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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
--------
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the quarter ended December 31, 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)
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes ____ No X ------
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 January 14, 2004.
UCI MEDICAL AFFILIATES, INC.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2003
and September 30, 2003 3
Condensed Consolidated Statements of Operations for the quarters
ended December 31, 2003 and December 31, 2002 4
Condensed Consolidated Statements of Cash Flows for the quarters
ended December 31, 2003 and December 31, 2002 5
Notes to Condensed Consolidated Financial Statements 6 - 7
Item 2 Management's Discussion and Analysis of Financial
Condition, Critical Accounting Policies and Results of Operations 8 - 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 13
Item 4 Controls and Procedures 14 - 15
PART II OTHER INFORMATION
Items 1-6 16
SIGNATURES 17
UCI Medical Affiliates, Inc.
Condensed Consolidated Balance Sheets
December 31, 2003 September 30, 2003
------------------- -------------------
(unaudited) (audited)
Assets
Current assets
Cash and cash equivalents $ 295,511 $ 683,135
Accounts receivable, less allowance for doubtful accounts
of $2,292,555 and $1,924,820 8,407,914 6,874,423
Inventory 646,320 646,320
Prepaid expenses and other current assets 318,260 227,666
------------------- -------------------
Total current assets 9,668,005 8,431,544
Property and equipment less accumulated depreciation of
$9,547,356 and $9,294,442 4,377,416 4,027,767
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 7,822
------------------- -------------------
Total Assets $17,445,185 $ 15,859,075
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 920,940 $ 946,358
Accounts payable 1,539,343 998,052
Accrued salaries and payroll taxes 1,888,978 1,610,651
Current portion of pre-petition payroll taxes 735,502 720,477
Other accrued liabilities 1,288,157 1,230,853
------------------- -------------------
Total current liabilities 6,372,920 5,506,391
Long-term liabilities
Accounts payable 1,703,779 1,917,779
Long-term portion of pre-petition payroll taxes 3,297,906 3,488,815
Long-term debt, net of current portion 2,206,508 2,380,328
------------------- -------------------
------------------- -------------------
Total long-term liabilities 7,208,193 7,786,922
------------------- -------------------
Total Liabilities 13,581,113 13,293,313
------------------- -------------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $.01 per share:
Authorized shares - 10,000,000; none issued
Common stock, par value $.05 per share:
Authorized shares - 50,000,000
Issued and outstanding - 9,650,472 and 9,650,472 shares 482,524 482,524
Paid-in capital 21,723,630 21,723,630
Accumulated deficit (18,342,082) (19,640,392)
------------------- -------------------
Total Stockholders' Equity 3,864,072 2,565,762
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 17,445,185 $ 15,859,075
=================== ===================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
UCI Medical Affiliates, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended December 31,
2003 2002
-------------------- ------------------
------------------
Revenues $ 12,770,309 $ 10,296,744
Operating costs 9,381,717 7,991,923
-------------------- ------------------
------------------
Operating margin 3,388,592 2,304,821
General and administrative expenses 1,633,400 1,502,465
Depreciation and amortization 252,914 234,772
-------------------- ------------------
------------------
Income from operations 1,502,278 567,584
Other expense
Interest expense, net of interest income (177,968) (195,280)
-------------------- ------------------
-------------------- ------------------
Income before benefit (provision) for income taxes 1,324,310 372,304
Provision for income taxes (26,000) 0
-------------------- ------------------
Net income $ 1,298,310 $ 372,304
==================
==================== ==================
Basic earnings per share $ .13 $
.04
==================== ==================
==================
Basic weighted average common shares outstanding 9,650,472 9,650,515
==================== ==================
==================
Diluted earnings per share $ .13 $
.04
==================== ==================
==================
Diluted weighted average common shares outstanding 9,650,472 9,650,515
==================== ==================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
UCI Medical Affiliates, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended December 31,
2003 2002
------------------ -----------------
Operating activities:
Net income $ 1,298,310 $ 372,304
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on accounts receivable 820,705 410,463
Depreciation and amortization 252,914 234,772
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,354,196) (751,906)
(Increase) decrease in prepaid expenses and other
current assets (90,594) (217,599)
Increase (decrease) in accounts payable and accrued
expenses 487,038 260,355
-----------------
------------------
Cash provided by operating activities 414,177 308,389
------------------ -----------------
Investing activities:
Purchases of property and equipment (602,563) (217,396)
-----------------
------------------ -----------------
Cash used in investing activities (602,563) (217,396)
------------------ -----------------
Financing activities:
Payments on long-term debt (199,238) (302,804)
------------------ -----------------
Cash used in financing activities (199,238) (302,804)
------------------ -----------------
Decrease in cash and cash equivalents (387,624) (211,811)
Cash and cash equivalents at beginning of period 683,135 269,298
------------------ -----------------
------------------
Cash and cash equivalents at end of period $ 295,511 $ 57,487
================== =================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
UCI MEDICAL AFFILIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of those of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended December 31, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2004. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in our annual
report on Form 10-K for the year ended September 30, 2003.
The consolidated financial statements include the accounts of UCI Medical
Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc.
("UCI-SC"), UCI Medical Affiliates of Georgia, Inc. ("UCI-GA"), Doctor's Care,
P.A., Doctor's Care of Georgia, P.C., and Doctor's Care of Tennessee, P.C. (the
three together as the "P.A." and together with UCI, UCI-SC and UCI-GA, the
"Company"). Because of the corporate practice of medicine laws in the states in
which the Company operates, the Company does not own medical practices but
instead enters into exclusive long-term management services agreements with the
P.A. which operate the medical practices. Consolidation of the financial
statements is required under Emerging Issues Task Force (EITF) 97-2 as a
consequence of the nominee shareholder arrangement that exists with respect to
the P.A. In each case, the nominee (and sole) shareholder of the P.A. has
entered into an agreement with UCI-SC or UCI-GA, as applicable, which satisfies
the requirements set forth in footnote 1 of EITF 97-2. Under the agreement,
UCI-SC or UCI-GA, as applicable, in its sole discretion, can effect a change in
the nominee shareholder at any time for a payment of $100 from the new nominee
shareholder to the old nominee shareholder, with no limits placed on the
identity of any new nominee shareholder and no adverse impact resulting to any
of UCI-SC, UCI-GA or the P.A. resulting from such change.
In addition to the nominee shareholder arrangements described above, each of
UCI-SC and UCI-GA have entered into Administrative Service Agreements with the
P.A. 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., 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 Service 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
Statement No. 141 (Business Combinations), the Company must consolidate the
results of the affiliated practices with those of the Company. All significant
intercompany accounts and transactions are eliminated in consolidation,
including management fees.
The method of computing the management fees is based on billings of the
affiliated practices less the amounts necessary to pay professional compensation
and other professional expenses. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services plus
a profit. These interests are unilaterally salable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The most significant estimates are related to the allowance for doubtful
accounts, goodwill and intangible assets, income taxes, contingencies, and
health insurance accruals.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates in the near term.
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.
Certain reclassifications have been made to the fiscal year 2003 financial
statements to conform to the fiscal year 2004 presentation.
The Company operates as one segment.
NOTE 2. MEDICAL SUPPLIES AND DRUG INVENTORY
The inventory consists of medical supplies and drugs and both are carried at the
lower of average cost (first in, first out) or market. The volume of supplies
carried at a center varies very little from month to month and management,
therefore, does only an annual physical inventory count and does not maintain a
perpetual inventory system.
NOTE 3. INTANGIBLES
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill and
intangible assets with indefinite lives will no longer be amortized, but are
reviewed at least annually for impairment. Pursuant to SFAS No. 142, the Company
tested goodwill for impairment in the fourth quarter of 2003, and determined
there had not been any impairment.
NOTE 4. EARNINGS PER SHARE
Net income per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share is
calculated by dividing income available to common shareholders by the
weighted-average number of shares outstanding for each period. Diluted earnings
per common share is calculated by adjusting the weighted-average shares
outstanding assuming conversion of all potentially dilutive stock options.
NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the EITF reached a consensus on issue 00-21, "Revenue
Arrangements with Multiple Deliverables" (EITF 00-21). EITF 00-21 addresses
revenue recognition on arrangements encompassing multiple elements that are
delivered at different points in time, defining criteria that must be met for
elements to be considered to be a separate unit of accounting. If an element is
determined to be a separate unit of accounting, the revenue for the element is
recognized at the time of delivery. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company adopted this standard as of October 1, 2003 with no material impact on
its financial position, results of operations or cash flows.
NOTE 6. 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"). By
August 8, 2002, the Bankruptcy Court confirmed each of the Company's Plans of
Reorganization, as amended, and the Company has, therefore, emerged from Chapter
11 protection of the Court. The Company continues to make payments to its
creditors as outlined in the Plans.
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this Report on Form 10-Q that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. We caution
readers of this Form 10-Q that such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from those
expressed or implied by such forward-looking statements. Although our management
believes that their expectations of future performance are based on reasonable
assumptions within the bounds of their knowledge of their business and
operations, we have no assurance that actual results will not differ materially
from their expectations. Factors that could cause actual results to differ from
expectations include, among other things, (1) the difficulty in controlling our
costs of providing healthcare and administering our network of centers; (2) the
possible negative effects from changes in reimbursement and capitation payment
levels and payment practices by insurance companies, healthcare plans,
government payors and other payment sources; (3) the difficulty of attracting
primary care physicians; (4) the increasing competition for patients among
healthcare providers; (5) possible government regulations negatively impacting
our existing organizational structure; (6) the possible negative effects of
prospective healthcare reform; (7) the challenges and uncertainties in the
implementation of our expansion and development strategy; (8) the dependence on
key personnel; (9) adverse conditions in the stock market, the public debt
market, and other capital markets (including changes in interest rate
conditions); (10) the strength of the United States economy in general and the
strength of the local economies in which we conduct operations may be different
than expected resulting in, among other things, a reduced demand for practice
management services; (11) the demand for our products and services; (12)
technological changes; (13) the ability to increase market share; (14) the
adequacy of expense projections and estimates of impairment loss; (15) the
impact of change in accounting policies by the Securities and Exchange
Commission; (16) unanticipated regulatory or judicial proceedings; (17) the
impact on our business, as well as on the risks set forth above, of various
domestic or international military or terrorist activities or conflicts; (18)
other factors described in this report and in our other reports filed with the
Securities and Exchange Commission; and (19) our success at managing the risks
involved in the foregoing.
PART I
FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CRITICAL
ACCOUNTING POLICIES AND RESULTS OF OPERATIONS
The following discussion and analysis provides information 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 allowance 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, the intangible
assets are written off 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. Our recorded valuation allowance
reduces our deferred tax assets to equal our deferred tax liability.
Our consolidated financial statements include the accounts of UCI, UCI-SC,
UCI-GA and the P.A. Such consolidation is required under Emerging Issues Task
Force (EITF) 97-2 as a consequence of the nominee shareholder arrangement that
exists with respect to the P.A. In each case, the nominee (and sole) shareholder
of the P.A. has entered into an agreement with UCI-SC or UCI-GA, as applicable,
which satisfies the requirements set forth in footnote 1 of EITF 97-2. Under the
agreement, UCI-SC or UCI-GA, as applicable, in its sole discretion, can effect a
change in the nominee shareholder at any time for a payment of $100 from the new
nominee shareholder to the old nominee shareholder, with no limits placed on the
identity of any new nominee shareholder and no adverse impact resulting to any
of UCI-SC, UCI-GA or the P.A. resulting from such change.
In addition to the nominee shareholder arrangements described above, each of
UCI-SC and UCI-GA have entered into Administrative Service Agreements with the
P.A. 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. According to EITF 97-2, the application of FASB
Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and
Statement No. 141 (Business Combinations), UCI must consolidate the results of
the affiliated practices with those of UCI.
Over 79% of the physicians employed by the P.A. are paid on an hourly basis for
time scheduled and worked at the medical centers, while the remaining physicians
are salaried. Approximately 30% 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. As of December 31, 2003 and 2002, the P.A. employed 120 and 114
medical providers, respectively.
The net assets of the P.A. are not material for any period presented, and
intercompany accounts and transactions have been eliminated.
We 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, as
amended, 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.
Results of Operations
UCI provides nonmedical management and administrative services for a network of
41 freestanding medical centers (the "Centers"), 40 of which are located
throughout South Carolina and one is located in Knoxville, Tennessee (28
operating as Doctorss.s Care in South Carolina, one as Doctor's Care in
Knoxville, Tennessee, and 12 as Progressive Physical Therapy Services in South
Carolina).
Revenues of $12,770,000 for the quarter ended December 31, 2003 reflect an
increase of $2,474,000 or 24% from those of the quarter ended December 31, 2002.
Management believes that this unusual increase in revenues is the direct result
of the influenza epidemic. According to the Center for Disease Control and
Prevention (CDC), the flu season began four to six weeks earlier than usual, and
the southeastern region of the U.S. had an epidemic level of influenza. The
current epidemic is said to have reached a severity level three times greater in
comparison to the last significant influenza epidemic. Although it is
exceedingly difficult to accurately quantify the amount of revenues specifically
related to the unusual epidemic, management feels that approximately $1,000,000
or more of the revenue increase may be directly attributable to this one-time
event.
Pursuant to SFAS No. 142, we tested goodwill for impairment in the fourth
quarter of 2003, and we determined there had not been any impairment.
Patient encounters increased to approximately 131,000 in the first quarter of
fiscal year 2004 from 113,000 in the first quarter of fiscal year 2003, an
increase of 16% a portion of which is the result of an early and severe flu
season.
During the past three fiscal years, we have continued our services provided to
members of HMOs. In these arrangements, we, through the P.A., act as the
designated primary caregiver for members of HMOs who have selected one of our
centers or providers as their primary care provider. In fiscal year 1994, we
began participating in an HMO operated by Companion HealthCare Corporation
("CHC"), a wholly owned subsidiary of Blue Cross Blue Shield of South Carolina
("BCBS"). BCBS, through CHC, is a primary stockholder of UCI. Including its
arrangement with CHC, we now participate in four HMOs and are the primary care
"gatekeeper" for more than 9,000 lives at December 31, 2003. As of December 31,
2003, all of these HMOs use a discounted fee-for-service basis for payment. HMOs
do not, at this time, have a significant penetration into the South Carolina
market. We are not certain if the market share of HMOs will grow in the areas in
which we operate clinics.
Sustained revenues in fiscal years 2004 and 2003 also reflect our continued
focus on occupational medicine and industrial health services (these revenues
are referred to as "employer paid" and "workers compensation" on the table
below). We developed focused marketing materials, including quarterly
newsletters for employers, to spotlight our services for industry. We derived
approximately 17% of our total revenues from these occupational medicine
services in the first quarter of both 2004 and 2003.
The following table breaks out our revenue and patient visits by revenue source
for the first quarter of fiscal years 2004 and 2003.
Percent of Percent of
Payor Patient Visits Revenue
------------------------------------------------ ------------------------ -----------------------
2004 2003 2004 2003
------------ ----------- ------------ ----------
18 16 12 11
Patient Pay
9 10 5 5
Employer Paid
6 7 7 8
HMO
9 10 12 12
Workers Compensation
14 11 9 7
Medicare/Medicaid
41 42 51 51
Managed Care Insurance
3 4 4 6
Other (Commercial Indemnity, Champus, etc.)
We earned an operating margin of $3,389,000 during the first quarter of fiscal
2004 as compared to an operating margin of $2,305,000 for the first quarter of
fiscal 2003.
Our management believes that the increase in margin was due to the increase in
patient encounters, resulting chiefly from the influenza epidemic. Somewhat
offsetting the increased revenue are increased personnel costs, in part
attributable to increased cost-cutting pressures being applied by managed care
insurance payors that cover many of our patients. As managed care plans attempt
to cut costs, they typically increase our administrative burden by requiring
referral approvals and by requesting hard copies of medical records before they
will pay claims.
Depreciation expense increased slightly to $253,000 in the first quarter of
fiscal 2004, up from $235,000 in the first quarter of fiscal 2003 and is the
result of renovations and equipment purchases. Interest expense decreased from
$195,000 in the first quarter of fiscal 2003 to $178,000 in the first quarter of
fiscal 2004, due to the pay-down of debt.
General and administrative expenses include all salaries, benefits, supplies,
and other operating expenses not specifically related to the day-to-day
operation of the Centers. General and administrative expenses increased to
$1,633,000 in the first quarter of fiscal year 2004, up from $1,502,000 in the
first quarter of fiscal year 2003, as a result of wage increases and increased
advertising costs.
Financial Condition at December 31, 2003
Cash and cash equivalents decreased by $388,000 during the quarter ended
December 31, 2003, mainly as a result of timing of payments, payroll, and
equipment purchases.
Accounts receivable increased by $1,533,000 during the quarter and is related to
the timing of the keying of remittances from insurance carriers and an overall
increase in revenues from the flu epidemic.
Long-term debt decreased from $3,327,000 at September 30, 2003 to $3,127,000 at
December 31, 2003. Regular principal pay-downs of approximately $199,000 were
made during the quarter. Our management believes that it will be able to fund
debt service requirements out of cash generated through operations and does not
anticipate a need for additional debt financing.
Liquidity and Capital Resources
We require capital principally to fund growth (acquire new Centers), for working
capital needs, and for the retirement of indebtedness. We fund our capital
requirements and working capital needs through a combination of external
financing (including bank debt and proceeds from the sale of common stock to
Companion HealthCare Corporation and Companion Property & Casualty) and credit
extended by suppliers.
As of December 31, 2003, we have no material commitments for capital
expenditures or for acquisitions or start-ups.
Operating activities produced $414,000 of cash during the first quarter of
fiscal year 2004, compared to $308,000 during the first quarter of fiscal year
2003. This increase is mainly due to the increase in accounts payable and
accrued liabilities and the decrease in prepaid expenses, offset by an increase
in accounts receivable.
Investing activities used $603,000 in the first quarter of fiscal year 2004 as
compared to $217,000 in the first quarter of fiscal year 2003. This increase is
due to purchases of needed equipment and renovation for our operating sites.
Financing activities utilized $199,000 in cash during the first quarter of
fiscal year 2004 for debt reduction.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates primarily as a result of our
borrowing activities, which includes credit facilities with financial
institutions used to maintain liquidity and fund our business operations, as
well as notes payable to various third parties in connection with certain
acquisitions of property and equipment. The nature and amount of our debt may
vary as a result of future business requirements, market conditions, and other
factors. The definitive extent of our interest rate risk is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements. We do not currently use derivative instruments to adjust
our interest rate risk profile.
Approximately $1,089,000 of our debt at December 31, 2003 was subject to fixed
interest rates and principal payments. Approximately $2,038,000 of our debt at
December 31, 2003 was subject to variable interest rates. Based on the
outstanding amounts of variable rate debt at December 31, 2003, our interest
expense on an annualized basis would increase approximately $20,000 for each
increase of one percent in the prime rate.
We do not utilize financial instruments for trading or other speculative
purposes, nor do we utilize leveraged financial instruments.
ITEM 4
CONTROLS AND PROCEDURES
Quarterly Controls Evaluation and Related CEO and CFO Certifications.
We conducted an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (Disclosure Controls) as of the end of
the period covered by this Quarterly Report. 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).
Attached as exhibits to this Quarterly Report are certifications of the CEO and
the CFO, which are required in accord with Rule 13a-14 of the Exchange Act. This
Controls and Procedures section includes the information concerning the controls
evaluation referred to in the certifications and it should be read in
conjunction with the certifications for a more complete understanding of the
topics presented.
Definition of Disclosure Controls.
Disclosure Controls are controls and procedures designed to reasonably assure
that information required to be disclosed in our reports filed under the
Exchange Act, such as this Quarterly Report, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Disclosure Controls are also designed to reasonably assure 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 US generally accepted
accounting principles. To the extent that components of our internal control
over financial reporting are included within our Disclosure Controls, they are
included in the scope of our quarterly controls evaluation.
Limitations on the Effectiveness of Controls
The company's management, including the CEO and CFO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent all error 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 there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. 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, the company's implementation of the controls and the
effect of the controls on the information generated for use in this Quarterly
Report. In the course of the controls evaluation, we sought to identify data
errors, controls problems or acts of fraud and confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of 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 our 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 Internal Audit Department
and by other personnel in our Finance organization, 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 and not to
provide assurance on our controls. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls, and to modify them as
necessary; our intent is to maintain the 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 the company 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 certifications of the CEO and
CFO require that the CEO and CFO disclose that information to our Board's Audit
Committee and to our independent auditors. 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
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and the risk that such
misstatements would not be detected within a timely period by employees in the
normal course of performing their assigned functions. 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 end of the period covered by this
Quarterly Report, our Disclosure Controls were effective to provide reasonable
assurance that material information relating to UCI 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.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
We are not a party to any pending litigation other than
routine litigation incidental to the business or that is
immaterial in amount of damages sought.
Item 2 Changes in Securities
This item is not applicable.
Item 3 Defaults upon Senior Securities
This item is not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
This item is not applicable.
Item 5 Other Information
This item is not applicable.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of
the Exchange Act.
31.2 Certification of Chief Financial Officer and Principal Accounting
Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer and Chief
Financial and Principal Accounting Officer Pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K - none.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UCI Medical Affiliates, Inc.
(Registrant)
/s/ D. Michael Stout, M.D. /s/ Jerry F. Wells, Jr., CPA
- ---------------------------------- ---------------------------------
D. Michael Stout, M.D. Jerry F. Wells, Jr., CPA
President and Chief Executive Officer Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
Date: January 30, 2004