UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2007
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES E
XCHANGE ACT OF 1934
For the transition period from: to:
----------------------------------- -------------------------------
Commission file number 0-13265
UCI MEDICAL AFFILIATES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
59-2225346
(State or other jurisdiction of incorporation) (IRS Employer
Identification No.)
4416 Forest Drive
Columbia, SC 29206
(Address of principal executive offices)
(803) 782-4278
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. ( X )Yes ( ) No
Indicate by check mark whether the registrant is 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 checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
( ) Yes ( X ) No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by checkmark whether the registrant filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court. ( X )Yes
( )No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's common stock, $.05 par
value, was 9,914,122 at June 30, 2007.
UCI MEDICAL AFFILIATES, INC.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2007 and September 30, 2006 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended June 30, 2007 and June 30, 2006 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 2007 and June 30, 2006 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
Item 4 Controls and Procedures 14-15
PART II OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 1A Risk Factors 16
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits 16
SIGNATURES 17
UCI MEDICAL AFFILIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2007 September 30, 2006
---------------- -----------------------
Assets (unaudited)
Current assets
Cash and cash equivalents $ 325,158 $ 533,209
Accounts receivable, less allowance for doubtful accounts
of $2,225,230 and $3,628,558 11,778,359 10,627,543
Inventory 1,045,634 876,609
Deferred taxes 1,097,713 1,582,190
Prepaid expenses and other current assets 962,073 545,298
---------------- -----------------------
---------------- -----------------------
Total current assets 15,208,937 14,164,849
---------------- -----------------------
Property and equipment, less accumulated depreciation of
$13,432,969 and $12,580,568 9,430,928 8,748,974
Deferred taxes 456,228 440,232
Restricted investments 1,865,156 1,343,432
Excess of cost over fair value of assets acquired, less
accumulated amortization of $2,451,814 3,391,942 3,391,942
Other assets 49,234 36,272
---------------- -----------------------
Total Assets $30,402,425 $ 28,125,701
================ =======================
Liabilities and Stockholders' Equity
Current liabilities
Line of credit $ 764,082 $ 279,373
Current portion of long-term debt 1,060,338 1,029,702
Accounts payable 2,570,319 2,297,493
Accrued salaries and payroll taxes 1,618,768 2,109,588
Accrued uncompensated absences 265,974 342,993
Other accrued liabilities 713,020 741,291
-----------------------
----------------
Total current liabilities 6,992,501 6,800,440
Long-term liabilities
Accounts payable 198,163 414,231
Deferred tax liability 412,932 346,707
Deferred compensation liability 1,947,709 1,374,840
Long-term debt, net of current portion 2,092,392 2,942,993
---------------- -----------------------
---------------- -----------------------
Total long-term liabilities 4,651,196 5,078,771
---------------- -----------------------
---------------- -----------------------
Total Liabilities 11,643,697 11,879,211
---------------- -----------------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $.01 per share:
Authorized shares - 10,000,000; none issued -- --
Common stock, par value $.05 per share:
Authorized shares - 50,000,000
Issued and outstanding - 9,914,122 and 9,826,297 shares 495,706 491,315
Paid-in capital 22,105,024 21,929,944
Accumulated deficit (3,842,002) (6,174,769)
---------------- -----------------------
Total Stockholders' Equity 18,758,728 16,246,490
---------------- -----------------------
Total Liabilities and Stockholders' Equity $30,402,425 $28,125,701
================ =======================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
UCI Medical Affiliates, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
------------------------------------ -----------------------------------
2007 2006 2007 2006
----------------- --------------- --------------- ----------------
Revenues $17,557,264 $15,636,858 $53,972,138 $47,240,128
Operating costs (13,353,336) (11,657,234) (40,464,635) (35,167,347)
----------------- --------------- --------------- ----------------
Operating margin 4,203,928 3,979,624 13,507,503 12,072,781
General and administrative expenses (2,912,701) (2,318,693) (8,232,986) (6,716,770)
Depreciation and amortization (389,373) (335,062) (1,126,367) (905,772)
----------------- --------------- --------------- ----------------
Income from operations 901,854 1,325,869 4,148,150 4,450,239
Other expense
Interest expense, net of interest income (131,788) (128,934) (401,479) (368,135)
----------------- --------------- --------------- ----------------
----------------- --------------- --------------- ----------------
Income before income taxes 770,066 1,196,935 3,746,671 4,082,104
Income tax expense (289,972) (448,920) (1,413,904) (1,530,662)
----------------- --------------- --------------- ----------------
----------------- --------------- --------------- ----------------
Net income $ 480,094 $ 748,015 $2,332,767 $ 2,551,442
=============== =============== ================
=================
Basic earnings per share $ .05 $ .08 $ .24 $ .26
================= =============== =============== ================
Basic weighted average common shares
outstanding 9,914,122 9,826,297 9,870,657 9,769,080
================= =============== =============== ================
================= =============== =============== ================
Diluted earnings per share $ .05 $ .08 $ .24 $ .26
================= =============== =============== ================
================= =============== =============== ================
Diluted weighted average common shares
outstanding 9,914,122 9,928,122 9,915,996 9,803,022
================= =============== =============== ================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
UCI Medical Affiliates, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended June 30,
-----------------------------------
2007 2006
-------------- -----------------
Operating activities:
Net income $2,332,767 $ 2,551,442
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on accounts receivable 2,875,426 2,359,485
Depreciation and amortization 1,126,367 905,772
Deferred taxes 534,706 1,022,387
Changes in operating assets and liabilities:
(Increase) in accounts receivable (4,026,242) (3,230,688)
(Increase) in inventory (169,025) (14,947)
(Increase) in prepaid expenses and other current assets (416,775) (237,448)
Increase (decrease) in accounts payable and accrued (323,284) 501,971
liabilities
Deferred compensation 572,869 380,554
-------------- -----------------
-------------- -----------------
Cash provided by operating activities 2,506,809 4,238,528
-------------- -----------------
Investing activities:
Purchases of property and equipment (1,808,321) (2,585,774)
(Increase) in other assets (12,962) (16,927)
Additions to restricted investments (521,724) (362,509)
-------------- -----------------
-------------- -----------------
Cash used in investing activities (2,343,007) (2,965,210)
-------------- -----------------
Financing activities:
Proceeds from issuance of common stock 179,471 173,205
Net borrowings on line of credit 484,709 --
Payments on term-note (495,856) (731,741)
Payments on other long-term obligations (540,177) (953,275)
-------------- -----------------
Cash used in financing activities (371,853) (1,511,811)
-------------- -----------------
Decrease in cash and cash equivalents (208,051) (238,493)
Cash and cash equivalents at beginning of period 533,209 961,610
-------------- -----------------
--------------
Cash and cash equivalents at end of period $ 325,158 $ 723,117
============== =================
============== =================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
UCI MEDICAL AFFILIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of those of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended June 30, 2007 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2007. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in our annual
report on Form 10-K for the year ended September 30, 2006.
The consolidated financial statements include the accounts of UCI Medical
Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc.
("UCI-SC"), Doctors Care, P.A., Progressive Physical Therapy, P.A. ("PPT"),
Carolina Orthopedic & Sports Medicine, P.A. ("COSM"), and Doctors Care of
Tennessee, P.C. (the four together as the "P.A." and together with UCI and
UCI-SC, the "Company"). Because of the corporate practice of medicine laws in
the states in which the Company operates, the Company does not own medical
practices but instead enters into exclusive long-term management services
agreements with the P.A. that operates the medical practices. Consolidation of
the financial statements is required under Financial Accounting Standards Board
("FASB") Interpretation No. 46, as revised, ("FIN 46") "Consolidation of
Variable Interest Entities." Prior to the Company's adoption of FIN 46 on
October 1, 2003, the Company consolidated the P.A. as a result of Emerging
Issues Task Force ("EITF") No. 97-2, "Application of FASB Statement No. 94 and
APB Opinion No. 16 to Physician Practice Management Entities and Certain Other
Entities with Contractual Management Arrangements." UCI-SC, in its sole
discretion, can effect a change in the nominee shareholder of each of the P.A.
at any time for a payment of $100 from the new nominee shareholder to the old
nominee shareholder, with no limits placed on the identity of any new nominee
shareholder and no adverse impact resulting to any of UCI-SC or the P.A. from
such change.
In addition to the nominee shareholder arrangement described above, UCI-SC has
entered into an Administrative Service Agreement with each P.A. As a consequence
of the nominee shareholder arrangement and the Administrative Service Agreement,
the Company has a long-term financial interest in the affiliated practices of
each P.A. and the Company has exclusive authority over decision-making relating
to all major on-going operations. The Company establishes annual operating and
capital budgets for the P.A. and compensation guidelines for the licensed
medical professionals. The Administrative Service Agreements have an initial
term of forty years. All significant intercompany accounts and transactions are
eliminated in consolidation, including management fees.
The method of computing the management fees is based on billings of the
affiliated practices less the amounts necessary to pay professional compensation
and other professional expenses. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services plus
a profit. These interests are unilaterally salable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The most significant estimates are related to the allowance for doubtful
accounts, goodwill and intangible assets, income taxes, contingencies, and
health insurance accruals.
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.
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 are recorded in the Company's
statement of income.
The Company adopted FASB Statement No. 131, "Disclosure about Segments of an
Enterprise and Related Information," in fiscal year 1999. Statement No. 131
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 55 freestanding medical centers, 54 of which are located throughout
South Carolina and one is located in Knoxville, Tennessee (34 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).
Certain reclassifications have been made to the prior period's financial
statements to conform to the fiscal year 2007 presentation.
NOTE 2. INVENTORY
The Company's inventory consists of medical supplies and drugs and both are
carried at the lower of average cost or market. The volume of supplies carried
at a center varies very little from month to month; therefore, management does
only an annual physical inventory count and does not maintain a perpetual
inventory system.
NOTE 3. INCOME TAXES
Deferred tax assets and liabilities are recorded based on the difference between
the financial statement and tax bases of assets and liabilities as measured by
the enacted tax rates which are anticipated to be in effect when these
differences reverse. The deferred tax provision is the result of the net change
in the deferred tax assets to amounts expected to be realized. Valuation
allowances are provided against deferred tax assets when the Company determines
it is more likely than not that the deferred tax asset will not be realized.
During the quarter ended June 30, 2007, the Company recorded income tax expense
of approximately $290,000.
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 fiscal year 2006, and
determined there had not been any impairment.
NOTE 5. LINE OF CREDIT
During 2006, the Company entered into an agreement with a financial institution
providing for maximum borrowings of $500,000. During 2007, the Company increased
its line of credit to $1,000,000. As of June 30, 2007, the Company had
outstanding borrowings on the line of approximately $764,000. Pricing is prime
rate plus a $150 fee (prime rate was 8.25% at June 30, 2007). Borrowings are
collateralized by the Company's accounts receivable and the maturity date of
this credit line is August 16, 2009.
NOTE 6. 2007 EQUITY INCENTIVE PLAN
The Company established the 2007 Equity Incentive Plan (the "Plan"), effective
as of March 7, 2007, to use Common Stock in UCI ("Common Stock") as a tool to
encourage employees of UCI and its subsidiaries, its affiliates and its joint
ventures to work together to increase the overall value of UCI Common Stock. The
Company believes the Plan will serve the interests of UCI and its stockholders
because it allows employees to have a greater personal financial interest in UCI
through ownership of its Common Stock, the right to acquire its Common Stock, or
other Plan Awards and Rights that are measured and paid based on UCI's
performance. The types of equity Incentives under this Plan include:
(a) Incentive Stock Options;
(b) Nonqualified Stock Options;
(c) Stock Appreciation Rights;
(d) Restricted Stock Grants;
(e) Performance Shares;
(f) Share Awards; and
(g) Phantom Stock Awards.
NOTE 7. EARNINGS PER SHARE
Net income per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share are
calculated by dividing income available to common shareholders by the
weighted-average number of shares outstanding for each period. Diluted earnings
per common share are calculated by adjusting the weighted-average shares
outstanding assuming conversion of all potentially dilutive stock options.
NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" (FIN 48) which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes." This interpretation 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 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. Any resulting cumulative effect of applying the provisions of FIN 48
upon adoption will be reported as an adjustment to beginning retained earnings
in the period of adoption. The Interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact of the adoption of FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. The Statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. The Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157
is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", (SFAS No. 159) which gives
companies the option to measure eligible financial assets, financial liabilities
and firm commitments at fair value (i.e., the fair value option), on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted
for at fair value under other accounting standards. The election to use the fair
value option is available when an entity first recognizes a financial asset or
financial liability or upon entering into a firm commitment. Subsequent changes
in fair value must be recorded in earnings. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
The Company is in the process of evaluating the impacts, if any, of adopting
this pronouncement.
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this Report on Form 10-Q that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. We caution
readers of this Form 10-Q that such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from those
expressed or implied by such forward-looking statements. Although our management
believes that their expectations of future performance are based on reasonable
assumptions within the bounds of their knowledge of their business and
operations, we have no assurance that actual results will not differ materially
from their expectations. Factors that could cause actual results to differ from
expectations include, among other things, (1) the difficulty in controlling our
costs of providing healthcare and administering our network of centers; (2) the
possible negative effects from changes in reimbursement and capitation payment
levels and payment practices by insurance companies, healthcare plans,
government payors and other payment sources; (3) the difficulty of attracting
primary care physicians; (4) the increasing competition for patients among
healthcare providers; (5) possible government regulations negatively impacting
our existing organizational structure; (6) the possible negative effects of
prospective healthcare reform; (7) the challenges and uncertainties in the
implementation of our expansion and development strategy; (8) the dependence on
key personnel; (9) adverse conditions in the stock market, the public debt
market, and other capital markets (including changes in interest rate
conditions); (10) the strength of the United States economy in general and the
strength of the local economies in which we conduct operations may be different
than expected resulting in, among other things, a reduced demand for practice
management services; (11) the demand for our products and services; (12)
technological changes; (13) the ability to increase market share; (14) the
adequacy of expense projections and estimates of impairment loss; (15) the
impact of change in accounting policies by the Securities and Exchange
Commission; (16) unanticipated regulatory or judicial proceedings; (17) the
impact on our business, as well as on the risks set forth above, of various
domestic or international military or terrorist activities or conflicts; (18)
other factors described in this report and in our other reports filed with the
Securities and Exchange Commission; and (19) our success at managing the risks
involved in the foregoing.
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
The following discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our consolidated results of
operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
Critical Accounting Policies
We have adopted accounting policies that we believe will result in an accurate
presentation of the financial statements. We consider critical accounting
policies to be those that require more significant judgments and estimates in
the preparation of our financial statements and include the following: (1)
revenue recognition; (2) allowance for doubtful accounts; (3) consideration of
impairment of intangible assets; and (4) valuation reserve on net deferred tax
assets.
Revenue recognition -
We record revenues at the estimated net amount that we expect to receive from
patients, employers, third party payors, and others at the time we perform the
services. We record contractual adjustments when we prepare the related bills to
our customers as we bill some third parties at discounted and negotiated
amounts. Whenever we bill at the discounted amounts, we do not need to estimate
third party settlements.
Allowance for doubtful accounts -
We maintain our allowance for doubtful accounts for estimated losses, which may
result from the inability of our customers to make required payments. We base
our allowance on the likelihood of recoverability of accounts receivable
considering such factors as past experience and current collection trends.
Factors taken into consideration in estimating the allowance include: amounts
past due, in dispute, or a customer 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. Consolidation of the financial statements is required under FIN 46, as
revised. Prior to the adoption of FIN 46, we consolidated the P.A. as a result
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.
Approximately 99% of the physicians employed by the P.A. are paid on an hourly
basis for time scheduled and worked at the medical centers. Approximately 30% of
the physicians have incentive compensation arrangements; however, no amounts
were accrued or paid that were significant during our three prior fiscal years.
We base any incentive compensation upon a percentage of non-ancillary
collectible charges for services performed by a provider. As of June 30, 2007
and 2006, the P.A. employed 163 and 139 medical providers, respectively.
The net assets of the P.A. are not material for any period presented, and
intercompany accounts and transactions have been eliminated.
We allocate all indirect costs incurred at the corporate office to the centers.
Therefore, all discussions below are intended to be in the aggregate for us as a
whole.
Results of Operations
The Company provides nonmedical management and administrative services for a
network of 55 freestanding medical centers, 54 of which are located throughout
South Carolina and one is located in Knoxville, Tennessee (34 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).
Revenues of approximately $17,557,000 for the quarter ended June 30, 2007
reflect an increase of approximately $1,920,000 or 12% from those of the quarter
ended June 30, 2006. For the nine months ended June 30, 2007, revenues were
approximately $53,972,000 as compared to approximately $47,240,000 for the nine
months ended June 30, 2006.
This increase in revenue is the result of opening additional operating
facilities as well as an increase in patient encounters. Patient encounters were
approximately 158,000 in the third quarter of fiscal year 2007 and 140,000 in
the third quarter of fiscal year 2006.
Pursuant to SFAS No. 142, we tested goodwill for impairment in the fourth
quarter of fiscal year 2006, and we determined there had not been any
impairment.
We have continued our services provided to members of HMOs. In these
arrangements, we, through the P.A., act as the designated primary caregiver for
members of HMOs who have selected one of our centers or providers as their
primary care provider. In fiscal year 1994, we began participating in an HMO
operated by BlueChoice HealthPlan ("BCHP") and Companion Property and 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 three HMOs
and are the primary care "gatekeeper" for approximately 6,000 lives at June 30,
2007. As of June 30, 2007, all of these HMOs use a discounted fee-for-service
basis for payment. HMOs do not, at this time, have a significant penetration
into the South Carolina market. We are not certain if the market share of HMOs
will grow in the areas in which we operate clinics.
The Company sustained revenues in fiscal year 2007 in occupational medicine and
industrial health services (these revenues are referred to as "employer paid"
and "workers compensation" on the table below). We developed focused marketing
materials, including quarterly newsletters for employers to spotlight our
services for industry. We derived approximately 17% of our total revenues from
these occupational medicine services in the third quarter of fiscal year 2007 as
compared to 19% of our total revenues in the third quarter of fiscal year 2006.
The following table breaks out our revenue and patient visits by revenue source
for the third quarter of fiscal years 2007 and 2006.
Percent of Percent of
Payor Patient Visits Revenue
------------------------------------------------ ----------------- --------------------
2007 2006 2007 2006
------- --------- --------- ----------
15 15 10 10
Patient Pay
10 9 4 4
Employer Paid
5 6 6 6
HMO
11 13 13 15
Workers Compensation
12 11 12 12
Medicare/Medicaid
44 43 52 49
Managed Care Insurance
3 3 3 4
Other (Commercial Indemnity, Champus, etc.)
------- --------- --------- ----------
------- --------- --------- ----------
100 100 100 100
======= ========= ========= ==========
We earned an operating margin of approximately $4,204,000 during the third
quarter of fiscal 2007 as compared to an operating margin of approximately
$3,980,000 for the third quarter of fiscal 2006. For the nine months ended June
30, 2007, operating margin was approximately $13,508,000 as compared to
approximately $12,073,000 for the nine months ended June 30, 2006. The increase
in margin was primarily the result of increased revenues, as discussed above.
General and administrative expenses include all salaries, benefits, supplies,
and other operating expenses not specifically related to the day-to-day
operation of the Centers. General and administrative expenses increased to
approximately $2,913,000 in the third quarter of fiscal year 2007, up from
approximately $2,319,000 in the third quarter of fiscal year 2006. For the nine
months ended June 30, 2007, general and administrative expenses increased to
approximately $8,233,000, up from approximately $6,717,000 for the nine months
ended June 30, 2006. This increase is primarily the result of an increase in
personnel costs during fiscal year 2007 in preparation for the opening of new
centers.
Depreciation and amortization expense increased to approximately $389,000 in the
third quarter of fiscal 2007, up from approximately $335,000 in the third
quarter of fiscal 2006. For the nine months ended June 30, 2007, depreciation
and amortization expense increased to approximately $1,126,000, up from
approximately $906,000 for the nine months ended June 30, 2006. This increase is
the result of equipment purchases and building renovations.
Interest expense increased to approximately $132,000 in the third quarter of
fiscal year 2007, up from approximately $129,000 in the third quarter of fiscal
2006. For the nine months ended June 30, 2007, interest expense increased to
approximately $401,000, as compared to approximately $368,000 for the nine
months ended June 30, 2006. This was due to increased borrowings on the line of
credit.
During the quarter ended June 30, 2007, our management recorded income tax
expense of approximately $290,000, compared to approximately $449,000 recorded
during the quarter ended June 30, 2006. For the nine months ended June 30, 2007,
income tax expense was approximately $1,414,000, compared to approximately
$1,531,000 for the nine months ended June 30, 2006. This decrease is the result
of lower pretax income for the three months ended June 30, 2007 and for the nine
months ended June 30, 2007 as compared to the three months ended June 30, 2006
and the nine months ended June 30, 2006.
Financial Condition at June 30, 2007
Cash and cash equivalents decreased by approximately $208,000 during the nine
months ended June 30, 2007, mainly as a result of payments on debt and equipment
purchases.
Accounts receivable increased by approximately $1,151,000 during the nine months
ended June 30, 2007 as a result of increased revenues.
Long-term debt decreased from approximately $3,973,000 at September 30, 2006 to
approximately $3,153,000 at June 30, 2007, due to regular principal pay-downs.
Our management believes that it will be able to continue to fund debt service
requirements out of cash generated through operations.
Liquidity and Capital Resources
We require capital principally to fund growth (acquire new Centers), for working
capital needs, and for the retirement of indebtedness. We fund our capital
requirements and working capital needs through a combination of external
financing and credit extended by suppliers.
As of June 30, 2007, we have no material commitments for capital expenditures or
for acquisitions or start-ups.
Operating activities produced approximately $2,507,000 of cash during the nine
months ended June 30, 2007, compared to approximately $4,239,000 during the nine
months ended June 30, 2006, as a result of a larger increase in accounts
receivable and a decrease in accounts payable and accrued liabilities.
Investing activities used approximately $2,343,000 during the nine months ended
June 30, 2007 as compared to approximately $2,965,000 during the nine months
ended June 30, 2006, as a result of fewer equipment purchases and building
renovations for our operating sites.
Financing activities utilized approximately $372,000 in cash during the nine
months ended June 30, 2007 as compared to approximately $1,512,000 during the
nine months ended June 30, 2006, as a result of proceeds from the issuance of
common stock and increased borrowings on the line of credit, offset by regular
principal payments.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates primarily as a result of our
borrowing activities, which includes credit facilities with financial
institutions used to maintain liquidity and fund our business operations, as
well as notes payable to various third parties in connection with certain
acquisitions of property and equipment. The nature and amount of our debt may
vary as a result of future business requirements, market conditions, and other
factors. The definitive extent of our interest rate risk is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements. We do not currently use derivative instruments to adjust
our interest rate risk profile.
Approximately $607,000 of our debt at June 30, 2007 was subject to fixed
interest rates. Approximately $2,546,000 of our debt at June 30, 2007 was
subject to variable interest rates. Based on the outstanding amounts of variable
rate debt at June 30, 2007, our interest expense on an annualized basis would
increase approximately $25,000 for each increase of one percent in the prime
rate.
We do not utilize financial instruments for trading or other speculative
purposes, nor do we utilize leveraged financial instruments.
Item 4. Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (Disclosure Controls) as of the end of
the period covered by this Quarterly Report. The controls evaluation was done
under the supervision and with the participation of management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
Attached as exhibits to this Quarterly Report are certifications of the CEO and
the CFO, which are required in accord with Rule 13a-15(e) of the Exchange Act.
This Controls and Procedures section includes the information concerning the
controls evaluation referred to in the certifications and it should be read in
conjunction with the certifications for a more complete understanding of the
topics presented.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to reasonably assure
that information required to be disclosed in our reports filed under the
Exchange Act, such as this Quarterly Report, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Disclosure Controls are also designed to reasonably assure that such information
is accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Our
Disclosure Controls include components of our internal control over financial
reporting, which consists of control processes designed to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements in accordance with US generally accepted
accounting principles. To the extent that components of our internal control
over financial reporting are included within our Disclosure Controls, they are
included in the scope of our quarterly controls evaluation.
Limitations on the Effectiveness of Controls
The company's management, including the CEO and CFO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent all 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 Quarterly
Report. In the course of the controls evaluation, we sought to identify data
errors, controls problems or acts of fraud and confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation is performed on a quarterly basis so that the conclusions of
management, including the CEO and CFO, concerning controls effectiveness can be
reported in our Quarterly Reports on Form 10-Q and to supplement our disclosures
made in our Annual Report on Form 10-K. Many of the components of our Disclosure
Controls are also evaluated on an ongoing basis by 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 deficiencies in the design or
operation of controls that could adversely affect our ability to record,
process, summarize and report financial data in the financial statements.
Auditing literature defines "material weakness" as a particularly serious
significant deficiency where the internal control does not reduce to a
relatively low level the risk that misstatements caused by error or fraud may
occur in amounts that would be material in relation to the financial statements
and the risk that such misstatements would not be detected within a timely
period by employees in the normal course of performing their assigned functions.
We also sought to address other control matters in the controls evaluation, and
in each case if a problem was identified, we considered what revision,
improvement and/or correction to make in accordance with our ongoing procedures.
Conclusions
Based upon the controls evaluation, our CEO and CFO have concluded that, subject
to the limitations noted above, as of the end of the period covered by this
Quarterly Report, our Disclosure Controls were effective to provide reasonable
assurance that material information relating to UCI and its consolidated
subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being prepared.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
We are a party to certain litigation that we consider routine
and incidental to our business. Management does not expect the
results of any of these actions to have a material effect on
our business, results of operations or financial condition.
Item 1A Risk Factors
Information regarding risk factors appears in Part I - Item 1A
- Risk Factors of our report on Form 10-K for the fiscal year
ended September 30, 2006. There have been no material changes
from the risk factors previously disclosed in our report on
Form 10-K.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
This item is not applicable.
Item 3 Defaults upon Senior Securities
This item is not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
This item is not applicable.
Item 5 Other Information This item is not applicable.
Item 6 Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of
the Exchange Act.
31.2 Certification of Chief Financial Officer and Principal Accounting
Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer and Principal Accounting Officer Pursuant to
Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.1 Press Release dated August 8, 2007.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UCI Medical Affiliates, Inc.
(Registrant)
/s/ D. Michael Stout, M.D. /s/ Jerry F. Wells, Jr., CPA
- ------------------------------------ ----------------------------
D. Michael Stout, M.D. Jerry F. Wells, Jr., CPA
President and Chief Executive Officer Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
Date: August 8, 2007