UAHC United America Healthcare Corp (PK)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________

FORM 10-K/A

Amendment No. 1

                     (Mark One)

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the fiscal year ended June 30, 2012

303 East Wacker Drive, Suite 1200

Chicago, Illinois 60601

  (Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (313) 393-4571

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

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

Common Stock, no par value

 

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         UNITED AMERICAN HEALTHCARE CORPORATION

FORM 10-K/A

TABLE OF CONTENTS

PART II			Page
	Item 8.	Financial Statements and Supplementary Data	1
PART IV
	Item 15.	Exhibits and Financial Statement Schedules	1
		Financial Statements	F-1

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See accompanying notes to the consolidated financial statements.

F-3

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See accompanying notes to the consolidated financial statements.

F-4

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See accompanying notes to the consolidated financial statements.

F-5

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F-6

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  See accompanying notes to the consolidated financial statements.

F-7

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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 Company's 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-TN's 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. However, revenue under this contract was only earned 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 Company wound down the Medicare business and as of December 31, 2010, virtually all of the Tennessee operations had ceased.

On June 18, 2010, UAHC acquired Pulse Systems, LLC (referred to as "Pulse Systems" or "Pulse" or "Pulse Sellers") for consideration with a fair value of $8.64 million. With the acquisition of Pulse Systems, LLC 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.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.

Principles of Consolidation.   The 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.

b.

Use of Estimates.   The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates as more information becomes available and any such difference could be significant.

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c.	Cash and Cash Equivalents.   The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents.

d.

Accounts Receivable – Trade, Net. Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. The Company determines the allowance for doubtful accounts by identifying trouble accounts and by using historical experience applied to an aging of accounts.  The Company also determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer's financial condition and credit history and current economic conditions.  Trade receivables are written off when deemed uncollectible.  Recoveries of trade receivables previously written off are recorded when received.  The allowance for doubtful accounts was $41,000 as of June 30, 2012 and 2011, respectively.

e.

Property and Equipment . Property and equipment are stated at cost, net of accumulated depreciation and amortization.  Expenditures and improvements, which add significantly to the productive capacity or extend the useful life of an asset, are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets.  Estimated useful lives of the major classes of property and equipment are as follows:  furniture and fixtures – 5 years; equipment – 7 years; and computer software – 3 to 5 years.  Leasehold improvements are included in furniture and fixtures and are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life.   The Company uses accelerated methods for income tax purposes.

g.

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 fiscal years 2012 and 2011.

As a result of the acquisition of Pulse, the Company recorded goodwill of $10.4 million on June 18, 2010.  At June 30, 2010, goodwill was adjusted to $10.1 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.

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As the valuation of all assets acquired was finalized in early fiscal 2011, a retroactive adjustment resulted to other intangible assets and goodwill.  The retroactive adjustment of the valuation did not materially impact net income, retained earnings or earnings per share for any period presented. See Note 6 below for additional discussion of the Pulse transaction.   The roll forward of goodwill is as follows (in thousands):

 

1)	Management Companies: United American Healthcare Corporation, United American of Tennessee, Inc.

2)	Pulse Systems: Provider of Contract Manufacturing Services to the medical device industry.

h.

Long-Lived Assets.  Long-lived assets are reviewed by the Company for events or changes in circumstances which would indicate that the carrying value may not be recoverable.  In making this determination, the Company considers a number of factors, including estimated future undiscounted cash flows associated with long-lived assets, current and historical operating and cash flow results and other economic factors. When any such impairment exists, the related assets are written down to fair value.  Based upon its most recent analysis, the Company believes that long-lived assets are not impaired.

i.	Revenue Recognition.   Contract manufacturing service revenue is recognized when title to the product transfers, no remaining performance obligations exist, the terms of the sale are fixed and collection is probable, which generally occurs at shipment.

j.

Income Taxes. Deferred income tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled.  Valuation allowances are established when necessary to reduce the deferred tax assets and liabilities to the amount expected to be realized.  The deferred income tax provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year.  The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible for the period.

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k.

Earnings (Loss) Per 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 loss per share is computed the same as basic except that the denominator also includes shares issuable upon assumed exercise of stock options and warrants.  For the years ended June 30, 2012 and 2011, the Company had outstanding stock options and warrants which were not included in the computation of net loss per share because the shares would be anti-dilutive due to the net loss each period.

l.

Segment Information.  The Company reports financial and descriptive information about its reportable operating segments.  Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.  Financial information is reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments.

m.	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 June 30, 2012 and 2011, (in thousands):

n.	Other Intangibles.   Intangible assets are amortized over their estimated useful lives using the straight-line method.

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The following is a summary of intangible assets subject to amortization as of June 30, 2012 and 2011, including the retroactive adjustments for final valuation of such intangible assets (in thousands):

The backlog was amortized over a six month period and was fully amortized as of June 30, 2012, and the customer list is amortized over seven years.  Amortization expense was $432,000 and $838,000 for fiscal year 2012 and 2011, respectively.  Amortization expense for the next five fiscal years is as follows (in thousands):

o.	Shipping and Handling.  Shipping and handling costs are included in cost of goods sold.

p.	Reclassifications. Certain items in the prior periods consolidated financial statements have been reclassified to conform to the June 30, 2012 presentation.

q.

Going Concern.   The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  The Company incurred a net loss from continuing operations of $1.9 million during the year ended June 30, 2012, and, as of that date, had a working capital deficiency of $10.1 million.  As a result, the Company could go into default on certain long-term debt arrangements or on the redeemable preferred units of Pulse Systems, LLC.  These conditions raise substantial doubt as to the Company's ability to continue as a going concern.  These consolidated financial statements do not include any adjustments relating to the recoverability of recorded assets, or amounts and classification of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern.  In order to provide the Company with the ability to continue its operations:, the Company's Management has instituted cost savings actions to reduce corporate overhead. To the extent the Company needs to finance its debts or other obligations, or fund capital expenditures or acquisitions, the Company will need to access the capital markets by, for example, issuing securities in private placements or private investments in public equities ("PIPE") offerings.

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NOTE 3 – FAIR VALUE

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 management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration was given to the 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 on a recurring basis in the Consolidated Balance Sheet as of June 30, 2012 and 2011:

The Company uses an interest swap to manage the risk associated with its floating long-term notes payable.  As interest rates change, 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.  The fair value of the interest rate swap was determined to be $32,000 using inputs other than quoted prices in active markets. The fixed interest rate of the interest rate swap is 4.78%. The Company has not designated this interest rate swap for hedge accounting.

As of June 30,2012, the aggregate notional amount of the swap agreement was $2.1 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 agreement.  The interest rate swap is classified within level 2 of the fair market measurements.

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The total gain included in earnings attributable to the change in fair value of the interest rate swap was $30,690 and $32,514 for the year ended June 30, 2012 and 2011, respectively.

NOTE 4 - CONCENTRATION OF RISK

Pulse Systems provided contract manufacturing services to 121 medical device customers, with approximately 61% of revenue arising from customers located in the San Francisco Bay Area.  For the twelve-months ended June 30, 2012 Pulse's two largest customers accounted for approximately 52% of its total revenue and the ten largest customers accounted for 79% of Pulse's total revenue. Pulse was acquired late in fiscal 2010.

The Company from time to time may maintain cash balances with financial institutions in excess of federally insured limits.  Management has deemed this as a normal business risk.

Depreciation expense for each of the years ended June 30, 2012, and 2011 was $285,000 and $302,000, respectively.

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NOTE 6 – 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 (e) and 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 Company's board of 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 has been 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 Company also assumed Pulse's term loan to 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 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 Pulse's 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 Pulse's revolving and term loans are not included in the $9.46 million purchase price listed above.

During the three months ended September 30, 2010, the Company finalized its valuation of all assets acquired, 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.

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A summary of the final purchase price allocation for the acquisition of the Company is as follows (in thousands):

The fair value of the consideration paid for the acquisition of the net assets was as follows (in thousands):

 

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 the beginning of the periods presented. 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 periods 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.

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NOTE 7 – INCOME TAXES

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 June 30, 2012 and 2011. The Company expects no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of June 30, 2012. The Company has no interest or penalties relating to income taxes recognized in the consolidated statement of operations for the years ended June 30,2012 and 2011, or in the consolidated balance sheet as of June 30, 2012 and 2011.   The Company's tax returns for fiscal 2008 and later remain subject to examination by the Internal Revenue Service and the respective states.

The components of income tax expense (benefit) from continuing operations for each year ended June 30 are as follows (in thousands):

A reconciliation of the provision for income taxes from continuing operations for each year ended June 30 is as follows (in thousands):

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  As a result of losses in recent years, management believes that the realization of deferred tax assets does not meet the more likely than not threshold for recognition.

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Components of the Company's deferred tax assets and liabilities at each year ended June 30 are as follows (in thousands):

As of June 30, 2012, the net operating loss carry forward for federal income tax purposes was approximately $27.3 million and expires beginning 2023.

NOTE 8 – RELATED PARTY TRANSACTIONS

Convertible Note

On May 18, 2011, the Company issued a Convertible Promissory Note (the "Convertible Note") in favor of St. George Investments, LLC ("St. George"), an affiliate of John M. Fife, the Company's Chairman, President and Chief Executive Officer. On that date, St. George had 19.23% beneficial ownership of the Company.  See Note 10 "Notes Payable" for additional discussion of the Convertible Note.

On September 28, 2011, the Company issued a Promissory Note (the "Promissory Note") to St. George, an affiliate of John M. Fife, who is the Company's Chairman, President and Chief Executive Officer, in exchange for a loan in the amount of $400,000 made by St. George to the Company.  See Note 10 "Notes Payable" for additional discussion of the Promissory Note.

December 9, 2011, the Company issued a Promissory Note (the "Second Promissory Note") in favor of St. George, in exchange for a loan in the amount of $300,000 made by St. George to the Company.   See Note 10 "Notes Payable" for additional discussion of the Second Promissory Note.

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On February 9, 2012, the Company issued a Promissory Note (the "Third Promissory Note") in favor of St. George, in exchange for a loan in the amount of $350,000 made by St. George to the Company.   See Note10 "Notes Payable" for additional discussion of the Third Promissory Note.

On May 16, 2012, the Company issued a Promissory Note (the "Fourth Promissory Note") in favor of St. George in exchange for a loan in the amount of $75,000 made by St. George to the Company.   See Note 10 "Notes Payable" for additional discussion of the Fourth Promissory Note.

Reimbursement Agreement

On June 23, 2011, the Company entered into a Reimbursement Agreement and Mutual Release (the "Reimbursement Agreement") with various parties (collectively, the "Parties"), including Strategic Turnaround Equity Partners, L.P. (Cayman), a Cayman Islands limited partnership ("STEP"), Bruce R. Galloway ("Galloway"), St. George Investments, LLC, an Illinois limited liability company ("St. George"), John M. Fife ("Fife"), and several of their respective affiliates. St. George is controlled by Mr. John M. Fife, who is the Company's Chairman, CEO and President.

Under the Reimbursement Agreement, the Parties agreed to dismiss the litigation between them in the U.S. District Court for the Eastern District of Michigan, the Circuit Court for Wayne County, Michigan, and the Michigan Court of Appeals, as well as to release each other from liability in connection with any issue related to the litigation, in exchange for payments of $5,000 by each of the Company and St. George to STEP (for a total of $10,000). The Parties filed a Joint Stipulation of Dismissal on June 27, 2011.

As part of the Reimbursement Agreement and as further consideration for the releases, STEP, its principals and affiliates, including Galloway, agreed that for 20 years they would not (i) purchase any shares of common stock of the Company ("Common Stock"), (ii) take any insurgent action against the Company, engage in any type of proxy challenge, tender offer, acquisition or battle for corporate control with respect to the Company, (iii) initiate any lawsuit or governmental proceeding against the Company, its affiliates or any of their respective directors, officers, employees or agents, or (iv) take any action that would encourage any of the foregoing.

In addition, under the Reimbursement Agreement, each of the Company and St. George agreed to reimburse STEP in the amount of $225,409 (for a total of $450,819) for expenses incurred by STEP, Galloway and their affiliates in connection with the proxy contest for the election of directors to the Company's Board of Directors (the "Board") in 2010. St. George paid $225,409 in cash on June 27, 2011. The payment of $225,409 by the Company was payable from the proceeds of the sale of artwork owned by the Company. Additionally, the Company's payment obligation was due and payable upon the occurrence of the earlier of (i) the Company's receipt of at least $225,409 from an escrow held in the State of Tennessee, (ii) a refinancing of the Company's credit facility with Fifth Third Bank dated March 31, 2009, as amended June 30, 2011, or (iii) June 12, 2012.  The Company was unable to make the payment as required.  As of June 30, 2012, the obligation is recorded in accrued expenses on the Consolidated Balance Sheet.

In connection with the Reimbursement Agreement, Galloway resigned from the Board, on June 23, 2011.

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In addition, in connection with the Reimbursement Agreement, on June 24, 2011, St. George purchased 774,151 shares of the Common Stock owned by STEP, Galloway and their affiliates at a price of $0.20112 per share for a total purchase price of $155,697 (the "Stock Purchase"). Finally, pursuant to the Waiver Agreement dated June 23, 2011, between St. George, the Company, STEP, Galloway and others, STEP, Galloway and their affiliates agreed to sell in the open market within 30 days all of their shares of the Company's common stock that were not purchased by St. George. After this 30-day period, STEP, its principals and affiliates, including Galloway, will own no Common Stock and are prohibited from owning Common Stock for 20 years in the future.

Standstill Agreement

On March 19, 2010, the Company and St. George Investments, LLC ("St. George"), which on that date was a 23.13% owner of the Company, entered into a Voting and Standstill Agreement (the "Standstill Agreement"). See Note 16 for additional discussion of the Standstill Agreement.

Management Services Agreement

The Company paid $160,000 and $74,000 for fiscal 2012 and 2011, respectively, to Wacker Services, Inc. an affiliate Company, for consulting services and reimbursements for rent, insurance and utilities of shared office space.

NOTE 9 - BENEFITS, OPTION PLANS,  WARRANTS AND SHARE BASED COMPENSATION

The Company offers a 401(k) retirement and savings plan that covers substantially all of its Pulse employees. Under this plan, the Company matches 100% of an employee's contribution up to 3% of the employee's salary, then 50% of an employee's contribution on the next 2% of the employee's salary. The Company offered a 401(k) retirement and savings plan that covered substantially all of its Michigan and Tennessee employees, which terminated on November 15, 2011.  Expenses related to the 401(k) plans were $64,255, and $65,606 for the fiscal years ended June 30, 2012 and 2011, respectively.

The Company's Board of Directors received stock awards as part of their compensation for 2011.  There was no stock awards for 2012.   Information regarding the stock awards for fiscal 2011 is as follows:

Year		Shares				Amount
2011			34,952			$	36,000

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On August 6, 1998, the Company's Board of Directors adopted the 1998 Stock Option Plan ("1998 Plan"). The 1998 Plan was approved by the Company's shareholders on November 12, 1998. The Company reserved an aggregate of 500,000 common shares for issuance upon exercise of options under the 1998 Plan. On November 14, 2003 the Company's shareholders approved an increase in the number of common shares reserved for issuance pursuant to the exercise of options granted under the amended plan from 500,000 to 1,000,000 shares, and extended the termination date of the plan by five years to August 6, 2013. On November 5, 2004 the Company's shareholders approved an increase in the number of common shares reserved for issuance pursuant to the exercise of options granted under the amended plan from 1,000,000 to 1,500,000 shares.

Information regarding the stock options outstanding at June 30, 2012 and 2011, are as follows (shares in thousands):

Option s for 255,792 comm on shares were available for grant under the amended and restated 1998 Plan at the end of fisca l 2012.

In accordance with GAAP, the Company records compensation cost relating to share-based payment transactions in the financial statements. That cost is measured based on the fair value of the equity or liability instruments issued. The Company recorded stock option expense of $23,000 and $49,000 for fiscal 2012 and 2011, respectively.

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The options have terms of 10.0 years and typically vest quarterly over 3 or 4 years.  As of June 30, 2012, there is no future compensation expense to be related to these options.  There were no grants in fiscal 2012 and 2011, and there were no exercises in fiscal 2012 and 2011.

The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following assumptions used for grants in 2009, depending on the date of issuance:

Dividend yield	0%
Expected volatility	29%	to	66%
Risk free interest rate	3.44%	to	4.81%
Expected life	5.0 years	to	10.0 years

There were warrants outstanding to purchase 99,999 shares of the Company's stock at an exercise price of $8.50 per share and 50,000 shares with an exercise price of $9.01.  All of these warrants expired December 2011.

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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, which currently relates to a revolving loan not to exceed $0.5 million, of which no amounts were outstanding as of June 30, 2012 or June 30, 2011, and a $2.9 million term loan, with a remaining balance of $2.4 million as of June 30, 2012 and $3.75 million as of June 30, 2011. The revolving loan matures July 31, 2012 and bears interest at prime plus 3.5% or, at the option of Pulse Systems, Adjusted LIBOR (the greater of LIBOR or 1%) plus 5.5%. The term loan interest is payable monthly and as of June 30, 2012 is calculated based on prime plus 4.5%, with a final balloon payment of $2,370,000 on June 30, 2012.  The term loan effective interest rate is 10.5% as of June 30, 2012. The revolving loan and term loan are secured by a lien on all of the assets of Pulse Systems. Effective August 14, 2012, the Loan Agreement was amended as described in Note 19.

The Loan Agreement contains financial covenants. At June 30, 2012, the Company was not in compliance with certain financial covenants. Defaults under the Loan and Security Agreement, as amended, arose from Pulse System's failure to satisfy (a) the Fixed Charge Coverage Ratio (as defined therein) as of June 30, 2012.  Management has not been able to obtain a waiver of these covenant defaults from the lender.

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 generally restricts the payments of dividends or distributions on, and redemptions of, UAHC common stock, except as permitted under the Standstill Agreement, as amended.  See Note 16 for additional discussion of the Standstill Agreement.

The Company had 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.  As of June 30, 2012, there was no outstanding amount due under the Promissory Note.  The recorded amount of the promissory note at June 30, 2011 was $0.5 million, calculated using a discount rate of 12%.  The promissory note was non-interest bearing and is secured by a pledge of the common units of Pulse Systems acquired by UAHC.  The Sellers' security interest in the common units of Pulse Systems is subordinate to that of Fifth Third.

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On May 18, 2011, the Company issued a Convertible Promissory Note (the "Convertible Note") to St. George, a related party, in exchange for a loan in the amount of $400,000 made by St. George to the Company. The Company used the proceeds of the loan for working capital purposes.  On June 27, 2011, St. George exercised its right to convert into newly issued common stock, the entire $400,000 principal amount, plus $4,383 in accrued interest.  Based on the conversion price of $0.20112 per share set forth in the Convertible Note, the Company issued 2,010,658 new shares of Common Stock to St. George.  The conversion price of $0.20112 per share of Common Stock, represented 80% of the volume-weighted average price for the Common Stock on the 20 trading days immediately preceding May 13, 2011, when the Company's Board of Directors approved the Convertible Note and the loan from St. George to the Company. The beneficial conversion feature related to this convertible debt was $55,250 and was recorded as a discount on the convertible debt, with the offset recorded to additional paid-in-capital.  The entire discount was amortized into interest expense during fiscal 2011 as the debt was converted.

On September 28, 2011, the Company issued a Promissory Note (the "Promissory Note") to St. George, an affiliate of John M. Fife, who is the Company's Chairman, President and Chief Executive Officer, in exchange for a loan in the amount of $400,000 made by St. George to the Company. The Company used the proceeds of the loan for working capital purposes. Interest on the Promissory Note accrued at an annual rate of 10%. Principal and interest payments were due at the maturity date of December 31, 2014, or if the Company were to sell substantially all of its assets before then. However, the Company can pay, without penalty, the Convertible Note before maturity. In the case of default, St. George can convert all or part of the principal amount and the unpaid interest into newly issued shares of the Company's common stock. The conversion price is $0.0447 per share.

On December 9, 2011, the Company issued a Promissory Note (the "Second Promissory Note") in favor of St. George, in exchange for a loan in the amount of $300,000 made by St. George to the Company. The Company will use the proceeds of the loan for working capital purposes. Interest on the Second Promissory Note accrues at an annual rate of 10%. No payments of principal or interest on the Second Promissory Note are due until the Second Promissory Note matures, which is on the earlier of (a) December 31, 2014, or (b) the date of (i) the sale of all or substantially all of the assets of the Company or Pulse Systems, (ii) the merger of the Company or Pulse Systems, LLC, or (iii) the sale of all or substantially all of the equity of the Company or Pulse Systems, LLC. Only upon an event of default (as defined in the Second Promissory Note), the holder of the Second Promissory Note may elect to convert all or any part of the outstanding principal of, and the accrued but unpaid interest on, the Second Promissory Note into newly issued shares of common stock of the Company at a conversion price of $0.0226 per share.

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On February 9, 2012, the Company issued a Promissory Note (the "Third Promissory Note") in favor of St. George, in exchange for a loan in the amount of $350,000 made by St. George to the Company. The Company will use the proceeds of the loan for working capital purposes. Interest on the Third Promissory Note accrues at an annual rate of 10%. No payments of principal or interest on the Third Promissory Note are due until the Third Promissory Note matures, which is on the earlier of (a) December 31, 2014, or (b) the date of (i) the sale of all or substantially all of the assets of the Company or Pulse Systems, (ii) the merger of the Company or Pulse Systems, LLC, or (iii) the sale of all or substantially all of the equity of the Company or Pulse Systems, LLC. Only upon an event of default (as defined in the Third Promissory Note), the holder of the Third Promissory Note may elect to convert all or any part of the outstanding principal of, and the accrued but unpaid interest on, the Third Promissory Note into newly issued shares of common stock of the Company at a conversion price of $0.01903 per share.

On May 16, 2012, the Company issued a Promissory Note (the "Fourth Promissory Note") in favor of St. George, in exchange for a loan in the amount of $75,000 made by St. George to the Company. The Company will use the proceeds of the loan for working capital purposes. Interest on the Fourth Promissory Note accrues at an annual rate of 10%. No payments of principal or interest on the Fourth Promissory Note are due until the Fourth Promissory Note matures, which is on the earlier of (a) December 31, 2014, or (b) the date of (i) the sale of all or substantially all of the assets of the Company or Pulse Systems, (ii) the merger of the Company or Pulse Systems, LLC, or (iii) the sale of all or substantially all of the equity of the Company or Pulse Systems, LLC. Only upon an event of default (as defined in the Fourth Promissory Note), the holder of the Fourth Promissory Note may elect to convert all or any part of the outstanding principal of, and the accrued but unpaid interest on, the Fourth Promissory Note into newly issued shares of common stock of the Company at a conversion price of $0.01793 per share.

The schedule of maturities of the long-term notes payable as of June 30, 2012 are as follows (in thousands):

Interest expense was approximately $515,000 and $875,000 for fiscal year 2012 and 2011, respectively.  Accrued interest as of June 30, 2012 and 2011 was $384 and $8,324, respectively.

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The Company leases equipment under various noncancelable capital leases which expire at various dates through July 2014.  Lease payments totaling $9,600 are payable monthly and include interest at approximately 8 to 9 percent.  The leases are collateralized by the underlying assets.  Minimum future lease payments under capital leases as of June 30, 2012 are as follows, not including interest (in thousands):

As of both June 30, 2012 and 2011, fixed assets with a cost basis of $416,816 related to these capital leases were recorded on the consolidated balance sheets, with accumulated depreciation of $212,000 and $146,000, respectively.

NOTE 12 – 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-TN's 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.

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During fiscal year 2011, 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 Company's facility. As of June 30, 2011, all amounts have been paid.

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 Company's operations and financial statements.

For all periods presented in the consolidated statements of operations, the Company's 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):

A summary of revenues and income (loss) from discontinued operations is a follows (in thousands):

NOTE 13 –  LEGAL SETTLEMENT

The Company was a defendant with others in a lawsuit that commenced in February 2005 in the Circuit Court for the 30th Judicial Circuit, in the County of Ingham, Michigan, Case No. 05127CK, entitled "Provider Creditors Committee on behalf of Michigan Health Maintenance Organizations Plans, Inc. v. United American Healthcare Corporation and others, et al." On September 22, 2009, the Company settled this litigation for $3.3 million and all claims were dismissed against the Company and the individuals.  The Company recovered $0.2 million through insurance. In the fourth quarter of fiscal 2009, the Company recorded a provision for this legal settlement of $3.1 million, which is net of the insurance reimbursement of $0.2 million in the fiscal year 2009 statement of operations.

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NOTE 14 – 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. Failure to make any of the redemption payments results in the increase of the redemption price for it preferred units by $0.83 million and a 14% per annum cumulative (but not compounded) return on the aggregate amounts of the unredeemed preferred units plus the $0.83 million commencing on the date of default. Pulse Systems Corporation agreed to the redemption of its preferred units over a two-year period, commencing with a cash payment made at closing of $1.75 million. On August 30, 2011, St. George Investments purchased the preferred stock held by Pulse Corporation in Pulse Systems, LLC. The obligations of Pulse Systems under the redemption agreement are subordinate to its obligations under the Loan Agreement and Pledge Agreement.

On January 1, 2012, Pulse Systems was in default of the Redemption Agreement. As a result, the $0.83 million reduction from the amount outstanding at June 18, 2010 was reinstated. In addition, 14% interest on the preferred amount began from the default date of January 1, 2012. The redeemable preferred units were recorded in the June 30, 2012 and 2011 consolidated balance sheets at a value of approximately $2.5 million and $1.6 million, respectively. The June 30, 2011 amount is net of the 12% discount. The $0.9 million impact of the default of the Redemption Agreement has been reflected in the consolidated statement of operations.

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(1)	Management Companies: United American Healthcare Corporation, United American of Tennessee, Inc.

(2)	Pulse Systems: Provider of Contract Manufacturing Services to the medical device industry.

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Standstill Agreement

On March 19, 2010, the Company and St. George, which on that date was a 23.13% beneficial owner of the Company, entered into a Voting and Standstill Agreement (the "Standstill Agreement"). St. George is an Illinois limited liability company that is controlled by Mr. John M. Fife, who is the Company's Chairman, CEO and President. On June 7, 2010, the Company and St. George entered into an Amendment to the Voting and Standstill Agreement (the "Amendment"), and then The Dove Foundation ("Dove") entered into a Joinder to the Voting and Standstill Agreement. On June 18, 2010, the Company, St. George and Dove entered into an Acknowledgement and Waiver of Certain Provisions in the Voting and Standstill Agreement, whereby St. George and Dove agreed that the Pulse Systems acquisition shall not be considered a "Triggering Event" under the Standstill Agreement.

Under the Standstill Agreement, St. George and Dove each have the right (the "Put") to require the Company to purchase some or all of its shares of the Company's common stock ("Shares") at an exercise price of $1.26 per share. The Put may be exercised between October 1, 2012 and March 30, 2013 ("Put Exercise Period"). As of June 30, 2012, the put obligation is recorded at a fair value of $5,694,218 in current liabilities in the accompanying consolidated financial statements. If St. George and Dove were to exercise the Put with respect to all of their Shares, assuming that at the time of exercise St. George and Dove own the same number of Shares that they owned at June 30, 2012, then the costs to the Company would be $3,860,319 and $2,020,595, respectively.

The Company had the right (the "Call") to purchase all of the Shares owned by St. George and Dove at an exercise price of $1.26 per Share, if the Call was exercised between July 1, 2011 and September 30, 2011. The Call expired on September 30, 2011.

Also under the Standstill Agreement, the Company agreed to maintain certain reserves of its unrestricted cash on its balance sheet, initially equal to 20% of the Company's pro forma estimate of its 2010 fiscal year end shareholders' equity and then equal to the Company's actual 2010 fiscal year-end shareholders' equity thereafter. The Company was unable to maintain such cash reserves in 2010 and entered into the Amendment, whereby St. George and Dove waived such cash reserve requirement, provided that the Company replaced such cash reserves with other collateral that is reasonably acceptable to St. George. To date, the Company has not replaced such cash reserves with other collateral. As a result, the Company has not replaced such cash reserves with other collateral. As a result, the Company is in default of the Standstill Agreement, which gave St. George and Dove the right to exercise the Put at any time. Pursuant to the Second Amendment to Voting and Standstill Agreement dated November 3, 2011, each   of St. George and Dove agreed to forbear from exercising its Put Option during the then-present Put Exercise Period in exchange for the Company's agreement to postpone the Put Commencement Date until October 1, 2012 (and either or both of St. George and Dove may exercise its Put Option during the Put Exercise Period commencing on such date), provided that the Put Commencement Date would accelerate, and   either or both of St. George and Dove may elect to exercise the Put Option upon the occurrence of any one of certain events, including: 1) the Company or Pulse defaults under any loan agreement or debt instrument, including without limitation Pulse's credit facility

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 with Fifth Third Bank, N.A. and any promissory note made by the Company in favor of St. George (including such promissory notes dated September 28, 2011, December 9, 2011, February 9, 2012, and at any time thereafter; 2) the Company ceases to be current in its periodic reporting, or 3) ceases to be subject to periodic reporting requirements, under Section 13 of the Securities Exchange Act of 1934, as amended.

On May 15, 2012, the Company entered into the Third Amendment to Voting and Standstill Agreement (the "Third Amendment"). Pursuant to the Third Amendment, St. George and Dove agreed to forbear from exercising their Put Option during the Put Exercise Period whose commencement was accelerated to December 31, 2012, as a result of defaults by the Company under certain loan covenants in its Loan and Security Agreement with Fifth Third Bank, as further described in Note 10 to these Financial Statements. The Third Amendment also reestablished October 1, 2012, as the Put Commencement Date under the Voting and Standstill Agreement and amended the Voting and Standstill Agreement such that any further acceleration of the Put Option will be at the discretion of St. George or Dove, upon the occurrence of certain specified events.

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.

 

NOTE 17 – RECENTLY ENACTED 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 Company's financial position or results of operations upon adoption.

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NOTE 18 – SETTLEMENT AGREEMENT

On March 27, 2011, the Company and William C. Brooks ("Brooks"), who is the former President and Chief Executive Officer of the Company, entered into a Settlement Agreement and Mutual Full General Release (the "Brooks Settlement Agreement").  In the Brooks Settlement Agreement, the Company agreed to pay Brooks $320,000 in (i) a lump sum of $60,000 on April 4, 2011, (ii) 10 monthly payments of $10,000 commencing June 1, 2011, and (iii) a payment of $160,000 on or before December 31, 2011, out of proceeds from the sale of artwork owned by the Company.   The Company elected to pay the balance in artwork, at an appraised value. As of June 30, 2012, there was $153,000 outstanding under this settlement agreement. This amount is included in accrued expenses in the Company's consolidated balance sheet.   See Note 19 for additional discussion of the Brooks Settlement Agreement.