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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 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 Identification No.)
incorporation or organization)
1155 BREWERY PARK BOULEVARD, SUITE 200
DETROIT, MICHIGAN 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 393-0200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF NOVEMBER 10,
1998 WAS 6,578,356.
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As filed with the Securities and Exchange Commission on November 10, 1998
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United American Healthcare Corporation
Form 10-Q
Table of Contents
<TABLE>
<CAPTION>
PART I. Page
<S> <C> <C>
Item 1. Unaudited Condensed Consolidated Financial Statements--
Condensed Consolidated Balance Sheets--September 30, 1998
and June 30, 1998 2
Condensed Consolidated Statements of Operations--Three Months
Ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows--Three Months
Ended September 30, 1998 and 1997 4
Notes to the Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II.
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBITS 18
</TABLE>
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Part I.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
--------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
--------------------------------------------------------------------------
Current assets
Cash and cash equivalents $ 13,232 $ 13,259
Marketable securities 1,431 1,431
Premium receivables 4,638 2,723
Current portion of long-term note receivable 13,500 --
Other receivables 1,897 1,816
Refundable federal income taxes 5,341 5,453
Prepaid expenses and other 262 281
Deferred income taxes 594 594
-------- --------
Total current assets 40,895 25,557
Property and equipment, net 5,322 6,098
Intangible assets, net 5,439 5,629
Long-term note receivable 2,250 --
Surplus note receivable, net 2,300 2,300
Marketable securities 1,396 1,396
Deferred income taxes 528 417
Other assets 584 584
Net assets of discontinued operations -- 16,703
======== ========
$ 58,714 $ 58,684
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Current liabilities
Current portion of long-term debt $ 12,444 $ 14,444
Medical claims payable 22,185 20,004
Accounts payable and accrued expenses 3,365 3,549
Accrued compensation and related benefits 1,038 1,240
Other current liabilities 535 420
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Total current liabilities 39,567 39,657
Long-term debt, less current portion 8,000 8,000
Accrued rent 935 935
Deferred income taxes 1,011 1,011
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par, 15,000,000 shares authorized; 6,578,356 issued
and outstanding at September 30, 1998 and June 30, 1998 10,715 10,715
Retained earnings (deficit) (1,380) (1,500)
Accumulated other comprehensive income (loss)
net of deferred federal income taxes (134) (134)
-------- --------
9,201 9,081
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$ 58,714 $ 58,684
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</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
September 30,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Revenues
Medical premiums $ 16,585 $ 20,284
Management fees from related party 5,302 6,246
Interest and other income 465 502
----------- --------
Total revenues 22,352 27,032
Expenses
Medical services 14,097 17,179
Marketing, general and administrative 6,705 10,442
Depreciation and amortization 887 1,062
Interest expense 495 330
----------- --------
Total expenses 22,184 29,013
----------- --------
Earnings (loss) from continuing operations before income taxes 168 (1,981)
Income tax expense (benefit) 48 (439)
----------- --------
Earnings (loss) from continuing operations 120 (1,542)
Earnings from discontinued operation, net of income taxes -- 209
----------- --------
Net earnings (loss) $ 120 $ (1,333)
=========== ========
Net earnings (loss) per common share
Earnings (loss) per common share from continuing operations $ 0.02 $ (0.23)
=========== ========
Net earnings (loss) per common share $ 0.02 $ (0.20)
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Weighted average shares outstanding 6,578 6,578
=========== ========
Net earnings (loss) per common share - diluted
Earnings (loss) per common share from continuing operations $ 0.02 $ (0.23)
=========== ========
Net earnings (loss) per common share $ 0.02 $ (0.20)
=========== ========
Weighted average shares outstanding 6,754 6,578
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</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>
Three months ended
September 30,
------------------------
1998 1997
------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 120 $ (1,333)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating
activities
Depreciation and amortization 887 1,062
Net change in assets and liabilities (97) (445)
--------------------
Net cash provided by (used in) operating activities 910 (716)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities -- 696
Proceeds from the sale of property and equipment 122 --
Purchase of property and equipment (12) (890)
Proceeds from collection of notes receivable 2,000 --
Cash used in discontinued operation (1,047) (166)
--------------------
Net cash provided by (used in) investing activities 1,063 (360)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under line of credit agreement -- 143
Payments made on long-term debt (2,000) (728)
Proceeds from issuance of common stock -- 217
--------------------
Net cash (used in) financing activities (2,000) (368)
--------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (27) (1,444)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,259 9,582
--------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,232 $ 8,138
====================
Supplemental disclosure of cash flow information
Cash paid for interest $ 495 $ 439
====================
Supplemental disclosure of non-cash investing activities
Issuance of notes receivables in
connection with sale of discontinued operation $ 15,750 $ --
====================
</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
SEPTEMBER 30, 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
intercompany transactions and balances have been eliminated in consolidation.
Non-majority investments in affiliates in which management has the ability to
exercise significant influence are recorded using the equity method. As
discussed in Note 4, through August 31, 1998, Corporate Healthcare Financing,
Inc. and its Subsidiaries (CHF) were presented as a discontinued operation.
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in conformity with generally accepted
accounting principles and with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X as they apply to interim financial information. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation of
the financial position and results of operations have been included. The results
of operations for the three month period ended September 30, 1998 are not
necessarily indicative of the results of operations for the full fiscal year
ending June 30, 1999. Audited June 30, 1998 financial statements, with
accompanying footnotes, can be found in the Company's most recent Form 10-K.
- -----------------------------
NOTE 2 - COMPREHENSIVE INCOME
- -----------------------------
As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This
standard establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of SFAS 130 had no impact
on the Company's results of operations or shareholders' equity. SFAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior period financial
statements have been reclassified to conform to the requirements of SFAS 130.
The components of comprehensive income (loss), net of related tax, for
the three months ended September 30, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Net earnings (loss) $120 $(1,333)
Unrealized holding gains (losses), net of tax - (40)
============================
Comprehensive income (loss) $120 $(1,373)
============================
</TABLE>
The components of accumulated other comprehensive income (loss), net of
related tax, included in shareholders' equity at September 30, 1998 and 1997
include only unrealized holding gains or losses, net of tax.
5
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED
SEPTEMBER 30, 1998 AND 1997
- --------------------------------------
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENT
- --------------------------------------
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131), which is effective for fiscal
years beginning after December 15, 1997. This standard requires that an
enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performances. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company is
not required to report pursuant to SFAS 131 until June 30, 1999 and has not
determined what effects the adoption of SFAS 131 will have on its consolidated
footnote disclosures.
- -------------------------------
NOTE 4 - DISCONTINUED OPERATION
- -------------------------------
As previously reported in the Company's most recent 10-K annual
report, CHF was sold on September 8, 1998, effective as of August 31, 1998. In
anticipation of this sale, the results of CHF prior to September 1, 1998, have
been reported as a discontinued operation in the consolidated financial
statements for all periods presented. In accordance with the sale terms, $3
million of the sale price has been received through the date of this report.
At June 30, 1998, the carrying value of CHF was written down to the
net realizable value of $17.75 million. During the three months ended September
30, 1998, the carrying value of CHF was written down by an additional $.3
million, which represented the net earnings of CHF during this period. This
write down is included in the expenses of the discontinued operation to reflect
a reduction in the net carrying value to the net realizable value of $17.75
million. Earnings from the discontinued operation for the three months ended
September 30, 1998 and 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Total revenues $4,677 $ 5,227
Total expenses 4,677 5,018
============================
Earnings from discontinued operation (1) $ - $ 209
============================
</TABLE>
(1) Net of income tax provision of $509 and $117 for the three months ended
September 30, 1998, and 1997, respectively.
- ---------------------------
NOTE 5 - STOCK OPTION PLANS
- ---------------------------
Previously, the Company had adopted a stock option plan (the Old Stock
Option Plan), under which a maximum of 331,250 common shares are presently
reserved for issuance upon exercise of options granted under the Old Stock
Option Plan. No options were granted under the Old Stock Option Plan through
September 30, 1998. The Old Stock Option Plan shall be terminated and superseded
upon shareholder approval of the Company's 1998 Stock Option Plan (1998 Plan)
adopted by its Board of Directors on August 6, 1998. The Company has an
aggregate of 500,000 common shares reserved for issuance upon exercise of
options under the 1998 Plan. On September 9, 1998, nonqualified options for a
total of 325,000 common shares were granted under the 1998 Plan, subject to
requisite shareholder approval of such plan which management will seek at the
annual meeting of shareholders in November 1998. Such options expire September
9, 2008 and are fully exercisable beginning March 10, 1999, at a price of $1.625
per share.
Independent of any stock option plan, on May 11, 1998 the Company
issued nonqualified stock options for 100,000 common shares to Gregory H. Moses,
Jr. in
6
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED
SEPTEMBER 30, 1998 AND 1997
connection with his employment as its new President and Chief Operating
Officer, and reserved that number of common shares for issuance upon exercise of
such options. Such options expire May 11, 2003 and are exercisable beginning May
11, 1999 for up to 77,000 common shares and in full beginning May 11, 2000, at a
price of $1.38 per share.
- ---------------------------------------------
NOTE 6 - NET EARNINGS (LOSS) PER COMMON SHARE
- ---------------------------------------------
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (SFAS 128). In accordance with SFAS 128, basic net
earnings (loss) per share excluding dilution has been computed by dividing net
earnings (loss) by the weighted-average number of common shares outstanding for
the period. Diluted earnings (loss) per share is computed the same as basic
except that the denominator also includes shares issuable upon assumed exercise
of stock options.
At September 30, 1998, the Company has stock options for 100,000 shares
issued and outstanding and has granted stock options for 325,000 shares subject
to requisite shareholder approval. For the three months ended September 30,
1998, these stock options have been included in the computation of diluted
earnings from continuing operations per common share. For the three months ended
September 30, 1997, the Company did not have any outstanding securities having a
dilutive effect on loss per share.
- -----------------------------
NOTE 7 - YEAR 2000 COMPLIANCE
- -----------------------------
The Company is in the process of developing plans to address issues
related to the potential impact of the Year 2000 on its computerized systems and
equipment. The plans in development will address systems modification
requirements in the following primary areas: information systems, facilities,
payors and suppliers. While the financial impact of making the required systems
changes has not yet been quantified, it is not expected to have a material
effect on the Company's financial condition and results of operations. The
Company presently believes that with such modifications to software and
hardware, which are expected to be completed by the end of 1999, the Year 2000
issue will not pose material problems. However, if such modifications are not
made or are not completed timely, the Year 2000 issue could have a material
adverse impact on the Company's consolidated financial position.
Furthermore, the Company has initiated formal communications with its
significant suppliers and large payors to determine the extent to which the
Company may be vulnerable to those third parties' failure to remediate their own
Year 2000 issues. However, there can be no assurances that the systems of other
companies on which the Company relies will be timely converted and the Company
may be adversely affected by the failure of a significant third party to become
Year 2000 compliant.
7
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED
SEPTEMBER 30, 1998 AND 1997
- ----------------------
NOTE 8 - CONTINGENCIES
- ----------------------
As previously reported by the Company, certain 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. In September 1998, the parties agreed to a
restructured proposed settlement requiring the release of all claims and damages
sought by the plaintiffs in exchange for (a) $2.0 million in cash from the
Company's insurance carrier, (b) a $625,000 promissory note of the Company
payable in 15 equal monthly installments beginning 13 months after entry of a
final court order approving the settlement, with interest at 4% per annum from
the date of such order, and (c) newly issued shares of common stock of the
Company with an aggregate value of $625,000 based on a share price equal to the
greater of (i) the average closing price of the Company's common stock for the
period from July 20, 1998 through the third trading day preceding the Court
hearing on approval of the settlement or (ii) $2.25 per share.
The pending settlement is subject to federal court approval following a
court hearing on the fairness of the proposed settlement scheduled for December
11, 1998. 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.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
As previously reported in the Company's most recent 10-K, the Company
continues to implement the restructuring plan initiated in fiscal 1998, which
during the three months ended September 30, 1998, included changes in senior
management, the sale of CHF, renegotiation of the bank credit facility, the
restructuring of the proposed shareholder lawsuit settlement, and continued
efforts to achieve further cost reductions and maintain Company revenue.
During August 1998, the Chief Executive Officer of the Company retired
and the Board of Directors elected Gregory H. Moses, Jr. as the new Chief
Executive Officer of the Company, the Company's Corporate Controller became its
new Treasurer and Interim Chief Financial Officer and the Company appointed a
new Senior Director of Management Information Systems.
On September 8, 1998, effective as of August 31, 1998, CHF was sold for
$17.75 million, comprised of $2 million in cash, a secured note for $13.25
million and an unsecured note for $2.5 million. In accordance with the sale
terms, $3 million in cash was received from the sale through October 1998, and
was applied against the Company's outstanding bank debt.
On September 1, 1998, the Company and its bank lender amended the
Company's loan agreement and promissory note to decrease the line of credit
amount to $20.94 million. Additionally, by April 15, 1999, the revised agreement
requires the permanent reduction of the outstanding balance owed to the bank to
the lesser of the then outstanding principal balance or $8 million. The maturity
date of the line of credit is October 1, 1999.
In September, 1998, the Company's proposed shareholder lawsuit
settlement was restructured, subject to court approval following a fairness
hearing scheduled for December 11, 1998, to include $2 million in cash from the
Company's insurance carrier, a $625,000 promissory note from the Company payable
in 15 equal monthly installments beginning 13 months after final court approval,
and a number of newly issued shares of common stock of the Company based upon a
formula as previously reported (currently estimated to be 277,777 shares).
The Company continues to implement the corrective action plan developed
for OmniCare-MI. The corrective action plan includes the reduction of medical
costs through renegotiation of hospital provider contracts, reduction of
pharmacy costs and a reduction in the management fee percentage paid to the
Company from 17% to 14% effective June 1, 1998. The effect of the management fee
percentage reduction on the
9
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Company's revenues for the three months ended September 30, 1998 was
approximately $.9 million.
The three months ended September 30, 1998 were impacted by the cost
reductions initiated in fiscal 1998, including an approximate 35% workforce
reduction at the Company's corporate and Tennessee operations, and the cessation
of operations in Florida, Louisiana, and Pennsylvania.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1997
Total revenues from continuing operations decreased $4.6 million (17%),
from $27.0 million in the three months ended September 30, 1997 to $22.4 million
in the three months ended September 30, 1998.
Medical premium revenues were $16.6 million in the three months ended
September 30, 1998, a decrease of $3.7 million (18%) from medical premium
revenues of $20.3 million in the three months ended September 30, 1997. Medical
premiums for OmniCare-TN increased $2.2 million (15%), from $14.4 million in the
three months ended September 30, 1997 to $16.6 million in the three months ended
September 30, 1998. The per member per month ("PMPM") premium rate -- based on
an average membership of 45,800 for the three months ended September 30, 1998
compared to 42,200 for the three months ended September 30, 1997 -- was $120 for
the three months ended September 30, 1998, compared to $114 for the three months
ended September 30, 1997, an increase of 5% or $.9 million. The rate increase
included changes in the enrollment mix. An 8% increase in enrollment accounted
for the remaining increase of $1.3 million. UltraMedix Healthcare Systems, Inc.
("UltraMedix"), a Florida HMO 51%-owned by the Company, which ceased operations
and was placed in liquidation in March 1998, did not contribute any medical
premium revenues in the three months ended September 30, 1998. Medical premium
revenues from UltraMedix were $5.9 million in the three months ended September
30, 1997.
Management fees were $5.3 million in the three months ended September
30, 1998, a decrease of $.9 million (15%) from fees of $6.2 million in the three
months ended September 30, 1997. Management fees earned from OmniCare-MI
decreased in the three months ended September 30, 1998 due primarily to the June
1998 reduction in the management fee percentage from 17% to 14%.
Total expenses before income taxes from continuing operations totaled
$22.2 million in the three months ended September 30, 1998, compared to $29.0
million in the three months ended September 30, 1997, a decrease of $6.8 million
(23%).
Medical service expenses were $14.1 million in the three months ended
September 30, 1998, a decrease of $3.1 million (18%) from medical service
expenses of
10
<PAGE> 12
$17.2 million in the three months ended September 30, 1997. Medical
expenses for OmniCare-TN increased $1.9 million (16%), from $12.2 million in the
three months ended September 30, 1997 to $14.1 million in the three months ended
September 30, 1998. The percentage of medical service expenses to medical
premium revenues -- the medical loss ratio ("MLR") -- was 85% for both of the
three month periods ended September 30, 1998 and 1997 for OmniCare-TN.
UltraMedix did not incur any medical service expenses in the three months ended
September 30, 1998. Medical expenses for UltraMedix were $5.0 million in the
three months ended September 30, 1997.
Marketing, general and administrative expenses (MG&A) decreased $3.7
million (36%), from $10.4 million in the three months ended September 30, 1997
to $6.7 million in the three months ended September 30, 1998, due to the
following: (i) MG&A for the corporate headquarters, including the cost to
operate OmniCare-MI, decreased $2.0 million with a reduction in the number of
employees significantly contributing to the decrease; and (ii) a decrease of
approximately $1.5 million related to UltraMedix and United American of Florida,
Inc., the Company's 80%-owned subsidiary which ceased operations and was placed
in liquidation in March 1998.
As a result of the foregoing, the Company recognized earnings from
continuing operations before income taxes of $.2 million for the three months
ended September 30, 1998, compared to a loss from continuing operations before
income taxes of $2.0 million for the three months ended September 30, 1997, a
$1.8 million change. Net earnings from continuing operations was $.1 million for
the three months ended September 30, 1998, compared to a net loss from
continuing operations of $1.5 million for the three months ended September 30,
1997, a change of $1.6 million.
The discontinued operation contributed no earnings or loss for the
three months ended September 30, 1998, compared to earnings of $.2 million for
the three months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had (i) cash and cash equivalents
and short-term marketable securities of $14.7 million, the same amount as at
June 30, 1998; (ii) working capital of $1.3 million, compared to negative
working capital of $14.1 million at June 30, 1998; and (iii) a current
assets-to-current liabilities ratio of 1.03-to-1, compared to .64-to-1 at June
30, 1998. The principal sources of funds for the Company during the three months
ended September 30, 1998 were $.9 million provided from net operating
activities, proceeds from the sale of CHF of $2 million and proceeds from the
sale of property and equipment of $.1 million -- offset by cash used in
discontinued operation of $1.0 million, and $2 million to repay bank debt.
On September 8, 1998, effective as of August 31, 1998, the Company sold
the stock of CHF for $17.75 million, comprised of $2 million in cash, a secured
note for $13.25 million and an unsecured note for $2.5 million. The secured note
is payable to the
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Company in four monthly installments of $.5 million each on the last day of
September through December 1998 with the balance due in January 1999, with
options to extend the final payment to March 1999, plus interest at the prime
rate on short-term unsecured commercial borrowings. The unsecured note is
payable to the Company in two annual installments of $.25 million with the
balance due August 31, 2001, plus interest at 6% per annum. The security for the
secured note includes a pledge of the stock of CHF and a limited personal
guarantee of a principal of the buyer. The proceeds from the sale of CHF have
been and will be used to reduce the Company's outstanding bank debt and provide
security for the Company's bank indebtedness. Through October, 1998, $3 million
from CHF sale proceeds have been applied against the Company's outstanding bank
debt.
On September 1, 1998, the Company and its bank lender amended the
Company's loan agreement and promissory note to decrease the line of credit
amount to $20.94 million and modify other terms. By April 15, 1999, the
agreement requires the permanent reduction of the outstanding balance and the
line of credit to the lesser of the then outstanding principal balance or $8
million, and the agreement requires the cancellation of the $.5 million letter
of credit by January 1, 1999. The maturity date of the line of credit is October
1, 1999.
The line of credit is secured by all of the Company's rights, title and
interest in the secured and unsecured promissory notes of the purchaser of the
stock of CHF representing part of the purchase price for such stock (which
purchaser has covenanted with the bank to make all payments on such notes
directly to the bank for credit against the Company's indebtedness to the bank)
and in the pledged CHF stock and other documents related to such purchase.
Financial covenants for minimum net worth, debt service coverage ratio, and
maximum debt to worth ratio will be established prior to March 1, 1999.
The Company is unable at this time to assess the capital requirements,
if any, related to the final disposition of UltraMedix.
The Company's restructuring efforts significantly contributed to the
$22.9 million loss from continuing operations in fiscal 1998. However, after
adjusting for non-cash activities and changes in assets and liabilities, the
Company generated positive cash flows from operations in fiscal 1998. The
Company's ability to generate adequate amounts of cash to meet its future cash
needs will depend on a number of factors, including the stabilization of
OmniCare-MI, continuation of its restructuring efforts, achieving increased
operational efficiencies at its Tennessee operation and the receipt of the
remaining CHF sale proceeds.
Management expects that the OmniCare-MI corrective action plan, which
is in the process of implementation, will stabilize OmniCare-MI and eliminate
the need for future cash infusions from the Company. OmniCare-MI has
successfully renegotiated certain
12
<PAGE> 14
major hospital provider contracts, including its most significant hospital
contract, which was one of the major components of the corrective action plan,
the effects of which will reduce medical costs.
13
<PAGE> 15
PART II.
ITEM 1. LEGAL PROCEEDINGS
As previously reported by the Company, the proposed settlement terms
with respect to certain shareholder litigation pending in the United States
District Court for the Eastern District of Michigan are subject to federal court
approval following a court hearing on the fairness of the proposed settlement.
That hearing has been scheduled for December 11, 1998, and notice of the hearing
was given to members of the class of plaintiffs on October 26, 1998.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage management to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statements.
Certain statements contained in this Form 10-Q report, including, without
limitation, statements containing the words "believes", "anticipates", "will",
"may", "might", and words of similar import, constitute "forward-looking
statements" within the meaning of this "safe harbor".
Such forward-looking statements are based on management's current
expectations and involve known and unknown risks, uncertainties and other
factors, many of which the Company is unable to predict or control, that may
cause the actual results, performance or achievements of the Company to be
materially different from any future
14
<PAGE> 16
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors potentially include, among others, the
following:
1. Inability of the buyer of CHF to comply with the terms of its
secured and unsecured notes and the resultant impact on bank
agreements.
2. Inability of OmniCare-MI to remain as a viable entity.
3. Inability to increase premium rates commensurate with
increases in medical costs due to utilization, government
regulation, or other factors.
4. Discontinuation of, limitations upon or restructuring of
government-funded programs, including but not limited to the
TennCare program.
5. Increases in medical costs, including increases in utilization
and costs of medical services and the effects of actions by
competitors or groups of providers.
6. 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.
7. The shift of employers from insured to self-funded coverage,
resulting in reduced operating margins to the Company.
8. Failure to obtain new customer bases or retain existing
customer bases or reductions in work force by existing
customers; failure to sustain commercial enrollment to
maintain an enrollment mix required by government programs.
9. Termination of the OmniCare-MI management agreement.
10. Increased competition between current organizations, the
entrance of new competitors and the introduction of new
products by new and existing competitors.
11. Adverse publicity and media coverage.
12. Inability to carry out marketing and sales plans.
13. Loss or retirement of key executives.
14. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.
15. The selection by employers and individuals of higher
co-payment/deductible/coinsurance plans with
relatively lower premiums or margins.
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 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).
15
<PAGE> 17
20. Adverse results from significant litigation matters.
21. Adverse impact from Year 2000 issues.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Document
-------------- -----------------------
27 Financial data schedule
(b) Reports on Form 8-K
None
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: November 10, 1998 By: /s/ Gregory H. Moses, Jr.
--------------------------------
Gregory H. Moses, Jr.
President & Chief Executive Officer
Dated: November 10, 1998 By: /s/ Paul G. Samuels
--------------------------------
Paul G. Samuels
Interim Chief Financial Officer
17
<PAGE> 19
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
27 Financial data schedule
18
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FILED
AS PART OF THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON
FORM 10-Q.
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<PERIOD-END> SEP-30-1998
<CASH> 13,232,000
<SECURITIES> 1,431,000
<RECEIVABLES> 25,376,000
<ALLOWANCES> 0
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<CURRENT-ASSETS> 40,895,000
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0
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<COMMON> 10,715,000
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<TOTAL-REVENUES> 22,352,000
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<INTEREST-EXPENSE> 495,000
<INCOME-PRETAX> 168,000
<INCOME-TAX> 48,000
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