<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 MARCH 31, 1997
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.)
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.
6,535,941 Common Shares as of
May 13, 1997
<PAGE> 2
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I
Item 1. Financial statements
Consolidated Balance Sheets--March 31, 1997
and June 30, 1996 2
Consolidated Statements of Operations--Three and Nine Months
Ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows--Nine Months
Ended March 31, 1997 and 1996 4
Notes to Consolidated Financial statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBITS 21
1
<PAGE> 3
PART 1. - ITEM 1. FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
ASSETS 1997 1996
- -------------------------------------------------------- ----------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $12,157,091 $23,679,351
Marketable securities 9,088,175 7,251,426
Premium, commission and service fees receivable 11,094,474 11,175,666
Other receivables 1,767,949 2,721,606
Refundable federal income tax 442,289 846,114
Prepaid expenses and other 1,133,269 808,403
Deferred income taxes 258,792 315,511
----------- -----------
Total current assets 35,942,039 46,798,077
Furniture and Equipment, net of accumulated depreciation
and amortization of $8,245,289 and $5,680,585 12,812,039 11,422,769
Intangible Assets, net of amortization of $4,044,045
and $2,373,817 18,807,523 19,540,353
Investments In and Advances to Affiliate 2,100,000 2,100,000
Notes Receivable 2,891,388 2,991,388
Statutory Reserves 3,772,109 7,863,553
Deferred Income Taxes 547,574 -
Other Assets 2,100,288 2,314,441
----------- -----------
$78,972,960 $93,030,581
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------
Current Liabilities
Current portion of long-term debt $ 3,104,906 $ 2,912,500
Medical claims payable 7,993,583 25,677,806
Accounts payable and accrued expenses 2,548,950 3,690,076
Accrued compensation and related benefits 2,634,643 2,304,504
Other current liabilities 283,324 -
----------- -----------
Total current liabilities 16,565,406 34,584,886
Long-Term Debt, Less Current Portion 22,186,797 18,741,664
Accrued Rent 1,319,123 1,240,830
Deferred Income Taxes - 641,000
Contingencies - -
Minority Interest 563,388 -
Shareholders' Equity
Preferred shares-authorized, 5,000,000 shares; none
issued - -
Common shares-authorized, 15,000,000 shares; issued,
6,560,941 shares, and outstanding, 6,535,941 shares 10,498,495 10,625,382
Retained earnings 27,948,625 27,411,032
Unrealized net holding losses on marketable securities (108,874) (214,213)
----------- -----------
38,338,246 37,822,201
----------- -----------
$78,972,960 $93,030,581
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
----------------------------------- -----------------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Medical premiums $17,584,770 $13,426,096 $51,714,696 $13,426,096
Management fees from related parties 10,004,323 10,673,850 29,769,902 37,512,200
Commission and service fees 5,039,647 3,129,304 14,610,147 8,476,180
Interest and other income 436,055 424,446 1,439,002 1,133,018
----------- ----------- ----------- -----------
Total revenues 33,064,795 27,653,696 97,533,747 60,547,494
EXPENSES
Medical services 12,843,454 11,218,903 40,746,061 11,218,903
Marketing, general and administrative 16,996,328 15,064,211 49,021,489 42,270,990
Depreciation and amortization 1,513,512 1,170,274 4,273,799 2,621,091
----------- ----------- ----------- -----------
Total operating expenses 31,353,294 27,453,388 94,041,349 56,110,984
----------- ----------- ----------- -----------
Operating profit 1,711,501 200,308 3,492,398 4,436,510
Interest expense 405,943 296,929 1,170,417 673,429
Contract settlement - - - 9,684,974
Minority interest 411,832 - 563,388 -
Equity in net (earnings) losses of
unconsolidated affiliates - 343,361 - (2,553,163)
----------- ------------ ----------- -----------
Earnings (loss) before income tax
expense (credit) 893,726 (439,982) 1,758,593 (3,368,730)
Income tax expense (credit) 478,000 394,000 1,221,000 (1,680,000)
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 415,726 $ (833,982) $ 537,593 $(1,688,730)
=========== =========== =========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE $ 0.06 $ (0.13) $ 0.08 $ (0.26)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
------------------------------------------
1997 1996
-------------------- --------------------
<C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 537,593 $(1,688,730)
Adjustments to reconcile net earnings (loss) to net cash (used in) provided
from operating activities:
Bad debt expense - 309,728
Loss on disposal of assets 17,069 18,932
Depreciation 1,624,293 1,310,023
Amortization 2,649,506 1,311,068
Accrued rent 78,293 78,047
Contract settlement - 9,684,974
Deferred income taxes (credit) (946,125) 877,882
Minority interest in consolidated affiliates 563,388 -
Equity in net (earnings) of unconsolidated affiliates - (2,553,162)
Change in unrealized holding losses on marketable securities 105,339 69,294
Changes in assets and liabilities
Decrease (increase) in premiums, commissions and service fee receivable 81,192 (2,142,932)
Decrease in other receivables 953,659 114,880
Decrease (increase) in refundable income taxes 403,825 (2,458,325)
(Increase) in prepaid expenses and other (324,865) (1,149,953)
Decrease (increase) in statutory reserves 4,091,444 (218,413)
Decrease (increase) in other assets 214,151 (469,944)
(Decrease) increase in medical claims payable (17,684,224) 855,986
(Decrease) increase in accounts payable and accrued expenses (1,141,126) 2,205,498
Increase (decrease) in accrued compensation and related benefits 330,139 (188,148)
Increase (decrease) in other current liabilities 283,324 (261,361)
------------ -----------
Total adjustments (8,700,718) 7,394,074
------------ -----------
Net cash (used in) provided from operating activities (8,163,125) 5,705,344
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of marketable securities 3,175,177 2,813,885
Purchase of marketable securities (4,850,314) -
Purchase of furniture and equipment (2,900,195) (3,365,755)
Investments in and advances to affiliates - (6,167,234)
(Increase) in intangible assets (752,076) (6,657,386)
Decrease (increase) in other assets 77,798 (264,136)
Decrease (increase) in long-term notes receivable 100,000 (2,098,570)
Acquisition of businesses, net of cash acquired (1,015,263) 22,653,605
------------ -----------
Net cash (used in) provided from investing activities (6,164,873) 6,914,409
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit 5,117,000 9,089,252
Payments made on long-term debt (2,184,375) (1,680,209)
Repurchase of stock (126,888) -
------------ -----------
Net cash provided from financing activities 2,805,737 7,409,043
------------ -----------
Net (decrease) increase in cash and cash equivalents (11,522,261) 20,028,796
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,679,352 6,197,656
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,157,091 $26,226,452
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for
Interest $ 1,000,000 $ 673,000
============ ===========
Income taxes $ 1,000,000 $ 589,000
============ ===========
</TABLE>
Investing activities for fiscal 1997 represents the acquisition of certain
contract rights, assets and assumed liabilities of Spectera, Inc., as follows:
Fair value of assets acquired of $1,765,263 less liabilities assumed of
$750,000.
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
(Unaudited)
NOTE A - BASIS OF PREPARATION
- --------------------------------------------------------------------------------
The financial statements as of and for the nine months ended March 31,
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 March 31, 1997 are not necessarily indicative
of the results of operations for the full fiscal year ending June 30, 1997.
Audited June 30, 1996 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
the Company and all majority-owned subsidiaries. Intercompany transactions and
balances have been eliminated. Non- majority investments in affiliates in
which management has the ability to exercise significant influence are recorded
on the equity method.
Certain reclassifications have been made to the fiscal 1996 balances to
conform to the current period classifications.
NOTE B - ACQUISITIONS
- --------------------------------------------------------------------------------
OMNICARE-TN
Effective July 1, 1994, the Company acquired a 50% equity interest in
OmniCare-TN for approximately $1.3 million in cash and on January 31, 1996
acquired an additional 25% of the voting common stock and 100% of the preferred
stock for $11 million, of which approximately $2.4 million was paid for in the
form of cash and $8.6 million in the conversion of debt to equity. This
increased the Company's ownership in the voting common stock of OmniCare-TN to
75%.
ULTRAMEDIX
Effective February 1, 1994, the Company acquired a 30.4% equity interest
in UltraMedix for approximately $1.4 million in cash and on January 29, 1996
acquired an additional 20.6% of the voting common stock and 100% of the
preferred stock for approximately $1.9 million in cash. This increased the
Company's ownership in the voting common stock of UltraMedix to 51%.
5
<PAGE> 7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1997 AND 1996
(Unaudited)
NOTE B - ACQUISITIONS (CONTINUED)
- --------------------------------------------------------------------------------
CHF
Effective December 31, 1996, the Company, through its wholly owned
subsidiary, Corporate Healthcare Financing, Inc. ("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 charged to goodwill.
These acquisitions were accounted for under the purchase method of
accounting.
The unaudited pro forma results of operations that follow for the nine and
three months ended March 31, 1996 assume that the OmniCare-TN and UltraMedix
acquisitions had occurred as of June 30, 1995. In addition to combining the
historical results of operations of the companies, the pro forma calculations
include adjustments for the estimated effect on the Company's historical
results of operations for amortization related to the acquisition. The pro
forma results of operations do not purport to be indicative of the results
which would actually have been obtained had the acquisitions occurred on the
date indicated or which may be obtained in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
--------------------------------
1997 (ACTUAL) 1996 (PRO FORMA)
-------------- ----------------
<S> <C> <C>
Total revenues $97,534,000 $103,000,000
Net earnings (loss) $ 538,000 $ (2,776,000)
Earnings (loss) per common share $ 0.08 $ (0.42)
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1997 (ACTUAL) 1996 (PRO FORMA)
-------------- ----------------
<S> <C> <C>
Total revenues $33,065,000 $ 33,475,000
Net earnings (loss) $ 416,000 $ (1,127,000)
Earnings (loss) per common share $ 0.06 $ (0.17)
</TABLE>
NOTE C - NET EARNINGS (LOSS) PER COMMON SHARE
- --------------------------------------------------------------------------------
Net earnings (loss) per common share is based on the weighted average
number of shares of common stock outstanding during each period. The number of
shares used in the computation of earnings (loss) per common share is 6,559,061
and 6,544,328 for the nine and three months ended March 31, 1997, respectively,
and 6,560,941 for the nine and three months ended March 31, 1996. On
various dates in March of 1997, the Company repurchased 25,000 shares of common
stock.
6
<PAGE> 8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1997 AND 1996
(Unaudited)
NOTE D - CONTINGENCIES
- --------------------------------------------------------------------------------
Pursuant to the contingent promissory note related to the May 7, 1993
acquisition of CHF, the Company, depending upon CHF's earnings over seven years
from the acquisition date, could increase the purchase price by a maximum
amount of approximately $6.6 million. Through March 31, 1997, the purchase
price was increased by approximately $5.7 million.
As previously reported by the Company, certain senior officers and the
Company are named defendants in a shareholder lawsuit filed in the United
States District Court for the Eastern District of Michigan in August 1995. In
October 1996, the plaintiffs filed a consolidated amended complaint. The
amended complaint alleges that certain senior officers and the Company issued
reports and made statements that were false or misleading in violation of
federal securities laws. The Company and the officers have filed an answer
denying these allegations and any liability to plaintiffs. The Company and the
officers contend that all material facts were disclosed during the alleged
period, or were already available in the financial market place.
The Company and the officers have agreed to the certification of the
lawsuit as a class action. The discovery process has commenced. The Company's
management believes that it is too early to form an opinion regarding the
potential financial impact of the lawsuit. An unfavorable outcome in excess of
insurance policy limits could have a potential adverse impact on the Company's
financial statements.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
OVERVIEW
In fiscal 1996, the Company acquired additional ownership in previously
unconsolidated affiliates that affect the year to date and quarter to quarter
comparability of its consolidated results of operations. In January 1996, the
Company purchased an additional 20.6% and 25% of the voting common stock of
UltraMedix and OmniCare-TN, respectively. This increased the Company's
ownership in UltraMedix to 51% and in OmniCare-TN to 75%. Accordingly, these
majority-owned affiliates are included in the Company's consolidated financial
results effective February 1996.
UA-TN, including the operations of OmniCare-TN, recognized net earnings
before income taxes of $2.5 million and $1.4 million for the nine and three
months ended March 31, 1997, respectively, as compared to losses before income
taxes of $6.0 million and $.5 million for the nine and three months ended March
31, 1996, respectively. The significant change from year to year for UA-TN is
attributable primarily to the net effect of the contract settlement adjustment
discussed below. UA-FL, including the operations of UltraMedix, incurred net
losses before income taxes of $3.7 million and $.9 million for the nine and
three months ended March 31, 1997, respectively, as compared to losses before
income taxes of $1.1 million and $.8 million for the nine and three months
ended March 31, 1996, respectively.
UltraMedix continues to implement an internal corrective action plan
addressing medical costs incurred and re-evaluating the efficiency and
effectiveness of overall operations. Integral components of the corrective
action plan include the resumption of Medicaid marketing effective October
1996, commercial market expansion, renegotiation of capitated primary care
physician contracts from a fee-for-service to a capitated arrangement,
conversion of the Plan's management information system to the Company's
proprietary client server information system, and increased focus on
utilization and case management practices. MANAGEMENT BELIEVES THAT THE
SUCCESSFUL IMPLEMENTATION OF THESE CORRECTIVE ACTION STEPS WILL CONTRIBUTE
TO THE PLAN'S PROFITABILITY IN FISCAL 1998. However, there can be no
assurances that these measures will be sufficient to allow the Company to
continue to operate in this market, and, if unsuccessful, could have a material
adverse effect on the Company's financial position.
The State of Ohio's initiative to mandate the enrollment of Medicaid
recipients into managed care organizations was the primary factor in the net
increase of management fees from Personal Physician Care, Inc. ("PPC") of $2.5
million and $.8 million for the nine and three months from fiscal 1996 to 1997,
respectively. PPC has served notice to the Company terminating the Management
Agreement effective December 31, 1997. See "Part II-Other Information-Item 5.
Other Information".
An approximate 2%-4% decrease in enrollment and premium rates contributed
to the net decrease of management fees from OmniCare-MI of $.7 million and $.5
million for the nine and three months from fiscal 1996 to 1997, respectively.
8
<PAGE> 10
Effective June 30, 1996, the Company entered into a three year contract
to provide managed care services to the Injured Workers' Insurance Fund
("IWIF"), a large workers' compensation insurer. Revenues generated from the
IWIF contract for the nine and three months ended March 31, 1997, were $4.9
million and $1.8 million, respectively. The quarter ending March 31, 1997 was
also impacted by the increased operational cost of approximately $1.0 million
related to the Company's direct management of the IWIF contract as a result of
the Company's acquisition in December 1996 of certain assets and contract
rights from the subcontractor, Spectera, initially involved in the medical
management of the IWIF contract.
In the quarter ending December 31, 1995, the Company recognized a contract
settlement expense of $9.7 million. This expense represented a one-time
adjustment to management fee revenues and its effect on other related accounts
based on the provisions of the revised management agreement between UA-TN and
OmniCare-TN as approved by the State of Tennessee in November 1995, retroactive
to January 1, 1994. This adjustment also significantly impacted equity in net
earnings of unconsolidated affiliates. In the quarter ended June 30, 1996, the
Company reached an agreement with OmniCare-TN, pursuant to which OmniCare-TN
agreed to reimburse the Company approximately $8.6 million for start-up costs
and other expenses incurred for the period January 1994 through September 1995.
Despite the fact that the Company and OmniCare-TN took certain actions
relating to this settlement agreement, the transaction was not sufficiently
documented so as to allow recognition of same on the Company's financial
statements for the quarter ended December 31, 1995.
The effect of these changes were the primary reasons that earnings before
income taxes increased $5.1 million and $1.3 million for the nine and three
months ended March 31, 1997, respectively, from the comparable periods last
year.
NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31,
1996
Total revenues increased $37.0 million (61%) from $60.5 million in fiscal
1996 to $97.5 million in fiscal 1997.
HMO medical premium revenues were $51.7 million, of which $42.5 million
and $9.2 million related to OmniCare-TN and UltraMedix, respectively, an
increase of $38.3 million over medical premium revenues of $13.4 million in
fiscal 1996. The average per member per month ("PMPM") premium rate for
OmniCare-TN was $108 and for UltraMedix was $97. The enrollment at OmniCare-TN
was approximately 39,000 at March 31, 1997, representing a decrease in
membership of 9,000 since June 30, 1996. The State of Tennessee's
disenrollment of approximately 7,000 members in the quarter ending December 31,
1996, was the primary reason for the decrease. The State took this action
based upon the return of undeliverable questionnaires mailed to members which
the State requested for continued participation. The Plan has contested the
validity of this method in determining the continued eligibility of the
Medicaid recipients, and has contacted approximately 2,300 of these disenrolled
members to request them to contact the State to regain their eligibility,
retroactive from the date of disenrollment.
9
<PAGE> 11
UltraMedix's enrollment at March 31, 1997 was approximately 14,000, a 26%
increase from the approximately 11,000 members enrolled at June 30, 1996. The
Plan has made significant enrollment gains in the commercial market since
approval of its HMO license in October 1995. This has contributed to the change
in the Plan's enrollment mix from 98%/2% (Medicaid-to-commercial) at June
1996, to 66%/34% at March 1997. In February 1997, UltraMedix was notified that
it had been selected to participate in the State of Florida's initiative to
provide managed care services to the State's Medicaid eligibles. The award
service area covers 14 counties and caps UltraMedix's Medicaid enrollment,
including existing members, at approximately 48,000 during the contract period.
Membership from the initiative will be assigned incrementally over a period of
time, using a formula which is currently under review by the federal government.
Management fees were $29.8 million in fiscal 1997, a decrease of $7.7
million (21%) over fees of $37.5 million in fiscal 1996. $8.5 million of the
decrease in management fees was due to the purchase of majority ownership
interests in UltraMedix and OmniCare-TN in January 1996, resulting in the
consolidation of these entities, including the elimination of intercompany
management fees for the nine months ended March 31, 1997 compared to the
recognition of $8.5 million for the nine months ended March 31, 1996.
Operating revenues of OmniCare-MI decreased due primarily to a net decrease
in premium and enrollment rates of approximately 2%, which resulted in decreased
management fees to the Company of approximately $.7 million. Additionally,
management fees decreased from approximately $.8 million in fiscal 1996 to zero
for fiscal 1997 related to the Company's administration of OmniCare-MI's
coordination of benefits program. These decreases were offset by a $2.5
million increase in management fees from PPC, attributable primarily to
increased PPC enrollment of approximately 55%, offset by a decrease in premium
rates of approximately 15%.
The enrollment and premium rates at PPC were significantly impacted by the
State of Ohio's July 1996 initiative which mandated the enrollment of Medicaid
recipients into managed care organizations and required premium reductions from
participating plans. In April 1997, the Company was notified by PPC that it
is terminating the management agreement with the Company effective
December 31, 1997. See further discussion in "Part II. Other Information-
Item 5. Other Information". Through nine months ending March 31, 1997, UA-OH,
which manages PPC, recognized earnings of $723,362 and for the years ending
June 30, 1996 and 1995, recognized earnings of $10,284 and $14,801,
respectively. The impact of the discontinued management agreement will not
affect the Company until the third quarter of fiscal 1998, and could have an
unfavorable effect on the Company's consolidated earnings during the third and
fourth quarters of fiscal 1998.
In May 1997 OmniCare-MI was notified that it had been selected to
participate in the State of Michigan's initiative to mandate Medicaid
enrollment into managed care organizations. THE INITIATIVE IS EXPECTED TO
BECOME EFFECTIVE IN THE COMPANY'S 1998 FISCAL YEAR AND MANAGEMENT BELIEVES THAT
THE AWARD COULD RESULT IN OMNICARE-MI BEING ASSIGNED 3%-5% OF THE APPROXIMATE
90,000 ELIGIBLE RECIPIENTS. Premium reductions are expected as a result of the
initiative and there can be no assurances that OmniCare-MI can control health
care costs at the rate of the premium reductions.
10
<PAGE> 12
Commission and service fees relate to the activities of CHF and primarily
represent contract renewals and new contracts. Commission and service fees
were $14.6 million in fiscal 1997, a $6.1 million (72%) increase over fees of
$8.5 million in fiscal 1996. Approximately $4.8 million of the increase
relates to the new IWIF contract that began in June 1996 and the balance to new
groups.
Interest and other income in fiscal 1997 was $1.4 million, an increase of
$.3 million (27%) over income of $1.1 million in fiscal 1996, due to
consolidating the HMOs.
Total expenses in fiscal 1997 were $95.8 million, an increase of $31.9
million (50%) over expenses of $63.9 million in fiscal 1996.
Medical service expenses of $40.7 million relate to OmniCare-TN and
UltraMedix, and were $32.8 million and $7.9 million, respectively, an increase
of $29.5 million over medical service expenses of $11.2 million in fiscal 1996.
For the nine months ended March 31, 1997, the percentage of medical service
expenses to medical premium revenues, or the medical loss ratio ("MLR") was 77%
for OmniCare-TN and 86% for UltraMedix. The OmniCare-TN MLR for fiscal 1997
was positively impacted by reductions to the medical accrual during the current
quarter but on a recurring basis MANAGEMENT BELIEVES THAT THE MLR FOR
OMNICARE-TN COULD INCREASE 3%-5%. MANAGEMENT ALSO EXPECTS A 3-6% DECREASE IN
THE MLR FOR ULTRAMEDIX AS A RESULT OF AN EXPECTED INCREASE IN THE MEMBERSHIP
BASE, RENEGOTIATIONS OF PROVIDER CONTRACTS, NEW SYSTEM IMPLEMENTATION AND OTHER
CORRECTIVE ACTIONS TO REDUCE MEDICAL SERVICE EXPENSES.
The State of Tennessee and OmniCare-TN are currently discussing a
proposed settlement to adjust the amount of claims saving paid and/or accrued to
the State of Tennessee prior to the Plan obtaining its TennCare HMO license.
BASED ON ITS NEGOTIATIONS WITH THE STATE OF TENNESSEE, MANAGEMENT BELIEVES THAT
THIS ISSUE WILL BE RESOLVED IN THE FOURTH QUARTER OF FISCAL 1997, AND COULD
HAVE A FAVORABLE EFFECT ON EARNINGS IN THAT QUARTER.
Marketing, general and administrative expenses ("MG&A") increased $6.7
million (16%) from $42.3 million in fiscal 1996 to $49.0 million in fiscal
1997, as follows: (i) MG&A for UA-OH increased $1.3 million, but MG&A as a
percentage of management fee revenues decreased 13% from 97% in fiscal 1996 to
84% in fiscal 1997, due primarily to the mandated Medicaid initiative
increasing enrollment without the corresponding marketing effort; (ii) MG&A for
corporate headquarters, including the cost to operate OmniCare-MI increased $.9
million, and MG&A as a percentage of management fee revenues increased 12%,
from 82% in fiscal 1996 to 92% in fiscal 1997, due primarily to the decrease in
management fees from OmniCare-MI; and (iii) MG&A for CHF increased $3.4
million, but MG&A as a percentage of commission and service fee revenues
decreased 12%, from 81% in fiscal 1996 to 71% in fiscal 1997, due primarily to
the activities related to the new IWIF contract.
MG&A for UA-TN and UA-FL increased from $9.4 million in fiscal 1996 to
$10.2 million in fiscal 1997, a net increase of $.8 million (9%), due primarily
to the consolidation of OmniCare-TN and UltraMedix activities effective
February 1996.
11
<PAGE> 13
The Company's development costs in Pennsylvania, Louisiana and Georgia
accounted for approximately $.4 million of the total MG&A increase. In October
1996, the Company withdrew its participation from the HealthChoices program in
Pennsylvania and its pending HMO license application in Georgia. See further
discussion under Liquidity and Capital Resources.
Depreciation and amortization in fiscal 1997 was $4.3 million, an increase
of $1.7 million (65%) from $2.6 million in fiscal 1996. The increase was due
primarily to the amortization of goodwill related to acquisitions and computer
software.
The $.5 million (71%) increase in interest expense from $.7 million in
fiscal 1996 to $1.2 million in fiscal 1997, was due to increased borrowings
against the line of credit.
Contract settlement expense was $9.7 million in fiscal 1996. This expense
represents a one-time non-recurring net charge to adjust management fee
revenues and its effect on other related accounts based on the provisions of
the revised management agreement between UA-TN and OmniCare-TN as approved by
the State of Tennessee in November 1995, retroactive to January 1, 1994. The
contract settlement charge represents the effect of retroactively applying the
provisions of the revised management agreement from January 1, 1994 to
September 30, 1995. The effect on management fee revenues for the period
January 1, 1994 to September 30, 1995, as adjusted in December 1995, was a
reduction of approximately $11.7 million, offset by a decrease in goodwill of
approximately $.6 million related to the Company's 50% equity ownership in
OmniCare-TN at the time. Additionally, the contract settlement charge was
reduced by the $1.4 million reversal of the valuation allowance established in
June 1995 representing an adjustment to the carrying value of the Company's
investments, advances and notes receivable from and related to OmniCare-TN to
their estimated fair values at June 30, 1995. The Company subsequently
acquired a majority interest in OmniCare-TN.
Equity in net earnings of unconsolidated affiliates' decreased $2.6
million, from $2.6 million in fiscal 1996 to zero in fiscal 1997, due to the
Company's recognition of its share of earnings as a shareholder of OmniCare-TN
(50%) and UltraMedix (30.4%) through January 1996, at which time the Company
acquired a majority interest in these plans.
As a result of the foregoing, the Company recognized earnings before
income taxes of $1.8 million in fiscal 1997 compared to losses before income
taxes of $3.4 million in fiscal 1996, a $5.2 million change. The statutory tax
rate for the fiscal 1997 period was approximately 48%, and is composed of the
federal rate of approximately 33% and the state and local tax rate of
approximately 15%. Goodwill amortization related to equity investments not
deductible for tax purposes resulted in an effective tax rate of 69%. The
statutory tax rate for the fiscal 1996 period was approximately 28%, and is
composed of the federal rate of approximately 26% and the state and local tax
rate of approximately 2%. Goodwill amortization related to equity investments
and equity earnings in affiliates not deductible and/or includable for tax
purposes resulted in an effective tax rate of 50%.
12
<PAGE> 14
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Total revenues increased $5.4 million (20%) from $27.7 million in fiscal
1996 to $33.1 million in fiscal 1997.
HMO medical premium revenues were $17.5 million, of which $13.8 million
($114 PMPM) and $3.7 million ($99 PMPM) related to OmniCare-TN and UltraMedix,
respectively, an increase of $4.1 million (31%) from premium revenues of $13.4
million for fiscal 1996.
Management fees were $10.0 million in fiscal 1997, a decrease of $.7
million (6%) over fees of $10.7 million in fiscal 1996. $1.0 million of the
decrease in management fees was due to the purchase of majority ownership
interests in UltraMedix and OmniCare-TN in January 1996, resulting in the
consolidation of these entities, including the elimination of intercompany
management fees for the three months ended March 31, 1997 compared to the
recognition of $1.0 million in management fees for the three months ended March
31, 1996. Operating revenues of OmniCare-MI decreased due primarily to a
net decrease in premium rates of 2% and enrollment rates of 4%, which resulted
in decreased management fees to the Company of approximately $.5 million. These
decreases were offset by increased operating revenues of PPC due primarily to
increased enrollment of approximately 49%, offset by a decrease in premium
rates of approximately 13% which resulted in a net increase in management fees
to the Company of approximately $.8 million.
Commission and service fees were $5.0 million in fiscal 1997, a $1.9
million (61%) increase over fees of $3.1 million in fiscal 1996. Approximately
$1.8 million of the increase relates to the new IWIF contract that began in
June 1996 and the balance to new groups.
Total expenses in fiscal 1997 were $32.2 million, an increase of $4.1
million (15%) over expenses of $28.1 million in fiscal 1996.
Medical service expenses of $12.8 million relate to OmniCare-TN and
UltraMedix, and were $9.8 million and $3.0 million, respectively, an increase
of $1.6 million over medical service expenses of $11.2 million in fiscal 1996.
The MLR for the three months ending March 31, 1997, for OmniCare-TN was 71% and
for UltraMedix was 81%. Reductions made to OmniCare-TN's medical accrual
during the quarter resulted in a lower then expected MLR for the quarter and
year to date.
MG&A increased $1.9 million (13%) from $15.1 million in fiscal 1996 to
$17.0 million in fiscal 1997, as follows: (i) MG&A for UA-OH increased $.4
million, but MG&A as a percentage of management fee revenues decreased 11% from
95% in fiscal 1996 to 84% in fiscal 1997, due primarily to the mandated
Medicaid initiative increasing enrollment but reducing the overall marketing
effort; (ii) MG&A for corporate headquarters, including the cost to operate
OmniCare-MI increased $.1 million, and MG&A as a percentage of management fee
revenues increased 8%, from 84% in fiscal 1996 to 91% in fiscal 1997, due
primarily to the decrease in management fees from OmniCare-MI; and (iii) MG&A
for CHF increased $1.8 million, and MG&A as a percentage of commission and
service fee revenues increased 1%, from 82% in fiscal 1996 to 83% in fiscal
1997, due primarily to the activities related to the new IWIF contract,
including the acquisition of Spectera in December 1996.
13
<PAGE> 15
MG&A for UA-TN and UA-FL decreased from $3.6 million in fiscal 1996 to
$3.4 million in fiscal 1997, a net decrease of $.2 million (6%).
Depreciation and amortization in fiscal 1997 was $1.5 million, an increase
of $.3 million (25%) from $1.2 million in fiscal 1996. The increase was due
primarily to the amortization of goodwill related to acquisitions and computer
software.
The $.1 million (33%) increase in interest expense from $.3 million in
fiscal 1996 to $.4 million in fiscal 1997, was due to increased borrowings
against the line of credit.
Equity in net losses of unconsolidated affiliates' decreased $.3 million,
from $.3 million in fiscal 1996 to zero in fiscal 1997, due to the Company's
recognition of its share of earnings as a shareholder of OmniCare-TN (50%) and
UltraMedix (30.4%) through January 1996, at which time the Company acquired a
majority interest in these plans.
As a result of the foregoing, the Company recognized earnings before
income taxes of $.9 million in fiscal 1997 compared to losses before income
taxes of $.4 million in fiscal 1996, a $1.3 million change. The statutory tax
rate for the current three month period was approximately 41%, and is composed
of the federal rate of approximately 36% and the state and local tax rate of
approximately 5%. Goodwill amortization related to equity investments not
deductible for tax purposes resulted in an effective tax rate of 54%. The
Company recognized income tax expense on the prior year's three month losses,
due primarily to goodwill amortization related to equity investments and equity
losses in affiliates not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had (i) cash and cash equivalents and
marketable securities of $21.2 million compared to $30.9 million at June 30,
1996, (ii) working capital of $19.4 million compared to $12.2 million at June
30, 1996, and (iii) a current assets to current liabilities ratio of 2.2-to-1
and 1.4-to-1 at March 31, 1997 and June 30, 1996, respectively. The principal
sources of funds for the Company during the nine months ended March 31, 1997
were long-term borrowings of $5.1 million, repayment of notes receivable of $.1
million and a decrease in other assets of $.1 million, offset by $8.2 million
used in net operating activities, net purchases of marketable securities of
$1.7 million, furniture and equipment additions of $2.9 million, increase in
intangibles of $.8 million, acquisition of a business, net of cash acquired of
$1.0 million, $2.2 million to repay long term debt and $.1 million to
repurchase Company shares.
As of March 31, 1997, outstanding advances and accrued interest due to the
Company from United/HealthScope, Inc. ("UHI") totaled approximately $4.9
million. The Company has set up allowances of approximately $1.8 million to
adjust the carrying values of amounts due from UHI to their estimated fair
values. In April 1997, the Company entered into a transaction with other UHI
shareholders and a private investment firm pursuant to which the Company
converted its interest in UHI at March 31, 1997, including advances, accrued
interest and the value of warrants held by the Company to one million shares of
non-voting preferred stock of the restructured UHI in the amount of $4.0
million and a warrant to purchase 3,310 shares of UHI common stock, exercisable
at any time at a nominal price. The third party investor had previously
advanced UHI $1.8 million, in partial consideration for which the Company had
subordinated its secured position to the extent thereof. The third party
intends to lend UHI an additional $2.2 million upon completion of the
transaction.
14
<PAGE> 16
PhilCare Health Systems, Inc., an HMO headquartered in Philadelphia,
Pennsylvania is 49% owned by the Company's wholly owned subsidiary, United
American Healthcare of Pennsylvania. PhilCare was developed to participate in
Pennsylvania's mandatory Medicaid pilot program, HealthChoices, and in June
1996, obtained its HMO license. In connection therewith, the Company funded
PhilCare's applicable statutory reserve and net worth requirements of $2.1
million in cash. On October 31, 1996, the Company announced its decision to
withdraw its support of PhilCare's for participation in the HealthChoices
program. After prolonged negotiations with the Commonwealth of Pennsylvania,
management felt that it was in the best interest of the Company's shareholders
to withdraw from consideration in the HealthChoices program. However,
management intends to explore other potential business opportunities in this
market.
In October 1996, the Company withdrew its HMO licensing application in
Georgia and the $4.1 million used to fund the statutory requirements. This
amount was funded from the Company's line of credit arrangement.
In fiscal 1995 the Company provided a $1 million letter of credit on
behalf of OmniCare-LA and a $1 million capital contribution to OmniCare-LA, in
satisfaction of applicable statutory requirements. The capital contribution was
funded from the Company's line of credit arrangement.
The Company anticipates that additional cash flow and working capital may
be necessitated by business expansion needs 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 BORROWINGS 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.
15
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported by the Company, certain senior officers and the
Company are named defendants in a shareholder lawsuit filed in the United
States District Court for the Eastern District of Michigan in August 1995. In
October 1996, the plaintiffs filed a consolidated amended complaint. The
amended complaint alleges that certain senior officers and the Company issued
reports and made statements that were false or misleading in violation of
federal securities laws. The Company and the officers have filed an answer
denying these allegations and any liability to plaintiffs. The Company and the
officers contend that all material facts were disclosed during the alleged
period, or were already available in the financial market place.
The Company and the officers have agreed to the certification of the
lawsuit as a class action. The discovery process has commenced. The Company's
management believes that it is too early to form an opinion regarding the
potential financial impact of the lawsuit. An unfavorable outcome in excess of
insurance policy limits could have a potential adverse impact on the Company's
financial statements.
In addition, the Company has learned that on March 31, 1997, four
individuals, three of whom were former OmniCare-TN marketing representatives,
were indicted by the federal grand jury for the alleged submission of fraudulent
TennCare applications in 1994. The indictment specifically alleges that the
individuals did not inform OmniCare-TN or the Company of this fraudulent
activity. The Company will monitor this indictment to determine if any action
is necessary to protect its interests.
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.
MANAGEMENT AGREEMENT
PPC previously served notice of its intention to terminate the Company's
Management Agreement with cause based upon a dispute of the payment of
non-emergent transportation costs for enrollees as a marketing expense to be
incurred under the Management Agreement. This matter has been submitted to
binding arbitration in accordance with the Management Agreement. MANAGEMENT
BELIEVES ARBITRATION WILL BE COMPLETED WITHIN THE NEXT THREE MONTHS AND THAT
ITS POSITION IN CHALLENGING THE TERMINATION WITH CAUSE IS MERITORIOUS. On
April 23, 1997, PPC served notice upon the Company terminating the Management
Agreement without cause pursuant to the terms of the Management Agreement. The
termination will be effective December 31, 1997.
16
<PAGE> 18
BOARD VACANCIES AND ELECTIONS
Effective January 1, and 7, 1997, Richard P. Sutkin and Karl D. Gregory,
Ph.D., respectively, resigned from the Company's Board of Directors. Effective
April 7, 1997, the Company's Board of Directors elected Vivian L. Carpenter,
Ph.D., Ronald M. Horwitz, Ph.D. and William B. Fitzgerald, Esq. as members of
the Board. There remains two Board vacancies which the Board intends to fill
upon identification of qualified candidates.
EXECUTIVE RESIGNATION
Bobby L. Jones, the Company's Senior Vice President, OmniCare-MI
Management Group and Chief Operating Officer of OmniCare-MI, submitted his
resignation effective June 1, 1997. On an interim basis, Ronald R. Dobbins,
the Company's President and Chief Operating Officer, will function in the role
as Chief Operating Officer of OmniCare-MI until a qualified replacement can be
identified.
CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies 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 BOLDED
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 which might be projected,
forecasted, estimated or budgeted by the Company in forward-looking statements.
1. Inability to increase premiums and prospective or retroactive
reductions to premium rates commensurate with increases in medical
costs due to utilization, government regulation, or other factors.
2. Discontinuance of, limitations on or restructure of governmental-funded
programs.
3. Increases in medical cost, including increases in utilization and costs
of medical services and the effects of actions by competitors or
groups of providers.
4. Adverse state and federal legislation and initiatives, including
limitations on or reductions of 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 clients.
17
<PAGE> 19
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 renegotiation at less
cost-effective rates or terms of payment.
14. The selection by employers and individuals of higher co-payments/
deductible/ coinsurance plans with relatively lower premiums or
margins.
15. The impact upon the Company's medical loss ratio on 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.
18. Increases by regulatory authorities of minimum capital, reserve and
other financial solvency requirements.
19. Denial of accreditation by quality accrediting agencies, e.g.,
National Committee for Quality Assurance.
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. Devaluation of goodwill and notes receivables.
18
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A).
(a) Exhibits
Exhibit Number Description of Document
-------------- -----------------------
27 Financial data schedule
(b) None.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: May 14, 1997 By: /s/ Ronald R. Dobbins
--------------------------------------
Ronald R. Dobbins
President & Chief Operating Officer
Dated: May 14, 1997 By: /s/ Jagannathan Vanaharam
--------------------------------------
Jagannathan Vanaharam
Senior Vice President-Finance & Treasurer
20
<PAGE> 22
EXHIBIT INDEX
Exhibit Number Description of Document
- -------------- ----------------------------
27 Financial data schedule
21
<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 MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON
FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 12,157,091
<SECURITIES> 9,088,175
<RECEIVABLES> 13,304,712
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,942,039
<PP&E> 21,057,328
<DEPRECIATION> (8,245,289)
<TOTAL-ASSETS> 78,972,960
<CURRENT-LIABILITIES> 16,565,406
<BONDS> 0
0
0
<COMMON> 10,498,495
<OTHER-SE> (108,874)
<TOTAL-LIABILITY-AND-EQUITY> 78,972,920
<SALES> 0
<TOTAL-REVENUES> 97,533,747
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 94,604,737
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<INTEREST-EXPENSE> 1,170,417
<INCOME-PRETAX> 1,758,593
<INCOME-TAX> 1,221,000
<INCOME-CONTINUING> 537,593
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