UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
--------
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the fiscal year ended September 30, 2004
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the transition period from _________________ to
______________
Commission File Number: 0-13265
UCI MEDICAL AFFILIATES, INC.
-----------------------------
(Name of Registrant as Specified in its Charter)
Delaware 59-2225346
- -------------------------------------------- ----------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification Number)
4416 Forest Drive, Columbia, SC 29206
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(Address of Principal Executive Offices) (Zip Code)
(803) 782-4278
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act: None
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Securities to be registered pursuant to Section 12(g) of the Act: Common
Stock, $.05 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes X No ____ ------ ----
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes ____ No X ------
The aggregate market value of voting stock held by non-affiliates of the
registrant on November 19, 2004 was approximately $3,140,807.* The registrant
has no non-voting common equity.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No -- -----
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the registrant's common stock, $.05 par
value, was 9,740,472 at September 30, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
* Calculated by excluding all shares held by officers, directors, and
controlling shareholders of registrant without conceding that all such persons
are affiliates of registrant for purposes of the federal securities laws.
UCI MEDICAL AFFILIATES, INC.
INDEX TO FORM 10-K
PART I PAGE
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition, Critical
Accounting Policies and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23
Item 9A. Controls and Procedures 23
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 31
Item 13. Certain Relationships and Related Transactions 33
Item 14. Principal Accountant Fees and Services 35
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 36
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this Report on Form 10-K that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. We caution
readers of this Annual Report on Form 10-K that such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
those expressed or implied by such forward-looking statements. Although our
management believes that their expectations of future performance are based on
reasonable assumptions within the bounds of their knowledge of their business
and operations, we have no assurance that actual results will not differ
materially from their expectations. Factors that could cause actual results to
differ from expectations include, among other items, (1) the difficulty in
controlling our costs of providing healthcare and administering our network of
centers; (2) the possible negative effects from changes in reimbursement,
payment practices by insurance companies, healthcare plans, government payors,
and other payment sources; (3) the difficulty of attracting primary care
physicians; (4) the increasing competition for patients among healthcare
providers; (5) possible government regulations negatively impacting our existing
organizational structure; (6) the possible negative effects of prospective
healthcare reform; (7) the challenges and uncertainties in the implementation of
any expansion and development strategy; (8) the dependence on key personnel; (9)
adverse conditions in the stock market, the public debt market, and other
capital markets (including changes in interest rate conditions); (10) the
strength of the United States economy in general and the strength of the local
economies in which we conduct operations may be different than expected
resulting in, among other things, a reduced demand for practice management
services; (11) the demand for our products and services; (12) technological
changes; (13) the ability to increase market share; (14) the adequacy of expense
projections and estimates of impairment loss; (15) the impact of change in
accounting policies and certain regulations promulgated by the Securities and
Exchange Commission; (16) unanticipated regulatory or judicial proceedings; (17)
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; (18)
other factors described in this report and in our other reports filed with the
Securities and Exchange Commission; and (19) our success at managing the risks
involved in the foregoing.
PART I
Item 1. Business
General
UCI Medical Affiliates, Inc. ("UCI") is a Delaware corporation incorporated on
August 25, 1982. Operating through its wholly-owned subsidiary, UCI Medical
Affiliates of South Carolina, Inc. (UCI-SC), UCI provides nonmedical management
and administrative services for a network of 43 freestanding medical centers, 42
of which are located throughout South Carolina and one is located in Knoxville,
Tennessee (28 operating as Doctors Care in South Carolina, one as Doctors Care
in Knoxville, Tennessee, and 14 as Progressive Physical Therapy Services in
South Carolina). We refer to these 43 medical centers as the "centers"
throughout this report.
Organizational Structure
Federal law and the laws of many states, including South Carolina and Tennessee,
generally specify who may practice medicine and limit the scope of relationships
between medical practitioners and other parties. Under such laws, UCI and UCI-SC
are prohibited from practicing medicine or exercising control over the provision
of medical services. In order to comply with such laws, all medical services at
the centers are provided by or under the supervision of Doctors Care, P.A. or
Doctors Care of Tennessee, P.C. (collectively the "P.A."), each of which has
contracted with UCI-SC to be the sole provider of all non-medical direction and
supervision of the centers operating in its respective state of organization. We
refer to the P.A., UCI, and UCI-SC collectively throughout this report as "we",
"us", and "our." The P.A. is organized so that all physician services are
offered by the physicians who are employed by the P.A. Neither UCI nor UCI-SC
employ practicing physicians as practitioners, exerts control over their
decisions regarding medical care, or represents to the public that it offers
medical services.
UCI-SC has entered into an Administrative Services Agreement with the P.A.
pursuant to which UCI-SC performs all non-medical management of the P.A. and has
exclusive authority over all aspects of the business of the P.A. (other than
those directly related to the provision of patient medical services or as
otherwise prohibited by state law). The non-medical management provided by
UCI-SC includes, among other functions, treasury and capital planning, financial
reporting and accounting, pricing decisions, patient acceptance policies,
setting office hours, contracting with third party payors, and all
administrative services. UCI-SC provides all of the resources (systems,
procedures, and staffing) to bill third party payors or patients and provides
all of the resources for cash collection and management of accounts receivables,
including custody of the lockbox where cash receipts are deposited. From the
cash receipts, UCI-SC pays all physician salaries and operating costs of the
centers and of UCI-SC. Compensation guidelines for the licensed medical
professionals at the P.A. are set by UCI-SC, and UCI-SC establishes guidelines
for selecting, hiring, and firing the licensed medical professionals. UCI-SC
also negotiates and executes substantially all of the provider contracts with
third party payors. UCI-SC does not loan or otherwise advance funds to the P.A.
for any purpose.
The P.A. and UCI-SC share a common management team. In each case, the same
individuals serve in the same executive offices of each entity.
UCI-SC believes that the services they provide to the P.A. do not constitute the
practice of medicine under applicable laws. Because of the unique structure of
the relationships described above, many aspects of our business operations have
not been the subject of state or federal regulatory interpretation. We have no
assurance that a review of our business by the courts or regulatory authorities
will not result in a determination that could adversely affect our operations or
that the health care regulatory environment will not change so as to restrict
our existing operations or future expansion.
The Centers
The centers are staffed by licensed physicians, physical therapists, other
healthcare providers, and administrative support staff. The medical support
staff includes licensed nurses, certified medical assistants, laboratory
technicians, and x-ray technicians.
The centers typically are open for extended hours (weekends and evenings) and
out-patient care only. When hospitalization or specialty care is needed,
referrals to appropriate specialists are made.
Our centers are broadly distributed throughout the state of South Carolina, and
one is in Knoxville, Tennessee. Eighteen primary care centers are in the
Columbia region (including six physical therapy offices), ten in the Charleston
region (including four physical therapy offices), four in the Myrtle Beach
region, two in the Aiken region (including one physical therapy office), eight
in the Greenville-Spartanburg region (including three physical therapy offices),
and one in Knoxville, Tennessee.
Medical Services Provided at the Centers
Our centers offer out-patient medical care for treatment of acute, episodic, and
some chronic medical problems. The centers provide a broad range of medical
services that would generally be classified as within the scope of family
practice, primary care, and occupational medicine. Licensed medical providers,
nurses, and auxiliary support personnel provide the medical services. The
services provided at the centers include, but are not limited to, the following:
o Routine care of general medical problems, including colds, flu, ear
infections, hypertension, asthma, pneumonia, and other conditions typically
treated by primary care providers;
o Treatment of injuries, such as simple fractures, dislocations, sprains,
bruises, and cuts;
o Minor surgery, including suturing of lacerations and removal of cysts and
foreign bodies;
o Diagnostic tests, such as x-rays, electrocardiograms, complete blood
counts, and urinalyses; and
o Occupational and industrial medical services, including drug testing, workers'
compensation cases, and physical examinations.
Patient Charges and Payments
The fees charged to a patient are determined by the nature of medical services
rendered. Our management believes that the charges at our centers are
significantly lower than the charges of hospital emergency departments and are
generally competitive with the charges of local physicians and other providers
in the area.
Our centers accept payment from a wide range of sources. These include patient
payments at time of service (by cash, check, or credit card), patient billing
and assignment of insurance benefits (including Blue Cross Blue Shield, Workers'
Compensation, and other private insurance). Managed care billings represent the
most significant source of revenues. We also provide services for members of the
four largest health maintenance organizations (HMOs) operating in South Carolina
- - Companion HealthCare Corporation, HMO Blue, Cigna/HealthSource South Carolina,
Inc., and Carolina Care Plan.
Revenues generated from billings to Blue Cross and Blue Shield of South Carolina
("BCBS") and its subsidiaries, Companion HealthCare Corporation ("CHC") and
Companion Property & Casualty Insurance Company ("CP&C"), totaled approximately
39%, 38%, and 29% of the Company's total revenues for fiscal years 2004, 2003,
and 2002, respectively.
The following table breaks out our approximate revenue and patient visits by
revenue source for fiscal year 2004:
Percent of Percent of Revenue
Payor Patient Visits
- ------------------------------- ------------------- -------------------
18 12
Patient Pay
9 5
Employer Paid
8 9
HMO
10 13
Workers' Compensation
12 8
Medicare/Medicaid
40 49
Managed Care Insurance
3 4
Other (Commercial Indemnity,
Champus, etc.)
In accordance with the Administrative Services Agreement described previously,
UCI-SC, as the agent for the P.A., processes all payments for the P.A. When
payments for the P.A. are received, they are deposited in accounts owned by each
P.A. and are automatically transferred to a lockbox account owned by UCI-SC. In
no event are the physicians entitled to receive such payments. The patient mix
in no way affects our management service fees per the Administrative Services
Agreement.
Fee Arrangements
Medical services traditionally have been provided on a fee-for-service basis
with insurance companies assuming responsibility for paying all or a portion of
such fees. The increase in medical costs under traditional indemnity health care
plans has been caused by a number of factors. These factors include: (i) the
lack of incentives on the part of health care providers to deliver
cost-effective medical care; (ii) the absence of controls over the utilization
of costly specialty care physicians and hospitals; (iii) a growing and aging
population that requires increased health care expenditures; and (iv) the
expense involved with the introduction and use of advanced pharmaceuticals and
medical technology.
As a result of escalating health care costs, employers, insurers, and
governmental entities all have sought cost-effective approaches to the delivery
of and payment for quality health care services. HMOs and other managed health
care organizations have emerged as integral components in this effort. HMOs
enroll members by entering into contracts with employer groups or directly with
individuals to provide a broad range of health care services for a capitation
payment (we have no capitation arrangements at the present time) or a discounted
fee-for-service schedule, with minimal or no deductibles or co-payments required
of the members. HMOs, in turn, contract with health care providers like us to
administer medical care to HMO members. These contracts provide for payment to
us on a discounted fee-for-service basis.
Certain third party payors constantly seek various alternatives for reducing
medical costs, some of which, if implemented, could affect our payment levels.
Our management cannot predict whether changes in present payment methods will
affect payments for services provided by the centers and, if so, whether they
will have an adverse impact upon our business.
Competition and Marketing
All of our centers face competition, in varying degrees, from hospital emergency
rooms, private doctor's offices, other competing freestanding medical centers,
and physical therapy offices. Some of these providers have financial resources
that are greater than our resources. In addition, traditional sources of medical
services, such as hospital emergency rooms and private physicians, have had, in
the past, a higher degree of recognition and acceptance by patients than centers
such as ours. Our centers compete on the basis of accessibility, including
evening and weekend hours, walk-in care, the attractiveness of our state-wide
network to large employers and third party payors. In an effort to offset the
competition's community recognition, we have substantial marketing efforts,
which currently include radio and television advertisements. We have added
regional marketing representatives, developed focused promotional material, and
initiated a newsletter for employers promoting our activities.
Government Regulation
As participants in the health care industry, our operations and relationships
are subject to extensive and increasing regulation by a number of governmental
entities at the federal, state, and local levels.
Limitations on the Corporate Practice of Medicine
Federal law and the laws of many states, including South Carolina and Tennessee,
generally specify who may practice medicine and limit the scope of relationships
between medical practitioners and other parties. Under such laws, business
corporations such as UCI and UCI-SC are prohibited from practicing medicine or
exercising control over the provision of medical services. In order to comply
with such laws, all medical services at our centers are provided by or are under
the supervision of the P.A. pursuant to contracts with UCI's wholly-owned
subsidiaries. The P.A. is organized so that the physicians who are employed by
the P.A. offer all physician services. Neither UCI nor UCI-SC employs practicing
physicians as practitioners, exerts control over any physician's decisions
regarding medical care, or represents to the public that it offers medical
services.
As described previously, UCI-SC has entered into an Administrative Services
Agreement with the P.A. to perform all non-medical management of the applicable
P.A. and has exclusive authority over all aspects of the business of the P.A.
(other than those directly related to the provision of patient medical services
or as otherwise prohibited by state law). (See Item 1. Business - Organizational
Structure.)
Because of the unique structure of the relationships existing between UCI-SC and
the P.A., many aspects of our business operations have not been the subject of
state or federal regulatory interpretation. We have no assurance that a review
by the courts or regulatory authorities of the business formerly or currently
conducted by us will not result in a determination that could adversely affect
our operations or that the healthcare regulatory environment will not change so
as to restrict the existing operations or any potential expansion of our
business.
Third Party Payments
Approximately eight percent of our revenue is derived from payments made by
government-sponsored healthcare programs (principally, Medicare and Medicaid).
As a result, any change in the laws, regulations, or policies governing
reimbursements could adversely affect our operations. State and federal civil
and criminal statutes also impose substantial penalties, including civil and
criminal fines and imprisonment, on healthcare providers that fraudulently or
erroneously bill governmental or other third-party payors for healthcare
services. We believe we are in material compliance with such laws, but we have
no assurance that our activities will not be challenged or scrutinized by
governmental authorities.
Federal Anti-Kickback and Self-Referral Laws
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease, or order of items or services that
are covered by Medicare or state health programs. Although we believe that we
are not in violation of the Anti-kickback Statute or similar state statutes, our
operations do not fit within any of the existing or proposed federal safe
harbors.
The Office of the Inspector General (the "OIG"), the government office that is
charged with the enforcement of the federal Anti-kickback Statute, has issued an
advisory opinion regarding a proposed management services contract unrelated to
us that involved a cost plus a percentage of net revenue payment arrangement
("Advisory Opinion 98-4"). Based on its analysis of the intent and scope of the
Anti-kickback Statute, the OIG determined that it could not approve the
arrangement because the structure of the management agreement raised the
following concerns under the Anti-kickback Statute: (i) the agreement might
include financial incentives to increase patient referrals; (ii) the agreement
did not include any controls to prevent over utilization; and (iii) the
percentage billing arrangement may include financial incentives that increase
the risk of abusive billing practices. The OIG opinion did not find that the
management arrangement violated the Anti-kickback Statute, rather that the
arrangement may involve prohibited remuneration absent sufficient controls to
minimize potential fraud and abuse. An OIG advisory opinion is only legally
binding on the Department of Health and Human Services (including the OIG) and
the requesting party and is limited to the specific conduct of the requesting
party because additional facts and circumstances could be involved in each
particular case. Accordingly, we believe that Advisory Opinion 98-4 does not
have broad application to the provision by UCI and UCI-SC of nonmedical
management and administrative services for the centers. We also believe that we
have implemented appropriate controls to ensure that the arrangements between
UCI and UCI-SC and the centers do not result in abusive billing practices or the
over utilization of items and services paid for by federal health programs.
The applicability of the Anti-kickback Statute to many business transactions in
the health care industry, including the service agreements with the centers and
the development of ancillary services by UCI and UCI-SC, has not been subject to
any significant judicial and regulatory interpretation. We believe that although
remuneration for the management services is provided for under our service
agreements with the centers, UCI and UCI-SC are not in a position to make or
influence referrals of patients or services reimbursed under Medicare or state
health programs to the centers. In addition, UCI and UCI-SC is not a separate
provider of Medicare or state health program reimbursed services. Consequently,
we do not believe that the service and management fees payable to UCI and UCI-SC
should be viewed as remuneration for referring or influencing referrals of
patients or services covered by such programs as prohibited by the Anti-kickback
Statute.
The U.S. Congress in the Omnibus Budget Reconciliation Act of 1993 enacted
significant prohibitions against physician referrals. Subject to certain
exemptions, a physician or a member of his or her immediate family is prohibited
from referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. While
we believe we are currently in compliance with such legislation, future
regulations could require us to modify the form of our relationships with
physician groups.
State Anti-Kickback and Self-Referral Laws
Some states have also enacted similar self-referral laws, and we believe that
more states will likely follow. We believe that our practices fit within
exemptions contained in such laws. Nevertheless, in the event we expand our
operations to certain additional jurisdictions, structural and organizational
modifications of our relationships with physician groups might be required to
comply with new or revised state statutes. Such modifications could adversely
affect our operations.
Through UCI's wholly owned subsidiary, UCI-SC, we provide non-medical management
and administrative services to the centers in South Carolina and Tennessee.
South Carolina and Tennessee have adopted anti-kickback and self-referral laws
that regulate financial relationships between health care providers and entities
that provide health care services. The following is a summary of the applicable
state anti-kickback and self-referral laws.
South Carolina
South Carolina's Provider Self-Referral Act of 1993 generally provides that a
health care provider may not refer a patient for the provision of any designated
health service to an entity in which the health care provider is an investor or
has an investment interest. Under our current operations, we do not believe UCI
or UCI-SC is an entity providing designated health services for purposes of the
South Carolina Provider Self-Referral Act. The centers provide all health care
services to patients through employees of the P.A. No provider investors in the
P.A. refer patients to the centers for designated health care services.
Accordingly, under South Carolina law, we believe that the provider
self-referral prohibition would not apply to our centers or operations in South
Carolina.
In addition to self-referral prohibitions, South Carolina's Provider
Self-Referral Act of 1993 also prohibits the offer, payment, solicitation, or
receipt of a kickback, directly or indirectly, overtly or covertly, in cash or
in kind, for referring or soliciting patients. We believe that payment
arrangements are reasonable compensation for services rendered and do not
constitute payments for referrals.
Tennessee
The Tennessee physician conflict of interest/disclosure law provides that
physicians are free to enter into lawful contractual relationships, including
the acquisition of ownership interests in health facilities. The law further
recognizes that these relationships can create potential conflicts of interests,
which shall be addressed by the following: (a) the physician has a duty to
disclose to the patient or referring colleagues such physician's ownership
interest in the facility or therapy at the time of referral and prior to
utilization; (b) the physician shall not exploit the patient in any way, as by
inappropriate or unnecessary utilization; (c) the physician's activities shall
be in strict conformity with the law; (d) the patient shall have free choice
either to use the physician's proprietary facility or therapy or to seek the
needed medical services elsewhere; and (e) when a physician's commercial
interest conflicts so greatly with the patient's interest as to be incompatible,
the physician shall make alternative arrangements for the care of the patient.
We believe that Tennessee's conflict of interest/disclosure law does not apply
to our current operations because UCI and UCI-SC are not providers of health
services. The centers provide all health care services to patients through
employees of the P.A. Even if the Tennessee conflict of interest/disclosure law
were to apply, our internal quality assurance/utilization review programs will
help identify any inappropriate utilization by a center.
Tennessee also has a law regulating healthcare referrals. The general rule is
that a physician who has an investment interest in a healthcare entity shall not
refer patients to the entity unless a statutory exception exists. A healthcare
entity is defined as an entity that provides healthcare services. We believe
that UCI and UCI-SC do not fit within the definition of a "healthcare entity"
because UCI and UCI-SC are not providers of healthcare services. The centers
provide all health care services to patients through employees of the P.A. No
provider investors in the P.A. refer patients for designated health care
services except the sole physician shareholder of the P.A. We believe that
referrals by the sole shareholder of the P.A. come within a statutory exception.
Accordingly, under Tennessee law, we believe that the provider self-referral
prohibition would not apply to our center or operations in Tennessee.
Tennessee's anti-kickback provision prohibits a physician from making payments
in exchange for the referral of a patient. In addition, under Tennessee law a
physician may not split or divide fees with any person for referring a patient.
The Tennessee Attorney General has issued opinions that determined that the
fee-splitting prohibition applied to management services arrangements. The
Tennessee fee-splitting prohibition contains an exception for reasonable
compensation for goods or services. We believe that the payment arrangements
between UCI and UCI-SC, as applicable, and the centers are reasonable
compensation for services rendered and do not constitute payments for referrals
or a fee-splitting arrangement.
Antitrust Laws
Because each of the P.A. is a separate legal entity, each may be deemed a
competitor subject to a range of antitrust laws that prohibit anti-competitive
conduct, including price fixing, concerted refusals to deal, and division of
market. We believe we are in compliance with such state and federal laws that
may affect our development of integrated healthcare delivery networks, but we
have no assurance that a review of our business by courts or regulatory
authorities will not result in a determination that could adversely affect our
operations.
Healthcare Reform
As a result of the continued escalation of healthcare costs and the inability of
many individuals to obtain health insurance, numerous proposals have been or may
be introduced in the U.S. Congress and in state legislatures relating to
healthcare reform. We have no assurance as to the ultimate content, timing, or
effect of any healthcare reform legislation, nor can we estimate at this time
the impact of potential legislation that may be material on us.
Regulation of Risk Arrangements and Provider Networks
Federal and state laws regulate insurance companies, health maintenance
organizations, and other managed care organizations. Generally, these laws apply
to entities that accept financial risk. Certain of the risk arrangements entered
into by us could possibly be characterized by some states as the business of
insurance. We, however, believe that the acceptance of capitation payments by a
healthcare provider does not constitute the conduct of the business of
insurance. Many states also regulate the establishment and operation of networks
of healthcare providers. Generally, these laws do not apply to the hiring and
contracting of physicians by other healthcare providers. South Carolina and
Tennessee do not currently regulate the establishment or operation of networks
of healthcare providers except where such entities provide utilization review
services through private review agents. We have no assurance that regulators of
the states in which we may operate would not apply these laws to require
licensure of our operations as an insurer or provider network. We believe that
we are in compliance with these laws in the states in which we currently do
business, but we have no assurance that future interpretations of these laws by
the regulatory authorities in South Carolina, Tennessee, or the states in which
we may expand in the future will not require licensure of our operations as an
insurer or provider network or a restructuring of some or all of our operations.
In the event we are required to become licensed under these laws, the licensure
process can be lengthy and time consuming and, unless the regulatory authority
permits us to continue to operate while the licensure process is progressing, we
could experience a material adverse change in our business while the licensure
process is pending. In addition, many of the licensing requirements mandate
strict financial and other requirements that we may not immediately be able to
meet. Further, once licensed, we would be subject to continuing oversight by and
reporting to the respective regulatory agency.
HIPPA
Under HIPPA, the Secretary of Health and Human Services, or HHS, has adopted
national data interchange standards for some types of electronic transactions
and the data elements used in those transactions; adopted security standards to
protect the confidentiality, integrity and availability of patient health
information; and adopted privacy standards to prevent inappropriate access, use
and disclosure of patient health information. In December 2000, HHS published
the final privacy regulations that took effect in April 2003. These regulations
restrict the use and disclosure of individually identifiable health information
without the prior informed consent of the patient. In February 2003, HHS
published the final security regulations, which will take effect in April 2005.
These regulations mandate that healthcare facilities implement operational,
physical and technical security measures to reasonably prevent accidental,
negligent or intentional inappropriate access or disclosure of patient health
information. We have made changes to our business operations to support these
regulatory requirements. We feel that our current operations fully support the
requirements to comply with the above regulations.
Employees
As of September 30, 2004, we had 660 employees (437 on a full-time equivalent
basis). This amount includes 111 medical providers employed by the P.A.
Item 2. Properties
All but one of our primary care center's facilities are leased. The properties
are generally located on well-traveled major highways, with easy access. Each
property offers free, off-street parking immediately adjacent to the center. One
center is leased from a physician employee of the P.A.
Our centers are broadly distributed throughout the state of South Carolina, and
one is in Knoxville, Tennessee. Eighteen primary care centers are in the
Columbia, South Carolina region (including six physical therapy offices), ten in
the Charleston, South Carolina region (including four physical therapy offices),
four in the Myrtle Beach, South Carolina region, two in the Aiken, South
Carolina region (including one physical therapy office), eight in the
Greenville-Spartanburg, South Carolina region (including three physical therapy
offices), and one in the Knoxville, Tennessee region. Our corporate offices are
located on the second floor of one of the Columbia, South Carolina locations.
The centers are all free-standing buildings in good repair.
Item 3. Legal Proceedings
We are a party to various claims, legal activities and complaints arising in the
normal course of business. In the opinion of management and legal counsel,
aggregate liabilities, if any, arising from legal actions would not have a
material adverse effect on our financial position.
Item 4. Submission of Matters to a Vote of Security Holders
On August 31, 2004, UCI's annual meeting of the shareholders was held and the
following actions were taken:
Holders of UCI's common stock represented at the meeting voted to elect Timothy
L. Vaughn, CPA and Jean E. Duke, CPA to the Board of Directors for terms
expiring at the 2007 annual meeting of stockholders and Joseph A. Boyle, CPA to
the Board of Directors for a term expiring at the 2005 annual meeting of
stockholders, as follows:
Number Withhold
Voting For Approval
------------ ------------ -------------
Timothy L. Vaughn, CPA 8,927,636 7,851,326 1,076,310
Jean E. Duke, CPA 8,927,636 7,655,028 1,272,608
Joseph A. Boyle, CPA 8,927,636 7,756,075 1,171,561
Holders of UCI's common stock represented at the meeting voted to ratify the
appointment of Scott McElveen, L.L.P. as our independent auditors for the fiscal
year ended September 30, 2004, as follows:
Number
Voting For Against Abstain
------------- ------------ ----------- -------------
8,927,636 8,493,067 56,974 377,595
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Until October 19, 1998, UCI's common stock was traded on the NASDAQ SmallCap
Market under the symbol UCIA. On October 20, 1998, UCI's common stock was
delisted for trading on the NASDAQ SmallCap Market as a consequence of UCI's
failure to meet certain quantitative requirements under the NASD's expanded
listing criteria. Trading in UCI's common stock is currently conducted in the
over-the-counter market. The prices set forth below indicate the high and low
bid prices reported on the over-the-counter bulletin board. The quotations
reflect inter-dealer prices without retail markup, markdown, or commission and
may not necessarily reflect actual transactions.
Bid Price
--------------------------
High Low
--------- ---------
Fiscal Year Ended September 30, 2004
1st quarter (10/01/03 - 12/31/03) $1.80 $1.20
2nd quarter (01/01/04 - 03/31/04) 3.00 1.67
3rd quarter (04/01/04 - 06/30/04) 3.00 1.46
4th quarter (07/01/04 - 09/30/04) 1.90 1.04
Fiscal Year Ended September 30, 2003
1st quarter (10/01/02 - 12/31/02) $.51 $.30
2nd quarter (01/01/03 - 03/31/03) .62 .30
3rd quarter (04/01/03 - 06/30/03) .75 .45
4th quarter (07/01/03 - 09/30/03) 1.39 .31
As of November 19, 2004, there were 293 stockholders of record of UCI's common
stock, excluding individual participants in security position listings.
UCI has not paid cash dividends on its common stock since its inception and has
no plans to declare cash dividends in the foreseeable future.
Item 6. Selected Financial Data
STATEMENT OF OPERATIONS DATA
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
For the year ended September 30,
-----------------------------------------------------------------------------
----------- -- ------------- -- ------------ -- ------------ -- -------------
2004 2003 2002 2001 2000
----------- ------------- ------------ ------------ -------------
Revenues $47,474 $43,518 $38,527 $38,117 $39,953
Net income (loss) 3,214 2,375 1,394 (1,475) (6,102)
Basic and diluted earnings (loss) per share .33 .25 .14 (.15) (.63)
Basic weighted average number of
shares outstanding 9,718 9,650 9,651 9,651 9,651
Diluted weighted average number of
shares outstanding 9,718 9,650 9,651 9,651 9,651
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------- ---------- ---- ---------- -- ------------ -- ------------- -- -------------
----------------------------------------------------------------------------
At September 30, (in thousands)
----------------------------------------------------------------------------
------------ -- ---------- -- ------------ -- ------------- -- -------------
2004 2003 2002 2001 2000
------------ ---------- ------------ ------------- -------------
Working capital $3,228 $2,925 $2,515 $(6,245) $(6,230)
Property and equipment, net 4,845 4,028 3,765 3,977 4,326
Total assets 17,549 15,859 14,517 14,983 17,782
Long-term debt, including current portion 3,504 3,327 4,079 7,210 8,952
Stockholders' equity (deficiency) 5,780 2,566 190 (1,204) 271
See Note 1 to the accompanying financial statements, which discusses the impact
of accounting changes on the information reflected above in selected financial
data and the reclassification of certain prior year amounts.
Item 7. Management's Discussion and Analysis of Financial Condition,
Critical Accounting Policies and Results of Operations
The following discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our consolidated results of
operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
Critical Accounting Policies
We have adopted accounting policies that we believe will result in an accurate
presentation of the financial statements. We consider critical accounting
policies to be those that require more significant judgments and estimates in
the preparation of our financial statements and include the following: (1)
revenue recognition; (2) allowance for doubtful accounts; (3) consideration of
impairment of intangible assets; and (4) valuation reserve on net deferred tax
assets.
Revenue recognition -
We record revenues at the estimated net amount that we expect to receive from
patients, employers, third party payors, and others at the time we perform the
services. We record contractual adjustments when we prepare the related bills to
our customers. We bill some third parties at discounted and negotiated amounts.
Because we bill at the discounted amounts, we do not need to estimate third
party settlements.
Allowance for doubtful accounts -
We maintain our allowance for doubtful accounts for estimated losses, which may
result from the inability of our customers to make required payments. We base
our allowance on the likelihood of recoverability of accounts receivable
considering such factors as past experience and current collection trends.
Factors taken into consideration in estimating the allowance include: amounts
past due, in dispute, or a client that we believe might be having financial
difficulties. If economic, industry, or specific customer business trends worsen
beyond earlier estimates, we increase the allowance for doubtful accounts by
recording additional expense.
Consideration of impairment of intangible assets -
We evaluate the recovery of the carrying amount of excess of cost over fair
value of assets acquired by determining if a permanent impairment has occurred.
This evaluation is done annually or more frequently if indicators of permanent
impairment arise. Indicators of a permanent impairment include, among other
things, significant adverse change in legal factors or the business climate, an
adverse action by a regulator, unanticipated competition, and loss of key
personnel or allocation of goodwill to a portion of the business that is to be
sold or otherwise disposed. We perform our impairment test on September 30th of
each year. In addition to the annual impairment test, we are required to perform
an impairment test any time an indicator occurs, such as those noted above. At
such time as impairment is determined, the intangible assets are written off
during that period. Although we take considerable care to ensure that impairment
losses are recorded as soon as indicators of impairment are noted, material
differences could occur if different, but nonetheless reasonably plausible,
indicators existed.
Valuation reserve on net deferred tax assets -
We record a valuation allowance to reduce our deferred tax assets to the
amount that management considers is more likely than not to be realized. We
generally budget out operations for twelve months, and when positive indicators
demonstrate that we will have taxable income, we reduce our valuation allowance
to recognize the tax asset.
Overview
Our consolidated financial statements include the accounts of UCI, UCI-SC,
and the P.A. Such consolidation is required under the Financial Accounting
Standards Board (FASB) Interpretation No. 46, as revised. Under the agreement,
UCI-SC, 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 or the P.A.
resulting from such change.
In addition to the nominee shareholder arrangement described above, UCI-SC has
entered into an Administrative Services Agreement with the P.A. As a consequence
of the nominee shareholder arrangement and the Administrative Services
Agreement, we have a long-term financial interest in the affiliated practices of
the P.A. According to FASB Statement No. 94 (Consolidation of All Majority-Owned
Subsidiaries), Statement No. 141 (Business Combinations), and Interpretation No.
46 (Consolidation of Variable Interest Entities), UCI must consolidate the
results of the affiliated practices with those of UCI.
Approximately 99% of the physicians employed by the P.A. are paid on an hourly
basis for time scheduled and worked at the medical centers. Approximately 30% of
the physicians have incentive compensation arrangements; however, no amounts
were accrued or paid that were significant during our three prior fiscal years.
We base any incentive compensation upon a percentage of non-ancillary
collectible charges for services performed by a provider. As of September 30,
2004 and 2003, the P.A. employed 111and 111 medical providers, respectively.
The net assets of the P.A. are not material for any period presented, and
intercompany accounts and transactions have been eliminated.
We 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 us as a whole.
Chapter 11 Bankruptcy Filing
On November 2, 2001, we filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the District of South Carolina (the "Bankruptcy Court"). By August 8,
2002, the Bankruptcy Court confirmed each of our Plans of Reorganization, as
amended, and we have, therefore, emerged from Chapter 11 protection of the
Court. We continue to make payments to our creditors as outlined in the Plans.
Comparison of Results of Operations for Fiscal Years 2004, 2003, and 2002
Revenues of $47,474,000 in fiscal year 2004 reflected an increase of
approximately 9% from the fiscal year 2003 revenues of $43,518,000, which
reflected an increase of approximately 13% from the amount reported for fiscal
year 2002. The following reflects revenue trends from fiscal year 2000 through
fiscal year 2004:
For the year ended September 30, (in thousands)
-------------------------------------------------------------------------------------------
-------------- -- ---------------- -- -------------- --- --------------- -- ---------------
2004 2003 2002 2001 2000
-------------- ---------------- -------------- --------------- ---------------
--------------
Revenues $ 47,474 $ 43,518 $ 38,527 $ 38,117 $ 39,953
Operating Costs 36,733 33,264 31,069 29,710 32,463
Operating Margin 10,741 10,254 7,458 8,407 7,490
The increase in revenues from fiscal year 2003 to fiscal year 2004 is attributed
to an increase in laboratory services offered during the year as well as an
increase in the volume of ancillary services (physical therapy) being offered at
our centers and an increase in patient visits.
The number of our centers remained constant at 36 from September 30, 2001 to
September 30, 2002. The number of centers in operation increased from 36 to 41
during fiscal year 2003. We added seven physical therapy offices (two in the
Greenville-Spartanburg region, three in the Columbia region, and two in the
Charleston region), and we closed two offices during fiscal year 2003 (one in
the Tennessee region and one in the Greenville-Spartanburg region). The number
of centers increased from 41 to 43 during fiscal year 2004. We added two
physical therapy offices (one in the Columbia region and one in the Charleston
region).
During the past three fiscal years, we have continued our services provided to
members of HMOs. In these arrangements, we, through the P.A., act as the
designated primary caregiver for members of HMOs who have selected one of our
centers or providers as their primary care provider. In fiscal year 1994, we
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 our
arrangement with CHC, we now participate in four HMOs and are the primary care
gatekeeper for more than 8,000 lives in fiscal year 2004; 9,000 lives in fiscal
year 2003, and 10,000 lives in fiscal year 2002. As of September 30, 2004, 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. We
are not certain if the market share of HMOs will grow in the areas in which we
operate clinics. (See Footnote 14 to audited consolidated Financial Statements
for information on related parties.)
Sustained revenues in fiscal years 2004, 2003, and 2002 also reflect our
occupational medicine and industrial health services (these revenues are
referred to as "employer paid" and "workers' compensation" on the table depicted
below). Approximately 18% of our total revenue was derived from these
occupational medicine services in both fiscal years 2004 and 2003, and 20% in
fiscal year 2002. We also entered into an agreement with Companion Property and
Casualty Insurance Company (CP&C) wherein we act as the primary care provider
for injured workers of firms insured through CP&C. CP&C is a primary stockholder
of UCI.
Patient encounters were 506,000 in fiscal year 2004, 469,000 in fiscal year 2003
and 459,000 in fiscal year 2002. The increase in the number of patient visits
was mainly a result of an intense advertising campaign in the Columbia region
and the increase in ancillary services.
No new significant competition entered our market during fiscal years 2004,
2003, and 2002.
The increase in the operating margin in 2004 of approximately five percent was
largely the result of increased revenues. The increase in the operating margin
during fiscal year 2003 was also due to increased revenues.
The following table breaks out our revenue and patient visits by revenue source
for fiscal years 2004, 2003, and 2002.
Percent of Percent of
Patient Visits Revenue
--------------------- ------------------------
2004 2003 2002 2004 2003 2002
------- ------ ------ ------- ------ ---------
18 16 16 12 11 14
Patient Pay
9 10 11 5 5 6
Employer Paid
8 8 9 9 10 9
HMO
10 10 11 13 13 14
Workers' Compensation
12 11 10 8 7 7
Medicare/Medicaid
40 41 40 49 48 46
Managed Care Insurance
3 4 3 4 6 4
Other (Commercial Indemnity, Champus, etc.)
As managed care plans attempt to cut costs, they typically increase the
administrative burden of providers by requiring referral approvals and by
requesting hard copies of medical records before they will pay claims. The
number of patients at our centers that are covered by a managed care plan versus
a traditional indemnity plan continues to grow. Management expects this trend to
continue.
Bad debt expense, a component of operating costs, was approximately $2,359,000
(or approximately 5% of revenue) for fiscal year 2004, $1,889,000 (or
approximately 4% of revenue) for fiscal year 2003, and $1,845,000 (or
approximately 5% of revenue) for fiscal year 2002. The collection percentage for
the established South Carolina centers has remained constant for the past 5
years.
General and administrative expenses include all salaries, benefits, supplies and
other operating expenses not specifically related to the day-to-day operations
of the centers. General and administrative expenses increased to $6,250,000 in
fiscal year 2004 as compared to $5,990,000 in fiscal year 2003. The increase is
primarily the result of legal settlements with former employees.
Depreciation and amortization expense decreased to $1,013,000 in fiscal year
2004 as compared to $1,145,000 in fiscal year 2003. This decrease is due to an
additional $200,000 in depreciation expense that was booked in 2003 in
anticipation of medical equipment obsolescence. Depreciation and amortization
expense for fiscal year 2002 was $1,022,000. Net interest expense decreased to
$693,000 in fiscal year 2004 down from $744,000 in fiscal year 2003. This
decrease was the result of more favorable terms and a lower interest rate under
the new BB&T Term Note Agreement. Net interest expense increased to $2,236,000
in fiscal year 2002 from $1,699,000 in fiscal year 2001 as a result of
approximately $1,400,000 of interest and fees associated with the settlement we
made with various taxing authorities as a part of our Chapter 11 reorganization.
We evaluate the valuation allowance regarding deferred tax assets on a more
likely than not basis. In determining that it was more likely than not that the
recorded deferred tax asset would be not realized, our management considered the
following:
o Recent historical operating results.
o The budgets and forecasts that management and the Board of Directors have
adopted.
o The ability to utilize net operating losses (NOL's) prior to their expiration.
o The potential limitation of NOL utilization in the event of a change in
ownership.
o The generation of future taxable income in excess of income reported on the
consolidated financial statements.
A valuation allowance of $4.5 million and $5.8 million at September 30, 2004 and
September 30, 2003 remained necessary based upon the factors noted above. During
the year ended September 30, 2004, our management determined that it was more
likely than not that the recorded deferred tax asset was becoming more
realizable. Therefore, we recorded a $500,000 adjustment based upon our current
financial position, results from operations, and our forecast of the next twelve
months.
Unaudited Quarterly Financial Information
The following is condensed quarterly financial information.
Fiscal Year Ended September 30, 2004
-----------------------------------------------------------------------
--------------- -- -------------- --- -------------- -- ---------------
12/31/2003 03/31/2004 06/30/2004 09/30/2004
--------------- -------------- -------------- ---------------
---------------
Revenues $12,770,000 $11,490,000 $11,318,000 $11,896,000
Operating Cost 9,382,000 9,002,000 8,869,000 9,481,000
Operating Margin 3,388,000 2,488,000 2,448,000 2,416,000
Net Income after Provision for
Income Taxes 1,298,000 1,124,000 236,000 555,000
Basic Earnings per Common Share .13 .12 .02 .06
Diluted Earnings per Common Share .13 .11 .02 .07
Fiscal Year Ended September 30, 2003
-----------------------------------------------------------------------
--------------- -- -------------- --- -------------- -- ---------------
12/31/2002 03/31/2003 06/30/2003 09/30/2003
--------------- -------------- -------------- ---------------
---------------
Revenues $10,297,000 $11,013,000 $11,049,000 $11,159,000
Operating Cost 7,992,000 8,183,000 8,581,000 8,508,000
Operating Margin 2,305,000 2,830,000 2,468,000 2,651,000
Net Income after Provision for
Income Taxes 372,000 700,000 524,000 779,000
Basic and Diluted Earnings per
Common Share 0.04 0.07 0.05 0.08
Results of Operations for the Three Months Ended September 30, 2004 as Compared
to the Three Months Ended September 30, 2003:
Revenues of $11,896,000 for the quarter ending September 30, 2004 reflect an
increase of approximately 7% from those of the quarter ending September 30,
2003. The increase is attributed to an increase in fee income associated with
laboratory services, some small increases in the fee schedule of some insurance
payors, an increase in physical therapy services provided, and an increase in
patient visits.
Patient encounters increased to 130,000 in the fourth quarter of fiscal year
2004 from 118,000 in the fourth quarter of fiscal year 2003.
The eleven percent increase in operating costs reflects routine salary
adjustments and increases in advertising costs.
The decrease in depreciation and amortization costs is due to an equipment
obsolescence adjustment in 2003.
The decrease in net interest expense was the result of more favorable terms
under the new BB&T Term Note Agreement.
During the fourth quarter of 2002, we recorded a gain on extinguishment of debt
in the amount of approximately $2,705,000 which resulted from a discharge of a
$1,500,000 of convertible subordinated debenture with accrued interest of
approximately $292,000; reducing the carrying value of compromised accounts
payable balances to their current present value by approximately $685,000; and
the termination of certain leases, with a recorded balance of approximately
$228,000, as provided for during the reorganization.
Financial Condition at September 30, 2004 and September 30, 2003
Cash and cash equivalents decreased by approximately $150,000 from September 30,
2003 to September 30, 2004. Working capital increased to $3,228,000 at September
30, 2004 from $2,925,000 at September 30, 2003.
Accounts receivable increased from $6,874,000 at September 30, 2003 to
$7,383,000 at September 30, 2004. This increase was attributable to the increase
in revenues during fiscal year 2004.
The increase in property and equipment is the result of medical equipment
purchases and facility renovations of approximately $1,831,000.
Long term debt increased from $3,327,000 at September 30, 2003 to $3,504,000 at
September 30, 2004. On February 9, 2004, we entered into a loan agreement with
Branch Banking & Trust Company of South Carolina in the principal amount of
$2,750,000 to refinance an existing term loan at more favorable terms and a
lower interest rate in order to pay amounts due to the Internal Revenue Service
and the South Carolina Department of Revenue. The new variable interest rate is
Branch Banking & Trust Company of South Carolina's prime rate plus one percent
per annum and is repayable monthly, with a final payment due on February 9,
2009.
Liquidity and Capital Resources
We require capital principally to fund growth for working capital needs and for
the retirement of indebtedness. Our past 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 September 30, 2004, we had no material commitments for capital
expenditures or for acquisitions or start-ups. Operating activities generated
$3,749,000 of cash during fiscal year 2004, compared to $3,592,000 during fiscal
year 2003. Operations continued to generate positive cash flow mainly due to an
improvement in our overall operations, much of which was the result of cost
reductions that have remained in place throughout 2004 and 2003, which is
reflected as the increase in operating margin on the income statement. In
addition, the extended payment terms realized through the bankruptcy filing
improved cash flow from operations.
Investing activities used $1,833,000 of cash during fiscal year 2004 and
$1,365,000 in fiscal year 2003 as a result of normal equipment upgrades in
existing centers.
We used approximately $2,065,000 of cash for financing activities in fiscal year
2004 to pay down the long-term debt. We used approximately $1,813,000 of cash
during fiscal year 2003 to reduce debt. We have no assurance that any additional
financing, if required, will be available on terms acceptable to us.
Overall, our current assets exceed our current liabilities at September 30,
2004.
Contractual Obligations
The following table summarizes our contractual obligations as of September 30,
2004:
Payment Due By Period
---------------------------------------------------------------------------------------
-------------- -- ------------- -- ------------ --- --------------- --- ---------------
Contractual Obligations Total < 1 Year 1-3 Years 3-5 Years > 5 Years
- --------------------------- -------------- ------------- ------------ --------------- ---------------
- --------------------------- -------------- ------------- ------------ --------------- ---------------
Long-term Debt 3,229,809 793,234 1,365,673 1,070,902 --
Capital Lease 274,088 178,874 95,214 -- --
Operating Lease 30,413,336 2,878,829 5,736,714 5,226,348 16,571,445
Please refer to the financial statement Footnotes No. 10 and 13.
Risk Factors
- -------------
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially than those anticipated
in these forward-looking statements as a result of factors both in and out of
our control, including the risks faced by us described below and elsewhere in
this Form 10-K. You should carefully read the risks described below. The risks
described below are not the only risks facing us. We have only described the
risks we consider to be the most material. There may be additional risks that
are viewed by us as not material or that are not presently known to us.
Risks Related to UCI Medical Affiliates, Inc.
- ----------------------------------------------
We can provide you no assurance that we will be able to implement
successfully our bankruptcy reorganization plans and continue as a going
concern.
On November 2, 2001, we filed a voluntary petition for protection under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court for the District
of South Carolina. We filed the bankruptcy petition because of our
heavily-burdened debt structure and our lack of liquidity.
In the course of our bankruptcy proceedings, we developed, in negotiation with
creditors and other interested constituencies, reorganization plans for our
company, our subsidiaries, and the professional corporations setting forth how
claims against and equity interests in the companies will be treated. We
submitted these plans of reorganization to the Bankruptcy Court on May 6, 2002,
and filed addendums to the plans with the Bankruptcy Court on June 14, 2002 and
July 29, 2002. By August 8, 2002, the Bankruptcy Court had issued orders
confirming all of the reorganization plans. For a summary description of the
terms of the reorganization plans as confirmed, please see our Current Report on
Form 8-K filed with the SEC on August 16, 2002. Although we have been able to
obtain confirmation of the reorganization plans by the Bankruptcy Court, it
remains uncertain whether we will be able to continue to implement successfully
the reorganization plans and continue as a going concern. Thus, any investment
in our shares of common stock is highly speculative.
We have a history of losses.
We have a history of operating losses, liquidity problems, uncertainty of
revenues, markets, profitability and the need for additional funding. We
incurred net losses of approximately $1,475,000, $6,102,000, $10,508,000,
$84,000 and $1,360,000 for the years ended September 30, 2001, 2000, 1998, 1997
and 1995, respectively. We had net income of $3,214,000, $2,375,000, $1,394,000,
$910,000 and $466,000 for the years ended September 30, 2004, 2003, 2002, 1999
and 1996, respectively. Thus, our financial viability and ability to continue as
a going concern depend on our ability to continue with our profitable
operations, maintain adequate working capital and obtain satisfactory long-term
financing. We can provide you with no assurance, however, that we can realize
these goals or that we will be profitable in the future or successful in
refinancing or renewing our outstanding debt.
We can provide no assurance that our medical centers will be able to
compete effectively with other existing healthcare providers.
The business of providing healthcare-related services is highly competitive.
Many companies, including professionally managed physician practice management
companies like us, have been organized to acquire medical clinics, manage the
clinics, and employ clinic physicians at the clinics. Large hospitals, other
physician practice centers, private doctor's offices and healthcare companies,
HMOs, and insurance companies are also involved in activities similar to ours.
Because our main business is the provision of medical services to the general
public, our primary competitors are the local physician practices and hospital
emergency rooms in the markets where we own medical centers. Some of these
competitors have longer operating histories and significantly greater resources
than we do. In addition, these traditional sources of medical services, such as
hospital emergency rooms and private physicians, have had in the past a higher
degree of recognition and acceptance than the medical centers that we operate.
We cannot assure you that we will be able to compete effectively or that
additional competitors will not enter the market in the future.
If a regulatory authority finds that our organization and relationships do
not comply with existing or future laws and regulations, our operations
could be materially adversely affected.
As a participant in the healthcare industry, our operations and relationships
are subject to extensive and increasing regulation by a number of governmental
bodies at the federal, state and local levels. Although we have tried to
structure our business to comply with these existing laws and regulations, we
have had little guidance as to whether we comply or not because of the unique
structure of our business operations. We cannot assure you that a review by the
courts or regulatory authorities of our former or current business will not
result in a determination that could
adversely affect our operations. In particular, we can provide you with no
assurance that a court or regulatory body would find that our structure and
business operations comply with the following:
o State and federal laws limiting the provision of medical services by
business corporations;
o State and federal anti-kickback and self-referral laws;
o Antitrust laws; and
o Federal and state laws and regulations governing insurance companies,
HMOs, and other managed care organizations.
We have provided you with a discussion of each of these areas in the section
titled "Government Regulation" under Item 1 above. Furthermore, the laws and
regulations governing the healthcare industry change rapidly and constantly. In
the future, the regulatory environment may change in a manner as to require us
to modify or restrict our existing operations and any proposed expansion of our
business. Restrictions on or modifications of our operations because of a
changing regulatory environment could materially adversely affect our business.
If the laws, regulations, and policies governing government-sponsored
healthcare programs are changed, our operations could be materially
adversely affected.
Historically, we derive approximately eight percent of our revenues from
payments made by government-sponsored healthcare programs (principally, Medicare
and Medicaid). As a result, any change in the laws, regulations, or policies
governing reimbursements could adversely affect our operations. Additionally,
state and federal civil and criminal statutes impose substantial penalties,
including civil and criminal fines and imprisonment, on healthcare providers
that fraudulently or wrongfully bill governmental or other third-party payors
for healthcare services. We believe we are in material compliance with these
laws, but we cannot assure you that our activities will not be challenged or
scrutinized by governmental authorities.
Departures of our key personnel or directors will impair our operations.
We have the following executive officers: D. Michael Stout, M.D., our
President, Chief Executive Officer and Director of Medical Affairs; and Jerry F.
Wells, Jr., CPA, our Executive Vice President, Chief Financial Officer, and
Corporate Secretary. They are instrumental in our organization and are the key
management officials in charge of our daily business operations. We cannot be
assured of the continued service of either of them, and each of them would be
difficult to replace. Additionally, our directors' community involvement,
diverse backgrounds, and extensive business relationships are important to our
success.
Because of the nature of our business, we run the risk that we will be
unable to collect the fees that we have earned. Virtually all of our
consolidated net revenue was derived in the past, and we believe will be derived
in the future, from our medical centers' charges for services on a
fee-for-service basis. Accordingly, we assume the financial risk related to
collection, including the potential uncollectability of accounts, long
collection cycles for accounts receivable, and delays attendant to reimbursement
by third party payors, such as governmental programs, private insurance plans
and managed care organizations. Increases in write-offs of doubtful accounts,
delays in receiving payments or potential retroactive adjustments, and penalties
resulting from audits by payors may require us to borrow funds to meet our
current obligations or may otherwise have a material adverse effect on our
financial condition and results of operations.
We are subject to certain special risks in connection with the intangible
assets reported on our balance sheet. As a result of our various acquisition
transactions, intangible assets (net of accumulated amortization) of
approximately $3.4 million have been recorded on our balance sheet as of
September 30, 2004. Because of a change in accounting principles adopted by the
accounting profession, we ceased amortizing our intangible assets in the fiscal
year ending September 30, 2002. Instead, after an initial review of our
intangible assets for impairment in connection with our adoption of this new
accounting principle, we analyze our intangible assets on an annual basis for
impairment of value.
Under these current accounting standards, our net unamortized balance of
intangible assets acquired was not considered to be impaired as of September 30,
2004. In the past, however, we have recorded impairments to our intangible
assets when appropriate. For example, effective September 30, 2001, we recorded
impairment in the approximate amount of $750,000 to reduce our intangible assets
to fair value. We recorded this impairment because we combined two of our
Knoxville, Tennessee locations and we also had decreased profitability in a
Columbia and Greenville center. Therefore, we deemed that the goodwill
associated with these three locations was impaired and should be written off.
Prior to that, we recorded impairment in the quarter ended March 31, 2000 in the
approximate amount of $3.6 million to reduce our intangible assets to fair
value. This impairment was required in connection with the closing of our
medical centers in Georgia. See further discussion in Item 7 above.
We cannot assure you that we will ever realize the value of our remaining
intangible assets in the future. We may be required to recognize that the value
of our intangible assets has been further impaired in our subsequent annual
reviews upon analyzing our operating results. Any future determination that a
significant impairment has occurred would require us to write-off the impaired
portion of our remaining intangible assets, which could have a material adverse
effect on our results of operations.
Our business is concentrated in specific geographic locations and could be
affected by a depressed economy in these areas.
We provide our services to areas in South Carolina and Tennessee. A stagnant or
depressed economy in these states could affect all of our markets and adversely
affect our business and results of operations.
Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, and other attacks, acts of war, or
military actions, such as continued military actions in Iraq or elsewhere,
may adversely affect our operating results and financial condition.
The attacks of September 11, 2001 have contributed to major instability in the
U.S. and other financial markets. These terrorist attacks, the military
response, and other future developments, may adversely affect prevailing
economic conditions. These developments, depending on their magnitude, could
have a material adverse effect of our operating results and financial condition.
Risks Related to Our Common Stock
Shareholders may have difficulty in selling their shares because we have
filed a voluntary petition for protection under Chapter 11 of the
Bankruptcy Code.
On November 2, 2001, we, along with our subsidiaries and affiliated professional
corporations, filed voluntary petitions for protection under Chapter 11 of the
Bankruptcy Code. We filed the bankruptcy petitions because of our
heavily-burdened debt structure and our lack of liquidity. Although the
reorganization plans have been confirmed by the Bankruptcy Court, it remains
uncertain whether we will be able to implement successfully the terms of the
reorganization plans and continue as a going concern.
Because of the uncertainty resulting from our financial distress and our ongoing
reorganization proceedings, our common stock is not attractive to many
investors. Consequently, should you desire to sell your shares, you may not be
able to find a buyer.
You may have difficulty in selling your shares because of the absence of
an active public market.
On October 20, 1998, our common stock was delisted for trading on the NASDAQ
SmallCap Market. Shortly before our delisting, NASDAQ raised its criteria to
remain listed on the NASDAQ SmallCap Market. Our delisting was a consequence of
our failure to meet the increased requirements for the value of assets for
companies traded on the NASDAQ SmallCap Market.
Because our stock is no longer listed on the NASDAQ SmallCap Market, trading in
our common stock is conducted in the over-the-counter market. Consequently, our
stockholders have found disposing of shares of our common
stock and obtaining accurate quotations of its market value more difficult. In
addition, the delisting makes our common stock substantially less attractive as:
o collateral for loans;
o an investment by financial institutions because of their internal
policies or state legal investment laws;
o consideration to finance any future acquisitions of medical practices;
and,
o an investment opportunity by investors should we desire to raise
additional capital in the future. Although our common stock is currently
eligible for quotation on the over-the-counter bulletin board, we have been
informed that the NASD may be considering higher standards for permitting
quotations of securities on the bulletin board. If the NASD does raise its
standards, the over-the-counter bulletin board may no longer be available as a
trading market for our stockholders as well. Consequently, potential investors
should only invest in our common stock if they have a long-term investment
intent. If an active market does not develop and a shareholder desires to sell
its shares of our common stock, the shareholder will be required to locate a
buyer on its own and may not be able to do so.
The absence of a public market makes the price of our common stock
particularly volatile and susceptible to market fluctuations.
Trading in our common stock has historically been very limited, and we cannot
assure you that an active trading market for our common stock will ever develop
or be sustained. Because of the limited trading liquidity in our common stock,
the market price of our common stock has been vulnerable to significant
fluctuations in response to very limited market trading in our shares. Sales of
substantial amounts of our common stock, or the availability of substantial
amounts of our common stock for future sale, could adversely affect the
prevailing market price of our common stock. The market price of our common
stock will remain subject to significant fluctuations in response to these
factors as well as in response to operating results and other factors affecting
stock prices generally. The stock market in recent years has experienced price
and volume fluctuations that often have been unrelated or disproportionate to
the operating performance of companies. These fluctuations, as well as general
economic and market conditions, may adversely affect the market price of our
common stock in the future.
Shareholders may have difficulty selling their shares because our common
stock is a "penny stock" and is subject to special SEC rules that make
transactions in our common stock burdensome for broker-dealers.
As long as the trading price of our common stock is less than $5.00 per share,
our common stock will be considered to be a "penny stock" under SEC rules.
Generally, a "penny stock" is any non-NASDAQ equity security that has a market
price of less than $5.00 per share. If a penny stock is traded in the secondary
market, these SEC rules require the broker-dealer to provide to the purchaser a
disclosure schedule explaining the penny stock market and the risks associated
with it. These SEC rules also require broker-dealers to abide by various sales
practices if they sell penny stocks to persons other than established customers
and accredited investors. For these penny stock transactions, the broker-dealer
must make a special determination that the investment in the penny stock is
suitable for the purchaser and receive the purchaser's written consent to the
purchase before the transaction. The additional burdens that these SEC rules
impose upon broker-dealers may discourage broker-dealers from effecting
transactions in our common stock and could severely limit a shareholder's
ability to sell its shares in the secondary market.
The market price of our common stock may fluctuate widely in the future.
The trading price of our common stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in our operating results, material
announcements made by us from time to time, governmental regulatory action,
general conditions in the healthcare industry, or other events, or factors, many
of which are beyond our control. In addition, the stock market has experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of many healthcare services companies and which have often been
unrelated to the operating performance of these companies. Our operating results
in future quarters may be below the expectations of securities analysts and
investors. In this event, the price of our common stock would likely decline,
perhaps substantially.
The market price of our common stock may decline should a substantial
number of shares of our common stock be offered for sale on the open
market.
Sales of substantial amounts of our common stock in the public market, or the
perception that these sales could occur, could adversely affect prevailing
market prices of our common stock and could impair our future ability to raise
capital through the sale of our equity securities. We are unable to predict the
effect, if any, that future sales of our common stock or the availability of our
common stock for sale may have on the market price of our common stock
prevailing from time to time.
Anti-takeover provisions in our certificate of incorporation and state
corporate laws could deter or prevent take-over attempts by a potential
purchaser of our common stock and deprive you of the opportunity to obtain
a takeover premium for your shares.
In many cases, stockholders receive a premium for their shares when a company is
purchased by another. Various provisions in our certificate of incorporation and
bylaws and state corporate laws could deter and make it more difficult for a
third party to bring about a merger, sale of control, or similar transaction
without approval of our board of directors. These provisions tend to perpetuate
existing management. As a result, our shareholders may be deprived of
opportunities to sell some or all of their shares at prices that represent a
premium over market prices. These provisions, which could make it less likely
that a change in control will occur, include:
provisions in our certificate of incorporation establishing three
classes of directors with staggered o terms, which means that only
one-third of the members of the board of directors is elected each year and
each director serves for a term of three years.
provisions in our certificate of incorporation authorizing the board
of directors to issue a series of preferred stock without shareholder
action, which issuance could discourage a third party from
o attempting to acquire, or make it more difficult for a third party to
acquire, a controlling interest in us.
We do not expect to pay dividends on our common stock in the foreseeable
future.
We have no source of income other than dividends that we receive from our
operating subsidiary, UCI-SC. Our ability to pay dividends to shareholders will
therefore depend on the subsidiary's ability to pay dividends to us. The
subsidiary intends to retain future earnings, if any, for use in the operation
and expansion of our business. Consequently, we do not plan to pay dividends
until we recover any losses that we have incurred and become profitable.
Additionally, our future dividend policy will depend on our earnings, financial
condition and other factors that our Board of Directors considers relevant.
Shareholders may suffer dilution in their interests in our common stock if
we offer additional shares of common stock in the future or if certain
third parties exercise their option rights to acquire additional shares of
our common stock.
There is no present intent to offer for sale additional shares of common stock.
However, we cannot ensure that, in the future, we will not have to seek
additional capital by offering and selling additional shares of common stock in
order to continue to operate, acquire additional medical practices in our
current or other markets, or achieve successful operations. If it becomes
necessary to raise additional capital to support our operations, there is no
assurance that additional capital will be available to us, that additional
capital can be obtained on terms favorable to us, or that the price of any
additional shares that may be offered by us in the future will not be less than
the subscription price paid by our shareholders. The effect on existing
stockholders of sales of additional shares of common stock cannot presently be
determined.
As of September 30, 2004, CHC and CP&C, each of which is a wholly-owned
subsidiary of BCBS, owned in the aggregate 6,726,019 shares, or approximately
69.05 percent, of our outstanding common stock. Under various agreements among
CHC, CP&C and us, we have given these companies the right at any time to
purchase from us the number of shares of our voting stock as is necessary for
BCBS and its affiliated entities, as a group, to obtain and then maintain an
aggregate ownership of 48 percent of our outstanding voting stock. To the extent
either of these BCBS subsidiaries exercises its right in conjunction with a sale
of voting stock by us, the price to be paid by the BCBS subsidiary is the
average price to be paid by the other purchasers in that sale. Otherwise, the
price is the average closing bid price of our voting stock on the ten trading
days immediately preceding the election by a BCBS subsidiary to exercise its
purchase rights. Consequently, to the extent either of the BCBS subsidiaries
elects to exercise any or a portion of its rights under these anti-dilution
agreements, the sale of shares of common stock to a BCBS subsidiary will have
the effect of further reducing the percentage voting interest in us represented
by a share of the common stock.
Certain affiliates have the ability to exercise substantial influence.
The substantial ownership of our common stock by the BCBS subsidiaries and other
of our affiliates may provide them with the ability to exercise substantial
influence in the election of directors and other matters submitted for approval
by our stockholders. As a result, other stockholders may be unable to
successfully oppose matters that are presented by these entities for action by
stockholders, or to take actions that are opposed by these entities. The
ownership by these entities may also have the effect of delaying, deterring, or
preventing a change in our control without the consent of these entities. These
effects could reduce the value of our stock. In addition, sales of common stock
by these entities could result in another stockholder obtaining control over us.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates primarily as a result of our
borrowing activities, which includes credit facilities with financial
institutions used to maintain liquidity and fund our 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 our debt may
vary as a result of future business requirements, market conditions and other
factors. The definitive extent of our interest rate risk is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements. We do not currently use derivative instruments to adjust
our interest rate risk profile.
Approximately $867,000 of our debt at September 30, 2004 was subject to fixed
interest rates and principal payments. Approximately $2,636, 000 of our debt at
September 30, 2004 was subject to variable interest rates. Based on the
outstanding amounts of variable rate debt at September 30, 2004, our interest
expense on an annualized basis would increase approximately $26,360 for each
increase of one percent in the prime rate.
We do not utilize financial instruments for trading or other speculative
purposes, nor do we utilize leveraged financial instruments.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Index to Financial Statements on Page 37.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Annual Controls Evaluation and Related CEO and CFO Certifications
We conducted an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (Disclosure Controls) as of the end of
the period covered by this Annual Report. The controls evaluation was done under
the supervision and with the participation of management, including our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO).
Attached as exhibits to this Annual Report are certifications of the CEO and the
CFO, which are required in accord with Rule 13a-14 of the Exchange Act. This
Controls and Procedures section includes the information concerning the controls
evaluation referred to in the certifications and it should be read in
conjunction with the certifications for a more complete understanding of the
topics presented.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to reasonably assure
that information required to be disclosed in our reports filed under the
Exchange Act, such as this Annual Report, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Disclosure Controls are also designed to reasonably assure that such information
is accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Our
Disclosure Controls include components of our internal control over financial
reporting, which consists of control processes designed to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements in accordance with US generally accepted
accounting principles. To the extent that components of our internal control
over financial reporting are included within our Disclosure Controls, they are
included in the scope of our quarterly controls evaluation.
Limitations on the Effectiveness of Controls
The company's management, including the CEO and CFO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Controls can also be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the controls. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Scope of the Controls Evaluation
The evaluation of our Disclosure Controls included a review of the controls'
objectives and design, the company's implementation of the controls and the
effect of the controls on the information generated for use in this Annual
Report. In the course of the controls evaluation, we sought to identify data
errors, controls problems or acts of fraud and confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation is performed on a quarterly basis so that the conclusions of
management, including the CEO and CFO, concerning controls effectiveness can be
reported in our Quarterly Reports on Form 10-Q and to supplement our disclosures
made in our Annual Report on Form 10-K. Many of the components of our Disclosure
Controls are also evaluated on an ongoing basis by other personnel in our
Finance organization, as well as our independent auditors who evaluate them in
connection with determining their auditing procedures related to their report on
our annual financial statements and not to provide assurance on our controls.
The overall goals of these various evaluation activities are to monitor our
Disclosure Controls, and to modify them as necessary; our intent is to maintain
the Disclosure Controls as dynamic systems that change as conditions warrant.
Among other matters, we also considered whether our evaluation identified any
"significant deficiencies" or "material weaknesses" in our internal control over
financial reporting, and whether the company had identified any acts of fraud
involving personnel with a significant role in our internal control over
financial reporting. This information was important both for the controls
evaluation generally, and because item 5 in the certifications of the CEO and
CFO require that the CEO and CFO disclose that information to our Board's Audit
Committee and to our independent auditors. In the professional auditing
literature, "significant deficiencies" are referred to as "reportable
conditions," which are deficiencies in the design or operation of controls that
could adversely affect our ability to record, process, summarize and report
financial data in the financial statements. Auditing literature defines
"material weakness" as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and the risk that such
misstatements would not be detected within a timely period by employees in the
normal course of performing their assigned functions. We also sought to address
other controls matters in the controls evaluation, and in each case if a problem
was identified, we considered what revision, improvement and/or correction to
make in accordance with our ongoing procedures.
Conclusions
Based upon the controls evaluation, our CEO and CFO have concluded that, subject
to the limitations noted above, as of the end of the period covered by this
Annual Report, our Disclosure Controls were effective to provide reasonable
assurance that material information relating to UCI and its consolidated
subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being prepared.
Under Rules 13a-15 and 15d-15 of the Exchange Act, companies are required to
maintain internal control over financial reporting, as defined, and company
managements are required to evaluate and report on internal control over
financial reporting. Under an extended compliance period for these rules, the
Company must begin to comply with the evaluation and disclosure requirements
with its annual report for the fiscal year ending September 30, 2005, and the
Company must begin to comply with a requirement to perform a quarterly
evaluation of changes to internal control over financial reporting that occur
thereafter. As of September 30, 2004, the Company had not performed the required
evaluations mentioned above.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Our Certificate of Incorporation provides for a classified Board of Directors so
that, as nearly as possible, one-third of the members of the Board are elected
at each annual meeting to serve until the third annual stockholders' meeting
after their election. Effective at our annual meeting which was held on August
31, 2004, the Board was expanded from six to seven members.
Timothy L. Vaughn, CPA, 39, has served as Chief Financial Officer of Companion
HealthCare since January 2000. He served as TRICARE Contracts Manager for Blue
Cross Blue Shield of South Carolina from 1997 to 2000. This federal program
provides health benefits administration for military dependents and retirees
across the nation. Mr. Vaughn is a Certified Public Accountant and has been
named a Fellow in both the Academy of Healthcare Management and Life Management
institute and is currently serving as Corporate Secretary and Treasurer of EAP
Alliance, Inc. in Columbia, South Carolina. He is a member of numerous
professional and civic organizations. Mr. Vaughn was most recently re-elected as
a director at the annual meeting of stockholders in 2004.
Jean E. Duke, CPA, 49, has served as Senior Vice President, Customer &
Information Services of Colonial Life & Accident Insurance Company since March
2004. Prior to that, Ms. Duke served as President and Chief Financial Officer of
Colonial since rejoining the company in August 2002. During the period from 1998
until 2002, Ms. Duke owned a consulting business providing services primarily
for insurance and financial organizations. Ms. Duke is a certified public
accountant. A graduate of Leadership Columbia, she was named the Financial
Executive of the Year by the Columbia chapter of the Institute of Management
Accountants, the Distinguished Young Alumni award by the Moore School of
Business, and was honored with the Tribute to Women and Industry award by the
Young Women's Christian Association. Ms. Duke has held leadership and board
positions with many professional and business organizations as well as
continuing to be active in numerous community organizations. Ms. Duke was
recently elected as a director at the annual meeting of stockholders in 2004.
Joseph A. Boyle, CPA, 50, has served as the President and Chief Executive
Officer of Affinity Technology Group, Inc. since January 2000 and as its
Chairman since March 2001. Mr. Boyle served as Affinity's Senior Vice President
and Chief Financial Officer from September 1996 until January 2000 and as
Chairman and Chief Executive Officer of Surety Mortgage, Inc., a wholly owned
subsidiary of Affinity, from December 1997 until December 2001. Mr. Boyle is a
certified public accountant and was a partner in the accounting firm of Elliott
Davis, LLC from April 2003 until August 2004. From June 1982 until August 1996,
Mr. Boyle was employed by Price Waterhouse, LLP and from 1993 until 1996 was a
partner in its Kansas City, Missouri office where he specialized in the
financial services industry. Mr. Boyle was recently elected as a director at the
annual meeting of stockholders in 2004.
Harold H. Adams, Jr., 57, has served as one of our directors since June 1994 and
as Chairman and owner of Adams and Associates, International and Southern
Insurance Managers since June 1992. He served as President of Adams Eaddy and
Associates, an independent insurance agency, from 1980 to 1992. Mr. Adams has
been awarded the Chartered Property Casualty Underwriter designation and is
currently a member of the President's Board of Visitors of Charleston Southern
University in Charleston, South Carolina. He has received numerous professional
awards as the result of over 34 years of involvement in the insurance industry
and is a member of many professional and civic organizations. Mr. Adams was most
recently elected as a director at the annual meeting of stockholders in 2003.
Charles M. Potok, 55, has served as our Chairman of the Board since February
2003, and has served as one of our directors since September 1995. He has served
as Executive Vice President and Chief Operating Officer of Companion Property
and Casualty Company, a wholly-owned subsidiary of Blue Cross and Blue Shield of
South Carolina, since March 1984; and, as President of Companion Property and
Casualty Company since April 2002. Mr. Potok is an Associate of the Casualty
Actuarial Society and a member of the American Academy of Actuaries. Prior to
joining Companion Property and Casualty Company, Mr. Potok served as Chief
Property and Casualty Actuary and Director of the Property and Casualty Division
of the South Carolina Department of Insurance. Mr. Potok was most recently
elected as a director at the annual meeting of stockholders in 2003.
John M. Little, Jr., M.D., MBA, 54, has served as one of our directors since
August 1998 and as Chief Medical Officer of Companion HealthCare Corporation, a
wholly-owned subsidiary of Blue Cross and Blue Shield of South Carolina, since
1996. Additionally, he has served since 1994 as Medical Director of Managed Care
Services of Companion HealthCare Corporation, as Chairman of the Quality
Assurance Committee and the Pharmacy and Therapeutics Committee of Companion
HealthCare Corporation, and as a Co-Chair of the Managed Care Oversight
Committee of Companion HealthCare Corporation. Prior to joining Companion
HealthCare Corporation in 1994, Dr. Little served as Assistant Chairman for
Academic Affairs, Department of Family Practice, Carolinas Medical Center,
Charlotte, North Carolina from 1992 to 1994. Dr. Little was most recently
elected as a director at the annual meeting of stockholders in 2003.
Ashby M. Jordan, M.D., 65, has served as one of our directors since August 1996
and as Vice President of Medical Affairs of Blue Cross and Blue Shield of South
Carolina since December 1986. Prior to joining Blue Cross and Blue Shield of
South Carolina, Dr. Jordan was the Vice President of Medical Affairs for CIGNA
HealthPlan of South Florida, Inc. Dr. Jordan is Board Certified by the American
Board of Pediatrics. Dr. Jordan was most recently elected as a director at the
annual meeting of stockholders in 2003.
Executive Officers
The following sets forth certain information concerning our executive officers
of UCI.
D. Michael Stout, M.D., 59, has served as President and Chief Executive Officer
of UCI, UCI-SC, and the P.A. since November 1, 2002. He continues to serve as
Medical Director and served as Executive Vice President of Medical Affairs
Services of UCI and DC-SC since 1995 and as Medical Director of UCI-SC and DC-SC
since 1989. He graduated from Boston University Medical School in 1980 and
practiced medicine for Doctors Care since 1983. He is Board Certified in
Emergency Medicine and is a member of the American College of Emergency
Physicians, the Columbia Medical Society, and the American College of Physician
Executives.
Jerry F. Wells, Jr., CPA, 42, has served as UCI's Executive Vice President and
Chief Financial Officer since February 1995 and as UCI's Corporate Secretary
since December 1996. He has served as Executive Vice President of Finance, Chief
Financial Officer and Corporate Secretary of UCI-SC since December 1996, and as
Corporate Secretary of DC-SC since December 1996. Prior to joining us, he served
as a Senior Manager and consultant for Price Waterhouse from 1985 until February
1995. Mr. Wells is a Certified Public Accountant and is a member of the American
Institute of Certified Public Accountants, the South Carolina Association of
Certified Public Accountants, and the North Carolina CPA Association.
Board of Directors and Board Committees
Board of Directors
The Board of Directors met or acted by written consent a total of four times
during our fiscal year ended September 30, 2004. No director attended fewer than
75 percent of the total of such Board meetings and the meetings of the
committees upon which the director served. Among the standing committees
established by the Board of Directors are a Compensation Committee, an Audit
Committee, and a Nominating Committee. The Board of Directors acting as a whole
currently performs such functions. Currently, seven directors serve on the Board
of Directors.
Audit Committee
We describe the functions of the Audit Committee under the heading "Audit
Committee Report" which can be found on page 35. The Audit Committee operates
under a written Charter, which was filed with our Proxy Statement on August 2,
2004. The Audit Committee is made up of Joseph A. Boyle, CPA; Jean E. Duke, CPA;
and, Harold H. Adams, Jr. and is independent within the meaning of SEC
regulations. The Board of Directors has determined that Mr. Boyle and Ms. Duke
are financial experts, as that term is defined in Item 401(h)(2) of Regulation
S-K under the Exchange Act. The Audit Committee met four times during the fiscal
year ended September 30, 2004.
Compensation Committee
During our fiscal year ended September 30, 2004, the Compensation Committee
consisted of Dr. Little, Dr. Jordan, and Mr. Potok, with Mr. Potok acting as
Chairman. This committee monitors our executive compensation plan, practice and
policies, including all salaries, bonus awards, and fringe benefits, and makes
recommendations to the Board of Directors with respect to changes in existing
executive compensation plans and the formation and adoption of new executive
compensation plans. This committee met one time during our fiscal year ended
September 30, 2004. The report of the Compensation Committee appears in this
Form 10-K on page 30.
Nominating Committee
The Nominating Committee makes recommendations to the Board with respect to the
size and composition of the Board, reviews the qualifications of potential
candidates for election as director, and recommends director nominees to the
Board. All of the members of the Nominating Committee are independent within the
meaning of SEC regulations. The Nominating Committee operates under a written
Charter, which was filed in our Proxy Statement on August 2, 2004. The
Nominating Committee was formed in June 2004, and met one time during the fiscal
year ended September 30, 2004. Members of the Nominating Committee consist of
Mr. Boyle, Ms. Duke and Mr. Adams, with Mr. Adams acting as Chairman.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires the directors, officers, and beneficial
owners of more than ten percent of a registrant's common stock to file reports
of holdings and acquisitions in common stock with the Securities and Exchange
Commission. To our knowledge, based solely on our records and a review of the
copies of such reports furnished to us, we believe that our directors, officers,
and beneficial owners of more than ten percent of our stock complied with all
SEC filing requirements applicable to them in respect to our fiscal year ended
September 30, 2004.
Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. We filed a copy of this
Code as Exhibit 14 to our Form 10-K for fiscal year ended September 30, 2003.
Item 11. Executive Compensation
The following table sets forth the total compensation earned during the fiscal
year ended September 30, 2004 and during each of the two prior fiscal years by
our President and Chief Executive Officer and our other executive officers whose
annual compensation from us exceeded $100,000 for all services provided to us.
No other executive officers earned compensation in excess of $100,000 for
services provided to us in any of the three fiscal years reflected in the table.
Summary Compensation Table
Long Term
Compensation
Annual Awards
Compensation
Securities
Underlying All Other
Name and Principal Position Fiscal Year Salary (1) Bonus (1) Options Compensation
--------------------------- ----------- ---------- --------- ------- ------------
D. Michael Stout, M.D. 2004 81,000 0 0
261,000 (2)
President and 2003 227,000 (2) 88,000 0 0
Chief Executive Officer 2002 210,000 (2) 58,000 0 0
Jerry F. Wells, Jr., CPA 2004 166,100 59,000 0 0
Executive Vice President, 2003 144,500 39,000 0 0
Chief Financial Officer, 2002 138,000 38,000 0 0
and Corporate Secretary
(1) Amounts included under the heading "Salary" and "Bonus" include
compensation from both UCI-SC and DC-SC. The remuneration described in
the table above does not include our cost of benefits furnished to
certain officers that were extended in connection with the conduct of
our business. The amount of such benefits accrued for each of the named
executives in each of the years reflected in the table did not exceed
10% of the total annual salary and bonus reported for such executive in
such year.
(2) For services performed by Dr. Stout for UCI-SC, Dr. Stout received an
annual salary of $50,000 in each of the three fiscal years ended
September 30, 2004, 2003, and 2002. For services performed by Dr. Stout
for DC-SC, Dr. Stout received an annual salary of $211,000, $177,000
and $160,000 in the fiscal years ended September 30, 2004, 2003 and
2002. Dr. Stout has served as the President and Chief Executive Officer
of UCI, UCI-SC, and DC-SC since November 1, 2002.
Fiscal Year End Option Values
The following table sets forth certain information with respect to unexercised
options to purchase our common stock held at September 30, 2004. None of the
named executive officers exercised any options during the fiscal year ended
September 30, 2004. Additionally, no options were granted to any officer or
director during the fiscal year ended September 30, 2004.
2004 FISCAL YEAR END
OPTION VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money
Fiscal Year End Options at Fiscal Year End
------------------------------------------ ---------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------- ---------------------- -------------------- -------------------
109,825 0 0 0
D. Michael Stout, M.D.
President and
Chief Executive Officer (1)
134,825 0 0 0
Jerry F. Wells, Jr., CPA
Executive Vice President,
Chief Financial Officer, and
Secretary
(1) Dr. Stout has served as the President and Chief Executive Officer of UCI,
UCI-SC, and DC-SC since November 1, 2002.
Director Compensation
Currently, members of our Board receive the following retainer fees: $6,000 per
fiscal year for the Chairman, $5,000 per year for Committee Chairs, and $4,000
per year for all other members of the Board. We also reimburse directors for
out-of-pocket expenses reasonably incurred by them in the discharge of their
duties as directors of our company.
During the fiscal year ended September 30, 1996, we adopted a Non-Employee
Director Stock Option Plan (the "1996 Non-Employee Plan"). The 1996 Non-Employee
Plan provided for the granting of options to two non-employee directors for the
purchase of 10,000 shares of our common stock at the fair market value as of the
date of grant. Under this plan, we issued 5,000 options to Harold H. Adams, Jr.,
CPCU and 5,000 options to Russell J. Froneberger. These options are exercisable
during the period commencing on March 20, 1999 and ending on March 20, 2006. At
September 30, 2004, stock options for 5,000 shares were outstanding under the
1996 Non-Employee Plan, all of which were exercisable.
During the fiscal year ended September 30, 1997, we adopted a Non-Employee
Director Stock Option Plan (the "1997 Non-Employee Plan"). The 1997 Non-Employee
Plan provided for the granting of options to three non-employee directors for
the purchase of 20,000 shares of our common stock at the fair market value as of
the date of grant. Under this plan, we issued 5,000 options each to Thomas G.
Faulds, Ashby M. Jordan, M.D., and Charles M. Potok. These options are
exercisable during the period commencing on March 28, 2000 and ending on March
28, 2007. At September 30, 2004, stock options for 10,000 shares were
outstanding under the 1997 Non-Employee Plan, all of which were exercisable.
Employment Contracts
There are no employment agreements with the Executive Officers.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee is or has been our executive
officer or employee or an executive officer or employee of any of our
subsidiaries. None of the members of the Compensation Committee is or has been a
member of the compensation committees of another entity. None of our executive
officers are or have been a member of the compensation committee, or a director,
of another entity.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors generally determines the
compensation of our executive officers. This committee reviews and recommends to
the Board the salaries and other compensation of all of our officers and
directors. The Compensation Committee also administers our Stock Incentive
Plans. The following report is being furnished with respect to certain
compensation paid or awarded to our executive officers during the fiscal year
ended September 30, 2004.
General Policies. Our compensation program is intended to enable us to attract,
motivate, reward, and retain the management talent to achieve corporate
objectives and thereby increase shareholder value. Our policy is to provide
incentives to senior management to achieve both short-term and long-term
objectives. To attain these objectives, our executive compensation program is
composed of a base salary, incentive compensation and stock options.
Base Salary. Base salaries for Dr. Stout and Mr. Wells were determined by a
subjective assessment of the executive officer's performance, in light of the
officer's responsibilities and position with us and our performance during prior
periods. In evaluating our overall performance, the primary focus is on
financial performance for the relevant annual period measured by operating
income. The Committee also considers the recommendations of the Chief Executive
Officer (except in the case of his own compensation); to the extent available,
the salary norms for persons in comparable positions at comparable companies;
and the person's experience. The Committee reviews base salaries from time to
time and adjusts them appropriately.
Incentive Compensation. The Compensation Committee determines cash bonuses for
all executive officers and awards the bonuses only if we, or any applicable
subsidiary or business unit, achieve performance objectives. We designed our
long-term incentive compensation for executive officers to focus management's
attention on our future. We provide long-term compensation through grants of
stock options. The number of stock options granted is based upon the executive's
salary, performance, and responsibilities. Each executive officer also receives
additional compensation through standard benefit plans available to all
employees, including but not limited to matching contributions pursuant to a
401(k) plan, paid vacation, and group health, life, and disability insurance.
The Compensation Committee believes each of these benefits is an integral part
of the overall compensation program that helps to ensure that our executive
officers receive competitive compensation.
Stock Options. Executive compensation includes the grant of stock options in
order to more closely align the interests of the executive with the long-term
interests of the shareholders.
Performance Graph
The following graph compares cumulative total shareholder return of UCI's common
stock over a five-year period with The NASDAQ Stock Market (US) Index and with a
Peer Group of companies for the same period. Total shareholder return represents
stock price changes and assumes the reinvestment of dividends. The graph assumes
the investment of $100 on September 30, 1999.
(INSERT GRAPH HERE)
Fiscal Year Ended
-----------------------------------------------------------------------------------
09/30/99 09/30/00 09/30/01 09/30/02 09/30/03 09/30/04
----------- ---------- ----------- ---------- ---------- ----------
UCI Medical Affiliates, Inc. 100.00 72.21 55.11 46.22 211.56 211.56
Peer Group 100.00 89.54 251.14 189.56 281.33 340.80
NASDAQ Market Index 100.00 136.79 56.05 45.09 69.11 73.27
The members of the Peer Group are Continucare Corporation, IntegraMed America,
Inc., Pediatrix Medical Group, Inc., and Metropolitan Health Networks. The
returns of each company in the Peer Group have been weighted according to their
respective stock market capitalization for purposes of arriving at a Peer Group
average. The prices of UCI's common stock used in computing the returns
reflected above are the average of the high and low bid prices reported for
UCI's common stock during the fiscal year ended on such dates.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information known to us regarding the
beneficial ownership of our common stock as of November 19, 2004. Information is
presented for (i) stockholders owning more than five percent of the outstanding
common stock as indicated in their respective Schedule 13D filings as filed with
the Securities and
Exchange Commission as of November 19, 2004, (ii) each of our directors, each
nominee for director, and each of our executive officers individually, and (iii)
all of our directors and executive officers, as a group. The percentages are
calculated based on 9,740,472 shares of common stock outstanding on November 19,
2004.
Shares
Beneficially
Name Owned (1) Percentage
- ------------------------------------------------------------------------- ----------------- -------------
Blue Cross and Blue Shield of South Carolina (2)...............................6,726,019 69.05
Harold H. Adams, Jr................................................................2,500 *
Ashby M. Jordan, M. D................................................................. 0 0
John M. Little, Jr., M.D...............................................................0 0
Charles M. Potok.......................................................................0 0
Timothy L. Vaughn, CPA.................................................................0 0
Joseph A. Boyle, CPA...................................................................0 0
Jean E. Duke, CPA......................................................................0 0
D. Michael Stout, M.D. (3).......................................................414,185 4.25
Jerry F. Wells, Jr. (4)..........................................................134,825 1.38
All current directors and executive officers
As a group (9 persons).......................................................551,510 5.66
* Amount represents less than 1.0 percent.
(1) Beneficial ownership reflected in the table is determined in accordance
with the rules and regulations of the SEC and generally includes voting
or investment power with respect to securities. Shares of common stock
issuable upon the exercise of options currently exercisable or
convertible, or exercisable or convertible within 60 days, are deemed
outstanding for computing the percentage ownership of the person
holding such options, but are not deemed outstanding for computing the
percentage ownership of any other person. Except as otherwise
specified, each of the stockholders named in the table has indicated to
us that such stockholder has sole voting and investment power with
respect to all shares of common stock beneficially owned by that
stockholder.
(2) The business address of the named beneficial owner is I-20 at Alpine
Road, Columbia, SC 29219. The shares reflected in the table are held of
record by Companion HealthCare Corporation (6,107,838 shares) and
Companion Property and Casualty (618,181 shares), each of which is a
wholly owned subsidiary of Blue Cross and Blue Shield of South
Carolina.
(3)......Includes 109,825 shares issuable pursuant to currently exercisable
stock options.
(4)......All shares are issuable pursuant to currently exercisable stock
options.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued
upon the exercise of options, warrants, and rights under all of our existing
equity compensation plans as of September 30, 2004.
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans [excluding
outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a)]
- ---------------------------------- ----------------------- ----------------------- -------------------------
- ---------------------------------- ----------------------- ----------------------- -------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 341,650 2.87 438,250
Equity compensation plans not
approved by security holders
-- -- --
----------------------- ----------------------- -------------------------
----------------------- ----------------------- -------------------------
Total 341,650 2.87 438,250
======================= ======================= =========================
Item 13. Certain Relationships and Related Transactions
Administrative Services Agreements
UCI-SC has entered into an Administrative Services Agreement with the P.A.
pursuant to which UCI-SC performs all non-medical management of the P.A. and has
exclusive authority over all aspects of the business of the P.A. (other than
those directly related to the provision of patient medical services or as
otherwise prohibited by state law). The non-medical management provided by
UCI-SC includes, among other functions, treasury and capital planning, financial
reporting and accounting, pricing decisions, patient acceptance policies,
setting office hours, contracting with third party payors, and all
administrative services. UCI-SC provides all of the resources (systems,
procedures, and staffing) to bill third party payors or patients and provides
all of the resources for cash collection and management of accounts receivables,
including custody of the lockbox where cash receipts are deposited. From the
cash receipts, UCI-SC pays all physician salaries and operating costs of the
centers and of UCI-SC. Compensation guidelines for the licensed medical
professionals at the P.A. are set by UCI-SC, and UCI-SC establishes guidelines
for selecting, hiring, and firing the licensed medical professionals. UCI-SC
also negotiates and executes substantially all of the provider contracts with
third party payors. UCI-SC does not loan or otherwise advance funds to the P.A.
for any purpose.
During UCI's fiscal years ended September 30, 2004 and 2003, the P.A. received
an aggregate of approximately $47,474,000 and $43,518,000, respectively, in fees
prior to deduction by the P.A. of their payroll and other related deductible
costs covered under the Administrative Services Agreement and its predecessor
agreement. For accounting purposes, we combine the operations of the P.A. with
the operations of UCI, as reflected in our consolidated financial statements.
D. Michael Stout, M.D. is the sole shareholder and sole director of the P.A.,
and since November 1, 2002, has served as the President and Chief Executive
Officer of UCI, UCI-SC, and the P.A. Prior to November 1, 2002, Dr. Stout was
the Executive Vice President of Medical Affairs for UCI and UCI-SC, and was the
President of the P.A.
Medical Center Leases
A partnership in which M. F. McFarland III, M.D., our former Chief Executive
Officer and Chairman of the Board, is a general partner leases to UCI-SC the
Doctors Care Northeast facility. We renewed the lease in October 1997 for a
fifteen-year term. We believe the terms of this lease to be no more or less
favorable to UCI-SC than those that would have been obtainable through
arm's-length negotiations with unrelated third parties for similar arrangements.
Total lease payments made by UCI-SC under this lease during the fiscal years
ended September 30, 2004 and 2003 were $96,000 each year, plus utilities and
real estate taxes.
Other Transactions with Related Parties
On May 13, 2003, Companion Healthcare Corporation ("CHC"), a wholly owned
subsidiary of Blue Cross and Blue Shield of South Carolina ("BCBS"), purchased
2,020,387 shares of our common stock from MainStreet Healthcare Corporation and
other shareholders for 40 cents ($0.40) per share for a total purchase price of
$808,155. On April 30, 2004, CHC purchased an additional 2,081,009 shares of our
common stock from MainStreet Healthcare Corporation and other shareholders for
50 cents ($0.50) per share for a total purchase price of $1,040,505. UCI was not
a party to these transactions and received none of the proceeds from these
transactions between several of our shareholders.
At September 30, 2004, CHC owned 6,107,838 shares of common stock and Companion
Property and Casualty Insurance Company ("CP&C"), another wholly owned
subsidiary of BCBS, owned 618,181 shares of our common stock, which combine to
approximately 69.05 percent of our outstanding common stock.
The following is a historical summary of purchases of our common stock by BCBS
subsidiaries directly from us.
Blue Cross and Blue Shield of South Price Total
Date Carolina Number per Purchase
Purchased Subsidiary of Shares Share Price
------------------- ------------------------------------- -------------- ------------ ------------------
12/10/93 Companion HealthCare Corporation 333,333 $1.50 $ 500,000
06/08/94 Companion HealthCare Corporation 333,333 3.00 999,999
01/16/95 Companion HealthCare Corporation 470,588 2.13 1,002,352
05/24/95 Companion HealthCare Corporation 117,647 2.13 250,588
11/03/95 Companion HealthCare Corporation 218,180 2.75 599,995
12/15/95 Companion HealthCare Corporation 218,180 2.75 599,995
03/01/96 Companion HealthCare Corporation 315,181 2.75 866,748
Companion Property and Casualty
06/04/96 218,181 2.75 599,998
06/23/97 Companion Property and Casualty 400,000 1.50 600,000
The common stock acquired by CHC and CP&C directly from us was purchased
pursuant to exemptions from the registration requirements of federal securities
laws available under Section 4(2) of the 1933 Act. Consequently, the ability of
the holders to resell such shares in the public market is subject to certain
limitations and conditions. CHC and CP&C purchased these shares at share prices
below market value at the respective dates of purchase in part as a consequence
of the lower issuance costs incurred by us in the sale of these unregistered
securities and in part as consequence of the restricted nature of the shares.
CHC and CP&C have the right to require registration of the stock under certain
circumstances as described in the respective stock purchase agreements.
These BCBS subsidiaries have the option to purchase as many shares as may be
necessary for BCBS and its subsidiaries in the aggregate to obtain and maintain
ownership of 48 percent of the outstanding common stock in the event that we
issue additional stock to other parties (excluding shares issued to our
employees or directors). To the extent either of these BCBS subsidiaries
exercises its right in conjunction with a sale of voting stock by us, the price
to be paid by such entity is the average price to be paid by the other
purchasers in that sale. Otherwise, the price is the average closing bid price
of our voting stock on the ten trading days immediately preceding the election
by a BCBS subsidiary to exercise its purchase rights. Consequently, to the
extent either of the BCBS subsidiaries elects to exercise any or a portion of
its rights under these anti-dilution agreements, the sale of shares of common
stock to a BCBS subsidiary will have the effect of reducing the percentage
voting interest in us represented by a share of the common stock.
During the fiscal year ended September 30, 1998, UCI-SC entered into a capital
lease purchase agreement with BCBS for a new billing and accounts receivable
system, which includes computer equipment, for an aggregate purchase price of
$1,253,000. UCI-SC has the option to purchase the equipment at the end of the
lease term for $1. The lease obligation recorded at September 30, 2004 is
$274,000, which includes lease addenda. We believe the terms of the lease
purchase agreement to be no more or less favorable to UCI-SC than the terms that
would have been obtainable through arm's-length negotiations with unrelated
third parties for a similar billing and accounts receivable system, which
includes computer equipment.
During the fiscal year ended September 30, 1994, UCI-SC entered into an
agreement with CP&C pursuant to which UCI-SC, through DC-SC, acts as the primary
care provider for injured workers of firms carrying worker's compensation
insurance through CP&C. Additionally, during the fiscal year ended September 30,
1995, UCI-SC executed a $400,000 note payable to CP&C payable in monthly
installments of $4,148 from April 1, 1995 to January 28, 2009. We believe the
terms of the agreement with CP&C to be no more or less favorable to UCI-SC than
those that would have been obtainable through arm's-length negotiations with
unrelated third parties for similar arrangements.
UCI-SC, through DC-SC, provides services to members of a health maintenance
organization operated by CHC who have selected DC-SC as their primary care
provider. We believe the terms of the agreement with CHC to be no more or less
favorable to UCI-SC than those that would have been obtainable through
arm's-length negotiations with unrelated third parties for similar arrangements.
Item 14. Principal Accountant Fees and Services
Audit Committee Report
The Audit Committee's charter, as revised as of June 30, 2004, specifies that
the purpose of the Committee is to oversee and monitor:
(1) the integrity of the company's accounting and financial reporting
process, including the financial reports and other financial
information provided by the company to the public,
(2) the independence and qualifications of the company's external
auditor, (3) the performance of the company's internal audit process
and its external auditor, (4) the company's system of internal
accounting and financial controls, (5) the company's system of public
and private disclosure controls, and
the company's compliance with laws, regulations, and the
company's Code of Ethics and any other code of ethics
applicable to the company.
The full text of the Charter was filed as Appendix A to our Proxy Statement
which was filed with the SEC on August 2, 2004. In carrying out its
responsibilities, the Audit Committee, among other things
(1) monitors preparation of quarterly and annual financial reports
by our management;
(2) supervises the relationship between us and our independent
auditors, including: having direct responsibility for our
auditor's appointment, compensation, and retention; reviewing
the scope of our auditor's audit services; approving
significant non-audit services; and confirming the
independence of our auditors; and
(3) oversees management's implementation and maintenance of
effective systems of internal and disclosure controls.
The Committee schedules its meetings with a view to ensuring that it devotes
appropriate attention to all of its tasks. The Committee's meetings include,
whenever appropriate, executive sessions with our independent auditors.
As part of its oversight of our financial statements, the Committee reviewed and
discussed with both management and our independent auditors the audited
consolidated financial statements for the year ended September 30, 2004.
Management advised the Committee that these financial statements had been
prepared in accordance with generally accepted accounting principles. The
discussions with Scott McElveen, L.L.P. also included the matters required by
Statement on Auditing Standards No. 61 (Communication with Audit Committees) as
amended by Statement on Auditing Standards No. 90, including the quality of our
accounting principles, the reasonableness of significant judgments, and the
clarity of the disclosures in our financial statements. The Committee also
discussed with Scott McElveen, L.L.P. matters relating to Scott McElveen
L.L.P.'s independence, including a review of audit and non-audit fees and the
written disclosures and letter from Scott McElveen, L.L.P. to the Committee as
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees).
Based on the above described discussions and reviews, the Audit Committee
recommended to the Board that the Board approve the inclusion of our audited
consolidated financial statements in our Annual Report on Form 10-K for the year
ended September 30, 2004 for filing with the Securities and Exchange Commission.
Submitted by the Audit Committee of Board of Directors.
Joseph A. Boyle, CPA
Jean E. Duke, CPA
Harold H. Adams, Jr.
Audit Fees
The following table presents for the fiscal years ending September 30, 2004 and
2003 under the heading: (1) "Audit Fees," the aggregate fees billed for
professional services rendered by Scott McElveen, L.L.P. for the audit of our
annual financial statements and review of financial statements included in our
Forms 10-Q and for services that are normally provided by Scott McElveen, L.L.P.
in connection with our statutory and regulatory filings or engagements; (2)
"Audit-Related Fees," the aggregate fees billed for assurance and related
services by Scott McElveen, L.L.P. that are reasonably related to the
performance of the audit or review of our financial statements; (3) "Tax Fees,"
the aggregate fees billed for professional services rendered by Scott McElveen,
L.L.P. for tax compliance, tax advice, and tax planning; and (4) "All Other
Fees," the aggregate fees billed for all other products and services provided by
Scott McElveen, L.L.P.
FY 2004 FY 2003
----------- -----------
----------- -----------
Audit Fees1 $66,125 $64,000
Audit Related Fees2 7,350 7,200
Tax Fees 16,500 16,500
1 Includes primarily fees relating to the audit of the Company's annual
financial statements and for reviews of the financial statements included in
the Company's reports on Form 10-Q.
2 Includes fees for services related to the audit of the Company's 401(k)
Plan and Form 5500 preparation.
3 Includes fees related to tax compliance, tax advice, and tax planning.
The Audit Committee pre-approved all audit related services, tax services, and
other services and concluded that provision of these services was compatible
with maintaining Scott McElveen, L.L.P.'s independence in conducting its audit
services.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Consolidated Financial Statements
The consolidated financial statements listed on the Index to Financial
Statements on page 37 are filed as part of this report on Form 10-K.
(a)(2) Financial Statement Schedules Required by Item 8
(a)(3) Exhibits
A listing of the exhibits to the Form 10-K is set forth on the
Exhibit Index that immediately precedes such exhibits in this Form
10-K.
(b) Reports on Form 8-K None.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Independent Auditors' Report.................................................................................38
Consolidated Balance Sheets at September 30, 2004 and 2003...................................................39
Consolidated Statements of Operations for each of the three years
ended September 30, 2004............................................................................40
Consolidated Statements of Changes in Stockholders' Equity
for each of the three years ended September 30, 2004................................................41
Consolidated Statements of Cash Flows for each of the three years
ended September 30, 2004............................................................................42
Notes to Consolidated Financial Statements................................................................43-56
Schedule II, Valuation and Qualifying Accounts, is omitted because the
information is included in the financial statements and notes.
Independent Auditors' Report
--------
To the Board of Directors and
Stockholders of UCI Medical Affiliates, Inc.
Columbia, South Carolina
We have audited the accompanying consolidated balance sheets of UCI Medical
Affiliates, Inc. and its subsidiaries (the "Company") as of September 30, 2004
and 2003, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years ended September
30, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 2004 and 2003, and the consolidated results of its operations and
its cash flows for each of the three years ended September 30, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
/S/ SCOTT MCELVEEN, L.L.P.
Columbia, South Carolina
November 19, 2004
..
SIGNED ORIGINAL ON SCOTT MCELVEEN, L.L.P. LETTERHEAD
IS ON FILE IN THE CORPORATE OFFICE OF
UCI MEDICAL AFFILIATES, INC.
UCI Medical Affiliates, Inc.
Consolidated Balance Sheets
September 30,
-------------------------------------
2004 2003
----------------- ----------------
Assets
Current assets
Cash and cash equivalents $ $
533,533 683,135
Accounts receivable, less allowance for doubtful accounts
of $2,368,464 and $1,924,820 7,382,619 6,874,423
Inventory 618,446 646,320
Deferred taxes 500,000 0
Prepaid expenses and other current assets 266,788 227,666
----------------- ----------------
Total current assets 9,301,386 8,431,544
Property and equipment, less accumulated depreciation of
$10,307,556 and $9,294,442 4,845,296 4,027,767
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 10,322 7,822
----------------- ----------------
Total Assets $ $
17,548,946 15,859,075
================= ================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ $
972,108 946,358
Accounts payable 1,669,565 998,052
Accrued salaries and payroll taxes 1,926,095 1,610,651
Current portion of pre-petition payroll taxes 595,744 720,477
Other accrued liabilities 909,909 1,230,853
----------------- ----------------
----------------- ----------------
Total current liabilities 6,073,421 5,506,391
----------------- ----------------
----------------- ----------------
Long-term liabilities
Accounts payable 1,193,935 1,917,779
Long-term portion of pre-petition payroll taxes 1,970,102 3,488,815
Long-term debt, net of current portion 2,531,789 2,380,328
----------------- ----------------
Total long-term liabilities 5,695,826 7,786,922
----------------- ----------------
----------------- ----------------
Total Liabilities 11,769,247 13,293,313
----------------- ----------------
Commitments and contingencies (Note 17)
Stockholders' Equity
Preferred stock, par value $.01 per share:
Authorized shares - 10,000,000; none issued -- --
Common stock, par value $.05 per share:
Authorized shares - 50,000,000
Issued and outstanding- 9,740,472 and 9,650,472 shares 487,024 482,524
Paid-in capital 21,719,130 21,723,630
Accumulated deficit (16,426,455) (19,640,392)
----------------- ----------------
Total Stockholders' Equity 5,779,699 2,565,762
----------------- ----------------
Total Liabilities and Stockholders' Equity $ 17,548,946 $
15,859,075
================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
UCI Medical Affiliates, Inc.
Consolidated Statements of Operations
For the Three Years Ended September 30,
-----------------------------------------------------------------
2004 2003 2002
------------------ ----------------- ------------------
Revenues $ 47,473,880 $ 43,518,068 $ 38,526,603
Operating costs 36,732,966 33,264,015 31,069,225
------------------ ----------------- ------------------
Operating margin 10,740,914 10,254,053 7,457,378
General and administrative expenses 6,250,282 5,990,293 5,295,364
Depreciation and amortization 1,013,114 1,144,631 1,021,563
Gain on extinguishment of debt -- -- (2,704,920)
Reorganization charges -- -- 214,968
------------------ ----------------- ------------------
Income from operations 3,477,518 3,119,129 3,630,403
------------------ ----------------- ------------------
------------------ ----------------- ------------------
Other expenses: Interest expense and other charges (692,581) (743,763) (2,236,408)
------------------ ----------------- ------------------
------------------ ----------------- ------------------
Income before benefit for income taxes 2,784,937 2,375,366 1,393,995
Income tax benefit 429,000 -- --
------------------ ----------------- ------------------
------------------ ----------------- ------------------
Net Income $ 3,213,937 $ 2,375,366 $ 1,393,995
================== ================= ==================
================== ================= ==================
Earnings per common share:
Basic earnings per common share $.33 $.25 $.14
================== ================= ==================
================== ================= ==================
Diluted earnings per common share $.33 $.25 $.14
================== ================= ==================
================== ================= ==================
Basic weighted average common shares outstanding 9,717,849 9,650,472 9,650,515
================== ================= ==================
Diluted weighted average common shares outstanding 9,717,849 9,650,472 9,650,515
================== ================= ==================
The accompanying notes are an integral part of these
consolidated financial statements.
UCI Medical Affiliates, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the Three Years Ended September 30, 2004
Common Stock
-------------------------------
Accumulated
Shares Par Value Paid-In Capital Deficit Total
-------------- ------------- ------------------ ------------------- -------------
-------------- ------------- ------------------ ------------------- ------------
Balance, September 30, 2001 9,650,515 $482,524 $21,723,630 $(23,409,753) $(1,203,599)
Net income -- -- -- 1,393,995 1,393,995
-------------- ------------- ------------------ ------------------- -------------
Balance, September 30, 2002 9,650,515 $482,524 $21,723,630 $(22,015,758) $ 190,396
Net income -- -- -- 2,375,366 2,375,366
Other (43) -- -- -- --
-------------- ------------- ------------------ ------------------- -------------
-------------- ------------- ------------------ ------------------- -------------
Balance, September 30, 2003 9,650,472 $482,524 $21,723,630 $(19,640,392) $2,565,762
Net income -- -- -- 3,213,937 3,213,937
Other 90,000 4,500 (4,500) -- --
-------------- ------------- ------------------ ------------------- -------------
-------------- ------------- ------------------ ------------------- -------------
Balance, September 30, 2004 9,740,472 $487,024 $21,719,130 $(16,426,455) $5,779,699
============== ============= ================== =================== =============
The accompanying notes are an integral part of these
consolidated financial statements.
UCI Medical Affiliates, Inc.
Consolidated Statements of Cash Flows
For the Three Years Ended September 30,
-----------------------------------------------------------
2004 2003 2002
------------------ ----------------- ----------------
Operating activities:
Net income $ 3,213,937 $ 2,375,366 $1,393,995
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Gain on extinguishment of debt -- -- (2,704,920)
Provision for losses on accounts receivable 2,358,571 1,888,594 1,845,094
Depreciation and amortization 1,013,114 1,144,631 1,021,563
Bankruptcy penalties and interest -- --
2,256,672
Change in valuation allowance -- --
(500,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (2,866,767) (2,413,388) (1,898,137)
(Increase) decrease in inventory 27,874 (252,525) (33,235)
Decrease in prepaid expenses and other current assets (39,122) 69,512 536,554
Increase (decrease) in accounts payable and accrued
expenses 541,280 780,264 (40,241)
------------------ ----------------- ----------------
Cash provided by (used in) operating activities 3,748,887 3,592,454 2,377,345
------------------ ----------------- ----------------
Investing activities:
Purchases of property and equipment (1,830,643) (1,407,853) (809,094)
(Increase) decrease in other assets (2,500) 42,661 (26,532)
------------------ ----------------- ----------------
Cash used in investing activities (1,833,143) (1,365,192) (835,626)
------------------ ----------------- ----------------
Financing activities:
Borrowings on term-note agreement -- --
2,750,000
Repayment on long term debt
(2,572,789) (751,792) (638,756)
Repayment on other obligations (2,242,557) (1,061,633) --
(Decrease) increase in book overdraft -- -- (733,094)
------------------ ----------------- ----------------
------------------ ----------------- ----------------
Cash provided by (used in) financing activities (2,065,346) (1,813,425) (1,371,850)
------------------ ----------------- ----------------
Increase (decrease) in cash and cash equivalents (149,602) 413,837 169,869
Cash and cash equivalents at beginning of year 683,135 269,298 99,429
------------------ -----------------
------------------ ----------------- ----------------
Cash and cash equivalents at end of year $ 533,533 $ 683,135 $ 269,298
================== ================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
UCI MEDICAL AFFILIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of UCI Medical
Affiliates, Inc. ("UCI"), UCI Medical Affiliates of South Carolina, Inc.
("UCI-SC"), Doctors Care, P.A., and Doctors Care of Tennessee, P.C. (the two
together as the "P.A." and together with UCI and UCI-SC, the "Company"). To
reduce administrative expenses and streamline operations, on June 30, 2004, the
company eliminated two of its operating entities by merging them into other
existing operating entities. Specifically, on June 30, 2004, UCI Medical
Affiliates of Georgia, Inc. merged into UCI Medical Affiliates of South
Carolina, Inc., and Doctors Care of Georgia, P.C. merged into Doctors Care, P.A.
Because of the corporate practice of medicine laws in the states in which the
Company operates, the Company does not own medical practices but instead enters
into exclusive long-term management services agreements with the P.A. which
operate the medical practices. Consolidation of the financial statements is
required under Financial Accounting Standards Board (FASB) Interpretation No.
46, as revised, ("FIN 46") "Consolidation of Variable Interest Entities." Prior
to the Company's adoption of FIN 46 on October 1, 2003, the Company consolidated
P.A. as a result of Emerging Issues Task Force (EITF 97.2), "Application of FASB
Statement 94 ad APB Opinion No. 16 to physician practice management entities and
certain other entities with contractual management arrangement." UCI-SC, 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 or the P.A.
resulting from such change.
In addition to the nominee shareholder arrangement described above, UCI-SC has
entered into an Administrative Services Agreement with the P.A. As a consequence
of the nominee shareholder arrangement and the Administrative Services
Agreement, the Company has a long-term financial interest in the affiliated
practices of the P.A. and 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 Agreement has an
initial term of forty years. According to Financial Accounting Standards Board
("FASB") Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries),
Statement No. 141 (Business Combinations), and FIN No. 46 (Consolidation of
Variable Interest Entities), 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 preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The most significant estimates are related to the allowance for doubtful
accounts, goodwill and intangible assets, income taxes, contingencies, and
health insurance accruals.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates in the near term.
Revenue is recognized at estimated net amounts to be received from patients,
employers, third party payors, and others at the time the related services are
rendered. The Company records contractual adjustments at the time bills are
generated for services rendered. Some third parties are billed at discounted and
negotiated amounts. As such, estimates of outstanding contractual adjustments or
any type of third party settlements are not necessary.
Accounts Receivable
Accounts receivable are primarily amounts due under fee-for-service contracts
from third-party payors, such as insurance companies, self-insured employers and
patients and government-sponsored health care programs geographically dispersed
throughout South Carolina. Concentration of credit risk related to accounts
receivable is limited by number, diversity and geographic dispersion of the
business units managed by the Company, as well as by the large number of
patients and payors, including the various governmental agencies in the state.
Allowance for Doubtful Accounts
An allowance for possible credit losses is recorded and reduces the carrying
value of accounts receivable to its net realizable value. The amount of the
reserve is based upon management's estimate of currently uncollectible accounts,
historical trends, current economic trends and other factors. Provisions to
increase the allowance are charged to operations. The Company will charge
accounts off generally after all reasonable collections efforts have been made.
Certain reclassifications have been made to the prior fiscal years financial
statements to conform to the fiscal year 2004 presentation.
The Company operates as one segment.
Stock Based Compensation
The Company has adopted FASB Statement No. 148 and the disclosure-only
provisions of Statement No. 123, "Accounting for Stock-Based Compensation." The
Company records compensation expense for stock options only if the market price
of the Company's stock, on the date of grant, exceeds the amount an individual
must pay to acquire the stock, if dilutive. See Note 12 for further discussion.
Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between
the financial statement and tax bases of assets and liabilities as measured by
the enacted tax rates which are anticipated to be in effect when these
differences reverse. The deferred tax provision is the result of the net change
in the deferred tax assets to amounts expected to be realized. Valuation
allowances are provided against deferred tax assets when the Company determines
it is more likely than not that the deferred tax asset will not be realized.
Extinguishments of Debt
In April 2002, the Financial Accounting Standards Board issued FASB
Statement No. 145 ("SFAS No. 145"), which, among other things, rescinded
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt" ("SFAS
No. 4"). Previously under SFAS No. 4, all gains and losses from extinguishments
of debt were required to be aggregated and, if material, classified as an
extraordinary item only if they meet the criteria in APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("Opinion No. 30"). Any gain or loss on extinguishments
of debt that were presented as extraordinary items in prior periods but which do
not qualify for classification as an extraordinary item under Opinion No. 30,
are to be reclassified. Companies are required to adopt SFAS No. 145 in fiscal
years beginning after May 15, 2002 but may elect to early adopt.
The Company elected to adopt the provisions of SFAS No. 145 during the fourth
quarter of fiscal year 2002. The Company had no extinguishments of debt
presented as an extraordinary item in prior periods and therefore, no
reclassifications were necessary.
Cash and Cash Equivalents
The Company considers all short-term deposits with a maturity of three months or
less at acquisition date to be cash equivalents.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein
are based on pertinent information available to management as of September 30,
2004 and 2003. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and current estimates of fair value may differ significantly from the
amounts presented herein. The fair values of the Company's financial instruments
are estimated based on current market rates and instruments with the same risk
and maturities. The fair values of cash and cash equivalents, accounts
receivable, accounts payable, notes payable and payables to related parties
approximate the carrying values of these financial instruments.
Segment Information
UCI adopted FASB Statement No. 131, "Disclosure about Segments of an Enterprise
and Related Information," ("SFAS No. 131") 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
43 freestanding medical centers, 42 of which are located throughout South
Carolina and one is located in Knoxville, Tennessee (29 operating as Doctors
Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, and 14 as
Progressive Physical Therapy Services in South Carolina).
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2004, the Financial Accounting Standards Board's Emerging Issue
Task Force ("EITF") reached a consensus on EITF Issue No. 04-08, The Effect of
Contingently Convertible Instruments on Diluted Earnings per Share. The Task
Force reached a conclusion that Contingently Convertible Instruments ("Co-Cos")
should be included in diluted earnings per share computations, if dilutive,
regardless of whether the market price trigger or other contingent feature has
been met. Through September 30, 2004, EITF Issue No. 04-08 had no effect on the
Company.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"
which addresses consolidation by business enterprises of variable interest
entities ("VIEs") either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB issued modifications to FIN 46 ("Revised Interpretations") resulting in
multiple effective dates based on the nature as well as the creation date of the
VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be
accounted for either based on the original interpretation or the Revised
Interpretations. However, the Revised Interpretations must be applied no later
than the first quarter of 2004. VIEs created after January 1, 2004 must be
accounted for under the Revised Interpretations. Non-Special Purpose Entities
created prior to February 1, 2003, should be accounted for under the Revised
Interpretation's provisions no later than the first quarter of fiscal 2004. As
of the beginning of 2004, the Company adopted FIN 46 and the Revised
Interpretations, neither of which had an impact on the Company's consolidated
financial statements because the VIE had previously been consolidated as a
result of other accounting pronouncements.
NOTE 3. MEDICAL SUPPLIES AND DRUG INVENTORY
The inventory consists of medical supplies and drugs and both are 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.
NOTE 4. INTANGIBLES
Effective October 1, 2001, the Company adopted FASB Statement No. 142, "Goodwill
and Other Intangible Assets" ("SFAS No. 142"). Prior to the adoption of SFAS No.
142, costs in excess of net tangible assets acquired were stated net of
accumulated amortization and amortized on a straight-line basis over periods not
exceeding 15 years. Under SFAS No.142, goodwill and intangible assets with
indefinite useful lives are no longer amortized but rather reviewed for
impairment annually, or more frequently if certain indicators arise. Indicators
of a permanent impairment include, among other things, significant adverse
change in legal factors or the business climate, an adverse action by a
regulator, unanticipated competition, and loss of key personnel or allocation of
goodwill to a portion of business that is to be sold. Intangible assets with
definite useful lives are amortized over their respective estimated useful lives
to their estimated residual values, and also reviewed for impairment annually,
or more frequently if certain indicators arise, in accordance with FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). In performing the annual
impairment test, the Company compares the fair value of the Company, as
determined by the current market value of the common stock, to the carrying
value of the total assets, including goodwill and intangible assets. The Company
completed the transitional impairment analysis and determined that no impairment
existed at the time of the adoption of SFAS No. 142. Any subsequent impairment
losses will be reflected in operating income in the income statement in the
period in which the impairment is determined. The Company completed its annual
impairment test on September 30, 2004, and determined that no impairment
existed. Accordingly, no impairment charges were recorded.
NOTE 5. EARNINGS PER SHARE
Net income per share is computed in accordance with FASB Statement No. 128,
"Earnings Per Share". Basic earnings per share are calculated by dividing income
available to common shareholders by the weighted-average number of shares
outstanding for each period. Diluted earnings per common share are calculated by
adjusting the weighted-average shares outstanding assuming conversion of all
potentially dilutive stock options. All warrants and options to purchase shares
of common stock were excluded from the calculation at September 30, 2004, 2003,
and 2002, respectively, because of their antidilutive effect.
NOTE 6. CHAPTER 11 BANKRUPTCY FILING
On November 2, 2001, the Company filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court"). By
August 8, 2002, the Bankruptcy Court confirmed each of the Company's Plans of
Reorganization, as amended, and the Company has, therefore, emerged from Chapter
11 protection of the Court. The Company continues to make payments to its
creditors as outlined in the Plans.
Because holders of our existing voting shares immediately before confirmation
received more than 50% of the voting shares of the reorganized equity, the
Company did not qualify for fresh start accounting under SOP 90-7.
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost.
Depreciation is provided principally by the straight-line method over the
estimated useful lives of the assets, ranging from one to forty years.
Maintenance, repairs and minor renewals are charged to expense. Major renewals
or betterments, which prolong the life of the assets, are capitalized.
Upon disposal of depreciable property, the asset accounts are reduced by the
related cost and accumulated depreciation. The resulting gains and losses are
reflected in the consolidated statements of operations.
Property and equipment consists of the following at September 30:
September 30, 2004 September 30, 2003
---------------------------------- -----------------------------
Useful Life
Range Accumulated Accumulated
(in years) Cost Depreciation Cost Depreciation
------------- --------------- ---------------- --------------- ---------------
- ------------------------------ ------------- --------------- ---------------- --------------- ---------------
5-40 $ 412,750 $ 127,561 $ 412,750 $ 114,879
Building
N/A 66,000 -- 66,000 --
Land
5-15 3,227,974 1,831,172 2,325,857 1,447,737
Leasehold Improvements
1-10 2,150,779 1,480,513 1,769,570 1,582,225
Furniture & Fixtures
1-5 1,402,274 1,304,436 1,402,274 1,304,356
EDP - Companion
1-10 1,620,673 1,123,043 1,446,591 981,411
EDP - Other
5-10 4,762,020 3,301,417 4,457,594 2,821,954
Medical Equipment
1-10 1,442,802 1,090,025 1,373,993 998,987
Other Equipment
Autos 3-10 67,580 49,389 67,580 42,893
--------------- ---------------- --------------- ---------------
$15,152,852 $10,307,556 $13,322,209 $9,294,442
Totals
=============== ================ =============== ===============
At September 30, 2004 and 2003, capitalized leased equipment included above
amounted to approximately $119,000 and $119,000, net of accumulated amortization
of $62,000 and $51,000, respectively.
Depreciation expense equaled $1,013,114, $1,144,631, and $1,021,563 for the
years ended September 30, 2004, 2003, and 2002, respectively.
NOTE 8. ADVERTISING COSTS
Advertising and marketing costs are expensed as incurred. Advertising and
marketing costs were approximately $681,000, $470,000, and $230,000,
respectively, for each of the three fiscal years ended September 30, 2004.
NOTE 9. INCOME TAXES
The components of the (benefit) for income taxes for each of the three years
ended September 30 are as follows:
2004 2003 2002
------------- -------------- -----------
-----------
Current:
$ 71,000 $ -- $ --
Federal
-- -- --
State
------------- --------------
------------- -------------- -----------
71,000 -- --
------------- -------------- -----------
Deferred:
$ (500,000) $ -- $ --
Federal
-- -- --
State
------------- -------------- -----------
------------- -------------- -----------
(500,000) -- --
------------- -------------- -----------
------------- -------------- -----------
$(429,000) $ -- $ --
Total income tax (benefit)
============= ============== ==== ===========
Deferred taxes result from temporary differences in the recognition of certain
items of income and expense, and the changes in the valuation allowance
attributable to deferred tax assets.
At September 30, 2004, 2003, and 2002, the Company's deferred tax assets
(liabilities) and the related valuation allowances are as follows:
2004 2003 2002
------------- ------------ ------------
------------ ------------
$ $ $ 614,587
Accounts receivable 905,937 712,183
-- 23,377 17,808
Other
4,160,049 5,156,716 6,223,974
Operating loss carry forwards
(226,118) (262,737) (370,791)
Fixed assets
Accruals 155,098 186,511 131,157
------------ ------------
------------- ------------ ------------
$ 4,994,966 $5,816,050 $ 6,616,735
============= ============ ============
============ ============
$ 4,494,966 $5,816,050 $ 6,616,735
Valuation allowance
============= ============ ============
The principal reasons for the differences between the consolidated income tax
(benefit) expense and the amount computed by applying the statutory federal
income tax rate of 34% to pre-tax income were as follows for the years ended
September 30:
2004 2003 2002
------------- ------------ -------------
$ $ 814,764 $ 473,958
Tax at federal statutory rate 974,728
Effect on rate of:
(62,808) (60,919) (60,919)
Amortization of goodwill
7,350 9,755 30,041
Non deductible expenses
(27,186) 37,085 5,195
State income taxes & other
(1,321,084) (800,685) (448,275)
Change in valuation allowance
------------- ------------ -------------
$ $ -- $ --
(429,000)
============= ============ =============
At September 30, 2004, the Company has net tax operating loss (NOL)
carryforwards expiring in the following years ending September 30,
2019 $4,403,682
2020 5,206,279
2021 1,112,283
2022 18,660
2023 63,181
2024 71,858
----------------
----------------
$10,875,943
================
In determining that it was more likely than not that the recorded deferred tax
asset would not be realized, management of the Company considered the following:
o Recent historical operations results.
o The budgets and forecasts that management and the Board of Directors had
adopted for the next fiscal year.
o The ability to utilize NOL's prior to their expiration.
o The potential limitation of NOL utilization in the event of a change in
ownership.
o The generation of future taxable income in excess of income reported on the
consolidated financial statements.
During the year ended September 30, 2004, our management determined that it was
more likely than not that the recorded deferred tax asset was becoming more
realizable. Therefore, we recorded a $500,000 adjustment to reduce the valuation
allowance based upon our current financial position and results from operations,
and our forecast of the next twelve months.
NOTE 10. LONG-TERM DEBT
Long-term debt consists of the following at September 30:
2004
2003
----------------- -----------------
Term note in the amount of $2,407,501 dated August 28, 2002, payable in monthly
installments of $48,000 including interest at a rate of prime plus
2% (prime rate is 4.75% as of September 30, 2004), maturing July 2007, $ -- $1,928,105
collateralized by substantially all assets of the Company. The term note
was satisfied on February 9, 2004.
Note payable in the amount of $1,600,000 with monthly installments of 593,409 701,142
$13,328 including interest at 8% through January 1, 2009 collateralized by
accounts receivable from patients and leasehold interests and the
guarantee of the P.A.
Note payable to a financial institution in the amount of $500,000, dated April
17, 2000, payable in monthly installments of $8,507 including
interest at a rate of prime plus 1% (prime rate is 4.75% as of September -- 63,056
30, 2004) maturing on May 2, 2004, collateralized by common stock of the
Company owned by the former President of the Company as well as a life
insurance policy on the President of the Company.
Note payable to a financial institution in the amount of $280,000, dated
May 11, 2002, with monthly installments (including interest at a variable 170,982 189,246
rate of prime plus 1.5%) (prime rate is 4.75% as of September 30, 2004) of
$2,377 from May 2002 to April 2005, with a final payment of all remaining
principal and accrued interest due in April 2005, collateralized by a
mortgage on one of the Company's medical facilities with a net book value
of approximately $405,000.
Term note in the amount of $2,750,000 dated February 9, 2004, payable in 2,465,418 --
monthly installments of $51,982 including interest at a rate of prime plus 1%
(prime rate is 4.75% as of September 30, 2004), maturing February 9, 2009,
collateralized by accounts receivable from patients.
----------------- -----------------
----------------- -----------------
3,229,809 2,881,549
Subtotal
Capitalized lease obligation with monthly payments of $16,195 through 274,088 445,137
March 16, 2006
----------------- -----------------
-----------------
3,503,897 3,326,686
(972,108) (946,358)
Less, current portion
----------------- -----------------
-----------------
$2,531,789 $2,380,328
Total Long-Term Debt
================= =================
Aggregate maturities of notes payable and capital leases are as follows:
Notes Payable Capital Leases
Year ending September 30: Total
---------------- ---------------- ----------------
$ 793,234 $ 178,874 $ 972,108
2005
661,787 95,214 757,001
2006
703,886 -- 703,886
2007
748,722 -- 748,722
2008
322,180 -- 322,180
2009
-- -- --
Thereafter
---------------- ---------------- ----------------
$3,229,809 $ 274,088 $3,503,897
================ ================ ================
During fiscal year 2004, the Company borrowed $2,750,000 under a term note
agreement. The agreement contains certain restrictive financial covenants
including restricting the purchase of capital assets in excess of $1,200,000
during any fiscal year; and requiring tangible net worth of $1,000,000 as of
fiscal year end 2004 and $3,000,000 for year 2005, and increasing by at least
the net profits after taxes less approved dividends over the prior fiscal year
end result each fiscal year thereafter. The Company was in violation of one of
its debt covenants. The covenant requires that annual aggregate capital
expenditures not exceed $1,200,000. The Company has received a letter from the
lender that has waived the violation through September 30, 2004.
NOTE 11. EMPLOYEE BENEFIT PLANS
The Company has an employee savings plan (the "Savings Plan") that qualifies as
a deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
The Company matches 100% of each employee's contribution up to a maximum of 6%
of the employee's earnings. The Company's matching contributions were
approximately $439,000, $277,000, and $233,000 in fiscal years 2004, 2003, and
2002, respectively.
During June 1997, the Company's Board of Directors approved the UCI/Doctors Care
Deferred Compensation Plan (the "Plan") for key employees of the Company with an
effective date of June 1998. To be eligible for the Plan, key employees must
have completed three years of full-time employment and hold a management or
physician position that is required to obtain specific operational goals that
benefit the Company as a whole. Under the Plan, key employees may defer a
portion of their after tax earnings with the Company matching three times the
employee's contribution percentage. The Company's matching contributions were
approximately $130,000, $118,000, and $161,000 in fiscal years 2004, 2003, and
2002, respectively.
During the fiscal year ended September 30, 1984, the Company adopted an
incentive stock plan (the "1984 Plan"). The 1984 Plan expired under its terms in
December 1993. At September 30, 2004, there were no stock options outstanding
under the 1984 Plan.
Pursuant to the Company's incentive stock option plan adopted in 1994, (the
"1994 Plan"), "incentive stock options", within the meaning of Section 422 of
the Internal Revenue Code, may be granted to employees of the Company. The 1994
Plan provides for the granting of options for the purchase of 750,000 shares at
100% of the fair market value of the stock at the date of grant (or for 10% or
higher shareholders, at 110% of the fair market value of the stock at the date
of grant). Options granted under the 1994 Plan vest at a rate of 33% in each of
the three years following the grant. Vested options become exercisable one year
after the date of grant and can be exercised within ten years of the date of
grant, subject to earlier termination upon cessation of employment.
During the fiscal year ended September 30, 1996, the Company adopted a
Non-Employee Director Stock Option Plan (the "1996 Non-Employee Plan"). The 1996
Non-Employee Plan provides for the granting of options to two non-employee
directors for the purchase of 10,000 shares of the Company's common stock at the
fair market value as of the date of grant. Under this plan, 5,000 options were
issued to Harold H. Adams, Jr. and 5,000 options were issued to Russell J.
Froneberger. These options are exercisable during the period commencing on March
20, 1999 and ending on March 20, 2006. At September 30, 2004, stock options for
5,000 shares were outstanding under the 1996 non-employee plan, all of which
were exercisable. During the fiscal year ended September 30, 1997, the Company
adopted a Non-Employee Director Stock Option Plan (the "1997 Non-Employee
Plan"). The 1997 Non-Employee Plan provides for the granting of options to three
non-employee directors for the purchase of 20,000 shares of the Company's common
stock at the fair market value as of the date of grant. Under this plan, 5,000
options were issued to Thomas G. Faulds, Ashby Jordan, M.D., and Charles M.
Potok. These options are exercisable during the period commencing on March 28,
2000 and ending on March 28, 2007. At September 30, 2004, stock options for
10,000 shares were outstanding under the 1997 non-employee plan, all of which
were exercisable.
NOTE 12. STOCKHOLDERS' EQUITY
In February 1999, the shareholders approved an increase in the number of
authorized shares to 50,000,000. The following table summarizes activity and
weighted average fair value of options granted for the three previous fiscal
years for the Company's four stock option plans.
1996 1997
1984 1994 Non-Employee Non-Employee
Stock Options Plan Plan Plan Plan
- ----------------------------- ------------ ------------ -------------
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
Outstanding at 09/30/01 11,100 565,325 10,000 15,000
---------- ------------ ------------ -------------
Exercisable at 09/30/01 11,100 565,325 10,000 15,000
Forfeited FY 01/02 (1,800) (224,675) -- --
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
Outstanding at 09/30/02 9,300 340,650 10,000 15,000
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
Exercisable at 09/30/02 9,300 340,650 10,000 15,000
Forfeited FY 02/03 (9,300) (14,000) (5,000) (5,000)
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
Outstanding at 09/30/03 -- 326,650 5,000 10,000
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
Exercisable at 09/30/03 -- 326,650 5,000 10,000
Forfeited FY -- -- -- --
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
Outstanding at 09/30/04 -- 326,650 5,000 10,000
---------- ------------ ------------ -------------
The Company has not granted options under any plans during fiscal years 2004,
2003, and 2002 and there have been no shares exercised during 2004, 2003, or
2002.
The following table summarizes the weighted average exercise price of stock
options exercisable at the end of each of the three previous fiscal years:
1996 1997
Weighted Average Non-Employee Plan Non-Employee
Exercise Price 1984 Plan 1994 Plan Plan
- ------------------------------------- ------------- ------------- ------------------ ------------------
Outstanding at 09/30/01 .25 2.63 3.50 2.50
------------- ------------- ------------------ ------------------
Exercisable at 09/30/01 .25 2.63 3.50 2.50
------------- ------------- ------------------ ------------------
Granted FY 01/02 -- -- -- --
Exercised FY 01/02 -- -- -- --
Forfeited FY 01/02 .25 2.63 -- --
------------- ------------- ------------------ ------------------
Outstanding at 09/30/02 .25 2.63 3.50 2.50
------------- ------------- ------------------ ------------------
Exercisable at 09/30/02 .25 2.63 3.50 2.50
Granted FY 02/03 -- -- -- --
Exercised FY 02/03 -- -- -- --
Forfeited FY 02/03 -- 2.63 3.50 2.50
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Outstanding at 09/30/03 N/A $ 2.63 $ 3.50 $ 2.50
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Exercisable at 09/30/03 N/A $ 2.63 $ 3.50 $ 2.50
Granted FY 03/04 -- -- -- --
Exercised FY 03/04 -- -- -- --
Forfeited FY 03/04 N/A -- -- --
------------- ------------- ------------------ ------------------
------------- ------------- ------------------ ------------------
Outstanding at 09/30/04 N/A $ 2.63 $ 3.50 $ 2.50
------------- ------------- ------------------ ------------------
The following table summarizes options outstanding and exercisable by price
range as of September 30, 2004:
- -------------------- --- --------------------------------------------------- -- ------------------------------
Options Outstanding Options Exercisable
- -------------------- --- --------------------------------------------------- -- ------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Price Outstanding Life Price Exercisable Price
- -------------------- --------------- --------------- ------------ -------------- ------------
-- -- -- -- --
$0.00 to $ .99
149,650 2.74 1.94 149,650 1.94
$1.00 to $1.99
124,000 2.64 2.67 124,000 2.67
$2.00 to $2.99
58,000 1.64 3.31 58,000 3.31
$3.00 to $3.99
10,000 1.35 4.00 10,000 4.00
$4.00 to $4.99
--------------- --------------
341,650 341,650
=============== ==============
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plans. All of the stock options had fully
vested prior to October 1, 2000, and therefore, there was no compensatory effect
for the three years ended September 30, 2004. The Company has historically
calculated the fair value of stock options using the Black-Scholes
option-pricing model.
- -------------------------------------------
- -------------------------------------------
During the year ended September 30, 1997, warrants for the purchase of shares of
the Company's common stock were issued, ranging in exercise price from $1.9375
to $5.00. Fifty-five thousand (55,000) warrants were issued in connection with
services to be rendered by an investor relations advisor to the Company. During
the years ended September 30, 1998 and September 30, 1999, the Company granted
to the convertible debenture holder warrants to purchase up to thirty-five
thousand (35,000) and ten thousand (10,000) warrant shares, respectively, as
part of a $1,500,000 convertible subordinated debenture. The Stock Purchase
Warrant allows for 65,000 shares in total. In addition, during the year ended
September 30, 1999, the Company granted to Allen & Company Incorporated,
financial advisors, warrants to purchase 150,000 shares of common stock. No
warrants were issued during the three fiscal years ended September 30, 2004,
2003, and 2002. On March 1, 2004, the company issued 90,000 shares of common
stock to Allen & Company, Incorporated upon the exercise of its warrants issued
in March of 1999.
The following is a schedule of warrants issued and outstanding during the years
ended September 30, 2004, 2003 and 2002:
Number of Exercise Date Expiration
Warrants Price Exercisable Date
-------------- --------------- --------------- --------------
--------------
Outstanding at 09/30/01 160,000
--------------
--------------
Activity during FY 01/02:
Exercised --
Expired (10,000) 2.5625 10/06/00 08/08/02
--------------
--------------
Outstanding at 09/30/02 150,000
Activity during FY 02/03:
Exercised --
Expired --
--------------
--------------
Outstanding at 09/30/03 150,000 1.00 03/03/99 03/03/04
--------------
--------------
Activity during FY 03/04:
Exercised (150,000)
Expired -- 1.00 03/03/99 03/03/04
--------------
--------------
Outstanding at 09/30/04 N/A
==============
NOTE 13. LEASE COMMITMENTS
UCI-SC leases office and medical center space under various operating lease
agreements. Certain operating leases provide for escalation payments, exclusive
of renewal options.
Future minimum lease payments under noncancellable operating leases with a
remaining term in excess of one year as of September 30, 2004, are as follows:
Operating
Leases
----------------
Year ending September 30:
2005
$ 2,878,829
2006 2,878,829
2007 2,857,885
2008 2,753,563
2009 2,472,785
16,571,445
Thereafter
----------------
$ 30,413,336
Total minimum lease payments
================
Total rental expense under operating leases for fiscal years 2004, 2003 and 2002
was approximately $2,600,000, $2,600,000, and $2,600,000, respectively.
NOTE 14. RELATED PARTY TRANSACTIONS
Relationship between UCI-SC and the P.A.
Pursuant to agreements between UCI-SC and the P.A., UCI-SC provides
non-medical management services and personnel, facilities, equipment and other
assets to the medical centers. UCI-SC guarantees the compensation of the
physicians employed by the P.A. The agreements also allow UCI-SC to negotiate
contracts with HMOs and other organizations for the provision of medical
services by the P.A. physicians. Under the terms of the agreement, the P.A.
assigns all revenue generated from providing medical services to UCI-SC after
paying physician salaries and the cost of narcotic drugs held by the P.A. The
P.A. is owned by D. Michael Stout, M.D., who is also the Chief Executive Officer
for UCI and UCI-SC.
Relationship between the Company and Blue Cross Blue Shield of South Carolina
Blue Cross Blue Shield of South Carolina (BCBS) owns 100% of Companion
HealthCare Corporation ("CHC"), Companion Property & Casualty Insurance Company
("CP&C") and Companion Technologies, Inc. ("CT"). At September 30, 2004, CHC
owned 6,107,838 shares of the Company's outstanding common stock and CP&C owned
618,181 shares of the Company's outstanding common stock, which combine to
approximately 69% of the Company's outstanding common stock.
Facility Leases
Several of the medical center facilities operated by UCI-SC are leased or were
leased from entities owned or controlled by certain principal shareholders,
Board members, and/or members of the Company's management. Total lease payments
made by UCI-SC under these leases during the fiscal years ended September 30,
2004, 2003 and 2002, were approximately $96,000, $96,000, and $96,000,
respectively.
One medical facility operated by UCI-SC is leased from a physician employee of
the P.A. Total lease payments made by UCI-SC under these leases during the
Company's fiscal years ended September 30, 2004, 2003, and 2002, were
approximately $61,000, $50,000, and $49,000, respectively.
Other Transactions with Related Parties
At September 30, 2004, BCBS and its subsidiaries control 6,726,019 shares, or
approximately 69% of the Company's outstanding common stock. The shares acquired
by CHC and CP&C from the Company were purchased pursuant to stock purchase
agreements and were not registered. CHC and CP&C have the right to require
registration of the stock under certain circumstances as described in the
agreement. BCBS and its subsidiaries have the option to purchase as many shares
as may be necessary for BCBS to obtain ownership of 48% of the outstanding
common stock of the Company in the event that the Company issues additional
stock to other parties (excluding shares issued to employees or directors of the
Company).
The Company enters into capital lease obligations with CT to purchase computer
equipment, software, and billing and accounts receivable upgrades. The total of
all lease obligations to CT recorded at September 30, 2004 is $274,000.
During the Company's fiscal year ended September 30, 1994, UCI-SC entered into
an agreement with CP&C pursuant to which UCI-SC, through the P.A., acts as the
primary care provider for injured workers of firms carrying worker's
compensation insurance through CP&C.
UCI-SC, through the P.A., provides services to members of a health maintenance
organization ("HMO") operated by CHC who have selected the P.A. as their primary
care provider.
During fiscal years 2004, 2003, and 2002, the Company paid BCBS and its
subsidiaries approximately $32,000, $47,000, and $314,000, respectively, in
interest.
Revenues generated from billings to BCBS and its subsidiaries totaled
approximately 38%, 38%, and 29%, of the Company's total revenues for fiscal
years 2004, 2003, and 2002, respectively.
NOTE 15. CONCENTRATION OF CREDIT RISK
In the normal course of providing health care services, the Company may extend
credit to patients without requiring collateral. Each individual's ability to
pay balances due the Company is assessed and reserves are established to provide
for management's estimate of uncollectible balances. Approximately 8% of the
Company's year end accounts receivable balance is due from Blue Cross Blue
Shield of South Carolina. No other single payor represents more than 5% of the
year end balance.
Future revenues of the Company are largely dependent on third-party payors and
private insurance companies, especially in instances where the Company accepts
assignment.
NOTE 16. COMMITMENTS AND CONTINGENCIES
The Company is insured for professional and general liability on a claims-made
basis, with additional tail coverage being obtained when necessary.
The Company provides health benefits to its employees under a self-insured
health plan. Claims are paid by the Company up to an individual and aggregate
amount limit of $60,000 and $1,042,726, respectively. Claims in excess of these
limits are covered by a third-party insurance contract. Health benefit claims of
approximately $923,000, $618,000, and $938,000, respectively, for each of the
three fiscal years ended September 30, 2004, are included in these financial
statements. The Company has accrued estimated incurred but not reported health
claims of approximately $200,000 and $480,000 as of September 30, 2004 and
September 30, 2003, respectively.
In the ordinary course of conducting its business, the Company becomes involved
in litigation, claims, and administrative proceedings. Certain litigation,
claims, and proceedings were pending at September 30, 2004, and management
intends to vigorously defend the Company in such matters.
The health care industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by health care
providers.
Violations of these laws and regulations could result in expulsion from
government health care programs together with the imposition of significant
fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with
fraud and abuse as well as other applicable government laws and regulations;
however, the possibility for future governmental review and interpretation
exists.
NOTE 17. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information
The Company made interest payments of approximately $692,000, $744,000, and
$609,000, in the years ended September 30, 2004, 2003, and 2002, respectively.
The Company paid approximately $70,000, zero, and zero of income tax payments in
the year ended September 30, 2004, 2003 and 2002, respectively.
Supplemental Non-Cash Financing Activities
No capital lease obligations were incurred in fiscal years 2004, 2003, and 2002.
NOTE 18. REALIGNMENT AND IMPAIRMENT CHARGES
At September 30, 2001, three centers were deemed to have impaired goodwill. One
center in the Columbia region and one center in the Greenville-Spartanburg
region had decreased profitability during fiscal year 2001 due to changes in the
assigned physicians. Additionally, as of September 30, 2001, a decision had been
made to combine the two Knoxville locations into one and, therefore, the
goodwill associated with the closed location was deemed to be impaired and,
therefore, was written off. The combined impairment charge for all three
locations was approximately $750,000.
NOTE 19. SUBSEQUENT EVENTS
On November 1, 2004, Doctors Care opened a new location in Georgetown, South
Carolina.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Signature Title Date
- --------- ----- ----
/s/ D. Michael Stout, M.D. President and November 30, 2004
- --------------------------
D. Michael Stout, M.D. Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ D. Michael Stout, M.D. President and November 30, 2004
- --------------------------
D. Michael Stout, M.D. Chief Executive Officer
/s/ Jerry F. Wells, Jr., CPA Executive Vice President and November 30, 2004
- -----------------------------
Jerry F. Wells, Jr., CPA Chief Financial Officer
/s/ Harold H. Adams, Jr., CPCU Director November 30, 2004
- ------------------------------
Harold H. Adams, Jr., CPCU
/s/ Charles M. Potok Director November 30, 2004
- --------------------
Charles M. Potok
/s/ Ashby Jordan, M.D. Director November 30, 2004
- ----------------------
Ashby Jordan, M.D.
/s/ John M. Little, Jr., M.D., MBA Director November 30, 2004
- ----------------------------------
John M. Little, Jr., M.D., MBA
/s/ Timothy L. Vaughn, CPA Director November 30, 2004
- --------------------------
Timothy L. Vaughn, CPA
/s/ Joseph A. Boyle, CPA Director November 30, 2004
- ------------------------
Joseph A. Boyle, CPA
/s/ Jean E. Duke, CPA Director November 30, 2004
- ---------------------
Jean E. Duke, CPA
UCI MEDICAL AFFILIATES, INC.
EXHIBIT INDEX
Exhibit Number Description
2.1 Order of Confirmation of UCI Medical Affiliates, Inc. ("UCI") Dated
August 7, 2002 (Incorporated by reference to Exhibit 2.1 on the Form 8-K filed
August 16, 2002)
2.2 Order of Confirmation of UCI Medical Affiliates of South Carolina Dated
August 5, 2002 (Incorporated by reference to Exhibit 2.2 on the Form 8-K filed
August 16, 2002) 2.3 Order of Confirmation of UCI Medical Affiliates of Georgia,
Inc. Dated August 7, 2002 (Incorporated by reference to Exhibit 2.3 on the Form
8-K filed August 16, 2002) 2.4 Order of Confirmation of Doctors Care, P.A. Dated
August 8, 2002 (Incorporated by reference to Exhibit 2.4 on the Form 8-K filed
August 16, 2002) 2.5 Order of Confirmation of Doctors Care of Tennessee, P.C.
Dated August 6, 2002 (Incorporated by reference to Exhibit 2.5 on the Form 8-K
filed August 16, 2002) 2.6 Order of Confirmation of Doctors Care of Georgia,
P.C. Dated August 7, 2002 (Incorporated by reference to Exhibit 2.6 on the Form
8-K filed August 16, 2002) 2.7 Plan of Reorganization for UCI (Incorporated by
reference to Exhibit 2.7 on the Form 8-K filed August 16, 2002) 2.8 Plan of
Reorganization for UCI Medical Affiliates of South Carolina, Inc. (Incorporated
by reference to Exhibit 2.8 on the Form 8-K filed August 16, 2002) 2.9 Plan of
Reorganization of UCI Medical Affiliates of Georgia, Inc. (Incorporated by
reference to Exhibit 2.9 on the Form 8-K filed August 16, 2002) 2.10 Plan of
Reorganization of Doctors Care, P.A. (Incorporated by reference to Exhibit 2.10
on the Form 8-K filed August 16, 2002) 2.11 Plan of Reorganization of Doctors
Care of Tennessee, P.C. (Incorporated by reference to Exhibit 2.11 on the Form
8-K filed August 16, 2002) 2.12 Plan of Reorganization for Doctors Care of
Georgia, P.C. (Incorporated by reference to Exhibit 2.12 on the Form 8-K filed
August 16, 2002) 2.13 Joint Disclosure Statement Filed as of May 3, 2002
(Incorporated by reference to Exhibit 2.13 on the Form 8-K filed August 16,
2002) 2.14 Addendum to Joint Disclosure Statement and Plans of Reorganization
Filed as of June 14, 2002 (Incorporated by reference to Exhibit 2.14 on the Form
8-K filed August 16, 2002) 2.15 Second Addendum to Plans of Reorganization Filed
as of July 29, 2002 (Incorporated by reference to Exhibit 2.15 on the Form 8-K
filed August 16, 2002) 3.1 Amended and Restated Certificate of Incorporation of
UCI filed with the Delaware Secretary of State as of July 27, 1994 (Incorporated
by reference to the exhibit of same number on the Form 10-K filed for fiscal
year 2003) 3.2 Amended and Restated Bylaws of UCI dated as of November 23, 1993
(Incorporated by reference to the exhibit of same number on the Form 10-K filed
for fiscal year 2003) 3.3 Amendment to Amended and Restated Bylaws of UCI dated
as of August 21, 1996 (Incorporated by reference to the exhibit of same number
on the Form 10-K filed for fiscal year 2003)
3.4 Amendment to Amended and Restated Bylaws of UCI dated as of August 15,
2002 (Incorporated by reference to Exhibit 3.4 on the Form 8-K filed as of
October 28, 2002) 3.5 Certificate of Amendment of Certificate of Incorporation
filed with the Delaware Secretary of State as of February 24, 1999 (Exhibit 3.5
on the Form 10-K filed for fiscal year 2002) 4.1 The rights of security holders
of the registrant are set forth in the registrant's Certificate of Incorporation
and Bylaws, as amended, included as Exhibits 3. 1 through 3. 5 10.5 Lease and
License Agreement dated March 30, 1994 between Doctors Care, P.A. and Blue Cross
Blue Shield of South Carolina (Incorporated by reference to the exhibit of same
number on the Form 10-K filed for fiscal year 2003) 10.6 Note Payable dated
February 28, 1995 between UCI-SC as payor, and Companion Property and Casualty
Insurance Company, as payee (Incorporated by reference to the exhibit of same
number on the Form 10-K filed for fiscal year 2003) 10.7 Revolving Line of
Credit dated November 11, 1996 between Carolina First Bank and UCI (Incorporated
by reference to the exhibit of same number on the Form 10-K filed for fiscal
year 2003) 10.8** Stock Option Agreement dated March 20,1996 between UCI and
Harold H. Adams, Jr. (Incorporated by reference to the exhibit of same number on
the Form 10-K filed for fiscal year 2003) 10.9** Stock Option Agreement dated
March 20, 1996 between UCI and Russell J. Froneberger (Incorporated by reference
to the exhibit of same number on the Form 10-K filed for fiscal year 2003)
10.11** Stock Option Agreement dated March 27, 1997, between UCI and Thomas G.
Faulds (Incorporated by reference to the exhibit of same number on the Form 10-K
filed for fiscal year 2003) 10.12** Stock Option Agreement dated March 27, 1997
between UCI and Ashby Jordan, M.D. (Incorporated by reference to the exhibit of
same number on the Form 10-K filed for fiscal year 2003) 10.13** Stock Option
Agreement dated March 27, 1997 between UCI and Charles M. Potok (Incorporated by
reference to the exhibit of same number on the Form 10-K filed for fiscal year
2003) 10.14** UCI 1994 Incentive Stock Option Plan (Incorporated by reference to
the exhibit of same number on the Form 10-K filed for fiscal year 2003) 10.17
Administrative Services Agreement dated April 24, 1998 by and between Doctors
Care of Georgia, P.C. and UCI Medical Affiliates of Georgia, Inc. (Incorporated
by reference to the exhibit of same number on the Form 10-K filed for fiscal
year 2003) 10.18 Administrative Services Agreement dated April 24, 1998 by and
between Doctors Care of Tennessee, P.C. and UCI Medical Affiliates of Georgia,
Inc. (Incorporated by reference to the exhibit of same number on the Form 10-K
filed for fiscal year 2003) 10.19 Administrative Services Agreement dated August
11, 1998 between UCI Medical Affiliates of South Carolina, Inc. and Doctors
Care, P.A. (Incorporated by reference to the exhibit of same number on the Form
10-K filed for fiscal year 2003) 10.21 Stock Purchase Option and Restriction
Agreement dated September 1, 1998 by and among D. Michael Stout, M.D.; UCI
Medical Affiliates of Georgia, Inc. and Doctors Care of Georgia, P.C.
(Incorporated by reference to the exhibit of same number on the Form 10-K filed
for fiscal year 2003)
** Denotes a management contract or compensatory plan or arrangement.
10.22 Stock Purchase Option and Restriction Agreement dated July 15, 1998
by and among D. Michael Stout, M.D.; UCI Medical Affiliates of Georgia, Inc.;
and Doctors Care of Georgia, P.C. (Incorporated by reference to the exhibit of
same number on the Form 10-K filed for fiscal year 2003) 10.31 Stock Purchase
Option and Restriction Agreement dated as of October 31, 2002 by and among D.
Michael Stout, M.D.; UCI Medical Affiliates of South Carolina, Inc.; and Doctors
Care, P.A. (Incorporated by reference to Exhibit 10.31 filed on Form 10-K for
fiscal year 2002) 14 Code of Ethics dated as of November 25, 2003 (Incorporated
by reference to the exhibit of same number on the Form 10-K filed for fiscal
year 2003) 15 Press Release dated December 4, 2003 (Incorporated by reference to
the exhibit of same number on the Form 10-K filed for fiscal year 2003) 21
Subsidiaries of the Registrant (Incorporated by reference to the exhibit of same
number on the Form 10-K filed for fiscal year 2003) 23* Consent of Independent
Auditors 31.1* Certification of Principal Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of
Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 32.1* Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 32.2* Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 99* Press Release dated November 30, 2004.
*Filed herewith