17
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, 2002
( ) 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.)
or organization)
4416 Forest Drive, Columbia, SC 29206
(Address of principal executive offices)
(803) 782-4278
(Registrant's telephone number including area code)
(Former name, address or fiscal year, if changed since last report)
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
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
9,650,515 shares of $.05 common stock outstanding at March 31, 2002
UCI MEDICAL AFFILIATES, INC.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets (Debtor-In-Possession) -
March 31, 2002 and September 30, 2001 3
Condensed Consolidated Statements of Operations (Debtor-In-Possession)
for the quarters and the six months ending March 31, 2002 and
March 31, 2001 4
Condensed Consolidated Statements of Cash Flows (Debtor-In-Possession)
for the six months ending March 31, 2002 and March 31, 2001 5
Notes to Condensed Consolidated Financial Statements
(Debtor-In-Possession) 6-8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
PART II OTHER INFORMATION
Items 1-6 15-16
SIGNATURES 17
UCI MEDICAL AFFILIATES, INC.
(Debtor-In-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, 2002 September 30, 2001
------------------- -----------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 63,865 $ 99,429
Accounts receivable, less allowance for doubtful accounts
of approximately $1,528,270 and $1,386,416 6,285,844 6,296,586
Inventory 360,560 360,560
Prepaid expenses and other current assets 579,897 833,732
------------------- -----------------------
Total current assets 7,290,166 7,590,307
Property and equipment, less accumulated depreciation of
$7,649,240 and $7,128,248 3,605,243 3,977,014
Excess of cost over fair value of assets acquired, less
accumulated amortization of $2,451,814 and $2,451,814 3,391,942 3,391,942
Other assets 55,174 23,951
------------------- -----------------------
Total Assets $ 14,342,525 $14,983,214
=================== =======================
Liabilities and Stockholders' Equity
Current liabilities
Book overdraft $ 44,115 $ 733,094
Current portion of long-term debt 5,035,002 4,858,216
Accounts payable 2,705,498 2,801,450
Accrued salaries and payroll taxes 4,397,189 3,651,068
Other accrued liabilities 1,110,303 1,790,931
-----------------------
-------------------
Total current liabilities 13,292,107 13,834,759
Long-term debt, net of current portion 1,712,421 2,352,054
------------------- -----------------------
Total Liabilities 15,004,528 16,186,813
------------------- -----------------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $.01 per share:
Authorized shares - 10,000,000; none issued 0 0
Common stock, par value $.05 per share:
Authorized shares - 50,000,000
Issued and outstanding- 9,650,515 and 9,650,515 shares 482,526 482,526
Paid-in capital 21,723,628 21,723,628
Accumulated deficit (22,868,157) (23,409,753)
------------------- -----------------------
Total Stockholders' Equity (662,003) (1,203,599)
------------------- -----------------------
Total Liabilities and Stockholders' Equity $14,342,525 $14,983,214
=================== =======================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
UCI MEDICAL AFFILIATES, INC.
(Debtor-In-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31, Six Months Ended March 31,
----------------------------------- -------------------------------------
2002 2001 2002 2001
---------------- --------------- --------------- ----------------
Revenues $ 9,749,507 $10,070,974 $ 18,980,013 $19,512,636
Operating costs 8,943,279 8,946,422 17,494,190 17,568,771
---------------- --------------- --------------- ----------------
Operating margin (deficit) 806,228 1,124,552 1,485,823 1,943,865
General and administrative expenses 11,000 16,620 28,000 26,278
Impairment of goodwill 0 0 0 0
Depreciation and amortization 258,073 383,317 520,992 763,355
---------------- --------------- --------------- ----------------
Income (loss) from operations 537,155 724,615 936,831 1,154,232
---------------- --------------- --------------- ----------------
Other income (expense)
Interest expense, net of interest income (193,591) (434,718) (395,235) (796,284)
---------------- --------------- --------------- ----------------
Other income (expense) (193,591) (434,718) (395,235) (796,284)
---------------- --------------- --------------- ----------------
Income (loss) before benefit (provision )for
income taxes 343,564 289,897 541,596 357,948
Benefit (provision )for income taxes 0 0 0 0
---------------- --------------- --------------- ----------------
Net income (loss) $ 343,564 $ 289,897 $ 541,596 $ 357,948
=============== =============== ================
================
Basic earnings (loss) per share $ .04 $ .03 $ .06 $ .04
================ =============== =============== ================
Basic weighted average common shares
outstanding 9,650,515 9,650,515 9,650,515 9,650,515
================ ===============
Diluted earnings (loss) per share $ .04 $ .03 $ .06 $ .04
================ ===============
Diluted weighted average common shares
=================================================== 9,654,412 9,653,503 ============== ===============
outstanding 9,655,036 9,654,178
================ ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
UCI MEDICAL AFFILIATES, INC.
(Debtor-In-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended March 31,
----------------------------------------
2002 2001
------------------ ------------------
Operating activities:
Net income (loss) $ 541,596 $ 357,948
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for losses on accounts receivable 857,708 767,013
Depreciation and amortization 520,992 763,355
Impairment of goodwill 0 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (846,966) 252,482
(Increase) decrease in prepaid expenses and other
current assets 253,835 (239,665)
Increase (decrease) in accounts payable and accrued
expenses (30,459) (817,421)
------------------
------------------
Cash provided by (used in) operating activities 1,296,706 1,083,712
------------------ ------------------
Investing activities:
Purchases of property and equipment (149,221) (288,636)
(Increase) decrease in other assets (31,223) 1,114
------------------
------------------
Cash provided by (used in) investing activities (180,444) (287,522)
------------------ ------------------
Financing activities:
Net borrowings (payments) under line-of-credit agreement (350,774) (60,104)
Increase (decrease) in book overdraft (688,979) (232,028)
Payments on long-term debt (112,073) (441,675)
------------------ ------------------
Cash provided by (used in) financing activities (1,151,826) (733,807)
------------------ ------------------
Increase (decrease) in cash and cash equivalents (35,564) 62,383
Cash and cash equivalents at beginning of period 99,429 302,927
------------------ ------------------
------------------
Cash and cash equivalents at end of period $ 63,865 $ 365,310
================== ==================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
UCI MEDICAL AFFILIATES, INC.
(Debtor-In-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of those of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three-month and six-month periods ended March 31, 2002
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2002. For further information, refer to the
audited consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 2001.
The consolidated financial statements include the accounts of UCI Medical
Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc.
("UCI-SC"), UCI Medical Affiliates of Georgia, Inc. ("UCI-GA"), Doctor's Care,
P.A., Doctor's Care of Georgia, P.C., and Doctor's Care of Tennessee, P.C. (the
three together as the "P.A."). (As used herein, the term "Company" refers to
UCI, UCI-SC, UCI-GA, and the P.A., collectively.) 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 an exclusive
long-term management services agreements with the P.A. which operate the medical
practices. Consolidation of the financial statements is required under Emerging
Issues Task Force (EITF) 97-2 as a consequence of the nominee shareholder
arrangement that exists with respect to each of the P.A.'s. In each case, the
nominee (and sole) shareholder of the P.A. has entered into an agreement with
UCI-SC or UCI-GA, as applicable, which satisfies the requirements set forth in
footnote 1 of EITF 97-2. Under the agreement, UCI-SC or UCI-GA, as applicable,
in its sole discretion, can effect a change in the nominee shareholder at any
time for a payment of $100 from the new nominee shareholder to the old nominee
shareholder, with no limits placed on the identity of any new nominee
shareholder and no adverse impact resulting to any of UCI-SC, UCI-GA or the P.A.
resulting from such change.
In addition to the nominee shareholder arrangements described above, each of
UCI-SC and UCI-GA has entered into Administrative Service Agreements with the
P.A.'s. As a consequence of the nominee shareholder arrangements and the
Administrative Service Agreements, the Company has a long-term financial
interest in the affiliated practices of the P.A.'s. Through the Administrative
Services Agreement, the Company has exclusive authority over decision making
relating to all major on-going operations. The Company establishes annual
operating and capital budgets for the P.A. and compensation guidelines for the
licensed medical professionals. The Administrative Services Agreements have an
initial term of forty years. According to EITF 97-2, the application of FASB
Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and APB No.
16 (Business Combinations), the Company must consolidate the results of the
affiliated practices with those of the Company. All significant intercompany
accounts and transactions are eliminated in consolidation, including management
fees.
The method of computing the management fees is based on billings of the
affiliated practices less the amounts necessary to pay professional compensation
and other professional expenses. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services, plus
a profit. These interests are unilaterally salable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporation.
The P.A. enters into employment agreements with physicians for terms ranging
from one to five years. All employment agreements have clauses that allow for
early termination of the agreement if certain events occur such as the loss of a
medical license.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and revenues and expenses
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates and assumptions. Significant estimates are discussed
in the footnotes, as applicable, of the Form 10-K for the year ended September
30, 2001.
The inventory of medical supplies and drugs is carried at the lower of average
cost (first in, first out) or market. The volume of supplies carried at a center
varies very little from month to month and management, therefore, does only an
annual physical inventory count and does not maintain a perpetual inventory
system.
The Company has no items of other comprehensive income; thus, comprehensive
income and net income are the same.
The Company operates as one segment.
Goodwill and Other Intangible Assets
In July 2001, FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS
No. 141 addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 142 addresses the
initial recognition and measurement of intangible assets acquired outside of a
business combination, whether acquired individually or with a group of other
assets, and the accounting and reporting for goodwill and other intangibles
subsequent to their acquisition. These standards require all future business
combinations to be accounted for using the purchase method of accounting.
Goodwill will no longer be amortized but instead will be subject to impairment
tests, at least annually. UCI has elected to adopt SFAS No. 141 and SFAS No. 142
on a prospective basis as of October 1, 2001; however, certain provisions of
these new standards also apply to any acquisitions concluded subsequent to June
30, 2001. As a result of implementing these new standards, UCI will discontinue
the amortization of goodwill as of September 30, 2001. Management believes the
adoption of this standard will have a material impact on its financial
statements in that its income before taxes will be increased by an amount equal
to the amortization expenses that would have otherwise been charged to earnings
under current accounting standards, approximately $450,000 annually.
Additionally, UCI's future earnings may periodically be affected in a materially
adverse manner should particular segments of its goodwill balances become
impaired pursuant to the valuation methodology.
EARNINGS PER SHARE
The computation of basic earnings (loss) per share and diluted earnings (loss)
per share is in conformity with the provisions of Statement of Financial
Accounting Standards No. 128.
GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has a working capital deficiency and an accumulated
deficit. Ultimately, the Company's viability as a going concern is dependent
upon its ability to continue to generate positive cash flows from operations,
maintain adequate working capital and obtain satisfactory long-term financing.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company plans include
the following, although it is not possible to predict the ultimate outcome of
the Company's efforts.
The closure of the Atlanta centers, which were unprofitable, had an immediate
positive effect on the Company in the fourth quarter of fiscal year 2000 and
continued into the first and second quarters of fiscal year 2002. This
improvement is expected to continue into fiscal year 2002 and beyond. However,
there can be no assurances that such improvement will occur.
CHAPTER 11 BANKRUPTCY FILING
On November 2, 2001, the Company (the "Debtors") filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
South Carolina (the "Bankruptcy Court"). The Debtors remain in possession of
their properties and assets and management of the Company continues to operate
the business of the Debtors as a debtor-in-possession. As a
debtor-in-possession, the Company is authorized to continue to operate its
businesses, but may not engage in transactions outside the ordinary course of
business without the approval, after notice and an opportunity for a hearing, of
the Bankruptcy Court. Pursuant to the automatic stay provisions of the
Bankruptcy Code, all actions to collect pre-petition indebtedness of the
Debtors, as well as most other pending litigation against the Debtors are
currently stayed. In addition, as debtor-in-possession, the Debtors have the
right, subject to the approval of the Bankruptcy Court and certain other
conditions, to assume or reject any pre-petition executory contracts or
unexpired leases.
The Bankruptcy Court has approved payment of certain pre-petition liabilities,
such as employee wages and benefits, and settlement of certain trade payable
claims. In addition, the Bankruptcy Court has allowed for the retention of legal
and financial professionals to advise in the bankruptcy proceedings.
The Company presently intends to reorganize the Company's business and
restructure the Company's liabilities through plans of reorganization filed with
the Bankruptcy Court on May 6, 2002 (the "Plan"). In connection with the
development of the plans of reorganization alternatives, the Company will
evaluate any and all proposals to maximize the value of the Debtors. As of this
date, an order confirming the plans of reorganization has not been entered by
the court.
At March 31, 2002, liabilities subject to compromise totaled approximately $2.3
million. The Plan calls for all pre-petition liabilities to be paid at 100% of
the total amounts, except a convertible debenture totaling approximately $1.5
million, as discussed below. Accordingly, management has elected not to
reclassify the balance sheets as illustrated by SOP 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code," because the
reclassification of the balance sheet would not be meaningful.
Had the Company not filed Chapter 11, interest expense would have been $406,000
and $601,000, for quarter ending March 31, 2002 and six-month period ending
March 31, 2002, respectively.
The difference is attributed to three note payables: FPA Convertible Debenture,
Family Medicine Centers of SC, and MainStreet Healthcare, all of which have
stated contractual interest. All of the aforementioned are included in the
Company's reorganization plans. Family Medicine and MainStreet Healthcare are to
be paid back at 100%. The Company is expecting to be released from the FPA debt,
as FPA no longer is in existence.
Currently, it is not possible to predict with certainty the length of time the
Company will operate under the protection of Chapter 11, the outcome of the
Chapter 11 proceedings in general, or the effect of the proceedings on the
business of the Company or on the interests of the various creditors and
security holders. Under the priority scheme established by the Bankruptcy Code,
certain post-petition liabilities and pre-petition liabilities need to be
satisfied before shareholders can receive any distribution. The ultimate
recovery to shareholders, if any, will not be determined until confirmation of
the plans of reorganization. There can be no assurance as to what value, if any,
will be ascribed to the Company's common stock in the bankruptcy proceedings.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which the Company
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto.
The consolidated financial statements of the Company include the accounts of
UCI, UCI-SC, UCI-GA and the P.A. Such consolidation is required under Emerging
Issues Task Force (EITF) 97-2 as a consequence of the nominee shareholder
arrangement that exists with respect to each of the P.A. In each case, the
nominee (and sole) shareholder of the P.A. has entered into an agreement with
UCI-SC or UCI-GA, as applicable, which satisfies the requirements set forth in
footnote 1 of EITF 97-2. Under the agreement, UCI-SC or UCI-GA, as applicable,
in its sole discretion, can effect a change in the nominee shareholder at any
time for a payment of $100 from the new nominee shareholder to the old nominee
shareholder, with no limits placed on the identity of any new nominee
shareholder and no adverse impact resulting to any of UCI-SC, UCI-GA or the P.A.
resulting from such change.
In addition to the nominee shareholder arrangements described above, each of
UCI-SC and UCI-GA has entered into Administrative Service Agreements with the
P.A. As a consequence of the nominee shareholder arrangements and the
Administrative Service Agreements, the Company has a long-term financial
interest in the affiliated practices of the P.A. According to EITF 97-2, the
application of FASB Statement No. 94 (Consolidation of All Majority-Owned
Subsidiaries), and APB No. 16 (Business Combinations), the Company must
consolidate the results of the affiliated practices with those of the Company.
The P.A. enters into employment agreements with physicians for terms ranging
from one to five years. All employment agreements have clauses that allow for
early termination of the agreement if certain events occur such as the loss of a
medical license. Over 79% of the physicians employed by the P.A. are paid on an
hourly basis for time scheduled and worked at the medical centers. The other
physicians are salaried. Approximately 25 of the physicians have incentive
compensation arrangements; however, no amounts were accrued or paid during the
Company's three prior fiscal years that were significant. Any incentive
compensation is based upon a percentage of non-ancillary collectible charges for
services performed by a provider. Percentages range from 3% to 17% and vary by
individual employment contract. As of March 31, 2002 and 2001, the P.A. employed
111 and 121 medical providers, respectively.
The net assets of the P.A. are not material for any period presented,
and intercompany accounts and transactions have been eliminated.
The Company does not allocate all indirect costs incurred at the corporate
offices to the Centers (defined below) on a center-by-center basis. Therefore,
all discussions below are intended to be in the aggregate for the Company as a
whole.
Chapter 11 Bankruptcy Filing
On November 2, 2001, the Company (the "Debtors") filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
South Carolina (the "Bankruptcy Court"). The Debtors remain in possession of
their properties and assets, and management of the Company continues to operate
the business of the Debtors as a debtor-in-possession. As a
debtor-in-possession, the Company is authorized to continue to operate its
businesses, but may not engage in transactions outside the ordinary course of
business without the approval, after notice and an opportunity for a hearing, of
the Bankruptcy Court. Pursuant to the automatic stay provisions of the
Bankruptcy Code, all actions to collect pre-petition indebtedness of the
Debtors, as well as most other pending litigation against the Debtors are
currently stayed. In addition, as debtor-in-possession, the Debtors have the
right, subject to the approval of the Bankruptcy Court and certain other
conditions, to assume or reject any pre-petition executory contracts or
unexpired leases.
The Bankruptcy Court has approved payment of certain pre-petition liabilities,
such as employee wages and benefits, and settlement of certain trade payable
claims. In addition, the Bankruptcy Court has allowed for the retention of legal
and financial professionals to advise in the bankruptcy proceedings.
The Company presently intends to reorganize the Company's business and
restructure the Company's liabilities through a plan of reorganization to be
filed with the Bankruptcy Court. In connection with the development of a plan or
plans of reorganization alternatives, the Company will evaluate any and all
proposals to maximize the value of the Debtors.
Currently, it is not possible to predict with certainty the length of time the
Company will operate under the protection of Chapter 11, the outcome of the
Chapter 11 proceedings in general, or the effect of the proceedings on the
business of the Company or on the interests of the various creditors and
security holders. Under the priority scheme established by the Bankruptcy Code,
certain post-petition liabilities and pre-petition liabilities need to be
satisfied before shareholders can receive any distribution. The ultimate
recovery to shareholders, if any, will not be determined until confirmation of a
plan of reorganization. There can be no assurance as to what value, if any, will
be ascribed to the Company's common stock in the bankruptcy proceedings.
Results of Operations
For the Three Months Ended March 31, 2002 as Compared to the
Three Months Ended March 31, 2001
UCI provides nonmedical management and administrative services for a network of
36 freestanding medical centers (the "Centers"), 34 of which are located
throughout South Carolina and two are located in Knoxville, Tennessee (29
operating as Doctor's Care in South Carolina, one as Doctor's Care in Knoxville,
Tennessee, five as Progressive Physical Therapy Services in South Carolina and
one as Progressive Physical Therapy Services in Knoxville, Tennessee).
Revenues of $9,750,000 for the quarter ended March 31, 2002 reflect a decrease
of $321,000 or 3% from those of the quarter ended March 31, 2001.
This decrease in revenue is believed to be the result in an overall slowing in
the economy in the communities in which the Company operates. A slow down in the
economy offsets the Company's occupational medicine lines of business by
reducing the number of pre-employment physicals and worker compensation injuries
as the economy hires fewer employees. Patient encounters decreased to
approximately 113,000 in the second quarter of fiscal year 2002 from 121,000 in
the second quarter of fiscal year 2001.
During the past three fiscal years, the Company has continued its services
provided to members of HMOs. In these arrangements, the Company, through the
P.A., acts as the designated primary caregiver for members of HMOs who have
selected one of the Company's centers or providers as their primary care
provider. In fiscal year 1994, the Company began participating in an HMO
operated by Companion HealthCare Corporation ("CHC"), a wholly owned subsidiary
of Blue Cross Blue Shield of South Carolina ("BCBS"). BCBS, through CHC, is a
primary stockholder of UCI. Including its arrangement with CHC, the Company now
participates in four HMOs and is the primary care "gatekeeper" for more than
14,000 lives at March 31, 2002. As of March 31, 2002, all of these HMOs use a
discounted fee-for-service basis for payment. HMOs do not, at this time, have a
significant penetration into the South Carolina market. The Company is not
certain if there will be growth in the market share of HMOs in the areas in
which it operates clinics.
Sustained revenues in the South Carolina and Tennessee centers in fiscal years
2002 and 2001 also reflect the Company's heightened focus on occupational
medicine and industrial health services (these revenues are referred to as
"employer paid" on the table below). Focused marketing materials, including
quarterly newsletters for employers, were developed to spotlight the Company's
services for industry. Approximately 21% of the Company's total revenues were
derived from these occupational medicine services in both 2002 and 2001.
The following table breaks out the Company's revenue and patient visits by
revenue source for the second quarter of fiscal years 2002 and 2001.
Percent of Percent of
Payor Patient Visits Revenue
------------------------------------------------ ------------------------ -----------------------
2002 2001 2002 2001
------------ ----------- ------------ ----------
15 17 14 16
Patient Pay
11 11 6 7
Employer Paid
9 13 9 10
HMO
10 7 15 14
Workers Compensation
10 8 8 6
Medicare/Medicaid
42 39 44 40
Managed Care Insurance
3 5 4 7
Other (Commercial Indemnity, Champus, etc.)
An operating margin of $806,000 was earned during the second quarter of fiscal
2002 as compared to $1,125,000 for the second quarter of fiscal 2001.
Management believes that the decline in margin was the result of personnel and
supply costs overruns that it is in the process of reducing. However, the
personnel cost increases are in part attributable to increased cost-cutting
pressures being applied by managed care insurance payors that cover many of the
Company's patients. As managed care plans attempt to cut costs, they typically
increase the administrative burden of providers such as the Company by requiring
referral approvals and by requesting hard copies of medical records before they
will pay claims. The number of patients at the Company's Centers that are
covered by a managed care plan versus a traditional indemnity plan continues to
grow. Management expects this trend to continue. The decline is also the result
of the overall slump of the economy, which has had an effect on patient visits.
Depreciation and amortization expense decreased to $258,000 in the second
quarter of fiscal 2002, down from $383,000 in the second quarter of fiscal 2001.
This decrease reflects the adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets" effective October 1, 2001 and the elimination of the
amortization of goodwill. Interest expense decreased from $435,000 in the second
quarter of fiscal 2001 to $194,000 in the second quarter of fiscal 2002
primarily as a result of the lower interest rates in the second quarter of
fiscal year 2002 and the overall reduction in long-term debt.
Income tax expense is zero due to the utilization of NOL's accumulated in prior
years.
Going Concern Matters
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has a working capital deficiency and an accumulated
deficit. Ultimately, the Company's viability as a going concern is dependent
upon its ability to continue to generate positive cash flows from operations,
maintain adequate working capital and obtain satisfactory long-term financing.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's plans
include the following, although it is not possible to predict the ultimate
outcome of the Company's efforts.
The closure of the Atlanta centers, which were unprofitable, had an immediate
positive effect on the Company in the fourth quarter of fiscal year 2000 and
continued into the first and second quarters of fiscal year 2002. This
improvement is expected to continue into fiscal year 2002 and beyond. However,
there can be no assurances that such improvement will occur.
For the Six Months Ended March 31, 2002 as Compared to the
Six Months Ended March 31, 2001
Revenues of $18,980,000 reflect a decrease of 3% from the same period in fiscal
year 2001 and are attributable to the overall economic downturn in the community
in which the Company operates. Patient encounters decreased to 222,000 for the
six months ended March 31, 2002 from 240,000 for the six months ended March 31,
2001.
The following table breaks out the Company's revenue and patient visits by
revenue source for the six months ended March 31, 2002 and March 31, 2001.
Percent of Percent of
Payor Patient Visits Revenue
------------------------------------------------ ------------------------ -----------------------
2002 2001 2002 2001
------------ ----------- ------------ ----------
16 17 14 16
Patient Pay
10 11 6 7
Employer Paid
9 13 9 10
HMO
10 7 15 14
Workers Compensation
11 8 8 6
Medicare/Medicaid
41 39 44 40
Managed Care Insurance
3 5 4 7
Other (Commercial Indemnity, Champus, etc.)
An operating margin of $1,486,000 was earned during the six months ended March
31, 2002 as compared to an operating margin of $1,944,000 for the six months
ended March 31, 2001.
Management believes that the decline in margin was the result of personnel and
supply costs overruns that it is in the process of reducing. However, the
personnel cost increases are in part attributable to increased cost-cutting
pressures being applied by managed care insurance payors that cover many of the
Company's patients. As managed care plans attempt to cut costs, they typically
increase the administrative burden of providers such as the Company by requiring
referral approvals and by requesting hard copies of medical records before they
will pay claims. The number of patients at the Company's Centers that are
covered by a managed care plan versus a traditional indemnity plan continues to
grow. Management expects this trend to continue. The decline is also the result
of the overall slump of the economy, which has had an effect on patient visits.
Depreciation and amortization expense decreased to $521,000 in the first six
months of fiscal 2002, down from $763,000 in the first six months of fiscal
2001. This decrease reflects the adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets" effective October 1, 2001 and the elimination of the
amortization of goodwill. Interest expense decreased from $796,000 in the first
six months of fiscal 2001 to $395,000 in the first six months of fiscal 2002
primarily as a result of the lower interest rates in the first quarter of fiscal
year 2002 and the overall reduction in long-term debt.
Income tax expense is zero due to the utilization of NOL's accumulated in prior
years.
Financial Condition at March 31, 2002
Cash and cash equivalents decreased by $35,000 during the six months ended March
31, 2002 mainly as a result of the timing of cash payments to vendors and salary
payments.
Accounts receivable remained about constant during the six months ended March
31, 2002.
Long-term debt decreased from $7,210,000 at September 30, 2001 to $6,747,000 at
March 31, 2002 due to regular principal pay-downs of approximately $463,000.
Management believes that it will be able to fund debt service requirements out
of cash generated through operations and does not anticipate the availability of
additional debt financing.
Liquidity and Capital Resources
The Company requires capital for working capital needs and for the retirement of
indebtedness. The Company's capital requirements and working capital needs have
been funded through a combination of external financing (primarily bank debt),
and credit extended by suppliers.
As of March 31, 2002, the Company had no material commitments for capital
expenditures and expects to continue to fund any required expenditure from
working capital. There can be no assurance that operations will continue to
provide adequate cash needed in the future.
Operating activities produced $1,297,000 of cash during the six months ended
March 31, 2002, compared with $1,084,000 during the same period in the prior
fiscal year.
Investing activities used only $180,000 in cash during the six months ended
March 31, 2002 to purchase needed equipment to operate existing centers.
Financing activities utilized $1,152,000 in cash during the six-month period
primarily for debt reduction.
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this PART I, Item 2 (Management's
Discussion and Analysis of Financial Condition and Results of Operations) that
are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers of this Quarterly Report on Form 10-Q that such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from those expressed or implied by such
forward-looking statements. Although the Company's management believes that
their expectations of future performance are based on reasonable assumptions
within the bounds of their knowledge of their business and operations, there can
be no assurance that actual results will not differ materially from their
expectations. Factors which could cause actual results to differ from
expectations include, among other things, the difficulty in controlling the
Company's costs of providing healthcare and administering its network of
Centers; the possible negative effects from changes in reimbursement and
capitation payment levels and payment practices by insurance companies,
healthcare plans, government payors and other payment sources; the difficulty of
attracting primary care physicians; the increasing competition for patients
among healthcare providers; possible government regulations negatively impacting
the existing organizational structure of the Company; the possible negative
effects of prospective healthcare reform; the challenges and uncertainties in
the implementation of the Company's expansion and development strategy; the
dependence on key personnel; demand for our services; technological changes; the
ability to increase market share; unanticipated regulatory or judicial
proceedings; 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; and other factors described in this report and in other reports filed
by the Company with the Securities and Exchange Commission.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily as a result of its
borrowing activities, which includes credit facilities with financial
institutions used to maintain liquidity and fund the Company's 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 the
Company's debt may vary as a result of future business requirements, market
conditions and other factors. The definitive extent of the Company's interest
rate risk is not quantifiable or predictable because of the variability of
future interest rates and business financing requirements. The Company does not
currently use derivative instruments to adjust the Company's interest rate risk
profile.
Approximately $2,200,000 of the Company's debt at March 31, 2002 was subject to
fixed interest rates and principal payments. Approximately $5,010,000 of the
Company's debt at March 31, 2002 was subject to variable interest rates. Based
on the outstanding amounts of variable rate debt at March 31, 2002, the
Company's interest expense on an annualized basis would increase approximately
$50,000 for each increase of one percent in the prime rate.
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not a party to any pending litigation other
than routine litigation incidental to the business or that
which is immaterial in amount of damages sought.
Chapter 11 Bankruptcy Filing
On November 2, 2001, the Company (the "Debtors") filed a
voluntary petition for reorganization under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the District of South
Carolina (the "Bankruptcy Court"). The Debtors remain in
possession of their properties and assets and management of
the Company continues to operate the business of the Debtors
as a debtor-in-possession. As a debtor-in-possession, the
Company is authorized to continue to operate its businesses,
but may not engage in transactions outside the ordinary course
of business without the approval, after notice and an
opportunity for a hearing, of the Bankruptcy Court. Pursuant
to the automatic stay provisions of the Bankruptcy Code, all
actions to collect pre-petition indebtedness of the Debtors,
as well as most other pending litigation against the Debtors
are currently stayed. In addition, as debtor-in-possession,
the Debtors have the right, subject to the approval of the
Bankruptcy Court and certain other conditions, to assume or
reject any pre-petition executory contracts or unexpired
leases.
The Bankruptcy Court has approved payment of certain
pre-petition liabilities, such as employee wages and benefits,
and settlement of certain trade payable claims. In addition,
the Bankruptcy Court has allowed for the retention of legal
and financial professionals to advise in the bankruptcy
proceedings.
The Company presently intends to reorganize the Company's
business and restructure the Company's liabilities through the
plans of reorganization filed with the Bankruptcy Court on May
6, 2002. In connection with the development of the plans of
reorganization alternatives, the Company will evaluate any and
all proposals to maximize the value of the Debtors. As of this
date, an order confirming the plans of reorganization has not
been entered by the court.
Currently, it is not possible to predict with certainty the
length of time the Company will operate under the protection
of Chapter 11, the outcome of the Chapter 11 proceedings in
general, or the effect of the proceedings on the business of
the Company or on the interests of the various creditors and
security holders. Under the priority scheme established by the
Bankruptcy Code, certain post-petition liabilities and
pre-petition liabilities need to be satisfied before
shareholders can receive any distribution. The ultimate
recovery to shareholders, if any, will not be determined until
confirmation of the plans of reorganization. There can be no
assurance as to what value, if any, will be ascribed to the
Company's common stock in the bankruptcy proceedings.
Item 2 Changes in Securities
This item is not applicable
Item 3 Defaults upon Senior Securities
This item is not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
This item is not applicable.
Item 5 Other Information
This item is not applicable.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits.
--------
None.
(b) Reports on Form 8-K.
-------------------
None.
SIGNATURE
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/ M.F. McFarland, III, M.D. /s/ Jerry F. Wells, Jr., CPA
- ------------------------------------ -----------------------------------
Marion F. McFarland, III, M.D. Jerry F. Wells, Jr., CPA
President, Chief Executive Officer, Executive Vice President of Finance,
and Chairman of the Board Chief Financial Officer, and
Principal Accounting Officer
Date: May 14, 2002