UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) -------- ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended September 30,
2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the transition period from _________________ to
______________
Commission File Number: 0-13265
UCI MEDICAL AFFILIATES, INC.
(Name of Registrant as Specified in its Charter)
Delaware 59-2225346
(State or Other Jurisdiction of
Incorporation or Organization) (IRS Employer Identification Number)
4416 Forest Drive, Columbia, SC 29206
(Address of Principal Executive Offices) (Zip Code)
(803) 782-4278
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act: Common
Stock, $.05 par value
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 twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes ____ No X
The aggregate market value of voting stock held by non-affiliates of the
registrant on November 12, 2003 was approximately $5,341,645.* The registrant
has no non-voting common equity.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No -- -----
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the registrant's common stock, $.05 par
value, was 9,650,472 at November 12, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
* Calculated by excluding all shares held by officers, directors, and
controlling shareholders of registrant without conceding that all such persons
are affiliates of registrant for purposes of the federal securities laws.
UCI MEDICAL AFFILIATES, INC.
INDEX TO FORM 10-K
PART I PAGE
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24
Item 9A. Controls and Procedures 24
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 32
Item 13. Certain Relationships and Related Transactions 33
Item 14. Controls and Procedures 35
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 35
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this Report on Form 10-K 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 Annual Report on Form 10-K 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 any 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
Item 1. Business
General
UCI Medical Affiliates, Inc. ("UCI") is a Delaware corporation incorporated on
August 25, 1982. Operating through its wholly-owned subsidiaries, UCI Medical
Affiliates of South Carolina, Inc. (UCI-SC) and UCI Medical Affiliates of
Georgia, Inc. ("UCI-GA"), UCI provides nonmedical management and administrative
services for a network of 41 freestanding medical centers, 40 of which are
located throughout South Carolina and one is located in Knoxville, Tennessee (28
operating as Doctors Care in South Carolina, one as Doctors Care in Knoxville,
Tennessee, and 12 as Progressive Physical Therapy Services in South Carolina).
We refer to these 41 medical centers as the "centers" throughout this report.
Organizational Structure
Federal law and the laws of many states, including South Carolina, Georgia and
Tennessee, generally specify who may practice medicine and limit the scope of
relationships between medical practitioners and other parties. Under such laws,
UCI, UCI-SC, and UCI-GA are prohibited from practicing medicine or exercising
control over the provision of medical services. In order to comply with such
laws, all medical services at the centers are provided by or under the
supervision of Doctors Care, P.A. or Doctors Care of Tennessee, P.C.
(collectively the "P.A.'s"), each of which has contracted with UCI-SC or UCI-GA,
as applicable, to be the sole provider of all non-medical direction and
supervision of the centers operating in its respective state of organization. We
refer to the P.A.'s, UCI, UCI-SC, and UCI-GA collectively throughout this report
as "we", "us", and "our." Each P.A. is organized so that all physician services
are offered by the physicians who are employed by the P.A. Neither UCI, UCI-SC,
nor UCI-GA employ practicing physicians as practitioners, exert control over
their decisions regarding medical care, or represent to the public that it
offers medical services.
UCI-SC and UCI-GA have entered into Administrative Services Agreements with the
P.A.'s pursuant to which UCI-SC and UCI-GA perform all non-medical management of
the P.A.'s and have exclusive authority over all aspects of the business of the
P.A.'s (other than those directly related to the provision of patient medical
services or as otherwise prohibited by state law). The non-medical management
provided by UCI-SC and UCI-GA includes, among other functions, treasury and
capital planning, financial reporting and accounting, pricing decisions, patient
acceptance policies, setting office hours, contracting with third party payors,
and all administrative services. UCI-SC and UCI-GA provide all of the resources
(systems, procedures, and staffing) to bill third party payors or patients and
provide all of the resources (systems, procedures, and staffing) for cash
collection and management of accounts receivables, including custody of the
lockbox where cash receipts are deposited. From the cash receipts, UCI-SC and
UCI-GA pay all physician salaries and operating costs of the centers and of
UCI-SC and UCI-GA. Compensation guidelines for the licensed medical
professionals at the P.A.'s are set by UCI-SC and UCI-GA, and UCI-SC and UCI-GA
establish guidelines for establishing, selecting, hiring, and firing the
licensed medical professionals. UCI-SC and UCI-GA also negotiate and execute
substantially all of the provider contracts with third party payors. Neither
UCI-SC nor UCI-GA loans or otherwise advances funds to any P.A. for any
purposes.
The P.A.'s, UCI-SC, and UCI-GA share a common management team. In each case, the
same individuals serve in the same executive offices of each entity.
UCI-SC and UCI-GA believe that the services they provide to the P.A.'s do not
constitute the practice of medicine under applicable laws. Nevertheless, because
of the uniqueness of the structure of the relationships described above, many
aspects of our business operations have not been the subject of state or federal
regulatory interpretation. We have no assurance that a review of our business by
the courts or regulatory authorities will not result in a determination that
could adversely affect our operations or that the health care regulatory
environment will not change so as to restrict our existing operations or future
expansion.
The Centers
The centers are staffed by licensed physicians, physical therapists, other
healthcare providers, and administrative support staff. The medical support
staff includes licensed nurses, certified medical assistants, laboratory
technicians, and x-ray technicians.
The centers typically are open for extended hours (weekends and evenings) and
out-patient care only. When hospitalization or specialty care is needed,
referrals to appropriate specialists are made.
Our centers are broadly distributed throughout the state of South Carolina, and
one is in Knoxville, Tennessee. Eighteen primary care centers are in the
Columbia region (including six physical therapy offices), nine in the Charleston
region (including three physical therapy offices), four in the Myrtle Beach
region, one in the Aiken region, eight in the Greenville-Spartanburg region
(including three physical therapy offices), and one in Knoxville, Tennessee.
Medical Services Provided at the Centers
Our centers offer out-patient medical care, generally without appointment, for
treatment of acute, episodic, and some chronic medical problems. The centers
provide a broad range of medical services that would generally be classified as
within the scope of family practice, primary care, and occupational medicine.
Licensed medical providers, nurses, and auxiliary support personnel provide the
medical services. The services provided at the centers include, but are not
limited to, the following:
o Routine care of general medical problems, including colds, flu, ear
infections, hypertension, asthma, pneumonia, and other conditions typically
treated by primary care providers;
o Treatment of injuries, such as simple fractures, dislocations, sprains,
bruises, and cuts;
o Minor surgery, including suturing of lacerations and removal of cysts and
foreign bodies;
o Diagnostic tests, such as x-rays, electrocardiograms, complete blood
counts, and urinalyses; and
o Occupational and industrial medical services, including drug testing,
workers' compensation cases, and physical examinations.
Patient Charges and Payments
The fees charged to a patient are determined by the nature of medical services
rendered. Our management believes that the charges at our centers are
significantly lower than the charges of hospital emergency departments and are
generally competitive with the charges of local physicians and other providers
in the area.
Our centers accept payment from a wide range of sources. These include patient
payments at time of service (by cash, check, or credit card), patient billing
and assignment of insurance benefits (including Blue Cross Blue Shield, Workers'
Compensation, and other private insurance). Managed care billings represent the
most significant source of revenues. We also provide services for members of the
four largest health maintenance organizations (HMOs) operating in South Carolina
- - Companion HealthCare Corporation, HMO Blue, Cigna/HealthSource South Carolina,
Inc., and Carolina Care Plan.
Revenues generated from billings to Blue Cross and Blue Shield of South Carolina
("BCBS") and its subsidiaries, Companion HealthCare Corporation ("CHC") and
Companion Property & Casualty Insurance Company ("CP&C"), totaled approximately
38%, 29%, and 26% of the Company's total revenues for fiscal years 2003, 2002,
and 2001.
The following table breaks out our approximate revenue and patient visits by
revenue source for fiscal year 2003:
Percent of Percent of Revenue
Payor Patient Visits
- ------------------------------- ------------------- -------------------
16 11
Patient Pay
10 5
Employer Paid
8 10
HMO
10 13
Workers' Compensation
11 7
Medicare/Medicaid
41 48
Managed Care Insurance
4 6
Other (Commercial Indemnity,
Champus, etc.)
In accordance with the Administrative Services Agreements described previously,
UCI-SC and UCI-GA, as the agents for the P.A.'s, process all payments for the
P.A.'s. When payments for the P.A.'s are received, they are deposited in
accounts owned by each P.A. and are automatically transferred to lockbox
accounts owned by UCI-SC and UCI-GA. In no event are the physicians entitled to
receive such payments. The patient mix in no way affects our management service
fees per the Administrative Services Agreements.
Reimbursement Arrangements
Medical services traditionally have been provided on a fee-for-service basis
with insurance companies assuming responsibility for paying all or a portion of
such fees. The increase in medical costs under traditional indemnity health care
plans has been caused by a number of factors. These factors include: (i) the
lack of incentives on the part of health care providers to deliver
cost-effective medical care; (ii) the absence of controls over the utilization
of costly specialty care physicians and hospitals; (iii) a growing and aging
population that requires increased health care expenditures; and (iv) the
expense involved with the introduction and use of advanced pharmaceuticals and
medical technology.
As a result of escalating health care costs, employers, insurers, and
governmental entities all have sought cost-effective approaches to the delivery
of and payment for quality health care services. HMOs and other managed health
care organizations have emerged as integral components in this effort. HMOs
enroll members by entering into contracts with employer groups or directly with
individuals to provide a broad range of health care services for a capitation
payment or a discounted fee-for-service schedule, with minimal or no deductibles
or co-payments required of the members. HMOs, in turn, contract with health care
providers like us to administer medical care to HMO members. These contracts
provide for payment to us on a discounted fee-for-service basis.
We currently do not provide any services on a capitated basis.
Certain third party payors constantly seek various alternatives for reducing
medical costs, some of which, if implemented, could affect our reimbursement
levels. Our management cannot predict whether changes in present reimbursement
methods or proposed future modifications in reimbursement methods will affect
payments for services provided by the centers and, if so, whether they will have
an adverse impact upon our business.
Competition and Marketing
All of our centers face competition, in varying degrees, from hospital emergency
rooms, private doctor's offices, other competing freestanding medical centers,
and physical therapy offices. Some of these providers have financial resources
that are greater than our resources. In addition, traditional sources of medical
services, such as hospital emergency rooms and private physicians, have had, in
the past, a higher degree of recognition and acceptance by patients than centers
such as ours. Our centers compete on the basis of accessibility, including
evening and weekend hours, walk-in care, the attractiveness of our state-wide
network to large employers and third party payors, and a competitive fee
schedule. In an effort to offset the competition's community recognition, we
have substantial marketing efforts, which currently include radio and television
advertisements. We have added regional marketing representatives, developed
focused promotional material, and initiated a newsletter for employers promoting
our activities.
Government Regulation
As participants in the health care industry, our operations and relationships
are subject to extensive and increasing regulation by a number of governmental
entities at the federal, state, and local levels.
Limitations on the Corporate Practice of Medicine
Federal law and the laws of many states, including Georgia, South Carolina, and
Tennessee, generally specify who may practice medicine and limit the scope of
relationships between medical practitioners and other parties. Under such laws,
business corporations such as UCI, UCI-SC, and UCI-GA are prohibited from
practicing medicine or exercising control over the provision of medical
services. In order to comply with such laws, all medical services at our centers
are provided by or under the supervision of the P.A.'s pursuant to contracts
with UCI's wholly-owned subsidiaries. The P.A.'s are organized so that the
physicians who are employed by the P.A.'s offer all physician services. None of
UCI, UCI-SC, or UCI-GA employs practicing physicians as practitioners, exerts
control over any physician's decisions regarding medical care, or represents to
the public that it offers medical services.
As described previously, UCI-SC has entered into an Administrative Services
Agreement with Doctors Care, P.A. and UCI-GA has entered into a similar
Administrative Services Agreement with the P.A. operating in Tennessee pursuant
to which UCI-SC and UCI-GA, as applicable, perform all non-medical management of
the applicable P.A.'s and have exclusive authority over all aspects of the
business of the P.A.'s (other than those directly related to the provision of
patient medical services or as otherwise prohibited by state law). (See Item 1.
Business - Organizational Structure.)
Because of the unique structure of the relationships existing between UCI-SC,
UCI-GA, and the P.A.'s, many aspects of our business operations have not been
the subject of state or federal regulatory interpretation. We have no assurance
that a review by the courts or regulatory authorities of the business formerly
or currently conducted by us will not result in a determination that could
adversely affect our operations or that the healthcare regulatory environment
will not change so as to restrict the existing operations or any potential
expansion of our business.
Third Party Reimbursements
Approximately seven percent of our revenue is derived from payments made by
government-sponsored health care programs (principally, Medicare and Medicaid).
As a result, any change in reimbursement regulations, policies, practices,
interpretations, or statutes could adversely affect our operations. State and
federal civil and criminal statutes also impose substantial penalties, including
civil and criminal fines and imprisonment, on healthcare providers that
fraudulently or erroneously bill governmental or other third-party payors for
healthcare services. We believe we are in material compliance with such laws,
but we have no assurance that our activities will not be challenged or
scrutinized by governmental authorities.
Federal Anti-Kickback and Self-Referral Laws
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease, or order of items or services that
are covered by Medicare or state health programs. Although we believe that we
are not in violation of the Anti-kickback Statute or similar state statutes, our
operations do not fit within any of the existing or proposed federal safe
harbors.
The Office of the Inspector General (the "OIG"), the government office that is
charged with the enforcement of the federal Anti-kickback Statute, has issued an
advisory opinion regarding a proposed management services contract unrelated to
us that involved a cost plus a percentage of net revenue payment arrangement
("Advisory Opinion 98-4"). Based on its analysis of the intent and scope of the
Anti-kickback Statute, the OIG determined that it could not approve the
arrangement because the structure of the management agreement raised the
following concerns under the Anti-kickback Statute: (i) the agreement might
include financial incentives to increase patient referrals; (ii) the agreement
did not include any controls to prevent over utilization; and (iii) the
percentage billing arrangement may include financial incentives that increase
the risk of abusive billing practices. The OIG opinion did not find that the
management arrangement violated the Anti-kickback Statute, rather that the
arrangement may involve prohibited remuneration absent sufficient controls to
minimize potential fraud and abuse. An OIG advisory opinion is only legally
binding on the Department of Health and Human Services (including the OIG) and
the requesting party and is limited to the specific conduct of the requesting
party because additional facts and circumstances could be involved in each
particular case. Accordingly, we believe that Advisory Opinion 98-4 does not
have broad application to the provision by UCI, UCI-SC, and UCI-GA of nonmedical
management and administrative services for the centers. We also believe that we
have implemented appropriate controls to ensure that the arrangements between
UCI, UCI-SC, and UCI-GA and the centers do not result in abusive billing
practices or the over utilization of items and services paid for by federal
health programs.
The applicability of the Anti-kickback Statute to many business transactions in
the health care industry, including the service agreements with the centers and
the development of ancillary services by UCI, UCI-SC, and UCI-GA, has not been
subject to any significant judicial and regulatory interpretation. We believe
that although remuneration for the management services is provided for under our
service agreements with the centers, UCI, UCI-SC, and UCI-GA are not in a
position to make or influence referrals of patients or services reimbursed under
Medicare or state health programs to the centers. In addition, UCI, UCI-SC, and
UCI-GA are not a separate provider of Medicare or state health program
reimbursed services. Consequently, we do not believe that the service and
management fees payable to UCI, UCI-SC, and UCI-GA should be viewed as
remuneration for referring or influencing referrals of patients or services
covered by such programs as prohibited by the Anti-kickback Statute.
The U.S. Congress in the Omnibus Budget Reconciliation Act of 1993 enacted
significant prohibitions against physician referrals. Subject to certain
exemptions, a physician or a member of his or her immediate family is prohibited
from referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. While
we believe we are currently in compliance with such legislation, future
regulations could require us to modify the form of our relationships with
physician groups.
State Anti-Kickback and Self-Referral Laws
Some states have also enacted similar self-referral laws, and we believe that
more states will likely follow. We believe that our practices fit within
exemptions contained in such laws. Nevertheless, in the event we expand our
operations to certain additional jurisdictions, structural and organizational
modifications of our relationships with physician groups might be required to
comply with new or revised state statutes. Such modifications could adversely
affect our operations.
Through UCI's wholly owned subsidiaries, UCI-SC and UCI-GA, we provide
non-medical management and administrative services to the centers in South
Carolina and Tennessee. South Carolina and Tennessee have adopted anti-kickback
and self-referral laws that regulate financial relationships between health care
providers and entities that provide health care services. The following is a
summary of the applicable state anti-kickback and self-referral laws.
South Carolina
South Carolina's Provider Self-Referral Act of 1993 generally provides that a
health care provider may not refer a patient for the provision of any designated
health service to an entity in which the health care provider is an investor or
has an investment interest. Under our current operations, we do not believe UCI,
UCI-SC, or UCI-GA are entities providing designated health services for purposes
of the South Carolina Provider Self-Referral Act. The centers provide all health
care services to patients through employees of the P.A. No provider investors in
the P.A. refer patients to the centers for designated health care services.
Accordingly, under South Carolina law, we believe that the provider
self-referral prohibition would not apply to our centers or operations in South
Carolina.
In addition to self-referral prohibitions, South Carolina's Provider
Self-Referral Act of 1993 also prohibits the offer, payment, solicitation, or
receipt of a kickback, directly or indirectly, overtly or covertly, in cash or
in kind, for referring or soliciting patients. We believe that payment
arrangements are reasonable compensation for services rendered and do not
constitute payments for referrals.
Tennessee
The Tennessee physician conflict of interest/disclosure law provides that
physicians are free to enter into lawful contractual relationships, including
the acquisition of ownership interests in health facilities. The law further
recognizes that these relationships can create potential conflicts of interests,
which shall be addressed by the following: (a) the physician has a duty to
disclose to the patient or referring colleagues such physician's ownership
interest in the facility or therapy at the time of referral and prior to
utilization; (b) the physician shall not exploit the patient in any way, as by
inappropriate or unnecessary utilization; (c) the physician's activities shall
be in strict conformity with the law; (d) the patient shall have free choice
either to use the physician's proprietary facility or therapy or to seek the
needed medical services elsewhere; and (e) when a physician's commercial
interest conflicts so greatly with the patient's interest as to be incompatible,
the physician shall make alternative arrangements for the care of the patient.
We believe that Tennessee's conflict of interest/disclosure law does not apply
to our current operations because UCI, UCI-SC, and UCI-GA are not providers of
health services. The centers provide all health care services to patients
through employees of the P.A. Even if the Tennessee conflict of
interest/disclosure law were to apply, our internal quality
assurance/utilization review programs will help identify any inappropriate
utilization by a center.
Tennessee also has a law regulating healthcare referrals. The general rule is
that a physician who has an investment interest in a healthcare entity shall not
refer patients to the entity unless a statutory exception exists. A healthcare
entity is defined as an entity that provides healthcare services. We believe
that UCI, UCI-SC, and UCI-GA do not fit within the definition of a "healthcare
entity" because UCI, UCI-SC, and UCI-GA are not providers of healthcare
services. The centers provide all health care services to patients through
employees of the P.A. No provider investors in the P.A. refer patients for
designated health care services except the sole physician shareholder of the
P.A. We believe that referrals by the sole shareholder of the P.A. come within a
statutory exception. Accordingly, under Tennessee law, we believe that the
provider self-referral prohibition would not apply to our centers or operations
in Tennessee.
Tennessee's anti-kickback provision prohibits a physician from making payments
in exchange for the referral of a patient. In addition, under Tennessee law a
physician may not split or divide fees with any person for referring a patient.
The Tennessee Attorney General has issued opinions that determined that the
fee-splitting prohibition applied to management services arrangements. The
Tennessee fee-splitting prohibition contains an exception for reasonable
compensation for goods or services. We believe that the payment arrangements
between UCI, UCI-SC, and UCI-GA, as applicable, and the centers are reasonable
compensation for services rendered and do not constitute payments for referrals
or a fee-splitting arrangement.
Antitrust Laws
Because each of the P.A.'s is a separate legal entity, each may be deemed a
competitor subject to a range of antitrust laws that prohibit anti-competitive
conduct, including price fixing, concerted refusals to deal, and division of
market. We believe we are in compliance with such state and federal laws that
may affect our development of integrated healthcare delivery networks, but we
have no assurance that a review of our business by courts or regulatory
authorities will not result in a determination that could adversely affect our
operations.
Healthcare Reform
As a result of the continued escalation of healthcare costs and the inability of
many individuals to obtain health insurance, numerous proposals have been or may
be introduced in the U.S. Congress and in state legislatures relating to
healthcare reform. We have no assurance as to the ultimate content, timing, or
effect of any healthcare reform legislation, nor can we estimate at this time
the impact of potential legislation that may be material on us.
Regulation of Risk Arrangements and Provider Networks
Federal and state laws regulate insurance companies, health maintenance
organizations, and other managed care organizations. Generally, these laws apply
to entities that accept financial risk. Certain of the risk arrangements entered
into by us could possibly be characterized by some states as the business of
insurance. We, however, believe that the acceptance of capitation payments by a
healthcare provider does not constitute the conduct of the business of
insurance. Many states also regulate the establishment and operation of networks
of healthcare providers. Generally, these laws do not apply to the hiring and
contracting of physicians by other healthcare providers. South Carolina and
Tennessee do not currently regulate the establishment or operation of networks
of healthcare providers except where such entities provide utilization review
services through private review agents. We have no assurance that regulators of
the states in which we may operate would not apply these laws to require
licensure of our operations as an insurer or provider network. We believe that
we are in compliance with these laws in the states in which we currently do
business, but we have no assurance that future interpretations of these laws by
the regulatory authorities in South Carolina, Tennessee, or the states in which
we may expand in the future will not require licensure of our operations as an
insurer or provider network or a restructuring of some or all of our operations.
In the event we are required to become licensed under these laws, the licensure
process can be lengthy and time consuming and, unless the regulatory authority
permits us to continue to operate while the licensure process is progressing, we
could experience a material adverse change in our business while the licensure
process is pending. In addition, many of the licensing requirements mandate
strict financial and other requirements that we may not immediately be able to
meet. Further, once licensed, we would be subject to continuing oversight by and
reporting to the respective regulatory agency.
HIPPA
Under HIPAA, the Secretary of Health and Human Services, or HHS, has adopted
national data interchange standards for some types of electronic transactions
and the data elements used in those transactions; adopted security standards to
protect the confidentiality, integrity and availability of patient health
information; and adopted privacy standards to prevent inappropriate access, use
and disclosure of patient health information. In December 2000, HHS published
the final privacy regulations that took effect in April 2003. These regulations
restrict the use and disclosure of individually identifiable health information
without the prior informed consent of the patient. In February 2003, HHS
published the final security regulations, which will take effect in April 2005.
These regulations mandate that healthcare facilities implement operational,
physical and technical security measures to reasonably prevent accidental,
negligent or intentional inappropriate access or disclosure of patient health
information. We have made changes to our business operations to support these
regulatory requirements. We feel that our current operations fully support any
of our requirements to comply with the above regulations.
Employees
As of September 30, 2003, we had 630 employees (503 on a full-time equivalent
basis). This amount includes 111 medical providers employed by the P.A.'s.
Item 2. Properties
All but one of our primary care center's facilities are leased. The properties
are generally located on well-traveled major highways, with easy access. Each
property offers free, off-street parking immediately adjacent to the center. One
center is leased from a physician employee of the P.A.'s.
Our centers are broadly distributed throughout the state of South Carolina, and
one is in Knoxville, Tennessee. Eighteen primary care centers are in the
Columbia, South Carolina region (including six physical therapy offices), nine
in the Charleston, South Carolina region (including three physical therapy
offices), four in the Myrtle Beach, South Carolina region, one in the Aiken,
South Carolina region, eight in the Greenville-Spartanburg, South Carolina
region (including three physical therapy offices), and one in the Knoxville,
Tennessee region. Our corporate offices are located on the second floor of one
of the Columbia, South Carolina locations. The centers are all in free-standing
buildings in good repair.
Item 3. Legal Proceedings
We are a party to various claims, legal activities and complaints arising in the
normal course of business. In the opinion of management and legal counsel,
aggregate liabilities, if any, arising from legal actions would not have a
material adverse effect on our financial position.
Item 4. Submission of Matters to a Vote of Security Holders
On July 30, 2003, UCI's annual meeting of the shareholders was held and the
following actions were taken:
Holders of UCI's common stock represented at the meeting voted to elect Charles
M. Potok and Harold H. Adams, Jr. to the Board of Directors for terms expiring
at the third succeeding annual meeting of stockholders; John M. Little, Jr.,
M.D. and Ashby M. Jordan, M.D. to the Board of Directors for terms expiring at
the second succeeding annual meeting of stockholders; and Louis M. McElveen, CPA
and Timothy L. Vaughn, CPA to the Board of Directors for terms expiring at the
first succeeding annual meeting of stockholders, as follows:
Number Withhold
Voting For Approval
------------ ------------ -------------
Charles M. Potok 7,122,195 7,019,026 103,169
Harold H. Adams, Jr. 7,122,195 7,121,393 802
John M. Little, Jr., M.D. 7,122,195 7,019,144 103,051
Ashby M. Jordan, M.D. 7,122,195 7,019,144 103,051
Louis M. McElveen, CPA 7,122,195 7,121,644 551
Timothy G. Vaughn, CPA 7,122,195 7,019,144 103,051
Holders of UCI's common stock represented at the meeting voted to ratify the
appointment of Scott McElveen, L.L.P. as our independent auditors for the fiscal
year ended September 30, 2003, as follows:
Number
Voting For Against Abstain
------------- ------------ ----------- -------------
7,122,195 7,114,383 4,772 3,040
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Until October 19, 1998, UCI's common stock was traded on the NASDAQ SmallCap
Market under the symbol UCIA. On October 20, 1998, UCI's common stock was
delisted for trading on the NASDAQ SmallCap Market as a consequence of UCI's
failure to meet certain quantitative requirements under the NASD's expanded
listing criteria. Trading in UCI's common stock is currently conducted in the
over-the-counter market. The prices set forth below indicate the high and low
bid prices reported on the over-the-counter bulletin board. The quotations
reflect inter-dealer prices without retail markup, markdown, or commission and
may not necessarily reflect actual transactions.
Bid Price
--------------------------
High Low
--------- ---------
Fiscal Year Ended September 30, 2003
1st quarter (10/01/02 - 12/31/02) $.51 $.30
2nd quarter (01/01/03 - 03/31/03) .62 .30
3rd quarter (04/01/03 - 06/30/03) .75 .45
4th quarter (07/01/03 - 09/30/03) 1.39 .31
Fiscal Year Ended September 30, 2002
1st quarter (10/01/01 - 12/31/01) $.30 $.15
2nd quarter (01/01/02 - 03/31/02) .23 .16
3rd quarter (04/01/02 - 06/30/02) .30 .19
4th quarter (07/01/02 - 09/30/02) .33 .26
As of November 12, 2003, there were 301 stockholders of record of UCI's common
stock, excluding individual participants in security position listings.
UCI has not paid cash dividends on its common stock since its inception and has
no plans to declare cash dividends in the foreseeable future.
Item 6. Selected Financial Data
STATEMENT OF OPERATIONS DATA
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
For the year ended September 30,
-----------------------------------------------------------------------------
----------- -- ------------- -- ------------ -- ------------ -- -------------
2003 2002 2001 2000 1999
----------- ------------- ------------ ------------ -------------
Revenues $43,518 $38,527 $38,117 $39,953 $40,470
Net income (loss) 2,375 1,394 (1,475) (6,102) 910
Basic and diluted earnings (loss) per share .25 .14 (.15) (.63) .11
Basic weighted average number of
shares outstanding 9,650 9,651 9,651 9,651 8,537
Diluted weighted average number of
shares outstanding 9,650 9,651 9,651 9,651 8,544
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------- ---------- ---- ---------- -- ------------ -- ------------- -- -------------
----------------------------------------------------------------------------
At September 30, (in thousands)
----------------------------------------------------------------------------
------------ -- ---------- -- ------------ -- ------------- -- -------------
2003 2002 2001 2000 1999
------------ ---------- ------------ ------------- -------------
Working capital $2,925 $2,515 $(6,245) $(6,230) $(2,289)
Property and equipment, net 4,028 3,765 3,977 4,326 4,797
Total assets 15,859 14,517 14,983 17,782 23,354
Long-term debt, including current portion 3,327 4,079 7,210 8,952 9,444
Stockholders' equity (deficiency) 2,566 190 (1,204) 271 6,373
See Note 1 to the accompanying financial statements, which discuss the impact of
accounting changes on the information reflected above in selected financial
data.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis provides information that 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 that 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. We base
our allowances on the likelihood of recoverability of accounts receivable
considering such factors as past experience and current collection trends.
Factors taken into consideration in estimating the reserves are amounts past
due, 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. As we allocate any excess of cost over fair value of assets
acquired on a center-by-center basis, we compare our centers fair value to our
carrying value for impairment issues. 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 an impairment is determined, we write-off the
intangible assets during that period. Although we take considerable care 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 September 30, 2001, we
recorded a valuation allowance that reduced our deferred tax assets to equal our
deferred tax liability.
Basis of Presentation
Our consolidated financial statements include the accounts of UCI, UCI-SC,
UCI-GA, and the P.A.'s. 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, that 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 with no
adverse impact resulting to any of UCI-SC, UCI-GA, or the P.A. 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 the
P.A.'s. (See Item 1. Business - "Organizational Structure" for a detailed
description of the Administrative Service Agreements.) 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 141 (Business Combinations), UCI
must consolidate the results of the affiliated practices with those of UCI.
The P.A.'s enter into employment agreements with physicians for terms ranging
from one to five 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.'s 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. We base any incentive
compensation 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 September 30, 2003 and 2002, the P.A.'s employed 111
and 110 medical providers, respectively.
The net assets of the P.A.'s are not material for any period presented, and
intercompany accounts and transactions have been eliminated.
We allocate all indirect costs incurred at the corporate offices to the 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 in the United States Bankruptcy
Court for the District of South Carolina (the "Bankruptcy Court").
By August 8, 2002, the Bankruptcy Court confirmed each of our Plans of
Reorganization and we have, therefore, emerged from Chapter 11 Protection of the
Court. We continue to make payments to our creditors as outlined in the Plans.
Comparison of Results of Operations for Fiscal Years 2003, 2002, and 2001
Revenues of $43,518,000 in fiscal year 2003 reflected an increase of
approximately 13% from the fiscal year 2002 revenues of $38,527,000, which
reflected an increase of approximately 11% from the amount reported for fiscal
year 2001. The following reflects revenue trends from fiscal year 1999 through
fiscal year 2003:
For the year ended September 30, (in thousands)
-------------------------------------------------------------------------------------------
-------------- -- ---------------- -- -------------- --- --------------- -- ---------------
2003 2002 2001 2000 1999
-------------- ---------------- -------------- --------------- ---------------
--------------
Revenues $ 43,518 $ 38,527 $ 38,117 $ 39,953 $ 40,470
Operating Costs 39,175 36,288 35,546 38,127 35,975
Operating Margin 4,343 2,238 2,572 1,827 4,495
The increase in revenues from fiscal year 2002 to fiscal year 2003 is attributed
to an increase in laboratory services offered during the year as well as an
increase in the volume of ancillary services (physical therapy) being offered at
our centers and an increase in patient visits.
The number of our centers decreased from 40 to 34 from September 30, 1999 to
September 30, 2000. Of the six centers closed, five were in the Atlanta region
and the sixth was a physical therapy site in the Greenville-Spartanburg region,
which was opened for only a short period in the fourth quarter of fiscal year
1999 and the first quarter of fiscal year 2000.
The number of our centers remained constant at 36 from September 30, 2001 to
September 30, 2002. The number of centers in operation increased from 36 to 41
during fiscal year 2003. We added seven physical therapy offices (two in the
Greenville-Spartanburg region, three in the Columbia region, and two in the
Charleston region), and we closed two offices during fiscal year 2003 (one in
the Tennessee region and one in the Greenville-Spartanburg region).
During the past three fiscal years, we have continued our services provided to
members of HMOs. In these arrangements, we, through the P.A.'s, 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 in fiscal year 2003, and 10,000 lives in
fiscal years 2002 and 2001. As of September 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.
(See Footnote 9 to audited consolidated Financial Statements for information on
related parties.)
Sustained revenues in fiscal years 2003, 2002, and 2001 also reflect our
occupational medicine and industrial health services (these revenues are
referred to as "employer paid" and "workers' compensation" on the table depicted
on the next page). Approximately 18% of our total revenue was derived from these
occupational medicine services in fiscal year 2003, compared to 20% in fiscal
year 2002, and 22% in fiscal year 2001. We also entered into an agreement with
Companion Property and Casualty Insurance Company (CP&C) wherein we act as the
primary care provider for injured workers of firms insured through CP&C. CP&C is
a primary stockholder of UCI.
Patient encounters were 469,000 in fiscal year 2003, 459,000 in fiscal year
2002, and 472,000 in fiscal year 2001. The increase in the number of patient
visits was mainly a result of an intense advertising campaign in the Columbia
region and the increase in ancillary services.
No new significant competition entered our market during fiscal years 2003,
2002, and 2001.
The increase in the operating margin in 2003 of approximately ninety-four
percent was largely the result of increased revenues. The decrease in the
operating margin during fiscal year 2002 was due to salary increases and
increases in other medical expenses.
The operating margin increased to $2,572,000 in fiscal year 2001 from $1,827,000
in fiscal year 2000 partially due to the poor performance of the Atlanta centers
for the first nine months of the fiscal year until their closure on June 30,
2000. For the nine months ending June 30, 2000, the Atlanta centers had an
operating deficit of approximately $1,143,000 as compared to an operating
deficit of approximately $730,000 for the twelve months of fiscal year 1999.
Approximately $400,000 of the decline in the operating margin from fiscal year
1999 to fiscal year 2000 was attributable to the two Knoxville centers, one of
which moved to a new location in early fiscal year 2000. This move resulted in a
severe reduction of business for approximately six months, but began to improve
over the last quarter of fiscal year 2000.
The following table breaks out our revenue and patient visits by revenue source
for fiscal years 2003, 2002, and 2001.
Percent of Percent of
Patient Visits Revenue
--------------------- ------------------------
2003 2002 2001 2003 2002 2001
------- ------ ------ ------- ------ ---------
16 16 19 11 14 17
Patient Pay
10 11 12 5 6 7
Employer Paid
8 9 12 10 9 12
HMO
10 11 10 13 14 15
Workers' Compensation
11 10 8 7 7 6
Medicare/Medicaid
41 40 35 48 46 38
Managed Care Insurance
4 3 4 6 4 5
Other (Commercial Indemnity, Champus, etc.)
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. Management expects this trend to
continue.
Bad debt expense, a component of operating costs, was approximately $1,889,000
(or approximately 4% of revenue) for fiscal year 2003, $1,845,000 (or
approximately 5% of revenue) for fiscal year 2002, and $1,495,000 (or
approximately 4% of revenue) for fiscal year 2001. The expense from bad debt was
higher in fiscal year 2000 due to the difficulties encountered in the collection
of amounts associated with patients seen at the centers acquired during fiscal
year 1998 (Atlanta centers) that were closed in fiscal year 2000. The collection
percentage for the established South Carolina centers has remained constant at
approximately 96% for the past 5 to 6 years.
We continually evaluate the operations of our physician practice centers and
assess the centers for impairment when certain indicators of impairment are
present. At September 30, 2003 and September 30, 2002, no operating centers were
considered to be showing indications of impairment. At September 30, 2001, three
centers were, upon review, deemed to have impaired goodwill. One center in the
Columbia region and one center in the Greenville-Spartanburg region had
decreased profitability during fiscal year 2001 due to changes in the assigned
physicians. The goodwill for these two centers was considered impaired at
September 30, 2001 and was, therefore, written off. Additionally, as of
September 30, 2001, we combined the two Knoxville locations into one and,
therefore, the goodwill associated with the closed location was deemed to be
impaired and, therefore, written off. In May 2000, we announced our intention to
close our Georgia physician practice centers effective June 30, 2000. The
performance of these centers, which were originally acquired in May 1998, did
not meet our expectations during fiscal year 2000, and we were no longer
committed to the Georgia market. We either sold the property and equipment at
these centers for an amount approximating the net book value of the fixed assets
or transferred the property and equipment to our other locations. The long-lived
assets and related goodwill for these centers was assessed for impairment under
a held for use model as of March 31, 2000. As a result of the decision to close
these centers, coupled with the fact that the remaining projected undiscounted
cash flows were less than the carrying value of the long-lived assets and
goodwill for these centers, we recorded impairment in the quarter ended March
31, 2000 of approximately $3,567,000 to reduce the goodwill to its fair value.
This reduction is a component of the line item Realignment and Impairment
Charges.
We incurred additional costs associated with the decision to close the Georgia
centers during the third and fourth quarters of fiscal year 2000. These costs
related primarily to exiting certain lease obligations. The estimated lease
obligations, net of estimated sub-lease income, were approximately $242,000 at
September 30, 2000. The total costs related to lease obligations and employee
contractual liabilities for the Atlanta centers closed June 30, 2000 was
$561,000, which is the other component of the line item Realignment and
Impairment Charges.
During the second quarter of fiscal year 2000 and the fourth quarter of fiscal
year 2001, the above analysis resulted in an impairment charge of approximately
$3,567,000 and $753,000 to goodwill for centers that had been closed (i.e.,
Atlanta region) in fiscal year 2000 and for three underperforming centers in
fiscal year 2001. This charge is a component of the line item Realignment and
Impairment Charges.
Depreciation and amortization expense increased to $1,145,000 in fiscal year
2003 as compared to $1,022,000 in fiscal year 2002. This increase reflects
increased equipment purchases for our centers. Depreciation and amortization
expense for fiscal year 2001 was $1,544,000. We also recorded $200,000 in
additional depreciation expense in anticipation of medical equipment
obsolescence. Net interest expense decreased to $744,000 in fiscal year 2003
down from $2,236,000 in fiscal year 2002. This decrease was the result of a
reduction in long-term debt due to regularly scheduled principal payments and a
decline in interest rates over the year. Net interest expense increased to
$2,236,000 in fiscal year 2002 from $1,699,000 in fiscal year 2001 as a result
of approximately $1,400,000 of interest and fees associated with the settlement
we made with various taxing authorities as a part of our Chapter 11
reorganization. These amounts will be paid out over the next six years per the
confirmed Plans of Reorganization.
We evaluate the valuation allowance regarding deferred tax assets on a more
likely than not basis. In determining that it was more likely than not that the
recorded deferred tax asset would be not realized, our management considered the
following:
o Recent historical operating results.
o The budgets and forecasts that management and the Board of Directors have
adopted.
o The ability to utilize net operating losses (NOL's) prior to their expiration.
o The potential limitation of NOL utilization in the event of a change in
ownership.
o The generation of future taxable income in excess of income reported on the
consolidated financial statements.
A valuation allowance of $5.8 million and $6.6 million at September 30, 2003 and
2002, respectively, remained necessary in the judgement of management because
the factors noted above did not support the utilization of less than a full
valuation allowance. The lack of consistent earnings, discussed above, was
considered in the decision to maintain a 100% valuation allowance.
Unaudited Quarterly Financial Information
The following is condensed quarterly financial information.
Fiscal Year Ended September 30, 2003
-----------------------------------------------------------------------
--------------- -- -------------- --- -------------- -- ---------------
12/31/2002 03/31/2003 06/30/2003 09/30/2003
--------------- -------------- -------------- ---------------
---------------
Revenues $10,296,744 $11,013,405 $11,048,786 $11,159,133
Operating Cost 9,472,378 9,833,985 10,087,327 9,781,498
Operating Margin 824,366 1,179,420 961,459 1,377,635
Net Income after Provision for
Income Taxes 372,301 700,305 523,581 779,179
Basic and Diluted Earnings per
Common Share 0.04 0.08 0.05 0.08
Fiscal Year Ended September 30, 2002
12/31/2001 03/31/2002 06/30/2002 09/30/2002
Revenues $9,230,506 $9,749,507 $9,823,464 $9,723,126
Operating Cost 8,550,911 8,943,279 9,176,050 9,618,108
Operating Margin 679,595 806,228 647,414 105,018
Net Income after Provision for
Income Taxes 198,032 343,564 149,740 702,659
Basic and Diluted Earnings per
Common Share 0.02 0.04 0.02 0.06
Results of Operations for the Three Months Ended September 30, 2003 as Compared
to the Three Months Ended September 30, 2002:
Revenues of $11,159,000 for the quarter ending September 30, 2003 reflect an
increase of approximately 15% from those of the quarter ending September 30,
2002. The increase is attributed to an increase in fee income associated with
laboratory services, some small increases in the fee schedule of some insurance
payors, an increase in physical therapy services provided, and an increase in
patient visits.
Patient encounters increased to 118,000 in the fourth quarter of fiscal year
2003 from 110,000 in the fourth quarter of fiscal year 2002.
The one percent increase in operating costs reflects routine salary adjustments
and increases in other medical costs.
The increase in depreciation and amortization costs is due to equipment
purchases and an equipment obsolescence adjustment.
The decrease in net interest expense was the result of a reduction in long-term
debt due to regularly scheduled principal payments and a decline in interest
rates over the year.
During the fourth quarter of 2002, we recorded a gain on extinguishment of debt
in the amount of approximately $2,705,000 which resulted from a discharge of a
$1,500,000 of convertible subordinated debenture with accrued interest of
approximately $292,000; reducing the carrying value of compromised accounts
payable balances to their current present value by approximately $685,000; and
the termination of certain leases, with a recorded balance of approximately
$228,000, as provided for during the reorganization.
Financial Condition at September 30, 2003 and September 30, 2002
Cash and cash equivalents increased by $414,000 from September 30, 2002 to
September 30, 2003. Working capital increased to $2,926,000 at September 30,
2003 from $2,516,000 at September 30, 2002.
Accounts receivable increased from $6,350,000 at September 30, 2002 to
$6,874,000 at September 30, 2003. This increase was attributable to the increase
in revenues during fiscal year 2003.
The increase in property and equipment is the result of medical equipment
purchases and facility renovations of approximately $1,408,000, offset by an
increase in depreciation expense.
The reductions in long-term debt from September 30, 2002 to September 30, 2003
were the result of the regularly scheduled principal payments. Management
believes that it will be able to fund debt service requirements for the
foreseeable future out of cash generated through operations.
Liquidity and Capital Resources
We require capital principally to fund growth for working capital needs and for
the retirement of indebtedness. Our past capital requirements and working
capital needs have been funded through a combination of external financing
(including bank debt and proceeds from the sale of common stock to CHC and
CP&C), and credit extended by suppliers.
As of September 30, 2003, we had no material commitments for capital
expenditures or for acquisitions or start-ups. Operating activities generated
$2,531,000 of cash during fiscal year 2003, compared to $2,377,000 during fiscal
year 2002. Operations continued to generate positive cash flow mainly due to an
improvement in our overall operations, much of which was the result of cost
reductions that have remained in place throughout 2003 and 2002, which is
reflected as the increase in operating margin on the income statement. In
addition, the extended payment terms realized through the bankruptcy filing
improved cash flow from operations.
Investing activities used $1,365,000 of cash during fiscal year 2003 and
$836,000 in fiscal year 2002 as a result of normal equipment upgrades in
existing centers.
We used approximately $752,000 of cash for financing activities in fiscal year
2003 to pay down the long-term debt. We used approximately $1,372,000 of cash
during fiscal year 2002 to reduce debt. We have no assurance that any additional
financing, if required, will be available on terms acceptable to us.
Overall, our current assets exceed our current liabilities at September 30,
2003.
Contractual Obligations
The following table summarizes our contractual obligations as of September 30,
2003:
Payment Due By Period
----------------------------------------------------------------------------------
------------- -- ------------- --- ------------- -- ------------ --- -------------
Contractual Obligations Total < 1 Year 1-3 Years 3-5 Years > 5 Years
- ------------------------------- ------------- ------------- ------------- ------------ -------------
- ------------------------------- ------------- ------------- ------------- ------------ -------------
Long-term Debt $2,881,549 $775,308 $1,892,711 $148,204 $65,326
Capital Lease 445,137 171,050 274,087 0 0
Operating Lease 33,074,297 2,606,801 7,664,567 2,436,572 20,366,357
Please refer to Footnote No. 5 in audited consolidated Financial Statements
on page 50.
Risk Factors
- -------------
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially than those anticipated
in these forward-looking statements as a result of factors both in and out of
our control, including the risks faced by us described below and elsewhere in
this Form 10-K. You should carefully read the risks described below. The risks
described below are not the only risks facing us. We have only described the
risks we consider to be the most material. There may be additional risks that
are viewed by us as not material or that are not presently known to us.
Risks Related to UCI Medical Affiliates, Inc.
- ----------------------------------------------
We can provide you no assurance that we will be able to implement
successfully our bankruptcy reorganization plans and continue as a going
concern.
On November 2, 2001, we filed a voluntary petition for protection under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court for the District
of South Carolina. We filed the bankruptcy petition because of our
heavily-burdened debt structure and our lack of liquidity.
In the course of our bankruptcy proceedings, we developed, in negotiation with
creditors and other interested constituencies, reorganization plans for our
company, our subsidiaries, and the professional corporations setting forth how
claims against and equity interests in the companies will be treated. We
submitted these plans of reorganization to the Bankruptcy Court on May 6, 2002,
and filed addendums to the plans with the Bankruptcy Court on June 14, 2002 and
July 29, 2002. By August 8, 2002, the Bankruptcy Court had issued orders
confirming all of the reorganization plans. For a summary description of the
terms of the reorganization plans as confirmed, please see our Current Report on
Form 8-K filed with the SEC on August 16, 2002. Although we have been able to
obtain confirmation of the reorganization plans by the Bankruptcy Court, it
remains uncertain whether we will be able to continue to implement successfully
the reorganization plans and continue as a going concern. Thus, any investment
in our shares of common stock is highly speculative.
We have a history of losses.
We have a history of operating losses, liquidity problems, uncertainty of
revenues, markets, profitability and the need for additional funding. We
incurred net losses of approximately $1,475,000, $6,102,000, $10,508,000,
$84,000 and $1,360,000 for the years ended September 30, 2001, 2000, 1998, 1997
and 1995, respectively. We had net income of $2,375,000, $1,394,000, $910,000
and $466,000 for the years ended September 30, 2003, 2002, 1999 and 1996,
respectively. Thus, our financial viability and ability to continue as a going
concern depend on our ability to achieve a significant increase in income from
operations, maintain adequate working capital and obtain satisfactory long-term
financing. We can provide you with no assurance, however, that we can realize
these goals or that we will be profitable in the future or successful in
refinancing or renewing our outstanding debt.
We can provide no assurance that our medical centers will be able to
compete effectively with other existing healthcare providers.
The business of providing healthcare-related services is highly competitive.
Many companies, including professionally managed physician practice management
companies like us, have been organized to acquire medical clinics, manage the
clinics, and employ clinic physicians at the clinics. Large hospitals, other
physician practice centers, private doctor's offices and healthcare companies,
HMOs, and insurance companies are also involved in activities similar to ours.
Because our main business is the provision of medical services to the general
public, our primary competitors are the local physician practices and hospital
emergency rooms in the markets where we own medical centers. All of our medical
centers are located in the States of South Carolina and Tennessee. Some of these
competitors have longer operating histories and significantly greater resources
than we do. In addition, these traditional sources of medical services, such as
hospital emergency rooms and private physicians, have had in the past a higher
degree of recognition and acceptance than the medical centers that we operate.
We cannot assure you that we will be able to compete effectively or that
additional competitors will not enter the market in the future.
If a regulatory authority finds that our organization and relationships do
not comply with existing or future laws and regulations, our operations
could be materially adversely affected.
As a participant in the healthcare industry, our operations and relationships
are subject to extensive and increasing regulation by a number of governmental
bodies at the federal, state and local levels. Although we have tried to
structure our business to comply with these existing laws and regulations, we
have had little guidance as to whether we comply or not because of the unique
structure of our business operations. We cannot assure you that a review by the
courts or regulatory authorities of our former or current business will not
result in a determination that could adversely affect our operations. In
particular, we can provide you with no assurance that a court or regulatory body
would find that our structure and business operations comply with the following:
o State and federal laws limiting the provision of medical services by
business corporations;
o State and federal anti-kickback and self-referral laws;
o Antitrust laws; and
o Federal and state laws and regulations governing insurance companies,
HMOs, and other managed care organizations.
We have provided you with a discussion of each of these areas in the section
titled "Government Regulation" under Item 1 above. Furthermore, the laws and
regulations governing the healthcare industry change rapidly and constantly. In
the future, the regulatory environment may change in a manner as to require us
to modify or restrict our existing operations and any proposed expansion of our
business. Restrictions on or modifications of our operations because of a
changing regulatory environment could materially adversely affect our business.
If the laws, regulations, and policies governing government-sponsored
healthcare programs are changed, our operations could be materially
adversely affected.
Historically, we derive approximately six percent of our revenues from payments
made by government-sponsored healthcare programs (principally, Medicare and
Medicaid). As a result, any change in the laws, regulations, or policies
governing reimbursements could adversely affect our operations. Additionally,
state and federal civil and criminal statutes impose substantial penalties,
including civil and criminal fines and imprisonment, on healthcare providers
that fraudulently or wrongfully bill governmental or other third-party payors
for healthcare services. We believe that we are in material compliance with
these laws, but we cannot assure you that our activities will not be challenged
or scrutinized by governmental authorities.
Departures of our key personnel or directors will impair our operations.
We have the following executive officers: D. Michael Stout, M.D., our
President, Chief Executive Officer and Director of Medical Affairs; and Jerry F.
Wells, Jr., CPA, our Executive Vice President, Chief Financial Officer, and
Corporate Secretary. They are instrumental in our organization and are the key
management officials in charge of our daily business operations. We cannot be
assured of the continued service of either of them, and each of them would be
difficult to replace. Additionally, our directors' community involvement,
diverse backgrounds, and extensive business relationships are important to our
success.
Because of the nature of our business, we run the risk that we will be
unable to collect the fees that we have earned. Virtually all of our
consolidated net revenue was derived in the past, and we believe will be derived
in the future, from our medical centers' charges for services on a
fee-for-service basis. Accordingly, we assume the financial risk related to
collection, including the potential uncollectability of accounts, long
collection cycles for accounts receivable, and delays attendant to reimbursement
by third party payors, such as governmental programs, private insurance plans
and managed care organizations. Increases in write-offs of doubtful accounts,
delays in receiving payments or potential retroactive adjustments, and penalties
resulting from audits by payors may require us to borrow funds to meet our
current obligations or may otherwise have a material adverse effect on our
financial condition and results of operations.
We are subject to certain special risks in connection with the intangible
assets reported on our balance sheet. As a result of our various acquisition
transactions, intangible assets (net of accumulated amortization) of
approximately $3.4 million have been recorded on our balance sheet as of
September 30, 2003. Because of a change in accounting principles adopted by the
accounting profession, we ceased amortizing our intangible assets in the fiscal
year ending September 30, 2002. Instead, after an initial review of our
intangible assets for impairment in connection with our adoption of this new
accounting principle, we analyze our intangible assets on an annual basis for
impairment of value.
Under these current accounting standards, our net unamortized balance of
intangible assets acquired was not considered to be impaired as of September 30,
2003. In the past, however, we have recorded impairments to our intangible
assets when appropriate. For example, effective September 30, 2001, we recorded
impairment in the approximate amount of $750,000 to reduce our intangible assets
to fair value. We recorded this impairment because we combined two of our
Knoxville, Tennessee locations, and we deemed that the goodwill associated with
the closed location was impaired and should be written off. Prior to that, we
recorded impairment in the quarter ended March 31, 2000 in the approximate
amount of $3.6 million to reduce our intangible assets to fair value. This
impairment was required in connection with the closing of our medical centers in
Georgia. See further discussion in Item 7 above.
We cannot assure you that we will ever realize the value of our remaining
intangible assets in the future. We may be required to recognize that the value
of our intangible assets has been further impaired in our subsequent annual
reviews upon analyzing our operating results. Any future determination that a
significant impairment has occurred would require us to write-off the impaired
portion of our remaining intangible assets, which could have a material adverse
effect on our results of operations.
Our business is concentrated in specific geographic locations and could be
affected by a depressed economy in these areas.
We provide our services to areas in South Carolina and Tennessee. A stagnant or
depressed economy in these states could affect all of our markets and adversely
affect our business and results of operations.
Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, and other attacks, acts of war, or
military actions, such as continued military actions in Iraq or elsewhere,
may adversely affect our operating results and financial condition.
The attacks of September 11, 2001 have contributed to major instability in the
U.S. and other financial markets. These terrorist attacks, the military
response, such as the continued military actions in Iraq or elsewhere, and other
future developments, may adversely affect prevailing economic conditions. These
developments, depending on their magnitude, could have a material adverse effect
of our operating results and financial condition.
Risks Related to Our Common Stock
Shareholders may have difficulty in selling their shares because we have
filed a voluntary petition for protection under Chapter 11 of the
Bankruptcy Code.
On November 12, 2001, we, along with our subsidiaries and affiliated
professional corporations, filed voluntary petitions for protection under
Chapter 11 of the Bankruptcy Code. We filed the bankruptcy petitions because of
our heavily-burdened debt structure and our lack of liquidity. Although the
reorganization plans have been confirmed by the Bankruptcy Court, it remains
uncertain whether we will be able to implement successfully the terms of the
reorganization plans and continue as a going concern.
Because of the uncertainty resulting from our financial distress and our ongoing
reorganization proceedings, our common stock is not attractive to many
investors. Consequently, should you desire to sell your shares, you may not be
able to find a buyer.
You may have difficulty in selling your shares because of the absence of
an active public market.
On October 20, 1998, our common stock was delisted for trading on the NASDAQ
SmallCap Market. Shortly before our delisting, NASDAQ raised its criteria to
remain listed on the NASDAQ SmallCap Market. Our delisting was a consequence of
our failure to meet the increased requirements for the value of assets for
companies traded on the NASDAQ SmallCap Market.
Because our stock is no longer listed on the NASDAQ SmallCap Market, trading in
our common stock is conducted in the over-the-counter market. Consequently, our
stockholders have found disposing of shares of our common stock and obtaining
accurate quotations of its market value more difficult. In addition, the
delisting makes our common stock substantially less attractive as:
o collateral for loans;
o an investment by financial institutions because of their internal
policies or state legal investment laws;
o consideration to finance any future acquisitions of medical practices;
and,
o an investment opportunity by investors should we desire to raise
additional capital in the future. Although our common stock is currently
eligible for quotation on the over-the-counter bulletin board, we have been
informed that the NASD may be considering higher standards for permitting
quotations of securities on the bulletin board. If the NASD does raise its
standards, the over-the-counter bulletin board may no longer be available as a
trading market for our stockholders as well. Consequently, potential investors
should only invest in our common stock if they have a long-term investment
intent. If an active market does not develop and a shareholder desires to sell
its shares of our common stock, the shareholder will be required to locate a
buyer on its own and may not be able to do so.
The absence of a public market makes the price of our common stock
particularly volatile and susceptible to market fluctuations.
Trading in our common stock has historically been very limited, and we cannot
assure you that an active trading market for our common stock will ever develop
or be sustained. Because of the limited trading liquidity in our common stock,
the market price of our common stock has been vulnerable to significant
fluctuations in response to very limited market trading in our shares. Sales of
substantial amounts of our common stock, or the availability of substantial
amounts of our common stock for future sale, could adversely affect the
prevailing market price of our common stock. The market price of our common
stock will remain subject to significant fluctuations in response to these
factors as well as in response to operating results and other factors affecting
stock prices generally. The stock market in recent years has experienced price
and volume fluctuations that often have been unrelated or disproportionate to
the operating performance of companies. These fluctuations, as well as general
economic and market conditions, may adversely affect the market price of our
common stock in the future.
Shareholders may have difficulty selling their shares because our common
stock is a "penny stock" and is subject to special SEC rules that make
transactions in our common stock burdensome for broker-dealers.
As long as the trading price of our common stock is less than $5.00 per share,
our common stock will be considered to be a "penny stock" under SEC rules.
Generally, a "penny stock" is any non-NASDAQ equity security that has a market
price of less than $5.00 per share. If a penny stock is traded in the secondary
market, these SEC rules require the broker-dealer to provide to the purchaser a
disclosure schedule explaining the penny stock market and the risks associated
with it. These SEC rules also require broker-dealers to abide by various sales
practices if they sell penny stocks to persons other than established customers
and accredited investors. For these penny stock transactions, the broker-dealer
must make a special determination that the investment in the penny stock is
suitable for the purchaser and receive the purchaser's written consent to the
purchase before the transaction. The additional burdens that these SEC rules
impose upon broker-dealers may discourage broker-dealers from effecting
transactions in our common stock and could severely limit a shareholder's
ability to sell its shares in the secondary market.
The market price of our common stock may fluctuate widely in the future.
The trading price of our common stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in our operating results, material
announcements made by us from time to time, governmental regulatory action,
general conditions in the healthcare industry, or other events, or factors, many
of which are beyond our control. In addition, the stock market has experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of many healthcare services companies and which have often been
unrelated to the operating performance of these companies. Our operating results
in future quarters may be below the expectations of securities analysts and
investors. In this event, the price of our common stock would likely decline,
perhaps substantially.
The market price of our common stock may decline should substantial number
of shares of our common stock be offered for sale on the open market.
Sales of substantial amounts of our common stock in the public market, or the
perception that these sales could occur, could adversely affect prevailing
market prices of our common stock and could impair our future ability to raise
capital through the sale of our equity securities. We are unable to predict the
effect, if any, that future sales of our common stock or the availability of our
common stock for sale may have on the market price of our common stock
prevailing from time to time.
Anti-takeover provisions in our certificate of incorporation and state
corporate laws could deter or prevent take-over attempts by a potential
purchaser of our common stock and deprive you of the opportunity to obtain
a takeover premium for your shares.
In many cases, stockholders receive a premium for their shares when a company is
purchased by another. Various provisions in our certificate of incorporation and
bylaws and state corporate laws could deter and make it more difficult for a
third party to bring about a merger, sale of control, or similar transaction
without approval of our board of directors. These provisions tend to perpetuate
existing management. As a result, our shareholders may be deprived of
opportunities to sell some or all of their shares at prices that represent a
premium over market prices. These provisions, which could make it less likely
that a change in control will occur, include:
provisions in our certificate of incorporation establishing three
classes of directors with staggered o terms, which means that only
one-third of the members of the board of directors is elected each year and
each director serves for a term of three years.
provisions in our certificate of incorporation authorizing the board
of directors to issue a series of preferred stock without shareholder
action, which issuance could discourage a third party from
o attempting to acquire, or make it more difficult for a third party to
acquire, a controlling interest in us.
We do not expect to pay dividends on our common stock in the foreseeable
future.
We have no source of income other than dividends that we receive from our
operating subsidiaries, UCI-SC and UCI-GA. Our ability to pay dividends to
shareholders will therefore depend on the subsidiaries' ability to pay dividends
to us. The subsidiaries intend to retain future earnings, if any, for use in the
operation and expansion of our business. Consequently, we do not plan to pay
dividends until we recover any losses that we have incurred and become
profitable. Additionally, our future dividend policy will depend on our
earnings, financial condition and other factors that our Board of Directors
considers relevant.
Shareholders may suffer dilution in their interests in our common stock if
we offer additional shares of common stock in the future or if certain
third parties exercise their option rights to acquire additional shares of
our common stock.
There is no present intent to offer for sale additional shares of common stock.
However, our success will depend on a number of factors, including the factors
set forth in this "Risk Factors" section of the Form 10-K. Accordingly, we
cannot ensure that, in the future, we will not have to seek additional capital
by offering and selling additional shares of common stock in order to continue
to operate, acquire additional medical practices in our current or other
markets, or achieve successful operations. If it becomes necessary to raise
additional capital to support our operations, there is no assurance that
additional capital will be available to us, that additional capital can be
obtained on terms favorable to us, or that the price of any additional shares
that may be offered by us in the future will not be less than the subscription
price paid by our shareholders. The effect on existing stockholders of sales of
additional shares of common stock cannot presently be determined.
As of September 30, 2003, CHC and CP&C, each of which is a wholly-owned
subsidiary of BCBS, owned in the aggregate 4,645,010 shares, or approximately
48.13 percent, of our outstanding common stock. Under various agreements among
CHC, CP&C and us, we have given these companies the right at any time to
purchase from us the number of shares of our voting stock as is necessary for
BCBS and its affiliated entities, as a group, to obtain and then maintain an
aggregate ownership of 48 percent of our outstanding voting stock. To the extent
either of these BCBS subsidiaries exercises its right in conjunction with a sale
of voting stock by us, the price to be paid by the BCBS subsidiary is the
average price to be paid by the other purchasers in that sale. Otherwise, the
price is the average closing bid price of our voting stock on the ten trading
days immediately preceding the election by a BCBS subsidiary to exercise its
purchase rights. Consequently, to the extent either of the BCBS subsidiaries
elects to exercise any or a portion of its rights under these anti-dilution
agreements, the sale of shares of common stock to a BCBS subsidiary will have
the effect of further reducing the percentage voting interest in us represented
by a share of the common stock.
The substantial ownership of our common stock by the BCBS subsidiaries,
MainStreet Healthcare Corporation, and other of our affiliates may provide them
with the ability to exercise substantial influence in the election of directors
and other matters submitted for approval by our stockholders. As a result, other
stockholders may be unable to successfully oppose matters that are presented by
these entities for action by stockholders, or to take actions that are opposed
by these entities. The ownership by these entities may also have the effect of
delaying, deterring, or preventing a change in our control without the consent
of these entities. These effects could reduce the value of our stock. In
addition, sales of common stock by these entities could result in another
stockholder obtaining control over us.
Item 7A. 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 $1,146,000 of our debt at September 30, 2003 was subject to fixed
interest rates and principal payments. Approximately $2,180,000 of our debt at
September 30, 2003 was subject to variable interest rates. Based on the
outstanding amounts of variable rate debt at September 30, 2003, our interest
expense on an annualized basis would increase approximately $22,000 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 8. Financial Statements and Supplementary Data
Reference is made to the Index to Financial Statements on Page 36.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Annual Controls Evaluation and Related CEO and CFO Certifications
Within the 90 days prior to the date of this Annual Report on Form 10-K, we
evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures" (Disclosure Controls). 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).
Certifications of the CEO and the CFO, which are required in accord with Rule
13a-14 of the Securities Exchange Act of 1934 (the Exchange Act), are located at
exhibits 31.1 and 31.2, respectively. This Controls and Procedures section
includes the information concerning the controls evaluation referred to in those
certifications and should be read in conjunction with the certifications for a
more complete understanding of the topics addressed.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange
Act, such as this Annual Report, is recorded, processed, summarized and reported
within the time periods specified in the U.S. Securities and Exchange
Commission's (SEC) rules and forms. Disclosure Controls are also designed to
ensure that such information is accumulated and communicated to our management,
including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure. Our Disclosure Controls include components of our internal
control over financial reporting, which consists of control processes designed
to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements in accordance with U.S.
Generally Accepted Accounting Principles ("GAAP". To the extent that components
of our internal control over financial reporting are included in our Disclosure
Controls, they are included in the scope of our annual controls evaluation.
Limitations on the Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our Disclosure
Controls or our internal control over financial reporting will prevent all
errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system's objectives will be met. Further, the design of a control system must
reflect the fact that resource constraints exist, 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 our 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. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls 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, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. 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 evaluation of our Disclosure Controls included a review of the controls'
objectives and design, our implementation of the controls, and the effect of the
controls on the information generated for use in this Annual Report. In the
course of the controls evaluation, we sought to identify data errors, controls
problems, or acts of fraud and confirm that appropriate corrective actions,
including process improvements, were being undertaken. This evaluation is
performed on a quarterly basis so that the conclusions of management, including
the CEO and CFO, concerning controls effectiveness can be reported in our
Quarterly Reports on Form 10-Q and to supplement the disclosures made in our
Annual Report on Form 10-K. Many of the components of our Disclosure Controls
are also evaluated on an ongoing basis by our finance personnel, as well as our
independent auditors who evaluate them in connection with determining their
auditing procedures related to their report on our annual financial statements.
The overall goals of these various evaluation activities are to monitor our
Disclosure Controls as dynamic systems that change as conditions warrant.
Among other matters, we also considered whether our evaluation identified any
"significant deficiencies" or "material weaknesses" in our internal control over
financial reporting and whether we had identified any acts of fraud involving
personnel with a significant role in our internal control over financial
reporting. This information was important both for the controls evaluation
generally and because Item 5 in the Exhibit 31.1 and 31.2 certifications of the
CEO and CFO requires that the CEO and CFO disclose that information to our
Board's Audit Committee and to our independent auditors. In the professional
auditing literature, "significant deficiencies" are referred to as "reportable
conditions", which are deficiencies in the design or operation of controls that
could adversely affect our ability to record, process, summarize, and report
financial data in the financial statements. Auditing literature defines
"material weakness" as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
erroneous or fraudulent misstatements (which would be undetected within a timely
period by employees in the normal course of performing their assigned functions)
may occur in amounts that would be material in relation to the financial
statements. We also sought to address 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 accordance with our ongoing
procedures.
Conclusions
Based upon the controls evaluation, our CEO and CFO have concluded that, subject
to the limitations noted above, as of the date of the controls evaluation, our
Disclosure Controls were effective to provide reasonable assurance that material
information relating to our company and its consolidated subsidiaries is made
known to management, including the CEO and CFO, particularly during the period
when our periodic reports are being prepared.
From the date of the controls evaluation to the date of this Annual Report,
there have been no significant changes in internal control over financial
reporting or in other factors that could significantly affect internal control
over financial reporting, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Harold H. Adams, Jr., CPCU, 56, has served as one of our directors since June
1994 and as President and owner of Adams and Associates, International and
Southern Insurance Managers since June 1992. He served as President of Adams
Eaddy and Associates, an independent insurance agency, from 1980 to 1992. Mr.
Adams has been awarded the Chartered Property Casualty Underwriter designation
and is currently a member of the President's Board of Visitors of Charleston
Southern University in Charleston, South Carolina. He has received numerous
professional awards as the result of over 32 years of involvement in the
insurance industry and is a member of many professional and civic organizations.
Mr. Adams was most recently reelected as a director at the annual meeting of
stockholders in 2003.
Charles M. Potok, 55, has served as one of our directors since September 1995;
as Executive Vice President and Chief Operating Officer of Companion Property
and Casualty Insurance Company, a wholly-owned subsidiary of Blue Cross and Blue
Shield of South Carolina, since March 1984; and, as President of Companion
Property and Casualty Insurance Company since April 2002. Mr. Potok is an
Associate of the Casualty Actuarial Society and a member of the American Academy
of Actuaries. Prior to joining Companion Property and Casualty Insurance
Company, Mr. Potok served as Chief Property and Casualty Actuary and Director of
the Property and Casualty Division of the South Carolina Department of
Insurance. Mr. Potok was most recently reelected as a director at the annual
meeting of stockholders in 2003.
Ashby M. Jordan, M.D., 64, has served as one of our directors since August 1996
and as Vice President of Medical Affairs of Blue Cross and Blue Shield of South
Carolina since December 1986. Prior to joining Blue Cross and Blue Shield of
South Carolina, Dr. Jordan was the Vice President of Medical Affairs for CIGNA
HealthPlan of South Florida, Inc. Dr. Jordan is Board Certified by the American
Board of Pediatrics. Dr. Jordan was most recently reelected as a director at the
annual meeting of stockholders in 2003.
John M. Little, Jr., M.D., MBA, 53, has served as one of our directors since
August 11, 1998 and as Chief Medical Officer of Companion HealthCare
Corporation, a wholly-owned subsidiary of Blue Cross and Blue Shield of South
Carolina, since 1996. Dr. Little is currently the Vice President for Health Care
Services at Blue Cross and Blue Shield of South Carolina. Additionally, he has
served since 1994 as Medical Director of Managed Care Services of Companion
HealthCare Corporation, as Chairman of the Quality Assurance Committee and the
Pharmacy and Therapeutics Committee of Companion HealthCare Corporation, and as
a Co-Chair of the Managed Care Oversight Committee of Companion HealthCare
Corporation. Prior to joining Companion HealthCare Corporation in 1994, Dr.
Little served as Assistant Chairman for Academic Affairs, Department of Family
Practice, Carolinas Medical Center, Charlotte, North Carolina from 1992 to 1994.
Dr. Little was most recently reelected as a director at the annual meeting of
stockholders in 2003.
Louis M. McElveen, CPA, CVA, 41, received his B.S. in Accounting, as well as his
Masters degree in Accountancy/Taxation from the University of South Carolina. He
is licensed to practice accounting in multiple states and is a member of several
societies including: American Institute of Certified Public Accountants, the
South Carolina Association of Certified Public Accountants, where he is also
Chairman of the Taxation Committee, and the National Association of Certified
Valuation Analysts. Mr. McElveen is currently the Chief Financial Officer of
Southern Anesthesia & Surgical, Inc, a privately-owned, national pharmaceutical
distribution company. Prior to joining Southern Anesthesia & Surgical, Inc., he
was Partner in Charge of Taxation with Scott McElveen, L.L.P., a private CPA
firm and our current independent accountants. Mr. McElveen has had 17 years of
public accounting experience, nine years of which, were spent with international
accounting firms. Mr. McElveen is a board member of several local non-profit
organizations. Mr. McElveen was most recently elected as a director at the
annual meeting of stockholders in 2003.
Timothy L. Vaughn, CPA, 38, has served as Chief Financial Officer of Companion
HealthCare since January 2000. Prior to January 2000, Mr. Vaughn was Contracts
Manager for Blue Cross Blue Shield of South Carolina's TRICARE line of business.
This federal program provides health benefits administration for military
dependents and retirees across the nation. Mr. Vaughn is a Certified Public
Accountant and is a Fellow in both the Academy of Healthcare Management and Life
Management institute and is currently serving as Corporate Secretary and
Treasurer of EAP Alliance, Inc., which provides employee assistance programs to
business and industry. He is a member of numerous civic and professional
organizations. Mr. Vaughn was most recently elected as a director at the annual
meeting of stockholders in 2003.
Executive Officers
The following sets forth certain information concerning our executive officers
of UCI who do not also serve on the Board of Directors.
D. Michael Stout, M.D., 58, has served as Executive Vice President of Medical
Affairs of UCI and DC-SC since 1983 and as President and Chief Executive Officer
of UCI, UCI-SC, UCI-GA and the P.A.'s since November 1, 2002. He is Board
Certified in Emergency Medicine and is a member of the American College of
Emergency Physicians, the Columbia Medical Society, and the American College of
Physician Executives.
Jerry F. Wells, Jr., CPA, 41, has served as UCI's Executive Vice President and
Chief Financial Officer since he joined us in February 1995 and as UCI's
Corporate Secretary since December 1996. He has served as Executive Vice
President of Finance, Chief Financial Officer and Corporate Secretary of UCI-SC
since December 1996, and of UCI-GA since its organization in February 1998, and
as Corporate Secretary of DC-SC since December 1996. Prior to joining us, he
served as a Senior Manager and consultant for Pricewaterhouse Coopers LLP from
1985 until February 1995. Mr. Wells is a Certified Public Accountant and is a
member of the American Institute of Certified Public Accountants, the South
Carolina Association of Certified Public Accountants, and the North Carolina CPA
Association.
Board of Directors and Board Committees
Board of Directors
The Board of Directors met or acted by written consent a total of six times
during our fiscal year ended September 30, 2003. No director attended fewer than
75 percent of the total of such Board meetings and the meetings of the
committees upon which the director served. Among the standing committees
established by the Board of Directors are a Compensation Committee, an Audit
Committee, and a Revenue Enhancement Committee. The Board of Directors has not
established a separate nominating committee for recommending to stockholders
candidates for positions on the Board of Directors. The Board of Directors
acting as a whole currently performs such functions. Currently, six directors
serve on the Board of Directors.
Audit Committee
During our fiscal year ended September 30, 2003, the Audit Committee consisted
of Mr. Adams, Mr. Johnson, and Dr. Jordan. For the fiscal year beginning on
October 1, 2003, the Audit Committee consists of Mr. McElveen, Mr. Vaughn, and
Mr. Adams, with Mr. McElveen acting as Chairman. This committee recommends to
the Board of Directors the engagement of our independent auditors, determines
the scope of the auditing of our books and accounts, reviews the reports
submitted by the auditors, examines procedures employed in connection with our
internal control structure, reviews and approves the terms of acquisitions
between us and any related party entities, undertakes certain other activities
related to our fiscal affairs, and makes recommendations to the Board of
Directors as may be appropriate. This committee met two times during our fiscal
year ended September 30, 2003. The Board of Directors has determined that UCI
has at least one audit committee financial expert serving on its audit
committee. Mr. McElveen is the financial expert, as that term is defined in Item
401(h)(2) of Regulation S-K under the Exchange Act, and is independent as that
term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Compensation Committee
During our fiscal year ended September 30, 2003, the Compensation Committee
consisted of Dr. Little, Mr. Johnson, and Mr. Potok. For the fiscal year
beginning on October 1, 2003, the Compensation Committee consists of Mr. Potok,
Dr. Jordan and Dr. Little, with Mr. Potok acting as Chairman. This committee
monitors our executive compensation plan, practice and policies, including all
salaries, bonus awards, and fringe benefits, and makes recommendations to the
Board of Directors with respect to changes in existing executive compensation
plans and the formation and adoption of new executive compensation plans. This
committee met two times during our fiscal year ended September 30, 2003. The
report of the Compensation Committee appears in this Form 10-K on page 30.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires the directors, officers, and beneficial
owners of more than ten percent of a registrant's common stock to file reports
of holdings and acquisitions in common stock with the Securities and Exchange
Commission. To our knowledge, based solely on our records and a review of the
copies of such reports furnished to us, we believe that our directors, officers,
and beneficial owners of more than ten percent of our stock complied with all
SEC filing requirements applicable to them in respect to our fiscal year ended
September 30, 2003, with the exception of a delayed Form 3 filing by Mr.
McElveen and Mr. Vaughn, after being elected as directors during 2003. Neither
Mr. McElveen nor Mr. Vaughn beneficially owns any shares of UCI's common stock.
Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. We have filed a copy of
this Code as Exhibit 14 to this Form 10-K.
Item 11. Executive Compensation
The following table sets forth the total compensation earned during the fiscal
year ended September 30, 2003 and during each of the two prior fiscal years by
our President and Chief Executive Officer and our other executive officers whose
annual compensation from us exceeded $100,000 for all services provided to us.
No other executive officers earned compensation in excess of $100,000 for
services provided to us in any of the three fiscal years reflected in the table.
Summary Compensation Table
Long Term
Compensation
Annual Awards
Compensation
Securities
Underlying All Other
Name and Principal Position Fiscal Year Salary (1) Bonus (1) Options Compensation (2)
--------------------------- ----------- ---------- --------- ------- ----------------
M. F. McFarland, III, M.D. 2003 $ 28,000 (3) $238,000 0 0
Chairman, President and 2002 325,000 (3) 155,500 0 9,272
Chief Executive Officer 2001 325,000 (3) 0 0 9,272
D. Michael Stout, M.D. 2003 $ 227,000 (4$ 88,000 0 0
Executive Vice President of 2002 210,000 (4) 58,000 0 0
Medical Affairs 2001 210,000 (4) 0 0 0
Jerry F. Wells, Jr., CPA 2003 $ 144,500 $ 39,000 0 0
Executive Vice President, 2002 138,000 38,000 0 0
Chief Financial Officer, 2001 112,000 0 0 0
and Corporate Secretary
(1) Amounts included under the heading "Salary" and "Bonus" include
compensation from both UCI-SC and DC-SC. The remuneration described in
the table above does not include our cost of benefits furnished to
certain officers that were extended in connection with the conduct of
our business. The amount of such benefits accrued for each of the named
executives in each of the years reflected in the table did not exceed
10% of the total annual salary and bonus reported for such executive in
such year.
(2) Amounts included under the heading "All Other Compensation" are
comprised of premiums for long-term disability and life insurance
provided by us for the benefit of Dr. McFarland.
(3) For services performed by Dr. McFarland for UCI-SC, Dr. McFarland
received an annual salary of $157,500 during each of the two fiscal
years ended September 30, 2002 and 2001. For services performed by Dr.
McFarland for DC-SC, an affiliated professional association which was
wholly owned by Dr. McFarland that contracts with UCI-SC to provide all
medical services at our medical facilities, Dr. McFarland received an
annual salary of $167,500 for each of the two fiscal years ended
September 30, 2002 and 2001. Dr. McFarland's employment with UCI-SC and
DC-SC terminated on November 1, 2002.
(4) For services performed by Dr. Stout for UCI-SC, Dr. Stout received an
annual salary of $50,000 in each of the three fiscal years ended
September 30, 2003, 2002, and 2001. For services performed by Dr. Stout
for DC-SC, Dr. Stout received an annual salary of $160,000 in each of
the two fiscal years ended September 30, 2002 and 2001. Dr. Stout has
served as the President and Chief Executive Officer of UCI, UCI-SC,
UCI-GA, and DC-SC since November 1, 2002.
Fiscal Year End Option Values
The following table sets forth certain information with respect to unexercised
options to purchase our common stock held at September 30, 2003. None of the
named executive officers exercised any options during the fiscal year ended
September 30, 2003. Additionally, no options were granted to any officer or
director during the fiscal year ended September 30, 2003.
2003 FISCAL YEAR END
OPTION VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money
Fiscal Year End Options at Fiscal Year End
------------------------------------------ ---------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------- ---------------------- -------------------- -------------------
0 0 0 0
M.F. McFarland, III, M.D. Chairman,
President and Chief
Executive Office (1)
109,825 0 0 0
D. Michael Stout, M.D.
Executive Vice President of
Medical Affairs (2)
134,825 0 0 0
Jerry F. Wells, Jr., CPA
Executive Vice President,
Chief Financial Officer, and
Secretary
(1) Dr. McFarland's employment with UCI-SC and DC-SC terminated on November 1,
2002.
(2) Dr. Stout has served as the President and Chief Executive Officer of UCI,
UCI-SC, UCI-GA, and DC-SC since November 1, 2002.
Director Compensation
We pay our non-employee directors a fee of $500 for attendance at each meeting
of our Board of Directors. We reimburse our non-employee directors for all
out-of-pocket expenses reasonably incurred by them in the discharge of their
duties as directors, including out-of-pocket expenses incurred in attending
meetings of the Board of Directors.
During the fiscal year ended September 30, 1996, we adopted a Non-Employee
Director Stock Option Plan (the "1996 Non-Employee Plan"). The 1996 Non-Employee
Plan provided for the granting of options to two non-employee directors for the
purchase of 10,000 shares of our common stock at the fair market value as of the
date of grant. Under this plan, we issued 5,000 options to Harold H. Adams, Jr.,
CPCU and 5,000 options to Russell J. Froneberger. These options are exercisable
during the period commencing on March 20, 1999 and ending on March 20, 2006. At
September 30, 2003, stock options for 5,000 shares were outstanding under the
1996 Non-Employee Plan, all of which were exercisable.
During the fiscal year ended September 30, 1997, we adopted a Non-Employee
Director Stock Option Plan (the "1997 Non-Employee Plan"). The 1997 Non-Employee
Plan provided for the granting of options to three non-employee directors for
the purchase of 20,000 shares of our common stock at the fair market value as of
the date of grant. Under this plan, we issued 5,000 options each to Thomas G.
Faulds, Ashby M. Jordan, M.D., and Charles M. Potok. These options are
exercisable during the period commencing on March 28, 2000 and ending on March
28, 2007. At September 30, 2003, stock options for 10,000 shares were
outstanding under the 1997 Non-Employee Plan, all of which were exercisable.
Employment Contracts
None.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended September 30, 2003, the Compensation Committee of
the Board of Directors decided matters of executive compensation. The
Compensation Committee was composed of Dr. Little, Mr. Johnson, and Mr. Potok.
None of the members of the Compensation Committee have served as our executive
officers or employees or as executive officers or employees of any of our
subsidiaries. None of the members of the Compensation Committee served as
members of the compensation committees of another entity. None of our executive
officers served as a member of the compensation committee of another entity, one
of whose executive officers served on our Compensation Committee. None of our
executive officers served as a director of another entity, one of whose
executive officers served as one of our directors.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors generally determines the
compensation of our executive officers and has furnished the following report
with respect to certain compensation paid or awarded to our executive officers
during the fiscal year ended September 30, 2003.
General Policies. Our compensation program is intended to enable us to attract,
motivate, reward, and retain the management talent to achieve corporate
objectives and thereby increase shareholder value. Our policy is to provide
incentives to senior management to achieve both short-term and long-term
objectives. To attain these objectives, our executive compensation program is
composed of a base salary and bonus.
Base Salary. Base salaries for Dr. Stout and Mr. Wells were determined by a
subjective assessment of the executive officer's performance, in light of the
officer's responsibilities and position with us and our performance during prior
periods. In evaluating our overall performance, the primary focus is upon not
only our financial performance, but also on the personal performance of the
executives in areas such as quality assurance and personal development.
Incentive Compensation. Incentive compensation for Dr. Stout and Mr. Wells was
established in their respective employment agreements, both of which are no
longer in effect as of the date of the most recent proxy statement, and were
most influenced by our profitability. Such compensation is completely "at risk"
depending upon our performance. The Compensation Committee reviews periodically,
and adjusts accordingly, incentive compensation.
Stock Options. Executive compensation includes the grant of stock options in
order to more closely align the interests of the executive with the long-term
interests of the shareholders.
For the fiscal year beginning on October 1, 2003, the Compensation
Committee consists of Mr. Potok, Dr. Jordan and Dr. Little, with Mr. Potok
acting as Chairman.
Performance Graph
The following graph compares cumulative total shareholder return of UCI's common
stock over a five-year period with The NASDAQ Stock Market (US) Index and with a
Peer Group of companies for the same period. Total shareholder return represents
stock price changes and assumes the reinvestment of dividends. The graph assumes
the investment of $100 on September 30, 1998.
(INSERT GRAPH HERE)
Fiscal Year Ended
-----------------------------------------------------------------------------------
09/30/98 09/30/99 09/30/00 09/30/01 09/30/02 09/30/03
----------- ---------- ----------- ---------- ---------- ----------
UCI Medical Affiliates, Inc. 45.00 22.50 16.25 12.40 10.40 105.78
NASDAQ Market Index 103.92 168.12 229.98 94.23 75.81 111.80
Peer Group 93.24 36.76 45.57 103.61 69.79 91.80
The members of the Peer Group are Continucare Corporation, IntegraMed America,
Inc., Pediatrix Medical Group, Inc., and Metropolitan Health Networks. The
returns of each company in the Peer Group have been weighted according to their
respective stock market capitalization for purposes of arriving at a Peer Group
average. The prices of UCI's common stock used in computing the returns
reflected above are the average of the high and low bid prices reported for
UCI's common stock during the fiscal year ended on such dates.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information known to us regarding the
beneficial ownership of our common stock as of November 12, 2003. Information is
presented for (i) stockholders owning more than five percent of the outstanding
common stock, (ii) each of our directors and executive officers individually,
and (iii) all of our directors and executive officers, as a group. The
percentages are calculated based on 9,650,472 shares of common stock outstanding
on November 12, 2003.
Shares
Beneficially
Name Owned (1) Percentage
- ------------------------------------------------------------------------- --- ---------------- ------------
Blue Cross and Blue Shield of South Carolina (2)...............................4,645,010 48.13
MainStreet Healthcare Corporation (3)..........................................1,481,009 15.35
M.F. McFarland, III, M.D. (4)....................................................521,962 5.41
Harold H. Adams, Jr................................................................2,500 *
Ashby M. Jordan, M. D................................................................. 0 *
A. Wayne Johnson.......................................................................0 *
John M, Little, Jr., M.D...............................................................0 *
Louis M. McElveen......................................................................0 *
Charles M. Potok.......................................................................0 *
Timothy L. Vaughn......................................................................0 *
D. Michael Stout, M.D. (5).......................................................414,185 4.00
Jerry F. Wells, Jr., CPA (6).....................................................134,825 1.40
All current directors and executive officers
As a group (8 persons).......................................................551,510 5.70
* Amount represents less than 1.0 percent.
(1) Beneficial ownership reflected in the table is determined in accordance
with the rules and regulations of the SEC and generally includes voting
or investment power with respect to securities. Shares of common stock
issuable upon the exercise of options currently exercisable or
convertible, or exercisable or convertible within 60 days, are deemed
outstanding for computing the percentage ownership of the person
holding such options, but are not deemed outstanding for computing the
percentage ownership of any other person. Except as otherwise
specified, each of the stockholders named in the table has indicated to
us that such stockholder has sole voting and investment power with
respect to all shares of common stock beneficially owned by that
stockholder.
(2) The business address of the named beneficial owner is I-20 at Alpine
Road, Columbia, SC 29219. The shares reflected in the table are held of
record by CHC (4,026,829 shares) and CP&C (618,181 shares), each of
which is a wholly owned subsidiary of BCBS.
(3) The business address of the named beneficial owner is 2370 Main Street,
Tucker, Georgia 30084.
(4) The business address of the named beneficial owner is 1829 Senate
Street, Columbia, SC 29201.
(5) Includes 109,825 shares issuable pursuant to currently exercisable
stock options.
(6) All shares are issuable pursuant to currently exercisable stock
options.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued
upon the exercise of options, warrants, and rights under all of our existing
equity compensation plans as of September 30, 2003.
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans [excluding
outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a)]
- ---------------------------------- ----------------------- ----------------------- -------------------------
- ---------------------------------- ----------------------- ----------------------- -------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 491,650 2.80 423,350
Equity compensation plans not
approved by security holders
-- -- --
----------------------- ----------------------- -------------------------
----------------------- ----------------------- -------------------------
Total 491,650 2.80 423,350
======================= ======================= =========================
Item 13. Certain Relationships and Related Transactions
Administrative Services Agreements
UCI-SC has entered into an Administrative Services Agreement with DC-SC. UCI-GA
has entered into Administrative Services Agreements with Doctors Care of
Tennessee, P.C. Under these Administrative Services Agreements, UCI-SC and
UCI-GA perform all non-medical management of the P.A.'s and have exclusive
authority over all aspects of the business of the P.A.'s (other than those
directly related to the provision of patient medical services or as otherwise
prohibited by state law). The non-medical management provided by UCI-SC and
UCI-GA includes, among other functions, treasury and capital planning, financial
reporting and accounting, pricing decisions, patient acceptance policies,
setting office hours, contracting with third party payors, and all
administrative services. UCI-SC and UCI-GA provide all of the resources
(systems, procedures and staffing) to bill third party payors or patients, and
provide all of the resources (systems, procedures and staffing) for cash
collection and management of accounts receivables, including custody of the
lockbox where cash receipts are deposited. From the cash receipts, UCI-SC and
UCI-GA pay all physician salaries, operating costs of the centers and of UCI-SC
and UCI-GA. UCI-SC and UCI-GA set compensation guidelines for the licensed
medical professionals at the P.A.'s establish guidelines for establishing,
selecting, hiring, and firing the licensed medical professionals. UCI-SC and
UCI-GA also negotiate and execute substantially all of the provider contracts
with third party payors, with the P.A.'s executing certain of the contracts at
the request of a minority of payors. Neither UCI-SC nor UCI-GA loans or
otherwise advances funds to any P.A. for any purposes.
During UCI's fiscal years ended September 30, 2003 and 2002, the P.A.'s received
an aggregate of approximately $43,518,000 and $38,527,000, respectively, in fees
prior to deduction by the P.A.'s of their payroll and other related deductible
costs covered under the Administrative Services Agreements and its predecessor
agreement. For accounting purposes, we combine the operations of the P.A.'s with
the operations of UCI, as reflected in our consolidated financial statements.
D. Michael Stout, M.D. is the sole shareholder and sole director of the P.A.'s,
and since November 1, 2002, has served as the President and Chief Executive
Officer of UCI, UCI-SC, UCI-GA, and the P.A.'s. Prior to November 1, 2002, Dr.
Stout was the Executive Vice President of Medical Affairs for UCI, UCI-SC, and
UCI-GA, and was the President of the P.A.'s.
Medical Center Leases
A partnership in which Dr. McFarland is a general partner leases to UCI-SC the
Doctors Care Northeast facility. We renewed the lease in October 1997 for a
fifteen-year term. We believe the terms of this lease to be no more or less
favorable to UCI-SC than those that would have been obtainable through
arm's-length negotiations with unrelated third parties for similar arrangements.
Total lease payments made by UCI-SC under this lease during the fiscal years
ended September 30, 2003 and 2002 were $96,000 each year, plus utilities and
real estate taxes.
Other Transactions with Related Parties
On May 13, 2003, CHC purchased 2,020,387 shares of common stock from MainStreet
Healthcare Corporation and other shareholders for 40 cents ($0.40) per share for
a total purchase price of $808,155.
At November 12, 2003, CHC owned 4,026,829 shares of common stock and CP&C owned
618,181 shares of common stock, which combine to approximately 48.13 percent of
the outstanding common stock. CHC and CP&C are wholly owned subsidiaries of
BCBS. The following is a historical summary of purchases of common stock by BCBS
subsidiaries directly from us.
Blue Cross and Blue Shield of South Price Total
Date Carolina Number per Purchase
Purchased Subsidiary of Shares Share Price
------------------- ------------------------------------- -------------- ------------ ------------------
12/10/93 Companion HealthCare Corporation 333,333 $1.50 $ 500,000
06/08/94 Companion HealthCare Corporation 333,333 3.00 1,000,000
01/16/95 Companion HealthCare Corporation 470,588 2.13 1,000,000
05/24/95 Companion HealthCare Corporation 117,647 2.13 250,000
11/03/95 Companion HealthCare Corporation 218,180 2.75 599,995
12/15/95 Companion HealthCare Corporation 218,180 2.75 599,995
03/01/96 Companion HealthCare Corporation 315,181 2.75 866,748
06/04/96 Companion Property and Casualty 218,181 2.75 599,998
06/23/97 Companion Property and Casualty 400,000 1.50 600,000
The common stock acquired by CHC and CP&C directly from us was purchased
pursuant to exemptions from the registration requirements of federal securities
laws available under Section 4(2) of the 1933 Act. Consequently, the ability of
the holders to resell such shares in the public market is subject to certain
limitations and conditions. CHC and CP&C purchased these shares at share prices
below market value at the respective dates of purchase in part as a consequence
of the lower issuance costs incurred by us in the sale of these unregistered
securities and in part as consequence of the restricted nature of the shares.
CHC and CP&C have the right to require registration of the stock under certain
circumstances as described in the respective stock purchase agreements.
These BCBS subsidiaries have the option to purchase as many shares as may be
necessary for BCBS and its subsidiaries in the aggregate to obtain and maintain
ownership of 48 percent of the outstanding common stock in the event that we
issue additional stock to other parties (excluding shares issued to our
employees or directors). To the extent either of these BCBS subsidiaries
exercises its right in conjunction with a sale of voting stock by us, the price
to be paid by such entity is the average price to be paid by the other
purchasers in that sale. Otherwise, the price is the average closing bid price
of our voting stock on the ten trading days immediately preceding the election
by a BCBS subsidiary to exercise its purchase rights. Consequently, to the
extent either of the BCBS subsidiaries elects to exercise any or a portion of
its rights under these anti-dilution agreements, the sale of shares of common
stock to a BCBS subsidiary will have the effect of reducing the percentage
voting interest in us represented by a share of the common stock.
During the fiscal year ended September 30, 1998, UCI-SC entered into a capital
lease purchase agreement with BCBS for a new billing and accounts receivable
system, which includes computer equipment, for an aggregate purchase price of
$1,253,000. UCI-SC has the option to purchase the equipment at the end of the
lease term for $1. The lease obligation recorded at September 30, 2003 is
$439,000, which includes lease addenda. We believe the terms of the lease
purchase agreement to be no more or less favorable to UCI-SC than the terms that
would have been obtainable through arm's-length negotiations with unrelated
third parties for a similar billing and accounts receivable system, which
includes computer equipment.
During the fiscal year ended September 30, 1994, UCI-SC entered into an
agreement with CP&C pursuant to which UCI-SC, through DC-SC, acts as the primary
care provider for injured workers of firms carrying worker's compensation
insurance through CP&C. Additionally, during the fiscal year ended September 30,
1995, UCI-SC executed a $400,000 note payable to CP&C payable in monthly
installments of $4,546 (including 11 percent interest) from April 1, 1995 to
March 1, 2010. We believe the terms of the agreement with CP&C to be no more or
less favorable to UCI-SC than those that would have been obtainable through
arm's-length negotiations with unrelated third parties for similar arrangements.
UCI-SC, through DC-SC, provides services to members of a health maintenance
organization operated by CHC who have selected DC-SC as their primary care
provider. We believe the terms of the agreement with CHC to be no more or less
favorable to UCI-SC than those that would have been obtainable through
arm's-length negotiations with unrelated third parties for similar arrangements.
Item 14. Principal Accountant Fees and Services.
Audit Fees
During fiscal years ended September 30, 2002 and 2003, Scott McElveen, L.L.P.
billed us approximately $76,000 and $79,000, respectively, for professional
services rendered for the audit of our annual financial statements and reviews
of the financial statements included in our Forms 10-Q or services that are
normally provided by our accountant in connection with statutory and regulatory
filings or engagements. We estimate that the total fees for such services for
the year ended September 30, 2004 will be approximately $70,000.
All Other Fees
During the fiscal years ended September 30, 2002 and 2003, Scott McElveen,
L.L.P. billed us an aggregate of $12,000 and $19,000, respectively, for the
following professional services: tax return preparation, assistance with
preparation of the Annual Report on Form 10-K, audit of our retirement plan, and
advice relating to internal audit functions. Scott McElveen, L.L.P. has informed
us that no additional amounts shall be billed during 2004 for such services
provided in 2002 or 2003. The Audit Committee considered whether provision of
these services was compatible with maintaining Scott McElveen, L.L.P.'s
independence.
In accordance with Section 10A(i) of the Exchange Act, before we engage an
accountant to render audit or non-audit services, our Audit Committee approves
the engagement.
Item15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Consolidated Financial Statements
The consolidated financial statements listed on the Index to Financial
Statements on page 36 are filed as part of this report on Form 10-K.
(a)(2) Financial Statement Schedules Required by Item 8
(a)(3) Exhibits
A listing of the exhibits to the Form 10-K is set forth on the
Exhibit Index that immediately precedes such exhibits in this Form
10-K.
(b) Reports on Form 8-K
On July 17, 2003, we filed a Form 8-K attaching a newspaper article
concerning us appearing in the Sunday, July 13, 2003 edition of The
State Newspaper.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Independent Auditors' Report.................................................................................37
Consolidated Balance Sheets at September 30, 2003 and 2002...................................................38
Consolidated Statements of Operations for each of the three years
ended September 30, 2003............................................................................39
Consolidated Statements of Changes in Stockholders' Equity
for each of the three years ended September 30, 2003................................................40
Consolidated Statements of Cash Flows for each of the three years
ended September 30, 2003............................................................................41
Notes to Consolidated Financial Statements................................................................42-57
Schedule II, Valuation and Qualifying Accounts, is omitted because the
information is included in the financial statements and notes.
Independent Auditors' Report
--------
To the Board of Directors and
Stockholders of UCI Medical Affiliates, Inc.
Columbia, South Carolina
We have audited the accompanying consolidated balance sheets of UCI Medical
Affiliates, Inc. and its subsidiaries (the "Company") as of September 30, 2003
and 2002, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 2003 and 2002, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
2003, in conformity with accounting principles generally accepted in the United
States of America.
/S/ SCOTT MCELVEEN, L.L.P.
Columbia, South Carolina
November 26, 2003
..
SIGNED ORIGINAL ON SCOTT MCELVEEN, L.L.P. LETTERHEAD
IS ON FILE IN THE CORPORATE OFFICE OF
UCI MEDICAL AFFILIATES, INC.
UCI Medical Affiliates, Inc.
Consolidated Balance Sheets
September 30,
-------------------------------------
2003 2002
----------------- ----------------
Assets
Current assets
Cash and cash equivalents $ 683,135 $ 269,298
Accounts receivable, less allowance for doubtful accounts
of $1,924,820 and $1,661,047 6,874,423 6,349,629
Inventory 646,320 393,795
Prepaid expenses and other current assets 227,666 297,178
----------------- ----------------
Total current assets 8,431,544 7,309,900
Property and equipment, less accumulated depreciation of
$9,294,442 and $8,149,811 4,027,767 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 7,822 50,483
----------------- ----------------
Total Assets $ $ 14,516,870
15,859,075
================= ================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt 946,358 1,014,829
Accounts payable 998,052 762,646
Accrued salaries and payroll taxes 1,610,651 1,514,745
Current portion of pre-petition payroll taxes 720,477 475,079
Other accrued liabilities 1,230,853 1,027,299
----------------- ----------------
----------------- ----------------
Total current liabilities 5,506,391 4,794,598
----------------- ----------------
----------------- ----------------
Long-term liabilities
Accounts payable 1,917,779 2,083,167
Long-term portion of pre-petition payroll taxes 3,488,815 4,385,060
Long-term debt, net of current portion 2,380,328 3,063,649
----------------- ----------------
Total long-term liabilities 7,786,922 9,531,876
----------------- ----------------
----------------- ----------------
Total Liabilities 13,293,313 14,326,474
----------------- ----------------
Commitments and contingencies (Note 12)
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 - 50,000,000 and 10,000,000
Issued and outstanding- 9,650,472 and 9,650,515 shares 482,524 482,526
Paid-in capital 21,723,630 21,723,628
Accumulated deficit (19,640,392) (22,015,758)
----------------- ----------------
Total Stockholders' Equity 2,565,762 190,396
----------------- ----------------
Total Liabilities and Stockholders' Equity $ 15,859,075 $ 14,516,870
================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
UCI Medical Affiliates, Inc.
Consolidated Statements of Operations
For the Three Years Ended September 30,
-----------------------------------------------------------------
2003 2002 2001
------------------ ----------------- ------------------
Revenues $ 43,518,068 $ 38,526,603 $ 38,117,161
Operating costs 39,175,188 36,288,348 35,545,631
------------------ ----------------- ------------------
Operating margin 4,342,880 2,238,255 2,571,530
General and administrative expenses 79,120 76,241 50,293
Reorganization charges -- 214,968 --
Realignment and impairment charges -- -- 752,737
Depreciation and amortization 1,144,631 1,021,563 1,544,153
Gain on extinguishment of debt -- (2,704,920) --
------------------ ----------------- ------------------
------------------ ----------------- ------------------
Income from operations 3,119,129 3,630,403 224,347
------------------ ----------------- ------------------
------------------ ----------------- ------------------
Other expenses: Interest expense and other charges (743,763) (2,236,408) (1,698,948)
------------------ ----------------- ------------------
------------------ ----------------- ------------------
Net income (loss) $ 2,375,366 $ 1,393,995 $ (1,474,601)
================== ================= ==================
================== ================= ==================
Earnings (loss) per common share:
Basic earnings (loss) per common share $.25 $.14 $(.15)
================== ================= ==================
================== ================= ==================
Diluted earnings (loss) per common share $.25 $.14 $(.15)
================== ================= ==================
================== ================= ==================
Basic weighted average common shares outstanding 9,650,472 9,650,515 9,650,515
================== ================= ==================
Diluted weighted average common shares outstanding 9,650,472 9,650,515 9,650,515
================== ================= ==================
The accompanying notes are an integral part of these
consolidated financial statements.
UCI Medical Affiliates, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the Three Years Ended September 30, 2003
Common Stock
-------------------------------
Accumulated
Shares Par Value Paid-In Capital Deficit Total
-------------- ------------- ------------------ ------------------- --------------
Balance, September 30, 2000 9,650,515 $482,526 $21,723,628 $(21,935,152) $ 271,002
Net loss -- -- -- (1,474,601) (1,474,601)
-------------- ------------- ------------------ ------------------- --------------
Balance, September 30, 2001 9,650,515 $482,526 $21,723,628 $(23,409,753) $(1,203,599)
Net income -- -- -- 1,393,995 1,393,995
-------------- ------------- ------------------ ------------------- --------------
-------------- ------------- ------------------ ------------------- --------------
Balance, September 30, 2002 9,650,515 $482,526 $21,723,628 $(22,015,758) $ 190,396
Net income -- -- -- 2,375,366 2,375,366
Other (43) -- -- -- --
-------------- ------------- ------------------ ------------------- --------------
-------------- ------------- ------------------ ------------------- --------------
Balance, September 30, 2003 9,650,472 $482,526 $21,723,628 $(19,640,392) $2,565,762
============== ============= ================== =================== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
UCI Medical Affiliates, Inc.
Consolidated Statements of Cash Flows
For the Three Years Ended September 30,
-----------------------------------------------------------
2003 2002 2001
------------------ ----------------- ----------------
Operating activities:
Net income (loss) $ 2,375,366 $1,393,995 $ (1,474,601)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on extinguishment of debt -- (2,704,920) --
Provision for losses on accounts receivable 1,888,594 1,845,094 1,494,915
Depreciation and amortization 1,144,631 1,021,563 1,544,153
Non-cash realignment and impairment charges -- -- 752,737
(Increase) decrease in accounts receivable (2,413,388) (1,898,137) (832,756)
(Increase) decrease in inventory (252,525) (33,235) 262,937
(Increase) decrease in prepaid expenses and other
current assets 69,512 536,554 99,398
Increase (decrease) in accounts payable and accrued
expenses (281,369) 2,216,431 869,440
------------------ ----------------- ----------------
Cash provided by operating activities 2,530,821 2,377,345 2,716,223
------------------ ----------------- ----------------
Investing activities:
Purchases of property and equipment (1,407,853) (809,094) (744,063)
(Increase) decrease in other assets 42,661 (26,532) 17,549
------------------ ----------------- ----------------
Cash used in investing activities (1,365,192) (835,626) (726,514)
------------------ ----------------- ----------------
Financing activities:
Net (payments) borrowings under line-of-credit agreement -- (371,317) (826,202)
(Decrease) increase in book overdraft -- (733,094) (451,163)
Payments on long-term debt (751,792) (267,439) (915,842)
------------------ ----------------- ----------------
Cash used in financing activities (751,792) (1,371,850) (2,193,207)
------------------ ----------------- ----------------
Increase (decrease) in cash and cash equivalents 413,837 169,869 (203,498)
Cash and cash equivalents at beginning of year 269,298 99,429 302,927
------------------ -----------------
------------------ ----------------- ----------------
Cash and cash equivalents at end of year $ 683,135 $ 269,298 $ 99,429
================== ================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
UCI MEDICAL AFFILIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Basis of Presentation
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"), Doctors Care,
P.A., Doctors Care of Georgia, P.C., and Doctors 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.'s, 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 has 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 are 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 certain physicians for terms
ranging from one to five 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.
Medical Supplies and Drug Inventory
Inventory consists of medical supplies and drugs and both are carried at the
lower of average cost (first in, first out) or market.
Property and Equipment
Property and equipment is recorded at cost.
Depreciation is provided principally by the straight-line method over the
estimated useful lives of the assets, ranging from three to forty years.
Maintenance, repairs and minor renewals are charged to expense. Major renewals
or betterments, which prolong the life of the assets, are capitalized.
Upon disposal of depreciable property, the asset accounts are reduced by the
related cost and accumulated depreciation. The resulting gains and losses are
reflected in the consolidated statements of operations.
Intangible Assets
Effective October 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). Prior to the adoption of SFAS No. 142, costs in excess of net tangible
assets acquired were stated net of accumulated amortization and amortized on a
straight-line basis over periods not exceeding 15 years. Under SFAS No.142,
goodwill and intangible assets with indefinite useful lives are no longer
amortized but rather reviewed for impairment annually, or more frequently if
certain indicators 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, and loss
of key personnel or allocation of goodwill to a portion of business that is to
be sold. Intangible assets with definite useful lives are amortized over their
respective estimated useful lives to their estimated residual values, and also
reviewed for impairment annually, or more frequently if certain indicators
arise, in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121).
In performing the annual impairment test, the Company compares the fair value of
the Company, as determined by the current market value of the common stock, to
the carrying value of the total assets, including goodwill and intangible
assets. The Company completed the transitional impairment analysis and
determined that no impairment existed at the time of the adoption of SFAS No.
142. Any subsequent impairment losses will be reflected in operating income in
the income statement in the period in which the impairment is determined. The
Company completed its annual impairment test on September 30, 2003, and
determined that no impairment existed. Accordingly, no impairment charges were
required.
Had the Company accounted for its goodwill and other intangible assets not
subject to amortization under SFAS No. 142 for all periods presented, the
Company's net income (loss) and earnings (loss) per share would have been as
follows:
Year Ended September 30,
--------------------------------------------------------------
----------------- --- ------------------ --- -----------------
2003 2002 2001
----------------- ------------------ -----------------
-----------------
Reported net income (loss) $ 2,375,366 $ 1,393,995 $ (1,474,601)
Add back amortization of intangible assets no
longer subject to amortization -- -- 381,459
----------------- ------------------ -----------------
----------------- ------------------ -----------------
Adjusted net income (loss) $ 2,375,366 1,393,995 (1,093,142)
================= ================== =================
================= ================== =================
Basic and diluted earnings per share:
Reported net income (loss) $ $ .14 $ (.15)
.25
Goodwill amortization -- -- .04
----------------- ------------------ -----------------
----------------- ------------------ -----------------
Adjusted net earnings (loss) per share $ $ .14 $ (.11)
.25
================= ================== =================
Revenue Recognition
Revenue is recognized at estimated net amounts to be received from employers,
third party payors, and others at the time the related services are rendered.
The Company records contractual adjustments at the time bills are generated for
services rendered. Third parties are billed at the discounted amounts. As such,
estimates of outstanding contractual adjustments or any type of third party
settlements of contractual adjustments are not necessary.
Advertising Costs
Advertising and marketing costs are expensed as incurred. Advertising and
marketing costs were approximately $470,000, $230,000, and $228,000,
respectively, for each of the three fiscal years ended September 30, 2003.
Income (Loss) Per Share
The computation of basic income (loss) per share is reported under SFAS No. 128
"Earning per Share" and is based on the weighted average number of common shares
outstanding during the period. Diluted income per share is similar to basic
income (loss) per share except that the weighted average common shares
outstanding is increased to include the number of shares that would have been
outstanding had the dilutive potential common shares been issued, such as common
stock options and warrants.
Stock Based Compensation
The Company has adopted SFAS No. 148 and the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." The Company records
compensation expense for stock options only if the market price of the Company's
stock, on the date of grant, exceeds the amount an individual must pay to
acquire the stock, if dilutive. See Note 7 for further discussion.
Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between
the financial statement and tax bases of assets and liabilities as measured by
the enacted tax rates which are anticipated to be in effect when these
differences reverse. The deferred tax provision is the result of the net change
in the deferred tax assets to amounts expected to be realized. Valuation
allowances are provided against deferred tax assets when the Company determines
it is more likely than not that the deferred tax asset will not be realized.
Extinguishments of Debt
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145
("SFAS No. 145"), which, among other things, rescinded SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" ("SFAS No. 4"). Previously under
SFAS No. 4, all gains and losses from extinguishments of debt were required to
be aggregated and, if material, classified as an extraordinary item only if they
meet the criteria in APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
("Opinion No. 30"). Any gain or loss on extinguishments of debt that were
presented as extraordinary items in prior periods but which do not qualify for
classification as an extraordinary item under Opinion No. 30, are to be
reclassified. Companies are required to adopt SFAS No. 145 in fiscal years
beginning after May 15, 2002 but may elect to early adopt.
The Company elected to adopt the provisions of SFAS No. 145 during the fourth
quarter of fiscal year 2002. The Company had no extinguishments of debt
presented as an extraordinary item in prior periods and therefore, no
reclassifications were necessary.
Cash and Cash Equivalents
The Company considers all short-term deposits with a maturity of three months or
less at acquisition date to be cash equivalents.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein
are based on pertinent information available to management as of September 30,
2003 and 2002. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and current estimates of fair value may differ significantly from the
amounts presented herein. The fair values of the Company's financial instruments
are estimated based on current market rates and instruments with the same risk
and maturities. The fair values of cash and cash equivalents, accounts
receivable, accounts payable, notes payable and payables to related parties
approximate the carrying values of these financial instruments.
Segment Information
UCI adopted FASB Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosure about Segments of an Enterprise and Related Information," in fiscal
year 1999. SFAS No. 131 requires companies to report financial and descriptive
information about their reportable operating segments, including segment profit
or loss, certain specific revenue and expense items, and segment assets, as well
as information about the revenues derived from the Company's products and
services, the countries in which the Company earns revenues and holds assets,
and major customers. This statement also requires companies that have a single
reportable segment to disclose information about products and services,
information about geographic areas, and information about major customers. This
statement requires the use of the management approach to determine the
information to be reported. The management approach is based on the way
management organizes the enterprise to assess performance and make operating
decisions regarding the allocation of resources. It is management's opinion
that, at this time, UCI has several operating segments, however, only one
reportable segment. The following discussion sets forth the required disclosures
regarding single segment information.
UCI provides nonmedical management and administrative services for a network of
41 freestanding medical centers, 40 of which are located throughout South
Carolina and one is located in Knoxville, Tennessee (28 operating as Doctors
Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, and 12 as
Progressive Physical Therapy Services in South Carolina).
Recent Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements
entered into in fiscal periods beginning after June 15, 2003, including interim
periods. The adoption of EITF Issue No. 00-21 has had no material impact on the
financial position or on its results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). The Company adopted this standard on October 1,
2002. Under SFAS No. 143, the fair value of a liability for an asset retirement
obligation will be recognized in the period in which it is incurred. The
associated retirement costs will be capitalized as part of the carrying amount
of the long-lived asset and subsequently allocated to expense over the asset's
useful life. The adoption of SFAS No. 143 did not have a material effect on the
financial results of the Company.
In October 2001, FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived
assets (including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business". The Company adopted this
standard as of October 1, 2002 with no material effect on its financial
position, results of operations or cash flows.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement requires
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred as opposed to the date of an entity's
commitment to an exit plan or disposal activity. The adoption of SFAS No. 146 in
January 2003 did not have a material effect on the financial statements.
In December 2002, SFAS 148 was issued, which amends SFAS 123, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. It also amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Certain disclosure requirements were effective beginning December 15,
2002. The adoption of the additional reporting requirements of SFAS 148 in
December 2002 did not have a material effect on the financial statements.
In December 2002, FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107
and rescission of FASB Interpretation No. 34", was issued, which addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligation under guarantees and clarifies the requirements
related to the recognition of a liability by a guarantor at the inception of a
guarantee for the obligations the guarantor has undertaken in issuing that
guarantee. The adoption of FIN 45 in December 2002 did not have a material
effect on the financial statements.
In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. In October 2003,
the FASB released for public comment a proposed exposure draft clarifying
certain aspects of FIN 46 and providing certain entities with exemptions from
the requirements of FIN 46. If approved, the exposure draft would apply to
financial statements for the first period ending after December 15, 2003.
Management expects that the adoption of FIN 46 will have no material impact on
the Company's financial position or on its results of operations.
In April 2003, SFAS No. 149 ("SFAS 149"), "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities", was issued, which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The adoption of SFAS 149 in July 2003 did not have a significant
impact on the financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatory redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS No. 150 is effective
for all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on the
financial position or on its results of operations of the Company.
2. 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 in the United States
Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court").
The Company's Plans of Reorganization, as amended, were confirmed by the
Bankruptcy Court by August 8, 2002 and the Company has, 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, the Company did not qualify for
fresh start accounting under SOP 90-7.
The more significant transactions resulting from the reorganization under
Chapter 11 are as follows:
Accrued Other Accrued
Accounts Long-Term Debt Payroll Taxes Liabilities
Payable
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Pre-petition liability amounts, net of any
payments made during the reorganization
period, as approved by the Bankruptcy
Court 2,537,379 6,571,513 1,777,618
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Adjustments as a result of Chapter 11:
Conversion of unsecured notes payable to
accounts payable to be paid at 0% interest
over 72 months (interest imputed at 8%
per annum) 993,035 (993,035)
Present value adjustment of accounts payable to be paid at 0% interest over 72
months (interest imputed at 8% per
annum) (684,601)
Forgiveness of convertible debenture and
interest payable to FPA (1,500,000) (291,919)
Rejected executory contracts (Atlanta
leases) under Chapter 11 (228,400)
Reclassification of accrued interest and
penalties to pre-petition payroll tax
liability 230,000 (230,000)
Reclassification of delinquent payroll taxes
from accrued salaries and payroll taxes to
pre-petition payroll tax liability 2,373,467
Interest and penalties assessment by taxing
authorities under Chapter 11 2,256,672
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Total adjustments 308,434 (2,493,035) 4,860,139 (750,319)
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Confirmed liability at 09/30/02 2,845,813 4,078,478 4,860,139 1,027,299
Less current portion at 09/30/02 (762,646) (1,014,829) (475,079) (1,027,299)
---------------
---------------
Non-current portion at 09/30/02 2,083,167 3,063,649 4,385,060 --
===============
Current year activity at 09/30/03 70,018 (751,792) (650,847)
-------------- ---------------- --------------
-------------- ---------------- --------------
Total Liability at 09/30/03 2,915,831 3,326,686 4,209,292
============== ================ ==============
============== ================ ==============
Current portion at 09/30/03 998,052 946,358 720,477
Long-term portion at 09/30/03 1,917,779 2,380,328 3,488,815
-------------- ---------------- --------------
-------------- ---------------- --------------
Total Liability at 09/30/03 2,915,831 3,326,686 4,209,292
============== ================ ==============
As a result of the Chapter 11 reorganization, the Company recorded a gain on
extinguishment of debt in the approximate amount of $2,705,000, which resulted
from a discharge of a $1,500,000 of convertible subordinated debenture with
accrued interest of approximately $292,000; reducing the carrying value of
compromised accounts payable balance to their current present value by
approximately $685,000; and the termination of certain leases, with a recorded
balance of approximately $228,000.
3. Property and Equipment
Property and equipment consists of the following at September 30:
September 30, 2003 September 30, 2002
---------------------------------- -----------------------------
Useful Life
Range Accumulated Accumulated
(in years) Cost Depreciation Cost Depreciation
------------- --------------- ---------------- --------------- ---------------
- ------------------------------ ------------- --------------- ---------------- --------------- ---------------
5-40 $ 412,750 $ 114,879 $ 412,750 $ 102,199
Building
N/A 66,000 -- 66,000 --
Land
5-15 2,325,857 1,447,737 1,745,873 1,258,058
Leasehold Improvements
1-10 1,769,570 1,582,225 1,592,579 1,275,411
Furniture & Fixtures
1-5 1,402,274 1,304,356 1,402,274 1,238,807
EDP - Companion
1-10 1,446,591 981,411 1,231,179 855,691
EDP - Other
5-10 4,457,594 2,821,954 4,135,356 2,539,229
Medical Equipment
1-10 1,373,993 998,987 1,260,765 844,020
Other Equipment
Autos 3-10 67,580 42,893 67,580 36,396
--------------- ---------------- --------------- ---------------
$13,322,209 $9,294,442 $11,914,356 $8,149,811
Totals
=============== ================ =============== ===============
At September 30, 2003 and 2002, capitalized leased equipment included above
amounted to approximately $119,000 and $728,000, net of accumulated amortization
of $51,312 and $515,751, respectively. See Footnote 2 regarding conversion of
long-term debt to accounts payable.
Depreciation expense equaled $1,144,631, $1,021,563, and $1,162,694 for the
years ended September 30, 2003, 2002, and 2001, respectively.
4. Income Taxes
The components of the provision for income taxes for each of the three years
ended September 30 are as follows:
2003 2002 2001
------------- -------------- -----------
-----------
Current:
$ -- $ -- $ --
Federal
-- -- --
State
-----------
Deferred:
$ -- $ -- $ --
Federal
-- -- --
State
------------- -------------- ---- -----------
$ -- $ -- $ --
Total income tax expense
============= ============== ==== ===========
Deferred taxes result from temporary differences in the recognition of certain
items of income and expense, and the changes in the valuation allowance
attributable to deferred tax assets.
At September 30, 2003, 2002, and 2001, the Company's deferred tax assets
(liabilities) and the related valuation allowances are as follows:
2003 2002 2001
----------------- ----------------- -----------------
----------------- -----------------
$ 712,183 $ 614,587 $ 512,974
Accounts receivable
23,377 17,808 15,950
Other
5,156,716 6,223,974 6,890,796
Operating loss carry forwards
(262,737) (370,791) (411,518)
Fixed assets
Accruals 186,511 131,157 56,808
----------------- -----------------
----------------- ----------------- -----------------
$5,816,050 $ 6,616,735 $ 7,065,010
Available deferred tax assets
================= ================= =================
================= =================
$5,816,050 $ 6,616,735 $ 7,065,010
Valuation allowance
================= ================= =================
The principal reasons for the differences between the consolidated income tax
(benefit) expense and the amount computed by applying the statutory federal
income tax rate of 34% to pre-tax income were as follows for the years ended
September 30:
2003 2002 2001
---------------- --------------- ----------------
$ 814,764 $ 473,958 $ (501,364)
Tax at federal statutory rate
Effect on rate of:
(60,919) (60,919) 119,935
Amortization of goodwill
9,755 30,041 106,244
Non deductible expenses
37,085 5,195 (24,281)
State income taxes & other
(800,685) (448,275) 299,466
Change in valuation allowance
---------------- --------------- ----------------
$ -- $ -- $ --
================ =============== ================
At September 30, 2003, the Company has net tax operating loss (NOL)
carryforwards expiring in the following years ending September 30, 2018
2,772,661
2019 4,827,186
2020 5,206,279
2021 1,112,283
2022 18,660
----------------
----------------
$13,937,069
================
In determining that it was more likely than not that the recorded deferred tax
asset would not be realized, management of the Company considered the following:
o Recent historical operations results.
o The budgets and forecasts that management and the Board of Directors had
adopted for the next fiscal year.
o The ability to utilize NOL's prior to their expiration.
o The potential limitation of NOL utilization in the event of a change in
ownership.
o The generation of future taxable income in excess of income reported on the
consolidated financial statements.
A valuation allowance of approximately $5.8 million and $6.6 million at
September 30, 2003 and 2002, respectively, remained necessary in the judgement
of management because the factors noted above did not support the utilization of
less than a full valuation allowance.
5. Long-Term Debt
Long-term debt consists of the following at September 30:
2003
2002
----------------- -----------------
Term note in the amount of $2,407,501 dated August 28, 2002, payable in monthly
installments of $48,000 including interest at a rate of prime plus 2% (prime
rate is 4.00% as of September 30, 2003), maturing July 2007,
collateralized by substantially all assets of the Company. $1,928,105 $2,253,520
Note payable in the amount of $1,600,000 with monthly installments of $13,328
including interest at prime plus 2% (prime rate is 4.00 % as of
September 30, 2003), through January 1, 2009 collateralized by accounts 701,142 800,618
receivable from patients and leasehold interests and the guarantee of the
P.A.
Note payable to a financial institution in the amount of $500,000, dated April
17, 2000, payable in monthly installments of $8,507 including interest at a rate
of prime plus 1% (prime rate is 4.00% as of September 30, 2003) maturing on May
2, 2004, collateralized by common stock of the Company owned by the former
President of the Company as well as a life
insurance policy on the President of the Company. 63,056 165,139
Note payable to a financial institution in the amount of $280,000, dated May 11,
2002, with monthly installments (including interest at a variable rate of prime
plus 1.5%) (prime rate is 4.00% as of September 30, 2003) of $2,377 from May
2002 to April 2005, with a final payment of all remaining
principal and accrued interest due in April 2005, collateralized by a 189,246 204,723
mortgage on one of the Company's medical facilities with a net book value
of approximately $405,000.
----------------- -----------------
2,881,549 3,424,000
Subtotal
445,137 654,478
Capitalized lease obligations
----------------- -----------------
-----------------
3,326,686 4,078,478
(946,358) (1,014,829)
Less, current portion
----------------- -----------------
-----------------
$2,380,328 $3,063,649
================= =================
Aggregate maturities of notes payable and capital leases are as follows:
Notes Payable Capital Leases
Year ending September 30: Total
---------------- ---------------- ----------------
$ 775,308 $171,050 $ 946,358
2004
677,258 178,874 856,132
2005
659,694 95,213 754,907
2006
555,759 -- 555,759
2007
148,204 -- 148,204
2008
65,326 -- 65,326
Thereafter
---------------- ---------------- ----------------
$2,881,549 $445,137 $3,326,686
================ ================ ================
6. Employee Benefit Plans
The Company has an employee savings plan (the "Savings Plan") that qualifies as
a deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
The Company matches 100% of each employee's contribution up to a maximum of 4%
of the employee's earnings. The Company's matching contributions were
approximately $277,000, $233,000, and $226,000 in fiscal years 2003, 2002, and
2001, respectively.
During June 1997, the Company's Board of Directors approved the UCI/Doctors Care
Deferred Compensation Plan (the "Plan") for key employees of the Company with an
effective date of June 1998. To be eligible for the Plan, key employees must
have completed three years of full-time employment and hold a management or
physician position that is required to obtain specific operational goals that
benefit the Company as a whole. Under the Plan, key employees may defer a
portion of their after tax earnings with the Company matching three times the
employee's contributions percentage. The Company's matching contributions were
approximately $118,000, $161,000, and $114,000 in fiscal years 2003, 2002, and
2001, respectively.
During the fiscal year ended September 30, 1984, the Company adopted an
incentive stock plan (the "1984 Plan"). The 1984 Plan expired under its terms in
December 1993. At September 30, 2003, there were no stock options outstanding
under the 1984 Plan.
Pursuant to the Company's incentive stock option plan adopted in 1994, (the
"1994 Plan"), "incentive stock options", within the meaning of Section 422 of
the Internal Revenue Code, may be granted to employees of the Company. The 1994
Plan provides for the granting of options for the purchase of 750,000 shares at
100% of the fair market value of the stock at the date of grant (or for 10% or
higher shareholders, at 110% of the fair market value of the stock at the date
of grant). Options granted under the 1994 Plan vest at a rate of 33% in each of
the three years following the grant. Vested options become exercisable one year
after the date of grant and can be exercised within ten years of the date of
grant, subject to earlier termination upon cessation of employment.
During the fiscal year ended September 30, 1996, the Company adopted a
Non-Employee Director Stock Option Plan (the "1996 Non-Employee Plan"). The 1996
Non-Employee Plan provides for the granting of options to two non-employee
directors for the purchase of 10,000 shares of the Company's common stock at the
fair market value as of the date of grant. Under this plan, 5,000 options were
issued to Harold H. Adams, Jr. and 5,000 options were issued to Russell J.
Froneberger. These options are exercisable during the period commencing on March
20, 1999 and ending on March 20, 2006.
During the fiscal year ended September 30, 1997, the Company adopted a
Non-Employee Director Stock Option Plan (the "1997 Non-Employee Plan"). The 1997
Non-Employee Plan provides for the granting of options to three non-employee
directors for the purchase of 20,000 shares of the Company's common stock at the
fair market value of the date of grant. Under this plan, 5,000 options were
issued to Thomas G. Faulds, Ashby Jordan, M.D., and Charles M. Potok. These
options are exercisable during the period commencing on March 28, 2000 and
ending on March 28, 2007.
7. Stockholders' Equity
In February 1999, the shareholders approved an increase in the number of
authorized shares to 50,000,000. The following table summarizes activity and
weighted average fair value of options granted for the three previous fiscal
years for the Company's four stock option plans.
1996 1997
1984 1994 Non-Employee Non-Employee
Stock Options Plan Plan Plan Plan
- ----------------------------- ------------ ------------ -------------
---------- ------------ ------------ -------------
Outstanding at 09/30/00 11,100 565,325 10,000 15,000
---------- ------------ ------------ -------------
Exercisable at 09/30/00 11,100 565,325 10,000 15,000
Forfeited FY 00/01 -- -- -- --
---------- ------------ ------------ -------------
Outstanding at 09/30/01 11,100 565,325 10,000 15,000
---------- ------------ ------------ -------------
Exercisable at 09/30/01 11,100 565,325 10,000 15,000
Forfeited FY 01/02 (1,800) (224,675) -- --
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
Outstanding at 09/30/02 9,300 340,650 10,000 15,000
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
Exercisable at 09/30/02 9,300 340,650 10,000 15,000
Forfeited FY 02/03 (9,300) (14,000) (5,000) (5,000)
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
Outstanding at 09/30/03 -- 326,650 5,000 10,000
---------- ------------ ------------ -------------
The Company has not granted options under any plans during fiscal years 2003,
2002, and 2001 and there have been no shares exercised during 2003, 2002, or
2001.
The following table summarizes the weighted average exercise price of stock
options exercisable at the end of each of the three previous fiscal years:
1996 1997
Weighted Average Non-Employee Plan Non-Employee
Exercise Price 1984 Plan 1994 Plan Plan
- ------------------------------------- ------------- ------------- ------------------ ------------------
Outstanding at 09/30/00 $ .25 $ 2.63 $ 3.50 $ 2.50
------------- ------------- ------------------ ------------------
Exercisable at 09/30/00 .25 2.63 3.50 2.50
------------- ------------- ------------------ ------------------
Granted FY 00/01 -- -- -- --
Exercised FY 00/01 -- -- -- --
Forfeited FY 00/01 -- -- -- --
------------- ------------- ------------------ ------------------
Outstanding at 09/30/01 .25 2.63 3.50 2.50
------------- ------------- ------------------ ------------------
Exercisable at 09/30/01 .25 2.63 3.50 2.50
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Granted FY 01/02 -- -- -- --
Exercised FY 01/02 -- -- -- --
Forfeited FY 01/02 .25 2.63 -- --
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Outstanding at 09/30/02 .25 2.63 3.50 2.50
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Exercisable at 09/30/02 .25 2.63 3.50 2.50
Granted FY 02/03 -- -- -- --
Exercised FY 02/03 -- -- -- --
Forfeited FY 02/03 .25 2.63 3.50 2.50
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Outstanding at 09/30/03 N/A $ 2.63 $ 3.50 $ 2.50
------------- ------------- ------------------ ------------------
The following table summarizes options outstanding and exercisable by price
range as of September 30, 2003:
Options Outstanding Options Exercisable
- -------------------- --- --------------------------------------------------- -- ------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Price Outstanding Life Price Exercisable Price
- -------------------- --------------- --------------- ------------ -------------- ------------
-- -- -- -- --
$0.00 to $ .99
149,650 6.34 $1.94 149,650 $1.94
$1.00 to $1.99
124,000 3.39 2.67 124,000 2.67
$2.00 to $2.99
58,000 3.32 3.31 58,000 3.31
$3.00 to $3.99
10,000 1.35 4.00 10,000 4.00
$4.00 to $4.99
--------------- --------------
341,650 341,650
=============== ==============
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plans. All of the stock options had fully
vested prior to October 1, 2000, and therefore, there was no compensatory effect
for the three years ended September 30, 2003. The Company has historically
calculated the fair value of stock options using the Black-Scholes
option-pricing model.
During the year ended September 30, 1997, warrants for the purchase of shares of
the Company's common stock were issued, ranging in exercise price from $1.9375
to $5.00. Fifty-five thousand (55,000) warrants were issued in connection with
services to be rendered by an investor relations advisor to the Company. During
the years ended September 30, 1998 and September 30, 1999, the Company granted
to the convertible debenture holder warrants to purchase up to thirty-five
thousand (35,000) and ten thousand (10,000) warrant shares, respectively, as
part of a $1,500,000 convertible subordinated debenture. The Stock Purchase
Warrant allows for 65,000 shares in total. In addition, during the year ended
September 30, 1999, the Company granted to Allen & Company Incorporated,
financial advisors, warrants to purchase 150,000 shares of common stock. No
warrants were issued during the three fiscal years ended September 30, 2003,
2002, and 2001.
The following is a schedule of warrants issued and outstanding during the years
ended September 30, 2003, 2002 and 2001:
Number of Exercise Date Expiration
Warrants Price Exercisable Date
-------------- --------------- --------------- --------------
--------------
Outstanding at 09/30/00 235,000
Activity during FY 00/01:
Exercised --
Expired (75,000) 2.5625 09/30/01 09/30/01
--------------
Outstanding at 09/30/01 160,000
--------------
--------------
Activity during FY 01/02:
Exercised --
Expired (10,000) 2.5625 10/06/00 08/08/02
--------------
--------------
Outstanding at 09/30/02 150,000
Activity during FY 02/03:
Exercised --
Expired --
--------------
--------------
Outstanding at 09/30/03 150,000
==============
8. Lease Commitments
UCI-SC leases office and medical center space under various operating lease
agreements. Certain operating leases provide for escalation payments, exclusive
of renewal options.
Future minimum lease payments under noncancellable operating leases with a
remaining term in excess of one year as of September 30, 2003, are as follows:
Operating
Leases
----------------
Year ending September 30:
$2,606,801
2004
2005 2,561,837
2006 2,561,837
2007 2,540,893
2008 2,436,572
20,366,357
Thereafter
----------------
$33,074,297
Total minimum lease payments
================
Total rental expense under operating leases for fiscal years 2003, 2002 and 2001
was approximately $2,600,000, $2,600,000 and $2,900,000, respectively.
9. Related Party Transactions
Relationship between UCI-SC and UCI-GA and the P.A.'s
Pursuant to agreements between UCI-SC, UCI-GA and the P.A.'s, UCI-SC and UCI-GA
provide non-medical management services and personnel, facilities, equipment and
other assets to the medical centers. UCI-SC and UCI-GA guarantee the
compensation of the physicians employed by the P.A.'s. The agreements also allow
UCI-SC and UCI-GA to negotiate contracts with HMOs and other organizations for
the provision of medical services by the P.A.'s physicians. Under the terms of
the agreement, the P.A.'s assign all revenue generated from providing medical
services to UCI-SC or UCI-GA after paying physician salaries and the cost of
narcotic drugs held by the P.A.'s. The P.A.'s are owned by D. Michael Stout,
M.D., who is also the Chief Executive Officer for UCI, UCI-SC and UCI-GA.
Relationship between the Company and Blue Cross Blue Shield of South Carolina
Blue Cross Blue Shield of South Carolina (BCBS) owns 100% of Companion
HealthCare Corporation ("CHC"), Companion Property & Casualty Insurance Company
("CP&C") and Companion Technologies, Inc. ("CT"). At September 30, 2003, CHC
owned 4,026,829 shares of the Company's outstanding common stock and CP&C owned
618,181 shares of the Company's outstanding common stock, which combine to
approximately 48% of the Company's outstanding common stock.
Facility Leases
Several of the medical center facilities operated by UCI-SC are leased or were
leased from entities owned or controlled by certain principal shareholders,
Board members, and/or members of the Company's management. Total lease payments
made by UCI-SC under these leases during the fiscal years ended September 30,
2003, 2002 and 2001, were approximately $96,000, $96,000, and $153,000,
respectively.
One medical facility operated by UCI-SC is leased from a physician employee of
the P.A.'s. Total lease payments made by UCI-SC under these leases during the
Company's fiscal years ended September 30, 2003, 2002, and 2001, were
approximately $50,000, $49,000, and $49,000, respectively.
Other Transactions with Related Parties
At September 30, 2003, BCBS and its subsidiaries control 4,646,010 shares, or
approximately 48% of the Company's outstanding common stock. The shares acquired
by CHC and CP&C from the Company were purchased pursuant to stock purchase
agreements and were not registered. CHC and CP&C have the right to require
registration of the stock under certain circumstances as described in the
agreement. BCBS and its subsidiaries have the option to purchase as many shares
as may be necessary for BCBS to obtain ownership of 47% of the outstanding
common stock of the Company in the event that the Company issues additional
stock to other parties (excluding shares issued to employees or directors of the
Company).
The Company enters into capital lease obligations with CT to purchase computer
equipment, software, and billing and accounts receivable upgrades. The total of
all lease obligations to CT recorded at September 30, 2003 is $439,000.
During the Company's fiscal year ended September 30, 1994, UCI-SC entered into
an agreement with CP&C pursuant to which UCI-SC, through the P.A., acts as the
primary care provider for injured workers of firms carrying worker's
compensation insurance through CP&C.
UCI-SC, through the P.A., provides services to members of a health maintenance
organization ("HMO") operated by CHC who have selected the P.A. as their primary
care provider.
During fiscal years 2003, 2002, and 2001, the Company paid BCBS and its
subsidiaries approximately $47,000, $314,000, and $110,000, respectively, in
interest.
Revenues generated from billings to BCBS and its subsidiaries totaled
approximately 38%, 29%, and 26% of the Company's total revenues for fiscal years
2003, 2002, and 2001, respectively.
10. Income (Loss) Per Share
All warrants and options to purchase shares of common stock were excluded from
the calculation at September 30, 2003, 2002, and 2001, respectively, because of
their antidilutive effect.
11. Concentration of Credit Risk
In the normal course of providing health care services, the Company may extend
credit to patients without requiring collateral. Each individual's ability to
pay balances due the Company is assessed and reserves are established to provide
for management's estimate of uncollectible balances. Approximately 8% of the
Company's year end accounts receivable balance is due from Blue Cross Blue
Shield of South Carolina. No other single payor represents more than 5% of the
year end balance.
Future revenues of the Company are largely dependent on third-party payors and
private insurance companies, especially in instances where the Company accepts
assignment.
12. Commitments and Contingencies
The Company is insured for professional and general liability on a claims-made
basis, with additional tail coverage being obtained when necessary.
The Company provides health benefits to its employees under a self-insured
health plan. Claims are paid by the Company up to an individual and aggregate
amount limit of $50,000 and $1,078,508, respectively. Claims in excess of these
limits are covered by a third-party insurance contract. Health benefit claims of
approximately $618,000, $938,000, and $938,000, respectively, for each of the
three fiscal years ended September 30, 2003, are included in these financial
statements. The Company has accrued health claims of approximately $480,000 and
$421,000 as of September 30, 2003 and September 30, 2002, respectively.
In the ordinary course of conducting its business, the Company becomes involved
in litigation, claims, and administrative proceedings. Certain litigation,
claims, and proceedings were pending at September 30, 2003, and management
intends to vigorously defend the Company in such matters.
The health care industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by health care
providers.
Violations of these laws and regulations could result in expulsion from
government health care programs together with the imposition of significant
fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with
fraud and abuse as well as other applicable government laws and regulations;
however, the possibility for future governmental review and interpretation
exists.
13. Supplemental Cash Flow Information
Supplemental Disclosure of Cash Flow Information
The Company made interest payments of approximately $744,000, $609,000, and
$1,447,000, in the years ended September 30, 2003, 2002, and 2001, respectively.
The Company paid approximately $27,000 of income tax payments in the year ended
September 30, 2003, and no income tax payment for the years ended September 30,
2002 and 2001, respectively.
Supplemental Non-Cash Financing Activities
No capital lease obligations were incurred in fiscal years 2003, 2002, and 2001.
14. Realignment and Impairment Charges
At September 30, 2001, three centers were deemed to have impaired goodwill. One
center in the Columbia region and one center in the Greenville-Spartanburg
region had decreased profitability during fiscal year 2001 due to changes in the
assigned physicians. Additionally, as of September 30, 2001, a decision had been
made to combine the two Knoxville locations into one and, therefore, the
goodwill associated with the closed location was deemed to be impaired and,
therefore, was written off. The combined impairment charge for all three
locations was approximately $753,000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Signature Title Date
- --------- ----- ----
/s/ D. Michael Stout, M.D. President and December 4, 2003
- --------------------------
D. Michael Stout, M.D. Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ D. Michael Stout, M.D. President and December 4, 2003
- --------------------------
D. Michael Stout, M.D. Chief Executive Officer
/s/ Jerry F. Wells, Jr., CPA Executive Vice President and December 4, 2003
- -----------------------------
Jerry F. Wells, Jr., CPA Chief Financial Officer
/s/ Harold H. Adams, Jr., CPCU Director December 4, 2003
- ------------------------------
Harold H. Adams, Jr., CPCU
/s/ Charles M. Potok Director December 4, 2003
- --------------------
Charles M. Potok
/s/ Ashby Jordan, M.D. Director December 4, 2003
- ----------------------
Ashby Jordan, M.D.
/s/ John M. Little, Jr., M.D., MBA Director December 4, 2003
- ----------------------------------
John M. Little, Jr., M.D., MBA
UCI MEDICAL AFFILIATES, INC.
EXHIBIT INDEX
Exhibit Number Description
2.1 Order of Confirmation of UCI Medical Affiliates, Inc. ("UCI") Dated
August 7, 2002 (Incorporated by reference to Exhibit 2.1 on the Form 8-K filed
August 16, 2002)
2.2 Order of Confirmation of UCI Medical Affiliates of South Carolina Dated
August 5, 2002 (Incorporated by reference to Exhibit 2.2 on the Form 8-K filed
August 16. 2002)
2.3 Order of Confirmation of UCI Medical Affiliates of Georgia, Inc. Dated
August 7, 2002 (Incorporated by reference to Exhibit 2.3 on the Form 8-K filed
August 16, 2002)
2.4 Order of Confirmation of Doctors Care, P.A. Dated August 8, 2002
(Incorporated by reference to Exhibit 2.4 on the Form 8-K filed August 16, 2002)
2.5 Order of Confirmation of Doctors Care of Tennessee, P.C. Dated August
6, 2002 (Incorporated by reference to Exhibit 2.5 on the Form 8-K filed August
16, 2002)
2.6 Order of Confirmation of Doctors Care of Georgia, P.C. Dated August 7,
2002 (Incorporated by reference to Exhibit 2.6 on the Form 8-K filed August 16,
2002)
2.7 Plan of Reorganization for UCI (Incorporated by reference to Exhibit
2.7 on the Form 8-K filed August 16, 2002)
2.8 Plan of Reorganization for UCI Medical Affiliates of South Carolina,
Inc. (Incorporated by reference to Exhibit 2.8 on the Form 8-K filed August 16,
2002)
2.9 Plan of Reorganization of UCI Medical Affiliates of Georgia, Inc.
(Incorporated by reference to Exhibit 2.9 on the Form 8-K filed August 16, 2002)
2.10 Plan of Reorganization of Doctors Care, P.A. (Incorporated by
reference to Exhibit 2.10 on the Form 8-K filed August 16, 2002)
2.11 Plan of Reorganization of Doctors Care of Tennessee, P.C.
(Incorporated by reference to Exhibit 2.11 on the Form 8-K filed August 16,
2002)
2.12 Plan of Reorganization for Doctors Care of Georgia, P.C. (Incorporated
by reference to Exhibit 2.12 on the Form 8-K filed August 16, 2002)
2.13 Joint Disclosure Statement Filed as of May 3, 2002 (Incorporated by
reference to Exhibit 2.13 on the Form 8-K filed August 16, 2002)
2.14 Addendum to Joint Disclosure Statement and Plans of Reorganization
Filed as of June 14, 2002 (Incorporated by reference to Exhibit 2.14 on the Form
8-K filed August 16, 2002)
2.15 Second Addendum to Plans of Reorganization Filed as of July 29, 2002
(Incorporated by reference to Exhibit 2.15 on the Form 8-K filed August 16,
2002)
3.1* Amended and Restated Certificate of Incorporation of UCI filed with
the Delaware Secretary of State as of July 27, 1994
3.2* Amended and Restated Bylaws of UCI dated as of November 23, 1993
3.3* Amendment to Amended and Restated Bylaws of UCI dated as of August 21,
1996
3.4 Amendment to Amended and Restated Bylaws of UCI dated as of August 15,
2002 (Incorporated by reference to Exhibit 3.4 on the Form 8-K filed as of
October 28, 2002)
3.5 Certificate of Amendment of Certificate of Incorporation filed with the
Delaware Secretary of State as of February 24, 1999 (Exhibit 3.5 on the Form
10-K filed for fiscal year 2002)
4.1 The rights of security holders of the registrant are set forth in the
registrant's Certificate of Incorporation and Bylaws, as amended, included as
Exhibits 3. 1 through 3. 5
10.5* Lease and License Agreement dated March 30, 1994 between Doctors
Care, P.A. and Blue Cross Blue Shield of South Carolina
10.6* Note Payable dated February 28, 1995 between UCI-SC as payor, and
Companion Property and Casualty insurance Company, as payee
10.7* Revolving Line of Credit dated November 11, 1996 between Carolina
First Bank and UCI
10.8* Stock Option Agreement dated March 20,1996 between UCI and Harold H.
Adams, Jr.
10.9* Stock Option Agreement dated March 20, 1996 between UCI and Russell
J. Froneberger
10.11* Stock Option Agreement dated March 27, 1997, between UCI and Thomas
G. Faulds
10.12* Stock Option Agreement dated March 27, 1997 between UCI and Ashby
Jordan, M.D.
10.13* Stock Option Agreement dated March 27, 1997 between UCI and Charles
M. Potok
10.14* UCI 1994 Incentive Stock Option Plan
10.17* Administrative Services Agreement dated April 24, 1998 by and
between Doctors Care of Georgia, P.C. and UCI Medical Affiliates of Georgia,
Inc.
10.18* Administrative Services Agreement dated April 24, 1998 by and
between Doctors Care of Tennessee, P.C. and UCI Medical Affiliates of Georgia,
Inc.
10.19* Administrative Services Agreement dated August 11, 1998 between UCI
Medical Affiliates of South Carolina, Inc. and Doctors Care, P.A.
10.21* Stock Purchase Option and Restriction Agreement dated September 1,
1998 by and among D. Michael Stout, M.D.; UCI Medical Affiliates of Georgia,
Inc. and Doctors Care of Georgia, P.C.
10.22* Stock Purchase Option and Restriction Agreement dated July 15, 1998
by and among D. Michael Stout, M.D.; UCI Medical Affiliates of Georgia, Inc.;
and Doctors Care of Georgia, P.C.
10.31 Stock Purchase Option and Restriction Agreement dated as of October
31, 2002 by and among D. Michael Stout, M.D.; UCI Medical Affiliates of South
Carolina, Inc.; and Doctors Care, P.A. (Incorporated by reference to Exhibit
10.31 filed on Form 10-K for fiscal year 2002)
14* Code of Ethics dated as of November 25, 2003.
15* Press Release dated December 4, 2003.
21* Subsidiaries of the Registrant
23* Consent of Independent Auditors
31.1* Certification of Principal Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Principal Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
*Filed herewith