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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: December 31, 2004
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( ) 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 December 31, 2004.
UCI MEDICAL AFFILIATES, INC.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2004
and September 30, 2004 3
Condensed Consolidated Statements of Operations for the three months
ended December 31, 2004 and December 31, 2003 4
Condensed Consolidated Statements of Cash Flows for the three months
ended December 31, 2004 and December 31, 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 - 18
SIGNATURES 19
UCI Medical Affiliates, Inc.
Condensed Consolidated Balance Sheets
December 31, 2004 September 30, 2004
------------------- -------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 424,365 $ 533,533
Accounts receivable, less allowance for doubtful accounts
of $2,535,377 and $2,368,464 7,678,216 7,382,619
Inventory 618,446 618,446
Deferred taxes 753,000 500,000
Prepaid expenses and other current assets 420,638 266,788
------------------- -------------------
Total current assets 9,894,665 9,301,386
Property and equipment less accumulated depreciation of
$10,557,826 and $10,307,556 4,954,808 4,845,296
Deferred taxes 4,241,966 0
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 10,322 10,322
------------------- -------------------
Total Assets $ 22,493,703 $ 17,548,946
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 836,330 $ 972,108
Accounts payable 2,008,434 1,669,565
Accrued salaries and payroll taxes 1,866,668 1,926,095
Current portion of pre-petition payroll taxes 612,258 595,744
Other accrued liabilities 730,875 909,909
------------------- -------------------
Total current liabilities 6,054,565 6,073,421
Long-term liabilities
Accounts payable 954,157 1,193,935
Long-term portion of pre-petition payroll taxes 1,771,638 1,970,102
Long-term debt, net of current portion 2,471,203 2,531,789
------------------- -------------------
------------------- -------------------
Total long-term liabilities 5,196,998 5,695,826
------------------- -------------------
Total Liabilities 11,251,563 11,769,247
------------------- -------------------
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 9,740,472 shares 487,024 487,024
Paid-in capital 21,719,130 21,719,130
Accumulated deficit (10,964,014) (16,426,455)
------------------- -------------------
Total Stockholders' Equity 11,242,140 5,779,699
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 22,493,703 $ 17,548,946
=================== ===================
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,
2004 2003
-------------------- ------------------
------------------
Revenues $12,193,866 $ 12,770,309
Operating costs 9,153,706 9,381,717
-------------------- ------------------
------------------
Operating margin 3,040,160 3,388,592
General and administrative expenses 1,665,466 1,633,400
Depreciation and amortization 250,270 252,914
-------------------- ------------------
------------------
Income from operations 1,124,424 1,502,278
Other expense
Interest expense, net of interest income (144,557) (177,968)
-------------------- ------------------
-------------------- ------------------
Income before benefit (provision) for income taxes 979,867 1,324,310
Income tax benefit (provision) 4,482,574 (26,000)
-------------------- ------------------
Net income $ 5,462,441 $ 1,298,310
==================
==================== ==================
Basic earnings per share $ .56 $ .13
==================== ==================
==================
Basic weighted average common shares outstanding 9,740,472 9,650,472
==================== ==================
==================
Diluted earnings per share $ .56 $ .13
==================== ==================
==================
Diluted weighted average common shares outstanding 9,740,472 9,650,472
==================== ==================
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,
2004 2003
------------------ -----------------
Operating activities:
Net income $ 5,462,441 $ 1,298,310
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on accounts receivable 487,755 820,705
Depreciation and amortization 250,270 252,914
Deferred taxes (4,494,966) 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (783,352) (2,354,196)
(Increase) decrease in prepaid expenses and other
current assets (153,850) (90,594)
Increase (decrease) in accounts payable and accrued
expenses 116,922 891,947
-----------------
------------------
Cash provided by operating activities 885,220 819,086
------------------ -----------------
Investing activities:
Purchases of property and equipment (359,782) (602,563)
-----------------
------------------ -----------------
Cash used in investing activities (359,782) (602,563)
------------------ -----------------
Financing activities:
Payments on term-note (120,249) (188,127)
Payments on other long-term obligations (514,357) (416,020)
------------------ -----------------
Cash used in financing activities (634,606) (604,147)
------------------ -----------------
Decrease in cash and cash equivalents (109,168) (387,624)
Cash and cash equivalents at beginning of period 533,533 683,135
------------------ -----------------
------------------
Cash and cash equivalents at end of period $ 424,365 $ 295,511
================== =================
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, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2005. 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, 2004.
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 Financial Accounting Standards Board (FASB) Interpretation No. 46, as
revised, ("FIN 46") "Consolidation of Variable Interest Entities." Prior to the
Company's adoption of FIN 46 on October 1, 2003, the Company consolidated P.A.
as a result of Emerging Issues Task Force ("EITF 97-2"), "Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
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 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 2004 financial
statements to conform to the fiscal year 2005 presentation.
The Company adopted FASB Statement No. 131, "Disclosure about Segments of an
Enterprise and Related Information," ("SFAS No. 131") 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, the Company has
several operating segments, however, only one reportable segment. The following
discussion sets forth the required disclosures regarding single segment
information.
The Company provides nonmedical management and administrative services for a
network of 44 freestanding medical centers, 43 of which are located throughout
South Carolina and one is located in Knoxville, Tennessee (30 operating as
Doctors Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, and
14 as Progressive Physical Therapy Services in South Carolina).
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 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. 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.
NOTE 4. 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 2004, and determined there had not been any impairment.
NOTE 5. 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 are
calculated by dividing income available to common shareholders by the
weighted-average number of shares outstanding for each period. Diluted earnings
per common share are calculated by adjusting the weighted-average shares
outstanding assuming conversion of all potentially dilutive stock options.
NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued revised Financial Accounting Standards No. 123R,
(Share-Based Payment), ("SFAS No. 123R"). This statement amends SFAS 123,
"Accounting for Stock-Based Compensation". The statement eliminates the
alternative to use APB Opinion No. 25, "Accounting for Stock Issued to
Employees", that was provided in SFAS 123 as previously issued. SFAS 123R
requires entities to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards. The statement is effective as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005 and
encourages early adoption.
NOTE 7. 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.
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. We do not
believe we currently need a valuation reserve.
Our consolidated financial statements include the accounts of UCI, UCI-SC, and
the P.A. Such consolidation is required under the Financial Accounting Standards
Board (FASB) Interpretation No. 46 as revised. 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 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 December 31,
2004 and 2003, the P.A. employed 131 and 120 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 office to the centers.
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
44 freestanding medical centers (the "Centers"), 43 of which are located
throughout South Carolina and one is located in Knoxville, Tennessee (30
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 $12,194,000 for the quarter ended December 31, 2004 reflect a
decrease of $576,000 or 5% from those of the quarter ended December 31, 2003.
We believe this decrease in revenue is the result of a less severe flu season as
compared to last year, as well as a reduction in the number of patient
encounters. Patient encounters were approximately 126,000 in the first quarter
of fiscal year 2005 and 131,000 in the first quarter of fiscal year 2004.
Pursuant to SFAS No. 142, we tested goodwill for impairment in the fourth
quarter of 2004, and we determined there had not been any impairment.
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 7,000 lives at
December 31, 2004. As of December 31, 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 2005 and 2004 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 both the first quarter of fiscal year 2005 and the first quarter of
fiscal year 2004.
The following table breaks out our revenue and patient visits by revenue source
for the first quarter of fiscal years 2005 and 2004.
Percent of Percent of
Payor Patient Visits Revenue
------------------------------------------------ ------------------------ -----------------------
2005 2004 2005 2004
------------ ----------- ------------ ----------
16 18 11 12
Patient Pay
9 9 4 5
Employer Paid
6 6 7 7
HMO
10 9 13 12
Workers Compensation
15 14 11 9
Medicare/Medicaid
41 41 50 51
Managed Care Insurance
3 3 4 4
Other (Commercial Indemnity, Champus, etc.)
We earned an operating margin of $3,040,000 during the first quarter of fiscal
2005 as compared to an operating margin of $3,389,000 for the first quarter of
fiscal 2004. Management believes that the decreased margin as compared to last
year is the result of fewer patient encounters in the first quarter of fiscal
year 2005. In 2004, patient numbers were unusually elevated due to an early and
severe flu epidemic.
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
$1,665,000 in the first quarter of fiscal year 2005, up from $1,633,000 in the
first quarter of fiscal year 2004. This increase is the result of wage
increases.
Depreciation and amortization expense decreased to $250,000 in the first quarter
of fiscal 2005, down from $253,000 in the first quarter of fiscal 2004. This
slight decrease is the result of reduced equipment purchases. Interest expense
decreased to $145,000 in the first quarter of fiscal year 2005, down from
$178,000 in the first quarter of fiscal 2004, due to the pay-down of debt.
During the quarter ended December 31, 2004, our management determined that it
was more likely than not that the Company's deferred tax asset would be fully
realizable. Therefore, we recorded a $4,483,000 adjustment to the valuation
allowance based upon our current financial position, results from operations,
and our forecast of future earnings.
Financial Condition at December 31, 2004
Cash and cash equivalents decreased by $109,000 during the quarter ended
December 31, 2004, mainly as a result of payments on debt.
Accounts receivable increased by $296,000 during the quarter and is a result of
timing of payments. The increase in accounts receivable was due to a software
conversion that caused a delay in billing and collections, during the first
quarter of fiscal year 2005.
Long-term debt decreased from $3,504,000 at September 30, 2004 to $3,308,000 at
December 31, 2004. Regular principal pay-downs of approximately $196,000 were
made during the quarter. Our management believes that it will be able to fund
debt service requirements out of cash generated through operations.
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 December 31, 2004, we have no material commitments for capital
expenditures or for acquisitions or start-ups.
Operating activities produced $885,000 of cash during the first quarter of
fiscal year 2005, compared to $819,000 during the first quarter of fiscal year
2004. This increase is mainly due to improved operations as well as the decrease
in accounts payable and accrued liabilities, as compared to the first quarter of
fiscal year 2004.
Investing activities used $360,000 in the first quarter of fiscal year 2005 as
compared to $603,000 in the first quarter of fiscal year 2004. This decrease is
due to a reduction in equipment purchases for our operating sites.
Financing activities utilized $635,000 in cash during the first quarter of
fiscal year 2005 as compared to $604,000 in the first quarter of fiscal year
2004, as a result of 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 $796,000 of our debt at December 31, 2004 was subject to fixed
interest rates and principal payments. Approximately $2,512,000 of our debt at
December 31, 2004 was subject to variable interest rates. Based on the
outstanding amounts of variable rate debt at December 31, 2004, our interest
expense on an annualized basis would increase approximately $25,000 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
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 control 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
On May 4, 2004, the P.A. along with physicians, a physical
therapist, and a physical therapist assistant, joined as
plaintiffs in a then pending declaratory judgment action in
the Circuit Court for Richland County, South Carolina, brought
by a South Carolina physician that employs physical
therapists, to attempt to enjoin the South Carolina Board of
Physical Therapy (the "Board") from disciplining physical
therapists employed by physicians or professional corporations
owned by physicians. The Board licenses physical therapists in
the State of South Carolina.
On March 30, 2004, the South Carolina Attorney General issued
its opinion that Section 40-45-110(A)(1) of the South Carolina
Code prohibits physical therapists from working for pay for a
professional corporation owned by one or more licensed
physicians when the physician owner or employees of the
corporation refer patients to the physical therapist for
physical therapy services. Federal law permits physical
therapists to be employed by, and provided services on behalf
of, physicians and corporations owned by physicians.
Nevertheless, on April 8, 2004, the Board changed its formal
position of five years that it was acceptable for physicians
to employ physical therapists and announced that it would
accept complaints against physical therapists employed by
physicians and corporations owned by physicians after a
ninety-day "grace period". On April 14, 2004, the Circuit
Court issued an injunction enjoining the Board from
disciplining physical therapists under section 40-45-110(A)(1)
until a resolution of this case on its merits. A hearing on
the merits was held on October 4, 2004, but the court has not
yet issued a ruling.
As of December 31, 2004, the P.A. employs approximately twenty
physical therapists in its Progressive Physical Therapy
division which generates approximately 8% of the Company's
revenues. In the event of an unfavorable ruling from the
court, the Company has investigated restructuring this
division to reduce the likelihood of its employed physical
therapists being disciplined by the Board. The Company
anticipates that this restructuring of the division should not
adversely affect the revenues of the Company; provided
however, the Company can provide no assurance that this
restructuring will in fact not adversely affect the revenues
of the Company.
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
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 February 10, 2005.
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: February 10, 2005