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)
<TABLE>
<CAPTION>
<S> <C>
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
------------------------------------
</TABLE>
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
<PAGE>
UCI MEDICAL AFFILIATES, INC.
INDEX TO FORM 10-KSB
<TABLE>
<CAPTION>
PART I PAGE
-----
<S> <C> <C>
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
</TABLE>
2
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
- - --------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
The fourteen additions were:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
<PAGE>
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.
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
PAYOR PATIENT VISITS REVENUE
--------------------------------------- --------------------- -------------------
1998 1997 1998 1997
--------------------- -------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
UCI MEDICAL AFFILIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1998 1997
------------- ------------
<S> <C> <C>
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
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
UCI MEDICAL AFFILIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
UCI MEDICAL AFFILIATES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
============ ============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
UCI MEDICAL AFFILIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------------------ -----------------------------------------
ACCUM ACCUM
COST DEPRECIATION COST DEPRECIATION
---------------- --------------- ------------------- ----------------
<S> <C> <C> <C> <C>
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
================= ================== ==================== ====================
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----------------- ----------------
<S> <C> <C> <C>
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)
================== ================= ================
</TABLE>
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
<PAGE>
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
<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
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
<PAGE>
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
<PAGE>
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
================= =================
</TABLE>
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
<PAGE>
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
<PAGE>
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.")
<TABLE>
<CAPTION>
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
- - ----------------------------- ---------- ------- ---------- -------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
44
<PAGE>
The following table summarizes the weighted average exercise price of stock
options exercisable at the end of each of the three previous fiscal years:
<TABLE>
<CAPTION>
1996 1997
WEIGHTED AVERAGE 1984 1994 NON-EMPLOYEE NON-EMPLOYEE
EXERCISE PRICE PLAN PLAN PLAN PLAN
- - ------------------------------------- ------------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
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
------------- ------------- ------------------ ------------------
</TABLE>
The following table summarizes options outstanding and exercisable by price
range as of September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
WEIGHTED-
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- - -------------------- --------------- --------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
$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
=============== ==============
</TABLE>
45
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30
------------------------------------------
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE DATE EXPIRATION
WARRANTS PRICE EXERCISABLE DATE
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
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
==============
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
DATE NUMBER PRICE TOTAL
PURCHASED ENTITY OF SHARES PER SHARE PURCHASE PRICE
-------- ------ --------- --------- --------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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.
</TABLE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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.
</TABLE>
53
<PAGE>
UCI MEDICAL AFFILIATES, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT PAGE NUMBER OR INCORPORATION
NUMBER DESCRIPTION BY REFERENCE TO
- - -------------- --------------------------------------------- ------------------------------
27 Financial Data Schedule Filed separately as Article
Type 5 via Edgar
</TABLE>
4
EXHIBIT 10.18
AMENDMENT DATED AUGUST 10, 1998 TO
EMPLOYMENT AGREEMENT DATED OCTOBER 6, 1995
5
<PAGE>
STATE OF SOUTH CAROLINA )
)
COUNTY OF RICHLAND )
AMENDMENT TO EMPLOYMENT
AGREEMENT BETWEEN
DOCTOR'S CARE, P.A. AND
M.F. MCFARLAND, III, M.D.
Doctor's Care, P.A., a South Carolina professional corporation
("Employer"), has entered into an Employment Agreement dated October 6, 1995
(the "Agreement") with M.F. McFarland, III, M.D. ("McFarland"), whereby
McFarland is employed to serve as President of Employer for a term commencing
October 1, 1995, and ending October 1, 2000. Employer and McFarland desire to
amend the Agreement to extend the term, increase the compensation, and modify
the termination procedures thereof. Accordingly, the parties have entered into
this Amendment to be effective as of this 10th day of August, 1998.
NOW, THEREFORE, for and in consideration of the mutual promises
set forth herein and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties do hereby agree to amend
paragraphs 2, 4, and 8 of the Agreement as provided herein. All remaining
provisions of the Agreement shall remain in full force and effect.
1. Paragraph 2 (Term) of the Agreement is hereby amended so as to
extend the term for ten (10) additional years, through October 1, 2010.
Accordingly, paragraph 2, as amended, now provides as follows:
Term. The employment shall commence on the date hereof, and shall
continue through October 1, 2010, unless earlier terminated in
accordance with the provisions of Section 8 of this Agreement.
2. Paragraph 4 (Compensation), subparagraph A of the Agreement is
hereby amended so as to increase McFarland's annual salary, effective October 1,
1998, to One Hundred Sixty-Seven Thousand Five Hundred Dollars and no/100
($167,500.00). In addition, commencing on October 1, 1999, and on the
anniversary date thereof every year until termination of the Agreement,
McFarland's annual salary shall be increased by three percent (3%) per year to
compensate for increases in the cost of living. The three percent (3%) annual
increase shall be calculated based on McFarland's annual salary on the
anniversary date.
Paragraph 4 is hereby amended further to include a new
subparagraph D entitled Additional
6
<PAGE>
Compensation in Event of Termination of Employment as President and Chief
Executive Officer of UCI Medical Affiliates of South Carolina, Inc. McFarland
has entered into a separate Employment Agreement with respect to his employment
as President and Chief Executive Officer of UCI Medical Affiliates of South
Carolina, Inc. ("UCI"). Subparagraph D shall provide that, in the event of the
termination of his employment as President and Chief Executive Officer of UCI,
McFarland shall receive as compensation from Employer certain additional
compensation formerly provided by UCI to McFarland.
Accordingly, subparagraph A of paragraph 4, as amended, and new
subparagraph D of paragraph 4, shall provide as follows:
A. Base Salary. Commencing on October 1, 1998, McFarland
shall receive from Employer an annual salary of One
Hundred Sixty-Seven Thousand Five Hundred Dollars and
no/100 ($167,500.00), payable in pay periods as determined
by Employer, but in no event less frequently than monthly.
Commencing on October 1, 1999, and on the anniversary date
thereof every year until termination of this Agreement,
McFarland's annual salary shall be increased by three
percent (3%) per year to compensate for increases in the
cost of living. The three percent (3%) annual increase
shall be calculated based upon McFarland's annual salary
on the anniversary date.
* * *
D. Additional Compensation in Event of Termination of
Employment as President and Chief Executive Officer of
UCI. In the event that McFarland is terminated from his
employment as President and Chief Executive Officer of
UCI, Employer will provide to McFarland the following
additional compensation:
1. Supplemental Salary. From the time of the UCI
termination until this Agreement terminates,
McFarland shall receive from Employer, in addition
to his base salary pursuant to subparagraph A of
paragraph 4 above, a supplemental annual salary in
the amount of One Hundred Fifty-Seven Thousand Five
Hundred Dollars and no/100 ($157,500.00), payable
in pay periods as determined by Employer, but in no
event less frequently than monthly.
2. Dues. From the time of the UCI termination until
this Agreement terminates, Employer shall pay all
dues of McFarland as a member of one private club
not to exceed Five Hundred Dollars and no/100
($500.00) per month for the purpose of entertaining
clients of Employer in connection with the
performance of McFarland's duties.
3. Automobile. From the time of the UCI termination
until this Agreement terminates, Employer shall
provide to McFarland the use of one (1) automobile.
4. Reimbursement for Expenses. From the time of the
UCI termination until this Agreement terminates,
Employer shall reimburse McFarland for all
7
<PAGE>
reasonable expenses in an aggregate amount equal
to, or less than Seven Thousand Five Hundred
Dollars and no/100 ($7,500.00) per annum incurred
by McFarland for the benefit of Employer in
performance of his duties hereunder.
5. Life Insurance. From the time of the UCI
termination until this Agreement terminates,
Employer shall purchase a term life insurance
policy that at the time of McFarland's death will
pay One Million Dollars ($1,000,000.00) to his
spouse or other designated beneficiary(s).
3. Paragraph 8 (Termination) of the Agreement is hereby amended
to define the term "cause" for termination.
Paragraph 8 is hereby amended further to include a new
subparagraph E entitled Termination without Cause by Employer, which provides
that in the event that McFarland is terminated without cause, Employer shall pay
McFarland a lump sum severance payment equal to two and one-half (2 1/2) times
his last two (2) years of Base Salary under subparagraph A plus any Supplemental
Salary under subparagraph D of paragraph 4.
Paragraph 8 is hereby amended further to include a new
subparagraph F entitled Personal Guarantee Assumption in the Event of
Termination, which provides that in the event of McFarland's termination by
either UCI or Employer under any circumstances, Employer shall assume any and
all liabilities personally guaranteed by McFarland within thirty (30) days of
such termination, thereby releasing McFarland from any personal liability.
Accordingly, subparagraph A of paragraph 8, as amended, and new subparagraphs E
and F of paragraph 8, shall provide as follows:
A. For Cause By Employer. Notwithstanding any other provision
hereof, Employer may terminate McFarland's employment under
this Agreement immediately at any time for "cause." For
purposes hereof the term "cause" shall be limited to the
commission of any of the following by McFarland: dishonesty;
theft; unethical business conduct; indictment for a felony;
McFarland's license to practice medicine in the State of
South Carolina is revoked or otherwise terminated; or
McFarland fails to follow accepted medical practices or is
guilty of misconduct under the principles of medical ethics
of the American Medical Association. If the termination is
for "cause" all compensation (including without limitation
the Base Salary, and all perquisites and fringe benefits) to
which McFarland would otherwise be entitled shall be
discontinued and forfeited as of the effective date of such
termination.
* * *
8
<PAGE>
E. Without Cause By Employer. Employer may terminate this
Agreement "without cause" at any time upon 30 days'
written notice to McFarland. In the event of such
termination, Employer shall pay McFarland a lump sum
severance payment equal to two and one-half (2 1/2)
times his last two (2) years of Base Salary. All other
compensation (including without limitation any
prerequisites and fringe benefits, if any) to which
McFarland would otherwise be entitled (for periods
after the effective date of such termination) shall be
discontinued and forfeited as of the effective date of
such termination.
F. Personal Guarantee Assumption in the Event of
Termination. In the event of McFarland's termination by
either UCI or Employer under any circumstances,
Employer shall assume any and all liabilities that
McFarland has personally guaranteed. Said guarantee
assumption shall take place within thirty (30) days of
McFarland's termination. If Employer fails to assume
any and all liabilities personally guaranteed by
McFarland within thirty (30) days of termination,
Employer shall pay McFarland One Thousand Dollars and
no/100 ($1,000.00) per day starting on the 30th day
after termination, and each day thereafter until
Employer assumes such liabilities.
IN WITNESS WHEREOF, Employer and McFarland have duly executed
this Amendment under seal to be effective as of the day and year first above
written.
IN THE PRESENCE OF: EMPLOYER:
--------
/s/ Patricia J. Hammond DOCTOR'S CARE, P.A. (SEAL)
- - ----------------------------
Witness
/s/ Carol J. Carroll By: /s/ M.F. McFarland, III, M.D.
- - ---------------------------- -----------------------------
Witness Its: President
-----------------------------
MCFARLAND:
---------
/s/ Patricia J. Hammond /s/ M.F. McFarland, III, M.D
- - ---------------------------- ---------------------------------
Witness M.F. McFarland, III, M.D.
/s/ Carol J. Carroll
- - ----------------------------
Witness
9
EXHIBIT 10.22
STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT
10
<PAGE>
STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT
THIS STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT (the "Option") is
made as of this 11th day of August, 1998, by and among M. F. McFarland, III,
M.D. (the "Shareholder"); UCI Medical Affiliates of South Carolina, Inc., a
South Carolina corporation ("UCI of SC"); and Doctor's Care, P.A., a South
Carolina professional corporation (the "Company").
WHEREAS, the Shareholder in the owner of Nine Hundred (900) shares (the
"Shares") of the common stock of the Company.
WHEREAS, the Shareholder is the President and Chief Executive Officer of
UCI of SC and the Company.
WHEREAS, the Shareholder desires to execute this Option to ensure that
the financial statements of the Company may be combined and consolidated with
and into the financial statements of UCI of SC and its parent entity, UCI
Medical Affiliates, Inc.
WHEREAS, in consideration of the foregoing, the Shareholder desires to
grant this Option pursuant to which UCI of SC may require that the Shareholder
offer to sell any and all shares of the common stock of the Company owned by
Shareholder, including but not limited to the Shares, to a person or persons
selected by UCI of SC in accordance with the terms and conditions set forth
herein.
WHEREAS, the Shareholder is the sole shareholder of the Company, and the
Share represents all the issued and outstanding capital stock of the Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the Shareholder hereby irrevocably grants
unto UCI of SC and its successors and assigns (the "Optionholder") an option to
the person or persons selected by the Optionholder (the "Purchaser") to purchase
any and all shares of the common stock of the Company now or hereafter owned by
Shareholder, including but not limited to the Shares, at the price and upon the
terms and conditions described herein, exercisable upon presentation of this
Option and payment of the purchase price as follows:
1. OPTION SHARE: Shareholder represents and warrants that: (a) as of the
date hereof, the Shares constitute the sole shares of stock or other
securities held directly or indirectly by Shareholder in the Company;
and (b) Shareholder owns, and shall deliver at the closing (as
described below), the Shares free and clear of all of pledges,
options, security interests, liens, claims, or other encumbrances
whatsoever and has full right, power, and authority to option and
transfer the Shares as described herein.
2. EXERCISE PRICE: Exercise of this Option requires the payment of One
Hundred and No/100 ($100.00) Dollars in cash or personal check by the
Purchaser to the Shareholder (the "Exercise Price").
3. OPTION PERIOD: This Option shall expire, and the Shareholder's
restrictions hereunder shall terminate, upon the earlier of (i) three
years after the effective date of the dissolution of the Company,
unless the Company is earlier reinstated pursuant to the South
Carolina Business Corporation Code, as amended, in which event this
Option shall not terminate; or (ii) the consummation of the exercise
of this Option as set forth herein; or (iii) the written consent of
UCI of SC.
11
<PAGE>
4. OPTION EXERCISE: The Optionholder may exercise this Option by
providing written notice (an "Exercise Notice") indicating the name
of the Purchaser(s), to the Shareholder at the Shareholder's notice
address set forth below, whereupon closing of the purchase of the
Shares shall take place at the date set forth in the Exercise Notice
(but not sooner than one (1) day nor later than ten (10) days after
the date the Exercise Notice is delivered to the Shareholder), or at
such other date as the Purchaser and the Shareholder shall agree.
Closing shall take place at the principal office of UCI of SC in
Columbia, South Carolina, or at such other place as the Optionholder
and the Shareholder shall agree. The purchase of the Shares pursuant
to this Option shall be effective for all purposes at the time the
Purchaser tenders payment to the Shareholder of the Exercise Price.
5. TRANSFER UPON EXERCISE: Upon delivery to the Shareholder of the
Exercise Notice by the Optionholder, the Shareholder (or in the event
of the Shareholder's death, the personal representative of
Shareholder) shall timely deliver or cause to be delivered to the
Purchaser on the date and at the place of closing set forth in the
Exercise Notice such stock certificates and stock powers, duly
endorsed for transfer, as are necessary to complete the transfer of
the Shares to Purchaser. Upon delivery to the Purchaser of such
instruments, the Purchaser shall immediately pay the Exercise Price
to the Shareholder.
6. RESTRICTIONS ON SHARES: So long as this Option remains
outstanding, (a) the Shareholder shall retain full title to, and
reserve for the benefit of the Optionholder, the Shares; (b)
certificates representing the Shares shall bear an appropriate legend
reflecting the Optionholder's rights under this Option; and (c) the
Shareholder shall not transfer the Shares except pursuant to this
Option without the Optionholder's prior written consent which may be
withheld for any or no reason. Any transfer in violation of this
Section shall be null, void, and without effect. The Shareholder
hereby acknowledges that the restrictions set forth in this Section
are necessary to maintain the number and identity of the shareholders
of the Company and are not manifestly unreasonable. Each certificate
evidencing shares of stock of the Company now or hereafter held by
the Shareholder shall bear a conspicuous statement in substantially
the following form:
THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THAT CERTAIN
STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT (THE "OPTION"), A COPY
OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. ANY PURPORTED
TRANSFER OR DISPOSITION OF SUCH SHARES IN VIOLATION OF THE OPTION SHALL
BE COMPLETELY NULL AND VOID.
7. VOTING AND OTHER SHAREHOLDER RIGHTS: Optionholder shall have none of the
voting or other rights of a shareholder with respect to the Shares which are
the subject of this Option granted hereby until such Shares have been fully
paid for upon valid exercise of this Option.
8. ANTI-DILUTION FEATURES: In the event that the Company proposes,
while this Option remains outstanding, (a) to make a stock dividend, stock
distribution, stock split, reverse stock split, stock reclassification, or
(b) to undergo a recapitalization, merger, consolidation, share exchange, or
sale of all or substantially all assets in return for securities of another
company, the Exercise Price and/or the number of shares subject to this
Option shall be adjusted equitably so that the Optionholder shall be
entitled to require that the Shareholder transfer to the Purchaser appointed
by the Optionholder for a proportionate aggregate price an equity and
economic position in the Company consistent with the equity and economic
position in the Company available under this Option at the date hereof.
Notwithstanding anything contained herein to the contrary, the term "Shares"
as used herein shall be deemed to include any and all such shares of the
capital stock of the Company owned by Shareholder from time to time.
9. RESIGNATION: The Shareholder shall be deemed to have resigned as an officer
and director of the Company at the time the Purchaser tenders payment to the
Shareholder of the Exercise Price as set forth in Section 4.
12
<PAGE>
10. LICENSE TO PRACTICE MEDICINE: The Shareholder hereby represents and warrants
that as of the date hereof Shareholder is licensed to practice medicine in
the State of South Carolina.
11. NOTICE OF CERTAIN EVENTS: So long as this Option has not expired or been
terminated pursuant to Section 3 hereof, (i) if the Company shall desire to
amend its bylaws or its Articles of Incorporation; or (ii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, sale lease, or transfer of all or substantially all of the
property and assets of the Company shall desire to be effected; or (iii) if
the Company shall desire to pay any dividend, in shares of stock or cash or
otherwise, or make any distribution upon the shares of its capital stock,
then in any such case, the Company shall cause to be delivered to the
Optionholder, at least thirty (30) days prior to the record date fixed for
the purpose of determining shareholders entitled to vote on such action, or
to receive such dividend, distribution, or offer, or to receive shares or
other assets deliverable upon such reorganization, reclassification,
consolidation, merger, sale, lease, transfer, dissolution, liquidation, or
winding up, as the case may be, a notice containing a brief description of
the proposed action and stating such record date.
12. SPECIFIC PERFORMANCE: Each party hereto acknowledges and agrees that the
other parties hereto would be damaged irreparably in the event any of the
provisions of this Option are not performed in accordance with their
specific terms or otherwise breached. Accordingly, each party agrees that
the other parties hereto shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Option and to specifically
enforce this Option and the terms and provisions hereof in any action
instituted in any court of the United States of any state thereof having
jurisdiction over the parties and the matter, in addition to any other
remedy to which it may be entitled, at law or in equity.
13. MISCELLANEOUS: The Optionholder shall be entitled to assign this Option to
any person or other entity, including but not limited to any corporation
controlled by or under common control with the Optionholder, or in
connection with the acquisition of, or the sale of substantially all of, the
assets of the Optionholder. This option may not be assigned by Shareholder
without the prior written consent of the Optionholder. This Option shall
inure to the benefit of the Optionholder and its successors and assigns and
shall be binding upon the Shareholder and his heirs and permitted assigns.
This Option may be modified or amended, and rights and obligations hereunder
may be waived, only in writing, signed by the Optionholder and the
Shareholder. This Option shall be governed by and construed in accordance
with the laws of the State of South Carolina. The parties consent to
jurisdiction and venue for any dispute arising hereunder in the courts for
Richland County, South Carolina. All terms and provisions of this Option
shall be severable from all other terms and provisions of this Option.
Notices required or permitted hereunder must be in writing and shall be
deemed given when placed in the U.S. certified mail, return receipt
requested, with postage prepaid, addressed to the recipient at the notice
address set forth below, or when personally delivered to the recipient.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Option and Restriction Agreement under seal to be legally binding and effective
as of the date first above written.
Notice Addresses: SHAREHOLDER:
- - ---------------- -----------
1901 Main Street, Suite 1200
Mail Code 1105
Columbia, South Carolina 29201 /s/ M.F. MCFARLAND, III, M.D.
Attn: M. F. McFarland, III, M.D. ----------------------------
M. F. McFarland, III, M.D.
UCI OF SC:
13
<PAGE>
UCI MEDICAL AFFILIATES OF SOUTH
CAROLINA, INC.
1901 Main Street, Suite 1200
Mail Code 1105
Columbia, South Carolina 29201 By: /s/ JERRY F. WELLS, JR.
Attn: Jerry F. Wells, Jr. ------------------------------------
Jerry F. Wells, Jr.
Its: Executive Vice-President and Chief
Financial Officer
COMPANY:
-------
DOCTOR'S CARE, P.A.
1901 Main Street, Suite 1200
Mail Code 1105
Columbia, South Carolina 29201 By: /s/ JERRY F. WELLS, JR.
Attn: Jerry F. Wells, Jr. ------------------------------------
Jerry F. Wells, Jr.
Its: Secretary
14
EXHIBIT 10.23
STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT
15
<PAGE>
STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT
THIS STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT (the "Option") is
made as of this 1st day of September, 1998, by and among D. Michael Stout, M.D.
(the "Shareholder"), UCI Medical Affiliates of Georgia, Inc., a South Carolina
corporation ("UCI of GA"), and Doctor's Care of Georgia, P.C., a Georgia
professional corporation (the "Company").
WHEREAS, simultaneously with the execution and delivery of this Option,
Beverly Yvonne Simons, M.D. ("Simons") sold to the Shareholder the sole
authorized, issued and outstanding share (the "Share") of the common stock of
the Company, pursuant to the direction of UCI of GA under that certain Stock
Purchase Option and Restriction Agreement by and among the Company, UCI of GA,
and Simons, dated March 9, 1998;
WHEREAS, in connection with the above-described sale of stock, UCI of GA
requires that the Shareholder grant this Option pursuant to which UCI of GA may
require that the Shareholder offer to sell any and all shares of the common
stock of the Company owned by Shareholder, including but not limited to the
Share, to a person or persons selected by UCI of GA in accordance with the terms
and conditions set forth herein; and
WHEREAS, the Shareholder is the sole shareholder of the Company, and the
Share represents all the issued and outstanding capital stock of the Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the Shareholder hereby irrevocably grants
unto UCI of GA and its successors and assigns (the "Optionholder") an option to
the person or persons selected by the Optionholder (the "Purchaser") to purchase
any and all shares of the common stock of the Company now or hereafter owned by
Shareholder, including but not limited to the Share, at the price and upon the
terms and conditions described herein, exercisable upon presentation of this
Option and payment of the purchase price as follows:
1. OPTION SHARE: Shareholder represents and warrants that: (a) as of the
date hereof, the Share constitutes the sole share of stock or other
securities held directly or indirectly by Shareholder in the Company;
and (b) Shareholder owns, and shall deliver at the closing (as
described below), the Share free and clear of all of pledges,
options, security interests, liens, claims, or other encumbrances
whatsoever and has full right, power, and authority to option and
transfer the Share as described herein.
2. EXERCISE PRICE: Exercise of this Option requires the payment of One
Hundred and No/100 ($100.00) Dollars in cash or personal check by the
Purchaser to the Shareholder (the "Exercise Price").
3. OPTION PERIOD: This Option shall expire, and the Shareholder's
restrictions hereunder shall terminate, upon the earlier of (i) three
years after the effective date of the dissolution of the Company,
unless the Company is earlier reinstated pursuant to the Georgia
Business Corporation Code, as amended, in which event this Option
shall not terminate; or (ii) the consummation of the exercise of this
Option as set forth herein; or (iii) the written consent of UCI of
GA.
4. OPTION EXERCISE: The Optionholder may exercise this Option by
providing written notice (an "Exercise Notice") indicating the name
of the Purchaser(s), to the Shareholder at the Shareholder's notice
address set forth below, whereupon closing of the purchase of the
Share shall take place at the date set forth in the Exercise Notice
(but not sooner than one (1) day nor later than ten (10) days after
the date the Exercise Notice is delivered to the Shareholder), or at
such other date as the Purchaser and the Shareholder shall agree.
Closing shall take place at the principal office of UCI of GA in
Columbia, South Carolina, or at such other place as the
Optionholder and the Shareholder
16
<PAGE>
shall agree. The purchase of the Share pursuant to this Option shall
be effective for all purposes at the time the Purchaser tenders
payment to the Shareholder of the Exercise Price.
5. TRANSFER UPON EXERCISE: Upon delivery to the Shareholder of the
Exercise Notice by the Optionholder, the Shareholder (or in the event
of the Shareholder's death, the personal representative of
Shareholder) shall timely deliver or cause to be delivered to the
Purchaser on the date and at the place of closing set forth in the
Exercise Notice such stock certificates and stock powers, duly
endorsed for transfer, as are necessary to complete the transfer of
the Share to Purchaser. Upon delivery to the Purchaser of such
instruments, the Purchaser shall immediately pay the Exercise Price
to the Shareholder.
6. RESTRICTIONS ON SHARES: So long as this Option remains
outstanding, (a) the Shareholder shall retain full title to, and
reserve for the benefit of the Optionholder, the Share; (b)
certificates representing the Share shall bear an appropriate legend
reflecting the Optionholder's rights under this Option; and (c) the
Shareholder shall not transfer the Share except pursuant to this
Option without the Optionholder's prior written consent which may be
withheld for any or no reason. Any transfer in violation of this
Section shall be null, void, and without effect. The Shareholder
hereby acknowledges that the restrictions set forth in this Section
are necessary to maintain the number and identity of the shareholders
of the Company and are not manifestly unreasonable. Each certificate
evidencing shares of stock of the Company now or hereafter held by
the Shareholder shall bear a conspicuous statement in substantially
the following form:
THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THAT CERTAIN
STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT (THE "OPTION"), A COPY
OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. ANY PURPORTED
TRANSFER OR DISPOSITION OF SUCH SHARES IN VIOLATION OF THE OPTION SHALL
BE COMPLETELY NULL AND VOID.
7. VOTING AND OTHER SHAREHOLDER RIGHTS: Optionholder shall have none of the
voting or other rights of a shareholder with respect to the Share which are
the subject of this Option granted hereby until such Share has been fully
paid for upon valid exercise of this Option.
8. ANTI-DILUTION FEATURES: In the event that the Company proposes,
while this Option remains outstanding, (a) to make a stock dividend, stock
distribution, stock split, reverse stock split, stock reclassification, or
(b) to undergo a recapitalization, merger, consolidation, share exchange, or
sale of all or substantially all assets in return for securities of another
company, the Exercise Price and/or the number of shares subject to this
Option shall be adjusted equitably so that the Optionholder shall be
entitled to require that the Shareholder transfer to the Purchaser appointed
by the Optionholder for a proportionate aggregate price an equity and
economic position in the Company consistent with the equity and economic
position in the Company available under this Option at the date hereof.
Notwithstanding anything contained herein to the contrary, in the event for
any reason the Shareholder is the owner of multiple shares of the capital
stock of the Company, the term "Share" as used herein shall be deemed to
include any and all such shares of the capital stock of the Company owned by
Shareholder from time to time.
9. RESIGNATION: The Shareholder shall be deemed to have resigned as an officer
and director of the Company at the time the Purchaser tenders payment to the
Shareholder of the Exercise Price as set forth in Section 4.
10. LICENSE TO PRACTICE MEDICINE: The Shareholder hereby represents and warrants
that as of the date hereof Shareholder is licensed to practice medicine in
the State of Georgia.
11. NOTICE OF CERTAIN EVENTS: So long as this Option has not expired or been
terminated pursuant to Section 3 hereof, (i) if the Company shall desire to
amend its bylaws or its Articles of Incorporation; or (ii) if any
17
<PAGE>
capital reorganization of the Company, reclassification of the capital stock
of the Company, consolidation or merger of the Company with or into another
corporation, sale lease, or transfer of all or substantially all of the
property and assets of the Company shall desire to be effected; or (iii) if
the Company shall desire to pay any dividend, in shares of stock or cash or
otherwise, or make any distribution upon the shares of its capital stock,
then in any such case, the Company shall cause to be delivered to the
Optionholder, at least thirty (30) days prior to the record date fixed for
the purpose of determining shareholders entitled to vote on such action, or
to receive such dividend, distribution, or offer, or to receive shares or
other assets deliverable upon such reorganization, reclassification,
consolidation, merger, sale, lease, transfer, dissolution, liquidation, or
winding up, as the case may be, a notice containing a brief description of
the proposed action and stating such record date.
12. SPECIFIC PERFORMANCE: Each party hereto acknowledges and agrees that the
other parties hereto would be damaged irreparably in the event any of the
provisions of this Option are not performed in accordance with their
specific terms or otherwise breached. Accordingly, each party agrees that
the other parties hereto shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Option and to specifically
enforce this Option and the terms and provisions hereof in any action
instituted in any court of the United States of any state thereof having
jurisdiction over the parties and the matter, in addition to any other
remedy to which it may be entitled, at law or in equity.
13. MISCELLANEOUS: The Optionholder shall be entitled to assign this Option to
any person or other entity, including but not limited to any corporation
controlled by or under common control with the Optionholder, or in
connection with the acquisition of, or the sale of substantially all of, the
assets of the Optionholder. This option may not be assigned by Shareholder
without the prior written consent of the Optionholder. This Option shall
inure to the benefit of the Optionholder and its successors and assigns and
shall be binding upon the Shareholder and his heirs and permitted assigns.
This Option may be modified or amended, and rights and obligations hereunder
may be waived, only in writing, signed by the Optionholder and the
Shareholder. This Option shall be governed by and construed in accordance
with the laws of the State of South Carolina. The parties consent to
jurisdiction and venue for any dispute arising hereunder in the courts for
Richland County, South Carolina. All terms and provisions of this Option
shall be severable from all other terms and provisions of this Option.
Notices required or permitted hereunder must be in writing and shall be
deemed given when placed in the U.S. certified mail, return receipt
requested, with postage prepaid, addressed to the recipient at the notice
address set forth below, or when personally delivered to the recipient.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Option and Restriction Agreement under seal to be legally binding and effective
this 1st day of September, 1998.
Notice Addresses: SHAREHOLDER:
- - ---------------- -----------
1901 Main Street
Mail Code 1105 /s/ D. MICHAEL STOUT, M.D.
Columbia, SC 29201 --------------------------------
D. Michael Stout, M.D.
UCI OF GA:
---------
UCI MEDICAL AFFILIATES OF GEORGIA, INC.
1901 Main Street, Suite 1200
Mail Code 1105
Columbia, South Carolina 29201 By: /s/ M. F. MCFARLAND, III, M.D.
-----------------------------------
18
<PAGE>
Attn: Jerry F. Wells, Jr. M. F. McFarland, III, M.D.
Its: President and Chief Executive
Officer
COMPANY:
-------
DOCTOR'S CARE OF GEORGIA, P.C.
1901 Main Street, Suite 1200
Mail Code 1105
Columbia, South Carolina 29201 By: /s/ JERRY F. WELLS, JR.
Attn: Jerry F. Wells, Jr. ----------------------------------
Jerry F. Wells, Jr.
Its: Secretary and Treasurer
19
EXHIBIT 10.24
STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT
20
<PAGE>
STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT
THIS STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT (the "Option") is
made as of this 15th day of July, 1998, by and among D. Michael Stout, M.D. (the
"Shareholder"), UCI Medical Affiliates of Georgia, Inc., a South Carolina
corporation ("UCI of GA"), and Doctor's Care of Tennessee, P.C., a Tennessee
professional corporation (the "Company").
WHEREAS, simultaneously with the execution and delivery of this Option,
Alfred R. Frye, D.O. ("Frye") sold to the Shareholder the sole authorized,
issued and outstanding share (the "Share") of the common stock of the Company,
pursuant to the direction of UCI of GA under that certain Stock Purchase Option
and Restriction Agreement by and among the Company, UCI of GA, and Frye, dated
March 9, 1998;
WHEREAS, in connection with the above-described sale of stock, UCI of GA
requires that the Shareholder grant this Option pursuant to which UCI of GA may
require that the Shareholder offer to sell any and all shares of the common
stock of the Company owned by Shareholder, including but not limited to the
Share, to a person or persons selected by UCI of GA in accordance with the terms
and conditions set forth herein; and
WHEREAS, the Shareholder is the sole shareholder of the Company, and the
Share represents all the issued and outstanding capital stock of the Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the Shareholder hereby irrevocably grants
unto UCI of GA and its successors and assigns (the "Optionholder") an option to
the person or persons selected by the Optionholder (the "Purchaser") to purchase
any and all shares of the common stock of the Company now or hereafter owned by
Shareholder, including but not limited to the Share, at the price and upon the
terms and conditions described herein, exercisable upon presentation of this
Option and payment of the purchase price as follows:
1. OPTION SHARE: Shareholder represents and warrants that: (a) as of the
date hereof, the Share constitutes the sole share of stock or other
securities held directly or indirectly by Shareholder in the Company;
and (b) Shareholder owns, and shall deliver at the closing (as
described below), the Share free and clear of all of pledges,
options, security interests, liens, claims, or other encumbrances
whatsoever and has full right, power, and authority to option and
transfer the Share as described herein.
2. EXERCISE PRICE: Exercise of this Option requires the payment of One
Hundred and No/100 ($100.00) Dollars in cash or personal check by the
Purchaser to the Shareholder (the "Exercise Price").
3. OPTION PERIOD: This Option shall expire, and the Shareholder's
restrictions hereunder shall terminate, upon the earlier of (i) three
years after the effective date of the dissolution of the Company,
unless the Company is earlier reinstated pursuant to the Tennessee
Business Corporation Code, as amended, in which event this Option
shall not terminate; or (ii) the consummation of the exercise of this
Option as set forth herein; or (iii) the written consent of UCI of
GA.
4. OPTION EXERCISE: The Optionholder may exercise this Option by
providing written notice (an "Exercise Notice") indicating the name
of the Purchaser(s), to the Shareholder at the Shareholder's notice
address set forth below, whereupon closing of the purchase of the
Share shall take place at the date set forth in the Exercise Notice
(but not sooner than one (1) day nor later than ten (10) days after
the date the Exercise Notice is delivered to the Shareholder), or at
such other date as the Purchaser and the Shareholder shall agree.
Closing shall take place at the principal office of UCI of GA in
Columbia, South Carolina, or at such other place as the Optionholder
and the Shareholder
21
<PAGE>
shall agree. The purchase of the Share pursuant to this Option shall
be effective for all purposes at the time the Purchaser tenders
payment to the Shareholder of the Exercise Price.
5. TRANSFER UPON EXERCISE: Upon delivery to the Shareholder of the
Exercise Notice by the Optionholder, the Shareholder (or in the event
of the Shareholder's death, the personal representative of
Shareholder) shall timely deliver or cause to be delivered to the
Purchaser on the date and at the place of closing set forth in the
Exercise Notice such stock certificates and stock powers, duly
endorsed for transfer, as are necessary to complete the transfer of
the Share to Purchaser. Upon delivery to the Purchaser of such
instruments, the Purchaser shall immediately pay the Exercise Price
to the Shareholder.
6. RESTRICTIONS ON SHARES: So long as this Option remains
outstanding, (a) the Shareholder shall retain full title to, and
reserve for the benefit of the Optionholder, the Share; (b)
certificates representing the Share shall bear an appropriate legend
reflecting the Optionholder's rights under this Option; and (c) the
Shareholder shall not transfer the Share except pursuant to this
Option without the Optionholder's prior written consent which may be
withheld for any or no reason. Any transfer in violation of this
Section shall be null, void, and without effect. The Shareholder
hereby acknowledges that the restrictions set forth in this Section
are necessary to maintain the number and identity of the shareholders
of the Company and are not manifestly unreasonable. Each certificate
evidencing shares of stock of the Company now or hereafter held by
the Shareholder shall bear a conspicuous statement in substantially
the following form:
THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THAT CERTAIN
STOCK PURCHASE OPTION AND RESTRICTION AGREEMENT (THE "OPTION"), A COPY
OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. ANY PURPORTED
TRANSFER OR DISPOSITION OF SUCH SHARES IN VIOLATION OF THE OPTION SHALL
BE COMPLETELY NULL AND VOID.
7. VOTING AND OTHER SHAREHOLDER RIGHTS: Optionholder shall have none of the
voting or other rights of a shareholder with respect to the Share which are
the subject of this Option granted hereby until such Share has been fully
paid for upon valid exercise of this Option.
8. ANTI-DILUTION FEATURES: In the event that the Company proposes,
while this Option remains outstanding, (a) to make a stock dividend, stock
distribution, stock split, reverse stock split, stock reclassification, or
(b) to undergo a recapitalization, merger, consolidation, share exchange, or
sale of all or substantially all assets in return for securities of another
company, the Exercise Price and/or the number of shares subject to this
Option shall be adjusted equitably so that the Optionholder shall be
entitled to require that the Shareholder transfer to the Purchaser appointed
by the Optionholder for a proportionate aggregate price an equity and
economic position in the Company consistent with the equity and economic
position in the Company available under this Option at the date hereof.
Notwithstanding anything contained herein to the contrary, in the event for
any reason the Shareholder is the owner of multiple shares of the capital
stock of the Company, the term "Share" as used herein shall be deemed to
include any and all such shares of the capital stock of the Company owned by
Shareholder from time to time.
9. RESIGNATION: The Shareholder shall be deemed to have resigned as an officer
and director of the Company at the time the Purchaser tenders payment to the
Shareholder of the Exercise Price as set forth in Section 4.
10. LICENSE TO PRACTICE MEDICINE: The Shareholder hereby represents and warrants
that as of the date hereof Shareholder is licensed to practice medicine in
the State of Tennessee.
11. NOTICE OF CERTAIN EVENTS: So long as this Option has not expired or been
terminated pursuant to Section 3 hereof, (i) if the Company shall desire to
amend its bylaws or its Articles of Incorporation; or (ii) if any
22
<PAGE>
capital reorganization of the Company, reclassification of the capital stock
of the Company, consolidation or merger of the Company with or into another
corporation, sale lease, or transfer of all or substantially all of the
property and assets of the Company shall desire to be effected; or (iii) if
the Company shall desire to pay any dividend, in shares of stock or cash or
otherwise, or make any distribution upon the shares of its capital stock,
then in any such case, the Company shall cause to be delivered to the
Optionholder, at least thirty (30) days prior to the record date fixed for
the purpose of determining shareholders entitled to vote on such action, or
to receive such dividend, distribution, or offer, or to receive shares or
other assets deliverable upon such reorganization, reclassification,
consolidation, merger, sale, lease, transfer, dissolution, liquidation, or
winding up, as the case may be, a notice containing a brief description of
the proposed action and stating such record date.
12. SPECIFIC PERFORMANCE: Each party hereto acknowledges and agrees that the
other parties hereto would be damaged irreparably in the event any of the
provisions of this Option are not performed in accordance with their
specific terms or otherwise breached. Accordingly, each party agrees that
the other parties hereto shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Option and to specifically
enforce this Option and the terms and provisions hereof in any action
instituted in any court of the United States of any state thereof having
jurisdiction over the parties and the matter, in addition to any other
remedy to which it may be entitled, at law or in equity.
13. MISCELLANEOUS: The Optionholder shall be entitled to assign this Option to
any person or other entity, including but not limited to any corporation
controlled by or under common control with the Optionholder, or in
connection with the acquisition of, or the sale of substantially all of, the
assets of the Optionholder. This option may not be assigned by Shareholder
without the prior written consent of the Optionholder. This Option shall
inure to the benefit of the Optionholder and its successors and assigns and
shall be binding upon the Shareholder and his heirs and permitted assigns.
This Option may be modified or amended, and rights and obligations hereunder
may be waived, only in writing, signed by the Optionholder and the
Shareholder. This Option shall be governed by and construed in accordance
with the laws of the State of South Carolina. The parties consent to
jurisdiction and venue for any dispute arising hereunder in the courts for
Richland County, South Carolina. All terms and provisions of this Option
shall be severable from all other terms and provisions of this Option.
Notices required or permitted hereunder must be in writing and shall be
deemed given when placed in the U.S. certified mail, return receipt
requested, with postage prepaid, addressed to the recipient at the notice
address set forth below, or when personally delivered to the recipient.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Option and Restriction Agreement under seal to be legally binding and effective
this 15th day of July, 1998.
Notice Addresses: SHAREHOLDER:
- - ---------------- ------------
1901 Main Street
Mail Code 1105 /s/ D. MICHAEL STOUT
Columbia, SC 29201 -------------------------------
Attn. D. Michael Stout, M.D. D. Michael Stout, M.D.
UCI OF GA:
---------
UCI MEDICAL AFFILIATES OF GEORGIA,
INC.
1901 Main Street, Suite 1200
Mail Code 1105
Columbia, South Carolina 29201 By: /s/ M.F.MCFARLAND,III,M.D.
---------------------------
23
<PAGE>
Attn: Jerry F. Wells, Jr. M. F. McFarland, III, M.D.
Its: President and Chief Executive
Officer
COMPANY:
-------
DOCTOR'S CARE OF TENNESSEE, P.C.
1901 Main Street, Suite 1200
Mail Code 1105
Columbia, South Carolina 29201 By: /s/ JERRY F. WELLS, JR.
Attn: Jerry F. Wells, Jr. ----------------------------
Jerry F. Wells, Jr.
Its: Secretary and Treasurer
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 335,923
<SECURITIES> 0
<RECEIVABLES> 8,788,620
<ALLOWANCES> 3,758,771
<INVENTORY> 539,564
<CURRENT-ASSETS> 10,539,516
<PP&E> 5,475,051
<DEPRECIATION> 3,762,865
<TOTAL-ASSETS> 26,202,283
<CURRENT-LIABILITIES> 14,257,940
<BONDS> 0
0
0
<COMMON> 364,962
<OTHER-SE> 621,834
<TOTAL-LIABILITY-AND-EQUITY> 26,202,283
<SALES> 0
<TOTAL-REVENUES> 37,566,037
<CGS> 0
<TOTAL-COSTS> 36,116,318
<OTHER-EXPENSES> 2,063,320
<LOSS-PROVISION> 2,977,958
<INTEREST-EXPENSE> 1,463,233
<INCOME-PRETAX> (8,755,402)
<INCOME-TAX> 1,752,741
<INCOME-CONTINUING> (10,508,143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,508,143)
<EPS-PRIMARY> (1.61)
<EPS-DILUTED> 0
</TABLE>
