UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (Mark One) ( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2003 ------------------------------ ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from: to -------------------------- ---------- Commission file number: 0-13265 ---------------------------------------- UCI MEDICAL AFFILIATES, INC. (Exact name of small business issuer 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 (Issuer's telephone number) (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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ( ) Yes ( X ) No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark 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 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 July 25, 2003 UCI MEDICAL AFFILIATES, INC. INDEX Page Number PART I FINANCIAL INFORMATION Item 1 Financial Statements Condensed Consolidated Balance Sheets - June 30, 2003 and September 30, 2002 3 Condensed Consolidated Statements of Operations for the quarters and the nine months ended June 30, 2003 and June 30, 2002 4 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2003 and June 30, 2002 5 Notes to Condensed Consolidated Financial Statements 6 - 8 Item 2 Management's Discussion and Analysis of Financial Condition, Critical Accounting Policies and Results of Operations 9 -13 Item 3 Quantitative and Qualitative Disclosures about Market Risk 14 Item 4 Controls and Procedures 15 -16 PART II OTHER INFORMATION Items 1-6 17 SIGNATURES 18 UCI Medical Affiliates, Inc. Condensed Consolidated Balance Sheets June 30, 2003 September 30, 2002 (unaudited) (audited) -------------------- ---------------------- Assets Current assets Cash and cash equivalents $ 327,101 $ 269,298 Accounts receivable, less allowance for doubtful accounts of $1,887,271 and $1,661,047 7,090,333 6,349,629 Inventory 393,795 393,795 Prepaid expenses and other current assets 389,950 297,178 -------------------- ---------------------- Total current assets 8,201,179 7,309,900 Property and equipment, less accumulated depreciation of $8,857,209 and $8,149,811 3,952,205 3,764,545 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 47,618 50,483 -------------------- ---------------------- Total Assets $ 15,592,944 $ 14,516,870 ==================== ====================== Liabilities and Stockholders' Equity Current liabilities Current portion of long-term debt $ 971,856 $ 1,014,829 Accounts payable 1,000,268 762,646 Accrued salaries and payroll taxes 1,633,124 1,514,745 Current portion of payroll taxes 718,608 475,079 Other accrued liabilities 1,188,240 1,027,299 -------------------- ---------------------- Total current liabilities 5,512,096 4,794,598 Long-term liabilities Accounts payable 2,136,476 2,083,167 Long-term portion of payroll taxes 3,682,900 4,385,060 Long-term debt, net of current portion 2,474,884 3,063,649 -------------------- ---------------------- Total long-term liabilities 8,294,260 9,531,876 -------------------- ---------------------- -------------------- ---------------------- Total Liabilities 13,806,356 14,326,474 -------------------- ---------------------- 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 - 10,000,000 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 (20,419,566) (22,015,758) -------------------- ---------------------- Total Stockholders' Equity 1,786,588 190,396 -------------------- ---------------------- Total Liabilities and Stockholders' Equity $ 15,592,944 $ 14,516,870 ==================== ====================== The accompanying notes are an integral part of these condensed consolidated financial statements. UCI Medical Affiliates, Inc. Condensed Consolidated Statements of Operations (unaudited) Three Months Ended June 30, Nine Months Ended June 30, ------------------------------------ ---------------------------------- 2003 2002 2003 2002 ----------------- --------------- --------------- --------------- Revenues $11,048,786 $ 9,823,464 $32,358,935 $28,803,478 Operating costs 10,087,327 9,176,050 29,418,691 26,670,242 ----------------- --------------- --------------- --------------- Operating margin 961,459 647,414 2,940,244 2,133,236 General and administrative expenses 21,453 17,335 60,083 45,335 Depreciation and amortization 238,494 255,215 707,398 776,207 ----------------- --------------- --------------- --------------- Income from operations 701,512 374,864 2,172,763 1,311,694 Other expense Interest expense, net of interest income (177,931) (225,124) (576,571) (620,359) ----------------- --------------- --------------- --------------- ----------------- --------------- --------------- --------------- Net income $ 523,581 $ 149,740 $1,596,192 $ 691,335 =============== =============== =============== ================= Basic and diluted earnings per share $ .05 $ .02 $ .17 $ .07 ================= =============== =============== =============== Basic and diluted weighted average common shares outstanding 9,650,515 9,650,515 9,650,515 9,650,515 ================= =============== =============== =============== The accompanying notes are an integral part of these condensed consolidated financial statements. UCI Medical Affiliates, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended June 30, ---------------------------------------- 2003 2002 ------------------ ------------------ Operating activities: Net income $ 1,596,192 $ 691,335 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on accounts receivable 1,392,307 1,267,290 Depreciation and amortization 707,398 776,207 Changes in operating assets and liabilities: Increase in accounts receivable (2,133,011) (1,360,097) (Increase) decrease in prepaid expenses and other current assets (92,772) 280,874 Increase in accounts payable and accrued expenses 111,620 149,724 ------------------ ------------------ Cash provided by operating activities 1,581,734 1,805,333 ------------------ ------------------ Investing activities: Purchases of property and equipment (895,058) (436,528) Decrease (increase) in other assets 2,865 (31,223) ------------------ ------------------ Cash used in investing activities (892,193) (467,751) ------------------ ------------------ Financing activities: Payments on long-term debt (631,738) (1,274,196) ------------------ ------------------ Cash used in financing activities (631,738) (1,274,196) ------------------ ------------------ Increase in cash and cash equivalents 57,803 63,386 Cash and cash equivalents at beginning of period 269,298 99,429 ------------------ ------------------ ------------------ Cash and cash equivalents at end of period $ 327,101 $ 162,815 ================== ================== The accompanying notes are an integral part of these condensed consolidated financial statements. UCI MEDICAL AFFILIATES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1. BUSINESS AND BASIS OF PRESENTATION: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of those of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2003. 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, 2002. 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." and together with UCI, UCI-SC and UCI-GA, the "Company"). Because of the corporate practice of medicine laws in the states in which the Company operates, the Company does not own medical practices but instead enters into exclusive long-term management services agreements with the P.A. which operate the medical practices. Consolidation of the financial statements is required under 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 have 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, and the Company has exclusive authority over decision making relating to all major on-going operations. The Company establishes annual operating and capital budgets for the P.A. and compensation guidelines for the licensed medical professionals. The Administrative Services Agreements have an initial term of forty years. According to EITF 97-2, the application of Financial Accounting Standards Board ("FASB") Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and FASB 141 (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 three 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 these footnotes, as applicable. 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 operates as one segment. NOTE 2. BUSINESS COMBINATIONS AND INTANGIBLES In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations consummated after June 30, 2001 be accounted for under the purchase method of accounting. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives will no longer be amortized, but are reviewed at least annually for impairment. Pursuant to SFAS No. 142, management tested goodwill for impairment in the fourth quarter of 2002, and determined there had not been any impairment. Management is not aware of any items which would indicate that goodwill has been impaired since its analysis of impairment. NOTE 3. EARNINGS PER SHARE The computation of basic earnings per share and diluted earnings per share is in conformity with the provisions of Statement of Financial Accounting Standards No. 128. NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS On January 1, 2003, the Company adopted Financial Accounting Standards Board No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 provides guidance on the recognition and measurement of an asset retirement obligation and its associated retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. The adoption of SFAS No. 143 did not materially impact the Company's consolidated financial statements. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities and Interpretation of ARB No. 51" ("Fin 46"). Many variable interest entities have been commonly referred to as special-purpose entities or off-balance sheet structures, but this interpretation applies to a larger population of entities. In general, a variable interest entity ("VIE") is any legal structure used for business purposes that either: (1) does not have equity investors with voting rights, or (2) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Under Fin 46, the VIE is required to be consolidated by the Company if it is subject to a majority of the risk of loss from the VIE's activities or entitled to receive a majority of the entity's residual returns. The consolidation requirements of FIN 46 apply to VIEs created after January 31, 2003 and apply to existing VIEs in the first year or interim period beginning after June 15, 2003. The Company has adopted FIN 46, and it did not have a material impact of the Company's consolidated financial statements. NOTE 5. CHAPTER 11 BANKRUPTCY FILING On November 2, 2001, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court"). As debtors-in-possession, the Company remained in possession of its properties and assets, and its management continued to operate its business. As debtors-in-possession, the Company was authorized to continue to operate its businesses, but it was not allowed to 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 from the Company, as well as most other pending litigation against the Company, were stayed. In addition, as debtors-in-possession, the Company had 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 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 allowed for the retention of legal and financial professionals to advise in the bankruptcy proceedings. The Bankruptcy Court confirmed each of the Company's Plans of Reorganization, as amended, by August 8, 2002, and the Company has, therefore, emerged from the Chapter 11 protection of the Court. Advisory Note Regarding Forward-Looking Statements Certain of the statements contained in this Report on Form 10-Q that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. We caution readers of this Form 10-Q that such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Although our management believes that their expectations of future performance are based on reasonable assumptions within the bounds of their knowledge of their business and operations, we have no assurance that actual results will not differ materially from their expectations. Factors that could cause actual results to differ from expectations include, among other things, (1) the difficulty in controlling our costs of providing healthcare and administering our network of centers; (2) the possible negative effects from changes in reimbursement and capitation payment levels and payment practices by insurance companies, healthcare plans, government payors and other payment sources; (3) the difficulty of attracting primary care physicians; (4) the increasing competition for patients among healthcare providers; (5) possible government regulations negatively impacting our existing organizational structure; (6) the possible negative effects of prospective healthcare reform; (7) the challenges and uncertainties in the implementation of our expansion and development strategy; (8) the dependence on key personnel; (9) adverse conditions in the stock market, the public debt market, and other capital markets (including changes in interest rate conditions); (10) the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected resulting in, among other things, a reduced demand for practice management services; (11) the demand for our products and services; (12) technological changes; (13) the ability to increase market share; (14) the adequacy of expense projections and estimates of impairment loss; (15) the impact of change in accounting policies by the Securities and Exchange Commission; (16) unanticipated regulatory or judicial proceedings; (17) the impact on our business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts; (18) other factors described in this report and in our other reports filed with the Securities and Exchange Commission; and (19) our success at managing the risks involved in the foregoing. PART I FINANCIAL INFORMATION ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CRITICAL ACCOUNTING POLICIES AND RESULTS OF OPERATIONS The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto. Critical Accounting Policies We have adopted accounting policies, which we believe will result in an accurate presentation of the financial statements. We consider critical accounting policies to be those that require more significant judgments and estimates in the preparation of our financial statements and include the following: (1) revenue recognition; (2) allowance for doubtful accounts; (3) consideration of impairment of intangible assets; and (4) valuation reserve on net deferred tax assets. Revenue recognition - We record revenues at the estimated net amount that we expect to receive from patients, employers, third party payors, and others at the time we perform the services. We record contractual allowances when we prepare the related bills to our customers. We bill some third parties at discounted and negotiated amounts. Because we bill at the discounted amounts, we do not need to estimate third party settlements. Allowance for doubtful accounts - We maintain our allowance for doubtful accounts for estimated losses, which may result from the inability of our customers to make required payments. Allowances are based on the likelihood of recoverability of accounts receivable considering such factors as past experience and taking into account current collection trends that are expected to continue. Factors taken into consideration in estimating the reserves are amounts past due, or are in dispute, or a client that we believe might be having financial difficulties. If economic, industry, or specific customer business trends worsen beyond earlier estimates, we increase the allowance for doubtful accounts by recording additional expense. Consideration of impairment of intangible assets - We evaluate the recovery of the carrying amount of excess of cost over fair value of assets acquired by determining if a permanent impairment has occurred. This evaluation is done annually or more frequently if indicators of permanent impairment arise. Indicators of a permanent impairment include, among other things, significant adverse change in legal factors or the business climate, an adverse action by a regulator, unanticipated competition, loss of key personnel or allocation of goodwill to a portion of business that is to be sold or otherwise disposed. We perform our impairment test on September 30th of each year. In addition to the annual impairment test, we are required to perform an impairment test any time an indicator occurs, such as those noted above. At such time as impairment is determined, the intangible assets are written off during that period. Although considerable care is taken to ensure that impairment losses are recorded as soon as indicators of impairment are noted, material differences could occur if different, but nonetheless reasonably plausible, indicators existed. Valuation reserve on net deferred tax assets - We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. As of June 30, 2003 and September 30, 2002, we recorded a valuation allowance that reduced our deferred tax assets to equal our deferred tax liability. Our consolidated financial statements 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.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 each of the P.A.s. As a consequence of the nominee shareholder arrangements and the Administrative Service Agreements, we have a long-term financial interest in the affiliated practices of the P.A.s. According to EITF 97-2, the application of FASB Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and FASB No. 16 (Business Combinations), we must consolidate the results of the affiliated practices with those of UCI. The P.A. enters into employment agreements with physicians for terms ranging from one to three 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 that were significant during our three prior fiscal years. 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 June 30, 2003 and 2002, the P.A. employed 115 and 111 medical providers, respectively. The net assets of the P.A. are not material for any period presented, and intercompany accounts and transactions have been eliminated. We do not allocate all indirect costs incurred at the corporate offices to the 40 freestanding medical centers on a center-by-center basis. Therefore, all discussions below are intended to be in the aggregate for us as a whole. Chapter 11 Bankruptcy Filing On November 2, 2001, we filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court"). As debtors-in-possession, we remained in possession of our properties and assets, and our management continued to operate our business. The Bankruptcy Court 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 allowed for the retention of legal and financial professionals to advise us in the bankruptcy proceedings. The Bankruptcy Court confirmed each of our Plans of Reorganization, as amended, by August 8, 2002 and we have, therefore, emerged from the Chapter 11 protection of the Bankruptcy Court. Because holders of our existing voting shares immediately before confirmation received more than 50% of the voting shares of the reorganized equity, we did not qualify for fresh start accounting under SOP 90-7. Results of Operations UCI provides nonmedical management and administrative services for our centers, 39 of which are located throughout South Carolina and one is located in Knoxville, Tennessee (29 operating as Doctor's Care in South Carolina, one as Doctor's Care in Knoxville, Tennessee, and ten as Progressive Physical Therapy Services in South Carolina). Revenues of $11,049,000 for the quarter ended June 30, 2003 reflect an increase of $1,226,000 or 12% from those of the quarter ended June 30, 2002. This increase in revenue is believed to be the result of an increase in the volume of ancillary services (such as physical therapy and laboratory tests) being offered at our facilities. An intense advertising campaign has also been launched in the upstate and midlands regions of South Carolina that has increased patient volume. Patient encounters increased to approximately 118,000 in the third quarter of fiscal year 2003 from 107,000 in the third quarter of fiscal year 2002. For the nine months ended June 30, 2003, patient encounters were approximately 350,000 as compared to 330,000 for the nine months ended June 30, 2002. Pursuant to SFAS No. 142, we tested goodwill for impairment in the fourth quarter of 2002, and we determined there has not been any impairment. During the past three fiscal years, we have continued our services provided to members of HMOs. In these arrangements, we, through the P.A., act as the designated primary caregiver for members of HMOs who have selected one of our centers or providers as their primary care provider. In fiscal year 1994, we began participating in an HMO operated by Companion HealthCare Corporation ("CHC"), a wholly owned subsidiary of Blue Cross Blue Shield of South Carolina ("BCBS"). BCBS, through CHC, is a primary stockholder of UCI. Including our arrangement with CHC, we now participate in four HMOs and are the primary care "gatekeeper" for more than 9,000 lives at June 30, 2003. As of June 30, 2003, all of these HMOs use a discounted fee-for-service basis for payment. HMOs do not, at this time, have a significant penetration into the South Carolina market. We are not certain if the market share of HMOs will grow in the areas in which we operate clinics. Sustained revenues in fiscal years 2003 and 2002 also reflect our continued focus on occupational medicine and industrial health services (these revenues are referred to as "employer paid" and "workers compensation" on the table below). We developed focused marketing materials, including quarterly newsletters for employers, to spotlight our services for industry. We derived approximately 17% and 22% of our total revenues from these occupational medicine services during the third quarter of fiscal years 2003 and 2002, respectively. The following table breaks out our revenue and patient visits by revenue source for the third quarter of fiscal years 2003 and 2002. Percent of Percent of Payor Patient Visits Revenue ------------------------------------------------ ------------------------ ----------------------- 2003 2002 2003 2002 ------------ ----------- ------------ ---------- 15 17 11 18 Patient Pay 11 12 5 6 Employer Paid 7 10 7 10 HMO 10 12 12 16 Workers Compensation 11 9 7 6 Medicare/Medicaid 42 36 52 39 Managed Care Insurance 4 4 6 5 Other (Commercial Indemnity, Champus, etc.) We earned an operating margin of $961,000 during the third quarter of fiscal 2003 as compared to $647,000 for the third quarter of fiscal 2002. Our management believes that the increase in margin was the result of an increase in ancillary services being offered to our patients. However, the personnel cost increases that continue will place continuing pressure on our margin and are in part attributable to increased cost-cutting pressures being applied by managed care insurance payors that cover many of our patients. As managed care plans attempt to cut costs, they typically increase the administrative burden of providers by requiring referral approvals and by requesting hard copies of medical records before they will pay claims. The number of patients at our centers that are covered by a managed care plan versus a traditional indemnity plan continues to grow. Our management expects this trend to continue. Depreciation and amortization expense decreased slightly to $238,000 in the third quarter of fiscal 2003, down from $255,000 in the third quarter of fiscal 2002. This decrease is the result of normal asset write-off. Interest expense decreased from $225,000 in the third quarter of fiscal 2002 to $178,000 in the third quarter of fiscal 2003. The decrease in interest expense is primarily a result of a reduction in long-term debt due to regularly scheduled principal payments. Financial Condition at June 30, 2003 Cash and cash equivalents increased slightly by $58,000 during the nine months ended June 30, 2003. Accounts receivable increased by $741,000 during the nine months ended June 30, 2003 and is a result of an overall increase in revenues during the quarter. Long-term debt decreased from $4,078,000 at September 30, 2002 to $3,447,000 at June 30, 2003. Regular principal pay-downs of approximately $632,000 were made during the nine months ended June 30, 2003. Our management believes that it will be able to fund debt service requirements out of cash generated through operations and does not anticipate the necessity of additional debt financing. Liquidity and Capital Resources We require capital principally to fund growth (acquire new centers), for working capital needs, and for the retirement of indebtedness. We fund our capital requirements and working capital needs through a combination of external financing and credit extended by suppliers. As of June 30, 2003, we have no material commitments for capital expenditures or for acquisitions or start-ups. Operating activities produced $1,582,000 of cash during the nine months ended June 30, 2003, compared with $1,805,000 during the same period in the prior fiscal year. This decrease is mainly due to pre-payment of certain liabilities, as noted in the increase in prepaid assets and an increase in accounts receivable. Investing activities used $468,000 in cash during the nine months ended June 30, 2002 as compared to $892,000 during the nine months ended June 30, 2003. This increase is due to purchases of equipment and renovations for our operating sites. Financing activities utilized $632,000 in cash during the nine month period ended June 30, 2003 primarily for debt reduction. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to changes in interest rates primarily as a result of our borrowing activities, which includes credit facilities with financial institutions used to maintain liquidity and fund our business operations, as well as notes payable to various third parties in connection with certain acquisitions of property and equipment. The nature and amount of our debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of our interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. We do not currently use derivative instruments to adjust our interest rate risk profile. Approximately $1,308,000 of our debt at June 30, 2003 was subject to fixed interest rates and principal payments. Approximately $2,139,000 of our debt at June 30, 2003 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at June 30, 2003, our interest expense on an annualized basis would increase approximately $21,000 for each increase of one percent in the prime rate. We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments. ITEM 4 CONTROLS AND PROCEDURES Quarterly evaluation of the Company's Disclosure Controls and Internal Controls. Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" (Disclosure Controls), and its "internal controls and procedures for financial reporting" (Internal Controls). This evaluation (the "Controls Evaluation") was done under the supervision and with the participation of management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Rules adopted by the SEC require that in this section of the Quarterly Report we present the conclusions of the CEO and the CFO about the effectiveness of our Disclosure Controls and Internal Controls based on and as of the date of the Controls Evaluation. CEO and CFO Certifications. Appearing immediately following the Signatures section of this Quarterly Report there is a form of Certification. The form of Certification is required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certification"). This section of the Quarterly Report that you are currently reading is the information concerning the Controls Evaluation referred to in the Section 302 Certifications, and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented. Disclosure Controls and Internal Controls. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the "Exchange Act"), such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures that are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles. Limitations on the Effectiveness of Controls. The company's management, including the CEO and CFO, does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Scope of the Controls Evaluation. The CEO/CFO evaluation of our Disclosure Controls and our Internal Controls included a review of the controls' objectives and design, the controls' implementation by the company and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the Controls Evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on at least a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-Q. Our Internal Controls are also evaluated on an ongoing basis by other personnel in our company and by our independent auditors in connection with their audit and review activities. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary; our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. Among other matters, we sought in our evaluation to determine whether there were any "significant deficiencies" or "material weaknesses" in the company's Internal Controls, or whether the company had identified any acts of fraud involving personnel who have a significant role in the company's Internal Controls. This information was important both for the Controls Evaluation generally and because items 5 and 6 in the Section 302 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to our Board's Audit Committee and to our independent auditors and to report on related matters in this section of the Quarterly Report. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions"; these are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accord with our on-going procedures. In accord with SEC requirements, the CEO and CFO note that, since the date of the Controls Evaluation to the date of this Quarterly Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that material information relating to the company is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles. PART II OTHER INFORMATION Item 1 Legal Proceedings We are not a party to any pending litigation other than routine litigation incidental to the business or that is immaterial in amount of damages sought. Item 2 Changes in Securities This item is not applicable. Item 3 Defaults upon Senior Securities This item is not applicable. Item 4 Submission of Matters to a Vote of Security Holders This item is not applicable. Item 5 Other Information On July 25, 2003, we issued a press release announcing financial results for the quarter ended June 30, 2003. The press release is attached as Exhibit 99.3 to this Form 10-Q. The information under this Item 5 of this Form 10-Q and the related Exhibit 99.3 attached hereto shall not be deemed "filed" for purposes of Section 18 of the Securities Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing. Item 6 Exhibits and Reports on Form 8-K (a) Exhibits. -------- See Exhibit Index at page 21. (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. UCI Medical Affiliates, Inc. (Registrant) /s/ D. Michael Stout, M.D. /s/ Jerry F. Wells, Jr., CPA - ------------------------------------ ------------------------------- D. Michael Stout, M.D. Jerry F. Wells, Jr., CPA President and Chief Executive Officer Executive Vice President, Chief Financial Officer and Principal Accounting Officer Date: July 25, 2003 CERTIFICATION I, D. Michael Stout, M.D., certify that: 1. I have reviewed this quarterly report on Form 10-Q of UCI Medical Affiliates, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 45 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 25, 2003 /s/ D. Michael Stout, M.D. ----------------------------------- D. Michael Stout, M.D. President & Chief Executive Officer CERTIFICATION I, Jerry F. Wells, Jr., CPA, certify that: 1. I have reviewed this quarterly report on Form 10-Q of UCI Medical Affiliates, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 45 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 25, 2003 /s/ Jerry F. Wells, Jr., CPA -------------------------------- Jerry F. Wells, Jr., CPA Executive Vice President, Chief Financial Officer and Principal Accounting Officer PAGE NUMBER OR INCORPORATION BY EXHIBIT NUMBER REFERENCE TO DESCRIPTION - ----------------- ------------------------------------------------------- ------------------------------------ 22 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 23 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.3 Press Release dated July 25, 2003 24 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of UCI Medical Affiliates, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, D. Michael Stout, M.D., President and Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. July 25, 2003 /s/ D. Michael Stout, M.D. -------------------------- D. Michael Stout, M.D. President and Chief Executive Officer EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of UCI Medical Affiliates, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jerry F. Wells, Jr., CPA, Executive Vice President, Chief Financial Officer and Principal Accounting Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. July 25, 2003 /s/ Jerry F. Wells, Jr., CPA ---------------------------- Jerry F. Wells, Jr., CPA Executive Vice President, Chief Financial Officer and Principal Accounting Officer EXHIBIT 99.3 PRESS RELEASE UCI MEDICAL AFFILIATES, INC. COMPANY REPORTS THIRD QUARTER FISCAL YEAR 2003 RESULTS Columbia, SC - July 25, 2003 - UCI Medical Affiliates, Inc. (OTC Bulletin Board: UCIA) announced today that revenue for the third quarter of the fiscal year ending September 30, 2003 increased to $11,049,000 from $9,823,000 for the third quarter of fiscal year 2002. Revenue for the nine months ended June 30, 2003 was $32,359,000 or 11% greater than the $28,803,000 earned for the first nine months of fiscal year ended September 30, 2002. Patient encounters increased to 350,000 for the nine months ended June 30, 2003 from 330,000 for the nine months ended June 30, 2002. The Company reported net income of $524,000 or $.05 per share for the third quarter of fiscal year 2003 as compared to $150,000 or $.02 per share for the third quarter of fiscal year 2002. For the nine months ended June 30, 2003, net income was $1,596,000 or $.017 per share while net income for the nine months ended June 30, 2002 was $691,000 or $.07 per share. D. Michael Stout, M.D., President and Chief Executive Officer said, "While the company has made money for five straight quarters, we will continue to focus on a conservative growth strategy and cutting expenses at corporate headquarters. " The Company's June 30, 2003 balance sheet reflects total assets of $15,593,000 as compared to $14,517,000 at September 30, 2002 while stockholders' equity at June 30, 2003 was $1,787,000 as compared to $190,000 at September 30, 2002. "We're extremely proud of the progress we've made in increasing profitability, cutting corporate expenses, and simultaneously increasing customer service," said Jerry F. Wells, Jr., CPA, Executive Vice President and Chief Financial Officer. UCI Medical Affiliates, Inc. provides non-medical management and administrative services for freestanding medical centers, which operate as Doctors Care and Progressive Physical Therapy Services. Doctors Care provides family care, urgent care, and occupational healthcare in 29 centers across South Carolina. Certain of the statements contained in this Press Release 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 Press Release that such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Although our management believes that their expectations of future performance are based on reasonable assumptions within the bounds of their knowledge of their business and operations, we have no assurance that actual results will not differ materially from their expectations. Factors that could cause actual results to differ from expectations include, among other things, (1) the difficulty in controlling our costs of providing healthcare and administering our network of centers; (2) the possible negative effects from changes in reimbursement and capitation payment levels and payment practices by insurance companies, healthcare plans, government payors and other payment sources; (3) the difficulty of attracting primary care physicians; (4) the increasing competition for patients among healthcare providers; (5) possible government regulations negatively impacting our existing organizational structure; (6) the possible negative effects of prospective healthcare reform; (7) the challenges and uncertainties in the implementation of our expansion and development strategy; (8) the dependence on key personnel; (9) adverse conditions in the stock market, the public debt market, and other capital markets (including changes in interest rate conditions); (10) the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected resulting in, among other things, a reduced demand for practice management services; (11) the demand for our products and services; (12) technological changes; (13) the ability to increase market share; (14) the adequacy of expense projections and estimates of impairment loss; (15) the impact of change in accounting policies by the Securities and Exchange Commission; (16) unanticipated regulatory or judicial proceedings; (17) the impact on our business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts; (18) other factors described in this Press Release and in our other reports filed with the Securities and Exchange Commission; and (19) our success at managing the risks involved in the foregoing. Contact: Jerry F. Wells, Jr., CPA Executive Vice President and Chief Financial Officer UCI Medical Affiliates, Inc. 4416 Forest Drive Columbia, South Carolina 29206 (803) 782-4278