Table of Contents
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: March 31, 2009
¨ | 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.
(Exact name of Registrant as specified in its charter)
Delaware | 59-2225346 | |
(State or other jurisdiction of incorporation) | (IRS Employer Identification No.) |
1818 Henderson Street
Columbia, SC 29201
(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 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
Non-Accelerated Filer | x | Smaller Reporting Company | ¨ |
Indicate by checkmark whether the registrant is a shell company (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
Table of Contents
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant’s common stock, $.05 par value, was 9,934,072 at February 28, 2010.
Table of Contents
INDEX
Page Number | ||||||
PART I | Explanatory Note | 4 | ||||
FINANCIAL INFORMATION | ||||||
Item 1 | Financial Statements | |||||
Condensed Consolidated Balance Sheets – March 31, 2009 and September 30, 2008 | 5 | |||||
6 | ||||||
7 | ||||||
9 -18 | ||||||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 -25 | ||||
Item 3 | 25 | |||||
Item 4T | 25 -27 | |||||
PART II | OTHER INFORMATION | |||||
Item 1 | 28 | |||||
Item 1A | 28 | |||||
Item 2 | 28 | |||||
Item 3 | 28 | |||||
Item 4 | 28 | |||||
Item 5 | 28 | |||||
Item 6 | 28 | |||||
29 |
3
Table of Contents
In this report on Form 10-Q for the quarter ended March 31, 2009 (this “Form 10-Q”), we are restating our condensed consolidated statement of operations for the three and six month periods ended March 31, 2008 and related statement of cash flows for the six month period ended March 31, 2008. The restatement is related to an internal investigation (the “Investigation”) commenced by our Audit Committee on December 10, 2008. On February 2, 2010, we filed our Annual Report on Form 10-K for the year ended September 30, 2008 (the “2008 10-K”) in which we restated our consolidated financial statements for the two years ended September 30, 2007 and other financial data included therein for the six years ended September 30, 2007. In addition, our 2008 10-K included restated unaudited quarterly financial information for the first three quarters in the fiscal year ended September 30, 2008 under the caption, “PART II – ITEM 8. – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA – NOTE 13.”
The circumstances that precipitated the Investigation are more fully discussed in this Form 10-Q under the caption, “PART I. FINANCIAL INFORMATION – Item 1. Financial Statements – Note 2. Restatement of Previously Issued Financial Statements.” In addition, the restatement of our previously issued consolidated financial statements and other financial data are discussed in our 2008 10-K under the caption, “PART II – ITEM 7. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Restatements and Related Matters.”
4
Table of Contents
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) | ||||||||
March 31, 2009 | September 30, 2008 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 1,977,762 | $ | 769,649 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,387,180 and $2,872,119 | 5,925,975 | 6,186,375 | ||||||
Inventory | 965,892 | 955,892 | ||||||
Income taxes receivable | 411,948 | 186,948 | ||||||
Deferred taxes | 2,563,321 | 3,310,902 | ||||||
Prepaid expenses and other current assets | 597,040 | 380,703 | ||||||
Total current assets | 12,441,938 | 11,790,469 | ||||||
Property and equipment, less accumulated depreciation of $14,728,506 and $13,622,353 | 12,840,675 | 10,935,156 | ||||||
Leased property under capital leases, less accumulated amortization of $1,529,917 and $1,200,660 | 11,215,807 | 9,334,040 | ||||||
Deferred taxes | 7,357 | 124,757 | ||||||
Restricted investments | 1,521,461 | 1,906,143 | ||||||
Goodwill, less accumulated amortization of $2,493,255 and $2,451,814 | 3,350,501 | 3,391,942 | ||||||
Other assets | 292,007 | 56,734 | ||||||
Total Assets | $ | 41,669,746 | $ | 37,539,241 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities | ||||||||
Current portion of long-term debt | $ | 894,558 | $ | 944,528 | ||||
Obligations under capital leases | 357,587 | 349,738 | ||||||
Accounts payable | 592,996 | 427,850 | ||||||
Payable to patients and insurance carriers | 2,326,946 | 2,215,638 | ||||||
Accrued salaries and payroll taxes | 3,234,436 | 3,127,691 | ||||||
Accrued compensated absences | 718,025 | 538,392 | ||||||
Other accrued liabilities | 1,435,880 | 1,293,184 | ||||||
Total current liabilities | 9,560,428 | 8,897,021 | ||||||
Long-term liabilities | ||||||||
Deferred compensation liability | 1,254,476 | 2,020,484 | ||||||
Long-term debt, net of current portion | 3,575,197 | 2,809,611 | ||||||
Obligations under capital leases | 11,456,318 | 9,434,678 | ||||||
Total long-term liabilities | 16,285,991 | 14,264,773 | ||||||
Total Liabilities | 25,846,419 | 23,161,794 | ||||||
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 - 9,945,472 and 9,914,122 shares | 497,275 | 495,706 | ||||||
Paid-in capital | 22,173,992 | 22,105,024 | ||||||
Accumulated deficit | (6,847,940 | ) | (8,223,283 | ) | ||||
Total Stockholders’ Equity | 15,823,327 | 14,377,447 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 41,669,746 | $ | 37,539,241 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
(Restated, see Note 2) | (Restated, see Note 2) | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues | $ | 20,544,839 | $ | 21,230,753 | $ | 38,852,625 | $ | 39,386,514 | ||||||||
Operating expenses | (15,539,153 | ) | (16,178,125 | ) | (30,957,602 | ) | (31,012,693 | ) | ||||||||
Operating margin | 5,005,686 | 5,052,628 | 7,895,023 | 8,373,821 | ||||||||||||
General and administrative expenses | (3,079,675 | ) | (3,605,747 | ) | (6,240,129 | ) | (7,216,290 | ) | ||||||||
Income from operations | 1,926,011 | 1,446,881 | 1,654,894 | 1,157,531 | ||||||||||||
Recovery of misappropriation loss | 585,422 | — | 585,422 | — | ||||||||||||
Income before income taxes | 2,511,433 | 1,446,881 | 2,240,316 | 1,157,531 | ||||||||||||
Income tax expense | (969,662 | ) | (553,085 | ) | (864,973 | ) | (442,478 | ) | ||||||||
Net Income | $ | 1,541,771 | $ | 893,796 | $ | 1,375,343 | $ | 715,053 | ||||||||
Basic earnings per share | $ | 0.16 | $ | 0.09 | $ | 0.14 | $ | 0.07 | ||||||||
Basic weighted average shares outstanding | 9,945,472 | 9,914,122 | 9,944,611 | 9,914,122 | ||||||||||||
Diluted earnings per share | $ | 0.16 | $ | 0.09 | $ | 0.14 | $ | 0.07 | ||||||||
Diluted weighted average shares outstanding | 9,945,472 | 9,914,122 | 9,944,611 | 9,914,122 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Table of Contents
Condensed Consolidated Statement Of Changes in Stockholders’ Equity
(unaudited)
Six Months Ended March 31, 2009 | |||||||||||||||
Common Stock | Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||
Shares | Amount | ||||||||||||||
Balance at September 30, 2008 | 9,914,122 | $ | 495,706 | $ | 22,105,024 | $ | (8,223,283 | ) | $ | 14,377,447 | |||||
Net income | 1,375,343 | 1,375,343 | |||||||||||||
Shares issued under stock plans | 31,350 | 1,568 | 68,969 | 70,537 | |||||||||||
Balance at March 31, 2009 | 9,945,472 | $ | 497,274 | $ | 22,173,993 | $ | (6,847,940 | ) | $ | 15,823,327 | |||||
7
Table of Contents
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended March 31, | ||||||||
2009 | (Restated, see Note 2) 2008 | |||||||
Operating activities: | ||||||||
Net income | $ | 1,375,343 | $ | 715,053 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for losses on accounts receivable | 1,121,668 | 1,750,727 | ||||||
Depreciation and amortization | 1,477,347 | 1,018,001 | ||||||
Deferred taxes | 864,981 | — | ||||||
Unrealized loss on restricted investments | 397,282 | 252,864 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (861,268 | ) | (1,076,549 | ) | ||||
Inventory | (10,000 | ) | — | |||||
Income taxes receivable | (225,000 | ) | 958,100 | |||||
Income taxes payable | — | 234,378 | ||||||
Prepaid expenses and other current assets | (216,337 | ) | (315,881 | ) | ||||
Accounts payable and accrued expenses | 776,065 | (746,740 | ) | |||||
Deferred compensation | (766,008 | ) | (11,073 | ) | ||||
Cash provided by operating activities | 3,934,073 | 2,778,880 | ||||||
Investing activities: | ||||||||
Purchases of property and equipment | (3,012,179 | ) | (1,326,925 | ) | ||||
Increase in other assets | (180 | ) | (9,999 | ) | ||||
Purchase of restricted investments | (247,693 | ) | (233,883 | ) | ||||
Cash used in investing activities | (3,260,052 | ) | (1,570,807 | ) | ||||
Financing activities: | ||||||||
Net payments on line of credit | — | (400,331 | ) | |||||
Proceeds from borrowings on notes | 1,222,227 | — | ||||||
Principal payments on notes | (506,611 | ) | (443,272 | ) | ||||
Principal payments on capital lease obligations | (181,524 | ) | (145,125 | ) | ||||
Payments on other long-term obligations | — | (96,511 | ) | |||||
Cash provided by (used in) financing activities | 534,092 | (1,085,239 | ) | |||||
Increase in cash and cash equivalents | 1,208,113 | 122,834 | ||||||
Cash and cash equivalents at beginning of period | 769,649 | 487,423 | ||||||
Cash and cash equivalents at end of period | $ | 1,977,762 | $ | 610,257 | ||||
Supplemental cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 607,738 | $ | 607,696 | ||||
Income taxes | $ | 225,000 | $ | — | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Capital lease obligations incurred | $ | 2,211,013 | $ | 3,261,481 | ||||
Issuance of common stock for compensation | $ | 70,537 | $ | — | ||||
Transfer of restricted investments to other assets | $ | 235,093 | $ | — |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Table of Contents
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 accounting principles generally accepted in the United States of America 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 March 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2009. 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, 2008.
UCI Medical Affiliates, Inc. (“UCI”) is a Delaware corporation incorporated on August 25, 1982. Operating through its wholly-owned subsidiary, UCI Medical Affiliates of South Carolina, Inc. (“UCI-SC”), UCI provides nonmedical management and administrative services for a network of 67 freestanding medical centers, 66 of which are located throughout South Carolina and one is located in Knoxville, Tennessee (43 operating as Doctors Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, 20 as Progressive Physical Therapy Services in South Carolina, one as Luberoff Pediatrics in South Carolina, one as Carolina Orthopedic & Sports Medicine in South Carolina and one as Doctors Wellness Center in South Carolina).
Principles of Consolidation
The consolidated financial statements include the accounts of UCI, UCI-SC, UCI Properties, LLC (“UCI-LLC”), Doctors Care, P.A., Progressive Physical Therapy, P.A. (“PPT”), Carolina Orthopedic & Sports Medicine, P.A. (“COSM”), and Doctors Care of Tennessee, P.C. (the four together as the “P.A.” and together with UCI, UCI-SC and UCI-LLC, 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 and administrative services agreements with the P.A.s that operate the medical practices. UCI-SC, in its sole discretion, can effect a change in the nominee shareholder of each of the P.A.s 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 UCI-SC or the P.A. from such change. Because of the agreements between UCI-SC and the P.A.s, and the rights held by UCI-SC under those agreements, the financial statements of the P.A.s are consolidated with UCI, UCI-SC and UCI-LLC in accordance with accounting principles generally accepted in the United States of America. All significant intercompany accounts and transactions are eliminated in consolidation, including management fees.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue recognition. 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.
9
Table of Contents
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” effective for the Company’s fiscal year beginning October 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements, but simplifies and codifies related guidance within GAAP. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The Company is currently reviewing this pronouncement, but the Company believes it will not have a material impact on the Company’s consolidated financial statements. On February 12, 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”) which defers the effective date for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually), to fiscal years beginning after November 15, 2008.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS No. 159”) which gives companies the option to measure eligible financial assets, financial liabilities and firm commitments at fair value (i.e., the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in earnings. SFAS No. 159 is effective for financial statements issued for fiscal years beginning on or after November 15, 2007. The Company is in the process of evaluating the impacts, if any, of adopting this pronouncement.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.” SFAS No. 141 (revised 2007) replaces SFAS No. 141, “Business Combinations,” and applies to all transactions or other events in which an entity obtains control of one or more businesses and combinations achieved without the transfer of consideration. This statement is effective for fiscal years beginning on or after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” (“SFAS No. 160”) an amendment of Accounting Research Bulletin No. 51, which establishes new standards governing the accounting for and reporting on noncontrolling interest (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of SFAS No. 160 indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than a step acquisition or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. SFAS No. 160 also requires changes to certain presentation and disclosure requirements. SFAS No. 160 is effective beginning October 1, 2009. The Company is currently evaluating the impact and disclosure implications of SFAS No. 160 but does not expect it to have a significant impact, if any, on the Company’s financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company does not currently use derivative instruments or engage in hedging activities and, therefore, this statement is not applicable to the Company.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with US GAAP for nongovernmental entities. The Company does not expect the adoption of SFAS 162 to have a material effect on its results of operations or financial position.
The SEC’s Office of the Chief Accountant and the staff of the FASB issued press release 2008-234 on September 30, 2008 (“Press Release”) to provide clarifications on fair value accounting. The Press Release includes guidance on the use of management’s internal assumptions and the use of “market” quotes. It also reiterates the factors in SEC Staff Accounting Bulletin (“SAB”) Topic 5M which should be considered when determining other-than-temporary impairment: the length of time and extent to which the market value has been less than cost; financial condition and near-term prospects of the issuer; and the intent and ability of the holder to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value. The Company does not expect this SEC guidance to have a material effect on its results of operations or financial position.
10
Table of Contents
On October 10, 2008, the FASB issued FSP SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS 157-3”). This FSP clarifies the application of SFAS No. 157, “Fair Value Measurements” in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. For the Company, this FSP was effective for the quarter ended September 30, 2008.
In June 2009, the FASB issued SFAS No. 168, “TheFASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes theFASB Accounting Standards CodificationTM(“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands forAccounting Standards Codification. SFAS 168 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Company’s financial position but will change the referencing system for accounting standards.
In April 2009, the FASB issued FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly,” which recognizes that quoted prices may not be determinative of fair value when the volume and level of trading activity has significantly decreased. The evaluation of certain factors may necessitate that fair value be determined using a different valuation technique. Fair value should be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, not a forced liquidation or distressed sale. If a transaction is considered to not be orderly, little, if any, weight should be placed on the transaction price. If there is not sufficient information to conclude as to whether or not the transaction is orderly, the transaction price should be considered when estimating fair value. An entity’s intention to hold an asset or liability is not relevant in determining fair value. Quoted prices provided by pricing services may still be used when estimating fair value in accordance with SFAS 157; however, the entity should evaluate whether the quoted prices are based on current information and orderly transactions. Inputs and valuation techniques are required to be disclosed in addition to any changes in valuation techniques.
In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and also requires those disclosures in summarized financial information at interim reporting periods. A publicly traded company includes any company whose securities trade in a public market on either a stock exchange or in the over-the-counter market, or any company that is a conduit bond obligor. Additionally, when a company makes a filing with a regulatory agency in preparation for sale of its securities in a public market it is considered a publicly traded company for this purpose.
The two preceding staff positions are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The staff positions will have no material impact on the Company’s financial statements. Additional disclosures will be provided where applicable.
SFAS 165, “Subsequent Events,” (“SFAS 165”) was issued in May 2009 and provides guidance on when a subsequent event should be recognized in the financial statements. Subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is the date the financial statements were issued or the date the financial statements were available to be issued. For nonrecognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, should be disclosed. The standard is effective for interim or annual periods ending after June 15, 2009. See Note 8 for management’s evaluation of subsequent events.
11
Table of Contents
SFAS 167, “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”) was also issued in June 2009. The standard amends FIN 46(R) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessments of whether a company is the primary beneficiary is also required by the standard. SFAS 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions that were available under FIN 46(R). SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effective date. The Company does not expect the standard to have any impact on the Company’s financial position.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Note 2. Restatement of Previously Issued Financial Statements
The Company is restating its condensed consolidated financial statements for the three and six month periods ended March 31, 2008. The restatements were principally related to an internal investigation (the “Investigation”) commenced by the Company’s Audit Committee on December 10, 2008. The Investigation, initially announced on December 18, 2008, was initiated due to the detection of irregularities with respect to the Company’s internal controls and improper expense reimbursements and other disbursements to Jerry F. Wells, Jr., the former Executive Vice-President of Finance, Chief Financial Officer, and Secretary of UCI Medical Affiliates, Inc. (the “former CFO” or Mr. Wells). Mr. Wells’ employment was terminated on December 17, 2008. As a result of the Investigation, on February 27, 2009, Mr. Wells executed a Confession of Judgment in favor of the Company in the amount of $2,967,382 (the “Confession Amount”) related to amounts he had embezzled in the fiscal years from 2003 through 2009.
The Confession Amount was composed of several categories of items that impact the restatements. First, certain items included in the Confession Amount were reflected as operating expenses in the Company’s consolidated financial statements at the time of Mr. Wells’ fraud; however, in the restatements, the items have been reclassified as general and administrative expenses. Similarly, the Company has determined that certain items processed by Mr. Wells which have been construed as legitimate business expenses were also improperly classified as operating expenses. These items have also been reclassified as general and administrative expenses. In addition, the former CFO classified certain fraudulent transactions as property and equipment and such transactions were included in the consolidated financial statements in the periods of and subsequent to the date of the fraud as property and equipment, net of accumulated depreciation. Restatement adjustments which impact the condensed consolidated financial statements for the three and six month periods ended March 31, 2008, related to the fraudulent transactions and other reclassifications are set forth in Table A, below.
12
Table of Contents
Table A
Restatement Adjustments Related to
Fraudulent Transactions and Reclassifications
Three Months Ended March 31, 2008 | Six Months Ended March 31, 2008 | |||||||
Statements of Operations Reclassifications | ||||||||
Fraudulent operating expenses reclassified to G&A expenses | $ | 113,050 | $ | 196,492 | ||||
Non-fraudulent operating expenses reclassified to G&A expenses | 17,046 | 46,625 | ||||||
Total operating expenses reclassified to G&A expenses | $ | 130,096 | $ | 243,117 | ||||
Statements of Operations Adjustments | ||||||||
Write-off of property and equipment to G&A expense | $ | 17,101 | $ | 45,601 | ||||
Reversal of depreciation expense: | ||||||||
Operating expenses | (16,904 | ) | (33,448 | ) | ||||
G&A expenses | (3,727 | ) | (7,301 | ) | ||||
Net effect on income before income taxes | $ | (3,530 | ) | $ | 4,852 | |||
In addition, as part of the Investigation, the Audit Committee directed the Company’s new Chief Financial Officer to re-evaluate its critical accounting policies and compliance with those policies (the “Accounting Policy Review”). In accordance with the Accounting Policy Review it was determined that certain accounting policies had not been applied properly in the current and prior periods. Thus, the restatements include certain adjustments related to the correction of errors resulting from the noncompliance with the Company’s accounting policies.
The Accounting Policy Review did not indicate that the noncompliance with the accounting policies which occurred during the tenure of the former CFO resulted from a scheme to intentionally misrepresent the results of the Company’s operations or its financial position. Rather, the Accounting Policy Review has indicated that the misapplication of the accounting policies resulted from the former CFO’s failure to supervise properly the application of such accounting policies in recording certain transactions, as well as the failure of the Company’s former independent registered public accounting firm to detect such misapplications in connection with its audit of the consolidated financial statements. The Company believes it has properly remediated the material weaknesses in its internal control over financial reporting.
The financial accounts and transactions that affect the restatement of financial data for the three and six month periods ended March 31, 2008 and a description of the relevant matters which were discovered pursuant to the Accounting Policy Review are summarized as follows:
Accounts Receivable and Revenues – It was determined that accounts receivable and revenues were misstated due to differences between standard fees (“Standard Fees”), upon which revenues were initially recorded and the actual amounts that were collected from payers, primarily insurance carriers (“Contracted Amounts”). The difference between the Standard Fees and Contracted Amounts are referred to as Contractual Adjustments.
Historically, Contractual Adjustments were recognized as a reduction to revenues and accounts receivable in the period in which the payments were collected, not at the time the services were rendered, billed and recognized as revenues. Typically, a short period of time transpires between the recognition of Standard Fees as revenues and Contractual Adjustments as reductions to revenues and accounts receivable. In the event that there are no changes in the difference between the Standard Fees and Contracted Amounts and accounts receivables balances remain consistent, the impact on revenues and accounts receivables would not be expected to be significant. However, when there is an increase in Standard Fees without a corresponding and proportionate increase in Contracted Amounts, revenues are misstated for a short period of time and the accumulated effect of the revenue misstatements cause a cumulative misstatement in accounts receivable. Additionally, changes in the amounts of revenues recognized and in the amounts of accounts receivable outstanding from period to period have an impact on the amounts of Contractual Adjustments recognized and the corresponding adjustments to revenues.
13
Table of Contents
The Company evaluated the differences between Standard Fees and Contracted Amounts since fiscal year 2001 and determined that the difference between the Standard Fees and the Contracted Amounts have increased from an insignificant amount in fiscal year 2001 to approximately 34% in fiscal year 2008. As a result, revenues and accounts receivable have been misstated over that period. The restatement adjustments related to revenues and accounts receivable associated with Contractual Adjustments in the three and six months ended March 31, 2008 are set forth in Table B, below.
Table B
Restatement Adjustments Related to
Contractual Adjustments
Three Months Ended March 31, 2008 | Six Months Ended March 31, 2008 | |||||
Statements of Operations Adjustments | ||||||
Restatement adjustments to increase revenues | $ | 338,930 | $ | 235,413 | ||
Capital Leases – In accordance with the Accounting Policy Review, the Company evaluated its leases for proper classification and performed classification tests as prescribed by Statement of Financial Accounting Standard (“SFAS”) No. 13 and other relevant accounting standards. It was determined that all leases pertaining to real estate were classified as operating leases; however, the Company determined that certain real estate leases which it had entered since 2004 were not properly classified and that such leases met the criteria as set forth in SFAS No. 13 for capital lease classification. The restatement adjustments related to capital lease assets and obligations, amortization expense, interest expense and operating expenses are set forth in Table C below.
Table C
Restatement Adjustments Related to Reclassification
of Operating Leases to Capital Leases
Three Months Ended March 31, 2008 | Six Months Ended March 31, 2008 | |||||||
Statements of Operations Adjustments | ||||||||
Restatement adjustments to recognize interest expense on capital leases | $ | 226,627 | $ | 404,911 | ||||
Restatement adjustments to recognize amortization expense on capital leases | 115,726 | 210,364 | ||||||
Restatement adjustments to reverse rent expense | (267,934 | ) | (481,277 | ) | ||||
Net effect on income before income taxes | $ | 74,419 | $ | 133,998 | ||||
Other – In accordance with the Company’s Accounting Policy Review, it evaluated certain accruals which were misstated related to salaries and payroll taxes and compensated absences, which in prior years were not considered of sufficient materiality to record. The Company elected to make the related adjustments as part of the restatements, as well as an item that affected its prepaid expense account. The restatement adjustments related to these items are set forth in Table D below.
Table D
Restatement Adjustments Related to Other Items
Three Months Ended March 31, 2008 | Six Months Ended March 31, 2008 | |||||||
Statements of Operations Adjustments | ||||||||
Restatement adjustments to increase (decrease) operating expenses for other items | $ | (225,803 | ) | $ | 168,647 | |||
Restatement adjustments to decrease G&A expenses for other items | (109,310 | ) | (5,190 | ) | ||||
Net effect on income before income taxes - (increase) decrease | $ | (335,113 | ) | $ | 163,457 | |||
14
Table of Contents
The restatement adjustments as described above are reflected in the consolidated financial statements for the three and six month periods ended March 31, 2008 in accordance with the financial caption to which they pertain. Table E, below, reconciles previously reported net income and accumulated deficit to restated amounts and summarizes the above restatement adjustments applied in the determination of net income by financial statement caption.
Table E
Reconciliation of Net Income
Three Months Ended March 31, 2008 | Six Months Ended March 31, 2008 | |||||||
Net income, as previously reported | $ | 507,874 | $ | 737,572 | ||||
Restatement adjustments: | ||||||||
Revenues | 338,930 | 235,413 | ||||||
Operating expenses | 298,384 | (26,080 | ) | |||||
General and administrative expenses | (34,160 | ) | (276,227 | ) | ||||
Restatement adjustments to income before income tax benefit (expense) | 603,154 | (66,894 | ) | |||||
Income tax benefit (expense) restatement adjustments | (217,232 | ) | 44,375 | |||||
Effect of restatement adjustments, after tax | 385,922 | (22,519 | ) | |||||
Net income, as restated | $ | 893,796 | $ | 715,053 | ||||
Consolidated Statements of Operations – Restatement Adjustments
The following table sets forth the effect of the restatement adjustments on the applicable line items within the Company’s condensed consolidated statement of operations for the three and six month periods ended March 31, 2008:
Three months ended March 31, 2008 | Six months ended March 31, 2008 | |||||||||||||||||||||||
As Previously Reported | Restatement Adjustments | Restated | As Previously Reported | Restatement Adjustments | Restated | |||||||||||||||||||
Revenues | $ | 20,891,823 | $ | 338,930 | $ | 21,230,753 | $ | 39,151,101 | $ | 235,413 | $ | 39,386,514 | ||||||||||||
Operating expenses | (16,476,509 | ) | 298,384 | (16,178,125 | ) | (30,986,613 | ) | (26,080 | ) | (31,012,693 | ) | |||||||||||||
Operating margin | 4,415,314 | 637,314 | 5,052,628 | 8,164,488 | 209,333 | 8,373,821 | ||||||||||||||||||
General and administrative expenses | (3,571,587 | ) | (34,160 | ) | (3,605,747 | ) | (6,940,063 | ) | (276,227 | ) | (7,216,290 | ) | ||||||||||||
Income before income taxes | 843,727 | 603,154 | 1,446,881 | 1,224,425 | (66,894 | ) | 1,157,531 | |||||||||||||||||
Income tax benefit (expense) | (335,853 | ) | (217,232 | ) | (553,085 | ) | (486,853 | ) | 44,375 | (442,478 | ) | |||||||||||||
Net income (loss) | $ | 507,874 | $ | 385,922 | $ | 893,796 | $ | 737,572 | $ | (22,519 | ) | $ | 715,053 | |||||||||||
Basic earnings per share | $ | 0.05 | $ | 0.04 | $ | 0.09 | $ | 0.07 | $ | — | $ | 0.07 | ||||||||||||
Basic weighted average common shares outstanding | 9,914,122 | 9,914,122 | 9,914,122 | 9,914,122 | 9,914,122 | 9,914,122 | ||||||||||||||||||
Diluted earnings per share | $ | 0.05 | $ | 0.04 | $ | 0.09 | $ | 0.07 | $ | — | $ | 0.07 | ||||||||||||
Diluted weighted average common shares outstanding | 9,914,122 | 9,914,122 | 9,914,122 | 9,914,122 | 9,914,122 | 9,914,122 | ||||||||||||||||||
15
Table of Contents
NOTE 3. INVENTORY
The Company’s 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; therefore, management does only an annual physical inventory count and does not maintain a perpetual inventory system.
NOTE 4. 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. The tax returns for the seven fiscal years ending September 30, 2008 are open for examination by the Internal Revenue Service and the open tax years by state authorities include returns for the fiscal years ending September 30, 2007, 2006, 2005, and 2004. During the three and six month periods ended March 31, 2009, the Company recorded income tax expense of $969,662 and $864,973, respectively, as compared to the $553,085 and $442,478, for the three and six month periods ended March 31, 2008, respectively.
NOTE 5. FINANCING ARRANGEMENTS
The Company maintains a line of credit of $1,000,000 with a commercial bank. At March 31, 2009 and September 30, 2008, there were no amounts outstanding under the line of credit. The line of credit bears interest at the commercial bank’s prime rate, which was 3.25% at March 31, 2009. Borrowings are collateralized by the Company’s accounts receivable and the maturity date of the line of credit is May 23, 2010.
At March 31, 2009, the Company had a term loan outstanding with a commercial bank in the amount of $1,171,935. The term loan was payable in monthly installments of $76,033 and was scheduled for maturity on June 16, 2009. The interest rate on the term loan was the commercial bank’s prime interest rate (3.25% at March 31, 2009) plus 1/2%. Prior to June 2009, and as explained further below, the term loan was extended and it was modified on November 23, 2009. Accordingly, $843,726 and $328,209 of amounts due under the term loan are classified as current and long-term liabilities, respectively, at March 31, 2009. The term loan is secured by substantially all the Company’s assets.
In addition, in 2008 the Company secured a mortgage loan commitment and agreement from the same commercial bank in the amount of $3,200,000 for the purpose of acquiring and renovating its new corporate headquarters property. At March 31, 2009, $2,622,714 was outstanding under the mortgage loan agreement. Under the terms of the mortgage loan agreement the Company paid interest only at one-month LIBOR plus 2.5% until the modification date, at which time $2,100,000 of the amount outstanding converted to a permanent mortgage loan. The mortgage loan was modified on November 23, 2009. As explained below, approximately $1,100,000 of the $3,200,000 amount then outstanding was transferred to the term loan. Interest on the permanent mortgage loan will continue to be paid based on one-month LIBOR plus 2.5% and the Company will pay total monthly payments of $11,407. Any amount outstanding on March 5, 2015 will be due and payable on that date. The mortgage loan is secured by a lien on the Company’s corporate headquarters.
The term loan, as described above, was modified on November 23, 2009. Under the modified terms, $1,100,000 of the amount outstanding under the mortgage loan was added to the outstanding balance of the term loan. After modification, the aggregate balance of the term loan was $1,785,000. The term loan agreement was further modified to extend the maturity date until October 2013. The Company will continue to pay monthly installments of $76,033 and the interest rate on the term loan will continue to be paid at the commercial bank’s prime interest rate plus 1/2%.
During 2009, the Company failed to meet certain covenants under the term loan and the mortgage loan agreements. The loan covenants related to the maintenance of certain debt to equity ratios and the timely filing of the Company’s annual and quarterly financial information with the commercial bank during 2009. The commercial bank has waived the violation of these loan covenants.
16
Table of Contents
On July 17, 2008, the Company purchased a Doctors Care building for a total purchase price of $815,000. This property was previously rented by the Company and occupied as a medical center. A portion of the purchase price was funded by a promissory note in the original principal amount of $695,000, and is collateralized by a lien on the property. At March 31, 2009, the outstanding balance on the mortgage loan was $675,106. The promissory note accrues interest at a rate of 5.95 percent per annum. Starting on August 16, 2008 and continuing for 59 months thereafter, principal and interest payments in the amount of $5,890 are payable. The entire unpaid balance of principal and interest will be due on July 16, 2013.
NOTE 6. 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 7. RECOVERY OF MISAPPROPRIATION LOSSES
As more fully explained in Note 2, on December 10, 2008, the Company’s Audit Committee of the Board of Directors (the “Audit Committee”) commenced an internal investigation (the “Investigation”) of certain accounting irregularities with respect to its internal controls and improper expense reimbursements to Jerry F. Wells, Jr., the Company’s former Executive Vice-President of Finance, Chief Financial Officer, and Secretary. On December 17, 2008, the Board of Directors terminated the employment of Mr. Wells based upon the preliminary results of the Investigation. On February 27, 2009, Mr. Wells executed a Confession of Judgment (the “Judgment”) in favor of the Company in the amount of Two Million Nine Hundred Sixty-Seven Thousand Three Hundred and Eighty-Two ($2,967,382) Dollars.
On February 20, 2009, the Company’s Board of Directors passed a resolution declaring a forfeiture of Mr. Wells’ interest in the Company’s deferred compensation plan. On February 23, 2009, Mr. Wells signed a voluntary relinquishment of his interest in the deferred compensation plan. The Company does not deem the forfeiture of Mr. Wells’ interest in the deferred compensation plan as a partial settlement of amounts he owes the Company under the Judgment. Rather, the Company deems such amount as being forfeited as of the date of the resolution of its Board of Directors because such credit in the deferred compensation plan had been credited to Mr. Wells under false pretenses. The amount of the liability associated with the deferred compensation plan at the time of forfeiture was $585,422. Such amount was recognized in the three month period ended March 31, 2009.
The Company’s efforts to collect under the Judgment from Mr. Wells continue. As of February 2010, the Company has recovered certain items of jewelry and other personal property, none of which is of significant value. Additionally, subsequent to March 31, 2009, the Company has collected $110,000 from the sales of other assets in which Mr. Wells had an interest.
Further, the Company has filed claims with two insurance carriers under fidelity bond and employee dishonesty insurance policies. The Company has vigorously pursued its claims under the policies and has recently received a notification from one of the insurance carriers that the carrier has accepted coverage losses under its policy, subject to certain conditions and limitations. Accordingly, the Company believes that it will recover at least a portion of its losses under the applicable insurance policy; however, the insurance carrier has not executed a definitive agreement, or made payment. Accordingly, the Company has not recognized any net receivable associated with the insurance claims.
NOTE 8. SUBSEQUENT EVENTS
Subsequent to March 31, 2009, the Company has opened three Doctors Care centers. All of the new centers are leased and all are located in South Carolina. The terms of the leases associated with the new centers are twenty years and all will be classified as capital leases. The aggregate amount the Company will record (at the inception of the leases) as capital lease assets and obligations under the capital leases is $2,446,003. In addition, in June 2009, the Company completed the renovation of its new corporate headquarters building which was acquired in October 2007, and relocated all of its corporate employees to the new location in Columbia, South Carolina. The Company financed the purchase and renovation of the new headquarters property and, since March 31, 2009, has incurred additional debt of approximately $574,000 related to the financing of the property.
17
Table of Contents
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 can give 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 payers 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 Form 10-Q, the factors described in our 2008 10-K, including, but not limited to, those matters described under the caption “PART I – ITEM 1A. – RISK FACTORS,” 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 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.
Restatements and Related Matters
In this Form 10-Q for the quarter ended March 31, 2009, we are restating our condensed consolidated statement of operations for the three and six month periods ended March 31, 2008 and the related statement of cash flows for the six month period ended March 31, 2008. The restatement is related to an internal investigation (the “Investigation”) commenced by our Audit Committee on December 10, 2008. On February 2, 2010, we filed our 2008 10-K in which we restated our consolidated financial statements for the two years ended September 30, 2007 and other financial data included therein for the six years ended September 30, 2007.
The circumstances that precipitated the Investigation are more fully discussed in this Form 10-Q under the caption, “PART I. FINANCIAL INFORMATION – Item 1. Financial Statements – Note 2. Restatement of Previously Issued Financial Statements.”
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements included in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. 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) accounts receivable; (3) allowance for doubtful accounts; (4) consideration of impairment of intangible assets; and (5) valuation reserve on net deferred tax assets.
18
Table of Contents
Revenue recognition -
We record revenues at the estimated net amount that we expect to receive from patients, employers, third party payers, and others at the time we perform the services. The amount of revenue we recognize pursuant to the services we provide is subject to significant judgments and estimates. We have stated billing rates which are billed as gross revenues when services are performed. The amounts we bill are then reduced by our estimate of amounts we do not expect to collect due to discounts (“Contractual Adjustments”) that are taken by third party payers or otherwise given to patients who pay us directly. We estimate Contractual Adjustments based on the ratio of cash collected in the preceding periods to gross revenues we billed. See “PART I. FINANCIAL INFORMATION – Item 1. Financial Statements – Note 2. Restatement of Previously Issued Financial Statements” for a discussion of issues regarding our prior accounting for Contractual Adjustments which are reflected in the restatement adjustments to our previously issued financial data for the three and six month periods ended March 31, 2008.
Accounts receivable -
Accounts receivable represent the net receivables we expect to collect related to the services we provide. The amount we record as net accounts receivable is subject to significant judgments and estimates. As explained in the above caption,“Revenue recognition,”the amounts we bill and record as accounts receivable are reduced by our estimate of amounts we will not collect due to Contractual Adjustments that are taken by third party payers or otherwise given to patients who pay us directly. Additionally, as explained below in the caption,“Allowance for doubtful accounts,”our accounts receivable are also reduced by our estimate of losses which may result from the inability of some of our patients or other payers to make required payments.
Allowance for doubtful accounts -
We maintain our allowance for doubtful accounts for estimated losses, which may result from the inability of our patients to make required payments. Most of our allowance for doubtful accounts relate to amounts owed to us by patients or other payers who are or become responsible for the payments associated with services we provide. 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 payer 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 bad debt expense.
Consideration of impairment of intangible assets -
We evaluate the recovery of the carrying amount of excess of cost over fair value of assets, primarily goodwill, acquired by determining if a permanent impairment has occurred. This evaluation is done annually as of September 30th of each year or more frequently if indicators of permanent impairment arise. Indicators of a permanent impairment include, among other things, a 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. 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. Based upon our current financial position, results from operations, and our forecast of future earnings, we do not believe we currently need a valuation allowance.
19
Table of Contents
Comparison of the Three and Six Month Periods Ended March 31, 2009 to the Three and Six Month Periods Ended March 31, 2008
Revenues and Operating Expenses
Our revenues are derived from the medical services we provide to our patients. Amounts we earn as revenues are paid by our patients or collected from third-party payers, including insurance carriers, employers or other third-parties. Our revenues are affected by a number of different factors, including increases or decreases in reimbursement rates from third-party payers, the mix of our patients between the nature of the payment source, competitive factors, the severity of seasonal illnesses, the general economic environment and most importantly, the new centers we open in the current and preceding year.
Operating expenses are those costs that we incur in the direct delivery of our services to patients and include the costs to operate and maintain our medical centers. Such costs include the salaries and benefits associated with our medical providers and other center employees, rent, depreciation, interest expense on our capital leases, medical supplies and other expenses incurred by our medical centers.
As more fully discussed above, our revenues and operating expenses for the three and six month periods ended March 31, 2008 have been restated. The following table sets forth our revenues, operating expenses and operating margin for the three and six month periods ended March 31, 2009 and 2008.
For the three month periods ended March 31, | For the six month periods ended March 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
Revenues | $ | 20,544,839 | $ | 21,230,753 | $ | 38,852,625 | $ | 39,386,514 | ||||||||
Operating Expenses | (15,539,153 | ) | (16,178,125 | ) | (30,957,602 | ) | (31,012,693 | ) | ||||||||
Operating Margin | $ | 5,005,686 | $ | 5,052,628 | $ | 7,895,023 | $ | 8,373,821 | ||||||||
Comparison of Revenues and Operating Expenses for the Three and Six Month Periods Ended March 31, 2009 and 2008
We recognized revenues of $20,544,839 and $38,852,625 in the three and six month periods ended March 31, 2009, respectively, compared to revenues of $21,230,753 and $39,386,514 in the same periods in 2008. The overall decrease in our revenues between the three and six month periods ended March 31, 2009 compared to the same periods in 2008 of $685,914, or 3.23%, and $533,889, or 1.36%, respectively, was the result of several factors. First, seasonal factors, primarily related to the severity and duration of seasonal flu, positively affected our revenues to a greater extent in the three month period ended March 31, 2008 compared to the same period in 2009. Patient encounters in the three month period March 31, 2008 exceeded patient encounters in the same period in 2009 by 4.76%. Our revenues for the six month period ended March 31, 2008 were positively affected by the same seasonal factors. Patient encounters in the six month period March 31, 2008 exceeded patient encounters in the same period in 2009 by 2.34%.
In addition, we opened a Doctors Care center during the first quarter of 2009 and a Doctors Care and a physical therapy center during the second quarter of 2009. We opened the Doctors Care center late in March 2009, and the center had an insignificant effect on our operations during the quarter. During that same period, we closed one Doctors Care center. In 2008, we opened two Doctors Care centers and two physical therapy centers. The centers we opened during the first and second quarters of 2009, contributed revenues of approximately $581,000 and $856,000 in the three and six month periods ended March 31, 2009, respectively. The centers we opened during fiscal year 2008 contributed revenues of approximately $328,000 and $791,000 in the three and six month periods ended March 31, 2009, respectively, in excess of the revenues the centers contributed in the same periods in 2008. Accordingly, the decrease in our revenues associated with our centers that were in operation prior to fiscal year 2008 was approximately $1,595,000 and $2,181,000, in the three and six month periods ended March 31, 2009, respectively, compared to the same periods in 2008.
20
Table of Contents
The decrease in our revenues associated with our centers that were in operation prior to fiscal year 2008 was the result of several factors. First, revenues in the three and six month periods ended March 31, 2008 included revenues of approximately $261,000 and $510,000, respectively, associated with the center we closed in January 2009. In addition, patient encounters related to centers that were in operation prior to fiscal year 2008 decreased by 8.95% and 5.93% in the three and six month periods ended March 31, 2009, compared to the same period in 2008. We believe the decrease in patient encounters is due to a combination of factors, including, the closure of the center in January 2009, the unusual severity and duration of the seasonal flu in second quarter of 2008 compared to the second quarter of 2009, the general worsening economic conditions in late 2008 and increased competition.
Our operating expenses were $15,539,153 and $30,957,602 in the three and six month periods ended March 31, 2009, respectively, compared to operating expenses of $16,178,125 and $31,012,693 in the same periods in 2008. The decrease of $638,972, or 3.95%, in the three month period ended March 31, 2009 compared to the same period in 2008 was due to several factors. Operating expenses associated with the center we closed in January 2009 were approximately $240,000 in the three month period ended March 31, 2008. We incurred no significant operating expenses related to the center in the same period in 2009. Additionally, certain operating expenses were higher in the second quarter of 2008 compared to the second quarter of 2009 as a result of the unusual severity and duration of the seasonal flu during the second quarter of 2008. Specifically, salaries and benefits and medical supplies were higher by $424,789 and $169,992, respectively, in the second quarter of 2008 compared to the same period in 2009. In addition, bad debt expense decreased by $240,544 in the three month period ended March 31, 2009 compared to the same period in 2008 as a result of more aggressive collection efforts and the full migration to a new billing and receivables management system. The overall decrease in our operating expenses in the three month period ended March 31, 2009 compared to the same period in 2008 was offset by increased depreciation and interest expense of $156,808 and $53,410, respectively, related to capital leases on the new centers we opened in 2008.
Our operating expenses decreased by $55,091 in the six month period ended March 31, 2009 compared to the same period in 2008. The decrease in salaries and benefits during the second quarter of 2009 compared to the second quarter of 2008, as explained above, was offset during the six month period by other increases related primarily to the addition of the two Doctors Care centers and two physical therapy centers we opened in 2008. In the six month period ended March 31, 2009, medical supplies and bad debt expense decreased by $237,297 and $629,060, respectively, compared to the same period in 2008. These decreases were offset by increases in depreciation and interest expense of $382,341 and $146,046, respectively, in the six month period ended March 31, 2009 compared to the same period in 2008, primarily related to capital leases. These fluctuations are related to the same factors discussed in the preceding paragraph.
General and Administrative Expenses (G&A)
G&A expenses consist of the costs and expenses to administer and support our medical centers. Such costs include salaries and benefits of corporate employees (administrative, maintenance and billing departments), postage and shipping, professional fees, advertising, banking fees and other costs incidental to operating our corporate office.
As more fully discussed above, our G&A expenses for the three and six month periods ended March 31, 2008 have been restated. The following table sets forth our G&A expenses for the three and six month periods ended March 31, 2009 and 2008.
For the three month periods ended March 31, | For the six month periods ended March 31, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
(Restated) | (Restated) | |||||||||||
General and administrative expenses | $ | 3,079,675 | $ | 3,605,747 | $ | 6,240,129 | $ | 7,216,290 | ||||
21
Table of Contents
Comparison of G&A Expenses for the Three and Six Month Periods Ended March 31, 2009 and 2008
Our G&A expenses were $3,079,675 and $6,240,129 in the three and six month periods ended March 31, 2009 compared to $3,605,747 and $7,216,290 in the same periods in 2008. The overall decrease in our G&A expenses between the three and six month periods ended March 31, 2009 compared to the same periods in 2008 of $526,072, or 14.6%, and $976,161, or 13.5%, respectively, was the result of several factors, a significant factor of which was a decrease in advertising expenses of $289,119 and $704,791 in the three and six month periods ended March 31, 2009, respectively, compared to the same periods in 2008. In addition, salaries and benefits expenses decreased by $272,329 and $432,992 in the three and six month periods ended March 31, 2009, respectively, compared to the same periods in 2008, most of which related to the termination of approximately twenty employees in the third quarter of 2008. Interest expense decreased by $78,669 and $146,004 and misappropriation losses decreased by $136,242 and $161,765 in the three and six month periods ended March 31, 2009, respectively, compared to the same periods in 2008. The decrease in interest expense was due to the reduction in our debt on which we recognized interest expense during the three and six month periods ended March 31, 2009.
The overall decrease was offset by increases in professional fees of $305,719 and $488,934 in the three and six month periods ended March 31, 2009, respectively, compared to the same periods in 2008. The increase in professional fees was related to the investigation of our former CFO, Jerry F. Wells, Jr. The investigation is discussed in this Form 10-Q under the caption, “PART I. FINANCIAL INFORMATION – Item 1. Financial Statements – Note 2. Restatement of Previously Issued Financial Statements.”
Moreover, G&A expenses in the three month period ended March 31, 2008 include $136,242 of fraudulent transactions related to the fraudulent conduct of our former CFO. Mr. Wells’ employment was terminated in December 2008, and, accordingly no fraudulent transactions occurred in the three month period ended March 31, 2009. During the six month periods ended March 31, 2009 and 2008, G&A expenses include fraudulent transactions of $102,030 and $263,795, respectively.
Recovery of Misappropriation Loss
As more fully explained under the caption, “PART I. FINANCIAL INFORMATION – Item 1. Financial Statements – Note 2. Restatement of Previously Issued Financial Statements,” on December 10, 2008, the Company’s Audit Committee of the Board of Directors (the “Audit Committee”) commenced an internal investigation (the “Investigation”) of certain accounting irregularities with respect to its internal controls and improper expense reimbursements to Jerry F. Wells, Jr., the Company’s former Executive Vice-President of Finance, Chief Financial Officer, and Secretary. As a result of the Investigation, on February 27, 2009, Mr. Wells executed a Confession of Judgment (the “Judgment”) in favor of the Company in the amount of Two Million Nine Hundred Sixty-Seven Thousand Three Hundred and Eighty-Two ($2,967,382) Dollars.
As discussed under the caption, “PART I. FINANCIAL INFORMATION – Item 1. Financial Statements – Note 7. Recovery of Misappropriation Losses,” during the quarter ended March 31, 2009, we recognized $585,422, the amount of the liability associated with Mr. Wells’ interest in our deferred compensation plan at the time such interest was forfeited.
Comparison of Income Tax Expense for the Three and Six Month Periods Ended March 31, 2009 and 2008
Our income tax expense was $969,662 and $864,973 in the three and six month periods ended March 31, 2009, respectively, compared to an income tax expense of $553,085 and $442,478 in the comparable periods in 2008. Our effective tax rates were 38.61% the three and six month periods ended March 31, 2009 and 38.22% in the comparable periods in 2008. Our effective tax rates vary from the combined enacted federal and state tax rates due to the net effect of nondeductible expenses, offset by certain tax credits we recognize.
Liquidity and Capital Resources
Our primary liquidity and capital requirements are to fund working capital for current operations, including the expansion of our business through opening new centers, and servicing our long-term debt. Typically, the cash requirements associated with the opening of new centers have been limited to funding the purchase of furniture and medical equipment necessary to provide medical services and funding the operations of the new centers until such time as they generate positive cash flows. The primary sources to meet our liquidity and capital requirements are funds generated from operations, a $1,000,000 line of credit with a commercial bank and other term and mortgage loans.
22
Table of Contents
The line of credit bears interest at the commercial bank’s prime interest rate which was 3.25% at March 31, 2009 and is secured by our accounts receivable. At March 31, 2009 and September 30, 2008, we had no outstanding borrowings under the line of credit. During the three and six month periods ended March 31, 2009, the maximum amount outstanding under the line of credit was $702,546 and $1,000,000, respectively, the average amount outstanding during both periods approximated $482,000 and we recognized interest expense of $3,919 and $9,046, respectively related to the line of credit. The weighted average interest rate on the line of credit during the three and six month periods ended March 31, 2009 was 3.25% and 3.75%, respectively.
At March 31, 2009, we had a term loan outstanding with a commercial bank in the amount of $1,171,935. The term loan was payable in monthly installments of $76,033 and was scheduled for maturity on June 16, 2009. The interest rate on the term loan was the commercial bank’s prime interest rate (3.25% at March 31, 2009) plus 1/2%. Prior to June 2009, and as explained further below, the term loan was extended and it was modified on November 23, 2009.
In addition, in 2008 we secured a mortgage loan commitment and agreement from the same commercial bank in the amount of $3,200,000 for the purpose of acquiring and renovating our new corporate headquarters property. At March 31, 2009, $2,622,714 was outstanding under the mortgage loan agreement. Under the terms of the mortgage loan agreement we paid interest only at one-month LIBOR plus 2.5% until the modification date, at which time $2,100,000 of the amount outstanding converted to a permanent mortgage loan. The mortgage loan was modified on November 23, 2009. As explained below, approximately $1,100,000 of the $3,200,000 amount then outstanding was transferred to the term loan. Interest on the permanent mortgage loan will continue to be paid based on one-month LIBOR plus 2.5% and we will pay total monthly payments of $11,407. Any amount outstanding on March 15, 2015 will be due and payable on that date.
The term loan, as described above, was modified on November 23, 2009. Under the modified terms, $1,100,000 of the amount outstanding under the mortgage loan was added to the outstanding balance of the term loan. After modification, the aggregate balance of the term loan was $1,785,000. The term loan agreement was further modified to extend the maturity date until October 2013. We will continue to pay monthly installments of $76,033 and the interest rate on the term loan will continue to be paid at the commercial bank’s prime interest rate plus 1/2%.
During 2009, we failed to meet certain covenants under the term loan and the mortgage loan agreements. The loan covenants related to the maintenance of certain debt to equity ratios and the timely filing of our annual and quarterly financial information with the commercial bank during 2009. The commercial bank has waived the violation of these covenants.
Additionally, in the fiscal year ending September 30, 2008 we acquired a center in Surfside Beach, SC for $815,000. We financed the acquisition of the center with a mortgage loan in the amount of $695,000, of which approximately $675,106 was outstanding at March 31, 2009.
Long-term debt increased from $3,754,139 at September 30, 2008 to $4,469,755 at March 31, 2009, due to additional borrowings under the mortgage loan agreement, net of regular principal pay-downs. Our management believes that for the next 12 months and the foreseeable future thereafter it will be able to continue to fund debt service requirements out of cash generated through operations.
Cash provided by operating activities for the six month period ended March 31, 2009 was $3,934,073 compared to $2,778,880 for the comparable period in 2008. In the six month periods ended March 31, 2009 and 2008, cash provided by operations was increased by non-cash charges to net income, the primary components of which were the provision for losses on accounts receivable, depreciation and amortization and the provision for deferred taxes. In aggregate, such non-cash charges increased cash provided by operating activities by $3,463,996 and $2,768,728 in the six month periods ended March 31, 2009 and 2008, respectively. Cash provided by operating activities was positively impacted by an increase in accounts payable and accrued expenses of $776,065 in the six month period ended March 31, 2009. In addition, cash provided by operating activities was reduced by increases in accounts receivable, inventory, income taxes receivable, prepaid expenses and other current assets and a reduction in our deferred compensation liability. In aggregate these items reduced cash provided by operations by $2,078,613. In the six month period ended March 31, 2008, cash provided by operating activities was reduced by an aggregate amount of $2,139,170 due to increases in accounts receivable, prepaid expenses and other current assets and decreases in accounts payable and accrued expenses. In the six month period ended March 31, 2008, cash provided by operating activities was increased by an aggregate amount of $1,192,478 due to changes in income taxes receivable and payable.
23
Table of Contents
Cash used in investing activities for the six month period ended March 31, 2009 was $3,260,052 compared to $1,570,807 for the comparable period in 2008. In the six month periods ended March 31, 2009 and 2008, the primary use of cash in investing activities related to the renovation of our new corporate office and the purchase of furniture and medical equipment to outfit the new centers we opened in the six month period ended March 31, 2009. In the six month period ended March 31, 2008, the primary use of cash in investing activities related to the purchase of furniture and medical equipment to outfit new centers and improvements to several of our existing centers.
Cash provided by financing activities for the six month period ended March 31, 2009 was $534,092. In the six month period ended March 31, 2009 proceeds from borrowings, related to draws on the mortgage loan associated with the renovation of our corporate headquarters building, were $1,222,227. During that period we paid $506,611 and $181,524 in payments related to other long-term debt and capital lease obligations, respectively. Cash used by financing activities for the six month period ended March 31, 2008 was $1,085,239. In the six month period ended March 31, 2008 we reduced amounts outstanding under our line of credit by $400,331. During that period we paid $443,272 and $145,125 in payments related to other long-term debt and capital lease obligations, respectively.
At March 31, 2009, we had cash and cash equivalents of $1,977,762 compared to $769,649 at September 30, 2008, an increase of $1,208,113. Our working capital was $2,881,510 at March 31, 2009 compared to $2,893,448 at September 30, 2008.
24
Table of Contents
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 $675,000 of our debt at March 31, 2009 was subject to fixed interest rates. Approximately $3,794,000 of our debt at March 31, 2009 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at March 31, 2009, our interest expense on an annualized basis would increase approximately $38,000 for each increase of one percent in the prime rate.
We also have exposure to increases in the consumer price index associated with certain operating and capital leases we have entered, all of which relate to our leased real estate. We have $3,891,698 in aggregate annual lease payments that are subject to increases based on future changes in the consumer price index. Such lease payments include lease agreements in place at March 31, 2009 and lease agreements entered subsequent to that date. Typically, the lease agreements stipulate that the lease payments will increase every three years based on the aggregate increase in the consumer price index over the preceding three years. Of the aggregate annual lease payments subject to change based on the consumer price index, annual payments subject to change in 2009, 2010, 2011 and 2012 are $262,416, $719,880, $2,125,581 and $783,821, respectively.
We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments.
Item 4T. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2009 and concluded that the disclosure controls and procedures were not effective. As discussed above, disclosure controls generally pertain to the reporting of financial information within the time periods specified in the SEC’s rules and forms. Due to the circumstances explained in this Form 10-Q under the caption, “PART I. FINANCIAL INFORMATION – Item 1. Financial Statements – Note 2. Restatement of Previously Issued Financial Statements,” we were unable to file this 10-Q on a timely basis. We believe that our inability to file this Form 10-Q on a timely basis indicates that our disclosure controls and procedures were not effective as of March 31, 2009.
In addition, because certain deficiencies involving our internal controls over financial reporting constituted material weaknesses, as discussed below, our management has concluded that our disclosure controls and procedures as of March 31, 2009 were not effective. A material weakness in internal control over financial reporting is a deficiency, or a combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified resulted in the restatement of the previously reported financial statements included in this Form 10-Q and relate to the circumstances explained in this Form 10-Q under the caption, “PART I. FINANCIAL INFORMATION – Item 1. Financial Statements – Note 2. Restatement of Previously Issued Financial Statements.”
25
Table of Contents
In connection with the evaluation described above, we have identified the following material weaknesses in our internal control over financial reporting which were not remediated as of March 31, 2009:
Risk Assessment
• | Failure to Specify Financial Reporting Objectives and Risks – We failed to adequately specify our financial reporting objectives related to revenue recognition and contractual adjustments, recognition of capital lease assets and liabilities, recognition of bad debt expense and the recognition of other assets and liabilities. Accordingly, we were unable to adequately identify the risks associated with the proper valuation and presentation of certain accounts and account classifications in our financial statements. As a result, control activities were not designed and implemented in a manner that permitted us to manage the risks of not achieving reliable financial reporting. |
Control Activities
• | Failure to Develop Appropriate Control Activities –We did not develop adequate control activities to mitigate and control the risks associated with properly valuing and presenting certain accounts and account classifications in our financial statements. As a result, our financial statements required restatement in part due to inadequate controls over the timing of the recognition of contractual adjustments which affects the recognition of our revenues, the failure to properly analyze leases for proper classification, the failure to consider relevant information regarding the recognition of bad debt expense and the failure to adequately evaluate the characteristics of other assets and liabilities for proper classification and recording in our financial statements. |
Monitoring Activities
• | Failure to Adequately Monitor the Functioning of Internal Control Components – We placed reliance on our former CFO to design and implement a self-assessment plan to monitor our internal control over financial reporting. Consistent with his failure to comply with our established standards of integrity and ethical values he failed to design and implement an adequate and comprehensive self-assessment plan and program and falsely reported the status of our internal controls, including our monitoring program, to our Audit Committee. As a result, we failed to detect our former CFO’s embezzlement and failed to identify other deficiencies in our internal control over financial reporting that contributed in part to the restatement of our financial information as described in this Form 10-Q. |
Changes in Internal Control over Financial Reporting
There were changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2009. Generally, such changes were related to the remediation of certain other material weakness in our internal control over financial reporting that we reported in our 2008 Annual Report on Form 10-K. The remedial measures we have subsequently taken related to the material weaknesses in our internal control over financial reporting that were not remediated as of March 31, 2009, as discussed above, are described below:
Remedial Measures
We have devoted substantial resources to improving our internal control over financial reporting in order to remediate the material weaknesses disclosed herein. We also are committed to achieving and maintaining a strong control environment, as well as setting an overall tone within our Company that encourages and empowers our employees to act in accordance with the highest standards of honest and ethical conduct. Moreover, we believe that any system of internal control requires active and continual management and we expect to further improve our internal control over financial reporting in the future. The following are measures we have taken to improve our internal control over financial reporting:
26
Table of Contents
Risk Assessment and Control Activities
• | Our new Chief Financial Officer (“New CFO”) has reviewed our critical accounting policies (“Accounting Policy Review”) and a determination of the proper application of those policies has been made. As part of the Accounting Policy Review we identified the key risks to the achievement of our financial reporting objectives and have implemented certain additional control activities, the most significant of which are as follows: |
• | Our New CFO is now directly and integrally involved in our closing processes and we have improved our analysis and investigation of variances in our revenues and expenses and the formulation of our estimates. |
• | Contractual adjustments are evaluated on a timely basis and we have developed procedures and processes to refine our estimates of the timing of the adjustments related to the recognition of revenues and valuation of accounts receivable. |
• | Other control activities have been implemented that generally involve: the timely analysis of the adequacy of our allowance for doubtful accounts; additional management review of expense accruals and other asset and liability accounts for proper classification and valuation; and, enhanced reconciliation procedures of certain accounts, including accounts affected by our recognition of income tax expense or benefit. |
Monitoring Activities
• | We have hired an additional resource, a certified public accountant, who will perform financial and operational audits, including the testing of our internal control over financial reporting. |
• | Our New CFO is integrally involved in and closely monitors our financial and accounting operations, including the preparation of our financial statements. Our New CFO also closely supervises the identification and resolution of accounting matters and issues and timely reviews our cash operations, including our disbursements. |
Notwithstanding our conclusion concerning the ineffectiveness of our disclosure controls and procedures and the material weaknesses we have identified in our internal control over financial reporting, as discussed above, we believe that the condensed consolidated financial statements in this Form 10-Q fairly present, in all material respects, our financial position and results of operations and cash flows as of the dates and for the periods presented, in conformity with accounting principles generally accepted in the United States of America. Such belief is based on a number of factors, including the completion and results of our Audit Committee’s Investigation, our internal review that identified revisions to our previously issued financial statements, our efforts to remediate the material weaknesses in internal control over financial reporting, as described above, and the performance of additional procedures by our management designed to ensure the reliability of our financial reporting.
27
Table of Contents
PART II
Item 1 | Legal Proceedings |
We are a party to certain litigation that we consider routine and incidental to our business. Management does not expect the results of any of these actions to have a material effect on our business, results of operations or financial condition.
Item 1A | Risk Factors |
Information regarding risk factors appears in Part I - Item 1A - Risk Factors of our report on Form 10-K for the fiscal year ended September 30, 2008. There have been no material changes from the risk factors previously disclosed in our report on Form 10-K.
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds |
This item is not applicable.
Item 3 | Defaults upon Senior Securities |
This item is not applicable.
Item 4 | Reserved |
Item 5 | Other Information |
This item is not applicable.
Item 6 | Exhibits |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of D. Michael Stout, M.D. | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Joseph A. Boyle, CPA | |
32 | Section 1350 Certification |
28
Table of Contents
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/ Joseph A. Boyle | |
D. Michael Stout, M.D. | Joseph A. Boyle | |
President and Chief Executive Officer | Executive Vice President, | |
Chief Financial Officer and | ||
Principal Accounting Officer |
Date: March 12, 2010
29