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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2010
¨ | 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
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant’s common stock, $.05 par value, was 9,934,072 at May 30, 2010.
Table of Contents
UCI MEDICAL AFFILIATES, INC.
Page Number | ||||||
PART I | FINANCIAL INFORMATION | |||||
Item 1 | Financial Statements | |||||
Condensed Consolidated Balance Sheets – March 31, 2010 and September 30, 2009 | 3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
7 - 10 | ||||||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 - 16 | ||||
Item 3 | 17 | |||||
Item 4T | 17 | |||||
PART II | OTHER INFORMATION | |||||
Item 1 | 18 | |||||
Item 1A | 18 | |||||
Item 2 | 18 | |||||
Item 3 | 18 | |||||
Item 4 | 18 | |||||
Item 5 | 18 | |||||
Item 6 | 18 | |||||
19 |
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) March 31, 2010 | September 30, 2009 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 3,725,889 | $ | 2,755,156 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,546,519 and $1,547,367 | 6,133,602 | 6,648,194 | ||||||
Inventory | 1,196,903 | 1,196,903 | ||||||
Income taxes receivable | 72,100 | 411,948 | ||||||
Deferred taxes | 1,207,693 | 1,374,385 | ||||||
Prepaid expenses and other current assets | 793,919 | 434,613 | ||||||
Total current assets | 13,130,106 | 12,821,199 | ||||||
Property and equipment, less accumulated depreciation of $16,685,923 and $15,959,380 | 14,390,070 | 14,203,029 | ||||||
Leased property under capital leases, less accumulated amortization of $2,327,691 and $1,911,931 | 12,864,037 | 13,279,797 | ||||||
Deferred taxes | 14,032 | 114,805 | ||||||
Restricted investments | 1,975,692 | 1,765,294 | ||||||
Goodwill, less accumulated amortization of $2,493,255 | 3,350,501 | 3,350,501 | ||||||
Other assets | 580,749 | 382,733 | ||||||
Total Assets | $ | 46,305,187 | $ | 45,917,358 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities | ||||||||
Current portion of long-term debt | $ | 985,730 | $ | 924,839 | ||||
Obligations under capital leases | 314,203 | 327,031 | ||||||
Accounts payable | 432,817 | 865,119 | ||||||
Payable to patients and insurance carriers | 1,749,710 | 1,927,039 | ||||||
Accrued salaries and payroll taxes | 4,224,492 | 3,736,387 | ||||||
Accrued compensated absences | 622,024 | 618,025 | ||||||
Other accrued liabilities | 1,063,738 | 1,202,535 | ||||||
Total current liabilities | 9,392,714 | 9,600,975 | ||||||
Long-term liabilities | ||||||||
Deferred compensation liability | 1,784,226 | 1,461,002 | ||||||
Long-term debt, net of current portion | 3,088,591 | 3,620,439 | ||||||
Obligations under capital leases | 13,562,504 | 13,723,419 | ||||||
Total long-term liabilities | 18,435,321 | 18,804,860 | ||||||
Total Liabilities | 27,828,035 | 28,405,835 | ||||||
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 - 9,945,472 shares; outstanding - 9,934,072 shares | 497,274 | 497,274 | ||||||
Treasury stock - 11.400 shares | (31,350 | ) | (31,350 | ) | ||||
Paid-in capital | 22,173,993 | 22,173,993 | ||||||
Accumulated deficit | (4,162,765 | ) | (5,128,394 | ) | ||||
Total Stockholders’ Equity | 18,477,152 | 17,511,523 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 46,305,187 | $ | 45,917,358 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||
Revenues | $ | 22,114,808 | $ | 20,544,839 | $ | 43,983,538 | $ | 38,852,625 | ||||
Operating expenses | 17,499,878 | 15,539,153 | 35,672,536 | 30,957,602 | ||||||||
Operating margin | 4,614,930 | 5,005,686 | 8,311,002 | 7,895,023 | ||||||||
General and administrative expenses | 3,423,641 | 3,079,675 | 6,738,060 | 6,240,129 | ||||||||
Income from operations | 1,191,289 | 1,926,011 | 1,572,942 | 1,654,894 | ||||||||
Recovery of misappropriation loss | — | 585,422 | — | 585,422 | ||||||||
Income before income taxes | 1,191,289 | 2,511,433 | 1,572,942 | 2,240,316 | ||||||||
Income tax expense | 459,957 | 969,662 | 607,313 | 864,973 | ||||||||
Net Income | $ | 731,332 | $ | 1,541,771 | $ | 965,629 | $ | 1,375,343 | ||||
Basic earnings per share | $ | 0.07 | $ | 0.16 | $ | 0.10 | $ | 0.14 | ||||
Basic weighted average shares outstanding | 9,934,072 | 9,945,472 | 9,934,072 | 9,944,611 | ||||||||
Diluted earnings per share | $ | 0.07 | $ | 0.16 | $ | 0.10 | $ | 0.14 | ||||
Diluted weighted average shares outstanding | 9,934,072 | 9,945,472 | 9,934,072 | 9,944,611 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statement Of Changes in Stockholders’ Equity
(unaudited)
Six Months Ended March 31, 2010 | |||||||||||||||||||
Common Stock | Paid-in Capital | Treasury Stock | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||
Shares | Amount | ||||||||||||||||||
Balance at September 30, 2009 | 9,945,472 | $ | 497,274 | $ | 22,173,993 | $ | (31,350 | ) | $ | (5,128,394 | ) | $ | 17,511,523 | ||||||
Net income | 965,629 | 965,629 | |||||||||||||||||
Balance at March 31, 2010 | 9,945,472 | $ | 497,274 | $ | 22,173,993 | $ | (31,350 | ) | $ | (4,162,765 | ) | $ | 18,477,152 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Operating activities: | ||||||||
Net income | $ | 965,629 | $ | 1,375,343 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for losses on accounts receivable | 1,067,442 | 1,121,668 | ||||||
Depreciation and amortization | 1,610,312 | 1,477,347 | ||||||
Loss on disposal | 1,273 | — | ||||||
Deferred taxes | 267,465 | 864,981 | ||||||
Unrealized loss on restricted investments | (53,961 | ) | 397,282 | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (552,850 | ) | (861,268 | ) | ||||
Inventory | — | (10,000 | ) | |||||
Income taxes receivable | 339,848 | (225,000 | ) | |||||
Prepaid expenses and other current assets | (359,306 | ) | (216,337 | ) | ||||
Accounts payable and accrued expenses | (256,324 | ) | 776,065 | |||||
Deferred compensation | 323,224 | (766,008 | ) | |||||
Cash provided by operating activities | 3,352,752 | 3,934,073 | ||||||
Investing activities: | ||||||||
Purchases of property and equipment | (1,382,866 | ) | (3,012,179 | ) | ||||
Increase in other assets | (198,016 | ) | (180 | ) | ||||
Purchase of restricted investments | (156,437 | ) | (247,693 | ) | ||||
Cash used in investing activities | (1,737,319 | ) | (3,260,052 | ) | ||||
Financing activities: | ||||||||
Proceeds from borrowings on notes | — | 1,222,227 | ||||||
Principal payments on notes payable | (470,957 | ) | (506,611 | ) | ||||
Principal payments on capital lease obligations | (173,743 | ) | (181,524 | ) | ||||
Payments on other long-term obligations | — | — | ||||||
Cash provided by (used in) financing activities | (644,700 | ) | 534,092 | |||||
Increase in cash | 970,733 | 1,208,113 | ||||||
Cash at beginning of period | 2,755,156 | 769,649 | ||||||
Cash at end of period | $ | 3,725,889 | $ | 1,977,762 | ||||
Supplemental cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 777,081 | $ | 607,738 | ||||
Income taxes | $ | — | $ | 225,000 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Capital lease obligations incurred | $ | — | $ | 2,211,013 | ||||
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.
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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, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2010. 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, 2009.
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.
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New Accounting Pronouncements
In October 2009, an update was issued to ASC 605, Revenue Recognition, to provide guidance requiring companies to allocate revenue in multi-element arrangements. Under this guidance, products or services (deliverables) must be accounted for separately rather than as a combined unit utilizing a selling price hierarchy to determine the selling price of a deliverable. The selling price is based on vendor-specific evidence, third-party evidence or estimated selling price. The amendments in the update are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. The Company does not expect the new guidance to have any material impact on its financial statements.
Guidance related to subsequent events was amended in February 2010 to remove the requirement for an SEC filer to disclose the date through which subsequent events were evaluated. The amendments were effective upon issuance and had no significant impact on the Company’s financial statements.
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.
Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring additional accrual or disclosure.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications had no material impact on the Company’s financial position, results of operations or cash flows.
NOTE 2. 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 3. INCOME TAXES
Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which are anticipated to be in effect when these differences reverse. The deferred tax provision is the result of the net change in the deferred tax assets to amounts expected to be realized. Valuation allowances are provided against deferred tax assets when the Company determines it is more likely than not that the deferred tax asset will not be realized. The tax returns for the seven fiscal years ending September 30, 2009 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, 2008, 2007, 2006, and 2005. During the three and six month periods ended March 31, 2010, the Company recorded income tax expense of $459,957 and $607,313, respectively, as compared to the $969,662 and $864,973, for the three and six month periods ended March 31, 2009, respectively.
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NOTE 4. FINANCING ARRANGEMENTS
The Company maintains a line of credit of $1,000,000 with a commercial bank. At March 31, 2010 and September 30, 2009, 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, 2010. On June 21, 2010, the line of credit was modified to extend the maturity to May 5, 2012. Borrowings are collateralized by the Company’s accounts receivable.
In 2008 the Company secured a mortgage loan commitment and agreement from a commercial bank in the amount of $3,200,000 for the purpose of acquiring and renovating its new corporate headquarters property. At March 31, 2010, $2,079,638 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 a 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.
As explained in the preceding paragraph, on November 23, 2009 the Company modified an existing term loan and mortgage loan. 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%. At March 31, 2010, $1,350,150 was outstanding under the term note agreement. The term loan is secured by substantially all the Company’s assets.
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, 2010, the outstanding balance on the mortgage loan was $644,533. 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 5. EARNINGS PER SHARE
Basic earnings per share are calculated by dividing income available to common shareholders by the weighted-average number of shares outstanding for each period. Diluted earnings per common share are calculated by adjusting the weighted-average shares outstanding assuming conversion of all potentially dilutive stock options.
NOTE 6. COMMITMENTS AND CONTINGENCIES
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.
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 may 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.
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NOTE 7. SUBSEQUENT EVENT
On June 10, 2010, the Company acquired a building in Easley, South Carolina for an aggregate purchase price of $320,000 in which it will locate a Doctors Care center. Additional expenses in the aggregate amount of approximately $24,466 were paid by the Company, but the Company did not incur additional debt in connection with the acquisition.
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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.
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 of America. 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.
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.
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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.
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Comparison of the Three and Six Month Periods Ended March 31, 2010 to the Three and Six Month Periods Ended March 31, 2009
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.
The following table sets forth our revenues, operating expenses and operating margin for the three and six month periods ended March 31, 2010 and 2009.
For the three month periods ended March 31, | For the six month periods ended March 31, | |||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||
Revenues | $ | 22,114,808 | $ | 20,544,839 | $ | 43,983,538 | $ | 38,852,625 | ||||
Operating Expenses | 17,499,878 | 15,539,153 | 35,672,536 | 30,957,602 | ||||||||
Operating Margin | $ | 4,614,930 | $ | 5,005,686 | $ | 8,311,002 | $ | 7,895,023 | ||||
Comparison of Revenues and Operating Expenses for the Three and Six Month Periods Ended March 31, 2010 and 2009
We recognized revenues of $22,114,808 and $43,983,538 in the three and six month periods ended March 31, 2010, respectively, compared to revenues of $20,544,839 and $38,852,625 in the same periods in 2009. The overall increase in our revenues between the three and six month periods ended March 31, 2010 compared to the same periods in 2009 of $1,569,969 or 7.64%, and $5,130,913, or 13.21%, respectively, was the result of several factors. First, we opened four new Doctors Care centers during the third and fourth quarters of 2009 which contributed significantly to the increase in revenues for the three and six month periods ended March 31, 2010. The centers we opened during the third and fourth quarters of 2009, contributed revenues of approximately $1,416,000 and $3,373,000 in the three and six month periods ended March 31, 2010, respectively. Centers that were opened prior to the third quarter of 2009 contributed revenues of approximately $1,758,000 during the six month period ended March 31, 2010 in excess of the revenues those centers contributed in the corresponding period in 2009. Most of the revenue increase associated with those centers was in the first quarter of 2010. We believe the revenue increase was due to the severity of the H1N1 flu virus during the first quarter of 2010.
Our operating expenses were $17,499,878 and $35,672,536 in the three and six month periods ended March 31, 2010, respectively, compared to operating expenses of $15,539,153 and $30,957,602 in the same periods in 2009. The increase of $1,960,725, or 12.62%, in the three month period ended March 31, 2010 compared to the same period in 2009 was primarily due to an increase in operating expenses of approximately $1,380,000 associated with the four new Doctors Care centers we opened in the third and fourth quarter of 2009. In addition, compensation expense associated with centers opened prior to the third quarter of 2009 increased by approximately $854,000 primarily as a result of seasonal factors. The increases were offset by decreases in medical and other supplies and bad debt expenses of $78,193 and $60,848, respectively, in the second quarter of 2010 compared to the corresponding period in 2009.
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Our operating expenses increased by $4,714,934 in the six month period ended March 31, 2010 compared to the same period in 2009. Operating expenses associated with the four new Doctors Care centers we opened in the third and fourth quarters of 2009 contributed approximately $2,802,000 to the total increase in operating expenses. In addition, compensation expense associated with centers opened prior to the third quarter of 2009 increased by approximately $1,894,000 in the six month period ended March 31, 2010 compared to the corresponding period in 2009. The increase in compensation expense related to the overall increase in patient encounters in the first quarter of 2010 which we believe was due to the severity of the H1N1 flu virus, and other seasonal factors in the second quarter of 2010.
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.
The following table sets forth our G&A expenses for the three and six month periods ended March 31, 2010 and 2009.
For the three month periods | For the six month periods | |||||||||||
ended March 31, | ended March 31, | |||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||
General and adminstrative expenses | $ | 3,423,641 | $ | 3,079,675 | $ | 6,738,060 | $ | 6,240,129 | ||||
Comparison of G&A Expenses for the Three and Six Month Periods Ended March 31, 2010 and 2009
Our G&A expenses were $3,423,641 and $6,738,060 in the three and six month periods ended March 31, 2010 compared to $3,079,675 and $6,240,129 in the same periods in 2009. The overall increase in our G&A expenses between the three and six month periods ended March 31, 2010 compared to the same periods in 2009 of $343,966, or 11.17%, and $497,931, or 7.98%, respectively, was the result of several factors. The overall increase was primarily due to the increase in compensation expense during the three and six month periods ended March 31, 2010 of $312,803 and $295,357, respectively. The increases in compensation expense related to the addition of several corporate employees during the fourth quarter of 2009 and bonuses paid to non-executive employees during the six month period ended March 31, 2010. In addition, G&A expenses generally increased during the three and six month period ended March 31, 2010 due to the relocation of our corporate headquarters. As a result, maintenance and utilities, taxes and insurance and communications expenses increased, in aggregate, $69,643 and $116,246, respectively, and depreciation expense increased $70,916 and $160,386, respectively.
The overall increase was offset by a decrease in professional fees of $209,075 and $172,638 in the three and six month periods ended March 31, 2010, respectively, compared to the same periods in 2009. Misappropriation losses of $102,030 were also eliminated in fiscal year 2010. The decrease in professional fees and elimination of misappropriation losses were related to the investigation and termination of our former CFO, Jerry F. Wells, Jr.
Comparison of Income Tax Expense for the Three and Six Month Periods Ended March 31, 2010 and 2009
Our income tax expense was $459,957 and $607,313 in the three and six month periods ended March 31, 2010, respectively, compared to an income tax expense of $969,662 and $864,973 in the comparable periods in 2009. Our effective tax rates were 38.61% the three and six month periods ended March 31, 2010 and 38.61% in the comparable periods in 2009. 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 through term and mortgage loans.
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The line of credit bears interest at the commercial bank’s prime interest rate which was 3.25% at March 31, 2010 and is secured by our accounts receivable. At March 31, 2010 and September 30, 2009, we had no outstanding borrowings under the line of credit. During the three and six month periods ended March 31, 2010, the maximum amount outstanding under the line of credit was $493,666 for both periods, the average amount outstanding approximated $86,000 and $44,000, respectively. The line of credit matures on May 5, 2012.
In 2008 we secured a mortgage loan commitment and agreement from a commercial bank in the amount of $3,200,000 for the purpose of acquiring and renovating our new corporate headquarters property. At March 31, 2010, $2,079,638 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 a 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 5, 2015 will be due and payable on that date. The mortgage loan is secured by a lien on our corporate headquarters.
As explained in the preceding paragraph, on November 23, 2009 we modified an existing term loan and mortgage loan. 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%. At March 31, 2010, $1,350,150 was outstanding under the term loan agreement.
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 $644,533 was outstanding at March 31, 2010.
Long-term debt decreased from $4,545,278 at September 30, 2009 to $4,074,321 at March 31, 2010, due to 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, 2010 was $3,352,752 compared to $3,934,073 for the comparable period in 2009. In the six month periods ended March 31, 2010 and 2009, 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 $2,945,219 and $3,463,996 in the six month periods ended March 31, 2010 and 2009, respectively. Cash provided by operating activities was positively impacted by an increase in accrued deferred compensation of $323,224 and a decrease in income taxes receivable of $339,848 in the six month period ended March 31, 2010. In addition, cash provided by operating activities was reduced by increases in accounts receivable, prepaid expenses and other current assets and a reduction in accounts payable and other accrued liabilities. In aggregate these items reduced cash provided by operations by $1,168,480. In the six month period ended March 31, 2009, cash provided by operating activities was positively impacted by an increase in accounts payable and accrued expenses of $776,065. In addition, in the six month period ended March 31, 2009, 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.
Cash used in investing activities for the six month period ended March 31, 2010 was $1,737,319 compared to $3,260,052 for the comparable period in 2009. In the six month periods ended March 31, 2010, the primary use of cash in investing activities related to the purchase of furniture and medical equipment and improvements to several of our existing centers. In the six month period ended March 31, 2009, 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 new centers and improvements to several of our existing centers.
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Cash used in financing activities for the six month period ended March 31, 2010 was $664,700. In the six month period ended March 31, 2010 we paid $470,957 and $173,743 in payments related to other long-term debt and capital lease obligations, respectively. 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.
At March 31, 2010, we had cash of $3,725,889 compared to $2,755,156 at September 30, 2009, an increase of $970,733. Our working capital was $3,737,392 at March 31, 2010 compared to $3,220,224 at September 30, 2009.
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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 $645,000 of our debt at March 31, 2010 was subject to fixed interest rates. Approximately $3,430,000 of our debt at March 31, 2010 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at March 31, 2010, our interest expense on an annualized basis would increase approximately $34,000 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 $3,792,320 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, 2010 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 2010, 2011 and 2012 are $604,560, $2,240,901 and $946,769, 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, 2010 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 investigation explained in this Form 10-Q under the caption, “PART I. FINANCIAL INFORMATION – Item 1. Financial Statements – Note 6. Commitments and Contingencies,” 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, 2010.
There have been no significant changes in our internal controls over financial reporting that occurred during the second quarter of fiscal 2010 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
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PART II
OTHER INFORMATION
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, 2009. 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 | |
99 | Press Release dated June 28, 2010 |
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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: June 28, 2010
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