UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (Mark One) ( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1999 ------------------------------ ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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) 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 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 9,650,515 shares of $.05 common stock outstanding at July 31, 1999 UCI MEDICAL AFFILIATES, INC. INDEX Page Number PART I FINANCIAL INFORMATION Item 1 Financial Statements Condensed Consolidated Balance Sheets - June 30, 1999 and September 30, 1998 3 Condensed Consolidated Statements of Operations for the quarters and the nine months ending June 30, 1999 and June 30, 1998 4 Condensed Consolidated Statements of Cash Flows for the nine months ending June 30, 1999 and June 30, 1998 5 Notes to Condensed Consolidated Financial Statements 6 - 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 14 Item 3 Quantitative and Qualitative Disclosures about Market Risk 15 PART II OTHER INFORMATION Items 1-6 16 SIGNATURES 17 EXHIBIT INDEX 18 UCI Medical Affiliates, Inc. Condensed Consolidated Balance Sheets June 30, 1999 September 30, 1998 -------------------- ------------------------ (unaudited) (audited) Assets Current assets Cash and cash equivalents $ 73,763 $ 335,923 Accounts receivable, less allowance for doubtful accounts of $887,299 and $3,758,771 8,608,169 8,788,620 Inventory 490,341 539,564 Prepaid expenses and other current assets 622,825 875,409 -------------------- ------------------------ Total current assets 9,795,098 ----------------------- 10,539,516 Property and equipment, less accumulated depreciation of $4,629,937 and $3,762,865 4,721,376 5,475,051 Excess of cost over fair value of assets acquired, less accumulated amortization of $2,460,969 and $2,097,149 8,889,622 9,944,039 Other assets 41,501 243,677 -------------------- ------------------------ Total Assets $ 23,447,597 $ 26,202,283 ==================== ======================== Liabilities and Stockholders' Equity Current liabilities Current portion of long-term debt $ 1,654,804 $ 5,540,552 Current portion of long-term debt payable to employees 45,246 190,452 Accounts payable 3,723,918 5,283,023 Accrued salaries and payroll taxes 1,659,333 1,837,880 Other accrued liabilities 972,087 ----------------------- 1,406,033 ------------------------ -------------------- Total current liabilities 8,055,388 14,257,940 Long-term debt, net of current portion 8,505,493 5,755,502 Long-term debt payable to employees, net of current portion 42,626 501,783 Common stock to be issued 0 4,700,262 -------------------- ------------------------ -------------------- ------------------------ Total Liabilities 16,603,507 25,215,487 -------------------- ------------------------ Commitments and contingencies 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- 9,650,515 and 7,299,245 Shares 482,528 364,962 Paid-in capital 21,723,626 17,364,263 Accumulated deficit (15,362,064) (16,742,429) -------------------- ----------------------- Total Stockholders' Equity 6,844,090 986,796 -------------------- ----------------------- Total Liabilities and Stockholders' Equity $ 23,447,597 $ 26,202,283 ==================== ======================= See Notes to Condensed Consolidated Financial Statements. UCI Medical Affiliates, Inc. Condensed Consolidated Statements of Operations (unaudited) Three Months Ended June 30, Nine Months Ended June 30, ------------------------------------ ------------------------------------- 1999 1998 1999 1998 --------------- ---------------- ----------------- ---------------- Revenues $9,956,512 $9,932,868 $ 30,110,753 $ 26,625,431 Operating costs 8,852,797 9,436,121 26,069,237 25,748,944 --------------- ---------------- ----------------- ---------------- Operating margin 1,103,715 496,747 4,041,516 876,487 General and administrative expenses 24,777 20,729 68,428 66,817 Depreciation and amortization 495,532 521,837 1,467,715 1,349,851 --------------- ---------------- ----------------- ---------------- Income (loss) from operations 583,406 (45,819) 2,505,373 (540,181) Other income (expense) Interest expense, net of interest income (311,849) (290,904) (1,059,763) (846,864) Gain (loss) on disposal of equipment (3,468) 27,654 (65,245) 27,215 --------------- ---------------- ----------------- ---------------- Other income (expense) (315,317) (263,250) (1,125,008) (819,649) Income (loss) before benefit (provision )for income taxes 268,089 (309,069) 1,380,365 (1,359,830) Benefit (provision )for income taxes 0 0 0 (558) --------------- ---------------- ----------------- ---------------- Net income (loss) $ 268,089 $(309,069) $ 1,380,365 $(1,360,388) ================ ================= ================ =============== Basic earnings (loss) per share $ $ (.05) $ $ .03 .17 (.22) =============== ================ ================= ================ Basic weighted average common shares outstanding 9,650,515 6,745,399 8,161,360 6,290,844 =============== ================ ================= ================ Diluted earnings (loss) per share $ $ (.05) $ $ (.22) .03 .17 =============== ================ ================= ================ Diluted weighted average common shares outstanding 9,657,734 6,756,273 8,167,747 6,309,164 =============== ================ ================= ================ See Notes to Condensed Consolidated Financial Statements. UCI Medical Affiliates, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended June 30, ---------------------------------------- 1999 1998 ------------------ ------------------ Operating activities: Net income (loss) $ 1,380,365 $ (1,360,388) Adjustments to reconcile net income (loss) to net cash provided by (used-in) operating activities: (Gain) loss on disposal of equipment 65,245 (27,215) Provision for losses on accounts receivable 1,270,585 897,237 Depreciation and amortization 1,467,714 1,349,851 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (1,233,060) (2,835,232) (Increase) decrease in inventories 0 (163,837) (Increase) decrease in prepaid expenses and other current assets 146,007 (433,935) Increase (decrease) in accounts payable and accrued expenses (1,086,511) 1,595,322 ------------------ ------------------ Cash provided by (used in) operating activities 2,010,345 (978,197) ------------------ ------------------ Investing activities: Purchases of property and equipment (359,114) (731,285) Disposals of property and equipment 41,083 1,500 Acquisitions of goodwill (79,743) (933,554) (Increase) decrease in other assets 202,177 2,878 ------------------ ------------------ Cash provided by (used in) investing activities (195,597) (1,660,461) ------------------ ------------------ Financing activities: Issuance of common stock, net of redemptions & expense 0 1,103,700 Net borrowings (payments) under line-of-credit agreement (209,206) (570,632) Increase in long-term debt 0 2,088,523 Book overdraft (included in accounts payable) (847,819) 1,020,709 Payments on long-term debt (1,019,883) (1,018,318) ------------------ ------------------ Cash provided by (used in) financing activities (2,076,908) 2,623,982 ------------------ ------------------ Increase (decrease) in cash and cash equivalents (262,160) (14,676) Cash and cash equivalents at beginning of period 335,923 14,676 ------------------ ------------------ ------------------ Cash and cash equivalents at end of period $ 73,763 $ 0 ================== ================== See Notes to Condensed Consolidated Financial Statements UCI MEDICAL AFFILIATES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) BASIS OF PRESENTATION: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of those of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended June 30, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 1999. 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, 1998. The consolidated financial statements include the accounts of UCI Medical Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc. ("UCI-SC"), UCI Medical Affiliates of Georgia, Inc. ("UCI-GA"), Doctor's Care, P.A., Doctor's Care of Georgia, P.C., and Doctor's Care of Tennessee, P.C. (the three together as the "P.A."). (As used herein, the term "Company" refers to UCI, UCI-SC, UCI-GA, and the P.A., collectively.) 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 an exclusive long-term management services agreements with the P.A. which operate the medical practices. Consolidation of the financial statements is required under Emerging Issues Task Force (EITF) 97-2 as a consequence of the nominee shareholder arrangement that exists with respect to each of the P.A.'s. In each case, the nominee (and sole) shareholder of the P.A. has entered into an agreement with UCI-SC or UCI-GA, as applicable, which satisfies the requirements set forth in footnote 1 of EITF 97-2. Under the agreement, UCI-SC or UCI-GA, as applicable, in its sole discretion, can effect a change in the nominee shareholder 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, UCI-GA or the P.A. resulting from such change. In addition to the nominee shareholder arrangements described above, each of UCI-SC and UCI-GA has entered into Administrative Service Agreements with the P.A.'s. As a consequence of the nominee shareholder arrangements and the Administrative Service Agreements, the Company has a long-term financial interest in the affiliated practices of the P.A.'s. Through the Administrative Services Agreement, the Company has exclusive authority over decision making relating to all major on-going operations. The Company establishes annual operating and capital budgets for the P.A. and compensation guidelines for the licensed medical professionals. The Administrative Services Agreements have an initial term of forty years. According to EITF 97-2, the application of FASB Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and APB No. 16 (Business Combinations), the Company must consolidate the results of the affiliated practices with those of the Company. All significant intercompany accounts and transactions are eliminated in consolidation, including management fees. The method of computing the management fees is based on billings of the affiliated practices less the amounts necessary to pay professional compensation and other professional expenses. In all cases, these fees are meant to compensate the Company for expenses incurred in providing covered services, plus a profit. These interests are unilaterally salable and transferable by the Company and fluctuate based upon the actual performance of the operations of the professional corporation. The 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 65% of the physicians employed by the P.A. are paid on an hourly basis for time scheduled and worked at the medical centers, while other physicians are salaried. A few of the physicians have incentive compensation arrangements, which are contractually based upon factors such as productivity, collections and quality. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates and assumptions. Significant estimates are discussed in the footnotes, as applicable, of the Form 10-KSB for the year ended September 30, 1998. The Company operates as one segment. 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. SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES In May 1998, the Company acquired certain assets of a seven facility medical practice (five in Georgia and two in Tennessee) for $5,255,437 by assuming certain liabilities, paying $450,010 at closing, financing $800,000 with the seller, and committing to issue 2,901,396 shares of the common stock of the Company. In February 1999, the shares were issued to the seller with the Board's approval. In exchange for the return of 550,082 shares of the Company's stock, the Company sold the three centers of the Springwood Lake Family Practice back to the physicians in November 1998. The centers were purchased from the physicians in September 1997. The three centers were operated by the Company as Springwood Lake Family Practice, Woodhill Family Practice and Midtown Family Practice. 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, UCI-GA and the P.A.'s. Such consolidation is required under Emerging Issues Task Force (EITF) 97-2 as a consequence of the nominee shareholder arrangement that exists with respect to each of the PA's. In each case, the nominee (and sole) shareholder of the P.A. has entered into an agreement with UCI-SC or UCI-GA, as applicable, which satisfies the requirements set forth in footnote 1 of EITF 97-2. Under the agreement, UCI-SC or UCI-GA, as applicable, in its sole discretion, can effect a change in the nominee shareholder 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, UCI-GA or the P.A. resulting from such change. In addition to the nominee shareholder arrangements described above, each of UCI-SC and UCI-GA has entered into Administrative Service Agreements with the P.A.'s. As a consequence of the nominee shareholder arrangements and the Administrative Service Agreements, the Company has a long-term financial interest in the affiliated practices of the P.A.'s. According to EITF 97-2, the application of FASB Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and APB No. 16 (Business Combinations), the Company must consolidate the results of the affiliated practices with those of the Company. The P.A.'s enter 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 65% of the physicians employed by the P.A.'s 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. Any incentive compensation is based upon a percentage of non-ancillary collectible charges for services performed by a provider. Percentages range from 3% to 17% and vary by individual employment contract. As of June 30, 1999 and 1998, the P.A.'s employed 93 and 120 medical providers, respectively. The net assets of the P.A.'s are not material for any period presented, and intercompany accounts and transactions have been eliminated. The Company does not allocate all indirect costs incurred at the corporate offices to the Centers on a center-by-center basis. Therefore, all discussions below are intended to be in the aggregate for the Company as a whole. Results of Operations For the Three Months Ended June 30, 1999 as Compared to the Three Months Ended June 30, 1998 Revenues of $9,957,000 for the quarter ending June 30, 1999 are virtually flat as compared to those of the quarter ending June 30, 1998. However, the lack of a significant change in quarter to quarter revenue is misleading. The Company engaged in expansion and in divestiture. This expansion included the addition of seven centers in May 1998 and the closure or divestiture of six centers during fiscal year 1998, for a net addition of one center. The Company operates 40 centers as of June 30, 1999. The seven additions were: 1. Doctor's Care Stone Mountain Atlanta, GA Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 2. Doctor's Care Tucker Atlanta, GA Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 3. Doctor's Care Lawrenceville Atlanta, GA Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 4. Doctor's Care Austell Atlanta, GA Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 5. Doctor's Care Snellville Atlanta, GA Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 6. Doctor's Care Knoxville West Knoxville, TN Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 7. Doctor's Care Knoxville North Knoxville, TN Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. The six closures or divestitures were: 1. Doctor's Care Waccamaw Myrtle Beach, SC Region This acquired center (01/95) was closed effective September 1998 and the provider and patient records were transferred to the near-by Doctor's Care Strand Medical Center. 2. Doctor's Care Camden Columbia, SC Region This acquired center (09/97) was closed in August 1998 and the provider and patient records were transferred to near-by Doctor's Care Wateree. 3. Doctor's Surgical Group Columbia, SC Region This start-up facility (06/93) was closed effective February 1998. 4. Springwood Lake Columbia, SC Region Acquired in August 1997 along with two more Family Practice centers and were divested of (sold back to the seller on November 1, 1998) effective September 1998. 5. Woodhill Family Practice Columbia, SC Region Acquired in August 1997 along with two more centers and were divested of (sold back to the seller on November 1, 1998) effective September 1998. 6. Midtown Family Practice Columbia, SC Region Acquired in August 1997 along with two more centers and were divested of (sold back to the seller on November 1, 1998) effective September 1998. The revenue from the centers that were operating during the entire third quarter of fiscal year 1999 but not during the entire third quarter of fiscal year 1998 was approximately $50,000 higher in fiscal year 1999 than in fiscal year 1998. This increase in revenue would be offset by the loss of revenue for the six centers that were operating for all or portions of the third quarter of fiscal year 1998 but not during the third quarter of fiscal year 1999 of approximately $1,011,000. The remainder of the growth in quarter to quarter revenue of approximately $985,000 is the result of "same store" growth. Even though patient encounters decreased to approximately 123,000 in the third quarter of fiscal year 1999 from 127,000 in the third quarter of fiscal year 1998, the average charge per encounter increased. During the past several fiscal years, the Company has continued its services provided to members of HMOs. In these arrangements, the Company, through the P.A., acts as the designated primary caregiver for members of HMOs who have selected one of the Company's centers or providers as their primary care provider. In fiscal year 1994, the Company began participating in an HMO operated by Companion HealthCare Corporation ("CHC"), a wholly owned subsidiary of Blue Cross Blue Shield of South Carolina ("BCBS"). BCBS, through CHC, is a primary stockholder of UCI. Including its arrangement with CHC, the Company now participates in four HMOs and is the primary care "gatekeeper" for more than 19,000 lives at June 30, 1999. Two of these HMOs use a capitation scheme for payments and two pay on a discounted fee-for-service basis. HMOs do not, at this time, have a significant penetration into the South Carolina market. The Company is not certain if there will be growth in the market share of HMOs in the areas in which it operates clinics. Capitated revenue decreased from approximately $589,000 in the third quarter of fiscal year 1998 to approximately $379,000 in the third quarter of fiscal year 1999. This decline was primarily the result of one of the "gatekeeper" HMO's (Companion) switching from a capitation payment method to a discounted fee-for-service method during the middle of fiscal year 1998. The Company currently negotiates contracts with two 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 capitated HMOs accounted for approximately 4% of the Company's net revenue in the third quarter of fiscal year 1999 compared to 6% the third quarter of fiscal year 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. No capitation contracts currently in place at the Company have been determined to be insufficient to cover related costs of treatment. 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 and sustained revenues in fiscal years 1999 and 1998 also reflect the Company's heightened focus on occupational medicine and industrial health services (these revenues are referred to as "employer paid" on the table below). Focused marketing materials, including quarterly newsletters for employers, were developed to spotlight the Company's services for industry. The following table breaks out the Company's revenue and patient visits by revenue source for the third quarter of fiscal years 1999 and 1998. Percent of Percent of Payor Patient Visits Revenue ---------------------------------------------- ------------------------ ----------------------- 1999 1998 1999 1998 ------------ ----------- ------------ ---------- 18 22 18 22 Patient Pay 15 13 9 10 Employer Paid 11 12 9 10 HMO 8 10 16 13 Workers Compensation 7 10 6 7 Medicare/Medicaid 34 26 31 28 Managed Care Insurance 7 7 11 10 Other (Commercial Indemnity, Champus, etc.) An operating margin of $1,104,000 was earned during the third quarter of fiscal 1999 as compared to an operating margin of $497,000 for the third quarter of fiscal 1998. Management believes that this margin improvement is mainly the result of the closure or divestiture of several unprofitable centers discussed above and the reduction of corporate overhead through personnel costs reductions. These decisions were in part 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 decreased to $496,000 in the third quarter of fiscal 1999, down from $522,000 in the third quarter of fiscal 1998. This increase reflects higher depreciation expense as a result of leasehold improvements and equipment upgrades at a number of the Company's medical centers, offset by a decrease in amortization expense related to the intangible assets disposed of by the Company's closure of existing practices as noted above. Interest expense increased from $290,000 in the third quarter of fiscal 1998 to $312,000 in the third quarter of fiscal 1999 primarily as a result of the interest costs associated with the indebtedness incurred in the usage of the operating line of credit. For the Nine Months Ended June 30, 1999 as Compared to the Nine Months Ended June 30, 1998 Revenues of $30,111,000 reflect an increase of 13% from the same period in fiscal year 1998 and is attributable to the expansion, marketing and line of business factors discussed above. Patient encounters increased to 384,000 for the nine months ended June 30, 1999 from 361,000 for the nine months ended June 30, 1998. Financial Condition at June 30, 1999 Cash and cash equivalents decreased by $262,000 during the nine months ended June 30, 1999 primarily as a result of a reduction in accounts payable. Accounts receivable as of June 30, 1999 decreased slightly as compared to September 30, 1998, reflecting the continuing focus on collection activities. The reduction in the excess of cost over fair value of assets acquired from September 30, 1998 as compared to June 30, 1999 is attributable to the closure or divestiture of the centers noted above and the write-off of the related goodwill in fiscal year 1998 as well as amortization expense during the nine months ended June 30, 1999. Long-term debt decreased from $11,989,000 at September 30, 1998 to $10,248,000 at June 30, 1999 primarily as a result of indebtedness retired in the divestiture of the three Family Practice Centers discussed earlier. The Company's line of credit balance was also temporarily lower at June 30, 1999 as compared to September 30, 1998. This balance fluctuates daily. Management believes that it will be able to fund debt service requirements out of cash generated through operations. The Company acquired substantially all of the assets of MainStreet Healthcare ("MHC") effective for accounting purposes as of May 1, 1998 ("the Acquisition"). As partial consideration for the Acquisition, the Company delivered to MHC at the closing a Conditional Delivery Agreement which required the Company to issue to MHC 2,901,396 shares of the common stock of the Company upon the approval to increase the number of authorized shares of the Company by the shareholders. These shares were recorded as "Common stock to be issued" on the September 30, 1998 balance sheet. Shareholder approval was obtained at the February 24, 1999 shareholder meeting and the liability has been reclassified to stockholder equity as of that date. Overall, the Company's current assets exceeded its current liabilities at June 30, 1999 by $1,740,000. 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), and credit extended by suppliers. The Company has a $7,000,000 bank line of credit with an outstanding indebtedness of approximately $3,369,000 at June 30, 1999. The line of credit bears interest of prime plus 2.5% with a maturity of March 2000. (Prime rate was 7.75% as of June 30, 1999.) The line of credit is used to fund the working capital needs of the Company's expansion. This debt was classified as current at September 30, 1998 due to a technical covenant default that was resolved in January 1999 with the lender and is, therefore, reclassified as long-term at the December 31, 1998, March 31, 1999 and June 30, 1999 balance sheet dates. As of June 30, 1999, the Company had no material commitments for capital expenditures. Operating activities produced $2,010,000 of cash during the nine months ended June 30, 1999, compared with $978,000 used during the same period in the prior fiscal year. This improvement was mainly the result of the improvement in the operating margin and in accounts receivable collections. Investing activities used only $196,000 in cash during the nine months ended June 30, 1999 mainly as the result of the Company selling a piece of investment property for approximately $225,000 (sold for approximately the recorded book value). Financing activities utilized $2,077,000 in cash during the nine month period for debt reduction. Approximately $400,000 of this was temporary in nature due to the daily fluctuation of the primary line of credit. The Year 2000 It is possible that the Company's currently installed computer systems, or other business systems, or those of the Company's vendors, working either alone or in conjunction with other software or systems, will not accept input of, store, manipulate or output dates in the years 1999, 2000 or thereafter without error or interruption (commonly known as the "Year 2000" problem). The Company has conducted a review of its business systems, including its computer systems, on a system-by-system basis, and is querying third parties with whom it conducts business as to their progress in identifying and addressing problems that their computer systems may face in correctly processing date information as the Year 2000 approaches and is reached. The Company has determined that its general accounting systems (which includes invoicing, accounts receivable, payroll, etc.) must be upgraded to make the systems Year 2000 compliant. The Company estimates that the cost of upgrading these accounting systems will be approximately $50,000 and that the upgrade will be completed before the end of fiscal year 1999. As of June 30, 1999, the Company had expended approximately $40,000 to remedy this problem. The Company is continuing to review its information technology ("IT") hardware and software, including personal computers, application and network software for Year 2000 compliance readiness. The review process entails evaluation of hardware/software and testing. The Company believes its IT review will be completed by the end of fiscal year 1999. While the review process is ongoing, the Company believes that the cost to bring its IT systems into Year 2000 compliance will be under $20,000 and it does not foresee any material difficulties with completing the necessary changes prior to January 1, 2000. The Company expects that its review of non-IT systems (including voice communications) will be completed before the end of fiscal year 1999. The estimated costs to remedy non-IT systems is not expected to be material. The Company expects that the source of funds for evaluation and remediation of Year 2000 compliance issues will be cash flow from operations. The Company believes that its most significant internal risk posed by the Year 2000 Problem is the possibility of a failure of its accounting systems. If the accounting systems were to fail, the Company would have to implement manual processes, which may slow the timeliness of information needed to manage the business. As discussed above, the Company plans to avoid this risk by upgrading its accounting systems; however, there can be no assurance that such actions will avoid problems that may arise. The third parties whose Year 2000 problems could have the greatest effect on the Company are believed by the Company to be banks that maintain the Company's depository accounts' credit card processing systems (including related telecommunication systems), the companies which supply the Company with medical supplies, and the insurance company payors for the Company's patients' medical claims. The Company has not yet established a "contingency plan" to address potential Year 2000 problems and is currently considering the extent to which it will develop a formal contingency plan. There can be no assurance that the Company will identify all Year 2000 problems in its computer systems or those of third parties in advance of their occurrence or that the Company will be able to successfully remedy any problems that are discovered. The expenses of the Company's efforts to identify and address such problems, or the expenses or liabilities to which the Company may become subject as a result of such problems, could have a material adverse effect on the Company's business, financial condition and results of operations. Maintenance or modification costs will be expensed as incurred. Advisory Note Regarding Forward-Looking Statements Certain of the statements contained in this PART I, Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this Quarterly Report on Form 10-Q that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Although the Company's management believes that their expectations of future performance are based on reasonable assumptions within the bounds of their knowledge of their business and operations, there can be no assurance that actual results will not differ materially from their expectations. Factors which could cause actual results to differ from expectations include, among other things, the difficulty in controlling the Company's costs of providing healthcare and administering its network of Centers; 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; the difficulty of attracting primary care physicians; the increasing competition for patients among healthcare providers; possible government regulations negatively impacting the existing organizational structure of the Company; the possible negative effects of prospective healthcare reform; the challenges and uncertainties in the implementation of the Company's expansion and development strategy; the dependence on key personnel, the ability to successfully integrate the management structures and consolidate the operations of recently acquired entities or practices with those of the Company, and other factors described in this report and in other reports filed by the Company with the Securities and Exchange Commission. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which includes credit facilities with financial institutions used to maintain liquidity and fund the Company's 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 the Company's debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of the Company's interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. The Company does not currently use derivative instruments to adjust the Company's interest rate risk profile. Approximately $6,000,000 of the Company's debt at June 30, 1999 was subject to fixed interest rates and principal payments. Approximately $4,000,000 of the Company's debt at June 30, 1999 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at June 30, 1999, the Company's interest expense on an annualized basis would increase approximately $40,000 for each increase of one percent in the prime rate. The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. 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 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 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. None. 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., CPA Marion F. McFarland, III, M.D. Jerry F. Wells, Jr., CPA President, Chief Executive Officer, Executive Vice President of Finance, and Chairman of the Board Chief Financial Officer, and Principal Accounting Officer Date: August 11, 1999 UCI MEDICAL AFFILIATES, INC. EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE NUMBER - ---------------- ------------------------------------------------------- ------------------------------------- 27 Financial Data Schedule Filed separately as Article Type 5 via Edgar