<PAGE> 1
Securities and Exchange Commission
Washington, DC 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, 1998
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.
6,578,356 Common Shares as of
May 15, 1998
<PAGE> 2
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I
Item 1. Condensed Financial Statements--Unaudited
Consolidated Balance Sheets--March 31, 1998
and June 30, 1997 2
Consolidated Statements of Operations--Three and Nine Months
Ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows--Nine Months
Ended March 31, 1998 and 1997 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBITS 27
1
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PART I.
ITEM 1. FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
--------- --------
ASSETS
- ---------------------------------------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 9,609 $ 9,582
Marketable securities 4,322 7,860
Premiums, commission and service fees receivables 3,973 5,275
Other receivables 2,160 2,441
Refundable federal income taxes 1,153 115
Prepaid expenses and other 452 587
Deferred income taxes 726 746
-------- -------
Total current assets 22,395 26,606
Property and equipment, net 7,640 10,100
Intangible assets, net 6,387 10,557
Investments in and advances to affiliates 2,100 4,400
Statutory reserves 1,900 3,937
Deferred income taxes 3,159 339
Other assets 584 1,940
Net assets of discontinued operations 19,490 19,746
-------- -------
$63,655 $77,625
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------
Current liabilities
Current portion of long-term debt $14,444 $15,868
Medical claims payable 17,066 8,735
Accounts payable and accrued expenses 2,276 6,539
Accrued compensation and related benefits 1,389 2,098
Other current liabilities 497 380
-------- -------
Total current liabilities 35,672 33,620
Long-term debt 8,000 8,000
Accrued rent 1,575 1,599
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued - -
Common stock, 15,000,000 shares authorized; 6,578,356 and
6,535,941 issued and outstanding, respectively 10,715 10,498
Retained earnings 7,752 23,996
Unrealized net holding losses on marketable securities (59) (88)
-------- -------
18,408 34,406
-------- -------
$63,655 $77,625
======== =======
</TABLE>
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
2
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Medical premiums $19,614 $17,585 $ 62,424 $51,715
Management fees from related parties 6,407 10,004 18,866 29,770
Interest and other income 635 449 1,590 1,492
------------- ------------- ------------- -------------
Total revenues 26,656 28,038 82,880 82,977
EXPENSES
Medical services 17,035 12,843 56,074 40,746
Marketing, general and administrative 15,283 13,464 37,503 39,828
Depreciation and amortization 2,102 1,058 7,836 3,075
Interest expense 424 386 1,210 1,151
------------- ------------- ------------- -------------
Total expenses 34,844 27,751 102,623 84,800
------------- ------------- ------------- -------------
Loss from continuing operations before
income tax (benefit) expense (8,188) 287 (19,743) (1,823)
Income tax (benefit) expense (1,108) 302 (3,620) (224)
------------- ------------- ------------- -------------
Loss from continuing operations (7,080) (15) (16,123) (1,599)
Discontinued operations, net of income
taxes 202 431 (121) 2,137
------------- ------------- ------------- -------------
NET (LOSS) EARNINGS $(6,878) $ 416 $(16,244) $ 538
============= ============= ============= =============
NET (LOSS) EARNINGS PER COMMON SHARE:
LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS $ (1.08) $ .00 $ (2.45) $ (0.24)
============= ============= ============= =============
NET (LOSS) EARNINGS PER COMMON SHARE $ (1.05) $ .06 $ (2.47) $ 0.08
============= ============= ============= =============
</TABLE>
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
3
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) earnings $(16,244) $ 538
Adjustments to reconcile net (loss) earnings to net cash
provided from (used in) operating activities:
Discontinued operations, net of income taxes 121 (2,137)
Bad debt expense 2,300 -
Gain on disposal of assets (102) -
Depreciation and amortization 7,836 3,075
Accrued rent (24) 87
Deferred income tax benefit (2,816) (841)
Minority interest in consolidated affiliate - 564
Changes in assets and liabilities
Decrease in premiums, commission and service fees receivables 1,302 2,443
Decrease in other receivables 281 1,538
(Increase) decrease in refundable federal income taxes (1,038) 893
Decrease in prepaid expenses and other 135 73
Decrease in statutory reserves 2,037 4,091
Decrease (increase) in other assets 1,356 (59)
Increase (decrease) in medical claims payable 10,641 (17,684)
Decrease in accounts payable and accrued expenses (4,763) (1,595)
(Decrease) increase in accrued compensation and related benefits (709) 108
Increase in other current liabilities 118 106
------------- -------------
Net cash provided from (used in) operating activities 431 (8,800)
INVESTING ACTIVITIES
Net decrease (increase) in marketable securities 3,583 (1,675)
Purchase of furniture and equipment (1,195) (1,695)
Increase in intangible assets (284) -
Cash used in discontinued operations (1,301) (1,453)
------------- -------------
Net cash provided by (used in) investing activities 803 (4,823)
FINANCING ACTIVITIES
Borrowings under line of credit agreement 142 4,367
Payments made on long-term debt (1,566) (2,139)
Proceeds from issuance (repurchase) of common stock 217 (127)
------------- -------------
Net cash (used in) provided from financing activities (1,207) 2,101
------------- -------------
Net increase (decrease) in cash and cash equivalents 27 (11,522)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,582 23,679
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,609 $ 12,157
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,406 $ 1,000
============= =============
Income taxes paid $ 61 $ 1,000
============= =============
</TABLE>
See accompanying notes to the Unaudited Condensed Consolidated Financial
Statements.
4
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 1 - BASIS OF PREPARATION
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
inter-company transactions and balances have been eliminated in consolidation.
Interest of other investors in the Company's majority-owned subsidiaries is
accounted for as minority interests. Non-majority investments in affiliates in
which management does not have the ability to exercise significant influence
are recorded on the cost method. As discussed in Note 3, Corporate Healthcare
Financing, Inc. and its wholly owned subsidiaries ("CHF") are presented as
discontinued operations.
The financial statements as of and for the nine and three months ended
March 31, 1998 and 1997 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, 1998 are not necessarily
indicative of the results of operations for the full fiscal year ending June
30, 1998. Audited June 30, 1997 financial statements, with accompanying
footnotes, can be found in the Company's most recent Form 10-K.
Certain reclassifications have been made to prior years' financial
statements' amounts to conform to the current period classifications.
NOTE 2 - RESTRUCTURING AND LIQUIDITY
On January 12, 1998, as a result of significant operating losses, negative
working capital and a reduction in net worth, the Company announced a major
financial restructuring program, which is designed to cut the Company's cash
losses and position the Company for profitable operations.
The restructuring program encompassed Company plans to discontinue some
expansion projects, reduce non-core spending activities, reduce
corporate overhead, renegotiate its bank credit facilities, re-evaluate the
Company's investment in its affiliates and other assets, and sell CHF. During
the quarter ended March 31, 1998, the Company recognized restructuring charges
of approximately $.7 million and $.3 million related to the write-off of
deferred HMO licensure costs in Louisiana and Pennsylvania, respectively, $.1
million of severance expenses, and $2.3 million in bad debt expense related to
the valuation of the Company's investment in Advica (formerly HealthScope),
recognizing a $2.3 million loss related to the liquidation of assets and
certain liabilities of the Florida operations, and the $.8 million write-off or
revaluation of obsolete and other property and equipment.
Other restructuring actions taken through March 31, 1998 included employee
downsizing, discontinuance of the Company's activities in Louisiana,
renegotiation of the Company's bank credit facility, and continuation of the
Company's efforts to sell CHF. Additional activities, which are in process and
are important for the overall success of the restructuring program, include
management's efforts to achieve further cost reductions, accomplish certain
asset sales, and maintain the Company's net revenues. The primary source of
future net revenues is expected to include those from certain health care plans
owned or operated by the Company. If the projected net revenues for these
health
5
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1997
care plans are not maintained, without mitigation by further cost reductions and
other asset sales, it would represent a significant adverse development for the
Company and the restructuring program.
As indicated in the three preceding paragraphs, the Company's ability to
generate adequate amounts of cash to meet its cash needs and to maintain
existing operations will be dependent on the success of the aforementioned
restructuring activities and other management initiatives. At March 31, 1998,
the Company had cash and cash equivalents and short-term marketable securities
of $13.9 million, compared to $17.4 million at June 30, 1997. The Company
believes that these assets, when combined with the restructuring activities and
operations, are sufficient to meet its obligations in the normal course of
business. If the restructuring activities are not successful to the extent of
meeting the cash needs of the Company, the results would represent a
significant adverse development for the Company.
NOTE 3 - DISCONTINUED OPERATIONS
In conjunction with the Company's intention to focus on core activities,
it is the intention of management to sell CHF. 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 assets and liabilities of CHF, except for cash and cash
equivalents, have been reported in the accompanying unaudited condensed
consolidated balance sheet as net assets of discontinued operations as of March
31, 1998 and June 30, 1997.
On September 12, 1997, the Company's Board of Directors approved a
proposed stock sale of CHF for $30 million in cash, contingent upon the
buyer securing financing. The buyer was unable to obtain financing, and the
sale did not occur. On May 14, 1998, the Company's Board of Directors approved
a new proposed stock sale of CHF to a privately held national employee leasing
company for $16 million in cash plus $2.5 million of the proposed buyer's
preferred stock, bearing 6% annual preferred dividend payable in stock for
three years and, thereafter, a 14% annual preferred dividend payable in cash.
In the event this sale is not consummated, the Company intends to pursue other
prospective buyers. The cash proceeds from the sale of CHF would be used to
reduce debt and provide security for the Company's bank indebtedness.
Discontinued operations are summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total revenues $6,047 $5,009 $15,582 $14,557
Total expenses 5,845 4,578 15,703 12,420
-------------- -------------- -------------- --------------
(Loss) earnings from
discontinued operations (1) $ 202 $ 431 $ (121) $ 2,137
============== ============== ============== ==============
</TABLE>
(1) Net of income tax of $369 and $176 for the three months ended March
31, 1998 and 1997, respectively, and $51 and $1,445 for the nine
months ended March 31, 1998 and 1997, respectively.
6
<PAGE> 8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1997
CHF and its subsidiaries' consolidated balance sheets are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
----------- ---------
ASSETS
- ---------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 754 $ 804
Commission, service fees and other receivables, net 10,062 9,927
Property and equipment, net 2,738 2,126
Intangible assets, net 8,089 9,217
Other assets 1,218 982
----------- ---------
$22,861 $23,056
=========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ---------------------------------------------------
Accounts payable and accrued expenses $ 1,244 $ 1,221
Accrued compensation and related benefits 861 627
Payable to parent 2,196 2,202
Debt payable within one year 197 197
Long-term debt 315 461
----------- ---------
4,813 4,708
Shareholder's equity 18,048 18,348
----------- ---------
$22,861 $23,056
=========== =========
</TABLE>
Effective December 31, 1996, CHF acquired certain contract rights and
assets and assumed certain liabilities of Spectera, Inc. for approximately $1.8
million in cash and debt. The excess of the 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 unaudited condensed consolidated balance sheets.
NOTE 4 - DEBT
On March 12, 1998, effective as of February 1, 1998, the Company entered
into an amended loan agreement and promissory note for a line of credit
facility with its current bank lender for $22.9 million. The purposes of the
line of credit facility are to (i) renew the existing line of credit, (ii)
increase the existing line of credit to pay off outstanding term loans with the
same bank, and (iii) provide for a letter of credit not to exceed $.5 million.
The agreement requires the permanent reduction of the outstanding balance and
the line of credit facility by (a) payment of 60% of the net cash sale proceeds
from the sale of CHF, or otherwise to the lesser of the outstanding balance or
$8 million, by February 1, 1999, and (b) cancellation of the $.5 million letter
of credit by July 31, 1998. The maturity date of the line of credit facility
is October 1, 1999. The Company's outstanding borrowings at March 31, 1998 on
its line of credit and term loans is $22.4 million, with an additional $.5
million letter of credit issued under the line of credit facility.
7
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1997
Pursuant to the promissory note, interest is payable monthly at the bank's
prime rate (8.5% at March 31, 1998), with the principal due and payable at
maturity. The interest rate on the line of credit facility will be increased
to one percent in excess of the bank's prime rate if the outstanding balance
and commitment to lend under the credit facility are not reduced to $8 million
on or before November 1, 1998 and increased to two percent in excess of the
bank's prime rate if CHF is not sold and the line of credit facility is not
reduced to $8 million on or before February 1, 1999.
The line of credit facility is secured by the stock of CHF. Financial
covenants for minimum net worth, debt service coverage ratio, and maximum debt
to worth ratio will be established within 20 days after the earlier of either:
(i) the sale of CHF and the bank's receipt of the Company's Form 10-K Annual
Report for the year ended June 30, 1998, or (ii) February 1, 1999.
On May 13, 1998, the bank conditionally approved the Company's request for
a waiver of a restrictive covenant in their loan agreement, subject to
requirements that the Company has accepted. Such requirements include, among
other things: (i) closing of the new proposed stock sale of CHF (discussed in
Note 3) on or before July 1, 1998, unless extended by the bank for cause; (ii)
permanent reduction of the Company's outstanding indebtedness to the bank
("Bank Debt") by $12 million from the cash sale proceeds received at such
closing; (iii) deposit of the remaining net sale proceeds in a cash collateral
account as security for the remaining Bank Debt; (iv) the Company's pledge to
the bank of the preferred stock of the buyer received as part of the CHF
purchase price, as additional security; (v) in the event that OmniCare Health
Plan in Michigan ("OmniCare-MI"), a plan operated by the Company, were placed
in receivership, application of the cash collateral account in permanent
reduction of the Bank Debt; (vi) that any default by OmniCare-MI under any
arrangement made with Michigan insurance regulators would be a cross-default
under the Bank Debt; and (vii) that the Company will use its best efforts to
cause its wholly owned subsidiary, United American Healthcare of Pennsylvania,
to pledge to the bank whatever interest it has in or to preferred stock of
PhilCare Health Systems, Inc.
NOTE 5 - NET (LOSS) EARNINGS PER COMMON SHARE
Basic 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 and nine months ended March 31, 1998 and 6,560,941 for the three and
nine months ended March 31, 1997.
Approximately 27,000 shares of the Company's common stock are estimated to
be purchased and approximately 42,000 shares were purchased under the Company's
Employee Stock Purchase Plan for fiscal 1998 and 1997, respectively, at a
purchase price which is the lesser of 85% of the fair market value of the shares
on the first day or the last day of the respective fiscal years. These shares
were not included in the computation of diluted loss per share because the
shares were antidilutive to the loss from continuing operations per share for
the period ended March 31, 1998 and had no impact per share for the period ended
March 31, 1997.
8
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1997
NOTE 6 - LONG-LIVED ASSETS
Effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). Following
the criteria set forth in SFAS 121, long-lived assets and certain identifiable
intangibles are reviewed by the Company for events or changes in circumstances
that would indicate that the carrying value may not be recoverable. In making
this determination, the Company considers a number of factors, including
estimated future undiscounted cash flows associated with long-lived assets.
During the quarter ended December 31, 1997, the Company wrote off the
remaining goodwill related to its purchase of UltraMedix Healthcare Systems,
Inc. ("UltraMedix" or the "Plan"), the Company's majority owned HMO in Florida,
of $3.5 million, and the UltraMedix deferred HMO licensure cost of $.2 million.
Also see Note 7. The Company also established a valuation allowance of $2.3
million on its investment in Advica (formerly HealthScope).
The Company believes that the remaining intangible assets are recorded at
their net recoverable value.
NOTE 7 - CONTINGENCIES
As previously reported by the Company, certain present and former senior
officers and the Company are named as defendants in two shareholder lawsuits
filed in the United States District Court for the Eastern District of Michigan
(the "Court") in August 1995. The Court consolidated these lawsuits into a
single action. In January 1998, the parties agreed to a proposed settlement
requiring the release of all claims and damages sought by the plaintiffs and
payment by the Company of $3.25 million, of which the Company anticipates the
insurance carrier to pay approximately $2.1 million. The Company recorded an
expense for the balance of $1.15 million as of June 30, 1997. In late April
1998, the Company informed the plaintiffs' counsel and the Court that the
Company would not be able to fully fund its portion of the tentative settlement
amount. Any settlement is subject to federal court approval following a court
hearing on the fairness of the proposed settlement, scheduled for April 27,
1998 and adjourned on that date to June 1, 1998, to allow the parties time to
attempt to agree on a restructured settlement proposal. 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.
As of December 31, 1997, UltraMedix was not in compliance with the Florida
Department of Insurance's ("FDOI") statutory solvency requirement. The FDOI
requires that HMOs maintain a minimum statutory reserve as determined in
accordance with statutory accounting practices of $.5 million. UltraMedix's
statutory deficiency at December 31, 1997 was estimated at $4.5 million. This
deficiency was determined by actuarial and extensive internal reviews of the
Plan's medical claims experience at December 31, 1997, which resulted in an
adjustment to the Plan's incurred but
9
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1997
not reported ("IBNR") medical expenses of $4.5 million during the second
quarter--$3.0 million after taxes.
As a result of the deficiency, on January 30, 1998, the Company,
UltraMedix and the Plan's third-party administrator, United American of
Florida, Inc. ("UA-FL"), a Company subsidiary, signed and delivered to the FDOI
a Stipulation and Consent to Appointment of Receiver and Order of Liquidation
entitling the FDOI to obtain the entry of an accompanying consent order by the
applicable Florida court if the Company did not cure UltraMedix's existing
statutory reserve deficiency (estimated at $4.5 million) by February 6, 1998.
On February 26, 1998, the deficiency had not been cured and pursuant to the
FDOI's petition, the Florida court entered such consent order.
Pursuant to the stipulation and consent order: UltraMedix and UA-FL (the
"Organizations") admitted that UltraMedix was statutorily insolvent as of
December 31, 1997; the Company paid $.5 million to the FDOI to cover UltraMedix
claims incurred during and provider capitation payments due for the eight days
ended February 6, 1998, and funded the Organizations' ordinary business expenses
for the same period; the FDOI took control of the Organizations' bank accounts;
the Plan ceased enrolling new members; and the Organizations continued to
provide services to all of the Plan's subscribers and to process renewals on all
policies as they came due. Pursuant to the consent order, on February 26, 1998,
the Organizations were declared insolvent and the FDOI was appointed as Receiver
for the purposes of their liquidation.
On March 3, 1998, the Florida court entered a Consent Order of Liquidation,
Injunction and Notice of Stay, ordering the FDOI, as Receiver, to take
possession of and liquidate all assets of the Organizations and ordering the
immediate cancellation of UltraMedix's authority to provide health care services
as a health maintenance organization in Florida.
On April 15, 1998, the Florida Agency for Health Care Administration
notified the Company of the Agency's intent to enforce the Company's Guarantee
Agreement, under which the Company had agreed to reimburse UltraMedix's
contracted Medicaid providers for authorized, covered Medicaid services rendered
to covered Medicaid enrollees, for which the Agency had made payment on behalf
of such enrollees, limited to an amount equal to the amount of surplus
UltraMedix would have been required to maintain under the Medicaid contract in
the absence of such Guarantee Agreement.
Although the outcome cannot be predicted or reasonably estimated, it is
expected that the ultimate resolution of the matters involving the
Organizations will not have a materially adverse effect on the Company's
financial position.
On April 24, 1998, the Board of Directors of the Company authorized an
unsecured loan by the Company to OmniCare-MI of the amount necessary (not to
exceed $4.2 million) to enable OmniCare-MI to meet its minimum statutory
requirements for net worth and working capital. Such loan would be evidenced by
a "surplus note" from OmniCare-MI to the Company, under which principal and
interest would not be payable without the prior approval of the Michigan
Insurance Bureau. Such loan would require the waiver by the Company's current
bank lender of a restrictive covenant in their current loan agreement,
10
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998 AND 1997
which the bank has conditionally granted, subject to requirements that the
Company has accepted. Such requirements include, prior to the Company's
disbursement of such loan to OmniCare-MI: (a) delivery by the Company and
OmniCare-MI to the bank of a written reorganization/turnaround plan and copies
of any material provided to Michigan insurance regulators; and (b) the bank's
approval of the proposed plan. Additional requirements on which the waiver is
conditioned are discussed in Note 4. The Company currently is unable to
reasonably estimate the amount of such loan or to predict when, if ever, such
loan will be disbursed.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
OVERVIEW
On January 12, 1998, the Company announced a major financial restructuring
program. To oversee the Company's restructuring efforts, the Company named a
new Chairman of the Board to serve in a non-executive capacity, with the
day-to-day operations of United American continuing to be managed by the
current Chief Executive Officer and President, and Chief Operating Officer of
the Company. United American engaged Arthur Andersen LLP to assist in the
development and implementation of the financial restructuring program and named
Thomas J. Allison as interim Chief Financial Officer of the Company. Mr.
Allison also is the head of Arthur Andersen LLP's Chicago-based Corporate
Recovery Services Group.
The Board of Directors of the Company adopted the financial restructuring
plan, endorsed by the Board of Directors' audit committee, which is designed to
cut the Company's cash losses and position the Company for profitable
operations. Under the restructuring plan, the Company intends to discontinue
some expansion projects, reduce non-core spending activities, reduce corporate
overhead, renegotiate its bank credit facilities, re-evaluate the Company's
investment in its affiliates and other assets, and sell CHF.
As of December 31, 1997, UltraMedix, the Company's majority owned HMO in
Florida, was not in compliance with the Florida Department of Insurance ("FDOI")
statutory solvency requirement. The FDOI requires that HMOs maintain a
statutory reserve as determined in accordance with statutory accounting
practices of $.5 million. UltraMedix's statutory deficiency at December 31,
1997 is estimated at $4.5 million. This deficiency was determined by actuarial
and extensive internal reviews of the Plan's medical claims experience at
December 31, 1997, which resulted in an adjustment to the Plan's incurred but
not reported ("IBNR") medical expenses of $4.5 million during the second
quarter--$3.0 million after taxes.
As a result of the deficiency, on January 30, 1998, the Company, UltraMedix
and the Plan's third-party administrator, United American of Florida, Inc.
("UA-FL"), a Company subsidiary, signed and delivered to the FDOI a Stipulation
and Consent to Appointment of Receiver and Order of Liquidation entitling the
FDOI to obtain the entry of an accompanying consent order by the applicable
Florida court if the Company did not cure UltraMedix's existing statutory
reserve deficiency (estimated at $4.5 million) by February 6, 1998. On February
26, 1998, the deficiency had not been cured and pursuant to the FDOI's petition,
the Florida court entered such consent order.
12
<PAGE> 14
Pursuant to the stipulation and consent order: UltraMedix and UA-FL (the
"Organizations") admitted that UltraMedix was statutorily insolvent as of
December 31, 1997; the Company paid $.5 million to the FDOI to cover UltraMedix
claims incurred during and provider capitation payments due for the eight days
ended February 6, 1998, and funded the Organizations' ordinary business expenses
for the same period; the FDOI took control of the Organizations' bank accounts;
the Plan ceased enrolling new members; and the Organizations continued to
provide services to all of the Plan's subscribers and to process renewals on all
policies as they came due. Pursuant to the consent order, on February 26, 1998,
the Organizations were declared insolvent and the FDOI was appointed as Receiver
for the purposes of their liquidation.
On March 3, 1998, the Florida court entered a Consent Order of Liquidation,
Injunction and Notice of Stay, ordering the FDOI, as Receiver, to take
possession of and liquidate all assets of the Organizations and ordering the
immediate cancellation of UltraMedix's authority to provide health care services
as a health maintenance organization in Florida.
On April 15, 1998, the Florida Agency for Health Care Administration
notified the Company of the Agency's intent to enforce the Company's Guarantee
Agreement, under which the Company had agreed to reimburse UltraMedix's
contracted Medicaid providers for authorized, covered Medicaid services
rendered to covered Medicaid enrollees, for which the Agency had made payment
on behalf of such enrollees, limited to an amount equal to the amount of
surplus UltraMedix would have been required to maintain under the Medicaid
contract in the absence of such Guarantee Agreement.
Although the outcome cannot be predicted or reasonably estimated, it is
expected that the utlimate resolution of the matters involving the
Organizations will not have a materially adverse effect on the Company's
financial position.
Restructuring actions taken through March 31, 1998 include employee
downsizing at the Company's Corporate and Tennessee operations of approximately
45 persons, or 7% of the work force, with annualized savings estimated at $2.6
million; other annualized fringe benefit reductions of $.7 million;
discontinuance of its activities in Louisiana; renegotiation of the Company's
bank credit facility; continuation of the Company's efforts to sell CHF; and
other expenditure reductions. Restructuring charges in the third quarter
included expensing $.7 million and $.3 million of deferred HMO licensure-related
costs in Louisiana and Pennsylvania, respectively, and $.1 million of severance
expenses, establishing a bad debt valuation reserve of $2.3 million on the
Company's investment in Advica (formerly HealthScope), recognizing a $2.3
million loss related to the liquidation of assets and certain liabilities of the
Florida operations, and the $.8 million write-off or revaluation of obsolete
and other property and equipment.
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<PAGE> 15
On March 12, 1998, effective as of February 1, 1998, the Company entered
into an amended loan agreement and promissory note for a line of
credit facility with its current bank lender for $22.9 million. The purposes
of the line of credit facility are to (i) renew the existing line of credit,
(ii) increase the existing line of credit to pay off outstanding term loans
with the same bank, and (iii) provide for a letter of credit not to exceed $.5
million. The agreement requires the permanent reduction of the outstanding
balance and the line of credit facility by (a) payment of 60% of the net cash
sale proceeds from the sale of CHF, or otherwise to the lesser of the
outstanding balance or $8 million, by February 1, 1999, and (b) cancellation of
the $.5 million letter of credit by July 31, 1998. The maturity date of the
line of credit facility is October 1, 1999. The interest rate could increase
in the event of certain conditions. The Company's outstanding borrowings at
March 31, 1998 on its line of credit and term loans is $22.4 million, with an
additional $.5 million letter of credit issued under the line of credit
facility. See Note 4 to the Unaudited Condensed Consolidated Financial
Statements for additional discussion.
On September 12, 1997, the Company's Board of Directors approved a
proposed stock sale of CHF for $30 million in cash, contingent upon the
buyer securing financing. The buyer was unable to obtain financing, and the
sale did not occur. On May 14, 1998, the Company's Board of Directors approved
a new proposed stock sale of CHF to a privately held national employee leasing
company for $16 million in cash plus $2.5 million of the proposed buyer's
preferred stock, bearing a 6% annual preferred dividend payable in stock for
three years and, thereafter, a 14% annual preferred dividend payable in cash.
In the event this sale is not consummated, the Company intends to pursue other
prospective buyers. The cash proceeds from the sale of CHF would be used to
reduce debt and provide security for the Company's bank indebtedness. There
can be no assurances that a sale of CHF will be consummated.
In December 1997, the Company completed the stock sale of ChoiceOne, its
preferred provider organization, for $.2 million in cash.
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. The termination of this agreement affects the
year-to-date and quarter-to-quarter comparability of the Company's consolidated
results of operations.
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. OmniCare-MI was selected to
participate in the State's program. It was anticipated that approximately
90,000 additional eligible recipients would be assigned to the selected plans.
The membership increase was expected to help offset the rate reductions under
the program.
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<PAGE> 16
Unsuccessful bidders to the State's request for proposal legally challenged the
initiative and, as a result, the State did not assign the Medicaid eligible
recipients to plans that were awarded contracts, but did institute the rate
reduction component of the new program effective July 1997.
With the indefinite delay of the assignment of the eligible recipients and
with Medicaid rate reductions of 18% to 21%, the operating revenues of
OmniCare-MI and the resulting management fees to the Company decreased in fiscal
1998. For the third quarter of fiscal 1998 and the nine months ended March 31,
1998, the effect of the rate reductions on management fees was approximately $.7
million, or $.07 per share and $1.9 million, or $.13 per share, respectively.
While there can be no assurances that OmniCare-MI can control health care costs
at the rate of the premium reductions, OmniCare-MI has begun to reduce certain
medical fees paid to providers and is contemplating other actions to increase
enrollment and further decrease medical expenses.
The Company reported a loss from continuing operations totaling $7.0
million and $16.1 million for the three and nine months ended March 31, 1998,
respectively, compared to a loss of $.1 million and $1.6 million for the three
and nine months ended March 31, 1997, respectively. Including discontinued
operations, the loss totaled $6.8 million, or $1.05 per share and $16.2 million,
or $2.47 per share for the three and nine months ended March 31, 1998,
respectively, compared to earnings of $.4 million, or $.06 per share and $.5
million, or $.08 per share for the three and nine months ended March 31, 1997,
respectively.
Results for the Florida operations for the current nine-month period
resulted in a loss of $9.8 million, or $1.49 per share (includes $2.3 million
loss related to the liquidation of the assets and certain liabilities of the
Florida operations) compared to a loss of $2.5 million, or $.38 per share for
the comparable period last year. A summary of other activities effecting the
current nine-month period includes the $2.3 million Advica investment valuation
($.35 per share), the write-off of deferred HMO licensure costs of $1 million
($.10 per share), professional fees incurred related to the restructuring
efforts of $1.6 million ($.15 per share), the write-off of obsolete and
revaluation of certain property and equipment of $.8 million ($.09 per share),
and the impact of reduced Medicaid management fees of $1.3 million ($.13 per
share).
NINE MONTHS ENDED MARCH 31, 1998,
COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
Total revenues from continuing operations remained constant at
approximately $83.0 million for the nine months ended March 31, 1997 and 1998.
Medical premium revenues were $62.4 million in the first nine months of
fiscal 1998, an increase of $10.7 million (21%) over medical premium revenues of
$51.7 million in the comparable period a year earlier. Medical premiums for
OmniCare-TN increased $4.9 million (12%), from $42.5 million in the first nine
months of fiscal 1997 to $47.4 million in the first nine months of fiscal 1998.
Of the increase, $1.1 million relates to the Bureau of TennCare's final
15
<PAGE> 17
annual payout, in December 1997, to managed care organizations for high cost
chronic conditions of their membership and new medical technologies. The total
payments of $2.6 million for the service period January 1, 1996 to June 30,
1997 were $1.1 million in excess of the State of Tennessee's estimate for the
same period.
The remaining OmniCare-TN increase of $3.8 million is due to rate
increases offset by enrollment decreases. The per member per month ("PMPM")
premium rate, based on an average membership of 43,000 for the current nine
months, compared to 44,000 for the prior year's nine months--excluding the
effects of the adverse selection and medical technologies settlements--was $119
in fiscal 1998, compared to $108 in fiscal 1997, an increase of 11%. The rate
increase includes changes in the Medicaid enrollment mix.
Medical premiums for UltraMedix increased $5.8 million (63%), from $9.2
million in the first nine months of fiscal 1997 to $15.0 million in the first
nine months of fiscal 1998.
Management fees were $18.9 million in the first nine months of fiscal 1998,
a decrease of $10.9 million (37%) from fees of $29.8 million in the first nine
months of fiscal 1997. Operating revenues of OmniCare-MI decreased in such
period in fiscal 1998 due primarily to a net decrease in premium and enrollment
rates of approximately 9% and 3%, respectively, which resulted in decreased
management fees to the Company of approximately $2.5 million. As noted in the
overview, the State initiative in Michigan was the primary factor in the
reduced premium rates. The Company recognized $8.4 million in management fees
related to the PPC management agreement, which was terminated in May 1997, for
the nine months ended March 31, 1997.
Total expenses before income taxes from continuing operations totaled
$102.6 million in the nine months ended March 31, 1998, compared to $84.8
million in the same period in fiscal 1997, an increase of $17.8 million (21%).
Medical service expenses were $56.1 million in the nine months ended March
31, 1998, an increase of $15.3 million (38%) over medical service expenses of
$40.8 million for the same period in fiscal 1997. Medical expenses for
OmniCare-TN increased by $6.4 million (20%), from $32.8 million for such period
in fiscal 1997 to $39.2 million in such period in fiscal 1998. Medical expenses
for UltraMedix increased $8.9 million (113%), from $7.9 million in the first
nine months of fiscal 1997 to $16.8 million in the nine months ended March 31,
1998. The percentage of medical service expenses to medical premium revenues,
or the medical loss ratio ("MLR"), was 83% and 77% for OmniCare-TN in such
periods in fiscal 1998 and 1997, respectively, and 112% and 86% for UltraMedix
in such periods in fiscal 1998 and 1997, respectively. The OmniCare-TN MLR for
fiscal 1997 was positively impacted by reductions to the medical accrual during
the quarter ended March 31, 1997.
Marketing, general and administrative expenses ("MG&A") decreased $2.3
million (6%), from $39.8 million in the first nine months of fiscal 1997 to
$37.5 million in the first nine months of fiscal 1998, due to the following:
(i) termination of the PPC management
16
<PAGE> 18
agreement, which resulted in a $7.0 million decrease; (ii) an increase in
professional fees of $3.8 million, related primarily to the financial
restructuring program of $2.5 million, information system development and
maintenance of $.6 million, and recruitment fees of $.2 million; (iii) a $2.3
million bad debt expense adjustment, which established a valuation allowance on
the Company's investment in Advica; (iv) a $2.3 million loss related to the
liquidation of the assets and certain liabilities of the Florida operations;
and (v) decreases in salary costs of $1.6 million, promotional and advertising
activities of $.7 million, consumables of $.3 million, travel of $.4 million,
and minority interest of $.6 million.
Depreciation and amortization in the nine months ended March 31, 1998 was
$7.8 million, compared to $3.1 million in the nine months ended March 31, 1997,
an increase of $4.7 million (152%). Of this increase, $3.4 million relates to
the Company's write-off of the remaining goodwill related to the Company's
purchase of UltraMedix in December 1997. Also see Notes 6 and 7 to the
Unaudited Condensed Consolidated Financial Statements. Additional increases
included the write-off and valuation of property and equipment of approximately
$.8 million and $.3 million related to fiscal 1997 and 1998 additions.
As a result of the foregoing, the Company recognized a loss from continuing
operations, before income taxes, of $19.7 million for the nine months ended
March 31, 1998, compared to a loss from continuing operations, before income
taxes, of $1.8 million for the nine months ended March 31, 1997, a $17.9 million
change. The loss from continuing operations, net of income taxes, was $16.1
million for the first nine months of fiscal 1998, compared to a loss from
continuing operations, net of income taxes, of $1.6 million for the comparable
period in fiscal 1997, a change of $14.5 million. The federal statutory tax rate
for continuing operations for both periods was approximately 34%. Goodwill
amortization related to equity investments and the write-off of capital
investments not deductible for tax purposes resulted in an effective tax rate of
approximately 18% for the current nine months, compared to 12% for the prior
fiscal year nine-month period.
The loss from discontinued operations, net of income taxes, was $.1 million
for the nine months ended March 31, 1998, compared to earnings of $2.1 million
for the nine months ended March 31, 1997, a decrease of $2.2 million. This
change is due primarily to increased costs related to servicing the contract
entered into in June 1996 with the State of Maryland's Injured Workers'
Insurance Fund.
The net loss for the nine months ended March 31, 1998 was $16.2 million, or
$2.47 per share, compared to earnings of $.5 million for the comparable prior
nine-month period, or $.08 per share.
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<PAGE> 19
THREE MONTHS ENDED MARCH 31, 1998,
COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Total revenues from continuing operations decreased $1.4 million (5%), from
$28.1 million in the three months ended March 31, 1997 to $26.7 million in the
three months ended March 31, 1998.
Medical premium revenues were $19.6 million in such period in fiscal 1998,
an increase of $2.0 million (11%) over medical premium revenues of $17.6 million
in such period in fiscal 1997. Medical premiums for OmniCare-TN increased $3.1
million (22%), from $13.8 million in such period in fiscal 1997 to $16.9 million
in such period in fiscal 1998.
The OmniCare-TN increase is due to rate and enrollment increases. The PMPM
premium rate, based on an average membership of 44,000 for the current three
months, compared to 40,000 for the prior three-month period, was $128 in fiscal
1998, compared to $116 in fiscal 1997, a 10% increase. The rate increase
includes changes in the Medicaid enrollment mix.
Medical premiums for UltraMedix decreased $1.1 million (141%), from $3.8
million in the three months ended March 31, 1997 to $2.7 million in the three
months ended March 31, 1998.
Management fees were $6.4 million in such period in fiscal 1998, a decrease
of $3.6 million (36%) from fees of $10.0 million in such period in fiscal 1997.
Operating revenues of OmniCare-MI decreased in such period in fiscal 1998, due
primarily to a net decrease in enrollment rates of approximately 9%, which
resulted in decreased management fees to the Company of approximately $.6
million. The State initiative in Michigan was the primary factor in the reduced
premium rates. The Company recognized $3.0 million in management fees for the
three months ended March 31, 1997 related to the PPC management agreement, which
was terminated in May 1997.
Total expenses before income taxes from continuing operations totaled $34.8
million in the three months ended March 31, 1998, compared to $27.8 million in
the three months ended March 31, 1997, an increase of $7.0 million (25%).
Medical service expenses were $17.0 million in such period in fiscal 1998,
an increase of $4.2 million (32%) over medical service expenses of $12.8 million
in such period in fiscal 1997. Medical expenses for OmniCare-TN increased $4.6
million (47%), from $9.8 million in such period in fiscal 1997 to $14.4 million
in such period in fiscal 1998. Medical expenses for UltraMedix decreased $.4
million (13%), from $3.0 million in the three months ended March 31, 1997 to
$2.6 million in the comparable current three-month period. The MLR was 85% and
71% for OmniCare-TN in such periods in fiscal 1998 and 1997, respectively, and
99% and 81% for UltraMedix in such periods in fiscal 1998 and 1997,
respectively. The OmniCare-TN MLR for fiscal 1997 was positively impacted by
reductions to the medical accrual during the period.
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<PAGE> 20
MG&A increased $1.8 million (13%), from $13.5 million in the three months
ended March 31, 1997 to $15.3 million in the three months ended March 31, 1998,
due to the following: (i) termination of the PPC management agreement, which
resulted in a $2.5 million decrease; (ii) an increase in professional fees of
$2.2 million, related primarily to the financial restructuring program of $2.3
million; (iii) a $2.3 million bad debt expense adjustment, which established a
valuation allowance on the Company's investment in Advica; (iv) a $2.3 million
loss related to the liquidation of the assets and certain liabilities of the
Florida operations; and (v) decreases in salary costs of $1.3 million,
promotional and advertising activities of $.2 million, consumables of $.1
million, travel of $.2 million, and minority interest of $.6 million.
Depreciation and amortization in such period in fiscal 1998 was $2.1
million, compared to $1.1 million in such period in fiscal 1997, an increase of
$1.0 million (91%). The increase includes the write-off and valuation of
property and equipment of approximately $.8 million and $.1 million related to
fiscal 1997 and 1998 additions.
As a result of the foregoing, the Company realized a loss from continuing
operations, before income taxes, of $8.2 million for the three months ended
March 31, 1998, compared to earnings from continuing operations, before income
taxes, of $.3 million for the three months ended March 31, 1997, a $8.5 million
change. The loss from continuing operations, net of income taxes, was $7.0
million for such three months of fiscal 1998, compared to a loss from
continuing operations, net of income taxes, of $.1 million for the comparable
period in fiscal 1997, a change of $6.9 million. Goodwill amortization related
to equity investments and the write-off of capital investments not deductible
for tax purposes resulted in an effective tax rate of approximately 14% for the
current three months, compared to 105% for the comparable three months in
fiscal 1997.
Earnings from discontinued operations, net of income taxes, was $.2 million
for the three months ended March 31, 1998, compared to earnings of $.4 million
for the three months ended March 31, 1997, a decrease of $.2 million.
The net loss for the three months ended March 31, 1998 was $6.9 million,
or $1.05 per share, compared to earnings of $.4 million for the comparable
three-month period in fiscal 1997, or $.06 per share.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had (i) cash and cash equivalents and
short-term marketable securities of $13.9 million, compared to $17.4
million at June 30, 1997; (ii) working capital of negative $13.3 million,
compared to negative $7.0 million at June 30, 1997; and (iii) a current
assets-to-current liabilities ratio of .63-to-1, compared to .79-to-1 at June
30, 1997. The principal sources of funds for the Company during the nine
months ended March 31, 1998 were $.4 million provided from net operating
activities, net sale of marketable securities of $3.6 million, debt borrowings
of $.1 million, and proceeds from the issuance of common stock of $.2
million--offset by furniture and equipment additions of $1.2 million,
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<PAGE> 21
investing cash used in discontinued operations of $1.3 million, $1.6 million to
repay long-term debt, and an increase in intangible assets of $.3 million.
In previous fiscal years, to satisfy applicable statutory requirements,
the Company provided a $1.0 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 its line of credit
arrangement. Due to the discontinuance of its Louisiana operations, the Company
canceled its letter of credit commitment of $1.0 million and withdrew the $1.0
million. The Company's Board of Directors has determined to withdraw from all
of its involvement in Pennsylvania and to pursue recouping its investment in
PhilCare.
Proceeds from the currently proposed sale of CHF would provide cash flow
to reduce debt and provide security for the Company's bank indebtedness. There
can be no assurances that a sale will be consummated. The Company is unable
at this time to assess the capital requirements related to the final
disposition of UltraMedix.
On April 24, 1998, the Board of Directors of the Company authorized an
unsecured loan by the Company to OmniCare-MI of the amount necessary
(not to exceed $4.2 million) to enable OmniCare-MI to meet its minimum
statutory requirements for net worth and working capital. Such loan would be
evidenced by a "surplus note" from OmniCare-MI to the Company, under which
principal and interest would not be payable without the prior approval of the
Michigan Insurance Bureau. Such loan would require the waiver by the Company's
current bank lender of a restrictive covenant in their current loan agreement,
which the bank has conditionally granted, subject to requirements that the
Company has accepted. Such requirements include, prior to the Company's
disbursement of such loan to OmniCare-MI: (a) delivery by the Company and
OmniCare-MI to the bank of a written reorganization/turnaround plan and copies
of any material provided to Michigan insurance regulators; and (b) the bank's
approval of the proposed plan. Additional requirements on which the waiver is
conditioned are discussed in Note 4 to the Unaudited Condensed Consolidated
Financial Statements. The Company currently is unable to reasonably estimate
the amount of such loan or to predict when, if ever, such loan will be
disbursed.
The Company's ability to generate adequate amounts of cash to meet its
cash needs will depend on a number of factors, including, in addition to those
described immediately above, the accomplished and prospective results of its
financial restructuring program described earlier in this Item 2 under
"Material Changes in Results of Operations - Overview" and Note 2 to the
Unaudited Condensed Consolidated Financial Statements.
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PART II.
ITEM 1. LEGAL PROCEEDINGS
As previously reported by the Company, certain present and former senior
officers and the Company are named as defendants in two shareholder lawsuits
filed in the United States District Court for the Eastern District of Michigan
("the Court") in August 1995. The Court consolidated these lawsuits into a
single action. In January 1998, the parties agreed to a proposed settlement
requiring the release of all claims and damages sought by the plaintiffs and
payment by the Company of $3.25 million, of which the Company anticipates the
insurance carrier will pay approximately $2.1 million. The Company recorded an
expense for the balance of $1.15 million as of June 30, 1997. In late April
1998, the Company informed the plaintiffs' counsel and the Court that the
Company would not be able to fully fund its portion of the tentative settlement
amount. Any settlement is subject to federal court approval following a court
hearing on the fairness of the proposed settlement scheduled for April 27, 1998
and adjourned on that date to June 1, 1998 to allow the parties time to attempt
to agree on a restructured settlement proposal. 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.
On February 26, 1998, pursuant to a Stipulation and Consent to Appointment
of Receiver and Order of Liquidation earlier signed and delivered to the FDOI
by the Company, UltraMedix and UA-FL, upon the FDOI's petition to the Circuit
Court of the Second Judicial Circuit, in and for Leon County, Florida (the
"Florida Court"), entered a consent order declaring UltraMedix and UA-FL (the
"Organizations") insolvent and appointing the FDOI as Receiver for the purposes
of their liquidation.
On March 3, 1998, the Florida court entered a Consent Order of Liquidation,
Injunction and Notice of Stay, declaring that any further efforts of the
Receiver to rehabilitate the Organizations would be useless, ordering the
Receiver to take possession of and liquidate all assets of the Organizations,
and ordering the immediate cancellation of UltraMedix's authority to provide
health care services as a health maintenance organization in Florida.
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, except as previously reported in the Company's preceding Form 10-Q
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ITEM 5. OTHER INFORMATION
MANAGEMENT CHANGES
On May 12, 1998, the Company announced three changes in its management:
(1) that the Company's Board of Directors had been informed of and accepted,
with regret, the retirement of Julius V. Combs, MD, as the Chief Executive
Officer of the Company, effective August 6, 1998, including Dr. Combs' immediate
relinquishment of his operational responsibilities; (2) that the Company's Board
of Directors had been informed of and accepted, with regret, the resignation
of Ronald R. Dobbins as the President and Chief Operating Officer of the
Company; and (3) that the Company's Board of Directors had elected Gregory H.
Moses as the new President and Chief Operating Officer of the Company. The
Company additionally announced that it expects Mr. Moses to be named Chief
Executive Officer of the Company upon Dr. Combs' retirement.
Mr. Moses, a retired partner of the Coopers & Lybrand accounting firm, most
recently was a consultant to a health maintenance organization in Detroit. He
previously had been partner-in-charge of the Coopers & Lybrand Healthcare
Consulting Group in New York and New Jersey for ten years, chairman of that
firm's National Healthcare Consulting Group for five years and its lead
engagement partner with respect to Mercy Health Services for seven years.
OMNICARE HEALTH PLAN IN MICHIGAN
Included in the Company's revenues are substantial management fees it
receives from OmniCare Health Plan in Michigan ("OmniCare-MI"), a plan operated
by the Company. Newspaper stories on and after May 9, 1998 reported that the
Michigan Insurance Bureau (the "Bureau") had obtained a sealed (confidential)
court order on May 7, 1998 giving state regulators control over OmniCare-MI's
assets. The Company responded to recent news stories with a public statement on
May 12, 1998, stating that: OmniCare-MI is not in receivership but is in active
discussion with the Bureau regarding compliance with certain regulatory issues;
the Company is prepared to bring OmniCare-MI's financial condition into
compliance with state regulations; all services to members of OmniCare-MI will
continue to be provided, with no decrease in the quality of care, and all
providers of care will continue to be paid for their services; the President and
Chief Executive Officer of OmniCare-MI has resigned, and both the Company and
OmniCare-MI have completely restructured their top management; and a plan
developed in conjunction with the Arthur Andersen LLP accounting firm to address
OmniCare-MI's financial difficulties will be presented to the Bureau.
REAL PROPERTY LEASES
The Company is in discussions with its landlords for two locations in
Detroit, Michigan: (i) to reduce its leased corporate headquarters space by
14% and reduce its rental costs therefor (lease expiring May 10, 2005), and
(ii) to move all of its information systems operations to its corporate
headquarters from premises currently leased therefor and terminate that lease,
which
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currently expires June 30, 2001. The Company is unable to predict what
will be the result of these discussions.
The Company is a tenant of approximately 67,000 square feet of office space
it is not using in Philadelphia, Pennsylvania (lease expiring September 30,
2002). As part of its restructuring program, the Company has subleased 79% of
such premises to third parties for rent substantially equal to its own and is
attempting to sublease all or nearly all of the remaining space similarly, with
a view to seeking from its landlord a release from the Company's rental
obligations. The Company is unable to predict what will be the result of these
negotiations.
INFORMATION SYSTEMS PERSONNEL
The Company recently lost the services of several employees in its
management information systems area, including three key individuals. The
Company has engaged a new information systems director and is actively
assessing the adequacy of its management information computer facilities and
software systems, and beginning to take appropriate steps to meet its needs in
this regard.
YEAR 2000
The Company has initiated an assessment of its Year 2000 systems
capabilities and plans to complete system changes by the first quarter of
calendar 1999 to allow time for testing. Management believes the likelihood of
any internal systems problems that could have a materially adverse impact on
the Company is remote and expects that the cost of these projects over the next
two years will not have a material effect on the Company's financial position.
The Company is also contacting suppliers to determine their Year 2000
capabilities and monitor their progress toward Year 2000 compliance. There can
be no assurance that a supplier's failure to ensure Year 2000 compliance would
not have an adverse effect on the Company.
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 the following important factors, the occurrence
of 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
23
<PAGE> 25
2. Discontinuation 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
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 or retain existing customer
bases; reductions in work force by existing customers, or failure to
sustain commercial enrollment to maintain an enrollment mix required
by government programs
7. Client terminations of management agreements
8. Increased competition between current organizations, 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 carryout 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. Adverse 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
24
<PAGE> 26
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., the
National Committee for Quality Assurance (NCQA)
20. Adverse results from significant litigation matters
21. Interest rate changes causing a reduction of investment income or in
the market value of interest rate sensitive investments
22. Inability to restructure debt
23. Inability to sell CHF
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A)
(a) Exhibits
Exhibit Number Description of Document
-------------- -----------------------
10 Amended and Restated Business Loan
Agreement, Business Loan Agreement
Addendum and Promissory Note
27 Financial data schedule
(b) Reports on Form 8-K
None
25
<PAGE> 27
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 15, 1998 By: /s/ Gregory H. Moses
--------------------------------------
Gregory H. Moses
President & Chief Operating Officer
Dated: May 15, 1998 By: /s/ Thomas J. Allison
-------------------------------------
Thomas J. Allison
Interim Chief Financial Officer
26
<PAGE> 28
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
10
Amended and Restated Business Loan
Agreement, Business Loan Agreement
Addendum and Promissory Note
27 Financial data schedule
27
<PAGE> 1
EXHIBIT 10
AMENDED AND RESTATED BUSINESS LOAN AGREEMENT
The undersigned UNITED AMERICAN HEALTHCARE CORPORATION, a MICHIGAN
CORPORATION, with its chief executive offices located at 1155 BREWERY PARK
BOULEVARD, SUITE 200, DETROIT, MICHIGAN 48207 (the "Borrower"), has requested
from MICHIGAN NATIONAL BANK, a NATIONAL BANKING ASSOCIATION, of 27777 INKSTER
ROAD [10-60], FARMINGTON HILLS, MICHIGAN 48333-9065 (the "Bank"), and Bank
agrees to make, or has made, the loan(s) described below (the "Loans") under
the terms and conditions set forth in this Business Loan Agreement
("Agreement").
THIS AMENDED AND RESTATED BUSINESS LOAN AGREEMENT AMENDS AND RESTATES,
IN ITS ENTIRETY, A BUSINESS LOAN AGREEMENT DATED MARCH 10, 1994,
EFFECTIVE DECEMBER 2, 1993, AS AMENDED FROM TIME TO TIME.
I. LOANS.
The following Loans and any amendments, extensions, renewals or
refinancings thereof are subject to this Agreement:
<TABLE>
<CAPTION>
TYPE OF LOAN LOAN AMOUNT LOAN DATE
<S> <C> <C>
LINE OF CREDIT $22,944,205.00 03/12/1998,
EFFECTIVE
02/01/1998
</TABLE>
PURPOSE of Loans listed above:
RENEWAL AND INCREASE OF EXISTING LINE OF CREDIT, NOTE NO. 02007144, TO
BE USED FOR WORKING CAPITAL LIQUIDITY; PAY OFF THE PRINCIPAL
OUTSTANDING BALANCE ON TERM LOANS, NOTE NO.'S 02065406; 02065407, AND
02104883, AND GUARANTY PAYMENT FOR EXISTING LETTER OF CREDIT NO.
LC-017478-DY ISSUED FOR INSURANCE PURPOSES FOR THE ACCOUNT OF OMNICARE
HEALTH PLAN OF LOUISIANA, LISTING LIBERTY BANK AND TRUST AS
BENEFICIARY
II. BORROWER'S REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Bank, all of which representations
and warranties shall be continuing until all of Borrower's Obligations
under this Agreement and the Related Documents are fully performed, as
follows:
A. BORROWER'S EXISTENCE AND AUTHORITY. Borrower is a MICHIGAN
CORPORATION, and the Person executing this Agreement has full power
and complete authority to execute this Agreement and all Related
Documents.
B. VALIDITY OF INDEBTEDNESS AND AGREEMENT. Borrower's Indebtedness to
Bank, this Agreement, and all Related Documents are valid, binding
upon, and fully enforceable against Borrower in accordance with their
respective terms.
C. NATURE OF BORROWER'S BUSINESS. The nature of Borrower's business is
to: PROVIDE MANAGEMENT AND CONSULTANT SERVICES FOR PUBLIC AND PRIVATE
HEALTH CARE SYSTEMS.
D. FINANCIAL INFORMATION. All Financial Statements provided to Bank have
been prepared and shall continue to be prepared in accordance with
generally accepted accounting principles ("GAAP"), consistently
applied, and fully and fairly present the financial condition of
Borrower. There has been no material adverse change in Borrower's
business, Property, or financial condition since the date of Borrower's
latest Financial Statements provided to Bank.
E. TITLE AND ENCUMBRANCES. Borrower owns all of its Property, and there
are no liens or encumbrances on any of the Property except as have been
disclosed to Bank in writing prior to the date of this Agreement and
which are identified and listed in an attachment to this Agreement (the
"Permitted Encumbrances"). Borrower agrees that Borrower shall not
obtain further loans, leases, or credit extensions from any Person
identified in the Permitted Encumbrances list or otherwise without
Bank's prior written consent.
F. NO LITIGATION. There are no suits or proceedings pending before any
court, government agency, arbitration panel, or administrative
tribunal, or, to Borrower's knowledge, threatened against Borrower,
which may result in any material adverse change in the business,
Property or financial condition of Borrower, EXCEPT AS PREVIOUSLY
DISCLOSED IN BORROWER'S DECEMBER 31, 1997 10Q REPORT TO THE SECURITIES
AND EXCHANGE COMMISSION, AND FURTHER BANK IS AWARE THAT ULTRAMEDIX IS
NOW IN RECEIVERSHIP.
G. NO MISREPRESENTATIONS. All representations and warranties in this
Agreement and the Related Documents are true and correct and no
material fact has been omitted.
<PAGE> 2
H. EMPLOYEE BENEFIT PLANS. Borrower has not incurred any material
accumulated funding deficiency within the meaning of ERISA, and has not
incurred any material liability to the PBGC in connection with any
employee benefit plan established or maintained by Borrower, and no
reportable event or prohibited transaction, as defined in ERISA, has
occurred with respect to such plan(s).
I. ENVIRONMENTAL COMPLIANCE. Borrower is in full compliance with all
applicable Environmental Laws. See Section III.H.
J. YEAR 2000 COMPLIANCE. Borrower is aware of and is actively addressing
the so-called "Millennium Bug" to insure that all of Borrower's
computer software and systems will be fully Year 2000 compliant.
III. AFFIRMATIVE COVENANTS.
As of the date of this Agreement and continuing until Borrower's
Obligations under this Agreement and the Related Documents are fully
performed, Borrower SHALL:
A. FINANCIAL REQUIREMENTS.
1. MEET WITH BANK TO ESTABLISH FINANCIAL COVENANTS FOR A MINIMUM
NET WORTH; DEBT SERVICE COVERAGE RATIO AND MAXIMUM DEBT TO WORTH
RATIO, WITHIN TWENTY (20) DAYS AFTER THE EARLIER OF EITHER (I)
FEBRUARY 1, 1999 OR (II) THE SALE OF CORPORATE HEALTH CARE,
FINANCING, INC. ("CHF") AND THE JUNE 30, 1998, FORM 10K HAS BEEN
RECEIVED BY BANK.
B. BOOKS AND REPORTS.
1. FINANCIAL STATEMENTS. Within ONE HUNDRED TWENTY (120) DAYS
after the end of each fiscal YEAR, furnish to Bank, in form
acceptable to Bank, Borrower's AUDITED Financial Statements for
the foregoing period prepared by A CERTIFIED PUBLIC ACCOUNTANT
ACCEPTABLE TO BANK.
2. FINANCIAL STATEMENTS. Within the earlier of ONE HUNDRED TWENTY
(120) DAYS after the end of each FISCAL YEAR, or FIVE (5) DAYS
of filing with the SECURITIES AND EXCHANGE COMMISSION, furnish
Bank, in form acceptable to Bank, 10K FINANCIAL STATEMENTS for
the foregoing period, certified to be correct by Borrower's
Treasurer or Chief Financial Officer.
3. FINANCIAL STATEMENTS. Within the earlier of SIXTY (60) DAYS
after the end of each FISCAL QUARTER, or FIVE (5) DAYS of filing
with the SECURITIES AND EXCHANGE COMMISSION, furnish Bank, in
form acceptable to Bank, 10Q FINANCIAL STATEMENTS for the
foregoing period, certified to be correct by Borrower's
Treasurer or Chief Financial Officer.
4. FINANCIAL STATEMENTS. Within THIRTY (30) DAYS after the end of
each fiscal MONTH, furnish to Bank, in form acceptable to Bank,
Borrower's MANAGEMENT prepared Financial Statements for the
foregoing period certified to be correct by Borrower's Treasurer
or Chief Financial Officer.
5. FINANCIAL STATEMENTS. Within THIRTY (30) DAYS after the end of
each fiscal MONTH, furnish to Bank, in form acceptable to Bank,
a TURNAROUND STATUS REPORT of Borrower, which Borrower's
management prepared for the foregoing period and is certified to
be correct by Borrower's Treasurer or Chief Financial Officer.
6. FINANCIAL STATEMENTS. Within THIRTY (30) DAYS after the end of
each fiscal YEAR, furnish to Bank, in form acceptable to Bank, a
CONSOLIDATED AND CONSOLIDATING BUDGET FORECAST of Borrower,
certified to be correct by Borrower's Treasurer or Chief
Financial Officer.
7. FINANCIAL STATEMENTS. Within SIXTY (60) DAYS after the end of
each fiscal QUARTER, furnish to Bank, in form acceptable to
Bank, MANAGEMENT prepared Financial Statements of OMNICARE OF
MICHIGAN for the foregoing period and certified to be correct by
Borrower's Treasurer or Chief Financial Officer.
8. FINANCIAL STATEMENTS. Within THIRTY (30) DAYS after the end of
each fiscal QUARTER, furnish to Bank, in form acceptable to
Bank, TWELVE (12) MONTH ROLLING CASHFLOW FORECASTS of BORROWER;
OMNICARE OF MICHIGAN, AND OMNICARE OF TENNESSEE, certified to be
correct by Borrower's Treasurer or Chief Financial Officer.
9. FIELD AUDIT. Allow the Bank's internal auditors to conduct a
field audit of Borrower's books, records and properties at such
times and to such extent as Bank in its sole discretion, may
determine and Borrower agrees to pay Bank for the cost of said
audit(s).
10. OTHER. Promptly furnish to Bank such other information and
reports concerning the Borrower's business, Property, and
financial condition as are provided to Borrower's owners or as
Bank shall request, and permit Bank to inspect, confirm, and
copy Borrower's books and records at any time during Borrower's
normal business hours.
<PAGE> 3
C. NOTICE OF ADVERSE EVENTS. Promptly notify Bank in writing of any
litigation, governmental proceeding, default or any other occurrence
which could have a material adverse effect on Borrower's business,
Property or financial condition.
D. MAINTAIN BUSINESS EXISTENCE AND OPERATIONS. Do all things necessary to
keep in full force and effect Borrower's corporate, partnership,
proprietorship, trust, or other existence, as the case may be, and to
continue its business described in Paragraph II.C. as presently
conducted. Borrower shall not change its corporate, partnership,
proprietorship, trust, or other existence, nor sell or merge Borrower's
business, in whole or in part, to or with any other Person, without the
prior written consent of Bank.
E. INSURANCE. Maintain adequate fire and extended risk coverage, business
interruption, workers disability compensation, public liability,
environmental, flood, and such other insurance coverages as may be
required by law or as may be required by Bank. All insurance policies
shall be in such amounts, upon such terms, in form, and carried with
such insurers, as are acceptable to Bank. Borrower shall provide
evidence satisfactory to Bank of all insurance coverages and that the
policies are in full force and effect, and for all insurance coverages
upon any Property which is Collateral, the insurance policy shall be
endorsed to provide Bank with a standard loss payable clause insuring
the Bank's interest without regard to any act, fault or neglect of
Borrower, with not less than thirty (30) days advance written notice to
Bank by the insurer of any cancellation or modification of coverage
(CF12181185). Any failure to maintain insurance as provided in this
Agreement shall be an Event of Default and Bank may obtain such
insurance as the Bank deems necessary or prudent, in the Bank's sole
discretion, without obligation to do so, and all amounts so expended by
Bank shall be added to the Indebtedness or shall be payable on demand,
at Bank's option. Upon Borrower's failure to promptly provide evidence
of such insurance as Bank has required, the Bank may assume Borrower
does not have the required coverage. Upon Borrower's failure to obtain
or maintain any insurance coverages required under this Agreement, the
Bank may assess a service charge for obtaining and servicing any
insurance coverage(s).
F. PAYMENT OF TAXES. Pay all taxes, levies and assessments due to all
local, State and Federal agencies, before any interest or penalty
thereon becomes due and payable. Unless Borrower has established a
cash reserve and is actively pursuing a tax appeal, any failure by
Borrower to pay promptly any taxes, levies and assessments shall be an
Event of Default.
G. EMPLOYEE BENEFIT PLANS.
1. At all times meet the minimum funding requirements of ERISA
concerning all of Borrower's employee benefit plans subject to
ERISA.
2. At no time shall Borrower (a) allow any event to occur or
condition concerning any employee benefit plan subject to ERISA
which might constitute grounds for termination of the plan or
for the appointment of a trustee to administer the plan; or (b)
allow any employee benefit plan to be the subject of any
voluntary or involuntary termination proceeding.
H. ENVIRONMENTAL LAWS COMPLIANCE/NOTICES/INDEMNITY. Strictly comply with
all Environmental Laws applicable to Borrower's business. Borrower
agrees to notify Bank, no later than ten (10) days after Borrower's
receipt, of any summons, notice, lawsuit, citation, letter, or other
communication received by Borrower from any Federal, State, or local
agency or unit of government or other Person, which asserts that
Borrower is in violation of any Environmental Laws. Borrower (and the
Obligors) agree to indemnify and hold Bank harmless from all violations
by Borrower of any Environmental Laws, which indemnity shall include
all costs and expenses incurred by Bank, including legal fees, which
are related to any violation by Borrower of any Environmental Laws,
whether or not the Indebtedness has been paid at the time any such
proceeding, claim, or action is instituted against Bank. Borrower
further agrees that Bank may at any time, at Borrower's sole cost and
expense, hire or require Borrower to hire and provide Bank with an
environmental audit prepared by an independent environmental
engineering firm acceptable to Bank to confirm the continuing truth and
accuracy of Borrower's environmental representations and warranties.
I. USE OF PROCEEDS; PURPOSE OF LOANS. Use the proceeds of the Loan(s)
only for Borrower's business described in Paragraph II.C., and only for
those purposes stated in Paragraph I.
J. ACCOUNT. Until all of the Indebtedness shall be fully repaid to Bank,
Borrower shall establish and maintain with Bank, a non-interest bearing
deposit account.
K. MAINTENANCE OF RECORDS; CHANGE IN PLACE OF BUSINESS OR NAME. Keep all
of its books and records at the address set forth in this Agreement,
and give the Bank prompt written notice of any change in its principal
place of business, in the location of Borrower's books and records, in
Borrower's name, and of any change in the location of the Collateral.
L. EMPLOYMENT LAWS. Strictly comply with all Federal and State laws
pertaining to Borrower's employees, including by way of illustration
but not of limitation, the Michigan Worker's Disability Compensation
Act, MCL 418.101 et seq., as amended, Michigan Employment Security
Act, MCL 421.1 et seq., as amended, and the Fair Labor Standards Act,
29 USC 201 et seq., as amended.
<PAGE> 4
M. GENERAL COMPLIANCE WITH LAW. At all times operate Borrower's business
in strict compliance with all applicable Federal, State, and local
laws, ordinances and regulations, including the Americans with
Disabilities Act of 1990, and refrain from and prevent Borrower's
partners, owners, directors, officers, employees and agents from
engaging in any civil or criminal activity proscribed by law.
N. MANAGEMENT CONTINUATION. Borrower agrees that THOMAS J. ALLISON, OR AN
INDIVIDUAL ACCEPTABLE TO BANK, SHALL REMAIN AS CHIEF FINANCIAL OFFICER,
and shall continue to actively manage and operate Borrower's business,
and acknowledges that the Bank has made the Loans in reliance thereon.
O. ARTHUR ANDERSEN CORPORATE RECOVERY SERVICES. BORROWER AGREES THAT
ARTHUR ANDERSEN CORPORATE RECOVERY SERVICES SHALL CONTINUE TO BE
ACTIVELY INVOLVED WITH THE TURNAROUND PROGRAM AS APPROVED BY THE BOARD
OF DIRECTORS OF BORROWER IN JANUARY, 1998, UNTIL PLANNED
LIQUIDATION/EXIT PROGRAMS HAVE BEEN COMPLETED INCLUDING, BUT NOT
LIMITED TO THE EXITING FROM LOUISIANA, FLORIDA, PENNSYLVANIA AND CHF.
P. BORROWER HAS PREVIOUSLY AGREED TO SELL ITS CHF SUBSIDIARY, AND BANK IS
AWARE OF SUCH SALE, ON OR BEFORE FEBRUARY 1, 1999.
IV. NEGATIVE COVENANTS.
Until all of Borrower's Obligations under this Agreement and the
Related Documents are fully performed, without the Bank's prior written
consent Borrower SHALL NOT:
A. NO BORROWINGS, GUARANTEES, OR LOANS. Borrow money or act as guarantor
of any loan or other obligation or lend any money to any Person without
Bank's prior written consent. Any sale of Borrower's accounts
receivable shall be deemed the borrowing of money.
B. LIENS AND ENCUMBRANCES; TRANSFER OF ASSETS. Mortgage, assign, or
encumber any of its Property except to Bank, nor sell, transfer or
assign any Property except in the ordinary course of business.
C. DIVIDENDS, DISTRIBUTIONS; CAPITAL STRUCTURE. If Borrower is a
corporation, it shall not purchase, sell, or retire any of its shares,
nor alter or amend its capital structure without Bank's prior written
consent, provided, however, with respect to any year in which Borrower
is taxed by the Internal Revenue Service as an "S" Corporation,
Borrower may make a distribution of profits to its shareholders not to
exceed an amount necessary to enable its shareholders to pay their
personal State and Federal taxes directly attributable to the profits
earned by Borrower in such year.
V. SECURITY FOR LOANS.
A. SECURITY/MORTGAGE INTERESTS. Borrower and the other Obligor(s) named
in this Agreement have granted or agree to grant to Bank on the date of
this Agreement, security/mortgage interests in certain Property as
collateral security for the Loans and repayment of the Indebtedness,
among which are the following Related Documents:
PLEDGE AGREEMENT DATED MARCH 12, 1998, EFFECTIVE FEBRUARY 1, 1998
VI. EVENTS OF DEFAULT.
The occurrence and continuation of any of the following events after
any notice and cure period specifically provided shall constitute an
Event of Default under this Agreement:
A. FAILURE TO PAY AMOUNTS DUE. Any principal or interest on any
Indebtedness to Bank is not paid within ten (10) days after the due
date.
B. MISREPRESENTATION; FALSE FINANCIAL INFORMATION. Any statement,
warranty or representation of Borrower in connection with or contained
in this Agreement, the Related Documents, or any Financial Statements
now or hereafter furnished to the Bank by or on behalf of the Borrower,
is false or misleading.
C. NONCOMPLIANCE WITH BANK AGREEMENTS. Borrower breaches any covenant,
term, condition or agreement stated in this Agreement or any other
agreement including, but not limited to the Related documents and said
breach is not fully cured and corrected within ten (10) days after
Bank's notice of default.
D. CESSATION/TERMINATION OF EXISTENCE. Borrower shall cease doing
business or Borrower's existence is terminated by death, sale,
dissolution, merger or otherwise.
E. BANKRUPTCY OR RECEIVERSHIP. Any conveyance of substantially all of
Borrower's assets, any assignment is made for the benefit of creditors,
any receiver is appointed, or any insolvency, liquidation or
reorganization proceeding under the Bankruptcy Code or otherwise shall
be filed by or against Borrower which is not dismissed within ten (10)
calendar days after filing.
- 6 -
<PAGE> 5
F. ATTACHMENTS; TAX LIENS. Any attachment, execution, levy, forfeiture,
tax lien or similar writ or process is issued against the Collateral
and is not removed within ten (10) calendar days after filing.
G. INDICTMENT. The institution of any criminal proceeding against
Borrower, the Borrower's management, or any Obligor which is not
dismissed within ten (10) calendar days after initiation.
H. AUTHORITY TO CHARGE INTEREST RATE ADVERSELY AFFECTED. Bank shall
determine the Loans interest rate is usurious or is otherwise unlawful
or limited.
I. MATERIAL ADVERSE CHANGE. Any material adverse change occurs or is
imminent the effect of which would be to substantially diminish
Borrower's or any Obligor's financial condition, business, ability to
perform their agreements with the Bank, or the value of the Collateral.
J. OTHER LENDER DEFAULT. Any other indebtedness of Borrower to the Bank
or to any other creditor becomes due and remains unpaid after
acceleration of the maturity or after the maturity stated.
K. CANCELLATION OF LETTER OF CREDIT. BORROWER FAILS TO OBTAIN OR ARRANGE
FOR THE RETURN OR CANCELLATION OF THE EXISTING LETTER OF CREDIT NO.
LC-017478-DY, IN THE AMOUNT OF $500,000.00 FROM THE BENEFICIARY ON OR
BEFORE JULY 31, 1998.
VII. REMEDIES ON DEFAULT.
A. ACCELERATION. Upon the occurrence of any Event of Default, the Loans
and all Indebtedness to Bank may, at the option of Bank, and without
demand or notice of any kind, be declared to be immediately due and
payable.
B. REMEDIES CUMULATIVE. The remedies provided for in this Agreement are
cumulative and not exclusive, and Bank may exercise any remedies
available to it at law or in equity, and as are provided in this
Agreement, the Related Documents, and any other agreement between
Borrower and Bank.
C. NO WAIVER. No delay or failure of Bank to exercise any right, remedy,
power or privilege hereunder shall affect that right, remedy, power or
privilege, nor shall any single or partial exercise thereof preclude
the exercise of any other right, remedy, power or privilege. No Bank
delay or failure to demand strict adherence to the terms of this
Agreement shall be deemed to constitute a course of conduct
inconsistent with the Bank's right to at any time, before or after any
Event of Default, demand strict adherence to the terms of this
Agreement and the Related Documents.
D. BANK'S RIGHT OF SET-OFF. Upon the occurrence of any Event of Default,
Bank shall have the right to apply any or all of Borrower's and any
Obligor's bank accounts or any other Property held by Bank against any
Indebtedness of Borrower to Bank.
VIII. CROSS-COLLATERALIZATION/CROSS-DEFAULT.
Borrower agrees the Collateral is security for the Loans under this
Agreement and for all other Indebtedness of Borrower to Bank, whether
or not such Indebtedness is related by class or kind and whether or not
contemplated by the parties at the time of executing each evidence of
Indebtedness. Any Borrower default under the terms of any Indebtedness
to Bank shall also constitute an Event of Default under this Agreement
and any Event of Default under this Agreement shall be a default under
any Indebtedness of Borrower to Bank.
IX. MISCELLANEOUS.
A. COMPLIANCE WITH BANK AGREEMENTS. Borrower acknowledges that it has
carefully read, and agrees to fully comply with this Agreement, the
Related Documents, and all other agreements between Borrower and Bank.
B. EXPENSES. Borrower agrees to pay all of Bank's costs and expenses
incurred to perfect or protect the Bank's security interests and liens,
pay any insurance premiums, Uniform Commercial Code search fees, taxes,
Environmental Laws inspection fees, appraisal fees, and all fees and
costs incurred by Bank for audits, inspection, and copying of
Borrower's books and records. Borrower also agrees to pay all costs
and expenses of Bank, including reasonable attorney fees, in connection
with the enforcement of the Bank's rights and remedies under this
Agreement, the Related Documents and any other agreement, and in
connection with the preparation of any amendments, modifications,
waivers or consents with respect to this Agreement.
C. FURTHER ACTION. Borrower agrees, from time to time upon Bank's
request, to make, execute, acknowledge, and deliver to Bank such
further and additional instruments, documents, and agreements, and to
take such further action as may be required to carry out the intent and
purpose of this Agreement and repayment of the Loans.
- 7 -
<PAGE> 6
D. GOVERNING LAW, PARTIAL ILLEGALITY. This Agreement and the Related
Documents shall be interpreted and the rights of the parties determined
under the laws of the State of Michigan. Should any part, term, or
provision of this Agreement be adjudged illegal or in conflict with any
law of the United States or State of Michigan, the validity of the
remaining portion or provisions of the Agreement shall not be affected.
E. WRITINGS CONSTITUTE ENTIRE AGREEMENT; MODIFICATIONS ONLY IN WRITING.
This Agreement, the Related Documents and all other written agreements
between Borrower and Bank, constitute the entire agreement of the
parties and there are no other agreements, express or implied. This
Agreement supersedes any and all commitment letters or term sheets
heretofore issued in connection with this Loan. None of the parties
shall be bound by anything not expressed in writing, and neither this
Agreement, the Related Documents, nor any other agreement can be
modified except by a writing executed by Borrower and by the Bank.
This Agreement shall inure to the benefit of and shall be binding upon
all of the parties to this Agreement and their respective successors,
estate representatives, and assigns, provided however, that Borrower
cannot assign or transfer its rights or obligations under this
Agreement without Bank's prior written consent.
F. CREDIT INQUIRIES. Borrower hereby authorizes Bank to respond to any
credit inquiries received by Bank from trade creditors or other credit
granting institutions.
G. RELEASE OF CLAIMS AGAINST BANK. In consideration of the Bank making
the Loans described in this Agreement, Borrower and the Obligor(s) do
each hereby release and discharge Bank of and from any and all claims,
harm, injury, and damage of any and every kind, known or unknown, legal
or equitable, which Borrower or any of the Obligor(s) have against the
Bank from the date of their respective first contact with Bank until
the date of this Agreement. Borrower and the Obligor(s) confirm to Bank
that they have reviewed the effect of this release with competent legal
counsel of their choice, or have been afforded the opportunity to do
so, prior to execution of this Agreement and the Related Documents and
do each acknowledge and agree that Bank is relying upon this release in
extending the Loans to Borrower.
H. WAIVER OF JURY TRIAL. Borrower and the Obligors do each knowingly,
voluntarily and intelligently waive their constitutional right to a
trial by jury with respect to any claim, dispute, conflict, or
contention, if any, as may arise under this Agreement or under the
Related Documents, and agree that any litigation between the parties
concerning this Agreement and the Related Documents shall be heard by a
court of competent jurisdiction sitting without a jury. Borrower and
the Obligor(s) hereby confirm to Bank that they have reviewed the
effect of this waiver of jury trial with competent legal counsel of
their choice, or have been afforded the opportunity to do so, prior to
signing this Agreement and the Related Documents and do each
acknowledge and agree that Bank is relying upon this waiver in
extending the Loans to Borrower.
I. HEADINGS. All section and paragraph headings in this Agreement are
included for convenience only and do not constitute a part of this
Agreement.
J. TERM OF AGREEMENT. This Agreement supersedes and replaces all previous
loan agreements with regard to the Loans described in Paragraph I.
Unless superseded by a later Business Loan Agreement, this Agreement
shall continue in full force and effect until all of Borrower's
Obligations to Bank are fully satisfied and the Loans and Indebtedness
are fully repaid.
K. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one
agreement, and any of the parties hereto may execute this Agreement by
signing any such counterpart.
L. PLEDGE OF NON-REFUNDABLE DEPOSITS. BORROWER HEREBY CONSENTS AND AGREES
TO PLEDGE TO, AND PROVIDE A FIRST PRIORITY PERFECTED SECURITY INTEREST
IN THE NON-REFUNDABLE DEPOSIT ON THE SALE OF CHF, OR ANY OTHER DEPOSIT
ON THE SALE OF ANY OF BORROWER'S ASSETS IN EXCESS OF $100,000.00, TO
BANK. THE PROCEEDS OF ANY SUCH DEPOSIT SHALL BE APPLIED TO REDUCE THE
LINE OF CREDIT LOAN, AS REFERENCED IN SECTION I. ABOVE, AT BANK'S
DISCRETION, EXCEPT THAT THE NET SALE PROCEEDS FROM CHF SHALL BE APPLIED
TO PERMANENTLY REDUCE THE LINE OF CREDIT LOAN AS MORE PARTICULARLY SET
FORTH IN THE ATTACHED BUSINESS LOAN AGREEMENT ADDENDUM (LINE OF CREDIT
WITH LETTER OF CREDIT ADVANCES) SECTION IV.
M. COMMITMENT FEE. BORROWER HEREBY AGREES TO PAY TO BANK A TWENTY FIVE
THOUSAND AND 00/100 DOLLAR ($25,000.00) COMMITMENT FEE. IF BORROWER
HAS NOT PAID THE ENTIRE COMMITMENT FEE PRIOR TO CLOSING, THEN BORROWER
WILL PAY $5,000.00 AT CLOSING, WITH THE REMAINDER TO BE PAID IN MONTHLY
INSTALLMENTS OF $5,000.00 DUE THE FIRST OF EACH MONTH COMMENCING UPON
THE DATE OF THE FIRST REQUIRED INTEREST PAYMENT.
X. DEFINITIONS.
The following words shall have the following meanings in this
Agreement:
A. "AVERAGE INVESTABLE BALANCE" means the average daily ledger balance in
Borrower's deposit account referred to in Paragraph III.K. of this
Agreement, less (i) average daily uncollected deposits, (ii) Bank's
reserve requirement, and (iii) amounts necessary to offset applicable
service charges, for
- 8 -
<PAGE> 7
the period covered by the account analysis statement provided by Bank,
as shown on such account analysis statement.
B. "BASE RATE" or "PRIME RATE" means that variable rate of interest from
time to time established by the bank designated in the Loan promissory
note(s) and Section I. of this Agreement as its base or prime
commercial lending rate.
C. "BANK" means Michigan National Bank, a National banking association,
and any successor or assign.
D. "COLLATERAL" means that Property which Borrower and any other Obligor
has pledged, mortgaged, or granted Bank a security interest in,
wherever located and whether now owned or hereafter acquired, together
with all replacements, substitutions, proceeds and products thereof.
E. "CURRENT RATIO" means that ratio obtained by dividing total current
assets by total current liabilities as determined under GAAP.
F. "DEBT SERVICE COVERAGE RATIO" means that ratio obtained by dividing the
sum of Borrower's (i) net income after taxes and distributions, (ii)
interest expense, (iii) depreciation expense, and (iv) amortization
expense, by the sum of Borrower's interest expense plus current
maturities of long-term debt, all as determined under GAAP.
G. "ENVIRONMENTAL LAWS" means all laws, regulations, and rules of the
United States of America, State of Michigan, and local authorities
which pertain to the environment, including but not limited to, the
Clean Air Act (42 USC 7401 et seq.), Clean Water Act (33 USC 1251 et
seq.), Resource Conservation and Recovery Act of 1976 (42 USC 6901 et
seq.), Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (42 USC 9601 et seq.), Hazardous Materials
Transportation Act (49 USC 1801 et seq.), Solid Waste Disposal Act (42
USC 6901 et seq.), Toxic Substances Control Act (15 USC 2601 et seq.),
Michigan Natural Resources and Environmental Protection Act (MCL
324.101 et seq. as each of said statutes have been or are hereafter
amended, together with all rules and regulations promulgated by the
Environmental Protection Agency and Michigan Departments of Natural
Resources and Environmental Quality and all additional environmental
laws, rules, and regulations in effect on the date of this Agreement
and as may be enacted and effective.
H. "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor act.
I. "EVENT OF DEFAULT" means any of the events described in Section VI. of
this Agreement or in the Related Documents.
J. "FINANCIAL STATEMENTS" means all balance sheets, cash flows, earnings
statements, and other financial information (whether of the Borrower or
an Obligor) which have been, are now, or are in the future furnished to
Bank.
K. "GAAP" means "generally accepted accounting principles" consistently
applied, as set forth from time to time in the Opinion of the
Accounting Principles Board of the American Institute of Certified
Public Accountants and the Financial Accounting Standards Board, or
which have other substantial authoritative support.
L. "GUARANTOR" means any Person who has guaranteed payment of the Loans.
M. "INDEBTEDNESS" OR "OBLIGATIONS" means all Loans, indebtedness, and
obligations of Borrower to the Bank, including but not limited to, any
Bank advances for payments of insurance, taxes, amounts advanced by
Bank to protect its interest in the Collateral, overdrafts in deposit
accounts with Bank, and all other indebtedness, obligations and
liabilities of Borrower to Bank, whether matured or unmatured,
liquidated or unliquidated, direct or indirect, absolute or contingent,
joint or several, due or to become due, now existing or hereafter
arising.
N. "MICHIGAN NATIONAL BANK PRIME RATE" or "MICHIGAN NATIONAL BANK PRIME"
means that variable rate of interest so designated and from time to
time established as the Michigan National Bank prime commercial lending
rate or such prime commercial lending rate.
O. "NET WORTH" means the difference between Borrower's total assets and
total liabilities, as determined under GAAP.
P. "OBLIGOR" means any person having any obligation to Bank, whether for
the payment of money or otherwise, under this Agreement or under the
Related Documents, including but not limited to any guarantors of
Borrower's Indebtedness.
Q. "PBGC" means the Pension Benefit Guaranty Corporation or any Person
succeeding to the powers and functions of the Pension Benefit Guaranty
Corporation.
- 9 -
<PAGE> 8
R. "PERSON" means any individual, corporation, partnership, joint venture,
association, trust, unincorporated association, joint stock company,
government, municipality, political subdivision, agency or other
entity.
S. "PROPERTY" means all of Borrower's (or other Obligor's, as applicable)
assets, tangible and intangible, real and personal.
T. "QUICK RATIO" means the total of Borrower's cash, marketable securities
and accounts receivable, divided by current liabilities, as determined
under GAAP.
U. "RELATED DOCUMENTS" means any and all documents, promissory notes,
security agreements, leases, mortgages, guaranties, pledges, and any
other documents or agreements executed in connection with this
Agreement. The term shall include documents existing before, at the
time of execution of, this Agreement, and documents executed after the
date of this Agreement.
V. "SUBORDINATED DEBT" means all of that indebtedness to others, and all
collateral security therefor, identified in Section III.J. of this
Agreement.
W. "TANGIBLE NET WORTH" means Net Worth plus Subordinated Debt less
intangible assets and all sums due from Affiliates.
X. "WORKING CAPITAL" means the excess of Borrower's current assets over
current liabilities, determined under GAAP.
XI. ADDITIONAL AGREEMENTS:
SEE THE BUSINESS LOAN AGREEMENT ADDENDUM (LINE OF CREDIT WITH LETTER OF
CREDIT ADVANCES), OF EVEN DATE HEREOF, FOR ADDITIONAL TERMS AND
CONDITIONS.
IN WITNESS WHEREOF the parties have executed this Agreement on this
12TH day of MARCH , 1998, EFFECTIVE AS OF FEBRUARY 1, 1998.
BORROWER:
UNITED AMERICAN HEALTHCARE
CORPORATION,
a MICHIGAN CORPORATION
By: ________________________________
Julius V. Combs, M.D.
Its: Chief Executive Officer
AND
By:_________________________________
Thomas J. Allison
Its: Interim Chief Financial Officer
BANK:
MICHIGAN NATIONAL BANK,
A NATIONAL BANKING ASSOCIATION
By: ________________________________
Eric L. Johnson
Its: Corporate Asset Manager
- 10 -
<PAGE> 9
SCHEDULE OF PERMITTED ENCUMBRANCES
ATTACHED TO AND FORMING A PART OF AN AMENDED RESTATED BUSINESS LOAN AGREEMENT
BY AND BETWEEN UNITED AMERICAN HEALTHCARE CORPORATION, A MICHIGAN CORPORATION,
AND MICHIGAN NATIONAL BANK, A NATIONAL BANKING ASSOCIATION
DATED MARCH 12, 1998, EFFECTIVE FEBRUARY 1, 1998
<TABLE>
<CAPTION>
SECRETARY OF STATE
FILING NO. SECURED PARTY FILING DATE
- ----------- ------------- -----------
<S> <C> <C>
C742014 American Rentals 07/29/93
57420B General Electric Capital Corporation 06/16/95
(Lease)
C990349 Pitney Bowes Credit Corporation 07/11/95
(Lease)
D282752 SunTel Services, Inc. 09/23/97
(Lease)
D282753 SunTel Services, Inc. 09/23/97
(Lease)
</TABLE>
______________
(INITIALS)
- 11 -
<PAGE> 10
BUSINESS LOAN AGREEMENT ADDENDUM
(LINE OF CREDIT WITH LETTER OF CREDIT ADVANCES)
This Addendum Agreement ("Addendum") is an integral part of the
Business Loan Agreement executed by Borrower, and each and all of the terms,
conditions, provisions and agreements set forth in the Business Loan Agreement
are incorporated by this reference into this Addendum.
I. LINE OF CREDIT LOAN
Under those terms and conditions set forth in the Business Loan
Agreement and in this Addendum, and provided there shall exist no Event of
Default, Bank agrees from time to time, at Borrower's request, to provide
Borrower with Advances in an aggregate amount up to but not to exceed THE
LESSER OF the sum of TWENTY TWO MILLION FOUR HUNDRED FORTY FOUR THOUSAND TWO
HUNDRED FIVE AND 00/100 DOLLARS ($22,444,205.00), or the maximum of Advances
allowable under the Advance Requirement set forth in Section IV of this
Addendum, AND CREDIT ADVANCES UP TO BUT NOT TO EXCEED FIVE HUNDRED THOUSAND AND
00/100 DOLLARS ($500,000.00), (the "Line of Credit Loan").
II. LINE OF CREDIT NOTE
The Line of Credit Loan shall be signified by Borrower's execution and
delivery to Bank of a promissory note to Bank's order in the amount of the Line
of Credit Loan (the "Line of Credit Note").
III. EXPIRATION OF BANK'S COMMITMENT
Bank's obligation to make any Advance or Credit Advance under the Line
of Credit Loan and Line of Credit Note shall automatically (a) cease and
terminate upon the maturity date stated in the Line of Credit Note; (b) suspend
or terminate (at Bank's option), upon the occurrence of any Event of Default
unless Bank in writing agrees to waive said Event of Default; AND (C) CREDIT
ADVANCE UNDER THE LINE OF CREDIT LOAN AND LINE OF CREDIT NOTE SHALL
AUTOMATICALLY CEASE AND TERMINATE ON JULY 31, 1998, OR BORROWER WILL BE IN
DEFAULT. No subsequent Advance by Bank shall be construed as a waiver by Bank
of the benefit of this provision, nor shall Bank be estopped thereby to refuse
any subsequent Borrower Advance request.
IV. ADVANCE REQUIREMENT
All Advances and Credit Advances to Borrower under the Line of Credit
Loan shall be made under the following Advance Requirement:
A. UNTIL SUCH TIME AS STATED HEREINAFTER, BORROWER SHALL HAVE A BORROWING
BASE NOT TO EXCEED $22,444,205.00;
B. PAY DOWNS AND READVANCES UNDER THE LINE OF CREDIT LOAN WILL BE ALLOWED
TO THE EXTENT THAT THE LOAN HAS BEEN PAID DOWN FROM CASH FLOW OR ASSET
SALES EXCLUDING THE SALE OF CORPORATE HEALTH CARE, FINANCING, INC.
("CHF"), PLUS;
C. SIXTY (60%) PERCENT OF THE NET SALE PROCEEDS FROM CHF ARE TO BE APPLIED
AS A PERMANENT REDUCTION TO THE BANK'S COMMITMENT ON OR BEFORE FEBRUARY
1, 1999 (THE "SALE OF SUBSIDIARY AND APPLICATION OF PROCEEDS"), PLUS;
D. BY FEBRUARY 1, 1999, BANK'S COMMITMENT SHALL BE PERMANENTLY REDUCED TO
THE LESSER OF THE THEN OUTSTANDING PRINCIPAL BALANCE OR $8,000,000.00,
PLUS;
E. ON OR BEFORE JULY 31, 1998, BORROWER WILL OBTAIN OR ARRANGE FOR THE
RETURN OR CANCELLATION OF THE EXISTING LETTER OF CREDIT NO.:
LC-017478-DY, IN THE AMOUNT OF $500,000.00 FOR THE ACCOUNT OF OMNICARE
HEALTH PLAN OF LOUISIANA, LISTING LIBERTY BANK AND TRUST AS THE
BENEFICIARY, AT WHICH TIME CREDIT ADVANCE CAPABILITY WILL CEASE TO
EXIST.
V. ADVANCE PROCEDURE
Subject to Paragraph III above, Borrower may request an Advance on any
day the Bank is open for business and Bank will promptly make the Advance
available to Borrower by crediting Borrower's general deposit account number
6843-10523-7 in the amount requested, or in such other manner as Borrower shall
request in writing, unless the requested Advance, when aggregated with all
prior unpaid Advances would exceed the lesser of the Line of Credit Loan or the
maximum loan under the Advance Requirement.
<PAGE> 11
VI. CREDIT ADVANCE PROCEDURE
Subject to Paragraph III above, Credit Advances would be provided to
Borrower through July 30, 1998, upon Bank receiving draft instructions,
acceptable to Bank, from Liberty Bank and Trust on Letter of Credit No.
LC-017478-DY, in an amount not to exceed Five Hundred Thousand and 00/100
Dollars ($500,000.00). Credit Advances shall be made only under the following
terms and conditions:
A. Borrower acknowledges and agrees that the Letter of Credit issued by
Bank for the account of OMNICARE HEALTH PLAN OF LOUISIANA is subject to
all terms and conditions set forth in the Application including,
without limitation, the grant to Bank of a security interest in such
collateral as is identified in the Business Loan Agreement and/or in
the Application.
B. Borrower shall pay to Bank, for the Letter of Credit issued by Bank for
the account of OMNICARE HEALTH PLAN OF LOUISIANA, all fees, charges,
and expenses specified in Bank's international department standard fee
schedule then in effect including, without limitation, issuance fees,
payment fees, amendment fees, non-utilization fees, communication and
delivery expenses, and any and all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in defending any suit or
claim brought against the Bank by any Letter of Credit beneficiary.
For each Letter of Credit draft received and paid by Bank, Borrower's
obligation to immediately put Bank in good funds shall be funded by an
Advance under the Line of Credit Note to the extent unpaid Advances and
other open and outstanding Credit Advances do not exceed the lesser of
the Line of Credit Loan or Advance Requirement, otherwise Borrower
shall immediately pay Bank the entire amount of any Letter of Credit
draft paid by Bank;
VII. BORROWER REPORTS
Until all Advances under the Line of Credit Note, together with accrued
interest thereon, are fully repaid to Bank and Bank's obligation under all
Credit Advances is terminated, Borrower agrees promptly to provide Bank, UPON
REQUEST, with the following periodic reports:
A. ACCOUNTS AGINGS REPORT. Upon request, Borrower shall furnish to Bank a
report certified by Borrower's Treasurer or chief financial officer and
showing the number and dollar sum of all of Borrower's Accounts
outstanding and unpaid at the end of Borrower's preceding calendar
month, together with an aging schedule showing the number and dollar
amounts of all Accounts outstanding and unpaid for more than 30, 60,
and 90 days. All of Borrower's Accounts reports shall be in form
satisfactory to the Bank and, upon Bank's request, Borrower agrees
immediately to provide Bank such additional Accounts information as
Bank shall request including, but not limited to, a list with the name,
address and amount of each Account Debtor's indebtedness to Borrower.
B. ACCOUNTS PAYABLE AGINGS. Upon request, Borrower shall furnish to Bank
a report certified by Borrower's Treasurer or chief financial officer
and showing the number and dollar sum of all of Borrower's accounts
payable outstanding and unpaid for more than 30, 60, and 90 days. All
of Borrower's accounts payable reports shall be in form satisfactory to
Bank and, upon Bank's request, Borrower agrees to immediately provide
Bank such additional information with respect to any account payable as
Bank specifies, including, but not limited to, a list with the name,
address and amount of each account payable.
VIII. EVENTS OF DEFAULT
The occurrence of any of the following events shall constitute an Event
of Default under this Addendum:
A. Any Event of Default under the Business Loan Agreement of which this
Addendum is a part, INCLUDING, BUT NOT LIMITED TO BORROWER'S FAILURE TO
OBTAIN OR ARRANGE FOR THE RETURN OR CANCELLATION OF THE EXISTING LETTER
OF CREDIT NO. LC-017478-DY, ON OR BEFORE JULY 31, 1998;
B. Any Borrower breach of any provision or agreement in this Addendum;
C. Any representation or warranty made under this Addendum is or becomes
false or misleading in any material respect;
D. The aggregate unpaid principal amount of all Advances and Bank
obligations under all open Credit Advances exceeds the lesser of the
Line of Credit Note or the maximum of Advances and Credit Advances
available under the Advance Requirement.
IX. REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default under this Addendum, Bank
shall have all remedies as are provided by law or by the Business Loan
Agreement, the Line of Credit Note, the Application, or any mortgage, security
or other collateral agreement.
- 2 -
<PAGE> 12
. DEFINITIONS
The following terms used in this Addendum shall have the following
meanings:
A. "ADVANCE" or "ADVANCES" shall mean a loan or loans of money from Bank to
Borrower.
B. "ADVANCE REQUIREMENT" shall mean the maximum aggregate Advances and
Credit Advances for which Borrower from time to time will be eligible
under the Line of Credit Loan by application of the requirements set
forth in Section IV above.
C. "BORROWING BASE" SHALL MEAN AN AMOUNT WHICH MAY BE ADVANCED WITHOUT
REFERENCE TO ANY ADVANCE REQUIREMENTS.
D. "CREDIT ADVANCE" shall mean the Bank's liability, direct or contingent,
for or arising under Letter of Credit No. LC-017478-DY, issued by Bank.
E. "LETTER OF CREDIT" shall have the meaning ascribed to such term under
Article 5 of the Michigan Uniform Commercial Code, as amended from time
to time, as supplemented by the Uniform Customs and Practice for
Documentary Credits, ICC Publication 500, as amended from time to time,
PERTAINING TO LETTER OF CREDIT NO. LC-017478-DY.
F. "NET SALE PROCEEDS FROM CHF" SHALL MEAN CHF SALE PROCEEDS NET OF
EXPENSES AND CAPITAL GAINS TAXES.
IN WITNESS WHEREOF, the parties have executed this Addendum on this
12TH day of MARCH , 1998, EFFECTIVE AS OF FEBRUARY 1, 1998.
BORROWER:
UNITED AMERICAN HEALTHCARE
CORPORATION,
a MICHIGAN CORPORATION
By:_________________________________
Julius V. Combs, M.D.
Its: Chief Executive Officer
AND
By:_________________________________
Thomas J. Allison
Its: Interim Chief Financial Officer
BANK
MICHIGAN NATIONAL BANK,
a NATIONAL BANKING ASSOCIATION
By:_________________________________
Eric L. Johnson
Its: Corporate Asset Manager
- 3 -
<PAGE> 13
PROMISSORY NOTE
(LINE OF CREDIT)
THIS PROMISSORY NOTE (LINE OF CREDIT) AMENDS, RESTATES AND INCREASES,
WITHOUT NOVATION OR SATISFACTION, AN AMENDED AND RESTATED PROMISSORY
NOTE (LINE OF CREDIT NOTE), NOTE NO. 02007144, DATED OCTOBER 30, 1997
$22,944,205.00 Note No.: __________________
FARMINGTON HILLS, MICHIGAN
Due Date: OCTOBER 1, 1999 Dated: MARCH 12, 1998,
EFFECTIVE FEBRUARY 1, 1998
FOR VALUE RECEIVED on the Due Date, the undersigned, jointly and
severally (the "Borrower"), promise to pay to the order of MICHIGAN NATIONAL
BANK, a NATIONAL BANKING ASSOCIATION (the "Bank"), at its office set forth
below or at such other place as Bank may designate in writing, the principal
sum of TWENTY TWO MILLION NINE HUNDRED FORTY FOUR THOUSAND TWO HUNDRED FIVE AND
00/100 DOLLARS ($22,944,205.00), UNTIL JULY 31, 1998, AT WHICH TIME THE
PRINCIPAL SUM SHALL NOT EXCEED TWENTY TWO MILLION FOUR HUNDRED FORTY FOUR
THOUSAND TWO HUNDRED FIVE AND 00/100 DOLLARS ($22,444,205.00) or such lesser
sum as shall have been advanced by Bank to Borrower under the loan account
hereinafter described, plus interest as hereinafter provided, all in lawful
money of the United States of America. The unpaid principal balance of this
promissory note ("Note") shall bear interest computed upon the basis of a year
of 360 days for the actual number of days elapsed in a month, at a rate of
interest (the "Effective Interest Rate") which is equal to:
That rate of interest established by BANK as its PRIME RATE (the
"Index"), as such Index may vary from time to time, THROUGH OCTOBER
31, 1998. IF BORROWER HAS NOT PERMANENTLY REDUCED THE PRINCIPAL
BALANCE TO EIGHT MILLION AND 00/100 DOLLARS ($8,000,000.00), ON OR
BEFORE NOVEMBER 1, 1998, THEN THE RATE OF INTEREST SHALL THEN BE
INCREASED TO EQUAL ONE PERCENT (1.00%) PER ANNUM IN EXCESS OF BANK'S
PRIME RATE. FURTHER, IF BORROWER HAS NOT PERMANENTLY REDUCED THE
PRINCIPAL BALANCE TO EIGHT MILLION AND 00/100 DOLLARS
($8,000,000.00), ON OR BEFORE FEBRUARY 1, 1999, THEN THE RATE OF
INTEREST SHALL THAN BE INCREASED TO EQUAL TWO PERCENT (2.00%) PER
ANNUM IN EXCESS OF BANK'S PRIME RATE UNTIL THE DUE DATE. Borrower
understands and agrees that the Effective Interest Rate payable to
Bank under this Note shall be determined by reference to the Index and
not by reference to the actual rate of interest charged by the Bank to
any particular borrower(s). If the Index shall be increased or
decreased, the Effective Interest Rate under this Note shall be
increased or decreased by the same amount, effective upon the day of
each increase or decrease in the Index.
Interest on all principal amounts advanced by Bank from time to time
and unpaid by Borrower shall be paid on the FIRST day of APRIL, 1998, and on
the FIRST day of each MONTH thereafter.
Advances of principal, repayment, and readvances may be made under this
Note AS SET FORTH IN THE BUSINESS LOAN AGREEMENT ADDENDUM (LINE OF CREDIT WITH
LETTER OF CREDIT ADVANCES), SECTION IV. ADVANCE REQUIREMENT, from time to time,
but Bank, in its sole discretion, may refuse to make advances or readvances
hereunder during any period(s) this Note is in default. All advances made
hereunder shall be charged to a loan account in Borrower's name on Bank's
books, and Bank shall debit to such account the amount of each advance made to,
and credit to such account the amount of each repayment made by Borrower. From
time to time, Bank shall furnish Borrower a statement of Borrower's loan
account, which statement shall be deemed to be correct, accepted by, and
binding upon Borrower, unless Bank receives a written statement of exceptions
from Borrower within ten (10) days after such statement has been furnished.
This Note may be paid in full or in part at any time without payment of
any prepayment fee. All payments received shall, at the option of the Bank,
first be applied against accrued and unpaid interest and the balance against
principal. Borrower expressly assumes all risks of loss or delay in the
delivery of any payments made by mail, and no course of conduct or dealing
shall affect Borrower's assumption of these risks. Borrower shall not be
required to pay interest at a rate greater than the maximum allowed by law and
any interest payment received by Bank which exceeds the maximum legal rate
shall be automatically credited upon the unpaid principal balance of this Note.
If the Bank determines the Effective Interest Rate is, or may be, usurious or
otherwise limited by law, the unpaid balance of this Note shall, at Bank's
option, become immediately due and payable.
Upon the occurrence of any of the Events of Default DESCRIBED IN THE
AMENDED AND RESTATED BUSINESS LOAN AGREEMENT EXECUTED CONTEMPORANEOUSLY
HEREWITH, the Bank, at its option, and without FURTHER notice to Borrower, may
declare the entire unpaid principal balance of this Note and all accrued
interest, together with all other indebtedness of Borrower to Bank, to be
immediately due and payable.
<PAGE> 14
Upon the occurrence of any Event of Default, or upon non-payment of
this Note after demand, the unpaid principal balance of this Note shall bear
interest at a rate which is two percent (2%) greater than the Effective
Interest Rate otherwise applicable. HOWEVER, IF BORROWER HAS NOT PERMANENTLY
REDUCED THE AMOUNT OF THE LOAN TO EIGHT MILLION AND 00/100 DOLLARS
($8,000,000.00) ON OR BEFORE NOVEMBER 1, 1998, UPON THE OCCURRENCE OF ANY EVENT
OF DEFAULT THIS NOTE SHALL BEAR INTEREST AT A RATE WHICH IS THREE PERCENT (3%)
GREATER THAN THE EFFECTIVE INTEREST RATE OTHERWISE APPLICABLE. FURTHERMORE, IF
BORROWER HAS NOT PERMANENTLY REDUCED THE AMOUNT OF THE LOAN TO EIGHT MILLION
AND 00/100 DOLLARS ($8,000,000.00) ON OR BEFORE FEBRUARY 1, 1999, UPON THE
OCCURRENCE OF ANY EVENT OF DEFAULT, BUT NOT AS A RESULT OF THE SALE OF
SUBSIDIARY AND APPLICATION OF PROCEEDS AS STATED IN THE BUSINESS LOAN AGREEMENT
ADDENDUM (LINE OF CREDIT WITH LETTER OF CREDIT ADVANCES), SECTION IV.C.,
EXECUTED CONTEMPORANEOUSLY HEREWITH, THIS NOTE SHALL BEAR INTEREST AT A RATE
WHICH IS FOUR PERCENT (4%) GREATER THAN THE EFFECTIVE INTEREST RATE OTHERWISE
APPLICABLE. If any payment under this Note is not paid within ten (10) days
after the date due, at the option of Bank a late charge of not more than five
cents ($.05) for each dollar of the installment past due may be charged by
Bank. In addition to any other security interest granted, Borrower hereby
grants Bank a security interest in all of Borrower's bank deposits,
instruments, negotiable documents, and chattel paper which at any time are in
the possession or control of Bank, and after the occurrence of any Event of
Default, Bank may apply its own indebtedness or liability to Borrower or any
guarantor to any indebtedness due under this Note. Borrower agrees to pay all
of the Bank's costs incurred in the collection of this Note, including
reasonable attorney fees.
Acceptance by Bank of any payment in an amount less than the amount
then due shall be deemed an acceptance on account only, and Bank's acceptance
of any such partial payment shall not constitute a waiver of Bank's right to
receive the entire amount due. Borrower and all guarantors of this Note do
hereby (I) jointly and severally waive presentment for payment, demand, notice
of non-payment, notice of protest or protest of this Note, any defenses under
3-605 of the Michigan Uniform Commercial Code, the release of any collateral or
part thereof, with or without substitution, and Bank diligence in collection or
bringing suit, and (ii) do hereby consent to any and all extensions of time,
renewals, waivers or modifications as may be granted by Bank with respect to
payment or any other provisions of this Note. The liability of the Borrower
under this Note shall be absolute and unconditional, without regard to the
liability of any other party. This Note shall be deemed to have been executed
in Michigan, and all rights and obligations hereunder shall be governed by the
laws of the State of Michigan.
This Note is secured by:
AMENDED AND RESTATED BUSINESS LOAN AGREEMENT DATED MARCH 12, 1998,
EFFECTIVE FEBRUARY 1, 1998
PLEDGE AGREEMENT DATED MARCH 12, 1998, EFFECTIVE FEBRUARY 1, 1998
Reference is hereby made to the document(s) and agreement(s) described
above (the "Related Documents") for additional terms and conditions relating to
this Note.
BORROWER:
UNITED AMERICAN HEALTHCARE
CORPORATION ,
a MICHIGAN CORPORATION
BORROWER ADDRESS:
1155 Brewery Park Blvd. Suite 200 By:_________________________________
Detroit, Michigan 48207 Julius V. Combs, M.D.
Its: Chief Executive Officer
AND
By:_________________________________
Thomas J. Allison
Its: Interim Chief Financial Officer
Tax ID No.: 38-2526913
BANK ADDRESS:
27777 Inkster Road [10-60]
Farmington Hills, Michigan 48333
- 2 -
<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,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON
FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 9,609,000
<SECURITIES> 4,322,000
<RECEIVABLES> 7,286,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,395,000
<PP&E> 18,105,000
<DEPRECIATION> (10,465,000)
<TOTAL-ASSETS> 63,655,000
<CURRENT-LIABILITIES> 35,672,000
<BONDS> 0
0
0
<COMMON> 10,715,000
<OTHER-SE> (59,000)
<TOTAL-LIABILITY-AND-EQUITY> 63,655,000
<SALES> 0
<TOTAL-REVENUES> 82,880,000
<CGS> 0
<TOTAL-COSTS> 101,378,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,210,000
<INCOME-PRETAX> (19,743,000)
<INCOME-TAX> (3,620,000)
<INCOME-CONTINUING> (16,123,000)
<DISCONTINUED> (121,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,244,000)
<EPS-PRIMARY> (2.47)
<EPS-DILUTED> 0
</TABLE>
