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. 5 )
Filed by the registrant [ X ]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement.
[ X ] 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:
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(2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------
(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.:
------------------------
(3) Filing Party:
----------------------------------------
(4) Date Filed:
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UCI MEDICAL AFFILIATES, INC.
1901 MAIN STREET, SUITE 1200
COLUMBIA, SOUTH CAROLINA 29201
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, FEBRUARY 24, 1999
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, February 24, 1999 at
10:00 a.m., local time, at the Adam's Mark Hotel, 1200 Hampton Street, Columbia,
South Carolina 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 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 1999 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 PricewaterhouseCoopers
LLP as the firm of independent auditors to audit the
consolidated financial statements of UCI and its
subsidiaries for the fiscal year ended 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 December 31, 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
January 22, 1999
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.
----------------------
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 January 22, 1999,
and was first mailed to stockholders on or about January 27, 1999.
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 ......................... 8
Selected Historical Financial Data of MHC ................................. 9
Selected Pro Forma Financial Data of the Company .......................... 10
RISK FACTORS
Financial Status of MHC ................................................... 11
Integration of Operations; Management of Growth ........................... 11
Dilution .................................................................. 12
Resales of Common Stock ................................................... 13
Nasdaq Delisting .......................................................... 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 .............................. 19
Scheduling of Stockholder Approval ............................... 19
Fairness Opinion ................................................. 19
Financing of the Acquisition ..................................... 21
Certain Federal Income Tax Matters ............................... 22
Accounting Treatment ............................................. 22
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 ........................................................ 27
Unaudited Pro Forma Combined Condensed Financial Statement ................ 29
THE ANNUAL MEETING
Business to be Conducted at the Annual Meeting ............................ 31
Proposals to be Voted Upon ....................................... 31
Date, Time and Place of Meeting .................................. 31
Record Date ...................................................... 32
Shares Outstanding and Entitled to Vote .......................... 32
Voting and Revocation of Proxies ................................. 32
Quorum ........................................................... 32
Vote Required .................................................... 33
Solicitation of Proxies and Expenses ............................. 33
Description of Proposals .................................................. 34
Acquisition Proposals ............................................ 34
Share Issuance and Warrant Issuance Proposals ........... 34
Authorized Capital Stock Proposal ....................... 34
Annual Meeting Proposals ......................................... 34
Election of Directors ................................... 34
1999 Incentive Plan Proposal ............................ 35
Reverse Stock Split Proposal ............................ 39
Ratification of Auditors Proposal ....................... 41
Directors and Executive Officers .......................................... 41
Directors ........................................................ 41
Executive Officers ............................................... 42
Section 16(a) Beneficial Ownership Reporting Compliance .......... 43
Board of Directors and Board Committees .......................... 43
Executive Compensation ........................................... 44
Director Compensation ............................................ 45
Employment Contracts ............................................. 45
Security Ownership of Certain Beneficial Owners and Management ............ 46
Certain Relationships and Related Party Transactions ...................... 46
ADDITIONAL INFORMATION
Cautionary Statement Concerning Forward-Looking Statements ................ 50
Stockholder Proposals ..................................................... 50
Other Matters ............................................................. 50
Annual Report ............................................................ 50
Where You Can Find More Information ....................................... 50
APPENDICES
APPENDIX A ................................................................ A-1
APPENDIX B ................................................................ B-1
APPENDIX C ................................................................ 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, February 24, 1999 at 10:00 a.m., local
time, at the Adam's Mark Hotel, 1200 Hampton Street, 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 freestanding medical
centers (the "UCI Centers") located
1
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.
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
2
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).
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 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 recognition of the fact
that the Acquisition resulted in the integration of multiple business operations
involving the combination of operating, accounting and software systems and
departments, as well as various re-allocations of administrative management and
staff, modifications and enhancements to support functions, and applicable
adjustments in arrangements with third parties, the Conditional Delivery
Agreement addresses the fact that it may not be possible to restore a party to
the position it held prior to the closing of the Acquisition. In such event, the
Conditional Delivery Agreement provides that should any party be unable to
return to any other party any assets or liabilities originally transferred by
such other party in the Acquisition, the party unable to fully return such
assets or liabilities
shall instead deliver a promissory note in principal amount equal to the excess
of the fair market value of any assets not returned over the fair market value
of any liabilities not returned. It is expected that the parties will resolve by
mutual agreement the definitive amounts of any such promissory notes and the
extent of any
3
set-offs to be recognized. The notes will bear interest at the then prime rate,
with all interest and principal due one month following the date of the note.
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; 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 the record date for the Annual Meeting, shares held by these
stockholders represented approximately 50.8 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 four 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 National Association of Securities Dealers, Inc.
(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.
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.
4
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 being accounted for as a purchase in accordance with
generally accepted accounting principles.
RESALES OF COMMON STOCK
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, the Board of Directors of UCI has
proposed that approval by UCI stockholders be sought for the issuance of such
Common Stock and Warrants.
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, stockholder 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
5
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 1999 STOCK INCENTIVE PLAN
The UCI Board has approved the UCI 1999 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
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. UCI is presently authorized to
issue 10 million shares of Common Stock, of which 6,749,119 shares of Common
Stock were outstanding at the close of business on December 31, 1998. The
principal effect of the proposed reverse stock 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 1,349,823. At the Annual Meeting, you will be asked to approve
the amendment of the UCI Certificate to give effect to the reverse stock split.
PROPOSAL TO RATIFY AUDITORS
UCI has appointed PricewaterhouseCoopers LLP as the independent
auditors of the Company's consolidated financial statements for the fiscal year
ended 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
December 31, 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 three 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 1999 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
6
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 three nominees for director
named in this Proxy Statement and FOR each of the other proposals being
submitted to you.
MARKETS AND MARKET PRICES
Until October 19, 1998, the Common Stock was traded on the Nasdaq
SmallCap Market under the symbol "UCIA". On October 20, 1998, the Common Stock
was delisted for trading on the Nasdaq SmallCap Market as a consequence of the
Company's failure to meet certain quantitative requirements under the NASD's
expanded listing criteria. Trading in the Common Stock is currently conducted in
the over-the-counter market. 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 January 21, 1999, the last trading day before the printing of this Proxy
Statement, the high and low bid prices for the Common Stock were $0.40 and $0.40
per share, respectively.
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.
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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 for the year ended September 30, 1998 (which Report accompanies 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 Statement."
Summary Consolidated Fiscal Year Ended Fiscal Year Ended
Statements of Operations Data September 30, 1997 September 30, 1997
----------------------------- ------------------ ------------------
Revenues .............................. $ 37,566,037 $27,924,772
Income (loss) from operations ......... (7,294,105) 54,684
Net income (loss) ..................... (10,508,143) (83,726)
Net income (loss) per common and
common equivalent share (basic) ....... (1.61) (0.02)
Weighted average common shares and
common share equivalents outstanding
(basic) ............................... 6,545,016 5,005,081
Summary Consolidated
Balance Sheet Data September 30, 1998 September 30, 1997
------------------ ------------------ ------------------
Working capital ....................... $ (3,718,424) $ 2,921,045
Total assets .......................... 26,202,283 21,082,369
Long-term debt, net ................... 6,257,285 6,920,470
Capital ............................... 986,796 9,488,497
8
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)
9
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 fiscal
year ended September 30, 1998 as if the Acquisition and the Private Placement
(as defined herein) had been completed on October 1, 1997.
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 that
date. It is also important to remember that this information does not
necessarily reflect future financial performance.
Please see the information in this Proxy Statement under the heading
"Financial and Business Information - Unaudited Pro Forma Combined Condensed
Financial Statement" for a more detailed explanation of this analysis.
Summary Pro Forma Combined Fiscal Year Ended
Statement of Operations Data September 30, 1998
---------------------------- ------------------
Revenues.................................... $ 41,315,477
Income (loss) from operations .............. (8,154,153)
Net income (loss) .......................... (11,642,332)
Basic earnings (loss) per share ............ (1.78)
Weighted average common shares and
common share equivalents outstanding ..... 6,545,016
10
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
11
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 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 stockholder 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"), owned in the aggregate 2,624,623 shares,
or approximately 39 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, 1998 (from $(1.61) per share to $(1.78) per share).
These pro forma amounts are based on the assumptions reflected in the notes to
the Unaudited Pro Forma Combined Condensed Financial Statement included
elsewhere in this Proxy Statement and,
12
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 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 stockholder 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 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.
NASDAQ DELISTING
On October 20, 1998, the Common Stock was delisted for trading on the
Nasdaq SmallCap Market. The delisting was a consequence of the Company's failure
to meet certain quantitative requirements regarding assets as set forth in the
NASD's expanded quantitative and qualitative listing criteria for all companies
listed on the Nasdaq Stock Market. These new requirements for continued listing
became effective as to the Company on February 23, 1998. As of June 30, 1998,
after giving effect to the issuance of Common Stock contemplated in the
Conditional Delivery Agreement executed at the closing of the Acquisition, the
amount of the Company's net tangible assets exceeded the applicable Nasdaq Stock
Market $2 million net tangible assets requirement. As of September 30, 1998,
however, the Company's net tangible assets were below the Nasdaq requirements.
As a consequence of such delisting, trading in the Common Stock is currently
conducted in the over-the-counter market, and 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, delisting
makes 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
13
Company, and for issuance by the Company in future capital raising transactions.
Although the Common Stock remains 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.
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. Following
14
additional negotiation, Messrs. Johnson, Wells and Dr. McFarland settled on a
purchase price of approximately 1.3 times the annual revenue stream of 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, 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. Dr. Wood was not
engaged to, and did not, participate in the determination of the consideration
to be paid by UCI in the proposed acquisition.
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
15
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 stockholder 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 Agreement until after requisite stockholder approval for such
issuance had been obtained at the Annual Meeting. 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
16
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).
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 timing of the discussions between UCI and MHC which led to the
Acquisition was a consequence of the election by the Chief Executive Officer of
MHC to initiate contact with UCI in the third quarter of 1997 as disclosed
above. The election by the respective managements of UCI and MHC to proceed with
the closing
17
of the Acquisition was based on their observations regarding the expected
advantages of the Acquisition and the absence of any compelling basis on which
to delay the closing.
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 whose members 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 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 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 recognition of the fact
that the Acquisition resulted in the integration
18
of multiple business operations involving the combination of operating,
accounting and software systems and departments, as well as various
re-allocations of administrative management and staff, modifications and
enhancements to support functions, and applicable adjustments in arrangements
with third parties, the Conditional Delivery Agreement addresses the fact that
it may not be possible to restore a party to the position it held prior to the
closing of the Acquisition. In such event, the Conditional Delivery Agreement
provides that should any party be unable to return to any other party any assets
or liabilities originally transferred by such other party in the Acquisition,
the party unable to fully return such assets or liabilities shall instead
deliver a promissory note in principal amount equal to the excess of the fair
market value of any assets not returned over the fair market value of any
liabilities not returned. It is expected that the parties will resolve by mutual
agreement the definitive amounts of any such promissory notes and the extent of
any set-offs to be recognized. The notes will bear interest at the then prime
rate, with all interest and principal due one month following the date of the
note.
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. In late July 1998 MHC obtained an agreement
with D. Michael Stout, M.D., Executive Vice President of Medical Affairs for
UCI, in which he agreed to vote his shares in favor of the Acquisition
proposals. As of the record date for the Annual Meeting, shares held by these
four stockholders represented approximately 50.8 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 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 has obtained the commitment of four
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.
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
19
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. All material analyses conducted by Dr. Wood are described in this
section of this Proxy Statement.
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 acquisition
value-to-target net sales multipliers of the indicated transactions ranged from
0.754:1 to 1.992:1. 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
20
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.
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
21
the Company committed to issue the Warrants for the purchase of 150,000 shares
of Common Stock upon receipt of requisite stockholder 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. Consolidation is required by EITF 97-2 as a
consequence of the nominee shareholder arrangement that exists with respect to
each of the UCI-PCs.
Representatives of PricewaterhouseCoopers 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
22
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."
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. Approval of the stockholders of UCI is required
under the DGCL to amend the UCI Certificate to increase the number of authorized
shares of Common Stock. Stockholder approval of neither the Acquisition nor the
Private Placement themselves 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 three 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 amendment of the UCI Certificate 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 term
to which he is elected.
23
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, AUGUST 13, 1998, OCTOBER 13, 1998 AND DECEMBER 7 , 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 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, is in the principal amount of
24
$759,079, 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. Such promissory note, as amended, is interest only until
its maturity date which is defined as the earlier of January 31, 1999; the sale
by UCI of substantially all of its assets; any person, entity or group acquiring
more than 50% of the voting stock of UCI; or the sale by UCI of more than $1
million of Common Stock. 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.
TAX 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 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
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 UCI-PCs. 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.
25
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.
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.
26
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.; 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 50.8 percent of the outstanding Common Stock.
See "Description of the Acquisition - Expectation of Stockholder Approval."
27
FINANCIAL AND BUSINESS INFORMATION
MARKET PRICE AND DIVIDEND INFORMATION
Until October 19, 1998, the Common Stock was traded on the Nasdaq
SmallCap Market under the symbol UCIA. On October 20, 1998, the Common Stock was
delisted for trading on the Nasdaq SmallCap Market as a consequence of the
Company's failure to meet certain quantitative requirements under the NASD's
expanded listing criteria. Trading in the Common Stock is currently conducted in
the over-the-counter market. The prices set forth below indicate the high and
low bid prices reported on the Nasdaq SmallCap Market for the indicated periods.
The quotations reflect inter-dealer prices without retail markup, markdown or
commission and may not necessarily reflect actual transactions.
BID PRICE
---------
High Low
------------ -------------
Fiscal Year Ended 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
4th quarter (07/01/98 - 09/30/98) 1.469 0.75
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
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 January 21,
1999, the latest practicable trading day before the printing of this Proxy
Statement, the high and low bid prices for the Common Stock were $0.40 and $0.40
per share, respectively.
As of the Record Date, there were 501 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.
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. Each of the MHC-PCs designated one of its
licensed physicians as a medical director. The medical director was available
for professional consultation by any of the healthcare providers concerning
patient matters to ensure that quality medical care was provided at each patient
encounter at the MHC Centers. The medical director did not exert control over
the financial management of medical treatment. Pricing for medical treatment was
dictated almost exclusively by insurance payor contracts. The MHC-PCs were
organized so that all physician
28
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.
29
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENT
The following unaudited pro forma combined condensed financial statement
(the "Condensed Statement") has 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 Statement reflects certain assumptions
regarding the Acquisition and the Private Placement and is based on the
historical consolidated financial statements of the respective entities. The
financial information relating to UCI reflected in the Condensed Statement,
including the notes thereto, is qualified in its entirety by reference to, and
should be read in conjunction with, the audited financial statements , including
the notes thereto, of UCI, which are incorporated by reference in this Proxy
Statement. The Condensed Statement was prepared on the basis of such audited
financial statements of UCI, as well as the internal unaudited monthly financial
statements of MHC for each of the months in the seven-month period ended
April 30, 1998.
The Condensed Statement combines UCI's historical results of operations for
the fiscal year ended September 30, 1998 with MHC's historical results of
operations for the seven months ended April 30, 1998, giving effect to the
Acquisition and the Private Placement as if they had occurred on October 1,
1997.
The Condensed Statement is presented for illustrative purposes only and is
not necessarily indicative of the results of operations which would have
actually been reported had the Acquisition occurred as of October 1, 1997, nor
is the Condensed Statement 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. Such consolidation is required under EITF 97-2 as a
consequence of the nominee shareholder arrangement that exists with respect to
each of the UCI-PCs. In each case, the nominee (and sole) shareholder of the
UCI-PC has entered into an agreement with UCI-GA which satisfies the
requirements set forth in footnote 1 of EITF 97-2. Under each agreement, UCI-GA,
in its sole discretion, can effect a change in the nominee shareholder at any
time for a payment of $100 from the new nominee shareholder to the old nominee
shareholder, with no limits placed on the identity of any new nominee
shareholder and no adverse impact resulting to either UCI-GA or the UCI-PC
resulting from such change.
The Condensed Statement does not give pro forma effect to the acquisitions
by UCI-SC, completed since October 1, 1997, of certain assets (including patient
lists and goodwill) associated with the professional practices of the physicians
and entities identified below:
Acquisition Date Seller Acquisition Price
- ---------------- ------ -----------------
October 1, 1997 Progressive Therapy Services, P.A. $ 550,720
October 1, 1997 Bar-Ed, Professional Corporation 306,036
November 1, 1997 Marvin Dees, M.D. 259,536
March 1, 1998 Allan M. Weldon, M.D. 235,000
Forms 8-K dated the respective acquisition dates and describing the
acquisition transactions were filed by UCI with the SEC in connection with each
of the acquisitions identified above. Forms 8-K/A which included historical and
pro forma financial information with respect to each of the acquisitions were
also filed by UCI with the SEC. 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." In light of the existing
public disclosure of each of these other acquisitions and consistent with the
Company's objective of isolating for the reader of this Proxy Statement the pro
forma impact of the Acquisition, the Company has elected not to reflect the pro
forma impact of such other acquisitions in the Condensed Statement. The
inclusion of such transactions in the Condensed Statement would have reflected a
pro forma increase in revenues, operating and administrative costs, depreciation
and amortization, and loss for the combined entity and a pro forma decrease in
the operating margins for the combined entity.
30
31
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
UCI MHC
(Fiscal Year Ended (SEVEN MONTHS
September 30, ENDED PRO FORMA PRO FORMA
1998) APRIL 30,1998) ADJUSTMENTS COMBINED
-------------------- ----------------- ---------------- -------------------
Revenue $ 37,566,037 $ 3,749,440 $ --- $ 41,315,477
Operating costs 39,094,276 3,812,855 (315,000) (a)
(150,000) (b) 42,442,131
-------------------- ----------------- ---------------- -------------------
Operating margin (1,528,239) (63,415) 465,000 (1,126,654)
General and administrative expenses 113,172 827,895 --- 941,067
Realignment and other expenses 3,702,546 --- --- 3,702,546
Depreciation and amortization 1,950,148 149,955 263,783 (c)
20,000 (d) 2,383,886
-------------------- ----------------- ---------------- -------------------
Income (loss) from operations (7,294,105) (1,041,265) 181,217 (8,154,153)
Interest expense, net (1,463,792) (274,141) --- (1,737,933)
Gain (loss) on equipment 1,936 --- --- 1,936
-------------------- ----------------- ---------------- -------------------
Other income (expense) (1,461,856) (274,141) --- (1,735,997)
Income (loss) before income tax (8,755,961) (1,315,406) 181,217 (9,890,150)
Income tax (expense) benefit (1,752,182) --- --- (1,752,182)
-------------------- ----------------- ---------------- -------------------
Net income (loss) $ (10,508,143) $ (1,315,406) $ 181,217 $ (11,642,332)
==================== ================= ================ ===================
Basic earnings (loss) per share $ (1.61) --- (e) --- $ (1.78)
==================== ================= ================ ===================
Basic weighted average common
shares outstanding 6,545,016 --- (e) --- 6,545,016
==================== ================= ================ ===================
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENT
(a) Net decrease in salaries paid to former corporate officers.
(b) Net decrease in salaries for clinic based administrative personnel.
(c) Amortization of goodwill on a straight line basis over 15 years.
(d) Net increase in amortization expense related to building improvements in
leased real estate.
(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 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.
1999 Stock Incentive Plan for officers, directors, employees and
consultants of UCI and its subsidiaries (the "1999 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 PricewaterhouseCoopers
LLP as the firm of independent auditors to audit the consolidated
financial statements of the Company for the fiscal year ended
September 30, 1998 (the "Ratification of Auditors Proposal").
DATE, TIME AND PLACE OF MEETING
The Annual Meeting will be held on Wednesday, February 24, 1999 at
10:00 a.m. local time, at the Adam's Mark Hotel, 1200 Hampton Street, Columbia,
South Carolina.
33
RECORD DATE
Only holders of record of Common Stock at the close of business on
December 31, 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 6,749,119 shares of Common Stock
outstanding and entitled to vote, held of record by approximately 501
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 3,374,560 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
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 will have the same effect as a vote against
such proposals. Broker non-votes will be considered shares present but not
entitled to vote and therefore will have no effect on the outcome of the vote.
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 1999 Incentive
Plan Proposal and the Ratification of Auditors Proposal. Accordingly,
abstentions will have the same effect as a vote against such proposals. Broker
non-votes will be considered shares present but not entitled to vote and
therefore will have no effect on the outcome of the vote. Approval of the 1999
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., 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 50.8 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
35
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.
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 Board
of Directors of UCI has proposed that approval by UCI stockholders be sought for
the issuance of such Common Stock and 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 next
two succeeding annual meetings of stockholders . Charles P. Cannon, a director
whose term would have expired at the forthcoming Annual Meeting, resigned from
the UCI Board effective June 1, 1998. On August 11, 1998, the UCI Board
appointed John M. Little, Jr., M.D. to fill the vacancy on the UCI Board created
by Mr. Cannon's resignation. 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
36
Annual Meeting for terms expiring at the annual meeting of stockholders in the
year 2001. Dr. Jordan's and Dr. Little's terms as directors expire 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 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.
1999 INCENTIVE PLAN PROPOSAL
GENERAL
The UCI Board approved the adoption of the UCI Medical Affiliates, Inc.
1999 Stock Incentive Plan (the "Stock Plan") to be effective as of January 1,
1999, 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
37
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 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 stockholder 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, seven directors, approximately 512 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 31, 2009.
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
38
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 December 31, 1998, the high and low bid
prices of the Common Stock on the over-the-counter market were $0.41 and $0.41
per share, respectively.
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.
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.
39
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, no grants of any awards have been approved under the Stock Plan to
any persons.
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
40
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.
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.
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 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.
UCI is presently authorized to issue 10 million shares of Common Stock,
of which 6,749,119 shares of Common Stock were outstanding at the close of
business on December 31, 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 1,349,820 (approximately 1,930,099 shares following the
issuance, if approved, of shares contemplated by the Conditional Delivery
Agreement executed and delivered at the closing of the Acquisition). Assuming
the Reverse Stock Split Proposal is approved by the stockholders and UCI issues
the 2,901,396 shares (580,279 shares, post-split) of Common Stock to the escrow
agent as contemplated by the Conditional Delivery Agreement executed and
delivered at the closing of the Acquisition, and assuming no other changes in
the outstanding shares of Common Stock, UCI will have approximately 242,400
authorized but unissued shares reserved for issuance pursuant the Warrants, the
UCI stock option plans (including the UCI 1999 Stock Incentive Plan, if approved
by the stockholders), and certain other outstanding warrants of UCI, and will
have approximately 7,717,481 authorized but unissued shares of Common Stock
which are not otherwise reserved for any specific issuance.
The proposal to amend 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
41
approved. Because the Reverse Stock Split Proposal includes this provision to
increase the authorized shares of Common Stock, approval of the Reverse Stock
Split Proposal by the stockholders will enable UCI to issue the shares of Common
Stock and Warrants in connection with the Acquisition even if the Authorized
Capital Stock Proposal is not approved by the stockholders. UCI does not
presently have any plans or understandings with respect to the issuance of
additional shares of Common Stock, except for issuances in connection with
agreements delivered at the closings of the Acquisition and the Private
Placement described in this Proxy Statement, and as otherwise necessary in
connection with exercises from time to time of stock options granted under the
employee stock option plans of UCI.
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, 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.
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
42
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.
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 7,000 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 PricewaterhouseCoopers LLP as UCI's independent auditors for
the fiscal year ended September 30, 1998, subject to ratification by the
stockholders at the Annual Meeting. Representatives of PricewaterhouseCoopers
LLP are expected to be present at the
43
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, 48, 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., 60, 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., 49, has served as a director of UCI since
August 11, 1998 and 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.
DIRECTORS WHOSE TERMS EXPIRE IN 2000
M.F. MCFARLAND, III, M.D., 51, 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, 50, 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., 52, 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
44
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, 58, 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., 37, 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
PricewaterhouseCoopers 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., 54, 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.
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, 1998.
BOARD OF DIRECTORS AND BOARD COMMITTEES
UCI BOARD
The UCI Board had a total of four regular meetings and four special
meetings during the Company's fiscal year ended September 30, 1998. 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 Dr. Jordan in August 1998. This
committee recommends to the UCI Board the engagement of the independent
45
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, 1998.
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 did not meet during the Company's fiscal year
ended September 30, 1998.
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 to the UCI Board with respect
to changes in such existing services. This committee met twice during the
Company's fiscal year ended September 30, 1998.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation earned during the
fiscal year ended September 30, 1998 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. 1998 $ 322,274 (3) $ -0- -0- $ 8,983
CHAIRMAN, PRESIDENT AND 1997 316,540 (3) -0- 141,675 7,968
CHIEF EXECUTIVE OFFICER 1996 315,000 (3) 63,500 (4) 30,000 7,368
D. Michael Stout, M.D. 1998 $ 223,041 (5) $ -0- -0- $ -0-
EXECUTIVE VICE PRESIDENT OF 1997 216,825 (5) -0- 79,825 -0-
MEDICAL AFFAIRS 1996 198,316 (5) -0- 10,000 -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
during each of the fiscal years ended September 30, 1998, 1997 and
1996. For services
46
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 $164,774, $159,040 and $157,500 for the fiscal years ended
September 30, 1998, 1997, and 1996, respectively.
(4) Pursuant to the employment agreement dated October 1, 1995 between
UCI-SC and Dr. McFarland, UCI-SC accrued an incentive bonus of $63,500
during the fiscal year ended September 30, 1996 and made no payments to
Dr. McFarland against accrued bonuses during the fiscal years ended
September 30, 1998, 1997 and 1996. Dr. McFarland received draws from
DC-SC out of previously accrued bonuses of $25,000, $62,000 and
$120,000 during the fiscal years ended September 30, 1998, 1997 and
1996, respectively.
(5) For services performed by Dr. Stout for UCI-SC, Dr. Stout received an
annual salary of $50,000, $50,000 and $45,833 during the fiscal years
ended September 30, 1998, 1997 and 1996, respectively. For services
performed by Dr. Stout for DC-SC, Dr. Stout received an annual salary
of $173,041, $166,825 and $152,483 for the fiscal years ended September
30, 1998, 1997, and 1996, respectively.
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, 1998. None of
the named executive officers exercised any options during the fiscal year ended
September 30, 1998.
1998 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. 102,225 104,450 $ -0- $ -0-
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
A. Michael Stout, M.D. 53,276 56,549 -0- -0-
EXECUTIVE VICE PRESIDENT OF
MEDICAL AFFAIRS 53,276
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
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, 1998, 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
47
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, 1998, 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 December 31, 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. The percentages are calculated based on 6,749,119 shares of
Common Stock outstanding on December 31, 1998.
NUMBER OF SHARES
NAME BENEFICIALLY OWNED (1) PERCENTAGE
- --------------------------------------------- ---------------------- ----------
Blue Cross Blue Shield of South Carolina (2) ......... 2,624,623 38.89%
-------
M.F. McFarland, III, M.D. (3) ........................ 641,353 9.36
-------
Harold H. Adams, Jr .................................. 2,500 *
Thomas G. Faulds ..................................... -0- -0-
Russell J. Froneberger ............................... 2,000 *
A. Wayne Johnson ..................................... -0- -0-
Ashby M. Jordan, M.D ................................. -0- -0-
John M. Little, Jr., M.D ............................. -0- -0-
Charles M. Potok ..................................... -0- -0-
D. Michael Stout, M.D. (4) .......................... 319,436 4.7
-------
Jerry F. Wells, Jr. (5) ............................. 69,942 1.03
-------
All current directors and executive officers
as a group (9 persons) ............................ 1,035,231 14.84%
--------- -------
- -------
* 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 named in the table 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 102,225 shares issuable pursuant to currently exercisable
stock options.
48
(4) Includes 53,276 shares issuable pursuant to currently exercisable
stock options.
(5) All shares are issuable pursuant to currently exercisable stock
options.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
AGREEMENTS WITH DC-SC AND THE UCI-PCS
ADMINISTRATIVE SERVICES AGREEMENTS
UCI-SC has entered into an Administrative Services Agreement with
DC-SC, and UCI-GA has entered into Administrative Services Agreements with each
of the UCI-PCs (collectively, the "Administrative Agreements"). Under the
Administrative Agreements, UCI-SC and UCI-GA perform all non-medical management
of DC-SC and the UCI-PCs (collectively with DC-SC, the "PCs"), and have
exclusive authority over all aspects of the business of the PCs (other than
those directly related to the provision of patient medical services or as
otherwise prohibited by state law). The non-medical management provided by
UCI-SC and UCI-GA includes, among other functions, treasury and capital
planning, financial reporting and accounting, pricing decisions, patient
acceptance policies, setting office hours, contracting with third party payors
and all administrative services. UCI-SC and UCI-GA provide all of the resources
(systems, procedures and staffing) to bill third party payors or patients, and
provide all of the resources (systems, procedures and staffing) for cash
collection and management of accounts receivables, including custody of the
lockbox where cash receipts are deposited. From the cash receipts, UCI-SC and
UCI-GA pay all physician salaries, operating costs of the centers and operating
costs of UCI-SC and UCI-GA. Compensation guidelines for the licensed medical
professionals at the PCs are set by UCI-SC and UCI-GA, and UCI-SC and UCI-GA
establish guidelines for establishing, selecting, hiring and firing the licensed
medical professionals. UCI-SC and UCI-GA also negotiate and execute
substantially all of the provider contracts with third party payors, with the
PCs executing certain of the contracts at the request of a minority of payors.
Neither UCI-SC nor UCI-GA loans or otherwise advances funds to any PC for any
purposes.
During the Company's fiscal years ended September 30, 1998 and 1997,
DC-SC received an aggregate of approximately $37,566,000 and $27,925,000,
respectively, in fees prior to deduction by DC-SC of its payroll and other
related deductible costs covered under the Administrative Agreement and its
predecessor agreement. For accounting purposes, the operations of the PCs 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, 1998 and 1997. 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, 1998 and 1997. Dr.
McFarland is the Chief Executive Officer of UCI and is the President, sole
director and sole owner of DC-SC. Dr. Stout is the Executive Vice President of
Medical Affairs for UCI, UCI-SC and UCI-GA, and is the President, sole director
and sole shareholder of the UCI-PCs.
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, 1998,
1997 and 1996, UCI-SC made payments to DC-SC of $25,000, $62,000 and $120,000,
respectively, against accumulated
49
refunds payable. At September 30, 1998, 1997 and 1996, UCI-SC had refunds
payable to DC-SC of approximately $69,000, $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, 1998 and 1997 were $326,093 and $319,730, respectively.
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 terms of this lease 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 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, 1998 and 1997 were $62,400 and $45,600, respectively.
OTHER TRANSACTIONS WITH RELATED PARTIES
At December 31, 1998, CHC owned 2,006,442 shares of Common Stock and
CP&C owned 618,181 shares of Common Stock, which combine to approximately 39
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).
50
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, 1998 is
$267,600, 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.
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 contracted with Adams and Associates for
worker's compensation, and professional liability insurance coverage through
fiscal year 1997, which in turn contracted 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, 1998 in connection with these services were approximately $68,000.
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.
51
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 Company's expansion
and development strategy; the dependence on key personnel; 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 documents 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 on or before September 27, 1999 in order to be considered for
inclusion in such proxy statement and form of proxy.
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 REPORT
A copy of the Company's Annual Report on Form 10- KSB for the fiscal
year ended September 30, 1998, a copy of which has been filed with the SEC,
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
52
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 ...................... Fiscal year ended September 30, 1998
--- ----
Current Reports on Form 8-K and Form 8-K/A ........ Filed October 13, 1998 and December 7, 1998
A description of Common Stock
contained in UCI's Registration
Statement on Form 8-A ............................. Dated March 6, 1985
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
February 10, 1999 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 JANUARY 22, 1999. YOU SHOULD NOT ASSUME THAT THE
53
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.
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;
A-1
The Board of Directors
UCI Medical Affiliates, Inc.
February 9, 1998
Page 2
- -----------------------------
(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;
(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 ($0.05) 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
($0.01) per share, amounting in the aggregate to One Hundred Thousand Dollars
($100,000)."
REVERSE STOCK SPLIT PROPOSAL
The Reverse Stock Split Proposal provides that if the Authorized Capital
Stock Proposal is approved by the UCI stockholders, 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
($0.05) 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 ($0.25) 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 ($0.05) 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 ($0.25) 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."
The Reverse Stock Split Proposal also provides that if the Authorized
Capital Stock Proposal is not approved by the UCI stockholders, the UCI
Certificate will be amended as set forth in the preceding paragraphs, except
that the first paragraph of Article Seventh shall be restated to read in its
entirety as follows:
B-1
"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 Ten Million
(10,000,000) shares of Common Stock, having a par value of five cents ($0.05)
per share, amounting in the aggregate to Five Hundred Thousand Dollars
($500,000), shall be Two Million (2,000,000) shares of Common Stock, having a
par value of twenty-five cents ($0.25) per share, amounting in the aggregate to
Five Hundred Thousand Dollars ($500,000); provided however, immediately after
the effectuation of such reverse stock split, the authorized Common Stock of
this corporation shall be increased so that the authorized Common Stock of this
corporation shall be Ten Million (10,000,000) shares of Common Stock, having a
par value of twenty-five cents ($0.25) per share, amounting in the aggregate to
Two Million Five Hundred Thousand Dollars ($2,500,000)."
B-2
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
MAINSTREET HEALTHCARE CORPORATION
Consolidated Balance Sheets
March 31, 1998 and 1997
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
Stockholder 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 Additional Total
common stock paid-in Accumulated stockholders'
-------------------------
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
(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
C-9
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
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 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.
C-10
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(h) Reclassifications
Certain reclassifications have been made in the 1997
consolidated financial statements to conform with the presentation in
the 1998 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
C-11
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
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:
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.
C-12
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(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) 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
C-15
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.
C-16
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
The following is a schedule of future minimum lease payments under
noncancelable operating leases as of March 31, 1998.
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 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
C-17
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
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.
C-18
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(12) Redeemable Preferred Stock
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-19
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.
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
C-20
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-21
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.
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
C-22
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) $ 112,617 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.
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 certain 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
UCI MEDICAL AFFILIATES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON WEDNESDAY, FEBUARY 24, 1999 AT THE ADAM'S
MARK HOTEL, 1200 HAMPTON STREET, 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 for the
above-referenced Annual Meeting and appoints each of Jerry F. Wells,
Jr. and S. Louise Bryant 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 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 1999 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 PricewaterhouseCoopers LLP as the
firm of independent auditors for the Company for the fiscal
year ended 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: , 1999
--------------- ----------------------- ------------
(Signature)* Print Name
(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.
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
COMMISSION FILE NUMBER: 0-13265
UCI MEDICAL AFFILIATES, INC.
(Name of Small Business Issuer in its charter)
Delaware 59-2225346
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
1901 Main Street, Suite 1200, Mail Code 1105, Columbia, SC 29201
- -------------------------------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 252-3661
------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
------------------------------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.05 par value
------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. YES (X) NO ( )
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. (X)
The registrant's revenue for the year ended September 30, 1998, the registrant's
most recent year end, was $37,566,037.
The aggregate market value of voting stock held by nonaffiliates of the
registrant on January 11, 1999, is approximately $2,525,800.*
The number of shares outstanding of the registrant's common stock, $.05 par
value, was 7,256,415 at December 31, 1998.
Transitional Small Business Disclosure Format (check one): Yes ( ) No (X)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be furnished in connection with
its Annual Meeting of Stockholders to be held February 24, 1999 are incorporated
by reference into Part III of this Form 10-KSB.
* Calculated by excluding all shares held by officers, directors and controlling
shareholder of registrant without conceding that all such persons are Affiliates
of registrant for purposes of the federal securities laws.
1
UCI MEDICAL AFFILIATES, INC.
INDEX TO FORM 10-KSB
PART I PAGE
-----
Item 1. Description of Business..................................................................................3
Item 2. Description of Property.................................................................................11
Item 3. Legal Proceedings.......................................................................................11
Item 4. Submission of Matters to a Vote of Security Holders.....................................................11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters................................................12
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations...................13
Item 7. Financial Statements....................................................................................23
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................23
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act............................................................................................25
Item 10. Executive Compensation.................................................................................25
Item 11.Security Ownership of Certain Beneficial Owners and Management .........................................25
Item 12. Certain Relationships and Related Transactions ........................................................25
Item 13. Exhibits and Reports on Form 8-K.......................................................................25
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
UCI Medical Affiliates, Inc. ("UCI") is a Delaware corporation incorporated on
August 25, 1982. Operating through its wholly-owned subsidiaries, UCI Medical
Affiliates of South Carolina, Inc. ("UCI-SC") and UCI Medical Affiliates of
Georgia, Inc. ("UCI-GA"), UCI provides nonmedical management and administrative
services for a network of 41 freestanding medical centers (the "Centers")
located throughout South Carolina, Georgia and Tennessee (29 operating as
Doctor's Care in South Carolina, five as Doctor's Care in Georgia, two as
Doctor's Care in Tennessee, one as Doctor's Orthopedic Group in South Carolina,
and four as Progressive Physical Therapy Services in South Carolina).
Organizational Structure
Federal law and the laws of South Carolina generally specify who may practice
medicine and limit the scope of relationships between medical practitioners and
other parties. Under such laws, UCI, UCI-SC and UCI-GA are prohibited from
practicing medicine or exercising control over the provision of medical
services. In order to comply with such laws, all medical services at the Centers
are provided by or under the supervision of Doctor's Care, P.A., Doctor's Care
of Georgia, P.C. or Doctor's Care of Tennessee, P.C. (collectively the "P.A.'s,"
and together with UCI, UCI-SC and UCI-GA, the "Company"), each of which has
contracted with UCI-SC or UCI-GA, as applicable, to be the sole provider of all
non-medical direction and supervision of the Centers operating in its respective
state of organization. Each P.A. is organized so that all physician services are
offered by the physicians who are employed by the P.A. Neither UCI, UCI-SC nor
UCI-GA employ practicing physicians as practitioners, exert control over their
decisions regarding medical care or represent to the public that it offers
medical services.
UCI-SC and UCI-GA have entered into Administrative Services Agreements with the
P.A.'s pursuant to which UCI-SC and UCI-GA perform all non-medical management of
the P.A.'s and have exclusive authority over all aspects of the business of the
P.A.'s (other than those directly related to the provision of patient medical
services or as otherwise prohibited by state law). The non-medical management
provided by UCI-SC and UCI-GA includes, among other functions, treasury and
capital planning, financial reporting and accounting, pricing decisions, patient
acceptance policies, setting office hours, contracting with third party payors
and all administrative services. UCI-SC and UCI-GA provide all of the resources
(systems, procedures, and staffing) to bill third party payors or patients, and
provide all of the resources (systems, procedures, and staffing) for cash
collection and management of accounts receivables, including custody of the
lockbox where cash receipts are deposited. From the cash receipts, UCI-SC and
UCI-GA pay all physician salaries, operating costs of the centers and operating
costs of UCI-SC and UCI-GA. Compensation guidelines for the licensed medical
professionals at the P.A.'s are set by UCI-SC and UCI-GA, and UCI-SC and UCI-GA
establish guidelines for establishing, selecting, hiring and firing the licensed
medical professionals. UCI-SC and UCI-GA also negotiate and execute
substantially all of the provider contracts with third party payors, with the
P.A.'s executing certain of the contracts at the request of a minority of
payors. Neither UCI-SC nor UCI-GA loans or otherwise advances funds to any P.A.
for any purposes.
The P.A. and UCI-SC share a common management team, and the Georgia and
Tennessee P.A.'s and UCI-GA share a common management team. In each case, the
same individuals serve as President, Medical Director and as Chief Financial
Officer of each entity. The sole shareholder and President of the South Carolina
P.A. is M.F. McFarland, III, M.D., the President and Chief Executive Officer of
UCI, UCI-SC and UCI-GA. The sole shareholder of the Georgia and Tennessee P.A.'s
is D. Michael Stout, M.D., the Executive Vice President of Medical Affairs for
UCI, UCI-SC and UCI-GA.
3
UCI-SC and UCI-GA believe that the services they provide to the P.A.'s do not
constitute the practice of medicine under applicable laws. Nevertheless, because
of the uniqueness of the structure of the relationships described above, many
aspects of the Company's business operations have not been the subject of state
or federal regulatory interpretation and there can be no assurance that a review
of the Company's business by the courts or regulatory authorities will not
result in a determination that could adversely affect the operations of the
Company or that the health care regulatory environment will not change so as to
restrict the Company's existing operations or future expansion.
The Centers
The Centers are 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.
The Centers typically are open for extended hours (weekends and evenings) and
out-patient care only. When hospitalization or specialty care is needed,
referrals to appropriate specialists are made.
The Company's Centers are broadly distributed throughout the state of South
Carolina, Georgia and Tennessee. There are seventeen primary care Centers in the
Columbia region (including the one orthopedic and four physical therapy
offices), five in the Charleston region, four in the Myrtle Beach region, two in
the Aiken region, six in the Greenville-Spartanburg region, five in Georgia and
two in Tennessee.
The Company may consider further introduction of its medical model into
neighboring states as management believes that the same conditions that led to
the Company's growth to date exist in other states. Although management believes
that expansion into neighboring states is possible, there can be no assurance
that expansion into other states would be successful.
Medical Services Provided at the Centers
The Company's Centers offer out-patient medical care, without appointment, for
treatment of acute and episodic medical problems. The 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 provided at the 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 Centers, a patient with a life-threatening condition would be
evaluated by the physician, stabilized and immediately referred to a nearby
hospital.
4
Patient Charges and Payments
The fees charged to a patient are determined by the nature of medical services
rendered. Management of the Company believes that the charges at its Centers are
significantly lower than the charges of hospital emergency departments and are
generally competitive with the charges of local physicians and other providers
in the area.
The Company's Centers accept payment from a wide range of sources. These include
patient payments 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). Managed care billings
represent the most significant source of revenues. The Company also provides
services for members of the four largest health maintenance organizations
("HMOs") operating in South Carolina - Companion HealthCare Corporation,
HealthSource South Carolina, Inc., Physician's Health Plan, and Maxicare.
The following table breaks out the Company's approximate revenue and patient
visits by revenue source for fiscal year 1998:
PERCENT OF PERCENT OF
PAYOR PATIENT VISITS REVENUE
- -------------------------- ---------------- ---------------
Patient Pay 20% 18%
Employer Paid 13% 9%
HMO 13% 12%
Workers Compensation 10% 14%
Medicare/Medicaid 11% 7%
Managed Care Insurance 27% 30%
Other (Commercial Indemnity,
Champus, etc.) 6% 10%
In accordance with the Administrative Services Agreements described above,
UCI-SC and UCI-GA, as the agents for the P.A.'s, process all billings and
capitation payments for the P.A.'s. When the billings and capitation payments
for the P.A.'s are received, they are deposited in accounts owned by each P.A.
and are automatically transferred to lockbox accounts owned by UCI-SC and
UCI-GA. In no event are the physicians entitled to receive such billings and
capitation payments. The patient mix in no way affects the Company's management
service fees per the Administrative Services Agreements.
Capitated Reimbursement Arrangements
Medical services traditionally have been provided on a fee-for-service basis
with insurance companies assuming responsibility for paying all or a portion of
such fees. The increase in medical costs under traditional indemnity health care
plans has been caused by a number of factors. These factors include: (i) the
lack of incentives on the part of health care providers to deliver
cost-effective medical care; (ii) the absence of controls over the utilization
of costly specialty care physicians and hospitals; (iii) a growing and aging
population which requires increased health care expenditures; and (iv) the
expense involved with the introduction and use of advanced pharmaceuticals and
medical technology.
As a result of escalating health care costs, employers, insurers and
governmental entities all have sought cost-effective approaches to the delivery
of and payment for quality health care services. HMOs and other managed health
care organizations have emerged as integral components in this effort. HMOs
enroll members by entering into contracts with employer groups or directly with
individuals to provide a broad range of health care services for a capitation
payment or a discounted fee-for-service schedule, with minimal or no deductibles
or co-payments required of the members. HMOs, in turn, contract with health care
providers like the Company to administer medical care to HMO members. These
contracts provide for payment to the Company on either a
5
discounted fee-for-service basis or through capitation payments based on the
number of members covered, regardless of the amount of necessary medical care
required within the covered benefit period.
The Company negotiates contracts with two HMOs for the P.A.s' physicians to
provide health care on a capitated reimbursement basis. Under these contracts,
which typically are automatically renewed on an annual basis, the P.A.
physicians provide virtually all covered primary care services in exchange for a
fixed monthly capitation payment from the HMOs for each member who chooses a
P.A. physician as his or her primary care physician. Note that the Company is
only capitated for and obligated to provide the primary care services for the
patient. The Company is not at risk for specialty care or hospital services. The
capitation amount is fixed depending upon the age and sex of the HMO enrollee.
Contracts with capitated HMOs accounted for approximately 4% of the Company's
net revenues in fiscal year 1998.
To the extent that enrollees require more care than is anticipated, aggregate
capitation payments may be insufficient to cover the costs associated with the
treatment of enrollees. Neither of the contracts currently in place at the
Company has been determined to be insufficient to cover related costs of
treatment. Higher capitation rates are typically received for senior patients
because their medical needs are generally greater and consequently the cost of
covered care is higher.
Certain third party payors are studying various alternatives for reducing
medical costs, some of which, if implemented, could affect reimbursement levels
to the Company. Management of the Company cannot predict whether changes in
present reimbursement methods or proposed future modifications in reimbursement
methods will affect payments for services provided by the Centers and, if so,
whether they will have an adverse impact upon the business of the Company.
Competition and Marketing
All of the Company's 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 the Company. The Company's Centers compete on the
basis of accessibility, including evening and weekend hours, a no-appointment
policy, the attractiveness of the Company's state-wide network to large
employers and third party payors, and on a basis of a competitive fee schedule.
In an effort to offset the competition's community recognition, the Company has
substantially increased its marketing efforts. Regional marketing
representatives have been added, focused promotional material has been developed
and a newsletter for employers promoting the Company's activities has been
initiated.
Government Regulation
As participants in the health care industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels.
LIMITATIONS ON THE CORPORATE PRACTICE OF MEDICINE
Federal law and the laws of many states, including Georgia, South Carolina and
Tennessee, generally specify who may practice medicine and limit the scope of
relationships between medical practitioners and other parties. Under such laws,
business corporations such as UCI, UCI-SC and UCI-GA are prohibited from
practicing medicine or exercising control over the provision of medical
services. In order to comply with such laws, all medical services at the UCI
Centers are provided by or under the supervision of the PA's pursuant to
contracts with the Company's wholly-owned subsidiaries. The PA's are organized
so that all physician services are offered by the physicians who are employed by
the PA's. None of UCI, UCI-SC or UCI-GA employs practicing
6
physicians as practitioners, exerts control over any physician's decisions
regarding medical care or represents to the public that it offers medical
services.
As described above, UCI-SC has entered into an Administrative Services Agreement
with Doctor's Care, P.A. and UCI-GA has entered into a similar Administrative
Services Agreements with each of the PA's operating in Georgia and Tennessee
pursuant to which UCI-SC and UCI-GA, as applicable, perform all non-medical
management of the applicable PA's and have exclusive authority over all aspects
of the business of the PA's (other than those directly related to the provision
of patient medical services or as otherwise prohibited by state law). (See Item
1. Description of Business - Organizational Structure.)
Because of the unique structure of the relationships existing between UCI-SC,
UCI-GA and the PA's, many aspects of UCI's business operations have not been the
subject of state or federal regulatory interpretation. There can be no assurance
that a review by the courts or regulatory authorities of the business formerly
or currently conducted by the Company will not result in a determination that
could adversely affect the operations of the Company or that the healthcare
regulatory environment will not change so as to restrict the existing operations
or proposed expansion of the Company's business.
THIRD PARTY REIMBURSEMENTS
Approximately seven percent (7%) of the revenues of the Company is derived from
payments made by government-sponsored health care programs (principally,
Medicare and Medicaid). As a result, any change in reimbursement regulations,
policies, practices, interpretations or statutes could adversely affect the
operations of the Company. There are also state and federal civil and criminal
statutes imposing substantial penalties, including civil and criminal fines and
imprisonment, on healthcare providers that fraudulently or wrongfully bill
governmental or other third-party payors for healthcare services. The Company
believes it is in material compliance with such laws, but there can be no
assurance that the Company's activities will not be challenged or scrutinized by
governmental authorities.
FEDERAL ANTI-KICKBACK AND SELF-REFERRAL LAWS
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit the offer, payment, solicitation or receipt of
any form of remuneration in return for the referral of Medicare or state health
program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Although the Company believes
that it is not in violation of the Anti-kickback Statute or similar state
statutes, its operations do not fit within any of the existing or proposed
federal safe harbors.
The Office of the Inspector General (the "OIG"), the government office that is
charged with the enforcement of the federal Anti-kickback Statute, recently
issued an advisory opinion regarding a proposed management services contract
that involved a cost plus a percentage of net revenue payment arrangement
("Advisory Opinion 98-4"). Based on its analysis of the intent and scope of the
Anti-kickback Statute, the OIG determined that it could not approve the
arrangement because the structure of the management agreement raised the
following concerns under the Anti-kickback Statute: (i) the agreement might
include financial incentives to increase patient referrals; (ii) the agreement
did not include any controls to prevent over utilization; and (iii) the
percentage billing arrangement may include financial incentives that increase
the risk of abusive billing practices. The OIG opinion did not find that the
management arrangement violated the Anti-kickback Statute, rather that the
arrangement may involve prohibited remuneration absent sufficient controls to
minimize potential fraud and abuse. An OIG advisory opinion is only legally
binding on the Department of Health and Human Services (including the OIG) and
the requesting party and is limited to the specific conduct of the requesting
party because additional facts and circumstances could be involved in each
particular case. Accordingly, the Company believes that Advisory Opinion 98-4
does not have broad application to the Company's provision of nonmedical
management and administrative services for the Centers. The Company also
believes that the Company and the Centers have implemented appropriate controls
to ensure that the arrangements between the
7
Company and the Centers do not result in abusive billing practices or the over
utilization of items and services paid for by Federal health programs.
The applicability of the Anti-kickback Statute to many business transactions in
the health care industry, including the Company's service agreements with the
Centers and the development of ancillary services by the Company, has not been
subject to any significant judicial and regulatory interpretation. The Company
believes that although it receives remuneration for its management services
under its service agreements with the Centers, the Company is not in a position
to make or influence referrals of patients or services reimbursed under Medicare
or state health programs to the Centers. In addition, the Company is not a
separate provider of Medicare or state health program reimbursed services.
Consequently, the Company does not believe that the service and management fees
payable to it should be viewed as remuneration for referring or influencing
referrals of patients or services covered by such programs as prohibited by the
Anti-kickback Statute.
Significant prohibitions against physician referrals were enacted by the U.S.
Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his immediate family is prohibited from
referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. While
the Company believes it is currently in compliance with such legislation, future
regulations could require the Company to modify the form of its relationships
with physician groups.
STATE ANTI-KICKBACK AND SELF-REFERRAL LAWS
Some states have also enacted similar self-referral laws, and the Company
believes it is likely that more states will follow. The Company believes that
its practices fit within exemptions contained in such laws. Nevertheless,
expansion of the operations of the Company to certain additional jurisdictions
may require structural and organizational modifications of the Company's
relationships with physician groups to comply with new or revised state
statutes. Such modifications could adversely affect the operations of the
Company.
Through its wholly-owned subsidiaries, UCI-SC and UCI-GA, the Company provides
management and administrative services to the UCI Centers in Georgia, South
Carolina and Tennessee. Georgia, South Carolina and Tennessee have adopted
anti-kickback and self-referral laws that regulate financial relationships
between health care providers and entities that provide health care services.
The following is a summary of the applicable state anti-kickback and
self-referral laws.
GEORGIA
Georgia's "Patient Self-Referral Act of 1993" forbids a health care provider
from referring a patient for the provision of designated health services to an
entity in which the investor has an investment interest. Designated health
services are defined as clinical laboratory services, physical therapy services,
rehabilitation services, diagnostic imaging services, pharmaceutical services,
durable medical equipment, home infusion therapy services (including related
pharmaceuticals and equipment), home health care services, and outpatient
surgical services. Under the Company's current operations, the Company does not
believe it is an entity providing designated health services for purposes of
Georgia's Patient Self-Referral Act. Further, the Company believes that the
Georgia Patient Self-Referral Act does not prohibit referrals for designated
health services by providers employed by the PA in Georgia, including referrals
to physical therapy centers, because the health care providers that refer
patients for designated health services are not investors in the Centers except
the sole physician shareholder of the PA in Georgia. The Company believes that
referrals by the sole physician shareholder of the PA are not within the
definition of referrals and would not be prohibited under Georgia law.
Georgia's Patient Self-Referral Act also prohibits the payment of any
consideration which is intended to compensate a person for a referral. This
prohibition applies to all payors. The Company believes that all payments
between the Company and the Centers are reasonable compensation for services
rendered and are not intended as compensation for referrals.
8
SOUTH CAROLINA
South Carolina's Provider Self-Referral Act of 1993 generally provides that a
health care provider may not refer a patient for the provision of any designated
health service to an entity in which the health care provider is an investor or
has an investment interest. Under the Company's current operations, the Company
does not believe it is an entity providing designated health services for
purposes of the South Carolina Provider Self-Referral Act. The Centers provide
all health care services to patients through employees of the PA. There are no
provider investors in the PA that refer patients to the Centers for designated
health care services. Accordingly, under South Carolina law, the Company
believes that the provider self-referral prohibition would not apply to the
Centers' or the Company's operations in South Carolina.
In addition to self-referral prohibitions, South Carolina's Provider
Self-Referral Act of 1993 also prohibits the offer, payment, solicitation, or
receipt of a kickback, directly or indirectly, overtly or covertly, in cash or
in kind, for referring or soliciting patients. The Company believes that its
payment arrangements are reasonable compensation for services rendered and do
not constitute payments for referrals.
TENNESSEE
The Tennessee physician conflict of interest law provides that physicians are
free to enter into lawful contractual relationships, including the acquisition
of ownership interests in health facilities. The law further recognizes that
these relationships can create potential conflicts of interests, which shall be
addressed by the following: (a) the physician has a duty to disclose to the
patient or referring colleagues such physician's ownership interest in the
facility or therapy at the time of referral and prior to utilization; (b) the
physician shall not exploit the patient in any way, as by inappropriate or
unnecessary utilization; (c) the physician's activities shall be in strict
conformity with the law; (d) the patient shall have free choice either to use
the physician's proprietary facility or therapy or to seek the needed medical
services elsewhere; and (e) when a physician's commercial interest conflict so
greatly with the patient's interest as to be incompatible, the physician shall
make alternative arrangements for the care of the patient.
Because the Company is not a provider of health services, the Company believes
that Tennessee's conflict of interest/disclosure law does not apply to its
current operations. Even if the Tennessee conflict of interest/disclosure law
were to apply, the Company's internal quality assurance/utilization review
programs will help identify any inappropriate utilization by a Center.
Tennessee also has a law regulating healthcare referrals. The general rule is
that a physician who has an investment interest in a healthcare entity shall not
refer patients to the entity unless a statutory exception exists. A healthcare
entity is defined as an entity which provides healthcare services. The Company
believes that it does not fit within the definition of a "healthcare entity"
because the Company is not a provider of healthcare services. The Centers
provide all health care services to patients through employees of the PA. There
are no provider investors in the PA that refer patients for designated health
care services except the sole physician shareholder of the PA. The Company
believes that referrals by the sole shareholder of the PA come within a
statutory exception. Accordingly, under Tennessee law, the Company believes that
the provider self-referral prohibition would not apply to the Centers' or the
Company's operations in Tennessee.
Tennessee's anti-kickback provision prohibits a physician from making payments
in exchange for the referral of a patient. In addition, under Tennessee law a
physician may not split or divide fees with any person for referring a patient.
The Tennessee Attorney General has issued opinions that determined that the
fee-splitting prohibition applied to management services arrangements. The
Tennessee fee-splitting prohibition contains an exception for reasonable
compensation for goods or services. The Company believes that its payment
arrangements with the Centers are reasonable compensation for services rendered
and do not constitute payments for referrals or a fee-splitting arrangement.
9
ANTITRUST LAWS
Because each of the PA's is a separate legal entity, each may be deemed a
competitor subject to a range of antitrust laws which prohibit anti-competitive
conduct, including price fixing, concerted refusals to deal and division of
market. The Company believes it is in compliance with such state and federal
laws which may affect its development of integrated healthcare delivery
networks, but there can be no assurance that a review of the Company's business
by courts or regulatory authorities will not result in a determination that
could adversely affect the operations of the Company.
HEALTHCARE REFORM
As a result of the continued escalation of healthcare costs and the inability of
many individuals to obtain health insurance, numerous proposals have been or may
be introduced in the U.S. Congress and in state legislatures relating to
healthcare reform. There can be no assurance as to the ultimate content, timing
or effect of any healthcare reform legislation, nor is it possible at this time
to estimate the impact of potential legislation, which may be material, on the
Company.
REGULATION OF RISK ARRANGEMENTS AND PROVIDER NETWORKS
Federal and state laws regulate insurance companies, health maintenance
organizations and other managed care organizations. Generally, these laws apply
to entities that accept financial risk. Certain of the risk arrangements entered
into by the Company could possibly be characterized by some states as the
business of insurance. The Company, however, believes that the acceptance of
capitation payments by a healthcare provider does not constitute the conduct of
the business of insurance. Under Georgia law, pursuant to regulations issued by
the Georgia Insurance Commissioner in 1996, a provider sponsored health care
corporation may obtain a certificate of authority to establish, maintain and
operate one or more health plans to provide service to enrollees if the
corporation has an initial net worth of one million dollars and meets certain
filing and administrative requirements. The Company believes that the acceptance
of capitated payments by the Centers under managed care agreements with payors
does not constitute the operation of a health plan that would require the
Company to obtain a certificate of authority under Georgia law. Many states also
regulate the establishment and operation of networks of healthcare providers.
Generally, these laws do not apply to the hiring and contracting of physicians
by other healthcare providers. South Carolina, Georgia and Tennessee do not
currently regulate the establishment or operation of networks of healthcare
providers except where such entities provide utilization review services through
private review agents. There can be no assurance that regulators of the states
in which the Company may operate would not apply these laws to require licensure
of the Company's operations as an insurer or provider network. The Company
believes that it is in compliance with these laws in the states in which it
currently does business, but there can be no assurance that future
interpretations of these laws by the regulatory authorities in Georgia, South
Carolina, Tennessee or the states in which the Company may expand in the future
will not require licensure of the Company's operations as an insurer or provider
network or a restructuring of some or all of the Company's operations. In the
event the Company is required to become licensed under these laws, the licensure
process can be lengthy and time consuming and, unless the regulatory authority
permits the Company to continue to operate while the licensure process is
progressing, the Company could experience a material adverse change in its
business while the licensure process is pending. In addition, many of the
licensing requirements mandate strict financial and other requirements which the
Company may not immediately be able to meet. Further, once licensed, the Company
would be subject to continuing oversight by and reporting to the respective
regulatory agency.
Employees
As of September 30, 1998, the Company had 612 employees (472 on a full-time
equivalent basis). This includes 115 medical providers employed by the P.A.'s.
10
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this PART I, Item 1 (Description of
Business) and in PART II, Item 6 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) that are not historical facts are
forward-looking statements subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. The Company cautions readers of this
Annual Report on Form 10-KSB that such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from those expressed or implied by such forward-looking statements. Although the
Company's management believes that their expectations of future performance are
based on reasonable assumptions within the bounds of their knowledge of their
business and operations, there can be no assurance that actual results will not
differ materially from their expectations. Factors which could cause actual
results to differ from expectations include, among other things, the difficulty
in controlling the Company's costs of providing healthcare and administering its
network of Centers; the possible negative effects from changes in reimbursement
and capitation payment levels and payment practices by insurance companies,
healthcare plans, government payors and other payment sources; the difficulty of
attracting primary care physicians; the increasing competition for patients
among healthcare providers; possible government regulations negatively impacting
the existing organizational structure of the Company; the possible negative
effects of prospective healthcare reform; the challenges and uncertainties in
the implementation of the Company's expansion and development strategy; the
dependence on key personnel, the ability to successfully integrate the
management structures and consolidate the operations of recently acquired
entities or practices with those of the Company, and other factors described in
this report and in other reports filed by the Company with the Securities and
Exchange Commission.
ITEM 2. DESCRIPTION OF PROPERTY
All but one of the Company's primary care Centers' facilities are leased. The
properties are generally located on well-traveled major highways, with easy
access. Each property offers free, off-street parking immediately adjacent to
the center. One Center is leased from an entity affiliated with the Company's
Chairman. Six Centers are leased from Companion HealthCare Corporation and one
Center is leased from Companion Property and Casualty Insurance Company,
principal shareholders of the Company. Ten of the Centers are leased from
physician employees of the P.A.'s.
The Company's Centers are broadly distributed throughout the states of South
Carolina, Georgia and Tennessee. There are 17 primary care Centers in the
Columbia, South Carolina region (including the one orthopedic and four physical
therapy offices), five in the Charleston, South Carolina region, four in the
Myrtle Beach, South Carolina region, two in the Aiken, South Carolina region,
six in the Greenville - Spartanburg, South Carolina region, five in the Atlanta,
Georgia region and two in the Knoxville, Tennessee region. The Company's
corporate offices are located in downtown Columbia, South Carolina in 13,000
square feet of leased space. The Centers are all in free-standing buildings in
good repair.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various claims, legal activities and complaints arising
in the normal course of business. In the opinion of management and legal
counsel, aggregate liabilities, if any, arising from legal actions would not
have a material adverse effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until October 19, 1998, the Common Stock was traded on the NASDAQ SmallCap
Market under the symbol UCIA. On October 20, 1998, the Common Stock was delisted
for trading on the NASDAQ SmallCap Market as a consequence of the Company's
failure to meet certain quantitative requirements under the NASD's expanded
listing criteria. Trading in the Common Stock is currently conducted in the
over-the-counter market. The prices set forth below indicate the high and low
bid prices reported on the NASDAQ SmallCap Market for the indicated periods. The
quotations reflect inter-dealer prices without retail markup, markdown or
commission and may not necessarily reflect actual transactions.
BID PRICE
-----------------------------
HIGH LOW
------- -------
FISCAL YEAR ENDED 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
4th quarter (07/01/98 - 09/30/98) 1-15/32 3/4
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
As of the Record Date, there were 501 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.
12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which the Company
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto.
STATEMENT OF OPERATIONS DATA
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- --------
Revenues $ 37,566 $ 27,925 $ 23,254 $ 17,987 $ 12,540
Income (loss) before extraordinary items (10,508) (84) 466 (1,360) 644
Net income (loss) (10,508) (84) 466 (1,360) 644
Net income (loss) per share1 (1.61) (.02) .11 (.43) .28
Weighted average number of shares
outstanding1 6,545 5,005 4,294 3,137 2,324
BALANCE SHEET DATA
- ---------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------------------
AT SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- ---------- -------
Working capital $(3,718) $2,921 $ 2,020 $ (383) $763
Premises & equipment, net 5,475 4,003 3,300 2,795 1,098
Total assets 26,202 21,082 15,733 10,216 6,674
Long-term debt 11,988 7,939 5,373 4,366 2,838
Stockholders' equity 987 9,488 7,822 3,253 2,603
Basis of Presentation
The consolidated financial statements of the Company include the accounts of
UCI, UCI-SC, UCI-GA and the P.A.'s. Such consolidation is required under
Emerging Issues Task Force (EITF) 97-2 as a consequence of the nominee
shareholder arrangement that exists with respect to each of the PA's. In each
case, the nominee (and sole) shareholder of the P.A. has entered into an
agreement with UCI-SC or UCI-GA, as applicable, which satisfies the requirements
set forth in footnote 1 of EITF 97-2. Under the agreement, UCI-SC or UCI-GA, as
applicable, in its sole discretion, can effect a change in the nominee
shareholder at any time for a payment of $100 from the new nominee shareholder
to the old nominee shareholder, with no limits placed on the identity of any new
nominee shareholder and no adverse impact resulting to any of UCI-SC, UCI-GA or
the P.A. resulting from such change.
- ------------------
1 The net income (loss) per share and the weighted average number of shares
outstanding has been restated for all periods presented to reflect the one for
five reverse stock split effected on July 27, 1994.
13
In addition to the nominee shareholder arrangements described above, each of
UCI-SC and UCI-GA have entered into Administrative Service Agreements with the
P.A.'s. (See Item 1. Description of Business - "Organizational Structure" for a
detailed description of the Administrative Service Agreements.) As a consequence
of the nominee shareholder arrangements and the Administrative Service
Agreements, the Company has a long-term financial interest in the affiliated
practices of the P.A.'s. According to EITF 97-2, the application of FASB
Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and APB No.
16 (Business Combinations), the Company must consolidate the results of the
affiliated practices with those of the Company.
The P.A.'s enter into employment agreements with physicians for terms ranging
from one to ten years. All employment agreements have clauses that allow for
early termination of the agreement if certain events occur such as the loss of a
medical license. Over 65% of the physicians employed by the P.A.'s are paid on
an hourly basis for time scheduled and worked at the medical centers. The other
physicians are salaried. A few of the physicians have incentive compensation
arrangements, however, no amounts were accrued or paid during the Company's
three prior fiscal years that were significant. Any incentive compensation is
based upon a percentage of non-ancillary collectible charges for services
performed by a provider. Percentages range from 3% to 17% and vary by individual
employment contract. As of September 30, 1998 and 1997, the P.A.'s employed 115
and 84 medical providers, respectively.
The net assets of the P.A.'s are not material for any period presented, and
intercompany accounts and transactions have been eliminated. For the fiscal year
ended September 30, 1998, the Company has shown a substantial increase in
revenues and in the number of medical centers under management. This growth is a
direct result of actions taken by management to increase marketing efforts, to
expand the state-wide network in South Carolina and to focus on the field of
occupational and industrial medicine.
The Company does not allocate all indirect costs incurred at the Corporate
offices to the Centers on a center-by-center basis. Therefore, all discussions
below are intended to be in the aggregate for the Company as a whole.
Comparison of Results of Operations for Fiscal Years 1998, 1997 and 1996
Revenues of $37,566,000 in fiscal year 1998 reflected an increase of 35% from
the fiscal year 1997 revenues of $27,925,000 which reflected an increase of 20%
from the amount reported for fiscal year 1996. The following reflects revenue
trends from fiscal year 1994 through fiscal year 1998:
FOR THE YEAR ENDED SEPTEMBER 30, (IN THOUSANDS)
--------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- ---------- ----------
Revenues $37,566 $27,925 $23,254 $17,987 $12,540
Operating Costs 39,094 26,466 21,525 18,180 11,881
Operating Margin (1,528) 1,458 1,729 (193) 660
The increase in revenue for fiscal year 1998 is attributable to a number of
factors. The Company engaged in a significant expansion, increasing the number
of primary care medical Centers from 33 to 41 (as of September 30, 1998). The
expansion included the addition of fourteen Centers and the closure or
divestiture of six Centers, for a net addition of eight Centers.
14
The fourteen additions were:
1. Doctor's Care Conway Myrtle Beach, SC Region Opened as a start-up facility in November
1997.
2. Doctor's Care New Ellenton Aiken, SC Region Acquired from Primary Care Provider/Owner in
November 1997.
3. Doctor's Care Ridgeview Columbia, SC Region Opened as a start-up facility in December
1997.
4. Progressive Therapy Bush River Columbia, SC Region Acquired from Therapist/Owner in October
1997.
5. Progressive Therapy West Columbia Columbia, SC Region Acquired from Therapist/Owner in October
1997.
6. Progressive Therapy Columbia East Columbia, SC Region Acquired from Therapist/Owner in October
1997.
7. Progressive Therapy Forest Acres Columbia, SC Region Opened as a start-up facility in November
1997.
8. Doctor's Care Stone Mountain Atlanta, GA Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
9. Doctor's Care Tucker Atlanta, GA Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
10. Doctor's Care Lawrenceville Atlanta, GA Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
11. Doctor's Care Austell Atlanta, GA Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
12. Doctor's Care Snellville Atlanta, GA Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
13. Doctor's Care Knoxville West Knoxville, TN Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
14. Doctor's Care Knoxville North Knoxville, TN Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
15
The six closures or divestitures were:
1. Doctor's Care Waccamaw Myrtle Beach, SC Region This acquired center (01/95) was closed
effective September 1998 and the
provider and patient records were
transferred to the near-by Doctor's
Care Strand Medical Center.
2. Doctor's Care Camden Columbia, SC Region This acquired center (09/97) was closed
in August 1998 and the provider and
patient records were transferred to
near-by Doctor's Care Wateree.
3. Doctor's Surgical Group Columbia, SC Region This start-up facility (06/93) was
closed effective February 1998.
4. Springwood Lake Family Practice Columbia, SC Region Acquired in August 1997 along with two
more centers and were divested of (sold
back to the seller on November 1, 1998)
effective September 1998.
5. Woodhill Family Practice Columbia, SC Region Acquired in August 1997 along with two
more centers and were divested of (sold
back to the seller on November 1, 1998)
effective September 1998.
6. Midtown Family Practice Columbia, SC Region Acquired in August 1997 along with two
more centers and were divested of (sold
back to the seller on November 1, 1998)
effective September 1998.
The revenue from the increase in centers in fiscal year 1998 and from the full
year of operations of the locations added in fiscal year 1997 represented the
most significant portion of the revenue growth. Of the $9,641,000 in revenue
growth, approximately $4,999,000 was from the fourteen locations opened during
fiscal year 1998 and approximately $900,000 was the result of having the four
locations opened during fiscal year 1997 operating for all of fiscal year 1998.
The remainder of the revenue growth in fiscal year 1998 (approximately
$3,742,000) was the result of two factors:
1. Approximately $2,960,000 was from revenue for centers acquired at the end of
fiscal year 1997 and divested of on November 1, 1998, to be effective
September 30, 1998 (Springwood Lake Family Practice, Woodhill Family
Practice and Midtown Family Practice).
2. The remaining $782,000 in revenue growth represents approximately a three
(3%) percent growth in "same center" patient visits and charges.
The increase in revenue for fiscal year 1997 is attributable to a number of
factors. The Company engaged in a significant expansion, increasing the number
of primary care medical Centers in South Carolina from 29 to 33 (as of September
30, 1997). The expansion included the addition of seven Centers and the closure
of three Centers, for a net addition of three Centers to the cluster in Columbia
(bringing the total to 18) and one Center in Greenville (bringing the total to
six in this region). Myrtle Beach had four locations and the Charleston area had
the remaining five sites. The revenue from the net increase in new locations in
fiscal year 1997 and from the full year of operations of the locations added in
fiscal year 1996 represented the most significant portion of the revenue growth.
Of the $4,671,000 in revenue growth, approximately $876,000 was from the net
increase of
16
four locations opened in fiscal year 1997 and approximately $2,462,000 was the
result of having the four locations opened during fiscal year 1996 operating for
all of fiscal year 1997.
The increase of four Centers in fiscal year 1997 was net of two centers in the
Columbia area and one center in the Myrtle Beach area that were closed during
fiscal year 1997. Each of these centers were start-ups (versus acquisitions)
and, therefore, had no related intangible assets recorded, and each had not
proven to be profitable in a reasonable period of time. The aggregate costs of
the three centers closed exceeded their aggregate revenues by $253,000 during
fiscal year 1997.
The remainder of the revenue growth in fiscal year 1997 (approximately
$1,333,000) was the result of "same center" growth in patient visits and
charges. This represents an average growth of approximately seven (7%) percent
in revenue at these established centers.
During the past three fiscal years, the Company has continued its services
provided to members of HMOs. In these arrangements, the Company, through the
P.A., acts as the designated primary caregiver for members of HMOs who have
selected one of the Company's centers or providers as their primary care
provider. In fiscal year 1994, the Company began participating in an HMO
operated by Companion HealthCare Corporation ("CHC"), a wholly owned subsidiary
of Blue Cross Blue Shield of South Carolina ("BCBS"). BCBS, through CHC, is a
primary stockholder of UCI. Including its arrangement with CHC, the Company now
participates in four HMOs and is the primary care "gatekeeper" for more than
19,000 lives in fiscal year 1998 compared to 20,000 in fiscal year 1997 and
18,000 in fiscal year 1996. Two of these HMOs use a capitation scheme for
payments and two pay on a discounted fee-for-service basis. HMOs do not, at this
time, have a significant penetration into the South Carolina market; the Company
is not certain if there will be growth in the market share of HMOs in the areas
in which it operates clinics. Capitated revenue grew from approximately
$2,400,000 for fiscal year 1996 to $3,100,000 ($700,000, or 15%, of the
$4,671,000 in total revenue growth) in fiscal year 1997. For fiscal year 1998,
capitated revenue declined to $2,700,000. This decline was primarily the result
of one of the "gatekeeper" HMO's (Companion) switching from a capitation payment
scheme to a discounted fee for service scheme during the middle of fiscal year
1998.
The Company currently negotiates contracts with two HMOs for the P.A.'s
physicians to provide health care on a capitated reimbursement basis. Under
these contracts, which typically are automatically renewed on an annual basis,
the P.A. physicians provide virtually all covered primary care services and
receive a fixed monthly capitation payment from the HMOs for each member who
chooses a P.A. physician as his or her primary care physician. The capitation
amount is fixed depending upon the age and sex of the HMO enrollee. Contracts
with capitated HMOs accounted for approximately 7% of the Company's net revenue
in fiscal year 1998 compared to 11% in fiscal year 1997 and 10% in fiscal year
1996. Based on current payment schemes, this percent will decrease in fiscal
year 1999.
To the extent that enrollees require more care than is anticipated, aggregate
capitation payments may be insufficient to cover the costs associated with the
treatment of enrollees. No capitation contracts currently in place at the
Company have been determined to be insufficient to cover related costs of
treatment. Higher capitation rates are typically received for senior patients
because their medical needs are generally greater and consequently the cost of
covered care is higher.
Increased and sustained revenues in fiscal years 1998 and 1997 also reflect the
Company's heightened focus on occupational medicine and industrial health
services (these revenues are referred to as "employer paid" on the table below).
Focused marketing materials, including quarterly newsletters for employers, were
developed to spotlight the Company's services for industry. The Company also
entered into an agreement with Companion Property and Casualty Insurance Company
("CP&C") wherein the Company acts as the primary care provider for injured
workers of firms insured through CP&C. CP&C is a primary stockholder of UCI.
Patient encounters increased to 497,000 in fiscal year 1998, from 393,000 in
fiscal year 1997 and 338,000 in fiscal year 1996. Of the 104,000 increase in
fiscal year 1998, 55,000 is attributable to the Centers opened during
17
the fiscal year. A decrease in patient encounters in fiscal year 1998 is not
believed to have resulted from the six center closures noted above due to timing
(divestiture or closure in September 1998) or because the Company had a nearby
operating location. Similarly, a decrease in patient encounters in fiscal year
1997 is not believed to have resulted from the three center closures noted above
as the Company, in each case, had a nearby operating location.
Even with the positive effects of the factors mentioned above, revenues were
short of goals for fiscal years 1998 and 1997, due in part to the increased
competition from hospitals and other providers in Columbia, Greenville, Myrtle
Beach and Atlanta during fiscal year 1998 and in Columbia, Greenville, Myrtle
Beach and Sumter during fiscal year 1997. In each of these areas, regional
hospitals have acquired or opened new primary care physician practices that
compete directly with the Company for patients. In each case, the hospital owner
of the Company's competition is believed to have significantly greater resources
than the Company. Management believes that such competition will continue into
the future and plans to compete on a basis of quality service and accessibility.
An operating margin of $(1,528,000) was realized in fiscal year 1998 as compared
to an operating margin of $1,458,000 in fiscal year 1997 and $1,729,000 in
fiscal year 1996. In each fiscal year, this margin deterioration was primarily
the result of the increased cost-cutting pressures being applied by managed care
insurance payors that cover many of the Company's patients. The following table
breaks out the Company's revenue and patient visits by revenue source for fiscal
years 1998 and 1997.
PERCENT OF PERCENT OF
PAYOR PATIENT VISITS REVENUE
--------------------------------------- --------------------- -------------------
1998 1997 1998 1997
--------------------- -------------------
Patient Pay 20% 24% 18% 24%
Employer Paid 13 15 9 11
HMO 13 10 12 11
Workers Compensation 10 10 14 14
Medicare/Medicaid 11 12 7 7
Managed Care Insurance 27 24 30 28
Other (Commercial Indemnity, Champus, etc.) 6 5 10 5
As managed care plans attempt to cut costs, they typically increase the
administrative burden of providers such as the Company by requiring referral
approvals and by requesting hard copies of medical records before they will pay
claims. The number of patients at the Company's Centers that are covered by a
managed care plan versus a traditional indemnity plan continues to grow.
Management expects this trend to continue.
The operating margin deterioration during fiscal year 1998 and 1997 was also
contributed to by the high costs of the six centers closed during fiscal year
1998 and the three centers closed during fiscal year 1997. Aggregate costs
exceeded revenues by $770,000 at the six centers closed during the fiscal year
1998 and by $253,000 at the three centers closed during the fiscal year 1997.
Five of the six centers closed during fiscal year 1998 were acquisitions and the
closure or divestiture resulted in significant write-offs of intangible assets
(goodwill) and/or the recognition of a loss on the divestiture.
Bad debt expense, a component of operating costs, was approximately $2,978,000
(or approximately 8% of revenue) for fiscal year 1998 compared to approximately
$1,106,000 (or approximately 4% of revenue) for fiscal year 1997. This increase
is believed to be primarily due to the difficulties encountered in the
collection of amounts associated with patients seen at the centers acquired
during fiscal year 1998. Management is not yet certain if the collection
difficulties being encountered will continue but intends to evaluate
collectibility on a monthly basis.
18
Effective November 1, 1998, the Company sold the three centers of the Springwood
Lake Family Practice that had been acquired approximately one year earlier in
September 1997. The three centers were operated by the Company as Springwood
Lake Family Practice, Woodhill Family Practice and Midtown Family Practice.
These centers operated more along the lines of traditional family practices
(taking appointments, doing hospital admissions, etc.) than the Company's other
centers and had not been profitable. They were also a drain on cash flow to the
Company of approximately $460,000 during fiscal year 1998. The time needed to
correct these problems was determined to be excessive by the Company's
management and these three centers were sold back to the former owners
(providers). As of September 30, 1998, the Company accrued a loss on the
disposition of approximately $1,668,000. This is a component of the line item
Realignment and Other Expenses.
When the Company acquires medical practices, the excess of cost over fair value
of assets acquired (goodwill) is recorded as an asset and is amortized on a
straight-line basis over 15 years. Subsequent to an acquisition, the Company
periodically evaluates whether later events and circumstances have occurred that
indicate that the remaining balance of goodwill may not be recoverable. When
external factors indicate that goodwill should be evaluated for possible
impairment, the Company uses an estimate of the related center's undiscounted
cash flows to determine if an impairment exists. If an impairment exists, it is
measured based on the difference between the carrying amount and fair value, for
which discounted cash flows are used. Examples of external factors that are
considered in evaluation for possible impairment include significant changes in
the third party payor reimbursement rates and unusual turnover or licensure
difficulties of clinical staff at a center.
During the fourth quarter of fiscal year 1998, the above analysis resulted in an
impairment change of approximately $1,642,000 to goodwill for centers that had
been closed (i.e., Waccamaw and Camden) and for two underperforming centers.
This is a component of the line item Realignment and Other Expenses.
It should be noted that the Company also has launched medical centers as
start-up operations, which have contributed in fiscal years 1998, 1997 and 1996
to the Company's overall cash used in operations. However, the Company has not
recorded goodwill from these start-up medical centers as they were not
purchased.
Depreciation and amortization expense increased to $1,950,000 in fiscal year
1998, up from $1,250,000 in fiscal year 1997 and $961,000 in fiscal year 1996.
This increase reflects higher depreciation expense as a result of significant
leasehold improvements and equipment upgrades at a number of the Company's
Centers, as well as an increase in amortization expense related to the
intangible assets acquired from the Company's purchase of existing practices in
Atlanta, Knoxville, Aiken and Columbia in fiscal year 1998 and in Greenville and
Columbia in fiscal year 1997. Net interest expense increased to $1,463,000 in
fiscal year 1998 from $813,000 in fiscal year 1997 and $583,000 in fiscal year
1996 primarily as a result of the interest costs associated with the
indebtedness incurred in the leasehold improvements, the operating line of
credit the Company has with its primary bank, and debt associated with the
acquisitions noted above.
In determining that it was more likely than not that the recorded deferred tax
asset would be realized, management of the Company considered the following:
o Recent historical operating results.
o The budgets and forecasts that management and the Board of Directors had
adopted for the next five fiscal years including plans for expansion.
o The ability to utilize NOL's prior to their expiration.
o The potential limitation of NOL utilization in the event of a change in
ownership.
o The generation of future taxable income in excess of income reported on the
consolidated financial statements.
19
A valuation allowance of $1.3 million and $1.9 million at September 30, 1997 and
1996, respectively, remained necessary in the judgement of management because
the factors noted above (i.e. forecasts) did not support the utilization of a
larger number. The deterioration of the operating margin, discussed above, was
considered in the decision to increase the valuation allowance to the full
$3,053,000 at September 30, 1998, leaving no asset recorded.
Going Concern Matters
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company incurred losses of $10,508,000 in fiscal year 1998 and
has classified its primary debt as current at September 30, 1998, due to the
violation of a net worth debt covenant. Ultimately, the Company's viability as a
going concern is dependent upon its ability to generate positive cash flows from
operations. In the year ended September 30, 1998, the Company experienced
negative cash flows from operations of approximately $1,495,000.
Revenues increased approximately 35% in fiscal year 1998 over the previous
fiscal years, growth that resulted in operational cash demands that have
significantly impaired the Company's ability to meet its obligations on a
current basis.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company plans include
the following, although it is not possible to predict the ultimate outcome of
the Company's efforts.
o During the fourth quarter of fiscal year 1998, management implemented a
decisive cost reduction plan that included staff reductions and the closure
or divestiture of several unprofitable Centers. Management believes that
these changes will be enough to make the Company both profitable and cash
flow positive for fiscal year 1999.
o The Company is in negotiations with its primary lender to revise the one
debt covenant relating to net worth which would allow the reclassification
of this debt back to long-term. The revolving debt facility is still being
used on a daily basis to fund operating cash requirements.
The Company may consider additional capital or financing sources, if needed. It
is not possible to predict the ultimate outcome of the Company's efforts in
these matters.
Results of Operations for the Three Months Ended September 30, 1998 as Compared
to the Three Months Ended September 30, 1997:
The following summarizes the fiscal 1998 fourth quarter results of operations as
compared to the prior year:
FOR THE THREE MONTHS ENDED (IN 000'S)
-----------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------- -------------------
Revenues $ 10,941 $ 7,625
Operating Costs 13,345 7,590
Operating Margin (2,404) 35
G&A Expenses 46 25
Realignment and Other Expenses 3,703 0
Depreciation & Amortization 600 358
Interest Expense, net 616 242
Benefit for Income Taxes (1,753) 167
Net Income (loss) (9,148) (423)
20
Revenues of $10,941,000 for the quarter ending September 30, 1998 reflect an
increase of forty-three (43%) percent from those of the quarter ending September
30, 1997.
Of the fourteen centers opened during the year, discussed earlier, all were
fully operational during the entire fourth quarter and represented $2,240,000 of
the total $3,316,000 in revenue growth from quarter to quarter.
Patient encounters increased to 136,783 in the fourth quarter of fiscal 1998
from 106,000 in the fourth quarter of fiscal 1997.
Even with the positive effects of the factors mentioned above, revenues were
short of goals for the quarter, due in part to the increased competition from
hospitals and other providers in Columbia, Greenville, Myrtle Beach and Atlanta.
In each of these areas, regional hospitals have acquired or opened new primary
care physician practices that compete directly with the Company for patients. In
each case, the hospital owners of our competition are believed to have
significantly greater resources than the Company. Management believes that such
competition will continue into the future and plans to compete on a basis of
quality service and accessibility.
The increases in depreciation, amortization and interest expense are all related
to the items discussed in the year-to-date results with nothing unusual being
recorded in the fourth quarter.
Financial Condition at September 30, 1998 and September 30, 1997
The Company grew significantly during the year ended September 30, 1998.
Cash and cash equivalents increased by $102,000 from September 30, 1997 to
September 30, 1998.
Accounts receivable increased from $5,944,000 at September 30, 1997 to
$8,788,620 at September 30, 1998. These increases were attributable to the net
growth in primary care Centers and the overall growth in patient visits to
existing Centers over the period. This growth was expected.
The increases in property and equipment during fiscal year 1998 is attributable
to the equipment needs of new Centers and to the up-grading of equipment at
established Centers. The excess of cost over the net assets of acquired
businesses (goodwill) totaled $9,644,000 at September 30, 1998 compared to
$7,802,000 at the end of fiscal year 1997 and reflects the medical practices
acquired.
The growth in accounts payable ($2,258,000 at September 30, 1997 to $5,283,000
at September 30, 1998) and in accrued salaries ($959,000 at September 30, 1997
to $1,838,000 at September 30, 1998) is attributable to the overall growth in
the Company in terms of the number of centers and employees. Long-term debt,
included in current maturities increased from $7,938,794 for fiscal year 1997,
and to $11,988,288 for fiscal year 1998 primarily as a result of indebtedness
incurred in capital leases for Center upfits, in the utilization of an operating
line of credit, and as part of practice acquisitions. Management believes that
it will be able to fund debt service requirements for the foreseeable future out
of cash generated through operations which will improve in fiscal year 1999
based on cost reduction plans implemented by management in late fiscal year
1998.
Liquidity and Capital Resources
The Company requires capital principally to fund growth (acquire new Centers),
for working capital needs and for the retirement of indebtedness. The Company's
capital requirements and working capital needs have been funded through a
combination of external financing (including bank debt and proceeds from the
sale of common stock to CHC and CP&C), and credit extended by suppliers.
21
The Company has a $7,000,000 bank line of credit with an outstanding
indebtedness of $3,446,000 at September 30, 1998. The availability under this
line of credit is limited by accounts receivable type and age as defined in the
agreement. As of the fiscal year end, the Company had borrowed approximately the
maximum allowable amounts. The line of credit bears interest of prime plus 2.5%
with a maturity of March 2000. (Prime rate was 8.25% as of September 30, 1998.)
The line of credit is used to fund the working capital needs of the Company's
expansion. At September 30, 1998, the Company is in default of a debt covenant
related to the Line of Credit. The Company has requested a written waiver and
believes that it is likely to receive such from the financial institution
indicating that the financial institution does not intend to take action related
to this default and has reclassified this debt to current pending receipt of the
revised covenant.
As of September 30, 1998, the Company had no material commitments for capital
expenditures.
Operating activities used $1,495,000 of cash during fiscal year 1998, compared
with $461,000 used during fiscal year 1997. The increased utilization of cash
for the increase of accounts receivable resulting from the growth in the number
of Centers and in the number of patient visits was offset by an increase in
accounts payable. This utilization of cash in operations is expected to continue
as the Company continues to grow.
Investing activities used $1,399,000 of cash during fiscal year 1998 compared
with $808,000 used in fiscal year 1997 as a result of continued expansion
activity. Continued growth is anticipated during fiscal year 1999.
The Company received $1,102,000 in cash during fiscal year 1998 resulting from
private placements of stock which was used in part to manage the Company's rapid
growth. Should additional needs arise, the Company may consider additional
capital sources to obtain funding. There is no assurance that any additional
financing, if required, will be available on terms acceptable to the Company.
Overall, the Company's current liabilities exceeded its current assets at
September 30, 1998 by $3,718,000 mainly due to the reclassification of the
line-of-credit; however, at September 30, 1997, the Company's current assets
exceeded its current liabilities by $2,921,000.
The Year 2000
It is possible that the Company's currently installed computer systems, or other
business systems, or those of the Company's vendors, working either alone or in
conjunction with other software or systems, will not accept input of, store,
manipulate or output dates in the years 1999, 2000 or thereafter without error
or interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems, on a
system-by-system basis, and is querying third parties with whom it conducts
business as to their progress in identifying and addressing problems that their
computer systems may face in correctly processing date information as the Year
2000 approaches and is reached.
The Company has determined that its general accounting systems (which includes
invoicing, accounts receivable, payroll, etc.) must be upgraded to make the
systems Year 2000 compliant. The Company estimates that the cost of upgrading
these accounting systems will be approximately $50,000 and that the upgrade will
be completed before the end of fiscal year 1999. As of September 30, 1998, the
Company had expended approximately $5,000 to remedy this problem.
The Company is continuing to review its information technology ("IT") hardware
and software, including personal computers, application and network software for
Year 2000 compliance readiness. The review process entails evaluation of
hardware/software and testing. The Company believes its IT review will be
completed by the end of fiscal year 1999. While the review process is ongoing,
the Company believes that the cost to bring its IT systems into Year 2000
compliance will be under $20,000 and it does not foresee any material
difficulties with completing the necessary changes prior to January 1, 2000.
22
The Company expects that its review of non-IT systems (including voice
communications) will be completed before the end of fiscal year 1999. The
estimated costs to remedy non-IT systems is not expected to be material.
The Company expects that the source of funds for evaluation and remediation of
Year 2000 compliance issues will be cash flow from operations.
The Company believes that its most significant internal risk posed by the Year
2000 Problem is the possibility of a failure of its accounting systems. If the
accounting systems were to fail, the Company would have to implement manual
processes, which may slow the timeliness of information needed to manage the
business. As discussed above, the Company plans to avoid this risk by upgrading
its accounting systems; however, there can be no assurance that such actions
will avoid problems that may arise.
The third parties whose Year 2000 problems could have the greatest effect on the
Company are believed by the Company to be banks that maintain the Company's
depository accounts' credit card processing systems (including related
telecommunication systems), the companies which supply the Company with medical
supplies, and the insurance company payors for the Company's patients' medical
claims.
The Company has not yet established a "contingency plan" to address potential
Year 2000 problems and is currently considering the extent to which it will
develop a formal contingency plan.
There can be no assurance that the Company will identify all Year 2000 problems
in its computer systems or those of third parties in advance of their occurrence
or that the Company will be able to successfully remedy any problems that are
discovered. The expenses of the Company's efforts to identify and address such
problems, or the expenses or liabilities to which the Company may become subject
as a result of such problems, could have a material adverse effect on the
Company's business, financial condition and results of operations. Maintenance
or modification costs will be expensed as incurred.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Index to Financial Statements on Page 28.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
PART III
Information called for by Part III (Items 9, 10, 11 and 12) of this report on
Form 10-KSB has been omitted as the Company intends to file with the Securities
and Exchange Commission not later than 120 days after the close of its fiscal
year ended September 30, 1998, a definitive Proxy Statement pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934. Such
information will be set forth in such Proxy Statement and is incorporated herein
by reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated herein by reference to the
Proxy Statement for the Company's forthcoming Annual Meeting of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
Proxy Statement for the Company's forthcoming Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
Proxy Statement for the Company's forthcoming Annual Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
Proxy Statement for the Company's forthcoming Annual Meeting of Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A listing of the exhibits to the Form 10-KSB is set forth on the Exhibit Index
which immediately precedes such exhibits in this Form 10-KSB.
Reports on Form 8-K
The Company filed a Form 8-K/A on July 24, 1998 to amend the Form 8-K filed on
February 17, 1998 and the Forms 8-K/A filed on April 20, 1998 and May 28, 1998,
all of which related to the Acquisition Agreement and Plan of Reorganization
dated February 9, 1998 by and among UCI Medical Affiliates, Inc., UCI Medical
Affiliates of Georgia, Inc., MainStreet Healthcare Corporation and certain of
its affiliated entities. The Form 8-K/A was filed to include the financial
statements and certain other exhibits required by Item 7 of Form 8-K.
24
The Company filed a Form 8-K/A on August 13, 1998 to amend the Form 8-K filed on
February 17, 1998 and the Forms 8-K/A filed on April 20, 1998, May 28, 1998 and
July 24, 1998, all of which related to the Acquisition Agreement and Plan of
Reorganization dated February 9, 1998 by and among UCI Medical Affiliates, Inc.,
UCI Medical Affiliates of Georgia, Inc., MainStreet Healthcare Corporation and
certain of its affiliated entities. The Form 8-K/A was filed to include the
revised financial statements required by Item 7 of Form 8-K.
The Company filed a Form 8-K/A on August 21, 1998 to amend the Form 8-K filed on
March 11, 1998 and the Form 8-K/A filed on May 11, 1998, all of which related to
the acquisition by a wholly-owned subsidiary of UCI Medical Affiliates, Inc. of
the business of Allan M. Weldon, M.D. The Form 8-K/A was filed to include the
revised historical and pro forma financial statements required by Item 7 of Form
8-K.
The Company filed a Form 8-K/A on September 1, 1998 to amend the Form 8-K filed
on September 3, 1997 and the Form 8-K/A filed on November 13, 1997, all of which
related to the acquisition by a wholly-owned subsidiary of UCI Medical
Affiliates, Inc. of the business of Clifton G. Aycock, M.D. The Form 8-K/A was
filed to include the revised pro forma financial statements required by Item 7
of Form 8-K.
The Company filed a Form 8-K/A on September 1, 1998 to amend the Form 8-K filed
on September 15, 1997 and the Form 8-K/A filed on November 19, 1997, all of
which related to the acquisition by a wholly-owned subsidiary of UCI Medical
Affiliates, Inc. of the business of Leif Martin Adams, D.O. The Form 8-K/A was
filed to include the revised pro forma financial statements required by Item 7
of Form 8-K.
The Company filed a Form 8-K/A on September 2, 1998 to amend the Form 8-K filed
on November 5, 1997 and the Form 8-K/A filed on January 7, 1998, all of which
related to the acquisition by a wholly-owned subsidiary of UCI Medical
Affiliates, Inc. of the business of Marvin Dees, M.D.. The Form 8-K/A was filed
to include the revised pro forma financial statements required by Item 7 of Form
8-K.
The Company filed a Form 8-K/A on September 2, 1998 to amend the Form 8-K filed
on October 15, 1997 and the Form 8-K/A filed on December 11, 1997, all of which
related to the acquisition by a wholly-owned subsidiary of UCI Medical
Affiliates, Inc. of Progressive Therapy Services, P.A. The Form 8-K/A was filed
to include the revised pro forma financial statements required by Item 7 of Form
8-K.
The Company filed a Form 8-K/A on September 2, 1998 to amend the Form 8-K filed
on August 5, 1997 and the Form 8-K/A filed on October 14, 1997, all of which
related to the acquisition by a wholly-owned subsidiary of UCI Medical
Affiliates, Inc. of Springwood Lake Family Practice Center, P.A. The Form 8-K/A
was filed to include the revised pro forma financial statements required by Item
7 of Form 8-K.
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
-------
Report of Independent Accountants.............................................27
Consolidated Balance Sheets at September 30, 1998 and 1997....................28
Consolidated Statements of Operations for the years
ended September 30, 1998, 1997 and 1996...............................29
Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 30, 1998, 1997 and 1996.................30
Consolidated Statements of Cash Flows for the years
ended September 30, 1998, 1997 and 1996...............................31
Notes to Consolidated Financial Statements.................................32-52
ALL OTHER SCHEDULES ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE OR THE REQUIRED
INFORMATION IS INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS OR NOTES
THERETO.
26
Report of Independent Accountants
January 8, 1999
To the Board of Directors and
Stockholders of UCI Medical Affiliates, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
UCI Medical Affiliates, Inc. at September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered a loss from operations, recurring
net losses, an accumulated deficit, a net working capital deficiency and a
violation of a loan covenant that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/S/ PRICEWATERHOUSECOOPERS, LLP
Columbia, South Carolina
ORIGINAL SIGNED OPINION ON PRICEWATERHOUSECOOPERS LLP LETTERHEAD
IS ON FILE WITH
UCI MEDICAL AFFILIATES, INC.
27
UCI MEDICAL AFFILIATES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
-----------------------------
1998 1997
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 335,923 $ 233,513
Accounts receivable, less allowance for doubtful accounts
of $3,758,771 and $878,469 8,788,620 5,943,884
Inventory 539,564 502,888
Deferred taxes 0 334,945
Prepaid expenses and other current assets 875,409 579,217
------------ ------------
Total current assets 10,539,516 7,594,447
Property and equipment less accumulated depreciation of
$3,762,865 and $2,724,222 5,475,051 4,002,699
Deferred taxes 0 1,417,237
Excess of cost over fair value of assets acquired, less
accumulated amortization of $2,097,149 and $1,664,739 9,944,039 7,801,607
Other assets 243,677 266,379
------------ ------------
Total Assets $ 26,202,283 $ 21,082,369
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 5,540,552 $ 840,879
Current portion of long-term debt payable to employees 190,452 177,445
Accounts payable 5,283,023 2,258,343
Accrued salaries and payroll taxes 1,837,880 959,068
Other accrued liabilities 1,406,033 437,667
------------ ------------
Total current liabilities 14,257,940 4,673,402
Long-term debt, net of current portion 5,755,502 6,438,655
Long-term debt payable to employees, net of current portion 501,783 481,815
Common stock to be issued 4,700,262 0
------------ ------------
Total Liabilities 25,215,487 11,593,872
------------ ------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $.01 per share:
Authorized shares - 10,000,000; none issued 0 0
Common stock, par value $.05 per share:
Authorized shares - 10,000,000
Issued and outstanding- 7,299,245 and 5,744,965 shares 364,962 287,248
Paid-in capital 17,364,263 15,435,535
Accumulated deficit (16,742,429) (6,234,286)
------------ ------------
Total Stockholders' Equity 986,796 9,488,497
------------ ------------
Total Liabilities and Stockholders' Equity $ 26,202,283 $ 21,082,369
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
28
UCI MEDICAL AFFILIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenues $ 37,566,037 $ 27,924,772 $ 23,254,351
Operating costs 39,094,276 26,466,294 21,525,421
------------ ------------ ------------
Operating margin (1,528,239) 1,458,478 1,728,930
General and administrative expenses 113,172 153,445 148,637
Realignment and other expenses 3,702,546 0 0
Depreciation and amortization 1,950,148 1,250,349 961,115
------------ ------------ ------------
Income (loss) from operations (7,294,105) 54,684 619,178
Other income (expenses)
Interest expense, net of interest income (1,463,792) (812,749) (582,937)
Gain (loss) on disposal of equipment 1,936 8,809 2,105
------------ ------------ ------------
Other income (expense) (1,461,856) (803,940) (580,832)
Income (loss) before benefit for income taxes (8,755,961) (749,256) 38,346
Income tax (expense) benefit (1,752,182) 665,530 427,733
============ ============ ============
Net income (loss) $(10,508,143) $ (83,726) $ 466,079
============ ============ ============
Basic earnings (loss) per share $ (1.61) $ (.02) $ .11
============ ============ ============
Basic weighted average common shares
Outstanding 6,545,016 5,005,081 4,294,137
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
29
UCI MEDICAL AFFILIATES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1995 3,508,164 $ 175,408 $ 9,694,256 $ (6,616,639) $ 3,253,025
------------ ------------ ------------ ------------ ------------
Net income (loss) -- -- -- 466,079 466,079
Exercise of Stock Options 2,300 115 460 -- 575
Issuance of common stock 1,297,350 64,868 4,077,677 -- 4,142,545
Other (7) (1) (40,000) -- (40,001)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1996 4,807,807 240,390 13,732,393 (6,150,560) 7,822,223
------------ ------------ ------------ ------------ ------------
Net income (loss) -- -- -- (83,726) (83,726)
Issuance of common stock 937,162 46,858 1,703,142 -- 1,750,000
Other (4) -- -- -- --
Balance, September 30, 1997 5,744,965 287,248 15,435,535 (6,234,286) 9,488,497
------------ ------------ ------------ ------------ ------------
Net income (loss) -- -- -- (10,508,143) (10,508,143)
Issuance of common stock 1,554,280 77,714 1,928,728 -- 2,006,442
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1998 7,299,245 $ 364,962 $ 17,364,263 $(16,742,429) $ 986,796
============ ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
30
UCI MEDICAL AFFILIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $(10,508,143) $ (83,726) $ 466,079
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
(Gain) loss on disposal of equipment (1,936) (8,809) (2,105)
Provision for losses on accounts receivable 2,978,024 1,106,252 627,508
Depreciation and amortization 1,966,571 1,250,349 961,115
Deferred taxes 1,752,182 (700,000) (440,000)
Realignment and other expenses 3,724,215 0 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (4,337,212) (2,679,489) (2,447,650)
(Increase) decrease in inventory (40,466) (83,521) (142,549)
(Increase) decrease in prepaid expenses and other
current assets (256,092) (137,833) (159,324)
Increase (decrease) in accounts payable and accrued
expenses 3,227,749 876,253 (59,707)
------------ ------------ ------------
Cash provided by (used in) operating activities (1,495,108) (460,524) (1,196,633)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (334,121) (531,941) (438,491)
Disposals of property and equipment 3,500
Acquisitions of goodwill (1,090,978) (286,896) (239,832)
(Increase) decrease in other assets 22,701 11,042 (14,654)
------------ ------------ ------------
Cash provided by (used in) investing activities (1,398,898) (807,795) (692,977)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net of redemptions 1,102,072 600,000 2,089,990
Net borrowings (payments) under line-of-credit agreement 539,899 2,030,844 400,000
Proceeds from issuance of common stock under
stock option plan 0 0 575
Proceeds from increase in long-term debt 2,091,232 280,000 600,095
Book overdraft (included in accounts payable) 1,122,243 218,837 0
Payments on long-term debt (1,859,030) (1,865,533) (1,039,879)
------------ ------------ ------------
Cash provided by financing activities 2,996,416 1,264,148 2,050,781
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 102,410 (4,171) 161,171
Cash and cash equivalents at beginning of year 233,513 237,684 76,513
------------ ------------ ------------
Cash and cash equivalents at end of year $ 335,923 $ 233,513 $ 237,684
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
31
UCI MEDICAL AFFILIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of UCI Medical
Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc.
("UCI-SC"), UCI Medical Affiliates of Georgia, Inc. ("UCI-GA"), Doctor's Care,
P.A., Doctor's Care of Georgia, P.C., and Doctor's Care of Tennessee, P.C. (the
three together as the "P.A."). Because of the corporate practice of medicine
laws in the states in which the Company operates, the Company does not own
medical practices but instead enters into an exclusive long-term management
services agreements with the P.A. which operate the medical practices.
Consolidation of the financial statements is required under Emerging Issues Task
Force (EITF) 97-2 as a consequence of the nominee shareholder arrangement that
exists with respect to each of the P.A.'s. In each case, the nominee (and sole)
shareholder of the P.A. has entered into an agreement with UCI-SC or UCI-GA, as
applicable, which satisfies the requirements set forth in footnote 1 of EITF
97-2. Under the agreement, UCI-SC or UCI-GA, as applicable, in its sole
discretion, can effect a change in the nominee shareholder at any time for a
payment of $100 from the new nominee shareholder to the old nominee shareholder,
with no limits placed on the identity of any new nominee shareholder and no
adverse impact resulting to any of UCI-SC, UCI-GA or the PA resulting from such
change.
In addition to the nominee shareholder arrangements described above, each of
UCI-SC and UCI-GA have entered into Administrative Service Agreements with the
P.A.'s. As a consequence of the nominee shareholder arrangements and the
Administrative Service Agreements, the Company has a long-term financial
interest in the affiliated practices of the P.A.'s through the Administrative
Services Agreement, the Company has exclusive authority over decision making
relating to all major on-going operations. The Company establishes annual
operating and capital budgets for the PA and compensation guidelines for the
licensed medical professionals. The Administrative Services Agreements have an
initial term of forty years. According to EITF 97-2 the application of FASB
Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and APB No.
16 (Business Combinations), the Company must consolidate the results of the
affiliated practices with those of the Company. All significant intercompany
accounts and transactions are eliminated in consolidation, including management
fees.
The method of computing the management fees are based on billings of the
affiliated practices less the amounts necessary to pay professional compensation
and other professional expenses. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services plus
a profit. These interest are unilaterally salable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporation.
The P.A. enters into employment agreements with physicians for terms ranging
from one to ten years. All employment agreements have clauses that allow for
early termination of the agreement if certain events occur such as the loss of a
medical license. Over 65% of the physicians employed by the P.A. are paid on an
hourly basis for time scheduled and worked at the medical centers while other
physicians are salaried. A few of the physicians have incentive compensation
arrangements which are contractually based upon factors such as productivity,
collections and quality.
32
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and revenues and expenses
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates and assumptions. Significant estimates are discussed
in these footnotes, as applicable.
The Company operates as one segment.
Medical Supplies and Drug Inventory
The inventory of medical supplies and drugs is carried at the lower of average
cost or market.
Property and Equipment
Depreciation is provided principally by the straight-line method over the
estimated useful lives of the assets, ranging from three to thirty years.
Maintenance, repairs and minor renewals are charged to expense. Major renewals
or betterments, which prolong the life of the assets, are capitalized.
Upon disposal of depreciable property, the asset accounts are reduced by the
related cost and accumulated depreciation. The resulting gains and losses are
reflected in the consolidated statements of operations.
Intangible Assets
Prior to September 30, 1994, the excess of cost over fair value of assets
acquired (goodwill) was amortized on the straight-line method over periods from
15 to 30 years. Since October 1, 1994, goodwill arising from acquisitions has
been amortized on the straight line method over 15 years. During fiscal year
1998, the Company changed prospectively the estimated life recorded on all
goodwill acquired prior to September 30, 1994 to a maximum life of 15 years.
Long-Lived Assets
The Company periodically evaluates whether later events and circumstances have
occurred that indicate that the remaining balance of long-lived assets including
goodwill and property and equipment may not be recoverable or that the remaining
useful life may warrant revision. The Company's evaluation is performed at a
center level. When external factors indicate that a long-lived asset should be
evaluated for possible impairment, the Company uses an estimate of the related
center's undiscounted cash flows to determine if an impairment exists. If an
impairment exists, it is measured based on the difference between the carrying
amount and fair value, for which discounted cash flows are used. Examples of
external factors that are considered in evaluation possible impairment include
significant changes in the third party payor reimbursement rates and unusual
turnover or licensure difficulties of clinical staff at a center.
Revenue Recognition
Revenue is recognized at estimated net amounts to be received from employers,
third party payors, and others at the time the related services are rendered.
Capitation payments from payors are paid monthly and are recognized as revenue
during the period in which enrollees are entitled to receive services. The
Company recognizes capitation revenue from HMOs that contract with the Company
for the delivery of health care services on a monthly basis. This capitation
revenue is at the contractually agreed-upon per-member, per-month rates.
Capitation revenue was approximately $2,700,000, $3,100,000, and $2,400,000 for
the fiscal years ended September 30, 1998, 1997 and 1996, respectively. The
Company records contractual adjustments at the time bills are generated for
services rendered. Third parties are billed at the discounted amounts. As such,
estimates
33
of outstanding contractual adjustments or any type of third party settlements of
contractual adjustments are not necessary.
Earnings Per Share
The computation of basic earnings per share is based on the weighted average
number of common shares outstanding during the period. Fully diluted earnings
per share have not been presented because of their antidilutive affect for
fiscal years 1998 and 1997 and the difference for fiscal year 1996 is not
significant.
Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between
the financial statement and tax bases of assets and liabilities as measured by
the enacted tax rates which are anticipated to be in effect when these
differences reverse. The deferred tax (benefit) provision is the result of the
net change in the deferred tax assets to amounts expected to be realized.
Valuation allowances are provided against deferred tax assets when the Company
determines it is more likely than not that the deferred tax asset will not be
realized.
Cash and Cash Equivalents
The Company considers all short-term deposits with a maturity of three months or
less at acquisition date to be cash equivalents.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein
are based on pertinent information available to management as of September 30,
1998 and 1997. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and current estimates of fair value may differ significantly from the
amounts presented herein. The fair values of the Company's financial instruments
are estimated based on current market rates and instruments with the same risk
and maturities. The fair values of cash and cash equivalents, accounts
receivable, accounts payable, notes payable and payables to related parties
approximate the carrying values of these financial instruments.
Reclassifications
Certain 1997 amounts have been reclassified to conform with the 1998
presentation. The Company has reclassified certain 1997 cash balances of
$218,837 from accounts payable and accordingly revised the financing activity
cash flow in fiscal year 1997.
2. GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company incurred a net loss of approximately $10,500,000 in
fiscal year 1998, has a working capital deficiency and an accumulated deficit,
and has classified its primary debt as current at September 30, 1998, due to the
violation of a net worth debt covenant. Ultimately, the Company's viability as a
going concern is dependent upon its ability to generate positive cash flows from
operations and obtain satisfactory long-term financing. In the year ended
September 30, 1998, the Company experienced negative cash flows from operations
of $1,495,108.
34
Revenues increased approximately 35% in fiscal year 1998 over the previous
fiscal years, growth that resulted in operational cash demands that have
significantly impaired the Company's ability to meet its obligations on a
current basis.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company plans include
the following, although it is not possible to predict the ultimate outcome of
the Company's efforts.
o During the fourth quarter of fiscal year 1998, management implemented a
decisive cost reduction plan that included staff reductions and the closure
or divestiture of several unprofitable Centers. Management believes that
these changes will be enough to make the Company both profitable and cash
flow positive for fiscal year 1999.
o The Company is in negotiations with its primary lender to revise the one
debt covenant relating to net worth which would allow the reclassification
of this debt back to long-term. The revolving debt facility is still being
used on a daily basis to fund operating cash requirements.
The Company may consider additional capital or financing sources, if needed.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30:
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------------------ -----------------------------------------
ACCUM ACCUM
COST DEPRECIATION COST DEPRECIATION
---------------- --------------- ------------------- ----------------
Building $ 437,583 $ 49,672 $ 437,583 $ 34,661
Land 66,000 0 66,000 0
Leasehold Improvements 1,055,715 510,945 827,218 329,996
Furniture & Fixtures 1,309,483 520,683 885,421 333,817
EDP - Companion 1,464,985 623,376 841,356 429,886
EDP - Other 733,539 366,338 592,499 270,898
Medical Equipment 3,495,054 1,345,783 2,555,564 1,016,950
Other Equipment 640,459 326,619 453,943 266,642
Autos 35,099 19,449 67,337 41,372
------------------------------------ -----------------------------------------
Totals $ 9,237,916 $ 3,762,865 $ 6,726,921 $ 2,724,222
================= ================== ==================== ====================
At September 30, 1998 and 1997 capitalized leased equipment included above
amounted to approximately $3,776,000 and $3,063,000, net of accumulated
amortization of $1,470,000 and $969,000, respectively. Depreciation and
amortization expense equaled $1,092,579, $796,179, and $619,817 for the years
ended September 30, 1998, 1997 and 1996, respectively.
4. BUSINESS COMBINATIONS
During the fiscal year ended September 30, 1998, the Company acquired the net
assets of 12 medical practices, and in most cases, entered into employment
agreements with the physician owners of those practices. The Company values
stock issued in business combinations based on the market price of the
securities over a two to three day period before and after the companies have
reached agreement on the purchase price and the transaction is announced. The
acquisitions were accounted for under the purchase method, and the financial
35
activity since the date of acquisition of these acquired practices has been
included in the accompanying consolidated financial statements. The combined pro
forma results listed below reflect purchase price accounting adjustments
assuming the acquisitions occurred at the beginning of each fiscal year
presented. Individual pro forma disclosures are not provided here as the
information is deemed to be insignificant for separate presentation.
Refer to Note 14 for details regarding business combinations in fiscal year
1997.
UNAUDITED
----------------------------------
1998 1997
------------- ------------
$ 35,571,950
Revenue $ 41,216,534
$ (2,854,912)
Net income (loss) $(12,177,005)
Basic earnings (loss) per share $ (1.86) $ (0.53)
The Company acquired substantially all the assets of MainStreet Healthcare
Corporation ("MHC") effective for accounting purposes as of May 1, 1998 (the
"Acquisition"). The closing of the Acquisition was completed on May 13, 1998.
This Acquisition is part of the above unaudited pro forma presentation. As
partial consideration for the Acquisition, the Company delivered to MHC at the
closing of the Acquisition a Conditional Delivery Agreement (the "Conditional
Delivery Agreement") by and between the Company and MHC which requires the
Company to issue to MHC 2,901,396 shares of the common stock of the Company upon
the approval to increase the number of authorized shares of the Company by the
shareholders. The Conditional Delivery Agreement states that in the event the
shareholders of the Company fail to approve the authorization to increase the
authorized shares due to the MHC Acquisition, the Acquisition shall be unwound,
and the assets shall be returned to MHC. However, the Company shareholders of an
aggregate of 54% of the issued and outstanding shares of the Company's common
stock have executed and delivered separate agreements with MHC to vote their
shares at a shareholders meeting in favor of an increase in the number of
authorized common shares of the Company for the purpose of satisfying Company
obligations related to the issuance of shares under the Conditional Delivery
Agreement. Shareholder approval of the MHC purchase is not required under the
rules and regulations to which the Company is subject. Upon the vote of such
shareholders as indicated, 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. The Company has set a meeting of shareholders for
February 24, 1999, and the record date for shareholders is December 31, 1998.
The Acquisition has already been approved by the shareholders of MHC. The
Company is, therefore, of the opinion that it is a remote possibility that the
Acquisition will be required to be unwound as contemplated in the Conditional
Delivery Agreement.
The Company treated the Acquisition as a purchase for accounting purposes per
APB 16. Total consideration amounted to $5,255,347, consisting of 2,901,396
shares of common stock of the Company valued at $1.62 per share, a cash payment
of $450,010, note payable of $800,000 bearing interest per annum at 10.5%, due
October 1, 1998 and acquisition related expense of approximately $894,000. The
excess purchase price over the fair value of assets of $5,492,404 is amortized
using the straight-line method over 10 years. The Company has reflected the
obligation to issue the common shares under the Conditional Delivery Agreement
as a long term liability described as common stock to be issued.
The Company also purchased the assets of other physician practices during the
year ended September 30, 1998. The total purchase price of the acquisitions was
$1,118,760 including acquisition related costs. The purchase price consisted of
cash of $17,468, notes payable to the physicians of $159,536 and the issuance of
common stock of $829,370. The excess purchase price over the fair value of
assets acquired of the practices is amortized over a 15-year period.
36
The purchase price for all asset purchases has been allocated to the assets
purchased, and liabilities assumed based upon the fair values on the dates of
acquisitions.
5. INCOME TAXES
The components of the (benefit) provision for income taxes for the years ended
September 30 are as follows:
1998 1997
----------- -----------
Current:
Federal $ 0 $ 31,675
State 0 2,795
----------- -----------
0 34,470
Deferred:
Federal 1,610,113 (643,243)
State 142,069 (56,757)
----------- -----------
1,752,182 (700,000)
----------- -----------
Total income tax expense (benefit) $ 1,752,182 $ (665,530)
=========== ===========
Deferred taxes result from temporary differences in the recognition of certain
items of income and expense, and the changes in the valuation allowance
attributable to deferred tax assets.
At September 30, 1998, 1997 and 1996 the Company's deferred tax assets
(liabilities) and the related valuation allowances are as follows:
1998 1997 1996
----------- ----------- -----------
Accounts receivable $ 1,302,267 $ 325,034 $ 378,087
Other 52,604 58,420 81,360
Operating loss carryforwards 4,069,762 2,993,578 2,754,874
Fixed assets 923,200 (279,548) (210,762)
Accounts payable 295,068 0 0
----------- ----------- -----------
$ 6,642,901 $ 3,097,483 $ 3,003,559
=========== =========== ===========
Valuation allowance $ 6,642,901 $ 1,345,301 $ 1,951,377
=========== =========== ===========
37
The principal reasons for the differences between the consolidated income tax
(benefit) expense and the amount computed by applying the statutory federal
income tax rate of 34% to pre-tax income were as follows for the years ended
September 30:
1998 1997 1996
------------------ ----------------- ----------------
Tax at federal statutory rate $ (2,977,027) $(254,747) $ 13,038
Effect on rate of:
Amortization of goodwill 893,281 67,528 48,704
Non deductible expenses 33,502 12,068 32,091
Life insurance premiums 887 815 5,392
State income taxes & other (262,679) 114,882 27,378
Acquisitions of medical practices (1,233,382) 0 0
Change in valuation allowance 5,297,600 (606,076) (566,603)
------------------ ----------------- ----------------
$ 1,752,182 $(665,530) $ (440,000)
================== ================= ================
At September 30, 1998, the Company has net tax operating loss (NOL)
carryforwards expiring in the following years ending September 30,
2000 $ 910,935
2001 1,783,595
2002 1,802,220
2003 458,112
2005 470,006
2006 76,306
2010 1,944,371
2012 645,206
2013 2,908,607
----------------
$10,999,358
================
During the year ended September 30, 1996, the Company experienced an ownership
change which limits the amount of net operating losses the Company may use on an
annual basis for income tax purposes. The Company may use $893,507 of net
operating losses on an annual basis.
The Company has $7,800 and $8,450 of investment tax credit carryforwards which
expire in 1999 and 2000, respectively.
38
In determining that it was more likely than not that the recorded deferred tax
asset would be realized, management of the Company considered the following:
o Recent historical operations results.
o The budgets and forecasts that management and the Board of Directors had
adopted for the next five fiscal years including plans for expansion.
o The ability to utilize NOL's prior to their expiration.
o The potential limitation of NOL utilization in the event of a change in
ownership.
o The generation of future taxable income in excess of income reported on the
consolidated financial statements.
A valuation allowance of $1.3 million and $1.9 million at September 30, 1997 and
1996, respectively, remained necessary in the judgement of management because
the factors noted above (i.e. forecasts) did not support the utilization of a
larger number. The deterioration of the operating margin, discussed above, was
considered in the decision to increase the valuation allowance to the full
$3,053,000 at September 30, 1998, leaving no asset recorded.
39
6. LONG-TERM DEBT
Long-term debt consists of the following at September 30:
1998 1997
----------------- -----------------
Revolving line of credit with a financial institution in the maximum amount of
$7,000,000 dated March 24, 1998, bearing interest at a rate of prime plus 2.5%
(prime rate is 8.25% as of September 30, 1998), collateralized by accounts
receivable and other assets, renewable annually
after first term of two years. Availability is limited by accounts
receivable type and age as defined in the agreement. $ 3,445,743 $0
Convertible subordinated debenture with a national physician practice management
company, in the amount of $1,500,000, dated October 6, 1997, interest only
payable annually at the rate of 6.5%, maturing October 5,
2002. 1,500,000 0
Note payable in the amount of $1,600,000 with monthly installments of $8,889
plus interest at prime plus 6% (prime rate is 8.25 % as of
September 30, 1998), through February 1, 2009 collateralized by certain
accounts receivable and leasehold interests and the guarantee of the P.A. 1,102,222 1,208,889
Note payable to MainStreet Healthcare Corporation in the amount of $800,000
dated July 31, 1998, payable in monthly installments of interest
only at a rate of 10.5% maturing January 31, 1999. 800,000 0
Note payable to a financial institution in the amount of $500,000, dated March
17, 1998, payable in monthly installments of interest only at a rate of prime
plus 1% (prime rate is 8.25% as of September 30, 1998) maturing on January 15,
1999, collateralized by common stock and life insurance
policy of president of the Company. 500,000 0
Note payable to Companion Property & Casualty Insurance Company (a shareholder)
in the amount of $400,000, with monthly installments of
$4,546 (including 11% interest) from April 1, 1995 to March 1, 2010,
collateralized by certain accounts receivable 353,888 368,624
Note payable to a financial institution in the amount of $280,000, dated
March 11, 1997, with monthly installments (including interest at a
variable rate of prime plus 1%) (prime rate is 8.25% as of September 30,
1998) of $3,100 from April 1997 to February 2002, with a final payment of
all remaining principal and accrued interest due in March 2002,
collateralized by a mortgage on one of the Company's medical facilities. 263,525 274,715
Note payable to a financial institution in the amount of $194,782, payable
in monthly installments of interest only at a rate of 9.25%, maturing on
January 1, 2005, personally guaranteed by three physician employees of the
P.A. 263,915 194,782
40
1998 1997
----------------- -----------------
Note payable in the amount of $250,000 with monthly installments of $1,389
plus interest at prime plus 2% (prime rate is 8.25% as of September 30,
1998), through February 1, 2009 collateralized by a condominium. 172,222 188,889
Note payable in the amount of $43,500 dated September 1, 1997, with monthly
installments (including 8% interest) of $1,500, payable from
January 1998 to September 2000. 31,966 43,500
Notes payable in monthly installments over three to four years at interest
rates ranging from 3.9% to 10.5%, collateralized by related vehicles. 10,060 18,508
Line of Credit with a financial institution in the amount of $3,000,000 dated
December 9, 1996, bearing interest at a rate of prime plus 1% (prime rate is
8.25% as of September 30, 1998), collateralized by certain
accounts receivable and inventory, and the personal guarantee of an
officer of the Company, renewable annually in December of each year. 0 $2,905,845
Note payable to a financial institution in the amount of $99,209, payable in
monthly installments of interest only at a rate of 9%, maturing on May
1, 2002, personally guaranteed by three physician employees of the P.A. 0 99,209
Note payable in the amount of $240,000 dated March 1, 1996, with monthly
installments of $11,075 (including 10% interest) from April 1, 1996 to March 1,
1998, collateralized by a security agreement executed by UCI-SC
and the P.A. 0 54,016
----------------- -----------------
Subtotal 8,443,541 5,356,977
Note payable to a physician employee of the P.A. in the amount of $294,000
with monthly installments (including 8.5% interest) of $6,032 from August
1997 to August 2002. 236,090 286,073
Note payable to a physician employee of the P.A. in the amount of $294,000
with monthly installments (including 8.5% interest) of $6,032 from August
1997 to August 2002. 236,090 286,073
Note payable to a physician employee of the P.A. in the amount of $110,000
with monthly installments (including 6% interest) of $3,346 from April
1998 to March 2001. 89,741 0
Note payable to a physician employee of the P.A. in the amount of $90,536
with monthly installments (including 6.5% interest) of $2,468 from
December 1997 to April 2001. 68,179 0
Note payable to a physician employee of the P.A. in the amount of $69,000
with monthly installments of $1,500 plus interest at 6.5% from December
1997 to September 2001. 52,500 0
41
1998 1997
----------------- -----------------
Note payable to a physician employee of the P.A. in the amount of $12,000
with monthly installments (including 8.5% interest) of $246 from August
1997 to August 2002. 9,635 11,676
Note payable to a physician employee of the P.A. in the amount of $43,000, with
monthly principal payments of $4,000 from October 1997 to January 1998 and
$3,000 from February 1998 to October 1998, plus interest at 8%. 0 39,000
Note payable to a physician employee of the P.A. in the amount of $80,000
with monthly installments (including 8.25% interest) of $3,174 from
October 1996 to October 1998. 0 36,438
----------------- -----------------
Subtotal - payable to employees 692,235 659,260
Capitalized lease obligations 2,852,512 1,920,725
Other 0 1,832
----------------- -----------------
11,988,288 7,938,794
Less, current portion -5,540,552 -840,879
Less, current portion payable to employees -190,452 -177,445
----------------- -----------------
$ 6,257,284 $6,920,470
================= =================
Aggregate maturities of notes payable and capital leases in each of the five
years 1999 through 2003 are as follows:
NOTES CAPITAL
Year ending September 30: PAYABLE LEASES TOTAL
----------- ----------- -----------
1999 $ 1,663,198 $ 618,629 $ 2,281,827
2000 3,821,335 818,137 4,639,472
2001 336,570 620,483 957,053
2002 493,849 449,327 943,176
2003 1,648,811 342,608 1,991,419
Thereafter 1,172,014 3,328 1,175,342
----------- ----------- -----------
$ 9,135,777 $ 2,852,512 $11,988,289
=========== =========== ===========
As of September 30, 1998, the Company had borrowed approximately the maximum
allowable amount under its operating line of credit and was in violation of one
of its debt covenants. The covenant requires that the net worth of the Company
did not drop below $7,650,000. The Company has requested a written waiver from
its lender or a modification to the covenant and has reclassified this liability
of $3,445,743 to current pending resolution.
7. EMPLOYEE BENEFIT PLANS
The Company has an employee savings plan ( the "Savings Plan") that qualifies as
a deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Effective in June 1995, the Company discontinued its matching contribution. In
42
February 1996, the Company reinstated its matching contribution. Effective
January 1, 1997, the Company increased its matching contribution from 50% to 75%
of each employee's contribution up to a maximum of 3.75% of the employee's
earnings. The Company's matching contributions were $182,681, $172,792, and
$97,610 in fiscal years 1998, 1997, and 1996, respectively.
During June 1997, the Company's Board of Directors approved the UCI/Doctor's
Care Deferred Compensation Plan (the "Plan") for key employees of the Company
with an effective date of June 1998. To be eligible for the Plan, key employees
must have completed three years of full-time employment and hold a management or
physician position that is required to obtain specific operational goals that
benefit the corporation as a whole. Under the Plan, key employees may defer a
portion of their after tax earnings with the Company matching two times the
employee's contribution percentage. During fiscal year 1998, the Company's
matching contribution was $34,189.
The incentive stock option plan adopted in 1984 (the "1984 Plan") expired under
its terms in December 1993.
Pursuant to the Company's incentive stock option plan adopted in 1994, (the
"1994 Plan"), "incentive stock options", within the meaning of Section 422 of
the Internal Revenue Code, may be granted to employees of the Company. The 1994
Plan provides for the granting of options for the purchase of 750,000 shares at
100% of the fair market value of the stock at the date of grant (or for 10% or
higher shareholders, at 110% of the fair market value of the stock at the date
of grant). Options granted under the 1994 Plan vest at a rate of 33% in each of
the three years following the grant. Vested options become exercisable one year
after the date of grant and can be exercised within ten years of the date of
grant, subject to earlier termination upon cessation of employment.
During the fiscal year ended September 30, 1996, the Company 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 the Company's common stock at the
fair market 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.
During the fiscal year ended September 30, 1997, the Company 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 the Company's common stock at the
fair market value of the date of grant. Under this plan, 5,000 options were
issued and are outstanding as of September 30, 1998 to Thomas G. Faulds, Ashby
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.
Please refer to Note 7, "Stockholders' Equity" for activity information
regarding these four stock option plans.
8. STOCKHOLDERS' EQUITY
On June 30, 1994, the Company's shareholders approved an amendment to, and a
restatement of, the Restated Certificate of Incorporation to provide for a 1 for
5 reverse stock split. The Amended and Restated Certificate of Incorporation
increased the number of authorized shares of common stock from 4,000,000 to
10,000,000 (as adjusted for the reverse stock split as discussed above) and
increased the par value per share of common stock from one cent ($.01) to five
cents ($.05). In addition, the Amended and Restated Certificate of Incorporation
authorized the Company to issue up to 10,000,000 shares of $.01 par value
preferred stock to be issued in one or more series. The Board of Directors is
authorized, without further action by the stockholders, to designate the rights,
preferences, limitations and restrictions of and upon shares of each series,
including dividend voting,
43
redemption and conversion rights. All references in the financial statements to
average number of shares outstanding and related prices, per share amounts,
common stock and stock option plan data have been restated to reflect the split.
The following table summarizes activity and weighted average fair value of
options granted for the three previous fiscal years for the Company's four stock
option plans. (Please refer also to Note 6, "Employee Benefit Plans.")
1996 1996 NON- 1997 1997 NON-
1984 1984 1994 1994 NON-EMPLOYEE EMPLOYEE NON-EMPLOYEE EMPLOYEE
STOCK OPTIONS PLAN PLAN PLAN PLAN PLAN PLAN PLAN PLAN
- ----------------------------- ---------- ------- ---------- -------- ----------- --------- ----------- -----------
Outstanding at 10/01/95 15,500 242,000
Granted FY 95/96 0 140,500 10,000
Exercised FY 95/96 (2,300) 0 0
Forfeited FY 95/96 (400) (23,000) 0
---------- ---------- -----------
Outstanding at 09/30/96 12,800 359,500 10,000
---------- ---------- -----------
Exercisable at 09/30/96 12,800 73,000 0
---------- ---------- -----------
Weighted average fair
value of options granted
during fiscal year 95/96
for options whose
exercise price:
(1) equals fair value N/A 3.5395 3.5000 N/A
(2) exceeds fair value N/A 4.0000 N/A N/A
Granted FY 96/97 0 445,500 0 20,000
Exercised FY 96/97 0 0 0 0
Forfeited FY 96/97 0 (55,000) 0 0
---------- ---------- ----------- -----------
Outstanding at 09/30/97 12,800 750,000 10,000 20,000
---------- ---------- ----------- -----------
Exercisable at 09/30/97 12,800 164,500 0 0
Weighted average fair value of
options granted during fiscal
year 96/97 for options whose
exercise price:
(1) equals fair value N/A 2.1608 N/A 2.5000
(2) exceeds fair value N/A 2.6250 N/A N/A
Granted FY 97/98 0 0 0 0
Exercised FY 97/98 0 0 0 0
Forfeited FY 97/98 (500) (13,000) 0 (5,000)
---------- ---------- ----------- -----------
Outstanding at 09/30/98 12,300 737,000 10,000 15,000
---------- ---------- ----------- -----------
Exercisable at 09/30/98 12,300 0 0 0
Weighted average fair value of
options granted during fiscal
year 97/98 for options whose
exercise rice:
(1) equals fair value N/A N/A N/A N/A
(2) exceeds fair value N/A N/A N/A N/A
44
The following table summarizes the weighted average exercise price of stock
options exercisable at the end of each of the three previous fiscal years:
1996 1997
WEIGHTED AVERAGE 1984 1994 NON-EMPLOYEE NON-EMPLOYEE
EXERCISE PRICE PLAN PLAN PLAN PLAN
- ------------------------------------- ------------- ------------- ------------------ ------------------
Outstanding at 10/01/95 .25 2.9941
Granted FY 95/96 0 3.7055 3.50
Exercised FY 95/96 .25 0 0
Forfeited FY 95/96 .25 2.8750 0
------------- ------------- ------------------ ------------------
Outstanding at 09/30/96 .25 3.2797 3.50
------------- ------------- ------------------ ------------------
Exercisable at 09/30/96 .25 3.0066 0
------------- ------------- ------------------ ------------------
Granted FY 96/97 0 2.1934 0 2.50
Exercised FY 96/97 0 0 0 0
Forfeited FY 96/97 0 3.3409 0 0
------------- ------------- ------------------ ------------------
Outstanding at 09/30/97 .25 2.6320 3.50 2.50
------------- ------------- ------------------ ------------------
Exercisable at 09/30/97 .25 3.1591 0 0
------------- ------------- ------------------ ------------------
Granted FY 97/98 0 0 0 0
Exercised FY 97/98 0 0 0 0
Forfeited FY 97/98 0.25 3.2596 0 2.50
------------- ------------- ------------------ ------------------
Outstanding at 09/30/98 0.25 0.2609 3.50 2.50
------------- ------------- ------------------ ------------------
Exercisable at 09/30/98 0.25 0 0 0
------------- ------------- ------------------ ------------------
The following table summarizes options outstanding and exercisable by price
range as of September 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
WEIGHTED-
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------- --------------- --------------- ------------ -------------- ------------
$0.00 to $ .99 12,300 4.25 years .25 12,300 .25
$1.00 to $1.99 210,825 8.67 1.9375 0 N/A
$2.00 to $2.99 378,675 6.02 2.580 0 N/A
$3.00 to $3.99 129,500 5.70 3.356 0 N/A
$4.00 to $4.99 43,000 3.68 4.279 0 N/A
--------------- --------------
774,300 12,300
=============== ==============
45
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation costs for the Company's stock option plans been
determined based on the fair value at the grant date for awards in fiscal 1998,
1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option-pricing model.
FISCAL YEAR ENDED SEPTEMBER 30
------------------------------------------
1998 1997 1996
------------ ----------- ----------
Net income (loss) - as reported (10,508,143) (83,726) 466,079
Net income (loss) - pro forma (10,687,809) (171,232) 455,188
Basic earnings (loss) per share - as reported (1.61) (.02) .11
Basic earnings (loss) per share - pro forma (1.63) (.03) .11
Weighted average number of shares 6,545,016 5,005,081 4,294,137
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
Expected Dividend Yield 0
Expected Stock Price Volatility 35.77%
Risk-free Interest Rate 5.45% to 6.75%
Expected Life of Options 1 to 6 years
During the year ended September 30, 1997, warrants for the purchase of shares of
the Company's common stock were issued, ranging in exercise price from $1.9375
to $5.00. Fifty-five thousand (55,000) warrants were issued in connection with
services to be rendered by an investor relations advisor to the Company. Two
hundred fifty thousand (250,000) warrants were issued during the year ended
September 30, 1997 and cancelled during the year ended September 30, 1998, in
connection with consulting and financial analysis services to be rendered (i.e.,
financial analyst report, etc.). During the year ended September 30, 1998, the
Company granted to FPA
46
Medical Management, Inc. warrants to purchase up to thirty-five thousand
(35,000) warrant shares as part of a $1,500,000 convertible subordinated
debenture. The Stock Purchase Warrant allows for 65,000 shares in total. The
following is a schedule of warrants issued and outstanding during the years
ended September 30, 1998 and 1997:
NUMBER OF EXERCISE DATE EXPIRATION
WARRANTS PRICE EXERCISABLE DATE
-------------- --------------- --------------- --------------
Outstanding at 09/30/96 0
Activity during FY 96/97:
Issued at $1.9375 30,000 1.9375 06/18/97 06/18/02
Issued at $3.125 137,500 3.1250 10/09/96 09/16/99
Issued at $5.00 137,500 5.0000 10/09/96 09/16/99
Exercised 0
Expired 0
--------------
Outstanding at 09/30/97 305,000
Activity during FY 97/98:
Issued at $2.5625 25,000 2.5625 10/06/97 09/30/00
Issued at $2.5625 10,000 2.5625 04/06/98 04/05/01
Cancelled at $3.125 -125,000 3.1250
Cancelled at $5.00 -125,000 5.0000
Exercised 0
Expired 0
--------------
Outstanding at 09/30/98 90,000
==============
In addition, the Company has issued a conditional agreement to issue warrants to
purchase 150,000 shares of common stock at an exercise price of $1.00 per share
to a financial advisor involved in the issuing of 1,200,000 shares of common
stock at $1.00 per share during the year ended September 30, 1998. The warrants
are expected to be issued upon shareholder approval to increase the authorized
shares.
In accordance with SFAS No. 123, no expense has been recognized in relation to
these warrants.
9. LEASE COMMITMENTS
UCI-SC leases office and medical center space under various operating lease
agreements. Certain operating leases provide for escalation payments, exclusive
of renewal options.
47
Future minimum lease payments under noncancellable operating leases with a
remaining term in excess of one year as of September 30, 1998, are as follows:
OPERATING
LEASES
-----------------
Year ending September 30:
1999 $2,485,810
2000 2,311,014
2001 2,034,290
2002 1,704,834
2003 1,405,728
Thereafter 9,804,006
-----------------
Total minimum lease payments $19,745,682
=================
Total rental expense under operating leases for fiscal 1998, 1997 and 1996 was
approximately $2,499,000, $1,475,000, and $1,188,000, respectively.
10. RELATED PARTY TRANSACTIONS
Relationship between UCI-SC and UCI-GA and the P.A.s
Pursuant to agreements between UCI-SC, UCI-GA and the P.A.'s, UCI-SC and UCI-GA
provide non-medical management services and personnel, facilities, equipment and
other assets to the Centers . UCI-SC and UCI-GA guarantee the compensation of
the physicians employed by the P.A.'s. The agreements also allow UCI-SC and
UCI-GA to negotiate contracts with HMOs and other organizations for the
provision of medical services by the P.A.'s physicians. Under the terms of the
agreement, the P.A.'s assign all revenue generated from providing medical
services to UCI-SC or UCI-GA after paying physician salaries and the cost of
narcotic drugs held by the P.A.'s. The South Carolina P.A. is owned by M.F.
McFarland, III, M.D. Dr. McFarland is also President, Chief Executive Officer
and Chairman of UCI, UCI-SC and UCI-GA. The Georgia and Tennessee P.A.'s are
owned by D. Michael Stout, M.D., who is also the Executive Vice President of
Medical Affairs for UCI, UCI-SC and UCI-GA.
Relationship between the Company and Blue Cross Blue Shield of South Carolina
Blue Cross Blue Shield of South Carolina (BCBS) owns 100% of Companion
HealthCare Corporation ("CHC"), Companion Property & Casualty Insurance Company
("CP&C") and Companion Technologies, Inc. ("ACT"). At September 30,1998, CHC
owned 2,006,442 shares of the Company's outstanding common stock and CP&C owned
618,181 shares of the Company's outstanding common stock, which combine to
approximately 36% of the Company's outstanding common stock.
Facility 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. Each of these leases has a five year renewal option, and a
rent guarantee by the South Carolina P.A. 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 Company's fiscal years ended September 30, 1998, 1997, and 1996 were
$326,093, $319,730, and $306,178, respectively.
48
Several of the medical center facilities operated by UCI-SC are leased or were
leased from entities owned or controlled by certain principal shareholders
and/or members of the Company's management. Total lease payments made by UCI-SC
under these leases during the fiscal years ended September 30, 1998, 1997 and
1996 were $62,400, $45,600, and $122,854, respectively.
Ten of the medical center facilities operated by UCI-SC are or were leased from
physician employees of the P.A.'s. Total lease payments made by UCI-SC under
these leases during the Company's fiscal years ended September 30, 1998, 1997
and 1996 were $444,153, $258,026, and $189,945, respectively.
Other Transactions with Related Parties
The following is a historical summary of BCBS and its subsidiaries' purchases of
the Company's common stock.
DATE NUMBER PRICE TOTAL
PURCHASED ENTITY OF SHARES PER SHARE PURCHASE 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
Including shares purchased by CHC from third parties, at September 30, 1998,
BCBS controls 2,624,623 shares, or approximately 36% of the Company's
outstanding common stock. The shares acquired by CHC and CP&C from the Company
were purchased pursuant to stock purchase agreements and were not registered.
CHC and CP&C have the right to require registration of the stock under certain
circumstances as described in the agreement. BCBS and its subsidiaries have the
option to purchase as many shares as may be necessary for BCBS to maintain
ownership of 47% of the outstanding common stock of the Company in the event
that the Company issues additional stock to other parties (excluding shares
issued to employees or directors of the Company).
In June 1997, CP&C purchased 400,000 shares of the Company's common stock for
$600,000. The purchase price was below fair value due to lower issuance costs by
the Company.
During the Company's fiscal year ended September 30, 1994, UCI-SC purchased a
new billing and accounts receivable system from CT for an aggregate purchase
price of $504,000. The Company entered into a capital lease agreement for this
system, which includes computer equipment. The Company has the option to
purchase the equipment at the end of the lease term for $1. The lease obligation
recorded at September 30, 1998 is $267,600, which includes lease addenda.
During the Company's fiscal year ended September 30, 1994, UCI-SC entered into
an agreement with CP&C pursuant to which UCI-SC, through the P.A., acts as the
primary care provider for injured workers of firms carrying worker's
compensation insurance through CP&C. Additionally, during the Company's fiscal
year ended September 30, 1995, UCI-SC executed a note payable to CP&C consisting
of monthly installments of $4,546 (including 11% interest) from April 1, 1995 to
March 1, 2010, collateralized by certain accounts receivable.
49
UCI-SC, through the P.A., provides services to members of a health maintenance
organization ("HMO") operated by CHC who have selected the P.A. as their primary
care provider.
During the year ended September 30, 1996, BCBS provided a non-interest bearing
advance to the Company in the amount of $600,000. This advance was paid in full
in December 1996.
The employees of the Company are offered health, life, and dental insurance
coverage at group rates from BCBS and its subsidiaries.
The Company contracted with Adams and Associates for its workers compensation
and professional liability insurance coverage through fiscal year 1997.
Aggregate premiums paid during the fiscal year ended September 30, 1997 in
connection with such policies were approximately $155,000. Adams and Associates
contracted with CP&C to be the insurance carrier for the Company's workers
compensation insurance coverage. Harold H. Adams, Jr. is the President and owner
of Adams and Associates and is also a director of the Company.
11. EARNINGS PER SHARE
The calculation of basic earnings (loss) per share is based on the weighted
average number of shares outstanding (6,545,016 in fiscal 1998, 5,005,081 in
fiscal 1997, and 4,294,137 in fiscal 1996).
12. CONCENTRATION OF CREDIT RISK
In the normal course of providing health care services, the Company may extend
credit to patients without requiring collateral. Each individual's ability to
pay balances due the Company is assessed and reserves are established to provide
for management's estimate of uncollectible balances.
Future revenues of the Company are largely dependent on third-party payors and
private insurance companies, especially in instances where the Company accepts
assignment.
13. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting its business, the Company becomes involved
in litigation, claims, and administrative proceedings. Certain litigation,
claims, and proceedings were pending at September 30, 1997, and management
intends to vigorously defend the Company in such matters. While the ultimate
results cannot be predicted with certainty, management does not expect these
matters to have a material adverse effect on the financial position or results
of operations of the Company.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information
The Company made interest payments of $1,463,991, $813,569, and $583,981, in the
years ended September 30, 1998, 1997, and 1996, respectively. The Company made
income tax payments of $0, $0 and $15,350 in the years ended September 30, 1998,
1997 and 1996, respectively.
50
Supplemental Non-Cash Financing Activities
Capital lease obligations of $1,138,231, $1,004,837, and $711,569 were incurred
in fiscal 1998, 1997, and 1996. Additionally, in February 1995, the Company
acquired property which was financed through a note payable in the amount of
$400,000.
In December 1995, the Company acquired certain assets of a medical practice in
Greenville, South Carolina for $300,000, by paying $30,000 at closing, financing
$30,000 with the seller, and issuing 60,000 shares of the common stock of the
Company.
In December 1995, the Company acquired a medical practice in Myrtle Beach, South
Carolina for $334,400, consisting of 70,400 shares of the common stock of the
Company. The Company commenced management of the facility in January 1995, prior
to the closing date of the acquisition in December 1995. Financial results of
operations of the acquired facility since January 1995 are included in these
consolidated financial statements for fiscal years 1995 and 1996.
In March 1996, the Company acquired certain assets of a medical practice in
Columbia, South Carolina for $125,000, by assuming $25,000 in the seller's
accounts payable, and issuing 24,243 shares of the common stock of the Company.
In March 1996, the Company acquired certain assets of a medical practice in
Murrells Inlet, South Carolina for $600,000, by paying $60,000 at closing,
financing $240,000 with the seller, and issuing 72,728 shares of the common
stock of the Company.
In April 1996, the Company acquired certain assets of a medical practice in
Greenville, South Carolina for $513,931, by paying $6,315 at closing, financing
$69,462 with the seller, and issuing 125,187 shares of the common stock of the
Company.
In June 1996, the Company acquired certain assets of a medical practice in
Lugoff, South Carolina for $675,000, by paying $15,000 at closing, financing
$60,000 with the seller, and issuing 172,588 shares of the common stock of the
Company.
In October 1996, the Company acquired certain assets of a medical practice in
Aiken, South Carolina for $80,000 by financing $80,000 with the seller.
In October 1996, the Company acquired certain assets of a medical practice in
Simpsonville, South Carolina for $25,000 by financing $25,000 with the seller.
In August 1997, the Company acquired a three facility medical practice in
Columbia, South Carolina for $2,271,250, by paying $200,000 at closing, assuming
$371,250 in notes payable, financing $600,000 with the seller and issuing
517,649 shares of the common stock of the Company.
In September 1997, the Company acquired certain assets of a medical practice in
Camden, South Carolina for $45,000 by paying $1,500 at closing and financing
$43,500 with the seller.
In September 1997, the Company acquired certain assets of a medical practice in
Summerville, South Carolina for $100,000 by paying $7,000 at closing, financing
$43,000 with the seller and issuing 19,513 shares of the common stock of the
Company.
In October 1997, the Company acquired certain assets of a three facility
physical therapy practice in Columbia, South Carolina for $856,756 by assuming
certain liabilities and issuing 276,976 shares of the common stock of the
Company.
51
In November 1997, the Company acquired certain assets of a medical practice in
New Ellenton, South Carolina for $262,004 by paying $17,468 at closing,
financing $159,536 with the seller, and issuing 30,223 shares of the common
stock of the Company.
In May 1998, the Company acquired certain assets of an seven facility medical
practice (five in Georgia and two in Tennessee) for $5,255,437 by assuming
certain liabilities, paying $450,010 at closing, financing $800,000 with the
seller, and committing to issue 2,901,396 shares of the common stock of the
Company.
15. REALIGNMENT AND OTHER CHARGES
In the fourth quarter of fiscal year 1998, the Company recorded a charge of
$4,307,020 for the impairment of goodwill and the accrual of certain estimated
operating lease obligations. The impairment charge of $3,702,546 is related to a
write-off of $672,322 of goodwill impairment associated with Center closures,
$1,808,504 of goodwill impairment of Centers sold or which the Company had
agreed to sell as of September 30, 1998 $969,720 related to goodwill impairment
on two operating Centers and $252,000 related to changing the estimated life on
all goodwill acquired prior to September 30, 1994 from 30 years to 15 years. In
addition, the Company accrued $604,475 of estimated operating lease obligations
related to closed Centers (this amount is included in the operating costs line
item). The leasing obligation will be paid over a remaining term ranging from
one to fourteen years. The charge discussed above includes a charge of
$1,668,000 related to the sale of the Family Medical Division, consisting of the
Springwood Lake Family Practice, Midtown Family Practice and the Woodhill Family
Practice. The Company agreed to sell the facilities back to the physicians in
September, 1998. The Centers were purchased from the physicians in September
1997. The closing of the sale occurred effective November 1, 1998. The
impairment charge was based upon the estimated fair market value of
consideration to be received from the sale less directly related costs of sale.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15() of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ M.F. MCFARLAND, III, M.D. President, Chief Executive Officer
- ------------------------------ and Chairman of the Board January 12, 1999
M.F. McFarland, III, M.D.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ M.F. MCFARLAND, III, M.D. President, Chief Executive Officer
- ------------------------------ and Chairman of the Board January 12, 1999
M.F. McFarland, III, M.D.
/S/ JERRY F. WELLS, JR. Executive Vice President of Finance
- ------------------------------------- and Chief Financial Officer January 12, 1999
Jerry F. Wells, Jr.
/S/ RUSSELL J. FRONEBERGER Director January 12, 1999
- -----------------------------
Russell J. Froneberger
/S/ HAROLD H. ADAMS, JR. Director January 12, 1999
- --------------------------------
Harold H. Adams, Jr.
/S/ CHARLES M. POTOK Director January 12, 1999
- ---------------------------------
Charles M. Potok
/S/ THOMAS G. FAULDS Director January 12, 1999
- --------------------------------
Thomas G. Faulds
/S/ ASHBY JORDAN, M.D. Director January 12, 1999
- ------------------------------
Ashby Jordan, M.D.
/S/ JOHN M. LITTLE, Jr., M.D. Director January 12, 1999
- ------------------------------
John M. Little, Jr., M.D.
53
UCI MEDICAL AFFILIATES, INC.
EXHIBIT INDEX
EXHIBIT PAGE NUMBER OR INCORPORATION
NUMBER DESCRIPTION BY REFERENCE TO
- -------------- --------------------------------------------- ------------------------------
3.1 Amended and Restated Certificate of Exhibit 3.1 on the Form
Incorporation of UCI Medical Affiliates, 10-KSB filed for fiscal year
Inc. ("UCI") 1995
3.2 Amended and Restated Bylaws of UCI Exhibit 3.2 on the Form
10-KSB filed for fiscal year
1995
3.3 Amendment to Amended and Restated Bylaws of Exhibit 3.3 on the Form
UCI 10-KSB filed for fiscal year
1996
4.1 Convertible Subordinated Debenture of UCI Exhibit 4.1 on the Form 10-KSB filed for
dated October 6, 1997 payable to FPA Medical fiscal year 1997
Management, Inc. (AFPAMM")
4.2 Stock Purchase Warrant Agreement dated Exhibit 4.2 on the Form
October 6, 1996 between UCI and FPAMM 10-KSB filed for fiscal year
1997
10.1 Facilities Agreement dated May 8, 1984 by Exhibit 10.1 on the Form
and between UCI Medical Affiliates of South 10-KSB filed for fiscal year
Carolina, Inc. (AUCI-SC") and Doctor's 1996
Care, P.A., as amended September 24, 1984 and
January 13, 1995
10.2 Amendment No. 3 dated September 17, 1996 to Exhibit 10.2 on the Form
the Facilities Agreement listed as Exhibit 10-KSB filed for fiscal year
10.1 to this report 1997
10.3 Employment Agreement dated October 1, 1995 Exhibit 10.4 on the Form
between UCI-SC and M.F. McFarland, III, M.D. 10-KSB filed for fiscal year
1995
10.4 Employment Agreement dated October 1, 1995 Exhibit 10.5 on the Form
between Doctor's Care, P.A. and M.F. 10-KSB filed for fiscal year
McFarland, III, M.D. 1995
10.5 Employment Agreement dated November 1, 1995 Exhibit 10.6 on the Form
between UCI-SC and D. Michael Stout, M.D. 10-KSB filed for fiscal year
1995
10.6 Employment Agreement November 1, 1995 Exhibit 10.7 on the Form
between Doctor's Care, P.A. and D. Michael 10-KSB filed for fiscal year
Stout, M.D. 1995
1
EXHIBIT PAGE NUMBER OR INCORPORATION
NUMBER DESCRIPTION BY REFERENCE TO
- -------------- --------------------------------------------- ------------------------------
10.7 Lease and License Agreement dated March 30, Exhibit 10.8 on the Form
1994 between Doctor's Care, P.A. and Blue 10-KSB filed for fiscal year
Cross Blue Shield of South Carolina 1995
10.8 Note Payable dated February 28, 1995 Exhibit 10.8 on the Form 10-KSB
between UCI-SC, as payor, and Companion filed for fiscal year 1997
Property and Casualty Insurance Company,
as payee
10.9 Revolving Line of Credit dated November 11, Exhibit 10.9 on the Form 10-KSB filed for
1996 between Carolina First Bank and UCI fiscal year 1997
10.10 Stock Option Agreement dated March 20, 1996 Exhibit 10.10 on the Form
between UCI and Harold H. Adams, Jr. 10-KSB filed for fiscal year 1997
10.11 Stock Option Agreement dated March 20, 1996 Exhibit 10.11 on the Form
between UCI and Russell J. Froneberger 10-KSB filed for fiscal year 1997
10.12 Stock Option Agreement dated March 27, 1997 Exhibit 10.12 on the Form
between UCI and Charles P. Cannon 10-KSB filed for fiscal year 1997
10.13 Stock Option Agreement dated March 27, 1997 Exhibit 10.13 on the Form
between UCI and Thomas G. Faulds 10-KSB filed for fiscal year 1997
10.14 Stock Option Agreement dated March 27, 1997 Exhibit 10.14 on the Form
between UCI and Ashby Jordan, M.D. 10-KSB filed for fiscal year 1997
10.15 Stock Option Agreement dated March 27, 1997 Exhibit 10.15 on the Form
between UCI and Charles M. Potok 10-KSB filed for fiscal year 1997
10.16 UCI Medical Affiliates, Inc. 1994 Incentive Exhibit 10.9 on the Form
Stock Option Plan 10-KSB filed for fiscal year 1995
10.17 Consulting Agreement dated December 10, Exhibit 10.17 on the Form
1996 between UCI and Global Consulting, Inc. 10-KSB filed for fiscal year 1997
10.18 Amendment dated August 10, 1998 to 56
Employment Agreement dated October 6, 1995
between Doctor's Care, P.A. and M.F.
McFarland, III, M.D.
10.19 Administrative Services Agreement dated Exhibit 10.19 on the Form
April 24, 1998 by and between Doctor's Care 10-QSB filed for the quarter
of Georgia, P.C. and UCI Medical Affiliates ended March 31, 1998
of Georgia, Inc.
10.20 Administrative Services Agreement dated Exhibit 10.20 on the Form
April 24, 1998 by and between Doctor's Care 10-QSB filed for the quarter
of Tennessee, P.C. and UCI Medical ended March 31, 1998
Affiliates of Tennessee, Inc.
2
EXHIBIT PAGE NUMBER OR INCORPORATION
NUMBER DESCRIPTION BY REFERENCE TO
- -------------- --------------------------------------------- ------------------------------
10.21 Administrative Services Agreement dated Exhibit 10.21 on the Form
August 11, 1998 between UCI Medical 10-KSB filed for fiscal year
Affiliates of South Carolina, Inc. and 1997
Doctor's Care, P.A.
10.22 Stock Purchase Option and Restriction 61
Agreement dated August 11, 1998 by and
among M.F. McFarland, III, M.D.; UCI
Medical Affiliates of South Carolina, Inc.;
and Doctor's Care, P.A.
10.23 Stock Purchase Option and Restriction 66
Agreement dated September 1, 1998 by and
among D. Michael Stout, M.D.; UCI Medical
Affiliates of Georgia, Inc.; and Doctor's
Care of Georgia, P.C.
10.24 Stock Purchase Option and Restriction 71
Agreement dated July 15, 1998 by and among
D. Michael Stout, M.D.; UCI Medical
Affiliates of Georgia, Inc.; and Doctor's
Care of Tennessee, P.C.
10.25 Acquisition Agreement and Plan of Exhibit 2 on the Form 8-K
Reorganization dated February 9, 1998, by filed February 17, 1998
and among UCI Medical Affiliates of
Georgia, Inc., UCI Medical Affiliates,
Inc., MainStreet Healthcare Corporation;
MainStreet Healthcare Medical Group, P.C.;
MainStreet Healthcare Medical Group, P.C.;
Prompt Care Medical Center, Inc.; Michael
J. Dare; A. Wayne Johnson; Penman Private
Equity and Mezzanine Fund, L.P.; and Robert
G. Riddett, Jr.
10.26 First Amendment to Acquisition Agreement Exhibit 2.1 on Form 8-K/A
and Plan of Reorganization (included as filed April 20, 1998
Exhibit 10.25 hereof) dated April 15, 1998.
10.27 Second Amendment to Acquisition Agreement Exhibit 2.2 on Form 8-K/A
and Plan of Reorganization (included as filed May 28, 1998
Exhibit 10.25 hereof) dated May 7, 1998.
10.28 Conditional Delivery Agreement dated Exhibit 2.3 on Form 8-K/A
effective as of May 1, 1998, by and among filed July 24, 1998
UCI Medical Affiliates, Inc.; UCI Medical
Affiliates of Georgia, Inc.; and MainStreet
Healthcare Corporation.
10.29 Amendment to Conditional Delivery Agreement Exhibit 2.4 on Form 8-K/A
dated as of July 21, 1998, by and among UCI filed July 24, 1998
Medical Affiliates, Inc.; UCI Medical
Affiliates of Georgia, Inc.; and MainStreet
Healthcare Corporation.
10.30 Second Amendment to Conditional Delivery Exhibit 2.5 on Form 8-K/A
Agreement dated as of December 7, 1998, by filed on December 7, 1998
and among UCI Medical Affiliates, Inc.; UCI
Medical Affiliates of Georgia, Inc.; and
MainStreet Healthcare Corporation.
21 Subsidiaries of the Registrant Exhibit 21 on the Form
10-QSB filed for period
ending December 31, 1997
3
EXHIBIT PAGE NUMBER OR INCORPORATION
NUMBER DESCRIPTION BY REFERENCE TO
- -------------- --------------------------------------------- ------------------------------
27 Financial Data Schedule Filed separately as Article
Type 5 via Edgar
4