26
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2006
Commission File Number: 0-13265
UCI MEDICAL AFFILIATES, INC.
(Name of Registrant as Specified in its Charter)
Delaware 59-2225346
(State or Other Jurisdiction of Incorporation or Organization) (IRS
Employer Identification Number)
4416 Forest Drive, Columbia, South Carolina 29206
(Address of Principal Executive Offices, Including Zip Code)
(803) 782-4278
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.05 par value -------
Indicate by check mark whether the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes __ No X
-----
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ___ No X
----
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, and (2) has been subject to the filing
requirements for the past 90 days. Yes X No __
------
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
Indicate by check mark 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 _______ Non-Accelerated Filer X
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No X
The aggregate market value of voting common stock held by non-affiliates of the
registrant on November 8, 2006 was approximately $8,600,938. The registrant has
no non-voting common equity.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Section
12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes X No __
The number of shares outstanding of the registrant's common stock, $.05 par
value, was 9,826,297 at September 30, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the Annual Meeting
of Stockholders, which is expected to be filed within 120 days after the
registrant's fiscal year ended September 30, 2006, are incorporated by reference
into Part III hereof.
UCI MEDICAL AFFILIATES, INC.
INDEX TO FORM 10-K
PART I PAGE
Item 1. Business 3
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 14
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21
Item 9A. Controls and Procedures 21
Item 9B. Other Information 22
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 23
Item 13. Certain Relationships and Related Transactions 23
Item 14. Principal Accountant Fees and Services 23
PART IV
Item 15. Exhibits and Financial Statement Schedules 23
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this Report on Form 10-K 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-K 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
ITEM 1. BUSINESS
General
UCI Medical Affiliates, Inc. ("UCI") is a Delaware corporation incorporated on
August 25, 1982. Operating through its wholly-owned subsidiary, UCI Medical
Affiliates of South Carolina, Inc. ("UCI-SC"), UCI provides nonmedical
management and administrative services for a network of 52 freestanding medical
centers, 51 of which are located throughout South Carolina and one is located in
Knoxville, Tennessee (31 operating as Doctors Care in South Carolina, one as
Doctors Care in Knoxville, Tennessee, 17 as Progressive Physical Therapy
Services in South Carolina, one as Luberoff Pediatrics in South Carolina, one as
Carolina Orthopedic & Sports Medicine in South Carolina and one as Doctors
Wellness Center). We refer to these 52 medical centers as the "centers"
throughout this report.
Organizational Structure
Federal law and the laws of many states, including South Carolina and Tennessee,
generally specify who may practice medicine and limit the scope of relationships
between medical practitioners and other parties. Under such laws, UCI and UCI-SC
are prohibited from practicing medicine or exercising control over the provision
of medical services. In order to comply with such laws, all medical services at
the centers are provided by or under the supervision of Doctors Care, P.A.,
Progressive Physical Therapy, P.A. ("PPT"), Carolina Orthopedic & Sports
Medicine, P.A. ("COSM") or Doctors Care of Tennessee, P.C. (the four together as
the "P.A."), each of which has contracted with UCI-SC to be the sole provider of
all non-medical direction and supervision of the centers operating in its
respective state of organization. We refer to the P.A., UCI, and UCI-SC (the
three together as the "Company") throughout this report as "we", "us", and
"our." The P.A. is organized so that all physician services are offered by the
physicians who are employed by the P.A. Neither UCI nor UCI-SC employ practicing
physicians as practitioners, exert control over their decisions regarding
medical care, or represent to the public that it offers medical services.
UCI-SC has entered into an Administrative Services Agreement with each P.A.
pursuant to which UCI-SC performs all non-medical management of the P.A. and has
exclusive authority over all aspects of the business of the P.A. (other than
those directly related to the provision of patient medical services or as
otherwise prohibited by state law). The non-medical management provided by
UCI-SC includes, among other functions, treasury and capital planning, financial
reporting and accounting, pricing decisions, patient acceptance policies,
setting office hours, contracting with third party payors, and all
administrative services. UCI-SC provides all of the resources (systems,
procedures, and staffing) to bill third party payors or patients and provides
all of the resources for cash collection and management of accounts receivables,
including custody of the lockbox where cash receipts are deposited. From the
cash receipts, UCI-SC pays all physician salaries and operating costs of the
centers and of UCI-SC. Compensation guidelines for the licensed medical
professionals at the P.A. are set by UCI-SC, and UCI-SC establishes guidelines
for selecting, hiring, and terminating the licensed medical professionals.
UCI-SC also negotiates and executes substantially all of the provider contracts
with third party payors. UCI-SC does not loan or otherwise advance funds to the
P.A. for any purpose.
The P.A. and UCI-SC share a common management team. In each case, the same
individuals serve in the same executive offices of each entity.
UCI-SC believes that the services it provides to the P.A. do not constitute the
practice of medicine under applicable laws. Because of the unique structure of
the relationships described above, many aspects of our business operations have
not been the subject of state or federal regulatory interpretation. We have no
assurance that a review of our business by the courts or regulatory authorities
will not result in a determination that could adversely affect our operations or
that the health care regulatory environment will not change so as to restrict
our existing operations or future expansion.
The Centers
The centers are staffed by licensed physicians, physical therapists, other
healthcare providers, medical support staff, and administrative support staff.
The medical support staff includes licensed nurses, certified medical
assistants, laboratory technicians, and registered radiographic technologists.
The centers typically are open for extended hours (weekends and evenings) and
provide out-patient care only. When hospitalization or specialty care is needed,
referrals to appropriate specialists are made. Carolina Orthopaedic and Sports
Medicine is an exception since it does provide in-patient care.
Our centers are broadly distributed throughout the state of South Carolina, and
one is in Knoxville, Tennessee. Twenty-two centers are in the Columbia, South
Carolina region (including seven physical therapy offices, one pediatric office,
one orthopedic office, and one wellness office), thirteen in the Charleston,
South Carolina region (including six physical therapy offices), five in the
Myrtle Beach, South Carolina region, three in the Aiken, South Carolina region
(including one physical therapy office), eight in the Greenville-Spartanburg,
South Carolina region (including three physical therapy offices), and one in
Knoxville, Tennessee.
Medical Services Provided at the Centers
Our centers offer out-patient medical care for treatment of acute, episodic, and
some chronic medical problems. The centers provide a broad range of medical
services that would generally be classified as within the scope of family
practice, primary care, and occupational medicine. We also offer pediatric and
orthopedic medical services at two of our centers, and physical therapy at our
17 physical therapy sites. Licensed medical providers, nurses, and auxiliary
support personnel provide the medical services. The services provided at the
centers include, but are not limited to, the following:
o Routine care of general medical problems, including colds, flu, ear
infections, hypertension, asthma, pneumonia, and other conditions typically
treated by primary care providers;
o Treatment of injuries, such as simple fractures, dislocations, sprains,
bruises, and cuts;
o Minor surgery, including suturing of lacerations and removal of cysts and
foreign bodies;
o Diagnostic tests, such as x-rays, electrocardiograms, complete blood
counts, and urinalyses; and
o Occupational and industrial medical services, including drug testing,
workers' compensation cases, and physical examinations.
Patient Charges and Payments
The fees charged to a patient are determined by the nature of medical services
rendered. Our management believes that the charges at our centers are
significantly lower than the charges of hospital emergency departments and are
generally competitive with the charges of local physicians and other providers
in the area and for the majority of patients the charges are established by
third-party payors.
Our centers accept payment from a wide range of sources. These include patient
payments at time of service (by cash, check, or credit card), patient billing,
and assignment of insurance benefits (including Blue Cross Blue Shield, Workers'
Compensation, and other private insurance). We also provide services for members
of the three largest health maintenance organizations ("HMOs") operating in
South Carolina - BlueChoice HealthPlan ("BCHP"), Cigna/HealthSource South
Carolina, Inc., and Carolina Care Plan.
Revenues generated from billings to Blue Cross Blue Shield of South Carolina
("BCBS") and its subsidiaries, BCHP and Companion Property and Casualty
Insurance Company ("CP&C"), totaled approximately 38%, 40%, and 39% of the
Company's total revenues for fiscal years 2006, 2005, and 2004, respectively.
The following table breaks out our approximate revenue and patient visits by
revenue source for fiscal year 2006:
Percent of Percent of
Payor Patient Visits Revenue
------------------------------- --------------- --------------
16 10
Patient Pay
4
Employer Paid 9
6
HMO 6
13
Workers' Compensation 11
12
Medicare/Medicaid 12
49
Managed Care Insurance 43
6
Other (Commercial Indemnity, 3
Champus, etc.)
--------------- --------------
--------------- --------------
100 100
=============== ==============
In accordance with the Administrative Services Agreements described previously,
UCI-SC, as the agent for each P.A., processes all payments for the P.A. (When
payments for the P.A. are received, they are deposited in accounts owned by each
P.A. and are automatically transferred to a lockbox account owned by UCI-SC.) In
no event are the physicians entitled to receive such payments. The patient mix
in no way affects our management service fees per the Administrative Services
Agreement.
Fee Arrangements
Medical services traditionally have been provided on a fee-for-service basis
with insurance companies assuming responsibility for paying all or a portion of
such fees. The increase in medical costs under traditional indemnity health care
plans has been caused by a number of factors. These factors include: (i) the
lack of incentives on the part of health care providers to deliver
cost-effective medical care; (ii) the absence of controls over the utilization
of costly specialty care physicians and hospitals; (iii) a growing and aging
population that requires increased health care expenditures; and (iv) the
expense involved with the introduction and use of advanced pharmaceuticals and
medical technology.
As a result of escalating health care costs, employers, insurers, and
governmental entities all have sought cost-effective approaches to the delivery
of and payment for quality health care services. HMOs and other managed health
care organizations have emerged as integral components in this effort. HMOs and
managed care organizations enroll members by entering into contracts with
employer groups or directly with individuals to provide a broad range of health
care services for a capitation payment (we have no capitation arrangements at
the present time) or a discounted fee-for-service schedule, with minimal or no
deductibles or co-payments required of the members. HMOs and other managed care
groups, in turn, contract with health care providers like us to administer
medical care to their members. These contracts provide for payment to us on a
discounted fee-for-service basis.
Certain third party payors constantly seek various alternatives for reducing
medical costs, some of which, if implemented, could affect our payment levels.
Our management cannot predict whether changes in present payment methods will
affect payments for services provided by the centers and, if so, whether they
will have an adverse impact upon our business.
Competition and Marketing
All of our centers face competition, in varying degrees, from hospital emergency
rooms, private doctor's offices, other competing freestanding medical centers,
and physical therapy offices. Some of these providers have financial resources
that are greater than our resources. Our centers compete on the basis of
accessibility, including evening and weekend hours, walk-in care, as well as
limited appointment opportunities, and the attractiveness of our state-wide
network to large employers and third party payors. We have implemented
substantial marketing efforts, which currently include radio and television
advertisements. We have also added regional marketing representatives, developed
focused promotional material, and initiated a newsletter for employers promoting
our activities.
Government Regulation
As participants in the health care industry, our operations and relationships
are subject to extensive and increasing regulation by a number of governmental
entities at the federal, state, and local levels.
Limitations on the Corporate Practice of Medicine
Federal law and the laws of many states, including South Carolina and Tennessee,
generally specify who may practice medicine and limit the scope of relationships
between medical practitioners and other parties. Under such laws, business
corporations such as UCI and UCI-SC are prohibited from practicing medicine or
exercising control over the provision of medical services. In order to comply
with such laws, all medical services at our centers are provided by or are under
the supervision of the P.A. pursuant to contracts with UCI-SC. The P.A. is
organized so that the physicians who are employed by the P.A. offer all
physician services. Neither UCI nor UCI-SC employs practicing physicians as
practitioners, exerts control over any physician's decisions regarding medical
care, or represents to the public that it offers medical services.
As described previously, UCI-SC has entered into an Administrative Services
Agreement with each P.A. to perform all non-medical management of the applicable
P.A. and has exclusive authority over all aspects of the business of the P.A.
(other than those directly related to the provision of patient medical services
or as otherwise prohibited by state law). (See Item 1. Business - Organizational
Structure).
Because of the unique structure of the relationships existing between UCI-SC and
each P.A., many aspects of our business operations have not been the subject of
state or federal regulatory interpretation. We have no assurance that a review
by the courts or regulatory authorities of the business formerly or currently
conducted by us will not result in a determination that could adversely affect
our operations or that the healthcare regulatory environment will not change so
as to restrict the existing operations or any potential expansion of our
business.
Third Party Payments
Approximately 12 percent of our revenue is derived from payments made by
government-sponsored healthcare programs (principally, Medicare and Medicaid).
As a result, any change in the laws, regulations, or policies governing
reimbursements could adversely affect our operations. State and federal civil
and criminal statutes also impose substantial penalties, including civil and
criminal fines and imprisonment, on healthcare providers that fraudulently or
erroneously bill governmental or other third-party payors for healthcare
services. We believe we are in compliance with such laws, but we have no
assurance that our activities will not be challenged or scrutinized by
governmental authorities.
Federal Anti-Kickback and Self-Referral Laws
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease, or order of items or services that
are covered by Medicare or state health programs. Although we believe that we
are not in violation of the Anti-kickback Statute or similar state statutes, our
operations do not fit within any of the existing or proposed federal safe
harbors.
The Office of the Inspector General (the "OIG"), the government office that is
charged with the enforcement of the federal Anti-kickback Statute, issued an
advisory opinion regarding a proposed management services contract unrelated to
us that involved a cost plus a percentage of net revenue payment arrangement
("Advisory Opinion 98-4"). Based on its analysis of the intent and scope of the
Anti-kickback Statute, the OIG determined that it could not approve the
arrangement because the structure of the management agreement raised the
following concerns under the Anti-kickback Statute: (i) the agreement might
include financial incentives to increase patient referrals; (ii) the agreement
did not include any controls to prevent over utilization; and (iii) the
percentage billing arrangement may include financial incentives that increase
the risk of abusive billing practices. The OIG opinion did not find that the
management arrangement violated the Anti-kickback Statute, rather that the
arrangement may involve prohibited remuneration absent sufficient controls to
minimize potential fraud and abuse. An OIG advisory opinion is only legally
binding on the Department of Health and Human Services (including the OIG) and
the requesting party and is limited to the specific conduct of the requesting
party because additional facts and circumstances could be involved in each
particular case. Accordingly, we believe that Advisory Opinion 98-4 does not
have broad application to the provision by UCI and UCI-SC of nonmedical
management and administrative services for the centers. We also believe that we
have implemented appropriate controls to ensure that the arrangements between
UCI and UCI-SC and the centers do not result in abusive billing practices or the
over utilization of items and services paid for by federal health programs.
The applicability of the Anti-kickback Statute to many business transactions in
the health care industry, including the service agreements with the centers and
the development of ancillary services by UCI and UCI-SC, has not been subject to
any significant judicial and regulatory interpretation. We believe that although
remuneration for the management services is provided for under our service
agreements with the centers, UCI and UCI-SC are not in a position to make or
influence referrals of patients or services reimbursed under Medicare or state
health programs to the centers. In addition, UCI and UCI-SC is not a separate
provider of Medicare or state health program reimbursed services. Consequently,
we do not believe that the service and management fees payable to UCI and UCI-SC
should be viewed as remuneration for referring or influencing referrals of
patients or services covered by such programs as prohibited by the Anti-kickback
Statute.
The U.S. Congress in the Omnibus Budget Reconciliation Act of 1993 enacted
significant prohibitions against physician referrals. Subject to certain
exemptions, a physician or a member of his or her immediate family is prohibited
from referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. While
we believe we are currently in compliance with such legislation, future
regulations could require us to modify the form of our relationships with
physician groups.
State Anti-Kickback and Self-Referral Laws
Some states have also enacted similar self-referral laws, and we believe that
more states will likely follow. We believe that our practices fit within
exemptions contained in such laws. Nevertheless, in the event we expand our
operations to certain additional jurisdictions, structural and organizational
modifications of our relationships with physician groups might be required to
comply with new or revised state statutes. Such modifications could adversely
affect our operations.
Through UCI's wholly owned subsidiary, UCI-SC, we provide non-medical management
and administrative services to the centers in South Carolina and Tennessee.
South Carolina and Tennessee have adopted anti-kickback and self-referral laws
that regulate financial relationships between health care providers and entities
that provide health care services. The following is a summary of the applicable
state anti-kickback and self-referral laws.
South Carolina
South Carolina's Provider Self-Referral Act of 1993 generally provides that a
health care provider may not refer a patient for the provision of any designated
health service to an entity in which the health care provider is an investor or
has an investment interest. Under our current operations, we do not believe UCI
or UCI-SC is an entity providing designated health services for purposes of the
South Carolina Provider Self-Referral Act. The centers provide all health care
services to patients through employees of the P.A. No provider investors in the
P.A. refer patients to the centers for designated health care services.
Accordingly, under South Carolina law, we believe that the provider
self-referral prohibition would not apply to our centers or operations in South
Carolina.
In addition to self-referral prohibitions, South Carolina's Provider
Self-Referral Act of 1993 also prohibits the offer, payment, solicitation, or
receipt of a kickback, directly or indirectly, overtly or covertly, in cash or
in kind, for referring or soliciting patients. We believe that payment
arrangements are reasonable compensation for services rendered and do not
constitute payments for referrals.
Tennessee
The Tennessee physician conflict of interest/disclosure law provides that
physicians are free to enter into lawful contractual relationships, including
the acquisition of ownership interests in health facilities. The law further
recognizes that these relationships can create potential conflicts of interests,
which shall be addressed by the following: (a) the physician has a duty to
disclose to the patient or referring colleagues such physician's ownership
interest in the facility or therapy at the time of referral and prior to
utilization; (b) the physician shall not exploit the patient in any way, as by
inappropriate or unnecessary utilization; (c) the physician's activities shall
be in strict conformity with the law; (d) the patient shall have free choice
either to use the physician's proprietary facility or therapy or to seek the
needed medical services elsewhere; and (e) when a physician's commercial
interest conflicts so greatly with the patient's interest as to be incompatible,
the physician shall make alternative arrangements for the care of the patient.
We believe that Tennessee's conflict of interest/disclosure law does not apply
to our current operations because UCI and UCI-SC are not providers of health
services. The centers provide all healthcare services to patients through
employees of the P.A. Even if the Tennessee conflict of interest/disclosure law
were to apply, our internal quality assurance/utilization review programs will
help identify any inappropriate utilization by a center.
Tennessee also has a law regulating healthcare referrals. The general rule is
that a physician who has an investment interest in a healthcare entity shall not
refer patients to the entity unless a statutory exception exists. A healthcare
entity is defined as an entity that provides healthcare services. We believe
that UCI and UCI-SC do not fit within the definition of a "healthcare entity"
because UCI and UCI-SC are not providers of healthcare services. The centers
provide all health care services to patients through employees of the P.A. No
provider investors in the P.A. refer patients for designated healthcare services
except the sole physician shareholder of the P.A. We believe that referrals by
the sole shareholder of the P.A. come within a statutory exception. Accordingly,
under Tennessee law, we believe that the provider self-referral prohibition
would not apply to our center or operations in Tennessee.
Tennessee's anti-kickback provision prohibits a physician from making payments
in exchange for the referral of a patient. In addition, under Tennessee law a
physician may not split or divide fees with any person for referring a patient.
The Tennessee Attorney General has issued opinions that determined that the
fee-splitting prohibition applied to management services arrangements. The
Tennessee fee-splitting prohibition contains an exception for reasonable
compensation for goods or services. We believe that the payment arrangements
between UCI and UCI-SC, as applicable, and the centers are reasonable
compensation for services rendered and do not constitute payments for referrals
or a fee-splitting arrangement.
Antitrust Laws
Because each P.A. is a separate legal entity, each may be deemed a competitor
subject to a range of antitrust laws that prohibit anti-competitive conduct,
including price fixing, concerted refusals to deal, and division of market. We
believe we are in compliance with such state and federal laws that may affect
our development of integrated healthcare delivery networks, but we have no
assurance that a review of our business by courts or regulatory authorities will
not result in a determination that could adversely affect our operations.
Healthcare Reform
As a result of the continued escalation of healthcare costs and the inability of
many individuals to obtain health insurance, numerous proposals have been or may
be introduced in the U.S. Congress and in state legislatures relating to
healthcare reform. We have no assurance as to the ultimate content, timing, or
effect of any healthcare reform legislation, nor can we estimate at this time
the impact of potential legislation that may be material on us.
Regulation of Risk Arrangements and Provider Networks
Federal and state laws regulate insurance companies, health maintenance
organizations, and other managed care organizations. Generally, these laws apply
to entities that accept financial risk. Certain of the risk arrangements entered
into by us could possibly be characterized by some states as the business of
insurance. We, however, believe that the acceptance of capitation payments by a
healthcare provider does not constitute the conduct of the business of
insurance. Many states also regulate the establishment and operation of networks
of healthcare providers. Generally, these laws do not apply to the hiring and
contracting of physicians by other healthcare providers. South Carolina and
Tennessee do not currently regulate the establishment or operation of networks
of healthcare providers except where such entities provide utilization review
services through private review agents. We believe that we are in compliance
with these laws in the states in which we currently do business, but we have no
assurance that future interpretations of these laws by the regulatory
authorities in South Carolina, Tennessee, or the states in which we may expand
in the future will not require licensure of our operations as an insurer or
provider network or a restructuring of some or all of our operations. In the
event we are required to become licensed under these laws, the licensure process
can be lengthy and time consuming and, unless the regulatory authority permits
us to continue to operate while the licensure process is progressing, we could
experience a material adverse change in our business while the licensure process
is pending. In addition, many of the licensing requirements mandate strict
financial and other requirements that we may not immediately be able to meet.
Further, once licensed, we would be subject to continuing oversight by and
reporting to the respective regulatory agency.
HIPAA
Under the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"),
the Secretary of Health and Human Services ("HHS") has adopted national data
interchange standards for some types of electronic transactions and the data
elements used in those transactions; adopted security standards to protect the
confidentiality, integrity and availability of patient health information; and
adopted privacy standards to prevent inappropriate access, use and disclosure of
patient health information. In December 2000, HHS published the final privacy
regulations that took effect in April 2003. These regulations restrict the use
and disclosure of individually identifiable health information without the prior
informed consent of the patient. In February 2003, HHS published the final
security regulations, which took effect in April 2005. These regulations mandate
that healthcare facilities implement operational, physical and technical
security measures to reasonably prevent accidental, negligent, or intentional
inappropriate access or disclosure of patient health information. We have made
changes to our business operations to support these regulatory requirements. We
feel that our current operations fully support the requirements to comply with
the above regulations.
Employees
As of September 30, 2006, we had 775 employees (576 on a full-time equivalent
basis). This amount includes 126 medical providers employed by the P.A.
ITEM 1A. RISK FACTORS.
Investing in our common stock involves various risks which are particular to our
company, our industry and our market area. Several risk factors regarding
investing in our common stock are discussed below. This listing should not be
considered as all-inclusive. If any of the following risks were to occur, we may
not be able to conduct our business as currently planned and our financial
condition or operating results could be negatively impacted. These matters could
cause the trading price of our common stock to decline in future periods.
We can provide no assurance that our medical centers will be able to compete
effectively with other existing healthcare providers. The business of providing
healthcare-related services is highly competitive. Many companies, including
professionally managed physician practice management companies like ours, have
been organized to acquire medical clinics, manage the clinics, and employ clinic
physicians at the clinics. Large hospitals, other physician practice centers,
private doctor's offices and healthcare companies, HMOs, and insurance companies
are also involved in activities similar to ours. Because our main business is
the provision of medical services to the general public, our primary competitors
are the local physician practices and hospital emergency rooms in the markets
where we own medical centers. Some of these competitors have longer operating
histories and significantly greater resources than we do. In addition, these
traditional sources of medical services, such as hospital emergency rooms and
private physicians, have had in the past a higher degree of recognition and
acceptance than the medical centers that we operate. We cannot assure you that
we will be able to compete effectively or that additional competitors will not
enter the market in the future.
If a regulatory authority finds that our organization and relationships do not
comply with existing or future laws and regulations, our operations could be
materially adversely affected.
As a participant in the healthcare industry, our operations and relationships
are subject to extensive and increasing regulation by a number of governmental
bodies at the federal, state and local levels. Although we have tried to
structure our business to comply with these existing laws and regulations, we
have had little guidance as to whether we comply or not because of the unique
structure of our business operations. We cannot assure you that a review by the
courts or regulatory authorities of our former or current business will not
result in a determination that could adversely affect our operations. In
particular, we can provide you with no assurance that a court or regulatory body
would find that our structure and business operations comply with the following:
o State and federal laws limiting the provision of medical services by
business corporations;
o State and federal anti-kickback and self-referral laws;
o Antitrust laws; and
o Federal and state laws and regulations governing insurance companies,
HMOs, and other managed care organizations.
We have provided you with a discussion of each of these areas in the section
titled "Government Regulation" under Item 1 above. Furthermore, the laws and
regulations governing the healthcare industry change rapidly and constantly. In
the future, the regulatory environment may change in a manner as to require us
to modify or restrict our existing operations and any proposed expansion of our
business. Restrictions on or modifications of our operations because of a
changing regulatory environment could materially adversely affect our business.
If the laws, regulations, and policies governing government-sponsored healthcare
programs are changed, our operations could be materially adversely affected.
Historically, we derive approximately 12 percent of our revenues from payments
made by government-sponsored healthcare programs (principally, Medicare and
Medicaid). As a result, any change in the laws, regulations, or policies
governing reimbursements could adversely affect our operations. Additionally,
state and federal civil and criminal statutes impose substantial penalties,
including civil and criminal fines and imprisonment, on healthcare providers
that fraudulently or wrongfully bill governmental or other third-party payors
for healthcare services. We believe we are in material compliance with these
laws, but we cannot assure you that our activities will not be challenged or
scrutinized by governmental authorities.
Departures of our key personnel or directors will impair our operations.
We have the following executive officers: D. Michael Stout, M.D., our President,
Chief Executive Officer and Director of Medical Affairs; and Jerry F. Wells,
Jr., CPA, our Executive Vice President, Chief Financial Officer, and Corporate
Secretary. They are instrumental in our organization and are the key management
officials in charge of our daily business operations. We cannot be assured of
the continued service of either of them, and each of them would be difficult to
replace. Additionally, our directors' community involvement, diverse
backgrounds, and extensive business relationships are important to our success.
Because of the nature of our business, we run the risk that we will be unable to
collect the fees that we have earned. Virtually all of our consolidated net
revenue was derived in the past, and we believe will be derived in the future,
from our medical centers' charges for services on a fee-for-service basis.
Accordingly, we assume the financial risk related to collection, including the
potential uncollectability of accounts, long collection cycles for accounts
receivable, and delays attendant to reimbursement by third party payors, such as
governmental programs, private insurance plans and managed care organizations.
Increases in write-offs of doubtful accounts, delays in receiving payments or
potential retroactive adjustments, and penalties resulting from audits by payors
may require us to borrow funds to meet our current obligations or may otherwise
have a material adverse effect on our financial condition and results of
operations.
We are subject to certain special risks in connection with the intangible assets
reported on our balance sheet. As a result of our various acquisition
transactions, intangible assets (net of accumulated amortization) of
approximately $3.4 million have been recorded on our balance sheet as of
September 30, 2006. Because of a change in accounting principles adopted by the
accounting profession, we ceased amortizing our intangible assets in the fiscal
year ending September 30, 2002. Instead, after an initial review of our
intangible assets for impairment in connection with our adoption of this new
accounting principle, we analyze our intangible assets on an annual basis for
impairment of value.
Under these current accounting standards, our net unamortized balance of
intangible assets acquired was not considered to be impaired as of September 30,
2006. In the past, however, we have recorded impairments to our intangible
assets when appropriate. For example, effective September 30, 2001, we recorded
impairment in the approximate amount of $750,000 to reduce our intangible assets
to fair value. We recorded this impairment because we combined two of our
Knoxville, Tennessee locations, and we also had decreased profitability in a
Columbia and Greenville center. Therefore, we deemed that the goodwill
associated with these three locations was impaired and should be written off.
We cannot assure you that we will ever realize the value of our remaining
intangible assets in the future. We may be required to recognize that the value
of our intangible assets has been further impaired in our subsequent annual
reviews upon analyzing our operating results. Any future determination that a
significant impairment has occurred would require us to write-off the impaired
portion of our remaining intangible assets, which could have a material adverse
effect on our results of operations and financial condition.
Changes in accounting standards could impact reported earnings.
The accounting standard setters, including the FASB, SEC and other regulatory
bodies, periodically change the financial accounting and reporting standards
that govern the preparation of our consolidated financial statements. These
changes can be hard to predict and can materially impact how we record and
report our financial condition and results of operations. In some cases, we
could be required to apply a new or revised standard retroactively, resulting in
the restatement of prior period financial statements.
You may have difficulty in selling your shares because of the absence of an
active public market.
On October 20, 1998, our common stock was delisted for trading on the NASDAQ
SmallCap Market. Shortly before our delisting, NASDAQ raised its criteria to
remain listed on the NASDAQ SmallCap Market. Our delisting was a consequence of
our failure to meet the increased requirements for the value of assets for
companies traded on the NASDAQ SmallCap Market.
Because our stock is no longer listed on the NASDAQ SmallCap Market, trading in
our common stock is conducted in the over-the-counter market. Consequently, our
stockholders have found disposing of shares of our common stock and obtaining
accurate quotations of its market value more difficult. In addition, the
delisting makes our common stock substantially less attractive as:
o collateral for loans;
o an investment by financial institutions because of their internal
policies or state legal investment laws;
o consideration to finance any future acquisitions of medical practices;
and,
o an investment opportunity by investors should we desire to raise
additional capital in the future. Although our common stock is currently
eligible for quotation on the over-the-counter bulletin board, we have been
informed that the NASD may be considering higher standards for permitting
quotations of securities on the bulletin board. If the NASD does raise its
standards, the over-the-counter bulletin board may no longer be available as a
trading market for our stockholders as well. Consequently, potential investors
should only invest in our common stock if they have a long-term investment
intent. If an active market does not develop and a shareholder desires to sell
its shares of our common stock, the shareholder will be required to locate a
buyer on its own and may not be able to do so.
The absence of a public market makes the price of our common stock particularly
volatile and susceptible to market fluctuations. Trading in our common stock has
historically been very limited, and we cannot assure you that an active trading
market for our common stock will ever develop or be sustained. Because of the
limited trading liquidity in our common stock, the market price of our common
stock has been vulnerable to significant fluctuations in response to very
limited market trading in our shares. Sales of substantial amounts of our common
stock, or the availability of substantial amounts of our common stock for future
sale, could adversely affect the prevailing market price of our common stock.
The market price of our common stock will remain subject to significant
fluctuations in response to these factors as well as in response to operating
results and other factors affecting stock prices generally. The stock market in
recent years has experienced price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price of our common stock in the future.
Shareholders may have difficulty selling their shares because our common stock
is a "penny stock" and is subject to special SEC rules that make transactions in
our common stock burdensome for broker-dealers.
As long as the trading price of our common stock is less than $5.00 per share,
our common stock will be considered to be a "penny stock" under SEC rules.
Generally, a "penny stock" is any non-NASDAQ equity security that has a market
price of less than $5.00 per share. If a penny stock is traded in the secondary
market, these SEC rules require the broker-dealer to provide to the purchaser a
disclosure schedule explaining the penny stock market and the risks associated
with it. These SEC rules also require broker-dealers to abide by various sales
practices if they sell penny stocks to persons other than established customers
and accredited investors. For these penny stock transactions, the broker-dealer
must make a special determination that the investment in the penny stock is
suitable for the purchaser and receive the purchaser's written consent to the
purchase before the transaction. The additional burdens that these SEC rules
impose upon broker-dealers may discourage broker-dealers from effecting
transactions in our common stock and could severely limit a shareholder's
ability to sell its shares in the secondary market.
The market price of our common stock may fluctuate widely in the future.
The trading price of our common stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in our operating results, material
announcements made by us from time to time, governmental regulatory action,
general conditions in the healthcare industry, or other events, or factors, many
of which are beyond our control. In addition, the stock market has experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of many healthcare services companies and which have often been
unrelated to the operating performance of these companies. Our operating results
in future quarters may be below the expectations of securities analysts and
investors. In this event, the price of our common stock would likely decline,
perhaps substantially.
The market price of our common stock may decline should a substantial number of
shares of our common stock be offered for sale on the open market.
Sales of substantial amounts of our common stock in the public market, or the
perception that these sales could occur, could adversely affect prevailing
market prices of our common stock and could impair our future ability to raise
capital through the sale of our equity securities. We are unable to predict the
effect, if any, that future sales of our common stock or the availability of our
common stock for sale may have on the market price of our common stock from time
to time.
Anti-takeover provisions in our certificate of incorporation and state corporate
laws could deter or prevent take-over attempts by a potential purchaser of our
common stock and deprive you of the opportunity to obtain a takeover premium for
your shares.
In many cases, stockholders receive a premium for their shares when a company is
purchased by another. Various provisions in our certificate of incorporation and
bylaws and state corporate laws could deter and make it more difficult for a
third party to bring about a merger, sale of control, or similar transaction
without approval of our board of directors. These provisions tend to perpetuate
existing management. As a result, our shareholders may be deprived of
opportunities to sell some or all of their shares at prices that represent a
premium over market prices.
These provisions, which could make it less likely that a change in control will
occur, include:
provisions in our certificate of incorporation establishing three
classes of directors with staggered terms, o which means that only
one-third of the members of the board of directors is elected each year and
each
director serves for a term of three years.
provisions in our certificate of incorporation authorizing the board of
directors to issue a series of o preferred stock without shareholder action,
which issuance could discourage a third party from attempting to acquire, or
make it more difficult for a third party to acquire, a controlling interest in
us.
We do not expect to pay dividends on our common stock in the foreseeable future.
We have no source of income other than dividends that we receive from our
operating subsidiary, UCI-SC. Our ability to pay dividends to shareholders will
therefore depend on the subsidiary's ability to pay dividends to us. The
subsidiary intends to retain future earnings, if any, for use in the operation
and expansion of our business. Consequently, we do not plan to pay dividends
until we recover any losses that we have incurred and become profitable.
Additionally, our future dividend policy will depend on our earnings, financial
condition, and other factors that our Board of Directors considers relevant.
Shareholders may suffer dilution in their interests in our common stock if we
offer additional shares of common stock in the future or if certain third
parties exercise their option rights to acquire additional shares of our common
stock.
There is no present intent to offer for sale additional shares of common stock.
However, we cannot ensure that, in the future, we will not have to seek
additional capital by offering and selling additional shares of common stock in
order to continue to operate, acquire additional medical practices in our
current or other markets, or achieve successful operations. If it becomes
necessary to raise additional capital to support our operations, there is no
assurance that additional capital will be available to us, that additional
capital can be obtained on terms favorable to us, or that the price of any
additional shares that may be offered by us in the future will not be less than
the subscription price paid by our shareholders. The effect on existing
stockholders of sales of additional shares of common stock cannot presently be
determined.
As of September 30, 2006, BlueChoice HealthPlan "BCHP", a wholly-owned
subsidiary of BCBS, owned in the aggregate 6,726,019 shares, or approximately
68.45 percent, of our outstanding common stock. Under various agreements among
BCHP and us, we have given these companies the right at any time to purchase
from us the number of shares of our voting stock as is necessary for BCBS and
its affiliated entity, as a group, to obtain and then maintain an aggregate
ownership of 48 percent of our outstanding voting stock. To the extent the BCBS
subsidiary exercises its right in conjunction with a sale of voting stock by us,
the price to be paid by the BCBS subsidiary is the average price to be paid by
the other purchasers in that sale. Otherwise, the price is the average closing
bid price of our voting stock on the ten trading days immediately preceding the
election by the BCBS subsidiary to exercise its purchase rights. Consequently,
to the extent the BCBS subsidiary elects to exercise any or a portion of its
rights under these anti-dilution agreements, the sale of shares of common stock
to the BCBS subsidiary will have the effect of further reducing the percentage
voting interest in us represented by a share of the common stock.
Certain affiliates have the ability to exercise substantial influence.
The substantial ownership of our common stock by the BCBS subsidiary and other
of our affiliates may provide them with the ability to exercise substantial
influence in the election of directors and other matters submitted for approval
by our stockholders. As a result, other stockholders may be unable to
successfully oppose matters that are presented by these entities for action by
stockholders, or to take actions that are opposed by these entities. The
ownership by these entities may also have the effect of delaying, deterring, or
preventing a change in our control without the consent of these entities. These
effects could reduce the value of our stock. In addition, sales of common stock
by these entities could result in another stockholder obtaining control over us.
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.
Our business is concentrated in specific geographic locations and could be
affected by a depressed economy in these areas.
We provide our services to areas in South Carolina and Tennessee. A stagnant or
depressed economy in these states could affect all of our markets and adversely
affect our business and results of operations.
Terrorist attacks, such as the attacks that occurred in New York and Washington,
D.C. on September 11, 2001, and other attacks, acts of war, or military actions,
such as continued military actions in Iraq or elsewhere, may adversely affect
our operating results and financial condition.
The attacks of September 11, 2001 contributed to major instability in the U.S.
and other financial markets. Future terrorist attacks, the military response,
and other future developments, may adversely affect prevailing economic
conditions. These developments, depending on their magnitude, could have a
material adverse effect on our operating results and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
There are no comments from the staff of the SEC regarding our periodic or
current reports under the Exchange Act that remain unresolved.
ITEM 2. PROPERTIES
All of our center's facilities are leased. The properties are generally located
on well-traveled major highways, with easy access. Each property offers free,
off-street parking immediately adjacent to the center. One center is leased from
a physician employee of the P.A.
Our centers are broadly distributed throughout the state of South Carolina, and
one is in Knoxville, Tennessee. Twenty-two centers are in the Columbia, South
Carolina region (including seven physical therapy offices, one pediatric office,
one orthopedic office, and one wellness office), thirteen in the Charleston,
South Carolina region (including six physical therapy offices), five in the
Myrtle Beach, South Carolina region, three in the Aiken, South Carolina region
(including one physical therapy office), eight in the Greenville-Spartanburg,
South Carolina region (including three physical therapy offices), and one in
Knoxville, Tennessee. Our corporate offices are located on the second floor of
one of the Columbia, South Carolina locations. The centers are all free-standing
buildings in good repair.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various claims, legal activities, and complaints arising in
the normal course of business. In the opinion of management and legal counsel,
aggregate liabilities, if any, arising from legal actions would not have a
material adverse effect on our financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Until October 19, 1998, UCI's common stock was traded on the NASDAQ SmallCap
Market under the symbol UCIA. On October 20, 1998, UCI's common stock was
delisted for trading on the NASDAQ SmallCap Market as a consequence of UCI's
failure to meet certain quantitative requirements under the NASD's expanded
listing criteria. Trading in UCI's common stock is currently conducted in the
over-the-counter market. The prices set forth below indicate the high and low
bid prices reported on the over-the-counter bulletin board. The quotations
reflect inter-dealer prices without retail markup, markdown, or commission and
may not necessarily reflect actual transactions.
Bid Price
--------------------------
High Low
--------- ---------
Fiscal Year Ended September 30, 2006
1st quarter (10/01/05 - 12/31/05) $3.40 $2.61
2nd quarter (01/01/06 - 03/31/06) 3.65 3.30
3rd quarter (04/01/06 - 06/30/06) 3.55 3.30
4th quarter (07/01/06 - 09/30/06) 3.36 2.25
Fiscal Year Ended September 30, 2005
1st quarter (10/01/04 - 12/31/04) $2.30 $1.08
2nd quarter (01/01/05 - 03/31/05) 2.02 1.55
3rd quarter (04/01/05 - 06/30/05) 4.02 1.99
4th quarter (07/01/05 - 09/30/05) 3.24 2.87
As of September 30, 2006, there were 253 stockholders of record of UCI's common
stock, excluding individual participants in security position listings.
UCI has not paid cash dividends on its common stock since its inception and has
no plans to declare cash dividends in the foreseeable future.
During the fiscal year ended September 30, 2006, 85,825 shares of common stock
were issued by UCI upon the exercise of options which were registered under the
Securities Act.
No equity securities of UCI were repurchased by UCI during the fiscal year ended
September 30, 2006.
Equity Compensation Plan Information
The following table provides information about our common stock authorized for
issuance under all of our existing equity compensation plans as of September 30,
2006.
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans [excluding
outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a)]
- ---------------------------------- ----------------------- ----------------------- -------------------------
- ---------------------------------- ----------------------- ----------------------- -------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 240,650 $2.27 --
Equity compensation plans not
approved by security holders
-- -- --
----------------------- ----------------------- -------------------------
----------------------- ----------------------- -------------------------
Total 240,650 $2.27 --
======================= ======================= =========================
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
For the year ended September 30,
-----------------------------------------------------------------------------
----------- -- ------------- -- ------------ -- ------------ -- -------------
2006 2005 2004 2003 2002
----------- ------------- ------------ ------------ -------------
Revenues $63,672 $56,642 $47,474 $43,518 $38,527
Net income 2,710 *7,541 3,214 2,375 1,394
Basic earnings per share .28 .77 .33 .25 .14
Diluted earnings per share .27 .76 .33 .25 .14
Basic weighted average number of
shares outstanding 9,784 9,740 9,718 9,650 9,651
Diluted weighted average number of
shares outstanding 9,859 9,879 9,718 9,650 9,651
*See Note 8 to the accompanying financial statements, which disclose the tax
benefit of $4,500,000 that was recorded during the year ended September 30,
2005.
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------- ---------- ---- ---------- -- ------------ -- ------------- -- -------------
----------------------------------------------------------------------------
At September 30, (in thousands)
----------------------------------------------------------------------------
------------ -- ---------- -- ------------ -- ------------- -- -------------
2006 2005 2004 2003 2002
------------ ---------- ------------ ------------- -------------
Working capital $ 7,364 $ 6,690 $3,228 $ 2,925 $ 2,515
Property and equipment, net 8,749 6,013 4,845 4,028 3,765
Total assets 28,126 24,292 18,105 15,859 14,517
Long-term debt, including current portion 3,973 4,758 3,504 3,327 4,079
Stockholders' equity 16,246 13,321 5,780 2,566 190
See Note 1 to the accompanying financial statements, which discusses the impact
of accounting changes on the information reflected above in selected financial
data and the reclassification of certain prior year amounts.
ITEM 7. 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 bad debt expense.
Consideration of impairment of intangible assets -
We evaluate the recovery of the carrying amount of excess of cost over fair
value of assets acquired by determining if a permanent impairment has occurred.
This evaluation is done annually on September 30th of each year 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. At such time
as impairment is determined, the intangible assets are written off during that
period.
Valuation reserve on net deferred tax assets -
We record a valuation allowance to reduce our deferred tax assets to the amount
that management considers is more likely than not to be realized. Based upon our
current financial position, results from operations, and our forecast of future
earnings, we do not believe we currently need a valuation allowance.
Company structure -
Our consolidated financial statements include the accounts of UCI and
UCI-SC. Such consolidation is required under FIN 46, as revised. We believe that
the P.A. is a viable interest entity (VIE) as defined by FIN 46, as revised.
However, if the P.A. is subsequently determined not to be a VIE, the P.A. would
continue to be consolidated with UCI under the guidance of EITF 97-2,
"Application of FASB Statement No. 94 and A.P.B. 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 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 FASB Statement No. 94 (Consolidation of All
Majority-Owned Subsidiaries), and FIN No. 46, as revised (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 September 30,
2006 and 2005, the P.A. employed 126 and 110 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.
Chapter 11 Bankruptcy Filing
On November 2, 2001, we filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the District of South Carolina (the "Bankruptcy Court"). By August 8,
2002, the Bankruptcy Court confirmed each of our Plans of Reorganization (the
"Plans"), as amended, and we have, therefore, emerged from Chapter 11 protection
of the Court.
Comparison of Fiscal Year Ended September 30, 2006 to Fiscal Year Ended
September 30, 2005 and Comparison of Fiscal Year Ended September 30, 2005 to
Fiscal Year Ended September 30, 2004
Revenues of $63,672,000 in fiscal year 2006 reflected an increase of
approximately 12% from the fiscal year 2005 revenues of $56,642,000, which
reflected an increase of approximately 19% from the amount reported for fiscal
year 2004. The following reflects revenue trends from fiscal year 2002 through
fiscal year 2006:
For the year ended September 30, (in thousands)
--------------------------------------------------------------------------------------------
------------ ----- ------------- ----- ------------ ----- --------------- --- --------------
2006 2005 2004 2003 2002
------------ ------------- ------------ --------------- --------------
------------
Revenues $63,672 $ 56,642 $ 47,474 $ 43,518 $ 38,527
Operating Costs 48,175 42,310 36,733 33,264 31,069
Operating Margin 15,497 14,332 10,741 10,254 7,458
The increase in revenues from fiscal year 2005 to fiscal year 2006 is attributed
to the opening of six new centers, an increase in the number of patient visits
and improved revenue per patient.
The number of our centers remained constant at 36 from September 30, 2001 to
September 30, 2002. The number of centers in operation increased from 36 to 41
during fiscal year 2003. We added seven physical therapy offices (two in the
Greenville-Spartanburg, South Carolina region, three in the Columbia, South
Carolina region, and two in the Charleston, South Carolina region), and we
closed two offices during fiscal year 2003 (one in the Tennessee region and one
in the Greenville-Spartanburg, South Carolina region). The number of centers
increased from 41 to 43 during fiscal year 2004. We added two physical therapy
offices (one in the Columbia, South Carolina region and one in the Charleston,
South Carolina region). The number of centers in operation increased from 43 to
47 during fiscal year 2005. We added three Doctors Care offices (two in the
Columbia, South Carolina region and one in the Myrtle Beach, South Carolina
region) and one physical therapy office (in the Charleston, South Carolina
region). The number of centers in operation increased from 47 to 52 during
fiscal year 2006. We added two Doctors Care offices (one in the Columbia, South
Carolina region and one in the Charleston, South Carolina region), three
physical therapy offices (two in the Columbia, South Carolina region and one in
the Charleston, South Carolina), and one Wellness center (in the Columbia, South
Carolina region), and we closed one physical therapy office (in the Columbia,
South Carolina region).
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 BlueChoice HealthPlan ("BCHP") and
Companion Property & Casualty Insurance Company ("CP&C"), wholly owned
subsidiaries of Blue Cross Blue Shield of South Carolina ("BCBS"). BCBS, through
BCHP, is a primary stockholder of UCI. Including our arrangement with BCHP and
CP&C, we now participate in four HMOs and are the primary care "gatekeeper" for
more than 6,000 lives in fiscal year 2006; 7,000 lives in fiscal year 2005; and
8,000 lives in fiscal year 2004. As of September 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.
(See Footnote 14 to audited consolidated Financial Statements for information on
related parties.)
Sustained revenues in fiscal years 2006, 2005, and 2004 also reflect our
occupational medicine and industrial health services (these revenues are
referred to as "employer paid" and "workers' compensation" on the table depicted
below). Approximately 17% of our total revenue was derived from these
occupational medicine services in fiscal year 2006, while 16% and 18% were
derived in fiscal years 2005 and 2004, respectively.
Patient encounters were 588,000 in fiscal year 2006, 553,000 in fiscal year
2005, and 506,000 in fiscal year 2004. The increase in the number of patient
visits was mainly a result of an intense advertising campaign throughout South
Carolina, an increase in provided services, the opening of six new centers, and
continued successful efforts at enhanced customer service and patient
satisfaction.
No new significant competition entered our market during fiscal years 2006,
2005, and 2004.
The increase in the operating margin in 2006 of approximately 8% was largely the
result of increased revenues. The increase in the operating margin during fiscal
year 2005 was also due to increased revenues.
The following table breaks out our revenue and patient visits by revenue source
for fiscal years 2006, 2005, and 2004.
Percent of Percent of
Patient Visits Revenue
--------------------- ------------------------
2006 2005 2004 2006 2005 2004
------- ------ ------ ------- ------ ---------
16 16 18 10 11 12
Patient Pay
9 9 9 4 4 5
Employer Paid
6 6 8 6 7 9
HMO
11 10 10 13 12 13
Workers' Compensation
12 14 12 12 11 8
Medicare/Medicaid
43 42 40 49 52 49
Managed Care Insurance
3 3 3 6 3 4
Other (Commercial Indemnity, Champus, etc.)
------- ------ ------ ------- ------ ---------
------- ------ ------ ------- ------ ---------
100 100 100 100 100 100
======= ====== ====== ======= ====== =========
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.
Bad debt expense, a component of operating costs, was approximately $3,181,000
(or approximately 5% of revenue) for fiscal year 2006, $3,108,000, (or
approximately 5% of revenue) for fiscal year 2005, and $2,359,000 (or
approximately 5% of revenue) for fiscal year 2004. The collection percentage for
the established South Carolina centers has remained constant for the past 5
years.
General and administrative expenses include all salaries, benefits, supplies and
other operating expenses not specifically related to the day-to-day operations
of the centers. General and administrative expenses increased to $9,237,000 in
fiscal year 2006 as compared to $7,791,000 in fiscal year 2005. The increase is
the result of increased advertising expenses and administrative salary expenses.
Depreciation and amortization expense increased slightly to $1,254,000 in fiscal
year 2006 as compared to $1,019,000 in fiscal year 2005. Net interest expense
decreased to $492,000 in fiscal year 2006 down from $549,000 in fiscal year
2005. This decrease was the result of more favorable terms and a lower interest
rate under the loan agreement we entered into during fiscal year 2005.
Operating costs include office supplies, staff salary, medical supplies, and
other day-to-day expenses that are required to operate the centers. Operating
expenses increased to $48,175,000 in fiscal year 2006 as compared to $42,310,000
in fiscal year 2005. The increase is primarily the result of increases in staff
salary, medical supplies, and office supplies.
We evaluate the valuation allowance regarding deferred tax assets on a more
likely than not basis. In determining that it was more likely than not that the
recorded deferred tax asset would be realized, our management considered the
following:
o Recent historical operating results.
o The budgets and forecasts that management and the Board of Directors have
adopted.
o The ability to utilize net operating losses NOLs prior to their expiration.
o The potential limitation of NOL utilization in the event of a change in
ownership.
o The generation of future taxable income in excess of income reported on the
consolidated financial statements.
Deferred tax assets and liabilities are recorded based on the difference between
the financial statement and tax bases of assets and liabilities as measured by
the enacted tax rates which are anticipated to be in effect when these
differences reverse. The deferred tax provision is the result of the net change
in the deferred tax assets to amounts expected to be realized. Valuation
allowances are provided against deferred tax assets when the Company determines
it is more likely than not that the deferred tax asset will not be realized.
During the quarter ended December 31, 2004, our management determined that it
was more likely than not that the recorded deferred tax asset was realizable.
Therefore, we recorded an adjustment of approximately $4,500,000 based upon our
current financial position and results from operations, and our forecast of the
next twelve months. During the year ended September 30, 2005, the Company
recorded income tax expense of approximately $1,931,000. Tax expense of
$1,931,000 netted against the $4,500,000 tax adjustment resulted in a tax
benefit of $2,569,000 for the year ended September 30, 2005. During the year
ended September 30, 2006, the Company recorded income tax expense of
approximately $1,804,000.
Results of Operations for the Three Months Ended September 30, 2006 as Compared
to the Three Months Ended September 30, 2005:
Revenues of $16,432,000 for the quarter ending September 30, 2006 reflect an
increase of approximately eleven percent from those of the quarter ending
September 30, 2005. The increase is attributed to an increase in the number of
patient visits and improved revenue per patient.
Patient encounters increased to 151,000 in the fourth quarter of fiscal year
2006 from 139,000 in the fourth quarter of fiscal year 2005.
The 16 percent increase in operating costs reflects routine salary adjustments
and increases in advertising costs.
The slight increase in net interest expense was the result of a new capital
lease agreement.
Financial Condition at September 30, 2006 and September 30, 2005
Cash and cash equivalents decreased by approximately $428,000 from September 30,
2005 to September 30, 2006.
Accounts receivable increased from $8,778,000 at September 30, 2005 to
$10,628,000 at September 30, 2006. This increase was attributable to the
increase in revenues during fiscal year 2006.
The increase in property and equipment is the result of opening six additional
operating sites, medical equipment purchases, and facility renovations of
approximately $3,536,000.
Long-term debt decreased from $4,758,000 at September 30, 2005 to $3,973,000 at
September 30, 2006. The decrease is a result of regular debt payments offset by
a new capital lease.
Liquidity and Capital Resources
We require capital principally to fund growth (opening 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 September 30, 2006, we have no material commitments for capital
expenditures or for acquisitions or start-ups.
Operating activities produced approximately $5,068,000 of cash during the fiscal
year 2006, compared with approximately $3,750,000 during the fiscal year 2005.
This increase was the result of an increase in accounts payable and accrued
expenses offset by increases in inventory and accounts receivable.
Investing activities used $4,009,000 of cash during fiscal year 2006 and
$2,528,000 of cash during fiscal year 2005. This increase is due to purchases of
equipment and building renovations for our operating sites.
Financing activities utilized approximately $1,488,000 in cash during the fiscal
year 2006 as compared to approximately $794,000 in cash during the fiscal year
2005. This increase is primarily the result of regular principal payments offset
by proceeds received from the issuance of common stock and additional borrowings
on the line of credit.
Overall, our current assets exceed our current liabilities at September 30, 2006
by $7,364,000 or a current ratio of 2.08 as compared to $6,690,000 or a current
ratio of 2.29 at September 30, 2005.
Contractual Obligations
The following table summarizes our contractual obligations as of September 30,
2006:
Payment Due By Period
--------------------------------------------------------------------------------------------
---------------- -- --------------- -- -------------- --- -------------- -- ----------------
Contractual Obligations Total < 1 Year 1-3 Years 3-5 Years > 5 Years
- --------------------------- ---------------- --------------- -------------- -------------- ----------------
- --------------------------- ---------------- --------------- -------------- -------------- ----------------
Long-term Debt $ 3,519,410 $ 902,120 $2,577,753 $ 39,537 --
Capital Leases 453,285 127,582 297,024 28,679 --
Operating Leases 38,462,603 3,474,786 6,472,927 5,594,995 22,919,895
Please refer to the financial statement Footnotes No. 9 and 12.
ITEM 7A. 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 $804,000 of our debt at September 30, 2006 was subject to fixed
interest rates. Approximately $3,169,000 of our debt at September 30, 2006 was
subject to variable interest rates. Based on the outstanding amounts of variable
rate debt at September 30, 2006, our interest expense on an annualized basis
would increase approximately $32,000 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements on Page 25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 Annual 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 Annual 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 Annual 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 annual 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 error 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 Annual
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 control over
financial reporting, and whether the company had identified any acts of fraud
involving personnel with a significant role in our internal control 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 standards define "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
Annual 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.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K is incorporated by reference
from the information contained in the Definitive Proxy Statement for the Annual
Meeting of Stockholders, which is expected to be filed within 120 days after the
registrant's fiscal year ended September 30, 2006.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference
from the information contained in the Definitive Proxy Statement for the Annual
Meeting of Stockholders, which is expected to be filed within 120 days after the
registrant's fiscal year ended September 30, 2006.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 of Form 10-K is incorporated by reference
from the information contained in the Definitive Proxy Statement for the Annual
Meeting of Stockholders, which is expected to be filed within 120 days after the
registrant's fiscal year ended September 30, 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference
from the information contained in the Definitive Proxy Statement for the Annual
Meeting of Stockholders, which is expected to be filed within 120 days after the
registrant's fiscal year ended September 30, 2006.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference
from the information contained in the Definitive Proxy Statement for the Annual
Meeting of Stockholders, which is expected to be filed within 120 days after the
registrant's fiscal year ended September 30, 2006.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Consolidated Financial Statements
The consolidated financial statements listed on the Index to Financial
Statements on page 25 are filed as part of this report on Form 10-K.
(a)(2) Financial Statement Schedules Required by Item 8
(a)(3) Exhibits
A listing of the exhibits to the Form 10-K is set forth on the
Exhibit Index that immediately precedes such exhibits in this Form
10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant, UCI Medical Affiliates, Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
UCI MEDICAL AFFILIATES, INC. Date
----
/s/ D. Michael Stout, M.D. December 22, 2006
- --------------------------
D. Michael Stout, M.D.
Its: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ D. Michael Stout, M.D. President and December 22, 2006
- --------------------------
D. Michael Stout, M.D. Chief Executive Officer
/s/ Jerry F. Wells, Jr., CPA Executive Vice President and December 22, 2006
- -----------------------------
Jerry F. Wells, Jr., CPA Chief Financial Officer
/s/ Harold H. Adams, Jr., CPCU Director December 22, 2006
- ------------------------------
Harold H. Adams, Jr., CPCU
/s/ Charles M. Potok Director December 22, 2006
- --------------------
Charles M. Potok
/s/ Thomas G. Faulds Director December 22, 2006
- --------------------
Thomas G. Faulds
/s/ John M. Little, Jr., M.D., MBA Director December 22, 2006
- ----------------------------------
John M. Little, Jr., M.D., MBA
/s/ Timothy L. Vaughn, CPA Director December 22, 2006
- --------------------------
Timothy L. Vaughn, CPA
/s/ Joseph A. Boyle, CPA Director December 22, 2006
- ------------------------
Joseph A. Boyle, CPA
/s/ Jean E. Duke, CPA Director December 22, 2006
- ---------------------
Jean E. Duke, CPA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Report of Independent Registered Public Accounting Firm......................................................26
Consolidated Balance Sheets at September 30, 2006 and 2005...................................................27
Consolidated Statements of Income for each of the three years
ended September 30, 2006............................................................................28
Consolidated Statements of Changes in Stockholders' Equity
for each of the three years ended September 30, 2006................................................29
Consolidated Statements of Cash Flows for each of the three years
ended September 30, 2006............................................................................30
Notes to Consolidated Financial Statements................................................................31-42
Schedule II, Valuation and Qualifying Accounts, is omitted because the
information is included in the financial statements and notes.
Report of Independent Registered Public Accounting Firm
--------
To the Board of Directors and
Stockholders of UCI Medical Affiliates, Inc.
Columbia, South Carolina
We have audited the accompanying consolidated balance sheets of UCI Medical
Affiliates, Inc. and its subsidiaries (the "Company") as of September 30, 2006
and 2005, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2006. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 2006 and 2005, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
2006, in conformity with accounting principles generally accepted in the United
States of America.
/S/ SCOTT MCELVEEN, L.L.P.
Columbia, South Carolina
November 22, 2006
..
SIGNED ORIGINAL ON SCOTT MCELVEEN, L.L.P. LETTERHEAD
IS ON FILE IN THE CORPORATE OFFICE OF
UCI MEDICAL AFFILIATES, INC.
UCI Medical Affiliates, Inc.
Consolidated Balance Sheets
as of September 30,
-------------------------------------
2006 2005
----------------- ----------------
Assets
Current assets
Cash and cash equivalents $ 533,209 $
961,610
Accounts receivable, less allowance for doubtful accounts
of $3,628,558 and $2,949,127 10,627,543 8,778,025
Inventory 876,609 623,941
Deferred taxes 1,582,190 1,319,457
Prepaid expenses and other current assets 545,298 192,279
----------------- ----------------
Total current assets 14,164,849 11,875,312
Property and equipment, less accumulated depreciation of
$12,580,568 and $11,327,037 8,748,974 6,013,236
Deferred taxes 440,232 2,104,606
Restricted investments 1,343,432 892,509
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 36,272 14,278
----------------- ----------------
Total Assets $ $
28,125,701 24,291,883
================= ================
Liabilities and Stockholders' Equity
Current liabilities
Line of credit $ $
279,373 --
Current portion of long-term debt 1,029,702
1,259,315
Accounts payable 2,297,493 882,988
Accrued salaries and payroll taxes 2,109,588 1,979,048
Accrued compensated absences 342,993 320,434
Other accrued liabilities 741,291 743,862
----------------- ----------------
----------------- ----------------
Total current liabilities 6,800,440 5,185,647
----------------- ----------------
----------------- ----------------
Long-term liabilities
Accounts payable 414,231 1,115,711
Deferred tax liability 346,707 278,211
Deferred compensation liability 1,374,840 892,509
Long-term debt, net of current portion 2,942,993 3,498,790
----------------- ----------------
Total long-term liabilities 5,078,771 5,785,221
----------------- ----------------
----------------- ----------------
Total Liabilities 11,879,211 10,970,868
----------------- ----------------
Commitments and contingencies (Note 16)
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 (6,174,769) (8,885,139)
----------------- ----------------
Total Stockholders' Equity 16,246,490 13,321,015
----------------- ----------------
Total Liabilities and Stockholders' Equity $ $
28,125,701 24,291,883
================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
UCI Medical Affiliates, Inc.
Consolidated Statements of Income
for the three years ended September 30,
-----------------------------------------------------------------
2006 2005 2004
------------------ ----------------- ------------------
Revenues $ 63,672,049 $ 56,641,717 $ 47,473,880
Operating costs 48,175,190 42,309,660 36,732,966
------------------ ----------------- ------------------
Operating margin 15,496,859 14,332,057 10,740,914
General and administrative expenses 9,236,861 7,791,365 6,250,282
Depreciation and amortization 1,253,694 1,019,481 1,013,114
------------------ ----------------- ------------------
Income from operations 5,006,304 5,521,211 3,477,518
------------------ ----------------- ------------------
------------------ ----------------- ------------------
Other expense
Interest expense, net of interest income (692,581)
(491,797) (548,855)
------------------ ----------------- ------------------
Income before income taxes 4,514,507 4,972,356 2,784,937
Income tax benefit (expense) 2,568,960 429,000
(1,804,137)
------------------ ----------------- ------------------
------------------ ----------------- ------------------
Net income $ 2,710,370 $ 7,541,316 $ 3,213,937
================== ================= ==================
================== ================= ==================
Basic earnings per share $.28 $.77 $.33
================== ================= ==================
================== ================= ==================
Basic weighted average common shares outstanding 9,783,502 9,740,472 9,717,849
================== ================= ==================
Diluted earnings per share $.27 $.76 $.33
================== ================= ==================
================== ================= ==================
Diluted weighted average common shares outstanding 9,858,959 9,879,345 9,717,849
================== ================= ==================
The accompanying notes are an integral part of these
consolidated financial statements.
UCI Medical Affiliates, Inc.
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended September 30, 2006
Common Stock
-------------------------------
Accumulated
Shares Par Value Paid-In Capital Deficit Total
-------------- ------------- ------------------ ------------------- -------------
-------------- ------------- ------------------ ------------------- -------------
Balance, September 30, 2003 9,650,472 $482,524 $21,723,630 $(19,640,392) $2,565,762
Net income -- -- -- 3,213,937 3,213,937
Conversion of warrants
into common stock 90,000 4,500 (4,500) -- --
-------------- ------------- ------------------ ------------------- -------------
-------------- ------------- ------------------ ------------------- -------------
Balance, September 30, 2004 9,740,472 $487,024 $21,719,130 $(16,426,455) $5,779,699
-------------- ------------- ------------------ ------------------- -------------
-------------- ------------- ------------------ ------------------- -------------
Net income -- -- -- 7,541,316 7,541,316
-------------- ------------- ------------------ ------------------- -------------
Balance, September 30, 2005 9,740,472 $487,024 $21,719,130 $(8,885,139) $13,321,015
-------------- ------------- ------------------ ------------------- -------------
-------------- ------------- ------------------ ------------------- -------------
Net income -- -- -- 2,710,370 2,710,370
Exercised stock options 85,825 4,291 210,814 -- 215,105
-------------- ------------- ------------------ ------------------- -------------
-------------- ------------- ------------------ ------------------- -------------
Balance, September 30, 2006 9,826,297 $491,315 $21,929,944 $(6,174,769) $16,246,490
============== ============= ================== =================== =============
The accompanying notes are an integral part of these
consolidated financial statements.
UCI Medical Affiliates, Inc.
Consolidated Statements of Cash Flows
for the three years ended September 30,
-----------------------------------------------------
2006 2005 2004
-------------- ---------------- ---------------
Operating activities:
Net income $ 2,710,370 $ 7,541,316 $ 3,213,937
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on accounts receivable 3,181,008 3,108,369 2,358,571
Depreciation and amortization 1,253,694 1,019,481 1,013,114
Deferred taxes 1,512,037 (2,645,852) (500,000)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (5,030,526) (4,503,775) (2,866,767)
(Increase) decrease in inventory (5,495)
(252,668) 27,874
(Increase) decrease in prepaid expenses and other current assets (39,122)
(353,019) 74,509
Increase (decrease) in accounts payable and accrued expenses 1,565,033 (1,174,981)
541,280
Deferred compensation 482,331
336,231 193,859
-------------- ---------------- ---------------
-------------- ---------------- ---------------
Cash provided by operating activities 5,068,260 3,749,803 3,942,746
-------------- ---------------- ---------------
Investing activities:
Purchases of property and equipment (3,536,147) (2,187,421) (1,830,643)
(Increase) decrease in other assets
(21,994) (3,956) (2,500)
Additions to restricted investments (450,923)
(336,231) (193,459)
-------------- ---------------- ---------------
-------------- ---------------- ---------------
Cash used in investing activities (4,009,064) (2,527,608) (2,027,002)
-------------- ---------------- ---------------
Financing activities:
Proceeds from issuance of common stock 173,205 -- --
Net borrowings on line of credit 279,373 -- --
Borrowings on term note agreement -- 4,300,000
2,750,000
(Payments) borrowings on term note (990,930) (3,045,792) (2,572,789)
Payments on other long-term obligations (949,245) (2,048,326) (2,242,557)
-------------- ---------------- ---------------
Cash used in financing activities (1,487,597) (794,118) (2,065,346)
-------------- ---------------- ---------------
Increase (decrease) in cash and cash equivalents (428,401) 428,077 (149,602)
Cash and cash equivalents at beginning of year 961,610 533,533 683,135
-------------- ----------------
-------------- ---------------- ---------------
Cash and cash equivalents at end of year $ 533,209 $ 961,610 $ 533,533
============== ================ ===============
============== ================ ===============
Supplemental disclosure of non-cash financing activities:
Capital lease obligations incurred to finance equipment purchases $ 453,285 $ -- $ --
============== ================ ===============
============== ================ ===============
Tax benefit for fair market value of exercised common stock $ 41,900 $ -- $ --
============== ================ ===============
The accompanying notes are an integral part of these
consolidated financial statements.
UCI MEDICAL AFFILIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
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 Services Agreement with each P.A. As a
consequence of the nominee shareholder arrangement and the Administrative
Services 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 Services
Agreements have an initial term of forty years. According to FASB Statement No.
94 (Consolidation of All Majority-Owned Subsidiaries), and 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.
On May 27, 2005, UCI-SC entered into an Administrative Services Agreement with
Progressive Physical Therapy, P.A., a South Carolina professional corporation
("PPT"). A copy of the Administrative Services Agreement was previously filed
with the Securities and Exchange Commission. Pursuant to the agreement, PPT will
serve as the operating entity for the physical therapy services managed and
administered by UCI-SC.
On May 27, 2005, UCI-SC entered into an Administrative Services Agreement with
Carolina Orthopedic & Sports Medicine, P.A., a South Carolina professional
corporation ("COSM"). A copy of the Administrative Services Agreement was
previously filed with the Securities and Exchange Commission. Pursuant to the
agreement, COSM will serve as the operating entity for the orthopedic and sports
medicine services managed and administered by UCI-SC.
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.
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.
Accounts Receivable
Accounts receivable are primarily amounts due under fee-for-service contracts
from third-party payors, such as insurance companies, self-insured employers and
patients and government-sponsored health care programs. Concentration of credit
risk related to accounts receivable is limited by number, diversity and
geographic dispersion of the business units managed by the Company, as well as
by the large number of patients and payors, including the various governmental
agencies in the state. The accounts receivable balances serve as collateral for
certain of the Company's financing arrangements.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses,
which may result from the inability of customers to make required payments. The
allowance is based 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 may be having financial difficulties. If
economic, industry, or specific customer business trends worsen beyond earlier
estimates, the allowance for doubtful accounts is increased by recording
additional bad debt expense.
Stocked Based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised), "Share-Based Payment"
("SFAS 123(R)"). SFAS 123(R) replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). SFAS 123(R) requires compensation costs
related to share-based payment transactions to be recognized ratably in the
financial statements over the period that an employee provides service in
exchange for the award. Public companies are required to adopt, and the Company
has adopted effective October 1, 2005, the new standard using a modified
prospective method. Under the modified prospective method, companies are allowed
to record compensation cost for new and modified awards over the related vesting
period of such awards prospectively and record compensation cost prospectively
on the nonvested portion, at the date of adoption, of previously issued and
outstanding awards over the remaining vesting period of such awards. No change
to prior periods presented is permitted under the modified prospective method.
At September 30, 2006, the Company had no nonvested stock options outstanding in
any of its plans. Prior to October 1, 2005, the Company, as permitted under SFAS
123, applied the intrinsic value method under APB 25, and related
interpretations in accounting for its stock-based compensation plan.
The fair value at the date of grant of the stock option is estimated using the
Black-Scholes option-pricing model based on assumptions noted in a table below.
The dividend yield is based on estimated future dividend yields. The risk-free
rate for periods within the contractual term of the share option is based on the
U.S. Treasury yield curve in effect at the time of grant. Expected volatilities
are generally based on historical volatilities. The expected term of share
options granted is generally derived from historical experience. Compensation
expense is recognized on a straight-line basis over the stock option vesting
period.
Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between
the financial statement and tax bases of assets and liabilities as measured by
the enacted tax rates which are anticipated to be in effect when these
differences reverse. The deferred tax provision is the result of the net change
in the deferred tax assets to amounts expected to be realized. Valuation
allowances are provided against deferred tax assets when the Company determines
it is more likely than not that the deferred tax asset will not be realized.
Cash and Cash Equivalents
The Company considers all short-term deposits with a maturity of three months or
less at acquisition date to be cash equivalents. At September 30, 2006, the
Company had cash deposits in excess of federally insured limits in the
approximate amount of $508,000.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein
are based on pertinent information available to management as of September 30,
2006 and 2005. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and current estimates of fair value may differ significantly from the
amounts presented herein. The fair values of the Company's financial instruments
are estimated based on current market rates and instruments with the same risk
and maturities. The fair values of cash and cash equivalents, accounts
receivable, restricted investments, or the related deferred compensation
liability, accounts payable, notes payable and payables to related parties
approximate the carrying values of these financial instruments.
Restricted Investments
Restricted investments represent mutual fund investments to fund the Company's
deferred compensation liability and are classified as trading. Realized gains
and losses are determined on the basis of first-in, first-out (FIFO) cost of the
securities. Both realized and unrealized gains and losses are recorded in the
Company's statement of income.
Segment Information
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 52 freestanding medical centers, 51 of which are located throughout
South Carolina and one is located in Knoxville, Tennessee (31 operating as
Doctors Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, 17
as Progressive Physical Therapy Services in South Carolina, one as Luberoff
Pediatrics in South Carolina, one as Carolina Orthopedic and Sports Medicine in
South Carolina, and one as Doctors Wellness Center).
Reclassification
Certain amounts in the 2004 and 2005 consolidated financial statements have been
reclassified to conform to the 2006 presentation. During years presented prior
to 2006, the Company elected to net restricted investments against the deferred
compensation liability. Such reclassifications did not change net income or
equity as previously reported.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement 109," which clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FAS 109, "Accounting for Income Taxes." FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006, which will be the Company's fiscal year beginning October 1,
2007. The Company is currently evaluating the impact of adopting FIN 48.
On September 13, 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108 ("SAB 108"), which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
SAB 108 is effective for the first fiscal year ending after November 15, 2006,
which will be the Company's fiscal year beginning October 1, 2007. The adoption
of this statement is not expected to have a material impact on the Company's
financial position or results of operations.
Also in September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement",
effective for the Company's fiscal year beginning October 1, 2008. This
Statement defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. This Statement does not
require any new fair value measurements, but simplifies and codifies related
guidance within GAAP. This Statement applies under other accounting
pronouncements that require or permit fair value measurements. The Company is
currently reviewing this pronouncement, but the Company believes it will not
have a material impact on the Company's financial statements.
NOTE 3. MEDICAL SUPPLIES AND DRUG 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; therefore, management does only an
annual physical inventory count and does not maintain a perpetual inventory
system.
NOTE 4. INTANGIBLES
In June 2001, the FASB 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 2006, 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 ("SFAS") 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. All
warrants and options to purchase shares of common stock were excluded from the
calculation at September 30, 2006, 2005, and 2004, respectively, because of
their antidilutive effect.
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost.
Depreciation is provided principally by the straight-line method over the
estimated useful lives of the assets, ranging from one to forty years.
Maintenance, repairs and minor renewals are charged to expense. Major renewals
or betterments, which prolong the life of the assets, are capitalized.
Upon disposal of depreciable property, the asset accounts are reduced by the
related cost and accumulated depreciation. The resulting gains and losses are
reflected in the consolidated statements of operations.
Property and equipment consists of the following at September 30:
September 30, 2006 September 30, 2005
---------------------------------- -----------------------------
Useful Life
Range Accumulated Accumulated
(in years) Cost Depreciation Cost Depreciation
-
------------- --------------- ---------------- --------------- ---------------
------------- --------------- ---------------- --------------- ---------------
N/A $ 66,000 $ $ 66,000 $
Land -- --
5-40 412,750 152,924 412,750 140,242
Building
5-15 5,971,365 2,491,652 4,272,788 2,128,779
Leasehold Improvements
1-10 2,864,826 1,868,418 2,499,647 1,652,536
Furniture & Fixtures
1-5 1,402,274 1,304,436 1,402,274 1,304,436
EDP - Companion
1-10 2,678,969 1,498,506 1,889,263 1,259,914
EDP - Other
5-10 5,857,624 3,867,742 5,057,944 3,582,397
Medical Equipment
1-10 1,993,854 1,332,792 1,672,027 1,202,848
Other Equipment
Autos 3-10 81,880 64,098 67,580 55,885
--------------- ---------------- --------------- ---------------
$21,329,542 $12,580,568 $17,340,273 $11,327,037
Totals
=============== ================ =============== ===============
At September 30, 2006 and 2005, capitalized leased equipment included above
amounted to approximately $690,000 and $119,000, net of accumulated amortization
of $135,000 and $73,000, respectively.
Depreciation expense totaled $1,253,694, $1,019,481, and $1,013,114, for the
years ended September 30, 2006, 2005 and 2004, respectively.
NOTE 7. ADVERTISING COSTS
Advertising and marketing costs are expensed as incurred. Advertising and
marketing costs were approximately $1,364,000, $1,068,000, and $681,000,
respectively, for each of the three fiscal years ended September 30, 2006, 2005
and 2004, respectively.
NOTE 8. INCOME TAXES
The components of the provision (benefit) for income taxes for each of the three
years ended September 30 are as follows:
2006 2005 2004
------------- -------------- -------------
-------------- -------------
Current:
$ 105,000 $ 100,000 $ 71,000
Federal
229,000 -- --
State
------------- -------------- -------------
------------- -------------- -------------
334,000 100,000 71,000
-------------- -------------
------------- -------------- -------------
Deferred:
1,470,137 (2,668,960) (500,000)
Federal
-- -- --
State
------------- -------------- -------------
------------- -------------- -------------
1,470,137 (2,668,960) (500,000)
------------- -------------- -------------
------------- -------------- -------------
$1,804,137 $(2,568,960) $(429,000)
Total income tax provision (benefit)
============= ============== =============
Deferred taxes result from temporary differences in the recognition of certain
items of income and expense, and the changes in the valuation allowance
attributable to deferred tax assets.
At September 30, 2006, 2005, and 2004, the Company's deferred tax assets
(liabilities) are as follows:
2006 2005 2004
------------- ------------- ------------
------------- ------------
Accounts receivable $ 1,387,923 $ $
1,128,041 905,937
Other
349,775 285,509 --
Operating loss carry forwards 79,048 1,948,362 4,160,049
Fixed assets (156,203) (129,265) (226,118)
Goodwill (346,707) (278,211)
--
Accruals 361,879 191,416 155,098
------------- ------------
------------- ------------- ------------
$ 1,675,715 $ 4,994,966
$3,145,852
============= ============= ============
============= ============
Valuation allowance $ $ $ 4,494,966
-- --
============= ============= ============
The principal reasons for the differences between the consolidated income tax
(benefit) expense and the amount computed by applying the statutory federal
income tax rate of 35% to pre-tax income were as follows for the years ended
September 30:
2006 2005 2004
------------- ------------- -------------
$1,580,078 $1,760,583 $
Tax at federal statutory rate 974,728
Effect on rate of:
215,403 (62,808)
Amortization of goodwill --
16,710 8,294 7,350
Non deductible expenses
207,349 441,726 (27,186)
State income taxes & other
(4,994,966) (1,321,084)
Change in valuation allowance --
------------- ------------- -------------
$1,804,137 $(2,568,960) $
(429,000)
============= ============= =============
At September 30, 2006, the Company has net tax operating loss (NOL)
carryforwards of approximately $207,000.
In determining that it was more likely than not that the recorded deferred tax
asset would not be realized, management of the Company considered the following:
o Recent historical operating results.
o The budgets and forecasts that management and the Board of Directors had
adopted for the next fiscal year.
o The ability to utilize NOL's prior to their expiration.
o The potential limitation of NOL utilization in the event of a change in
ownership.
o The generation of future taxable income in excess of income reported on the
consolidated financial statements.
During the year ended September 30, 2005, management determined that it was more
likely than not that the recorded deferred tax asset was realizable. Therefore,
a $4,500,000 adjustment was recorded to reduce the valuation allowance based
upon the Company's current financial position and results of operations, and the
forecast of the next twelve months.
NOTE 9. FINANCING ARRANGEMENTS
Line of Credit - During 2006, the Company entered into an agreement with a
financial institution providing for maximum borrowings of $500,000. As of
September 30, 2006, the Company had outstanding borrowings on the line of
approximately $279,000, and approximately $221,000 was available. Pricing is
prime rate plus a $150 fee (prime rate is 8.25% as of September 30, 2006).
Borrowings are collateralized by the Company's accounts receivable and the
maturity date of this credit line is August 16, 2009.
Long-term debt consists of the following at September 30:
2006 2005
----------------- ------------------
Term note in the amount of $4,300,000 dated June 16, 2005, payable in monthly
installments including interest at a rate of prime plus 1/2% (prime rate is
8.25% as of September 30, 2006) of $94,977 from July 2005 to June
2006 and $76,033 from July 2006 to June 2009, maturing June 16, 2009, $ 3,041,976 $
collateralized by substantially all assets of the Company. 4,032,907
Note payable in the amount of $1,600,000 with monthly installments of
$13,328 including interest at 8% through January 1, 2009 collateralized by 350,376
accounts receivable from patients and leasehold interests and the 476,733
guarantee of the P.A.
Note payable to a financial institution in the amount of $280,000, dated May 11,
2002, with monthly installments including interest at a rate of prime plus 1.5%
(prime rate is 8.25% as of September 30, 2006) of $2,377 from May 2005 to June
2010, with a final payment of all remaining principal and accrued interest due
in June 2010, collateralized by a 127,058
mortgage on one of the Company's medical facilities with a net book value 153,250
of approximately $405,000.
----------------- ------------------
3,519,410
Subtotal 4,662,890
Capitalized lease obligation with monthly payments of $13,949 through 453,285
December 2009. 95,215
----------------- ------------------
------------------
3,972,695
4,758,105
(1,029,702) (1,259,315)
Less, current portion
----------------- ------------------
------------------
$ 2,942,993 $
Total Long-term Debt 3,498,790
================= ==================
Aggregate maturities of notes payable and capital leases are as follows:
Notes Payable Capital Leases
Year ending September 30: Total
---------------- ---------------- ----------------
$ 902,120 $127,582 $1,029,702
2007
912,773 141,061 1,053,834
2008
1,664,980 155,963 1,820,943
2009
39,537 28,679 68,216
2010
-- -- --
2011
---------------- ---------------- ----------------
---------------- ---------------- ----------------
$3,519,410 $453,285 $3,972,695
================ ================ ================
During fiscal year 2005, the Company borrowed $4,300,000 under a loan agreement
with Branch Banking & Trust Company of South Carolina to refinance an existing
term loan at more favorable terms and a lower interest rate in order the pay the
balance in full for all pre-petition taxes due to the Internal Revenue Service
and the South Carolina Department of Revenue. The agreement contains certain
restrictive covenants including restricting the purchase of capital assets in
excess of $1,500,000 during any fiscal year and requiring net worth of
$4,500,000 as of fiscal year end 2005 and increasing by at least the net profits
after taxes less approved dividends over the prior fiscal year end result each
fiscal year thereafter. The Company was in violation of certain of its debt
covenants. The covenant requires that annual aggregate capital expenditures not
exceed $2,200,000. The Company has received a letter from the lender that has
waived the violation through September 30, 2006.
NOTE 10. EMPLOYEE BENEFIT PLANS
The Company has an employee savings plan (the "Savings Plan") that qualifies as
a deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
The Company matches 100% of each employee's contribution up to a maximum of 6%
of the employee's earnings. The Company's matching contributions were
approximately $830,000, $547,000, and $439,000, in fiscal years 2006, 2005, and
2004, respectively.
During June 1997, the Company's Board of Directors approved the UCI/Doctors Care
Deferred Compensation Plan (the "Plan") for key employees of the Company with an
effective date of June 1998. To be eligible for the Plan, key employees must
have completed three years of full-time employment and hold a management or
physician position that is required to obtain specific operational goals that
benefit the Company as a whole. Under the Plan, key employees may defer a
portion of their after tax earnings with the Company matching three times the
employee's contribution percentage. The Company's matching contributions were
approximately $233,000, $185,000, and $130,000, in fiscal years 2006, 2005 and
2004, respectively. The Company establishes and maintains investment accounts to
fund the Deferred Compensation Plan. The deferred compensation liability
increases or decreases based on the amounts deferred plus or minus earnings or
losses on the deemed investment selections of the participants less any payments
to participants.
During the fiscal year ended September 30, 1984, the Company adopted an
incentive stock plan (the "1984 Plan"). The 1984 Plan expired under its terms in
December 1993. At September 30, 2006, there were no stock options outstanding
under the 1984 Plan.
Pursuant to the Company's incentive stock option plan adopted in 1994, (the
"1994 Plan"), "incentive stock options", within the meaning of Section 422 of
the Internal Revenue Code, may be granted to employees of the Company. The 1994
Plan provides for the granting of options for the purchase of 750,000 shares at
100% of the fair market value of the stock at the date of grant (or for 10% or
higher shareholders, at 110% of the fair market value of the stock at the date
of grant). Options granted under the 1994 Plan vest at a rate of 33% in each of
the three years following the grant. Vested options become exercisable one year
after the date of grant and can be exercised within ten years of the date of
grant, subject to earlier termination upon cessation of employment. At September
30, 2006, stock options for 86,825 shares were outstanding under the 1994 Plan.
During the fiscal year ended September 30, 1996, the Company adopted a
Non-Employee Director Stock Option Plan (the "1996 Non-Employee Plan"). The 1996
Non-Employee Plan provides for the granting of options to two non-employee
directors for the purchase of 10,000 shares of the Company's common stock at the
fair market value as of the date of grant. Under this plan, 5,000 options were
issued to Harold H. Adams, Jr. and 5,000 options were issued to Russell J.
Froneberger. These options were exercisable during the period commencing on
March 20, 1999 and ending on March 20, 2006. At September 30, 2006, stock
options under the 1996 Non-Employee Plan had expired.
During the fiscal year ended September 30, 1997, the Company adopted a
Non-Employee Director Stock Option Plan (the "1997 Non-Employee Plan"). The 1997
Non-Employee Plan provides for the granting of options to three non-employee
directors for the purchase of 20,000 shares of the Company's common stock at the
fair market value as of the date of grant. Under this plan, 5,000 options were
issued to Thomas G. Faulds, Ashby Jordan, M.D., and Charles M. Potok. These
options are exercisable during the period commencing on March 28, 2000 and
ending on March 28, 2007. At September 30, 2006, stock options for 10,000 shares
were outstanding under the 1997 Non-Employee Plan, all of which were
exercisable.
NOTE 11. STOCKHOLDERS' EQUITY
The following table summarizes activity and weighted average fair value of
options granted for the three previous fiscal years for the Company's four stock
option plans.
1996 1997
1984 1994 Non-Employee Non-Employee
Stock Options Plan Plan Plan Plan
- ----------------------------- ---------- ------------- ------------ -------------
---------- ------------- ------------ -------------
Outstanding at 09/30/03 -- 326,650 5,000 10,000
Exercisable at 09/30/03 -- 326,650 5,000 10,000
Forfeited FY 03/04 -- -- -- --
---------- ------------- ------------ -------------
---------- ------------- ------------ -------------
Outstanding at 09/30/04 -- 326,650 5,000 10,000
---------- ------------- ------------ -------------
---------- ------------- ------------ -------------
Exercisable at 09/30/04 -- 326,650 5,000 10,000
Forfeited FY 04/05 -- (101,000) -- --
---------- ------------- ------------ -------------
---------- ------------- ------------ -------------
Outstanding at 09/30/05 -- 225,650 5,000 10,000
---------- ------------- ------------ -------------
---------- ------------- ------------ -------------
Exercisable at 09/30/05 -- 225,650 5,000 10,000
Exercised at 09/30/06 -- (85,825) -- --
Forfeited FY 05/06 -- (53,000) (5,000) --
---------- ------------- ------------ -------------
---------- ------------- ------------ -------------
Outstanding at 09/30/06 -- 86,825 -- 10,000
========== ============= ============ =============
The Company has not granted options under any plans during fiscal years 2006,
2005 and 2004, and there have been 85,825 shares exercised during 2006 and no
shares exercised during 2005 or 2004.
The following table summarizes the weighted average exercise price of stock
options exercisable at the end of each of the three previous fiscal years:
1996 1997
Weighted Average Non-Employee Plan Non-Employee
Exercise Price 1984 Plan 1994 Plan Plan
- ------------------------------------- ------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Outstanding at 09/30/03 N/A $ 2.63 $ 3.50 $ 2.50
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Exercisable at 09/30/03 N/A $ 2.63 $ 3.50 $ 2.50
Granted FY 03/04 -- -- -- --
Exercised FY 03/04 -- -- -- --
Forfeited FY 03/04 N/A -- -- --
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Outstanding at 09/30/04 N/A $ 2.63 $ 3.50 $ 2.50
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Exercisable at 09/30/04 N/A $ 2.63 $ 3.50 $ 2.50
Granted FY 04/05 -- -- -- --
Exercised FY 04/05 -- -- -- --
Forfeited FY 04/05 N/A -- -- --
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Outstanding at 09/30/05 N/A $ 2.63 $ 3.50 $ 2.50
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Exercisable at 09/30/06 -- 2.63 3.50 2.50
Granted FY 05/06 -- -- -- --
Exercised FY 05/06 -- -- -- --
Forfeited FY 05/06 -- -- (3.50) --
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Outstanding at 09/30/06 N/A $ 2.63 $ -- $ 2.50
============= ============= ================== ==================
The following table summarizes options outstanding and exercisable by price
range as of September 30, 2006:
Options Outstanding Options Exercisable
- -------------------- --- --------------------------------------------------- -- ------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Price Outstanding Life Price Exercisable Price
- -------------------- --------------- --------------- ------------ -------------- ------------
73,825 .94 $1.94 73,825 $1.94
$1.00 to $1.99
23,000 .86 $2.58 23,000 $2.58
$2.00 to $2.99
--------------- --------------
96,825 96,825
=============== ==============
All of the stock options had fully vested prior to October 1, 2000, and
therefore, there was no compensatory effect for the three years ended September
30, 2006. The Company has historically calculated the fair value of stock
options using the Black-Scholes option-pricing model.
- -------------------------------------------
- -------------------------------------------
During the year ended September 30, 1997, warrants for the purchase of shares of
the Company's common stock were issued, ranging in exercise price from $1.9375
to $5.00. Fifty-five thousand (55,000) warrants were issued in connection with
services to be rendered by an investor relations advisor to the Company. During
the years ended September 30, 1998 and September 30, 1999, the Company granted
to the convertible debenture holder warrants to purchase up to thirty-five
thousand (35,000) and ten thousand (10,000) warrant shares, respectively, as
part of a $1,500,000 convertible subordinated debenture. The Stock Purchase
Warrant allows for 65,000 shares in total. In addition, during the year ended
September 30, 1999, the Company granted to Allen & Company Incorporated,
financial advisors, warrants to purchase 150,000 shares of common stock. No
warrants were issued during the three fiscal years ended September 30, 2006,
2005, and 2004. On March 1, 2004, the company issued 90,000 shares of common
stock to Allen & Company, Incorporated upon the exercise of its warrants issued
in March of 1999.
The following is a schedule of warrants issued and outstanding during the years
ended September 30, 2006, 2005 and 2004:
Number of Exercise Date Expiration
Warrants Price Exercisable Date
-------------- --------------- --------------- --------------
--------------
Outstanding at 09/30/03 150,000 $1.00 03/03/99 03/03/04
--------------
--------------
Activity during FY 03/04:
Exercised (150,000) $1.00 03/03/99 03/03/04
Expired --
--------------
--------------
Outstanding at 09/30/04 N/A
--------------
--------------
Activity during FY 04/05:
Exercised --
Expired --
--------------
--------------
Outstanding at 09/30/05 N/A
--------------
--------------
Activity during FY 05/06:
Exercised --
Expired --
--------------
--------------
Outstanding at 09/30/06 N/A
==============
NOTE 12. LEASE COMMITMENTS
UCI-SC leases office and medical center space under various operating lease
agreements. Certain operating leases provide for escalation payments, exclusive
of renewal options.
Future minimum lease payments under noncancellable operating leases with a
remaining term in excess of one year as of September 30, 2006, are as follows:
Operating
Leases
----------------
Year ending September 30:
2007 $3,474,786
2008 3,374,683
2009 3,098,244
2010 2,991,492
2011 2,603,503
22,919,895
Thereafter
----------------
$38,462,603
Total minimum lease payments
================
Total rental expense under operating leases for fiscal years 2006, 2005 and 2004
was approximately $3,043,000, $2,700,000, and $2,600,000, respectively.
NOTE 13. RELATED PARTY TRANSACTIONS
Relationship between UCI-SC and the P.A.
Pursuant to agreements between UCI-SC and the P.A., UCI-SC provides
non-medical management services and personnel, facilities, equipment and other
assets to the medical centers. UCI-SC guarantees the compensation of the
physicians employed by the P.A. The agreements also allow UCI-SC to negotiate
contracts with HMOs and other organizations for the provision of medical
services by the P.A. physicians. Under the terms of the agreement, the P.A.
assigns all revenue generated from providing medical services to UCI-SC after
paying physician salaries and the cost of narcotic drugs held by the P.A. The
P.A. is owned by D. Michael Stout, M.D., who is also the Chief Executive Officer
for UCI and UCI-SC.
Relationship between the Company and Blue Cross Blue Shield of South Carolina
Blue Cross Blue Shield of South Carolina (BCBS) owns 100% of BlueChoice
HealthPlan ("BCHP"), Companion Property & Casualty Insurance Company ("CP&C")
and Companion Technologies, Inc. ("CT"). At September 30, 2006, BCHP owned
6,107,838 shares of the Company's outstanding common stock and CP&C owned
618,181 shares of the Company's outstanding common stock, which combine to
approximately 68% of the Company's outstanding common stock.
Facility Leases
Several of the medical center facilities operated by UCI-SC are leased or were
leased from entities owned or controlled by certain principal shareholders,
board members, and/or members of the Company's management. Total lease payments
made by UCI-SC under these leases during the fiscal years ended September 30,
2006, 2005 and 2004 were approximately $96,000 for each year.
One medical facility operated by UCI-SC is leased from a physician employee of
the P.A. Total lease payments made by UCI-SC under these leases during the
Company's fiscal years ended September 30, 2006, 2005 and 2004, were
approximately $61,000 for each year.
Other Transactions with Related Parties
At September 30, 2006, BCBS and its subsidiaries control 6,726,019 shares, or
approximately 68% of the Company's outstanding common stock. The shares acquired
by BlueChoice HealthPlan ("BCHP") and Companion Property & Casualty Insurance
Company ("CP&C") from the Company were purchased pursuant to stock purchase
agreements and were not registered. BCHP and CP&C have the right to require
registration of the stock under certain circumstances as described in the
agreement. BCBS and its subsidiaries have the option to purchase as many shares
as may be necessary for BCBS to obtain ownership of 48% of the outstanding
common stock of the Company in the event that the Company issues additional
stock to other parties (excluding shares issued to employees or directors of the
Company).
The Company enters into capital lease obligations with CT to purchase computer
equipment, software, and billing and accounts receivable upgrades. The total of
all lease obligations to CT recorded at September 30, 2006 is $453,000.
During the Company's fiscal year ended September 30, 1994, UCI-SC entered into
an agreement with CP&C pursuant to which UCI-SC, through the P.A., acts as the
primary care provider for injured workers of firms carrying worker's
compensation insurance through CP&C.
UCI-SC, through the P.A., provides services to members of a health maintenance
organization ("HMO") operated by BlueChoice HealthPlan ("BCHP") who have
selected the P.A. as their primary care provider.
During fiscal years 2006, 2005 and 2004, the Company paid BCBS and its
subsidiaries approximately $28,000, $15,000, and $32,000, respectively, in
interest.
Revenues generated from billings to BCBS and its subsidiaries totaled
approximately 38%, 40%, and 39%, of the Company's total revenues for fiscal
years 2006, 2005 and 2004, respectively.
NOTE 14. CONCENTRATION OF CREDIT RISK
In the normal course of providing health care services, the Company may extend
credit to patients without requiring collateral. Each individual's ability to
pay balances due the Company is assessed and reserves are established to provide
for management's estimate of uncollectible balances. Approximately 11% of the
Company's year end accounts receivable balance is due from Blue Cross Blue
Shield of South Carolina. No other single payor represents more than 5% of the
year end balance.
Future revenues of the Company are largely dependent on third-party payors and
private insurance companies, especially in instances where the Company accepts
assignment.
NOTE 15. COMMITMENTS AND CONTINGENCIES
The Company is insured for professional and general liability on a claims-made
basis, with additional tail coverage being obtained when necessary.
The Company provides health benefits to its employees under a self-insured
health plan. Claims are paid by the Company up to an individual and aggregate
amount limit of $60,000 and $1,170,912. Claims in excess of these limits are
covered by a third-party insurance contract. Health benefit claims of
approximately $1,361,000, $1,230,000, and $923,000, respectively, for each of
the three fiscal years ended September 30, 2006, are included in these financial
statements. The Company has accrued estimated incurred but not reported health
claims of approximately $201,000 and $267,000 as of September 30, 2006 and
September 30, 2005, respectively.
In the ordinary course of conducting its business, the Company becomes involved
in litigation, claims, and administrative proceedings. Certain litigation,
claims, and proceedings were pending at September 30, 2006, and management
intends to vigorously defend the Company in such matters.
The health care industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by health care
providers.
Violations of these laws and regulations could result in expulsion from
government health care programs together with the imposition of significant
fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with
fraud and abuse laws and regulations as well as other applicable government laws
and regulations; however, the possibility for future governmental review and
interpretation exists.
NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information
The Company made interest payments of approximately $492,000, $549,000, and
$693,000, in the years ended September 30, 2006, 2005, and 2004, respectively.
The Company paid approximately $455,000 and $96,000 of income tax payments in
the years ended September 30, 2006 and 2005, respectively.
NOTE 17. QUARTERLY FINANCIAL DATA (unaudited)
The quarterly data below is based on the Company's fiscal periods.
Fiscal Year Ended September 30, 2006
-----------------------------------------------------------------------
--------------- -- -------------- --- -------------- -- ---------------
12/31/2005 03/31/2006 06/30/2006 09/30/2006
--------------- -------------- -------------- ---------------
---------------
Revenues $14,632,000 $16,971,000 $15,637,000 $16,432,000
Operating Costs 11,010,000 12,500,000 11,657,000 13,008,000
Operating Margin 3,622,000 4,471,000 3,980,000 3,424,000
Net Income after Provision for
Income Taxes 796,000 1,007,000 748,000 159,000
Basic Earnings per Common Share .08 .10 .08 .02
Diluted Earnings per Common Share .08 .10 .08 .02
Fiscal Year Ended September 30, 2005
-----------------------------------------------------------------------
--------------- -- -------------- --- -------------- -- ---------------
12/31/2004 03/31/2005 06/30/2005 09/30/2005
--------------- -------------- -------------- ---------------
---------------
Revenues $12,194,000 $15,662,000 $14,000,000 $14,786,000
Operating Costs 9,154,000 11,579,000 10,328,000 11,249,000
Operating Margin 3,040,000 4,083,000 3,672,000 3,537,000
Net Income after Provision for
Income Taxes 5,462,000 941,000 662,000 476,000
Basic Earnings per Common Share .56 .10 .07 .05
Diluted Earnings per Common Share .56 .10 .07 .05
NOTE 18. SUBSEQUENT EVENTS
On October 16, 2006, Doctors Care opened a new location in Mt. Pleasant,
South Carolina.
UCI MEDICAL AFFILIATES, INC.
EXHIBIT INDEX
< Exhibit Number Description
2.1 Order of Confirmation of UCI Medical Affiliates, Inc. ("UCI") Dated
August 7, 2002 (Incorporated by reference to Exhibit 2.1 on the Form 8-K filed
August 16, 2002)
2.2 Order of Confirmation of UCI Medical Affiliates of South Carolina Dated
August 5, 2002 (Incorporated by reference to Exhibit 2.2 on the Form 8-K filed
August 16, 2002)
2.3 Order of Confirmation of UCI Medical Affiliates of Georgia, Inc. Dated
August 7, 2002 (Incorporated by reference to Exhibit 2.3 on the Form 8-K filed
August 16, 2002)
2.4 Order of Confirmation of Doctors Care, P.A. Dated August 8, 2002
(Incorporated by reference to Exhibit 2.4 on the Form 8-K filed August 16, 2002)
2.5 Order of Confirmation of Doctors Care of Tennessee, P.C. Dated August
6, 2002 (Incorporated by reference to Exhibit 2.5 on the Form 8-K filed August
16, 2002)
2.6 Order of Confirmation of Doctors Care of Georgia, P.C. Dated August 7,
2002 (Incorporated by reference to Exhibit 2.6 on the Form 8-K filed August 16,
2002)
2.7 Plan of Reorganization for UCI (Incorporated by reference to Exhibit
2.7 on the Form 8-K filed August 16, 2002)
2.8 Plan of Reorganization for UCI Medical Affiliates of South Carolina,
Inc. (Incorporated by reference to Exhibit 2.8 on the Form 8-K filed August 16,
2002)
2.9 Plan of Reorganization of UCI Medical Affiliates of Georgia, Inc.
(Incorporated by reference to Exhibit 2.9 on the Form 8-K filed August 16, 2002)
2.10 Plan of Reorganization of Doctors Care, P.A. (Incorporated by
reference to Exhibit 2.10 on the Form 8-K filed August 16, 2002)
2.11 Plan of Reorganization of Doctors Care of Tennessee, P.C.
(Incorporated by reference to Exhibit 2.11 on the Form 8-K filed August 16,
2002)
2.12 Plan of Reorganization for Doctors Care of Georgia, P.C. (Incorporated
by reference to Exhibit 2.12 on the Form 8-K filed August 16, 2002)
2.13 Joint Disclosure Statement Filed as of May 3, 2002 (Incorporated by
reference to Exhibit 2.13 on the Form 8-K filed August 16, 2002)
2.14 Addendum to Joint Disclosure Statement and Plans of Reorganization
Filed as of June 14, 2002 (Incorporated by reference to Exhibit 2.14 on the Form
8-K filed August 16, 2002)
2.15 Second Addendum to Plans of Reorganization Filed as of July 29, 2002
(Incorporated by reference to Exhibit 2.15 on the Form 8-K filed August 16,
2002)
3.1 Amended and Restated Certificate of Incorporation of UCI filed with the
Delaware Secretary of State as of July 27, 1994 (Incorporated by reference to
the exhibit of same number on the Form 10-K filed for fiscal year 2003)
3.2 Amended and Restated Bylaws of UCI dated as of November 23, 1993
(Incorporated by reference to the exhibit of same number on the Form 10-K filed
for fiscal year 2003)
3.3 Amendment to Amended and Restated Bylaws of UCI dated as of August 21,
1996 (Incorporated by reference to the exhibit of same number on the Form 10-K
filed for fiscal year 2003)
3.4 Amendment to Amended and Restated Bylaws of UCI dated as of August 15,
2002 (Incorporated by reference to Exhibit 3.4 on the Form 8-K filed as of
October 28, 2002)
3.5 Certificate of Amendment of Certificate of Incorporation filed with the
Delaware Secretary of State as of February 24, 1999 (Exhibit 3.5 on the Form
10-K filed for fiscal year 2002)
4.1 The rights of security holders of the registrant are set forth in the
registrant's Certificate of Incorporation and Bylaws, as amended, included as
Exhibits 3. 1 through 3. 5
10.5 Lease and License Agreement dated March 30, 1994 between Doctors Care,
P.A. and Blue Cross Blue Shield of South Carolina (Incorporated by reference to
the exhibit of same number on the Form 10-K filed for fiscal year 2003)
10.6 Note Payable dated February 28, 1995 between UCI-SC as payor, and
Companion Property and Casualty Insurance Company, as payee (Incorporated by
reference to the exhibit of same number on the Form 10-K filed for fiscal year
2003)
10.7 Revolving Line of Credit dated November 11, 1996 between Carolina
First Bank and UCI (Incorporated by reference to the exhibit of same number on
the Form 10-K filed for fiscal year 2003)
10.8** Stock Option Agreement dated March 20, 1996 between UCI and Harold
H. Adams, Jr. (Incorporated by reference to the exhibit of same number on the
Form 10-K filed for fiscal year 2003)
10.9** Stock Option Agreement dated March 20, 1996 between UCI and Russell
J. Froneberger (Incorporated by reference to the exhibit of same number on the
Form 10-K filed for fiscal year 2003)
10.11** Stock Option Agreement dated March 27, 1997, between UCI and Thomas
G. Faulds (Incorporated by reference to the exhibit of same number on the Form
10-K filed for fiscal year 2003)
10.12** Stock Option Agreement dated March 27, 1997 between UCI and Ashby
Jordan, M.D. (Incorporated by reference to the exhibit of same number on the
Form 10-K filed for fiscal year 2003)
10.13** Stock Option Agreement dated March 27, 1997 between UCI and Charles
M. Potok (Incorporated by reference to the exhibit of same number on the Form
10-K filed for fiscal year 2003)
10.14** UCI 1994 Incentive Stock Option Plan (Incorporated by reference to
the exhibit of same number on the Form 10-K filed for fiscal year 2003)
10.17 Administrative Services Agreement dated April 24, 1998 by and between
Doctors Care of Georgia, P.C. and UCI Medical Affiliates of Georgia, Inc.
(Incorporated by reference to the exhibit of same number on the Form 10-K filed
for fiscal year 2003)
10.18 Administrative Services Agreement dated April 24, 1998 by and between
Doctors Care of Tennessee, P.C. and UCI Medical Affiliates of Georgia, Inc.
(Incorporated by reference to the exhibit of same number on the Form 10-K filed
for fiscal year 2003)
10.19 Administrative Services Agreement dated August 11, 1998 between UCI
Medical Affiliates of South Carolina, Inc. and Doctors Care, P.A. (Incorporated
by reference to the exhibit of same number on the Form 10-K filed for fiscal
year 2003)
10.21 Stock Purchase Option and Restriction Agreement dated September 1,
1998 by and among D. Michael Stout, M.D.; UCI Medical Affiliates of Georgia,
Inc. and Doctors Care of Georgia, P.C. (Incorporated by reference to the exhibit
of same number on the Form 10-K filed for fiscal year 2003)
10.22 Stock Purchase Option and Restriction Agreement dated July 15, 1998
by and among D. Michael Stout, M.D.; UCI Medical Affiliates of Georgia, Inc.;
and Doctors Care of Georgia, P.C. (Incorporated by reference to the exhibit of
same number on the Form 10-K filed for fiscal year 2003)
10.31 Stock Purchase Option and Restriction Agreement dated as of October
31, 2002 by and among D. Michael Stout, M.D.; UCI Medical Affiliates of South
Carolina, Inc.; and Doctors Care, P.A. (Incorporated by reference to Exhibit
10.31 filed on Form 10-K for fiscal year 2002)
14 Code of Ethics dated as of November 25, 2003 (Incorporated by reference
to the exhibit of same number on the Form 10-K filed for fiscal year 2003)
21 Subsidiaries of the Registrant (Incorporated by reference to the exhibit
of same number on the Form 10-K filed for fiscal year 2003)
23* Consent of Independent Auditors
31.1* Rule 13a-14(a)/15d-14(a) Certification of D. Michael Stout, M.D.
31.2* Rule 13a-14(a)/15d-14(a) Certification of Jerry F. Wells, Jr., CPA
32* Section 1350 Certification
99* Press Release dated December 22, 2006.
*Filed herewith
** Denotes a management contract or compensatory plan or arrangement.