e10vq
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-11638
United American Healthcare Corporation
(Exact name of registrant as specified in its charter)
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Michigan
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38-2526913 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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303 East Wacker Drive, Suite 1200
Chicago, Illinois 60601
(Address of principal executive offices) (Zip code)
Registrants telephone number, including area code: (313) 393-4571
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ.
The number of outstanding shares of registrants common stock as of May 13, 2011 is 9,807,108.
United American Healthcare Corporation
Form 10-Q
Table of Contents
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
United American Healthcare Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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June 30, |
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March 31, 2011 |
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2010 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
716 |
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$ |
3,458 |
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Accounts receivable, net |
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1,035 |
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910 |
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Inventories |
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284 |
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209 |
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Prepaid expenses and other |
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77 |
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264 |
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Total current assets |
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2,112 |
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4,841 |
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Property and equipment, net |
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907 |
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895 |
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Goodwill |
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10,228 |
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10,088 |
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Other intangibles, net |
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2,597 |
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3,327 |
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Other assets |
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480 |
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486 |
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Assets of discontinued operations |
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55 |
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1,017 |
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Total assets |
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$ |
16,379 |
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$ |
20,654 |
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Liabilities and Shareholders Equity |
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Current liabilities |
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Long-term debt, current portion and net of discount |
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$ |
1,813 |
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$ |
2,710 |
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Accounts payable |
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207 |
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527 |
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Accrued expenses |
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846 |
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729 |
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Accrued purchase price |
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1,255 |
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Redeemable
preferred member units of Pulse, current portion and net of discount |
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293 |
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228 |
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Other current liabilities |
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86 |
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96 |
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Total current liabilities |
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3,245 |
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5,545 |
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Long-term debt, less current portion |
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2,125 |
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2,923 |
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Redeemable
preferred member units of Pulse, net of discount and current portion |
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1,404 |
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1,622 |
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Deferred tax liability |
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301 |
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Capital lease obligation |
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129 |
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204 |
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Interest rate swap obligation |
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58 |
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95 |
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Liabilities of discontinued operations |
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16 |
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248 |
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Total liabilities |
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7,278 |
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10,637 |
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Commitments and contingencies |
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Shareholders equity |
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Preferred stock, 5,000,000 shares authorized; none issued |
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Common stock, no par, 15,000,000 shares authorized;
9,807,108 and 8,164,117 shares issued and outstanding at
March 31, 2011 and June 30, 2010, respectively |
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18,631 |
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17,711 |
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Additional paid in capital stock options |
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1,750 |
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1,703 |
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Additional paid in capital warrants |
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444 |
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444 |
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Accumulated deficit |
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(11,720 |
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(9,838 |
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Accumulated other comprehensive loss, net of tax |
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(4 |
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(3 |
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Total shareholders equity |
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9,101 |
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10,017 |
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Total liabilities and shareholders equity |
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$ |
16,379 |
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$ |
20,654 |
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See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
2
United American Healthcare Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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March 31, |
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March 31, |
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2011 |
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2010 |
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2011 |
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2010 |
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Operating Revenues |
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Contract manufacturing services |
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$ |
2,164 |
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$ |
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$ |
6,483 |
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$ |
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Total operating revenues |
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2,164 |
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6,483 |
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Operating Expenses |
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Cost of goods sold |
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1,260 |
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3,433 |
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Marketing, general and administrative |
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778 |
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1,242 |
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4,608 |
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3,551 |
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Total operating expenses |
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2,038 |
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1,242 |
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8,041 |
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3,551 |
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Operating income (loss) |
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126 |
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(1,242 |
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(1,558 |
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(3,551 |
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Interest and other income (expense), net |
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(164 |
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9 |
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(565 |
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30 |
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Loss from continuing operations, before income tax |
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(38 |
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(1,233 |
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(2,123 |
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(3,521 |
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Income tax expense (benefit) |
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Loss from continuing operations |
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(38 |
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(1,233 |
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(2,123 |
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(3,521 |
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Discontinued Operations |
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Income (loss) from discontinued operations |
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(14 |
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(168 |
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241 |
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(570 |
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Income tax expense |
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Income (loss) from discontinued operations |
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(14 |
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(168 |
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241 |
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(570 |
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Net loss |
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$ |
(52 |
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$ |
(1,401 |
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$ |
(1,882 |
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$ |
(4,091 |
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Continuing Operations: |
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Net loss per common share basic and diluted |
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Net loss per common share |
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$ |
(0.00 |
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$ |
(0.15 |
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$ |
(0.22 |
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$ |
(0.43 |
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Weighted average shares outstanding |
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9,807 |
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8,149 |
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9,723 |
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8,142 |
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Discontinued Operations: |
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Net income (loss) per common share
basic and diluted |
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Net income
(loss) per common share |
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$ |
(0.00 |
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$ |
(0.02 |
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$ |
0.02 |
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$ |
(0.07 |
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Weighted average shares outstanding |
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9,807 |
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8,149 |
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9,723 |
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8,142 |
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Net loss per common share basic and
diluted |
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Net loss per common share |
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$ |
(0.01 |
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$ |
(0.17 |
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$ |
(0.19 |
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$ |
(0.50 |
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Weighted average shares outstanding |
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9,807 |
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8,149 |
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9,723 |
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8,142 |
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See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
3
United American Healthcare Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Nine Months Ended |
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March 31, |
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2011 |
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2010 |
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Operating activities |
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Net loss |
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$ |
(1,882 |
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$ |
(4,091 |
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Less: Income (loss) from discontinued operations |
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241 |
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(570 |
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Loss from continuing operations |
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(2,123 |
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(3,521 |
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Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |
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Depreciation and amortization |
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929 |
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3 |
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Amortization of debt discount |
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269 |
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Stock-based compensation |
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83 |
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207 |
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Net changes in other operating assets and liabilities |
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(265 |
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(3,842 |
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Net cash used in operating activities of continuing operations |
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(1,107 |
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(7,153 |
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Net cash provided by (used in) operating activities of discontinued
operations |
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72 |
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(986 |
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Net cash used in operating activities |
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(1,035 |
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(8,139 |
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Investing activities |
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Purchase of equipment |
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(211 |
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Purchase price adjustment |
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(210 |
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Net cash used in investing activities by continuing operations |
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(421 |
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Net cash provided by investing activities by discontinued operations |
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899 |
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4,455 |
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Net cash provided by investing activities |
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478 |
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4,455 |
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Financing activities |
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Payments of long-term debt |
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(1,797 |
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Redemption of preferred stock |
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(320 |
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Payment on capital lease obligation |
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(68 |
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Net cash used in financing activities by continuing operations |
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(2,185 |
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Net cash used in financing activities by discontinued operations |
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Net cash used in financing activities |
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(2,185 |
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Net decrease in cash and cash equivalents |
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(2,742 |
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(3,684 |
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Cash and cash equivalents at beginning of period |
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3,458 |
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13,100 |
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Cash and cash equivalents at end of period |
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$ |
716 |
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$ |
9,416 |
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Supplemental disclosure of cash flow information |
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Interest paid |
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$ |
616 |
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$ |
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Supplemental noncash financing activities |
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Stock issued as part of acquisition |
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$ |
884 |
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$ |
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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
NOTE 1 DESCRIPTION OF BUSINESS
United American Healthcare Corporation (the Company or UAHC) was incorporated in Michigan on
December 1, 1983 and commenced operations in May 1985.
From November 1993 to June 2009, the Companys indirect, wholly owned subsidiary, UAHC Health Plan
of Tennessee, Inc. (UAHC-TN), was a managed care organization in the TennCare program, a State of
Tennessee program that provided medical benefits to Medicaid and working uninsured recipients. On
April 22, 2008, the Company learned that UAHC-TN would no longer be authorized to provide managed
care services as a TennCare contractor when its present TennCare contract expired on June 30, 2009.
UAHC-TNs TennCare members transferred to other managed care organizations on November 1, 2008,
after which UAHC-TN continued to perform its remaining contractual obligations through its TennCare
contract expiration date of June 30, 2009.
From January 2007 to December 2009, UAHC-TN served as a Medicare Advantage qualified organization
(the Medicare contract) pursuant to a contract with the Centers for Medicare & Medicaid Services
(CMS). The contract authorized 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. The Company did not seek
renewal of the Medicare contract, which expired December 31, 2009. The Company wound down the
Medicare business and continued to incur costs related to the Medicare business through December
31, 2010, including labor, claim processing and the differential costs related to Tennessee
facility sublease.
As a result of an in-depth strategic review, on June 18, 2010, UAHC acquired Pulse Systems, LLC
(referred to as Pulse Systems or Pulse) for consideration with a fair value of $9.0 million,
net of cash acquired and subject to certain purchase price adjustments. With the acquisition of
Pulse Systems on June 18, 2010, UAHC now provides contract manufacturing services to the medical
device industry, with a focus on precision laser-cutting capabilities and the processing of
thin-wall tubular metal components, sub-assemblies and implants, primarily in the cardiovascular
market.
The Companys ability to maintain adequate amounts of cash to meet its future cash needs depends on
a number of factors, particularly controlling corporate overhead costs. Market conditions may
continue to limit our sources of funds for these activities and our ability to refinance our debt
obligations at present interest rates and other terms. The Company expects that it will require
additional capital within the next 6 months. Absent access to sources of external financial
support, including accommodations and financing from affiliates, the Company expects to be at or
below minimum levels of cash necessary to operate the business during fiscal 2011. The Company is
exploring additional debt or equity financing and other accommodations, including from affiliates
such as members of its board of directors. Any such equity financing may result in significant
dilution of the Companys existing shareholders. See Note 6 for discussion of debt obligations.
5
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 2 BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements include the accounts of
United American Healthcare Corporation, its wholly owned subsidiary, United American of
Tennessee, Inc. (UA-TN) and its wholly owned subsidiary Pulse Systems, LLC. UAHC Health Plan
of Tennessee, Inc. (formerly called OmniCare Health Plan, Inc.) (UAHC-TN) is a wholly owned
subsidiary of UA-TN. 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 U.S. generally accepted accounting principles (GAAP) and
with the instructions for Form 10-Q and Article 10 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.
For all periods presented in the accompanying unaudited condensed consolidated statements of
operations, the Companys managed care business is classified as discontinued operations. At
December 31, 2010, the Company reclassified the managed care services of UAHC-TN to
discontinued operations based on the fact that the Company had performed substantially all of
its contractual obligations.
In the opinion of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the financial position, results of operations
and cash flows have been included. The results of operations for the three months and nine
months ended March 31, 2011 are not necessarily indicative of the results of operations
expected for the full fiscal year ended June 30, 2011 (fiscal 2011) or for any other period.
The accompanying interim unaudited condensed consolidated financial statements and related
notes should be read in conjunction with our audited consolidated financial statements and
related notes contained in our most recent annual report on Form
10-K filed with the
Securities and Exchange Commission (SEC) on September 8, 2010.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Goodwill. Goodwill resulting from business acquisitions is carried at cost. The
carrying amount of goodwill is 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. There were no goodwill impairment charges
recorded during the nine months ended March 31, 2011 or 2010.
As a result of the acquisition of Pulse, the Company recorded Goodwill of $10.4 million. At
June 30, 2010, goodwill was adjusted to $10.0 million to reflect the change in fair value of
common stock payable at June 30, 2010. At September 30, 2010, goodwill was decreased by
$161,000 to reflect the change in fair value of common stock issued to the Pulse shareholders
and increased by $301,000 to record the deferred tax effect of the issuance of the common
stock as part of the acquisition. The retroactive adjustment of the valuation of the other
acquired intangible assets did not materially impact net income, retained earnings or earnings
per share for any period presented. See Note 4 below for additional
6
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
discussion of the Pulse transaction. The roll forward of goodwill is as follows, which
includes the retroactive adjustment for the finalized valuation of acquired intangible assets
(in thousands):
|
|
|
|
|
June 30, 2010 balance |
|
$ |
10,088 |
|
Fiscal 2011 changes |
|
|
140 |
|
Fiscal 2011 impairment |
|
|
|
|
|
|
|
|
December 31, 2010 balance |
|
$ |
10,228 |
|
|
|
|
|
b. Inventories. Inventories are valued at the lower of cost, on a first-in, first-out method,
or market. Work in process and finished goods include materials, labor and allocated
overhead.
Inventories consist of the following at March 31, 2011 and June 30, 2010, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
June 30, |
|
|
2011 |
|
2010 |
|
|
|
Raw materials |
|
$ |
61 |
|
|
$ |
61 |
|
Work in process |
|
|
183 |
|
|
|
146 |
|
Finished goods |
|
|
40 |
|
|
|
2 |
|
|
|
|
Inventories |
|
$ |
284 |
|
|
$ |
209 |
|
|
|
|
c. Other Intangibles. Intangibles assets are amortized over their estimated useful lives using
the straight-line method. The following is a summary of intangible assets subject to
amortization as of March 31, 2011 and June 30, 2010, including the retroactive adjustments for
final valuation of such intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
June 30, |
|
|
2011 |
|
2010 |
|
|
|
Customer list |
|
$ |
2,927 |
|
|
$ |
2,927 |
|
Backlog |
|
|
425 |
|
|
|
425 |
|
|
|
|
Total intangible assets |
|
|
3,352 |
|
|
|
3,352 |
|
Less: accumulated amortization |
|
|
(755 |
) |
|
|
(25 |
) |
|
|
|
Other intangible assets, net |
|
$ |
2,597 |
|
|
$ |
3,327 |
|
|
|
|
The backlog is amortized over a six month period and the customer list is amortized over seven
years. Amortization expense was $0.3 million and $0.7 million for the three months and nine months
ended March 31, 2011, respectively. There was no amortization expense during the three months and
nine months ended March 31, 2010.
d. Fair Value Measurements. To prioritize the inputs the Company uses in measuring fair value,
the Company applies a three-tier fair value hierarchy. These tiers include: Level 1, defined
as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other
than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, reflects managements best estimate of what market participants would use in pricing
the asset or liability at the measurement date. Consideration was given to the
7
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Determining which hierarchical level an asset or liability falls within requires significant
judgment. The Company evaluates its hierarchy disclosures each quarter. The following table
summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of
March 31, 2011 and June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
Fair Value Measurements |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
58 |
|
|
$ |
|
|
|
$ |
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
Fair Value Measurements |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
Securities- long-term |
|
$ |
900 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
900 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued purchase price |
|
$ |
1,045 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,045 |
|
Interest rate swaps |
|
$ |
|
|
|
$ |
95 |
|
|
$ |
|
|
|
$ |
95 |
|
The Company uses an interest swap to manage the risk associated with its floating long-term notes
payable. As interest rates changes, the differential paid or received is recognized in interest
expense for the period. In addition, the change in fair value of the swaps is recognized as
interest expense or income during each reporting period. As of March 31, 2011, the fair value of
the interest rate swap was determined to be $58,000 using valuation models rather than actual
quotes. The Company has not designated these interest rate swaps for hedge accounting.
As of March 31, 2011, the aggregate notional amount of the swap agreements was $3.6 million, which
will mature on March 31, 2014. The notional amount of the swap will decrease by $0.3 million each
quarter or $1.2 million each year. The Company is exposed to credit loss in the event of
nonperformance by the counterpart to the interest rate swap agreements. The interest rate swaps
are classified within level 2 of the fair market measurements.
The total gain included in earnings for the year ended March 31, 2011 related to the change in fair
value of the interest rate swap was $37,820.
NOTE 4 ACQUISITION
On June 18, 2010, the Company entered into a Securities Purchase Agreement and a Warrant Purchase
Agreement to acquire 100% of the outstanding common units and warrants to purchase common units of
Pulse. The consideration paid to acquire the common units and warrants of Pulse totaled
approximately $9.46 million, which consisted of (a) cash paid at closing of $3.40 million, (b) a
non-interest bearing note payable of $1.75 million (secured by a subordinated pledge of all the
common units of Pulse), (c) 1,608,039 shares of UAHC common stock determined based on an initial
value of $1.6 million, (d) an estimated purchase price adjustment of $210,364 based on targeted
levels of net working capital, cash and debt of Pulse at the acquisition date, and (e) the funding
of $2.5 million for certain obligations of Pulse as discussed below. The shares of UAHC common
stock were issued on July 12, 2010, upon approval by the Companys board of
8
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
directors on July 7, 2010 and, therefore, were revalued at June 30, 2010. The shares of UAHC common
stock had a fair value of $1.05 million as of June 30, 2010, which was recorded as accrued purchase
price at that date, and a fair value of $884,000 on July 12, 2010, the date the shares were issued
and recorded. The decline in the value of the common stock was recorded as a reduction of
goodwill. The Company also assumed Pulses term loan from a bank of $4.25 million, after making a
payment at closing as discussed below.
In connection with the acquisition of the Pulse common units, Pulse entered into a redemption
agreement with the holders of its preferred units to redeem the preferred units for $3.99 million.
Pulse is allowed to redeem the preferred units only if UAHC makes additional cash equity
contributions to Pulse in an amount necessary to fully fund each such redemption. UAHC funded an
initial payment of $1.75 million to the preferred unitholders on June 18, 2010. Pulse has agreed to
redeem the remaining preferred units over a two-year period ending in June 2012. Finally, as an
additional condition of closing, UAHC funded a $750,000 payment toward Pulses outstanding term
loan with a bank and pledged all of the common units of Pulse to the bank as additional security
for the remaining $4.25 million outstanding under the loan. The initial payment of $1.75 million to
the preferred unitholders and the $750,000 payment to the bank by UAHC are considered additional
consideration for the acquisition of Pulse. The funding of the remaining redemption payments
totaling $2.24 million and the assumption of Pulses revolving and term loans are not included in
the $9.46 million purchase price listed above.
The Company finalized its valuation of all assets acquired during the three months ended September
30, 2010, primarily related to long-lived tangible and intangible assets and restated the balance
sheet at June 30, 2010 to reflect the final purchase price allocation.
The fair value of the consideration paid for the acquisition of the net assets was as follows (in
thousands):
|
|
|
|
|
Cash at closing |
|
$ |
5,900 |
|
Note payable |
|
|
1,649 |
|
UAHC common stock |
|
|
884 |
|
Obligation for estimated purchase price adjustment |
|
|
210 |
|
|
|
|
|
Total fair value of consideration |
|
$ |
8,643 |
|
|
|
|
|
The financial information in the table below summarizes the combined results of operations of UAHC
and Pulse, on a pro forma basis, as though the companies had been combined as of July 1, 2009. The
pro forma financial information is presented for informational purposes only and is not indicative
of the results of operations that would have been achieved if the acquisition had taken place at
the beginning of the period presented. Such pro forma financial information is based on the
historical financial statements of UAHC and Pulse. This pro forma financial information is based on
estimates and assumptions, which have been made solely for purposes of developing such pro forma
information, including, without limitation, purchase accounting adjustments.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, 2010 |
|
March 31, 2010 |
Revenues |
|
$ |
1,736 |
|
|
$ |
5,844 |
|
Loss from continuing operations |
|
$ |
(920 |
) |
|
$ |
(2,740 |
) |
9
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 5 DISCONTINUED OPERATIONS
On April 22, 2008, the Company learned that UAHC-TN would no longer be authorized to provide
managed care services as a TennCare contractor when its TennCare contract expired on June 30,
2009. UAHC-TNs TennCare members transferred to other managed care organizations on
November 1, 2008, after which UAHC-TN continued to perform its remaining contractual obligations
through its TennCare contract expiration date of June 30, 2009.
From January 2007 to December 2009, UAHC-TN served as a Medicare contractor with CMS. The contract
authorized UAHC-TN to offer a SNP to its eligible members in Shelby County, Tennessee (including
the City of Memphis), and to operate a Voluntary Medicare Prescription Drug Plan. The Company did
not seek renewal of the Medicare contract, which expired December 31, 2009. The Company completed
the wind down of the Medicare business during the three months ended December 31, 2010.
The Company recognized a liability for certain costs associated with an exit or disposal activity
and measured the liability initially at its fair value in the period in which the liability was
incurred. The costs recognized included employee termination benefits, lease termination and costs
to relocate the Companys facility. The following table summarizes certain exit costs activity
resulting from the TennCare contract expiration and the expiration of the Medicare contract (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Expense/ |
|
|
|
|
|
Balance at |
Item |
|
July 1, 2010 |
|
Adj.* |
|
Payments |
|
March 31, 2011 |
|
|
|
Lease abandonment, net |
|
$ |
6 |
|
|
$ |
|
|
|
$ |
(6 |
) |
|
$ |
|
|
In connection with the discontinuance of the TennCare and CMS contracts, the Company reduced its
workforce, subleased its leased Tennessee facility to a third party effective April 2009 and ending
December 31, 2010, and relocated the Tennessee office. The discontinuance of the TennCare and CMS
contracts has had a material adverse impact on the Companys operations and financial statements.
For all periods presented in the accompanying unaudited condensed consolidated statements of
operations, the Companys managed care business is classified as discontinued operations.
Starting December 31, 2010, the Company reclassified the managed care services of UAHC-TN to
discontinued operations based on the fact that the Company had performed substantially all of
its contractual obligations. The major classes of assets related to discontinued
operations, were as follows (in thousands):
10
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Assets: |
|
|
|
|
|
|
|
|
Receivables |
|
$ |
|
|
|
$ |
43 |
|
Marketable Securities |
|
|
|
|
|
|
901 |
|
Prepaid expenses and other |
|
|
55 |
|
|
|
73 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
55 |
|
|
$ |
1,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
148 |
|
Medical claims payable |
|
|
16 |
|
|
|
84 |
|
Accrued liabilities |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
16 |
|
|
$ |
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
Ended |
|
Ended |
|
|
March 31, |
|
March 31, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
Revenues |
|
$ |
|
|
|
$ |
14 |
|
|
$ |
357 |
|
|
$ |
3,475 |
|
Income (loss) from
discontinued
operations, before
income taxes |
|
|
(14 |
) |
|
|
(168 |
) |
|
|
241 |
|
|
|
(570 |
) |
NOTE 6 NOTES PAYABLE
The Companys long-term borrowings consist of the following at March 31, 2011, and June 30, 2010,
respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Notes payable to bank |
|
$ |
3,188 |
|
|
$ |
3,984 |
|
Notes payable to former common shareholders of
Pulse, net of discount of $0 and $101 |
|
|
750 |
|
|
|
1,649 |
|
|
|
|
|
|
|
|
Total debt |
|
|
3,938 |
|
|
|
5,633 |
|
Less: current portion |
|
|
(1,813 |
) |
|
|
(2,710 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
2,125 |
|
|
$ |
2,923 |
|
|
|
|
|
|
|
|
Following its acquisition by the Company, Pulse Systems remains party to the Loan and Security
Agreement, as amended (the Loan Agreement), with Fifth Third Bank. The Loan Agreement currently
relates to a revolving loan not to exceed $1.0 million, of which no amounts were outstanding as of
the closing, June 30, 2010 or as of March 31, 2011, and a $5.0 million term loan, with a remaining
balance of $4.25 million as of the closing and $3.2 million as of March 31, 2011. The revolving
loan matures June 30, 2011 and bears interest at prime plus 4% or, at the option of Pulse Systems,
Adjusted LIBOR (the greater of LIBOR or 3%)
11
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
plus 4%. The term loan effective interest rate is 9.75% as of both March 31, 2011 and June 30,
2010. For the three months and nine months ended March 31, 2011, total effective interest expense
recorded in the condensed consolidated statement of operations was $0.2 million and $0.6 million,
respectively. The revolving loan and term loan are secured by a lien on all of the assets of Pulse
Systems.
The Loan Agreement contains financial covenants. In connection with the acquisition and the
execution of the Second Amendment to the Loan and Security Agreement (the Amendment), the lender
waived the existing defaults under the Loan Agreement arising from Pulse Systems failure to
satisfy (a) the Adjusted EBITDA (as defined therein) covenant as of December 31, 2009 and March 31,
2010, (b) the Funded Debt to Adjusted EBITDA covenant (as defined therein) as of March 31, 2010,
(c) the Fixed Charge Coverage Ratio (as defined therein) as of December 31, 2009 and March 31,
2010, and (d) to timely deliver audited financial statements for the fiscal year ended December 31,
2009. In addition, the Amendment modified the definition of Adjusted EBITDA, to among other things,
add $750,000 to the calculation to reflect the $750,000 contribution to capital made by UAHC to
Pulse Systems at closing which was applied to reduce the amount of Pulse Systems debt.
In addition, UAHC has pledged its membership interests in Pulse Systems to Fifth Third as
additional security for the loans, as set forth in the Membership Interest Pledge Agreement (the
Pledge Agreement). The Pledge Agreement restricts the ability of UAHC to incur additional
indebtedness, other than the Seller Note and up to $1.0 million of unsecured working capital
financing. The Pledge Agreement also generally restricts the payments of dividends or distributions
on, and redemptions of, UAHC common stock.
The Company also has a promissory note made in favor of the sellers of the Pulse Systems common
units (the Sellers) with a stated amount of $1.75 million payable on January 2, 2011. The
recorded amount of the promissory note at March 31, 2011 was $0.75 million and at June 30, 2010 was
$1.65 million, respectively, calculated using a discount rate of 12%. The promissory note is
non-interest bearing and secured by a pledge of the common units of Pulse Systems acquired by UAHC.
On January 2, 2011, the note became due. On January 13, 2011, the Company paid $1 million to
Pulse Sellers, LLC in partial repayment of the note. In exchange, Pulse Sellers, LLC granted to
the Company a forbearance with respect to payment of the remaining $750,000 until March 30, 2011.
The March 30, 2011 payment was not made. See Note 15 Subsequent Events for further discussion.
NOTE 7 REDEEMABLE PREFERRED MEMBER UNITS
In connection with the acquisition of Pulse, Pulse Systems also entered into a Redemption
Agreement, dated June 18, 2010 (the Redemption Agreement), with Pulse Systems Corporation, the
holder of all of the outstanding preferred units in Pulse Systems. The aggregate redemption price
is $3.99 million for the preferred units, including the accrued but unpaid return on such units,
which reflects a $0.83 million reduction from the actual outstanding amount as of the date of the
agreement. In addition, the 14% dividend rate on the preferred units is eliminated, subject to
reinstatement if there is a default as explained in the next sentence. If Pulse Systems fails to
pay the entire $3.99 million redemption price as required by the terms of the redemption agreement,
the $0.83 million discount is eliminated and the preferred units will be entitled to a 14% per
annum cumulative (but not compounded) return, consistent with the current terms of the preferred
units. Pulse Systems Corporation has agreed to the redemption of its preferred units over a
two-year period,
12
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
commencing with a cash payment made at closing of $1.75 million. During the three months and nine
months ended March 31, 2011, Pulse Systems redeemed $120,000 and $320,000, respectively, of the
preferred units and has agreed to continue to redeem $40,000 each month for the next 14 months,
with a final payment of $1.36 million in June 2012. The obligations of Pulse Systems under the
redemption agreement are subordinate to its obligations under the Loan Agreement and Pledge
Agreement. In addition, the redemption payments can be made only if UAHC makes additional cash
equity contributions to Pulse Systems in an amount necessary to fully fund each such payment. The
redeemable preferred units were recorded in the March 31, 2011 and June 30, 2010 consolidated
balance sheets at a value of approximately $1.70 million and $1.85 million, respectively,
discounted using an interest rate of 12%.
NOTE 8 INCOME TAXES
In accordance with GAAP, the Company periodically assesses whether valuation allowances against its
deferred tax assets are adequate based on the consideration of all available evidence. The
Companys effective tax rate for the three months and nine months ended March 31, 2011 and 2010 is
0% and differs from the statutory rate of 34%. The difference is primarily related to an increase
in the valuation allowance against the future tax benefit of the current period losses as the
Company does not believe that the realization of the benefit is more likely than not.
The Company recognizes the impact of a tax position if that position is more likely than not of
being sustained on audit, based on the technical merits of the position. The Company had no
unrecognized tax benefits as of March 31, 2011 and June 30, 2010. The Company expects no
significant increases or decreases in unrecognized tax benefits due to changes in tax positions
within one year of March 31, 2011. The Company has no interest or penalties relating to income
taxes recognized in the condensed consolidated statement of operations for the three months and
nine months ended March 31, 2011 and 2010 or in the condensed consolidated balance sheet as of
March 31, 2011 and June 30, 2010.
NOTE 9 NET LOSS PER COMMON SHARE
Basic net loss per share excluding dilution has been computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Diluted net loss per share is computed
using the treasury stock method for outstanding stock options and warrants. For the three months
ended March 31, 2011 and 2010 and nine months ended March 31, 2011 and 2010, the Company incurred a
net loss. Accordingly, no common stock equivalents for outstanding stock options and warrants have
been included in the computation of diluted net loss per share for such periods as the impact would
be anti-dilutive.
13
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE
10 COMPREHENSIVE LOSS
The components of comprehensive loss, net of related tax, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31 |
|
March 31, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
|
Net loss |
|
$ |
(52 |
) |
|
$ |
(1,401 |
) |
|
$ |
(1,882 |
) |
|
$ |
(4,091 |
) |
Unrealized holding
gain (loss), net of
tax |
|
|
|
|
|
|
29 |
|
|
|
(1 |
) |
|
|
(20 |
) |
|
|
|
|
|
Comprehensive loss |
|
$ |
(52 |
) |
|
$ |
(1,372 |
) |
|
$ |
(1,883 |
) |
|
$ |
(4,111 |
) |
|
|
|
|
|
NOTE
11 SHARE BASED COMPENSATION
The Company recognizes the compensation cost relating to share-based payment transactions in the
Companys consolidated financial statements. That cost is measured based on the fair value of the
equity instruments issued on the date of grant. The Company recorded stock-based compensation
expense of $9,000 and $70,000 for the three months ended March 31, 2011 and 2010, respectively, and
$83,000 and $207,000 for the nine months ended March 31, 2011 and 2010, respectively.
NOTE 12 RELATED PARTY TRANSACTIONS
Approximately $0.5 million of the notes payable to former common shareholders of Pulse is payable
to Chicago Venture Partners, L.P., an affiliate of John M. Fife, who is the Companys Chairman,
President and Chief Executive Officer.
Approximately
$0.1 million of the notes payable to former common shareholders of
Pulse and $1.7 million in redeemable preferred units are payable to
Pulse Systems Corporation as affiliate of Grayson Beck, who is on the
Companys Board of Directors and serves as the Audit Committee
Chair.
NOTE
13 COMMITMENT & CONTINGENCIES
Pending Litigation
From time to time, the Company may become involved in litigation relating to claims arising out of
its operations in the normal course of business. We are not involved in any pending legal
proceeding or litigation and, to the best of our knowledge, no governmental authority is
contemplating any proceeding to which we are a party or to which any of our properties is subject,
which would reasonably be likely to have a material adverse effect on the Company, except for the
following:
14
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
On August 17, 2010, Strategic Turnaround Equity Partners, L.P. (Cayman) (STEP) and Bruce Galloway
filed suit against the Company, in the Wayne County (Michigan) Circuit Court, Case No.
10-009344-CZ, seeking, among other things, a rescission of the Pulse Systems, LLC acquisition. On
August 27, 2010, STEP and Galloway filed a motion for preliminary injunction. On September 3, 2010,
the Company filed motions for summary disposition. On September 24, 2010, the circuit court held a
hearing on STEPs and Galloways motion for preliminary injunction and the Companys motions for
summary disposition and issued orders denying STEPs and Galloways motion for preliminary
injunction, granting the Companys motions for summary disposition, and dismissing their complaint
with prejudice as to all defendants. On October 15, 2010, STEP and Galloway filed a Claim of Appeal
with the State of Michigan Court of Appeals, challenging the circuit courts orders granting
summary disposition in favor of the Company and dismissing the complaint. The appeal is now pending
with the court of appeals.
On April 26, 2010, Legacy Commercial Flooring Ltd. (Legacy) filed an action against the Company
in Franklin County Common Pleas Court in Columbus, Ohio. The action alleges that, in failing to
close its acquisition of Legacy, the Company breached its duty to negotiate in good faith and the
Company is therefore liable to Legacy for the amounts expended of approximately $350,000 in
connection with the transaction. Upon the Companys motion, the case was removed to the U.S.
District Court for the Southern District of Ohio. In the district court, the Company filed a motion
to dismiss, and Legacy filed a motion to remand the case back to the Franklin County Common Pleas
Court. The district court denied Legacys motion to remand, and the parties are currently awaiting
the district courts decision regarding the Companys motion to dismiss.
On November 30, 2010, Tony Vacca and his spouse, Antoinetta Paladino, shareholders of the Company,
filed an action against the Company, John Fife, William Brooks and Tom Goss in Wayne County
(Michigan) Circuit Court asserting claims based on shareholder oppression theory and seeking
damages in an amount over $310,000. The Company and the other defendants filed a motion to dismiss
this case. A hearing was held on the motion on May 13, 2011, and the Court dismissed the case.
The plaintiffs have the right to appeal this decision, to the Michigan Court of Appeals, and may or
may not do so.
St. George Agreement
In addition, the Company has incurred an obligation to St. George and others pursuant to a put
right whereby St. George and others may put their holdings in Company stock back to the Company at
a price of $1.26 per share, payable by the Company, pursuant to the Voting and Standstill Agreement
dated March 19, 2010, attached as Exibit 10.1 to the Companys Current Report on Form 8-K filed on
March 22, 2010. The put exercise period runs from October 1, 2011, through March 31, 2012. If St.
George and others were to exercise their put right, assuming that at the time of exercise St.
George and others with the put right own the same number of shares of the Companys stock that they
currently own, then the amount of the Companys purchase obligation would be $2,372,055 as of March
31, 2011. St. George is an Illinois limited liability company that is controlled by Mr. John M.
Fife, who is the Companys Chairman, CEO and President.
15
United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 14 RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards
Board (FASB) or other standard setting bodies that are adopted by the Company as of the effective
dates. Unless otherwise discussed, management believes that the impact of recently issued
standards that are not yet effective will not have a material impact on the Companys financial
position or results of operations upon adoption.
NOTE 15 SUBSEQUENT EVENTS
The Company has performed a review of events subsequent to the balance sheet date.
On April 4, 2011, the Board of Directors of the Company approved a Forbearance Agreement under
which Pulse Sellers, LLC will agree to temporarily forebear with respect to collection of the
remaining balance of $750,000 plus interest under the Note as described in Note 6 Notes Payable.
The principal terms of the forbearance are as follows:
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1) |
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the Company shall make an immediate cash payment of $150,000 of principal under the
Note; |
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2) |
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the Company shall bring interest charges current through March 31, 2011 at the 18%
default rate of interest computed from the default date of January 3, 2011; |
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3) |
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the Company shall make monthly principal payments of $50,000 plus accrued interest on
the first day of each month, beginning on May 1, 2011, which was made, and continuing
thereafter for the next 12 months; and |
|
|
4) |
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In the event the Company fails to make payment on the Note pursuant to this Forbearance
Agreement, the holders of the Note retain all rights and remedies, none of which are
waived, including the right to accelerate the entire outstanding balance on the Note,
including all interest, default interest and fees, and to effect any and all remedies,
including remedies with respect to their collateral, which is a lien on all of the
membership units of Pulse Systems, LLC a wholly-owned subsidiary of the Company. This lien
is subordinate to the lien on the membership units of Pulse Systems, LLC held by Fifth
Third Bank, an Ohio banking corporation, pursuant to the Loan and Security Agreement dated
March 31, 2009, as amended on September 23, 2009 and June 18, 2010. Mr. John M. Fife, who
is the Chairman, Chief Executive Officer and President of the Company, is the
representative for Pulse Sellers, LLC. Chicago Venture Partners, L.P., which is an entity
controlled by Mr. Fife, is a significant beneficiary of the repayment of the note. |
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following Managements Discussion and Analysis of Financial Condition and Results of Operations
and other sections of this report contains various forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or
beliefs concerning future events, including statements regarding future plans and strategy for our
business, earnings and the sufficiency of our cash balances and cash generated from operating,
investing, and financing activities for our future liquidity and capital resource needs. We caution
that although forward-looking statements reflect our good faith beliefs and reasonable judgment
based upon current information, these statements are qualified by important factors that could
cause actual results to differ materially from those in the forward-looking statements, because of
risks, uncertainties, and factors including, but not limited, to: the recent acquisition of Pulse
and its integration into the Company; changes in the medical device and healthcare industry; the
ongoing impacts of the U.S. recession; the continuing impacts of the global credit and financial
crisis; and other changes in general economic conditions. Other risks and uncertainties are
detailed from time to time in our reports filed with the SEC, and in particular those set forth
under Risk Factors in our Annual Report on Form 10-K for fiscal 2010. Given such uncertainties,
you should not place undue reliance on any such forward-looking statements. The forward-looking
statements included in this report are made as of the date hereof. Except as required by law, we
may not update these forward-looking statements, even if new information becomes available in the
future.
Overview
This section discusses the Companys results of operations, financial position and liquidity. This
discussion should be read in conjunction with the condensed consolidated financial statements and
related notes thereto contained in Item 1 of this quarterly report on Form 10-Q.
History
From November 1993 to June 2009, the Companys indirect, wholly owned subsidiary, UAHC Health Plan
of Tennessee, Inc. (UAHC-TN), was a managed care organization in the TennCare program, a State of
Tennessee program that provided medical benefits to Medicaid and working uninsured recipients. On
April 22, 2008, the Company learned that UAHC-TN would no longer be authorized to provide managed
care services as a TennCare contractor when its TennCare contract expired on June 30, 2009.
UAHC-TNs TennCare members transferred to other managed care organizations on November 1, 2008,
after which UAHC-TN continued to perform its remaining contractual obligations through its TennCare
17
contract expiration date of June 30, 2009. However, revenue under this contract was earned only
through October 31, 2008.
From January 2007 to December 2009, UAHC-TN served as a Medicare Advantage qualified organization
(the Medicare contract) pursuant to a contract with the Centers for Medicare & Medicaid Services
(CMS). The contract authorized 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. The Company did not seek
renewal of the Medicare contract, which expired December 31, 2009. The discontinuance of the
TennCare and Medicare contracts have had a material adverse effect on the Companys operations,
earnings, financial condition and cash flows in fiscal 2009 and 2010.
For all periods presented in the accompanying unaudited condensed consolidated statements of
operations, the Companys managed care business has been classified as discontinued operations.
Starting at December 31, 2010, the Company reclassified the managed care services of UAHC-TN to
discontinued operations based on the fact that the Company completed substantially all of its
contractual obligations as of December 31, 2010.
Acquisition of Pulse Systems, LLC
On June 18, 2010, the Company entered into a Securities Purchase Agreement and a Warrant Purchase
Agreement to acquire 100% of the outstanding common units and warrants to purchase common units of
Pulse. See Note 4 to the Notes to the Unaudited Condensed Consolidated Financial Statements for
additional discussion of the purchase terms.
Operating Results
For the Three Months Ended March 31, 2011 Compared
to the Three Months Ended March 31, 2011
Total operating revenues increased $2.2 million for the three months ended March 31, 2011, over the
three months ended March 31, 2010. The operating revenues for the three months ended March 31,
2011 related to contract manufacturing services resulting from the Pulse acquisition. On a
proforma basis, total revenues were $2.2 million for the three months ended March 31, 2011,
compared to proforma revenue of $1.7 million for the three months ended March 31, 2010. As
described in Note 5, the Medicare operations were reclassified to discontinued operations. There
were no revenues from discontinued operations for the three months ended March 31, 2011 compared to
$14,000 for the three months ended March 31, 2010.
Total
operating expenses increased by $0.8 million (64%) to $2.0 million for the three months ended
March 31, 2011 as compared to $1.2 million for the three months ended March 31, 2010. The
increase in operating expenses is primarily the result of increased
operational cost resulting from the newly acquired Pulse offset by a decrease in marketing, general and
administrative expenses. Approximately 85% of total operating expenses relate to the Pulse
operations.
18
Cost of goods sold increased $1.3 million for the three months ended March 31, 2011 as a result of
the acquisition of Pulse. There were no cost of goods sold for
the three months ended March 31,
2010.
Marketing, general and administrative expenses decreased $0.5 million (37%) to $0.8 million for the
three months ended March 31, 2011 from $1.2 million for the three months ended March 31, 2010. The
decrease was principally due to decreases in legal and consulting expenses and operational costs
related to the Medicare operations. Approximately 18% of the marketing, general and adminstrative
expenses relate to the Pulse operations.
There was no income tax expense for the three months ended March 31, 2011 or March 31, 2010. The
Companys effective tax rate for both periods of 0% differs from the statutory rate of 34%. This
difference is primarily related to an increase in the valuation allowance against the future tax
benefit of the current period losses as the Company does not believe that the realization of the
benefit is more likely than not.
Loss from continuing operations before income taxes was $38,000 for the quarter ended March 31,
2011 compared to loss before income taxes of $1.2 million for the quarter ended March 31, 2010.
Loss from continuing operations was $38,000, or $(0.00) per basic share, for the quarter ended
March 31, 2011, compared to loss from continuing operations of $1.2 million, or $(0.15) per basic
share, for the quarter ended March 31, 2010.
Loss from discontinued operations was $14,000, or $(0.00) per basic share for the quarter ended
March 31, 2011, compared to loss from discontinued operations of $0.2 million, or $(0.02) per basic
share for the quarter ended March 31, 2010.
Net loss was $52,000, or $(0.01) per basic share for the quarter ended March 31, 2011 compared to
net loss of $1.4 million, or $(0.17) for the quarter ended March 31, 2010.
For the Nine Months Ended March 31, 2011 Compared
to the Nine Months Ended March 31, 2010
Total operating revenues were $6.5 million for the nine months ended March 31, 2011. There were no
operating revenues for the nine months ended March 31, 2010. The revenues for the nine months
ended March 31, 2011 related to contract manufacturing services resulting from the Pulse
acquisition. On a proforma basis, total operating revenues were $6.5 million compared proforma
operating revenues of $5.8 million. Revenues attributable to discontinued operations were $0.4
million for the nine months ended March 31, 2011 compared to $3.5 million of the nine months ended
March 31, 2010.
Total operating expenses increased $4.5 million (126%) to $8.0 million for the nine months ended
March 31, 2011 as compared to $3.5 million for the nine months ended March 31, 2010. The increase
is primarily the result of increase in costs of goods sold related to the newly acquired Pulse.
Approximately 66% of total expenses relate to the Pulse operations.
Cost of goods sold
increased to $3.4 million for the nine months ended March 31,
2011, as a result of the acquisition of Pulse. There were no cost of goods sold for the nine
months ended March 31, 2010.
Marketing, general and administrative expenses increased $1.1 (30%) to $4.6 million for the nine
months ended March 31, 2011 compared to $3.6 million for the nine months ended March 31, 2010.
The increase was principally due to increases in operational costs related to
19
the newly acquired Pulse, offset by decrease in legal and consulting fees. Approximately 16% of
the marketing, general and adminstrative expenses relate to the Pulse operations.
There was no income tax expense for the nine months ended March 31, 2011 or 2010. The Companys
effective tax rate for both periods of 0% differs from the statutory rate of 34%. This difference
is primarily related to an increase in the valuation allowance against the future tax benefit of
the current period losses as the Company does not believe that the realization of the benefit is
more likely than not.
Loss from continuing operations before income taxes was $2.1 million for the nine months ended
March 31, 2011 compared to loss from continuing operations before income taxes of $3.5 million for
the nine months ended March 31, 2010.
Loss from continuing operations was $2.1 million, or $(0.22) per basic share, for the nine months
ended March 31, 2011, compared to loss from continuing operations of $3.5 million, or $(0.43) per
basic share, for the nine months ended March 31, 2010.
Income
from discontinued operations was $0.2 million, or $0.02 per
basic share, for the nine months ended
March 31, 2011, compared to loss from discontinued operations of $0.6 million or $(0.07) per basic
share, for the nine months ended March 31, 2010.
Net loss was $1.9 million, or $(0.19) per basic share, for the nine months ended March 31, 2011,
compared to net loss of $4.1 million, or $(0.50) per basic share.
Liquidity and Capital Resources
Capital resources, which for us are primarily cash from operations and the Pulse debt facility, are
required to maintain our current operations and to fund planned capital spending and other
commitments and contingencies. The Companys ability to maintain adequate amounts of cash to meet
its future cash needs depends on a number of factors, particularly including controlling corporate
overhead costs. Market conditions may continue to limit our sources of funds for these activities
and our ability to refinance our debt obligations at their present interest rates and other terms.
The Company expects that it will require additional capital within the next 6 months. Absent
access to sources of external financial support, including accommodations and financing from
affiliates, the Company expects to be at or below minimum levels of cash necessary to operate the
business during fiscal 2011. The Company is exploring additional debt or equity financing and
other accommodations, including from affiliates such as members of its board of directors. Any
such equity financing may result in significant dilution of the Companys existing shareholders.
As a result of the Pulse acquisition, the Company incurred and assumed certain debt obligations
including, (a) a non-interest bearing note payable of $1.75 million (secured by a subordinated
pledge of all the common units of Pulse) and (b) the funding of $2.5 million for certain
obligations of Pulse. The Company also assumed Pulses outstanding term loan. See Acquisition
of Pulse Systems, LLC above for additional discussion.
At March 31, 2011, the Company had (i) cash and cash equivalents and short-term marketable
securities of $0.7 million, compared to $3.5 million at June 30, 2010; (ii) negative
20
working capital of $1.1 million, compared to negative working capital of $0.7 million at June 30,
2010; and (iii) a current assets-to-current liabilities ratio of 0.65-to-1, compared to 0.87-to-1
at June 30, 2010.
Net cash used in operating activities of $1.0 million in the nine months ended March 31, 2011 was
primarily due to a net loss of $1.8 million. Net cash used in operating activities of continuing
operations was $1.1 million. Net cash provided by operating operating activities of discontinued
operations was $72,000.
Net cash provided by investing activities of $0.5 million for the nine months ended March 31, 2011
was primarily due to cash proceeds from the sale of marketable securities of $0.9 million, which
was partially offset by the payment of the purchase price adjustment related to the Pulse
transaction and purchase of equipment.
Cash used in financing activities of $2.2 million for the nine months ended March 31, 2011 was
primarily attributable to payments made to the notes payable to a bank and redemption of the
preferred stock.
Decrease in cash was $2.7 million and $3.7 million for the nine months ended March 31, 2011 and
March 31, 2010, respectively.
In addition, the Company has incurred an obligation to St. George and others pursuant to a put
right whereby St. George and others may put their holdings in Company stock back to the Company at
a price of $1.26 per share, payable by the Company, pursuant to the Voting and Standstill Agreement
dated March 19, 2010, attached as Exibit 10.1 to the Companys Current Report on Form 8-K filed on
March 22, 2010. The put exercise period runs from October 1, 2011, through March 31, 2012. If St.
George and others were to exercise their put right, assuming that at the time of exercise St.
George and others with the put right own the same number of shares of the Companys stock that they
currently own, then the amount of the Companys purchase obligation would be $2,372,055 as of March
31, 2011. St. George is an Illinois limited liability company that is controlled by Mr. John M.
Fife, who is our Chairman, CEO and President.
21
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our principal
executive and financial officers, we have evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of March 31, 2011. Based upon that evaluation, our
principal executive and financial officers have concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this report to provide reasonable
assurance that information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms and is accumulated and
communicated to our management, including our principal executive and financial officers, as
appropriate to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting during our third quarter ended
March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 17, 2010, Strategic Turnaround Equity Partners, L.P. (Cayman) (STEP) and Bruce Galloway
filed suit against the Company, in the Wayne County (Michigan) Circuit Court, Case No.
10-009344-CZ, seeking, among other things, a rescission of the Pulse Systems, LLC acquisition. On
August 27, 2010, STEP and Galloway filed a motion for preliminary injunction. On September 3, 2010,
the Company filed motions for summary disposition. On September 24, 2010, the circuit court held a
hearing on STEPs and Galloways motion for preliminary injunction and the Companys motions for
summary disposition and issued orders denying STEPs and Galloways motion for preliminary
injunction, granting the Companys motions for summary disposition, and dismissing their complaint
with prejudice as to all defendants. On October 15, 2010, STEP and Galloway filed a Claim of Appeal
with the State of Michigan Court of Appeals, challenging the circuit courts orders granting
summary disposition in favor of the Company and dismissing the complaint. The appeal is now pending
with the court of appeals.
On April 26, 2010, Legacy Commercial Flooring Ltd. (Legacy) filed an action against the Company
in Franklin County Common Pleas Court in Columbus, Ohio. The action alleges that, in failing to
close its acquisition of Legacy, the Company breached its duty to negotiate in good faith and the
Company is therefore liable to Legacy for the amounts expended of approximately $350,000 in
connection with the transaction. Upon the Companys motion, the case was removed to the U.S.
District Court for the Southern District of Ohio. In the district court, the Company filed a motion
to dismiss, and Legacy filed a motion to remand the case back to the Franklin County Common Pleas
Court. The district court denied Legacys motion to remand, and the parties are currently awaiting
the district courts decision regarding the Companys motion to dismiss.
On November 30, 2010, Tony Vacca and his spouse, Antoinetta Paladino, shareholders of the Company,
filed an action against the Company, John Fife, William Brooks and Tom Goss in Wayne County
(Michigan) Circuit Court asserting claims based on shareholder oppression theory and seeking
damages in an amount over $310,000. The Company and the other defendants filed a motion to dismiss
this case. A hearing was held on the motion on May 13, 2011, and the Court dismissed the case.
The plaintiffs have the right to appeal this decision, to the Michigan Court of Appeals, and may or
may not do so.
23
Item 1A. Risk Factors
Other than discussed below, there are no material changes to the risk factors previously disclosed
in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended June 30,
2010 and otherwise subsequently disclosed in our reports filed with the SEC. You should carefully
consider the risks and uncertainties we describe in such report and in other reports filed or
furnished thereafter with the SEC before deciding to invest in or retain shares of our common
stock. If any of these risks or uncertainties actually occurs, our business, financial condition,
operating results or liquidity could be materially and adversely affected.
We expect that we will require additional capital within the next 6 months.
Absent access to sources of external financial support, including accommodations and financing from
affiliates, the Company expects to be at or below minimum levels of cash necessary to operate the
business during fiscal 2011. The Company is exploring additional debt or equity financing and
other accommodations, including from affiliates such as members of its board of directors. Any
such equity financing may result in significant dilution of the Companys existing shareholders.
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources elsewhere in this report.
24
Item 6. Exhibits
31.1* |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
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31.2* |
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Certification 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* |
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Certification 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. |
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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United American Healthcare Corporation
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Dated: May 16, 2011 |
By: |
/s/ John M. Fife
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John M. Fife |
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Chairman, President & Chief Executive Officer
(Principal Executive Officer) |
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Dated: May 16, 2011 |
By: |
/s/ Robert Sullivan
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Robert Sullivan |
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Chief Financial Officer & Treasurer
(Principal Financial Officer) |
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26