred income taxes 1,878 1,950
------- -------
Total current assets 21,513 19,177
Property and equipment, net 451 357
Goodwill 3,452 3,452
Marketable securities 7,573 7,475
Restricted assets 421 2,721
Other assets 586 586
------- -------
Total assets $33,996 $33,768
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Medical claims payable $ 2,769 $ 576
Accounts payable and accrued expenses 885 3,142
Accrued compensation and related benefits 626 896
Accrued rent 112 135
Unearned revenue -- 279
Other current liabilities 1,015 1,099
------- -------
Total current liabilities 5,407 6,127
Commitments and contingencies
------- -------
Total liabilities 5,407 6,127
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par, 15,000,000 shares authorized; 8,690,666 and
8,588,211 issued and outstanding at December 31, 2007 and June
30, 2007, respectively 18,450 18,327
Paid in capital - stock options 1,010 607
Warrants 444 444
Retained earnings 8,632 8,303
Accumulated other comprehensive income (loss), net of deferred federal
income taxes 53 (40)
------- -------
Total shareholders' equity 28,589 27,641
======= =======
Total liabilities and shareholders' equity $33,996 $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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ----------------
2007 2006 2007 2006
------ ------ ------- ------
REVENUES
Fixed administrative fees $3,677 $3,949 $ 7,383 $7,962
Variable administrative fees 280 -- 280 --
Medical premiums 2,707 -- 4,789 --
Interest and other income 384 274 784 435
------ ------ ------- ------
Total revenues 7,048 4,223 13,236 8,397
EXPENSES
Medical expenses 2,551 -- 4,415 --
Marketing, general and administrative 4,089 3,950 8,280 7,709
Depreciation and amortization 51 27 91 59
------ ------ ------- ------
Total expenses 6,691 3,977 12,786 7,768
------ ------ ------- ------
Earnings from operations before income taxes 357 246 450 629
Income tax expense 101 18 121 69
------ ------ ------- ------
NET EARNINGS $ 256 $ 228 $ 329 $ 560
====== ====== ======= ======
NET EARNINGS PER COMMON SHARE - BASIC
Net earnings per common share $ 0.03 $ 0.03 $ 0.04 $ 0.07
====== ====== ======= ======
Weighted average shares outstanding 8,612 7,728 8,636 7,629
====== ====== ======= ======
NET EARNINGS PER COMMON SHARE - DILUTED
Net earnings per common share $ 0.03 $ 0.03 $ 0.04 $ 0.07
====== ====== ======= ======
Weighted average shares outstanding 8,778 8,172 8,797 7,970
====== ====== ======= ======
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)
SIX MONTHS ENDED
DECEMBER 31,
----------------
2007 2006
------- ------
OPERATING ACTIVITIES
Net earnings $ 329 $ 560
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 91 59
Stock compensation 403 113
Deferred income taxes 72 36
Change in restricted assets 2,300 --
Net changes in other operating assets and liabilities (516) (680)
------- ------
Net cash provided by operating activities 2,679 88
INVESTING ACTIVITIES
Proceeds from maturity of marketable securities 3,482 --
Purchase of marketable securities (4,857) (423)
Purchase of property and equipment (185) (135)
Proceeds from sale of property and equipment -- 6
------- ------
Net cash used in investing activities (1,560) (552)
FINANCING ACTIVITIES
Net proceeds from sale of common stock -- 5,816
Proceeds from exercise of stock options 123 21
Proceeds from the issuance of warrants -- 262
------- ------
Net cash provided by financing activities 123 6,099
------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,242 5,635
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,932 4,316
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,174 $9,951
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 20 $ --
Transaction fee paid with warrants -- 184
Unrealized gain on investments 93 100
======= ======
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
DECEMBER 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 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 six-month period ended December 31, 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 December 31, 2006 financial statements have been
reclassified to conform to presentation adopted in the December 31, 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 Six months ended
December 31, December 31,
------------------ ----------------
2007 2006 2007 2006
-------- ------- ------- ------
Net earnings $256 $228 $329 $560
Unrealized holding gains (loss), net
of deferred federal income taxes 27 12 93 100
---- ---- ---- ----
Comprehensive income $283 $240 $422 $660
---- ---- ---- ----
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2007 AND 2006
The components of accumulated other comprehensive income, included in
shareholders' equity at December 31, 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 and warrants.
NOTE 4 - EFFECTIVE TAX RATE
The Company's effective tax rate for the six months ended December 31, 2007 is
27% and differs from the statutory rate of 34%. This difference is primarily the
result of a change in the valuation allowance.
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
DECEMBER 31, 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
(through June 30, 2007). UAHC-TN received notice from TennCare that it earned
additional revenue of $1.1 million for its performance under the modified risk
arrangement for fiscal 2006, representing a 7% bonus revenue payout. Such
additional revenue has been recorded, of which $0.3 million was recorded in the
second fiscal quarter of 2008. UAHC-TN expects to similarly earn 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.
The amended contractual risk agreement expires March 31, 2008. Revenue under
this agreement represented 56% and 52% of total revenue for the six and three
months ended December 31, 2007, respectively. TennCare has issued a Request For
Proposals ("RFP") as described in Note 10. In the event that UAHC-TN is not
successful in the RFP process, management believes that the Company's liquidity
and operations would be materially adversely affected.
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 $0.4 million and $0.1 million for
the six months ended December 31, 2007 and 2006, respectively.
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 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") have been parties to two escrow
agreements under which the Company funded, on August 5, 2005, two escrow
accounts held by TennCare at the State Treasury. 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.
The larger escrow account, in the original amount of $2,300,000 has expired, and
was security for repayment to TennCare of any overpayments to UAHC-TN that might
be determined by an audit of all UAHC-TN process claims since 2002. In August
2007, the Company received $1,289,851 plus accumulated interest earnings back
from that account. In November 2007, the remaining $1,010,149 account balance
was paid to TennCare for claims discrepancies found in the review by the
Tennessee Department of Commerce and Insurance.
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. The escrow account will terminate 30 days
after the conclusion of such investigations, unless the parties earlier agree
otherwise. The escrow account bears 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 account 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.
8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 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 have been and are
principally for start-up costs associated with the Company's Tennessee
subsidiary's Medicare Advantage contract with the Centers for Medicare &
Medicaid Services 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 current contract term is through December 31, 2008, after
which the contract may be renewed for successive one-year periods in accordance
with its terms. As of January 20, 2008 there were approximately 815 enrollees in
UAHC-TN's Medicare Advantage Special Needs Plan.
NOTE 10- SUBSEQUENT EVENTS
On January 7, 2008, TennCare issued a Request for Proposal ("RFP") for managed
care services to be provided in the West Grand Region of Tennessee. The RFP
indicates TennCare's intent to secure two contracts for the provision of managed
care services in that region beginning November 1, 2008. The Company's
subsidiary, UAHC-TN, has notified TennCare that UAHC-TN intends to submit a
joint proposal in response to this RFP to serve the West Grand Region. As the
Company derives the majority of its revenues from UAHC-TN's present TennCare
contract in that region, if UAHC-TN would not receive one of the two new
contracts, that would materially adversely affect the Company's liquidity and
operations.
9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2007 AND 2006
NOTE 11 - UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the six-month periods ended December 31, 2007 and 2006, is as follows
(in thousands):
MANAGEMENT HMO & CORPORATE & CONSOLIDATED
COMPANIES (1) MANAGED PLAN (2) ELIMINATIONS COMPANY
------------- ---------------- ------------ ------------
SIX MONTHS ENDED
DECEMBER 31, 2007
Revenues - external customers $ -- $12,452 $ -- $12,452
Revenues - intersegment 7,012 -- (7,012) --
Interest and other income 261 523 -- 784
------- ------- -------- -------
Total revenues $ 7,273 $12,975 $ (7,012) $13,236
======= ======= ========= =======
Interest expense $ -- $ -- $ -- $ --
Earnings (loss) from operations (524) 853 -- 329
Segment assets 65,449 20,840 (52,293) 33,996
Purchase of equipment 185 -- -- 185
Depreciation and amortization 91 -- -- 91
------- ------- -------- -------
SIX MONTHS ENDED
DECEMBER 31, 2006
Revenues - external customers $ -- $ 7,962 $ -- $ 7,962
Revenues - intersegment 6,979 -- (6,979) --
Interest and other income 158 277 -- 435
------- ------- -------- -------
Total revenues $ 7,137 $ 8,239 $ (6,979) $ 8,397
======= ======= ========= =======
Interest expense $ -- $ -- $ -- $ --
Earnings (loss) from operations (94) 654 -- 560
Segment assets 66,039 16,869 (51,012) 31,896
Purchase of equipment 135 -- -- 135
Depreciation and amortization 59 -- -- 59
------- ------- -------- -------
(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
DECEMBER 31, 2007 AND 2006
NOTE 12 - 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 what had been
current practice. Such changes 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. FASB 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided that the entity also
elects to apply the provisions of FASB 157. The Company is continuing to
evaluate the impact of this statement.
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" in the first paragraph of Item 1A 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, Bureau of TennCare ("TennCare"), 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 March 31, 2008. As of December 31,
2007, there were approximately 105,189 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 contract term is through December 31, 2008, after which the contract
may be renewed for successive one-year periods in accordance with its terms. As
of January 20, 2008 there were approximately 815 enrollees in UAHC-TN's Medicare
Advantage Special Needs Plan ("our MA-SNP").
12
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 2006
Total revenues increased $2.8 million (67%) to $7.0 million for the three months
ended December 31, 2007, compared to $4.2 million for the three months ended
December 31, 2006. The increase was principally due to an increase in our MA-SNP
revenues and variable administrative fees offset by a decrease in TennCare
revenues primarily due to a decrease in TennCare enrollees.
Fixed administrative fees related to TennCare's below-described ASO program were
$3.7 million for the three months ended December 31, 2007, a decrease of $0.3
million (7%) from $4.0 million in the three months ended December 31, 2006. The
decrease is principally due to a decrease in TennCare enrollees.
Variable administrative fees resulting from Modified Risk Arrangement ("MRA")
were $0.3 million for the three months ended December 31, 2007. There were no
variable administrative fees for the three months ended December 31, 2006. Under
the MRA, UAHC-TN is 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 (through June 30, 2007). The $0.3 million
Modified Risk Arrangement revenue recorded in fiscal 2008 relates to the third
quarter of fiscal 2006. 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.
Our MA-SNP medical premiums revenues were $2.7 million for the three months
ended December 31, 2007. Because our MA-SNP started effective January 1, 2007,
there were no MA-SNP medical premiums for the three months ended December 31,
2006.
Our MA-SNP per member per month ("PMPM") premium rate for the three months ended
December 31, 2007, was $1,142.
Total expenses increased $2.7 million (68%) to $6.7 million for the three months
ended December 31, 2007, compared to $4.0 million for the three months ended
December 31, 2006, principally due to medical expenses related to our MA-SNP,
which was launched in January 2007.
Medical expenses for our MA-SNP were $2.6 million for the three months ended
December 31, 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 84.6% at December 31, 2007.
Marketing, general and administrative expenses increased $0.1 million (4%) to
$4.1 million for the three months ended December 31, 2007 from $4.0 million for
the three months ended December 31, 2006. The increase was principally due to
additional marketing costs related to our MA-SNP offset by $0.4 million received
from TennCare
13
during the second fiscal quarter ended December 31, 2007 as reimbursement for
certain services performed under our contract.
Depreciation and amortization expense was $0.05 million for the three months
ended December 31, 2007, a $0.02 increase from $0.03 million for the three
months ended December 31, 2006.
Income tax expense was $0.1 million for the three months ended December 31,
2007, an increase of $0.08 million from $0.02 million for the three months ended
December 31, 2006. The Company's effective tax rate for the three months ended
December 31, 2007 is 28%. The increase in tax expense was primarily related to
the change in the valuation allowance.
Earnings before income taxes were $0.4 million and $0.2 million for the second
fiscal quarters ended December 31, 2007 and 2006, respectively. Net earnings
were $0.3 million, or $0.03 per basic share, for the quarter ended December 31,
2007, compared to net earnings of $0.2 million, or $0.03 per basic share, for
the quarter ended December 31, 2006.
FOR THE SIX MONTHS ENDED DECEMBER 31, 2007 COMPARED TO
SIX MONTHS ENDED DECEMBER 31, 2006
Total revenues increased $4.8 million (58%) to $13.2 million for the six months
ended December 31, 2007, compared to $8.4 million for the six months ended
December 31, 2006. The increase was principally due to an increase in our MA-SNP
revenues and variable administrative fees offset by the decrease in TennCare
revenues.
Fixed administrative fees related to TennCare's below-described ASO program were
$7.4 million for the six months ended December 31, 2007, a decrease of $0.6
million (7%) from $8.0 million in the six months ended December 31, 2006. The
decrease is principally due to a decrease in TennCare enrollees.
Variable administrative fees resulting from MRA revenue were $0.3 million for
the six months ended December 31, 2007. There were no variable administrative
fees for the six months ended December 31, 2006. The $0.3 million MRA revenue
received in fiscal 2008 relates to the third quarter of fiscal 2006.
Our MA-SNP medical premiums revenues were $4.8 million for the six months ended
December 31, 2007. Because our MA-SNP started effective January 1, 2007, there
were no MA-SNP medical premium revenues for the six months ended December 31,
2006.
Our MA-SNP per member per month ("PMPM") premium rate for the six months ended
December 31, 2007 was $1,175.
Total expenses increased $5.0 million (65%) to $12.8 million for the six months
ended December 31, 2007, compared to $7.8 million for the six months ended
December 31, 2006, principally due to medical expenses related to our MA-SNP,
which was launched January 1, 2007, offset by $0.4 million received from
TennCare during the second fiscal
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quarter ended December 31, 2007 as reimbursement for certain services performed
under our contract.
Medical expenses for our MA-SNP were $4.4 million for the six months ended
December 31, 2007. There were no medical expenses for our MA-SNP for the
comparable period 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 84.6% at December 31, 2007.
Marketing, general and administrative expenses increased $0.6 million (7%) to
$8.3 million for the six months ended December 31, 2007 from $7.7 million for
the six months ended December 31, 2006. The increase was principally due to
additional marketing costs related to our MA-SNP.
Depreciation and amortization expense was $0.09 million for the six months ended
December 31, 2007, a slight increase from $0.06 million for the six months ended
December 31, 2006.
Income tax expense was $0.1 million for the six months ended December 31, 2007,
a increase from $0.07 million for the six months ended December 31, 2006. The
Company's effective tax rate for the six months ended December 31, 2007 is 27%
and differs from the statutory rate of 34%. This difference is primarily the
result of the change in the valuation allowance.
Earnings before income taxes were $0.5 million and $0.6 million for the six
months ended December 31, 2007 and 2006, respectively. Net earnings were $0.3
million, or $0.04 per basic share, for the six months ended December 31, 2007,
compared to net earnings of $0.6 million, or $0.07 per basic share, for the six
months ended December 31, 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 increased marketing costs relating to our MA-SNP offset by the increase in
our MA-SNP revenues.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2007, the Company had (i) cash and cash equivalents and
short-term marketable securities of $16.8 million, compared to $14.2 million at
June 30, 2007; (ii) working capital of $16.1 million, compared to working
capital of $13.1 million at June 30, 2007; and (iii) a current assets-to-current
liabilities ratio of 3.98-to-1, compared to 3.13-to-1 at June 30, 2007.
Net cash provided by operating activities of $2.7 million in the six months
ended December 31, 2007 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 as well as receipt of $0.4 million from TennCare during the second
fiscal quarter ended December 31, 2007 as reimbursement for certain services
performed under our contract. See Note 7 to our
15
Unaudited Condensed Consolidated Financial Statements in Item 1 above for
additional information regarding the restricted assets.
Cash flow was $1.2 million for the six months ended December 31, 2007, compared
to $5.6 million for the comparable period a year earlier. The decrease was
principally due to the net proceeds received from the private placement of
common stock during fiscal year 2007. There were no private placement
transactions during fiscal year 2008.
Accounts receivable from the State of Tennessee increased by $0.3 million at
December 31, 2007 compared to June 30, 2007, primarily due to timing of cash
receipts from TennCare.
Property, plant and equipment increased by $0.1 million at December 31, 2007
compared to June 30, 2007, due to recording depreciation of $0.1 million offset
by equipment purchases of $0.2 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 December 31,
2007. UAHC-TN had excess statutory net worth of approximately $7.4 million at
December 31, 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 -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 (through June 30, 2007). UAHC-TN received
notice from TennCare that it earned additional revenue of $1.1 million for its
performance under the modified risk arrangement for fiscal 2006, representing a
7% bonus revenue payout. Such additional revenue has been recorded, of which
$0.3 million was recorded in the second fiscal quarter of 2008. UAHC-TN expects
to similarly earn additional MRA revenue 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 the Department of Finance and Administration of the State of
Tennessee, Bureau of TennCare have been parties to two escrow agreements under
which the Company funded, on August 5, 2005, two escrow accounts held by
TennCare at the State Treasury. 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
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funded the escrow accounts as a show of goodwill and good faith in working with
TennCare.
The larger escrow account, in the original amount of $2,300,000 has expired and,
was security for repayment to TennCare of any overpayments to UAHC-TN that might
be determined by an audit of all UAHC-TN process claims since 2002. In August
2007,the Company received $1,289,851 plus accumulated interest earnings back
from that account. In November 2007, the remaining $1,010,149 account balance
was paid to TennCare for claims discrepancies found in the audit by the
Tennessee Department of Commerce and Insurance.
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. The escrow account will terminate 30 days
after the conclusion of such investigations, unless the parties earlier agree
otherwise. The escrow account 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 account 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.
In a December 13, 2006 private placement transaction, the Company raised gross
proceeds of $6.50 million through the sale of 1,000,000 newly issued shares of
its common stock to certain institutional and other accredited investors at a
price of $6.50 per share. The investors also received warrants to purchase
99,999 shares of the Company's common stock at an exercise price of $8.50 per
share and expiring in December 2011. In addition, the Company agreed to pay the
co-placement agents a transaction fee of $325,000 and warrants to purchase
50,000 shares of the Company's common stock at an exercise price of $9.01 per
share. The uses of the net proceeds from the private placement have been and are
principally for start-up costs associated with the Company's Tennessee
subsidiary's 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.
On January 7, 2008, TennCare issued a Request for Proposal ("RFP") for managed
care services to be provided in the West Grand Region of Tennessee. The RFP
indicates TennCare's intent to secure two contracts for the provision of managed
care services in that region beginning November 1, 2008. The Company's
subsidiary, UAHC-TN, has notified TennCare that UAHC-TN intends to submit a
joint proposal with Molina Healthcare, Inc. in response to this RFP to serve the
West Grand Region. As the Company derives the majority of its revenues from
UAHC-TN's present TennCare contract in that region, if UAHC-TN would not receive
one of the two new contracts, that would materially adversely affect the
Company's liquidity and operations.
17
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, 2007, 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, 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
December 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As we previously reported in our most recent Annual Report on Form 10-K and our
most recent Quarterly Report on Form 10-Q, in the consolidated cases 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.
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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: February 7, 2008 By: /s/ William C. Brooks
------------------------------------
William C. Brooks
Chairman, President & Chief
Executive Officer
Dated: February 7, 2008 By: /s/ Stephen D. Harris
------------------------------------
Stephen D. Harris
Executive Vice President, Chief
Financial Officer & Treasurer
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