18
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, 2008
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to -----------------------------------
- -------------------------------
Commission file number 0-13265
UCI MEDICAL AFFILIATES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 59-2225346
(State or other jurisdiction of incorporation) (IRS Employer
Identification No.)
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, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ( ) Accelerated Filer ( ) Non-Accelerated Filer (X)
Smaller Reporting Company ( )
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, 2008.
UCI MEDICAL AFFILIATES, INC.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2008
and September 30, 2007 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended June 30, 2008 and June 30, 2007 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended June 30, 2008 and June 30, 2007 5
Notes to Condensed Consolidated Financial Statements 6 - 10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 14
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
Item 4T Controls and Procedures 15 - 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 1A Risk Factors 17
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits 17
SIGNATURES 18
UCI Medical Affiliates, Inc.
Condensed Consolidated Balance Sheets
June 30, 2008 September 30, 2007
(unaudited)
----------------------- -------------------
Assets
Current assets
Cash and cash equivalents $ 719,572 $ 487,423
Accounts receivable, less allowance for doubtful accounts
of $1,723,247 and $2,267,793 9,965,762 11,414,362
Inventory 957,569 957,569
Income taxes receivable - 800,388
Deferred taxes 1,091,291 1,311,291
Prepaid expenses and other current assets 772,033 612,650
----------------------- ----------------------
Total current assets 13,506,227 15,583,683
Property and equipment, less accumulated depreciation of
$13,331,859 and $13,769,878 11,782,418 9,732,315
Deferred taxes 62,406 11,034
Restricted investments 2,030,497 1,956,087
Excess of cost over fair value of assets acquired, less
accumulated amortization of $2,451,814 3,391,942 3,391,942
Other assets 56,733 46,735
----------------------- ----------------------
Total Assets $ 30,830,223 $ 30,721,796
======================= ======================
Liabilities and Stockholders' Equity
Current liabilities
Line of credit $ 284,857 $ 415,888
Current portion of long-term debt 2,058,388 1,031,902
Accounts payable 1,416,144 2,739,425
Income taxes payable 57,968 -
Accrued salaries and payroll taxes 2,894,711 2,681,346
Accrued uncompensated absences 444,027 315,774
Other accrued liabilities 597,889 1,206,338
----------------------- ----------------------
Total current liabilities 7,753,984 8,390,673
Long-term liabilities
Accounts payable - 96,511
Deferred tax liability 466,576 415,204
Deferred compensation liability 2,147,314 2,068,436
Long-term debt, net of current portion 1,468,668 1,879,995
----------------------- ----------------------
----------------------- ----------------------
Total long-term liabilities 4,082,558 4,460,146
----------------------- ----------------------
Total Liabilities 11,836,542 12,850,819
----------------------- ----------------------
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 9,914,122 shares 495,706 495,706
Paid-in capital 22,105,024 22,105,024
Accumulated deficit (3,607,049) (4,729,753)
----------------------- ----------------------
Total Stockholders' Equity 18,993,681 17,870,977
----------------------- ----------------------
Total Liabilities and Stockholders' Equity $ 30,830,223 $ 30,721,796
======================= ======================
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,
----------------------------------- -----------------------------------
2008 2007 2008 2007
---------------- --------------- ---------------- --------------
Revenues $19,301,437 $ 17,557,264 $58,452,538 $ 53,972,138
Operating costs (15,165,498) (13,353,336) (45,595,314) (40,464,635)
---------------- --------------- ---------------- ---------------
Operating margin 4,135,939 4,203,928 12,857,224 13,507,503
General and administrative expenses (2,975,402) (2,912,701) (9,421,089) (8,232,986)
Depreciation and amortization (425,945) (389,373) (1,274,332) (1,126,367)
---------------- --------------- ---------------- ---------------
Income from operations 734,592 901,854 2,161,803 4,148,150
---------------- --------------- ---------------- ---------------
Other expense
Interest expense, net of interest income (95,246) (131,788) (298,030) (401,479)
---------------- --------------- ---------------- ---------------
---------------- --------------- ---------------- ---------------
Income before income taxes 639,346 770,066 1,863,773 3,746,671
Income tax expense (254,216) (289,972) (741,069) (1,413,904)
---------------- --------------- ---------------- ---------------
Net income $ $ 480,094 $ 1,122,704 $ 2,332,767
385,130
=============== ================ ===============
================
Basic earnings per share $ $ .05 $ $ .24
.04 .11
================ =============== ================ ===============
================ =============== ================ ===============
Basic weighted average common shares
Outstanding 9,914,122 9,914,122 9,914,122 9,870,657
================ =============== ================ ===============
================ ===============
Diluted earnings per share $ $ .05 $ $ .24
.04 .11
================ =============== ================ ===============
Diluted weighted average common shares
outstanding 9,914,122 9,914,122 9,914,122 9,915,996
================ =============== ================ ===============
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,
2008 2007
------------------ -----------------
Operating activities:
Net income $ 1,122,704 $ 2,332,767
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on accounts receivable 2,680,802 2,875,426
Depreciation and amortization 1,274,332 1,126,367
Deferred taxes 220,000 534,706
Changes in operating assets and liabilities:
Accounts receivable (1,232,202) (4,026,242)
Inventory - (169,025)
Income taxes receivable 800,388 -
Income taxes payable 57,968 -
Prepaid expenses and other current assets (159,383) (416,775)
Accounts payable and accrued expenses (1,590,112) (323,284)
Deferred compensation 78,878 572,869
------------------ -----------------
------------------ -----------------
Cash provided by operating activities 3,253,375 2,506,809
------------------ -----------------
Investing activities:
Purchases of property and equipment (3,324,435) (1,808,321)
(Increase) in other assets (9,998) (12,962)
(Increase) in restricted investments (74,410) (521,724)
------------------ -----------------
------------------ -----------------
Cash used in investing activities (3,408,843) (2,343,007)
------------------ -----------------
Financing activities:
Proceeds from issuance of common stock - 179,471
Net (payments) borrowings on line of credit (131,031) 484,709
Net borrowings (payments) on term-notes 829,653 (495,856)
Payments on other long-term obligations (311,005) (540,177)
------------------ -----------------
Cash provided by (used in) financing activities 387,617 (371,853)
------------------ -----------------
Increase (decrease) in cash and cash equivalents 232,149 (208,051)
Cash and cash equivalents at beginning of period 487,423 533,209
------------------ -----------------
------------------
Cash and cash equivalents at end of period $ 719,572 $ 325,158
================== =================
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, 2008 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2008. 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, 2007.
The consolidated financial statements include the accounts of UCI Medical
Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc.
("UCI-SC"), UCI Properties, LLC ("UCI-LLC"), 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, UCI-SC and UCI-LLC, 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.
On September 28, 2007, the Company formed a South Carolina limited liability
company, UCI Properties, LLC ("UCI-LLC") for the purpose of holding certain real
estate. The sole member of UCI-LLC is 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.
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 61 freestanding medical centers, 60 of which are located throughout
South Carolina and one is located in Knoxville, Tennessee (39 operating as
Doctors Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, 18
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 in South Carolina).
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 quarters ended June 30, 2008 and June 30, 2007, the Company recorded
income tax expense of approximately $254,000 and $290,000, respectively.
NOTE 4. INTANGIBLES
In June 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets." Statement No. 142 requires that
goodwill and intangible assets with indefinite lives will no longer be
amortized, but are reviewed at least annually for impairment. Pursuant to
Statement No. 142, the Company tested goodwill for impairment in the fourth
quarter of fiscal year 2007, 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. At June 30, 2008, the Company had outstanding
borrowings on the line of approximately $285,000. Pricing is prime rate plus a
$150 monthly fee (prime rate was 5% at June 30, 2008). Borrowings are
collateralized by the Company's accounts receivable and the maturity date of
this credit line is August 16, 2009.
NOTE 6. TERM NOTE AGREEMENT
During the quarter ended June 30, 2008, the Company entered into a term note
agreement with a financial institution with a commitment level up to $3,500,000.
This term note agreement was entered into to finance the purchase by UCI-LLC of,
and renovations to, a new corporate headquarters to be located in Columbia,
South Carolina. The term note agreement is attached as Exhibit 10.35 to this
Form 10-Q and is incorporated herein by reference. At June 30, 2008, the
outstanding balance on the term note was approximately $1,400,000. The note has
a variable interest rate based on the Adjusted Libor Rate with interest only
payments due through September 2009. Starting in October 2009, the balance is
payable in equal monthly installments of principal and interest in the amount of
$27,562 with the balance due on March 5, 2015. The promissory note is
collateralized by a lien on the property.
NOTE 7. 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.
At June 30, 2008, no equity incentives have been issued under this Plan.
NOTE 8. 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 9. 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. FIN 48 was adopted commencing in the first quarter of the Company's fiscal
year end 2008. The adoption of FIN 48 did not have a material impact on the
Company's financial condition and results of operations. At June 30, 2008, the
Company had no unrecognized tax benefits that, if recognized, would materially
affect the Company's effective income tax rate in future periods. Management is
currently unaware of any issues under review that could result in significant
payments, accruals or material deviations from its recognized tax positions.
In September 2006, the SEC staff issued Staff Accounting Bulletin 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
requires that public companies utilize a `dual-approach' to assessing the
quantitative effects of financial misstatements. This dual approach includes
both an income statement focused assessment and a balance sheet focused
assessment. The Company adopted SAB 108 in fiscal year 2007 without any impact
on the Company's consolidated financial statements.
Also in September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
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 consolidated financial statements. On
February 12, 2008, the FASB issued FASB Staff Position No. FAS No. 157-2,
"Effective Date of FASB Statement No. 157" ("FSP 157-2") which defers the
effective date for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (that is, at least annually), to fiscal years beginning
after November 15, 2008.
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.
The Company adopted both FAS 157 and FAS 159 on January 1, 2008 for its
financial assets and liabilities and, in accordance with FSP 157-2, deferred the
effective date for its nonfinancial assets and liabilities. The adoption of FAS
157 and FAS 159 had no impact on the Company's consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements", ("SFAS No. 160") an amendment of Accounting
Research Bulletin No. 51, which establishes new standards governing the
accounting for and reporting on noncontrolling interest ("NCIs") in partially
owned consolidated subsidiaries and the loss of control of subsidiaries. Certain
provisions of SFAS No. 160 indicate, among other things, that NCIs (previously
referred to as minority interests) be treated as a separate component of equity,
not as a liability; that increases and decreases in the parent's ownership
interest that leave control intact be treated as equity transactions, rather
than a step acquisition or dilution gains or losses; and that losses of a
partially owned consolidated subsidiary be allocated to the NCI even when such
allocation might result in a deficit balance. SFAS No. 160 also requires changes
to certain presentation and disclosure requirements. SFAS No. 160 is effective
beginning October 1, 2009. The Company is currently evaluating the impact and
disclosure implications of SFAS No. 160 but does not expect it to have a
significant impact, if any, in the financial statements.
NOTE 10. SUBSEQUENT EVENTS
On July 17, 2008, the Doctors Care building located in Surfside Beach, South
Carolina was purchased by UCI-LLC for a total purchase price of $815,000. This
property was previously rented by the Company and occupied as a medical center.
A portion of the purchase price was funded by a promissory note in the original
principal amount of $695,000, and is collateralized with a lien on the property.
The promissory note accrues interest at a rate of 5.95 percent per annum.
Starting on August 16, 2008 and continuing for 59 months thereafter, principal
and interest payments in the amount of $5,890 are payable. The entire unpaid
balance of principal and interest will be due on July 16, 2013. The promissory
note is attached as Exhibit 10.36 to this Form 10-Q and is incorporated herein
by reference.
On July 23, 2008, a construction contract in the amount of $2,035,157 was
entered into by UCI-LLC and a builder for renovations to the corporate
headquarters. The financing for this commitment is being provided by the term
note discussed in Note 6.
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this Report on Form 10-Q that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. We caution
readers of this Form 10-Q that such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from those
expressed or implied by such forward-looking statements. Although our management
believes that their expectations of future performance are based on reasonable
assumptions within the bounds of their knowledge of their business and
operations, we have no assurance that actual results will not differ materially
from their expectations. Factors that could cause actual results to differ from
expectations include, among other things, (1) the difficulty in controlling our
costs of providing healthcare and administering our network of centers; (2) the
possible negative effects from changes in reimbursement and capitation payment
levels and payment practices by insurance companies, healthcare plans,
government payors and other payment sources; (3) the difficulty of attracting
primary care physicians; (4) the increasing competition for patients among
healthcare providers; (5) possible government regulations negatively impacting
our existing organizational structure; (6) the possible negative effects of
prospective healthcare reform; (7) the challenges and uncertainties in the
implementation of our expansion and development strategy; (8) the dependence on
key personnel; (9) adverse conditions in the stock market, the public debt
market, and other capital markets (including changes in interest rate
conditions); (10) the strength of the United States economy in general and the
strength of the local economies in which we conduct operations may be different
than expected resulting in, among other things, a reduced demand for practice
management services; (11) the demand for our products and services; (12)
technological changes; (13) the ability to increase market share; (14) the
adequacy of expense projections and estimates of impairment loss; (15) the
impact of change in accounting policies by the Securities and Exchange
Commission; (16) unanticipated regulatory or judicial proceedings; (17) the
impact on our business, as well as on the risks set forth above, of various
domestic or international military or terrorist activities or conflicts; (18)
other factors described in this report and in our other reports filed with the
Securities and Exchange Commission; and (19) our success at managing the risks
involved in the foregoing.
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
The following discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our consolidated results of
operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
Critical Accounting Policies
We have adopted accounting policies that we believe will result in an accurate
presentation of the financial statements. We consider critical accounting
policies to be those that require more significant judgments and estimates in
the preparation of our financial statements and include the following: (1)
revenue recognition; (2) allowance for doubtful accounts; (3) consideration of
impairment of intangible assets; and (4) valuation reserve on net deferred tax
assets.
Revenue recognition -
We record revenues at the estimated net amount that we expect to receive from
patients, employers, third party payors, and others at the time we perform the
services. We record contractual adjustments when we prepare the related bills to
our customers as we bill some third parties at discounted and negotiated
amounts. Whenever we bill at the discounted amounts, we do not need to estimate
third party settlements.
Allowance for doubtful accounts -
We maintain our allowance for doubtful accounts for estimated losses, which may
result from the inability of our customers to make required payments. We base
our allowance on the likelihood of recoverability of accounts receivable
considering such factors as past experience and current collection trends.
Factors taken into consideration in estimating the allowance include: amounts
past due, in dispute, or a client that we believe might be having financial
difficulties. If economic, industry, or specific customer business trends worsen
beyond earlier estimates, we increase the allowance for doubtful accounts by
recording additional 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, 2008
and 2007, the P.A. employed 185 and 163 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 61 freestanding medical centers, 60 of which are located throughout
South Carolina and one is located in Knoxville, Tennessee (39 operating as
Doctors Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, 18
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 in South Carolina).
Revenues of $19,301,000 for the quarter ended June 30, 2008 reflect an increase
of $1,744,000 or 10% from those of the quarter ended June 30, 2007. For the nine
months ended June 30, 2008, revenues were $58,453,000 as compared to $53,972,000
for the nine months ended June 30, 2007.
This increase in revenue is the result of opening additional operating
facilities, as well as an increase in patient encounters. Patient encounters
were approximately 172,000 in the third quarter of fiscal year 2008 and 158,000
in the third quarter of fiscal year 2007.
Pursuant to SFAS No. 142, we tested goodwill for impairment in the fourth
quarter of fiscal year 2007, 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 of South Carolina ("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. As of June 30, 2008, 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 2008 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 16% of our total revenues from
these occupational medicine services in the third quarter of fiscal year 2008
and approximately 17% in the third quarter of fiscal year 2007.
The following table breaks out our revenue and patient visits by revenue source
for the third quarter of fiscal years 2008 and 2007.
Percent of Percent of
Payor Patient Visits Revenue
------------------------------------------------ ----------------- --------------------
2008 2007 2008 2007
------- --------- --------- ----------
15 15 8 10
Patient Pay
8 10 3 4
Employer Paid
5 5 7 6
HMO
10 11 13 13
Workers Compensation
14 12 13 12
Medicare/Medicaid
45 44 53 52
Managed Care Insurance
3 3 3 3
Other (Commercial Indemnity, Champus, etc.)
------- --------- --------- ----------
------- --------- --------- ----------
100 100 100 100
======= ========= ========= ==========
We earned an operating margin of $4,136,000 during the third quarter of fiscal
2008 as compared to an operating margin of $4,204,000 for the third quarter of
fiscal 2007. For the nine months ended June 30, 2008, operating margin was
$12,857,000 as compared to $13,508,000 for the nine months ended June 30, 2007.
The decrease in the year to date margin was the result of the operating costs of
the new centers exceeding their revenues. As the new centers continue to grow,
we expect the margins to improve.
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 $2,975,000 in the
third quarter of fiscal year 2008, up from $2,913,000 in the third quarter of
fiscal year 2007. For the nine months ended June 30, 2008, general and
administrative expenses increased to $9,421,000, up from $8,233,000 for the same
period in the prior fiscal year. This increase is the result of increased
advertising expenses and an increase in corporate personnel costs associated
with the support of the new centers.
Depreciation and amortization expense increased to $426,000 in the third quarter
of fiscal 2008, up from $389,000 in the third quarter of fiscal 2007. For the
nine months ended June 30, 2008, depreciation and amortization expense increased
to $1,274,000 up from $1,126,000 for the nine months ended June 30, 2007. This
increase is the result of equipment purchases and building renovations. Interest
expense decreased to $95,000 in the third quarter of fiscal year 2008, down from
$132,000 in the third quarter of fiscal 2007. For the nine months ended June 30,
2008, interest expense decreased to $298,000, as compared to $401,000 for the
nine months ended June 30, 2007. This decrease was due to the normal
amortization schedule of the long-term debt and lower interest rates.
During the quarter ended June 30, 2008, our management recorded income tax
expense of approximately $254,000, compared to $290,000 recorded during the
third quarter of fiscal year 2007. For the nine months ended June 30, 2008,
income tax expense was $741,000, compared to $1,414,000 for the nine months
ended June 30, 2007.
Financial Condition at June 30, 2008
Cash and cash equivalents increased by $232,000 during the nine months ended
June 30, 2008, mainly as a result of increased collections on patient accounts.
Accounts receivable decreased by $1,449,000 during the nine months ended June
30, 2008 and is a result of increased collection efforts, offset by increased
revenues.
Long-term debt increased from $2,912,000 at September 30, 2007 to $3,527,000 at
June 30, 2008 due to borrowings on the new term note offset by 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 (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 June 30, 2008, we have no material commitments for capital expenditures or
for acquisitions or start-ups.
Operating activities produced $3,253,000 of cash during the nine months ended
June 30, 2008, compared to $2,507,000 during the nine months ended June 30,
2007. The net change in accounts receivable for the nine months ended June 30,
2008 is comprised of increased cash collections of approximately $1,993,000
offset by writeoffs to the allowance for doubtful accounts in the amount of
approximately $3,226,000.
Investing activities used $3,409,000 in the nine months ended June 30, 2008 as
compared to $2,343,000 in the nine months ended June 30, 2007. This increase is
due to purchases of equipment and building renovations for our operating sites
and the purchase of the new corporate office property.
Financing activities provided $388,000 in cash during the nine months ended June
30, 2008 as compared to utilizing $372,000 in the nine months ended June 30,
2007, primarily as a result of the borrowings on the new note offset by the
payments on the line of credit balance.
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 $256,000 of our debt at June 30, 2008 was subject to fixed
interest rates. Approximately $3,271,000 of our debt at June 30, 2008 was
subject to variable interest rates. Based on the outstanding amounts of variable
rate debt at June 30, 2008, our interest expense on an annualized basis would
increase approximately $33,000 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 4T. Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (Disclosure Controls) as of the end of
the period covered by this Quarterly Report. The controls evaluation was done
under the supervision and with the participation of management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
Attached as exhibits to this Quarterly Report are certifications of the CEO and
the CFO, which are required in accordance with Rule 13a-15(e) of the Exchange
Act. This Controls and Procedures section includes the information concerning
the controls evaluation referred to in the certifications and it should be read
in conjunction with the certifications for a more complete understanding of the
topics presented.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to reasonably assure
that information required to be disclosed in our reports filed under the
Exchange Act, such as this Quarterly Report, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Disclosure Controls are also designed to reasonably assure that such information
is accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Our
Disclosure Controls include components of our internal control over financial
reporting, which consists of control processes designed to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements in accordance with US generally accepted
accounting principles. To the extent that components of our internal control
over financial reporting are included within our Disclosure Controls, they are
included in the scope of our quarterly controls evaluation.
Limitations on the Effectiveness of Controls
The company's management, including the CEO and CFO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent all 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, 2007. 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
10.35 Promissory Note dated February 13, 2008 executed by UCI
Properties, LLC and payable to Branch Banking and Trust
Company in the original principal amount of up to $3,500,000
10.36 Promissory Note dated July 16, 2008 executed by UCI
Properties, LLC and payable to Carolina First Bank in the
original principal amount of $695,000
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 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 11, 2008.
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 11, 2008