UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1999
------------------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from: to
Commission file number: 0-13265
UCI MEDICAL AFFILIATES, INC.
(Exact name of small business issuer as specified in its
charter)
Delaware 59-2225346
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
1901 Main Street, Suite 1200, Mail Code 1105,
Columbia, SC 29201 (Address of principal
executive offices)
(803) 252-3661
(Issuer's telephone number)
(Former name, address or fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ( X )Yes ( ) No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
9,650,515 shares of $.05 common stock outstanding at July 31, 1999
<PAGE>
UCI MEDICAL AFFILIATES, INC.
INDEX
<TABLE>
<S> <C> <C>
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1999
and September 30, 1998 3
Condensed Consolidated Statements of Operations for the quarters and
the nine months ending June 30, 1999 and June 30, 1998 4
Condensed Consolidated Statements of Cash Flows for the nine months
ending June 30, 1999 and June 30, 1998 5
Notes to Condensed Consolidated Financial Statements 6 - 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 14
Item 3 Quantitative and Qualitative Disclosures about Market Risk 15
PART II OTHER INFORMATION
Items 1-6 16
SIGNATURES 17
EXHIBIT INDEX 18
</TABLE>
<PAGE>
UCI Medical Affiliates, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
June 30, 1999 September 30, 1998
-------------------- ------------------------
(unaudited) (audited)
Assets
Current assets
Cash and cash equivalents $ 73,763 $ 335,923
Accounts receivable, less allowance for doubtful accounts
of $887,299 and $3,758,771 8,608,169 8,788,620
Inventory 490,341 539,564
Prepaid expenses and other current assets 622,825 875,409
-------------------- ------------------------
Total current assets 9,795,098 -----------------------
10,539,516
Property and equipment, less accumulated depreciation of
$4,629,937 and $3,762,865 4,721,376 5,475,051
Excess of cost over fair value of assets acquired, less
accumulated amortization of $2,460,969 and $2,097,149 8,889,622 9,944,039
Other assets 41,501 243,677
-------------------- ------------------------
Total Assets $ 23,447,597 $ 26,202,283
==================== ========================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 1,654,804 $ 5,540,552
Current portion of long-term debt payable to employees 45,246 190,452
Accounts payable 3,723,918 5,283,023
Accrued salaries and payroll taxes 1,659,333 1,837,880
Other accrued liabilities 972,087 -----------------------
1,406,033
------------------------
--------------------
Total current liabilities 8,055,388 14,257,940
Long-term debt, net of current portion 8,505,493 5,755,502
Long-term debt payable to employees, net of current portion 42,626 501,783
Common stock to be issued 0 4,700,262
-------------------- ------------------------
-------------------- ------------------------
Total Liabilities 16,603,507 25,215,487
-------------------- ------------------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $.01 per share:
Authorized shares - 10,000,000; none issued 0 0
Common stock, par value $.05 per share:
Authorized shares - 10,000,000
Issued and outstanding- 9,650,515 and 7,299,245
Shares 482,528 364,962
Paid-in capital 21,723,626 17,364,263
Accumulated deficit (15,362,064) (16,742,429)
-------------------- -----------------------
Total Stockholders' Equity 6,844,090 986,796
-------------------- -----------------------
Total Liabilities and Stockholders' Equity $ 23,447,597 $ 26,202,283
==================== =======================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
UCI Medical Affiliates, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended June 30, Nine Months Ended June 30,
------------------------------------ -------------------------------------
1999 1998 1999 1998
--------------- ---------------- ----------------- ----------------
Revenues $9,956,512 $9,932,868 $ 30,110,753 $ 26,625,431
Operating costs 8,852,797 9,436,121 26,069,237 25,748,944
--------------- ---------------- ----------------- ----------------
Operating margin 1,103,715 496,747 4,041,516
876,487
General and administrative expenses 24,777 20,729 68,428
66,817
Depreciation and amortization 495,532 521,837 1,467,715 1,349,851
--------------- ---------------- ----------------- ----------------
Income (loss) from operations 583,406 (45,819) 2,505,373
(540,181)
Other income (expense)
Interest expense, net of interest income (311,849) (290,904) (1,059,763) (846,864)
Gain (loss) on disposal of equipment (3,468) 27,654 (65,245) 27,215
--------------- ---------------- ----------------- ----------------
Other income (expense) (315,317) (263,250) (1,125,008) (819,649)
Income (loss) before benefit (provision )for
income taxes 268,089 (309,069) 1,380,365 (1,359,830)
Benefit (provision )for income taxes 0 0
0 (558)
--------------- ---------------- ----------------- ----------------
Net income (loss) $ 268,089 $(309,069) $ 1,380,365 $(1,360,388)
================ ================= ================
===============
Basic earnings (loss) per share $ $ (.05) $ $
.03 .17 (.22)
=============== ================ ================= ================
Basic weighted average common shares
outstanding 9,650,515 6,745,399 8,161,360 6,290,844
=============== ================ ================= ================
Diluted earnings (loss) per share $ $ (.05) $ $ (.22)
.03 .17
=============== ================ ================= ================
Diluted weighted average common shares
outstanding 9,657,734 6,756,273 8,167,747 6,309,164
=============== ================ ================= ================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
UCI Medical Affiliates, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<S> <C> <C>
Nine Months Ended June 30,
----------------------------------------
1999 1998
------------------ ------------------
Operating activities:
Net income (loss) $ 1,380,365 $ (1,360,388)
Adjustments to reconcile net income (loss) to net
cash provided by (used-in) operating activities:
(Gain) loss on disposal of equipment 65,245 (27,215)
Provision for losses on accounts receivable 1,270,585 897,237
Depreciation and amortization 1,467,714 1,349,851
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,233,060) (2,835,232)
(Increase) decrease in inventories 0 (163,837)
(Increase) decrease in prepaid expenses and other
current assets 146,007 (433,935)
Increase (decrease) in accounts payable and accrued
expenses (1,086,511) 1,595,322
------------------
------------------
Cash provided by (used in) operating activities 2,010,345 (978,197)
------------------ ------------------
Investing activities:
Purchases of property and equipment (359,114) (731,285)
Disposals of property and equipment 41,083 1,500
Acquisitions of goodwill (79,743) (933,554)
(Increase) decrease in other assets 202,177 2,878
------------------
------------------
Cash provided by (used in) investing activities (195,597) (1,660,461)
------------------ ------------------
Financing activities:
Issuance of common stock, net of redemptions & expense 0 1,103,700
Net borrowings (payments) under line-of-credit agreement (209,206) (570,632)
Increase in long-term debt 0 2,088,523
Book overdraft (included in accounts payable) (847,819) 1,020,709
Payments on long-term debt (1,019,883) (1,018,318)
------------------ ------------------
Cash provided by (used in) financing activities (2,076,908) 2,623,982
------------------ ------------------
Increase (decrease) in cash and cash equivalents (262,160) (14,676)
Cash and cash equivalents at beginning of period 335,923 14,676
------------------ ------------------
------------------
Cash and cash equivalents at end of period $ 73,763 $
0
================== ==================
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
UCI MEDICAL AFFILIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of those of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three-month and nine-month periods ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 1999. For further information, refer to the
audited consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended September 30, 1998.
The consolidated financial statements include the accounts of UCI Medical
Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc.
("UCI-SC"), UCI Medical Affiliates of Georgia, Inc. ("UCI-GA"), Doctor's Care,
P.A., Doctor's Care of Georgia, P.C., and Doctor's Care of Tennessee, P.C. (the
three together as the "P.A."). (As used herein, the term "Company" refers to
UCI, UCI-SC, UCI-GA, and the P.A., collectively.) Because of the corporate
practice of medicine laws in the states in which the Company operates, the
Company does not own medical practices but instead enters into an exclusive
long-term management services agreements with the P.A. which operate the medical
practices. Consolidation of the financial statements is required under Emerging
Issues Task Force (EITF) 97-2 as a consequence of the nominee shareholder
arrangement that exists with respect to each of the P.A.'s. In each case, the
nominee (and sole) shareholder of the P.A. has entered into an agreement with
UCI-SC or UCI-GA, as applicable, which satisfies the requirements set forth in
footnote 1 of EITF 97-2. Under the agreement, UCI-SC or UCI-GA, as applicable,
in its sole discretion, can effect a change in the nominee shareholder at any
time for a payment of $100 from the new nominee shareholder to the old nominee
shareholder, with no limits placed on the identity of any new nominee
shareholder and no adverse impact resulting to any of UCI-SC, UCI-GA or the P.A.
resulting from such change.
In addition to the nominee shareholder arrangements described above, each of
UCI-SC and UCI-GA has entered into Administrative Service Agreements with the
P.A.'s. As a consequence of the nominee shareholder arrangements and the
Administrative Service Agreements, the Company has a long-term financial
interest in the affiliated practices of the P.A.'s. Through the Administrative
Services Agreement, the Company has exclusive authority over decision making
relating to all major on-going operations. The Company establishes annual
operating and capital budgets for the P.A. and compensation guidelines for the
licensed medical professionals. The Administrative Services Agreements have an
initial term of forty years. According to EITF 97-2, the application of FASB
Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and APB No.
16 (Business Combinations), the Company must consolidate the results of the
affiliated practices with those of the Company. All significant intercompany
accounts and transactions are eliminated in consolidation, including management
fees.
The method of computing the management fees is based on billings of the
affiliated practices less the amounts necessary to pay professional compensation
and other professional expenses. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services, plus
a profit. These interests are unilaterally salable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporation.
The P.A. enters into employment agreements with physicians for terms ranging
from one to ten years. All employment agreements have clauses that allow for
early termination of the agreement if certain events occur such as the loss of a
medical license. Over 65% of the physicians employed by the P.A. are paid on an
hourly basis for time scheduled and worked at the medical centers, while other
physicians are salaried. A few of the physicians have incentive compensation
arrangements, which are contractually based upon factors such as productivity,
collections and quality.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and revenues and expenses
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates and assumptions. Significant estimates are discussed
in the footnotes, as applicable, of the Form 10-KSB for the year ended September
30, 1998.
The Company operates as one segment.
EARNINGS PER SHARE
The computation of basic earnings (loss) per share and diluted earnings (loss)
per share is in conformity with the provisions of Statement of Financial
Accounting Standards No. 128.
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES
In May 1998, the Company acquired certain assets of a seven facility medical
practice (five in Georgia and two in Tennessee) for $5,255,437 by assuming
certain liabilities, paying $450,010 at closing, financing $800,000 with the
seller, and committing to issue 2,901,396 shares of the common stock of the
Company. In February 1999, the shares were issued to the seller with the Board's
approval.
In exchange for the return of 550,082 shares of the Company's stock, the Company
sold the three centers of the Springwood Lake Family Practice back to the
physicians in November 1998. The centers were purchased from the physicians in
September 1997. The three centers were operated by the Company as Springwood
Lake Family Practice, Woodhill Family Practice and Midtown Family Practice.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information which the Company
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto.
The consolidated financial statements of the Company include the accounts of
UCI, UCI-SC, UCI-GA and the P.A.'s. Such consolidation is required under
Emerging Issues Task Force (EITF) 97-2 as a consequence of the nominee
shareholder arrangement that exists with respect to each of the PA's. In each
case, the nominee (and sole) shareholder of the P.A. has entered into an
agreement with UCI-SC or UCI-GA, as applicable, which satisfies the requirements
set forth in footnote 1 of EITF 97-2. Under the agreement, UCI-SC or UCI-GA, as
applicable, in its sole discretion, can effect a change in the nominee
shareholder at any time for a payment of $100 from the new nominee shareholder
to the old nominee shareholder, with no limits placed on the identity of any new
nominee shareholder and no adverse impact resulting to any of UCI-SC, UCI-GA or
the P.A. resulting from such change.
In addition to the nominee shareholder arrangements described above, each of
UCI-SC and UCI-GA has entered into Administrative Service Agreements with the
P.A.'s. As a consequence of the nominee shareholder arrangements and the
Administrative Service Agreements, the Company has a long-term financial
interest in the affiliated practices of the P.A.'s. According to EITF 97-2, the
application of FASB Statement No. 94 (Consolidation of All Majority-Owned
Subsidiaries), and APB No. 16 (Business Combinations), the Company must
consolidate the results of the affiliated practices with those of the Company.
The P.A.'s enter into employment agreements with physicians for terms ranging
from one to ten years. All employment agreements have clauses that allow for
early termination of the agreement if certain events occur such as the loss of a
medical license. Over 65% of the physicians employed by the P.A.'s are paid on
an hourly basis for time scheduled and worked at the medical centers. The other
physicians are salaried. A few of the physicians have incentive compensation
arrangements; however, no amounts were accrued or paid during the Company's
three prior fiscal years that were significant. Any incentive compensation is
based upon a percentage of non-ancillary collectible charges for services
performed by a provider. Percentages range from 3% to 17% and vary by individual
employment contract. As of June 30, 1999 and 1998, the P.A.'s employed 93 and
120 medical providers, respectively.
The net assets of the P.A.'s are not material for any period presented, and
intercompany accounts and transactions have been eliminated.
The Company does not allocate all indirect costs incurred at the corporate
offices to the Centers on a center-by-center basis. Therefore, all discussions
below are intended to be in the aggregate for the Company as a whole.
Results of Operations
For the Three Months Ended June 30, 1999 as Compared to the Three Months
Ended June 30, 1998
Revenues of $9,957,000 for the quarter ending June 30, 1999 are virtually flat
as compared to those of the quarter ending June 30, 1998. However, the lack of a
significant change in quarter to quarter revenue is misleading. The Company
engaged in expansion and in divestiture. This expansion included the addition of
seven centers in May 1998 and the closure or divestiture of six centers during
fiscal year 1998, for a net addition of one center. The Company operates 40
centers as of June 30, 1999.
The seven additions were:
<TABLE>
<S> <C> <C> <C>
1. Doctor's Care Stone Mountain Atlanta, GA Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
2. Doctor's Care Tucker Atlanta, GA Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
3. Doctor's Care Lawrenceville Atlanta, GA Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
4. Doctor's Care Austell Atlanta, GA Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
5. Doctor's Care Snellville Atlanta, GA Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
6. Doctor's Care Knoxville West Knoxville, TN Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
7. Doctor's Care Knoxville North Knoxville, TN Region Acquired in May 1998 from MainStreet
Healthcare, Inc. as part of five centers in
Atlanta, Georgia and two in Knoxville,
Tennessee.
The six closures or divestitures were:
1. Doctor's Care
Waccamaw Myrtle
Beach, SC Region
This acquired
center (01/95)
was closed
effective
September 1998
and the provider
and patient
records were
transferred to
the near-by
Doctor's Care
Strand Medical
Center.
2. Doctor's Care Camden Columbia, SC Region This acquired center (09/97) was closed in
August 1998 and the provider and patient
records were transferred to near-by Doctor's
Care Wateree.
3. Doctor's
Surgical Group
Columbia, SC
Region This
start-up
facility (06/93)
was closed
effective
February 1998.
4. Springwood Lake Columbia, SC Region Acquired in August 1997 along with
two more Family Practice centers and were divested of (sold back to
the seller on November 1, 1998) effective
September 1998.
</TABLE>
<PAGE>
5. Woodhill Family
Practice Columbia,
SC Region Acquired
in August 1997 along
with two more
centers and were
divested of (sold
back to the seller
on November 1, 1998)
effective September
1998.
6. Midtown Family
Practice Columbia,
SC Region Acquired
in August 1997 along
with two more
centers and were
divested of (sold
back to the seller
on November 1, 1998)
effective September
1998.
The revenue from the centers that were operating during the entire third quarter
of fiscal year 1999 but not during the entire third quarter of fiscal year 1998
was approximately $50,000 higher in fiscal year 1999 than in fiscal year 1998.
This increase in revenue would be offset by the loss of revenue for the six
centers that were operating for all or portions of the third quarter of fiscal
year 1998 but not during the third quarter of fiscal year 1999 of approximately
$1,011,000.
The remainder of the growth in quarter to quarter revenue of approximately
$985,000 is the result of "same store" growth. Even though patient encounters
decreased to approximately 123,000 in the third quarter of fiscal year 1999 from
127,000 in the third quarter of fiscal year 1998, the average charge per
encounter increased.
During the past several fiscal years, the Company has continued its services
provided to members of HMOs. In these arrangements, the Company, through the
P.A., acts as the designated primary caregiver for members of HMOs who have
selected one of the Company's centers or providers as their primary care
provider. In fiscal year 1994, the Company began participating in an HMO
operated by Companion HealthCare Corporation ("CHC"), a wholly owned subsidiary
of Blue Cross Blue Shield of South Carolina ("BCBS"). BCBS, through CHC, is a
primary stockholder of UCI. Including its arrangement with CHC, the Company now
participates in four HMOs and is the primary care "gatekeeper" for more than
19,000 lives at June 30, 1999. Two of these HMOs use a capitation scheme for
payments and two pay on a discounted fee-for-service basis. HMOs do not, at this
time, have a significant penetration into the South Carolina market. The Company
is not certain if there will be growth in the market share of HMOs in the areas
in which it operates clinics. Capitated revenue decreased from approximately
$589,000 in the third quarter of fiscal year 1998 to approximately $379,000 in
the third quarter of fiscal year 1999. This decline was primarily the result of
one of the "gatekeeper" HMO's (Companion) switching from a capitation payment
method to a discounted fee-for-service method during the middle of fiscal year
1998.
The Company currently negotiates contracts with two HMOs for the P.A.'s
physicians to provide health care on a capitated reimbursement basis. Under
these contracts, which typically are automatically renewed on an annual basis,
the P.A. physicians provide virtually all covered primary care services and
receive a fixed monthly capitation payment from the HMOs for each member who
chooses a P.A. physician as his or her primary care physician. The capitation
amount is fixed depending upon the age and sex of the HMO enrollee. Contracts
with capitated HMOs accounted for approximately 4% of the Company's net revenue
in the third quarter of fiscal year 1999 compared to 6% the third quarter of
fiscal year 1998.
To the extent that enrollees require more care than is anticipated, aggregate
capitation payments may be insufficient to cover the costs associated with the
treatment of enrollees. No capitation contracts currently in place at the
Company have been determined to be insufficient to cover related costs of
treatment. Higher capitation rates are typically received for senior patients
because their medical needs are generally greater and consequently the cost of
covered care is higher.
Increased and sustained revenues in fiscal years 1999 and 1998 also reflect the
Company's heightened focus on occupational medicine and industrial health
services (these revenues are referred to as "employer paid" on the table below).
Focused marketing materials, including quarterly newsletters for employers, were
developed to spotlight the Company's services for industry.
The following table breaks out the Company's revenue and patient visits by
revenue source for the third quarter of fiscal years 1999 and 1998.
<TABLE>
<S> <C> <C> <C> <C> <C>
Percent of Percent of
Payor Patient Visits Revenue
---------------------------------------------- ------------------------ -----------------------
1999 1998 1999 1998
------------ ----------- ------------ ----------
18 22 18 22
Patient Pay
15 13 9 10
Employer Paid
11 12 9 10
HMO
8 10 16 13
Workers Compensation
7 10 6 7
Medicare/Medicaid
34 26 31 28
Managed Care Insurance
7 7 11 10
Other (Commercial Indemnity, Champus, etc.)
</TABLE>
An operating margin of $1,104,000 was earned during the third quarter of fiscal
1999 as compared to an operating margin of $497,000 for the third quarter of
fiscal 1998.
Management believes that this margin improvement is mainly the result of the
closure or divestiture of several unprofitable centers discussed above and the
reduction of corporate overhead through personnel costs reductions. These
decisions were in part attributable to increased cost-cutting pressures being
applied by managed care insurance payors that cover many of the Company's
patients. As managed care plans attempt to cut costs, they typically increase
the administrative burden of providers such as the Company by requiring referral
approvals and by requesting hard copies of medical records before they will pay
claims. The number of patients at the Company's Centers that are covered by a
managed care plan versus a traditional indemnity plan continues to grow.
Management expects this trend to continue.
Depreciation and amortization expense decreased to $496,000 in the third quarter
of fiscal 1999, down from $522,000 in the third quarter of fiscal 1998. This
increase reflects higher depreciation expense as a result of leasehold
improvements and equipment upgrades at a number of the Company's medical
centers, offset by a decrease in amortization expense related to the intangible
assets disposed of by the Company's closure of existing practices as noted
above. Interest expense increased from $290,000 in the third quarter of fiscal
1998 to $312,000 in the third quarter of fiscal 1999 primarily as a result of
the interest costs associated with the indebtedness incurred in the usage of the
operating line of credit.
For the Nine Months Ended June 30, 1999 as Compared to the Nine Months
Ended June 30, 1998
Revenues of $30,111,000 reflect an increase of 13% from the same period in
fiscal year 1998 and is attributable to the expansion, marketing and line of
business factors discussed above. Patient encounters increased to 384,000 for
the nine months ended June 30, 1999 from 361,000 for the nine months ended June
30, 1998.
Financial Condition at June 30, 1999
Cash and cash equivalents decreased by $262,000 during the nine months ended
June 30, 1999 primarily as a result of a reduction in accounts payable.
Accounts receivable as of June 30, 1999 decreased slightly as compared to
September 30, 1998, reflecting the continuing focus on collection activities.
The reduction in the excess of cost over fair value of assets acquired from
September 30, 1998 as compared to June 30, 1999 is attributable to the closure
or divestiture of the centers noted above and the write-off of the related
goodwill in fiscal year 1998 as well as amortization expense during the nine
months ended June 30, 1999.
Long-term debt decreased from $11,989,000 at September 30, 1998 to $10,248,000
at June 30, 1999 primarily as a result of indebtedness retired in the
divestiture of the three Family Practice Centers discussed earlier. The
Company's line of credit balance was also temporarily lower at June 30, 1999 as
compared to September 30, 1998. This balance fluctuates daily. Management
believes that it will be able to fund debt service requirements out of cash
generated through operations.
The Company acquired substantially all of the assets of MainStreet Healthcare
("MHC") effective for accounting purposes as of May 1, 1998 ("the Acquisition").
As partial consideration for the Acquisition, the Company delivered to MHC at
the closing a Conditional Delivery Agreement which required the Company to issue
to MHC 2,901,396 shares of the common stock of the Company upon the approval to
increase the number of authorized shares of the Company by the shareholders.
These shares were recorded as "Common stock to be issued" on the September 30,
1998 balance sheet. Shareholder approval was obtained at the February 24, 1999
shareholder meeting and the liability has been reclassified to stockholder
equity as of that date.
Overall, the Company's current assets exceeded its current liabilities at June
30, 1999 by $1,740,000.
Liquidity and Capital Resources
The Company requires capital principally to fund growth (acquire new Centers),
for working capital needs and for the retirement of indebtedness. The Company's
capital requirements and working capital needs have been funded through a
combination of external financing (including bank debt and proceeds from the
sale of common stock), and credit extended by suppliers.
The Company has a $7,000,000 bank line of credit with an outstanding
indebtedness of approximately $3,369,000 at June 30, 1999. The line of credit
bears interest of prime plus 2.5% with a maturity of March 2000. (Prime rate was
7.75% as of June 30, 1999.) The line of credit is used to fund the working
capital needs of the Company's expansion. This debt was classified as current at
September 30, 1998 due to a technical covenant default that was resolved in
January 1999 with the lender and is, therefore, reclassified as long-term at the
December 31, 1998, March 31, 1999 and June 30, 1999 balance sheet dates.
As of June 30, 1999, the Company had no material commitments for capital
expenditures.
Operating activities produced $2,010,000 of cash during the nine months ended
June 30, 1999, compared with $978,000 used during the same period in the prior
fiscal year. This improvement was mainly the result of the improvement in the
operating margin and in accounts receivable collections.
Investing activities used only $196,000 in cash during the nine months ended
June 30, 1999 mainly as the result of the Company selling a piece of investment
property for approximately $225,000 (sold for approximately the recorded book
value).
Financing activities utilized $2,077,000 in cash during the nine month period
for debt reduction. Approximately $400,000 of this was temporary in nature due
to the daily fluctuation of the primary line of credit.
<PAGE>
The Year 2000
It is possible that the Company's currently installed computer systems, or other
business systems, or those of the Company's vendors, working either alone or in
conjunction with other software or systems, will not accept input of, store,
manipulate or output dates in the years 1999, 2000 or thereafter without error
or interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems, on a
system-by-system basis, and is querying third parties with whom it conducts
business as to their progress in identifying and addressing problems that their
computer systems may face in correctly processing date information as the Year
2000 approaches and is reached.
The Company has determined that its general accounting systems (which includes
invoicing, accounts receivable, payroll, etc.) must be upgraded to make the
systems Year 2000 compliant. The Company estimates that the cost of upgrading
these accounting systems will be approximately $50,000 and that the upgrade will
be completed before the end of fiscal year 1999. As of June 30, 1999, the
Company had expended approximately $40,000 to remedy this problem.
The Company is continuing to review its information technology ("IT") hardware
and software, including personal computers, application and network software for
Year 2000 compliance readiness. The review process entails evaluation of
hardware/software and testing. The Company believes its IT review will be
completed by the end of fiscal year 1999. While the review process is ongoing,
the Company believes that the cost to bring its IT systems into Year 2000
compliance will be under $20,000 and it does not foresee any material
difficulties with completing the necessary changes prior to January 1, 2000.
The Company expects that its review of non-IT systems (including voice
communications) will be completed before the end of fiscal year 1999. The
estimated costs to remedy non-IT systems is not expected to be material.
The Company expects that the source of funds for evaluation and remediation of
Year 2000 compliance issues will be cash flow from operations.
The Company believes that its most significant internal risk posed by the Year
2000 Problem is the possibility of a failure of its accounting systems. If the
accounting systems were to fail, the Company would have to implement manual
processes, which may slow the timeliness of information needed to manage the
business. As discussed above, the Company plans to avoid this risk by upgrading
its accounting systems; however, there can be no assurance that such actions
will avoid problems that may arise.
The third parties whose Year 2000 problems could have the greatest effect on the
Company are believed by the Company to be banks that maintain the Company's
depository accounts' credit card processing systems (including related
telecommunication systems), the companies which supply the Company with medical
supplies, and the insurance company payors for the Company's patients' medical
claims.
The Company has not yet established a "contingency plan" to address potential
Year 2000 problems and is currently considering the extent to which it will
develop a formal contingency plan.
There can be no assurance that the Company will identify all Year 2000 problems
in its computer systems or those of third parties in advance of their occurrence
or that the Company will be able to successfully remedy any problems that are
discovered. The expenses of the Company's efforts to identify and address such
problems, or the expenses or liabilities to which the Company may become subject
as a result of such problems, could have a material adverse effect on the
Company's business, financial condition and results of operations. Maintenance
or modification costs will be expensed as incurred.
<PAGE>
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this PART I, Item 2 (Management's
Discussion and Analysis of Financial Condition and Results of Operations) that
are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers of this Quarterly Report on Form 10-Q that such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from those expressed or implied by such
forward-looking statements. Although the Company's management believes that
their expectations of future performance are based on reasonable assumptions
within the bounds of their knowledge of their business and operations, there can
be no assurance that actual results will not differ materially from their
expectations. Factors which could cause actual results to differ from
expectations include, among other things, the difficulty in controlling the
Company's costs of providing healthcare and administering its network of
Centers; the possible negative effects from changes in reimbursement and
capitation payment levels and payment practices by insurance companies,
healthcare plans, government payors and other payment sources; the difficulty of
attracting primary care physicians; the increasing competition for patients
among healthcare providers; possible government regulations negatively impacting
the existing organizational structure of the Company; the possible negative
effects of prospective healthcare reform; the challenges and uncertainties in
the implementation of the Company's expansion and development strategy; the
dependence on key personnel, the ability to successfully integrate the
management structures and consolidate the operations of recently acquired
entities or practices with those of the Company, and other factors described in
this report and in other reports filed by the Company with the Securities and
Exchange Commission.
<PAGE>
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily as a result of its
borrowing activities, which includes credit facilities with financial
institutions used to maintain liquidity and fund the Company's business
operations, as well as notes payable to various third parties in connection with
certain acquisitions of property and equipment. The nature and amount of the
Company's debt may vary as a result of future business requirements, market
conditions and other factors. The definitive extent of the Company's interest
rate risk is not quantifiable or predictable because of the variability of
future interest rates and business financing requirements. The Company does not
currently use derivative instruments to adjust the Company's interest rate risk
profile.
Approximately $6,000,000 of the Company's debt at June 30, 1999 was subject to
fixed interest rates and principal payments. Approximately $4,000,000 of the
Company's debt at June 30, 1999 was subject to variable interest rates. Based on
the outstanding amounts of variable rate debt at June 30, 1999, the Company's
interest expense on an annualized basis would increase approximately $40,000 for
each increase of one percent in the prime rate.
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments.
<PAGE>
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not a party to any pending litigation other
than routine litigation incidental to the business or that
which is immaterial in amount of damages sought.
Item 2 Changes in Securities
This item is not applicable.
Item 3 Defaults upon Senior Securities
This item is not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
This item is not applicable.
Item 5 Other Information
This item is not applicable.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits included on the attached Exhibit
Index are filed as part of this report.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UCI Medical Affiliates, Inc.
(Registrant)
/s/ M.F. McFarland, III, M.D. /s/ Jerry F. Wells, Jr., CPA
Marion F. McFarland, III, M.D. Jerry F. Wells, Jr., CPA
President, Chief Executive Officer, Executive Vice President of Finance,
and Chairman of the Board Chief Financial Officer, and
Principal Accounting Officer
Date: August 11, 1999
<PAGE>
UCI MEDICAL AFFILIATES, INC.
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
EXHIBIT NUMBER
DESCRIPTION PAGE NUMBER
- ---------------- ------------------------------------------------------- -------------------------------------
27 Financial Data Schedule Filed separately as Article Type 5
via Edgar
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> sep-30-1999
<PERIOD-START> apr-1-1999
<PERIOD-END> jun-30-1999
<CASH> 73,763
<SECURITIES> 0
<RECEIVABLES> 8,608,169
<ALLOWANCES> 887,299
<INVENTORY> 490,341
<CURRENT-ASSETS> 9,795,098
<PP&E> 4,721,376
<DEPRECIATION> 4,629,937
<TOTAL-ASSETS> 23,447,597
<CURRENT-LIABILITIES> 8,055,388
<BONDS> 0
0
0
<COMMON> 482,528
<OTHER-SE> 6,361,562
<TOTAL-LIABILITY-AND-EQUITY> 23,447,597
<SALES> 0
<TOTAL-REVENUES> 30,110,753
<CGS> 0
<TOTAL-COSTS> 24,794,008
<OTHER-EXPENSES> 1,536,143
<LOSS-PROVISION> 1,275,229
<INTEREST-EXPENSE> 1,059,763
<INCOME-PRETAX> 1,380,365
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,380,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,380,365
<EPS-BASIC> .17
<EPS-DILUTED> .17
</TABLE>
