10-Q 1 q063002.txt FORM 10-Q 063002 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, 2002 ------------------------------- ( ) 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) (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 1, 2002 UCI MEDICAL AFFILIATES, INC. INDEX Page Number PART I FINANCIAL INFORMATION Item 1 Financial Statements Condensed Consolidated Balance Sheets - June 30, 2002 and September 30, 2001 3 Condensed Consolidated Statements of Operations for the quarters and the nine months ended June 30, 2002 and June 30, 2001 4 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2002 and June 30, 2001 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 14 Item 3 Quantitative and Qualitative Disclosures about Market Risk 15 PART II OTHER INFORMATION Items 1-6 16 - 17 SIGNATURES 18
UCI Medical Affiliates, Inc. (Debtor-In-Possession) Condensed Consolidated Balance Sheets (unaudited) June 30, 2002 September 30, 2001 -------------------- ---------------------- Assets Current assets Cash and cash equivalents $ 162,815 $ 99,429 Accounts receivable, less allowance for doubtful accounts of $1,655,110 and $1,386,416 6,389,393 6,296,586 Inventory 360,560 360,560 Prepaid expenses and other current assets 552,858 833,732 -------------------- ---------------------- Total current assets 7,465,626 7,590,307 Property and equipment, less accumulated depreciation of $7,904,455 and $7,128,248 3,637,335 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 55,174 23,951 -------------------- ---------------------- Total Assets $ 14,550,077 $ 14,983,214 ==================== ====================== Liabilities and Stockholders' Equity Current liabilities Book overdraft $ 0 $ 733,094 Current portion of long-term debt 5,014,773 4,858,216 Accounts payable 2,658,126 2,801,450 Accrued salaries and payroll taxes 4,264,475 3,651,068 Other accrued liabilities 1,470,572 1,790,931 -------------------- ---------------------- Total current liabilities 13,407,946 13,834,759 Long-term debt, net of current portion 1,654,395 2,352,054 -------------------- ---------------------- Total Liabilities 15,062,341 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 - 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 (22,718,418) (23,409,753) -------------------- ---------------------- Total Stockholders' Equity (512,264) (1,203,599) -------------------- ---------------------- Total Liabilities and Stockholders' Equity $ 14,550,077 $14,983,214 ==================== ======================
The accompanying notes are an integral part of these condensed consolidated financial statements. UCI Medical Affiliates, Inc. (Debtor-In-Possession) Condensed Consolidated Statements of Operations (unaudited) Three Months Ended June 30, Nine Months Ended June 30, ------------------------------------ ---------------------------------- 2002 2001 2002 2001 ----------------- --------------- --------------- --------------- Revenues $ 9,823,464 $9,409,100 $ 28,803,478 $28,921,736 Operating costs 9,176,050 8,705,327 26,670,242 26,274,099 ----------------- --------------- --------------- --------------- Operating margin 647,414 703,773 2,133,236 2,647,637 General and administrative expenses 17,335 12,015 45,335 38,293 Realignment and other expenses 0 0 0 0 Impairment of goodwill 0 0 0 0 Depreciation and amortization 255,215 391,252 776,207 1,154,606 ----------------- --------------- --------------- --------------- Income (loss) from operations 374,864 300,506 1,311,694 1,454,738 Other expense Interest expense, net of interest income (225,124) (370,593) (620,359) (1,166,877) Loss on disposal of equipment 0 0 0 0 ----------------- --------------- --------------- --------------- Other expense (225,124) (370,593) (620,359) (1,166,877) Income (loss) before benefit (provision) for income taxes 149,740 (70,087) 691,335 287,861 Benefit (provision) for income taxes 0 0 0 0 ----------------- --------------- --------------- --------------- Net income (loss) $ 149,740 $ (70,087) $ 691,335 $ 287,861 =============== =============== =============== ================= Basic earnings (loss) per share $ .02 $ (.01) $ .07 $ .03 ================= =============== =============== =============== Basic weighted average common shares outstanding 9,650,515 9,650,515 9,650,515 9,650,515 ================= =============== =============== =============== Diluted earnings (loss) per share $ .02 $ (.01) $ .07 $ .03 ================= =============== =============== =============== Diluted weighted average common shares Outstanding 9,650,683 9,650,515 9,649,353 9,653,778 ================= =============== =============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements. UCI Medical Affiliates, Inc. (Debtor-In-Possession) Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended June 30, ---------------------------------------- 2002 2001 ------------------ ------------------ Operating activities: Net income (loss) $ 691,335 $ 287,861 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for losses on accounts receivable 1,267,290 1,134,449 Depreciation and amortization 776,207 1,154,606 Impairment of goodwill 0 0 Changes in operating assets and liabilities: Accounts receivable (1,360,097) (243,301) Inventories 0 0 Prepaid expenses and other current assets 280,874 91,063 Accounts payable and accrued expenses 149,724 (1,344,266) ------------------ ------------------ Cash provided by operating activities 1,805,333 1,080,412 ------------------ ------------------ Investing activities: Purchases of property and equipment (436,528) (595,241) Disposals of property and equipment 0 0 Acquisitions of goodwill 0 0 (Increase) decrease in other assets (31,223) 18,760 ------------------ ------------------ Cash used in investing activities (467,751) (576,481) ------------------ ------------------ Financing activities: Net borrowings (payments) under line-of-credit agreement (377,863) (383,767) Increase (decrease) in book overdraft (733,094) 443,250 Payments on long-term debt (163,239) (671,861) ------------------ ------------------ Cash used in financing activities (1,274,196) (612,378) ------------------ ------------------ Increase (decrease) in cash and cash equivalents 63,386 (108,447) Cash and cash equivalents at beginning of period 99,429 302,927 ------------------ ------------------ ------------------ Cash and cash equivalents at end of period $ 162,815 $ 194,480 ================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements. UCI MEDICAL AFFILIATES, INC. (Debtor-In-Possession) 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, 2002 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 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 five 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 has no items of other comprehensive income; thus, comprehensive income and net income are the same. Segment Information UCI adopted FASB Statement of Financial Accounting Standards No. ("SFAS") 131, "Disclosure about Segments of an Enterprise and Related Information," in fiscal year 1999. SFAS No. 131 requires companies to report financial and descriptive information about their reportable operating segments, including segment profit or loss, certain specific revenue and expense items, and segment assets, as well as information about the revenues derived from the Company's products and services, the countries in which the Company earns revenues and holds assets, and major customers. This statement also requires companies that have a single reportable segment to disclose information about products and services, information about geographic areas, and information about major customers. This statement requires the use of the management approach to determine the information to be reported. The management approach is based on the way management organizes the enterprise to assess performance and make operating decisions regarding the allocation of resources. It is management's opinion that, at this time, UCI has several operating segments, however, only one reportable segment. The following discussion sets forth the required disclosures regarding single segment information. UCI provides nonmedical management and administrative services for a network of 36 freestanding medical 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, one as Doctor's Care in Knoxville, Tennessee, five as Progressive Physical Therapy Services in South Carolina, and one as Progressive Physical Therapy Services in Knoxville, Tennessee). 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 discontinued the amortization of goodwill as of September 30, 2001. The adoption of this standard increased by an amount equal to the amortization expenses of approximately $450,000 annually that would have otherwise been charged to earnings under current accounting standards. 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 (SFAS 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, second and third quarters 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 plans of reorganization filed with the Bankruptcy Court on May 6, 2002 (the "Plan"). At June 30, 2002, liabilities subject to compromise totaled approximately $2.3 million. The Plan calls for all pre-petition liabilities to be paid at 100% of the total amounts, except a convertible debenture totaling approximately $1.5 million, as discussed below. Accordingly, management has elected not to reclassify the balance sheets as illustrated by SOP 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," because the reclassification of the balance sheet would not be meaningful. Had the Company not filed Chapter 11, interest expense would have been $438,000 and $1,039,000, for quarter ending June 30, 2002 and nine-month period ending June 30, 2002, respectively. The difference between these amounts and the interest expense recorded is attributed to three note payables: FPA Convertible Debenture, Family Medicine Centers of SC, and MainStreet Healthcare, all of which have stated contractual interest. In addition, certain capital lease obligations were rejected as part of the reorganization. All of the aforementioned are included in the Company's reorganization plans. Family Medicine and MainStreet Healthcare are to be paid back at 100% of principle and no interest. The Company is expecting to be released from the FPA debt, as FPA no longer is in existence. 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 the plans 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. Subsequent Event On July 29, 2002, the Plan was approved by the Bankruptcy Court at the final confirmation hearing. As of the date hereof, an order confirming the Plan has not been entered by the court. The Company anticipates filing within fifteen calendar days after the date of entry of such order a Form 8-K summarizing the material features of the Plan. 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 five 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, 2002 and 2001, the P.A.'s employed 111 and 114 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 the Plan filed with the Bankruptcy Court on May 6, 2002. 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 For the Three Months Ended June 30, 2002 as Compared to the Three Months Ended June 30, 2001 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, one as Doctor's Care in Knoxville, Tennessee, five as Progressive Physical Therapy Services in South Carolina and one as Progressive Physical Therapy Services in Knoxville, Tennessee). Revenues of $9,823,000 for the quarter ended June 30, 2002 reflect an increase of $414,000 or 4% from those of the quarter ended June 30, 2001. The Company experienced positive trends in both patient visits and charges per patient in both April and May of 2002 which it attributes to the continuing marketing efforts of the Company and to the general medical condition of the populations served during these months. 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 June 30, 2002. As of June 30, 2002, 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 the South Carolina and Tennessee centers in fiscal years 2002 and 2001 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 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 third quarter of fiscal years 2002 and 2001. Percent of Percent of Payor Patient Visits Revenue ------------------------------------------------ ------------------------ ----------------------- 2002 2001 2002 2001 ------------ ----------- ------------ ---------- 17 17 18 18 Patient Pay 12 12 6 7 Employer Paid 10 10 10 10 HMO 12 12 16 17 Workers Compensation 9 8 6 7 Medicare/Medicaid 36 38 39 37 Managed Care Insurance 4 3 5 4 Other (Commercial Indemnity, Champus, etc.)
An operating margin of $647,000 was earned during the third quarter of fiscal 2002 as compared to an operating margin of $704,000 for the third quarter of fiscal 2001. Depreciation and amortization expense decreased to $255,000 in the third quarter of fiscal 2002, down from $391,000 in the third 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 $371,000 in the third quarter of fiscal 2001 to $225,000 in the third quarter of fiscal 2002 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. In addition, certain capital lease obligations were rejected and interest on certain notes was suspended as part of the reorganization. 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 first, second and third quarters 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. For the Nine Months Ended June 30, 2002 as Compared to the Nine Months Ended June 30, 2001 Revenues of $28,803,000 held almost constant from the same period in fiscal year 2001. Patient encounters decreased to 329,000 for the nine months ended June 30, 2002 from 349,000 for the nine months ended June 30, 2001. The difference in the 6% decrease in patient visits and the less than 1% decrease in revenues 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, 2002 and June 30, 2001. Percent of Percent of Payor Patient Visits Revenue ------------------------------------------------ ------------------------ ----------------------- 2002 2001 2002 2001 ------------ ----------- ------------ ---------- 16 17 16 16 Patient Pay 11 12 6 7 Employer Paid 10 11 10 11 HMO 11 9 14 15 Workers Compensation 11 9 8 7 Medicare/Medicaid 37 38 41 39 Managed Care Insurance 4 4 5 5 Other (Commercial Indemnity, Champus, etc.)
An operating margin of $2,133,000 was earned during the nine months ended June 30, 2002 as compared to an operating margin of $2,648,000 for the nine months ended June 30, 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 $776,000 in the nine months ended June 30, 2002, down from $1,155,000 in the nine months ended June 30, 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 $1,167,000 for the nine months ended June 30, 2001 to $620,000 for the nine months ended June 30, 2002 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. In addition, certain capital lease obligations were rejected and interest on certain notes was suspended as part of the reorganization. Income tax expense is zero due to the utilization of NOL's accumulated in prior years. Financial Condition at June 30, 2002 Cash and cash equivalents increased by $63,000 during the nine months ended June 30, 2002 mainly as a result of the timing of cash payments to vendors and salary payments. Accounts receivable remained about constant during the nine months ended June 30, 2002. Long-term debt decreased from $7,210,000 at September 30, 2001 to $6,669,000 at June 30, 2002 due to regular principal pay-downs of approximately $540,000. 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, 2002, 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 $1,805,000 of cash during the nine months ended June 30, 2002, compared with $1,080,000 during the same period in the prior fiscal year. Investing activities used only $468,000 in cash during the nine months ended June 30, 2002 to purchase needed equipment to operate existing centers and to upfit an existing facility to house the Corporate offices. Financing activities utilized $1,274,000 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; demand for our services; technological changes; the ability to increase market share; unanticipated regulatory or judicial proceedings; the impact on our business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts; 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 June 30, 2002 was subject to fixed interest rates and principal payments. Approximately $4,469,000 of the Company's debt at June 30, 2002 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at June 30, 2002, the Company's interest expense on an annualized basis would increase approximately $45,000 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 the plans of reorganization filed with the Bankruptcy Court on May 6, 2002. In connection with the development of the plans of reorganization alternatives, the Company will evaluate any and all proposals to maximize the value of the Debtors. On July 29, 2002, the plans of reorganization were approved by the Bankruptcy Court at the final confirmation hearing. As of this date, an order confirming the plans of reorganization has not been entered by the court. 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 the plans 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. -------- None. (b) Reports on Form 8-K. ------------------- None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. UCI Medical Affiliates, Inc. (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 7, 2002