SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) May 13, 1998
UCI Medical Affiliates, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
0-13265 59-2225346
(Commission File Number) (I.R.S. Employer Identification No.)
1901 Main Street, Suite 1200, Columbia, SC 29201
(Address of Principal Executive Offices) (Zip Code)
(803) 252-3661
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
This Form 8-K/A amends the Form 8-K filed with the Securities and
Exchange Commission on February 17, 1998 by UCI Medical Affiliates, Inc., a
Delaware corporation ("UCI"); that certain Form 8-K/A filed with the Securities
and Exchange Commission on April 20, 1998; that certain Form 8-K/A filed with
the Securities and Exchange Commission on May 28, 1998; and that certain Form
8-K/A filed with the Securities and Exchange Commission on July 24, 1998, and is
filed to include the revised financial statements required by Item 7 of Form
8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The revised consolidated financial statements for
MainStreet Healthcare Corporation, the business acquired by a
wholly-owned subsidiary of UCI Medical Affiliates, Inc., are
included in this report beginning on page 5.
(B) PRO FORMA FINANCIAL INFORMATION.
The revised unaudited pro forma financial information
prepared to give effect to the acquisition was included in this
report as an attachment to that certain Form 8-K/A filed with the
Securities and Exchange Commission on May 28, 1998.
(C) EXHIBITS.
Exhibit 2 Acquisition Agreement and Plan of Reorganization dated
February 9, 1998, by and among UCI Medical Affiliates of
Georgia, Inc., a South Carolina corporation; UCI Medical
Affiliates, Inc., a Delaware corporation; MainStreet
Healthcare Corporation, a Delaware corporation; MainStreet
Healthcare Medical Group, P.C., a Georgia professional
corporation; MainStreet Healthcare Medical Group, PC, a
Tennessee professional corporation; Prompt Care Medical
Center, Inc., a Georgia corporation; Michael J. Dare; A.
Wayne Johnson; PENMAN Private Equity and Mezzanine Fund,
L.P., a Delaware limited partnership; and Robert G. Riddett,
Jr. (Previously filed with the initial filing of this Report
on Form 8- K).
Exhibit 2.1 First Amendment To Acquisition Agreement and Plan of
Reorganization dated April 15, 1998, by and among UCI Medical
Affiliates of Georgia, Inc., a South Carolina corporation;
UCI Medical Affiliates, Inc., a Delaware corporation;
MainStreet Healthcare Corporation, a Delaware corporation;
MainStreet Healthcare Medical Group, P.C., a Georgia
professional corporation; MainStreet Healthcare Medical
Group, PC, a Tennessee professional corporation; Prompt Care
Medical Center, Inc., a Georgia corporation; Michael J. Dare;
A. Wayne Johnson; PENMAN Private Equity and Mezzanine Fund,
L.P., a Delaware limited partnership; and Robert G. Riddett,
Jr (Previously filed with the filing of this Report on Form
8-K/A filed on April 20,1998).
<PAGE>
Exhibit 2.2 Second Amendment To Acquisition Agreement and Plan of
Reorganization dated May 7, 1998, by and among UCI Medical
Affiliates of Georgia, Inc., a South Carolina corporation;
UCI Medical Affiliates, Inc., a Delaware corporation;
MainStreet Healthcare Corporation, a Delaware corporation;
MainStreet Healthcare Medical Group, P.C., a Georgia
professional corporation; MainStreet Healthcare Medical
Group, PC, a Tennessee professional corporation; Prompt Care
Medical Center, Inc., a Georgia corporation; Michael J. Dare;
A. Wayne Johnson; PENMAN Private Equity and Mezzanine Fund,
L.P., a Delaware limited partnership; and Robert G. Riddett,
Jr. (Previously filed with the filing of this Report on Form
8-K/A filed on May 28,1998)
Exhibit 2.3 Conditional Delivery Agreement dated effective as of May 1,
1998, by and among UCI Medical Affiliates, Inc.; UCI Medical
Affiliates of Georgia, Inc.; and MainStreet Healthcare
Corporation. (Previously filed with the filing of this Report
on Form 8-K/A filed on July 24,1998)
Exhibit 2.4 Amendment to Conditional Delivery Agreement dated as of July
21, 1998, by and among UCI Medical Affiliates, Inc.; UCI
Medical Affiliates of Georgia, Inc.; and MainStreet
Healthcare Corporation. (Previously filed with the filing of
this Report on Form 8-K/A filed on July 24,1998)
Exhibit 99 News release of UCI Medical Affiliates, Inc. dated February
13, 1998. (Previously filed with the initial filing of this
Report on Form 8-K).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UCI MEDICAL AFFILIATES, INC.
Date: August 12, 1998 By: /S/ JERRY F. WELLS, JR.
-----------------------
Jerry F. Wells, Jr., C.P.A.
Executive Vice President of
Finance and Chief Financial Officer
<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Consolidated Financial Statements
March 31, 1998 and 1997
With Independent Auditors Report Thereon
<PAGE>
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.
June 2, 1998, except as to the third /S/ KPMG Peat Marwick, LLP
paragraph of note 7, which is as of
July 6, 1998
(Original signed opinion on KPMG Peat Marwick, LLP letterhead is on file in the
corporate offices of UCI Medical Affiliates, Inc.)
- 1 -
<PAGE>
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
========== ==========
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<PAGE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Deficit 1998 1997
------------------------------------- ----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable ........................................................................ $ 1,136,606 695,411
Line of credit (note 7) ................................................................. 574,327 --
Accrued expenses and liabilities ........................................................ 1,928,547 615,237
Current portion of notes payable (notes 3 and 8) ........................................ 477,095 357,053
Current portion of capital lease obligation (note 8) .................................... 48,693 3,401
Shareholder loan (note 9) ............................................................... 94,174 18,252
----------- -----------
Total current liabilities ..................................................... 4,259,442 1,689,354
----------- -----------
Long-term liabilities:
Notes payable, less current portion (notes 3 and 8) ..................................... 368,704 751,261
Capital lease obligation, less current portion (note 8) ................................. 74,380 14,183
----------- -----------
Total long-term liabilities ................................................... 443,084 765,444
----------- -----------
Total liabilities ............................................................. 4,702,526 2,454,798
Preferred stock, $.01 par value; 11,500 and 14,000 shares authorized, no shares
issued and outstanding at March 31,
1998 and 1997, respectively (note 4) .................................................... -- --
5% cumulative redeemable preferred stock, $1,000 redemption
value; 6,000 shares authorized, 4,367 shares issued and outstanding at
March 31, 1998 and 3,367 shares issued and outstanding, 750 shares
subscribed at March 31, 1997
(notes 4, 9, and 12) .................................................................... 4,367,000 4,117,000
10% cumulative redeemable preferred stock, $1,000 redemption
value; 2,500 and -0- shares authorized, 412 and -0- shares issued and
outstanding at March 31, 1998 and 1997, respectively
(notes 4, 9, and 12) .................................................................... 412,000 --
Class A nonvoting convertible common stock, $.01 par value;
5,000,000 shares authorized, 248,000 and 268,000 shares issued and
outstanding at March 31, 1998 and 1997,
respectively (notes 3 and 4) ............................................................ 816,007 738,979
Stockholders' deficit:
Class B common stock, $.01 par value; 20,000,000 shares authorized,
6,460,452 and 5,875,000 shares issued and outstanding at March 31, 1998
and 1997,
respectively (notes 4, 9, and 12) .................................................... 64,605 58,750
Additional paid-in capital .............................................................. 42,516 38,586
Accumulated deficit ..................................................................... (5,698,392) (1,612,237)
----------- -----------
Total stockholders' deficit ................................................... (5,591,271) (1,514,901)
----------- -----------
Total liabilities and stockholders' deficit ................................... $ 4,706,262 5,795,876
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
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.
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<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Consolidated Statements of Stockholders' Deficit
For the Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Class B
common stock Additional Total
-------------------------- paid-in Accumulated stockholder's
Shares Amount capital deficit deficit
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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)
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Consolidated Statements of Cash Flows
For the Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
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 ....................................................................... $ -- --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(1) Organization and Basis of Presentation
(a) Description of Business
MainStreet Healthcare Corporation ("the Company") was incorporated on
February 6, 1996 and commenced operations on April 1, 1996. The Company
was organized to purchase general practitioner outpatient clinics in
Georgia and Tennessee. After purchasing a clinic, the Company focuses on
centralizing fixed costs and reducing the overall overhead of each
outpatient clinic in order to maximize income and cash flow. From April
1, 1996 to March 31, 1998, the Company has acquired 14 primary care
clinics.
(b) Basis of Presentation
The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and the
affiliated professional corporations ("Professional Corporations").
Through the initial management services agreements between the Company
and the Professional Corporations which contain fifty-year terms, the
Company has assumed full responsibility for the operating expenses in
return for the assignment of the revenue of the Professional
Corporations.
The Company has perpetual, unilateral control over the assets and
operations of the Professional Corporations, and notwithstanding the
lack of technical majority ownership of the stock of such entities,
consolidation of the various Professional Corporations is necessary to
present fairly the financial position and results of operations of the
Company because control exists by means other than ownership of stock.
Control by the Company is perpetual rather than temporary because (i)
the length of the original terms of the agreements, (ii) the successive
extension periods provided by the agreements, (iii) the continuing
investment of capital by the Company, (iv) the employment of the
nonphysician personnel, and (v) the nature of the services provided to
the Professional Corporations by the Company. All intercompany accounts
and transactions have been eliminated during consolidation.
The Company has experienced recurring losses of approximately $5,700,000
since its inception and has a net working capital deficiency of
approximately $2,700,000 at March 31, 1998. In addition, the liabilities
of the Company, including preferred stock and Class A common stock,
exceeded its assets by approximately $5,600,000. Effective May 1, 1998,
the Company sold substantially all of its assets for which the ultimate
proceeds will not be determined until the stock to be received is sold
(note 13). The Company is currently negotiating with its creditors and
preferred and Class A common shareholders to satisfy its debt
obligations. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
(Continued)
- 7 -
<PAGE>
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.
(Continued)
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<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(d) Income Taxes
The Company accounts for income taxes using the asset and liability
method of Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES ("SFAS No. 109"). Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences 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
(Continued)
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<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(h) Reclassifications
Certain reclassifications have been made in the 1997 consolidated
financial statements to conform with the presentation in the 1998
consolidated financial statements.
(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.
Simultaneous with each acquisition, the Company enters into long-term
clinic services agreements. Under these agreements, the Company manages all
aspects of the affiliated practice other than the provision of medical
services, which is controlled by the physician groups. For providing
services under the clinic services agreements, the physicians receive
compensation based on individually negotiated contracts. Generally, the
clinic service agreements cannot be terminated by the physician group or
the Company without cause, which includes material default or bankruptcy of
either party.
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
(Continued)
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<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
net assets acquired and the liabilities assumed based upon their fair
values at the dates of acquisition. In connection with these acquisitions,
the Company issued 268,000 shares of Class A common stock in MainStreet
Healthcare Corporation in 1997. The Company also entered into stock
repurchase agreements with the selling physicians whereby in the event
there has not been an initial public stock offering, or a sale of
substantially all of the Company's assets, or a change in control of the
Company's voting stock which would produce for the Class A shareholders a
value of $5 per share, the shareholders could compel the Company to
purchase the stock for $5 a share at a predetermined future date (the
"repurchase date"). The Company recorded the stock by discounting the $5
per share price from the repurchase date using a risk-based interest rate
of 15%. The difference between the recorded value and the maximum
repurchase value of its stock issued in connection with these acquisitions
was $643,395, which is being accreted over the period from the date of
issuance to the repurchase dates through periodic charges to accumulated
deficit. Effective May 1, 1998, the Company sold substantially all of the
assets of the Company (see note 13). The Company is in the process of
negotiating settlements with each Class A shareholder to satisfy these
obligations. The ultimate settlement amount has not been determined. The
Company also issued $71,876 and $1,531,677 in notes payable in 1998 and
1997, respectively. The excess of the purchase price over the fair values
of the net assets acquired was $29,612 and $1,813,179 in 1998 and 1997,
respectively, and has been recorded as goodwill and is being amortized
using a straight-line method over 15 years. The composition of acquisition
of businesses, net of cash acquired, is set forth below:
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.
(Continued)
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<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
(4) Reorganization
MainStreet Healthcare Corporation (MainStreet Georgia), an S Corporation,
was organized on February 6, 1996 as a Georgia Corporation and was
authorized 10,000,000 shares of no par common stock of which 5,375,000
shares were issued.
On December 4, 1996, MainStreet Healthcare Corporation (MainStreet
Delaware), a C Corporation, was incorporated and was authorized 10,000,000
shares of no par common stock. Effective December 9, 1996, the shareholders
of MainStreet Georgia exchanged their shares for equal shares in MainStreet
Delaware pursuant to a merger of MainStreet Georgia with and into
MainStreet Delaware.
On December 11, 1996, MainStreet Delaware amended and restated the
Certificate of Incorporation in order to give MainStreet Delaware the
authority to issue preferred stock and common stock as follows:
(a) 20,000 shares of preferred stock, par value $.01 per share.
MainStreet Delaware's Board of Directors has the authority to
fix the terms of the preferred stock. These shares were
subsequently used to issue five and ten percent cumulative
redeemable preferred stock in MainStreet Delaware during 1998
and 1997.
(b) 5,000,000 shares of Class A non-voting convertible common stock,
par value $.01 per share. One share of Class A non-voting is
convertible upon: (i) a qualified public offering; (ii) a sale
of substantially all of the assets; or (iii) a sale of a
majority of the Class B common stock, into one fully paid and
non-assessable share of Class B common stock. On May 1, 1998,
substantially all the assets of the Company were sold. The
Company is negotiating with all Class A shareholders to either
effect the conversion or enter into a settlement agreement (note
13).
(c) 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.
(Continued)
- 12 -
<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
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
=========== ===========
(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,
(Continued)
- 13 -
<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
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
========== ==========
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.
(Continued)
- 14 -
<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
The following is a schedule of future minimum lease payments under the
capital leases together with the present value of the net minimum lease
payments as of March 31, 1998.
1999 $ 60,055
2000 47,055
2001 22,648
2002 13,908
2003 1,159
--------
Total minimum lease payments 144,825
Less amounts representing interest 21,752
--------
Obligation under capital leases 123,073
Less current portion of capital lease obligations 48,693
--------
Long-term obligations under capital leases $ 74,380
========
Capitalized equipment leases included in equipment were 169,007 and $18,600
at March 31, 1998 and 1997, respectively. Imputed interest rates ranged
from 6.20% to 16.45% at March 31, 1998 and 1997, respectively.
OPERATING LEASES: Operating leases generally consist of short-term lease
agreements for professional office space where the medical practices are
located. These leases generally have five-year terms with renewal options.
Lease expense of approximately $565,000 and $250,000 for 1998 and 1997,
respectively, consists of corporate office space, corporate equipment and
medical office space, and equipment for the operating practices.
The following is a schedule of future minimum lease payments under
noncancelable operating leases as of March 31, 1998.
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.
(Continued)
- 15 -
<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
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 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.
(Continued)
- 16 -
<PAGE>
MAINSTREET HEALTHCARE CORPORATION
Notes to Consolidated Financial Statements
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.
(Continued)
- 17 -
<PAGE>
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).
- 18 -
