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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED DECEMBER 31, 2006
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.)
300 RIVER PLACE, SUITE 4950
DETROIT, MICHIGAN 48207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 393-4571
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X].
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF JANUARY 22,
2007 IS 8,574,777
As filed with the Securities and Exchange Commission on January 25, 2007
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UNITED AMERICAN HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -- December 31,
2006 and June 30, 2006............................... 2
Condensed Consolidated Statements of Operations -- Three
and Six months ended December 31, 2006 and 2005...... 3
Condensed Consolidated Statements of Cash Flows
--Six months ended December 31, 2006 and 2005........ 4
Notes to the Unaudited Condensed Consolidated Financial
Statements........................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk................................................. 16
Item 4. Controls and Procedures................................. 17
PART II. OTHER INFORMATION
Item 6. Exhibits................................................ 18
SIGNATURES............................................................... 19
1
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
2006 JUNE 30,
(Unaudited) 2006
------------ --------
ASSETS
Current assets
Cash and cash equivalents $ 9,951 $ 4,316
Marketable securities 3,025 2,605
Accounts receivable -- State of Tennessee, net 1,517 1,463
Other receivables 771 384
Prepaid expenses and other 302 265
Deferred income taxes 1,914 1,950
------- -------
Total current assets 17,480 10,983
Property and equipment, net 212 142
Intangible assets, net 3,452 3,452
Marketable securities 7,445 7,342
Restricted assets 2,721 2,721
Other assets 586 586
------- -------
Total assets $31,896 $25,226
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Medical claims payable $ 156 $ 156
Accounts payable and accrued expenses 975 920
Accrued compensation and related benefits 540 732
Accrued rent 158 244
Other current liabilities 1,145 1,124
------- -------
Total current liabilities 2,974 3,176
------- -------
Total liabilities 2,974 3,176
Shareholders' equity
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par, 15,000,000 shares authorized;
8,543,277 and 7,527,023 issued and outstanding at
December 31, 2006 and June 30, 2006, respectively 18,194 12,541
Paid-in-capital -- stock options 372 259
Warrants 446 --
Retained earnings 9,980 9,420
Accumulated other comprehensive loss, net of deferred
federal income taxes (70) (170)
------- -------
Total shareholders' equity $28,922 $22,050
======= =======
$31,896 $25,226
======= =======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
2
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ----------------
2006 2005 2006 2005
------ ------ ------ ------
REVENUES
Fixed administrative fees $3,949 $4,308 $7,962 $8,798
Interest and other income 274 183 435 201
------ ------ ------ ------
Total revenues 4,223 4,491 8,397 8,999
EXPENSES
Marketing, general and administrative 3,950 3,968 7,709 7,986
Depreciation and amortization 27 29 59 62
------ ------ ------ ------
Total expenses 3,977 3,997 7,768 8,048
------ ------ ------ ------
Earnings from operations before income taxes 246 494 629 951
Income tax expense 18 54 69 108
------ ------ ------ ------
NET EARNINGS $ 228 $ 440 $ 560 $ 843
====== ====== ====== ======
NET EARNINGS PER COMMON SHARE -- BASIC
Net earnings per common share $ 0.03 $ 0.06 $ 0.07 $ 0.11
====== ====== ====== ======
Weighted average shares outstanding 7,728 7,474 7,629 7,464
====== ====== ====== ======
NET EARNINGS PER COMMON SHARE - DILUTED
Net earnings per common share $ 0.03 $ 0.06 $ 0.07 $ 0.11
====== ====== ====== ======
Weighted average shares outstanding 8,172 7,604 7,970 7,593
====== ====== ====== ======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
3
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
DECEMBER 31,
----------------
2006 2005
------ -------
OPERATING ACTIVITIES
Net earnings $ 560 $ 843
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loss on disposal of assets -- 4
Depreciation and amortization 59 62
Deferred income taxes 36 (340)
Stock compensation expense 113 155
Net changes in operating assets and liabilities (680) (355)
------ -------
Net cash provided by operating activities 88 369
INVESTING ACTIVITIES
Purchase of marketable securities (423) (6,428)
Purchase of property and equipment (135) (22)
Proceeds from the sale of property and equipment 6 --
------ -------
Net cash used in investing activities (552) (6,450)
FINANCING ACTIVITIES
Net proceeds from sale of common stock 5,816 34
Proceeds from exercise of stock options 21 --
Proceed from issuance of warrants 262 --
------ -------
Net cash provided by financing activities 6,099 34
------ -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,635 (6,047)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,316 9,843
------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $9,951 $ 3,796
====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ -- $ 30
====== =======
Non-cash financing activity
Transaction fee paid with warrants $ 184 --
====== =======
See accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
4
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE 1 -- BASIS OF PREPARATION
General
The accompanying unaudited condensed consolidated financial statements include
the accounts of United American Healthcare Corporation and its wholly and
majority-owned subsidiaries, together referred to as the "Company." All
significant intercompany transactions and balances have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP) 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 GAAP 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 six month period ended December 31, 2006 are not necessarily indicative
of the results of operations for the full fiscal year ending June 30, 2007. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the notes to the financial statements contained in the
Company's most recent annual report on Form 10-K.
Reclassifications
Certain amounts from the June 30, 2006 and December 31, 2005 financial
statements have been reclassified to conform to the presentation adopted in the
December 31, 2006 financial statements.
NOTE 2 -- COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are summarized as
follows (in thousands):
Three months Six months
ended ended
December 31, December 31,
------------ ------------
2006 2005 2006 2005
---- ----- ---- -----
Net earnings $228 $440 $560 $843
Unrealized holding
gains (losses),
net of deferred
federal income
taxes 12 35 100 (72)
---- ----- ---- -----
Comprehensive income $240 $475 $660 $771
==== ===== ==== =====
5
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2006 AND 2005
The components of accumulated other comprehensive income (loss), included in
shareholders' equity at December 31, 2006 and June 30, 2006, include net
unrealized holding gains and losses, net of deferred federal income taxes.
NOTE 3 -- NET EARNINGS PER COMMON SHARE
Basic net earnings per share excluding dilution have been computed by dividing
net earnings by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share are computed using the treasury stock method
for outstanding stock options.
NOTE 4 -- EFFECTIVE TAX RATE
The Company's effective tax rate for the six months ended December 31, 2006 is
11% and differs from the statutory rate of 34%. This difference is the result of
the utilization of net operating loss carryforwards.
NOTE 5 -- CONTRACTUAL RISK AGREEMENT
Beginning July 1, 2002, TennCare, a State of Tennessee program that provides
medical benefits to Medicaid and working uninsured recipients, implemented an
18-month stabilization program, which entailed changes to TennCare's contracts
with managed care organizations ("MCOs"), including the Company's subsidiary,
UAHC Health Plan of Tennessee, Inc. During that period, MCOs were generally
compensated for administrative services only (commonly called "ASO"), earned
fixed administrative fees, were not at risk for medical costs in excess of
targets established based on various factors, were subject to increased
oversight, and could incur financial penalties for not achieving certain
performance requirements. Through successive contractual amendments, TennCare
extended the ASO reimbursement system applicable to UAHC-TN through June 30,
2005. Through an amendment with an effective date of July 1, 2005, TennCare
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, which are at risk for losing up to 10% of administrative fee revenue
and may receive up to 15% incentive bonus revenue based on performance relative
to benchmarks. UAHC-TN has received notice from TennCare that it earned
additional revenue of $0.2 million and $0.2 million, respectively, for its
performance under the modified risk arrangement for the first and second
quarters of fiscal 2006. Such additional revenue has been recorded. UAHC-TN
expects to similarly earn additional revenue of approximately $0.2 million for
each of the third and fourth quarters of fiscal 2006 UAHC-TN as well as the
first quarter of fiscal 2007. The Company has not recorded such earnings as of
December 31, 2006, and would record such earnings in
6
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2006 AND 2005
fiscal 2007 only upon receipt of final notification thereof from TennCare. The
Company also recorded an allowance of $0.3 million in fiscal 2006 for a State of
Tennessee receivable because management determined the collectibility is
doubtful.
NOTE 6 -- GOODWILL
Goodwill resulting from business acquisitions is carried at cost. Effective July
1, 2001, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
eliminates the amortization of goodwill, but requires that the carrying amount
of goodwill be tested for impairment at least annually at the reporting unit
level, as defined, and will only be reduced if it is found to be impaired or is
associated with assets sold or otherwise disposed of.
Management has assessed the remaining carrying amount of previously recorded
goodwill of $3.5 million and determined that such amount is not impaired in
accordance with SFAS No. 142. Accordingly, there was no goodwill impairment
recorded for the six months ended December 31, 2006 and 2005.
NOTE 7 -- STOCK OPTION PLANS
The Company has adopted SFAS No. 123(R), "Share-Based Payment," which is a
revision of SFAS No. 123, "Accounting for Stock Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," which
was issued in December 2004. The revisions are intended to provide investors and
other users of financial statements with more complete and neutral financial
information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued.
The Company recorded stock option expense of $0.11 million and $0.16 million for
the six-months ended December 31, 2006 and 2005, respectively.
Effective July 1, 2005, the Compensation Committee and Board of Directors
approved the immediate termination of 124,167 non-vested stock options to the
Company's directors and officers. The purpose of the termination was to enable
the Company to avoid recognizing compensation expense associated with these
options in future periods in its consolidated statements of earnings, as a
result of SFAS No. 123(R). The pre-tax charge thereby avoided totaled
approximately $650,581 which would have been recognized over fiscal years 2006
through 2008, and, accordingly, the Compensation Committee determined that the
expense savings from the termination for these particular option agreements
outweighed the objective of incentive compensation and retention.
NOTE 8 -- RESTRICTED ASSETS
7
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2006 AND 2005
The Company and the Department of Finance and Administration of the State of
Tennessee, Bureau of TennCare ("TennCare") are parties to two escrow agreements
under which the Company funded, on August 5, 2005, two escrow accounts held by
TennCare at the State Treasury. One, in the amount of $2,300,000, is security
for repayment to TennCare of any overpayments to UAHC-TN that may be determined
by a pending audit of all UAHC-TN process claims since 2002; and the other, in
the amount of $420,500, is security for any money damages that may be awarded to
TennCare in the event of any future litigation between the parties in connection
with certain pending investigations by state and federal authorities. The escrow
accounts bear interest at a rate no lower than the prevailing commercial
interest rates for savings accounts at financial institutions in Nashville,
Tennessee. The escrow accounts will terminate August 5, 2007 or sooner in
certain events, except if litigation is pursued by either party, in which event
the escrow accounts will continue until the end of such litigation. All amounts
(including interest earnings) credited to the escrow accounts will belong to the
Company, except to the extent, if any, they are paid to TennCare to satisfy
amounts determined to be owed to TennCare as provided in the escrow agreements.
Both escrow agreements recite that TennCare does not at that time assert there
has been any breach of UAHC-TN's TennCare contract and that the Company has
funded the escrow accounts as a show of goodwill and good faith in working with
TennCare.
NOTE 9 -- PRIVATE PLACEMENT
In a December 13, 2006 private placement transaction, the Company raised gross
proceeds of $6.50 million through the sale of 1,000,000 newly issued shares of
its common stock to certain institutional and other accredited investors at a
price of $6.50 per share. The investors also received warrants to purchase
99,999 shares of the Company's common stock at an exercise price of $8.50 per
share and expiring in December 2011. In addition, the Company agreed to pay the
co-placement agents a transaction fee of $325,000 and warrants to purchase
50,000 shares of the Company's common stock at an exercise price of $9.01 per
share. The net proceeds from the private placement will be used principally for
start-up costs associated with the Company's Tennessee subsidiary's new Medicare
Advantage contract with the Centers for Medicare & Medicaid Services, which
became effective January 1, 2007. The remainder is to be used for working
capital and general corporate purposes.
8
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2006 AND 2005
NOTE 10 -- UNAUDITED SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company's principal operations, as of
and for the six month periods ended December 31, 2006 and 2005, is as follows
(in thousands):
MANAGEMENT HMO & CORPORATE & CONSOLIDATED
COMPANIES (1) MANAGED PLAN (2) ELIMINATIONS COMPANY
------------- ---------------- ------------ ------------
DECEMBER 31, 2006
Revenues -- external customers $ -- $ 7,962 $ -- $ 7,962
Revenues -- intersegment 6,979 -- (6,979) --
Interest and other income 158 277 -- 435
-------- ------- -------- -------
Total revenues $ 7,137 $ 8,239 $ (6,979) $ 8,397
======== ======= ======== =======
Interest expense $ -- $ -- $ -- $ --
Earnings (loss) from operations (94) 654 -- 560
Segment assets 66,039 16,869 (51,012) 31,896
Purchase of equipment 135 -- -- 135
Depreciation and amortization 59 -- -- 59
-------- ------- -------- -------
DECEMBER 31, 2005
Revenues -- external customers $ -- $ 8,798 $ -- $ 8,798
Revenues -- intersegment 7,958 -- (7,958) --
Interest and other income 95 106 -- 201
-------- ------- -------- -------
Total revenues $ 8,053 $ 8,904 $ (7,958) $ 8,999
======== ======= ======== =======
Interest expense $ -- $ -- $ -- $ --
Earnings from operations 463 380 -- 843
Segment assets 59,496 14,938 (49,990) 24,444
Purchase of equipment 22 -- -- 22
Depreciation and amortization 62 -- -- 62
-------- ------- -------- -------
(1) Management Companies: United American Healthcare Corporation and United
American of Tennessee, Inc.
(2) HMO and Managed Plan: UAHC Health Plan of Tennessee, Inc.
NOTE 11 -- RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board's Final Interpretation No. 48,"Accounting
for Uncertainty in Income Taxes" ("FIN 48"). This interpretation was issued on
July 13, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with SFAS No. 109,
"Accounting for Income Taxes." This interpretation provides guidance on the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Further, FIN 48 provides guidance on
9
UNITED AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 2006 AND 2005
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition. This interpretation is effective for fiscal
years beginning after December 15, 2006. The cumulative effects, if any, of
applying FIN 48 will be recorded as an adjustment to retained earnings as of the
beginning of the period of adoption.
The Company is in the process of evaluating the expected effect of this
pronouncement and is currently unable to determine the impact, if any, that it
may have on its results of operations, financial position and cash flows.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
You should read the following discussion and analysis of our financial
condition and results of operations together with our financial statements and
the related notes and other financial data included elsewhere in this report.
Some of the information contained in this discussion and analysis or set forth
elsewhere in this report, including information with respect to our plans and
strategy for our business, includes forward-looking statements that involve
risks and uncertainties. You should review the "Cautionary Statement Regarding
Forward-Looking Statements" section in Item 1 of our most recent Annual Report
on Form 10-K for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion and analysis.
OVERVIEW
This Financial Review discusses the Company's results of operations, financial
position and liquidity. This discussion should be read in conjunction with the
consolidated financial statements and related notes thereto contained elsewhere
in this quarterly report.
The Company provides comprehensive management and consulting services to UAHC
Health Plan of Tennessee, Inc. ("UAHC-TN"), a managed care organization ("MCO")
which is a wholly owned second-tier subsidiary of United American Healthcare
Corporation. Since November 1993, UAHC-TN has had a contract with the State of
Tennessee for the State's "TennCare" program, to arrange for the financing and
delivery of health care services on a capitated basis to eligible Medicaid
beneficiaries and non-Medicaid individuals who lack access to private or
employer sponsored health insurance or to another government health plan.
Through successive contractual amendments, UAHC-TN's TennCare contract has been
extended many times, most recently through June 30, 2007. As of December 31,
2006, there were approximately 112,000 TennCare enrollees in UAHC-TN.
On October 10, 2006, UAHC-TN entered into a contract with the Centers for
Medicare & Medicaid Services (CMS) to act as a Medicare Advantage qualified
organization. The contract authorizes UAHC-TN to serve members enrolled in both
the Tennessee Medicaid and Medicare programs, commonly referred to as
"dual-eligibles," specifically to offer a Special Needs Plan ("SNP") to its
eligible members in Shelby County, Tennessee (including the City of Memphis),
and to operate a Voluntary Medicare Prescription Drug Plan, both beginning
January 1, 2007. The initial contract term is through December 31, 2007, after
which the contract may be renewed for successive one-year periods in accordance
with its terms. As of January 1, 2007, there were approximately 110 SNP
enrollees in UAHC-TN.
11
Total revenues decreased $0.3 million (6%) to $4.2 million for the quarter ended
December 31, 2006, compared to $4.5 million for the quarter ended December 31,
2005, principally due to a decline in enrollees.
Total expenses were unchanged at $4.0 million for the quarter ended December 31,
2006, compared to $4.0 million for the quarter ended December 31, 2005,
principally due to the elimination of fiscal 2006 general and administrative
expenses associated with the order of administrative supervision referred to
under the heading "Liquidity and Capital Resources" below, which expired on
December 31, 2005, offset by start-up expenses associated with the Company's
Medicare Advantage SNP product.
Earnings before income taxes were $0.2 million and $0.5 million for the quarters
ended December 31, 2006 and 2005, respectively. Net earnings were $0.2 million,
or $0.03 per basic share, for the quarter ended December 31, 2006, compared to
net earnings of $0.4 million, or $0.06 per basic share, for the quarter ended
December 31, 2005. Such decrease in earnings of $0.2 million, or $0.03 per basic
share, is principally due to a decrease in enrollees.
12
FOR THREE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 2005
Fixed administrative fees related to TennCare's below-described ASO program were
$4.0 million for the quarter ended December 31, 2006, a decrease of $0.3 million
(8%) from $4.3 million in the three-months ended December 31, 2005. Such
decrease in fixed administrative fees is attributed to a decrease in membership.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program,
which entailed changes to TennCare's contracts with MCOs including UAHC-TN.
During that period, MCOs were generally compensated for administrative services
only (commonly called "ASO"), earned fixed administrative fees, were not at risk
for medical costs in excess of targets established based on various factors,
were subject to increased oversight, and could incur financial penalties for not
achieving certain performance requirements. Through subsequent amendments,
TennCare extended the ASO reimbursement system applicable to UAHC-TN through
June 30, 2005. Through an amendment with an effective date of July 1, 2005,
TennCare has implemented a reduction in capitated administrative fees and has
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, which are at risk for losing up to 10% of administrative fee revenue
and may receive up to 15% incentive bonus revenue based on performance relative
to benchmarks. UAHC-TN has received notice from TennCare that it earned
additional revenue of $0.2 million and $0.2 million, respectively, for its
performance under the modified risk arrangement for the first and second
quarters of fiscal 2006. Such additional revenue was recorded in fiscal 2006.
UAHC-TN expects to similarly earn additional revenue of approximately $0.2
million for each of the third and fourth quarters of fiscal 2006 as well as the
first quarter of fiscal 2007. The Company would record such earnings in fiscal
2007 only upon receipt of final notification thereof from TennCare.
Marketing, general and administrative expenses were unchanged at $4.0 million
for the three-months ended December 31, 2006 from $4.0 million for the
three months ended December 31, 2005.
Depreciation and amortization expense were unchanged at $0.03 million for the
three months ended December 31, 2006 compared to the same period in 2005.
Income tax expense was unchanged at $0.1 million for the three months ended
December 31, 2006 from the three months ended December 31, 2005. The Company's
effective tax rate for the three months ended December 31, 2006 is 7% and
differs from the statutory rate of 34%. This difference is the result of the
utilization of net operating loss carryforwards.
13
FOR SIX-MONTHS ENDED DECEMBER 31, 2006 COMPARED TO
SIX MONTHS ENDED DECEMBER 31, 2005
There were no medical premiums revenues in either of the six month periods ended
December 31, 2006 and 2005.
Fixed administrative fees related to TennCare's below-described ASO program were
$8.0 million for the six months ended December 31, 2006, a decrease of $0.8
million (10%) from $8.8 million in the six months ended December 31, 2005. Such
decrease in fixed administrative fees is attributed to a decrease in membership.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program,
which entailed changes to TennCare's contracts with MCOs, including UAHC-TN.
During that period, MCOs were generally compensated for administrative services
only (commonly called "ASO"), earned fixed administrative fees, were not at risk
for medical costs in excess of targets established based on various factors,
were subject to increased oversight, and could incur financial penalties for not
achieving certain performance requirements. Through subsequent amendments,
TennCare extended the ASO reimbursement system applicable to UAHC-TN through
June 30, 2005. Through an amendment with an effective date of July 1, 2005,
TennCare has implemented a reduction in capitated administrative fees and has
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, which are at risk for losing up to 10% of administrative fee revenue
and may receive up to 15% incentive bonus revenue based on performance relative
to benchmarks. UAHC-TN has received notice from TennCare that it earned
additional revenue of $0.2 million and $0.2 million, respectively, for its
performance under the modified risk arrangement for the first and second
quarters of fiscal 2006. Such additional revenue was recorded in fiscal 2006.
UAHC-TN expects to similarly earn additional revenue of approximately $0.2
million for each of the third and fourth quarters of fiscal 2006 as well as the
first quarter of fiscal 2007. The Company would record such earnings in fiscal
2007 only upon receipt of final notification thereof from TennCare.
Marketing, general and administrative expenses decreased $0.3 million (3%) to
$7.7 million for the six months ended December 31, 2006 from $8.0 million for
the six months ended December 31, 2005. The decrease was principally due to the
elimination of fiscal 2006 general and administrative expenses associated with
the order of administrative supervision which expired on December 31, 2005.
Depreciation and amortization expense was $0.06 million for the six months ended
December 31, 2006, unchanged from $0.06 million for the six months ended
December 31, 2005.
Income tax expense was $0.1 million for the six months ended December 31, 2006,
unchanged from $0.1 million for the six months ended December 31, 2005. The
Company's effective tax rate for the six months ended December 31, 2006 is 11%
and differs from the statutory rate of 34%. This difference is the result of the
utilization of net operating loss carryforwards.
14
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, the Company had (i) cash and cash equivalents and
short-term marketable securities of $13.0 million, compared to $6.9 million at
June 30, 2006; (ii) working capital of $14.5 million, compared to working
capital of $7.8 million at June 30, 2006; and (iii) a current assets-to-current
liabilities ratio of 5.88-to-1, compared to 3.46-to-1 at June 30, 2006. The
principal use of funds for the most recent six month period was $0.1 million for
the purchase of equipment. Cash flow was $5.7 million for the six months ended
December 31, 2006, compared to $(6.0) million for the comparable period a year
earlier. The increase was principally due to the sale of 1,000,000 newly issued
shares of common stock in the three months ended December 31, 2006.
Accounts receivable increased by $0.4 million at December 31, 2006 compared to
June 30, 2006, primarily due to timing of cash receipts from TennCare.
Property, plant and equipment increased by $0.07 million at December 31, 2006
compared to June 30, 2006, due to recording depreciation of $0.06 million offset
by equipment purchases of $0.14 million.
The Company's wholly owned subsidiary, UAHC-TN, had a required minimum net worth
requirement using statutory accounting practices of $7.2 million at December 31,
2006. UAHC-TN had excess statutory net worth of approximately $3.9 million at
December 31, 2006.
UAHC-TN's application for a commercial HMO license in Tennessee was approved on
September 7, 2001. However, management is not yet actively pursuing that
commercial business, due to UAHC-TN's substantially increased enrollment from
members TennCare assigned from defunct other plans, together with adapting to
TennCare's stabilization program and reforms.
Through an amendment with an effective date of July 1, 2005, TennCare has
implemented a modified risk arrangement with all its contracted MCOs, including
UAHC-TN, which are at risk for losing up to 10% of administrative fee revenue
and may receive up to 15% incentive bonus revenue based on performance relative
to benchmarks. TennCare also disenrolled non-medically needy adults who are not
eligible for Medicaid from TennCare coverage statewide, and imposed additional
benefit limits on the 396,000 adults left in the program who are eligible for
Medicaid. As a result, UAHC-TN lost approximately 12,000 members beginning in
the first quarter of fiscal 2006.
The Company and the Department of Finance and Administration of the State of
Tennessee, Bureau of TennCare ("TennCare") are parties to two escrow agreements
under which the Company funded, on August 5, 2005, two escrow accounts held by
TennCare at the State Treasury. One, in the amount of $2,300,000, is security
for repayment to TennCare of any overpayments to UAHC-TN that may be determined
by a pending audit of all UAHC-TN process claims since 2002; and the other, in
the amount of $420,500, is security for any money damages that may be awarded to
TennCare in the event of any future litigation between the parties in connection
with certain pending investigations by state and federal authorities. The escrow
accounts bear interest at a rate no lower than the prevailing
15
commercial interest rates for savings accounts at financial institutions in
Nashville, Tennessee. The escrow accounts will terminate August 5, 2007 or
sooner in certain events, except if litigation is pursued by either party, in
which event the escrow accounts will continue until the end of such litigation.
All amounts (including interest earnings) credited to the escrow accounts will
belong to the Company, except to the extent, if any, they are paid to TennCare
to satisfy amounts determined to be owed to TennCare as provided in the escrow
agreements. Both escrow agreements recite that TennCare does not at that time
assert there has been any breach of UAHC-TN's TennCare contract and that the
Company has funded the escrow accounts as a show of goodwill and good faith in
working with TennCare.
UAHC-TN is no longer subject to the notice and order of administrative
supervision that the Commissioner of the State of Tennessee's Department of
Commerce and Insurance had issued to it on April 20, 2005. That notice and order
expired in accordance with its terms on December 31, 2005. The State of
Tennessee extended UAHC-TN's TennCare contract through June 30, 2007, by an
amendment to the contract effective as of January 1, 2007.
In a December 13, 2006 private placement transaction, the Company raised gross
proceeds of $6.50 million through the sale of 1,000,000 newly issued shares of
its common stock to certain institutional and other accredited investors at a
price of $6.50 per share. The investors also received warrants to purchase
99,999 shares of the Company's common stock at an exercise price of $8.50 per
share and expiring in December 2011. In addition, the Company agreed to pay the
co-placement agents a transaction fee of $325,000 and warrants to purchase
50,000 shares of the Company's common stock at an exercise price of $9.01 per
share. The net proceeds from the private placement will be used principally for
start-up costs associated with the Company's Tennessee subsidiary's new Medicare
Advantage contract with the Centers for Medicare & Medicaid Services, which
became effective January 1, 2007. The remainder is to be used for working
capital and general corporate purposes.
The Company's ability to generate adequate amounts of cash to meet its future
cash needs depends on a number of factors, particularly including its ability to
control medical expenses associated with its Medicare Advantage Special Needs
Plan and administrative costs related to the modified risk arrangement for the
TennCare program and controlling corporate overhead costs. On the basis of the
matters discussed above, management believes at this time that the Company has
the ability to generate sufficient cash to adequately support its financial
requirements through the next twelve months, and maintain minimum statutory net
worth requirements of UAHC-TN.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
ITEM 4. CONTROLS AND PROCEDURES
Our management has evaluated, with the participation of our principal executive
and principal financial officers, the effectiveness of our disclosure controls
and procedures as of December 31, 2006, and based on their evaluation, our
principal executive and principal financial officers have concluded that these
controls and procedures are effective as of December 31, 2006. There was no
change in our internal controls over financial reporting identified in
connection with such evaluation that occurred during our fiscal quarter ended
December 31, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file and submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
Internal control over financial reporting is a process designed by, or under the
supervision of, our principal executive and principal financial officers, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that: (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect our transactions and dispositions of
assets, (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
directors, and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
10.1 United American Healthcare Corporation Supplemental Executive Retirement
Plan, as amended and restated effective as of January 1, 2005, signed on
November 9, 2006.
31.1 Certifications of Chief Executive Officer pursuant to Rule 13a-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to Rule 13a-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION
Dated: January 25, 2007 By: /s/ William C. Brooks
------------------------------------
William C. Brooks
Chairman, President & Chief
Executive Officer
Dated: January 25, 2007 By: /s/ Stephen D. Harris
------------------------------------
Stephen D. Harris
Executive Vice President, Chief
Financial Officer & Treasurer
19
Exhibit Index
Exhibit
No. Description
- ------- -----------
10.1 United American Healthcare Corporation Supplemental Executive
Retirement Plan, as amended and restated effective as of January 1,
2005, signed on November 9, 2006.
31.1 Certifications of Chief Executive Officer pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.