10-Q 1 q63001.txt JUNE 30, 2001 FORM 10-Q 1 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, 2001 ( ) 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) 4416 Forest Drive, Columbia, SC 29206 (Address of principal executive offices) (803) 782-4278 (Issuer's telephone number) 1901Main Street, Suite 1200, Mail Code 1105, Columbia, SC 29201 (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 August 16, 2001 UCI MEDICAL AFFILIATES, INC. INDEX PART I FINANCIAL INFORMATION Page Number Item 1 Financial Statements Condensed Consolidated Balance Sheets - June 30, 2001 and September 30, 2000 3 Condensed Consolidated Statements of Operations for the quarters and the nine months ending June 30, 2001 and June 30, 2000 4 Condensed Consolidated Statements of Cash Flows for the nine months ending June 30, 2001 and June 30, 2000 5 Notes to Condensed Consolidated Financial Statements 6 - 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9- 13 Item 3 Quantitative and Qualitative Disclosures about Market Risk 14 PART II OTHER INFORMATION Items 1-6 15 SIGNATURES 16
UCI Medical Affiliates, Inc. Condensed Consolidated Balance Sheets (unaudited) June 30, 2001 September 30, 2000 -------------------- ---------------------- Assets Current assets Cash and cash equivalents $ 194,480 $ 302,927 Accounts receivable, less allowance for doubtful accounts of $1,371,000 and $1,549,000 6,067,597 6,958,745 Inventory 623,497 623,497 Prepaid expenses and other current assets 842,067 933,130 -------------------- ---------------------- Total current assets 7,727,641 8,818,299 Property and equipment, less accumulated depreciation of $6,856,000 and $6,035,000 4,100,618 4,326,093 Excess of cost over fair value of assets acquired, less accumulated amortization of $2,950,000 and $2,616,000 4,261,800 4,595,690 Other assets 22,740 41,500 -------------------- ---------------------- Total Assets $16,112,799 $17,781,582 ==================== ====================== Liabilities and Stockholders' Equity Current liabilities Book overdraft $ 1,627,507 $ 1,184,257 Current portion of long-term debt 4,205,968 6,489,280 Accounts payable 2,723,639 3,511,545 Accrued salaries and payroll taxes 1,799,478 2,544,102 Other accrued liabilities 1,506,626 1,318,362 -------------------- ---------------------- Total current liabilities 11,863,218 15,047,546 Long-term debt, net of current portion 3,690,718 2,463,034 -------------------- ---------------------- Total Liabilities 15,553,936 17,510,580 -------------------- ---------------------- 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 9,650,515 shares 482,526 482,526 Paid-in capital 21,723,628 21,723,628 Accumulated deficit (21,647,291) (21,935,152) -------------------- ---------------------- Total Stockholders' Equity 558,863 271,002 -------------------- ---------------------- Total Liabilities and Stockholders' Equity $16,112,799 $17,781,582 ==================== ======================
The accompanying notes are an integral part of these condensed consolidated financial statements. UCI Medical Affiliates, Inc. Condensed Consolidated Statements of Operations (unaudited) Three Months Ended June 30, Nine Months Ended June 30, ------------------------------------ ---------------------------------- 2001 2000 2001 2000 ----------------- --------------- --------------- --------------- Revenues $9,409,100 $9,815,072 $28,921,736 $30,781,926 Operating costs 8,705,327 9,675,552 26,274,099 29,747,531 ----------------- --------------- --------------- --------------- Operating margin 703,773 139,520 2,647,637 1,034,395 General and administrative expenses 12,015 22,084 38,293 70,426 Realignment and other expenses 0 491,000 0 491,000 Impairment of goodwill 0 0 0 3,567,376 Depreciation and amortization 391,252 395,890 1,154,606 1,332,767 ----------------- --------------- --------------- --------------- Income (loss) from operations 300,506 (769,454) 1,454,738 (4,427,174) Other expense Interest expense, net of interest income (370,593) (483,076) (1,166,877) (1,372,929) Loss on disposal of equipment 0 0 0 0 ----------------- --------------- --------------- --------------- Other expense (370,593) (483,076) (1,166,877) (1,372,929) Income (loss) before benefit (provision )for income taxes (70,087) (1,252,530) 287,861 (5,800,103) Benefit (provision )for income taxes 0 0 0 0 ----------------- --------------- --------------- --------------- Net income (loss) $ (70,087) $(1,252,530) $ 287,861 $(5,800,103) =============== =============== =============== ================= Basic earnings (loss) per share $ (.01) $ (.13) $ .03 $ (.60) ================= =============== =============== =============== Basic weighted average common shares outstanding 9,650,515 9,650,515 9,650,515 9,650,515 ================= =============== =============== =============== Diluted earnings (loss) per share $ (.01) $ (.13) $ .03 $ (.60) ================= =============== =============== =============== Diluted weighted average common shares Outstanding 9,650,515 9,650,515 9,653,778 9,650,515 ================= =============== =============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements. UCI Medical Affiliates, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended June 30, ---------------------------------------- 2001 2000 ------------------ ------------------ Operating activities: Net income (loss) $ 287,861 $(5,800,103) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for losses on accounts receivable 1,134,449 2,444,356 Depreciation and amortization 1,154,606 1,332,767 Impairment of goodwill 0 3,567,376 Changes in operating assets and liabilities: Accounts receivable (243,301) (1,892,354) Inventories 0 (3,709) Prepaid expenses and other current assets 91,063 (42,440) Accounts payable and accrued expenses (1,344,266) 1,557,838 ------------------ ------------------ Cash provided by operating activities 1,080,412 1,163,731 ------------------ ------------------ Investing activities: Purchases of property and equipment (595,241) (677,047) Disposals of property and equipment 0 0 Acquisitions of goodwill 0 0 Decrease in other assets 18,760 0 ------------------ ------------------ Cash used in investing activities (576,481) (677,047) ------------------ ------------------ Financing activities: Net borrowings (payments) under line-of-credit agreement (383,767) 318,422 Increase in book overdraft 443,250 153,837 Payments on long-term debt (671,861) (1,006,008) ------------------ ------------------ Cash used in financing activities (612,378) (533,749) ------------------ ------------------ Decrease in cash and cash equivalents (108,447) (47,065) Cash and cash equivalents at beginning of period 302,927 66,159 ------------------ ------------------ ------------------ Cash and cash equivalents at end of period $ 194,480 $ 19,094 ================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements. 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, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2001. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 2000. 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. 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-K for the year ended September 30, 2000. 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. 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 has a working capital deficiency and an accumulated deficit. Ultimately, the Company's viability as a going concern is dependent upon its ability to continue to generate positive cash flows from operations, maintain adequate working capital and obtain satisfactory long-term financing. As of July 1, 2001, the Company was successful in renegotiating its line of credit to an 18-month term note with monthly principle payments of $120,000, plus interest at a rate of prime plus 4%, designed to pay out the note by December 2002. This has resulted in a portion of this balance being reclassified to long-term on the June 30, 2001 balance sheet. 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. The closure of the Atlanta centers, which were unprofitable, had an immediate positive effect on the Company in the fourth quarter of fiscal year 2000 and continued into the first nine months of fiscal year 2001. This improvement is expected to continue into fiscal year 2001 and beyond. However, there can be no assurances that such improvement will occur. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" was issued. This Statement supersedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Pre-acquisition Contingencies of Purchased Enterprises" and eliminated the pooling method of accounting for business enterprises. This Statement requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. In July 2001, SFAS No. 142 "Goodwill and Other Intangible Assets" was issued. This Statement supersedes APB No. 17 "Intangible Assets" and addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill and intangible assets that have indefinite useful lives will not be amortized; they will be reviewed for impairment on at least an annual basis. This Statement is effective for all fiscal years beginning after December 15, 2001; however, goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the non-amortization provisions of this Statement. The Company is currently evaluating the impact of these Statements on its financial statements. The Company's intangible assets consist principally of goodwill. While the Company has not made any assessment of the impact of FAS 142 on the carrying value of goodwill, the methodology for the impairment assessment represents a significant change from the existing goodwill impairment methodology periodically performed by the Company. The Company believes that, based on current economic conditions and operating results experienced by the Company and the overall economic conditions of its industry, the implementation of the impairment test required under FAS 142 could result in an impairment charge which could be material to the Company's operating results and financial position. 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 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. 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 79% 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. Approximately 25 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, 2001 and 2000, the P.A.'s employed 114 and 101 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, 2001 as Compared to the Three Months Ended June 30, 2000 ---------------------------------------------------------------------------- UCI provides nonmedical management and administrative services for a network of 36 freestanding medical centers (the "Centers"), 34 of which are located throughout South Carolina and two are located in Knoxville, Tennessee (29 operating as Doctor's Care in South Carolina, two as Doctor's Care in Knoxville, Tennessee, and five as Progressive Physical Therapy Services in South Carolina). Revenues of $9,409,000 for the quarter ended June 30, 2001 reflect a decrease of $406,000 or 4% from those of the quarter ended June 30, 2000. Of this decrease $402,000 is related to the closure of the company's Atlanta centers to be discussed below. The Company continually evaluates the operations of its physician practice centers and assesses the centers for impairment when certain indicators of impairment are present. In May 2000, the Company announced its intention to close its seven Georgia physician practice centers effective June 30, 2000. The performance of these centers, which were originally acquired in May 1998, did not meet the expectations of the Company during fiscal year 2000 and the Company was no longer committed to the Georgia market. The Company sold the property and equipment at these centers for an amount approximating the net book value of the fixed assets or transferred the property and equipment to other Company locations. The long-lived assets and related goodwill for these centers was assessed for impairment under a held for use model as of March 31, 2000. As a result of the decision to close these centers coupled with the fact that the remaining projected undiscounted cash flows were less than the carrying value of the long-lived assets and goodwill for these centers, the Company recorded an impairment in the quarter ended March 31, 2000 of approximately $3,567,000 to reduce the goodwill to its fair value. This decrease in revenue is primarily the result of the decrease in the number of centers in operation from 41 locations during the quarter ended June 30, 2000 to 36 during the quarter ended June 30, 2001. Patient encounters decreased to approximately 110,000 in the third quarter of fiscal year 2001 from 122,000 in the third quarter of fiscal year 2000. The difference in the 4% decrease in revenue and the approximately 10% decrease in patient visits is due to some rate increases in the Medicare and workers compensation fee schedules. 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 16,000 lives at June 30, 2001. As of June 30, 2001, all of these HMO's use a discounted fee-for-service basis for payment. 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. Sustained revenues in the South Carolina and Tennessee centers in fiscal years 2001 and 2000 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. Approximately 25% of the Company's total revenues were derived from these occupational medicine services in both 2001 and 2000. The following table breaks out the Company's revenue and patient visits by revenue source for the third quarter of fiscal years 2001 and 2000. Percent of Percent of Payor Patient Visits Revenue ------------------------------------------------ ------------------------ ----------------------- 2001 2000 2001 2000 ------------ ----------- ------------ ---------- 17 17 18 18 Patient Pay 12 14 7 8 Employer Paid 10 12 10 12 HMO 12 8 17 17 Workers Compensation 8 7 7 6 Medicare/Medicaid 38 37 37 32 Managed Care Insurance 3 5 4 7 Other (Commercial Indemnity, Champus, etc.)
An operating margin of $704,000 was earned during the third quarter of fiscal 2001 as compared to an operating margin of $140,000 for the third quarter of fiscal 2000. If the Atlanta centers had not been operating in the third quarter of fiscal year 2000, the operating margin for that quarter would have been $568,000. The remainder of the improvement was achieved by personnel cost reductions and a significant improvement in the collection of accounts receivable which reduced bad debt expense from 7% to 4% of revenue. Depreciation and amortization expense decreased to $391,000 in the third quarter of fiscal 2001, down from $396,000 in the third quarter of fiscal 2000. The expense in the two quarters did not vary significantly because the goodwill for the Atlanta centers was written off in the second quarter of fiscal year 2000. Interest expense decreased from $483,000 in the third quarter of fiscal 2000 to $371,000 in the third quarter of fiscal 2001 primarily as a result of a reduction in long-term debt due to regularly scheduled principal payments and as a result of the reduction in interest rates over the past months. The improvement in cash flow has also resulted in a reduction in bank fees. Income tax expense is zero due to the utilization of NOL's accumulated in prior years. 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 has a working capital deficiency and an accumulated deficit. Ultimately, the Company's viability as a going concern is dependent upon its ability to continue to generate positive cash flows from operations, maintain adequate working capital and obtain satisfactory long-term financing. 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. The closure of the Atlanta centers, which were unprofitable, had an immediate positive effect on the Company in the fourth quarter of fiscal year 2000 and continued into the third quarter of fiscal year 2001. This improvement is expected to continue into fiscal year 2001 and beyond. However, there can be no assurances that such improvement will occur. For the Nine Months Ended June 30, 2001 as Compared to the Nine Months Ended June 30, 2000 ------------------------------------------------------------------------------- Revenues of $28,922,000 reflect a decrease of 6% from the same period in fiscal year 2000 and is attributable to the Atlanta center closures discussed earlier. Patient encounters decreased to 349,000 for the nine months ended June 30, 2001 from 387,000 for the nine months ended June 30, 2000. The difference in the 4% decrease in revenue and the approximately 10% decrease in patient visits is due to some rate increases in the Medicare and workers compensation fee schedules. The following table breaks out the Company's revenue and patient visits by revenue source for the nine months ended June 30, 2001 and June 30, 2000. Percent of Percent of Payor Patient Visits Revenue ------------------------------------------------ ------------------------ ----------------------- 2001 2000 2001 2000 ------------ ----------- ------------ ---------- 17 17 16 17 Patient Pay 12 12 7 7 Employer Paid 11 12 11 13 HMO 9 7 15 15 Workers Compensation 9 8 7 6 Medicare/Medicaid 38 39 39 34 Managed Care Insurance 4 5 5 8 Other (Commercial Indemnity, Champus, etc.)
An operating margin of $2,648,000 was earned during the nine months ended June 30, 2001 as compared to an operating margin of $1,034,000 for the nine months ended June 30, 2000. If the Atlanta centers had not been operating in the fiscal year 2000, the operating margin for the nine months ended June 30, 2000 would have been $2,017,000. The remainder of the improvement was achieved by personnel cost reductions and a significant improvement in the collection of accounts receivable which reduced bad debt expense from 7% to 4% of revenue. Depreciation and amortization expense decreased to $1,155,000 in the nine months ended June 30, 2001, down from $1,333,000 in the nine months ended June 30, 2000. This decrease 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 greater reduction in amortization expense for fully amortized acquisitions and the closure of the Atlanta sites. Interest expense decreased from $1,373,000 for the nine months ended June 30, 2000 to $1,167,000 for the nine months ended June 30, 2001 primarily as a result of a reduction in long-term debt due to regularly scheduled principal payments and as a result of the reduction in interest rates over the past months. Income tax expense is zero due to the utilization of NOL's accumulated in prior years. Financial Condition at June 30, 2001 Cash and cash equivalents decreased by $109,000 during the nine months ended June 30, 2001 mainly as a result of the timing of cash payments to vendors and salary payments. Accounts receivable decreased by $891,000 during the nine months, reflecting an improvement in the billing and collection functions and the elimination of the Atlanta centers. The reduction in goodwill is attributable to regularly scheduled amortization. Long-term debt decreased from $8,952,000 at September 30, 2000 to $7,897,000 at June 30, 2001. Regular principal pay-downs of approximately $672,000 and a decrease in the Company's line of credit balance were the cause. The line of credit has been converted into an 18 month term note effective July 1, 2001, with monthly principal and interest payments. Management believes that it will be able to fund debt service requirements out of cash generated through operations and does not anticipate the availability of additional debt financing. Liquidity and Capital Resources The Company requires capital 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 (primarily bank debt), and credit extended by suppliers. As of June 30, 2001, the Company had no material commitments for capital expenditures and expects to continue to fund any required expenditure from working capital. There can be no assurance that operations will continue to provide adequate cash needed in the future. Operating activities produced $1,080,000 of cash during the nine months ended June 30, 2001, compared with $1,164,000 during the same period in the prior fiscal year. The reduction in operating cash flow as compared to the prior year resulted primarily from a reduction in accounts payable and accrued expenses, partially offset by a reduction in accounts receivable. Investing activities used only $576,000 in cash during the nine months ended June 30, 2001 to purchase needed equipment to operate existing centers and to upfit an existing facility to house the Corporate offices. Financing activities utilized $612,000 in cash during the nine-month period primarily for debt reduction. 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. 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 $3,500,000 of the Company's debt at June 30, 2001 was subject to fixed interest rates and principal payments. Approximately $4,397,000 of the Company's debt at June 30, 2001 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at June 30, 2001, the Company's interest expense on an annualized basis would increase approximately $44,000 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. 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. -------- None. (b) Reports on Form 8-K. ------------------- None. 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 16, 2001