<PAGE> 1
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, 1997
Commission File Number: 000-18839
_______________
UNITED AMERICAN HEALTHCARE CORPORATION
(Exact Name of Registrant as Specified in Charter)
_______________
Michigan 38-2526913
(I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
United American Healthcare Corporation
1155 Brewery Park Boulevard, Suite 200
Detroit, Michigan 48207
(313) 393-0200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
_______________
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 the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
6,578,356 Common Shares as of
November 14, 1997
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UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I
Item 1. Financial statements
Consolidated Balance Sheets--September 30, 1997
and June 30, 1997 2
Consolidated Statements of Operations--Three Months
Ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows--Three Months
Ended September 30, 1997 and 1996 4
Notes to Consolidated Financial statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBITS 19
1
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PART 1. - ITEM 1. FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ------------
<S> <C> <C>
ASSETS
- ------------------------------------------
Current assets
Cash and cash equivalents $ 8,138 $ 9,582
Marketable securities 7,104 7,860
Premiums, commission and service fees receivable 2,606 5,275
Other receivables 2,026 2,441
Refundable federal income taxes 199 115
Prepaid expenses and other 527 587
Deferred income taxes 726 746
------- -------
Total current assets 21,326 26,606
Property and equipment, net 10,214 10,100
Intangible assets, net 10,377 10,557
Investments in and advances to affiliates 4,400 4,400
Statutory reserves 3,941 3,937
Deferred income taxes 2,669 2,376
Other assets 1,920 1,940
Net assets of discontinued operations 20,120 19,746
------- -------
$74,967 $79,662
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------
Current liabilities
Current portion of long-term debt:
Line of credit $19,499 $19,356
Term loans 2,495 2,495
Medical claims payable 7,205 8,735
Accounts payable and accrued expenses 5,443 6,539
Accrued compensation and related benefits 1,580 2,098
Other current liabilities 546 380
------- -------
Total current liabilities 36,768 39,603
Long-term debt, less current portion 1,289 2,017
Accrued rent 1,575 1,599
Deferred income taxes 2,085 2,037
Shareholders' equity
Preferred, 5,000,000 shares authorized; none issued - -
Common, 15,000,000 shares authorized;
6,578,356 and 6,535,941 issued and
outstanding at September 30, 1997
and June 30, 1997 10,715 10,498
Retained earnings 22,663 23,996
Unrealized net holding losses on marketable securities (128) (88)
------- -------
33,250 34,406
------- -------
$74,967 $79,662
======= =======
</TABLE>
See accompanying notes to the financial statement
2
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
REVENUES
Medical premiums $ 20,284 $ 18,102
Management fees from related parties 6,246 9,823
Interest and other income 502 556
---------- ----------
Total revenues 27,032 28,481
EXPENSES
Medical services 17,179 14,605
Marketing, general and administrative 10,442 13,203
Depreciation and amortization 1,062 1,008
Interest expense 330 399
---------- ----------
Total expenses 29,013 29,215
Loss from continuing operations before income tax credit (1,981) (734)
Income tax credit (439) (175)
---------- ----------
Loss from continuing operations (1,542) (559)
Discontinued operations, net of income taxes 209 567
---------- ----------
NET (LOSS) EARNINGS $ (1,333) $ 8
========== ==========
NET (LOSS) EARNINGS PER COMMON SHARE:
LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS $ (0.23) $ (0.09)
========== ==========
NET (LOSS) EARNINGS PER COMMON SHARE $ (0.20) $ 0.00
========== ==========
</TABLE>
See accompanying notes to the financial statements.
3
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) earnings $(1,333) $ 8
Adjustments to reconcile net (loss) earnings to net cash
used in operating activities:
Discontinued operations (209) (567)
Depreciation and amortization 1,062 1,008
Accrued rent (24) 29
Deferred income taxes credit (205) (300)
Changes in assets and liabilities
Decrease in premiums, commissions and service fees receivable 2,669 2,789
Decrease in other receivables 415 354
Increase in refundable income taxes (84) (125)
Decrease in prepaid expenses and other 60 44
Increase in statutory reserves (4) -
Decrease in other assets 6 5
Decrease in medical claims payable (1,530) (13,334)
(Decrease) increase in accounts payable and accrued expenses (1,096) 1,397
Decrease in accrued compensation and related benefits (518) (229)
Increase in other current liabilities 166 614
---------- ----------
Total adjustments 708 (8,315)
---------- ----------
Net cash used in operating activities (625) (8,307)
INVESTING ACTIVITIES
Net decrease (increase) in marketable securities 696 (26)
Purchase of furniture and equipment (890) (680)
(Increase) decrease in intangible assets (91) 129
Cash used in discontinued operations (166) (30)
---------- ----------
Net cash used in investing activities (451) (607)
FINANCING ACTIVITIES
Borrowings under line of credit agreement 143 1,815
Payments made on long-term debt (728) (728)
Proceeds from issuance of common stock 217 -
---------- ----------
Net cash (used in) provided by financing activities (368) 1,087
---------- ----------
Net decrease in cash and cash equivalents (1,444) (7,827)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,582 23,679
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,138 $15,852
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 439 $ 396
========== ==========
Income taxes paid $ - $ 90
========== ==========
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE> 6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(Unaudited)
NOTE 1 - BASIS OF PREPARATION
The financial statements as of and for the three months ended September
30, 1997 and 1996 are unaudited, and in the opinion of management include all
adjustments necessary for a fair presentation thereof. The results of
operations for the period ended September 30, 1997 are not necessarily
indicative of the results of operations for the full fiscal year ending June
30, 1998. Audited June 30, 1997 financial statements can be found in the
Company's most recent Form 10-K with accompanying footnotes.
The accompanying consolidated financial statements include the accounts of
United American Healthcare Corporation, and all of its majority-owned
subsidiaries, together referred to as (the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
Interest of other investors in the Company's majority-owned subsidiaries are
accounted for as minority interests. Non-majority investments in affiliates
in which management has the ability to exercise significant influence are
recorded on the equity method. As discussed in Note 2, Corporate Healthcare
Financing, Inc. and its wholly-owned Subsidiaries is presented as discontinued
operations.
NOTE 2 -- ACQUISITIONS AND DISPOSITION
ACQUISITIONS
CORPORATE HEALTHCARE FINANCING, INC. ("CHF")
On May 7, 1993, CHF acquired substantially all of the assets and assumed
certain liabilities of a Maryland limited partnership, in a business
combination accounted for as a purchase. The cost at the time of the
acquisition was approximately $9.6 million and is included with net assets of
discontinued operations in the accompanying balance sheet.
Through September 30, 1997 and June 30,1997, the purchase price was
cumulatively increased by $6.6 million, pursuant to a contingent promissory
note that, depending upon CHF's earnings (as defined in the agreement) over
seven years from the acquisition date, could increase the purchase price by a
maximum amount of $6.6 million. At September 30, 1997, approximately $.1
million remained payable under the terms of this note.
5
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
(Unaudited)
OMNICARE HEALTH PLAN, INC. OF TENNESSEE ("OMNICARE-TN")
In February 1994, the Company entered into a long-term agreement to manage
OmniCare-TN and effective July 1994 acquired a 50% equity interest in
OmniCare-TN for approximately $1.3 million in cash. The excess of the purchase
price over the Company's equity interest in the net assets of OmniCare-TN at
the effective date of acquisition of approximately $4.1 million has been
recorded as goodwill, and is being amortized over ten years on a straight-line
basis.
Effective January 31, 1996, the Company purchased an additional 25% of the
voting common stock, and 100% of the preferred stock, of OmniCare-TN. This
increased the Company's ownership in the voting common stock of OmniCare-TN to
75%. The purchase price for the additional common stock and preferred stock of
OmniCare-TN was $.1 million and $10.9 million, respectively, of which $8.7
million represented the conversion of OmniCare-TN debt to the Company to equity
and $2.3 million in cash. The acquisition was accounted for under the purchase
method of accounting. Results of operations are included in the accompanying
financial statements effective with the date of purchase of the majority common
stock ownership interest. The excess of the purchase price over the fair value
of the net assets acquired of approximately $3.3 million has been recorded as
goodwill, and is being amortized over ten years on a straight-line basis.
Goodwill is reduced by the subsequent utilization of OmniCare-TN's net
operating losses.
ULTRAMEDIX HEALTH CARE SYSTEMS, INC. ("ULTRAMEDIX")
In February 1994, the Company entered into a long-term agreement to manage
UltraMedix and acquired a 30.4% equity interest for approximately $1.4 million
in cash. The excess of the purchase price over the Company's equity interest in
the net assets of UltraMedix at the effective date of acquisition of
approximately $1.7 million has been recorded as goodwill, and is being
amortized over ten years on a straight-line basis.
Effective January 29, 1996, the Company purchased an additional 20.6% of
the voting common stock, and 100% of the preferred stock, of UltraMedix. This
increased the Company's ownership in the voting common stock of UltraMedix to
51%. The purchase price for the additional common stock and preferred stock of
UltraMedix was approximately $1.9 million in cash. The acquisition was
accounted for under the purchase method of accounting. Results of operations
are included in the accompanying financial statements effective with the date
of purchase of the majority common stock ownership interest. The excess of the
purchase price over the fair value of the net assets acquired of approximately
$2.9 million has been recorded as goodwill, and is being amortized over ten
years on a straight-line basis.
6
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
(Unaudited)
SPECTERA, INC.
Effective December 31, 1996, CHF acquired certain contract rights, assets
and assumed certain liabilities of Spectera, Inc. for approximately $1.8
million in cash and debt. The excess purchase price over the fair market value
of the net assets acquired of approximately $1.0 million has been recorded as
goodwill, and is included with net assets of discontinued operations in the
accompanying balance sheet.
DISPOSITION
On September 12, 1997, the Company's Board of Directors approved the
proposed stock sale of CHF and subsidiaries for $30 million in cash to an
entity related to the Company via common shareholders. CHF provides
administrative services to self-funded employers and employee welfare plans,
including health benefit plan design and development of workers' compensation
and unemployment benefit programs.
The sale, which is contingent upon the buyer securing financing, is
expected to close in the Company's third quarter of fiscal 1998. In
anticipation of this sale, the results of CHF and its subsidiaries are reported
as discontinued operations in the consolidated financial statements for all
periods presented.
The assets and liabilities of CHF and its subsidiaries have been reported
in the accompanying consolidated balance sheets as net assets of discontinued
operations, except for cash and cash equivalents of $.5 million and $.8
million, which are included with cash and cash equivalents in the accompanying
consolidated balance sheets as of September 30, 1997 and June 30, 1997,
respectively.
Discontinued operations are summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Total revenues $5,227 $5,131
Total expenses 5,018 4,564
-------- --------
Earnings from dis-
continued operations (1) $ 209 $ 567
======== ========
</TABLE>
(1) Net of income taxes of $117 and $608 for the three months
ended September 30, 1997 and 1996, respectively.
7
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
(Unaudited)
CHF and subsidiaries balance sheets are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- --------
<S> <C> <C>
ASSETS
- -------------------------------------
Cash and cash equivalents $ 540 $ 804
Commission, service fees and other receivables, net 8,977 9,927
Property and equipment, net 2,116 2,126
Intangibles, net 8,847 9,217
Other assets 2,374 982
----------- -----------
$22,854 $23,056
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
- -------------------------------------
Accounts payable and accrued expenses $ 935 $ 1,221
Accrued compensation and related benefits 648 627
Payable to parent 2,103 2,202
Debt payable within one year 197 197
Long-term debt 414 461
----------- -----------
4,297 4,708
Shareholder's equity 18,557 18,348
----------- -----------
$22,854 $23,056
=========== ===========
</TABLE>
PRO FORMA EFFECTS OF THE CHF SALE
On a pro forma basis, the CHF sale would have decreased the September 30,
1997 loss from continuing operations by approximately $.3 million ($.5 million
pretax), or $0.05 per share. Approximately $.1 million represents investment
income on invested net proceeds, and approximately $.2 million represents a
reduction of interest expense resulting from the repayment of debt. On a pro
forma basis, the impact on the September 30, 1997 Consolidated Balance Sheet
would be to increase marketable securities by approximately $10 million,
representing the net proceeds from the sale after payment of income taxes of
approximately $3.8 million, and the reduction of debt by approximately $16
million.
NOTE 3 - NET (LOSS) EARNINGS PER COMMON SHARE
- -------------------------------------------------------------------------------
Net (loss) earnings per common share is based on the average number of
shares of common stock outstanding during each period. The number of shares
used in the computation of (loss) earnings per common share is 6,578,356 for
the three months ended September 30, 1997 and 6,560,941 for the three months
ended September 30, 1996.
8
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
(Unaudited)
NOTE 4 - CONTINGENCIES
- --------------------------------------------------------------------------------
As previously reported by the Company, certain senior officers and the
Company are named defendants in two shareholder lawsuits filed in the United
States District Court for the Eastern District of Michigan (the "Court") on
August 23 and August 24, 1995. In September 1996, these lawsuits were
consolidated by the Court into a single cause of action. The consolidated
action alleged that certain senior officers and the Company issued reports and
statements that violated federal securities laws. The Company and the officers
contend that all material facts were disclosed during the alleged period in
question and that certain material facts alleged to have not been disclosed,
were already available in the financial market place.
Nevertheless, management concluded that continued defense of the
litigation was depleting the available insurance pool and that an unfavorable
outcome in excess of insurance policy limits could potentially have an adverse
impact on the Company's financial position. Continuation of this litigation
would have also diverted management's focus from operations. Based on these
facts, management pursued settlement with the plaintiff. The parties have
agreed to a proposed settlement requiring the release of all claims and damages
sought by the plaintiff and payment by the Company of $3.25 million, of which
the Company anticipates $2.1 million to be paid by the insurance carrier. The
Company recorded an expense for the balance of $1.15 million as of June 30,
1997. The pending settlement is subject to federal court approval. The
Company has agreed to indemnify the named officers from monetary exposure in
connection with the lawsuit, subject to reimbursement by any named officer, in
the event he is found not to be entitled to such indemnification.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
OVERVIEW
In September 1997, the Company announced its plans to sell the stock of
its subsidiary, CHF. The sale is expected to be completed in January 1998, but
is contingent upon the buyer obtaining financing. In accordance with accounting
literature, CHF results are reported as discontinued operations in the
consolidated financial statements for all periods presented. Also, see Note 2
to the Consolidated Financial Statements. The proposed sale for $30 million in
cash will result in an estimated gain to the Company in 1998 of approximately
$6.5 million or $1.00 earnings per share after closing costs and income taxes,
and will provide cash flow to reduce debt and support enhancements in existing
operations. There can be no assurances that this sale will be consummated.
Consolidated losses from continuing operations totaled $1.5 million for
the three months ended September 30, 1997, compared to losses of $.6 million
for the three months ended September 30, 1996. Including discontinued
operations, consolidated losses totaled $1.3 million for the three months ended
September 30, 1997 and break even for the three months ended September 30,
1996, a loss per share of $.20 and zero, respectively.
Results for the three months ended September 30, 1997 include net losses
in the Company's Florida operations of $.5 million or $.08 per share, compared
to losses of $1 million for the three months ended September 30, 1996 or $.16
per share. The constantly changing governmental environment in Florida has
required the Company to change its marketing strategy to a commercial market
focus. The $3.2 million increase in premium revenues from the three months
ended September 30, 1996 to the current three month period is attributable
primarily to the Company targeting the commercial market. WITH THE REALIGNMENT
OF THE MEMBERSHIP MIX, CONTINUED INCREASED ENROLLMENT AND OPERATIONAL
IMPROVEMENTS, PARTICULARLY RELATED TO THE COMPLETE INTEGRATION AND TESTING OF
THE CLIENT/SERVER INFORMATION SYSTEM, PROVIDER CONTRACTING AND UTILIZATION AND
CASE MANAGEMENT PRACTICES, MANAGEMENT BELIEVES IT CAN REVERSE THE CURRENT LOSS
TREND EXPERIENCED BY THE FLORIDA HMO. The Company's fiscal 1998 results will
greatly depend on its ability to successfully implement these goals in Florida.
The State of Michigan, in an effort to reduce the cost of its Medicaid
program, competitively bid its Medicaid contracts, with an effective date of
July 1997. The affected southeastern Michigan counties include a significant
portion of the Medicaid enrollment for OmniCare Health Plan, in Michigan
("OmniCare-MI"), a plan operated by the Company. In May 1997, OmniCare-MI was
notified that it had been selected to participate in the State's program.
Unsuccessful bidders to the State's request for proposal legally challenged the
initiative and, as a result, the State did not assign the Medicaid eligibles to
plans that were awarded contracts, but did, however, institute the rate
reduction component of the new
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program effective July 1997. With the indefinite delay of the assignment of
approximately 90,000 eligible recipients to the selected plans, and the
implementation of the rate reductions of 10% to 15%, the operating revenues of
OmniCare-MI and the resulting management fees to the Company will be affected
in 1998. In the first quarter of 1998 the effect of the rate reductions on
management fees was approximately $.6 million or $.06 per share net of taxes.
The Company has been in constant communications with the State, in an attempt
to prompt the State to implement the assignment component of the program. The
State has given some indication that it may begin to assign the eligible
members to selected health plans during the Company's third quarter. There can
be no assurances that OmniCare-MI can control health care costs at the rate of
the premium reductions or that the State will assign the eligible recipients.
The Company previously managed the operations of Personal Physician Care
Inc., in Ohio ("PPC") under a long-term management agreement that was
terminated pursuant to binding arbitration, effective May 31, 1997, based in
part on a dispute between the parties with respect to the payment of
non-emergent transportation costs for enrollees as a marketing expense to be
incurred under the management agreement. Earnings from this management
agreement for the three months ended September 30, 1996 was $.2 million or $.03
earnings per share.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Total revenues from continuing operations decreased $1.5 million (5%),
from $28.5 million in 1997 to $27.0 million in 1998.
Medical premium revenues were $20.3 million in 1998, an increase of $2.2
million (12%) over medical premium revenues of $18.1 million in 1997. Medical
premiums for OmniCare-TN decreased $1 million (7%), from $15.4 million in 1997
to $14.4 million in 1998. The net decrease is due to a decrease in member
months resulting from enrollment adjustments. The enrollment at OmniCare-TN
was approximately 42,600 at September 30, 1997, compared to approximately
48,400 at September 30, 1996, a decrease of 5,800 members (12%). The State of
Tennessee's disenrollment of approximately 7,000 members in the quarter ending
December 1996 was the primary reason for the enrollment decrease. This action
was taken by the State based upon the return of undeliverable questionnaires
mailed to members, which the State requested for continued participation.
OmniCare-TN has contested the validity of this method of determining the
continued eligibility of the Medicaid recipients and has contacted
approximately 3,000 of these disenrolled members to request that they contact
the State to regain their eligibility, retroactive from the date of
disenrollment. The outcome of this effort is pending.
Medical premiums for UltraMedix increased $3.2 million (119%), from $2.7
million in 1997 to $5.9 million in 1998. UltraMedix's enrollment at September
30, 1997 was approximately 20,100, an increase of 10,800 (116%) from the
September 30, 1996 enrollment of approximately 9,300 members. UltraMedix has
made significant enrollment gains in the
11
<PAGE> 13
commercial market since approval of its HMO license in October 1995. The
increase in the commercial market was due in part to the State of Florida's
unsuccessful initiative to mandate the enrollment of Medicaid eligibles into
managed care. UltraMedix was selected to participate in this program and the
contract award would have capped UltraMedix's Medicaid enrollment, including
existing members, at approximately 48,000 during the contract period. Because
of legal challenges from unsuccessful bidders to the State's request for
proposal, the initiative has been halted indefinitely. To minimize the
uncertainty related to rate reductions contemplated by the initiative,
UltraMedix has retargeted its marketing efforts to expand its commercial
business. This has contributed to the change in UltraMedix's enrollment mix
from 92:8 (Medicaid-to-commercial) as of September 1996, to 46:54 as of
September 1997.
The average per member per month ("PMPM") premium rate in 1998 for
OmniCare-TN was approximately $114 compared to $106 in 1997 (8%) and for
UltraMedix, approximately $101 compared to $98 in 1997 (3%). MANAGEMENT
EXPECTS THAT THE ULTRAMEDIX PMPM WILL BE AFFECTED BY THE CHANGE IN THE
MEMBERSHIP MIX, REFLECTING HIGHER COMMERCIAL RATES.
Management fees were $6.2 million in 1998, a decrease of $3.6 million
(37%) from fees of $9.8 million in 1997. Operating revenues of OmniCare-MI
decreased in 1998 due primarily to a net decrease in premium and enrollment
rates of approximately 7% and 4%, respectively, which resulted in decreased
management fees to the Company of approximately $1 million. As noted in the
overview, the State initiative in Michigan was the primary factor for the
reduced premium rates. The Company recognized $2.6 million in management fees
from PPC in 1996 and, zero in 1998 due to the termination of the PPC management
agreement in May 1997.
Total expenses before income taxes from continuing operations totaled
$29.0 million in 1998, compared to $29.2 million in 1997, a decrease of $.2
million (1%).
Medical service expenses were $17.2 million in 1998, an increase of $2.6
million (18%) over medical service expenses of $14.6 million in 1997. Medical
expenses for OmniCare-TN increased $.1 million (1%), from $12.1 million in 1997
to $12.2 million in 1998. Medical expenses for UltraMedix increased $2.5
million (50%), from $2.5 million in 1997 to $5.0 million in 1998. The
percentage of medical service expenses to medical premium revenues, or the
medical loss ratio ("MLR"), was 85% and 79% for OmniCare-TN in 1998 and 1997,
respectively, and 84% and 91% for UltraMedix in 1998 and 1997, respectively.
MANAGEMENT EXPECTS THAT THE MLR AT BOTH OMNICARE-TN AND ULTRAMEDIX WILL
REMAIN RELATIVELY FLAT AND ULTIMATELY DECREASE AS THE COMPANY INSTITUTES
CERTAIN CORRECTIVE ACTION STEPS OVER THE NEXT SEVERAL MONTHS.
Marketing, general and administrative expenses ("MG&A") decreased $2.8
million (21%), from $13.2 million in 1997 to $10.4 million in 1998, due to the
following: (i) termination of the PPC management agreement resulted in a $2.2
million decrease; (ii) MG&A for the corporate headquarters, including the cost
to operate OmniCare-MI, decreased $.2 million; and (iii) a net decrease of
approximately $.4 million related to the Company's Florida and Tennessee
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<PAGE> 14
operations. Overall, MG&A as a percentage of management fees and medical
premiums decreased 8% from 47% in 1997 to 39% in 1998.
Depreciation and amortization in 1998 was $1.1 million, compared to $1
million in 1997, an increase of $.1 million (10%). The increase was due
primarily to equipment purchases.
Interest expense decreased approximately $.1 million (25%), from $.4
million in 1997 to $.3 million in 1998.
As a result of the foregoing, the Company recognized losses from
continuing operations before income taxes of $2.0 million for the three months
ended September 30, 1997, compared to losses from continuing operations before
income taxes of $.7 million for the three months ended September 30, 1996, a
$1.3 million change. The federal statutory tax rate for continuing operations
for both periods was approximately 34%. Goodwill amortization related to
equity investments not deductible for tax purposes resulted in an effective tax
rate of approximately 22% for the current three months compared to 24% for the
prior year three months. Net losses from continuing operations was $1.5
million for the first three months of 1998, compared to net losses from
continuing operations of $.6 million for the comparable period in 1997, a
change of $.9 million.
Earnings from discontinued operations, net of income taxes, was $.2
million for the three months ended September 30, 1997, compared to earnings of
$.6 million for the three months ended September 30, 1996, a decrease of $.4
million. This change is due primarily to increased cost related to servicing
the contract entered in June 1996 with the State of Maryland's Injured Workers'
Insurance Fund.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had (i) cash and cash equivalents and
short-term marketable securities of $15.4 million, compared to $17.4 million at
June 30, 1997, (ii) working capital of negative $15.7 million, compared to
$13.0 million at June 30, 1997, and (iii) a current
assets-to-current-liabilities ratio of .58-to-1 compared to .67-to-1 at June
30, 1997. The principal sources of funds for the Company during the three
months ended September 30, 1997 were net sale of marketable securities of $.7
million, debt borrowings of $.2 million and proceeds from issuance of common
stock of $.2 million offset by $.6 million used in net operating activities,
furniture and equipment additions of $.9 million, increase in intangible assets
of $.1 million, investing cash used in discontinued operations of $.2 million
and $.7 million to repay long-term debt.
The Company has a $20 million unsecured line-of-credit commitment that
expires in February 1998. The outstanding line of credit borrowings at
September 30, 1997 were $19.5 million. The Company is currently negotiating
with the bank to extend the maturity of the line of credit and to convert a
portion of the borrowings from the line of credit to a term loan. The proposed
sale of CHF for $30 million in cash is expected to reduce debt by approximately
$16 million. There can be no assurances that the Company will be successful in
its negotiations with
13
<PAGE> 15
the bank. At September 30, 1997, the Company was in violation of a debt
covenant that set a floor on a debt service coverage ratio. The Company
obtained a waiver for this provision from the lending institution. The
Company's debt is collateralized by all of the assets of the Company.
In previous fiscal years to satisfy applicable statutory requirements, the
Company provided a $1 million letter of credit on behalf of, and a $1.0 million
capital contribution to, OmniCare-LA, an HMO wholly-owned by the Company's
Louisiana subsidiary and made a $2.1 million capital contribution to PhilCare,
an HMO headquartered in Pennsylvania and owned 49% by the Company. The
foregoing funds were provided by the Company from the line of credit
arrangement. The Company anticipates additional funding requirements for its
initiatives in Louisiana and Pennsylvania to approximate an aggregate amount of
$7 million, and to be applied toward the establishment of statutory reserves
and payment of operational costs. There can be no assurance that the Company
will fund these requirements. The source for these funding requirements is
anticipated from third party investors and borrowings.
The Company anticipates that additional cash flow and working capital may
be necessitated by business expansion needs (including potential acquisitions)
and new marketing program requirements. The Company has submitted and expects
to continue to submit proposals to governmental, quasi-governmental and private
entities to provide managed care services. MANAGEMENT BELIEVES THAT AS IT
CONTINUES TO PURSUE OTHER CONTRACTUAL RELATIONSHIPS, THE COMPANY'S CASH
RESERVES, MARKETABLE SECURITIES, FUTURE CASH FLOWS FROM OPERATIONS, AND
PROCEEDS FROM THE PROPOSED SALE OF CHF WILL BE SUFFICIENT TO ENABLE THE COMPANY
TO CONTINUE TO DEVELOP ITS OPERATIONS, SUPPORT ITS ANTICIPATED BUSINESS
EXPANSION AND SATISFY ITS WORKING CAPITAL NEEDS FOR THE FORESEEABLE FUTURE.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported by the Company, certain senior officers and the
Company are named defendants in two shareholder lawsuits filed in the United
States District Court for the Eastern District of Michigan (the "Court") on
August 23 and August 24, 1995. In September 1996, these lawsuits were
consolidated by the Court into a single cause of action. The consolidated
action alleged that certain senior officers and the Company issued reports and
statements that violated federal securities laws. The Company and the officers
contend that all material facts were disclosed during the alleged period in
question and that certain material facts alleged to have not been disclosed,
were already available in the financial market place.
Nevertheless, management concluded that continued defense of the
litigation was depleting the available insurance pool and that an unfavorable
outcome in excess of insurance policy limits could potentially have an adverse
impact on the Company's financial position. Continuation of this litigation
would have also diverted management's focus from operations.
14
<PAGE> 16
Based on these facts, management pursued settlement with the plaintiff. The
parties have agreed to a proposed settlement requiring the release of all
claims and damages sought by the plaintiff and payment by the Company of $3.25
million, of which the Company anticipates $2.1 million to be paid by the
insurance carrier. The Company recorded an expense for the balance of $1.15
million as of ended June 30, 1997. The pending settlement is subject to
federal court approval. The Company has agreed to indemnify the named officers
from monetary exposure in connection with the lawsuit, subject to reimbursement
by any named officer, in the event he is found not to be entitled to such
indemnification.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage management to provide
prospective information about their companies without fear of litigation so
long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in the
statements. The Company desires to take advantage of this "safe harbor" and,
accordingly, hereby IDENTIFIES FORWARD-LOOKING STATEMENTS THROUGH THE BOLD
ITALIC TEXT WITHIN THE BODY OF THIS DOCUMENT and the following important
factors which could cause the Company's actual financial and enrollment results
to differ materially from any such results that might be projected, forecasted,
estimated or budgeted by the Company in forward-looking statements.
1. Inability to increase premiums and prospective or retroactive
reductions in premium rates commensurate with increases in medical
costs due to utilization, government regulation, or other factors.
2. Discontinaution of, limitations upon or restructuring of
government-funded programs.
3. Increases in medical costs, including increases in
utilization and costs of medical services and the effects of actions
by competitors or groups of providers.
15
<PAGE> 17
4. Adverse state and federal legislation and initiatives,
including limitations upon or reductions in premium payments;
prohibition or limitation of capitated arrangements or financial
incentives to providers; federal and state benefit mandates
(including mandatory length of stay and emergency room coverage);
limitations on the ability to manage care and utilization; and any
willing provider or pharmacy laws.
5. The shift of employers from insured to self-funded coverage,
resulting in reduced margins to the Company.
6. Failure to obtain new customer bases, retain existing
customer bases or reductions in work force by existing customers;
failure to sustain commercial enrollment to maintain an enrollment
mix required by government programs.
7. Termination of management agreements by the Managed Plans.
8. Increased competition between current organizations and the
entrance of new competitors and the introduction of new products by
new and existing competitors.
9. Adverse publicity and media coverage.
10. Inability to carry out marketing and sales plans.
11. Loss or retirement of key executives.
12. Governmental financial assessments or taxes to subsidize
uncompensated care, other insurance carriers, or academic medical
institutions.
13. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.
14. The selection by employers and individuals of higher
co-payment/deductible/coinsurance plans with relatively lower
premiums or margins.
15. The impact upon the Company's medical loss ratio of greater
net enrollment in higher medical loss ratio lines of business such
as Medicare and Medicaid.
16. Adverse regulatory determinations resulting in loss or
limitations of licensure, certification or contracts with
governmental payors.
17. Higher sales, administrative or general expenses occasioned
by the need for additional advertising, marketing, administrative,
or management information systems expenditures.
16
<PAGE> 18
18. Increases by regulatory authorities of minimum capital,
reserve and other financial solvency requirements.
19. Denial of accreditation by quality accrediting agencies,
e.g., the National Committee for Quality Assurance (NCQA).
20. Adverse results from significant litigation matters.
21. Interest rates causing a reduction of investment income, or
in the market value of interest rate sensitive investments.
22. Inability to restructure debt.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A).
(a) Exhibits
Exhibit Number Description of Document
-------------- -----------------------
27 Financial data schedule
(b) None.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: November 14, 1997 By: /s/ Ronald R. Dobbins
-----------------------------
Ronald R. Dobbins
President & Chief Operating Officer
Dated: November 14, 1997 By: /s/ Jagannathan Vanaharam
-----------------------------
Jagannathan Vanaharam
Senior Vice President-Finance & Treasurer
18
<PAGE> 20
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
27 Financial data schedule
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FILED
AS PART OF THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON
FORM 10-Q.
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,138,000
<SECURITIES> 7,104,000
<RECEIVABLES> 4,831,000
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<INVENTORY> 0
<CURRENT-ASSETS> 21,326,000
<PP&E> 18,570,000
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0
0
<COMMON> 10,715,000
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<INTEREST-EXPENSE> 330,000
<INCOME-PRETAX> (1,981,000)
<INCOME-TAX> (439,000)
<INCOME-CONTINUING> (1,542,000)
<DISCONTINUED> 209,000
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