1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-QSB (Mark One) (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: December 31, 1997 ---------------------------------- ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from: to Commission file number: 0-13265 UCI MEDICAL AFFILIATES, INC, (Exact name of small business issuer as specified in its charter) Delaware 59-2225346 (State or other jurisdiction of incorporation (IRS Employer Identification No.) or organization) 1901 Main Street, Suite 1200, Mail Code 1105, Columbia, SC 29201 (Address of principal executive offices) (803) 252-3661 (Issuer's telephone number) (Former name, address or fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check 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. ( )Yes ( ) No APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 6,052,164 shares of $.05 common stock outstanding at December 31, 1997 Transitional Small Business Disclosure Format (check one): ( )Yes ( X ) No UCI MEDICAL AFFILIATES, INC. INDEX Page Number PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets - December 31, 1997 and September 30, 1997 3 Consolidated Statements of Operations for the quarters ended December 31, 1997 and December 31, 1996 4 Consolidated Statements of Cash Flows for the quarters ended December 31, 1997 and December 31, 1996 5 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 - 9 PART II OTHER INFORMATION Items 1-6 10 SIGNATURES 11 UCI Medical Affiliates, Inc. Consolidated Balance Sheets December 31, 1997 September 30, 1997 ------------------- ----------------- (unaudited) (audited) Assets Current assets Cash and cash equivalents $ 0 $ 14,676 Accounts receivable, less allowance for doubtful accounts of $923,721 and $878,469 6,862,480 5,943,884 Inventory 538,396 502,888 Deferred taxes 334,945 334,945 Prepaid expenses and other current assets 629,653 579,217 ------------------- ---------------- Total current assets 8,365,474 7,375,610 Property and equipment less accumulated depreciation of $2,957,691 and $2,724,222 4,474,621 4,002,699 Deferred taxes 1,417,237 1,417,237 Excess of cost over fair value of assets acquired, less accumulated amortization of $1,821,679 and $1,664,739 8,437,440 7,801,607 Other assets 266,380 266,379 ------------------- ----------------- Total Assets $ 22,961,152 $ 20,863,532 =================== ================= Liabilities and Stockholders' Equity Current liabilities Current portion of long-term debt $ 916,411 $ 840,879 Current portion of long-term debt payable to employees 201,518 177,445 Accounts payable 2,956,625 2,039,506 Accrued salaries and payroll taxes 676,107 959,068 Other accrued liabilities 371,630 437,667 ---------------- ----------------- Total current liabilities 5,122,291 4,454,565 Long-term debt, net of current portion 7,833,551 6,438,655 Long-term debt payable to employees, net of current portion 564,782 481,815 ------------------- ----------------- Total Liabilities 13,520,624 11,375,035 ------------------- ----------------- Commitments and contingencies 0 0 Stockholders' Equity Preferred stock, par value $.01 per share: Authorized shares - 10,000,000; none issued 0 0 Common stock, par value $.05 per share: Authorized shares - 10,000,000 Issued and outstanding- 6,052,164 and 5,744,965 shares 302,608 287,248 Paid-in capital 16,249,546 15,435,535 Accumulated deficit (7,111,626) (6,234,286) ------------------- ----------------- Total Stockholders' Equity 9,440,528 9,488,497 ------------------- ----------------- Total Liabilities and Stockholders' Equity $ 22,961,152 $ 20,863,532 =================== ================= The accompanying notes are an integral part of these consolidated financial statements. UCI Medical Affiliates, Inc. Consolidated Statements of Operations (unaudited) Three Months Ended December 31, 1997 1996 -------------------- ------------------ Revenues $ 8,077,876 $ 6,487,908 Operating costs 8,243,266 6,130,191 -------------------- ------------------ Operating margin (165,390) 357,717 General and administrative expenses 25,434 37,709 Depreciation and amortization 406,168 289,474 -------------------- ------------------ Income (loss) from operations (596,992) 30,534 Other income (expense) Interest expense, net of interest income (279,351) (166,794) Gain (loss) on disposal of equipment (439) 0 -------------------- ------------------ Other income (expense) (279,790) (166,794) Income (loss) before benefit (provision ) for income taxes (876,782) (136,260) Benefit (provision )for income taxes (558) 166,382 -------------------- ------------------ Net income (loss) $ (877,340) $ 30,122 ================== ==================== Basic earnings (loss) per share $ (.15) $ .01 ==================== ================== Basic weighted average common shares outstanding 6,041,980 4,807,807 ==================== ================== Diluted earnings (loss) per share $ (.14) $ .01 ==================== ================== Diluted weighted average common shares outstanding 6,061,945 4,819,491 ==================== ================== The accompanying notes are an integral part of these consolidated financial statements. UCI Medical Affiliates, Inc. Consolidated Statements of Cash Flows (unaudited) Three Months Ended December 31, 1997 1996 ------------------ ---------------- Operating activities: Net income (loss) $ (877,340) $ 30,122 Adjustments to reconcile net income (loss) to net cash provided by (used-in) operating activities: (Gain) loss on disposal of equipment 439 0 Provision for losses on accounts receivable 244,613 130,720 Depreciation and amortization 406,168 289,474 Deferred Taxes 0 (175,000) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (899,080) (684,836) (Increase) decrease in inventory (35,508) (4,776) (Increase) decrease in prepaid expenses and other current assets (50,435) (165,981) Increase (decrease) in accounts payable and accrued expenses 562,078 (164,782) ---------------- ------------------ Cash provided by (used in) operating activities (649,065) (745,059) ------------------ ------------------ Investing activities: Purchases of property and equipment (289,260) (135,519) Acquisitions of goodwill (106,863) (20,718) (Increase) decrease in other assets 0 (377) ---------------- ------------------ Cash provided by (used in) investing activities (396,123) (156,614) ------------------ ---------------- Financing activities: Net borrowings (payments) under line-of-credit agreement (125,921) 1,355,760 Increase in long-term debt 1,500,000 269,400 Payments on long-term debt (343,567) (882,949) ------------------ ---------------- Cash provided by (used in) financing activities 1,030,512 742,211 ------------------ ---------------- Increase (decrease) in cash and cash equivalents (14,676) (159,462) Cash and cash equivalents at beginning of period 14,676 237,684 ------------------ --------------- Cash and cash equivalents at end of period $ 0 $ 78,222 ================== ================ The accompanying notes are an integral part of these consolidated financial statements. UCI MEDICAL AFFILIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of those of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three month period ended December 31, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 1998. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended September 30, 1997. The consolidated financial statements of the Company include the accounts of UCI Medical Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc. ("UCI-SC") and Doctor's Care, P.A. (the "P.A."). The financial statements of the P.A. are consolidated with UCI because UCI-SC has unilateral control over the assets and operations of the P.A., and notwithstanding the lack of majority ownership of the P.A. by UCI and UCI-SC, consolidation of the P.A. with UCI and UCI-SC is necessary to present fairly the financial position and results of operations of UCI and UCI-SC. The management agreement between UCI-SC and the P.A. conveys to UCI-SC perpetual, unilateral control over the assets and operations of the P.A. Control is perpetual rather than temporary because of (i) the length of the term of the agreement, (ii) the continuing investment of capital by UCI-SC, (iii) the employment of all of the non-physician personnel by UCI-SC and (iv) the nature of the services provided to the P.A. by UCI-SC. In November 1997 the Emerging Issue Task Force (EITF) finalized EITF 97-2 which provides guidance on consolidation of physician practices and enhances related disclosures of physician practice management companies. This EITF 97-2 is effective for fiscal years ending after December 15, 1998. The Company is in the process of evaluating any potential effect on its financial reporting format. Procedurally, the management agreement calls for the P.A. to provide medical services and charge a fee to the patient or to the patient's insurance carrier or employer for such services. Physician salaries are paid out of these revenues and all remaining revenues are passed to UCI-SC as a management fee. UCI-SC provides all support personnel (nurses, technicians, receptionists), all administrative functions (billing, collecting, vendor payment), and all facilities, supplies and equipment. The consolidated accounts of the Company include all revenue and all expenses (including physician salaries) of all three entities. The net assets of the P.A. are not material for any period presented and intercompany accounts and transactions have been eliminated. EARNINGS PER SHARE The computation of basic earnings (loss) per share and diluted earnings (loss) per share is in conformity with the provisions of Statement of Financial Accounting Standards No. 128. 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 which the Company believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto. The consolidated financial statements of the Company include the accounts of UCI, UCI-SC and the P.A. The financial statements of the P.A. are consolidated with UCI because UCI-SC has unilateral control over the assets and operations of the P.A., and notwithstanding the lack of majority ownership of the P.A. by UCI and UCI-SC, consolidation of the P.A. with UCI and UCI-SC is necessary to present fairly the financial position and results of operations of UCI and UCI-SC. The management agreement between UCI-SC and the P.A. conveys to UCI-SC perpetual, unilateral control over the assets and operations of the P.A. Control is perpetual rather than temporary because of (i) the length of the term of the agreement, (ii) the continuing investment of capital by UCI-SC, (iii) the employment of all of the non-physician personnel by UCI-SC and (iv) the nature of the services provided to the P.A. by UCI-SC. In November 1997 the Emerging Issue Task Force (EITF) finalized EITF 97-2 which provides guidance on consolidation of physician practices and enhances related disclosures of physician practice management companies. This EITF 97-2 is effective for fiscal years ending after December 15 1998. The Company is in the process of evaluating any potential effect on its financial reporting format. Procedurally, the management agreement calls for the P.A. to provide medical services and charge a fee to the patient or to the patient's insurance carrier or employer for such services. Physician salaries are paid out of these revenues and all remaining revenues are passed to UCI-SC as a management fee. UCI-SC provides all support personnel (nurses, technicians, receptionists), all administrative functions (billing, collecting, vendor payment), and all facilities, supplies and equipment. The consolidated accounts of the Company include all revenue and all expenses (including physician salaries) of all three entities. The P.A. enters into employment agreements with physicians for terms ranging from one to ten years. All employment agreements have clauses that allow for early termination of the agreement if certain events occur such as the loss of a medical license. Over 80% of the physicians employed by the P.A. are paid on an hourly basis for time scheduled and worked at the medical centers. The other physicians are salaried. A few of the physicians have incentive compensation arrangements, however, no amounts were accrued or paid during the Company's three prior fiscal years that were significant. As of December 31, 1997 and 1996, the P.A. employed 98 and 71 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. Results of Operations Revenues of $8,078,000 for the quarter ending December 31, 1997 reflect an increase of 25% from those of the quarter ending December 31, 1996. This increase in revenue is attributable to a number of factors. The Company engaged in a significant expansion, increasing the number of medical centers from 30 to 40. This expansion included Springwood Lake Family Practice, Woodhill Family Practice and Midtown Family Practice, all of Columbia, South Carolina and all acquired in August 1997; Doctor's Care - Camden acquired in September 1997; three Progressive Therapy Services offices all located in Columbia, South Carolina and all acquired in October 1997; Doctor's Care - New Ellenton acquired in November 1997; a Physical Therapy practice in Columbia, South Carolina opened in November 1997; and Ridgeview Family Practice of Columbia, South Carolina opened in December 1997. Of the $1,590,000 in revenue growth for the first quarter of fiscal 1997 to the first quarter of fiscal 1998, approximately $1,080,000 or 68% of this growth was from the ten locations opened after December 31, 1996. The Company has increased its services provided to members of Health Maintenance Organizations (HMOs). In such arrangements, the Company, through Doctor's Care, P.A., acts as the designated primary caregiver for members of the HMO who have selected Doctor's Care as their primary care provider. The Company began participating in an HMO operated by Companion HealthCare Corporation ("Companion"), a wholly owned subsidiary of Blue Cross Blue Shield of South Carolina. The Company now acts as primary care provider for four HMOs, including Companion and is the primary care "gatekeeper" for more than 23,000 capitated lives. While HMOs do not, at this time, have a significant penetration into the South Carolina market, the Company believes that HMOs and other managed care plans will experience a substantial increase in market share in the next few years, and the Company is therefore positioning itself for that possibility. Capitated revenue grew from approximately $705,000 in the first quarter of fiscal 1997 to approximately $900,000 in the first quarter of fiscal 1998. The Company negotiates contracts with HMOs for the P.A.'s physicians to provide health care on a capitated reimbursement basis. Under these contracts, which typically are automatically renewed on an annual basis, the P.A. physicians provide virtually all covered primary care services and receive a fixed monthly capitation payment from the HMOs for each member who chooses a P.A. physician as his or her primary care physician. The capitation amount is fixed depending upon the age and sex of the HMO enrollee. Contracts with HMOs accounted for approximately 11% of the Company's net revenue in fiscal 1997 and in the first quarter of fiscal 1998. To the extent that enrollees require more care than is anticipated, aggregate capitation payments may be insufficient to cover the costs associated with the treatment of enrollees. Higher capitation rates are typically received for senior patients because their medical needs are generally greater and consequently the cost of covered care is higher. Increased revenues also reflect the Company's heightened focus on occupational medicine and industrial health services. Focused marketing materials, including quarterly newsletters for employers, were developed to spotlight the Company's services for industry. The Company also entered into an agreement with Companion Property and Casualty Insurance Company, wherein the Company acts as the primary care provider for injured workers of firms insured through Companion Property and Casualty Insurance Company. Companion Property and Casualty Insurance Company is wholly owned by Blue Cross Blue Shield of South Carolina and is a primary shareholder of the Company. Patient encounters increased to 115,000 in the first quarter of fiscal 1998 from 96,000 in the first quarter of fiscal 1997. Even with the positive effects of the factors mentioned above, revenues were short of goals for the quarter, due in part to the increased competition from hospitals and other providers in Columbia, Greenville, Sumter and Myrtle Beach. In each of these areas, regional hospitals have acquired or opened new primary care physician practices that compete directly with the Company for patients. In each case, the hospital owner of our competition is believed to have significantly greater resources than the Company. Management believes that such competition will continue into the future and plans to compete on a basis of quality service and accessibility. An operating margin of $358,000 was earned during the first quarter of fiscal 1997 as compared to an operating deficit of $165,000 for the first quarter of fiscal 1998. Management believes that this margin deterioration is mainly the result of some start-up costs being absorbed for the locations added since December 1996. Additionally, patient visits did not meet budget for the first quarter of fiscal 1998, possibly due to the competition factors discussed above. Management does not currently believe that this negative trend is indicative of the results that may be expected for the fiscal year 1998. This margin deterioration is also attributable to increased cost-cutting pressures being applied by managed care insurance payors that cover many of the Company's patients. As managed care plans attempt to cut costs, they typically increase the administrative burden of providers such as the Company by requiring referral approvals and by requesting hard copies of medical records before they will pay claims. The number of patients at the Company's Centers that are covered by a managed care plan versus a traditional indemnity plan continues to grow. Management expects this trend to continue. Depreciation and amortization expense increased to $406,000 in the first quarter of fiscal 1998, up from $289,000 in the first quarter of fiscal 1997. This increase reflects higher depreciation expense as a result of significant leasehold improvements and equipment upgrades at a number of the Company's medical centers, as well as an increase in amortization expense related to the intangible assets acquired from the Company's purchase of existing practices as noted above. Interest expense increased from $167,000 in the first quarter of fiscal 1997 to $279,000 in the first quarter of fiscal 1998 primarily as a result of the interest costs associated with the indebtedness incurred in the Company's purchase of these assets and centers and for the usage of the operating line of credit. Financial Condition at December 31, 1997 Cash and cash equivalents decreased by $15,000 during the quarter ended December 31, 1997 and were utilized mainly for working capital needs and to fund the expansion previously discussed. Accounts receivable increased 15% during the quarter, reflecting the addition of the ten centers described above and the overall growth in patient visits to existing centers. The increase in goodwill attributable to the purchases of the eight practices since December 31, 1996 was somewhat offset by the amortization recorded. Long-term debt increased from $6,920,000 at September 30, 1997 to $8,398,000 at December 31, 1997 primarily as a result of indebtedness incurred in capital leases for Center upfits, the utilization of an operating line of credit, and the debt incurred as a result of practice acquisitions. Management believes that it will be able to fund debt service requirements out of cash generated through operations. On October 6, 1997, the Company completed a private placement of $1.5 million, 6.5% five-year convertible subordinated debenture with FPA Medical Management, Inc., a national physician practice management company headquartered in San Diego, California. The debentures are convertible to common stock at any time within the five year period at a fixed price premium to the current stock price and are subject to Rule 144 of the Securities and Exchange Commission when converted. Overall, the Company's current assets exceeded its current liabilities at December 31, 1997 by $3,243,000. Liquidity and Capital Resources The Company requires capital principally to fund growth (acquire new centers), for working capital needs and for the retirement of indebtedness. The Company's capital requirements and working capital needs have been funded through a combination of external financing (including bank debt and proceeds from the sale of common stock to Companion HealthCare Corporation and Companion Property & Casualty Insurance Company), internally generated funds and credit extended by suppliers. Operating activities used $649,000 of cash during the first quarter of fiscal 1998. This reflects growth in the Company's accounts receivable as well as prepaid expenses and a decrease in accounts payable and accrued expenses. The growth in accounts receivable is the result of growth in the number of Centers, patient visits and charges per patient visit. Investing activities used $396,000 of cash during the quarter as a result of expansion efforts. Continued growth is anticipated during the remainder of fiscal 1998. PART II OTHER INFORMATION Item 1 Legal Proceedings The Company is not a party to any pending litigation other than routine litigation incidental to the business or that which is immaterial in amount of damages sought. Item 2 Changes in Securities Recent Sales of Unregistered Securities During the three months ended December 31, 1997, the securities identified below were issued by the Company without registration under the Securities Act of 1933. In each case, all of the shares were issued pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933 as a transaction, not involving a general solicitation, in which the purchaser was purchasing for investment. The Company believes that each purchaser was given or had access to detailed financial and other information with respect to the Company and possessed requisite financial sophistication. On October 1, 1997, the Company issued 163,102 shares of its common stock to L.D., P.A. (formerly Progressive Therapy Services, P.A.) and 113,874 shares to L.D., Jr., P.C. (formerly Bar-Ed, Professional Corporation) as part of the purchase prices in connection with the Company's acquisition of substantially all the assets of such entities' physical therapy practices. On November 1, 1997, the Company issued 30,223 shares of its common stock to Marvin Dees, M.D. as part of the purchase price in connection with the Company's acquisition of substantially all the assets of the medical practice of Dr. Dees. 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 and Reports on Form 8-K (a) Exhibits. The exhibits included on the attached Exhibit Index are filed as part of this report. (b) Reports on Form 8-K. The Company filed a Form 8-K on October 15, 1997 which reported the acquisition by UCI-SC of Progressive Therapy Services, P.A. and Bar-Ed, Professional Corporation, each of Columbia, South Carolina. Financial statements of the acquired entity and pro forma financial information regarding the combined entity were filed in a Form 8-K/A on December 11, 1997. The Company filed a Form 8-K on November 5, 1997 which reported the acquisition by UCI-SC of Marvin Dees, M.D. of New Ellenton, South Carolina. Financial statements of the acquired entity and pro forma financial information regarding the combined entity were filed in a Form 8-K/A on January 7, 1998. SIGNATURE 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/ M.F. McFarland, III, M.D. /s/ Jerry F. Wells, Jr. Marion F. McFarland, III, M.D. Jerry F. Wells, Jr. President, Chief Executive Officer, Executive Vice President of Finance, and Chairman of the Board Chief Financial Officer and Principal Accounting Officer Date: February 12, 1998 UCI MEDICAL AFFILIATES, INC. EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE NUMBER - ---------------- ------------------------------------------------------- ------------------------------------- 10.18 Employment Agreement dated January 23, 1997 between 14 UCI Medical Affiliates of South Carolina, Inc. and Jon G. Keith 21 Subsidiaries of the Registrant 26 27 Financial Data Schedule Filed separately as Article Type 5 via Edgar