10-Q 1 form10q123101.txt FORM 10-Q FOR QTR ENDED 12/31/02 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: December 31, 2001 ---------------------------------- ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE 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) (Former name, address or fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13, or 15(d)of the Exchange Act after the distribution of securities under a plan confirmed by a court. ( )Yes ( ) No APPLICABLE ONLY TO CORPORATE ISSUERS 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 December 31, 2001 Transitional Small Business Disclosure Format (check one): ( )Yes ( X ) No UCI MEDICAL AFFILIATES, INC. INDEX Page Number PART I FINANCIAL INFORMATION Item 1 Financial Statements Condensed Consolidated Balance Sheets - December 31, 2001 and September 30, 2001 3 Condensed Consolidated Statements of Operations for the quarters ended December 31, 2001 and December 31, 2000 4 Condensed Consolidated Statements of Cash Flows for the quarters ended December 31, 2001 and December 31, 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 - 16 SIGNATURES 17
UCI Medical Affiliates, Inc. Condensed Consolidated Balance Sheets December 31, 2001 September 30, 2001 ------------------- ----------------- (unaudited) (audited) Assets Current assets Cash and cash equivalents $ 368,858 $ 99,429 Accounts receivable, less allowance for doubtful accounts of $1,465,584 and $1,386,416 6,387,834 6,296,586 Inventory 360,560 360,560 Prepaid expenses and other current assets 471,869 833,732 ------------------- ----------------- Total current assets 7,589,121 7,590,307 Property and equipment less accumulated depreciation of $7,391,167 and $7,128,248 3,760,228 3,977,014 Excess of cost over fair value of assets acquired, less accumulated amortization of $2,451,814 and $2,451,814 3,391,942 3,391,942 Other assets 34,576 23,951 ------------------- ----------------- Total Assets $14,775,867 $14,983,214 =================== ================= Liabilities and Stockholders' Equity Current liabilities Book overdraft $ 423,722 $ 733,094 Current portion of long-term debt 5,105,905 4,858,216 Accounts payable 2,808,034 2,801,450 Accrued salaries and payroll taxes 4,057,013 3,651,068 Other accrued liabilities 1,642,690 1,790,931 ------------------- ----------------- Total current liabilities 14,037,364 13,834,759 Long-term debt, net of current portion 1,744,070 2,352,054 ------------------- ----------------- Total Liabilities 15,781,434 16,186,813 ------------------- ----------------- 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 - 50,000,000 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 (23,211,721) (23,409,753) ------------------- ----------------- Total Stockholders' Equity (Deficit) (1,005,567) (1,203,599) ------------------- ----------------- Total Liabilities and Stockholders' Equity $14,775,867 $14,983,214 =================== =================
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 December 31, 2001 2000 -------------------- ------------------ Revenues $9,230,506 $9,441,662 Operating costs 8,550,911 8,622,349 -------------------- ------------------ Operating margin 679,595 819,313 General and administrative expenses 17,000 9,658 Depreciation and amortization 262,919 380,038 -------------------- ------------------ Income (loss) from operations 399,676 429,617 Other income (expense) Interest expense, net of interest income (201,644) (361,566) Income before benefit (provision ) for income taxes 198,032 68,051 Benefit (provision )for income taxes 0 0 -------------------- ------------------ Net income $ 198,032 $ 68,051 ================== ==================== Basic earnings per share $ .02 $ .01 ==================== ================== Basic weighted average common shares outstanding 9,650,515 9,650,515 ==================== ================== Diluted earnings per share $ .02 $ .01 ==================== ================== Diluted weighted average common shares outstanding 9,652,811 9,657,675 ==================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements. UCI Medical Affiliates, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended December 31, 2001 2000 ------------------ ----------------- Operating activities: Net income (loss) $ 198,032 $ 68,051 Adjustments to reconcile net income (loss) to net cash provided by (used-in) operating activities: Provision for losses on accounts receivable 463,107 371,750 Depreciation and amortization 262,919 380,037 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (554,355) (932,874) (Increase) decrease in inventory 0 0 (Increase) decrease in prepaid expenses and other current assets 361,863 (109,387) Increase (decrease) in accounts payable and accrued expenses 264,288 424,351 ----------------- ------------------ Cash provided by (used in) operating activities 995,854 201,928 ------------------ ----------------- Investing activities: Purchases of property and equipment (46,133) (150,614) (Increase) decrease in other assets (10,625) 0 ----------------- ------------------ Cash provided by (used in) investing activities (56,758) (150,614) ------------------ ----------------- Financing activities: Net borrowings (payments) under line-of-credit agreement (297,792) 216,316 Increase (decrease) in book overdraft (309,372) 2,564 Payments on long-term debt (62,503) (227,985) ------------------ ----------------- Cash provided by (used in) financing activities (669,667) (9,105) ------------------ ----------------- Increase (decrease) in cash and cash equivalents 269,429 42,209 Cash and cash equivalents at beginning of period 99,429 302,927 ------------------ ----------------- ------------------ Cash and cash equivalents at end of period $ 368,858 $ 345,136 ================== =================
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 period ended December 31, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2002. 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, 2001. 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 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 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 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, 2001. The inventory of medical supplies and drugs is carried at the lower of average cost (first in, first out) or market. The volume of supplies carried at a center varies very little from month to month and management, therefore, does only an annual physical inventory count and does not maintain a perpetual inventory system. The Company operates as one segment. Goodwill and Other Intangible Assets In July 2001, FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination, whether acquired individually or with a group of other assets, and the accounting and reporting for goodwill and other intangibles subsequent to their acquisition. These standards require all future business combinations to be accounted for using the purchase method of accounting. Goodwill will no longer be amortized but instead will be subject to impairment tests, at least annually. UCI has elected to adopt SFAS No. 141 and SFAS No. 142 on a prospective basis as of October 1, 2001; however, certain provisions of these new standards also apply to any acquisitions concluded subsequent to June 30, 2001. As a result of implementing these new standards, UCI will discontinue the amortization of goodwill as of September 30, 2001. Management believes the adoption of this standard will have a material impact on its financial statements in that its income before taxes will be increased by an amount equal to the amortization expenses that would have otherwise been charged to earnings under current accounting standards, approximately $450,000 annually. Additionally, UCI's future earnings may periodically be affected in a materially adverse manner should particular segments of its goodwill balances become impaired pursuant to the valuation methodology. 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. 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 quarter of fiscal year 2002. This improvement is expected to continue into fiscal year 2002 and beyond. However, there can be no assurances that such improvement will occur. Chapter 11 Bankruptcy Filing On November 2, 2001, the Company (the "Debtors") filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court"). The Debtors remain in possession of their properties and assets and management of the Company continues to operate the business of the Debtors as a debtor-in-possession. As a debtor-in-possession, the Company is authorized to continue to operate its businesses, but may not engage in transactions outside the ordinary course of business without the approval, after notice and an opportunity for a hearing, of the Bankruptcy Court. Pursuant to the automatic stay provisions of the Bankruptcy Code, all actions to collect pre-petition indebtedness of the Debtors, as well as most other pending litigation against the Debtors are currently stayed. In addition, as debtor-in-possession, the Debtors have the right, subject to the approval of the Bankruptcy Court and certain other conditions, to assume or reject any pre-petition executory contracts or unexpired leases. The Bankruptcy Court has approved payment of certain pre-petition liabilities, such as employee wages and benefits, and settlement of certain trade payable claims. In addition, the Bankruptcy Court has allowed for the retention of legal and financial professionals to advise in the bankruptcy proceedings. The Company presently intends to reorganize the Company's business and restructure the Company's liabilities through a plan of reorganization to be filed with the Bankruptcy Court. In connection with the development of a plan or plans of reorganization alternatives, the Company will evaluate any and all proposals to maximize the value of the Debtors. Currently, it is not possible to predict with certainty the length of time the Company will operate under the protection of Chapter 11, the outcome of the Chapter 11 proceedings in general, or the effect of the proceedings on the business of the Company or on the interests of the various creditors and security holders. Under the priority scheme established by the Bankruptcy Code, certain post-petition liabilities and pre-petition liabilities need to be satisfied before shareholders can receive any distribution. The ultimate recovery to shareholders, if any, will not be determined until confirmation of a plan of reorganization. There can be no assurance as to what value, if any, will be ascribed to the Company's common stock in the bankruptcy proceedings. 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 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. 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 December 31, 2001 and 2000, the P.A.'s employed 109 and 106 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. Chapter 11 Bankruptcy Filing On November 2, 2001, the Company (the "Debtors") filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court"). The Debtors remain in possession of their properties and assets and management of the Company continues to operate the business of the Debtors as a debtor-in-possession. As a debtor-in-possession, the Company is authorized to continue to operate its businesses, but may not engage in transactions outside the ordinary course of business without the approval, after notice and an opportunity for a hearing, of the Bankruptcy Court. Pursuant to the automatic stay provisions of the Bankruptcy Code, all actions to collect pre-petition indebtedness of the Debtors, as well as most other pending litigation against the Debtors are currently stayed. In addition, as debtor-in-possession, the Debtors have the right, subject to the approval of the Bankruptcy Court and certain other conditions, to assume or reject any pre-petition executory contracts or unexpired leases. The Bankruptcy Court has approved payment of certain pre-petition liabilities, such as employee wages and benefits, and settlement of certain trade payable claims. In addition, the Bankruptcy Court has allowed for the retention of legal and financial professionals to advise in the bankruptcy proceedings. The Company presently intends to reorganize the Company's business and restructure the Company's liabilities through a plan of reorganization to be filed with the Bankruptcy Court. In connection with the development of a plan or plans of reorganization alternatives, the Company will evaluate any and all proposals to maximize the value of the Debtors. Currently, it is not possible to predict with certainty the length of time the Company will operate under the protection of Chapter 11, the outcome of the Chapter 11 proceedings in general, or the effect of the proceedings on the business of the Company or on the interests of the various creditors and security holders. Under the priority scheme established by the Bankruptcy Code, certain post-petition liabilities and pre-petition liabilities need to be satisfied before shareholders can receive any distribution. The ultimate recovery to shareholders, if any, will not be determined until confirmation of a plan of reorganization. There can be no assurance as to what value, if any, will be ascribed to the Company's common stock in the bankruptcy proceedings. Results of Operations 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 Doctorss.s Care in South Carolina, one as Doctor's Care in Knoxville, Tennessee, and five as Progressive Physical Therapy Services in South Carolina and one as Progressive Physical Therapy Services in Knoxville, Tennessee). Revenues of $9,231,000 for the quarter ended December 31, 2001 reflect a decrease of $211,000 or 2% from those of the quarter ended December 31, 2000. This small decrease is believed to be temporary in nature and related to the overall slowing economy. 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. Patient encounters decreased to approximately 109,000 in the first quarter of fiscal year 2002 from 119,000 in the first quarter of fiscal year 2001. 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 14,000 lives at December 31, 2001. As of December 31, 2001, all of these HMOs 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 fiscal years 2002 and 2001 also reflect the Company's continued focus on occupational medicine and industrial health services (these revenues are referred to as "employer paid" and "workers compensation" on the table below). Focused marketing materials, including quarterly newsletters for employers, were developed to spotlight the Company's services for industry. Approximately 21% of the Company's total revenues were derived from these occupational medicine services in both 2002 and 2001. The following table breaks out the Company's revenue and patient visits by revenue source for the first quarter of fiscal years 2002 and 2001. Percent of Percent of Payor Patient Visits Revenue ------------------------------------------------ ------------------------ ----------------------- 2002 2001 2002 2001 ------------ ----------- ------------ ---------- 16 17 14 16 Patient Pay 10 11 6 7 Employer Paid 8 12 8 14 HMO 10 7 15 15 Workers Compensation 12 9 9 6 Medicare/Medicaid 41 38 43 33 Managed Care Insurance 3 6 5 9 Other (Commercial Indemnity, Champus, etc.)
An operating margin of $680,000 was earned during the first quarter of fiscal 2002 as compared to an operating margin of $819,000 for the first quarter of fiscal 2001. Management believes that the decline in margin was the result of personnel and supply costs overruns that it is in the process of reducing. However, the personnel cost increases are 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. The decline is also the result of the overall slump of the economy, which has had an effect on patient visits. Depreciation and amortization expense decreased to $263,000 in the first quarter of fiscal 2002, down from $380,000 in the first quarter of fiscal 2001. This decrease reflects the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" effective October 1, 2001 and the elimination of the amortization of goodwill. Interest expense decreased from $380,000 in the first quarter of fiscal 2001 to $263,000 in the first quarter of fiscal 2002 primarily as a result of the lower interest rates in the first quarter of fiscal year 2002 and the overall reduction in long-term debt. 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 first quarter of fiscal year 2002. This improvement is expected to continue into fiscal year 2002 and beyond. However, there can be no assurances that such improvement will occur. Financial Condition at December 31, 2001 Cash and cash equivalents increased by $270,000 during the quarter ended December 31, 2001 mainly as a result of continuing profitability. Accounts receivable increased by $91,000 during the quarter and is a temporary increase that reversed in January 2002 and is related to the timing of the keying of remittances from insurance carriers. Long-term debt decreased from $7,210,000 at September 30, 2001 to $6,850,000 at December 31, 2001. Regular principal pay-downs of approximately $361,000 were made during the quarter. 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 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. As of December 31, 2001, the Company had no material commitments for capital expenditures or for acquisition or start-ups. Operating activities produced $996,000 of cash during the first quarter of fiscal year 2002, compared with $202,000 during the first quarter of fiscal year 2001. Investing activities used $57,000 in the first quarter of fiscal year 2002 as compared to $151,000 in the first quarter of fiscal year 2001 in cash to purchase needed equipment for its operating sites. Financing activities utilized $670,000 in cash during the quarter 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 DISCLOSURES 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 $2,200,000 of the Company's debt at December 31, 2001 was subject to fixed interest rates and principal payments. Approximately $4,900,000 of the Company's debt at December 31, 2001 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at December 31, 2001, the Company's interest expense on an annualized basis would increase approximately $49,000 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. Chapter 11 Bankruptcy Filing On November 2, 2001, the Company (the "Debtors") filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court"). The Debtors remain in possession of their properties and assets and management of the Company continues to operate the business of the Debtors as a debtor-in-possession. As a debtor-in-possession, the Company is authorized to continue to operate its businesses, but may not engage in transactions outside the ordinary course of business without the approval, after notice and an opportunity for a hearing, of the Bankruptcy Court. Pursuant to the automatic stay provisions of the Bankruptcy Code, all actions to collect pre-petition indebtedness of the Debtors, as well as most other pending litigation against the Debtors are currently stayed. In addition, as debtor-in-possession, the Debtors have the right, subject to the approval of the Bankruptcy Court and certain other conditions, to assume or reject any pre-petition executory contracts or unexpired leases. The Bankruptcy Court has approved payment of certain pre-petition liabilities, such as employee wages and benefits, and settlement of certain trade payable claims. In addition, the Bankruptcy Court has allowed for the retention of legal and financial professionals to advise in the bankruptcy proceedings. The Company presently intends to reorganize the Company's business and restructure the Company's liabilities through a plan of reorganization to be filed with the Bankruptcy Court. In connection with the development of a plan or plans of reorganization alternatives, the Company will evaluate any and all proposals to maximize the value of the Debtors. Currently, it is not possible to predict with certainty the length of time the Company will operate under the protection of Chapter 11, the outcome of the Chapter 11 proceedings in general, or the effect of the proceedings on the business of the Company or on the interests of the various creditors and security holders. Under the priority scheme established by the Bankruptcy Code, certain post-petition liabilities and pre-petition liabilities need to be satisfied before shareholders can receive any distribution. The ultimate recovery to shareholders, if any, will not be determined until confirmation of a plan of reorganization. There can be no assurance as to what value, if any, will be ascribed to the Company's common stock in the bankruptcy proceedings. 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. This item is not applicable. ----------------- (b) Reports on Form 8-K. ------------------- The Company filed a Form 8-K on November 9, 2001 to report that the Company had filed, on November 2, 2001, voluntary petitions for protection under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of South Carolina. The Bankruptcy Court assumed jurisdiction over the Company on November 2, 2001, and the existing officers and directors have been left in possession of the respective bankruptcy estates subject to the supervision and orders of the Bankruptcy Court. The Company filed a Form 8-K on December 3, 2001 to report that on November 29, 2001, the Company notified PricewaterhouseCoopers LLP that it would not be retained by the Company to perform the audit of the financial statements of the Company for the fiscal year ended September 30, 2001. The decision to change independent accountants was approved by the Audit Committee of the Company. PricewaterhouseCoopers LLP had served as the Company's principal independent accountants for the fiscal years ended September 30, 1995 through 2000. The Company's decision to dismiss PricewaterhouseCoopers LLP for the fiscal year ended 2001 audit was not the result of any prior, current or expected disagreement with the Company. 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. ----------------------------- ----------------------------------- Marion F. McFarland, III, M.D. Jerry F. Wells, Jr. President, Chief Executive Officer, Executive Vice President of Finance, and Chairman of the Board Chief Financial Officer and Principal Accounting Officer Date: February 14, 2002