<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED DECEMBER 31, 1997
Commission File Number: 000-18839
---------------
UNITED AMERICAN HEALTHCARE CORPORATION
(Exact Name of Registrant as Specified in Charter)
---------------
Michigan 38-2526913
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
United American Healthcare Corporation
1155 Brewery Park Boulevard, Suite 200
Detroit, Michigan 48207
(313) 393-0200
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
6,578,356 Common Shares as of
February 17, 1998
<PAGE> 2
UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets--December 31, 1997
and June 30, 1997 2
Consolidated Statements of Operations--Three and Six Months
Ended December 31, 1997 and 1996 3
Consolidated Statements of Cash Flows--Six Months
Ended December 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II
Item 1. Legal Proceedings 20
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 21
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBITS 25
</TABLE>
1
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PART 1. - ITEM 1. FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------------ -----------------
ASSETS
------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 9,580 $ 9,582
Marketable securities 7,066 7,860
Premiums, commission and service fees receivables 2,361 5,275
Other receivables 1,393 2,441
Refundable federal income taxes 1,183 115
Prepaid expenses and other 476 587
Deferred income taxes 806 746
------------------ -----------------
Total current assets 22,865 26,606
Property and equipment, net 9,514 10,100
Intangible assets, net 6,407 10,557
Investments in and advances to affiliates 4,400 4,400
Statutory reserves 3,946 3,937
Deferred income taxes 1,761 339
Other assets 1,509 1,940
Net assets of discontinued operations 19,744 19,746
------------------ -----------------
$70,146 $77,625
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------------------------------------
Current liabilities
Current portion of long-term debt $14,444 $15,868
Medical claims payable 14,564 8,735
Accounts payable and accrued expenses 3,670 6,539
Accrued compensation and related benefits 1,746 2,098
Other current liabilities 862 380
------------------ -----------------
Total current liabilities 35,286 33,620
Long-term debt 8,000 8,000
Accrued rent 1,575 1,599
Shareholders' equity
Preferred, 5,000,000 shares authorized; none issued - -
Common, 15,000,000 shares authorized; 6,578,356 and 6,535,941
issued and outstanding at December 31, 1997 and June 30,
1997 10,715 10,498
Retained earnings 14,630 23,996
Unrealized net holding losses on marketable securities (60) (88)
------------------ -----------------
25,285 34,406
------------------ -----------------
$70,146 $77,625
================== =================
</TABLE>
See accompanying notes to the financial statements.
2
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
--------------------------------------- ---------------------------------------
1997 1996 1997 1996
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES
Medical premiums $22,526 $16,028 $ 42,810 $ 34,130
Management fees from related
parties 6,213 9,943 12,459 19,766
Interest and other income 453 487 955 1,043
----------------- ------------------ ----------------- -----------------
Total revenues 29,192 26,458 56,224 54,939
EXPENSES
Medical services 21,860 13,298 39,039 27,903
Marketing, general and
administrative 11,778 13,161 22,220 26,364
Depreciation and amortization 4,672 1,009 5,734 2,017
Interest expense 456 366 786 765
----------------- ------------------ ----------------- -----------------
Total expenses 38,766 27,834 67,779 57,049
----------------- ------------------ ----------------- -----------------
Loss from continuing operations
before income tax credit (9,574) (1,376) (11,555) (2,110)
Income tax credit (2,073) (351) (2,512) (526)
----------------- ------------------ ----------------- ------------------
Loss from continuing operations (7,501) (1,025) (9,043) (1,584)
Discontinued operations, net of
income taxes (532) 1,139 (323) 1,706
----------------- ------------------ ----------------- ------------------
NET (LOSS) EARNINGS $(8,033) $ 114 $ (9,366) $ 122
================= ================== ================= ==================
NET (LOSS) EARNINGS PER COMMON SHARE:
LOSS PER COMMON SHARE FROM
CONTINUING OPERATIONS $ (1.14) $ (0.15) $ (1.37) $ (0.24)
================= ================== ================= =================
NET (LOSS) EARNINGS PER COMMON
SHARE $ (1.22) $ .02 $ (1.42) $ 0.02
================= ================== ================= =================
</TABLE>
See accompanying notes to the financial statements.
3
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) earnings $ (9,366) $ 122
Adjustments to reconcile net (loss) earnings to net cash
provided from (used in) operating activities:
Discontinued operations, net of income taxes 323 (1,706)
Gain on disposal of assets (91) -
Depreciation and amortization 5,734 2,017
Accrued rent (24) 58
Deferred income tax credit (1,138) (722)
Changes in assets and liabilities
Decrease in premiums, commission and service fees receivables 2,914 3,571
Decrease in other receivables 1,048 703
(Increase) decrease in refundable federal income taxes (1,068) 168
Decrease in prepaid expenses and other 111 73
(Increase) decrease in statutory reserves (9) 4,677
Decrease in other assets 587 162
Increase (decrease) in medical claims payable 5,829 (15,229)
(Decrease) increase in accounts payable and accrued expenses (2,869) 1,261
(Decrease) increase in accrued compensation and related benefits (352) 330
Increase (decrease) in other current liabilities 482 (97)
------------ ------------
Net cash provided from (used in) operating activities 2,111 (4,612)
INVESTING ACTIVITIES
Net decrease (increase) in marketable securities 839 (2,738)
Purchase of furniture and equipment (1,028) (1,118)
Cash used in discontinued operations (717) (1,083)
------------ ------------
Net cash used in investing activities (906) (4,939)
FINANCING ACTIVITIES
Borrowings under line of credit agreement 142 3,939
Payments made on long-term debt (1,566) (728)
Proceeds from issuance of common stock 217 -
------------ ------------
Net cash (used in) provided from financing activities (1,207) 3,211
------------ ------------
Net increase (decrease) in cash and cash equivalents (2) (6,340)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,582 22,961
============ ============
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,580 $ 16,621
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 814 $ 765
============ ============
Income taxes paid $ - $ 469
============ ============
</TABLE>
See accompanying notes to the financial statements.
4
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(Unaudited)
NOTE 1 - BASIS OF PREPARATION
The financial statements as of and for the six and three months ended
December 31, 1997 and 1996 are unaudited, and in the opinion of management
include all adjustments necessary for a fair presentation thereof. The results
of operations for the period ended December 31, 1997 are not necessarily
indicative of the results of operations for the full fiscal year ending June 30,
1998. Audited June 30, 1997 financial statements can be found in the Company's
most recent Form 10-K with accompanying footnotes.
The accompanying consolidated financial statements include the accounts
of United American Healthcare Corporation and all of its majority-owned
subsidiaries, together referred to as the "Company". All significant
intercompany transactions and balances have been eliminated in consolidation.
Interest of other investors in the Company's majority-owned subsidiaries are
accounted for as minority interests. Non-majority investments in affiliates in
which management has the ability to exercise significant influence are recorded
on the equity method. As discussed in Note 3, Corporate Healthcare Financing,
Inc. and its wholly owned subsidiaries ("CHF") are presented as discontinued
operations.
Certain reclassifications have been made to prior years' financial
statements amounts to conform to the current period classifications.
NOTE 2 - RESTRUCTURING
As of December 31, 1997, the Company's accompanying financial
statements reflect significant operating losses, negative working capital and a
reduction in net worth. On January 12, 1998, as a result of this operating
performance, 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.
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. The Company expects
restructuring charges in its third quarter, including estimated charges of
approximately $.7 million and $.3 million of deferred HMO licensure costs in
Louisiana and Pennsylvania, respectively, and $.1 million of severance expenses,
but is not in a position to estimate the full range and magnitude of all such
charges at this time.
Restructuring actions taken subsequent to December 31, 1997, included
employee downsizing, discontinuance of its 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
5
<PAGE> 7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(Unaudited)
revenues. The primary source of future net revenues is expected to include
those from certain healthcare plans owned or operated by the Company. If the
projected net revenues for these healthcare 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.
NOTE 3 - DISCONTINUED OPERATIONS
In conjunction with the Company's intention to focus on core
activities, it is the intention of management to sell substantially all of the
assets and liabilities of 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 consolidated balance sheet
as net assets of discontinued operations as of December 31, 1997 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 to an entity related to the
Company via common shareholders, contingent upon the buyer securing financing.
The buyer was not able to obtain financing, and the Company's Board of Directors
approved pursuing a modified agreement for such sale with the same buyer. In the
event a sale to this buyer is not consummated, the Company intends to pursue
other prospective buyers. The cash proceeds from the eventual sale of CHF could
be less than $30 million and would provide cash flow to reduce debt and support
enhancements in existing operations.
Discontinued operations are summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
--------------------------------------- ---------------------------------------
1997 1996 1997 1996
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Total revenues $4,308 $4,417 $9,535 $9,548
Total expenses 4,840 3,278 9,858 7,842
================= ================== ================= =================
(Loss) earnings from discontinued
operations (1) $(532) $1,139 $(323) $1,706
================= ================== ================= =================
</TABLE>
(1) Net of income tax (credit) of $(435) and $661 for the three months ended
December 31, 1997 and 1996, respectively, and $(318) and $1,269 for the six
months ended December 31, 1997 and 1996, respectively.
6
<PAGE> 8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(Unaudited)
CHF and its subsidiaries' consolidated balance sheets are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
----------------- -----------------
<S> <C> <C>
ASSETS
-------------------------------------------------------
Cash and cash equivalents $ 312 $ 804
Commission, service fees and other receivables, net 8,154 9,927
Property and equipment, net 2,447 2,126
Intangible assets, net 8,468 9,217
Other assets 2,872 982
----------------- -----------------
$22,253 $23,056
================= =================
LIABILITIES AND SHAREHOLDER'S EQUITY
-------------------------------------------------------
Accounts payable and accrued expenses $ 996 $ 1,221
Accrued compensation and related benefits 639 627
Payable to parent 2,154 2,202
Debt payable within one year 197 197
Long-term debt 365 461
----------------- -----------------
4,351 4,708
Shareholder's equity 17,902 18,348
----------------- -----------------
$22,253 $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 balance sheets.
NOTE 4 - DEBT
In February 1998, the Company entered into a commitment letter 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 commitment letter 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
December 31, 1997 on its existing line of credit and term loans is $22.4
million, with an additional $.5 million letter of credit issued under the
existing line of credit facility.
Pursuant to the commitment letter, interest is payable monthly at the
bank's prime rate, with the principal due and payable at maturity. The interest
rate on the line of credit facility will be
7
<PAGE> 9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(Unaudited)
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.
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 six months ended December 31, 1997 and 6,560,941 for the three
and six months ended December 31, 1996.
Approximately 42,000 shares of the Company's common stock are estimated
to be purchased or 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 periods ended December 31,
1997, and had no impact per share for the periods ended December 31, 1996.
NOTE 6 - INTANGIBLE 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,
which 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.
Based upon its most recent evaluation, the Company believes that the
remaining goodwill related to the Company's 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 are not recoverable, and has accordingly recognized the remaining
unamortized balance during the quarter ended December 31, 1997. Also see Note 7.
8
<PAGE> 10
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997 AND 1996
(Unaudited)
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 defendants in two shareholder lawsuits
filed in the United States District Court for the Eastern District of Michigan
(the "Court") in August 1995. These lawsuits were consolidated by the Court into
a single action. 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 approximately $2.1
million to be paid by the insurance carrier. The Company recorded an expense for
the balance of $1.15 million as of June 30, 1997. The pending settlement is
subject to federal court approval following a court hearing on the fairness of
the proposed settlement scheduled for April 27, 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.
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 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. Unfavorable
commercial market provider contract rates were determined to be the most
significant contributing factor to the deterioration of the medical loss ratio
in Florida from previous periods.
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. At this report date, the deficiency has not been cured and the FDOI has
not petitioned the court to enter such consent order, but it may do so at any
time. The Company, which has no present intention to cure the deficiency, is in
discussions with potential buyers for the Plan.
Pursuant to the stipulation and consent order (although such order has
not yet been entered by the court): 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's 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 over control of the Organizations' bank accounts; the
Plan ceased enrolling new members; and the
9
<PAGE> 11
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997 AND 1996
(Unaudited)
Organizations continue to provide services to all of the Plan's subscribers
and to process renewals on all policies as they come due. If the consent order
is entered by the court, it will have the additional effect of appointing the
FDOI as Receiver for the purposes of liquidation of the Organizations.
No provision has been made for the ultimate outcome of this matter, as
it cannot be predicted or reasonably estimated. A final resolution by the FDOI
could require adjustments to the account activity currently recorded, including
the need for future additional provisions. The Company expects additional
adjustments related to this matter in future periods.
10
<PAGE> 12
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 in non-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. Unfavorable
commercial market provider contract rates were determined to be the most
significant contributing factors to the deterioration of the medical loss ratio
in Florida from previous periods.
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. At this report date, the deficiency has not been cured and the FDOI has
not petitioned the court to enter such consent order, but it may do so at any
time. The Company, which has no present intention to cure the deficiency, is in
discussions with potential buyers for the Plan. There can be no assurance
whether a sale of the Plan may occur, whether the consent order may be
entered, or what effect a sale, if any, might have in regard to the consent
order.
11
<PAGE> 13
Pursuant to the stipulation and consent order (although such order has
not yet been entered by the court): 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's 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 over control of the Organizations' bank accounts; the
Plan ceased enrolling new members; and the Organizations continue to provide
services to all of the Plan's subscribers and to process renewals on all
policies as they come due. If the consent order is entered by the court,
it will have the additional effect of appointing the FDOI as Receiver for
the purposes of liquidation of the Organizations.
No provision has been made for the ultimate outcome of this matter, as
it cannot be predicted or reasonably estimated. A final resolution by the FDOI
could require adjustments to the account activity currently recorded, including
the need for future additional provisions. The Company expects additional
adjustments related to this matter in future periods.
Restructuring actions taken subsequent to December 31, 1997, include
employee downsizing at the Company's Corporate, Tennessee and Florida operations
of approximately 60 persons or 9% of the work force, with annualized savings
estimated at $3.0 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. The Company
expects restructuring charges in its third quarter, including estimated charges
of approximately $.7 million and $.3 million of deferred HMO licensure costs in
Louisiana and Pennsylvania, respectively, and $.1 million of severance expenses,
but is not in a position to estimate the full range and magnitude of all such
charges at this time.
In February 1998, the Company entered into a commitment letter 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 commitment letter 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 December
31, 1997 on its existing line of credit and term loans is $22.4 million, with an
additional $.5 million letter of credit issued under the existing line of credit
facility. See Note 4 to the 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 to an entity related
to the Company via common shareholders, contingent upon the buyer
securing financing. The buyer was not able to obtain financing, and the
Company's Board of Directors approved pursuing a modified agreement for such
sale with the same buyer. In the event a sale to this buyer is not consummated,
the Company intends to pursue other prospective buyers. The cash proceeds from
the eventual sale of CHF could be less than $30 million and would provide cash
flow to reduce debt and support enhancements in existing operations. There can
be no assurances that a sale of CHF will be consummated.
12
<PAGE> 14
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. 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 second quarter of fiscal 1998 and the six months ended December
31, 1997, the effect of the rate reductions on management fees was approximately
$.8 million or $.08 per share and $1.3 million or $.13 per share, respectively.
The State has begun to enroll certain of these eligible persons to selected
health plans, including OmniCare-MI during the Company's third quarter ending
March 31, 1998. Additionally, the Plan is expecting Medicaid rate increases
effective in the Company's third quarter. 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 $7.5
million and $9.0 million for the three and six months ended December 31, 1997,
respectively, compared to a loss of $1.0 million and $1.6 million for the three
and six months ended December 31, 1996, respectively. Including discontinued
operations, the loss totaled $8.0 million or $1.22 per share and $9.4 million or
$1.42 per share for the three and six months ended December 31, 1997,
respectively, compared to earnings of $.1 million for both the three and six
months ended December 31, 1996, or $.02 per share for both periods.
13
<PAGE> 15
Results for the three months ended December 31, 1997 include a loss
after taxes at the Company's Florida operations of $6.8 million or $1.03 per
share, including $3.5 million of goodwill write-off and $3.0 million related to
the increase of the IBNR medical expenses during the quarter, compared to a loss
of $.9 million for the three months ended December 31, 1996. Florida operations
for the current six month period resulted in a loss of $7.3 million or $1.11 per
share, compared to a loss of $1.9 million or $.30 per share for the comparable
period last year.
The Company has not yet made a complete assessment of its Year 2000
issues or determined whether it has material Year 2000 issues, internally or
with other entities with which the Company electronically interacts.
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1996
Total revenues from continuing operations increased $1.3 million (2%),
from $54.9 million in the six months ended December 31, 1996 to $56.2 million in
six months ended December 31, 1997.
Medical premium revenues were $42.8 million in the first six months of
fiscal 1998, an increase of $8.7 million (26%) over medical premium revenues of
$34.1 million in the comparable period a year earlier. Medical premiums for
OmniCare-TN increased $1.7 million (6%), from $28.7 million in the first six
months of fiscal 1997 to $30.4 million in the first six months of fiscal 1998.
$1.1 million of the increase relates to the Bureau of Tenncare's final 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 $.6 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 six
months compared to 46,000 for the prior year's six months, was $119 in fiscal
1998 compared to $104 in fiscal 1997, an increase of 14%. Excluding the effects
of the adverse selection and medical technologies settlements, rates increased
approximately 9%. The State of Tennessee's disenrollment of approximately 7,000
members in the quarter ended December 1996 was the primary reason for the
enrollment decrease. This action was taken by the State based upon the return of
undeliverable questionnaires mailed to members, which the State requested for
continued participation.
Medical premiums for UltraMedix increased $7.0 million (130%), from
$5.4 million in the first six months of fiscal 1997 to $12.4 million in the
first six months of fiscal 1998. The average of UltraMedix's enrollment for the
six months ended December 31, 1997 was approximately 20,300, an increase of
10,600 (109%) from an average enrollment of approximately 9,700 members for the
comparable period a year earlier. The average UltraMedix
14
<PAGE> 16
PMPM premium rate for the six month periods was approximately $102 in
fiscal 1998 compared to $96 in fiscal 1997, a 6% increase.
UltraMedix made significant enrollment gains in the commercial market
since approval of its HMO license in October 1995. The increase in the
commercial market was due in part to the State of Florida's unsuccessful
initiative to mandate the enrollment of Medicaid eligibles into managed care.
UltraMedix was selected to participate in this program and the contract award
would have capped UltraMedix's Medicaid enrollment, including existing members,
at approximately 48,000 during the contract period. Because of legal challenges
from unsuccessful bidders to the State's request for proposals, the initiative
has been halted indefinitely. To minimize the uncertainty related to rate
reductions contemplated by the initiative, UltraMedix retargeted its marketing
efforts to expand its commercial business. This contributed to the change in
UltraMedix's enrollment mix from 82:18 (Medicaid-to-commercial) as of December
1996, to 43:57 as of December 1997.
Management fees were $12.5 million in the first six months of fiscal
1998, a decrease of $7.3 million (37%) from fees of $19.8 million in the first
six 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 4%, respectively, which resulted in decreased
management fees to the Company of approximately $1.9 million. As noted in the
overview, the State initiative in Michigan was the primary factor for the
reduced premium rates. The Company recognized $5.4 million in management fees
for the six months ended December 31, 1996 related to the PPC management
agreement, which was terminated in May 1997.
Total expenses before income taxes from continuing operations totaled
$67.8 million in the six months ended December 31, 1997, compared to $57.0
million in the same period in fiscal 1997, an increase of $10.8 million (19%).
Medical service expenses were $39.0 million in the six months ended
December 31, 1997, an increase of $11.1 million (40%) over medical service
expenses of $27.9 million in the same period in fiscal 1997. Medical expenses
for OmniCare-TN increased $1.9 million (8%), from $23.0 million in such period
in fiscal 1997 to $24.9 million in such period in fiscal 1998. Medical expenses
for UltraMedix increased $9.2 million (188%), from $4.9 million in the first six
months of fiscal 1997 to $14.1 million in the six months ended December 31,
1997. The percentage of medical service expenses to medical premium revenues, or
the medical loss ratio ("MLR"), was 82% and 80% for OmniCare-TN in such periods
in fiscal 1998 and 1997, respectively, and 114% and 89% for UltraMedix in such
periods in fiscal 1998 and 1997, respectively. Management expects that the MLR
at OmniCare-TN could increase as it expands into the commercial market.
Based on actuarial and extensive internal reviews of the UltraMedix's
medical claims experience at December 31, 1997, the Company recorded an
adjustment to the Plan's IBNR medical expenses of $4.5 million during the second
quarter of fiscal 1998, $3.0 million after taxes. Unfavorable commercial market
provider contract rates were determined to be the most
15
<PAGE> 17
significant contributing factor to the deterioration of the medical loss
ratio in Florida from previous periods.
Marketing, general and administrative expenses ("MG&A") decreased $4.1
million (16%), from $26.4 million in the first six months of fiscal 1997 to
$22.3 million in the first six months of fiscal 1998, due to the following: (i)
termination of the PPC management agreement resulted in a $4.6 million decrease;
(ii) an increase in professional fees of $1.9 million related primarily to the
financial restructuring program, information system development, and broker
commissions in Florida; and (iii) decreases in salary cost of $.3 million,
promotional and advertising activities of $.5 million, consumables of $.2
million and travel of $.2 million.
Depreciation and amortization in the six months ended December 31, 1997
was $5.7 million, compared to $2.0 million in the six months ended December 31,
1996, an increase of $3.7 million (185%). $3.5 million of the increase relates
to the Company's evaluation that the remaining goodwill related to the Company's
purchase of UltraMedix was not recoverable. Also see Notes 6 and 7 to the
Consolidated Financial Statements.
As a result of the foregoing, the Company recognized a loss from
continuing operations before income taxes of $11.6 million for the six months
ended December 31, 1997, compared to a loss from continuing operations before
income taxes of $2.1 million for the six months ended December 31, 1996, a $9.5
million change. The loss from continuing operations, net of income taxes, was
$9.0 million for the first six 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 $7.4 million. The federal statutory tax rate
for continuing operations for both periods was approximately 34%. Goodwill
amortization related to equity investments not deductible for tax purposes
resulted in an effective tax rate of approximately 22% for the current six
months compared to 25% for the comparable prior six months.
The loss from discontinued operations, net of income taxes, was $.3
million for the six months ended December 31, 1997, compared to earnings of $1.7
million for the six months ended December 31, 1996, a decrease of $2.0 million.
This change is due primarily to increased cost related to servicing the contract
entered in June 1996 with the State of Maryland's Injured Workers' Insurance
Fund.
The net loss for the six months ended December 31, 1997 was $9.4
million or $1.42 per share, compared to earnings of $.1 million for the
comparable prior six month period, or $.02 per share.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1996
Total revenues from continuing operations increased $2.7 million (10%),
from $26.5 million in the three months ended December 31, 1996 to $29.2 million
in the three months ended December 31, 1997.
16
<PAGE> 18
Medical premium revenues were $22.5 million in such period in fiscal
1998, an increase of $6.5 million (41%) over medical premium revenues of $16.0
million in such period in fiscal 1997. Medical premiums for OmniCare-TN
increased $2.7 million (20%), from $13.3 million in such period in fiscal 1997
to $16.0 million in such period in fiscal 1998. $1.1 million of the increase
relates to the Bureau of Tenncare's final annual payout in December 1997 to
managed care organizations for high cost chronic conditions of their membership
and new medical technologies.
The remaining OmniCare-TN increase of $1.6 million is due to rate
increases. The PMPM premium rate, based on an average membership of 43,000 for
the current and comparable prior three month periods was $124 in fiscal 1998
compared to $101 in fiscal 1997, a 23% increase. Excluding the effects of the
adverse selection and medical technologies settlements, rates increased
approximately 11%.
Medical premiums for UltraMedix increased $3.8 million (141%), from
$2.7 million in the three months ended December 31, 1996 to $6.5 million in the
three months ended December 31, 1997. The average of UltraMedix's enrollment for
the three months ended December 31, 1997 was approximately 21,000, an increase
of 11,300 (116%) from an average enrollment of approximately 9,700 members for
the comparable period a year earlier. The average UltraMedix PMPM premium
rate for such three month period was approximately $104 in fiscal 1998 compared
to $96 in fiscal 1997, a 8% increase.
Management fees were $6.2 million in such period in fiscal 1998, a
decrease of $3.7 million (37%) from fees of $9.9 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 premium and enrollment rates of
approximately 11% and 3%, respectively, which resulted in decreased management
fees to the Company of approximately $1.0 million. As noted in the overview, the
State initiative in Michigan was the primary factor for the reduced premium
rates. The Company recognized $2.8 million in management fees for the three
months ended December 31, 1996 related to the PPC management agreement, which
was terminated in May 1997.
Total expenses before income taxes from continuing operations totaled
$38.8 million in the three months ended December 31, 1997, compared to $27.8
million in the three months ended December 31, 1996, an increase of $11.0
million (40%).
Medical service expenses were $21.9 million in such period in fiscal
1998, an increase of $8.6 million (65%) over medical service expenses of $13.3
million in such period in fiscal 1997. Medical expenses for OmniCare-TN
increased $1.7 million (16%), from $10.9 million in such period in fiscal 1997
to $12.6 million in such period in fiscal 1998. Medical expenses for UltraMedix
increased $6.9 million (288%), from $2.4 million in the three months ended
December 31, 1996 to $9.3 million in the comparable current three month period.
The MLR was 79% and 82% for OmniCare-TN in such periods in fiscal 1998 and 1997,
respectively, and 142% and 88% for UltraMedix in such periods in fiscal 1998 and
1997, respectively. Management expects that the MLR at OmniCare-TN could
increase as it expands into the commercial market.
17
<PAGE> 19
Based on actuarial and extensive internal reviews of the UltraMedix's
medical claims experience at December 31, 1997, the Company recorded an
adjustment to the Plan's IBNR medical expenses of $4.5 million during the second
quarter of fiscal 1998, $3.0 million after taxes. Unfavorable commercial market
provider contract rates were determined to be the most significant contributing
factor to the deterioration of the medical loss ratio in Florida from previous
periods.
MG&A decreased $1.4 million (11%), from $13.2 million in the three
months ended December 31, 1996 to $11.8 million in the three months ended
December 31, 1997, due to the following: (i) termination of the PPC management
agreement resulting in a $2.4 million decrease; (ii) an increase in professional
fees of $1.4 million related primarily to the financial restructuring program,
information system development, and broker commissions in Florida; (iii)
decreases in salary cost of $.3 million, promotional and advertising activities
of $.2 million, consumables of $.1 million and travel of $.1 million; and (iv)
increases in occupancy cost of $.1 million and minority interest of $.2 million.
Depreciation and amortization in such period in fiscal 1998 was $4.7
million, compared to $1.0 million in such period in fiscal 1997, an increase of
$3.7 million (370%). $3.5 million of the increase relates to the Company's
evaluation that the remaining goodwill related to the Company's purchase of
UltraMedix was not recoverable. Also see Notes 6 and 7 to the Consolidated
Financial Statements.
As a result of the foregoing, the Company recognized a loss from
continuing operations before income taxes of $9.6 million for the three months
ended December 31, 1997, compared to a loss from continuing operations before
income taxes of $1.4 million for the three months ended December 31, 1996, a
$8.2 million change. The loss from continuing operations, net of income taxes,
was $7.5 million for such three months of fiscal 1998, compared to a loss from
continuing operations, net of income taxes, of $1.0 million for the comparable
period in fiscal 1997, a change of $6.5 million. The federal statutory tax rate
for continuing operations for both periods was approximately 34%. Goodwill
amortization related to equity investments not deductible for tax purposes
resulted in an effective tax rate of approximately 22% for the current three
months compared to 26% for the comparable prior three months.
The loss from discontinued operations, net of income taxes, was $.5
million for the three months ended December 31, 1997, compared to earnings of
$1.1 million for the three months ended December 31, 1996, a decrease of $1.6
million. This change is due primarily to increased cost related to servicing the
contract entered in June 1996 with the State of Maryland's Injured Workers'
Insurance Fund.
18
<PAGE> 20
The net loss for the three months ended December 31, 1997 was $8.0
million or $1.22 per share, compared to earnings of $.1 million for the
comparable prior three month period, or $.02 per share.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had (i) cash and cash equivalents and
short-term marketable securities of $16.6 million, compared to $17.4 million at
June 30, 1997, (ii) working capital of negative $12.4 million, compared to
negative $7.0 million at June 30, 1997, and (iii) a current
assets-to-current-liabilities ratio of .65-to-1 compared to .79-to-1 at June 30,
1997. The principal sources of funds for the Company during the six months ended
December 31, 1997 were $2.1 million provided from net operating activities, net
sale of marketable securities of $.8 million, debt borrowings of $.1 million and
proceeds from the issuance of common stock of $.2 million offset by furniture
and equipment additions of $1.0 million, investing cash used in discontinued
operations of $.7 million and $1.5 million to repay long-term debt.
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
intends to cancel its letter of credit commitment of $1.0 million and unrestrict
the $1.0 million funded in satisfaction of applicable statutory requirements.
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 proposed sale of CHF would provide cash flow to
reduce debt and support enhancements in existing operations. 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.
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 plan described earlier in this Item 2 under "Material
Changes in Results of Operations - Overview" and Note 2 to the Consolidated
Financial Statements.
19
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported by the Company, certain present and former
senior officers and the Company are named defendants in two shareholder
lawsuits filed in the United States District Court for the Eastern District
of Michigan (the "Court") in August 1995. These lawsuits were consolidated by
the Court into a single action. 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
approximately $2.1 million to be paid by the insurance carrier. The Company
recorded an expense for the balance of $1.15 million as of June 30, 1997.
The pending settlement is subject to federal court approval following a
court hearing on the fairness of the proposed settlement scheduled for April
27, 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.
On January 30, 1998, the Company, UltraMedix and UA-FL 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. At this report date, the deficiency has
not been cured and the FDOI has not petitioned the court to enter such consent
order, but it may do so at any time. The Company, which has no present
intention to cure the deficiency, is in discussions with potential buyers
for the Plan. There can be no assurance whether a sale of the Plan may
occur, whether the consent order may be entered, or what effect a sale, if
any, might have in regard to the consent order.
The basis for the stipulation and consent order was UltraMedix's
noncompliance with the FDOI's requirement that HMOs maintain a minimum $.5
million statutory reserve as determined in accordance with statutory accounting
practices. UltraMedix's statutory deficiency at December 31, 1997 is estimated
at $4.5 million (see Note 7 to the Consolidated Financial Statements). Pursuant
to the stipulation and consent order (although such order has not yet been
entered by the court): 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's 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 over control of the Organizations' bank accounts; the Plan ceased
enrolling new members; and the Organizations continue to provide services to
all of the Plan's subscribers and to process renewals on all policies as
they come due. If the consent order is entered by the court, it will have the
additional effect of appointing the FDOI as Receiver for the purposes of
liquidation of the Organizations.
20
<PAGE> 22
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An annual meeting of the shareholders of the Company was held on
November 13, 1997, and the following action was taken: (i) re-election of Emmett
S. Moten, Jr., Louis J. Nicholas, and William B. Fitzgerald as directors of the
Company to serve for three-year terms; and (ii) selection of Arthur Andersen LLP
as independent auditors of the Company for the 1997-1998 fiscal year.
Anita Gorham, Harcourt Harris, M.D., Vivian Carpenter, Ph.D. and Ronald
Horwitz, Ph.D., whose terms expire in 1998, and Julius Combs, M.D., Ronald
Dobbins, and William Brooks, whose terms expire in 1999, continued in office as
directors of the Company after the meeting.
After selecting Arthur Andersen LLP as its independent auditors for the
fiscal year ending June 30, 1998, the Company engaged Arthur Andersen LLP to
assist it in the development and implementation of a financial restructuring
program and the Company selected the head of Arthur Andersen LLP's Corporate
Recovery Services Group, Thomas J. Allison, in his individual capacity, as
the Company's interim Chief Financial Officer.
In view of the consulting services to be provided to the Company by
Arthur Andersen LLP and the selection of the head of Arthur Andersen LLP's
Corporate Recovery Services Group as interim Chief Financial Officer, Arthur
Andersen LLP no longer had the independence required to serve as the Company's
independent auditors. On January 12, 1998, the Company's Board of Directors,
upon the recommendation of its Audit Committee, engaged KPMG Peat Marwick LLP as
the Company's independent auditors for the fiscal year ending June 30, 1998.
ITEM 5. OTHER INFORMATION.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage management to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statements. The
Company desires to take advantage of this "safe harbor" and, accordingly, hereby
identifies the following important factors, the occurrence of which could cause
the Company's actual financial
21
<PAGE> 23
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.
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 carry out marketing and sales plans.
11. Loss or retirement of key executives.
12. Governmental financial assessments or taxes to subsidize
uncompensated care, other insurance carriers or academic
medical institutions.
13. Termination of provider contracts or renegotiations at less
cost-effective rates or terms of payment.
22
<PAGE> 24
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.
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
----------------------- -----------------------
27 Financial data schedule
(B) REPORTS ON FORM 8-K
Dated Items Reported
----------------------- --------------
October 23, 1997 (1) (2) 4 and 7
January 12, 1998 (2) 4, 5 and 7
(1) Filed October 30, 1997; amended 8-K/A filed
November 12, 1997.
(2) No financial statements were filed
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: February 17, 1998 By: /s/ Ronald R. Dobbins
------------------------------
Ronald R. Dobbins
President & Chief Operating Officer
Dated: February 17, 1998 By: /s/ Thomas J. Allison
------------------------------
Thomas J. Allison
Interim Chief Financial Officer
24
<PAGE> 26
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
27 Financial data schedule
<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 DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRELY 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> DEC-31-1997
<CASH> 9,580,000
<SECURITIES> 7,066,000
<RECEIVABLES> 4,937,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,865,000
<PP&E> 18,599,000
<DEPRECIATION> (9,085,000)
<TOTAL-ASSETS> 70,146,000
<CURRENT-LIABILITIES> 35,286,000
<BONDS> 0
0
0
<COMMON> 10,715,000
<OTHER-SE> (60,000)
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<INCOME-TAX> (2,512,000)
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</TABLE>
