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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 MARCH 31, 1999
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 MAY 13, 1999
WAS 6,887,247.
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As filed with the Securities and Exchange Commission on May 13, 1999
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UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C>
Item 1. Unaudited Condensed Consolidated Financial Statements--
Condensed Consolidated Balance Sheets--March 31, 1999
and June 30, 1998 2
Condensed Consolidated Statements of Operations--Three and Nine Months
Ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows--Nine Months
Ended March 31, 1999 and 1998 4
Notes to the Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 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>
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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>
MARCH 31, JUNE 30,
1999 1998
---------------- -------------
ASSETS (Unaudited)
-----------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $13,287 $13,259
Marketable securities, available for sale 6,254 1,431
Premium receivables 4,639 2,723
Note receivable 11,000 -
Other receivables 1,286 1,816
Refundable federal income taxes - 5,453
Prepaid expenses and other 248 281
Deferred income taxes 594 594
-------------------------------
Total current assets 37,308 25,557
Property and equipment, net 4,196 6,098
Intangible assets, net 5,059 5,629
Long-term note receivable 2,250 -
Surplus note receivable, net 2,300 2,300
Marketable securities 1,400 1,396
Deferred income taxes 417 417
Other assets 379 584
Net assets of discontinued operation - 16,703
------------------------------
$53,309 $58,684
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------
Current liabilities
Current portion of long-term debt $17,652 $14,444
Medical claims payable 19,490 20,004
Accounts payable and accrued expenses 2,103 3,549
Accrued compensation and related benefits 980 1,240
Other current liabilities 375 420
------------------------------
Total current liabilities 40,600 39,657
Long-term debt, less current portion 500 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; 6,887,247 and
6,578,356 issued and outstanding at March 31, 1999 and June 30, 1998,
respectively 11,367 10,715
Retained deficit (959) (1,500)
Accumulated other comprehensive loss, net of deferred federal income taxes
(145) (134)
------------------------------
10,263 9,081
------------------------------
$53,309 $58,684
==============================
</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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- -----------------------------
1999 1998 1999 1998
---------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Medical premiums $19,279 $19,614 $52,499 $ 62,424
Management fees from related party 3,383 6,407 13,731 18,866
Interest and other income 679 635 1,833 1,590
-------------------------------------------------------------
Total revenues 23,341 26,656 68,063 82,880
EXPENSES
Medical services 14,938 17,035 43,175 56,074
Marketing, general and administrative 6,996 15,283 20,448 37,503
Depreciation and amortization 856 2,102 2,600 7,836
Interest expense 387 424 1,325 1,210
-------------------------------------------------------------
Total expenses 23,177 34,844 67,548 102,623
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Earnings (loss) from continuing operations before income taxes 164 (8,188) 515 (19,743)
Income tax benefit (103) (1,108) (26) (3,620)
-------------------------------------------------------------
Earnings (loss) from continuing operations 267 (7,080) 541 (16,123)
Earnings (loss) from discontinued operation, net of income taxes - 202 - (121)
-------------------------------------------------------------
NET EARNINGS (LOSS) $ 267 $(6,878) $541 $(16,244)
=============================================================
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC
EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS $ 0.04 $(1.08) $0.08 $(2.45)
=============================================================
NET EARNINGS (LOSS) PER COMMON SHARE $ 0.04 $(1.05) $0.08 $(2.47)
=============================================================
Weighted average shares outstanding 6,867 6,578 6,699 6,578
=============================================================
NET EARNINGS (LOSS) PER COMMON SHARE - DILUTED
EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS $ 0.04 $(1.08) $0.08 $(2.45)
=============================================================
NET EARNINGS (LOSS) PER COMMON SHARE $ 0.04 $(1.05) $0.08 $(2.47)
=============================================================
Weighted average shares outstanding 6,867 6,578 6,702 6,578
=============================================================
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------- -- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 541 $(16,244)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization 2,600 7,836
Net change in assets and liabilities 3,239 8,839
-----------------------------
Net cash provided by operating activities 6,380 431
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (5,464) -
Proceeds from sale of marketable securities 671 3,583
Proceeds from the sale of property and equipment 124 -
Purchase of property and equipment (219) (1,195)
Proceeds from collection of note receivable 4,500 -
Purchase of intangible assets - (284)
Cash used in discontinued operation (1,047) (1,301)
-----------------------------
Net cash (used in) provided by investing activities (1,435) 803
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit agreement - 142
Payments made on long-term debt (4,917) (1,566)
Proceeds from issuance of common stock - 217
-----------------------------
Net cash (used in) financing activities (4,917) (1,207)
-----------------------------
Net increase in cash and cash equivalents 28 27
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,259 9,582
-----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,287 $ 9,609
=============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,325 $ 1,406
Income taxes paid - 61
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Investing - Issuance of note receivables in connection with sale of discontinued operation $15,750 $ -
Financing - Conversion of current liability to common stock 652 -
Financing - Conversion of current liability to long-term debt 625 -
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
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. As discussed in Note 4, through August 31, 1998, the
results of 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 nine month period
ended March 31, 1999 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 annual report on Form 10-K.
NOTE 2 - COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) 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 accumulated other comprehensive loss. 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, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
1999 1998 1999 1998
------------ ----------- ---------- -------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 267 $(6,878) $ 541 $(16,244)
Unrealized holding gains (losses), net of deferred federal
income taxes (11) - (11) 28
============ =========== ========== =============
Comprehensive income (loss) $ 256 $(6,878) $ 530 $(16,216)
============ =========== ========== =============
</TABLE>
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999 AND 1998
The components of accumulated other comprehensive loss, included in
shareholders' equity at March 31, 1999 and 1998, include net unrealized holding
gains (losses), net of deferred federal income taxes.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued SFAS 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 performance. 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 it reports its annual financial statements for the year ending 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 annual report on
Form 10-K, 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.
At June 30, 1998, the carrying value of CHF was written down to the net
realizable value of $17.75 million. During the nine months ended March 31, 1999,
the carrying value of CHF was written down by an additional $.3 million, which
represented the excess of revenues over expense of CHF during that period. This
writedown 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.
Discontinued operation is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ----------------------
1999 1998 1999 1998
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Total revenues $ - $6,047 $4,677 $15,582
Total expenses - 5,845 4,677 15,703
=========== ============ ========== ===========
Earnings (loss) from discontinued operation (1) $ - $ 202 $ - $ (121)
=========== ============ ========== ===========
</TABLE>
(1) Net of income tax expense of $0 and $369 for the three months ended March
31, 1999 and 1998, respectively, and $509 and $51 for the nine months ended
March 31, 1999 and 1998, respectively.
6
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999 AND 1998
NOTE 5 - LONG TERM DEBT AND NOTE RECEIVABLE
In September 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 to require reductions in the outstanding balance
owed to the bank at scheduled future dates, including the permanent reduction of
the outstanding balance to the lesser of the then outstanding principal balance
or $8.0 million by April 15, 1999. In view of the extension of the final
maturity date of the CHF buyer's secured note from March 31, 1999 to August 31,
1999 (described in the paragraph below), the bank lender has agreed with the
Company to waive the April 15 requirement and instead to require the permanent
reduction of the outstanding balance owed to the bank to the lesser of the then
outstanding principal balance or $16.6 million by September 1, 1999. The
maturity date of the line of credit is October 1, 1999.
CHF was sold on September 8, 1998, effective as of August 31, 1998, for
$17.75 million, comprised of $2 million in cash and the buyers secured and
unsecured notes for $13.25 million and $2.5 million, respectively. Including
payments on the secured note, $4.5 million of the sale price, plus $.4 million
of interest, in cash was received through March 31, 1999, and was applied
against the Company's outstanding bank debt as required by the Company's bank
loan agreement. The remaining principal balance on the secured note of $10.75
million was due March 31, 1999, but the buyer requested an extension to allow it
additional time to secure financing. In April 1999, the parties agreed to modify
the secured note payment terms, extending its maturity date to August 31, 1999,
requiring additional principal and interest payments totaling $.9 million to be
paid over the extended period and requiring an additional limited personal
guarantee by a principal of the buyer of $1.5 million of the principal of the
secured note.
NOTE 6 - 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 had been reserved
for issuance upon exercise of options granted under the Old Stock Option Plan.
The Old Stock Option Plan was terminated and superseded by the Company's 1998
Stock Option Plan (1998 Plan) adopted by its Board of Directors on August 6,
1998 and approved by the Company's shareholders on November 12, 1998. No options
were granted under the Old Stock Option Plan. 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, December 15, 1998 and February 3, 1999,
nonqualified options for a total of 325,000, 26,000, and 5,000 common shares,
respectively, were granted under the 1998 Plan (of which an option for 1,000
shares terminated in accordance with its terms during the quarter ended March
31, 1999). Such options expire on dates ranging from September 9, 2008 to
February 3, 2009 and are fully exercisable on dates ranging from March 10, 1999
to February 3, 2003, at prices ranging from $1.1875 to $1.625 per share.
7
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999 AND 1998
Independent of any stock option plan, on May 11, 1998 the Company
granted nonqualified stock options for 100,000 common shares to the Company's
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 7 - NET EARNINGS (LOSS) PER COMMON SHARE
Basic net earnings (loss) per share 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 March 31, 1999, the Company has outstanding stock options for
455,000 shares, which, when accounted for under the treasury method, result in
no common share equivalents for the three month period ended March 31, 1999 and
2,444 common share equivalents for the nine months ended March 31, 1999. These
common share equivalents have been included in the computation of diluted
earnings from continuing operations per common share. For the three and nine
months ended March 31, 1998, the Company did not have any outstanding securities
having a dilutive effect on loss per share.
NOTE 8 - YEAR 2000 COMPLIANCE
The Company has developed and followed a plan to ensure all
modifications and conversions to its primary information systems are implemented
and thoroughly tested on a timely basis. The Company estimates that 40% of such
modifications and conversions have been made to date. Management anticipates
that the remaining modifications and conversions will be completed by August 31,
1999 and that the Company's primary computerized information systems will be
Year 2000 compliant by that date. Current conversion activities include the
replacement and/or upgrade of the Company's telecommunication systems and
personal computers at a cost totaling $.6 million
Although the Company is in the process of completing a contingency plan
for critical computerized information systems to mitigate potential delays or
other problems associated with such modifications or conversions deemed
necessary by management, the Company continues to bear some risk related to the
Year 2000 issue due to its voluntary interaction with other entities not
affiliated with the Company (e.g., vendors and customers) who must address their
own Year 2000 issues. For this reason, the Company has been monitoring the Year
2000 issues of certain third parties with which it interacts. The Company has
asked such third parties to demonstrate, or give some indication as to, their
ability to become Year 2000 compliant by July 31, 1999. With respect to any
third party who appears unlikely to remedy its Year 2000 issues, the Company
intends to take appropriate steps to mitigate the exposure to the risk posed by
such third party's failure to timely address its Year 2000 issues. However, due
to the uncertainty inherent in both the Year 2000 problem and the efforts of
third parties to timely resolve their own Year 2000 issues, there can be no
assurances the Company's
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UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999 AND 1998
mitigation efforts will be successful or that the failure of any third party or
the Company to timely resolve its Year 2000 issues will not have a material
adverse impact on the Company's operations, operating results or financial
position.
Both internal and external resources will be utilized in the Company's
efforts to become Year 2000 compliant. During the three and nine months ended
March 31, 1999, $94,000 and $126,000, respectively, of costs were incurred by
the Company in connection with its efforts to become Year 2000 compliant.
Cumulative Year 2000 modifications and conversion costs approximate the current
nine month total. The total costs of the Company's efforts to become Year 2000
compliant are not expected to exceed $1.3 million, of which approximately 60%
represents capital costs. Costs related to software modifications have been, and
will continue to be, expensed as incurred.
The costs expected to be incurred in connection with the Company's
efforts to become Year 2000 compliant, as well as the date by which the Company
is expected to be Year 2000 compliant, are based on management's best estimates.
Because such estimates were derived utilizing numerous assumptions as to future
events (including the availability of certain resources, third party
modifications and other factors), there can be no assurance that these estimates
will be achieved and such actual costs and date could differ materially from
those currently expected. Specific factors that might cause material differences
include, but are not limited to, the availability and costs of personnel trained
in this area, the ability to locate and correct all relevant computer codes and
similar uncertainties.
NOTE 9 - CONTINGENCIES
On December 11, 1998, pursuant to notice duly given, the United States
District Court for the Eastern District of Michigan held a hearing on the
fairness of the previously reported proposed settlement of two consolidated
shareholder lawsuits which had been filed in August 1995 against certain former
senior officers and the Company. Following the hearing, also on December 11,
1998, the court entered a final judgment approving the settlement and dismissing
the case. Pursuant thereto, all claims and damages sought by the plaintiffs were
released in exchange for $2.0 million in cash from the Company's insurance
carrier, a $625,000 promissory note from the Company dated December 11, 1998,
payable in 15 equal monthly installments beginning January 3, 2000, with
interest at 4% per annum, and 277,777 new shares of common stock of the Company
valued at $625,000 (based on a stipulated share price of $2.25 per share) and
issued on March 29, 1999.
A demand for arbitration was filed on December 1, 1998 with the
American Arbitration Association, entitled SunTel Services, Inc. v. United
American Healthcare Corporation. The claimant sought $413,664 from the Company
for alleged breach of a lease agreement for telecommunications equipment and
related services. The Company, which had returned the leased equipment from
business locations it had closed, asserted a counterclaim. In April 1999, the
parties reached a settlement agreement and the arbitration proceeding was
dismissed in exchange for the Company's paying the claimant $120,000 in cash and
issuing to the claimant 67,369 new shares of common stock of the Company valued
at $80,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
As reported in the Company's most recent annual report on Form 10-K,
the Company continues to implement the restructuring plan initiated in fiscal
1998, which during fiscal 1999 has included changes in senior management, sale
of CHF, renegotiation of the bank credit facility, settlement of legal
proceedings and continued efforts to achieve further cost reductions and
maintain Company revenue.
During August 1998, the then 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.
In September 1998, effective as of August 31, 1998, CHF was sold for
$17.75 million, comprised of $2 million in cash and the buyer's secured and
unsecured notes for $13.25 million and $2.5 million, respectively. Including
payments on the secured note, $4.5 million of the sale price, plus $.4 million
of interest, in cash was received through March 31, 1999, and was applied
against the Company's outstanding bank debt as required by the Company's bank
loan agreement. The remaining principal balance on the secured note of $10.75
million was due March 31, 1999, but the buyer requested an extension to allow it
additional time to secure financing. In April 1999, the parties agreed to modify
the secured note payment terms, extending its maturity date to August 31, 1999,
requiring additional principal and interest payments totaling $.9 million to be
paid over the extended period and requiring an additional limited personal
guarantee by a principal of the buyer of $1.5 million of the principal of the
secured note.
In September 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 to require reductions in the outstanding balance
owed to the bank at scheduled future dates, including the permanent reduction of
the outstanding balance to the lesser of the then outstanding principal balance
or $8.0 million by April 15, 1999. In view of the extension of the final
maturity date of the CHF buyer's secured note from March 31, 1999 to August 31,
1999, the bank lender has agreed with the Company to waive the April 15
requirement and instead to require the permanent reduction of the outstanding
balance owed to the bank to the lesser of the then outstanding principal balance
or $16.6 million by September 1, 1999. The maturity date of the line of credit
is October 1, 1999.
10
<PAGE> 12
In December 1998, final judgment was entered approving the Company's
shareholder lawsuit settlement and dismissing the action. Pursuant thereto, all
claims and damages sought by the plaintiffs were released in exchange for $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 January 3,
2000, with interest at 4% per annum from December 11, 1998, and 277,777 new
shares of common stock of the Company valued at $625,000 and issued on March 29,
1999.
A demand for arbitration was filed on December 1, 1998 against the
Company, seeking approximately $414,000 for alleged breach of a lease agreement
for telecommunications equipment and related services. In April 1999, the
parties reached a settlement agreement and the arbitration proceeding was
dismissed in exchange for the Company's paying the claimant $120,000 in cash and
issuing to the claimant 67,369 new shares of common stock of the Company valued
at $80,000.
Effective April 1, 1999, the Company entered into a contract("County
Care") with Urban Hospital Care Plus to arrange for the delivery of health care
services, including the assumption of underwriting risk, on a capitated basis
to certain enrollees residing in Wayne County (Michigan) who lack access to
private or employer sponsored health insurance or to another government health
plan. The initial contract period is six months and shall be automatically
renewed for successive periods of one year unless terminated by either party as
provided in the contract.
The April 1999 County Care enrollment was approximately 8,200 members,
which generated medical premium revenues of approximately $745,000 for that
month. Management expects that enrollment could exceed 10,000 enrollees by the
end of the initial contract period. Although Company management does not expect
significant net earnings directly from the County Care contract, management
believes that entering into this contract is consistent with the Company's
strategic objective of expanding the client base and achieving size sufficient
to enable the Company to negotiate better rates, save on administrative costs
and build profits.
The Company continues to implement the corrective action plan developed
for OmniCare Health Plan ("OmniCare-MI"), a plan operated by the Company in
Michigan. The corrective action plan includes the reduction of medical costs
through renegotiation of hospital and provider contracts, a reduction in the
management fee percentage paid to the Company from 17% to 14% effective June 1,
1998 and a commitment to ensure OmniCare-MI meets its minimum statutory
requirements for net worth and working capital. In June 1998, the Company funded
a $4.6 million unsecured loan to OmniCare-MI, evidenced by a surplus note, to
enable OmniCare-MI to meet its minimum requirements for net worth and working
capital. Pursuant to the surplus note, interest and principal repayments are
subject to approval by the Michigan Insurance Bureau and are payable only out of
the statutory surplus earnings of OmniCare-MI. The interest is payable annually,
at prime, and if not paid is forfeited. No interest has been accrued during
fiscal 1999. The principal has no stated maturity
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or repayment date. Additionally, in fiscal 1999 the Company provided additional
funding by forgiving $1.3 million in management fees owed by OmniCare-MI, to
enable OmniCare-MI to meet its statutory requirements for net worth and working
capital.
OmniCare-MI recognized earnings of $.3 million for the three months
ended March 31, 1999, compared to a loss of $4.7 million for the three months
ended March 31, 1998, a favorable change of $5.0 million. The change was due
primarily to renegotiated hospital provider contracts and the 3% reduction in
the management fee percentage. The stabilization efforts related to OmniCare-MI
continue, including pursuing joint ventures and other similar activities. The
management fee percentage reduction decreased the Company's revenue for the
three and nine months ended March 31, 1999 by approximately $1.0 million and
$3.3 million, respectively.
In January 1999, the Company announced that OmniCare-MI had joined with
Blue Cross and Blue Shield of Michigan (the "Omni-Blues Venture") in proposals
to provide health care, dental and prescription drug benefits to employees of
the three planned casinos that are to bring casino gaming to Detroit. One of the
casinos has selected the Omni-Blues Venture to provide health care coverage to
its employees, beginning on May 1, 1999. The casino is currently building its
temporary facility, scheduled to open in late 1999. The Company estimates that
over the next several months approximately 3,000 employees (amounting to more
than 7,000 members) will require health coverage and could generate medical
premiums of up to $.9 million monthly ($11.2 million annually), for which the
Company would receive a management fee. The casino's temporary facility is
expected to be replaced by a permanent riverfront facility in Detroit in 2002;
and the Company estimates that then up to 6,000 employees (amounting to more
than 14,000 members) will require health coverage and could generate medical
premiums of up to $1.8 million monthly ($22.0 million annually), for which the
Company would receive a management fee. Management believes that the Omni-Blues
Venture is in strong contention to be selected to similarly provide health care
benefits to employees of another new casino. The outcome of this proposal should
be known in the Company's current fiscal year.
The Company's results of operation for fiscal 1999 have also been
impacted by the cost reductions implemented 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. Payroll expenses at the corporate and Tennessee operations
decreased approximately $1.2 million and $4.3 million for the three and nine
months ended March 31, 1999, compared to the same periods one year earlier.
Earnings from continuing operations before income taxes for the three
and nine months ended March 31, 1999 were $.2 million and $.5 million,
respectively, compared to losses of $8.2 million and $19.7 million for the
comparable fiscal 1998 periods. The $8.4 million change for the comparable three
months is due primarily to corporate expense reductions of $4.4 million,
increased earnings before income taxes from the Company's Tennessee operation of
$1.4 million and the end of losses related
12
<PAGE> 14
to the Company's Florida operation (which ceased operation and was placed in
liquidation in March 1998) of $2.5 million. The $20.2 million change for the
comparable nine months ended is due primarily to corporate expense reductions of
$6.8 million, increased earnings before income taxes from the Company's
Tennessee operation of $1.3 million and the end of losses related to the
Company's Florida operation of $11.7 million.
The Company's cash position was significantly improved with receipts in
the quarter ended March 31, 1999, of a federal income tax refund of
approximately $5.5 million, $4.0 million related to adverse selection
settlements (see three paragraphs below) and the net recovery of $.5 million in
refundable advances made to a third party administrator. The Company is in the
process of upgrading its telecommunications equipment and personal computers,
primarily for Year 2000 compliance but also to increase its operational
functionality and capabilities.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO
NINE MONTHS ENDED MARCH 31, 1998
Total revenues decreased $14.8 million (18%), from $82.9 million in the
nine months ended March 31, 1998 to $68.1 million in the nine months ended March
31, 1999.
Medical premium revenues were $52.5 million in the nine months ended
March 31, 1999, a decrease of $9.9 million (16%) from medical premium revenues
of $62.4 million in the nine months ended March 31, 1998. Medical premiums for
OmniCare Health Plan, Inc. in Tennessee ("OmniCare-TN"), a managed care
organization owned 75% by the Company, increased $5.1 million (11%), from $47.4
million in the nine months ended March 31, 1998 to $52.5 million in the nine
months ended March 31, 1999.
The State of Tennessee's TennCare Bureau provides an annual interim
payment settlement to managed care organizations for high cost chronic
conditions of their memberships and new medical technologies ("adverse
selection"). OmniCare-TN received $4.0 million in adverse selection payments in
the quarter ended March 31, 1999, comprising $3.1 million for the service period
from July 1997 to June 1998 and a $.9 million adjustment for the January 1996 to
June 1997 service period. The July 1997 to June 1998 service period payments of
$3.1 million exceeded recorded medical premiums of $1.1 million (which had been
based on the State of Tennessee's estimate for the same period) by $2.0 million.
For the January 1996 to June 1997 service period, in addition to the $.9 million
received in fiscal 1999, OmniCare-TN received $2.6 million in December 1997 for
a total of $3.5 million. The $3.5 million in payments exceeded recorded medical
premiums of $1.5 million (which had been based on the State of Tennessee's
estimate for the same period) by $2.0 million. The excess of $1.1 million and
$.9 million were recorded in the quarters ended December 31, 1997 and March 31,
1999, respectively. For the nine months ended March 31, 1999,
13
<PAGE> 15
OmniCare-TN medical premiums related to excess adverse selection payments
increased by $1.8 million (164%), from $1.1 million for fiscal 1998 to $2.9
million for fiscal 1999. The OmniCare-TN per member per month ("PMPM") premium
rate -- based on an average membership of 45,500 for the nine months ended March
31, 1999 compared to 43,200 for the nine months ended March 31, 1998 -- was $121
for the nine months ended March 31, 1999, compared to $119 for the nine months
ended March 31, 1998 (excluding adverse selection payments), an increase of 2%
or $.8 million. The 5% increase in member months accounted for $2.5 million of
the OmniCare-TN increase.
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 nine
months ended March 31, 1999. Medical premium revenues from UltraMedix were $15.0
million in the nine months ended March 31, 1998.
Management fees were $13.7 million in the nine months ended March 31,
1999, a decrease of $5.2 million (28%) from fees of $18.9 million in the nine
months ended March 31, 1998. Management fees earned from OmniCare-MI decreased
in the nine months ended March 31, 1999 due to the following: (i) reduction in
the management fee percentage in June 1998 from 17% to 14%, which resulted in a
decrease of $3.3 million; (ii) a decrease in operating revenues of OmniCare-MI
in such period in fiscal 1999 due primarily to a net premium rate increase of
2%, offset by an enrollment decrease of 4%, which resulted in a net decrease in
management fees of $.4 million; and (iii) forgiveness of management fee revenues
from OmniCare-MI of $1.3 million.
Total expenses before income taxes from continuing operations totaled
$67.5 million in the nine months ended March 31, 1999, compared to $102.6
million in the nine months ended March 31, 1998, a decrease of $35.1 million
(34%).
Medical service expenses were $43.2 million in the nine months ended
March 31, 1999, a decrease of $12.9 million (23%) from medical service expenses
of $56.1 million in the nine months ended March 31, 1998. Medical service
expenses for OmniCare-TN increased $3.9 million (10%), from $39.3 million in the
nine months ended March 31, 1998 to $43.2 million in the nine months ended March
31, 1999. The percentage of medical service expenses to medical premium revenues
- -- the medical loss ratio ("MLR") -- was 82% for the nine months ended March 31,
1999 and 83% for the nine months ended March 31, 1998 for OmniCare-TN. The
fiscal 1999 OmniCare-TN MLR includes an offset to medical service expenses
related to the net recovery of $.5 million in refundable advances made to a
third party dental administrator. Additionally, no MLR was applied to the excess
adverse selection payment of $.9 million for the period from January 1996 to
June 1997, received in fiscal 1999, as the medical expense lag for this period
is estimated to be complete.
14
<PAGE> 16
UltraMedix did not incur any medical service expenses in the nine
months ended March 31, 1999. Medical service expenses for UltraMedix were $16.8
million in the nine months ended March 31, 1998.
Marketing, general and administrative expenses (MG&A) decreased $17.1
million (46%), from $37.5 million in the nine months ended March 31, 1998 to
$20.4 million in the nine months ended March 31, 1999, due to the following
corporate and Tennessee activities: (i) employee downsizing in fiscal 1998 and
early fiscal 1999 which significantly contributed to the decrease in salary
expense of $4.3 million; (ii) expensing of $1.0 million of deferred HMO
licensure-related costs in Louisiana and Pennsylvania in fiscal 1998; (iii) a
decrease in professional service fees of $1.3 million related primarily to the
fiscal 1998 financial restructuring program; (iv) a $2.3 million bad debt
expense adjustment in fiscal 1998, which established a valuation allowance on
the Company's New York investment (Advica); and (v) a decrease in promotion and
advertising expense of $1.9 million and a decrease of approximately $6.0 million
related to UltraMedix and United American of Florida, Inc., the Company's
80%-owned subsidiary, which ceased operations and were placed in liquidation in
March 1998.
Depreciation and amortization decreased $5.2 million (67%) from $7.8
million for the nine months ended March 31, 1998 to $2.6 million for the
comparable fiscal 1999 period. Of the decrease, $4.1 million is attributable to
the write-off in fiscal 1998 of the remaining intangibles related to the
Company's purchase of UltraMedix due to the liquidation of the Florida operation
and $.8 million related to the write-off or revaluation of obsolete and other
property and equipment in fiscal 1998.
As a result of the foregoing, the Company recognized earnings from
continuing operations before income taxes of $.5 million for the nine months
ended March 31, 1999, compared to a loss from continuing operations before
income taxes of $19.7 million for the nine months ended March 31, 1998, a $20.2
million change. Net earnings from continuing operations was $.5 million for the
nine months ended March 31, 1999, compared to a net loss from continuing
operations of $16.1 million for the nine months ended March 31, 1998, a change
of $16.6 million.
The discontinued operation contributed no earnings or loss for the nine
months ended March 31, 1999, compared to a loss of $.1 million for the nine
months ended March 31, 1998.
15
<PAGE> 17
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1998
Total revenues decreased $3.4 million (13%), from $26.7 million in the
three months ended March 31, 1998 to $23.3 million in the three months ended
March 31, 1999.
Medical premium revenues were $19.3 million in the three months ended
March 31, 1999, a decrease of $.3 million (2%) from medical premium revenues of
$19.6 million in the three months ended March 31, 1998. Medical premiums for
OmniCare-TN increased $2.4 million (14%) from $16.9 million in the three months
ended March 31, 1998 to $19.3 million in the three months ended March 31, 1999.
For the three months ended March 31, 1999, OmniCare-TN medical premiums
related to excess adverse selection payments were $2.9 million, compared to zero
in fiscal 1998. The fiscal 1998 payment was received in December 1997. The PMPM
premium rate -- based on an average membership of 44,800 for the three months
ended March 31, 1999 compared to 44,100 for the three months ended March 31,
1998 -- was $121 for the three months ended March 31, 1999, compared to $128 for
the three months ended March 31, 1998 (excluding the effects of the adverse
selection payments), a decrease of 5% or $.8 million. The PMPM decrease between
the comparable three month periods was due primarily to the timing of payments
received in the third quarter of fiscal 1998, related to 1997 retroactive
capitation rate increases. The 2% increase in enrollment accounted for $.3
million of the OmniCare-TN increase. UltraMedix did not contribute any medical
premium revenues in the three months ended March 31, 1999. Medical premium
revenues from UltraMedix were $2.7 million in the three months ended March 31,
1998.
Management fees were $3.4 million in the three months ended March 31,
1999, a decrease of $3.0 million (47%) from fees of $6.4 million in the three
months ended March 31, 1998. Management fees earned from OmniCare-MI decreased
in the three months ended March 31, 1999 due to the following: (i) reduction in
the management fee percentage in June 1998 from 17% to 14%, which resulted in a
decrease of $1.0 million; (ii) a decrease in operating revenues of OmniCare-MI
in such period in fiscal 1999 due primarily to a net premium rate increase of
1%, offset by an enrollment decrease of 9%, which resulted in a net decrease in
management fees of $.5 million; and (iii) forgiveness of management fee revenues
from OmniCare-MI of $1.3 million.
Total expenses before income taxes from continuing operations totaled
$23.2 million in the three months ended March 31, 1999, compared to $34.8
million in the three months ended March 31, 1998, a decrease of $11.6 million
(33%).
Medical service expenses were $14.9 million in the three months ended
March 31, 1999, a decrease of $2.1 million (12%) from medical service expenses
of $17.0 million in the three months ended March 31, 1998. Medical service
expenses for
16
<PAGE> 18
OmniCare-TN increased $.5 million (3%), from $14.4 million in the three months
ended March 31, 1998 to $14.9 million in the three months ended March 31, 1999.
The MLR was 77% for the three months ended March 31, 1999 and 85% for the three
months ended March 31, 1998 for OmniCare-TN. The fiscal 1999 MLR includes an
offset to medical service expenses related to the net recovery of $.5 million in
refundable advances made to a third party dental administrator. Additionally, no
MLR was applied to the excess adverse selection payment of $.9 million for the
period from January 1996 to June 1997, received during the quarter ended March
31, 1999, as the medical expense lag for this period is estimated to be
complete.
UltraMedix did not incur any medical service expenses in the three
months ended March 31, 1999. Medical service expenses for UltraMedix were $2.6
million in the three months ended March 31, 1998.
MG&A decreased $8.3 million (54%), from $15.3 million in the three
months ended March 31, 1998 to $7.0 million in the three months ended March 31,
1999, due to the following corporate and Tennessee activities: (i) employee
downsizing in fiscal 1998 and early fiscal 1999 which significantly contributed
to the decrease in salary expense of $1.2 million; (ii) expensing of $1.0
million of deferred HMO licensure-related costs in Louisiana and Pennsylvania in
fiscal 1998; (iii) a decrease in professional service fees of $.8 million
related primarily to the fiscal 1998 financial restructuring program; (iv) a
$2.3 million bad debt expense adjustment on the Company's Advica investment; and
(v) a decrease in promotion and advertising expense of $.8 million; partially
offset by a $.5 million charge incurred by OmniCare-TN in fiscal 1999,
retroactively to January 1994, for a trademark license and a decrease of
approximately $2.7 million related to the Company's Florida operation, which
ceased operation and was placed in liquidation in March 1998.
Depreciation and amortization decreased from $2.1 million for the three
months ended March 31, 1998 to $.9 million for the comparable fiscal 1999 period
or $1.2 million (57%). The decrease includes $.8 million related to the
write-off or revaluation of obsolete and other property and equipment in fiscal
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 March 31, 1999, compared to a loss from continuing operations before
income taxes of $8.2 million for the three months ended March 31, 1998, a $8.4
million change. Net earnings from continuing operations was $.3 million for the
three months ended March 31, 1999, compared to a net loss from continuing
operations of $7.1 million for the three months ended March 31, 1998, a change
of $7.4 million.
The discontinued operation contributed no earnings or loss for the
three months ended March 31, 1999, compared to a loss of $.2 million for the
three months ended March 31, 1998.
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<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had (i) cash and cash equivalents and
short-term marketable securities of $19.5 million, compared to $14.7 million at
June 30, 1998; (ii) negative working capital of $3.3 million, compared to
negative working capital of $14.1 million at June 30, 1998; and (iii) a current
assets-to-current liabilities ratio of .92-to-1, compared to .64-to-1 at June
30, 1998. The principal sources of funds for the Company during the nine months
ended March 31, 1999 were $6.4 million provided from net operating activities,
including a federal income tax refund of $5.5 million, cash proceeds and
payments received on the secured note from the sale of CHF of $4.9 million and
proceeds from the sale of property and equipment of $.1 million -- offset by net
marketable securities additions of $4.8 million, discontinued operation of $1.0
million, $4.9 million to repay bank debt and the purchase of property and
equipment of $.2 million.
In September 1998, effective as of August 31, 1998, CHF was sold for
$17.75 million, comprised of $2 million in cash and the buyer's secured and
unsecured notes for $13.25 million and $2.5 million, respectively. Including
payments on the secured note, $4.5 million of the sale price, plus $.4 million
of interest, in cash was received through March 31, 1999, and was applied
against the Company's outstanding bank debt as required by the Company's bank
loan agreement. The remaining principal balance on the secured note of $10.75
million was due March 31, 1999, but the buyer requested an extension to allow it
additional time to secure financing. In April 1999, the parties agreed to modify
the secured note payment terms, extending its maturity date to August 31, 1999,
requiring additional principal and interest payments totaling $.9 million to be
paid over the extended period and requiring an additional limited personal
guarantee by a principal of the buyer of $1.5 million of the principal of the
secured note.
In September 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 to require reductions in the outstanding balance
owed to the bank at scheduled future dates, including the permanent reduction of
the outstanding balance to the lesser of the then outstanding principal balance
or $8.0 million by April 15, 1999. In view of the extension of the final
maturity date of the CHF buyer's secured note from March 31, 1999 to August 31,
1999, the bank lender has agreed with the Company to waive the April 15
requirement and instead to require the permanent reduction of the outstanding
balance owed to the bank to the lesser of the then outstanding principal balance
or $16.6 million by September 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
18
<PAGE> 20
the Company's indebtedness to the bank) and in the pledged CHF stock and other
documents related to such sale. Financial covenants for minimum net worth, debt
service coverage ratio and maximum debt to worth ratio are expected to be
established with the bank prior to September 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 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 major hospital and provider contracts, which
was one of the major components of the corrective action plan, the effects of
which will reduce medical costs.
The Company has developed and followed a plan to ensure all
modifications and conversions to its primary information systems are implemented
and thoroughly tested on a timely basis. The Company estimates that 40% of such
modifications and conversions have been made to date. Management anticipates
that the remaining modifications and conversions will be completed by August 31,
1999 and that the Company's primary computerized information systems will be
Year 2000 compliant by that date. Current conversion activities include the
replacement and/or upgrade of the Company's telecommunication systems and
personal computers. The Company has placed orders for this equipment totaling
$.6 million and expects to finance the additions.
Although the Company is in the process of completing a contingency plan
for critical computerized information systems to mitigate potential delays or
other problems associated with such modifications or conversions deemed
necessary by management, the Company continues to bear some risk related to the
Year 2000 issue due to its voluntary interaction with other entities not
affiliated with the Company (e.g., vendors and customers) who must address their
own Year 2000 issues. For this reason, the Company has been monitoring the Year
2000 issues of certain third parties with which it interacts. The Company has
asked such third parties to demonstrate, or give some indication as to, their
ability to become Year 2000 compliant by July 31, 1999. With respect to any
third party who appears unlikely to remedy its Year 2000 issues, the Company
intends to take appropriate steps to mitigate the exposure to the risk posed by
such third party's failure to timely address its Year 2000 issues. However, due
to the uncertainty inherent in both the Year 2000 problem and the efforts of
third parties or the Company to timely resolve their own Year 2000 issues, there
can be no assurances or the Company's mitigation efforts will be successful or
that the failure of any third party to timely
19
<PAGE> 21
resolve its Year 2000 issues will not have a material adverse impact on the
Company's operations, operating results or financial position.
Both internal and external resources will be utilized in the Company's
efforts to become Year 2000 compliant. During the three and nine months ended
March 31, 1999, $94,000 and $126,000, respectively, of costs were incurred by
the Company in connection with its efforts to become Year 2000 compliant.
Cumulative Year 2000 modifications and conversion costs approximate the current
nine month total. The total costs of the Company's efforts to become Year 2000
compliant are not expected to exceed $1.3 million, of which approximately 60%
represents capital costs. Costs related to software modifications have been, and
will continue to be, expensed as incurred.
The costs expected to be incurred in connection with the Company's
efforts to become Year 2000 compliant, as well as the date by which the Company
is expected to be Year 2000 compliant, are based on management's best estimates.
Because such estimates were derived utilizing numerous assumptions as to future
events (including the availability of certain resources, third party
modifications and other factors), there can be no assurance that these estimates
will be achieved and such actual costs and date could differ materially from
those currently expected. Specific factors that might cause material differences
include, but are not limited to, the availability and costs of personnel trained
in this area, the ability to locate and correct all relevant computer codes and
similar uncertainties.
PART II.
ITEM 1. LEGAL PROCEEDINGS
As previously reported by the Company, pursuant to a court-approved
settlement, two consolidated shareholder lawsuits which had been filed in August
1995 against certain former senior officers and the Company were dismissed on
December 11, 1998, in exchange for $2 million from the Company's insurance
carrier, a $625,000 promissory note from the Company and 277,777 new shares of
common stock of the Company valued at $625,000 (based on a stipulated share
price of $2.25 per share) and issued on March 29, 1999.
A previously reported arbitration proceeding against the Company in
which SunTel Services, Inc. sought approximately $414,000 from the Company for
alleged breach of a lease agreement for telecommunications equipment and related
services was settled in April 1999. The arbitration proceeding was dismissed in
exchange for the Company's payment to the claimant of $120,000 and issuing to
the claimant 67,369 new shares of common stock of the Company valued at $80,000.
20
<PAGE> 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
NEW YORK STOCK EXCHANGE LISTING
The Company's common stock is listed on the New York Stock Exchange,
Inc. ("Exchange"). As reported in the Company's most recent quarterly report on
Form 10-Q, the Exchange and the Company have had communications about the
Company's not meeting applicable listing standards and the Company consequently
presented to the Exchange a definitive action plan for meeting those standards
over a reasonable period. In February 1999, the Exchange notified the Company
that, based on its review of the plan submitted by the Company, the Exchange
would continue the listing of the Company currently and would review the
Company's continued listing on a quarterly basis for compliance with the plan
submitted.
SHARE REPURCHASE PROGRAM
On May 6, 1999, the Company's Board of Directors authorized the
repurchase by the Company of up to 250,000 of the Company's common shares, which
constitutes approximately 3.6% of the Company's outstanding common shares. The
timing and volume of purchases under this program will depend upon market
conditions.
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," "expects,"
"anticipates," "will," "may," "might," and words of similar
21
<PAGE> 23
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 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); and limitations on the
ability to manage care and utilization.
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.
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<PAGE> 24
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).
20. Adverse results from significant litigation matters.
21. Adverse impact from Year 2000 issues.
22. Delisting from the New York Stock Exchange, Inc.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: May 13, 1999 By: /s/ Gregory H. Moses, Jr.
--------------------------------------
Gregory H. Moses, Jr.
President & Chief Executive Officer
Dated: May 13, 1999 By: /s/ Paul G. Samuels
--------------------------------------
Paul G. Samuels
Interim Chief Financial Officer
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<PAGE> 26
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
27 Financial data schedule
25
<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 NINE MONTHS ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON
FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
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