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EX-32 - SECTION 1350 CERTIFICATION - UCI MEDICAL AFFILIATES INCdex32.htm
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EX-31.2 - CERTIFICATION OF JOSEPH A. BOYLE, CPA - UCI MEDICAL AFFILIATES INCdex312.htm
EX-31.1 - CERTIFICATION OF D. MICHAEL STOUT, M.D. - UCI MEDICAL AFFILIATES INCdex311.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2010

 

¨

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.

(Exact name of Registrant as specified in its charter)

 

Delaware   59-2225346

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

1818 Henderson Street

Columbia, SC 29201

(Address of principal executive offices)

(803) 782-4278

(Registrant’s telephone number including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     x  Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

¨

  

Accelerated Filer

 

¨

Non-Accelerated Filer

 

x

  

Smaller Reporting Company

 

¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes     x  No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by checkmark whether the registrant filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.     x  Yes    ¨  No


Table of Contents

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the registrant’s common stock, $.05 par value, was 9,934,072 at December 31, 2010.


Table of Contents

UCI MEDICAL AFFILIATES, INC.

INDEX

 

               Page
Number
 

PART I

  

FINANCIAL INFORMATION

  
  

Item 1

  

Financial Statements

  
     

Condensed Consolidated Balance Sheets – December 31, 2010 and September 30, 2010

     4   
     

Condensed Consolidated Statements of Operations for the three months ended December 31, 2010 and December 31, 2009

     5   
     

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended December 31, 2010

     6   
     

Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2010 and December 31, 2009

     7   
     

Notes to Condensed Consolidated Financial Statements

     8 - 10   
  

Item 2

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     11 - 15   
  

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

     16   
  

Item 4

  

Controls and Procedures

     16   

PART II 

  

OTHER INFORMATION

  
  

Item 1

  

Legal Proceedings

     17   
  

Item 1A

  

Risk Factors

     17   
  

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

     17   
  

Item 3

  

Defaults Upon Senior Securities

     17   
  

Item 4

  

[Removed and Reserved]

     17   
  

Item 5

  

Other Information

     17   
  

Item 6

  

Exhibits

     17   

SIGNATURES

     18   

 

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Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

UCI Medical Affiliates, Inc.

Condensed Consolidated Balance Sheets

 

     (unaudited)
12/31/2010
    9/30/2010  

Assets

    

Current Assets

    

Cash

   $ 4,557,736      $ 4,586,614   

Certificates of deposit

     755,990        755,990   

Accounts receivable, net of allowance for doubtful accounts of $1,359,389 and $1,375,856

     5,754,194        5,810,442   

Inventory

     1,076,555        1,066,555   

Income taxes receivable

     —          187,346   

Deferred taxes

     963,040        910,568   

Prepaid expenses and other current assets

     955,905        331,356   
                

Total current assets

     14,063,420        13,648,871   

Property and equipment, less accumulated depreciation of $17,003,667 and $16,424,672

     15,479,098        14,747,283   

Leased property under capital leases, less accumulated amortization of $2,944,515 and $2,736,632

     12,240,388        12,448,271   

Deferred taxes

     200,881        94,634   

Restricted investments

     2,409,479        2,172,840   

Goodwill, less accumulated amortization of $2,493,255

     3,350,501        3,350,501   

Other assets

     461,406        590,085   
                

Total Assets

   $     48,205,173      $     47,052,485   
                

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Current portion of long-term debt

   $ 806,164      $ 995,042   

Obligations under capital leases

     337,955        329,841   

Accounts payable

     462,274        566,667   

Income taxes payable

     194,237        —     

Payable to patients and insurance carriers

     1,590,724        1,586,050   

Accrued salaries and payroll taxes

     3,362,785        3,019,380   

Accrued compensated absences

     712,527        638,026   

Other accrued liabilities

     1,259,375        1,165,867   
                

Total current liabilities

     8,726,041        8,300,873   
                

Long-term liabilities

    

Deferred compensation liability

     2,380,281        2,124,976   

Long-term debt, net of current portion

     2,526,045        2,585,576   

Obligations under capital leases

     13,305,983        13,393,577   
                

Total long-term liabilities

     18,212,309        18,104,129   
                

Total Liabilities

     26,938,350        26,405,002   
                

Commitments and contingencies (Note 6)

     —          —     

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 - 9,945,472 shares; outstanding - 9,934,072 shares

     497,274        497,274   

Treasury stock - 11,400 shares

     (31,350     (31,350

Paid-in capital

     22,173,993        22,173,993   

Accumulated deficit

     (1,373,094     (1,992,434
                

Total Stockholders’ Equity

     21,266,823        20,647,483   
                

Total Liabilities and Stockholders’ Equity

   $ 48,205,173      $ 47,052,485   
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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UCI Medical Affiliates, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

     Three Months Ended December 31,  
     2010     2009  

Revenues

   $ 22,112,826      $ 21,868,730   

Operating expenses

     17,903,954        18,172,658   
                

Operating margin

     4,208,872        3,696,072   

General and administrative expenses

     3,192,747        3,314,419   
                

Income before income taxes

     1,016,125        381,653   

Income tax expense

     (396,785     (147,356
                

Net income

   $ 619,340      $ 234,297   
                

Basic income per share

   $ 0.06      $ 0.02   

Basic weighted average common shares outstanding

     9,934,072        9,934,072   

Diluted income per share

   $ 0.06      $ 0.02   

Diluted weighted average common shares outstanding

     9,934,072        9,934,072   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

UCI Medical Affiliates, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(unaudited)

 

     Three Months Ended December 31, 2010  
      Common Stock      Paid-in
Capital
     Treasury
Stock
    Accumulated
Deficit
    Total
Stockholders’
Equity
 
      Shares      Amount            

Balance at September 30, 2010

     9,945,472       $ 497,274       $ 22,173,993       $ (31,350   $ (1,992,434   $ 20,647,483   

Net income

                619,340        619,340   
                                                   

Balance at December 31, 2010

     9,945,472       $ 497,274       $ 22,173,993       $ (31,350   $ (1,373,094   $ 21,266,823   
                                                   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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UCI Medical Affiliates, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

     Three Months Ended December 31,  
     2010     2009  

Operating activities:

    

Net income

   $ 619,340      $ 234,297   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for losses on accounts receivable

     719,733        528,801   

Depreciation and amortization

     786,878        804,169   

(Gain) Loss on disposal

     (1,200     1,273   

Deferred taxes

     (158,719     162,119   

Unrealized gain on restricted and other investments

     (157,369     (39,629

Changes in operating assets and liabilities:

    

Accounts receivable

     (663,485     102,878   

Inventory

     (10,000     —     

Income taxes receivable

     187,346        (14,763

Prepaid expenses and other current assets

     (624,549     (393,789

Accounts payable and accrued expenses

     411,695        (858,998

Income taxes payable

     194,237        —     

Deferred compensation

     255,305        112,400   
                

Cash provided by operating activities

     1,559,212        638,758   
                

Investing activities:

    

Purchases of property and equipment

     (1,309,610     (408,541

Decrease (increase) in other assets

     154,999        (185,676

Purchase of restricted investments

     (105,590     (68,962
                

Cash used in investing activities

     (1,260,201     (663,179
                

Financing activities:

    

Net borrowings on line of credit

     —          50,859   

Principal payments on notes payable

     (248,409     (228,891

Principal payments on capital lease obligations

     (79,480     (99,842
                

Cash used in financing activities

     (327,889     (277,874
                

Decrease in cash

     (28,878     (302,295

Cash at beginning of period

     4,586,614        2,755,156   
                

Cash at end of period

   $ 4,557,736      $ 2,452,861   
                

Supplemental cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 373,956      $ 389,571   

Income taxes

   $ 173,921      $ —     

Supplemental disclosure of non-cash investing and financing activities:

    

Capital lease obligations incurred

   $ —        $ —     

Issuance of common stock for compensation

   $ —        $ —     

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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UCI MEDICAL AFFILIATES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. BUSINESS AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of those of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three month period ended December 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2011. The Company’s results are subject to seasonal factors, particularly relating to seasonal influenza and other periodic influenza outbreaks. For further information, refer to the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2010.

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 68 freestanding medical centers, 67 of which are located throughout South Carolina and one is located in Knoxville, Tennessee (44 operating as Doctors Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, 20 as Progressive Physical Therapy Services in South Carolina, one as Luberoff Pediatrics in South Carolina, one as Carolina Orthopedic & Sports Medicine in South Carolina and one as Doctors Wellness Center in South Carolina).

Principles of Consolidation

The consolidated financial statements include the accounts of UCI, UCI-SC, UCI Properties, LLC (“UCI-LLC”), Doctors Care, P.A., Progressive Physical Therapy, P.A. (“PPT”), Carolina Orthopedic & Sports Medicine, P.A. (“COSM”), and Doctors Care of Tennessee, P.C. (the four together as the “P.A.” and together with UCI, UCI-SC and UCI-LLC, the “Company”). 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 and administrative services agreements with the P.A.s that operate the medical practices. UCI-SC, in its sole discretion, can effect a change in the nominee shareholder of each of the P.A.s 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 UCI-SC or the P.A. from such change. Because of the agreements between UCI-SC and the P.A.s, and the rights held by UCI-SC under those agreements, the financial statements of the P.A.s are consolidated with UCI, UCI-SC and UCI-LLC, in accordance with accounting principles generally accepted in the United States of America. All significant intercompany accounts and transactions are eliminated in consolidation, including management fees.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue recognition. 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.

 

 

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New Accounting Pronouncements

In August 2010, the FASB issued ASU 2010-21, “Accounting for Technical Amendments to Various SEC Rules and Schedules: Amendments to SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies” (“ASU 2010-21”), was issued to conform the SEC’s reporting requirements to the terminology and provisions in ASC 805, Business Combinations, and in ASC 810-10, Consolidation. ASU No. 2010-21 was issued to reflect SEC Release No. 33-9026, “Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies,” which was effective April 23, 2009. The ASU also proposes additions or modifications to the XBRL taxonomy as a result of the amendments in the update.

In August 2010, the FASB issued ASU 2010-22, “Accounting for Various Topics: Technical Corrections to SEC Paragraphs” (“ASU 2010-22”), which amends various SEC paragraphs based on external comments received and the issuance of SEC Staff Accounting Bulletin (SAB) No. 112, which amends or rescinds portions of certain SAB topics. The adoption of AS 2010-22 did not have a material impact on our financial statements.

In December 2010, the FASB issued the ASU No. 2010-29 “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amended guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications had no material impact on the Company’s financial position, results of operations or cash flows.

NOTE 2. INVENTORY

The Company’s inventory consists of medical supplies and drugs and both are carried at the lower of average cost or market. The volume of supplies carried at a center varies very little from month to month; therefore, management does only an annual physical inventory count and does not maintain a perpetual inventory system.

NOTE 3. 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. The tax returns for the eight fiscal years ended September 30, 2010 are open for examination. During the quarters ended December 31, 2010 and December 31, 2009, the Company recorded an income tax expense of $396,785 and $147,356, respectively.

NOTE 4. FINANCING ARRANGEMENTS

The Company maintains a line of credit of $1,000,000 with a commercial bank. At December 31, 2010 and September 30, 2010, there were no outstanding borrowings under the line of credit. The line of credit bears interest at the commercial bank’s prime rate, which was 3.25% at December 31, 2010. Borrowings are collateralized by the Company’s accounts receivable, and the maturity date of the line of credit is May 5, 2012.

 

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In 2008 the Company secured a mortgage loan commitment and agreement from a commercial bank in the amount of $3,200,000 for the purpose of acquiring and renovating a new corporate headquarters property. Under the terms of the mortgage loan agreement, the Company paid interest only at one-month LIBOR plus 2.5% until the modification date, at which time $2,100,000 of the amount outstanding converted to a permanent mortgage loan. The mortgage loan was modified on November 23, 2009. As explained below, approximately $1,050,000 of the $3,150,000 amount then outstanding was transferred to a term loan. At December 31, 2010, $2,015,574 was outstanding under the mortgage loan agreement. Interest on the permanent mortgage loan will continue to be paid based on one-month LIBOR plus 2.5%, and the Company will pay total monthly payments of $11,407. Any amount outstanding on March 5, 2015 will be due and payable on that date.

At December 31, 2010, the Company had a term loan outstanding with a commercial bank in the amount of $696,274. The term loan is payable in monthly installments of $76,033 and was originally scheduled for maturity on June 16, 2009. The interest rate on the term loan is the commercial bank’s prime interest rate plus  1/2%. Prior to June 2009, the term loan was extended, and it was modified on November 23, 2009. Under the modified terms, $1,050,000 of the amount outstanding under the mortgage loan was added to the outstanding balance of the term loan. After modification, the aggregate balance of the term loan was $1,785,000. The term loan agreement was further modified to extend the maturity date until October 2013.

On July 17, 2008, UCI-LLC purchased a Doctors Care building for a total purchase price of $815,000. This property was previously rented by the Company and occupied as a medical center. A portion of the purchase price was funded by a promissory note in the original principal amount of $695,000, and is collateralized by a lien on the property. At December 31, 2010, the outstanding balance on the mortgage loan was $620,361. The promissory note accrues interest at a rate of 5.95% per annum. Monthly principal and interest payments are $5,890. Remaining unpaid principal and interest will be due on July 16, 2013.

NOTE 5. 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.

NOTE 6. COMMITMENTS AND CONTINGENCIES

The Company is from time to time involved in other litigation incidental to the conduct of its business, none of which is expected to be material to its business, financial condition, or operations.

NOTE 7. SUBSEQUENT EVENTS

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring additional accrual or disclosure.

 

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Advisory Note Regarding Forward-Looking Statements

Certain of the statements contained in this Report on Form 10-Q 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 Form 10-Q 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 can give 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 things, (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 and capitation payment levels and payment practices by insurance companies, healthcare plans, government payers 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 healthcare reform; (7) the challenges and uncertainties in the implementation of our 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 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 Form 10-Q, the factors described in our 2010 10-K, including, but not limited to, those matters described under the caption “PART I – ITEM 1A. – RISK FACTORS,” and in our other reports filed with the Securities and Exchange Commission; and (19) our success at managing the risks involved in the foregoing.

 

Item 2.

Management’s Discussion And Analysis Of Financial Condition 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

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements included in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. 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) accounts receivable; (3) allowance for doubtful accounts; (4) consideration of impairment of intangible assets; and (5) 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 payers, and others at the time we perform the services. The amount of revenue we recognize pursuant to the services we provide is subject to significant judgments and estimates. We have stated billing rates which are billed as gross revenues when services are performed. The amounts we bill are then reduced by our estimate of amounts we do not expect to collect due to discounts (“Contractual Adjustments”) that are taken by third party payers or otherwise given to patients who pay us directly. We estimate Contractual Adjustments based on the ratio of cash collected in the preceding periods to gross revenues we billed.

 

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Accounts receivable -

Accounts receivable represent the net receivables we expect to collect related to the services we provide. The amount we record as net accounts receivable is subject to significant judgments and estimates. As explained in the above caption, “Revenue recognition,” the amounts we bill and record as accounts receivable are reduced by our estimate of amounts we will not collect due to Contractual Adjustments that are taken by third party payers or otherwise given to patients who pay us directly. Additionally, as explained below in the caption, “Allowance for doubtful accounts,” our accounts receivable are also reduced by our estimate of losses which may result from the inability of some of our patients or other payers to make required payments.

Allowance for doubtful accounts -

We maintain our allowance for doubtful accounts for estimated losses, which may result from the inability of our patients to make required payments. Most of our allowance for doubtful accounts relate to amounts owed to us by patients or other payers who are or become responsible for the payments associated with services we provide. 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 payer 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 bad debt expense.

Consideration of impairment of intangible assets -

We evaluate the recovery of the carrying amount of excess of cost over fair value of assets, primarily goodwill, acquired by determining if a permanent impairment has occurred. This evaluation is done annually as of September 30th of each year or more frequently if indicators of permanent impairment arise. Indicators of a permanent impairment include, among other things, a significant adverse change in legal factors or the business climate, an adverse action by a regulator, unanticipated competition, loss of key personnel or allocation of goodwill to a portion of the business that is to be sold or otherwise disposed. At such time as impairment is determined, the intangible assets are written off during that period.

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. Based upon our current financial position, results from operations, and our forecast of future earnings, we do not believe we currently need a valuation allowance.

 

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Comparison of the Three Month Period Ended December 31, 2010 to the Three Month Period Ended December 31, 2009

Revenues and Operating Expenses

Our revenues are derived from the medical services we provide to our patients. Amounts we earn as revenues are paid by our patients or collected from third-party payers, including insurance carriers, employers or other third-parties. Our revenues are affected by a number of different factors, including increases or decreases in reimbursement rates from third-party payers, the mix of our patients between the nature of the payment source, competitive factors, the severity of seasonal illnesses, the general economic environment and most importantly, the number of new centers we open in the current and preceding year.

Operating expenses are those costs that we incur in the direct delivery of our services to patients and include the costs to operate and maintain our medical centers. Such costs include the salaries and benefits associated with our medical providers and other center employees, rent, depreciation, interest expense on our capital leases, medical supplies and other expenses incurred by our medical centers.

The following table sets forth our revenues, operating expenses and operating margin for the three month periods ended December 31, 2010 and 2009.

 

     For the three month periods
ended December 31,
 
     2010      2009  

Revenues

   $ 22,112,826       $ 21,868,730   

Operating Expenses

     17,903,954         18,172,658   
                 

Operating Margin

   $ 4,208,872       $ 3,696,072   
                 

Comparison of Revenues and Operating Expenses for the Three Month Periods Ended December 31, 2010 and 2009

We recognized revenues of $22,112,826 in the three month period ended December 31, 2010 (the first quarter of fiscal year 2011) compared to revenues of $21,868,730 in the comparable period in 2009 (the first quarter of fiscal year 2010). The overall increase in our revenues in the three month period ended December 31, 2010 compared to the same period in 2009 is $244,096 or 1.12%. Total patient encounters during both three month periods were unchanged. The nominal increase in revenue was related to payer mix and general increases in reimbursement rates.

Our operating expenses were $17,903,954 in the three month period ended December 31, 2010 compared to operating expenses of $18,172,658 in the comparable period in 2009. The decrease of $268,704 or 1.48%, was primarily due to a reduction in medical supplies in the first quarter of 2011 of approximately $484,000 compared with the first quarter of 2010. Medical supply expense was unusually high in the first quarter of 2010 due to the severity of the H1N1 flu virus during that period. The overall decrease was offset by an increase in bad debt expense of approximately $191,000. Management does not believe the increase in bad debt expense is associated with any long-term trends.

General and Administrative Expenses (G&A)

G&A expenses consist of the costs and expenses to administer and support our medical centers. Such costs include salaries and benefits of corporate employees (administrative, maintenance and billing departments), postage and shipping, professional fees, advertising, banking fees and other costs incidental to operating our corporate office.

The following table sets forth our G&A expenses for the three month periods ended December 31, 2010 and 2009.

 

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     For the three month periods
ended December 31,
 
     2010      2009  

General and adminstrative expenses

   $ 3,192,747       $ 3,314,419   
                 

Comparison of G&A Expenses for the Three Month Periods Ended December 31, 2010 and 2009

Our G&A expenses were $3,192,747 in the three month period ended December 31, 2010 compared to $3,314,419 in the comparable period in fiscal year 2010. The decrease of $121,672, or 3.67%, was due to several factors. First, professional fees decreased approximately $160,000. The decrease was due to our reduced activities associated with the investigation of the criminal activities of our former CFO, Jerry F. Wells, Jr. and the reduction in audit expenses related to the restatement of our financial statements. In addition, other miscellaneous expenses were reduced by approximately $116,000 in the first quarter of 2011 compared to the same period in 2010. The overall decrease in G&A expenses was offset by an increase in compensation expense of approximately $171,000 associated with normal cost of living increases and the addition of several administrative employees to support our medical operations.

Comparison of Income Tax Expense for the Three Month Periods Ended December 31, 2010 and 2009

Our income tax expense was $396,785 in the three month period ended December 31, 2010 compared to an income tax expense of $147,356 in the comparable period in 2009. Our effective tax rates were 39.05% and 38.61% for the three months ended December 31, 2010 and December 31, 2009, respectively. Our effective tax rates vary from the combined enacted federal and state tax rates due to the net effect of nondeductible expenses, offset by certain tax credits we recognize.

Liquidity and Capital Resources

Our primary liquidity and capital requirements are to fund working capital for current operations, including the expansion of our business through opening new centers, and servicing our long-term debt. Typically, the cash requirements associated with the opening of new centers have been limited to funding the purchase of furniture and medical equipment necessary to provide medical services and funding the operations of the new centers until such time as they generate positive cash flows. The primary sources to meet our liquidity and capital requirements are funds generated from operations, a $1,000,000 line of credit with a commercial bank and through term and mortgage loans.

The line of credit bears interest at the commercial bank’s prime interest rate which was 3.25% at December 31, 2010 and is secured by our accounts receivable. At December 31, 2010 and September 30, 2010, there were no outstanding borrowings under the line of credit.

In 2008 we secured a mortgage loan commitment and agreement from a commercial bank in the amount of $3,200,000 for the purpose of acquiring and renovating our new corporate headquarters property. Under the terms of the mortgage loan agreement, we paid interest only at one-month LIBOR plus 2.5% until the modification date, at which time $2,100,000 of the amount outstanding converted to a permanent mortgage loan. The mortgage loan was modified on November 23, 2009. As explained below, approximately $1,050,000 of the $3,150,000 amount then outstanding was transferred to a term loan. At December 31, 2010, $2,015,574 was outstanding under the mortgage loan agreement. Interest on the permanent mortgage loan will continue to be paid based on one-month LIBOR plus 2.5%, and we will pay total monthly payments of $11,407. Any amount outstanding on March 5, 2015 will be due and payable on that date.

At December 31, 2010, we had a term loan outstanding with a commercial bank in the amount of $696,274. The term loan is payable in monthly installments of $76,033 and was originally scheduled for maturity on June 16, 2009. The interest rate on the term loan is the commercial bank’s prime interest rate plus  1/2%. Prior to June 2009, the term loan was extended, and it was modified on November 23, 2009. Under the modified terms, $1,050,000 of the amount outstanding under the mortgage loan was added to the outstanding balance of the term loan. After modification, the aggregate balance of the term loan was $1,785,000. The term loan agreement was further modified to extend the maturity date until October 2013.

 

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Additionally, in the fiscal year ended September 30, 2008 we acquired a center in Surfside Beach, SC for $815,000. We financed the acquisition of the center with a mortgage loan in the amount of $695,000, of which $620,361 was outstanding at December 31, 2010. Monthly principal and interest payments are $5,890. Remaining unpaid principal and interest will be due on July 16, 2013.

Long-term debt decreased from $3,580,618 at September 30, 2010 to $3,332,209 at December 31, 2010, due to regular principal pay-downs. Our management believes that for the next 12 months and the foreseeable future thereafter it will be able to continue to fund debt service requirements out of cash generated through operations.

During the three month period ending December 31, 2010, contractual obligations related to the principal component of our long-term debt decreased $248,409.

Cash provided by operating activities for the three month period ended December 31, 2010 was $1,559,212 compared to $638,758 for the comparable period in 2009. In the three month periods ended December 31, 2010 and 2009, cash provided by operations was increased by non-cash charges to net income, the primary components of which were the provision for losses on accounts receivable and depreciation and amortization. In aggregate, such non-cash charges increased cash provided by operating activities by $1,506,611 and $1,332,970 in the three month periods ended December 31, 2010 and 2009, respectively. Cash provided by operating activities was negatively impacted by an increase in accounts receivable and prepaid expenses of $663,485 and $624,549, respectively, in the three month period ended December 31, 2010. In addition, cash provided by operating activities was negatively impacted by a decrease in accounts payable and accrued expenses of $858,998 in the three month period ended December 31, 2009.

Cash used in investing activities for the three month period ended December 31, 2010 was $1,260,201 compared to $663,179 for the comparable period in 2009. In the three month period ended December 31, 2010, the primary use of cash in investing activities related to the acquisition and construction of two new properties. In the three month period ended December 31, 2009, the primary use of cash in investing activities related to the purchase of furniture, information technology equipment and medical equipment.

Cash used by financing activities for the three month period ended December 31, 2010 was $327,889 compared to $277,874 for the same period in 2009. For the three months ended December 31, 2010, the cash used by financing activities was a result of payments made on our long term debt and capital lease obligations. In 2009, these payments were offset by borrowings under our line of credit.

At December 31, 2010, we had cash of $4,557,736 compared to $4,586,614 at September 30, 2010, a decrease of $28,878. Our working capital was $5,337,379 at December 31, 2010 compared to $5,347,998 at September 30, 2010. The change in our cash and working capital was due to normal business operations.

 

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Item 3.

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 $620,000 of our debt at December 31, 2010 was subject to fixed interest rates. Approximately $2,712,000 of our debt at December 31, 2010 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at December 31, 2010, our interest expense on an annualized basis would increase approximately $27,000 for each increase of one percent in the prime rate.

We have $3,833,738 in aggregate annual lease payments that are subject to increases based on future changes in the consumer price index. Typically, the lease agreements stipulate that the lease payments will increase every three years based on the aggregate increase in the consumer price index over the preceding three years. Of the aggregate annual lease payments subject to change based on the consumer price index, annual payments subject to change in 2011, 2012 and 2013 are $2,240,901, $946,769 and $646,068, respectively.

We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010 and concluded that the disclosure controls and procedures were effective.

There have been no significant changes in our internal controls over financial reporting that occurred during the first quarter of fiscal 2011 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

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PART II

OTHER INFORMATION

 

Item 1

Legal Proceedings

We are a party to certain litigation that we consider routine and incidental to our business. Management does not expect the results of any of these actions to have a material effect on our business, results of operations or financial condition.

 

Item 1A

Risk Factors

Information regarding risk factors appears in Part I - Item 1A - Risk Factors of our report on Form 10-K for the fiscal year ended September 30, 2010. There have been no material changes from the risk factors previously disclosed in our report on Form 10-K.

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

This item is not applicable.

 

Item 3

Defaults upon Senior Securities

This item is not applicable.

 

Item 4

[Removed and Reserved]

 

Item 5

Other Information

This item is not applicable.

 

Item 6

Exhibits

 

31.1   

Rule 13a-14(a)/15d-14(a) Certification of D. Michael Stout, M.D.

31.2   

Rule 13a-14(a)/15d-14(a) Certification of Joseph A. Boyle, CPA

32   

Section 1350 Certification

99   

Press Release dated February 14, 2011

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

UCI Medical Affiliates, Inc.

 

(Registrant)

     

/s/ D. Michael Stout, M.D.

   

/s/ Joseph A. Boyle

 

D. Michael Stout, M.D.

   

Joseph A. Boyle

 

President and Chief Executive Officer

   

Executive Vice President,

 
   

Chief Financial Officer and

 
   

Principal Accounting Officer

 

Date: February 14, 2011

 

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