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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 quarterly period ended: June 30, 2004
---------------------------------------
( ) 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
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UCI MEDICAL AFFILIATES, INC.
- -------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 59-2225346
(State or other
jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
4416 Forest Drive, Columbia, SC 29206
(Address of principal executive offices)
(803)782-4278
(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 such filing
requirements for the past 90 days. ( X )Yes ( ) No
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
( ) Yes ( X ) No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by checkmark whether the registrant filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court. ( X )Yes
( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's common stock, $.05 par
value, was 9,740,472 at June 30, 2004.
UCI MEDICAL AFFILIATES, INC.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2004 and September 30, 2003 3
Condensed Consolidated Statements of Operations for the
three and nine months ended June 30, 2004 and June 30, 2003 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 2004 and June 30, 2003 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of Financial
Condition, Critical Accounting Policies and Results of Operations 9-13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
Item 4 Controls and Procedures 15-16
PART II OTHER INFORMATION
Items 1-6 17
SIGNATURES 18
UCI MEDICAL AFFILIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004 September 30, 2003
------------------- -----------------------
(unaudited) (audited)
Assets
Current assets
Cash and cash equivalents $ 238,234 $ 683,135
Accounts receivable, less allowance for doubtful accounts
of $2,225,024 and $1,924,820 7,603,809 6,874,423
Inventory 646,320 646,320
Deferred taxes 500,000 0
Prepaid expenses and other current assets 303,462 227,666
------------------- -----------------------
Total current assets 9,291,825 8,431,544
Property and equipment, less accumulated depreciation of
$10,057,109 and $9,294,442 4,746,835 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 $ 17,438,424 $ 15,859,075
=================== =======================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 966,234 $ 946,358
Accounts payable 1,527,145 998,052
Accrued salaries and payroll taxes 1,905,912 1,610,651
Current portion of pre-petition payroll taxes 583,986 720,477
Other accrued liabilities 996,857 1,230,853
-----------------------
-------------------
Total current liabilities 5,980,134 5,506,391
Long-term liabilities
Accounts payable 1,289,537 1,917,779
Long-term portion of pre-petition payroll taxes 2,197,132 3,488,815
Long-term debt, net of current portion 2,747,396 2,380,328
------------------- -----------------------
------------------- -----------------------
Total long-term liabilities 6,234,065 7,786,922
------------------- -----------------------
------------------- -----------------------
Total Liabilities 12,214,199 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 - 9,740,472 and 9,650,472 shares 487,024 482,524
Paid-in capital 21,719,130 21,723,630
Accumulated deficit (16,981,929) (19,640,392)
------------------- -----------------------
Total Stockholders' Equity 5,224,225 2,565,762
------------------- -----------------------
Total Liabilities and Stockholders' Equity $ 17,438,424 $ 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 June 30, Nine Months Ended June 30,
------------------------------------ ----------------------------------
2004 2003 2004 2003
----------------- --------------- --------------- ---------------
Revenues $11,317,569 $11,048,786 $35,577,798 $32,358,935
Operating costs 8,869,179 8,580,679 27,252,391 24,755,703
----------------- --------------- --------------- ---------------
Operating margin 2,448,390 2,468,107 8,325,407 7,603,232
General and administrative expenses 1,769,126 1,528,101 4,800,908 4,698,071
Depreciation and amortization 244,770 238,494 762,667 707,398
----------------- --------------- --------------- ---------------
Income from operations 434,494 701,512 2,761,832 2,197,763
Other expense
Interest expense, net of interest income (183,503) (177,931) (531,369) (576,571)
----------------- --------------- --------------- ---------------
----------------- --------------- --------------- ---------------
Income before (provision) benefit for
income taxes 250,991 523,581 2,230,463 1,621,192
Income taxes (provision) benefit (14,800) 0 428,000 (25,000)
----------------- --------------- --------------- ---------------
----------------- --------------- --------------- ---------------
Net income $ 236,191 $ 523,581 $ 2,658,463 $1,596,192
=============== =============== ===============
=================
Basic earnings per share $ .02 $ .05 $ .27 $ .17
================= =============== =============== ===============
Basic weighted average common shares
outstanding 9,740,472 9,650,515 9,740,472 9,650,515
================= =============== =============== ===============
================= =============== =============== ===============
Diluted earnings per share $ .02 $ .05 $ .27 $ .17
================= =============== =============== ===============
================= =============== =============== ===============
Diluted weighted average common shares
outstanding 9,890,122 9,650,515 9,890,122 9,650,515
================= =============== =============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
UCI Medical Affiliates, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended June 30,
----------------------------------------
2004 2003
------------------ ------------------
Operating activities:
Net income $ 2,658,463 $ 1,596,192
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on accounts receivable 1,732,844 1,392,307
Depreciation and amortization 762,667 707,398
Deferred taxes (500,000) 0
Changes in operating assets and liabilities:
Increase in accounts receivable (2,462,230) (2,133,011)
(Increase) decrease in prepaid expenses and other
current assets (75,796) (92,772)
Increase in accounts payable and accrued expenses 453,867 760,471
------------------
------------------
Cash provided by operating activities 2,569,815 2,230,585
------------------ ------------------
Investing activities:
Purchases of property and equipment (1,481,735) (895,058)
Decrease (increase) in other assets 0 2,865
------------------
------------------
Cash used in investing activities (1,481,735) (892,193)
------------------ ------------------
Financing activities:
Borrowings (payments) on term-note agreement 2,586,878 (308,091)
Payments on long-term debt (4,119,859) (972,498)
------------------ ------------------
Cash used in financing activities (1,532,981) (1,280,589)
------------------ ------------------
(Decrease) increase in cash and cash equivalents (444,901) 57,803
Cash and cash equivalents at beginning of period 683,135 269,298
------------------ ------------------
------------------
Cash and cash equivalents at end of period $ 238,234 $ 327,101
================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
UCI MEDICAL AFFILIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of those of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three-month and nine-month periods ended June 30, 2004
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 the
Company's annual report on Form 10-K for the year ended September 30, 2003.
To reduce administrative expenses and streamline operations, on June 30, 2004,
the company eliminated two of its operating entities by merging them into other
existing operating entities. Specifically, on June 30, 2004, UCI Medical
Affiliates of Georgia, Inc. merged into UCI Medical Affiliates of South
Carolina, Inc., and Doctors Care of Georgia, P.C. merged into Doctors Care, P.A.
The consolidated financial statements include the accounts of UCI Medical
Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc.
("UCI-SC"), Doctors Care, P.A., and Doctors Care of Tennessee, P.C. (the two
together as the "P.A." and together with UCI and UCI-SC, 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 both the Financial Accounting Standards Board (FASB) Interpretation No. 46
and the 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 which satisfies the requirements set forth in footnote 1 of EITF 97-2.
Under the agreement, UCI-SC, 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 or the P.A. resulting from such change.
In addition to the nominee shareholder arrangement described above, UCI-SC has
entered into an Administrative Service Agreement with the P.A. As a consequence
of the nominee shareholder arrangement and the Administrative Service Agreement,
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), Statement No. 141 (Business Combinations), and
Interpretation No. 46 (Consolidation of Variable Interest Entities), 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 patients,
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. Some third parties are billed at discounted and
negotiated amounts. As such, estimates of outstanding contractual adjustments or
any type of third party settlements 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 Statement No.
142, "Goodwill and Other Intangible Assets". Statement 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
Statement 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 January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"
which addresses consolidation by business enterprises of variable interest
entities ("VIEs") either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB issued modifications to FIN 46 ("Revised Interpretations") resulting in
multiple effective dates based on the nature as well as the creation date of the
VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be
accounted for either based on the original interpretation or the Revised
Interpretations. However, the Revised Interpretations must be applied no later
than the first quarter of 2004. VIEs created after January 1, 2004 must be
accounted for under the Revised Interpretations. Non-Special Purpose Entities
created prior to February 1, 2003, should be accounted for under the revised
interpretation's provisions no later than the first quarter of fiscal 2004. As
of the beginning of 2004, the Company adopted FIN 46 and the Revised
Interpretations, neither of which had an impact on the Company's consolidated
financial statements.
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 adjustments 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 allowance include: 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 the business that is to be sold or
otherwise disposed. We perform our impairment test on September 30th of each
year. In addition to the annual impairment test, we are required to perform an
impairment test any time an indicator occurs, such as those noted above. At such
time as impairment is determined, the intangible assets are written off during
that period. Although 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 management considers is more likely than not to be realized.
Our consolidated financial statements include the accounts of UCI, UCI-SC, and
the P.A. Such consolidation is required under both the Financial Accounting
Standards Board (FASB) Interpretation No. 46 and the 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 which satisfies the requirements
set forth in footnote 1 of EITF 97-2. Under the agreement, UCI-SC, 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 or the P.A. resulting from such
change.
In addition to the nominee shareholder arrangement described above, UCI-SC has
entered into an Administrative Service Agreement with the P.A. As a consequence
of the nominee shareholder arrangement and the Administrative Service Agreement,
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), Statement No. 141 (Business Combinations),
and Interpretation No. 46 (Consolidation of Variable Interest Entities), UCI
must consolidate the results of the affiliated practices with those of UCI.
Approximately 99% of the physicians employed by the P.A. are paid on an hourly
basis for time scheduled and worked at the medical centers. 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 June 30, 2004
and 2003, the P.A. employed 134 and 115 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
43 freestanding medical centers (the "Centers"), 42 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 14 as Progressive Physical Therapy Services in South Carolina).
Revenues of $11,318,000 for the quarter ended June 30, 2004 reflect an increase
of $269,000 or 2% from those of the quarter ended June 30, 2003.
We believe this increase in revenue is the result of an increase in patient
encounters as well as an increase in the volume of ancillary services (such as
physical therapy and laboratory tests) being offered at our facilities. We have
also launched an intense advertising campaign in the upstate and midlands
regions of South Carolina. Patient encounters were approximately 122,000 in the
third quarter of fiscal year 2004 and 118,000 in the third quarter of fiscal
year 2003.
Pursuant to SFAS No. 142, we tested goodwill for impairment in the fourth
quarter of 2003, and we determined there has not been any impairment.
During the past three fiscal years, we have continued our services provided to
members of HMOs. In these arrangements, we, through the P.A., act as the
designated primary caregiver for members of HMOs who have selected one of our
centers or providers as their primary care provider. In fiscal year 1994, we
began participating in an HMO operated by Companion HealthCare Corporation
(CHC), a wholly owned subsidiary of Blue Cross Blue Shield of South Carolina
(BCBS). BCBS, through CHC, is a primary stockholder of UCI. Including our
arrangement with CHC, we now participate in four HMOs and are the primary care
gatekeeper for more than 8,000 lives at June 30, 2004. As of June 30, 2004, 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 20% of our total revenues from these occupational medicine
services in the third quarter of fiscal year 2004 and 17% in the third quarter
of fiscal year 2003, respectively.
The following table breaks out our revenue and patient visits by revenue source
for the third quarter of fiscal years 2004 and 2003.
Percent of Percent of
Payor Patient Visits Revenue
------------------------------------------------ ------------------------ -----------------------
2004 2003 2004 2003
------------ ----------- ------------ ----------
18 15 13 11
Patient Pay
11 11 6 5
Employer Paid
6 7 7 7
HMO
11 10 14 12
Workers Compensation
10 11 7 7
Medicare/Medicaid
41 42 49 52
Managed Care Insurance
3 4 4 6
Other (Commercial Indemnity, Champus, etc.)
We earned an operating margin of 2,448,000 during the third quarter of fiscal
2004 as compared to $2,468,000 for the third quarter of fiscal 2003.
Our management believes that the slight decrease in margin was the result of
personnel cost increases that place continuing pressure on our margin and are in
part attributable to increased cost-cutting pressures being applied by managed
care insurance payors that cover many of our patients. As managed care plans
attempt to cut costs, they typically increase the administrative burden of
providers by requiring referral approvals and by requesting hard copies of
medical records before they will pay claims. The number of patients at our
centers that are covered by a managed care plan versus a traditional indemnity
plan continues to grow. Our management expects this trend to continue. We
continue to investigate ways to stabilize and minimize our personnel costs while
simultaneously meeting the requirements of these increased administrative
burdens.
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
$1,769,000 in the third quarter of fiscal year 2004, up from $1,528,000 in the
third quarter of fiscal year 2003. This increase is the result of the successful
negotiation of a final settlement with the Company's former CEO.
Depreciation and amortization expense increased to $245,000 in the third quarter
of fiscal 2004, up from $238,000 in the third quarter of fiscal 2003. This
increase is the result of renovations and equipment purchases, which we
anticipate will continue into the foreseeable future during the upfitting of our
Centers. Interest expense increased from $178,000 in the third quarter of fiscal
2003 to $184,000 in the third quarter of fiscal 2004, due to an increase in
interest rates.
During the quarter ended March 31, 2004, our management determined that it was
more likely than not that the recorded deferred tax asset was becoming more
realizable. Therefore, we recorded a $500,000 adjustment based upon our current
financial position and results from operations, and our forecast of the next
twelve months.
Financial Condition at June 30, 2004
Cash and cash equivalents decreased by $445,000 during the nine months ended
June 30, 2004, mainly as a result of building renovations, equipment purchases
and payroll, offset by increased revenues.
Accounts receivable increased by $729,000 during the nine months ended June 30,
2004 and is a result of an overall increase in revenues largely occurring during
the months of December 2003 and March 2004. We believe the large increase is
primarily due to increased patient volume.
Long-term debt increased from $3,327,000 at September 30, 2003 to $3,714,000 at
June 30, 2004. On February 9, 2004, we entered into a loan agreement with Branch
Banking & Trust Company of South Carolina in the principal amount of $2,750,000
to refinance an existing term loan at more favorable terms and a lower interest
rate in order to pay amounts due to the Internal Revenue Service and the South
Carolina Department of Revenue. The new variable interest rate is Branch Banking
& Trust Company of South Carolina's prime rate plus one percent per annum and is
repayable monthly, with a final payment due on February 9, 2009.
Liquidity and Capital Resources
We require capital principally to fund growth (acquire new Centers), for working
capital needs, and for the retirement of indebtedness. We fund our capital
requirements and working capital needs through a combination of external
financing and credit extended by suppliers.
As of June 30, 2004, we have no material commitments for capital expenditures or
for acquisitions or start-ups.
Operating activities produced $2,570,000 of cash during the nine months ended
June 30, 2004, compared with $2,231,000 during the same period in the prior
fiscal year. This increase is primarily attributable to increased revenues.
Investing activities used $1,482,000 in cash during the nine months ended June
30, 2004 as compared to $892,000 during the nine months ended June 30, 2003.
This increase is due to purchases of needed equipment and building renovations
for our operating sites.
Financing activities utilized approximately $1,533,000 in cash during the nine
month period ended June 30, 2004 as compared to $1,281,000 during the nine
months ended June 30, 2003. This increase is primarily the result of increased
borrowings under the new term note agreement offset by regular principal
payments.
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 $951,000 of our debt at June 30, 2004 was subject to fixed
interest rates and principal payments. Approximately $2,762,000 of our debt at
June 30, 2004 was subject to variable interest rates. Based on the outstanding
amounts of variable rate debt at June 30, 2004, our interest expense on an
annualized basis would increase approximately $27,600 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 Officer 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.
99.1 Press Release dated August 10, 2004.
(b) Reports on Form 8-K.
This item is not applicable.
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: August 10, 2004