SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 2 )
Filed by the registrant [ X ]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement.
[ ] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
[ ] Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2)).
UCI MEDICAL AFFILIATES, INC.
(Name of Registrant as Specified in Its Charter)
Payment of filing fee (check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on
which the filing fee is calculated and state how it was
determined):
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------
(5) Total fee paid:
-------------------------------------
[X] Fee paid previously with preliminary materials.
--- ($1,774 paid with February 24, 1998 filing.)
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[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the form or schedule and the date
of its filing.
(1) Amount Previously Paid:
-----------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
---------------------------------------------
(4) Date Filed:
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PRELIMINARY PROXY STATEMENT DATED AUGUST 20, 1998
UCI MEDICAL AFFILIATES, INC.
1901 MAIN STREET, SUITE 1200
COLUMBIA, SOUTH CAROLINA 29201
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, SEPTEMBER 30, 1998
TO THE STOCKHOLDERS OF UCI MEDICAL AFFILIATES, INC.:
The Annual Meeting of Stockholders of UCI Medical Affiliates, Inc., a
Delaware corporation ("UCI"), will be held on Wednesday, September 30, 1998 at
10:00 a.m., local time, at the Embassy Suites Hotel, 200 Stoneridge Drive,
Columbia, South Carolina 29210 for the following purposes:
A. In connection with the transaction in which UCI has acquired
certain assets and assumed certain liabilities of MainStreet Healthcare
Corporation ("MHC"), a Delaware corporation, UCI stockholders will be asked:
1. To approve the issuance of shares of UCI common
stock in connection with the transaction.
2. To approve the issuance of warrants for the
purchase of shares of UCI common stock in
connection with a private placement of UCI common
stock.
3. To approve an amendment to the Amended and
Restated Certificate of Incorporation of UCI to
increase the authorized shares of UCI common
stock from 10 million shares to 50 million
shares.
B. In connection with the Annual Meeting, UCI stockholders will be
asked:
1. To approve the election of three members of the
UCI Board of Directors, each to hold office for a
three-year term ending on the date of the annual
meeting of stockholders in the year 2001 and
until such director's respective successor shall
have been duly elected and qualified.
2. To approve the adoption of the UCI 1997 Stock
Incentive Plan for officers, directors, employees
and consultants.
3. To approve an amendment to the Amended and
Restated Certificate of Incorporation of UCI to
give effect to a one-for-five reverse stock
split.
4. To ratify the appointment of Price Waterhouse LLP
as the firm of independent auditors to audit the
consolidated financial statements of UCI and its
subsidiaries for the fiscal year ending September
30, 1998.
C. To transact such other business as may properly come before the
Annual Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record of UCI common stock at the close of
business on August 20, 1998 are entitled to notice of, and will be entitled to
vote at, the Annual Meeting or any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
M. F. McFarland, III, M.D.
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
August 31, 1998
TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, WE
URGE YOU TO COMPLETE, DATE AND SIGN THE ENCLOSED FORM OF PROXY AND MAIL IT
PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO
ATTEND THE ANNUAL MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY
TIME BEFORE IT IS VOTED.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES REGULATOR HAS APPROVED THE SHARES OF UCI COMMON STOCK TO BE ISSUED IN
THE TRANSACTION, OR DETERMINED IF THIS PROXY STATEMENT IS ACCURATE OR ADEQUATE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The accompanying Proxy Statement is dated
August 31 1998, and was first mailed to
stockholders on or about August 31, 1998.
TABLE OF CONTENTS
SUMMARY
Proposals Relating to the Acquisition..........................................1
Description of the Acquisition.................................................1
Annual Meeting Proposals.......................................................5
Record Date; Vote Required for Stockholder Approval of the Proposals ..........6
Recommendations to Stockholders................................................6
Markets and Market Prices......................................................6
Selected Historical Financial Data of the Company..............................7
Selected Historical Financial Data of MHC......................................8
Selected Pro Forma Financial Data of the Company...............................9
RISK FACTORS
Financial Status of MHC.......................................................10
Integration of Operations; Management of Growth...............................10
Dilution......................................................................11
Resales of Common Stock.......................................................12
Possible Nasdaq Delisting.....................................................12
Competition...................................................................13
THE ACQUISITION
Description of the Acquisition................................................14
Background ........................................................14
Closing of the Acquisition.........................................16
Reasons for the Acquisition........................................17
Recommendation of the UCI Board....................................18
Stockholder Approval...............................................18
Expectation of Stockholder Approval................................18
Scheduling of Stockholder Approval.................................19
Fairness Opinion ..................................................19
Financing of the Acquisition.......................................21
Certain Federal Income Tax Matters.................................21
Accounting Treatment...............................................21
Resales of Common Stock............................................22
Absence of Dissenters' Rights......................................23
Interests of Certain Persons in the Acquisition....................23
Description of the Agreements.................................................23
Acquisition Agreement..............................................23
Related Agreements................................................26
Non-Solicit Agreements...................................26
Registration Rights Agreement............................26
Stockholder Agreements...................................26
FINANCIAL AND BUSINESS INFORMATION
Market Price and Dividend Information.........................................27
Description of MHC............................................................28
Unaudited Pro Forma Combined Condensed Financial Statements..................29
THE ANNUAL MEETING
Business to be Conducted at the Annual Meeting................................33
Proposals to be Voted Upon.........................................33
Date, Time and Place of Meeting....................................33
Record Date........................................................34
Shares Outstanding and Entitled to Vote............................34
Voting and Revocation of Proxies...................................34
Quorum .........................................................34
Vote Required......................................................35
Solicitation of Proxies and Expenses...............................35
Description of Proposals......................................................36
Acquisition Proposals.........................................................36
Share Issuance and Warrant Issuance Proposals......................36
Authorized Capital Stock Proposal..................................36
Annual Meeting Proposals......................................................36
Election of Directors..............................................36
1997 Incentive Plan Proposal.......................................37
Reverse Stock Split Proposal.......................................41
Ratification of Auditors Proposal..................................43
Directors and Executive Officers..............................................43
Directors .........................................................43
Executive Officers.................................................44
Section 16(a) Beneficial Ownership Reporting Compliance............45
Board of Directors and Board Committees............................45
Executive Compensation.............................................46
Director Compensation .............................................47
Employment Contracts...............................................48
Security Ownership of Certain Beneficial Owners and Management................48
Certain Relationships and Related Party Transactions..........................49
ADDITIONAL INFORMATION
Cautionary Statement Concerning Forward-Looking Statements....................52
Stockholder Proposals.........................................................53
Other Matters.................................................................53
Annual and Quarterly Reports..................................................53
Where You Can Find More Information...........................................53
APPENDICES
APPENDIX A-Fairness Opinion..................................................A-1
APPENDIX B-Proposed Amendments to the UCI Certificate........................B-1
APPENDIX C-MHC Historical Financial Statements...............................C-1
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT, AND
MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND
THE PROPOSED TRANSACTION FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE TRANSACTION, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE
DOCUMENTS TO WHICH WE HAVE REFERRED YOU. SEE "ADDITIONAL INFORMATION - WHERE YOU
CAN FIND MORE INFORMATION."
This Proxy Statement is being furnished to the holders of common
stock, par value $0.05 per share (the "Common Stock"), of UCI Medical
Affiliates, Inc., a Delaware corporation ("UCI"), in connection with the
solicitation of proxies by the UCI Board of Directors (the "UCI Board") for use
at the Annual Meeting of Stockholders of UCI to be held Wednesday, September
30, 1998 at 10:00 a.m., local time, at the Embassy Suites Hotel, 200 Stoneridge
Drive, Columbia, South Carolina for the following purposes:
o To approve certain proposals relating to the May 1998
acquisition (the "Acquisition") by UCI and certain of its
affiliated entities of substantially all of the assets and
certain of the liabilities of MainStreet Healthcare
Corporation, a Delaware corporation ("MHC"), and its
affiliated entities, and the funding of a portion of the
Acquisition by UCI through the private placement of Common
Stock, and
o To approve certain proposals presented as part of the
regularly scheduled Annual Meeting of Stockholders of UCI.
PROPOSALS RELATING TO THE ACQUISITION
Three of the proposals stockholders are being asked to approve at
the Annual Meeting relate to matters necessary for UCI to satisfy its
obligations under agreements delivered at the closings of the Acquisition and
the private placement of certain securities by UCI to finance the cash portion
of the consideration exchanged in the Acquisition. Specifically, stockholders
are being asked to approve the issuance by UCI of 2,901,396 shares of Common
Stock to MHC following the Annual Meeting and the issuance by UCI of stock
purchase warrants for the purchase of 300,000 shares of Common Stock to certain
investors following the Annual Meeting. Also, because the number of shares of
Common Stock authorized under the Amended and Restated Certificate of
Incorporation of UCI (the "UCI Certificate") is not currently sufficient to
accommodate the issuances of Common Stock identified above, stockholders are
being asked to approve an amendment to the UCI Certificate to increase UCI's
authorized shares of Common Stock from 10 million to 50 million shares.
DESCRIPTION OF THE ACQUISITION
PARTIES TO THE ACQUISITION
On May 13, 1998, UCI Medical Affiliates of Georgia, Inc. ("UCI-GA"),
a wholly-owned subsidiary of UCI, and certain of its affiliated entities
acquired substantially all of the assets and certain of the liabilities of MHC
and its affiliated entities. MHC is a closely held corporation that prior to the
Acquisition provided nonmedical management and administrative services for its
network of 11 freestanding medical centers (the "MHC Centers") located in
Georgia and Tennessee.
UCI-GA was formed to acquire the assets and liabilities of MHC
pursuant to the Acquisition and to provide nonmedical management and
administrative services for the MHC Centers following the Acquisition. UCI
Medical Affiliates of South Carolina, Inc. ("UCI-SC"), another wholly-owned UCI
subsidiary, performs this same category of services for its network of 40
freestanding medical centers (the "UCI Centers") located throughout South
Carolina. All medical services at the UCI Centers are provided by Doctor's
Care, P.A. ("DC-SC"), a professional corporation affiliated with UCI and
UCI-SC.
1
Prior to the Acquisition, in compliance with applicable laws governing
the corporate practice of medicine, two professional corporations, MainStreet
Healthcare Medical Group, P.C., Georgia ("MHC-GA") and MainStreet Healthcare
Medical Group, P.C., Tennessee ("MHC-TN", and collectively with MHC-GA, the
"MHC-PCs"), performed all medical services at the MHC Centers in Georgia and
Tennessee, respectively. The MHC-PCs operated solely to fulfill the licensed
medical provider responsibilities associated with the MHC Centers pursuant to
administrative service agreements between each of the MHC-PCs and MHC.
In connection with the Acquisition, two new professional
corporations, Doctor's Care of Georgia, P.C. ("DC-GA") and Doctor's Care of
Tennessee, P.C. ("DC-TN" and, collectively with DC-GA, the "UCI-PCs") were
formed to acquire the assets of MHC-GA and MHC-TN, respectively, and to
fulfill the licensed medical provider responsibilities associated with the MHC
Centers acquired by UCI-GA in the Acquisition. These responsibilities, as well
as various administrative, management and support functions, are currently
carried out pursuant to an administrative services agreement between UCI-GA and
each of the UCI-PCs.
AS USED IN THIS PROXY STATEMENT, THE TERM "COMPANY" REFERS TO UCI,
UCI-SC, UCI-GA, DC-SC, AND THE UCI-PCS, COLLECTIVELY.
ACQUISITION AGREEMENTS
The Acquisition was carried out pursuant to the terms of the
Acquisition Agreement and Plan of Reorganization dated February 9, 1998, as
amended on April 15, 1998 and May 7, 1998 (the "Acquisition Agreement"). This
agreement is summarized in this Proxy Statement under the heading "The
Acquisition -Description of the Agreements - Acquisition Agreement." The
Acquisition also included the delivery of a Conditional Delivery Agreement,
non-solicit agreements and a registration rights agreement, all of which are
summarized in this Proxy Statement under the heading "The Acquisition -
Description of the Agreements."
CLOSING OF THE ACQUISITION
The closing of the Acquisition took place on May 13, 1998 and is
being accounted for as of May 1, 1998. All of the transfers and exchanges
identified below were completed and accounted for as of such dates. At the
closing of the Acquisition, the following took place:
o MHC transferred to UCI-GA substantially all of the assets of MHC in
exchange for the following:
o assumption by UCI-GA of certain liabilities, including a
$594,184 line of credit obligation and certain real
property and equipment lease obligations of MHC; and
o cash, note payable and a commitment to issue stock having
an aggregate value of $8.14 million, exchanged as follows:
o delivery of a cash payment of $450,000 to an
escrow agent selected by MHC and the delivery
to the escrow agent of a $800,000 promissory note
of UCI-GA payable to the escrow agent, with such
cash and the proceeds from the repayment of the
note to be paid by the escrow agent to certain
creditors of MHC; and
o delivery of a Conditional Delivery Agreement
pursuant to which UCI commits to issue 2,901,396
shares of Common Stock to the escrow agent
subject to the receipt of stockholder approval
for such issuance (such shares valued at $6.89
million using a value of $2.375 per share
pursuant to the share price formula set forth in
the Acquisition Agreement). At the Annual
Meeting, stockholders of UCI will be asked to
approve the issuance of such shares. See "Annual
Meeting Proposals."
2
o The MHC-PCs transferred to the UCI-PCs all of the assets of the
MHC-PCs in exchange for the following:
o assumption by the UCI-PCs of the obligations of the MHC-PCs
under employment agreements with medical service providers;
and
o an aggregate cash payment of $200 ($100 to each of the two
MHC-PCs).
FINANCING THE ACQUISITION - THE PRIVATE PLACEMENT
UCI financed the cash portion of the consideration exchanged in the
Acquisition using a portion of the net proceeds received by UCI in a private
placement (the "Private Placement") by UCI of $1.2 million of Common Stock (1.2
million shares) which closed on May 12, 1998. As placement agent and financial
advisory services fees in connection with the Private Placement, UCI delivered a
Conditional Delivery Agreement at the closing of the Private Placement pursuant
to which UCI has agreed to issue warrants (the "Warrants") for the purchase of
an aggregate of 300,000 shares of Common Stock subject to the receipt of
stockholder approval for such issuance. At the Annual Meeting, stockholders of
UCI will be asked to approve the issuance of the Warrants and the shares of
Common Stock issuable upon their exercise. See "Annual Meeting Proposals."
STOCKHOLDER APPROVAL REQUIREMENT
Stockholders of UCI are not being asked at the Annual Meeting to
approve or ratify the Acquisition or the Private Placement. Stockholder approval
is being sought at the Annual Meeting to enable UCI to satisfy its obligations
under agreements delivered at the closings of the Acquisition and the Private
Placement. Specifically, as reflected above, under Conditional Delivery
Agreements delivered at the closings of each of the Acquisition and the Private
Placement, UCI has committed to issue 2,901,396 shares of Common Stock to an
escrow agent and to issue Warrants for the purchase of 300,000 shares of Common
Stock to certain parties who participated in the Private Placement. Because the
aggregate number of such shares of Common Stock will exceed 20 percent of the
number of outstanding shares of Common Stock prior to such issuances, rules and
regulations of the National Association of Securities Dealers, Inc. (the "NASD")
require that approval by UCI stockholders be received prior to the issuance of
the Common Stock and the Warrants. Also, because such number of shares will
exceed the existing number of shares authorized under the UCI Certificate,
stockholder approval is being sought to make an appropriate amendment to the UCI
Certificate to increase the authorized capital stock. Because the Common Stock
and the Warrants were not actually issued at the closings of the Acquisition and
the Private Placement, stockholder approval was not required for such closings
to take place.
The Conditional Delivery Agreement delivered at the closing of the
Acquisition states that in the event the stockholders of UCI fail to approve any
of the matters necessary to issue the shares to MHC as provided in the
Acquisition Agreement, each of the parties, to the extent possible, is to be
restored to its position held prior to the closing. In the event it is
impossible to restore a party to its position held prior to closing, any
deficiency is to be resolved by the exchanging of promissory notes among the
parties.
EXPECTATION OF STOCKHOLDER APPROVAL
M.F. McFarland, III, M.D., Chairman and Chief Executive Officer of
UCI; D. Michael Stout, M.D., Executive Vice President of Medical Affairs for
UCI; Stephen F. Serbin, M.D., Director of the Family Medical Division of DC-SC;
Peter J. Stahl, M.D., Assistant Director of the Family Medical Division of
DC-SC; and two subsidiaries of Blue Cross Blue Shield of South Carolina ("BCBS")
have indicated to UCI that each of them intends to vote the shares of Common
Stock controlled by them in favor of each of the proposals relating to the
Acquisition scheduled to be presented for stockholder approval at the Annual
Meeting. In addition, each of these stockholders has executed a separate
agreement with MHC in which each of them has agreed to vote shares held by such
stockholder in favor of the proposals relating to the Acquisition and the
Private Placement that will be presented for stockholder approval. None of such
stockholders has any direct or indirect interest in the Acquisition other than
as stockholders of UCI. As of
3
the record date for the Annual Meeting, shares held by these stockholders
represented approximately 54 percent of the outstanding Common Stock.
ACCORDINGLY, IF EACH OF SUCH STOCKHOLDERS VOTES AS INDICATED, ALL OF
THE PROPOSALS RELATING TO THE ACQUISITION AND THE PRIVATE PLACEMENT ARE ASSURED
TO BE APPROVED, REGARDLESS OF THE VOTES THAT MAY BE CAST BY ANY OTHER HOLDERS OF
COMMON STOCK ENTITLED TO VOTE.
SCHEDULING OF STOCKHOLDER APPROVAL
The timing of the Acquisition and the Private Placement made it
convenient for UCI to seek stockholder approval for the issuance of the Common
Stock and the Warrants at the Annual Meeting. The Annual Meeting had originally
been scheduled to occur prior to the closing of the Acquisition and the Private
Placement. However, in the context of various operational needs of both UCI and
MHC which were to be addressed through the Acquisition, and the delays in the
scheduling of the Annual Meeting as a consequence of the review of this Proxy
Statement and related materials by the Securities and Exchange Commission (the
"SEC"), the respective managements of both companies determined that the
interests of the stockholders of both companies were better served by proceeding
to close the Acquisition and the Private Placement in advance of the Annual
Meeting. As discussed above, to ensure that UCI's commitment to issue the shares
contemplated by the Conditional Delivery Agreement would be approved, MHC
obtained the commitment of six stockholders of UCI holding votes sufficient to
approve the issuance of the Common Stock to vote in favor of such issuance at
the Annual Meeting. Prior to scheduling the closings, UCI also sought and
received confirmation from the NASD that closing of the Acquisition and the
Private Placement in advance of stockholder approval for the issuance of the
Common Stock and the Warrants would not violate applicable NASD rules and
regulations. In addition, in communications with counsel to UCI, the SEC
indicated the absence of any objection to the accelerated closing schedule.
BOARD APPROVAL
The UCI Board believes the Acquisition was in the best interests of
the Company and its stockholders. Included among the potential benefits
considered by the UCI Board were the strategic value of a multi-state presence,
competitive advantages gained by a larger medical provider base, and the
economies of scale, operating efficiencies and other synergies available through
consolidation with MHC.
FAIRNESS OPINION
In deciding to approve the Acquisition, the UCI Board considered,
among other things, advice from Dr. Oliver G. Wood, Jr., an independent
consulting economist. The UCI Board received an opinion from Dr. Wood that as
of the date of his opinion the terms of the Acquisition were fair to UCI from
a financial point of view. Dr. Wood's opinion is attached as Appendix A to this
Proxy Statement. We encourage you to read it thoroughly.
TAX TREATMENT
For U.S. federal income tax purposes, no income, gain or loss will be
recognized by UCI or the stockholders of UCI as a result of the Acquisition.
ACCOUNTING TREATMENT
The Acquisition is to be accounted for as a purchase in accordance
with generally accepted accounting principles.
RESALES OF COMMON STOCK
4
All of the shares of Common Stock issued in the Private Placement and
all of the shares proposed to be issued pursuant to the Acquisition and upon
exercise of the Warrants are considered "restricted securities" under federal
and state securities laws. Consequently, the transferability of such shares by
their holders is limited during the two years following the respective dates of
their issuances, and will remain limited thereafter to the extent such shares
are held by affiliates of UCI. To assist the holders of such shares in the
public resale of such shares following their issuance, UCI has granted certain
registration rights to MHC, MHC stockholders, the investors in the Private
Placement and certain of the holders of the Warrants.
ABSENCE OF DISSENTERS' RIGHTS
UCI stockholders are not entitled under Delaware law to seek
appraisal of their shares of Common Stock in connection with the Acquisition.
RISK FACTORS
For a description of certain things which you should consider in
connection with your vote on the proposals relating to the Acquisition, in
addition to the other information described in this document, see the
disclosures in this Proxy Statement under the heading "Risk Factors."
ANNUAL MEETING PROPOSALS
PROPOSALS TO APPROVE THE ISSUANCE OF SHARES AND WARRANTS
Because the number of shares of Common Stock as to which UCI has
committed to issue in connection with the Acquisition and the shares of Common
Stock issuable upon exercise of the Warrants to be delivered in connection with
the Private Placement will exceed 20 percent of the number of outstanding shares
of Common Stock prior to such issuances, approval by UCI stockholders of the
issuance of the Common Stock and the Warrants is required under the rules of the
NASD.
PROPOSAL TO INCREASE THE AUTHORIZED CAPITAL STOCK
The UCI Certificate currently authorizes 10 million shares of
Common Stock. The authorized capital stock proposal provides that the authorized
shares of Common Stock will be increased to 50 million shares. Any authorized
but unissued shares of Common Stock may be used by UCI for general corporate
purposes, including for possible future acquisitions. To the extent required by
applicable law, shareholder approval will be sought in advance of any such
acquisitions. The increase in the authorized number of shares of Common Stock is
necessary to complete the issuance of Common Stock in connection with the
Acquisition and the issuance of the Warrants in connection with the Private
Placement.
ELECTION OF UCI DIRECTORS
At the Annual Meeting, UCI stockholders will be asked to elect the
following three director nominees: A. Wayne Johnson, Ashby M. Jordan, M.D.
and John M. Little, Jr., M.D.
PROPOSAL TO APPROVE THE 1997 STOCK INCENTIVE PLAN
The UCI Board has approved the UCI 1997 Stock Incentive Plan. At the
Annual Meeting, you will be asked to approve this plan.
PROPOSAL TO APPROVE REVERSE STOCK SPLIT
The UCI Board has approved a one-for-five reverse stock split which
would result in one share of post-split Common Stock being received in exchange
for each five presently issued and outstanding shares of Common Stock. To give
effect to the split, the UCI Certificate is proposed to be amended to reduce by
5
a factor of five the number of authorized shares of Common Stock and to increase
by a factor of five the par value per share. At the Annual Meeting, you will be
asked to approve this amendment of the UCI Certificate.
PROPOSAL TO RATIFY AUDITORS
UCI has appointed Price Waterhouse LLP as the independent auditors of
the Company's consolidated financial statements for the fiscal year ending
September 30, 1998. At the Annual Meeting, you will be asked to ratify this
appointment.
RECORD DATE; VOTE REQUIRED FOR STOCKHOLDER APPROVAL OF THE PROPOSALS
Only holders of record of Common Stock at the close of business on
August 30, 1998 (the "Record Date") are entitled to notice of and to vote at the
Annual Meeting. Common Stock is entitled to one vote per share on each matter
that is presented for stockholder approval at the Annual Meeting.
The proposals to issue shares of Common Stock to MHC pursuant to the
Acquisition and to issue the Warrants (and the Common Stock issuable upon
exercise of the Warrants) in connection with the Private Placement must be
approved by the affirmative vote of the holders of a majority of the total votes
cast on the proposals.
The proposals to amend the UCI Certificate to increase the number
of authorized shares of Common Stock and to give effect to a one-for-five
reverse stock split must be approved by the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock.
The two nominees receiving the greatest number of votes cast
(although not necessarily a majority of the votes cast) in the election of
directors will be elected to the UCI Board.
The proposal to approve the adoption of the UCI 1997 Stock Incentive
Plan and the proposal to ratify auditors must each be approved by the
affirmative vote of the holders of a majority of the shares of Common Stock
represented in person or by proxy and entitled to vote at the Annual Meeting.
RECOMMENDATIONS TO STOCKHOLDERS
The UCI Board recommends, by the unanimous consent of all
directors, that you vote FOR the proposals related to the Acquisition, FOR each
of the amendments to the UCI Certificate, FOR each of the two nominees for
director named in this Proxy Statement and FOR each of the other proposals being
submitted to you.
MARKETS AND MARKET PRICES
The Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "UCIA". For information regarding the historical market price of the
Common Stock, see "Financial and Business Information - Market Price and
Dividend Information."
On February 12, 1998, the last trading day prior to the public
announcement of the Acquisition, the Common Stock closed at $2.3125 per share.
On August , 1998, the last trading day before the printing of this Proxy
Statement, the Common Stock closed at $ per share.
MHC is a privately held corporation, and there is no public trading
market for its securities.
UCI's executive offices are located at 1901 Main Street, Suite 1200,
Columbia, South Carolina 29201 and its telephone number is (803) 252-3661. MHC's
executive offices are located at 2370 Main Street, Tucker, Georgia 30084 and its
telephone number is (770) 938-9355.
6
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
In the tables below, we provide you with selected historical
financial data of the Company. We prepared this data using the consolidated
financial statements of the Company. When you read this selected historical
consolidated financial data, you should read the historical financial statements
and accompanying notes that the Company has included in its Annual Report on
Form 10-KSB/A for the year ended September 30, 1997 and its Quarterly Report
on Form 10-QSB for the three and nine months ended June 30, 1998 (both of
which Reports accompany this Proxy Statement).
It is also important that you read the unaudited pro forma combined
financial information and accompanying notes that we have included in this Proxy
Statement under the heading "Financial and Business Information - Unaudited Pro
Forma Combined Condensed Financial Statements."
SUMMARY CONSOLIDATED NINE MONTHS ENDED FISCAL YEAR ENDED
STATEMENTS OF OPERATIONS DATA JUNE 30, 1998 SEPTEMBER 30, 1997
------------------------------- ----------------- -------------------
Revenues ............................................... $ 26,625,431 $ 27,924,772
------------
Income (loss) from operations .......................... (540,181) 54,684
------------
Net income (loss) ...................................... (1,360,388) (83,726)
------------
Net income (loss) per common and common
equivalent share (basic) .............................. (0.20) (0.02)
------------
Weighted average common shares and
common share equivalents outstanding (basic) ........... 6,939,141 5,005,081
------------
SUMMARY CONSOLIDATED
BALANCE SHEET DATA JUNE 30, 1998 SEPTEMBER 30, 1997
------------------ ------------- ------------------
Working capital ........................................ $ 3,615,627 $ 2,921,045
------------
Total assets ........................................... 33,662,837 20,863,532
------------
Long-term debt, net .................................... 8,095,793 6,920,470
------------
Capital ................................................ 17,026,994 9,488,497
------------
7
SELECTED HISTORICAL FINANCIAL DATA OF MHC
In the table below, we provide you with selected historical financial
data of MHC. We prepared this data using the consolidated financial statements
of MHC. When you read this selected historical combined financial data, it is
important that you read the historical financial statements of MHC and
accompanying notes that we have included as Appendix C to this Proxy Statement.
It is also important that you read the unaudited pro forma combined
financial information and accompanying notes that we have included in this Proxy
Statement under the heading "Financial and Business Information - Unaudited Pro
Forma Combined Condensed Financial Statements."
SUMMARY CONSOLIDATED FISCAL YEAR ENDED FISCAL YEAR ENDED
STATEMENTS OF OPERATIONS DATA MARCH 31, 1998 MARCH 31, 1997
----------------------------- ---------------- ---------------
Revenues ............................................... $ 6,436,950 $ 3,665,982
-----------
Income (loss) from operations .......................... (3,311,679) (1,318,509)
-----------
Net income (loss) ...................................... (3,949,195) (1,569,273)
-----------
Note: MHC was not required to, and did not, compute earnings per share.
SUMMARY CONSOLIDATED
BALANCE SHEET DATA MARCH 31, 1998 MARCH 31, 1997
------------------ -------------- --------------
Working capital ........................................ $ (2,663,403) $ 327,283
------------
Total assets ........................................... 4,706,262 5,795,876
----------- ----------
Long-term debt, net .................................... 443,084 765,444
-----------
Total stockholders' deficit ............................ (5,591,271) (1,471,937)
-----------
8
SELECTED PRO FORMA FINANCIAL DATA OF THE COMPANY
(unaudited)
In the table below, we attempt to illustrate the financial results
that might have occurred if the Acquisition had been completed previously.
Presented is combined statement of operations information for the Company for
the nine months ended June 30, 1998 and the fiscal year ended September 30,
1997 as if the Acquisition and the Private Placement (as defined herein) had
been completed on October 1, 1996.
It is important to remember that this information is hypothetical,
and does not necessarily reflect the financial performance that would have
actually resulted if the Acquisition and the Private Placement had been
completed on those dates. It is also important to remember that this information
does not necessarily reflect future financial performance if the Acquisition and
the Private Placement actually occur.
Please see the information in this Proxy Statement under the heading
"Financial and Business Information - Unaudited Pro Forma Combined Condensed
Financial Statements" for a more detailed explanation of this analysis.
SUMMARY PRO FORMA COMBINED NINE MONTHS ENDED Fiscal Year Ended
STATEMENT OF OPERATIONS DATA JUNE 30, 1998 September 30, 1997
------------------------------ ----------------- ------------------
Revenues........................................... $ 30,374,871 $ 33,933,214
Income (loss) from operations...................... (1,445,533) (2,302,180)
Net income (loss).................................. (2,539,881) (2,845,301)
Net income (loss) per common and common
equivalent share (basic).......................... (0.37) (0.30)
Weighted average common shares and
common share equivalents outstanding............. 6,939,141 9,406,477
9
RISK FACTORS
Each UCI stockholder should carefully consider and evaluate the
following factors, among others, before voting.
FINANCIAL STATUS OF MHC
MHC has experienced losses (aggregating approximately $5.7 million)
and operating deficits since its inception in February 1996. UCI expects that
the operations associated with the assets acquired in the Acquisition may
continue to experience losses and require the infusion of substantial capital to
build those operations to a profitable state. Although UCI management believes
that the assets acquired from MHC in the Acquisition are valuable to the
Company's operations and are expected to contribute to long-term profitability
and enhanced stockholder value, there can be no assurance that such expectations
can be realized or that UCI can achieve profitability as a consequence of the
Acquisition.
In addition, MHC continues to have various repayment obligations to
its third-party creditors. As of May 1, 1998, the effective closing date of the
Acquisition, these obligations totaled approximately $4 million. To the extent
that MHC is unable to satisfy its obligations to such creditors, MHC could be
forced to file for protection under applicable bankruptcy laws or could be
placed into an involuntary bankruptcy proceeding by its creditors. In such
event, the transfer of assets to UCI pursuant to the Acquisition could come
under review of a bankruptcy trustee, who could seek to characterize the
transfer in the Acquisition as a preference that could be set aside under
applicable bankruptcy law, requiring UCI and MHC to reverse the transactions
comprising the Acquisition. Pursuant to the Acquisition Agreement, MHC, the
MHC-PCs and certain of the MHC stockholders have represented and warranted that
they will not hinder, delay, defraud or avoid any obligation to any past,
present or future creditor in the transactions contemplated by the Acquisition
Agreement; that the consideration received by MHC and the MHC-PCs is more than a
reasonably equivalent value in exchange for the transfer of the assets of MHC
and the MHC-PCs; that each of MHC and the MHC-PCs is solvent and will not be
rendered insolvent as a result of the transactions contemplated by the
Acquisition Agreement; and that neither MHC nor any of the MHC-PCs has
initiated, nor does it intend to initiate or expect to have initiated against it
as debtor, any proceeding under federal or any state's bankruptcy, insolvency or
similar laws. Additionally, MHC and the MHC-PCs have represented and warranted
to UCI-GA that MHC and the MHC-PCs shall, as and when due, use their reasonable
best efforts within eleven months after the closing of the Acquisition to pay
all valid liabilities of MHC and the MHC-PCs which are not assumed by UCI-GA.
The Company's remedy for any breach of the foregoing by MHC, the MHC-PCs or the
MHC stockholders is subject to certain limitations which apply to all breaches
of the Acquisition Agreement. See "The Acquisition - Description of Agreements -
Acquisition Agreement -Representations, Indemnifications and Holdback Shares."
Although MHC has represented that it intends to satisfy its third-party creditor
obligations following the Acquisition, in the event of a set-aside pursuant to
applicable bankruptcy law, the expected benefits to UCI from the Acquisition
would not be achieved and, subject to a possible recovery under the applicable
indemnification provisions of the Acquisition Agreement, the transaction costs
associated with the Acquisition would not be recoverable by UCI, thereby
adversely affecting UCI's operations.
INTEGRATION OF OPERATIONS; MANAGEMENT OF GROWTH
In determining that the Acquisition was in the best interests of the
Company, the UCI Board addressed the cost savings, operating efficiencies, and
other synergies that may result from the consummation of the Acquisition. The
consolidation of functions and the integration of departments, systems and
procedures following the Acquisition present significant management challenges
requiring the dedication of management resources that may temporarily detract
attention from the day-to-day business of the Company. The difficulties of
assimilation may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. The process of combining
the MHC assets may cause an interruption of, or a loss of momentum in, the
Company's business, which could have an adverse effect on the revenues and
operating results of the combined Company, at least in the near term. There can
be no assurance that the combined entity will be able
10
to retain all of its key management and other operating personnel or that the
combined entity will realize any of the other anticipated benefits of the
Acquisition.
DILUTION
VOTING CONTROL
Upon receipt of requisite shareholder approval, UCI has committed to
issue 2,901,396 shares of Common Stock to a designated escrow agent in
connection with the Acquisition and has committed to issue the Warrants for the
purchase of up to 300,000 shares of Common Stock as placement agent and
financial advisory services fees in connection with the Private Placement.
Without giving effect to any other issuance of Common Stock by UCI following the
closing of the Acquisition, such additional shares of Common Stock to be issued
in connection with the Acquisition and pursuant to the exercise of the Warrants
would represent, in the aggregate, approximately 24.7 percent of the number of
shares of Common Stock outstanding immediately after the closing of the
Acquisition. Accordingly, the contemplated issuance of shares in connection with
the Acquisition and the exercise of the Warrants would have the effect of
substantially reducing the percentage voting interest in UCI represented by a
share of the Common Stock immediately prior to such share issuances.
As of the Record Date for the Annual Meeting, Companion HealthCare
Corporation ("CHC") and Companion Property and Casualty Company ("CP&C"), each a
wholly-owned subsidiary of BCBS (individually, a "BCBS Subsidiary," and
collectively, the "BCBS Subsidiaries"), own in the aggregate 2,624,623 shares,
or approximately 43 percent, of the outstanding Common Stock. Under various
agreements between UCI and the BCBS Subsidiaries (the "Anti-Dilution
Agreements"), the BCBS Subsidiaries have the right at any time to purchase from
UCI such number of shares of the voting stock of UCI as is necessary for BCBS
and its affiliated entities, as a group, to maintain an aggregate ownership of
47 percent of the outstanding voting stock of UCI. To the extent either of the
BCBS Subsidiaries exercises such right in conjunction with a sale of voting
stock by UCI, the price to be paid by the BCBS Subsidiary is the average price
to be paid by the other purchasers in such sale. Otherwise, the price is the
average closing bid price of the UCI voting stock on the ten trading days
immediately preceding the election by the BCBS Subsidiary to exercise its
purchase rights. Consequently, to the extent any of the BCBS Subsidiaries elect
to exercise any or a portion of their rights under the Anti-Dilution Agreements
following the Private Placement and, if approved, the issuance of shares
contemplated by the Acquisition and pursuant to the Warrants, the sale of shares
of Common Stock to such BCBS Subsidiary will have the effect of further reducing
the percentage voting interest in UCI represented by a share of the Common Stock
immediately prior to such sale.
The substantial ownership of Common Stock by the BCBS Subsidiaries,
MHC and other affiliates of the Company following the Acquisition and the
Private Placement will provide them with the ability to exercise substantial
influence in the election of directors and other matters submitted for approval
by the UCI stockholders. As a result, it may be difficult for other stockholders
of UCI to successfully oppose matters which are presented by such entities for
action by stockholders, or to take actions which are opposed by such entities.
Such ownership may also have the effect of delaying, deterring or preventing a
change in control of UCI without the consent of such entities. In addition,
sales of Common Stock by such entities could result in another stockholder
obtaining control over UCI.
EARNINGS AND BOOK VALUE PER SHARE
On a pro forma basis, the closing of the Acquisition and the Private
Placement have a dilutive effect on earnings per share of UCI for the fiscal
year ended September 30, 1997 (from $(0.02) per share to $(0.31) per share) and
for the six-month period ended March 31, 1998 (from $(0.17) per share to $(0.20)
per share). These pro forma amounts are based on the assumptions reflected in
the notes to the Unaudited Pro Forma Combined Condensed Financial Statements
included elsewhere in this Proxy Statement and, consequently, may not be
reflective of all of the actual cost savings or other synergies, if any, or the
related expenses that may be realized or incurred by the Company as a result of
the Acquisition and the Private Placement. The
11
extent of dilution to UCI stockholders with respect to future earnings per share
and book value per share will depend on the actual results achieved by the
Company following the Acquisition and the Private Placement as compared to the
results that could have been achieved by the Company on a stand-alone basis over
the same period in the absence of such transactions. No assurance can be given
as to such future results, and, accordingly, as to whether the Acquisition and
the Private Placement will ultimately be dilutive to UCI stockholders with
respect to future earnings per share or book value per share.
RESALES OF COMMON STOCK
Upon receipt of requisite shareholder approval, UCI has committed to
issue 2,901,396 shares of Common Stock to a designated escrow agent in
connection with the Acquisition and the Warrants for the purchase of up to
300,000 shares of Common Stock as placement agent and financial advisory
services fees in connection with the Private Placement. In addition, 1,200,000
shares of Common Stock were issued to investors in the Private Placement.
Without giving effect to any other issuance of Common Stock by UCI following the
closing of the Acquisition, shares of Common Stock issued in the Private
Placement and the shares that may be issued pursuant to the Acquisition and
pursuant to the exercise of the Warrants would represent, in the aggregate,
approximately 37.1 percent of the number of shares of Common Stock outstanding
immediately after such share issuances. The shares issued in connection with the
Private Placement and the shares UCI has committed to issue in connection with
the Acquisition and pursuant to the Warrants are considered "restricted
securities" under applicable securities laws, thereby limiting the resale of
such shares into the public market, in the absence of an effective registration
or exemption from such registration requirements. The holders of shares issued
in the Private Placement have been granted registration rights which entitle
such holders to have such shares registered for sale into the public market.
Comparable registration rights are to be granted to the holders of the shares to
be issued pursuant to the Acquisition and to the holders of the Warrants to be
issued in connection with the Private Placement. To the extent that such holders
do not exercise such registration rights, all of such shares will nevertheless
become eligible for sale in the public market in accordance with the Securities
and Exchange Commission's Rule 144 or Rule 145 one year following the closing of
the Acquisition and the Private Placement, as applicable, with certain volume
and manner of sale limitations continuing only for one year thereafter (except
as to shares held by persons deemed to be affiliates of UCI). In addition, if
the proposed amendments to the UCI Certificate are approved by the
stockholders at the Annual Meeting, UCI will substantially increase the number
of shares of Common Stock available for issuance. Sales of substantial amounts
of Common Stock, or the availability of substantial amounts of Common Stock for
future sale, could adversely affect the prevailing market price of the Common
Stock.
POSSIBLE NASDAQ DELISTING
The Common Stock is currently listed for trading on the Nasdaq
SmallCap Market. The continued trading of the Common Stock on the Nasdaq
SmallCap Market is conditioned upon the Company meeting certain quantitative and
qualitative requirements regarding assets, capital, earnings surplus, stock
price and corporate governance features. During 1997, the NASD expanded the
quantitative and qualitative listing criteria for all companies listed on the
Nasdaq Stock Market and placed additional corporate governance listing standards
on companies currently listed on the Nasdaq SmallCap Market. These new
requirements for continued listing became effective as to the Company on
February 23, 1998. On February 26, 1998, UCI was formally notified by the Nasdaq
Stock Market that a review of its financial statements indicated that the
Company was not in compliance with the new requirements for continued listing as
a consequence of its failure to meet the requirement of at least $2 million in
net tangible assets. As of December 31, 1997, the Company had net tangible
assets of approximately $1 million. The net tangible assets of the Company as
of June 30, 1998 were approximately $2.26 million. Consequently, the Company
believes that the Company is currently in compliance with the Nasdaq Stock
Market net tangible assets requirement as well as with all other applicable
listing requirements. Prior to the Acquisition, the Company submitted a proposed
plan of compliance to the Nasdaq Stock Market indicating its proposed timetable
for satisfying the new listing requirements, and following the closing of the
Acquisition the Company notified the Nasdaq Stock Market
12
of the Company's belief that it had achieved compliance with applicable
listing requirements. On July 9, 1998, UCI was formally notified by the Nasdaq
Stock Market that UCI's plan of compliance had not been accepted. UCI appealed
the decision by the Nasdaq Stock Market, and a hearing was held on August 14,
1998 with respect to the appeal. As of the date of this Proxy Statement, the
Company has not been informed as to the position of the Nasdaq Stock Market
on the appeal. Delisting of the Common Stock is stayed pending final resolution
of such appeal. To the extent that the Nasdaq Stock Market does not accept the
Company's position regarding satisfaction of the new maintenance criteria, the
Common Stock will be delisted, and trading in the Common Stock thereafter, if
any, will likely be conducted in the over-the-counter market. As a consequence
of any such delisting, it is expected that stockholders of UCI will find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Common Stock. In addition, any such delisting will make the Common Stock
substantially less attractive as collateral for margin and purpose loans, for
investment by financial institutions under their internal policies or state
legal investment laws, as consideration in the financing of future acquisitions
of other medical practices by the Company, and for issuance by the Company in
future capital raising transactions. Although following a delisting, the Common
Stock may be eligible for quotation on the over-the-counter bulletin board, the
Company is informed that the NASD may presently be considering higher standards
for permitting quotations of securities on such bulletin board, thereby
foreclosing this trading market to UCI stockholders as well.
COMPETITION
The UCI Centers and the MHC Centers face competition, in varying
degrees, from hospital emergency rooms, private doctor's offices and other
competing freestanding medical centers. Some of these providers have financial
resources which are greater than those of the Company. In addition, traditional
sources of medical services, such as hospital emergency rooms and private
physicians, have had, in the past, a higher degree of recognition and acceptance
by patients than centers such as those operated by UCI and MHC. Following the
Acquisition, the Company changed the name under which the MHC Centers publicly
conduct business. While the Company's management believes that the MHC Centers
will be able to compete on the basis of accessibility, including evening and
weekend hours, a non-appointment policy, the attractiveness to large employers
and third-party payors of the Company's state-wide network, and on the basis of
a competitive fee schedule, there can be no assurance that the MHC Centers will
be able to compete successfully in the future, or that the change in the name of
such centers will not adversely affect the operations of such centers.
13
THE ACQUISITION
DESCRIPTION OF THE ACQUISITION
BACKGROUND
The Company has experienced significant growth in the last few years
as a result of acquisitions of medical practices. Management has sought to
increase the Company's bargaining power with insurance payors and to lower
operating costs through negotiated discounts on medical supplies by enhancing
the Company's negotiating leverage through the clout associated with an
expanding number of medical practices under the Company's control and an
expanding number of medical providers employed by the professional
corporations affiliated with UCI. In this regard, several out-of-state
acquisition targets have been evaluated by the Company over the past few years.
In the third calendar quarter of 1997, A. Wayne Johnson, Chairman and
Chief Executive Officer of MHC, contacted M.F. McFarland, III, M.D., Chairman
and Chief Executive Officer of UCI, to discuss the potential benefits of a
combination of UCI and MHC. Mr. Johnson and Dr. McFarland had not met or had any
discussions regarding a combination of the two companies prior to that time.
Following their initial discussions, a determination was reached by the two
executives to informally exchange information about their respective companies.
In September 1997, several meetings took place among Dr. McFarland, Mr. Johnson,
Jerry F. Wells, Jr., Executive Vice President of Finance and Chief Financial
Officer of UCI, and Robert G. Riddett, Jr., President of MHC. During these
meetings, the possible combination of UCI and MHC was discussed and analyzed at
length in the context of both the existing operations of the respective
companies and the potential growth and estimated synergies that could result.
The content and findings from the September 1997 meetings were
discussed with the UCI Board at its regularly scheduled September 1997 meeting
in the context of potential growth opportunities and the enhancement of
long-term value for the UCI stockholders.
During October 1997, Dr. McFarland and Mr. Johnson authorized the
continued exploration of combination possibilities at an expanded level,
involving only a few members of senior management from each company. Thereafter,
Mr. Wells notified Mr. Johnson of the kinds of additional information UCI would
need to conduct more in-depth due diligence with respect to MHC. Following the
receipt and review by UCI of this information from MHC, meetings among the top
executive officers of UCI and MHC were held in October and November of 1997 to
discuss and clarify the information provided, and to give UCI the opportunity to
provide MHC with UCI's preliminary business plan and ideas for a possible
acquisition of MHC by UCI.
The two most in-depth meetings concerning the possible acquisition
were held on October 16, 1997 at the corporate headquarters of MHC in Tucker,
Georgia and on November 19, 1997 at the corporate offices of UCI in Columbia,
South Carolina. Each of these two meetings were attended by Dr. McFarland and
Mr. Wells of UCI and by Mr. Johnson and Mr. R. G. Riddett, President of MHC. At
both of these meetings, each of the MHC operating facilities was discussed in
detail (including the provider complement, provider contract issues, patient
base, competition, growth potential, facility operating costs, equipment status,
etc.). The proposed purchase price for the MHC assets was also discussed at both
of these meetings. Mr. Johnson commenced these discussions by proposing a
purchase price of approximately 1.9 times the annual revenue stream of MHC,
primarily on the basis of his estimation of the attractiveness of the MHC
markets. Dr. McFarland and Mr. Wells, however, proposed that approximately one
times the annual revenue stream was closer to the industry average for a
practice of the nature and size of that operated by MHC.
Through a series of telephone conversations in November 1997, Dr.
McFarland and Mr. Wells discussed with and recommended to the UCI Board that UCI
pursue the acquisition of the MHC medical practices. As part of such
conversations, Dr. McFarland and Mr. Wells reported to the UCI Board members on
the course of negotiations related to the proposed acquisition, summarized the
results of the due diligence that had been conducted on MHC, discussed the
potential benefits and risks of the proposed acquisition,
14
provided their respective views of the business and financial condition of MHC,
and responded to questions from the directors.
At the regularly scheduled December 1997 UCI Board meeting, results
of due diligence to date, forecasts for combined operations, and purchase price
negotiation details were presented by Dr. McFarland and Mr. Wells to the UCI
Board. Following extensive deliberation, UCI's Board unanimously approved
proceeding with the proposed acquisition of MHC in accordance with the
objectives that had been set forth by UCI senior management.
In January 1998, the UCI Board engaged the services of Dr. Oliver G.
Wood, Jr., an independent consulting economist, to conduct a financial analysis
of the proposed acquisition and to render an opinion as to the fairness of the
proposed acquisition to UCI from a financial point of view.
At a meeting among Dr. McFarland, Mr. Wells and Mr. Johnson during
the last week of January 1998, Mr. Wells informed Mr. Johnson that under NASD
rules, UCI stockholder approval would be necessary to issue Common Stock to MHC
as partial consideration in the proposed acquisition. To address the concern
expressed at that meeting by Mr. Johnson over the uncertainty of UCI stockholder
approval, Mr. Johnson required as a condition to MHC executing an acquisition
agreement that Dr. McFarland and certain subsidiaries of BCBS (who at that time
owned in the aggregate a majority of the outstanding Common Stock) execute
agreements with MHC under which each stockholder committed to vote the
stockholder's shares in favor of the issuance of Common Stock to MHC. Such
agreements were executed on February 9, 1998.
A letter of intent relating to the proposed acquisition was
negotiated in the first week of February 1998 among top management officials of
both companies, outside counsel and financial advisors. Over the course of the
same period, Dr. McFarland and Mr. Wells continued to hold discussions with
members of the UCI Board and provided board members with oral and written
information regarding the proposed acquisition. The letter of intent and the
form of a definitive acquisition agreement, including additional supporting
agreements, was unanimously approved by the UCI Board in the first week of
February 1998.
On February 9, 1998, Dr. Wood delivered a written opinion to the
effect that, as of that date and based on and subject to certain matters stated
in his opinion, the proposed acquisition was fair from a financial point of
view to UCI. On February 9, 1998, a definitive Acquisition Agreement was
executed by UCI and MHC.
During December of 1997, senior management of MHC provided the
members of the Board of Directors of MHC (the "MHC Board") with information on
the status of the discussions and negotiations with UCI and due diligence on
UCI. A meeting of the MHC Board was held on February 6, 1998. Prior to that
meeting, each director of MHC was provided with materials outlining and
analyzing the proposed acquisition. At the meeting of the MHC Board, MHC senior
management presented to the MHC Board the background of the proposed
acquisition, the outline of the terms and conditions of the proposed
acquisition, a financial analysis of the proposed acquisition, and the potential
benefits and risks of the proposed acquisition. MHC senior management also
responded to questions from directors. During the first week of February 1998,
the MHC Board approved the form of a definitive purchase agreement and related
documentation, subject to finalization by MHC management and its legal advisors.
On February 13, 1998, UCI issued a press release announcing the
Acquisition.
On February 24, 1998, the Company filed with the Securities and
Exchange Commission (the "SEC") its preliminary proxy statement relating to the
Annual Meeting. During the first week of March 1998, the SEC notified the
Company as to its timetable for reviewing the preliminary proxy statement. The
Company determined that the proposed timetable for the review of its proxy
statement by the SEC made it impracticable to obtain shareholder approval of the
issuance of Common Stock in the Acquisition prior to March 31, 1998, the date
originally contemplated by the parties for the closing of the Acquisition. As a
consequence of various operational needs of the Company and MHC, the respective
managements of both companies determined that it was in the best interests of
both companies to close the Acquisition prior to the Annual Meeting, but to
delay the actual delivery of Common Stock to MHC as contemplated in the
Acquisition
15
Agreement until after requisite shareholder approval for such issuance had been
obtained at the Annual Meeting, all in accordance with applicable NASD rules. To
address the revised structure of the Acquisition and the delay in delivery of
the Common Stock portion of the purchase price, on April 15, 1998 the parties to
the original Acquisition Agreement executed a First Amendment to the Acquisition
Agreement. The Acquisition Agreement was further amended on May 7, 1998 upon the
parties' execution of a Second Amendment which had the primary effect of
changing the amounts of cash and the promissory note to be delivered by the
Company at closing.
Following the date of the second amendment to the Acquisition
Agreement and continuing through the date of the closing of the Acquisition, UCI
and MHC continued to meet to exchange information and to prepare for the
anticipated consummation of the Acquisition.
On May 12, 1998, UCI closed the Private Placement of 1,200,000 shares
of Common Stock for net proceeds of approximately $1,074,000. A portion of these
proceeds was necessary to satisfy the cash portion of the consideration
exchanged by the Company in the Acquisition.
CLOSING OF THE ACQUISITION
The closing of the Acquisition took place on May 13, 1998 and is
being accounted for as of May 1, 1998. All of the transfers and exchanges
identified below were completed and accounted for as of such dates. At the
closing of the Acquisition, the following took place:
o MHC transferred to UCI-GA substantially all of the assets of MHC in
exchange for the following:
o assumption by UCI-GA of certain liabilities, including a
$594,184 line of credit obligation and certain real
property and equipment lease obligations of MHC; and
o cash, note payable and a commitment to issue stock having
an aggregate value of $8.14 million, exchanged as follows:
o delivery of a cash payment of $450,000 to an
escrow agent selected by MHC and the delivery to
the escrow agent of a $800,000 promissory note of
UCI-GA payable to the escrow agent, with such
cash and the proceeds from the repayment of the
note to be paid by the escrow agent to certain
creditors of MHC; and
o delivery of a Conditional Delivery Agreement
pursuant to which UCI commits to issue 2,901,396
shares of Common Stock to the escrow agent
subject to the receipt of stockholder approval
for such issuance (such shares valued at $6.89
million using a value of $2.375 per share
pursuant to the share price formula set forth in
the Acquisition Agreement). At the Annual
Meeting, stockholders of UCI will be asked to
approve the issuance of such shares. See "Annual
Meeting Proposals."
o The MHC-PCs transferred to the UCI-PCs all of the assets of the
MHC-PCs in exchange for the following:
o assumption by the UCI-PCs of the obligations of the MHC-PCs
under employment agreements with medical service providers;
and
o an aggregate cash payment of $200 ($100 to each of the two
MHC-PCs).
16
REASONS FOR THE ACQUISITION
The UCI Board and UCI senior management believe that the terms of the
Acquisition are fair to, and in the best interests of, UCI and the UCI
stockholders. In reaching its determination to approve the Acquisition, the UCI
Board identified and analyzed the following factors and potential benefits,
among others, relating to the Acquisition:
o alternatives for growth in the healthcare business, including
internal development, which the UCI Board viewed as less advantageous
due to UCI's limited development resources as well as the uncertainty
of the success of such development efforts, none of which appeared to
present the opportunity that an acquisition of MHC presented;
o the strategic value of further developing a multi-state presence for
the Company;
o the competitive advantage gained by increasing the medical provider
base in negotiating insurance reimbursement rates and discounts to
medical supply costs;
o the expectation that the assets of MHC represented a complementary
business and that the Acquisition would be viewed favorably by
investors due to such complementary nature;
o the benefits of enjoying economies of scale by combining the two
companies and eliminating certain duplications of overhead (The
expected savings from the elimination of certain MHC overhead are
estimated to range from $465,000 to $2 million annually.);
o information concerning the Company's and MHC's respective prospects,
financial performance, financial condition, assets and operations;
o the financial terms of the Acquisition and its effect on future
earnings;
o the opinion of Dr. Oliver G. Wood Jr. that the terms of the
Acquisition were fair, from a financial point of view, to UCI, as
well as the underlying financial analysis of Dr. Wood presented in
connection with such opinion; and
o a review with UCI's outside legal counsel of the terms of the
Acquisition Agreement and related agreements.
Following its deliberations concerning such factors, the UCI Board
concluded that the Acquisition may increase the long-term prospects of the
Company for continued growth, may increase stockholder value and was in the best
interests of UCI and its stockholders from both a financial and strategic
perspective.
The UCI Board also considered a variety of potentially negative
factors in its deliberations concerning the Acquisition, including: (i) the
possible dilutive effect of the issuance of Common Stock in the Acquisition;
(ii) the charges expected to be incurred in connection with the Acquisition,
including the transaction costs and costs of integrating the businesses of the
companies; (iii) the risk that, despite the efforts of the combined company, key
personnel of MHC may not be retained by the Company and the MHC assets may
continue to be unprofitable; and (iv) the risk that other benefits sought to be
obtained by the Acquisition might not be obtained.
The financial condition of MHC (including its losses to date) was
considered by both UCI management and the UCI Board who evaluated this factor in
conjunction with the potential cost savings expected to be achieved by the
elimination of certain duplications of overhead following the proposed
acquisition. An estimate of approximately $100,000 in related costs of the
acquisition (including professional, legal and accounting fees) was presented to
the UCI Board by UCI management.
In view of the wide variety of factors, both positive and negative,
considered by the UCI Board, the UCI Board did not find it practical to, and did
not quantify or otherwise assign relative weights to the specific
17
factors considered. In its deliberations, the UCI Board also did not undertake
to segregate its analysis of any one factor or a group of factors from the
context of all factors under consideration, nor did individual members express
how their conclusion as to any single factor or group of factors affected or was
otherwise relevant to that member's decision. In addition, individual members of
the UCI Board may have given different weights to the various factors
considered.
RECOMMENDATION OF THE UCI BOARD
The UCI Board has approved the Acquisition Agreement and the
transactions contemplated by the Acquisition Agreement by the unanimous consent
of all directors and has determined that the terms of the Acquisition Agreement
and related agreements are fair to, and that the Acquisition is in the best
interests of, UCI and its stockholders and, therefore, recommends that the
holders of common stock vote FOR the proposals relating to the Acquisition.
YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
STOCKHOLDER APPROVAL
Stockholders of UCI are not being asked at the Annual Meeting to
approve or ratify the Acquisition or the Private Placement. Stockholder approval
is being sought at the Annual Meeting to enable UCI to satisfy its obligations
under agreements delivered at the closings of the Acquisition and the Private
Placement. Specifically, under Conditional Delivery Agreements delivered at the
closings of each of the Acquisition and the Private Placement, UCI has committed
to issue 2,901,396 shares of Common Stock to an escrow agent and to issue
Warrants for the purchase of 300,000 shares of Common Stock to certain parties
who participated in the Private Placement. Because the aggregate number of such
shares of Common Stock will exceed 20 percent of the number of outstanding
shares of Common Stock prior to such issuances, rules and regulations of the
NASD require that approval by UCI stockholders be received prior to the issuance
of the Common Stock and the Warrants. Also, because such number of shares will
exceed the existing number of shares authorized under the UCI Certificate,
stockholder approval is being sought to make an appropriate amendment to the UCI
Certificate to increase the authorized capital stock. Because the Common Stock
and the Warrants were not actually issued at the closings of the Acquisition and
the Private Placement, stockholder approval was not required for such closings
to take place.
The Conditional Delivery Agreement delivered at the closing of the
Acquisition states that in the event the stockholders of UCI fail to approve any
of the matters necessary to issue the shares to MHC as provided in the
Acquisition Agreement, each of the parties, to the extent possible, is to be
restored to its position held prior to the closing. In the event it is
impossible to restore a party to its position held prior to closing, any
deficiency is to be resolved by the exchanging of promissory notes among the
parties.
EXPECTATION OF STOCKHOLDER APPROVAL
As noted above, on February 9, 1998 M.F. McFarland, III, M.D.,
Chairman and Chief Executive Officer of UCI, and two subsidiaries of Blue Cross
Blue Shield of South Carolina ("BCBS") executed separate agreements with MHC in
which each of them has agreed to vote shares held by such stockholder in favor
of the proposals relating to the Acquisition and the Private Placement that will
be presented for stockholder approval. Following the execution of such
agreements, it became necessary to move the record date for the Annual Meeting
to a date following the closing of the Private Placement. Because the shares
held by these three stockholders were no longer sufficient as of the rescheduled
Record Date to ensure stockholder approval of the proposals relating to the
Acquisition, in late July 1998 MHC obtained separate agreements with each of D.
Michael Stout, M.D., Executive Vice President of Medical Affairs for UCI;
Stephen F. Serbin, M.D., Director of the Family Medical Division of DC-SC; and
Peter J. Stahl, M.D., Assistant Director of the Family Medical Division of
DC-SC, in which each of them has agreed to vote his shares in favor of the
Acquisition proposals. As of the record date for the Annual Meeting, shares held
by these stockholders represented approximately 54 percent of the outstanding
Common Stock.
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ACCORDINGLY, IF EACH OF SUCH STOCKHOLDERS VOTES AS INDICATED, ALL OF
THE PROPOSALS RELATING TO THE ACQUISITION AND THE PRIVATE PLACEMENT ARE ASSURED
TO BE APPROVED, REGARDLESS OF THE VOTES THAT MAY BE CAST BY ANY OTHER HOLDERS OF
COMMON STOCK ENTITLED TO VOTE.
SCHEDULING OF STOCKHOLDER APPROVAL
The timing of the Acquisition and the Private Placement made it
convenient for UCI to seek stockholder approval for the issuance of the Common
Stock and the Warrants at the Annual Meeting. The Annual Meeting had originally
been scheduled to occur prior to the closing of the Acquisition and the Private
Placement. However, in the context of various operational needs of both UCI and
MHC which were to be addressed through the Acquisition, and the delays in the
scheduling of the Annual Meeting as a consequence of the review of this Proxy
Statement and related materials by the SEC, the respective managements of both
companies determined that the interests of the stockholders of both companies
were better served by proceeding to close the Acquisition and the Private
Placement in advance of the Annual Meeting. As discussed above, to ensure that
UCI's commitment to issue the shares contemplated by the Conditional Delivery
Agreement would be approved, MHC obtained the commitment of six stockholders of
UCI holding votes sufficient to approve the issuance of the Common Stock to vote
in favor of such issuance at the Annual Meeting. Prior to scheduling the
closings, UCI also sought and received confirmation from the NASD that closing
of the Acquisition and the Private Placement in advance of stockholder approval
for the issuance of the Common Stock and the Warrants would not violate
applicable NASD rules and regulations. In addition, in communications with
counsel to UCI, the SEC indicated the absence of any objection to the
accelerated closing schedule.
FAIRNESS OPINION
Dr. Oliver G. Wood, Jr. has delivered his opinion to the effect that
the terms of the Acquisition are fair to UCI, from a financial point of view.
The full text of the written opinion of Dr. Wood, dated February 9,
1998, is attached as Appendix A to this Proxy Statement and describes the
assumptions made, matters considered and limits on the review undertaken. UCI
stockholders are urged to read the opinion in its entirety. Dr. Wood's written
opinion is addressed to the UCI Board, is directed only to the fairness, from a
financial point of view, of the terms of the Acquisition to UCI, and does not
constitute a recommendation of the Acquisition over other courses of action that
may have been available to UCI or constitute a recommendation to any holder of
Common Stock concerning how such holder should vote with respect to the
proposals relating to the Acquisition. The summary of the opinion of Dr. Wood
set forth in this Proxy Statement is qualified in its entirety by reference to
the full text of such opinion.
In arriving at his opinion, Dr. Wood (i) reviewed the terms and
conditions of the Acquisition, including drafts of the Acquisition Agreement and
agreements ancillary to the Acquisition Agreement; (ii) analyzed certain
financial aspects of the Acquisition and consideration to be paid by UCI and
UCI-GA in connection with the Acquisition, (iii) reviewed and analyzed publicly
available historical business and financial information relating to UCI, as
presented in documents filed with the Securities and Exchange Commission (the
"SEC") as well as historical financial information relating to MHC provided to
him by UCI and MHC; (iv) analyzed selected non-public financial and operating
results of operations of UCI and MHC; (v) analyzed the financial conditions and
prospects of UCI and MHC; (vi) reviewed and analyzed public information,
including certain stock market data and financial information of selected
companies with operating and financial characteristics similar to those of UCI
and MHC; (vii) reviewed the trading history of the Common Stock, including such
stock's performance in comparison to market indices and to selected companies
with operating and financial characteristics similar to those of UCI; (viii)
conferred with the management teams of UCI and MHC; (ix) reviewed public
financial and transaction information relating to multiples paid in selected
merger and acquisition transactions similar to the Acquisition or relevant
portions thereof; and (x) conducted such other financial analyses and
investigations as deemed necessary or appropriate for the purposes of his
opinion.
19
In connection with his review, Dr. Wood assumed and relied on the
accuracy and completeness of the information he reviewed for the purpose of his
opinion and did not assume any responsibility for independent verification of
such information or for any independent evaluation or appraisal of the assets of
UCI or MHC. With respect to UCI's and MHC's non-public financial and operating
data, Dr. Wood assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of UCI and MHC. Dr. Wood expressed no opinion with respect to such
non-public financial and operating data or the assumptions on which they were
based. Dr. Wood's opinion was necessarily based upon business, market, economic
and other conditions as they existed on, and could be evaluated as of, the date
of his opinion. Dr. Wood's opinion did not imply any conclusion as to the likely
trading range of the Common Stock following the consummation of the Acquisition,
which may vary depending on, among other factors, changes in interest rates,
dividend rates, financial and operating performance of UCI market conditions,
general economic conditions and other factors that generally influence the price
of securities.
Dr. Wood's analysis focused primarily upon the purchase prices and
implied transaction multiples paid in selected merger and acquisition
transactions involving physician practices. Included in the transactions relied
upon by Dr. Wood were mergers and acquisitions involving InPhyNet Medical
Management/MedPartners, Inc., AHI Healthcare Systems, Inc./FPA Medical
Management, Inc., ReadiCare, Inc./HealthSouth Corp., Sterling Healthcare Group,
Inc./FPA Medical Management, Inc., Caremark International, Inc./MedPartners,
Inc. and Pacific Physician Services, Inc./MedPartners, Inc. The weighted average
acquisition value-to-target net sales multiplier of the indicated transactions
was 1.017:1. Also considered by Dr. Wood were the acquisition value-to-target
net sales multipliers for the pending HealthSouth Corp./Company Doctor
acquisition (1.74:1) and the weighted average acquisition value-to-target net
patient revenue multiplier for six recently completed physician practice
acquisitions by the Company (0.823:1). Applying the same analysis, Dr. Wood
calculated an acquisition value-to-target net patient revenue multiplier for the
Acquisition of 1.31:1. In making his evaluation, Dr. Wood also considered
certain other factors, including, among other things, the changing dynamics of
the medical care consumer price index and its reflection of competitive
pressures in the healthcare industry, the potential for various synergies and
cost reductions in consolidation of selected marketing, operations and
administrative activities of the Company and MHC, the potential for growth in
certain geographic areas of MHC and various risks associated with the
Acquisition.
No company used in the comparable transaction analyses conducted by
Dr. Wood is identical to UCI or MHC, and no acquisition used in such analyses is
identical to the Acquisition. Accordingly, any such analysis of the
consideration to be paid by UCI in connection with the Acquisition involves
complex considerations and judgments concerning differences in the potential
financial and operating characteristics of the comparable companies and
acquisitions and other factors in relation to the trading and acquisition values
of the comparable companies.
The preparation of a fairness opinion is not susceptible to partial
analysis or summary description. Dr. Wood believes that his analyses and the
summary set forth above must be considered as a whole and that selecting
portions of his analyses and the factors considered by him, without considering
all analyses and factors, could create an incomplete view of the processes
underlying the analysis set forth in his opinion. Dr. Wood has not indicated
that any of the analyses which he performed had a greater significance than any
other.
In determining the appropriate analyses to conduct and when
performing those analyses, Dr. Wood made numerous assumptions with respect to
industry performance, general business, financial, market and economic
conditions and other matters, many of which are beyond the control of UCI and
MHC. The analyses which Dr. Wood performed are not necessarily indicative of
actual values of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Such analyses were prepared solely as
part of Dr. Wood's analysis of the fairness, from a financial point of view, to
UCI of the terms of the Acquisition. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at the present time or any time in
the future.
20
Dr. Wood is engaged in the general business of providing valuations
of businesses and securities in connection with private placements and
valuations for corporations and other purposes. Dr. Wood was engaged by UCI
primarily because of his regional reputation in performing valuations and
financial analyses of the kind provided in connection with the Acquisition.
Prior to the engagement of Dr. Wood by UCI in connection with the matters
discussed above, neither UCI, MHC nor any affiliate of such companies had any
material relationship with Dr. Wood.
UCI entered into an agreement with Dr. Wood pursuant to which Dr.
Wood agreed to act as UCI's financial advisor in connection with the Acquisition
and to evaluate the fairness to UCI, from a financial point of view, of the
terms of the Acquisition. As compensation for his services, Dr. Wood
received $10,000, plus reimbursement of certain out-of-pocket expenses, payable
without regard to the financial analyses presented or the conclusions reached in
the opinion rendered.
FINANCING OF THE ACQUISITION
UCI engaged Allen & Company ("Allen") as its financial advisor to
assist UCI in the private offering and sale of 1.2 million shares of Common
Stock in the Private Placement which closed on May 12, 1998. The net proceeds to
UCI from the sale of Common Stock in the Private Placement (after payment of
related commissions and expenses) was approximately $1,074,000. UCI financed the
cash portion of the consideration issued in the Acquisition using $450,000 of
the net proceeds received by UCI in the Private Placement.
For its financial advisory and placement agent services in connection
with the Private Placement, Allen was paid a commission of $96,000 (8% of the
aggregate purchase price in the Private Placement) and the Company committed to
issue the Warrants for the purchase of 150,000 shares of Common Stock upon
receipt of requisite shareholder approval at the Annual Meeting. The Warrants to
be issued to Allen are to be exercisable at any time during their five-year term
at a price per share of $1.00. In addition, the Company has committed to issue
Warrants for the purchase of 150,000 shares of Common Stock to Laidlaw Global
Securities, Inc. ("Laidlaw") for certain financial advisory services in
connection with the Private Placement. The Warrants to be issued to Laidlaw are
to be exercisable at any time during their five-year term at a price per share
of $1.50.
The shares of Common Stock and the Warrants issued in the Private
Placement were issued pursuant to exemptions from the registration requirements
of federal and state securities laws. Consequently, the transferability of such
securities is restricted following the Private Placement. UCI has entered into a
registration rights agreement with the investors in the Private Placement that
provides the investors with certain registration rights. Upon issuance of the
Warrants, UCI will enter into a similar registration rights agreement with Allen
with respect to the Common Stock issuable upon exercise of the Warrants issued
to Allen. See "Risk Factors - Dilution - Voting Control" and "Risk Factors -
Resales of Common Stock."
CERTAIN FEDERAL INCOME TAX MATTERS
For U.S. federal income tax purposes, no income, gain or loss will be
recognized by UCI or the stockholders of UCI as a result of the Acquisition.
ACCOUNTING TREATMENT
In accordance with generally accepted accounting principles, the
Acquisition is being accounted for as a purchase of certain assets and an
assumption of certain liabilities of MHC and its affiliated entities with the
Company treated as the acquiror for accounting purposes in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations," as amended.
Under EITF 97-2, the Company is consolidating the results of the
affiliated medical practices of the MHC-PCs acquired in the Acquisition by the
UCI-PCs with those of the Company.
21
Representatives of Price Waterhouse LLP are expected to be present at
the Annual Meeting. Such representatives will have the opportunity to make a
statement if they desire to do so and are expected to be available to respond to
appropriate questions.
RESALES OF COMMON STOCK
All shares of Common Stock that were issued in the Private Placement
and all shares of Common Stock that may be issued in connection with the
Acquisition and pursuant to the exercise of the Warrants are, or upon issuance
will be, deemed to be "restricted securities" as that term is defined in Rule
144 under the Securities Act of 1933, as amended (the "1933 Act"). As a
consequence, such shares may not be sold, pledged or otherwise transferred by
the stockholders receiving such shares except in transactions permitted by the
resale provisions of Rule 145 under the 1933 Act (with respect to shares issued
in the Acquisition) and Rule 144 under the 1933 Act (with respect to persons
purchasing such shares in the Private Placement and persons who are or become
affiliates of UCI), or as otherwise permitted under the 1933 Act. See "Risk
Factors - Resales of Common Stock."
In general, under Rule 145 (with respect to shares received in the
Acquisition) and Rule 144 (with respect to shares received in the Private
Placement or purchased upon exercise of the Warrants) during the first year
following the issuance of the shares, any person receiving shares of Common
Stock in any of such transactions will be able to sell or otherwise transfer
such shares only pursuant to an effective registration statement under the 1933
Act or in compliance with an exemption from the registration requirements of the
1933 Act. During the second year following the receipt of such shares, such
person will be entitled to sell such shares only through unsolicited "brokers'
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 144. Additionally, the number of shares to be sold by such
person (together with certain related persons) within any three-month period for
the purposes of Rule 144 and Rule 145 cannot exceed the greater of one percent
of the outstanding shares of Common Stock or the average weekly trading volume
of such stock during the four calendar weeks preceding such sale. Rules 144 and
145 will only remain available, however, if UCI remains current with its
informational filings with the SEC under the Securities Exchange Act of 1934, as
amended (the "1934 Act"). Two years after the issuance of shares in the
Acquisition, the Private Placement, or upon exercise of the Warrants, as
applicable, a stockholder who received Common Stock in such transaction will be
able to sell such Common Stock without such manner of sale or volume
limitations, provided that UCI has been current with its 1934 Act informational
filings and such person has not been an affiliate of UCI for at least three
months prior to such sale. Persons who may be deemed to be affiliates of UCI
generally include individuals or entities that control, are controlled by, or
are under common control with, UCI, and may include certain officers and
directors of UCI as well as principal stockholders of UCI.
In order to help assure compliance with Rule 144 and Rule 145 under
the 1933 Act, each purchaser in the Private Placement signed, and each of MHC
and its stockholders will be required to sign prior to the issuance to any of
them of shares of Common Stock, an agreement providing that such person or
entity will not transfer any Common Stock received in the respective transaction
except in compliance with the 1933 Act, and a restrictive legend referencing
such transfer restrictions will be placed on the reverse side of certificates
representing such shares.
Under the terms of various registration rights agreements, the
investors in the Private Placement, Allen, MHC and the MHC Stockholders have
certain demand and piggyback registration rights pursuant to which they may
require UCI, subject to certain terms and conditions, to register under the 1933
Act all or part of the Common Stock received or to be by such stockholders in
connection with the Private Placement and the Acquisition and upon the exercise
of the Warrants, as applicable. See "Description of the Agreements - Other
Agreements - Registration Rights Agreement."
22
ABSENCE OF DISSENTERS' RIGHTS
UCI is incorporated in the State of Delaware, and accordingly, is
governed by the provisions of the Delaware General Corporation Law (the "DGCL").
UCI stockholders are not entitled to appraisal rights under the DGCL with
respect to the Acquisition. Although approval of the stockholders of UCI is
required under the rules and bylaws of the NASD for the issuance of Common Stock
pursuant to the Conditional Delivery Agreement delivered at the closing of the
Acquisition and for the issuance of the Warrants pursuant to the Conditional
Delivery Agreement delivered at the closing of the Private Placement,
stockholder approval of neither the Acquisition nor the Private Placement is
required under the DGCL.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION
Pursuant to the Acquisition Agreement, UCI agreed to undertake
appropriate corporate action to have A. Wayne Johnson, Chairman and Chief
Executive Officer of MHC, appointed to the UCI Board. The UCI Board has
nominated Mr. Johnson as one of the two nominees in the election of directors
at the Annual Meeting. To the extent Mr. Johnson is not elected as a director at
the Annual Meeting, promptly following the Annual Meeting, the UCI Board is
expected to vote to increase the size of the UCI Board from seven to eight
members and to appoint Mr. Johnson to fill the vacancy created by the expansion
in the number of directors. In the event Mr. Johnson is elected as a director at
the Annual Meeting and the issuance of Common Stock pursuant to the Conditional
Delivery Agreement delivered at the closing of the Acquisition is not approved
by the UCI stockholders, thereby requiring the parties to the Acquisition to
return, to the extent possible, to their postures held prior to the Acquisition,
there is no arrangement or understanding currently in place or contemplated that
would limit or otherwise restrict his service on the UCI Board for the full
three-year term to which he is elected.
DESCRIPTION OF THE AGREEMENTS
ACQUISITION AGREEMENT
GENERAL
The Acquisition Agreement (which includes as exhibits the Non-Solicit
Agreements and the Registration Rights Agreement) is the legal document that
governs the Acquisition. Pursuant to the terms of the Acquisition Agreement,
UCI-GA acquired substantially all of the assets of MHC (the "MHC Assets") and
the UCI-PCs acquired certain assets of the MHC-PCs (the "MHC-PC Assets"), all in
exchange for the assumption by UCI-GA of certain liabilities of MHC (the "MHC
Liabilities") and the payment of approximately $8.14 million in value,
comprised of a combination of cash paid by UCI-GA and the UCI-PCs, a note
payable of UCI-GA, and an agreement to issue UCI Common Stock. The closing of
the Acquisition was completed on May 13, 1998, effective for accounting purposes
as of May 1, 1998.
THE DESCRIPTION IN THIS SECTION OF THE ACQUISITION AGREEMENT IS
QUALIFIED BY REFERENCE TO THE FULL AGREEMENT WHICH HAS BEEN FILED AS AN EXHIBIT
TO THE UCI CURRENT REPORT ON FORM 8-K FILED WITH THE SEC ON FEBRUARY 17, 1998,
AS AMENDED BY FILING OF FORMS 8-K/A ON APRIL 20, 1998, MAY 28, 1998, JULY 24,
1998 AND AUGUST 13, 1998. YOU CAN OBTAIN SUCH REPORTS BY FOLLOWING THE
INSTRUCTIONS WE PROVIDE IN THIS PROXY STATEMENT UNDER THE HEADING "ADDITIONAL
INFORMATION - WHERE YOU CAN FIND MORE INFORMATION."
ASSETS PURCHASED AND LIABILITIES ASSUMED
The MHC Assets included the MHC accounts receivable, machinery,
furniture, furnishings, equipment, computer hardware and software, inventory,
supplies, leasehold interests, other contract rights, permits, licenses and
goodwill. Excluded from the MHC Assets were cash and cash accounts (other than
any holdback amounts associated with MHC's line of credit, as described below),
accounts receivable from employees, automobile leases, certain real property,
and any furniture, equipment and software used at the MHC headquarters facility.
Each of MHC and the MHC-PCs (collectively, the "Selling Entities") also
transferred or otherwise assigned to the Company all of their rights to all
corporate and trade names used by
23
each of the Selling Entities or their divisions. All MHC Assets, with the
exception of MHC's accounts receivable which were pledged in support of the
MHC line of credit obligation, were conveyed free and clear of all liens and
encumbrances.
The MHC-PC Assets primarily included medical records and the rights
under the various employment agreements with medical providers employed at the
MHC Centers.
The MHC Liabilities included the obligations of MHC under
operating and capital equipment leases, the obligations of MHC under certain of
its real property leases (or the obligations under new leases with similar
terms), and the MHC line of credit obligation with Bank One, N.A. in the amount
of $594,184. UCI-GA did not assume any other of the Selling Entities'
obligations or liabilities, including current and long-term liabilities,
contingent liabilities, medical malpractice claims, environmental claims,
workers' compensation claims, and sales, income and payroll taxes.
CONSIDERATION PAID IN THE ACQUISITION
The aggregate purchase price for the MHC Assets was $8.14 million,
plus the assumption of the MHC Liabilities, including the $594,184 line of
credit obligation and lease obligations of MHC. Payment of the purchase price
consisted in part of a cash payment by UCI-GA at closing of $450,000 to an
escrow agent appointed by MHC and the delivery of a promissory note in the
principal amount of $800,000 executed by UCI-GA in favor of the escrow agent.
Such promissory note, as amended, bears interest at a rate of 6.5% per annum
for the period May 1, 1998 through August 1, 1998, and interest at the rate of
10.5% thereafter until the note is paid in full, and such promissory note is due
and payable on October 1, 1998. UCI guaranteed the promissory note. The
purchase price received by the escrow agent is to be used to pay certain
creditors of MHC identified to the escrow agent by MHC.
The balance of the purchase price of the Acquisition consisted of the
delivery to MHC at the closing of a Conditional Delivery Agreement (the
"Conditional Delivery Agreement") by and between UCI, UCI-GA and MHC which
requires UCI to issue to MHC 2,901,396 shares of Common Stock after the
stockholders of UCI approve such issuance. Pursuant to the Acquisition
Agreement, the price per share utilized to determine the number of shares of
Common Stock to be issued to MHC was $2.375. The Conditional Delivery Agreement
states that in the event the stockholders of UCI fail to approve any of the
matters necessary to issue the shares to MHC as provided in the Acquisition
Agreement, the parties are to undertake, to the extent possible, such
actions as are necessary to restore the parties to their positions held prior to
the closing of the Acquisition. In the event it is impossible to restore a party
to its position held prior to closing, any deficiency is to be resolved by the
exchanging of promissory notes among the parties.
The purchase price for the MHC-PC Assets was $200 which was paid by
the UCI-PCs to the MHC-PCs at the closing of the Acquisition.
The purchase price was allocated among the MHC Assets pursuant to
a letter provided by UCI-GA to MHC following the closing. In such allocation,
the amount allocated to the fixed assets of the Selling Entities was determined
by an appraisal firm selected by UCI-GA.
ACCOUNTING TREATMENT
Although the parties believe that the purchase of the MHC Assets
qualified as a tax-free reorganization under Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended (the "Code"), the Company will not be
responsible for assuring that the transaction so qualifies, and the Acquisition
was not conditioned upon such qualification.
COVENANTS
Each of MHC and the MHC-PCs has agreed in the Acquisition Agreement
not to compete with the Company anywhere within the states of South Carolina,
Tennessee and Georgia for a period of three years
24
after the closing. In addition, the holders of the Class B voting common stock
of MHC (the "Class B Stockholders") executed a Non-Solicit Agreement attached
as an exhibit to the Acquisition Agreement. See "Related Agreements -
Non-Solicit Agreements."
EMPLOYEES
Each of the Selling Entities made available for employment by the
Company all of each of the Selling Entities' employees, but the Company was not
be obligated to employ any particular employee. Each of the
physician-employees, physician assistants and nurse practitioner employees of
the Selling Entities (collectively, the "Medical Providers") executed, effective
as of May 1, 1998, employment agreements with the Company. All of the such
employment agreements also include non-compete provisions which are consistent
with such employee's non-compete agreements, if any, with MHC and the MHC-PCs,
as applicable. MHC and the MHC-PCs will satisfy, and the Company will be
protected against, all accrued employee benefits, severance, accrued vacation or
other paid leave, and all obligations or liabilities to each of the employees of
MHC and the MHC-PCs arising in connection with their employment by any of MHC
and the MHC-PCs.
REPRESENTATIONS, INDEMNIFICATIONS AND HOLDBACK SHARES
The Acquisition Agreement contains certain customary comprehensive
representations and warranties of the Selling Entities, the Class B
Stockholders and the Company. The Acquisition Agreement also contains mutual
indemnification provisions which are subject to the following limitations which
apply to all claims for indemnification other than claims by the Company related
to the Selling Entities' pending and threatened litigation: (a) a basket of
$125,000, below which such indemnifying party will have no obligation for
breaches of representations, warranties and certain covenants, but when exceeded
will require payment of the first dollar of loss, (b) a general twelve-month
survival period for indemnification for breaches of representations, warranties
and certain covenants, and (c) a cap of $3 million for the total aggregate
liability of the indemnifying parties for breaches of representations,
warranties and certain covenants. Each Class B Stockholder is severally but
not jointly liable for any other Class B Stockholder's breach of the
Acquisition Agreement. Also, each Class B Stockholder's liability is limited
to an agreed upon percentage of the indemnified party's total damages which
approximates each Class B Stockholder's pro rata equity interest in MHC.
To provide the Company additional security in the event a claim for
indemnification by the Company arises, after the date of issuance of the
shares of Common Stock to MHC pursuant to the Conditional Delivery Agreement,
MHC will place into escrow 126,315 shares of Common Stock (the "Holdback
Shares") for a period of one year. In the event ownership of the Holdback Shares
is transferred to a stockholder of MHC upon the liquidation of MHC, or upon any
other distribution by MHC, the Holdback Shares will remain in escrow as an asset
of such stockholder of MHC. Subject to certain limitations described above, in
the event a claim by the Company for indemnification arises, the Company may
elect to recover such indemnification damages from the Selling Entities, the
Class B Stockholders and the Holdback Shares, or any one or more of them.
BOARD OF DIRECTORS
In accordance with the Acquisition Agreement, the Company has
nominated A. Wayne Johnson, Chairman and Chief Executive Officer of MHC, for
election as a director at the Annual Meeting. To the extent permitted by law, as
long as MHC or Penman Private Equity and Mezzanine Fund, L.P. ("Penman") is
the holder or record of five percent or more the issued and outstanding Common
Stock, a representative of Penman will be invited to attend, at Penman's
expense, all meetings of the UCI Board.
25
RELATED AGREEMENTS
NON-SOLICIT AGREEMENTS
Each of the Class B Stockholders entered into a non-solicit
agreement with the Company which prohibits each of the Class B Stockholders
for a period of two years after closing from soliciting or inducing any person
employed by any of Selling Entities or the Company to terminate such person's
contract of employment with such entity. In addition, each of the Class B
Stockholders is obligated under a covenant in the Acquisition Agreement which
prohibits each of the Class B Stockholders for a period of five years after
closing from soliciting or inducing a certain senior management employee of the
Selling Entities to terminate such senior management employee's contract of
employment with the Company.
REGISTRATION RIGHTS AGREEMENT
Under the registration rights agreement between UCI, MHC and each of
the MHC stockholders, UCI, upon written demand of the holders of at least 20
percent of the shares (the "Demand"), agrees to register on one occasion, all or
any portion of the shares so requested to be registered. In addition, UCI grants
to MHC and its stockholders certain "piggyback" registration rights, subject to
standard underwriter cutbacks and company deferral for good cause. The
registration rights terminate one year after the date of closing. Provided UCI
receives the Demand within 30 days after the date of the issuance of the Common
Stock to MHC, UCI will file with the SEC such registration statement within 60
days after the receipt of the Demand. UCI agrees to use its reasonable best
efforts to cause such registration statement to become effective and to maintain
its effectiveness for a period of nine months after its effective date.
STOCKHOLDER AGREEMENTS
As noted elsewhere in this Proxy Statement, each of M.F. McFarland
III, M.D.; D. Michael Stout, M.D.; Stephen F. Serbin, M.D.; Peter J. Stahl,
M.D.; CHC and CP&C have executed and delivered to MHC separate agreements to
vote their shares of Common Stock at the Annual Meeting in favor of the
transactions described in the Acquisition Agreement. As of the record date for
the Annual Meeting, such stockholders held, in the aggregate, shares
representing approximately 54 percent of the outstanding Common Stock.
Accordingly, if such stockholders vote as indicated, each of the proposals
relating to the Acquisition are assured to be approved, regardless of the votes
that may be cast by any other holders of Common Stock entitled to vote. See
"Description of the Acquisition - Expectation of Stockholder Approval."
26
FINANCIAL AND BUSINESS INFORMATION
MARKET PRICE AND DIVIDEND INFORMATION
The Common Stock is traded on the Nasdaq SmallCap Market under the
symbol UCIA. The prices set forth below indicate the high and low bid prices
reported on the Nasdaq SmallCap Market for the indicated periods.
BID PRICE
HIGH LOW
---- ----
FISCAL YEAR ENDING SEPTEMBER 30, 1998
1st quarter (10/01/97 - 12/31/97) $ 3-1/4 $ 1-3/4
2nd quarter (01/01/98 - 03/31/98) 2-1/2 2
3rd quarter (04/01/98 - 06/30/98) 2-1/16 1-3/8
FISCAL YEAR ENDED SEPTEMBER 30, 1997
1st quarter (10/01/96 - 12/31/96) 3-3/8 2-3/8
2nd quarter (01/01/97 - 03/31/97) 3-3/8 2-1/2
3rd quarter (04/01/97 - 06/30/97) 2-11/16 1-11/16
4th quarter (07/01/97 - 09/30/97) 2-3/4 1-5/16
FISCAL YEAR ENDED SEPTEMBER 30, 1996
1st quarter (10/01/95 - 12/31/95) 4-1/4 3-1/8
2nd quarter (01/01/96 - 03/31/96) 5-1/8 3-1/4
3rd quarter (04/01/96 - 06/30/96) 4 3-1/4
4th quarter (07/01/96 - 09/30/96) 3-3/4 2-7/8
FISCAL YEAR ENDED SEPTEMBER 30, 1995
1st quarter (10/01/94 - 12/31/94) 3-1/8 1-1/2
2nd quarter (01/01/95 - 03/31/95) 3-1/4 1-1/2
3rd quarter (04/01/95 - 06/30/95) 3-3/8 2-1/4
4th quarter (07/01/95 - 09/30/95) 3-1/4 1-3/4
The foregoing quotations reflect inter-dealer prices without retail
markup, markdown or commission and may not necessarily reflect actual
transactions.
On February 12, 1998, the last trading day prior to the public
announcement of the Acquisition, the Common Stock closed at $2.3125 per share.
On August 1998, the latest practicable trading day before the printing of this
Proxy Statement, the Common Stock closed at $ per share.
As of the Record Date, there were stockholders of record of
Common Stock, excluding individual participants in security position listings.
UCI has not paid cash dividends on the Common Stock since its
inception and has no plans to declare cash dividends in the foreseeable future.
27
DESCRIPTION OF MHC
Prior to the Acquisition, MHC provided nonmedical management and
administrative services for its 11 MHC Centers located in Georgia and Tennessee
(nine operating as MainStreet Healthcare in the Atlanta, Georgia area and two
operating as Prompt Care in Knoxville, Tennessee). All medical services at the
MHC Centers were provided by or under the supervision of the MHC-PCs which
contracted with MHC to be the sole provider of all medical direction and
supervision of the MHC Centers. The MHC-PCs were organized so that all
physician services were offered by the physicians who were employed by the
MHC-PCs. MHC did not employ practicing physicians as practitioners, exert
control over their decisions regarding medical care or represent to the public
that it offered medical services. MHC entered into administrative services
agreements with the MHC-PCs for the performance by MHC of all financial
functions (billings, collections, payables, payroll, etc.) and all
administrative management and support functions (excluding, as required by
state law, any functions involving the professional aspects of medical
practice).
The MHC Centers were and continue to be staffed by licensed
physicians, other healthcare providers and administrative support staff. The
medical support staff includes licensed nurses, certified medical assistants,
laboratory technicians and x-ray technicians.
Both before and following the Acquisition, the MHC Centers have
continued to offer out-patient medical care, with and without appointment, for
treatment of acute and episodic medical problems. The MHC Centers provide a
broad range of medical services which would generally be classified as within
the scope of family practice and occupational medicine. The medical services are
provided by licensed physicians, nurses and auxiliary support personnel. The
services that were and continue to be provided at the MHC Centers include, but
are not limited to, the following:
o Routine care of general medical problems, including colds, flu, ear
infections, hypertension, asthma, pneumonia and other conditions
typically treated by primary care providers;
o Treatment of injuries, such as simple fractures, dislocations,
sprains, bruises and cuts;
o Minor surgery, including suturing of lacerations and removal of cysts
and foreign bodies;
o Diagnostic tests, such as x-rays, electrocardiograms, complete blood
counts, urinalysis and various cultures; and
o Occupational and industrial medical services, including drug testing,
workers' compensation and physical examinations.
At any of the MHC Centers, a patient with a life-threatening
condition would be evaluated by the physician, stabilized and immediately
referred to a nearby hospital.
The fees charged to a patient are determined by the nature of medical
services rendered. The MHC Centers accept payment from a wide range of sources.
These include patient payment at time of service (by cash, check or credit
card), patient billing and assignment of insurance benefits (including Blue
Cross Blue Shield, workers' compensation and other private insurance). Private
pay billings represent the most significant source of revenues.
As of the closing date of the Acquisition, MHC had 103 full-time
equivalent employees and 20 part-time employees. Included in these numbers were
23 medical providers employed by the MHC-PCs.
Attached as Appendix C to this Proxy Statement are the audited
financial statements of MHC for the two fiscal years ended March 31, 1998 and
MHC's management's discussion and analysis of financial condition and results of
operations relating to such annual financial statements.
28
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial
statements (the "Condensed Statements") have been prepared to give effect to the
Acquisition and the Private Placement. The purchase method of accounting was
used to give effect to all transactions.
The Condensed Statements reflect certain assumptions regarding the
Acquisition and the Private Placement and are based on the historical
consolidated financial statements of the respective entities. The financial
information relating to UCI reflected in the Condensed Statements, including the
notes thereto, is qualified in its entirety by reference to, and should be
read in conjunction with, the audited financial statements and the unaudited
interim financial statements, including the notes thereto, of UCI, which are
incorporated by reference in this Proxy Statement. The Condensed Statements
were prepared on the basis of such audited and unaudited financial statements of
UCI, as well as the internal unaudited monthly financial statements of MHC as of
and for each of the months in the twelve-month period ended September 30, 1997
and the internal unaudited monthly financial statements of MHC for each of the
months in the seven-month period ended April 30, 1998.
The pro forma combined condensed statements of operations combine
UCI's historical results of operations for the nine months ended June 30,
1998 and the fiscal year ended September 30, 1997 with MHC's historical results
of operations for the seven months ended April 30, 1998 and the twelve
months ended September 30, 1997, respectively, giving effect to the Acquisition
and the Private Placement as if they had occurred on October 1, 1996.
The Condensed Statements are presented for illustrative purposes only
and are not necessarily indicative of the financial position or results of
operations which would have actually been reported had the Acquisition occurred
as of October 1, 1996, nor are the Condensed Statements necessarily indicative
of future financial position or results of operations.
Under EITF 97-2, the Company is consolidating the results of the
affiliated medical practices of the MHC-PCs acquired by the UCI-PCs in the
Acquisition with those of the Company.
29
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE NINE MONTHS ENDED JUNE 30, 1998
UCI MHC
(NINE MONTHS (SEVEN MONTHS
ENDED ENDED PRO FORMA PRO FORMA
JUNE 30, 1998) APRIL 30, 1998) ADJUSTMENTS COMBINED
---------------- --------------- ------------- ------------
Revenue $ 26,625,431 $ 3,749,440 --- $ 30,374,871
- -------
Operating costs 25,748,944 3,812,855 (236,250)(a)
(112,500)(b) 29,213,049
--------------- -------------- ------------- ------------
Operating margin 876,487 (63,415) 348,750 1,161,822
General and administrative expenses 66,817 827,895 --- 894,712
Depreciation and amortization 1,349,851 149,955 197,837(c)
15,000(d) 1,712,643
--------------- -------------- ------------- ------------
Income (loss) from operations (540,181) (1,041,265) 135,913 (1,445,533)
Interest expense, net (846,864) (274,141) --- (1,121,005)
Gain (loss) on equipment 27,215 --- --- 27,215
---------------- --------------- ------------- ------------
Income (loss) before income tax (1,359,830) (2,539,323)
Income tax benefit (558) --- 135,913 (558)
---------------- --------------- ------------- ------------
Net income (loss) $ (1,360,388) $ (1,315,406) $ 135,913 $ (2,539,881)
================ =============== ============= ============
Basic earnings (loss) per share $ (0.20) ---(e) --- $ (0.37)
================ =============== ============= ============
Basic weighted average common shares
outstanding 6,939,141 ---(e) --- 6,939,141
================ =============== ============= ============
Diluted earnings (loss) per share $ (0.20) ---(e) --- $ (0.37)
================ =============== ============= ============
Diluted weighted average common shares
outstanding 6,957,461 ---(e) --- 6,957,461
================ =============== ============= ============
30
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
PRO FORMA PRO FORMA
UCI MHC ADJUSTMENTS COMBINED
------------ ------------ ------------- ------------
Revenue $ 27,924,772 $ 6,008,442 $ -- $ 33,933,214
Operating costs 26,466,294 6,790,444 (315,000)(a)
(150,000)(b) 32,791,738
------------ ------------ ------------ ------------
Operating margin 1,458,478 (782,002) 465,000 1,141,476
General and administrative expenses 153,445 1,420,580 -- 1,574,025
Depreciation and amortization 1,250,349 335,499 263,783(c)
20,000(d) 1,869,631
------------ ------------ ------------ ------------
Income (loss) from operations 54,684 (2,538,081) 181,217 (2,302,180)
Interest expense, net (812,749) (273,721) -- (1,086,470)
Gain (loss) on equipment 8,809 (130,990) -- (122,181)
------------ ------------ ------------ ------------
Income (loss) before income tax (749,256) (2,942,792) 181,217 (3,510,831)
Income tax benefit 665,530 -- -- 665,530
------------ ------------ ------------ ------------
Net income (loss) $ (83,726) $ (2,942,792) $ 181,217 $ (2,845,301)
============ ============ ============ ============
Basic earnings (loss) per share $ (.02) ---(e) -- $ (0.30)
============ ============ ============ ============
Basic weighted average common shares
outstanding 5,005,080 ---(e) -- 9,406,477
============ ============ ============ ============
Diluted earnings (loss) per share $ (.02) ---(e) -- $ (0.30)
============ ============ ============ ============
Diluted weighted average common
shares outstanding 5,022,736 ---(e) -- 9,424,133
============ ============ ============ ============
31
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(a) Net decrease in salaries paid to former corporate officers is
$236,250 for nine months and $315,000 annually.
(b) Net decrease in salaries for clinic based administrative personnel is
$112,500 for nine months and $150,000 annually.
(c) Amortization of goodwill on a straight line basis over 15 years is
$197,837 for nine months and $263,783 annually.
(d) Net increase in amortization expense related to building improvements in
leased real estate is $15,000 for nine months and $20,000 annually.
(e) As a privately held corporation, MHC was not required to, and did not,
compute earnings per share.
32
THE ANNUAL MEETING
BUSINESS TO BE CONDUCTED AT THE ANNUAL MEETING
PROPOSALS TO BE VOTED UPON
This Proxy Statement is furnished to holders of Common Stock in
connection with the solicitation of proxies by the UCI Board for use at the
Annual Meeting of Stockholders of UCI to be held for the purposes described in
this Proxy Statement. Each copy of this Proxy Statement mailed to a holder of
Common Stock is accompanied by a form of proxy for use at the Annual Meeting.
There are two sets of proposals - one set relates to the Acquisition and the
other set relates to general business in connection with the Annual Meeting.
ACQUISITION PROPOSALS
UCI stockholders will be asked at the Annual Meeting to approve the
following proposals which relate to the Acquisition:
1. Issuance of shares of Common Stock in connection with
the Acquisition (the "Share Issuance Proposal").
2. Issuance of the Warrants in connection with the Private
Placement, including the shares of Common Stock underlying the
Warrants (the "Warrant Issuance Proposal").
3. Amendment of Article Fourth of the UCI Certificate to
increase the authorized shares of Common Stock from 10 million shares
to 50 million shares (the "Authorized Capital Stock Proposal").
ANNUAL MEETING PROPOSALS
In connection with the Annual Meeting, UCI stockholders will be
asked:
1. To elect three members of the UCI Board, each to hold
office for a three-year term ending on the date of the annual meeting
of stockholders in the year 2001 and until such director's respective
successor shall have been duly elected and qualified.
2. To approve the adoption of the UCI Medical Affiliates,
Inc. 1997 Stock Incentive Plan for officers, directors, employees and
consultants of UCI and its subsidiaries (the "1997 Incentive Plan
Proposal").
3. To approve an amendment of the UCI Certificate to give
effect to a one-for-five reverse stock split of the Common Stock (the
"Reverse Stock Split Proposal").
4. To ratify the appointment of Price Waterhouse LLP as the
firm of independent auditors to audit the consolidated financial
statements of the Company for the fiscal year ending September 30,
1998 (the "Ratification of Auditors Proposal").
DATE, TIME AND PLACE OF MEETING
The Annual Meeting will be held on Wednesday, September 30, 1998 at
10:00 a.m. local time, at the Embassy Suites Hotel, 200 Stoneridge Drive,
Columbia, South Carolina 29210.
33
RECORD DATE
Only holders of record of Common Stock at the close of business on
August 20, 1998 (the "Record Date") are entitled to notice of and will be
entitled to vote at the Annual Meeting.
SHARES OUTSTANDING AND ENTITLED TO VOTE
The Common Stock is entitled to one vote per share on each matter
that is presented for stockholder approval at the Annual Meeting. At the close
of business on the Record Date, there were 7,299,245 shares of Common Stock
outstanding and entitled to vote, held of record by approximately 630
stockholders. All of such shares are eligible to be voted on each matter
currently scheduled to come before the Annual Meeting.
VOTING AND REVOCATION OF PROXIES
The form of proxy accompanying this Proxy Statement is solicited on
behalf of the UCI Board for use at the Annual Meeting. You are requested to
complete, date and sign the accompanying form of proxy and promptly return it in
the accompanying envelope or otherwise mail it to UCI. All proxies that are
properly executed and returned, and that are not revoked, will be voted at the
Annual Meeting in accordance with the instructions indicated on the proxies. If
no instructions are indicated, such proxies will be voted FOR each of the
proposals described in this Proxy Statement, including election of the director
nominees set forth in this Proxy Statement.
The UCI Board does not presently intend to bring any business before
the Annual Meeting other than the specific UCI proposals referred to in this
Proxy Statement and specified in the notice of the Annual Meeting. So far as is
known to the UCI Board, no other matters are to be brought before the Annual
Meeting. If any other business properly comes before the Annual Meeting,
however, it is intended that proxies, in the form enclosed, will be voted on
such matters in accordance with the judgment of the persons voting such proxies.
Any UCI stockholder who has signed the proxy referred to in this
Proxy Statement may revoke it at any time before it is exercised at the Annual
Meeting by (i) delivering to the Corporate Secretary of UCI a written notice,
bearing a date later than the proxy, stating that the proxy is revoked, (ii)
signing and so delivering a proxy relating to the same shares and bearing a
later date prior to the vote at the Annual Meeting or (iii) attending the Annual
Meeting and voting in person (although attendance at the Annual Meeting will
not, by itself, revoke a proxy). Whether or not you plan to attend the Annual
Meeting, you are urged to sign and return the enclosed proxy.
QUORUM
The quorum required for the transaction of business at the Annual
Meeting is a majority of shares of Common Stock, or 3,649,624 shares, issued and
outstanding on the Record Date, which shares must be present in person or
represented by proxy at the Annual Meeting. Directions to withhold authority to
vote for directors, abstentions and broker non-votes will be considered shares
present in person or by proxy and entitled to vote and therefore will be counted
for purposes of determining whether there is a quorum at the Annual Meeting. If
a quorum is not present or represented at the Annual Meeting, the chairman of
the meeting or the stockholders holding a majority of the shares of Common Stock
entitled to vote, present in person or represented by proxy, have the power to
adjourn the meeting from time to time, without notice other than an announcement
at the meeting, until a quorum is present or represented. Directors, officers
and employees of UCI may solicit proxies for the reconvened Annual Meeting in
person or by mail, telephone or telegraph. At any such reconvened Annual Meeting
at which a quorum is present or represented, any business may be transacted that
might have been transacted at the meeting as originally scheduled.
34
VOTE REQUIRED
GENERAL
Under the NASD rules, approval by the affirmative vote of the holders
of a majority of the total votes cast on each of the Share Issuance Proposal and
the Warrant Issuance Proposal, in person or by proxy, is required to approve
such proposals. Accordingly, abstentions and broker non-votes will have no
effect on the outcome of the vote.
Under the DGCL, approval by the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock entitled to vote is required
to approve the Authorized Capital Stock Proposal and the Reverse Stock Split
Proposal. Accordingly, abstentions and broker non-votes will have the same
effect as a vote against such proposals.
Under the DGCL, the three director nominees receiving the greatest
number of votes cast (although not necessarily a majority of the votes cast) in
the election of directors at the Annual Meeting will be elected to the Board of
Directors. Accordingly, directions to withhold authority, abstentions and broker
non-votes will have no effect on the outcome of the vote. The UCI Certificate
does not allow for cumulative voting in the election of directors.
Approval by the affirmative vote of the holders of a majority of the
shares of Common Stock present in person or represented by proxy at the Annual
Meeting and entitled to vote is required to approve each of the 1997 Incentive
Plan Proposal and the Ratification of Auditors Proposal. Accordingly,
abstentions and broker non-votes will have the same effect as a vote against
such proposals. Approval of the 1997 Incentive Plan Proposal is required
pursuant to the rules and bylaws of the NASD and by the Code.
A broker non-vote occurs when a broker or other nominee holding
shares for a beneficial owner votes on one proposal, but does not vote on
another proposal because the broker or other nominee does not have the
discretionary voting power and has not received voting instructions from the
beneficial owner.
STOCKHOLDER AGREEMENTS
Each of M. F. McFarland, III, M.D., D. Michael Stout, M.D., Stephen
F. Serbin, M.D., Peter J. Stahl, CHC and CP&C has separately agreed with MHC
to vote shares of Common Stock as to which each of them has voting control in
favor of the proposals relating to the Acquisition to be presented at the Annual
Meeting. Each of them has also indicated to the Company their intent to vote in
favor of all other proposals scheduled to be presented at the Annual Meeting. As
of the Record Date, these shares represented approximately 54 percent of the
outstanding Common Stock.
BASED ON THESE NUMBERS, APPROVAL OF ALL PROPOSALS AND THE ELECTION OF
THE THREE DIRECTORS TO BE ELECTED BY THE HOLDERS OF COMMON STOCK IS ASSURED,
REGARDLESS OF THE VOTE CAST BY ANY OTHER UCI STOCKHOLDER.
SOLICITATION OF PROXIES AND EXPENSES
UCI will bear the cost of preparing, assembling and mailing this
Proxy Statement and the accompanying form of proxy to stockholders. In addition
to solicitation by mail, the directors, officers and employees of UCI may
solicit proxies from stockholders by telephone, telegram, letter, facsimile or
in person. No compensation will be paid for such solicitations. UCI may request
brokers, custodians, nominees and other record holders to forward copies of the
proxy and other soliciting materials to persons for whom they hold shares of
Common Stock and to request authority for the exercise of proxies. In such
cases, UCI, upon the request of the record holders, will reimburse such holders
for their reasonable expenses.
35
DESCRIPTION OF PROPOSALS
The UCI Board has considered each of the proposals described in this
Proxy Statement and believes that each proposal is in the best interests of UCI
stockholders.
THE UCI BOARD RECOMMENDS, BY THE UNANIMOUS CONSENT OF ALL DIRECTORS,
THAT YOU VOTE FOR EACH PROPOSAL DESCRIBED IN THIS SECTION.
YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
ACQUISITION PROPOSALS
SHARE ISSUANCE AND WARRANT ISSUANCE PROPOSALS
Because the shares of Common Stock to be issued in the Acquisition
and the shares of Common Stock issuable upon exercise of the Warrants to be
delivered in connection with the Private Placement will exceed 20 percent of the
number of shares of Common Stock outstanding prior to such issuances, the NASD
rules require that UCI stockholders approve the issuance of such Common Stock
and the Warrants.
AUTHORIZED CAPITAL STOCK PROPOSAL
The Authorized Capital Stock Proposal provides that Article Fourth of
the UCI Certificate will be amended to increase the authorized shares of Common
Stock from 10 million shares to 50 million shares. The remaining shares of
authorized but unissued Common Stock may thereafter be used for general
corporate purposes, including in connection with future acquisitions. Approval
of this proposal is required to consummate the issuance of the shares of Common
Stock contemplated by the Share Issuance Proposal and the issuance of the
Warrants and underlying Common Stock contemplated by the Warrant Issuance
Proposal discussed above. The full text of the Authorized Capital Stock Proposal
is included in Appendix B attached to this Proxy Statement.
The Conditional Delivery Agreement delivered at the closing of the
Acquisition states that in the event the stockholders of UCI fail to approve any
of the matters necessary to issue the shares to MHC as provided in the
Acquisition Agreement, each of the parties, to the extent possible, is to be
restored to its position held prior to the closing. In the event it is
impossible to restore a party to its position held prior to closing, any
deficiency is to be resolved by the exchanging of promissory notes among the
parties.
ANNUAL MEETING PROPOSALS
ELECTION OF DIRECTORS
Three directors are to be elected at the Annual Meeting. The UCI
Certificate provides for a classified Board of Directors so that, as nearly as
possible, one-third of the UCI Board is elected each year to serve a three-year
term. Pursuant to the authority granted to it under the UCI Bylaws, the UCI
Board has set the size of the UCI Board at seven members with staggered terms
expiring at the forthcoming Annual Meeting and at the annual meetings of
stockholders in the years 1999 and 2000. Charles P. Cannon, a director whose
term would have expired at the forthcoming Annual Meeting, resigned from the UCI
Board effective June 1, 1998. Mr. Cannon's resignation has created a vacancy on
the UCI Board which the UCI Board has indicated it expects to have filled
through the election of directors at the Annual Meeting. A. Wayne Johnson, Ashby
M. Jordan, M.D. and John M. Little, Jr., M.D. have been nominated by the UCI
Board for election as directors at the forthcoming Annual Meeting for terms
expiring at the annual meeting of stockholders in the year 2001. Dr. Jordan's
term as a director expires at the forthcoming Annual Meeting. See "Directors
and Executive Officers."
The persons named in the accompanying proxy have been designated by
the UCI Board and, unless authority is specifically withheld, they intend to
vote for the election of the nominees listed above. A
36
stockholder executing the enclosed proxy may vote for the nominees or may
withhold such vote from the nominees. In each case where the stockholder has
appropriately specified how the proxy is to be voted, it will be voted in
accordance with such stockholder's specifications. Although it is not
contemplated that the nominees will become unable to serve prior to the Annual
Meeting, the persons named on the enclosed proxy will have the authority to vote
for the election of another person in accordance with their best judgment.
Pursuant to the Acquisition Agreement, in the event Mr. Johnson is
not elected to the UCI Board at the Annual Meeting, promptly following the
Annual Meeting, the UCI Board, acting pursuant to the authority granted to it
under the UCI Bylaws, is expected to increase the size of the UCI Board to
eight directors, and Mr. Johnson is to be appointed by the UCI Board as the
director to fill the vacancy created by such expansion of the size of the UCI
Board.
1997 INCENTIVE PLAN PROPOSAL
GENERAL
The UCI Board approved the adoption of the UCI Medical Affiliates,
Inc. 1997 Stock Incentive Plan (the "Stock Plan") effective as of December 17,
1997, subject to the approval of the Stock Plan by the stockholders at the
Annual Meeting. The following discussion of the Stock Plan is qualified in its
entirety by reference to the Stock Plan. UCI will provide promptly, upon request
and without charge, a copy of the full text of the Stock Plan to each
stockholder to whom a copy of this Proxy Statement is delivered. Requests should
be directed to: Mr. Jerry F. Wells, Jr., Chief Financial Officer, UCI Medical
Affiliates, Inc., 1901 Main Street, Suite 1200, Columbia, South Carolina 29201
(803) 252-3661.
PURPOSE
The Stock Plan is intended to provide UCI with maximum flexibility to
meet the evolving needs of UCI and its subsidiaries over the next ten years in
providing stock-based incentives and rewards to officers, directors and
employees of UCI, and to consultants and advisors to UCI, who are and have been
in a position to contribute materially to improving UCI's profits. The enhanced
employment incentives available through the Stock Plan are expected to promote
the interests of UCI and its stockholders by strengthening UCI's ability to
attract and retain key officers and employees. Through the operation of the
Stock Plan, such present and future officers and employees may be encouraged to
acquire, or to increase their acquisition of, Common Stock, thus maintaining
their personal and proprietary interests in UCI's continued success and
progress.
ADMINISTRATION
The UCI Board will oversee and carry out the provisions of the Stock
Plan, and may establish one or more Committees (the "Committee") to assume such
duties and any other duties as are contemplated for any of such Committees under
the terms of the Stock Plan. When and if established by the UCI Board, the
Committee will be responsible to the UCI Board for the operation of the Stock
Plan and will make recommendations to the UCI Board with respect to
participation in the Stock Plan by officers, directors and employees of, and
consultants and advisors to, UCI and its subsidiaries, and with respect to the
extent of that participation. (All further references to the Committee contained
in this description of the Stock Plan should be deemed to be references to the
UCI Board to the extent that a Committee has not been established by the Board.)
The interpretation and construction by the Committee of any provisions of the
Stock Plan or of any award granted under it will be final. All awards made under
the Stock Plan will be evidenced by written agreements between UCI and the
participant.
OPERATION
The Stock Plan provides for the grant of incentive stock options
("ISOs"), nonqualified stock options ("NSOs"), stock appreciation rights
("SARs") and restricted stock awards ("Restricted Stock"). The Stock Plan will
be effective for a term of ten years after the effective date of its adoption by
the UCI Board. A maximum of 1,500,000 shares of Common Stock may be issued
pursuant to awards granted under the Stock Plan, and the UCI Board has reserved
1,500,000 shares for this purpose. The number of shares reserved for issuance
under the Stock
37
Plan will be adjusted in the event of an adjustment in the capital stock
structure of UCI affecting the Common Stock (in connection with a merger,
consolidation, recapitalization, reclassification, combination, stock dividend,
stock split or similar event), and the Committee is authorized to adjust the
terms of awards under the Stock Plan in the event of a change in the capital
stock in order to prevent dilution or enlargement of awards under the Stock
Plan. UCI intends to register the shares of Common Stock reserved under the
Stock Plan under the 1933 Act.
All obligations of UCI under the Stock Plan and under any award
granted under the Stock Plan will be binding upon any successor to UCI, whether
the existence of such successor is the result of a direct or indirect purchase
of all or substantially all of the business or assets of UCI, or a merger,
consolidation or otherwise. Unless otherwise specifically prohibited by the
terms of any award or under any applicable laws, rules or regulations, upon the
occurrence of a change in control of UCI, each then outstanding option and SAR
that is not otherwise exercisable will become immediately and fully exercisable,
and any restrictions imposed on Restricted Stock will lapse. Under the Stock
Plan, events constituting a change in control include the acquisition by any
third party or group of 35 percent or more of the outstanding Common Stock; the
change over a two-year period of the makeup of a majority of the members of the
UCI Board; a tender offer to acquire control of the outstanding Common Stock;
and shareholder approval of the liquidation of UCI, the sale of substantially
all of its assets, or the merger, consolidation or reorganization of UCI where
the voting securities of UCI prior to such event do not continue to constitute
at least 65 percent of the voting securities of the surviving entity.
ELIGIBILITY
Each officer, director and employee of UCI or any of its subsidiaries is
eligible to participate in the Stock Plan, and awards under the Stock Plan may
also be granted from time to time to persons serving as consultants or advisors
to UCI or any of its subsidiaries. The Committee will select the individuals who
will participate in the Stock Plan, and members of the Committee will not be
restricted under the terms of the Stock Plan from participating in the Stock
Plan while serving as members of the Committee. On the date of this Proxy
Statement, six directors, approximately 616 employees and no consultants
and advisors were eligible to participate in the Stock Plan. The Committee may
grant awards under the Stock Plan to any officer, director or other employee of,
or any consultant or advisor to, UCI or any of its subsidiaries. Awards that are
granted at the same or at different times under the Stock Plan are not required
to contain similar provisions.
No awards may be granted under the Stock Plan after December 17,
2007. The Board may terminate the Stock Plan sooner without further action by
the stockholders. The UCI Board also may amend the Stock Plan without
stockholder approval, except that no amendment that increases the number of
shares of Common Stock that may be issued under the Stock Plan or changes the
class of individuals who may be selected to participate in the Stock Plan will
become effective until it is approved by the stockholders.
STOCK OPTIONS
The Stock Plan permits the granting of non-transferable ISOs that
qualify as incentive stock options under Section 422A(b) of the Code and
non-transferable NSOs that do not so qualify. The option exercise price of each
option will be determined by the Committee in its sole discretion, but may not
be less than the fair market value of the Common Stock on the date the option is
granted in the case of ISOs and may not be less than 50 percent of such fair
market value in the case of NSOs. On August_____, 1998, the reported last sale
price of the Common Stock on the Nasdaq SmallCap Market was $________per share.
The term of each option will be fixed by the Committee, but may not exceed ten
years from the date of grant. The Committee will determine at what time or times
each option may be exercised. Options may be made exercisable in installments,
and the exercisability of options may be accelerated by the Committee. The
exercise price of options granted under the Stock Plan must be paid in cash or
by delivery of shares of Common Stock or a combination of cash and shares.
38
Except as otherwise provided below, upon termination of a
participant's employment, an option will terminate upon the earliest to occur of
the full exercise of the option, the expiration of the option by its terms, and
the date three months following the date of employment termination. Should
termination of employment (a) result from the death or permanent and total
disability of a participant, such three-month termination period shall extend to
one year, or (b) be for cause, the option will terminate on the date of
employment termination. The employment of a consultant or advisor will be deemed
terminated upon UCI's notice to the participant that UCI will no longer transact
business with the consultant or advisor.
To qualify as ISOs, options must currently meet additional federal
tax requirements, including limits on the value of shares subject to ISOs first
exercisable annually to any participant, and a shorter exercise period and
higher minimum exercise price in the case of certain large stockholders. To the
extent these special requirements are changed or eliminated, the Stock Plan will
be amended accordingly.
STOCK APPRECIATION RIGHTS
The Committee may also grant non-transferrable rights, alone or in
conjunction with options, entitling the holder upon exercise to receive an
amount in any combination of cash or shares of Common Stock (in the sole
discretion of the Committee) equal to the increase since the date of grant in
the fair market value of the shares covered by such SAR over the SAR price for
such shares. The SAR price will be established at the date of grant of the SAR
and will be determined by the Committee in its sole discretion, except that the
SAR price may not be less than the fair market value of the Common Stock on the
date the SAR is granted in the case of an SAR issued in tandem with an ISO, and
may not be less than 50 percent of such fair market value in the case of all
other SARs. The restrictions applicable to the exercise of SARs under the Stock
Plan in the context of termination of employment with UCI are the same as those
restrictions applicable to the exercise of stock options under the Stock Plan as
discussed above.
RESTRICTED STOCK AWARDS
The Committee may also award shares of Common Stock subject to such
conditions and restrictions, if any, as the Committee may determine. The
purchase price, if any, of shares of Restricted Stock shall be determined by the
Committee. Recipients of Restricted Stock may be required to enter into a
Restricted Stock award agreement with UCI in such form as the Committee may
determine, setting forth the restrictions to which the shares are subject and
the date or dates on which the restrictions will lapse. The Committee may at any
time waive such restrictions or accelerate such dates. Shares of Restricted
Stock will be non-transferable. If a participant who holds shares of Restricted
Stock terminates employment for any reason (including death) prior to the lapse
or waiver of any restrictions, then the shares shall be forfeited to UCI for no
payment. Prior to the lapse of any restrictions on shares of Restricted Stock,
the participant will have all rights of a stockholder with respect to the
shares, including voting and dividend rights, subject only to the conditions and
restrictions generally applicable to Restricted Stock or specifically set forth
in any Restricted Stock award agreement.
CURRENT AWARDS
The number and value of awards that may be granted under the Stock
Plan in the future to officers, directors and employees of, and consultants and
advisors to, UCI or any of its subsidiaries cannot currently be determined and
will be within the discretion of the Committee. As of the date of this Proxy
Statement, one award of an ISO for the purchase of 60,000 shares of Common Stock
at an exercise price of $1.75 per share was made effective December 17, 1997 to
an officer (non-executive) of UCI. One-third of that ISO vests on each of the
first three anniversaries of its date of grant. As of the date of this Proxy
Statement, no other grants of any awards have been approved under the Stock Plan
to any other persons.
39
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a brief summary of the
federal income tax rules currently in effect that are generally relevant to
stock incentive awards. The laws governing the tax aspects of awards are highly
technical and such laws are subject to change.
INCENTIVE STOCK OPTIONS: For regular income tax purposes, no taxable
income is realized by the optionee upon the grant or exercise of an ISO. As long
as no disposition of shares issued upon exercise of the ISO is made by the
optionee within two years from the date of grant or within one year after the
transfer of such shares to the optionee, then (a) upon sale of such shares, any
amount realized in excess of the option price will be taxed to the optionee as a
long-term capital gain, and any loss sustained will be a long-term capital loss,
and (b) no deductions will be allowed to UCI for federal income tax purposes.
However, the exercise of an ISO will give rise to an item of tax preference that
may result in alternative minimum tax liability for the optionee.
If shares acquired upon the exercise of an ISO are disposed of prior
to the expiration of the holding periods described above (a "disqualifying
disposition"), generally (a) the optionee will realize ordinary income in the
year of disposition in an amount equal to the excess (if any) of the fair market
value of the shares at exercise (or, if less, the amount realized on a sale of
such shares) over the option price thereof, and (b) UCI will be entitled to
deduct such amount. Any further gain realized will be taxed as short-term or
long-term capital gain and will not result in any deduction by UCI. Special
rules apply when all or a portion of the exercise price of the ISO is paid by
tendering shares of Common Stock, and special rules may also apply where the
optionee is subject to Section 16(b) of the 1934 Act. A disqualifying
disposition will eliminate the item of tax preference associated with the
exercise of the ISO if it occurs in the same taxable year as the exercise of the
ISO.
NONQUALIFIED STOCK OPTIONS: No income is realized by the optionee at
the time an NSO is granted. Generally, (a) at exercise, ordinary income is
realized by the optionee in an amount equal to the difference between the option
price and the fair market value of the shares on the date of exercise, and UCI
receives a tax deduction for the same amount, and (b) at disposition,
appreciation or depreciation after the date of the exercise is treated as either
short-term or long-term capital gain or loss, depending on how long the shares
have been held. Special rules could apply in some situations if the optionee is
subject to Section 16(b) of the 1934 Act.
STOCK APPRECIATION RIGHTS: No income will be realized by a
participant in connection with the grant of an SAR. When the SAR is exercised,
or when a participant receives payment in cancellation of an SAR, the
participant will generally be required to include as taxable ordinary income in
the year of such exercise or payment an amount equal to the amount of cash
received and the fair market value of any stock received. UCI will generally be
entitled at the same time to a deduction for federal income tax purposes equal
to the amount includable as ordinary income by such participant.
RESTRICTED STOCK AWARDS: The recipient of Restricted Stock generally
will realize ordinary income equal to the fair market value of the stock at the
time the stock is no longer subject to forfeiture, minus any amount paid for
such stock, and UCI will receive a corresponding deduction. However, unless
prohibited by any award agreement, a recipient may elect under Section 83(b) of
the Code to realize ordinary income on the date of issuance equal to the fair
market value of the shares of Restricted Stock at that time (measured as if the
shares were unrestricted and could be sold immediately), minus any amount paid
for such stock. If the shares are forfeited, the recipient will not be entitled
to any deduction, refund or loss for tax purposes with respect to the forfeited
shares. Upon sale of the shares after the forfeiture period has expired, the
holding period to determine whether the recipient has long-term or short-term
capital gain or loss begins when the restriction period expires (or upon earlier
issuance of the shares, if the recipient elected immediate recognition of income
under Section 83(b) of the Code). If Restricted Stock is received in connection
with another award under the Stock Plan, the income and the deduction, if any,
associated with such award may be deferred in accordance with the rules
described above for Restricted Stock.
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The foregoing discussion is provided for the information of
stockholders and is not a complete description of the federal tax consequences
in respect of transactions under the Stock Plan, nor does it describe state or
local tax consequences.
REVERSE STOCK SPLIT PROPOSAL
The UCI Board has concluded that it would be advisable to amend the
UCI Certificate to effect a one-for-five reverse stock split of the presently
issued and outstanding shares of Common Stock, and to provide for the payment of
cash in lieu of fractional shares otherwise issuable (the "Split"). The Split
requires that the UCI Certificate be amended to reduce the number of authorized
shares of Common Stock and increase the par value per share of Common Stock, as
described below. Accordingly, the Split is subject to approval by the
stockholders. Assuming approval of the Split by the stockholders, the Split
would result in one share of post-Split Common Stock ("New Common Stock") being
received in exchange for each five presently issued and outstanding shares of
Common Stock.
UCI is presently authorized to issue 10 million shares of Common
Stock, of which 7,299,245 shares of Common Stock were outstanding at the close
of business on August 20, 1998. In the event stockholders approve the proposal
to increase the authorized number of shares of Common Stock in connection with
the Acquisition, as discussed above, UCI will be authorized to issue 50 million
shares of Common Stock. To give effect to the Split, the UCI Certificate is
proposed to be amended to reduce by a factor of five the number of authorized
shares of Common Stock and to increase by a factor of five the par value per
share. The principal effect of the proposed Split will be to decrease the number
of authorized shares of Common Stock to 2 million shares (or 10 million shares
if the proposal to increase the authorized capital in connection with the
Acquisition is approved), to increase the par value per share to twenty-five
cents ($0.25), and to decrease the number of outstanding shares of Common Stock
to approximately 1,459,840. Except for those stockholders who receive cash in
lieu of fractional interests, the Split will not affect any stockholder's
proportionate equity interest in the Company. The proposed amendment to the UCI
Certificate also includes a provision to increase the number of authorized
shares of New Common Stock from 2 million to 10 million shares immediately after
the Split in the event the proposal to increase the authorized capital stock in
connection with the Acquisition is not approved. The Split will not have any
impact on the aggregate assigned value of the shares of Common Stock for
financial statement purposes. The full text of the Reverse Stock Split Proposal
is included in Appendix B attached to this Proxy Statement.
The UCI Board believes that the current share price of the Common
Stock has reduced the effective marketability of the Common Stock because of the
reluctance of many leading brokerage firms to recommend low-priced stocks to
their clients. Further, a variety of brokerage house policies and practices tend
to discourage individual brokers within those firms from dealing in low-priced
stocks. Some of those policies and practices pertain to the payment of brokers'
commissions and to time-consuming procedures that function to make the handling
of low-priced stocks unattractive to brokers from an economic standpoint. In
addition, the structure of trading commissions also tends to have an adverse
impact upon holders of low-priced stocks because the brokerage commission on the
sale of a low-priced stock generally represents a higher percentage of the sales
price than the commission on a relatively higher-priced issue.
The UCI Board is hopeful that the decrease in the number of shares of
Common Stock outstanding as a consequence of the Split, and the expected
increase in share price, will encourage interest in the New Common Stock, ensure
the continued qualification of the New Common Stock for quotation on the Nasdaq
SmallCap Market, and possibly promote greater liquidity for the UCI
stockholders. Also, although it may be anticipated that the expected increase in
the price level of the New Common Stock as a consequence of the Split will be
proportionately less than the decrease in the number of shares outstanding, the
Split could result in a price level for the shares that will overcome the
reluctance, policies and practices referred to above and diminish the adverse
impact of trading commissions on the market for the shares. There can, however,
be no assurance that the foregoing effects will occur, or that the per share
price level of the New Common Stock immediately after the Split will be
maintained for any period of time.
41
If the Split is approved by the stockholders, UCI will promptly file
an amendment to the UCI Certificate with the Secretary of State of the State of
Delaware. The proposed Split will become effective on the date of that filing
(the "Effective Date"). Commencing with the Effective Date, each certificate
representing shares of Common Stock will be deemed for all corporate purposes to
evidence ownership of a number of shares of New Common Stock equal to one-fifth
of the number of shares reflected as Common Stock, or, to the extent a
stockholder holds a number of shares not evenly divisible by five, fractional
interests for which UCI will pay cash as described below. Stockholders will not
have the opportunity on or after the Effective Date to round off their
share-holdings to a number evenly divisible by five.
American Stock Transfer & Trust Company has been appointed exchange
agent (the "Exchange Agent") to act for the stockholders in effecting the
exchange of their certificates. As soon as practicable after the Effective Date,
stockholders will be notified and requested to surrender their certificates
representing shares of Common Stock to the Exchange Agent in exchange for
certificates representing shares of New Common Stock.
No scrip or fractional share certificates of New Common Stock will be
issued in connection with the Split. Assuming approval of the Split by the
Company's stockholders, those stockholders who would otherwise receive
fractional shares will be entitled to payment of the applicable fraction of the
fair market value of each share of Common Stock held prior to the Effective Date
upon surrender of certificates representing such shares of Common Stock to the
Exchange Agent. Such fair market value shall be the closing price of the Common
Stock as of the trading date immediately prior to the Effective Date.
UCI will deposit sufficient cash with the Exchange Agent for the
purchase of the fractional interests expected to result from the Split.
Stockholders are urged to surrender their certificates to the Exchange Agent and
to claim the sums, if any, due them for fractional interests promptly after the
Effective Date. Under the escheat laws of the various jurisdictions where
stockholders reside, UCI is domiciled, and the funds are deposited, sums due for
fractional interests which are not timely claimed after the Effective Date will,
unless correspondence has been received by UCI or the Exchange Agent concerning
those funds within the time allowed by those jurisdictions, be paid to those
various jurisdictions. Thereafter stockholders otherwise entitled to the funds
will have to seek to obtain them directly from the state to which the funds were
paid.
The ownership of a fractional interest will not give the holder any
voting, dividend or any other right except the right to receive payment therefor
as described above. No service charges will be payable by stockholders in
connection with the exchange of stock certificates or the issuance of cash for
fractional interests, all of which costs will be borne by UCI.
The federal income tax consequences of the Split are expected to be
as set forth below. The following information is based upon existing law which
is subject to change by legislation, administrative action and judicial decision
and is necessarily general. Therefore, stockholders are advised to consult with
their own tax advisor for more detailed information relating to their individual
tax circumstances.
1. The Split is expected to be a tax-free recapitalization for UCI
and its stockholders to the extent that shares of Common Stock are exchanged for
shares of New Common Stock.
2. The shares of New Common Stock in the hands of a stockholder will
have an aggregate basis for computing gain or loss equal to the aggregate basis
of shares of Common Stock held by that stockholder immediately prior to the
Split, reduced by the amount of proceeds, if any, received from the redemption
by UCI of fractional interests and increased by any gain recognized on that
redemption.
3. A stockholder's holding period for shares of New Common Stock will
include the holding period of shares of Common Stock exchanged therefor,
provided that the shares of Common Stock were capital assets in the hands of the
stockholder.
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4. Stockholders who receive cash for all of their holdings will
recognize a gain or loss for federal income tax purposes as a result of the
disposition of their shares of Common Stock. Although the tax consequences to
stockholders who receive cash for some of their holdings are not entirely
certain, those stockholders in all likelihood will recognize a gain or loss for
federal income tax purposes as a result of the disposition of a portion of their
shares of Common Stock. Stockholders who do not receive any cash for their
holdings will not recognize any gain or loss for federal income tax purposes as
a result of the Split.
It is estimated that the number of shares of Common Stock outstanding
after payment of cash for fractional interests would be reduced by less than
0.03% (equivalent to approximately 2,000 shares of Common Stock or 400 shares of
New Common Stock) and the number of stockholders of record would not change.
Since the number of the UCI stockholders of record will not be reduced below 300
as a consequence of the Split, UCI will not as a result of those actions become
eligible to terminate the registration of the Common Stock under the Securities
Exchange Act of 1934 or to cease filing reports under that act with the SEC. UCI
does not have any present plans to take any action which would further reduce
the number of its stockholders.
RATIFICATION OF AUDITORS PROPOSAL
The UCI Board, adopting the recommendation of the Audit Committee of
the UCI Board (the "Audit Committee"), has appointed the certified public
accounting firm of Price Waterhouse LLP as UCI's independent auditors for the
fiscal year ending September 30, 1998, subject to ratification by the
stockholders at the Annual Meeting. Representatives of Price Waterhouse LLP are
expected to be present at the Annual Meeting and will be available to respond to
questions and may make a statement if such representatives so desire.
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The following sets forth certain information concerning the persons
nominated for election as directors and the current directors whose terms will
continue beyond the Annual Meeting.
DIRECTOR NOMINEES FOR TERMS EXPIRING IN 2001
A. WAYNE JOHNSON, 47, has served as Chairman and Chief Executive
Officer of MHC from its inception in February 1996. Mr. Johnson has 23 years of
entrepreneurial and business operations experience in the field of financial
services and corporate development. Prior to co-founding MHC in February 1996,
Mr. Johnson had served since 1991 as President of one of the major operating
subsidiaries of First Data Corporation and Chief Marketing Officer and strategic
planner for First Data Card Services Group, a subsidiary of First Data
Corporation. Mr. Johnson was the founder of both Integratec, a collection
company, and QualiServ, a credit card outsourcing service company.
ASHBY M. JORDAN, M.D., 59, has served as a director of UCI since
August 1996 and as Vice President of Medical Affairs of BCBS since December
1986. Prior to joining BCBS, Dr. Jordan was the Vice President of Medical
Affairs for CIGNA HealthPlan of South Florida, Inc. Dr. Jordan is Board
Certified by the American Board of Pediatrics.
JOHN M. LITTLE, JR., M.D., , has served as Chief Medical Officer of
CHC since 1996. Additionally, he has served since 1994 as Medical Director of
Managed Care Services of CHC, as Chairman of the Quality Assurance Committee and
the Pharmacy and Therapeutics Committee of CHC and as a Co-Chair of the Managed
Care Oversight Committee of CHC. Prior to joining CHC in 1994, Dr. Little served
as Assistant Chairman for Academic Affairs, Department of Family Practice,
Carolinas Medical Center, Charlotte, North Carolina from 1992 to 1994.
43
DIRECTORS WHOSE TERMS EXPIRE IN 2000
M.F. MCFARLAND, III, M.D., 50, has served as Chairman of the Board,
President and Chief Executive Officer of UCI since January 1987 and as a
director of UCI since September 1984. From September 1984 until January 1987, he
served as Vice President of UCI. He has served as President and as the sole
director of UCI-SC and DC-SC for over five years and of UCI-GA since its
organization in February 1998. He served as Associate Professional Director of
the Emergency Department of Richland Memorial Hospital in Columbia, South
Carolina from 1978 to 1981 and was President of the South Carolina Chapter of
the American College of Emergency Physicians in 1979. Dr. McFarland is currently
a member of the Columbia Medical Society, the South Carolina Medical Association
and the American Medical Association.
CHARLES M. POTOK, 49, has served as a director of UCI since September
1995 and as Executive Vice President and Chief Operating Officer of CP&C since
March 1984. Mr. Potok is an Associate of the Casualty Actuarial Society and a
member of the American Academy of Actuaries. Prior to joining CP&C, Mr. Potok
served as Chief Property and Casualty Actuary and Director of the Property and
Casualty Division of the South Carolina Department of Insurance.
DIRECTORS WHOSE TERMS EXPIRE IN 1999
HAROLD H. ADAMS, JR., 51, has served as a director of UCI since June
1994 and as President and owner of Adams and Associates, International, Adams
and Associates, and Southern Insurance Managers since June 1992. He served as
President of Adams Eaddy and Associates, an independent insurance agency, from
1980 to 1992. Mr. Adams has been awarded the Chartered Property Casualty
Underwriter designation and is currently a member of the President's Board of
Visitors of Charleston Southern University in Charleston, South Carolina. He has
received numerous professional awards as the result of over 25 years of
involvement in the insurance industry and is a member of many professional and
civic organizations.
THOMAS G. FAULDS, 57, has served as a director of UCI since August
1996 and as Executive Vice President of Private Business for BCBS since October
1991. Mr. Faulds has been with BCBS since March 1972 where he has served in key
senior management positions in government programs, information systems and
operations.
EXECUTIVE OFFICERS
The following sets forth certain information concerning the persons
who currently serve as executive officers of UCI who do not also serve on the
UCI Board.
JERRY F. WELLS, JR., 36, has served as Chief Financial Officer and
Executive Vice President of Finance of UCI since he joined UCI in February 1995
and as Corporate Secretary of UCI since December 1996. He has served as
Executive Vice President of Finance, Chief Financial Officer and Corporate
Secretary of UCI-SC since December 1996, and of UCI-GA since its organization in
February 1998, and as Corporate Secretary of DC-SC since December 1996. Prior to
joining UCI, he served as a Senior Manager and consultant for Price Waterhouse
LLP from 1985 until February 1995. Mr. Wells is a certified public accountant
and is a member of the American Institute of Certified Public Accountants, the
South Carolina Association of Certified Public Accountants and the North
Carolina CPA Association.
D. MICHAEL STOUT, M.D., 53, has served as Executive Vice President of
Medical Affairs of UCI and DC-SC since 1985. He is Board Certified in Emergency
Medicine and is a member of the American College of Emergency Physicians, the
Columbia Medical Society and the American College of Physician Executives.
JON G. KEITH, 49, has served as Executive Vice President and Chief
Operating Officer of UCI and as Chief Operating Officer of UCI-SC since he
joined the Company in January 1997. From 1985 until he joined the Company, Mr.
Keith served as Vice President for Corporate Services and Vice President for
44
Administration for Baptist Healthcare System of South Carolina and Baptist
Medical Center. Mr. Keith is a Diplomate with the American College of Healthcare
Executives and a member of the Medical Group Management Association.
JITENDRA S. MEHTA, 47, has served as Executive Vice President of
Development and Procurement of UCI since he joined the Company in November 1993.
Mr. Mehta has an extensive background in hospital and medical personnel
administration. He served as Business Director of Multispecialty Clinic in
Maryland from 1985 to 1989 and served as Vice President and Partner of Citrus
Diagnostic Center from 1990 to 1993. Mr. Mehta is currently a member of American
Registry for Radiological Technology and the Nuclear Medicine Technologist
Certification Board.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires the directors and officers of
UCI to file reports of holdings and acquisitions in Common Stock with the SEC.
Based on UCI records and other information, UCI believes that all SEC filing
requirements applicable to its directors and officers were complied with in
respect to the Company's fiscal year ended September 30, 1997.
BOARD OF DIRECTORS AND BOARD COMMITTEES
UCI BOARD
The UCI Board had a total of four regular meetings and no special
meetings during the Company's fiscal year ended September 30, 1997. No director
attended fewer than 75 percent of the total of such Board meetings and the
meetings of the committees upon which the director served. Among the standing
committees established by the UCI Board are a Compensation Committee, an Audit
Committee, and a Revenue Enhancement Committee. The UCI Board does not have a
nominating committee for recommending to stockholders candidates for positions
on the UCI Board. Currently, seven directors serve on the UCI Board.
AUDIT COMMITTEE
The Audit Committee consisted of Messrs. Adams and Cannon until Mr.
Cannon's resignation from the UCI Board in June 1998. Mr. Cannon was replaced on
the Audit Committee by the appointment of Mr. Faulds in July 1998. This
committee recommends to the UCI Board the engagement of the independent auditors
for the Company, determines the scope of the auditing of the books and accounts
of the Company, reviews the reports submitted by the auditors, examines
procedures employed in connection with the Company's internal control structure,
reviews and approves the terms of acquisitions between the Company and any
related party entities, undertakes certain other activities related to the
fiscal affairs of the Company and makes recommendations to the UCI Board as may
be appropriate. This committee met once during the Company's fiscal year ended
September 30, 1997.
COMPENSATION COMMITTEE
The Compensation Committee consists of Messrs Adams, Potok and
Russell J. Froneberger. (Mr. Froneberger is not standing for reelection at the
Annual Meeting.) This committee monitors the Company's executive compensation
plan, practice and policies, including all salaries, bonus awards and fringe
benefits, and makes recommendations to the UCI Board with respect to changes in
existing executive compensation plans and the formation and adoption of new
executive compensation plans. This committee met once during the Company's
fiscal year ended September 30, 1997.
REVENUE ENHANCEMENT COMMITTEE
The Revenue Enhancement Committee consists of Messrs. Adams, Faulds,
Froneberger and Potok. This committee monitors the Company's ancillary and
complementary services, and makes recommendations
45
to the UCI Board with respect to changes in such existing services. This
committee met once during the Company's fiscal year ended September 30, 1997.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation earned during
the fiscal year ended September 30, 1997 and during each of the two prior fiscal
years by the President and Chief Executive Officer of UCI and the executive
officers of UCI whose annual compensation from UCI exceeded $100,000 for all
services provided to the Company. No other executive officer of the Company
earned compensation in excess of $100,000 for services provided to the Company
in any of the three fiscal years reflected in the table.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
-------------------------------------------- -----------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary(1) Bonus (1) Options Compensation(2)
- ---------------------------- ------ ----------- ------------ --------- ----------------
M.F. McFarland, III, M.D. 1997 $ 316,540 (3) $ - 0-(4) 141,675 $ 7,968
CHAIRMAN, PRESIDENT AND 1996 315,000 (3) 63,500(4) 30,000 7,368
CHIEF EXECUTIVE OFFICER 1995 194,616 (3) 145,000(4) 35,000 6,818
D. Michael Stout, M.D. 1997 $ 216,825 (5) $ - 0-(6) 79,825 $ -0-
EXECUTIVE VICE PRESIDENT OF 1996 198,316 (5) - 0-(6) 10,000 -0-
MEDICAL AFFAIRS 1995 157,600 (5) 32,000(6) 20,000 -0-
(1) Amounts included under the heading "Salary" and "Bonus" include
compensation from both UCI-SC and DC-SC.
(2) Amounts included under the heading "All Other Compensation" are comprised
of premiums for long term disability and life insurance provided by the
Company for the benefit of Dr. McFarland.
(3) For services performed by Dr. McFarland for UCI-SC, a wholly-owned
subsidiary of UCI, Dr. McFarland received an annual salary of $157,500 and
$157,500 during the fiscal years ended September 30, 1997 and 1996,
respectively. Dr. McFarland served without compensation from UCI-SC for his
services during the fiscal year ended September 30, 1995. For services
performed by Dr. McFarland for DC-SC, an affiliated professional
association wholly owned by Dr. McFarland that contracts with UCI-SC to
provide all medical services at UCI's medical facilities, Dr. McFarland
received an annual salary of $159,040, $157,500, and $194,616 for the
fiscal years ended September 30, 1997, 1996, and 1995, respectively.
(4) Pursuant to the employment agreement dated October 1, 1995 between UCI-SC
and Dr. McFarland, UCI-SC accrued incentive bonuses during the fiscal years
ended September 30, 1997 and 1996 payable to Dr. McFarland of zero and
$63,500, respectively, and made no payments to Dr. McFarland against
accrued bonuses. DC-SC accrued a bonus payable to Dr. McFarland during the
fiscal year ended September 30, 1995 of $145,000. Dr. McFarland received
draws from DC-SC out of previously accrued bonuses of $62,000, $120,000 and
$167,430 during the fiscal years ended September 30, 1997, 1996, and 1995,
respectively.
(5) For services performed by Dr. Stout for UCI-SC, Dr. Stout received an
annual salary of $50,000 and $45,833 during the fiscal years ended
September 30, 1997 and 1996, respectively. Dr. Stout served without
compensation from UCI-SC for his services during the fiscal year ended
September 30, 1995. For services performed by Dr. Stout for DC-SC, Dr.
Stout received an annual salary of $166,825, $152,483, and $157,600 for the
fiscal years ended September 30, 1997, 1996, and 1995, respectively.
(6) DC-SC accrued and paid bonuses to Dr. Stout of zero, zero and $32,000
during the fiscal years ended September 30, 1997, 1996 and 1995,
respectively.
46
OPTION GRANTS
The following table sets forth certain information with respect to
options to purchase Common Stock granted during the fiscal year ended September
30, 1997 to certain of the executive officers of UCI. (All options reflected
below vest one-third on each of the first three anniversaries of the grant
date.)
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE OR
UNDERLYING OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION
Name GRANTED IN FY 1997 PER SHARE DATE
- ------------------------------- -------------------- ---------------- ------------ -------------
M.F. McFarland, III, M.D. 20,000 4.49% $ 2.8875 Dec. 18, 2001
CHAIRMAN, PRESIDENT AND 121,675 27.31 2.1313 June 18, 2002
CHIEF EXECUTIVE OFFICER
A. Michael Stout, M.D. 5,000 1.12 2.6250 Dec. 18, 2006
EXECUTIVE VICE PRESIDENT OF 74,825 16.80 1.9375 June 18, 2007
MEDICAL AFFAIRS
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to
unexercised options to purchase Common Stock held at September 30, 1997. None of
the named executive officers exercised any options during the fiscal year ended
September 30, 1997.
1997 FISCAL YEAR-END
OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY
FISCAL YEAR END OPTIONS AT FISCAL YEAR END
-------------------------------- -------------------------------
NAME EXERCISABLE Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
M.F. McFarland, III, M.D. 33,333 173,342 $ -0- $ 44,862
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
A. Michael Stout, M.D. 16,666 93,159 -0- 42,090
EXECUTIVE VICE PRESIDENT OF
MEDICAL AFFAIRS
DIRECTOR COMPENSATION
Non-employee directors are paid a fee of $500 for attendance at each
meeting of the UCI Board. Non-employee directors of UCI are reimbursed by UCI
for all out-of-pocket expenses reasonably incurred by them in the discharge of
their duties as directors, including out-of-pocket expenses incurred in
attending meetings of the UCI Board.
During the fiscal year ended September 30, 1996, UCI adopted a
Non-Employee Director Stock Option Plan (the "1996 Non-Employee Plan"). The 1996
Non-Employee Plan provides for the granting of options to two non-employee
directors for the purchase of 10,000 shares of Common Stock at the fair market
47
value as of the date of grant. Under this plan, 5,000 options were issued to
Harold H. Adams, Jr. and 5,000 options were issued to Russell J. Froneberger.
These options are exercisable during the period commencing on March 20, 1999 and
ending on March 20, 2006. At September 30, 1997, there were stock options
outstanding under the 1996 Non-Employee Plan for 10,000 shares, none of which
were exercisable.
During the fiscal year ended September 30, 1997, UCI adopted a
Non-Employee Director Stock Option Plan (the "1997 Non-Employee Plan"). The 1997
Non-Employee Plan provides for the granting of options to four non-employee
directors for the purchase of 20,000 shares of Common Stock at the fair market
value as of the date of grant. Under this plan, 5,000 options were issued each
to Charles P. Cannon, Thomas G. Faulds, Ashby M. Jordan, M.D., and Charles M.
Potok. These options are exercisable during the period commencing on March 28,
2000 and ending on March 28, 2007. At September 30, 1997, there were stock
options outstanding under the 1997 Non-Employee Plan for 20,000 shares, none of
which were exercisable.
EMPLOYMENT CONTRACTS
Effective October 1, 1995, Dr. McFarland entered into a five-year
contract with UCI-SC that provides for annual compensation of $157,500, the use
of one automobile and an incentive bonus payable at the end of the fiscal year,
subject to the determination of the UCI Board and based upon net income and
gross revenue of UCI for the same year. Also, effective October 1, 1995, Dr.
McFarland entered into a five-year contract with DC-SC that provides for annual
compensation of $157,500.
Effective November 1, 1995, Dr. Stout entered into a five-year
contract with UCI-SC that provides for annual compensation of $50,000. Also,
effective November 1, 1995, Dr. Stout entered into a five-year contract with
DC-SC that provides for annual compensation of $160,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to UCI
regarding the beneficial ownership of Common Stock as of April 30, 1998.
Information is presented for (i) stockholders owning more than five percent of
the outstanding Common Stock, (ii) each director, director nominee and executive
officer of UCI, individually, and (iii) all directors and executive officers of
UCI, as a group.
Number of Shares
NAME Beneficially Owned (1) Percentage
- ----------------------------------------------------------------- ---------------------------- ---------------
Blue Cross Blue Shield of South Carolina (2) ......................................2,624,623 43.37 %
M.F. McFarland, III, M.D. (3)........................................................589,128 9.65
Harold H. Adams, Jr....................................................................2,500 *
Charles P. Cannon........................................................................-0- -0-
Thomas G. Faulds.........................................................................-0- -0-
Russell J. Froneberger.................................................................2,000 *
A. Wayne Johnson.........................................................................-0- -0-
Ashby M. Jordan, M.D.....................................................................-0- -0-
Jon G. Keith..........................................................................20,500(4) *
John M. Little, Jr., M.D................................................................-0- -0-
Jitendra Mehta........................................................................18,334(5) *
Charles M. Potok........................................................................-0- -0-
D. Michael Stout, M.D................................................................280,627(6) 4.62
Jerry F. Wells, Jr....................................................................33,333(7) *
All current directors and executive officers
as a group (11 persons)...........................................................946,422 15.28%
- ----------------------
* Amount represents less than 1.0 percent.
(1) Beneficial ownership reflected in the table is determined in
accordance with the rules and regulations of the SEC and generally
includes voting or investment power with respect to securities.
Shares of Common Stock issuable upon the exercise of options
currently exercisable or convertible, or exercisable or convertible
within 60 days, are deemed outstanding for computing the percentage
ownership of the person holding such options, but are not deemed
outstanding for computing the percentage ownership of any other
person. Except as otherwise specified, each of the stockholders
48
named has indicated to UCI that such stockholder has
sole voting and investment power with respect to all shares of
Common Stock beneficially owned by that stockholder.
(2) The business address of the named beneficial owner is I-20 at Alpine
Road, Columbia, SC 29219. The shares reflected in the table are held
of record by CHC (2,006,442 shares) and CP&C (618,181 shares), each
of which is a wholly-owned subsidiary of BCBS.
(3) The business address of the named beneficial owner is 1901 Main
Street, Suite 1200, Columbia, SC 29201. Shares reflected in the
table include 50,000 shares issuable pursuant to currently
exercisable stock options.
(4) Includes 20,000 shares issuable pursuant to currently exercisable
stock options.
(5) All shares are issuable pursuant to currently exercisable stock
options.
(6) Includes 21,667 shares issuable pursuant to currently exercisable
stock options.
(7) All shares are issuable pursuant to currently exercisable stock
options.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
AGREEMENTS WITH DC-SC AND THE MHC-PCS
FACILITIES AGREEMENT
Pursuant to a Facilities Agreement between UCI-SC and DC-SC (the
"Facilities Agreement"), UCI-SC supplies to DC-SC the facilities, equipment and
assets of the UCI Centers as well as such non-medical personnel as are
reasonably required by DC-SC in the operation of the UCI Centers. In exchange,
DC-SC provides the necessary staffing for the performance of medical services at
the UCI Centers, including a physician to serve as Executive Medical Director
having overall responsibility for the operations of the UCI Centers. From the
fees paid each month to DC-SC for services rendered at the UCI Centers, DC-SC
retains an amount equal to the payroll and related personnel costs of DC-SC
for physicians and other medical providers at the UCI Centers, as well as an
amount equal to the nominal expenses incurred by DC-SC to purchase certain
narcotic drugs required by law to be owned by DC-SC or its employee-physicians.
The balance of all fees and other revenues generated by DC-SC is paid to UCI-SC
as its management fee. Consequently, the calculation of the management fee paid
by DC-SC to UCI-SC does not differ if the DC-SC collections are generated by
DC-SC's physical therapy group, surgical group, orthopedic group or family
practice group. During the Company's fiscal years ended September 30, 1997,
1996, and 1995, DC-SC received an aggregate of approximately $27,925,000,
$23,254,000, and $17,987,000, respectively, in fees prior to deduction by DC-SC
of its payroll and other related deductible costs covered under the Facilities
Agreement. For accounting purposes, the operations of DC-SC are combined with
the operations of UCI and are reflected in the consolidated financial statements
of UCI. Pursuant to the employment agreement between DC-SC and Dr. McFarland,
Dr. McFarland serves as Executive Medical Director of the UCI Centers, and is
paid an annual salary for his services in such position. Footnotes (3) and (4)
of the Summary Compensation Table in this Proxy Statement describe compensation
paid to Dr. McFarland by DC-SC during the fiscal years ended September 30, 1997,
1996 and 1995. Pursuant to the employment agreement between DC-SC and Dr. Stout,
Dr. Stout provides medical services to DC-SC, and is paid an annual salary for
such services. Footnotes (5) and (6) of the Summary Compensation Table in this
Proxy Statement describe compensation paid to Dr. Stout by DC-SC during the
fiscal years ended September 30, 1997, 1996 and 1995. In September 1996, the
Facilities Agreement was renewed for an additional fifteen-year term. In January
1995, the Facilities Agreement was modified to provide UCI-SC with certain
rights to terminate the Facilities Agreement (a) upon the death of Dr.
McFarland, (b) upon Dr. McFarland ceasing to own, either directly or indirectly,
a controlling interest in DC-SC, or (c) upon Dr. McFarland becoming a
"disqualified person" as defined by the South Carolina Business Corporation Act
of 1988, as amended. Dr. McFarland is the President, sole director and sole
owner of DC-SC.
To better comply with EITF 97-2, on August 11, 1998, UCI-SC and DC-SC
entered into that certain Administrative Services Agreement which terminates and
replaces in its entirety the Facilities Agreement. The calculation of the
management fee paid by DC-SC to UCI-SC does not differ from the calculation set
forth in the Facilities Agreement.
49
REFUND AGREEMENT
Pursuant to a Facilities Fee Refund Agreement (the "Refund
Agreement") entered into among UCI, UCI-SC and DC-SC, DC-SC was entitled to
receive a refund of a portion of the fees payable to UCI-SC under the Facilities
Agreement with respect to fourteen of the UCI Centers. The Refund Agreement was
terminated effective October 1, 1995. During UCI's fiscal years ended September
30, 1997 and 1996, UCI-SC made payments to DC-SC of $62,000 and $120,000,
respectively, against accumulated refunds payable. At September 30, 1997 and
1996, UCI-SC had refunds payable to DC-SC of approximately $94,000 and $156,000,
respectively.
MEDICAL CENTER LEASES
UCI-SC leases six medical center facilities from CHC and one medical
center facility from CP&C under operating leases with fifteen-year terms
expiring in 2008, 2009 and 2010. The terms of these leases are believed to be no
more or less favorable to UCI-SC than those that would have been obtainable
through arm's-length negotiations with unrelated third parties for similar
arrangements. Each of these leases has a five-year renewal option, and a rent
guarantee by DC-SC. One of the leases has a purchase option allowing UCI-SC to
purchase the center at fair market value after February 1, 1995. Total lease
payments made by UCI-SC under these leases during the fiscal years ended
September 30, 1997 and 1996 were $319,730 and $306,178, respectively.
Several of the UCI Centers are leased or were leased from entities
owned or controlled by certain principal stockholders and/or members of UCI's
management. The terms of these leases are believed to be no more or less
favorable to UCI-SC than those that would have been obtainable through
arm's-length negotiations with unrelated third parties for similar arrangements.
The Doctor's Care Northeast facility is leased from a partnership in
which Dr. McFarland is a general partner. The lease was renewed in
October 1994 for a five-year term. The lease has two five-year
renewal options and provides UCI-SC with an option to purchase the
facility at its fair market value after October 1995. Total lease
payments made by UCI-SC under this lease during the fiscal years
ended September 30, 1997 and 1996 were $45,600 and $45,600,
respectively, plus utilities and real estate taxes.
The Doctor's Care Lexington facility was leased from a general
partnership in which Dr. McFarland and Dr. Stout were general
partners. The Doctor's Care Lexington facility was sold in February
1996 to unrelated third parties who lease it to UCI-SC. Total lease
payments made by UCI-SC to such general partnership under this lease
during the fiscal year ended September 30, 1996 were $14,125,
plus utilities and real estate taxes.
The Doctor's Care West Columbia and the Doctor's Care Beltline
facilities were leased from a general partnership in which Dr.
McFarland and Dr. Stout were general partners. Both of these centers'
facilities were sold in May 1996 to unrelated third parties who lease
them to UCI-SC. Total lease payments made by UCI-SC to such general
partnership under these two leases during the fiscal year ended
September 30, 1996 were $46,516, plus utilities and real estate
taxes. In connection with its agreement with such general partnership
to lease these two facilities, UCI-SC guaranteed the lessor's
mortgage debt relating to the two facilities. At September 30,
1996, the outstanding balance of such debt was zero.
The Doctor's Care Lugoff facility was leased directly from Dr.
McFarland. This facility was sold in May 1996 to an unrelated third
party who leases it to UCI-SC. Total lease payments made by UCI-SC to
Dr. McFarland under this lease during the fiscal year ended
September 30, 1996 were $16,613, plus utilities and real estate
taxes.
50
OTHER TRANSACTIONS WITH RELATED PARTIES
At August 20, 1998, CHC owned 2,006,442 shares of Common Stock and
CP&C owned 618,181 shares of Common Stock, which combine to approximately
percent of the outstanding Common Stock. Each of CHC and CP&C is a wholly-owned
subsidiary of BCBS. The following is a historical summary of purchases of Common
Stock by BCBS subsidiaries directly from UCI.
Price Total
DATE BCBS Number per Purchase
PURCHASED Subsidiary of Shares Share Price
--------- ---------- --------- ----- -----------
12/10/93 CHC 333,333 $1.50 $ 500,000
06/08/94 CHC 333,333 3.00 1,000,000
01/16/95 CHC 470,588 2.13 1,000,000
05/24/95 CHC 117,647 2.13 250,000
11/03/95 CHC 218,180 2.75 599,995
12/15/95 CHC 218,180 2.75 599,995
03/01/96 CHC 109,091 2.75 300,000
06/04/96 CP&C 218,181 2.75 599,998
06/23/97 CP&C 400,000 1.50 600,000
The Common Stock acquired by CHC and CP&C directly from UCI was
purchased pursuant to exemptions from the registration requirements of federal
securities laws available under Section 4(2) of the 1933 Act. Consequently, the
ability of the holders to resell such shares in the public market is subject to
certain limitations and conditions. The shares acquired by CHC and CP&C were
purchased at share prices below market value at the respective dates of purchase
in part as a consequence of the lower issuance costs incurred by UCI in the sale
of these unregistered securities and in part as consequence of the restricted
nature of the shares. CHC and CP&C have the right to require registration of the
stock under certain circumstances as described in the respective stock purchase
agreements. BCBS and its subsidiaries have the option to purchase as many shares
as may be necessary for BCBS and its subsidiaries to maintain ownership of 47
percent of the outstanding Common Stock in the event that UCI issues additional
stock to other parties (excluding shares issued to employees or directors of
UCI).
During the fiscal year ended September 30, 1994, UCI-SC entered into
a capital lease purchase agreement with BCBS for a new billing and accounts
receivable system, which includes computer equipment, for an aggregate purchase
price of $504,000. UCI-SC has the option to purchase the equipment at the end of
the lease term for $1. The lease obligation recorded at September 30, 1997 is
$340,916, which includes lease addenda. The terms of the lease purchase
agreement are believed to be no more or less favorable to UCI-SC than the terms
that would have been obtainable through arm's-length negotiations with unrelated
third parties for a similar billing and accounts receivable system, which
includes computer equipment.
During the fiscal year ended September 30, 1994, UCI-SC entered into
an agreement with CP&C pursuant to which UCI-SC, through DC-SC, acts as the
primary care provider for injured workers of firms carrying worker's
compensation insurance through CP&C. Additionally, during the fiscal year ended
September 30, 1995, UCI-SC executed a $400,000 note payable to CP&C payable in
monthly installments of $4,546 (including 11 percent interest) from April 1,
1995 to March 1, 2010, collateralized by certain accounts receivable. The terms
of the agreement with CP&C are believed to be no more or less favorable to
UCI-SC than those that would have been obtainable through arm's-length
negotiations with unrelated third parties for similar arrangements.
UCI-SC, through DC-SC, provides services to members of a health
maintenance organization operated by CHC who have selected DC-SC as their
primary care provider. The terms of the agreement with CHC are believed to be no
more or less favorable to UCI-SC than those that would have been obtainable
through arm's-length negotiations with unrelated third parties for similar
arrangements.
During the fiscal year ended September 30, 1996, BCBS provided a
non-interest bearing advance to UCI in the amount of $600,000. This advance was
paid in full in December 1996. The terms of this
51
advance are believed to have been no more or less favorable to UCI than those
that would have been obtainable through arm's-length negotiations with related
third parties for similar arrangements.
The employees of UCI and its subsidiaries are offered health, life,
and dental insurance coverage at group rates from BCBS and its subsidiaries. The
group rates offered to the employees of UCI and its subsidiaries are believed to
be no more or less favorable to UCI and its subsidiaries than those that would
have been obtainable through arm's-length negotiations with unrelated third
parties for similar services.
UCI and its subsidiaries contract with Adams and Associates for
worker's compensation, and professional liability insurance coverage, which in
turn contracts with CP&C to be the insurance carrier for the workers
compensation insurance coverage of UCI and its subsidiaries. Aggregate premiums
paid during the fiscal year ended September 30, 1997 in connection with such
policies were approximately $155,000. During the fiscal year ended September 30,
1996, Adams and Associates provided short-term financing to UCI for
approximately $17,000 in workers compensation audit premiums, which was paid in
full during the fiscal year ended September 30, 1997. Harold H. Adams, Jr. is
the President and owner of Adams and Associates and is also a director of UCI.
Effective November 1, 1997, UCI and its subsidiaries no longer contract through
Adams and Associates for any of their insurance coverage. Management of UCI
believes that the terms of its contracts with Adams and Associates were no more
or less favorable to UCI and its subsidiaries than those that would have been
obtainable through arm's-length negotiations with unrelated third parties for
similar services.
UCI contracts with Global Consulting, Inc. for certain financial and
marketing consulting services. Russell J. Froneberger is the President and owner
of Global Consulting, Inc. and is also a director of UCI whose term expires at
the forthcoming Annual Meeting. Mr. Froneberger is not standing for reelection
as a director at the Annual Meeting. Fees paid during the fiscal year ended
September 30, 1997 in connection with these services were approximately $96,000.
The terms of the contracts with Global Consulting, Inc. are believed to be no
more or less favorable to UCI than those that would have been obtainable through
arm's-length negotiations with unrelated third parties for similar services.
ADDITIONAL INFORMATION
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document that are
subject to known and unknown risks and uncertainties. Forward-looking statements
include the information concerning possible or assumed future results of
operations of the combined company set forth under "Risk Factors" and "The
Acquisition -Description of the Acquisition - Reasons for the Acquisition" and
"- Fairness Opinion" and those preceded by, followed by or that include the
words "believes," "expects," "anticipates" or similar expressions. Such
statements reflect the current views of UCI and/or MHC with respect to future
events. For those statements as they relate to UCI only, we claim the protection
of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, to the extent provided by applicable
law. This safe harbor does not apply to forward-looking statements of MHC
because MHC has never registered its securities with the SEC. You should
understand that the important factors set forth below, in addition to those
discussed elsewhere in this document and in the documents which we incorporate
by reference, could affect the future results of the Company and could cause
those results to differ materially from those expressed or implied in our
forward-looking statements. Although UCI'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 medical
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 in multiple
jurisdictions 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
52
Company's expansion and development strategy; the dependence on key personnel, a
significant delay in the expected date of the closing of the Acquisition; the
ability to successfully integrate the management structures of MHC and
consolidate the operations of MHC with those of the Company; and other factors
described in this document and in other document filed by UCI with the SEC.
STOCKHOLDER PROPOSALS
Proposals of stockholders of UCI which are intended to be presented
by such stockholders at the next Annual Meeting of UCI stockholders must be
received by UCI no later than May 5, 1999 in order to be considered for
inclusion in the proxy statement and form of proxy relating to that meeting.
OTHER MATTERS
The UCI Board knows of no other matters which are likely to be
brought before the Annual Meeting. If any matters are brought before the Annual
Meeting, the proxy agents named in the enclosed proxy will vote on such matters
in accordance with their best judgment.
ANNUAL AND QUARTERLY REPORTS
A copy of the Company's Annual Report on Form 10-KSB/A for the fiscal
year ended September 30, 1997, and a copy of the Company's Quarterly Report on
Form 10-QSB for the quarter and nine-month period ended June 30, 1998, each of
which has been filed with the SEC, is included with the Company's 1997 Annual
Report to Stockholders which accompanies this Proxy Statement.
WHERE YOU CAN FIND MORE INFORMATION
UCI files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information that we file at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from commercial document retrieval
services and at the Internet web site maintained by the SEC at
"http://www.sec.gov." Reports, proxy statements and other information should
also be available for inspection at the offices of the NASD.
The SEC allows us to "incorporate by reference" information into this
Proxy Statement, which means that we can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this Proxy
Statement, except for any information superseded by information contained
directly in this Proxy Statement. This Proxy Statement incorporates by reference
the documents set forth below that we have previously filed with the SEC. These
documents contain important information about UCI and its finances.
UCI SEC Filings (File No. 0-13265) Period
---------------------------------- ------
Annual Report on Form 10-KSB/A.......................Fiscal year ended September 30, 1997
Quarterly Reports on Form 10-QSB ....................Quarters ended December 31, 1997, March 31,
1998 and Form 10-QSB/A and June 30, 1998
Current Reports on Form 8-K and Form 8-K/A...........Filed October 14, 1997, October 15, 1997,
November 5, 1997, November 13, 1997,
November 19, 1997, December 11, 1997,
January 7, 1998, February 17, 1998,
March 11, 1998, April 20, 1998, May 11, 1998,
May 28, 1998, July 24, 1998, August 13, 1998
and August 20, 1998
A description of Common Stock
contained in UCI's Registration
Statement on Form 8-A................................Dated March 6, 1985
53
Any statement in this document or in a document incorporated or
deemed to be incorporated by reference in this document shall be deemed to be
modified or superseded for purposes of this document to the extent that a
statement contained in this document or in any other subsequently filed document
which also is or is deemed to be incorporated by reference in this document
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part of this document, except as
so modified or superseded.
UCI has supplied all information contained or incorporated by reference
in this Proxy Statement relating to UCI. MHC has supplied all such information
relating to its operations.
If you are a stockholder, we may have already sent you some of the
documents incorporated by reference, but you can obtain any document
incorporated by reference through us, the SEC, or the SEC's Internet web site as
described above. Documents incorporated by reference are available from us
without charge, excluding all exhibits unless we have specifically incorporated
by reference an exhibit in this Proxy Statement. Stockholders may obtain
documents incorporated by reference in this Proxy Statement by requesting them
in writing or by telephone to us at the following address:
UCI Medical Affiliates, Inc.
Investor Relations Department
1901 Main Street, Suite 1200
Columbia, South Carolina 29201
(803) 252-3661
If you would like to request documents from us, please do so by June
15, 1998 to receive them before the Annual Meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE PROPOSALS RELATING TO THE
ACQUISITION. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT
IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY
STATEMENT IS DATED AUGUST 31, 1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THE PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT
DATE, AND NEITHER THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS NOR THE
ISSUANCE OF COMMON STOCK IN CONNECTION WITH THE ACQUISITION SHALL CREATE ANY
IMPLICATION TO THE CONTRARY.
54
APPENDIX A
February 9, 1998
The Board of Directors
UCI Medical Affiliates, Inc.
1901 Main Street, Suite 1200
Columbia, SC 29201
Members of the Board of Directors:
You have requested my opinion, as of this date, as to the fairness,
from a financial point of view, to UCI Medical Affiliates, Inc., a Delaware
corporation ("UCI"), of the terms of the proposed transactions referred to
below.
Pursuant to the proposed Acquisition Agreement and Plan of
Reorganization (the "Acquisition Agreement") dated as of the date hereof, to be
entered among UCI, UCI Medical Affiliates of Georgia, Inc. ("UCI-GA"),
MainStreet Healthcare Corporation ("MainStreet") and certain of its affiliated
entities, the parties thereto are to effect a business combination transaction
pursuant to which, on the terms and subject to the conditions set forth in the
Acquisition Agreement (the "Proposed Transactions"): (i) UCI-GA and certain of
its affiliates will acquire from MainStreet and its affiliates certain assets
and liabilities for a purchase price of $8,870,000 consisting of a combination
of cash, common stock of UCI and assumption of certain liabilities. I understand
that all approvals required for the consummation of the Proposed Transactions
have been or, prior to consummation of the Proposed Transactions will be,
obtained.
In arriving at my opinion, I have among other things:
(i) reviewed the terms and conditions of the Proposed
Transactions, including the draft Acquisition
Agreement and the draft agreements ancillary
thereto;
(ii) analyzed certain financial aspects of the Proposed
Transactions and consideration to be paid by UCI
and UCI-GA in connection with the Proposed
Transactions;
(iii) reviewed and analyzed publicly available
historical business and financial information
relating to UCI and its affiliated entities, as
presented in documents filed with the Securities
and Exchange Commission and otherwise provided to
me by UCI, as well as historical financial
information relating to MainStreet and its
affiliated entities as provided to me by UCI and
MainStreet;
(iv) analyzed selected summary non-public financial and
operating results of operations of UCI
(consolidated) and MainStreet;
(v) analyzed the financial conditions and prospects of
UCI and MainStreet;
(vi) reviewed and analyzed public information,
including certain stock market data and financial
information relating to selected companies with
operating statistics and dynamics similar to those
of UCI and MainStreet;
(vii) reviewed the trading history of UCI's common
stock, including such stock's performance in
comparison to market indices and to selected
companies with operating statistics and dynamics
similar to those of UCI;
(viii) conferred with the management teams of each of UCI
and MainStreet;
A-1
The Board of Directors
UCI Medical Affiliates, Inc.
February 9, 1998
Page 2
(ix) reviewed public financial and transaction
information relating to premiums and multiples
paid in certain merger and acquisition
transactions similar to the Proposed Transactions
or relevant portions thereof; and
(x) conducted such other financial analyses and
investigations as I deemed necessary or
appropriate for the purposes of the opinion
expressed herein.
In rendering my opinion, I have assumed and relied upon the accuracy
and completeness of the financial and other information respecting UCI and
MainStreet and any other information provided to me by the parties, and we have
not assumed any responsibility for any independent verification of such
information or any independent valuation or appraisal of any of the assets or
liabilities of UCI and MainStreet. With respect to selected summary financial
and operating results referred to above, I have assumed they were reasonably
prepared on a basis reflecting the best currently available information and the
good faith estimates and judgements of the management of UCI as to the future
financial performance of UCI and the management of MainStreet as to the future
financial performance of MainStreet.
In addition to my review and analysis of the specific information set
forth above, my opinion herein reflects and gives effect to my assessment of
general economic, monetary and market conditions existing as of the date of this
letter as they may affect the business and prospects of UCI and MainStreet.
My engagement and the opinion expressed herein are for the benefit of
the Board of Directors of UCI in its evaluation of the Proposed Transactions and
may not be used for any other purpose without my prior written consent, except
that this opinion may be included in its entirety and referred to in any filing
made by UCI with the Securities and Exchange Commission with respect to the
Proposed Transactions. Furthermore, the opinion rendered herein does not
constitute a recommendation that UCI pursue the Proposed Transactions over any
other alternative transactions which may be available to UCI or that any
stockholder of UCI vote to approve the Proposed Transactions.
Based on and subject to the foregoing, I am of the opinion that, as of
the date of this letter, the terms of the Proposed Transactions are fair to UCI
from a financial point of view.
Very truly yours,
/s/ Oliver G. Wood, Jr.
Oliver G. Wood, Jr.
A-2
APPENDIX B
PROPOSED AMENDMENTS TO THE UCI CERTIFICATE
AUTHORIZED CAPITAL STOCK PROPOSAL
The Authorized Stock Proposal provides that the UCI Certificate will be
amended by restating the first paragraph of Article Fourth to read in its
entirety as follows:
"FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is as follows: Fifty Million 50,000,000)
shares of Common Stock, having a par value of five cents ($.05) per share,
amounting in the aggregate to Two Million Five Hundred Thousand Dollars
($2,500,000) and Ten Million (10,000,000) shares of Preferred Stock having a
par value of one cent ($.01) per share, amounting in the aggregate to One
Hundred Thousand Dollars ($100,000)."
REVERSE STOCK SPLIT PROPOSAL
The Reverse Stock Split Proposal provides that the UCI Certificate will
be amended by restating Article Seventh to read in its entirety as follows:
"SEVENTH: Pursuant to a 1 for 5 reverse stock split, the amount of the
total authorized Common Stock of this corporation is decreased and the number
and par value are by these means changed so that the authorized Common Stock of
this corporation, which, prior to the filing of this amendment, was Fifty
Million (50,000,000) shares of Common Stock, having a par value of five cents
($.05) per share, amounting in the aggregate to Two Million Five Hundred
Thousand Dollars ($2,500,000), shall be Ten Million (10,000,000) shares of
Common Stock, having a par value of twenty-five cents ($.25) per share,
amounting in the aggregate to Two Million Five Hundred Thousand Dollars
($2,500,000).
At the time this amendment becomes effective, each five (5) prior
issued and outstanding shares of the Common Stock of this corporation, par value
five cents ($.05) per share, shall thereby and thereupon be combined into one
(1) share of validly issued, fully paid and nonassessable shares of Common Stock
of this corporation, par value twenty-five cents ($.25) per share. Each person
at that time holding of record any issued and outstanding shares of Common Stock
of this corporation shall receive upon surrender thereof to the corporation's
authorized agency a stock certificate or certificates to evidence and represent
the number of shares of post reverse stock split Common Stock of this
corporation to which such person is entitled after this reverse split; provided,
however, that this corporation shall not issue fractional shares of Common Stock
in connection with this reverse stock split, but, in lieu thereof, this
corporation shall make a cash payment at the rate equal to the fraction of the
share of Common Stock that would otherwise be issuable, multiplied by the
closing bid price for the Common Stock of this corporation as quoted by the
Nasdaq Stock Market on the trading day immediately prior to the date this
amendment is filed with the Delaware Secretary of State (or at the rate of One
and No/100th Dollar ($1.00) per share in the event the Common Stock of this
corporation is not listed for trading by the Nasdaq Stock Market on the trading
day immediately proceeding the date of filing of this amendment) upon surrender
to the corporation's authorized agent of certificates representing shares as to
which a fractional share would otherwise be issuable. The ownership of such
fractional interests shall not entitle the holder thereof to any voting,
dividend or other right except the right to receive payment therefor as
described above."
B-1
APPENDIX C
INDEX TO FINANCIAL STATEMENTS OF
MAINSTREET HEALTHCARE CORPORATION
Page
Audited Consolidated Financial Statements as of March 31, 1998 and 1997 and for
the fiscal years ended March 31, 1998 and 1997
Independent Auditors' Report .......................................C-2
Consolidated Balance Sheets ........................................C-3
Consolidated Statements of Operations...............................C-5
Consolidated Statements of Stockholders' Deficit ...................C-6
Consolidated Statements of Cash Flows...............................C-7
Notes to Consolidated Financial Statements..........................C-8
Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................C-19
C-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MainStreet Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of MainStreet
Healthcare Corporation as of March 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MainStreet
Healthcare Corporation at March 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that MainStreet Healthcare Corporation will continue as a going concern. As
discussed in note 1(b) to the consolidated financial statements, MainStreet
Healthcare Corporation has suffered recurring losses and has a working capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in note 1(b) and note 13. The accompanying consolidated financial statements do
not include any adjustment that might result from the outcome of this
uncertainty.
/s/ KPMG Peat Marwick LLP
June 2, 1998, except as to the third
paragraph of note 7, which is as of
July 6, 1998
C-2
MAINSTREET HEALTHCARE CORPORATION
Consolidated Balance Sheets
March 31, 1998 and 1997
Assets 1998 1997
------ ------ ------
Current assets:
Cash $ 34,231 1,950
Accounts receivable, less allowances for
contractual adjustments and uncollectible
accounts of $1,216,718 and $1,258,571 in
1998 and 1997, respectively 1,410,219 1,110,019
Redeemable preferred stock subscriptions
receivable (note 4) - 750,000
Other receivables 68,222 110,658
Prepaid and other 83,367 109,380
------------ ----------
Total current assets 1,596,039 2,082,007
Property and equipment, net (notes 3 and 5) 1,520,503 1,422,594
Intangible assets, net (notes 3 and 6) 1,549,861 1,968,252
Other assets 39,859 323,023
----------- ---------
Total assets $ 4,706,262 5,795,876
=========== =========
C-3
Liabilities and Stockholders' Deficit 1998 1997
------------------------------------- ---- ----
Current liabilities:
Accounts payable $ 1,136,606 695,411
Line of credit (note 7) 574,327 -
Accrued expenses and liabilities 1,928,547 615,237
Current portion of notes payable (notes 3 and 8) 477,095 357,053
Current portion of capital lease obligation (note 8) 48,693 3,401
Shareholder loan (note 9) 94,174 18,252
------------- -----------
Total current liabilities 4,259,442 1,689,354
------------- -----------
Long-term liabilities:
Notes payable, less current portion (notes 3 and 8) 368,704 751,261
Capital lease obligation, less current portion (note 8) 74,380 14,183
------------- -----------
Total long-term liabilities 443,084 765,444
------------- -----------
Total liabilities 4,702,526 2,454,798
Preferred stock, $.01 par value; 11,500 and 14,000 shares authorized, no
shares issued and outstanding at March 31, 1998 and 1997, respectively (note 4) - -
5% cumulative redeemable preferred stock, $1,000 redemption
value; 6,000 shares authorized, 4,367 shares issued and outstanding at March
31, 1998 and 3,367 shares issued and outstanding, 750 shares subscribed at
March 31, 1997 (notes 4, 9, and 12) 4,367,000 4,117,000
10% cumulative redeemable preferred stock, $1,000 redemption
value; 2,500 and -0- shares authorized, 412 and -0- shares issued
and outstanding at March 31, 1998 and 1997, respectively
(notes 4, 9, and 12) 412,000 -
Class A nonvoting convertible common stock, $.01 par value;
5,000,000 shares authorized, 248,000 and 268,000 shares issued and
outstanding at March 31, 1998 and 1997, respectively (notes 3 and 4) 816,007 738,979
Stockholders' deficit:
Class B common stock, $.01 par value; 20,000,000 shares authorized,
6,460,452 and 5,875,000 shares issued and outstanding at March 31, 1998
and 1997, respectively (notes 4, 9, and 12) 64,605 58,750
Additional paid-in capital 42,516 38,586
Accumulated deficit (5,698,392) (1,612,237)
------------- -----------
Total stockholders' deficit (5,591,271) (1,514,901)
------------- -----------
Total liabilities and stockholders' deficit $ 4,706,262 5,795,876
============= ===========
See accompanying notes to consolidated financial statements.
C-4
MAINSTREET HEALTHCARE CORPORATION
Consolidated Statements of Operations
For the Years ended March 31, 1998 and 1997
1998 1997
---- ----
Net patient service revenue $ 6,436,950 3,665,982
----------- ---------
Operating expenses:
Cost of affiliated physician services 3,082,389 1,689,235
Clinic salaries, wages, and benefits 2,404,156 1,188,415
Clinic rent and lease expense (notes 8 and 9) 566,245 306,571
Clinic supplies 784,825 317,417
Other clinic costs 788,919 371,001
General corporate expenses (note 9) 1,655,974 587,404
Depreciation and amortization (notes 5 and 6) 466,121 217,029
Clinic start-up expenses - 307,419
--------- ---------
Total expenses 9,748,629 4,984,491
--------- ---------
Operating loss (3,311,679) (1,318,509)
Interest expense, net (note 8) 364,292 161,774
Deferred financing costs (note 2(f)) 273,224 -
Loss on clinic disposals (note 3) - 88,990
------------ ----------
Loss before income taxes (3,949,195) (1,569,273)
Income taxes (note 10) - -
------------ ----------
Net loss $ (3,949,195) (1,569,273)
============ ==========
See accompanying notes to consolidated financial statements.
C-5
MAINSTREET HEALTHCARE CORPORATION
Consolidated Statements of Stockholders' Deficit
For the Years ended March 31, 1998 and 1997
Class B Total
Additional
common stock paid-in stockholders'
--------------------- ----------- Accumulated -------------
Shares Amount capital deficit deficit
------ ------ ------- ----------- ---------
Balance at April 1, 1996 --- $ --- --- --- ---
Issuance of common stock (notes 4 and 9) 5,875,000 58,750 38,586 --- 97,336
Accretion of difference between fair value
and repurchase value of stock issued
in connection with acquisition (note 3) --- --- --- (42,964) (42,964)
Net loss --- --- --- (1,569,273) (1,569,273)
--------- --------- ---------- ---------- ----------
Balance at March 31, 1997 5,875,000 58,750 38,586 (1,612,237) (1,514,901)
Issuance of common stock (notes 4 and 9) 585,452 5,855 3,930 --- 9,785
Accretion of difference between fair value
and repurchase value of stock issued
in connection with acquisition (note 3) 0 0 0 (136,960) (136,960)
Net loss 0 0 0 (3,949,195) (3,949,195)
--------- --------- ---------- ---------- ----------
Balance at March 31, 1998 6,460,452 $64,605 42,516 (5,698,392) (5,591,271)
========= ====== ====== ========== ==========
See accompanying notes to consolidated financial statements.
C-6
MAINSTREET HEALTHCARE CORPORATION
Consolidated Statements of Cash Flows
For the Years ended March 31, 1998 and 1997
1998 1997
---- ----
Operating activities:
Net loss $(3,949,195) (1,569,273)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 466,121 217,029
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net (320,013) (517,720)
Other receivables 42,436 (110,658)
Prepaid expenses and other assets (75,061) (64,010)
Accounts payable 441,195 580,688
Other accrued expenses and liabilities 1,410,974 615,237
Deferred financing costs 273,224 --
----------- -----------
Net cash used by operating activities (1,710,319) (848,707)
----------- -----------
Investing activities:
Acquisitions of businesses, net of cash acquired - (1,226,480)
Purchases of property and equipment (236,730) (631,279)
----------- -----------
Net cash used by investment activities (236,730) (1,857,759)
----------- -----------
Financing activities:
Net proceeds from issuance of preferred stock 1,298,000 2,071,607
Proceeds from shareholder loans 192,500 1,370,300
Proceeds from issuance of common stock 7,207 65,810
Net borrowings under capital lease obligations 105,489 17,584
Net borrowings from line of credit 574,327 --
Repayment of notes payable (198,193) (423,363)
Repayment of shareholder loans -- (393,522)
----------- -----------
Net cash provided by financing activities 1,979,330 2,708,416
----------- -----------
Net increase in cash 32,281 1,950
Cash at beginning of period 1,950 --
----------- -----------
Cash at end of period $ 34,231 1,950
=========== ===========
Supplemental disclosure of cash flow information cash paid during the period
for:
Interest $ 117,077 55,476
=========== ===========
Income taxes $ -- --
=========== ===========
See accompanying notes to consolidated financial statements.
C-7
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(1) Organization and Basis of Presentation
--------------------------------------
(a) Description of Business
-----------------------
MainStreet Healthcare Corporation ("the Company") was
incorporated on February 6, 1996 and commenced operations on April 1,
1996. The Company was organized to purchase general practitioner
outpatient clinics in Georgia and Tennessee. After purchasing a
clinic, the Company focuses on centralizing fixed costs and reducing
the overall overhead of each outpatient clinic in order to maximize
income and cash flow. From April 1, 1996 to March 31, 1998, the
Company has acquired 14 primary care clinics.
(b) Basis of Presentation
---------------------
The consolidated financial statements have been prepared on
the accrual basis of accounting and include the accounts of the
Company and the affiliated professional corporations ("Professional
Corporations"). Through the initial management services agreements
between the Company and the Professional Corporations which contain
fifty-year terms, the Company has assumed full responsibility for the
operating expenses in return for the assignment of the revenue of the
Professional Corporations.
The Company has perpetual, unilateral control over the
assets and operations of the Professional Corporations, and
notwithstanding the lack of technical majority ownership of the stock
of such entities, consolidation of the various Professional
Corporations is necessary to present fairly the financial position
and results of operations of the Company because control exists by
means other than ownership of stock. Control by the Company is
perpetual rather than temporary because (i) the length of the
original terms of the agreements, (ii) the successive extension
periods provided by the agreements, (iii) the continuing investment
of capital by the Company, (iv) the employment of the nonphysician
personnel, and (v) the nature of the services provided to the
Professional Corporations by the Company. All intercompany accounts
and transactions have been eliminated during consolidation.
The Company has experienced recurring losses of
approximately $5,700,000 since its inception and has a net working
capital deficiency of approximately $2,700,000 at March 31, 1998.
In addition, the liabilities of the Company, including preferred
stock and Class A common stock, exceeded its assets by approximately
$5,600,000. Effective May 1, 1998, the Company sold substantially all
of its assets for which the ultimate proceeds will not be determined
until the stock to be received is sold (note 13). The Company is
currently negotiating with its creditors and preferred and Class A
common shareholders to satisfy its debt obligations. The consolidated
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
C-8
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(2) Summary of Significant Accounting Policies
------------------------------------------
(a) Property and Equipment
----------------------
Property and equipment are recorded at cost, less
accumulated depreciation and amortization. Depreciation of property
and equipment is calculated using the straight-line method over the
estimated useful lives of the assets.
Equipment held under capital leases and leasehold
improvements are amortized on a straight-line basis over the shorter
of the lease term or estimated useful life of the assets.
(b) Intangible Assets
-----------------
(1) Noncompete Agreements
---------------------
In connection with certain clinic acquisitions,
the Company entered into noncompete agreements with
physicians. Such agreements are being amortized using the
straight-line method over the terms of the agreements,
generally three to five years.
(2) Excess of Cost
--------------
Goodwill, which represents the excess of purchase
price over fair value of net assets acquired, is amortized
on the straight-line method over the expected periods to
be benefited, generally fifteen years. The Company assesses
the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of
funds. The assessment of recoverability of goodwill will be
impacted if estimated future operating cash flows are not
achieved. In management's estimation, the remaining amount
of goodwill has continuing value.
(c) Net Revenue
-----------
Patient revenue is recorded at established rates reduced by
allowances for doubtful accounts and contractual adjustments.
Contractual adjustments arise due to the terms of certain
reimbursement and managed care contracts. Such adjustments represent
the difference between charges at established rates and estimated
recoverable amounts and are recognized in the period the services are
rendered. Any differences between estimated contractual adjustments
and actual final settlements under reimbursement contracts are
reported as contractual adjustments in the year final settlements are
made.
(d) Income Taxes
------------
The Company accounts for income taxes using the asset and
liability method of Statement of Financial Accounting Standards No.
109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109"). Under SFAS No.
109, deferred tax assets and liabilities are recognized for the
future tax consequences
C-9
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date.
Prior to the merger of MainStreet Georgia with and into
MainStreet Delaware, as discussed in note 4, the Company was taxed as
an S Corporation under the Internal Revenue Code. As a result, the
Company was taxed in a manner similar to a partnership for the
period prior to December 9, 1997, and has not provided any federal or
state income taxes as the results of operations were passed through
to, and the related income taxes became the individual responsibility
of the Company's shareholders.
(e) Impairment of Long-Lived Assets
-------------------------------
Financial Accounting Standards No. 121 ("SFAS No. 121"),
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, requires the Company to review for the
impairment of long-lived assets and certain identifiable intangibles
to be held and used by the Company whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable.
The statement also addresses the accounting for long-lived
assets that are expected to be disposed. SFAS No. 121 is applicable
for most long-lived assets, identifiable intangibles, and goodwill
related to those assets. Management has determined that long-lived
assets are fairly stated in the accompanying consolidated balance
sheets.
(f) Redeemable Preferred Stock Offering Costs
-----------------------------------------
Costs associated with the issuance of redeemable
preferred stock have been capitalized and are being amortized using a
straight-line method over five years and are included in other assets
in the accompanying 1997 consolidated balance sheet. During 1998,
the unamortized portion of these costs was written off.
(g) Use of Estimates
----------------
Management of the Company has made certain estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent liabilities to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(h) Reclassifications
-----------------
Certain reclassifications have been made in the 1997
consolidated financial statements to conform with the presentation in
the 1998 consolidated financial statements.
C-10
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(3) Clinic Acquisitions and Closures
--------------------------------
Since its inception, the Company has acquired, through its wholly
owned subsidiaries, certain operating assets of 14 primary care physician
practices.
A summary of the 14 primary care physician practice acquisitions
is as follows:
Acquired practices Location Date acquired
------------------ --------- -------------
Dr. Pamela Erdman, DO Tucker, GA April 1996
Tucker Eye, Ear, Nose, Throat Tucker, GA April 1996
Family Care Associates Covington, GA April 1996
Mountain East Family Care Stone Mtn, GA May 1996
Lawrenceville Family Care Lawrenceville, GA June 1996
Dr. Frank Corker, MD Valdosta, GA August 1996
Promptcare, Inc. Knoxville, TN November 1996
Dr. Dennis Thomas, MD Adel, GA December 1996
Gwinnett Family Medicine Snellville, GA December 1996
Salem Gate Family Medicine Conyers, GA December 1996
Dr. I. Oliver, MD Austell, GA December 1996
Occupational Medicine Macon, GA January 1997
Park Central Family Medicine Decatur, GA February 1997
Dr. Lanier L. Allen, MD Thomaston, GA May 1997
The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the net
assets acquired and the liabilities assumed based upon their fair values at the
dates of acquisition. In connection with these acquisitions, the Company issued
268,000 shares of Class A common stock in MainStreet Healthcare Corporation in
1997. The Company also entered into stock repurchase agreements with the selling
physicians whereby in the event there has not been an initial public stock
offering, or a sale of substantially all of the Company's assets, or a change in
control of the Company's voting stock which would produce for the Class A
shareholders a value of $5 per share, the shareholders could compel the Company
to purchase the stock for $5 a share at a predetermined future date (the
"repurchase date"). The Company recorded the stock by discounting the $5 per
share price from the repurchase date using a risk-based interest rate of 15%.
The difference between the recorded value and the maximum repurchase value of
its stock issued in connection with these acquisitions was $643,395, which is
being accreted over the period from the date of issuance to the repurchase dates
through periodic charges to accumulated deficit. Effective May 1, 1998, the
Company sold substantially all of the assets of the Company (see note 13). The
Company is in the process of negotiating settlements with each Class A
shareholder to satisfy these obligations. The ultimate settlement amount has not
been determined. The Company also issued $71,876 and $1,531,677 in notes payable
in 1998 and 1997, respectively. The excess of the purchase price over the fair
values of the net assets acquired was $29,612 and $1,813,179 in 1998 and 1997,
respectively, and has been recorded as goodwill and is being amortized using a
straight-line method over 15 years. The composition of acquisition of
businesses, net of cash acquired, is set forth below:
C-11
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
1998 1997
---------- ----------
Working capital, other than cash $ 12,264 477,577
Property and equipment 30,000 862,916
Noncompete agreements -- 300,500
Excess of costs over fair value of assets acquired 29,612 1,813,179
Less:
Value of stock issued -- (696,015)
Value of notes payable issued (71,876) (1,531,677)
---------- ----------
Cash purchase price, net of cash acquired $ -- 1,226,480
========== ==========
The operating results of the acquired clinics have been included in
the consolidated statements of operations from the respective dates of
acquisition.
During 1998, the Company closed three physician clinics resulting in
losses of $88,990 which were accrued for at March 31, 1997. In connection with
the closure of the physician clinics, 28,000 shares of Class A common stock in
the Company and $50,000 in notes payable were canceled.
During 1998, in consideration for a release of a covenant not to compete, a
physician canceled $94,872 in notes payable which was used to reduce goodwill.
The Company then wrote off the remaining unamortized noncompete agreement of
$8,334.
(4) Reorganization
--------------
MainStreet Healthcare Corporation (MainStreet Georgia), an S
Corporation, was organized on February 6, 1996 as a Georgia Corporation and was
authorized 10,000,000 shares of no par common stock of which 5,375,000 shares
were issued.
On December 4, 1996, MainStreet Healthcare Corporation (MainStreet
Delaware), a C Corporation, was incorporated and was authorized 10,000,000
shares of no par common stock. Effective December 9, 1996, the shareholders of
MainStreet Georgia exchanged their shares for equal shares in MainStreet
Delaware pursuant to a merger of MainStreet Georgia with and into MainStreet
Delaware.
On December 11, 1996, MainStreet Delaware amended and restated the
Certificate of Incorporation in order to give MainStreet Delaware the authority
to issue preferred stock and common stock as follows:
(a) 20,000 shares of preferred stock, par value $.01 per share.
MainStreet Delaware's Board of Directors has the authority to fix the
terms of the preferred stock. These shares were subsequently used to
issue five and ten percent cumulative redeemable preferred stock in
MainStreet Delaware during 1998 and 1997.
(b) 5,000,000 shares of Class A non-voting convertible common stock,
par value $.01 per share. One share of Class A non-voting is
convertible upon: (i) a qualified public offering; (ii) a sale of
substantially all of the assets; or (iii) a sale of a majority of the
Class B common stock, into one fully paid and non-assessable share of
Class B common stock. On May 1, 1998, substantially all the assets of
the Company were sold. The Company is negotiating with all Class A
shareholders to either effect the conversion or enter into a
settlement agreement (note 13).
C-12
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(c) 20,000,000 shares of Class B common stock, par value $.01 per share.
The Class A and Class B common stocks are identical, except with
respect to voting rights, where the Class A shares have no voting rights.
Effective December 12, 1996, MainStreet Delaware entered into a
recapitalization agreement with its shareholders. The shareholders exchanged
all of the 5,375,000 outstanding shares of no par common stock and $964,336 of
debt owed them by MainStreet Delaware for 2,350,000 shares of Class B common
stock and 927 shares of five percent cumulative redeemable preferred stock.
In addition, Penman Private Equity and Mezzanine Fund, L.P., (Penman)
purchased 3,525,000 shares of Class B common stock for $60,000 and 2,440
shares of five percent cumulative redeemable preferred stock in MainStreet
Delaware for $2,071,607, net of offering expenses of $368,393.
On March 21, 1997, Penman subscribed to 750 shares of the five
percent cumulative redeemable preferred stock for $750,000. On April 8, 1997,
the Company received $750,000 for the subscribed preferred stock.
In 1998, an additional 423,458 shares of Class B common stock, 250
shares of five percent cumulative redeemable preferred stock, and 298 shares of
ten percent cumulative redeemable preferred stock in the Company were issued to
Penman for $555,207. In addition, a shareholder of the Company exchanged
$116,578 of debt owed by the Company to the shareholder for 161,994 shares of
Class B common stock and 114 shares of ten percent cumulative redeemable
preferred stock in the Company.
(5) Property and Equipment
----------------------
Property and equipment consists of:
1998 1997
------------ -------
Land $ 104,600 104,600
Buildings and improvements 426,494 406,635
Furniture and fixtures 181,946 181,621
Clinic equipment 774,166 559,451
Office equipment 218,048 193,843
Leasehold improvements 50,143 48,046
----------- -----------
1,755,397 1,494,196
Accumulated depreciation and amortization (234,894) (71,602)
----------- -----------
$1,520,503 1,422,594
=========== ===========
C-13
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(6) Intangible Assets
Intangible assets consists of:
1998 1997
----------- ----------
Excess of cost over fair value of
assets acquired $ 1,586,601 1,813,179
Noncompete agreements 275,500 300,500
Less accumulated amortization
and amounts written-off (312,240) (145,427)
----------- ---------
$ 1,549,861 1,968,252
=========== =========
(7) Line of Credit
--------------
On October 14, 1997, the Company entered into a loan and subservicing
agreement (the "Loan Agreement") with National Century Financial Enterprises
(NCFE) whereby the Company is allowed to borrow against its accounts receivable.
At March 31, 1998, the Company had outstanding borrowings under this Loan
Agreement aggregating $574,327, bearing interest at 13% and collateralized by
gross accounts receivable aggregating $1,895,388.
Pursuant to the Acquisition Agreement and Plan of Reorganization
entered into between UCI Medical Affiliates Inc. (UCI) and the Company, UCI
purchased the accounts receivable and assumed the liability for the outstanding
borrowings (see note 13).
The Loan Agreement contained certain terms and financial covenants for
which the Company was not in compliance at March 31, 1998. In a letter dated May
1, 1998, NCFE acknowledged that the remedies available to NCFE should the
Company be in default of the terms of the Loan Agreement, would not be pursued
by NCFE so long as UCI satisfied the outstanding loan balance on or before May
31, 1998. UCI did not pay off the loan by May 31, 1998 which subsequently put
the Company in default. On July 6, 1998, the loan was paid.
(8) Long-Term Debt and Leases
-------------------------
Long-term debt and capital leases consist of:
1998 1997
----------- ---------
Notes payable to physician groups with interest
rates ranging from 7% to 10.5%, with payments
due at varying intervals through March 1, 2006 $ 845,799 1,108,314
Capital leases 123,073 17,584
---------- ---------
968,872 1,125,898
Less amounts due within one year 525,788 360,454
---------- ----------
$ 443,084 765,444
========== ==========
C-14
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
The following is a schedule of principal maturities of long-term
debt, including capital leases, as of March 31, 1998.
1999 $525,788
2000 174,171
2001 52,503
2002 47,982
2003 35,466
Thereafter 132,962
--------
Total $968,872
========
CAPITAL LEASES: The Company is the lessee of
equipment under a capital lease which expires during the
next ten years. The related equipment is being amortized
over ten years and the related amortization expense is
included with depreciation and amortization expense in the
consolidated statement of operations.
The following is a schedule of future minimum lease payments under
the capital leases together with the present value of the net minimum lease
payments as of March 31, 1998.
1999 $ 60,055
2000 47,055
2001 22,648
2002 13,908
2003 1,159
-------
Total minimum lease payments 144,825
Less amounts representing interest 21,752
-------
Obligation under capital leases 123,073
Less current portion of capital lease obligations 48,693
--------
Long-term obligations under capital leases $ 74,380
========
Capitalized equipment leases included in equipment were 169,007 and
$18,600 at March 31, 1998 and 1997, respectively. Imputed interest rates
ranged from 6.20% to 16.45% at March 31, 1998 and 1997, respectively.
OPERATING LEASES: Operating leases generally consist of short-term
lease agreements for professional office space where the medical practices are
located. These leases generally have five-year terms with renewal options. Lease
expense of approximately $565,000 and $250,000 for 1998 and 1997, respectively,
consists of corporate office space, corporate equipment and medical office
space, and equipment for the operating practices.
The following is a schedule of future minimum lease payments under
noncancelable operating leases as of March 31, 1998.
C-15
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
1999 $ 515,583
2000 458,279
2001 423,524
2002 266,906
2003 82,732
-------------
$ 1,747,024
=============
(9) Related Party Transactions
--------------------------
During 1998, Penman and the Chief Executive Officer made loans to
the Company of $42,500 and $12,500, respectively. The Chief Executive Officer
also made an additional loan in lieu of $137,500 in salary, of which $114,000
was converted into ten percent cumulative redeemable preferred stock and $2,578
was converted to Class B common stock. There were no cash repayments made to the
stockholders during 1998.
In 1997, the officers of the Company made loans to finance the
Company's operations in the amounts of $1,376,110, of which $927,000 was
converted into five percent cumulative redeemable preferred stock; $37,336 was
converted into Class B common stock; $393,522 was repaid during the year; and
the remainder of $18,252 is outstanding at March 31, 1998 and 1997.
During the year ended March 31, 1998 and the period ended March 31,
1997, the Company made payments of $21,624 and $14,270, respectively, to
related parties for rent expense in connection with the clinic facilities. Also,
the Company made principal and interest payments of $9,000 and $423,363,
respectively, on behalf of the Chief Executive and Operations Officers of the
Company for the corporate office location.
In the process of acquiring the physician clinic groups during 1997,
the Company paid $47,650 to a consultant who became an officer of the Company.
The Company did not make any similar payments in 1998.
(10) Income Taxes
------------
Because of operating losses, the Company has not provided any income
tax expense for the year ended March 31, 1998 and the period ended March 31,
1997. The Company has operating loss carryforwards, which may be used to reduce
future taxable income, of approximately $3,296,000 and $280,000 at March 31,
1998 and 1997, respectively, which expire beginning in 2013.
The income tax recognition of temporary differences originating
before the Company became a C Corporation will reverse. Accordingly, an income
tax liability of $101,500 was recorded as of the date the Company became a C
Corporation.
Deferred income taxes determined in accordance with Statement 109
reflect the net tax effects of (a) temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes and (b) operating loss and tax credit
carryforwards. In
C-16
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Due to the uncertainty of
future realization, the Company's deferred tax assets are subject to a valuation
allowance that results in the recognition of no deferred tax asset at March 31,
1998 and 1997. The increase in the valuation allowance of approximately
$1,413,000 during 1998 was equal to the increase in the deferred asset.
The tax effects of significant items comprising the Company's
deferred income taxes for March 31, 1998 and 1997 are as follows:
1998 1997
Deferred tax assets:
Accrual to cash $ 31,300 62,600
Net operating loss carryforwards 1,252,600 106,400
Allowance for doubtful accounts 438,800 144,400
Intangible assets 35,800 15,500
Accrued expenses 64,500 33,800
----------- ---------
1,823,000 362,700
Less valuation allowance (1,731,700) (318,600)
----------- ---------
Net deferred tax assets 91,300 44,100
Deferred tax liabilities - depreciation (91,300) (44,100)
----------- -----------
Net deferred taxes $ -- --
=========== ===========
The significant components of the deferred income tax expense
(benefit) for the year ended March 31, 1998 and the period ended March 31, 1997
are as follows:
1998 1997
---- ----
Deferred income tax benefit $ 1,413,100 420,100
Change in tax status from S Corporation
to C Corporation -- (101,500)
Increase in valuation allowance (1,413,100) (318,600)
------------ ---------
Deferred income tax expense $ -- --
============ =========
(11) Contingencies
-------------
In addition to the general liability and malpractice insurance
carried by the individual physicians, the Company is insured with respect to
general liability and medical malpractice risks on a claims-made basis. To the
extent that any claims-made coverage is not renewed or replaced with equivalent
insurance, claims based on occurrences during the term of the coverage, but
reported subsequently, would be uninsured. In connection with the sale of
substantially all the assets of the Company, the Company did not extend its
medical malpractice beyond May 1, 1998. However, general liability will be
extended through May 1, 1999.
(12) Redeemable Preferred Stock
--------------------------
C-17
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
The five and ten percent preferred stock is cumulative, mandatory
redeemable nonvoting shares issued in connection with the reorganization
described in note 4. The five percent preferred stock dividend is payable when
declared by the Company. During 1998 and 1997, the Company declared a dividend
on the five percent preferred stock of $215,674 and $47,046, respectively, based
on the preferred stock issuance date of December 12, 1996. During 1998, the
Company also declared a dividend on the ten percent preferred stock issued in
1998 of $29,793. Upon sale of the Company or a qualified public offering and
providing that sufficient proceeds remain after satisfying secured and unsecured
obligations (see note 1(b)), the Company will redeem the preferred stock at the
redemption price which is $1,000 per share plus the amount of accrued and unpaid
dividends at such date. The preferred shares are mandatory redeemable on
December 12, 2001.
During 1997, the Company granted options to acquire up to 146,875
shares of Class B common stock to officers of the Company, which are vested and
are exercisable at $5.50 per share.
(13) Sale of Company
---------------
Pursuant to an Acquisition Agreement and Plan of Reorganization
(the "Agreement") dated February 9, 1998 and as amended on April 15, 1998 and
May 7, 1998, the Company sold effective May 1, 1998, substantially all of its
assets to UCI Medical Affiliates, Inc. (UCI). The purchase price by UCI to
the Company for the assets, as defined in the agreement consisted of: (i) cash
of $450,000; (ii) a promissory note receivable of $800,000 due August 1, 1998;
(iii) 2,901,396 shares of UCI common stock; (iv) the assumption of capital
leases aggregating $123,073 at March 31, 1998; and (v) the assumption of the
line of credit having a balance of $574,327 at March 31, 1998.
The issuance of the shares of UCI common stock to the Company is
contingent upon the approval of UCI shareholders. The market value of the shares
to be received based on the closing price of UCI common stock at May 1, 1998 was
approximately $4,442,000; however, the ultimate value will be determined when
the Company sells the common stock which cannot take place prior to November 1,
1998. Based on the closing price of UCI common stock at July 30, 1998, the
market value of the shares to be received was approximately $2,901,000
(unaudited). As of August 3, 1998, approval of UCI shareholders had not occurred
(unaudited).
C-18
MAINSTREET HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MainStreet Healthcare Corporation ("MHC") was organized and
incorporated with the purpose of acquiring and subsequently managing, primary
care, family health centers. Within a period of 24 months, MHC acquired fourteen
practices and attained net revenues of $6.4 million. MHC, after acquisition of a
practice, utilizes management expertise to encourage growth in services and
revenues, and promote cost consolidation within each practice.
To facilitate the organization of the business, MHC formed both
MainStreet Healthcare Medical Group, PC, Georgia, and MainStreet Healthcare
Medical Group PC, Tennessee, (collectively the "PC") to provide employment to
physicians who provide patient care and other medical services at the practices.
Management service agreement(s) were executed to provide an underlying basis of
rights and obligations between both MHC and the PC. Also, such agreements
provided proper delineation of duties and responsibilities for the management
of, and administration within, each practice.
The consolidated financial statements include the accounts of MHC and
PC. The management service agreement between MHC and the PC conveys to MHC
perpetual and unilateral control over the assets and operations of the PC.
Control is perpetual rather than temporary because of (1) the length of term
of the agreement (50 years), (2) the continuing investment of capital by MHC,
(3) the employment of all of the non-physician personnel by MHC, and (4) the
nature of the services provided to the PC by MHC.
The financial terms of the management service agreement call for
the PC to provide medical service to patients. MHC, charges a fee to the
patient or to the patient's insurance carrier, or employer for such services
(pursuant to the agreement PDC assigns to MHC the rights to receive all payments
for all services performed by the PC). MHC collects all of the "Net Business
Revenues" through the collection of open accounts receivable. MHC agrees to
compensate the PC for payment of physician salaries and physician related
expenses for continuing education and payroll taxes. MHC is financially
responsible to provide all support personnel (nurses, technicians, clerical
staff), all administrative functions (billing, collecting, vendor payment),
all facilities, supplies (both medical, equipment and administrative), and
equipment in substance all other business costs and expenses.
MHC has the obligation to provide to the business the management
services, personnel, equipment and supplies provided for and encapsulated as
follows:
1. the payment for all facility costs, including rent,
repairs, maintenance, utilities, insurance, janitorial,
refuse disposal, property taxes and improvements.
2. the provision of supplies, items of furniture, fixtures and
equipment, and repairs or improvements of same.
3. preparation of annual capital budgets.
4. maintaining the role of exclusive manager and administrator
of all business functions and services related to the
business, including (but not limited to):
(a) evaluating, negotiating, administering all
managed care contracts on behalf of the PC.
(b) provision of on-going assessment of business
activity, such as product line activity and
patient satisfaction.
(c) ordering and purchasing all medical and office
supplies reasonably required.
(d) billing and collection from patients all
professional fees for medical services and for
ancillary services performed at the medical
offices.
(e) marketing services, physician recruitment,
analysis and procurement for expansion of
business.
C-19
The PC has obligations to MHC including (but not limited to) payment
of all costs and expenses for insurance premiums for malpractice insurance
coverage, and physician employment expenses related to salaries, worker's
compensation, retirement plan contributions, health, disability and life
insurance premiums, payroll taxes and automobile expenses.
The PC enters into employment agreements with physicians for terms
ranging from one to ten years. All employment agreements have clauses which
allow for early termination of the agreement if certain events occur such as the
loss of a medical license. The physicians are paid on a salary basis. A few of
the physicians have incentive compensation agreements which afford them
incentive for additional earnings based upon an increase, as compared to
previous financial quarters, in the collections of Net Business Revenues at the
medical office the physician is employed Such agreements have no effect upon
MHC's rights to collect the net profits of the business. Any amounts paid in
fiscal years ending March 31, 1998 and 1997 were minimal.
MHC and the PC jointly establish fees for all professional and other
ancillary services and pharmaceutical items provided at the medical offices. To
facilitate consolidated billing and collection functions, MHC established a
centralized department during the second half of fiscal year 1998. This
department developed the communication systems (using computer systems,
telecommunications and administrative operations) to allow the billing and
collecting functions at 70% of the medical centers to be centralized. The intent
is to centralize the remaining 30% of the medical centers during the fiscal year
1999. This plan encouraged more moderate fee structures within the medical
centers. MHC is better able to set pricing plans within the company and between
he various medical offices using this centralized approach. Billing practices
for using proper and correct coding methods required by the various insurance
carriers and governmental programs are also more effectively monitored by using
a centralized department.
Subsequent to acquisition(s), MHC entered into several operational
agreements to facilitate cost consolidation, as well as to promote improved
services within the medical practices. Processes for ordering all medical
supplies and office supplies were centralized. All computer processes and
telecommunication processes were provided by single sources. Acquisitions of new
and more modern equipment provided the medical practices with improved patient
handling and treatment methods. Patient billing and collection processes were
centralized, the intent being to reduce the administrative costs of processing
such information.
Three unprofitable practices were closed by MHC on August 31, 1997
and effectively transferred back to their original owners through specific
agreement. As discussed in Note 3 of the MHC consolidated financial statements,
accrued losses of $88,990 were recorded as of March 31, 1997. Goodwill recorded
during the acquisition of these three practices amounted to a total of $4,500
and was considered immaterial in the presentation of the financial statements.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998 AS COMPARED
TO THE YEAR ENDED MARCH 31, 1997:
Revenues of $6,436,950 for the year ended March 31, 1998 reflects an
increase of 75.5% over those of the year ended March 31, 1997. The majority of
this increase related to having all of the acquired practices reporting revenues
for the full twelve months of the fiscal year ended March 31, 1998. MHC
commenced operations with its first acquisition on April 1, 1996, and grew
through a series of acquisitions through July, 1997 when a maximum of 14
clinics had been acquired.
MHC revenues per practice per month decreased from $46,700 in
fiscal 1997 to $44,701 in fiscal 1998. Revenues were short of goals for fiscal
1998 due in part to the increased competition from hospitals and other providers
in the metropolitan Atlanta market. In this area, regional hospitals have
acquired or opened new primary care physician practices that compete directly
with the company for patients. In each case, the hospital owners (MHC's
competition) are believed to have significantly greater resources than MHC.
MHC contracted with a broad cross section of managed care markets
in an attempt to increase its viability and marketability to the general patient
public. The following table listing the percentage of revenue by revenue source
provides an indication of the type of insurance markets which MHC entered.
C-20
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
Private Pay 6.5%
Medicare 16.8%
Medicaid 5.1%
Commercial Insurance 25.5%
PPO Insurance 41.7%
Workers Compensation Insurance 2.8%
All others 1.6%
-----
100.0%
The following table shows the percentage of net revenue by various
expense categories reflected in the MHC Consolidated Statements of Operations:
1998 1997
Net Patient service revenue 100% 100%
Operating expenses ----- ----
Cost of affiliated physician services..................................................48% 46%
Clinic salaries/benefits...............................................................37% 32%
Clinic rent and lease expense.......................................................... 9% 9%
Clinic supplies..................................................................... 12% 9%
Other clinic costs......................................................................12% 10%
General corporate expenses..............................................................26% 16%
Depreciation and amortization...........................................................7% 6%
Clinic start-up expenses.............................................................. 0% 8%
----- ----
Total expenses................................................................151% 136%
Operating loss....................................................................................-51% -36%
Interest expense...................................................................................6% 4%
Most of the categories of expenses increased during fiscal 1998 as
compared to fiscal 1997, primarily due to the fact that fiscal 1998 included a
full year of operations for all acquired practices.
Cost for clinic salary, wages and benefits increased from $1,188,415
in fiscal 1997, to $2,404,156 in fiscal 1998. This increase was mostly related
to the process of moving billing and collection processes out from the medical
centers staff and into the corporate staff. The reduction in personnel at the
medical center level upon transferring duties to the corporate staff level did
not transition in such a way as to allow for any significant costs savings. It
was quickly determined after most acquisitions that many medical centers were
over staffed, thus requiring many staffing changes. Most of the staffing changes
would have benefited fiscal periods beyond March 31, 1998.
General corporate expenses increased from $587,404 in fiscal 1997 to
$1,655,974 in fiscal 1998. This was due in part to several issues, including
operation of a departmental staff to locate, make recommendations on, hire,
train and administer, all medical office personnel. Responsibilities included
engaging and contracting with insurance carriers, as well as obtaining admission
privileges at local hospital centers for employed physicians. Secondly, both
hard and soft costs were incurred to establish a centralized collection
department, designed to bill and collect net business revenues for all medical
practices. Thirdly, greater than anticipated expenses were incurred to manage
changes resulting from the growth oriented phase the company went through from
November 1996 to May 1997. A total of nine medical centers were either acquired
or started up during this time. The ability to bring all three of the above
mentioned departmental staff and processes up to operational profitability took
most of the end of fiscal year 1997 as well as the entire fiscal year 1998, a
period of 12 to 15 months, when it was originally anticipated such processes
would only take 3 to 6 months.
C-21
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
Depreciation and amortization expense increased to $466,121 in
fiscal 1998 from $217,029 in fiscal 1997. This increase is a direct reflection
of the additional practice months in 1998 (144 in 1998, as compared to 75 in
1997).
Interest expense of $364,292 in fiscal 1998 and $161,774 in fiscal
1997 is composed of those costs associated with amortization of interest on
debt for long-term financing of the acquisition of physician practices, interest
for the financing of accounts receivable, and interest associated with the
indebtedness incurred with the issuance of 5% and 10% cumulative redeemable
preferred shares.
Operating losses (before corporate expenses and non cash items)
decreased on a monthly basis during five of the final six months of fiscal 1998.
FINANCIAL CONDITION AT MARCH 31, 1998
Working capital at March 31, 1997 was $392,653. At March 31, 1998,
there was a deficit working capital of $2,663,403. Operating losses in fiscal
1998 were not offset by equity transactions as they had been in fiscal 1997.
Management entered into a financing agreement on certain accounts
receivable in October 1997. Approximately 70% of the outstanding accounts were
placed into the agreement, as well as future billed revenues from those same
medical centers. This financing provided MHC with some of the new capital needed
to operate the practices during fiscal year 1998.
Accounts receivable allowances for contractual adjustments and
uncollectible accounts decreased from 53% of gross accounts receivable at March
31, 1997 to 46% of gross accounts receivable at March 31, 1998, due to the
changes in make-up which occurred in gross receivables during the year. At March
31, 1997, outstanding accounts receivable from acquired practices represented
32% of the outstanding gross accounts receivable. Those acquired accounts had a
98% allowance. At March 31, 1998, acquired accounts receivable balances totaled
only 4% of total gross accounts receivable, as the majority of those accounts
were either collected or written off in fiscal 1998. The remaining 96% of gross
accounts receivable was allowed for at a more defined basis for contractual
adjustments and uncollectible accounts. See the table below:
1998 1997
----------- --------------
Gross accounts receivable (acquired) $ 12,617 4% $ 766,206 32%
Gross accounts receivable (generated) $2,514,320 96% $1,602,384 68%
---------- ----------
Total gross accounts receivable $2,626,937 $2,368,590
========== ==========
Allowance account (acquired) $ 61,809 55% $ 752,312 98%
Allowance account (generated) $1,154,909 46% $ 506,259 32%
---------- ----------
Total allowance account $1,216,718 46% $1,258,571 53%
========== ==========
Total liabilities increased from $2,454,798 at March 31, 1997 to
$4,702,526 at March 31, 1998 primarily as a result of indebtedness incurred in
the establishment of equipment capital leases and financing accounts
receivable. Increases to accounts payable and accrued expenses resulted from
losses incurred in operations.
New equity in the form of working capital was derived during fiscal
year 1998 through the sale of both 5% and 10% cumulative preferred stock, and
Class B common stock. This infusion of capital (approximately $550,000) provided
some of the working capital needed to operate the business during fiscal year
1998.
LIQUIDITY AND CAPITAL RESOURCES
MHC requires capital principally to fund growth (acquire new medical
centers), for working capital needs and for the retirement of indebtedness.
MHC's capital requirements and working capital needs have been funded through a
combination of external financing (including receivable funding and proceeds
from the sale of 5% and 10% cumulative redeemable preferred stock) and credit
extended by suppliers.
C-22
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
SUBSEQUENT EVENTS
In May of 1998, MHC sold substantially all of the assets of MHC to
UCI Medical Affiliates, Inc. And affiliated entities ("UCI") in exchange for
the assumption of certail indebtedness and certain leases of MHC and the
payment of approximately $8.14 million in value, comprised of a combination of
cash, a note payable and a commitment to issue common stock of UCI.
C-23
********************************************************************************
APPENDIX
UCI MEDICAL AFFILIATES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE 1998 ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON WEDNESDAY, SEPTEMBER 30, 1998 AT THE EMBASSY SUITES
HOTEL, 200 STONERIDGE DRIVE, COLUMBIA, SOUTH CAROLINA AT 10:00 A.M. LOCAL TIME.
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement, each dated August 31, 1998 and
appoints each of Jerry F. Wells, Jr. and Jon G. Keith as proxy and
attorney-in-fact of the undersigned, each with full power of substitution, to
vote all of the shares of common stock of UCI Medical Affiliates, Inc., a
Delaware corporation, held or owned by the undersigned or standing in the name
of the undersigned at the 1998 Annual Meeting of Stockholders of the Company and
at any adjournments thereof, and the undersigned hereby instructs said proxies
and attorneys to vote as follows:
1. To approve the issuance of shares of Common Stock of the Company
in connection with the Acquisition.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To approve the issuance of Warrants and underlying Common Stock in
connection with the Private Placement.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To approve the amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of the
Company's common stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Election of Directors: Terms Expiring in 2001
FOR the nominee listed below WITHHOLD AUTHORITY
to vote as to the nominee
A. Wayne Johnson [ ] [ ]
Ashby M. Jordan, M.D. [ ] [ ]
John M. Little, Jr., M.D. [ ] [ ]
5. To approve the adoption of the Company's 1997 Stock Incentive
Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
6. To approve the amendment and restatement of the Company's Amended
and Restated Certificate of Incorporation to give effect to a one-for-five
reverse stock split.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
7. To ratify the appointment of Price Waterhouse LLP as the firm of
independent auditors for the Company for the fiscal year ending September 30,
1998.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
8. In the discretion of each proxy and attorney-in-fact, upon any
other business which may properly come before the meeting or any adjournment
thereof.
DATE: ______________________, 1998 ______________________________
(Signature)*
(Please sign exactly as shown on the envelope addressed to you.)
NUMBER OF SHARES: ___________ ______________________________
(Signature, if held jointly)
*Note: When shares are held by joint tenants, both should sign. When signing
as attorney, executor, administrator, trustee, guardian or corporate
officer or partner, please give full title as such. If a corporation,
please sign in corporate name by president or other authorized officer.
If a partnership, please sign in partnership name by authorized person.
THIS PROXY WILL BE VOTED AS INSTRUCTED. IN THE ABSENCE OF SUCH INSTRUCTIONS,
THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS LISTED, AND THE PROXIES
HEREIN NAMED WILL VOTE ON OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE
MEETING OR ANY ADJOURNMENT THEREOF IN ACCORDANCE WITH THEIR JUDGMENT.