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Securities and Exchange Commission
Washington, D.C. 20549
     

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 2002
Commission File Number: 000-18839

United American Healthcare Corporation
(Exact Name of Registrant as Specified in Charter)

1155 Brewery Park Boulevard, Suite 200
Detroit, Michigan 48207
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (313) 393-0200

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, No Par Value
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   X           No      

The number of outstanding shares of Registrant’s common stock as of November 13, 2002 was 6,911,268

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United American Healthcare Corporation

Form 10-Q

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Part I.

Item 1. Unaudited Condensed Consolidated Financial Statements

United American Healthcare Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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United American Healthcare Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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United American Healthcare Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2002 and 2001

NOTE 1 — BASIS OF PREPARATION

The accompanying consolidated financial statements include the accounts of United American Healthcare Corporation and all of its majority-owned subsidiaries, together referred to as the “Company”. All significant intercompany transactions and balances have been eliminated in consolidation.

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 three-month period ended September 30, 2002 are not necessarily indicative of the results of operations for the full fiscal year ending June 30, 2003. The accompanying condensed consolidated financial statements should be read in conjunction with the notes to the financial statements contained in the most recent annual report on Form 10-K.

NOTE 2 — COMPREHENSIVE INCOME

The components of comprehensive income, net of related tax, are summarized as follows (in thousands):

The components of accumulated other comprehensive income, included in shareholders’ equity at September 30, 2002 and June 30, 2002, include net unrealized holding gains and losses, net of deferred federal income taxes.

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United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements — Continued
September 30, 2002 and 2001

NOTE 3 — LONG-TERM DEBT

The Company currently has a $2.6 million term loan with Standard Federal Bank, N.A. repayable in monthly installments of principal and interest of $0.1 million, with an interest rate equal to the bank’s prime rate (4.75% at September 30, 2002) plus one percent per annum, and a maturity date of September 30, 2004. The loan agreement is collateralized by a security interest in all of the Company’s personal property.

The Company’s outstanding debt is as follows (in thousands):

NOTE 4 — 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 5 — BAD DEBT EXPENSE

Management has determined the collectability of approximately $541,000 of other receivables is doubtful, and as a result, has charged bad debt expense.

NOTE 6 — EFFECTIVE TAX RATE

The Company’s effective tax rate for the first quarter of fiscal 2003 is 15% and differs from the statutory rate of 34%. This difference is primarily a result of the utilization of net operating loss carryforwards which reduced the effective tax rate by 18 basis points. Furthermore, the release of certain tax liabilities that were deemed to no longer be needed reduced the effective tax rate by another 1 basis point. In the first quarter of fiscal 2002, the effective tax rate was 17%, principally impacted by the Company’s net operating loss carryforward position.

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United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements — Continued
September 30, 2002 and 2001

NOTE 7 — CHANGE IN TENNCARE CONTRACT

For all its contracted managed care organizations (“MCOs”), the State of Tennessee, doing business as TennCare, changed its reimbursement system to an administrative services only (“ASO”) program for an 18-month stabilization period (July 1, 2002 through December 31, 2003), during which the MCOs — including OmniCare Health Plan, Inc., in Tennessee (“OmniCare-TN”), a MCO 75% owned by the Company’s wholly owned subsidiary — have no medical cost risk (i.e., no risk for medical losses), earn fixed administrative fees, are subject to increased oversight, may earn limited additional administrative fees based on certain performance measures as an incentive to manage medical costs below the targets, and may incur financial penalties for not achieving certain performance requirements. TennCare has stated it intends to return to a full-risk system after the end of the 18-month stabilization period at January 1, 2004.

NOTE 8 — CONTRACTUAL RISK AGREEMENT AND LIQUIDITY

Subsequent to June 30, 2002, OmniCare-TN and the State of Tennessee, doing business as TennCare, amended the Contractor Risk Agreement between them, in September 2002. Pursuant to the amendment:

- Retroactively effective July 1, 2001 through April 30, 2002, OmniCare-TN elected to operate under a shared risk arrangement, under which gains or losses are shared with the State of Tennessee;

- retroactively effective beginning May 1, 2002, OmniCare-TN is reimbursed under an administrative services only agreement with no risk of medical loss; and

- the State of Tennessee agreed to pay OmniCare-TN up to $7.5 million as necessary to meet its statutory net worth requirement as of June 30, 2002.

Pursuant to an agreement with OmniCare-TN in October 2002, the State of Tennessee further agreed to pay additional funds to OmniCare-TN if future certified actuarial data confirm they are needed by OmniCare-TN to meet its statutory net worth requirement as of June 30, 2002.

OmniCare-TN received a permitted practice letter from the State of Tennessee to include such $7.5 million receivable in its statutory net worth at June 30, 2002. Under GAAP, such $7.5 million was not recorded in the Company’s fiscal 2002 financial statements but will be recorded in its fiscal 2003 financial statements. Based on the actuarily estimated accrued medical claims liability which has been used in computing OmniCare-TN’s statutory net worth requirement as of June, 30, 2002, $7.5 million should be reimbursed

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United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements — Continued
September 30, 2002 and 2001

by the State of Tennessee pursuant to the TennCare amendment described above. Should actual claims experience be more or less than the accrued $24.0 million medical claims liability at June 30, 2002, the change in the estimated reimbursement from the State of Tennessee and the corresponding change in the medical claims liability should offset, still resulting in $7.5 million of net earnings in fiscal year 2003. At September 30, 2002 $2.7 million of such medical claims were processed, and the same amount was recognized as revenue by Omnicare TN. As of November 8, 2002, an additional $1.7 million in such medical claims were processed, and the same amount will be recognized as revenue in the fiscal quarter ending December 31, 2002.

Based on the foregoing, management believes that OmniCare-TN will be in compliance with its statutory net worth requirements through June 30, 2003.

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 administrative costs related to managing medical costs 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 June 30, 2003.

NOTE 9 — 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 $3.0 million and determined that such amount is not impaired in accordance with SFAS No. 142. Accordingly, goodwill amortization was not recorded for the three months ended September 30, 2002 and 2001.

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United American Healthcare Corporation and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements — Continued
September 30, 2002 and 2001

NOTE 10 — UNAUDITED SEGMENT FINANCIAL INFORMATION

Summarized financial information for the Company’s principal operations, as of and for the three months ended September 30, 2002 and 2001, is as follows (in thousands):

(1)		Management Companies: United American Healthcare Corporation and United American of Tennessee.
(2)		HMOs and Managed Plans: OmniCare Health Plan, Inc. of Tennessee and County Care.

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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 managed care organizations, including health maintenance organizations (“HMOs”) in Tennessee and (until November 1, 2002) Michigan, with a targeted mix of Medicaid and commercial enrollment. OmniCare Health Plan, in Michigan (“OmniCare-MI”), an HMO administered by the Company under a management agreement, was placed in court-ordered rehabilitation proceedings on July 31, 2001, which relieved the Company from further funding OmniCare-MI’s capital deficiencies and which continued its OmniCare-MI management agreement, with substantially reduced management fee revenues from OmniCare-MI beginning August 1, 2001. In March 2002, upon the court-appointed Rehabilitator’s filing a proposed rehabilitation plan for OmniCare-MI, the Company announced it anticipated eventual termination of the management agreement. Such termination occurred November 1, 2002, after which the Company’s only managed plan is OmniCare Health Plan, Inc. (“OmniCare-TN”), an HMO which is 75% owned by the Company’s wholly owned subsidiary. As of September 30, 2002 there were approximately 120,000 enrollees in OmniCare-TN.

Total revenues decreased $31.9 million (77%), to $9.7 million for the quarter ended September 30, 2002 compared to $41.6 million for the quarter ended September 30, 2001, principally as the result of a change in the reimbursement system of TennCare, a State of Tennessee program that provides medical benefits to Medicaid and working uninsured and uninsurable recipients. For all its contracted managed care organizations (“MCOs”), TennCare changed its