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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 2003
------------------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from: to
-------------------------- ----------
Commission file number: 0-13265
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UCI MEDICAL AFFILIATES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 59-2225346
(State or other
jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
4416 Forest Drive, Columbia, SC 29206
(Address of principal executive offices)
(803) 782-4278
(Issuer's telephone number)
(Former name, address or fiscal year, if changed since last report)
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. ( X )Yes ( ) No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). ( ) Yes ( X ) No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court. ( X )Yes
( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
9,650,515 shares of $.05 common stock outstanding at July 25, 2003
UCI MEDICAL AFFILIATES, INC.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2003
and September 30, 2002 3
Condensed Consolidated Statements of Operations for the quarters and
the nine months ended June 30, 2003 and June 30, 2002 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended June 30, 2003 and June 30, 2002 5
Notes to Condensed Consolidated Financial Statements 6 - 8
Item 2 Management's Discussion and Analysis of Financial
Condition, Critical Accounting Policies and Results of Operations 9 -13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
Item 4 Controls and Procedures 15 -16
PART II OTHER INFORMATION
Items 1-6 17
SIGNATURES 18
UCI Medical Affiliates, Inc.
Condensed Consolidated Balance Sheets
June 30, 2003 September 30, 2002
(unaudited) (audited)
-------------------- ----------------------
Assets
Current assets
Cash and cash equivalents $ 327,101 $ 269,298
Accounts receivable, less allowance for doubtful accounts
of $1,887,271 and $1,661,047 7,090,333 6,349,629
Inventory 393,795 393,795
Prepaid expenses and other current assets 389,950 297,178
-------------------- ----------------------
Total current assets 8,201,179 7,309,900
Property and equipment, less accumulated depreciation of
$8,857,209 and $8,149,811 3,952,205 3,764,545
Excess of cost over fair value of assets acquired, less
accumulated amortization of $2,451,814 and $2,451,814 3,391,942 3,391,942
Other assets 47,618 50,483
-------------------- ----------------------
Total Assets $ 15,592,944 $ 14,516,870
==================== ======================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 971,856 $ 1,014,829
Accounts payable 1,000,268 762,646
Accrued salaries and payroll taxes 1,633,124 1,514,745
Current portion of payroll taxes 718,608 475,079
Other accrued liabilities 1,188,240 1,027,299
-------------------- ----------------------
Total current liabilities 5,512,096 4,794,598
Long-term liabilities
Accounts payable 2,136,476 2,083,167
Long-term portion of payroll taxes 3,682,900 4,385,060
Long-term debt, net of current portion 2,474,884 3,063,649
-------------------- ----------------------
Total long-term liabilities 8,294,260 9,531,876
-------------------- ----------------------
-------------------- ----------------------
Total Liabilities 13,806,356 14,326,474
-------------------- ----------------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $.01 per share:
Authorized shares - 10,000,000; none issued -- --
Common stock, par value $.05 per share:
Authorized shares - 10,000,000
Issued and outstanding- 9,650,515 and 9,650,515 shares 482,526 482,526
Paid-in capital 21,723,628 21,723,628
Accumulated deficit (20,419,566) (22,015,758)
-------------------- ----------------------
Total Stockholders' Equity 1,786,588 190,396
-------------------- ----------------------
Total Liabilities and Stockholders' Equity $ 15,592,944 $ 14,516,870
==================== ======================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
UCI Medical Affiliates, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
------------------------------------ ----------------------------------
2003 2002 2003 2002
----------------- --------------- --------------- ---------------
Revenues $11,048,786 $ 9,823,464 $32,358,935 $28,803,478
Operating costs 10,087,327 9,176,050 29,418,691 26,670,242
----------------- --------------- --------------- ---------------
Operating margin 961,459 647,414 2,940,244 2,133,236
General and administrative expenses 21,453 17,335 60,083 45,335
Depreciation and amortization 238,494 255,215 707,398 776,207
----------------- --------------- --------------- ---------------
Income from operations 701,512 374,864 2,172,763 1,311,694
Other expense
Interest expense, net of interest income (177,931) (225,124) (576,571) (620,359)
----------------- --------------- --------------- ---------------
----------------- --------------- --------------- ---------------
Net income $ 523,581 $ 149,740 $1,596,192 $ 691,335
=============== =============== ===============
=================
Basic and diluted earnings per share $ .05 $ .02 $ .17 $ .07
================= =============== =============== ===============
Basic and diluted weighted average common
shares outstanding 9,650,515 9,650,515 9,650,515 9,650,515
================= =============== =============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
UCI Medical Affiliates, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended June 30,
----------------------------------------
2003 2002
------------------ ------------------
Operating activities:
Net income $ 1,596,192 $ 691,335
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on accounts receivable 1,392,307 1,267,290
Depreciation and amortization 707,398 776,207
Changes in operating assets and liabilities:
Increase in accounts receivable (2,133,011) (1,360,097)
(Increase) decrease in prepaid expenses and other
current assets (92,772) 280,874
Increase in accounts payable and accrued expenses 111,620 149,724
------------------
------------------
Cash provided by operating activities 1,581,734 1,805,333
------------------ ------------------
Investing activities:
Purchases of property and equipment (895,058) (436,528)
Decrease (increase) in other assets 2,865 (31,223)
------------------
------------------
Cash used in investing activities (892,193) (467,751)
------------------ ------------------
Financing activities:
Payments on long-term debt (631,738) (1,274,196)
------------------ ------------------
Cash used in financing activities (631,738) (1,274,196)
------------------ ------------------
Increase in cash and cash equivalents 57,803 63,386
Cash and cash equivalents at beginning of period 269,298 99,429
------------------ ------------------
------------------
Cash and cash equivalents at end of period $ 327,101 $ 162,815
================== ==================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
UCI MEDICAL AFFILIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of those of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three-month and nine-month periods ended June 30, 2003
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2003. For further information, refer to the
audited consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 2002.
The consolidated financial statements include the accounts of UCI Medical
Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc.
("UCI-SC"), UCI Medical Affiliates of Georgia, Inc. ("UCI-GA"), Doctor's Care,
P.A., Doctor's Care of Georgia, P.C., and Doctor's Care of Tennessee, P.C. (the
three together as the "P.A." and together with UCI, UCI-SC and UCI-GA, the
"Company"). Because of the corporate practice of medicine laws in the states in
which the Company operates, the Company does not own medical practices but
instead enters into exclusive long-term management services agreements with the
P.A. which operate the medical practices. Consolidation of the financial
statements is required under Emerging Issues Task Force (EITF) 97-2 as a
consequence of the nominee shareholder arrangement that exists with respect to
each of the P.A.s. In each case, the nominee (and sole) shareholder of the P.A.
has entered into an agreement with UCI-SC or UCI-GA, as applicable, which
satisfies the requirements set forth in footnote 1 of EITF 97-2. Under the
agreement, UCI-SC or UCI-GA, as applicable, in its sole discretion, can effect a
change in the nominee shareholder at any time for a payment of $100 from the new
nominee shareholder to the old nominee shareholder, with no limits placed on the
identity of any new nominee shareholder and no adverse impact resulting to any
of UCI-SC, UCI-GA or the P.A. resulting from such change.
In addition to the nominee shareholder arrangements described above, each of
UCI-SC and UCI-GA have entered into Administrative Service Agreements with the
P.A.s. As a consequence of the nominee shareholder arrangements and the
Administrative Service Agreements, the Company has a long-term financial
interest in the affiliated practices of the P.A.s through the Administrative
Services Agreement, and the Company has exclusive authority over decision making
relating to all major on-going operations. The Company establishes annual
operating and capital budgets for the P.A. and compensation guidelines for the
licensed medical professionals. The Administrative Services Agreements have an
initial term of forty years. According to EITF 97-2, the application of
Financial Accounting Standards Board ("FASB") Statement No. 94 (Consolidation of
All Majority-Owned Subsidiaries), and FASB 141 (Business Combinations), the
Company must consolidate the results of the affiliated practices with those of
the Company. All significant intercompany accounts and transactions are
eliminated in consolidation, including management fees.
The method of computing the management fees is based on billings of the
affiliated practices less the amounts necessary to pay professional compensation
and other professional expenses. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services plus
a profit. These interests are unilaterally salable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporation.
The P.A. enters into employment agreements with physicians for terms ranging
from one to three years. All employment agreements have clauses that allow for
early termination of the agreement if certain events occur such as the loss of a
medical license.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and revenues and expenses
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates and assumptions. Significant estimates are discussed
in these footnotes, as applicable.
The inventory of medical supplies and drugs is carried at the lower of average
cost (first in, first out) or market. The volume of supplies carried at a center
varies very little from month to month and management, therefore, does only an
annual physical inventory count and does not maintain a perpetual inventory
system.
The Company operates as one segment.
NOTE 2. BUSINESS COMBINATIONS AND INTANGIBLES
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations consummated after
June 30, 2001 be accounted for under the purchase method of accounting. SFAS No.
142 requires that goodwill and intangible assets with indefinite lives will no
longer be amortized, but are reviewed at least annually for impairment. Pursuant
to SFAS No. 142, management tested goodwill for impairment in the fourth quarter
of 2002, and determined there had not been any impairment. Management is not
aware of any items which would indicate that goodwill has been impaired since
its analysis of impairment.
NOTE 3. EARNINGS PER SHARE
The computation of basic earnings per share and diluted earnings per share is in
conformity with the provisions of Statement of Financial Accounting Standards
No. 128.
NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, the Company adopted Financial Accounting Standards
Board No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143").
SFAS No. 143 provides guidance on the recognition and measurement of an asset
retirement obligation and its associated retirement cost. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. The adoption of SFAS No. 143 did not materially
impact the Company's consolidated financial statements.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities and Interpretation of ARB
No. 51" ("Fin 46"). Many variable interest entities have been commonly referred
to as special-purpose entities or off-balance sheet structures, but this
interpretation applies to a larger population of entities. In general, a
variable interest entity ("VIE") is any legal structure used for business
purposes that either: (1) does not have equity investors with voting rights, or
(2) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. Under Fin 46, the VIE is required to be
consolidated by the Company if it is subject to a majority of the risk of loss
from the VIE's activities or entitled to receive a majority of the entity's
residual returns. The consolidation requirements of FIN 46 apply to VIEs created
after January 31, 2003 and apply to existing VIEs in the first year or interim
period beginning after June 15, 2003. The Company has adopted FIN 46, and it did
not have a material impact of the Company's consolidated financial statements.
NOTE 5. CHAPTER 11 BANKRUPTCY FILING
On November 2, 2001, the Company filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the District of South Carolina (the
"Bankruptcy Court"). As debtors-in-possession, the Company remained in
possession of its properties and assets, and its management continued to operate
its business. As debtors-in-possession, the Company was authorized to continue
to operate its businesses, but it was not allowed to engage in transactions
outside the ordinary course of business without the approval, after notice and
an opportunity for a hearing, of the Bankruptcy Court. Pursuant to the automatic
stay provisions of the Bankruptcy Code, all actions to collect pre-petition
indebtedness from the Company, as well as most other pending litigation against
the Company, were stayed. In addition, as debtors-in-possession, the Company had
the right, subject to the approval of the Bankruptcy Court and certain other
conditions, to assume or reject any pre-petition executory contracts or
unexpired leases.
The Bankruptcy Court approved payment of certain pre-petition liabilities, such
as employee wages and benefits and settlement of certain trade payable claims.
In addition, the Bankruptcy Court allowed for the retention of legal and
financial professionals to advise in the bankruptcy proceedings.
The Bankruptcy Court confirmed each of the Company's Plans of Reorganization, as
amended, by August 8, 2002, and the Company has, therefore, emerged from the
Chapter 11 protection of the Court.
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this Report on Form 10-Q that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. We caution
readers of this Form 10-Q that such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from those
expressed or implied by such forward-looking statements. Although our management
believes that their expectations of future performance are based on reasonable
assumptions within the bounds of their knowledge of their business and
operations, we have no assurance that actual results will not differ materially
from their expectations. Factors that could cause actual results to differ from
expectations include, among other things, (1) the difficulty in controlling our
costs of providing healthcare and administering our network of centers; (2) the
possible negative effects from changes in reimbursement and capitation payment
levels and payment practices by insurance companies, healthcare plans,
government payors and other payment sources; (3) the difficulty of attracting
primary care physicians; (4) the increasing competition for patients among
healthcare providers; (5) possible government regulations negatively impacting
our existing organizational structure; (6) the possible negative effects of
prospective healthcare reform; (7) the challenges and uncertainties in the
implementation of our expansion and development strategy; (8) the dependence on
key personnel; (9) adverse conditions in the stock market, the public debt
market, and other capital markets (including changes in interest rate
conditions); (10) the strength of the United States economy in general and the
strength of the local economies in which we conduct operations may be different
than expected resulting in, among other things, a reduced demand for practice
management services; (11) the demand for our products and services; (12)
technological changes; (13) the ability to increase market share; (14) the
adequacy of expense projections and estimates of impairment loss; (15) the
impact of change in accounting policies by the Securities and Exchange
Commission; (16) unanticipated regulatory or judicial proceedings; (17) the
impact on our business, as well as on the risks set forth above, of various
domestic or international military or terrorist activities or conflicts; (18)
other factors described in this report and in our other reports filed with the
Securities and Exchange Commission; and (19) our success at managing the risks
involved in the foregoing.
PART I
FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CRITICAL
ACCOUNTING POLICIES AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which we believe is
relevant to an assessment and understanding of our consolidated results of
operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
Critical Accounting Policies
We have adopted accounting policies, which we believe will result in an accurate
presentation of the financial statements. We consider critical accounting
policies to be those that require more significant judgments and estimates in
the preparation of our financial statements and include the following: (1)
revenue recognition; (2) allowance for doubtful accounts; (3) consideration of
impairment of intangible assets; and (4) valuation reserve on net deferred tax
assets.
Revenue recognition -
We record revenues at the estimated net amount that we expect to receive from
patients, employers, third party payors, and others at the time we perform the
services. We record contractual allowances when we prepare the related bills to
our customers. We bill some third parties at discounted and negotiated amounts.
Because we bill at the discounted amounts, we do not need to estimate third
party settlements.
Allowance for doubtful accounts -
We maintain our allowance for doubtful accounts for estimated losses, which may
result from the inability of our customers to make required payments. Allowances
are based on the likelihood of recoverability of accounts receivable considering
such factors as past experience and taking into account current collection
trends that are expected to continue. Factors taken into consideration in
estimating the reserves are amounts past due, or are in dispute, or a client
that we believe might be having financial difficulties. If economic, industry,
or specific customer business trends worsen beyond earlier estimates, we
increase the allowance for doubtful accounts by recording additional expense.
Consideration of impairment of intangible assets -
We evaluate the recovery of the carrying amount of excess of cost over fair
value of assets acquired by determining if a permanent impairment has occurred.
This evaluation is done annually or more frequently if indicators of permanent
impairment arise. Indicators of a permanent impairment include, among other
things, significant adverse change in legal factors or the business climate, an
adverse action by a regulator, unanticipated competition, loss of key personnel
or allocation of goodwill to a portion of business that is to be sold or
otherwise disposed. We perform our impairment test on September 30th of each
year. In addition to the annual impairment test, we are required to perform an
impairment test any time an indicator occurs, such as those noted above. At such
time as impairment is determined, the intangible assets are written off during
that period. Although considerable care is taken to ensure that impairment
losses are recorded as soon as indicators of impairment are noted, material
differences could occur if different, but nonetheless reasonably plausible,
indicators existed.
Valuation reserve on net deferred tax assets -
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. As of June 30, 2003 and September
30, 2002, we recorded a valuation allowance that reduced our deferred tax assets
to equal our deferred tax liability.
Our consolidated financial statements include the accounts of UCI, UCI-SC,
UCI-GA and the P.A. Such consolidation is required under Emerging Issues Task
Force (EITF) 97-2 as a consequence of the nominee shareholder arrangement that
exists with respect to each of the P.A.s. In each case, the nominee (and sole)
shareholder of the P.A. has entered into an agreement with UCI-SC or UCI-GA, as
applicable, which satisfies the requirements set forth in footnote 1 of EITF
97-2. Under the agreement, UCI-SC or UCI-GA, as applicable, in its sole
discretion, can effect a change in the nominee shareholder at any time for a
payment of $100 from the new nominee shareholder to the old nominee shareholder,
with no limits placed on the identity of any new nominee shareholder and no
adverse impact resulting to any of UCI-SC, UCI-GA or the P.A. resulting from
such change.
In addition to the nominee shareholder arrangements described above, each of
UCI-SC and UCI-GA has entered into Administrative Service Agreements with each
of the P.A.s. As a consequence of the nominee shareholder arrangements and the
Administrative Service Agreements, we have a long-term financial interest in the
affiliated practices of the P.A.s. According to EITF 97-2, the application of
FASB Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and
FASB No. 16 (Business Combinations), we must consolidate the results of the
affiliated practices with those of UCI.
The P.A. enters into employment agreements with physicians for terms ranging
from one to three years. All employment agreements have clauses that allow for
early termination of the agreement if certain events occur such as the loss of a
medical license. Over 79% of the physicians employed by the P.A. are paid on an
hourly basis for time scheduled and worked at the medical centers. The other
physicians are salaried. Approximately 25 of the physicians have incentive
compensation arrangements; however, no amounts were accrued or paid that were
significant during our three prior fiscal years. Any incentive compensation is
based upon a percentage of non-ancillary collectible charges for services
performed by a provider. Percentages range from 3% to 17% and vary by individual
employment contract. As of June 30, 2003 and 2002, the P.A. employed 115 and 111
medical providers, respectively.
The net assets of the P.A. are not material for any period presented, and
intercompany accounts and transactions have been eliminated.
We do not allocate all indirect costs incurred at the corporate offices to the
40 freestanding medical centers on a center-by-center basis. Therefore, all
discussions below are intended to be in the aggregate for us as a whole.
Chapter 11 Bankruptcy Filing
On November 2, 2001, we filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the District of South Carolina (the
"Bankruptcy Court"). As debtors-in-possession, we remained in possession of our
properties and assets, and our management continued to operate our business.
The Bankruptcy Court approved payment of certain pre-petition liabilities, such
as employee wages and benefits, and settlement of certain trade payable claims.
In addition, the Bankruptcy Court allowed for the retention of legal and
financial professionals to advise us in the bankruptcy proceedings.
The Bankruptcy Court confirmed each of our Plans of Reorganization, as amended,
by August 8, 2002 and we have, therefore, emerged from the Chapter 11 protection
of the Bankruptcy Court.
Because holders of our existing voting shares immediately before confirmation
received more than 50% of the voting shares of the reorganized equity, we did
not qualify for fresh start accounting under SOP 90-7.
Results of Operations
UCI provides nonmedical management and administrative services for our centers,
39 of which are located throughout South Carolina and one is located in
Knoxville, Tennessee (29 operating as Doctor's Care in South Carolina, one as
Doctor's Care in Knoxville, Tennessee, and ten as Progressive Physical Therapy
Services in South Carolina).
Revenues of $11,049,000 for the quarter ended June 30, 2003 reflect an increase
of $1,226,000 or 12% from those of the quarter ended June 30, 2002.
This increase in revenue is believed to be the result of an increase in the
volume of ancillary services (such as physical therapy and laboratory tests)
being offered at our facilities. An intense advertising campaign has also been
launched in the upstate and midlands regions of South Carolina that has
increased patient volume. Patient encounters increased to approximately 118,000
in the third quarter of fiscal year 2003 from 107,000 in the third quarter of
fiscal year 2002. For the nine months ended June 30, 2003, patient encounters
were approximately 350,000 as compared to 330,000 for the nine months ended June
30, 2002.
Pursuant to SFAS No. 142, we tested goodwill for impairment in the fourth
quarter of 2002, and we determined there has not been any impairment.
During the past three fiscal years, we have continued our services provided to
members of HMOs. In these arrangements, we, through the P.A., act as the
designated primary caregiver for members of HMOs who have selected one of our
centers or providers as their primary care provider. In fiscal year 1994, we
began participating in an HMO operated by Companion HealthCare Corporation
("CHC"), a wholly owned subsidiary of Blue Cross Blue Shield of South Carolina
("BCBS"). BCBS, through CHC, is a primary stockholder of UCI. Including our
arrangement with CHC, we now participate in four HMOs and are the primary care
"gatekeeper" for more than 9,000 lives at June 30, 2003. As of June 30, 2003,
all of these HMOs use a discounted fee-for-service basis for payment. HMOs do
not, at this time, have a significant penetration into the South Carolina
market. We are not certain if the market share of HMOs will grow in the areas in
which we operate clinics.
Sustained revenues in fiscal years 2003 and 2002 also reflect our continued
focus on occupational medicine and industrial health services (these revenues
are referred to as "employer paid" and "workers compensation" on the table
below). We developed focused marketing materials, including quarterly
newsletters for employers, to spotlight our services for industry. We derived
approximately 17% and 22% of our total revenues from these occupational medicine
services during the third quarter of fiscal years 2003 and 2002, respectively.
The following table breaks out our revenue and patient visits by revenue source
for the third quarter of fiscal years 2003 and 2002.
Percent of Percent of
Payor Patient Visits Revenue
------------------------------------------------ ------------------------ -----------------------
2003 2002 2003 2002
------------ ----------- ------------ ----------
15 17 11 18
Patient Pay
11 12 5 6
Employer Paid
7 10 7 10
HMO
10 12 12 16
Workers Compensation
11 9 7 6
Medicare/Medicaid
42 36 52 39
Managed Care Insurance
4 4 6 5
Other (Commercial Indemnity, Champus, etc.)
We earned an operating margin of $961,000 during the third quarter of fiscal
2003 as compared to $647,000 for the third quarter of fiscal 2002.
Our management believes that the increase in margin was the result of an
increase in ancillary services being offered to our patients. However, the
personnel cost increases that continue will place continuing pressure on our
margin and are in part attributable to increased cost-cutting pressures being
applied by managed care insurance payors that cover many of our patients. As
managed care plans attempt to cut costs, they typically increase the
administrative burden of providers by requiring referral approvals and by
requesting hard copies of medical records before they will pay claims. The
number of patients at our centers that are covered by a managed care plan versus
a traditional indemnity plan continues to grow. Our management expects this
trend to continue.
Depreciation and amortization expense decreased slightly to $238,000 in the
third quarter of fiscal 2003, down from $255,000 in the third quarter of fiscal
2002. This decrease is the result of normal asset write-off. Interest expense
decreased from $225,000 in the third quarter of fiscal 2002 to $178,000 in the
third quarter of fiscal 2003. The decrease in interest expense is primarily a
result of a reduction in long-term debt due to regularly scheduled principal
payments.
Financial Condition at June 30, 2003
Cash and cash equivalents increased slightly by $58,000 during the nine months
ended June 30, 2003.
Accounts receivable increased by $741,000 during the nine months ended June 30,
2003 and is a result of an overall increase in revenues during the quarter.
Long-term debt decreased from $4,078,000 at September 30, 2002 to $3,447,000 at
June 30, 2003. Regular principal pay-downs of approximately $632,000 were made
during the nine months ended June 30, 2003. Our management believes that it will
be able to fund debt service requirements out of cash generated through
operations and does not anticipate the necessity of additional debt financing.
Liquidity and Capital Resources
We require capital principally to fund growth (acquire new centers), for working
capital needs, and for the retirement of indebtedness. We fund our capital
requirements and working capital needs through a combination of external
financing and credit extended by suppliers.
As of June 30, 2003, we have no material commitments for capital expenditures or
for acquisitions or start-ups.
Operating activities produced $1,582,000 of cash during the nine months ended
June 30, 2003, compared with $1,805,000 during the same period in the prior
fiscal year. This decrease is mainly due to pre-payment of certain liabilities,
as noted in the increase in prepaid assets and an increase in accounts
receivable.
Investing activities used $468,000 in cash during the nine months ended June 30,
2002 as compared to $892,000 during the nine months ended June 30, 2003. This
increase is due to purchases of equipment and renovations for our operating
sites.
Financing activities utilized $632,000 in cash during the nine month period
ended June 30, 2003 primarily for debt reduction.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates primarily as a result of our
borrowing activities, which includes credit facilities with financial
institutions used to maintain liquidity and fund our business operations, as
well as notes payable to various third parties in connection with certain
acquisitions of property and equipment. The nature and amount of our debt may
vary as a result of future business requirements, market conditions and other
factors. The definitive extent of our interest rate risk is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements. We do not currently use derivative instruments to adjust
our interest rate risk profile.
Approximately $1,308,000 of our debt at June 30, 2003 was subject to fixed
interest rates and principal payments. Approximately $2,139,000 of our debt at
June 30, 2003 was subject to variable interest rates. Based on the outstanding
amounts of variable rate debt at June 30, 2003, our interest expense on an
annualized basis would increase approximately $21,000 for each increase of one
percent in the prime rate.
We do not utilize financial instruments for trading or other speculative
purposes, nor do we utilize leveraged financial instruments.
ITEM 4
CONTROLS AND PROCEDURES
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" (Disclosure Controls), and its "internal
controls and procedures for financial reporting" (Internal Controls). This
evaluation (the "Controls Evaluation") was done under the supervision and with
the participation of management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"). Rules adopted by the SEC require that in
this section of the Quarterly Report we present the conclusions of the CEO and
the CFO about the effectiveness of our Disclosure Controls and Internal Controls
based on and as of the date of the Controls Evaluation.
CEO and CFO Certifications. Appearing immediately following the Signatures
section of this Quarterly Report there is a form of Certification. The form of
Certification is required in accord with Section 302 of the Sarbanes-Oxley Act
of 2002 (the "Section 302 Certification"). This section of the Quarterly Report
that you are currently reading is the information concerning the Controls
Evaluation referred to in the Section 302 Certifications, and this information
should be read in conjunction with the Section 302 Certifications for a more
complete understanding of the topics presented.
Disclosure Controls and Internal Controls. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934 (the
"Exchange Act"), such as this Quarterly Report, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. Disclosure Controls are also designed with the objective of ensuring that
such information is accumulated and communicated to our management, including
the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure. Internal Controls are procedures that are designed with the
objective of providing reasonable assurance that (1) our transactions are
properly authorized; (2) our assets are safeguarded against unauthorized or
improper use; and (3) our transactions are properly recorded and reported, all
to permit the preparation of our financial statements in conformity with
generally accepted accounting principles.
Limitations on the Effectiveness of Controls. The company's management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation. The CEO/CFO evaluation of our Disclosure
Controls and our Internal Controls included a review of the controls' objectives
and design, the controls' implementation by the company and the effect of the
controls on the information generated for use in this Quarterly Report. In the
course of the Controls Evaluation, we sought to identify data errors, controls
problems or acts of fraud and to confirm that appropriate corrective action,
including process improvements, were being undertaken. This type of evaluation
will be done on at least a quarterly basis so that the conclusions concerning
controls effectiveness can be reported in our Quarterly Reports on Form 10-Q.
Our Internal Controls are also evaluated on an ongoing basis by other personnel
in our company and by our independent auditors in connection with their audit
and review activities. The overall goals of these various evaluation activities
are to monitor our Disclosure Controls and our Internal Controls and to make
modifications as necessary; our intent in this regard is that the Disclosure
Controls and the Internal Controls will be maintained as dynamic systems that
change (including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in the company's
Internal Controls, or whether the company had identified any acts of fraud
involving personnel who have a significant role in the company's Internal
Controls. This information was important both for the Controls Evaluation
generally and because items 5 and 6 in the Section 302 Certifications of the CEO
and CFO require that the CEO and CFO disclose that information to our Board's
Audit Committee and to our independent auditors and to report on related matters
in this section of the Quarterly Report. In the professional auditing
literature, "significant deficiencies" are referred to as "reportable
conditions"; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize and report financial data in
the financial statements. A "material weakness" is defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that misstatements
caused by error or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely period by
employees in the normal course of performing their assigned functions. We also
sought to deal with other controls matters in the Controls Evaluation, and in
each case if a problem was identified, we considered what revision, improvement
and/or correction to make in accord with our on-going procedures.
In accord with SEC requirements, the CEO and CFO note that, since the date of
the Controls Evaluation to the date of this Quarterly Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above, our Disclosure Controls are
effective to ensure that material information relating to the company is made
known to management, including the CEO and CFO, particularly during the period
when our periodic reports are being prepared, and that our Internal Controls are
effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with generally accepted accounting principles.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
We are not a party to any pending litigation other than
routine litigation incidental to the business or that is
immaterial in amount of damages sought.
Item 2 Changes in Securities This item is not applicable.
Item 3 Defaults upon Senior Securities This item is not applicable.
Item 4 Submission of Matters to a Vote of Security Holders This
item is not applicable.
Item 5 Other Information
On July 25, 2003, we issued a press release announcing
financial results for the quarter ended June 30, 2003. The
press release is attached as Exhibit 99.3 to this Form 10-Q.
The information under this Item 5 of this Form 10-Q and the
related Exhibit 99.3 attached hereto shall not be deemed
"filed" for purposes of Section 18 of the Securities Act of
1934, nor shall it be deemed incorporated by reference in any
filing under the Securities Act of 1933, except as shall be
expressly set forth by specific reference in such filing.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits.
--------
See Exhibit Index at page 21.
(b) Reports on Form 8-K. None.
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 hereunto duly authorized.
UCI Medical Affiliates, Inc.
(Registrant)
/s/ D. Michael Stout, M.D. /s/ Jerry F. Wells, Jr., CPA
- ------------------------------------ -------------------------------
D. Michael Stout, M.D. Jerry F. Wells, Jr., CPA
President and Chief Executive Officer Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
Date: July 25, 2003
CERTIFICATION
I, D. Michael Stout, M.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of UCI Medical
Affiliates, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 45 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: July 25, 2003 /s/ D. Michael Stout, M.D.
-----------------------------------
D. Michael Stout, M.D.
President & Chief Executive Officer
CERTIFICATION
I, Jerry F. Wells, Jr., CPA, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UCI Medical
Affiliates, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 45 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: July 25, 2003 /s/ Jerry F. Wells, Jr., CPA
--------------------------------
Jerry F. Wells, Jr., CPA
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
PAGE NUMBER OR INCORPORATION BY
EXHIBIT NUMBER REFERENCE TO
DESCRIPTION
- ----------------- ------------------------------------------------------- ------------------------------------
22
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
23
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.3 Press Release dated July 25, 2003 24
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of UCI Medical Affiliates, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, D.
Michael Stout, M.D., President and Chief Executive Officer of the Company,
certify to the best of my knowledge, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and 2. The information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
July 25, 2003 /s/ D. Michael Stout, M.D.
--------------------------
D. Michael Stout, M.D.
President and Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of UCI Medical Affiliates, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Jerry F. Wells, Jr., CPA, Executive Vice President, Chief Financial Officer and
Principal Accounting Officer of the Company, certify to the best of my
knowledge, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002 that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and 2. The information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
July 25, 2003 /s/ Jerry F. Wells, Jr., CPA
----------------------------
Jerry F. Wells, Jr., CPA
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
EXHIBIT 99.3
PRESS RELEASE
UCI MEDICAL AFFILIATES, INC.
COMPANY REPORTS THIRD QUARTER FISCAL YEAR 2003 RESULTS
Columbia, SC - July 25, 2003 - UCI Medical Affiliates, Inc. (OTC Bulletin Board:
UCIA) announced today that revenue for the third quarter of the fiscal year
ending September 30, 2003 increased to $11,049,000 from $9,823,000 for the third
quarter of fiscal year 2002.
Revenue for the nine months ended June 30, 2003 was $32,359,000 or 11% greater
than the $28,803,000 earned for the first nine months of fiscal year ended
September 30, 2002. Patient encounters increased to 350,000 for the nine months
ended June 30, 2003 from 330,000 for the nine months ended June 30, 2002.
The Company reported net income of $524,000 or $.05 per share for the third
quarter of fiscal year 2003 as compared to $150,000 or $.02 per share for the
third quarter of fiscal year 2002. For the nine months ended June 30, 2003, net
income was $1,596,000 or $.017 per share while net income for the nine months
ended June 30, 2002 was $691,000 or $.07 per share.
D. Michael Stout, M.D., President and Chief Executive Officer said, "While the
company has made money for five straight quarters, we will continue to focus on
a conservative growth strategy and cutting expenses at corporate headquarters. "
The Company's June 30, 2003 balance sheet reflects total assets of $15,593,000
as compared to $14,517,000 at September 30, 2002 while stockholders' equity at
June 30, 2003 was $1,787,000 as compared to $190,000 at September 30, 2002.
"We're extremely proud of the progress we've made in increasing profitability,
cutting corporate expenses, and simultaneously increasing customer service,"
said Jerry F. Wells, Jr., CPA, Executive Vice President and Chief Financial
Officer.
UCI Medical Affiliates, Inc. provides non-medical management and administrative
services for freestanding medical centers, which operate as Doctors Care and
Progressive Physical Therapy Services. Doctors Care provides family care, urgent
care, and occupational healthcare in 29 centers across South Carolina.
Certain of the statements contained in this Press Release that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. We caution
readers of this Press Release that such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from those
expressed or implied by such forward-looking statements. Although our management
believes that their expectations of future performance are based on reasonable
assumptions within the bounds of their knowledge of their business and
operations, we have no assurance that actual results will not differ materially
from their expectations. Factors that could cause actual results to differ from
expectations include, among other things, (1) the difficulty in controlling our
costs of providing healthcare and administering our network of centers; (2) the
possible negative effects from changes in reimbursement and capitation payment
levels and payment practices by insurance companies, healthcare plans,
government payors and other payment sources; (3) the difficulty of attracting
primary care physicians; (4) the increasing competition for patients among
healthcare providers; (5) possible government regulations negatively impacting
our existing organizational structure; (6) the possible negative effects of
prospective healthcare reform; (7) the challenges and uncertainties in the
implementation of our expansion and development strategy; (8) the dependence on
key personnel; (9) adverse conditions in the stock market, the public debt
market, and other capital markets (including changes in interest rate
conditions); (10) the strength of the United States economy in general and the
strength of the local economies in which we conduct operations may be different
than expected resulting in, among other things, a reduced demand for practice
management services; (11) the demand for our products and services; (12)
technological changes; (13) the ability to increase market share; (14) the
adequacy of expense projections and estimates of impairment loss; (15) the
impact of change in accounting policies by the Securities and Exchange
Commission; (16) unanticipated regulatory or judicial proceedings; (17) the
impact on our business, as well as on the risks set forth above, of various
domestic or international military or terrorist activities or conflicts; (18)
other factors described in this Press Release and in our other reports filed
with the Securities and Exchange Commission; and (19) our success at managing
the risks involved in the foregoing.
Contact: Jerry F. Wells, Jr., CPA
Executive Vice President and Chief Financial Officer
UCI Medical Affiliates, Inc.
4416 Forest Drive
Columbia, South Carolina 29206
(803) 782-4278