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: June 30, 2006
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to -----------------------------------
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Commission file number: 0-13265
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UCI MEDICAL AFFILIATES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 59-2225346
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
4416 Forest Drive, Columbia, SC 29206
(Address of principal executive offices)
(803)782-4278
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ( X )Yes ( ) No
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. ( ) Large
Accelerated Filer ( ) Accelerated Filer ( X ) Non-Accelerated Filer
Indicate by checkmark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
( ) Yes ( X ) No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by checkmark whether the registrant filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court. ( X )Yes
( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's common stock, $.05 par
value, was 9,826,297 at June 30, 2006.
UCI MEDICAL AFFILIATES, INC.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2006 and September 30, 2005 3
Condensed Consolidated Statements of Operations for the
three and nine months ended June 30, 2006 and June 30, 2005 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 2006 and June 30, 2005 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
Item 4 Controls and Procedures 15-16
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 1A Risk Factors 17
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits 18
SIGNATURES 19
UCI MEDICAL AFFILIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2006 September 30, 2005
---------------- -----------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 723,117 $ 961,610
Accounts receivable, less allowance for doubtful accounts
of $3,498,423 and $2,949,127 9,649,228 8,778,025
Inventory 638,888 623,941
Deferred taxes 1,173,342 1,319,457
Prepaid expenses and other current assets 429,727 192,279
---------------- -----------------------
Total current assets 12,614,302 11,875,312
Property and equipment, less accumulated depreciation of
$12,232,809 and $11,327,037 8,264,633 6,013,236
Deferred taxes 1,341,053 2,104,606
Excess of cost over fair value of assets acquired, less
accumulated amortization of $2,451,814 3,391,942 3,391,942
Other assets 31,205 14,278
---------------- -----------------------
Total assets $ 25,643,135 $23,399,374
================ =======================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $1,118,056 $ 1,259,315
Accounts payable 1,578,577 882,988
Accrued salaries and payroll taxes 2,180,410 1,979,048
Accrued uncompensated absences 409,556 320,434
Other accrued liabilities 277,805 743,862
-----------------------
----------------
Total current liabilities 5,564,404 5,185,647
Long-term liabilities
Accounts payable 402,000 1,115,711
Deferred tax liability 349,030 278,211
Long-term debt, net of current portion 3,240,139 3,498,790
---------------- -----------------------
---------------- -----------------------
Total long-term liabilities 3,991,169 4,892,712
---------------- -----------------------
---------------- -----------------------
Total liabilities 9,555,573 10,078,359
---------------- -----------------------
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.01 per share:
Authorized shares - 10,000,000; none issued -- --
Common stock, par value $.05 per share:
Authorized shares - 50,000,000
Issued and outstanding - 9,826,297 and 9,740,472 shares 491,315 487,024
Paid-in capital 21,929,944 21,719,130
Accumulated deficit (6,333,697) (8,885,139)
---------------- -----------------------
Total stockholders' equity 16,087,562 13,321,015
---------------- -----------------------
Total liabilities and stockholders' equity $ 25,643,135 $ 23,399,374
================ =======================
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,
------------------------------------ ----------------------------------
2006 2005 2006 2005
----------------- --------------- --------------- ---------------
Revenues $15,636,858 $13,999,708 $47,240,128 $41,855,652
Operating costs 11,657,234 10,327,951 35,167,347 31,061,048
----------------- --------------- --------------- ---------------
Operating margin 3,979,624 3,671,757 12,072,781 10,794,604
General and administrative expenses 2,318,693 2,165,537 6,716,770 5,604,864
Depreciation and amortization 335,062 253,559 905,772 755,045
----------------- --------------- --------------- ---------------
Income from operations 1,325,869 1,252,661 4,450,239 4,434,695
Other expense
Interest expense, net of interest income (128,934) (140,270) (368,135) (431,040)
----------------- --------------- --------------- ---------------
----------------- --------------- --------------- ---------------
Income before income taxes 1,196,935 1,112,391 4,082,104 4,003,655
Income tax benefit (provision) (448,920) (450,000) (1,530,662) 3,062,670
----------------- --------------- --------------- ---------------
----------------- --------------- --------------- ---------------
Net income $ 748,015 $ 662,391 $ 2,551,442 $7,066,325
=============== =============== ===============
=================
Basic earnings per share $ .08 $ .07 $ .26 $ .73
================= =============== =============== ===============
Basic weighted average common shares
outstanding 9,826,297 9,740,472 9,769,080 9,740,472
================= =============== =============== ===============
================= =============== =============== ===============
Diluted earnings per share $ .08 $ .07 $ .26 $ .72
================= =============== =============== ===============
================= =============== =============== ===============
Diluted weighted average common shares
outstanding 9,928,122 9,923,122 9,803,022 9,801,355
================= =============== =============== ===============
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,
------------------------------------
2006 2005
-------------- ------------------
Operating activities:
Net income $2,551,442 $7,066,325
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on accounts receivable 2,359,485 2,221,245
Depreciation and amortization 905,772 755,045
Deferred taxes 1,022,387 (3,139,562)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (3,230,688) (2,873,309)
(Increase) in inventory (14,947) --
(Increase) in prepaid expenses and other current assets (237,448) (112,498)
Increase (decrease) in accounts payable and accrued 520,016 (823,375)
liabilities
------------------
--------------
Cash provided by operating activities 3,876,019 3,093,871
-------------- ------------------
Investing activities:
Purchases of property and equipment (2,585,774) (1,678,436)
(Increase) in other assets (16,927) (3,956)
-------------- ------------------
Cash used in investing activities (2,602,701) (1,682,392)
-------------- ------------------
Financing activities:
Proceeds from issuance of common stock 173,205 --
(Payments) borrowings on term-note (731,741) 4,060,616
Payments on other long-term obligations (953,275) (4,983,007)
-------------- ------------------
Cash used in financing activities (1,511,811) (922,391)
-------------- ------------------
(Decrease) increase in cash and cash equivalents (238,493) 489,088
Cash and cash equivalents at beginning of period 961,610 533,533
-------------- ------------------
--------------
Cash and cash equivalents at end of period $ 723,117 $1,022,621
============== ==================
============== ==================
Supplemental disclosure of non-cash financing activities:
Capital lease obligation incurred to finance equipment purchases $ 571,395 $ --
============== ==================
============== ==================
Tax benefit for fair market value of exercised common stock $ 41,900 $ --
============== ==================
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, 2006
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2006. For further information, refer to the
audited consolidated financial statements and footnotes thereto included in our
annual report on Form 10-K for the year ended September 30, 2005.
The consolidated financial statements include the accounts of UCI Medical
Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc.
("UCI-SC"), Doctors Care, P.A., Progressive Physical Therapy, P.A. ("PPT"),
Carolina Orthopedic & Sports Medicine, P.A. ("COSM"), and Doctors Care of
Tennessee, P.C. (the four together as the "P.A." and together with UCI and
UCI-SC, the "Company"). Because of the corporate practice of medicine laws in
the states in which the Company operates, the Company does not own medical
practices but instead enters into exclusive long-term management services
agreements with the P.A. that operates the medical practices. Consolidation of
the financial statements is required under Financial Accounting Standards Board
("FASB") Interpretation No. 46, as revised, ("FIN 46") "Consolidation of
Variable Interest Entities." Prior to the Company's adoption of FIN 46 on
October 1, 2003, the Company consolidated the P.A. as a result of Emerging
Issues Task Force ("EITF") No. 97-2, "Application of FASB Statement No. 94 and
APB Opinion No. 16 to Physician Practice Management Entities and Certain Other
Entities with Contractual Management Arrangements." UCI-SC, in its sole
discretion, can effect a change in the nominee shareholder of each of the P.A.
at any time for a payment of $100 from the new nominee shareholder to the old
nominee shareholder, with no limits placed on the identity of any new nominee
shareholder and no adverse impact resulting to any of UCI-SC or the P.A. from
such change.
In addition to the nominee shareholder arrangement described above, UCI-SC has
entered into an Administrative Service Agreement with each of the P.A. As a
consequence of the nominee shareholder arrangement and the Administrative
Service Agreement, the Company has a long-term financial interest in the
affiliated practices of each P.A. and the Company has exclusive authority over
decision-making relating to all major on-going operations. The Company
establishes annual operating and capital budgets for the P.A. and compensation
guidelines for the licensed medical professionals. The Administrative Service
Agreements have an initial term of forty years. According to FIN No. 46, the
Company must consolidate the results of the affiliated practices with those of
the Company. All significant intercompany accounts and transactions are
eliminated in consolidation, including management fees.
The method of computing the management fees is based on billings of the
affiliated practices less the amounts necessary to pay professional compensation
and other professional expenses. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services plus
a profit. These interests are unilaterally salable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The most significant estimates are related to the allowance for doubtful
accounts, goodwill and intangible assets, income taxes, contingencies, and
health insurance accruals.
Certain reclassifications have been made to the prior fiscal years financial
statements to conform to the fiscal year 2006 presentation.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates in the near term.
Revenue is recognized at estimated net amounts to be received from patients,
employers, third party payors, and others at the time the related services are
rendered. The Company records contractual adjustments at the time bills are
generated for services rendered as some third parties are billed at discounted
and negotiated amounts. Whenever the Company bills at the discounted amounts,
estimates of third party settlements are not necessary.
FASB Statement No. 131, "Disclosure about Segments of an Enterprise and Related
Information," requires companies to report financial and descriptive information
about their reportable operating segments, including segment profit or loss,
certain specific revenue and expense items, and segment assets, as well as
information about the revenues derived from the Company's products and services,
the countries in which the Company earns revenues and holds assets, and major
customers. This statement also requires companies that have a single reportable
segment to disclose information about products and services, information about
geographic areas, and information about major customers. This statement requires
the use of the management approach to determine the information to be reported.
The management approach is based on the way management organizes the enterprise
to assess performance and make operating decisions regarding the allocation of
resources. It is management's opinion that, at this time, the Company has
several operating segments, however, only one reportable segment. The following
discussion sets forth the required disclosures regarding single segment
information.
The Company provides nonmedical management and administrative services for a
network of 49 freestanding medical centers, 48 of which are located throughout
South Carolina and one is located in Knoxville, Tennessee (30 operating as
Doctors Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, 16
as Progressive Physical Therapy Services in South Carolina, one as Luberoff
Pediatrics in South Carolina, and one as Carolina Orthopedic and Sports Medicine
in South Carolina).
NOTE 2. INVENTORY
The inventory consists of medical supplies and drugs and both are carried at the
lower of average cost or market. The volume of supplies carried at a center
varies very little from month to month and management, therefore, performs only
an annual physical inventory count and does not maintain a perpetual inventory
system.
NOTE 3. INCOME TAXES
Deferred tax assets and liabilities are recorded based on the difference between
the financial statement and tax bases of assets and liabilities as measured by
the enacted tax rates which are anticipated to be in effect when these
differences reverse. The deferred tax provision is the result of the net change
in the deferred tax assets and liabilities. Valuation allowances are provided
against deferred tax assets when the Company determines it is more likely than
not that the deferred tax asset will not be realized. During the quarter ended
December 31, 2004, management determined that it was more likely than not that
the Company's deferred tax asset would be fully realizable. Therefore, the
Company recorded a $4,495,000 adjustment to the valuation allowance based upon
the Company's current financial position, results from operations, and
management's forecast of future earnings. During the quarter ended June 30,
2006, management recorded income tax expense of approximately $449,000.
NOTE 4. INTANGIBLES
In June 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets". Statement No. 142 requires that
goodwill and intangible assets with indefinite lives will no longer be
amortized, but are reviewed at least annually for impairment. Pursuant to
Statement No. 142, the Company tested goodwill for impairment in the fourth
quarter of fiscal year 2005, and determined there had not been any impairment.
NOTE 5. EARNINGS PER SHARE
Net income per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share are
calculated by dividing income available to common shareholders by the
weighted-average number of shares outstanding for each period. Diluted earnings
per common share are calculated by adjusting the weighted-average shares
outstanding assuming conversion of all potentially dilutive stock options.
NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued revised Statements on Financial Accounting
Standards ("SFAS") No. 123R, "Share-Based Payment". This statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation". The statement eliminates the
alternative to use Accounting Principle Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", that was provided in SFAS 123 as
previously issued. SFAS 123R requires entities to recognize the cost of employee
services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards. The statement is effective as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005. The Company did not have to recognize any expense as a result of SFAS
123 during the current period.
In September 2004, the Financial Accounting Standards Board's Emerging Issue
Task Force ("EITF") reached a consensus on EITF Issue No. 04-08, "The Effect of
Contingently Convertible Instruments on Diluted Earnings per Share". The Task
Force reached a conclusion that Contingently Convertible Instruments ("Co-Cos")
should be included in diluted earnings per share computations, if dilutive,
regardless of whether the market price trigger or other contingent features have
been met. EITF Issue No. 04-08 has no effect on the Company.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"
which addresses consolidation by business enterprises of variable interest
entities ("VIEs") either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB issued modifications to FIN 46 ("Revised Interpretations") resulting in
multiple effective dates based on the nature as well as the creation date of the
VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be
accounted for either based on the original interpretation or the Revised
Interpretations. However, the Revised Interpretations must be applied no later
than the first quarter of 2004. VIEs created after January 1, 2004 must be
accounted for under the Revised Interpretations. Non-Special Purpose Entities
created prior to February 1, 2003, should be accounted for under the Revised
Interpretation's provisions no later than the first quarter of the 2004 fiscal
year. As of the beginning of 2004, the Company adopted FIN 46 and the Revised
Interpretations, neither of which had an impact on the Company's consolidated
financial statements because the VIE had previously been consolidated as a
result of other accounting pronouncements.
The FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a
replacement of APB Opinion No. 20 and FASB Statement No. 3" in May 2005. This
statement changes the requirements for the accounting for and reporting of a
change in accounting principle. SFAS No. 154 requires companies that make a
voluntary change in accounting principle to apply that change retrospectively to
prior period's financial statements, unless this would be impracticable. This
statement is effective for fiscal years beginning after December 15, 2005. The
Company will comply with the provisions of this statement for any future
accounting changes or error corrections.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes," which applies to all tax positions related to
income taxes subject to SFAS No. 109, "Accounting for Income Taxes". FIN 48
requires a new evaluation process for all tax positions taken. If the
probability for sustaining said tax position is greater than 50%, then the tax
position is warranted and recognition should be at the highest amount which
would be expected to be realized upon ultimate settlement. FIN 48 requires
expanded disclosure at each annual reporting period unless a significant change
occurs in an interim period. Differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN 48 and the amounts
reported after adoption should be accounted for as an adjustment to the
beginning balance of retained earnings.
The Company is currently evaluating the impact of the adoption of FIN 48 on
October 1, 2006, but has not yet determined what impact, if any, the adoption
will have on the Company's financial position or statement of income.
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 AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our consolidated results of
operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
Critical Accounting Policies
We have adopted accounting policies that we believe will result in an accurate
presentation of the financial statements. We consider critical accounting
policies to be those that require more significant judgments and estimates in
the preparation of our financial statements and include the following: (1)
revenue recognition; (2) allowance for doubtful accounts; (3) consideration of
impairment of intangible assets; and (4) valuation reserve on net deferred tax
assets.
Revenue recognition -
We record revenues at the estimated net amount that we expect to receive from
patients, employers, third party payors, and others at the time we perform the
services. We record contractual adjustments when we prepare the related bills to
our customers as we bill some third parties at discounted and negotiated
amounts. Whenever we bill at the discounted amounts, we do not need to estimate
third party settlements.
Allowance for doubtful accounts -
We maintain our allowance for doubtful accounts for estimated losses, which may
result from the inability of our customers to make required payments. We base
our allowance on the likelihood of recoverability of accounts receivable
considering such factors as past experience and current collection trends.
Factors taken into consideration in estimating the allowance include: amounts
past due, in dispute, or a client that we believe might be having financial
difficulties. If economic, industry, or specific customer business trends worsen
beyond earlier estimates, we increase the allowance for doubtful accounts by
recording additional expense.
Consideration of impairment of intangible assets -
We evaluate the recovery of the carrying amount of excess of cost over fair
value of assets acquired by determining if a permanent impairment has occurred.
This evaluation is done annually or more frequently if indicators of permanent
impairment arise. Indicators of a permanent impairment include, among other
things, significant adverse change in legal factors or the business climate, an
adverse action by a regulator, unanticipated competition, loss of key personnel
or allocation of goodwill to a portion of the business that is to be sold or
otherwise disposed. We perform our impairment test on September 30th of each
year. In addition to the annual impairment test, we are required to perform an
impairment test any time an indicator occurs, such as those noted above. At such
time as impairment is determined, the intangible assets are written off during
that period.
Valuation reserve on net deferred tax assets -
We record a valuation allowance to reduce our deferred tax assets to the amount
that management considers is more likely than not to be realized. Based upon our
current financial position, results from operations, and our forecast of future
earnings, we do not believe we currently need a valuation reserve.
Company structure
Our consolidated financial statements include the accounts of UCI, UCI-SC, and
its wholly owned subsidiaries. Such consolidation is required under FIN 46, as
revised. UCI-SC, in its sole discretion, can effect a change in the nominee
shareholder of each P.A. at any time for a payment of $100 from the new nominee
shareholder to the old nominee shareholder, with no limits placed on the
identity of any new nominee shareholder and no adverse impact resulting to any
of UCI-SC or the P.A. from such change.
In addition to the nominee shareholder arrangement described above, UCI-SC has
entered into an Administrative Service Agreement with each P.A. As a consequence
of the nominee shareholder arrangement and the Administrative Service Agreement,
we have a long-term financial interest in the affiliated practices of each P.A.
According to the application of Interpretation No. 46 (Consolidation of Variable
Interest Entities), UCI must consolidate the results of the affiliated practices
with those of UCI.
Approximately 99% of the physicians employed by the P.A. are paid on an hourly
basis for time scheduled and worked at the medical centers. Approximately 30% of
the physicians have incentive compensation arrangements; however, no amounts
were accrued or paid that were significant during our three prior fiscal years.
We base any incentive compensation upon a percentage of non-ancillary
collectible charges for services performed by a provider. As of June 30, 2006
and 2005, the P.A. employed 139 and 132 medical providers, respectively.
The net assets of the P.A. are not material for any period presented, and
intercompany accounts and transactions have been eliminated.
We allocate all indirect costs incurred at the corporate office to the centers.
Therefore, all discussions below are intended to be in the aggregate for us as a
whole.
Results of Operations
The Company provides nonmedical management and administrative services for a
network of 49 freestanding medical centers, 48 of which are located throughout
South Carolina and one is located in Knoxville, Tennessee (30 operating as
Doctors Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, 16
as Progressive Physical Therapy Services in South Carolina, one as Luberoff
Pediatrics in South Carolina, and one as Carolina Orthopedic and Sports Medicine
in South Carolina).
Revenues of approximately $15,637,000 for the quarter ended June 30, 2006
reflect an increase of approximately $1,637,000 or 12% from those of the quarter
ended June 30, 2005.
This increase in revenue is the result of opening four additional operating
facilities as well as an increase in per patient revenue from both enhanced
contract pricing for our services and also our ability to provide additional
services to our patient population.
Pursuant to SFAS No. 142, we tested goodwill for impairment in the fourth
quarter of fiscal year 2005, and we determined there had not been any
impairment.
We have continued our services provided to members of HMOs. In these
arrangements, we, through the P.A., act as the designated primary caregiver for
members of HMOs who have selected one of our centers or providers as their
primary care provider. In fiscal year 1994, we began participating in an HMO
operated by BlueChoice HealthPlan ("BCHP"), a wholly owned subsidiary of Blue
Cross Blue Shield of South Carolina (BCBS). BCBS, through BCHP, is a primary
stockholder of UCI. Including our arrangement with BCHP, we now participate in
four HMOs and are the primary care gatekeeper for more than 7,000 lives at June
30, 2006. As of June 30, 2006, 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.
The company maintained sustained revenues in fiscal year 2006 in 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 19% of our total
revenues from these occupational medicine services in the third quarter of
fiscal year 2006 and approximately 17% in the third quarter of fiscal year 2005.
The following table breaks out our revenue and patient visits by revenue source
for the third quarter of fiscal years 2006 and 2005.
Percent of Percent of
Payor Patient Visits Revenue
------------------------------------------------ ----------------- --------------------
2006 2005 2006 2005
------- --------- --------- ----------
15 15 10 11
Patient Pay
9 9 4 4
Employer Paid
6 6 6 7
HMO
13 10 15 13
Workers Compensation
11 14 12 10
Medicare/Medicaid
43 43 49 51
Managed Care Insurance
3 3 4 4
Other (Commercial Indemnity, Champus, etc.)
------- --------- --------- ----------
------- --------- --------- ----------
100 100 100 100
======= ========= ========= ==========
We earned an operating margin of approximately $3,980,000 during the third
quarter of fiscal 2006 as compared to an operating margin of approximately
$3,672,000 for the third quarter of fiscal 2005. The increase in margin was
primarily the result of increased revenues.
General and administrative expenses include all salaries, benefits, supplies,
and other operating expenses not specifically related to the day-to-day
operation of the Centers. General and administrative expenses increased to
approximately $2,319,000 in the third quarter of fiscal year 2006, up from
approximately $2,166,000 in the third quarter of fiscal year 2005. This increase
is primarily the result of an increase in personnel costs associated with our
new facilities during the third quarter of fiscal year 2006.
Depreciation and amortization expense increased to approximately $335,000 in the
third quarter of fiscal 2006, up from approximately $254,000 in the third
quarter of fiscal 2005. This increase is the result of equipment purchases and
building renovations. Interest expense decreased to approximately $129,000 in
the third quarter of fiscal year 2006, down from approximately $140,000 in the
third quarter of fiscal 2005, due to the pay-down of debt.
During the quarter ended December 31, 2004, management determined that it was
more likely than not that the Company's deferred tax asset would be fully
realizable. Therefore, we recorded a $4,495,000 adjustment to the valuation
allowance based upon the Company's current financial position, results from
operations, and management's forecast of future earnings. During the quarter
ended June 30, 2006, our management recorded income tax expense of approximately
$449,000.
Financial Condition at June 30, 2006
Cash and cash equivalents decreased by approximately $238,000 during the nine
months ended June 30, 2006, mainly as a result of payments on debt and equipment
purchases.
Accounts receivable increased by approximately $871,000 during the nine months
ended June 30, 2006 as a result of increased revenues.
Long-term debt decreased to approximately $4,358,000 at June 30, 2006 from
approximately $4,758,000 at September 30, 2005, due to regular principal
pay-downs. Our management believes that it will be able to fund debt service
requirements out of cash generated through operations.
Liquidity and Capital Resources
We require capital principally to fund growth (acquire new Centers), for working
capital needs, and for the retirement of indebtedness. We fund our capital
requirements and working capital needs through a combination of external
financing and credit extended by suppliers.
As of June 30, 2006, we have no material commitments for capital expenditures or
for acquisitions or start-ups.
Operating activities produced approximately $3,876,000 of cash during the nine
months ended June 30, 2006, compared to approximately $3,094,000 during the same
period in the prior fiscal year. This increase is mainly due to an increase in
accounts payable and accrued liabilities.
Investing activities used approximately $2,603,000 during the nine months ended
June 30, 2006 as compared to approximately $1,682,000 during the nine months
ended June 30, 2005. This increase is due to purchases of equipment and building
renovations for our operating sites.
Financing activities utilized approximately $1,512,000 in cash during the nine
months ended June 30, 2006 as compared to approximately $922,000 during the nine
months ended June 30, 2005, as a result of debt reduction. The Company issued
85,825 shares of common stock during the nine months ended June 30, 2006 as a
result of executive management exercising their stock options. The Company
received proceeds of approximately $173,000 as a result of these exercises.
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 $923,000 of our debt at June 30, 2006 was subject to fixed
interest rates and principal payments. Approximately $3,435,000 of our debt at
June 30, 2006 was subject to variable interest rates. Based on the outstanding
amounts of variable rate debt at June 30, 2006, our interest expense on an
annualized basis would increase approximately $34,000 for each increase of one
percent in the prime rate.
We do not utilize financial instruments for trading or other speculative
purposes, nor do we utilize leveraged financial instruments.
ITEM 4
CONTROLS AND PROCEDURES
We conducted an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (Disclosure Controls) as of the end of
the period covered by this Quarterly Report. The controls evaluation was done
under the supervision and with the participation of management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
Attached as exhibits to this Quarterly Report are certifications of the CEO and
the CFO, which are required in accordance with Rule 13a-15(e) of the Exchange
Act. This Controls and Procedures section includes the information concerning
the controls evaluation referred to in the certifications and it should be read
in conjunction with the certifications for a more complete understanding of the
topics presented.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to reasonably assure
that information required to be disclosed in our reports filed under the
Exchange Act, such as this Quarterly Report, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Disclosure Controls are also designed to reasonably assure that such information
is accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Our
Disclosure Controls include components of our internal control over financial
reporting, which consists of control processes designed to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements in accordance with US generally accepted
accounting principles. To the extent that components of our internal control
over financial reporting are included within our Disclosure Controls, they are
included in the scope of our quarterly controls evaluation.
Limitations on the Effectiveness of Controls
The company's management, including the CEO and CFO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent all errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Controls can also be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the controls. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Scope of the Controls Evaluation
The evaluation of our Disclosure Controls included a review of the controls'
objectives and design, the company's implementation of the controls and the
effect of the controls on the information generated for use in this Quarterly
Report. In the course of the controls evaluation, we sought to identify data
errors, controls problems or acts of fraud and confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation is performed on a quarterly basis so that the conclusions of
management, including the CEO and CFO, concerning controls effectiveness can be
reported in our Quarterly Reports on Form 10-Q and to supplement our disclosures
made in our Annual Report on Form 10-K. Many of the components of our Disclosure
Controls are also evaluated on an ongoing basis by our Internal Audit Department
and by other personnel in our Finance organization, as well as our independent
auditors who evaluate them in connection with determining their auditing
procedures related to their report on our annual financial statements and not to
provide assurance on our controls. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls, and to modify them as
necessary; our intent is to maintain the Disclosure Controls as dynamic systems
that change as conditions warrant.
Among other matters, we also considered whether our evaluation identified any
"significant deficiencies" or "material weaknesses" in our internal controls
over financial reporting, and whether the company had identified any acts of
fraud involving personnel with a significant role in our internal controls over
financial reporting. This information was important both for the controls
evaluation generally, and because item 5 in the certifications of the CEO and
CFO require that the CEO and CFO disclose that information to our Board's Audit
Committee and to our independent auditors. In the professional auditing
literature, "significant deficiencies" are referred to as "reportable
conditions," which are deficiencies in the design or operation of controls that
could adversely affect our ability to record, process, summarize and report
financial data in the financial statements. Auditing literature defines
"material weakness" as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and the risk that such
misstatements would not be detected within a timely period by employees in the
normal course of performing their assigned functions. We also sought to address
other control matters in the controls evaluation, and in each case if a problem
was identified, we considered what revision, improvement and/or correction to
make in accordance with our ongoing procedures.
Conclusions
Based upon the controls evaluation, our CEO and CFO have concluded that, subject
to the limitations noted above, as of the end of the period covered by this
Quarterly Report, our Disclosure Controls were effective to provide reasonable
assurance that material information relating to UCI and its consolidated
subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being prepared.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
We are a party to certain litigation that we consider routine
and incidental to our business. Management does not expect the
results of any of these actions to have a material effect on
our business, results of operations or financial condition.
Item 1A Risk Factors
Our Annual Report on Form 10-K filed for the fiscal year ended
September 30, 2005 includes a detailed discussion of our risk
factors. The information presented below amends, updates and
should be read in conjunction with the risk factors and
information disclosed in that Form 10-K.
We are dependent upon the good reputation of our physicians.
The success of our business is dependent upon quality medical
services being rendered by our physicians. As the
patient-physician relationship involves inherent trust and
confidence, any negative publicity, whether from civil
litigation, allegations of criminal misconduct, or forfeiture
of medical licenses, with respect to any of our physicians
and/or our facilities could adversely affect our results of
operations.
Our revenues and profits could be diminished if we lose the
services of key physicians.
Substantially all of our revenues are derived from medical
services performed by physicians. Some of our physicians
produce more revenue than other physicians in our company.
Certain of these higher producing physicians could retire,
become disabled, terminate their employment agreements or
provider contracts, or otherwise become unable or unwilling to
continue generating revenues at the current level, or
practicing medicine within our organization. Patients who have
been served by those physicians could choose to request
medical services from our competitors, reducing our revenues
and profits. Moreover, we may not be able to attract or retain
other qualified physicians into our company to replace the
services of such physicians.
We may become subject to claims of medical malpractice for
which our insurance coverage may not be adequate. Such claims
could materially increase our costs and reduce our
profitability.
Since we are involved in the delivery of healthcare services
to the public, we are exposed to the risk of professional
liability claims. Claims of this nature, if successful, could
result in substantial damage awards to the claimants, which
may exceed the limits of any applicable insurance coverage. We
are currently insured under policies in amounts management
deems appropriate, based upon historical claims and the nature
and risk of our business. Nevertheless, there are exclusions
and exceptions to coverage under each insurance policy that
may make coverage for any claim unavailable, future claims
could exceed the limits of available insurance coverage,
existing insurers could become insolvent and fail to meet
their obligations to provide coverage for such claims, and
such coverage may not always be available with sufficient
limits and at reasonable cost to adequately and economically
insure us in the future. A judgment against us could
materially increase our costs and reduce our profitability.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
This item is not applicable.
Item 3 Defaults upon Senior Securities This item is not applicable.
Item 4 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
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of
the Exchange Act.
31.2 Certification of Chief Financial Officer and Principal Accounting
Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer and Principal Accounting Officer Pursuant to
Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.1 Press Release dated August 9, 2006.
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: August 9, 2006