Item 1...Business
General
UCI Medical Affiliates, Inc. ("UCI") is a Delaware corporation incorporated on August 25, 1982. Operating through its wholly-owned subsidiaries, UCI Medical Affiliates of South Carolina, Inc. ("UCI-SC") and UCI Medical Affiliates of Georgia, Inc. ("UCI-GA"), UCI provides nonmedical management and administrative services for a network of 36 freestanding medical centers (the "Centers"), 34 of which are located throughout South Carolina and two are located in Knoxville, Tennessee (29 operating as Doctorss.s Care in South Carolina, one as Doctor's Care in Knoxville, Tennessee, five as Progressive Physical Therapy Services in South Carolina, and one as Progressive Physical Therapy Services in Knoxville, Tennessee).
Organizational Structure
Federal law and the laws of South Carolina generally specify who may practice medicine and limit the scope of relationships between medical practitioners and other parties. Under such laws, UCI, UCI-SC and UCI-GA 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 Doctorss.s Care, P.A. or Doctor's Care of Tennessee, P.C. (together the "P.A.'s," and together with UCI, UCI-SC and UCI-GA, the "Company"), each of which has contracted with UCI-SC or UCI-GA, as applicable, to be the sole provider of all non-medical direction and supervision of the Centers operating in its respective state of organization. Each P.A. is organized so that all physician services are offered by the physicians who are employed by the P.A. Neither UCI, UCI-SC nor UCI-GA employ practicing physicians as practitioners, exert control over their decisions regarding medical care or represent to the public that it offers medical services.
UCI-SC and UCI-GA have entered into Administrative Services Agreements with the P.A.'s pursuant to which UCI-SC and UCI-GA perform all non-medical management of the P.A.'s and have exclusive authority over all aspects of the business of the P.A.'s (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 and UCI-GA 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 and UCI-GA provide all of the resources (systems, procedures, and staffing) to bill third party payors or patients, and provide all of the resources (systems, procedures, and staffing) for cash collection and management of accounts receivables, including custody of the lockbox where cash receipts are deposited. From the cash receipts, UCI-SC and UCI-GA pay all physician salaries, operating costs of the centers and operating costs of UCI-SC and UCI-GA. Compensation guidelines for the licensed medical professionals at the P.A.'s are set by UCI-SC and UCI-GA, and UCI-SC and UCI-GA establish guidelines for establishing, selecting, hiring and firing the licensed medical professionals. UCI-SC and UCI-GA also negotiate and execute substantially all of the provider contracts with third party payors. Neither UCI-SC nor UCI-GA loans or otherwise advances funds to any P.A. for any purposes.
The P.A.'s and UCI-SC share a common management team. In each case, the same individuals serve as President, Medical Director and as Chief Financial Officer of each entity. The sole shareholder and President of the South Carolina P.A. is M.F. McFarland, III, M.D., the President and Chief Executive Officer of UCI, UCI-SC and UCI-GA. The sole shareholder of the Tennessee P.C. is D. Michael Stout, M.D., the Executive Vice President of Medical Affairs for UCI, UCI-SC and UCI-GA.
UCI-SC and UCI-GA believe that the services they provide to the P.A.'s do not constitute the practice of medicine under applicable laws. Nevertheless, because of the uniqueness of the structure of the relationships described above, many aspects of the Company's business operations have not been the subject of state or federal regulatory interpretation and there can be no assurance that a review of the Company's business by the courts or regulatory authorities will not result in a determination that could adversely affect the operations of the Company or that the health care regulatory environment will not change so as to restrict the Company's existing operations or future expansion.
Chapter 11 Bankruptcy Filing
On November 2, 2001, the Company (the "Debtors") filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court"). The Debtors remain in possession of their properties and assets and management of the Company continues to operate the business of the Debtors as a debtor-in-possession. As a debtor-in-possession, the Company is authorized to continue to operate its businesses, but may not engage in transactions outside the ordinary course of business without the approval, after notice and an opportunity for a hearing, of the Bankruptcy Court. Pursuant to the automatic stay provisions of the Bankruptcy Code, all actions to collect pre-petition indebtedness of the Debtors, as well as most other pending litigation against the Debtors are currently stayed. In addition, as debtor-in-possession, the Debtors have the right, subject to the approval of the Bankruptcy Court and certain other conditions, to assume or reject any pre-petition executory contracts or unexpired leases.
The Bankruptcy Court has approved payment of certain pre-petition liabilities, such as employee wages and benefits, and settlement of certain trade payable claims. In addition, the Bankruptcy Court has allowed for the retention of legal and financial professionals to advise in the bankruptcy proceedings.
The Company presently intends to reorganize the Company's business and restructure the Company's liabilities through a plan of reorganization to be filed with the Bankruptcy Court. In connection with the development of a plan or plans of reorganization alternatives, the Company will evaluate any and all proposals to maximize the value of the Debtors.
Currently, it is not possible to predict with certainty the length of time the Company will operate under the protection of Chapter 11, the outcome of the Chapter 11 proceedings in general, or the effect of the proceedings on the business of the Company or on the interests of the various creditors and security holders. Under the priority scheme established by the Bankruptcy Code, certain post-petition liabilities and pre-petition liabilities need to be satisfied before shareholders can receive any distribution. The ultimate recovery to shareholders, if any, will not be determined until confirmation of a plan of reorganization. There can be no assurance as to what value, if any, will be ascribed to the Company's common stock in the bankruptcy proceedings.
The Centers
The Centers are staffed by licensed physicians, 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.
The Company's Centers are broadly distributed throughout the state of South Carolina and there are two in Knoxville, Tennessee. There are fifteen primary care Centers in the Columbia region (including the three physical therapy offices), seven in the Charleston region (including one physical therapy office), four in the Myrtle Beach region, one in the Aiken region, seven in the Greenville-Spartanburg region (including one physical therapy office) and two in Knoxville, Tennessee (including one physical therapy office).
Medical Services Provided at the Centers
The Company's Centers offer out-patient medical care, without appointment, for treatment of acute and episodic medical problems. The Centers provide a broad range of medical services which would generally be classified as within the scope of family practice and occupational medicine. The medical services are provided by licensed physicians, nurses and auxiliary support personnel. 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, urinalysis and various cultures; and
o Occupational and industrial medical services, including drug testing, workers' compensation and physical examinations.
At any of the Centers, a patient with a life-threatening condition would be evaluated by the physician, stabilized and immediately referred to a nearby hospital.
Patient Charges and Payments
The fees charged to a patient are determined by the nature of medical services rendered. Management of the Company believes that the charges at its 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.
The Company's 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. The Company also provides 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 Physician's Health Plan.
The following table breaks out the Company's approximate revenue and patient visits by revenue source for fiscal year 2001:
In accordance with the Administrative Services Agreements described above, UCI-SC and UCI-GA, as the agents for the P.A.'s, process all payments for the P.A.'s. When payments for the P.A.'s are received, they are deposited in accounts owned by each P.A. and are automatically transferred to lockbox accounts owned by UCI-SC and UCI-GA. In no event are the physicians entitled to receive such payments. The patient mix in no way affects the Company's management service fees per the Administrative Services Agreements.
Capitated Reimbursement 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 which 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 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 the Company to administer medical care to HMO members. These contracts provide for payment to the Company on a discounted fee-for-service basis.
The Company currently does not provide any services on a capitated basis.
Certain third party payors are studying various alternatives for reducing medical costs, some of which, if implemented, could affect reimbursement levels to the Company. Management of the Company cannot predict whether changes in present reimbursement methods or proposed future modifications in reimbursement methods will affect payments for services provided by the Centers and, if so, whether they will have an adverse impact upon the business of the Company.
Competition and Marketing
All of the Company's Centers face competition, in varying degrees, from hospital emergency rooms, private doctor's offices and other competing freestanding medical centers. Some of these providers have financial resources which are greater than those of the Company. 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 those operated by the Company. The Company's Centers compete on the basis of accessibility, including evening and weekend hours, a no-appointment policy, the attractiveness of the Company's state-wide network to large employers and third party payors, and on a basis of a competitive fee schedule. In an effort to offset the competition's community recognition, the Company has substantial marketing efforts. Regional marketing representatives have been added, focused promotional material has been developed and a newsletter for employers promoting the Company's activities has been initiated.
Government Regulation
As participants in the health care industry, the Company's 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 Georgia, 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, UCI-SC and UCI-GA 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 UCI Centers are provided by or under the supervision of the P.A.'s pursuant to contracts with the Company's wholly-owned subsidiaries. The P.A.'s are organized so that all physician services are offered by the physicians who are employed by the P.A.'s. None of UCI, UCI-SC or UCI-GA 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 above, UCI-SC has entered into an Administrative Services Agreement with Doctor's Care, P.A. and UCI-GA has entered into a similar Administrative Services Agreement with the P.A. operating in Tennessee pursuant to which UCI-SC and UCI-GA, as applicable, perform all non-medical management of the applicable P.A.'s and have exclusive authority over all aspects of the business of the P.A.'s (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, UCI-GA and the P.A.'s, many aspects of UCI's business operations have not been the subject of state or federal regulatory interpretation. There can be no assurance that a review by the courts or regulatory authorities of the business formerly or currently conducted by the Company will not result in a determination that could adversely affect the operations of the Company or that the healthcare regulatory environment will not change so as to restrict the existing operations or proposed expansion of the Company's business.
Third Party Reimbursements
Approximately six percent (6%) of the revenues of the Company is derived from payments made by government-sponsored health care programs (principally, Medicare and Medicaid). As a result, any change in reimbursement regulations, policies, practices, interpretations or statutes could adversely affect the operations of the Company. There are also state and federal civil and criminal statutes imposing 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. The Company believes it is in material compliance with such laws, but there can be no assurance that the Company's 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 the Company believes that it is not in violation of the Anti-kickback Statute or similar state statutes, its 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, recently issued an advisory opinion regarding a proposed management services contract 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, the Company believes that Advisory Opinion 98-4 does not have broad application to the Company's provision of nonmedical management and administrative services for the Centers. The Company also believes that the Company and the Centers have implemented appropriate controls to ensure that the arrangements between the Company 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 Company's service agreements with the Centers and the development of ancillary services by the Company, has not been subject to any significant judicial and regulatory interpretation. The Company believes that although it receives remuneration for its management services under its service agreements with the Centers, the Company is 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, the Company is not a separate provider of Medicare or state health program reimbursed services. Consequently, the Company does not believe that the service and management fees payable to it 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.
Significant prohibitions against physician referrals were enacted by the U.S. Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to certain exemptions, a physician or a member of his 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 the Company believes it is currently in compliance with such legislation, future regulations could require the Company to modify the form of its relationships with physician groups.
State Anti-Kickback and Self-Referral Laws
Some states have also enacted similar self-referral laws, and the Company believes it is likely that more states will follow. The Company believes that its practices fit within exemptions contained in such laws. Nevertheless, in the event the Company expands its operations to certain additional jurisdictions, structural and organizational modifications of the Company's relationships with physician groups might be required to comply with new or revised state statutes. Such modifications could adversely affect the operations of the Company.
Through its wholly owned subsidiaries, UCI-SC and UCI-GA, the Company provides management and administrative services to the UCI 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 the Company's current operations, the Company does not believe it 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. There are no provider investors in the P.A. that refer patients to the Centers for designated health care services. Accordingly, under South Carolina law, the Company believes that the provider self-referral prohibition would not apply to the Centers' or the Company's 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. The Company believes that its 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 conflict so greatly with the patient's interest as to be incompatible, the physician shall make alternative arrangements for the care of the patient.
Because the Company is not a provider of health services, the Company believes that Tennessee's conflict of interest/disclosure law does not apply to its current operations. Even if the Tennessee conflict of interest/disclosure law were to apply, the Company's 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 which provides healthcare services. The Company believes that it does not fit within the definition of a "healthcare entity" because the Company is not a provider of healthcare services. The Centers provide all health care services to patients through employees of the P.A. There are no provider investors in the P.A. that refer patients for designated health care services except the sole physician shareholder of the P.A. The Company believes that referrals by the sole shareholder of the P.A. come within a statutory exception. Accordingly, under Tennessee law, the Company believes that the provider self-referral prohibition would not apply to the Centers' or the Company's 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. The Company believes that its payment arrangements with 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.'s is a separate legal entity, each may be deemed a competitor subject to a range of antitrust laws which prohibit anti-competitive conduct, including price fixing, concerted refusals to deal and division of market. The Company believes it is in compliance with such state and federal laws which may affect its development of integrated healthcare delivery networks, but there can be no assurance that a review of the Company's business by courts or regulatory authorities will not result in a determination that could adversely affect the operations of the Company.
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. There can be no assurance as to the ultimate content, timing or effect of any healthcare reform legislation, nor is it possible at this time to estimate the impact of potential legislation, which may be material, on the Company.
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 the Company could possibly be characterized by some states as the business of insurance. The Company, however, believes 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. There can be no assurance that regulators of the states in which the Company may operate would not apply these laws to require licensure of the Company's operations as an insurer or provider network. The Company believes that it is in compliance with these laws in the states in which it currently does business, but there can be no assurance that future interpretations of these laws by the regulatory authorities in South Carolina, Tennessee or the states in which the Company may expand in the future will not require licensure of the Company's operations as an insurer or provider network or a restructuring of some or all of the Company's operations. In the event the Company is required to become licensed under these laws, the licensure process can be lengthy and time consuming and, unless the regulatory authority permits the Company to continue to operate while the licensure process is progressing, the Company could experience a material adverse change in its business while the licensure process is pending. In addition, many of the licensing requirements mandate strict financial and other requirements which the Company may not immediately be able to meet. Further, once licensed, the Company would be subject to continuing oversight by and reporting to the respective regulatory agency.
Employees
As of September 30, 2001, the Company had 530 employees (403 on a full-time equivalent basis). This includes 109 medical providers employed by the P.A.'s.
Advisory Note Regarding Forward-Looking Statements
Certain of the statements contained in this PART I, Item 1 (Business) and in PART II, Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this Annual Report on Form 10-K that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Although the Company's management believes that their expectations of future performance are based on reasonable assumptions within the bounds of their knowledge of their business and operations, there can be no assurance that actual results will not differ materially from their expectations. Factors which could cause actual results to differ from expectations include, among other things, the difficulty in controlling the Company's costs of providing healthcare and administering its network of Centers; the possible negative effects from changes in reimbursement and capitation payment levels and payment practices by insurance companies, healthcare plans, government payors and other payment sources; the difficulty of attracting primary care physicians; the increasing competition for patients among healthcare providers; possible government regulations negatively impacting the existing organizational structure of the Company; the possible negative effects of prospective healthcare reform; the challenges and uncertainties in the implementation of the Company's expansion and development strategy; the dependence on key personnel; the ability to successfully integrate the management structures and consolidate the operations of recently acquired entities or practices with those of the Company; and other factors described in this report and in other reports filed by the Company with the Securities and Exchange Commission.
Item 2.
Item 2. Properties
All but one of the Company's primary care Centers' 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 an entity affiliated with the Company's Chairman and one Center is leased from Companion HealthCare Corporation, a principal shareholder of the Company. One of the Centers is leased from a physician employee of the P.A.'s.
The Company's Centers are broadly distributed throughout the state of South Carolina and two are in Knoxville, Tennessee. There are 15 primary care Centers in the Columbia, South Carolina region (including three physical therapy offices), seven in the Charleston, South Carolina region (including one physical therapy office), four in the Myrtle Beach, South Carolina region, one in the Aiken, South Carolina region, seven in the Greenville-Spartanburg, South Carolina region (including one physical therapy office) and two in the Knoxville, Tennessee region (including one physical therapy office). The Company's corporate offices are located on the second floor of one of the Columbia, South Carolina locations. The Centers are all in free-standing buildings in good repair.
Item 3.
Item 3. Legal Proceedings
The Company is 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 the financial position of the Company.
Chapter 11 Bankruptcy Filing
On November 2, 2001, the Company (the "Debtors") filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court"). The Debtors remain in possession of their properties and assets and management of the Company continues to operate the business of the Debtors as a debtor-in-possession. As a debtor-in-possession, the Company is authorized to continue to operate its businesses, but may not engage in transactions outside the ordinary course of business without the approval, after notice and an opportunity for a hearing, of the Bankruptcy Court. Pursuant to the automatic stay provisions of the Bankruptcy Code, all actions to collect pre-petition indebtedness of the Debtors, as well as most other pending litigation against the Debtors are currently stayed. In addition, as debtor-in-possession, the Debtors have the right, subject to the approval of the Bankruptcy Court and certain other conditions, to assume or reject any pre-petition executory contracts or unexpired leases.
The Bankruptcy Court has approved payment of certain pre-petition liabilities, such as employee wages and benefits, and settlement of certain trade payable claims. In addition, the Bankruptcy Court has allowed for the retention of legal and financial professionals to advise in the bankruptcy proceedings.
The Company presently intends to reorganize the Company's business and restructure the Company's liabilities through a plan of reorganization to be filed with the Bankruptcy Court. In connection with the development of a plan or plans of reorganization alternatives, the Company will evaluate any and all proposals to maximize the value of the Debtors.
Currently, it is not possible to predict with certainty the length of time the Company will operate under the protection of Chapter 11, the outcome of the Chapter 11 proceedings in general, or the effect of the proceedings on the business of the Company or on the interests of the various creditors and security holders. Under the priority scheme established by the Bankruptcy Code, certain post-petition liabilities and pre-petition liabilities need to be satisfied before shareholders can receive any distribution. The ultimate recovery to shareholders, if any, will not be determined until confirmation of a plan of reorganization There can be no assurance as to what value, if any, will be ascribed to the Company's common stock in the bankruptcy proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders ---------------------------------------------------
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Until October 19, 1998, the Common Stock was traded on the NASDAQ SmallCap Market under the symbol UCIA. On October 20, 1998, the Common Stock was delisted for trading on the NASDAQ SmallCap Market as a consequence of the Company's failure to meet certain quantitative requirements under the NASD's expanded listing criteria. Trading in the 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.
As of December 31, 2001, there were 310 stockholders of record of Common Stock, excluding individual participants in security position listings.
UCI has not paid cash dividends on the Common Stock since its inception and has no plans to declare cash dividends in the foreseeable future.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information which the Company believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto.
Basis of Presentation
The consolidated financial statements of the Company include the accounts of UCI, UCI-SC, UCI-GA and the P.A.'s. Such consolidation is required under Emerging Issues Task Force (EITF) 97-2 as a consequence of the nominee shareholder arrangement that exists with respect to each of the P.A.'s. In each case, the nominee (and sole) shareholder of the P.A. has entered into an agreement with UCI-SC or UCI-GA, as applicable, which satisfies the requirements set forth in footnote 1 of EITF 97-2. Under the agreement, UCI-SC or UCI-GA, as applicable, in its sole discretion, can effect a change in the nominee shareholder at any time for a payment of $100 from the new nominee shareholder to the old nominee shareholder, with no limits placed on the identity of any new nominee shareholder and no adverse impact resulting to any of UCI-SC, UCI-GA or the P.A. resulting from such change.
In addition to the nominee shareholder arrangements described above, each of UCI-SC and UCI-GA have entered into Administrative Service Agreements with the P.A.'s. (See Item 1. Business - "Organizational Structure" for a detailed description of the Administrative Service Agreements.) As a consequence of the nominee shareholder arrangements and the Administrative Service Agreements, the Company has a long-term financial interest in the affiliated practices of the P.A.'s. According to EITF 97-2, the application of FASB Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and APB No. 16 (Business Combinations), the Company must consolidate the results of the affiliated practices with those of the Company.
The P.A.'s enter into employment agreements with physicians for terms ranging from one to five years. All employment agreements have clauses that allow for early termination of the agreement if certain events occur such as the loss of a medical license. Over 79% of the physicians employed by the P.A.'s are paid on an hourly basis for time scheduled and worked at the medical centers. The other physicians are salaried. Approximately 25 of the physicians have incentive compensation arrangements; however, no amounts were accrued or paid during the Company's three prior fiscal years that were significant. Any incentive compensation is based upon a percentage of non-ancillary collectible charges for services performed by a provider. Percentages range from 3% to 17% and vary by individual employment contract. As of September 30, 2001 and 2000, the P.A.'s employed 109 and 106 medical providers, respectively.
The net assets of the P.A.'s are not material for any period presented, and intercompany accounts and transactions have been eliminated. For the fiscal year ended September 30, 2001, the Company has shown a decrease of approximately 5% in revenues. This decrease is a direct result of actions taken by management to close unprofitable centers in the Atlanta region.
The Company does not allocate all indirect costs incurred at the corporate offices to the Centers on a center-by-center basis. Therefore, all discussions below are intended to be in the aggregate for the Company as a whole.
Chapter 11 Bankruptcy Filing
On November 2, 2001, the Company (the "Debtors") filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court"). The Debtors remain in possession of their properties and assets and management of the Company continues to operate the business of the Debtors as a debtor-in-possession. As a debtor-in-possession, the Company is authorized to continue to operate its businesses, but may not engage in transactions outside the ordinary course of business without the approval, after notice and an opportunity for a hearing, of the Bankruptcy Court. Pursuant to the automatic stay provisions of the Bankruptcy Code, all actions to collect pre-petition indebtedness of the Debtors, as well as most other pending litigation against the Debtors are currently stayed. In addition, as debtor-in-possession, the Debtors have the right, subject to the approval of the Bankruptcy Court and certain other conditions, to assume or reject any pre-petition executory contracts or unexpired leases.
The Bankruptcy Court has approved payment of certain pre-petition liabilities, such as employee wages and benefits, and settlement of certain trade payable claims. In addition, the Bankruptcy Court has allowed for the retention of legal and financial professionals to advise in the bankruptcy proceedings.
The Company presently intends to reorganize the Company's business and restructure the Company's liabilities through a plan of reorganization to be filed with the Bankruptcy Court. In connection with the development of a plan or plans of reorganization alternatives, the Company will evaluate any and all proposals to maximize the value of the Debtors.
Comparison of Results of Operations for Fiscal Years 2001, 2000, and 1999 - -------------------------------------------------------------------------
Revenues of $38,117,000 in fiscal year 2001 reflected a decrease of approximately 5% from the fiscal year 2000 revenues of $39,953,000 which reflected a decrease of 1% from the amount reported for fiscal year 1999. The following reflects revenue trends from fiscal year 1997 through fiscal year 2001:
For the year ended September 30, (in thousands)
The decrease in revenue for fiscal year 2001 is attributed primarily to the shutdown of the Atlanta centers to be discussed later. Revenues for the Atlanta centers declined by $1,059,000 from $2,648,000 for fiscal year 1999 to $1,589,000 for fiscal year 2000 and was zero ($0.00) in fiscal year 2001.
The number of centers operated by the Company increased from 34 to 36 from September 30, 2000 to September 30, 2001. The additions were two physical therapy offices (one in the Greenville-Spartanburg region and one in the Charleston region).
The number of centers operated by the Company decreased from 40 to 34 from September 30, 1999 to September 30, 2000. Of the six centers closed, five were in the Atlanta region and the sixth was a physical therapy site in the Greenville-Spartanburg region which was opened for only a short period in the fourth quarter of fiscal year 1999 and the first quarter of fiscal year 2000.
During the past three fiscal years, the Company has continued its services provided to members of HMOs. In these arrangements, the Company, through the P.A., acts as the designated primary caregiver for members of HMOs who have selected one of the Company's centers or providers as their primary care provider. In fiscal year 1994, the Company began participating in an HMO operated by Companion HealthCare Corporation ("CHC"), a wholly owned subsidiary of Blue Cross Blue Shield of South Carolina ("BCBS"). BCBS, through CHC, is a primary stockholder of UCI. Including its arrangement with CHC, the Company now participates in four HMOs and is the primary care "gatekeeper" for more than 18,000 lives in fiscal years 2001, 2000, and 1999. As of September 30, 2001, all of these HMOs use a discounted fee-for-service basis for payment. HMOs do not, at this time, have a significant penetration into the South Carolina market; the Company is not certain if there will be growth in the market share of HMOs in the areas in which it operates clinics. In fiscal year 1999, there was only one HMO that paid by capitated revenue which was approximately $1,400,000 or 3% of total revenue. During fiscal years 2000 and 2001, none of the four HMOs paid via a capitation arrangement.
Sustained revenues in fiscal years 2001, 2000 and 1999 also reflect the Company's heightened focus on occupational medicine and industrial health services (these revenues are referred to as "employer paid" and "workers compensation" on the table below). Focused marketing materials, including quarterly newsletters for employers, were developed to spotlight the Company's services for industry. Approximately 22% of the Company's total revenue was derived from these occupational medicine services in fiscal year 2001, 25% in fiscal year 2000 and 24.5% in fiscal year 1999. The Company also entered into an agreement with Companion Property and Casualty Insurance Company ("CP&C") wherein the Company acts 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 472,000 in fiscal year 2001, 504,000 in fiscal year 2000 and 509,000 in fiscal year 1999. The small decrease in fiscal year 2000 is due to the closure of the Atlanta centers effective June 30, 2000. Patient encounters in the Atlanta centers were 21,000 in fiscal year 2000 as compared to 32,000 in fiscal year 1999 and were zero (0) in fiscal year 2001.
No new significant competition entered the Company's market during fiscal years 2001, 2000 or 1999.
The improvement in the operating margin during fiscal year 2001 was due to the elimination of the Atlanta operations during fiscal year 2000.
The operating margin decreased to $1,827,000 in fiscal year 2000 from $4,495,000 in fiscal year 1999 partially due to the poor performance of the Atlanta centers for the first nine months of the fiscal year until their closure on June 30, 2000. For the nine months ending June 30, 2000, the Atlanta centers had an operating deficit of approximately $1,143,000 as compared to an operating deficit of approximately $730,000 for the twelve months of fiscal year 1999. Approximately $400,000 of the decline in the operating deficit from fiscal year 1999 to fiscal year 2000 was attributable to the two Knoxville centers, one of which moved to a new location in early fiscal year 2000. This move resulted in a severe reduction of business for approximately six months which began to improve over the last quarter of fiscal year 2000. The remainder of the decrease was primarily due to continuing costs pressures of managed care and due to an increase of $519,000 in bad debt expense in fiscal year 2000 as compared to fiscal year 1999, and a $379,000 change in estimate in fiscal year 1999 reducing lease expense, as discussed in Note 14 to the financial statements.
An operating margin of $4,495,000 was achieved in fiscal year 1999. This significant improvement over fiscal year 1998 was the result of a decisive cost reduction plan put into place by management during the fourth quarter of fiscal year 1998 that included staff reductions and the closure or divestiture of several unprofitable centers. For the six centers that were closed or divested of during fiscal year 1998 the combined losses were approximately $775,000 during fiscal year 1998. Salary savings from the staff reductions are estimated to be approximately $1,000,000 at the corporate level and between $3,000,000 and $4,000,000 at the remaining centers. The following table breaks out the Company's revenue and patient visits by revenue source for fiscal years 2001, 2000, and 1999.
As managed care plans attempt to cut costs, they typically increase the administrative burden of providers such as the Company by requiring referral approvals and by requesting hard copies of medical records before they will pay claims. The number of patients at the Company's Centers that are covered by a managed care plan versus a traditional indemnity plan continues to grow. Management expects this trend to continue.
Bad debt expense, a component of operating costs, was approximately $1,495,000 (or approximately 4% of revenue) for fiscal year 2001, $2,808,000 (or approximately 7% of revenue) for fiscal year 2000 and $2,289,000 (or approximately 6% of revenue) for fiscal year 1999. The expenses from bad debts were higher in fiscal years 1999 and 2000 due to the difficulties encountered in the collection of amounts associated with patients seen at the centers acquired during fiscal year 1998 (Georgia centers) which were closed in fiscal year 2000. The collection percentage for the established South Carolina centers has remained constant at approximately 96% for the past 5 to 6 years.
The Company continually evaluates the operations of its physician practice centers and assesses the centers for impairment when certain indicators of impairment are present. At September 30, 2001, three centers were, upon review, 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. Even though management has made changes to the staffing and marketing focus on these two centers and now believes they are on the track to meeting expected goals and profitability in the next few months; the goodwill was considered impaired at September 30, 2001 and was, therefore, written off. 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 locations was deemed to be impaired and, therefore, written off. In May 2000, the Company announced its intention to close its Georgia physician practice centers effective June 30, 2000. The performance of these centers, which were originally acquired in May 1998, did not meet the expectations of the Company during fiscal year 2000 and the Company was no longer committed to the Georgia market. The Company sold the property and equipment at these centers for an amount approximating the net book value of the fixed assets or transferred the property and equipment to other Company locations. The long-lived assets and related goodwill for these centers was assessed for impairment under a held for use model as of March 31, 2000. As a result of the decision to close these centers coupled with the fact that the remaining projected undiscounted cash flows were less than the carrying value of the long-lived assets and goodwill for these centers, the Company recorded an impairment in the quarter ended March 31, 2000 of approximately $3,567,000 to reduce the goodwill to its fair value. This is a component of the line item Realignment and Impairment Charges.
Additionally, the Company incurred additional costs associated with the decision to close the Georgia centers during the third and fourth quarters of fiscal year 2000. These costs relate primarily to exiting certain lease obligations. The estimated lease obligations, net of estimated sub-lease income, are expected to be approximately $242,000 at September 30, 2000. The total costs related to lease obligations and employee contractual liabilities for the Atlanta centers closed June 30, 2000 was $561,000 which is the other component of the line item Realignment and Impairment Charges.
When the Company acquires medical practices, the excess of cost over fair value of assets acquired (goodwill) is recorded as an asset and is amortized on a straight-line basis over 15 years. Subsequent to an acquisition, the Company periodically evaluates whether later events and circumstances have occurred that indicate that the remaining balance of goodwill may not be recoverable. When external factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related center's undiscounted cash flows to determine if an impairment exists. If an impairment exists, it is measured based on the difference between the carrying amount and fair value, for which discounted cash flows are used. Examples of external factors that are considered in evaluation for possible impairment include significant changes in the third party payor reimbursement rates and unusual turnover or licensure difficulties of clinical staff at a center.
During the second quarter of fiscal year 2000 and the fourth quarter of fiscal year 2001, the above analysis resulted in an impairment charge of approximately $3,567,000 and $753,000 to goodwill for centers that had been closed (i.e., Atlanta region) in fiscal year 2000 and for three underperforming centers in fiscal year 2001. This is a component of the line item Realignment and Impairment Charges.
It should be noted that the Company also has launched medical centers as start-up operations, which have contributed in fiscal year 1999 to the Company's overall cash used in operations. Costs of starting up new centers are expensed as incurred.
Depreciation and amortization expense decreased to $1,544,000 in fiscal year 2000, down from $1,720,000 in fiscal year 2000 and $1,954,000 in fiscal year 1999. This decrease reflects lower amortization and depreciation resulting from the closure of the Atlanta region. Net interest expense decreased to $1,699,000 in fiscal year 2001 from $1,995,000 in fiscal year 2000 as a result of the overall decrease in long-term debt due to principal pay downs and due to a continuing decline in interest rates over the year. Net interest expense increased to $1,995,000 in fiscal year 2000 from $1,472,000 in fiscal year 1999 primarily as a result of the interest costs associated with the indebtedness incurred in the leasehold improvements, the operating line of credit the Company has with its primary bank, increase in bank fees and interest penalties, and debt associated with the acquisitions noted above.
The Company evaluates 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, management of the Company considered the following:
o Recent historical operating results.
o Lack of sufficient liquidity to support operations.
o The budgets and forecasts that management and the Board of Directors had adopted for the next five fiscal years including plans for expansion.
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.
A valuation allowance of $7.2 million and $7.6 million at September 30, 2001 and 2000, respectively, remained necessary in the judgement of management because the factors noted above (i.e. forecasts) did not support the utilization of less than a full valuation allowance. The lack of consistent earnings and liquidity concerns, discussed above, was considered in the decision to maintain a 100% valuation allowance of $7,184,000 at September 30, 2001, leaving no tax related asset recorded.
Going Concern Matters
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, the Company has a working capital deficiency and an accumulated deficit. Ultimately, the Company's viability as a going concern is dependent upon its ability to continue to generate positive cash flows from operations, maintain adequate working capital and obtain satisfactory long-term financing.
The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company plans include the following, although it is not possible to predict the ultimate outcome of the Company's efforts.
The Chapter 11 Bankruptcy Reorganization Plan filed by the Company and discussed earlier should allow the restructuring of long-term liabilities on a plan that will greatly improve the Company's cash flow. The closure of the Atlanta centers, which were unprofitable, had an immediate positive effect on the Company in the fourth quarter of fiscal year 2000. This improvement is expected to continue into fiscal year 2002 and beyond. However, there can be no assurances that such improvement will occur.
Results of Operations for the Three Months Ended September 30, 2001 as Compared to the Three Months Ended September 30, 2000:
The following summarizes the fiscal 2001 fourth quarter results of operations as compared to the prior year:
Revenues of $9,195,000 for the quarter ending September 30, 2001 remained consistent with those of the fourth quarter of fiscal year 2000.
Patient encounters decreased to 110,000 in the fourth quarter of fiscal year 2001 from 117,000 in the fourth quarter of fiscal year 2000 due to the reduction in the number of centers as discussed above.
The decrease in interest expense is due to the reduction in long-term debt due to regular principal payments and to the steady decline in interest rates during the year.
Financial Condition at September 30, 2001 and September 30, 2000
Cash and cash equivalents decreased by $204,000 from September 30, 2000 to September 30, 2001.
Accounts receivable decreased from $6,959,000 at September 30, 2000 to $6,297,000 at September 30, 2001. This decrease was attributable to increased focus on collections at the Corporate billing department that involved a reorganization of functional duties and slightly lower revenues in fiscal year 2001 as compared to fiscal year 2000. As the payor mix of the Company continues to change, the billing and collection functions will need to be continually modified and updated. The decrease in the number of centers in operation and the small decrease in revenue also result in a lower accounts receivable balance.
The decreases in property and equipment and in the excess of cost over fair value of assets acquired ("goodwill") are both the result of regular depreciation and amortization charges and the write-off of the goodwill discussed above. Depreciation charges were somewhat offset on the Property and Equipment balance by the net equipment purchases of approximately $744,000.
The reductions in long-term debt from September 30, 2000 to September 30, 2001 were the result of the regularly scheduled principal payments. Management believes that it will be able to fund debt service requirements for the foreseeable future out of cash generated through operations.
Liquidity and Capital Resources
The Company requires capital principally to fund growth (acquire new Centers), for working capital needs and for the retirement of indebtedness. The Company's capital requirements and working capital needs have been funded through a combination of external financing (including bank debt and proceeds from the sale of common stock to CHC and CP&C), and credit extended by suppliers.
As of September 30, 2001, the Company had no material commitments for capital expenditures or for acquisition or start-ups.
Operating activities generated $2,716,000 of cash during fiscal year 2001, compared to $1,048,000 during fiscal year 2000. The improvement from fiscal year 2000 to fiscal year 2001 was mainly due to an improvement in the overall operations of the Company, much of which was the result of cost reductions that have remained in place throughout 2001, which shows up as the increase in operating margin on the income statement.
Investing activities used $727,000 of cash during fiscal year 2001 and $701,000 used in fiscal year 2000 as a result of normal equipment upgrades in existing centers.
Approximately $2,193,000 of cash was used by the Company for financing activities in fiscal year 2001 to pay down the Line of Credit and a temporary year-end bank overdraft. Approximately $2,467,000 of cash was used during fiscal year 1999 to reduce debt. This was made possible by the positive performance of the Company and by the discontinuation of growth through acquisitions during the year. Liquidity in fiscal year 1999 was adequate to meet the operating needs of the Company; therefore, no financing sources of cash were required. There is no assurance that any additional financing, if required, will be available on terms acceptable to the Company.
Overall, the Company's current liabilities exceed its current assets at September 30, 2001 and 2000 by $6,245,000 and $6,230,000. The Company intends to renegotiate or renew all of its debt instruments during fiscal year 2002 and does not expect to pay them off during fiscal year 2002 as part of its Chapter 11 Reorganization Plan. There can be no assurances that these instruments will be reinstated or renewed. There can be no assurance that sources of cash will exceed uses of cash.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which includes credit facilities with financial institutions used to maintain liquidity and fund the Company's business operations, as well as notes payable to various third parties in connection with certain acquisitions of property and equipment. The nature and amount of the Company's debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of the Company's interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. The Company does not currently use derivative instruments to adjust the Company's interest rate risk profile.
Approximately $2,200,000 of the Company's debt at September 30, 2001 was subject to fixed interest rates and principal payments. Approximately $4,900,000 of the Company's debt at September 30, 2001 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at September 30, 2001, the Company's interest expense on an annualized basis would increase approximately $49,000 for each increase of one percent in the prime rate.
The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments.
Item 8.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Index to Financial Statements on Page 34.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
(a) On November 29, 2001, UCI Medical Affiliates, Inc. (the "Company") notified PricewaterhouseCoopers LLP that it would not be retained by the Company to perform the audit of the financial statements of the Company for the fiscal year ended September 30, 2001. The decision to change independent accountants was approved by the Audit Committee of the Company. PricewaterhouseCoopers LLP had served as the Company's principal independent accountants for the fiscal years ended September 30, 1995 through 2000. The Company's decision to dismiss PricewaterhouseCoopers LLP for the fiscal 2001 audit was not the result of any prior, current or expected disagreement with the Company.
The reports of PricewaterhouseCoopers LLP on the financial statements of the Company for each of the past two fiscal years ended September 30, 2000 and 1999 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle, except that the reports for each of the past two fiscal years contain an explanatory paragraph relating to the Company's ability to continue as a going concern as a consequence of losses incurred from continuing operations.
In connection with its audits of the financial statements of the Company for the fiscal years ended September 30, 2000 and 1999, and through November 29, 2001, the Company had no disagreement with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their reports on the financial statements for such years.
The Company requested PricewaterhouseCoopers LLP to furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether they agree with the statements made by the Company in responding to this item 4(a), and if not, stating the respects to which they do not agree.
(b) At its meeting on November 29, 2001, the Audit Committee of the Company approved the engagement of the accounting firm of Scott McElveen, LLP as independent accountants to audit the Company's financial statements for the fiscal year ended September 30, 2001. As of November 29, 2001, the Company had not on any occasion consulted with Scott McElveen, LLP regarding any of the matters set forth in item 304 (a)(2) of Regulation S-K.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Directors
M.F. McFarland, III, M.D., 54, has served as Chairman of the Board, President and Chief Executive Officer of UCI since January 1987 and as a director of UCI since September 1984. From September 1984 until January 1987, he served as Vice President of UCI. He has served as President and as the sole director of UCI-SC and Doctor's Care, P.A. ("DC-SC") for over five years and of UCI-GA since its organization in February 1998. He served as Associate Professional Director of the Emergency Department of Richland Memorial Hospital in Columbia, South Carolina from 1978 to 1981 and was President of the South Carolina Chapter of the American College of Emergency Physicians in 1979. Dr. McFarland is currently a member of the Columbia Medical Society, the South Carolina Medical Association and the American Medical Association. Dr. McFarland was most recently reelected as a director at the annual meeting of stockholders in 1997.
Charles M. Potok, 53, has served as a director of UCI since September 1995 and as Executive Vice President and Chief Operating Officer of Companion Property and Casualty Company ("CP&C"), a wholly-owned subsidiary of BCBS, since March 1984. Mr. Potok is an Associate of the Casualty Actuarial Society and a member of the American Academy of Actuaries. Prior to joining CP&C, 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 reelected as a director at the annual meeting of stockholders in 1997.
A. Wayne Johnson, 51, has served as Chairman and Chief Executive Officer of MainStreet Healthcare Corporation ("MHC") from its inception in February 1996. In addition to Mr. Johnson's MainStreet responsibilities, effective December 8, 1999, he assumed the role of Executive Vice President of Providan Financial, a San Francisco-based financial services company. Mr. Johnson has 24 years of entrepreneurial and business operations experience in the field of financial services and corporate development. Prior to co-founding MHC in February 1996, Mr. Johnson had served since 1991 as President of one of the major operating subsidiaries of First Data Corporation and Chief Marketing Officer and strategic planner for First Data Card Services Group, a subsidiary of First Data Corporation. Mr. Johnson was the founder of both Integratec, a collection company, and QualiServ, a credit card outsourcing service company. Mr. Johnson was initially elected as a director at the annual meeting of stockholders in 1999.
Ashby M. Jordan, M.D., 63, has served as a director of UCI since August 1996 and as Vice President of Medical Affairs of BCBS since December 1986. Prior to joining BCBS, 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 reelected as a director at the annual meeting of stockholders in 1999.
John M. Little, Jr., M.D., 52, has served as a director of UCI since August 11, 1998 and as Chief Medical Officer of Companion HealthCare Corporation ("CHC"), a wholly-owned subsidiary of BCBS, since 1996. Additionally, he has served since 1994 as Medical Director of Managed Care Services of CHC, as Chairman of the Quality Assurance Committee and the Pharmacy and Therapeutics Committee of CHC and as a Co-Chair of the Managed Care Oversight Committee of CHC. Prior to joining CHC 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 reelected as a director at the annual meeting of stockholders in 1999.
Harold H. Adams, Jr., 55, has served as a director of UCI since June 1994 and as President and owner of Adams and Associates, International, Adams and Associates, 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 26 years of involvement in the insurance industry and is a member of many professional and civic organizations. Mr. Adams was most recently reelected as a director at the annual meeting of stockholders in 2000.
Thomas G. Faulds, 61, has served as a director of UCI since August 1996 and as President and Chief Operating Officer, Blue Cross Blue Shield Division, Blue Cross Blue Shield of South Carolina ("BCBS") since October 1991. Mr. Faulds has been with BCBS since March 1972 where he has served in key senior management positions in government programs, information systems and operations. Mr. Faulds was most recently reelected as a director at the annual meeting of stockholders in 2000.
Executive Officers
The following sets forth certain information concerning the persons who currently serve as executive officers of the Company who do not also serve on the Board of Directors.
Jerry F. Wells, Jr., 39, has served as Chief Financial Officer and Executive Vice President of Finance of UCI since he joined UCI in February 1995 and as Corporate Secretary of the Company 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 of UCI-GA since its organization in February 1998, and as Corporate Secretary of DC-SC since December 1996. Prior to joining the Company, he served as a Senior Manager and consultant for PricewaterhouseCoopers LLP 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.
D. Michael Stout, M.D., 57, has served as Executive Vice President of Medical Affairs of UCI and DC-SC since 1985. 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.
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 UCI's fiscal year ended September 30, 2001. 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 Revenue Enhancement Committee. The Board of Directors has not established a nominating committee for recommending to stockholders candidates for positions on the Board of Directors. Such functions are currently performed by the Board of Directors acting as a whole. Currently, seven directors serve on the Board of Directors.
Audit Committee
The Audit Committee consists of Mr. Adams and Dr. Jordan. This committee recommends to the Board of Directors the engagement of the independent auditors for UCI, determines the scope of the auditing of the books and accounts of UCI, reviews the reports submitted by the auditors, examines procedures employed in connection with UCI's internal control structure, reviews and approves the terms of acquisitions between UCI and any related party entities, undertakes certain other activities related to the fiscal affairs of UCI and makes recommendations to the Board of Directors as may be appropriate. This committee met one time during UCI's fiscal year ended September 30, 2001.
Compensation Committee
The Compensation Committee consists of Messrs Adams and Potok. This committee monitors UCI's 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 UCI's fiscal year ended September 30, 2001.
Revenue Enhancement Committee
The Revenue Enhancement Committee consists of Messrs. Adams, Faulds and Potok. This committee monitors UCI's ancillary and complementary services, and makes recommendations to the Board of Directors with respect to changes in such existing services. This committee did not meet during UCI's fiscal year ended September 30, 2001.
Item 11.
Item 11. Executive Compensation
The following table sets forth the total compensation earned during the fiscal year ended September 30, 2001 and during each of the two prior fiscal years by the President and Chief Executive Officer of UCI and the executive officers of UCI whose annual compensation from UCI exceeded $100,000 for all services provided to UCI. No other executive officer of the Company earned compensation in excess of $100,000 for services provided to the Company in any of the three fiscal years reflected in the table.
(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 the cost to UCI of benefits furnished to certain officers that were extended in connection with the conduct of UCI's 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) Amounts included under the heading "All Other Compensation" are comprised of premiums for long-term disability and life insurance provided by UCI for the benefit of Dr. McFarland.
(3) For services performed by Dr. McFarland for UCI-SC, a wholly-owned subsidiary of UCI, Dr. McFarland received an annual salary of $157,500 during each of the fiscal years ended September 30, 2001, 2000, and 1999. For services performed by Dr. McFarland for DC-SC, an affiliated professional association wholly owned by Dr. McFarland that contracts with UCI-SC to provide all medical services at UCI's medical facilities, Dr. McFarland received an annual salary of $167,500 for each of the fiscal years ended September 30, 2001, 2000, and 1999, respectively.
(4) For services performed by Dr. Stout for UCI-SC, Dr. Stout received an annual salary of $50,000 in each of the fiscal years ended September 30, 2001, 2000, and 1999. For services performed by Dr. Stout for DC-SC, Dr. Stout received an annual salary of $160,000 in each of the fiscal years ended September 30, 2001, 2000, and 1999.
Fiscal Year-End Option Values
The following table sets forth certain information with respect to unexercised options to purchase Common Stock held at September 30, 2001. None of the named executive officers exercised any options during the fiscal year ended September 30, 2001. Additionally, no options were granted to any officer or director during the fiscal year ended September 30, 2001.
2001 FISCAL YEAR-END OPTION VALUES
Director Compensation
Non-employee directors are paid a fee of $500 for attendance at each meeting of the Board of Directors. Non-employee directors of UCI are reimbursed by UCI for all out-of-pocket expenses reasonably incurred by them in the discharge of their duties as directors, including out-of-pocket expenses incurred in attending meetings of the Board of Directors.
During the fiscal year ended September 30, 1996, UCI 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 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, 2000, there were stock options outstanding under the 1996 Non-Employee Plan for 10,000 shares, all of which were exercisable.
During the fiscal year ended September 30, 1997, UCI 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 four non-employee directors for the purchase of 20,000 shares of Common Stock at the fair market value as of the date of grant. Under this plan, 5,000 options were issued 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, 2000, there were stock options outstanding under the 1997 Non-Employee Plan for 15,000 shares, all of which were exercisable.
Employment Contracts
Effective August 19, 1999, Dr. McFarland entered into a five-year contract with UCI-SC that provides for annual compensation of $157,500, the use of one automobile and an incentive bonus payable at the end of the fiscal year, subject to the determination of the Board of Directors and based upon net income and gross revenue of the Company for the same year. Also, effective August 19, 1999, Dr. McFarland entered into a five-year contract with DC-SC that provides for annual compensation of $167,500.
Effective November 1, 1995, Dr. Stout entered into a five-year contract with UCI-SC that provides for annual compensation of $50,000. Also, effective November 1, 1995, Dr. Stout entered into a five-year contract with DC-SC that provides for annual compensation of $160,000.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended September 30, 2001, matters of executive compensation were decided by the Compensation Committee of the Board of Directors. The Compensation Committee is currently composed of Messrs. Adams and Potok.
Compensation Committee Report on Executive Compensation
The compensation of the Company's executive officers is generally determined by the Compensation Committee of the Board of Directors. The following report with respect to certain compensation paid or awarded to UCI's executive officers during the fiscal year ended September 30, 2001 is furnished by the directors who comprise the Compensation Committee.
General Policies. UCI's compensation program is intended to enable UCI to attract, motivate, reward and retain the management talent to achieve corporate objectives, and thereby increase shareholder value. It is UCI's policy to provide incentives to senior management to achieve both short-term and long-term objectives. To attain these objectives, UCI's executive compensation program is composed of a base salary and bonus, which is generally established for the executive officers in an employment agreement.
Base Salary. Base salaries for each of Dr. McFarland, 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 UCI and UCI's performance during prior periods. In evaluating overall UCI performance, the primary focus is upon not only UCI's financial performance, but also on the personal performance of the executives in areas such as quality assurance and personal development.
Incentive Compensation. Incentive compensation for each of Dr. McFarland and Dr. Stout is established in his employment agreement and is most influenced by UCI's profitability. It is completely "at risk" depending upon UCI's performance. Incentive compensation is reviewed periodically and from time to time by the Compensation Committee and adjusted accordingly.
Chief Executive Officer Compensation. Dr. McFarland is one of the original founders of UCI and has devoted his career to UCI since its inception in 1984. The Compensation Committee believes that Dr. McFarland's drive, dedication, commitment and knowledge have been vitally important to the successful and ongoing growth of UCI. Dr. McFarland's overall compensation for the fiscal year ended September 30, 2001 consisted of his base salary. In determining Dr. McFarland's compensation, the Compensation Committee evaluated Dr. McFarland's personal performance, the performance of UCI and Dr. McFarland's long-term commitment to the success of and ownership position in UCI.
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.
Report of Compensation Committee: Harold H. Adams, Jr. and Charles M. Potok
Performance Graph
The following graph compares cumulative total shareholder return of the 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 November 1, 1995.
GRAPH DEPICTED HERE
The members of the Peer Group are AmeriPath, Inc., Continucare Corporation, IntegraMed America, Inc., Pediatrix Medical Group, Inc., and PhyCor, Inc. 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 September 30, 1995 and 1996 prices of the Company's Common Stock used in computing the returns reflected above are the average of the high and low bid prices reported for the Common Stock during the fiscal quarter ended on such dates.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to UCI regarding the beneficial ownership of Common Stock as of December 31, 2001. Information is presented for (i) stockholders owning more than five percent of the outstanding Common Stock, (ii) each director and executive officer of UCI, individually, and (iii) all directors and executive officers of UCI, as a group. The percentages are calculated based on 9,650,515 shares of Common Stock outstanding on December 31, 2001.
(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 the Company 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 2370 Main Street, Tucker, Georgia 30084. (3) 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 CHC (2,006,442 shares) and CP&C (618,181 shares), each of which is a wholly-owned subsidiary of BCBS. (4) The business address of the named beneficial owner is 4416 Forest Drive, Columbia, SC 29206. Shares reflected in the table include 206,675 shares issuable pursuant to currently exercisable stock options. (5) All shares reflected as beneficially owned are held of record by MainStreet Healthcare Corporation. Mr. Johnson is Chairman, Chief Executive Officer and a principal shareholder of MainStreet Healthcare Corporation. (6) Includes 109,825 shares issuable pursuant to currently exercisable stock options. (7) All shares are issuable pursuant to currently exercisable stock options.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires the directors and officers of UCI to file reports of holdings and acquisitions in Common Stock with the Securities and Exchange Commission (the "SEC"). Based on the Company records and other information, UCI believes that all SEC filing requirements applicable to its directors and officers were complied with in respect to UCI's fiscal year ended September 30, 2001.
Item 13.
Item 13. Certain Relationships and Related Transactions
Administrative Services Agreements
UCI-SC has entered into an Administrative Services Agreement with DC-SC. UCI-GA has entered into Administrative Services Agreements with Doctor's Care of Tennessee, P.C. Under these Administrative Services Agreements, UCI-SC and UCI-GA perform all non-medical management of the UCI-PCs and have exclusive authority over all aspects of the business of the PCs (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 and UCI-GA 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 and UCI-GA provide all of the resources (systems, procedures and staffing) to bill third party payors or patients, and provide all of the resources (systems, procedures and staffing) for cash collection and management of accounts receivables, including custody of the lockbox where cash receipts are deposited. From the cash receipts, UCI-SC and UCI-GA pay all physician salaries, operating costs of the centers and operating costs of UCI-SC and UCI-GA. Compensation guidelines for the licensed medical professionals at the P.A.'s are set by UCI-SC and UCI-GA, and UCI-SC and UCI-GA establish guidelines for establishing, selecting, hiring and firing the licensed medical professionals. UCI-SC and UCI-GA also negotiate and execute substantially all of the provider contracts with third party payors, with the PCs executing certain of the contracts at the request of a minority of payors. Neither UCI-SC nor UCI-GA loans or otherwise advances funds to any P.A. for any purposes.
During UCI's fiscal years ended September 30, 2001 and 2000, the P.A.'s received an aggregate of approximately $38,117,000 and $39,953,000, respectively, in fees prior to deduction by the P.A.'s of their payroll and other related deductible costs covered under the Administrative Agreement and its predecessor agreement. For accounting purposes, the operations of the P.A.'s are combined with the operations of UCI and are reflected in the consolidated financial statements of the Company. Pursuant to the employment agreement between DC-SC and Dr. McFarland, Dr. McFarland serves as Executive Medical Director of the Centers, and is paid an annual salary for his services in such position. Pursuant to the employment agreement between DC-SC and Dr. Stout, Dr. Stout provides medical services to DC-SC, and is paid an annual salary for such services. Dr. McFarland is the Chief Executive Officer of UCI and is the President, sole director and sole owner of DC-SC. Dr. Stout is the Executive Vice President of Medical Affairs for the Company, UCI-SC and UCI-GA, and is the President, sole director and sole stockholder of Doctor's Care of Georgia, P.C. and Doctor's Care of Tennessee, P.C.
Medical Center Leases
At September 30, 2001, UCI-SC leased one medical center facility from CHC under an operating lease with a fifteen-year term expiring in 2009. The terms of this lease is believed 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. This lease has a five-year renewal option, and a rent guarantee by DC-SC. Total lease payments made by UCI-SC under this lease during the fiscal years ended September 30, 2001 and 2000 were $64,968 and $64,968, respectively.
The Doctor's Care Northeast facility is leased from a partnership in which Dr. McFarland is a general partner. The lease was renewed in October 1997 for a fifteen-year term. The terms of this lease are believed 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, 2001 and 2000 were $96,000 each year, plus utilities and real estate taxes.
Beginning in August 1999, the Doctor's Care facility in Tucker, Georgia was leased from A. Wayne Johnson. The terms of this lease are believed 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. The lease agreement expires in March 2008. Total lease payments made by UCI-SC under this lease during the fiscal years ended September 30, 2001 and 2000 were $57,600 each year.
Other Transactions with Related Parties
At December 31, 2001, CHC owned 2,006,442 shares of Common Stock and CP&C owned 618,181 shares of Common Stock, which combine to approximately 27.2 percent of the outstanding Common Stock. Each of CHC and CP&C is a wholly-owned subsidiary of BCBS. The following is a historical summary of purchases of Common Stock by BCBS subsidiaries directly from UCI.
The Common Stock acquired by CHC and CP&C directly from UCI 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. The shares acquired by CHC and CP&C were purchased at share prices below market value at the respective dates of purchase in part as a consequence of the lower issuance costs incurred by the Company 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. BCBS and its subsidiaries have the option to purchase as many shares as may be necessary for BCBS and its subsidiaries to obtain ownership of 47 percent of the outstanding Common Stock in the event that UCI issues additional stock to other parties (excluding shares issued to employees or directors of UCI).
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, 2001 is $532,000, which includes lease addenda. The terms of the lease purchase agreement are believed 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 $4,546 (including 11 percent interest) from April 1, 1995 to March 1, 2010, collateralized by certain accounts receivable. The terms of the agreement with CP&C are believed 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. The terms of the agreement with CHC are believed 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.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Consolidated Financial Statements ---------------------------------- The financial statements listed on the Index to Financial Statements on page 35 are filed as part of this report on Form 10-K.
(a) (2) Exhibits A listing of the exhibits to the Form 10-K is set forth on the Exhibit Index which immediately precedes such exhibits in this Form 10-K.
(b) Reports on Form 8-K There were no reports filed on Form 8-K for the quarter ended September 30, 2001.
The Company filed a Form 8-K on November 9, 2001 to report that the Company had filed, on November 2, 2001, voluntary petitions for protection under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of South Carolina. The Bankruptcy Court assumed jurisdiction over the Company, the Subsidiaries, and the Affiliates on November 2, 2001, and the existing officers and directors have been left in possession of the respective bankruptcy estates subject to the supervision and orders of the Bankruptcy Court.
The Company filed a Form 8-K on December 3, 2001 to report that on November 29, 2001, the Company notified PricewaterhouseCoopers LLP that it would not be retained by the Company to perform the audit of the financial statements of the Company for the fiscal year ended September 30, 2001. The decision to change independent accountants was approved by the Audit Committee of the Company. PricewaterhouseCoopers LLP had served as the Company's principal independent accountants for the fiscal years ended September 30, 1995 through 2000. The Company's decision to dismiss PricewaterhouseCoopers LLP for the fiscal year ended 2001 audit was not the result of any prior, current or expected disagreement with the Company.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Schedule II, Valuation and Qualifying Accounts, is omitted because the information is included in the financial statements and notes.
Report of Independent Accountants
To the Board of Directors and Stockholders of UCI Medical Affiliates, Inc.
We have audited the accompanying consolidated balance sheet of UCI Medical Affiliates, Inc. and its subsidiaries (the "Company") as of September 30, 2001, and the related consolidated statement of operations, changes in stockholders' equity, and cash flows for the year then ended. 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 audit. The financial statements of UCI Medical Affiliates, Inc. as of September 30, 2000 and 1999, were audited by other auditors whose report dated December 27, 2000 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides 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, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a current year net loss, an accumulated deficit, and a working capital deficiency. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ SCOTT MCELVEEN, LLP
Columbia, South Carolina January 15, 2002 .
SIGNED ORIGINAL ON SCOTT MCELVEEN LETTERHEAD IS ON FILE IN THE CORPORATE OFFICE OF UCI MEDICAL AFFILIATES, INC.
Report of Independent Accountants
To the Board of Directors and Stockholders of UCI Medical Affiliates, Inc.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of UCI Medical Affiliates, Inc. and its subsidiaries (the "Company") at September 30, 2000, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a current year net loss, an accumulated deficit, and a working capital deficiency. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ PRICEWATERHOUSECOOPERS, LLP
December 27, 2000 Charlotte, North Carolina
ORIGINAL SIGNED OPINION IS ON FILE WITH UCI MEDICAL AFFILIATES, INC.
UCI Medical Affiliates, Inc. Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
UCI Medical Affiliates, Inc. Consolidated Statements of Operations
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, 2001
The accompanying notes are an integral part of these consolidated financial statements.
UCI Medical Affiliates, Inc. Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.
UCI MEDICAL AFFILIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
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"), UCI Medical Affiliates of Georgia, Inc. ("UCI-GA"), Doctor's Care, P.A., Doctor's Care of Georgia, P.C., and Doctor's Care of Tennessee, P.C. (the three together as the "P.A." and together with UCI, UCI-SC and UCI-GA, 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 services agreements with the P.A. which operate the medical practices. Consolidation of the financial statements is required under Emerging Issues Task Force (EITF) 97-2 as a consequence of the nominee shareholder arrangement that exists with respect to each of the P.A.'s. In each case, the nominee (and sole) shareholder of the P.A. has entered into an agreement with UCI-SC or UCI-GA, as applicable, which satisfies the requirements set forth in footnote 1 of EITF 97-2. Under the agreement, UCI-SC or UCI-GA, as applicable, in its sole discretion, can effect a change in the nominee shareholder at any time for a payment of $100 from the new nominee shareholder to the old nominee shareholder, with no limits placed on the identity of any new nominee shareholder and no adverse impact resulting to any of UCI-SC, UCI-GA or the P.A. resulting from such change.
In addition to the nominee shareholder arrangements described above, each of UCI-SC and UCI-GA have entered into Administrative Service Agreements with the P.A.'s. As a consequence of the nominee shareholder arrangements and the Administrative Service Agreements, the Company has a long-term financial interest in the affiliated practices of the P.A.'s through the Administrative Services Agreement, the Company has exclusive authority over decision making relating to all major on-going operations. The Company establishes annual operating and capital budgets for the P.A. and compensation guidelines for the licensed medical professionals. The Administrative Services Agreements have an initial term of forty years. According to EITF 97-2 the application of Financial Accounting Standards Board ("FASB") Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and APB No. 16 (Business Combinations), the Company must consolidate the results of the affiliated practices with those of the Company. All significant intercompany accounts and transactions are eliminated in consolidation, including management fees.
The method of computing the management fees are based on billings of the affiliated practices less the amounts necessary to pay professional compensation and other professional expenses. In all cases, these fees are meant to compensate the Company for expenses incurred in providing covered services plus a profit. These interests are unilaterally salable and transferable by the Company and fluctuate based upon the actual performance of the operations of the professional corporation.
The P.A. enters into employment agreements with physicians for terms ranging from one to ten years. All employment agreements have clauses that allow for early termination of the agreement if certain events occur such as the loss of a medical license.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates and assumptions. Significant estimates are discussed in these footnotes, as applicable.
Medical Supplies and Drug Inventory
The inventory of medical supplies and drugs is carried at the lower of average cost (first in, first out) or market.
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 three to thirty 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.
Intangible Assets
During fiscal year 1998, the Company changed prospectively the estimated life recorded on all goodwill to a maximum life of 15 years.
Long-Lived Assets
The Company periodically evaluates whether later events and circumstances have occurred that indicate that the remaining balance of long-lived assets including goodwill and property and equipment may not be recoverable or that the remaining useful life may warrant revision. The Company's evaluation is performed at the individual center level. When external factors indicate that a long-lived asset should be evaluated for possible impairment, the Company uses an estimate of the related center's undiscounted cash flows to determine if an impairment exists. If an impairment exists, it is measured based on the difference between the carrying amount and fair value of the sums of expected future discounted cash flows. Examples of external factors that are considered in evaluation of possible impairment include significant changes in the third party payor reimbursement rates and unusual turnover or licensure difficulties of clinical staff at a center.
Revenue Recognition
Revenue is recognized at estimated net amounts to be received from 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. Third parties are billed at the discounted amounts. As such, estimates of outstanding contractual adjustments or any type of third party settlements of contractual adjustments are not necessary.
Income (Loss) Per Share
The computation of basic income (loss) per share is based on the weighted average number of common shares outstanding during the period. Diluted income per share is similar to basic income (loss) per share except that the weighted average common shares outstanding is increased to include the number of shares that would have been outstanding had the dilutive potential common shares been issued, such as common stock options and warrants.
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 (benefit) 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.
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, 2001 and 2000. 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 of Financial Accounting Standards No. ("SFAS") 131, "Disclosure about Segments of an Enterprise and Related Information," in fiscal year 1999. SFAS No. 131 requires companies to report financial and descriptive information about their reportable operating segments, including segment profit or loss, certain specific revenue and expense items, and segment assets, as well as information about the revenues derived from the Company's products and services, the countries in which the Company earns revenues and holds assets, and major customers. This statement also requires companies that have a single reportable segment to disclose information about products and services, information about geographic areas, and information about major customers. This statement requires the use of the management approach to determine the information to be reported. The management approach is based on the way management organizes the enterprise to assess performance and make operating decisions regarding the allocation of resources. It is management's opinion that, at this time, UCI has several operating segments, however, only one reportable segment. The following discussion sets forth the required disclosures regarding single segment information.
UCI provides nonmedical management and administrative services for a network of 36-freestanding medical centers, 34 of which are located throughout South Carolina and two are located in Knoxville, Tennessee (29 operating as Doctor's Care in South Carolina, one as Doctor's Care in Knoxville, Tennessee, five as Progressive Physical Therapy Services in South Carolina, and one as Progressive Physical Therapy Services in Knoxville, Tennessee.
Recent Pronouncements
In July 2001, FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination, whether acquired individually or with a group of other assets, and the accounting and reporting for goodwill and other intangibles subsequent to their acquisition. These standards require all future business combinations to be accounted for using the purchase method of accounting. Goodwill will no longer be amortized but instead will be subject to impairment tests, at least annually. UCI has elected to adopt SFAS No. 141 and SFAS No. 142 on a prospective basis as of October 1, 2001; however, certain provisions of these new standards also apply to any acquisitions concluded subsequent to June 30, 2001. As a result of implementing these new standards, UCI will discontinue the amortization of goodwill as of September 30, 2001. Management believes the adoption of this standard will have a material impact on its financial statements in that its income before taxes will be increased by an amount equal to the amortization expenses that would have otherwise been charged to earnings under current accounting standards, approximately $450,000 annually. Additionally, UCI's future earnings may periodically be affected in a materially adverse manner should particular segments of its goodwill balances become impaired pursuant to the valuation methodology.
2. Going Concern Matters
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, the Company has a working capital deficiency and an accumulated deficit of approximately $6,245,000 and $1,204,000, respectively at September 30, 2001. Ultimately, the Company's viability as a going concern is dependent upon its ability to continue to generate positive cash flows from operations, maintain adequate working capital and obtain satisfactory long-term financing. However, there can be no assurances that the Company will be successful in refinancing or renewing outstanding debt instruments.
The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company plans include the following, although it is not possible to predict the ultimate outcome of the Company's efforts. The closure of the Atlanta centers, which were unprofitable, had an immediate positive offset on the Company in the fourth quarter of fiscal year 2000. Management expects improvement to continue into fiscal year 2002 and beyond. However, there can be no assurances that these improvements will continue.
3.
Property and Equipment
Property and equipment consists of the following at September 30:
At September 30, 2001 and 2000, capitalized leased equipment included above amounted to approximately $1,414,000 and $1,829,000, net of accumulated amortization of $841,000 and $873,000, respectively.
Depreciation expense equaled $1,093,142, $1,167,676, and $1,209,262 for the years ended September 30, 2001, 2000, and 1999, respectively.
4. Income Taxes
The components of the (benefit) provision for income taxes for the years ended September 30 are as follows:
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, 2001, 2000, and 1999, the Company's deferred tax assets (liabilities) and the related valuation allowances are as follows:
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:
At September 30, 2001, the Company has net tax operating loss (NOL) carryforwards expiring in the following years ending September 30,
During the year ended September 30, 1996, the Company experienced an ownership change, which limits the amount of net operating losses the Company may use on an annual basis for income tax purposes for years with NOL's that expire prior to 2011. The Company may use $893,507 of net operating losses on an annual basis.
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.
A valuation allowance of $7.0 million and $7.6 million at September 30, 2001 and 2000, respectively, remained necessary in the judgement of management because the factors noted above (i.e. forecasts) did not support the utilization of less than a full valuation allowance.
5. Long-Term Debt
Long-term debt consists of the following at September 30:
The MainStreet note to a financial institution has been classified as current due to payment term violations at September 30, 2001.
Aggregate maturities of notes payable and capital leases are as follows:
6. 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. Effective January 1, 1997, the Company increased its matching contribution from 50% to 75% of each employee's contribution up to a maximum of 3.75% of the employee's earnings. The Company's matching contributions were $226,656, $221,966, and $159,201 in fiscal years 2001, 2000, and 1999, respectively.
During June 1997, the Company's Board of Directors approved the UCI/Doctor's 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 corporation as a whole. Under the Plan, key employees may defer a portion of their after tax earnings with the Company matching two times the employee's contribution percentage. The Company's matching contribution was $114,507, $65,112, and $49,640 in fiscal years 2001, 2000 and 1999, 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, 2001, there were stock options outstanding under the 1984 Plan for 11,100 shares at $.25 per share, all of which were exercisable.
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.
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 four non-employee directors for the purchase of 20,000 shares of the Company's common stock at the fair market value of the date of grant. Under this plan, 5,000 options were issued and are outstanding as of September 30, 1998 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.
Please refer to Note 7, "Stockholders' Equity" for activity information regarding these four stock option plans.
7. 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. (Please refer also to Note 6, "Employee Benefit Plans.")
The Company has not granted options under any plans during fiscal years 2001, 2000 and 1999 and there have been no shares exercised during 2001, 2000, or 1999.
The following table summarizes the weighted average exercise price of stock options exercisable at the end of each of the three previous fiscal years:
The following table summarizes options outstanding and exercisable by price range as of September 30, 2001:
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. Had compensation costs for the Company's stock option plans been determined based on the fair value at the grant date for awards in fiscal 2001, 2000 and 1999 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
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. Two hundred fifty thousand (250,000) warrants were issued during the year ended September 30, 1997 and cancelled during the year ended September 30, 1998, in connection with consulting and financial analysis services to be rendered (i.e., financial analyst report, etc.). 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 in fiscal years ended September 30, 2000 or September 30, 2001.
The following is a schedule of warrants issued and outstanding during the years ended September 30, 2001, 2000 and 1999:
8. 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, 2001, are as follows:
Total rental expense under operating leases for fiscal 2001, 2000, and 1999 was approximately $2,907,963, $2,708,000, and $2,510,000, respectively.
9. Related Party Transactions
Relationship between UCI-SC and UCI-GA and the P.A.s
Pursuant to agreements between UCI-SC, UCI-GA and the P.A.'s, UCI-SC and UCI-GA provide non-medical management services and personnel, facilities, equipment and other assets to the Centers. UCI-SC and UCI-GA guarantee the compensation of the physicians employed by the P.A.'s. The agreements also allow UCI-SC and UCI-GA to negotiate contracts with HMOs and other organizations for the provision of medical services by the P.A.'s physicians. Under the terms of the agreement, the P.A.'s assign all revenue generated from providing medical services to UCI-SC or UCI-GA after paying physician salaries and the cost of narcotic drugs held by the P.A.'s. The South Carolina P.A. is owned by M.F. McFarland, III, M.D. Dr. McFarland is also President, Chief Executive Officer and Chairman of UCI, UCI-SC and UCI-GA. The Georgia and Tennessee P.A.'s are owned by D. Michael Stout, M.D., who is also the Executive Vice President of Medical Affairs for UCI, UCI-SC and UCI-GA.
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, 2001, CHC owned 2,006,442 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 27% of the Company's outstanding common stock.
Facility Leases
At September 30, 2001, UCI-SC leases one medical center facility from CHC under an operating lease with a fifteen-year term expiring in 2008. This lease has a five year renewal option, and a rent guarantee by the South Carolina P.A. Total lease payments made by UCI-SC under this lease during the Company's fiscal years ended September 30, 2001, 2000, and 1999 were $64,968 each year.
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, 2001, 2000 and 1999 were $153,600, $153,600, and $103,200, respectively.
One medical facility operated by UCI-SC is or was leased from physician employees of the P.A.'s. Total lease payments made by UCI-SC under these leases during the Company's fiscal years ended September 30, 2001, 2000, and 1999 were $49,250, $49,250, and $205,981, respectively.
Other Transactions with Related Parties
At September 30, 2001, BCBS and its subsidiaries control 2,624,623 shares, or approximately 27% 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 47% 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, 2001 is $546,000.
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 year 2001, 2000, and 1999, the Company paid BCBS and its subsidiaries $110,295, $170,517, and $208,000, respectively, in interest.
Revenues generated from billings to BCBS and its subsidiaries totaled approximately 29%, 26%, and 18% of the Company's total revenues for fiscal years 2001, 2000, and 1999.
10. Income (Loss) Per Share
The calculation of basic income (loss) per share is based on the weighted average number of shares outstanding (9,650,515 in fiscal 2001, 9,650,515 in fiscal 2000, and 8,536,720 in fiscal 1999). Fully diluted weighted average common shares outstanding during fiscal year 2001 were 9,653,728. Warrants and options to purchase 751,425 shares, 826,425 shares, and 903,050 shares of common stock were excluded from the calculation at September 30, 2001, September 30, 2000 and September 30, 1999, respectively, because of their antidilutive effect.
11. 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 6% 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.
12. 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.
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, 2001, and management intends to vigorously defend the Company in such matters. As of September 30, 2001, a default judgment in the approximate amount of $233,000 had been rendered against the Company for supplies and services that the plaintiff claims had not been paid by the Company. The Company's accrued expenses include an adequate reserve for the payable should the Company lose in its defenses. While the ultimate results cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial position or results of operations of the Company.
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.
13. Supplemental Cash Flow Information
Supplemental Disclosure of Cash Flow Information
The Company made interest payments of $1,447,045, $1,682,329, and $1,374,364, in the years ended September 30, 2001, 2000, and 1999, respectively. The Company made no income tax payments in the years ended September 30, 2001, 2000, and 1999, respectively.
Supplemental Non-Cash Financing Activities
Capital lease obligations of $0, 0, and $255,862, were incurred in fiscal 2001, 2000, and 1999.
14. 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. Even though management has made changes to the staffing and marketing focus on these two centers and now believes they are on the track to meeting goals and profitability in the next few months, the goodwill was considered impaired and was written off at September 30, 2001. 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 $753,000.
Effective June 30, 2000, the Company closed its Atlanta physician practices. The performance of these centers, which were originally acquired in May 1998, did not meet the expectations of the Company and the Company was no longer committed to the Georgia market. As a result of the decision to close these centers coupled with the fact that the remaining projected undiscounted cash flows were less than the carrying value of the long-lived assets and goodwill for these centers, the Company recorded an impairment in the quarter ended March 31, 2000 of $3,567,376 to reduce the goodwill to its fair value.
Additionally, the Company has incurred and expects to incur additional costs associated with the decision to close the Atlanta centers. These costs relate primarily to exiting certain lease obligations and paying severance benefits to certain employees at the closed locations. Severance costs of $185,000 and lease obligations, net of estimated sub-lease income, of $376,000 are included in the line item Realignment and Impairment Charges. At September 30, 2000, $242,000 remains accrued and unpaid relating to these lease obligations. All severance has been paid as of September 30, 2001.
In the fourth quarter of fiscal year 1998, the Company recorded a charge of $4,307,020 for the impairment of goodwill and the accrual of certain estimated operating lease obligations. The impairment charge of $3,702,546 is related to a write-off of $672,322 of goodwill impairment associated with Center closures, $1,808,504 of goodwill impairment of Centers sold or which the Company had agreed to sell as of September 30, 1998, $969,720 related to goodwill impairment on two operating Centers and $252,000 related to changing the estimated life on all goodwill acquired prior to September 30, 1994 from 30 years to 15 years. The impairment includes a charge of $1,668,000 related to the sale of the Family Medical Division, consisting of the Springwood Lake Family Practice, Midtown Family Practice and the Woodhill Family Practice. The Company agreed to sell the facilities back to the physicians in September, 1998. The Centers were purchased from the physicians in September 1997. The closing of the sale occurred effective November 1, 1998. The impairment charge was based upon the estimated fair market value of consideration to be received from the sale less directly related costs of sale.
In addition, the Company accrued $599,975 of estimated operating lease obligations related to closed Centers (this amount is included in the operating cost line item in fiscal year 1998). The leasing obligation will be paid over a remaining term ranging from one to fourteen years. During fiscal year 1999, the Company changed its estimated lease obligation by $329,094 when three landlords released the Company from its obligation and during fiscal year 2000, the Company changed its estimate by $29,500 relating to the one remaining lease obligation.
At the time management decides to close a center, management records an accrual for the remaining estimated net lease obligations that will be incurred by the Company. The accrual represents management's best estimate of the likely events that could occur, which include estimates for lease termination, fees, or estimated sub rental income. The estimate is based upon an assessment of the market conditions at the specific center, the estimated sub rental revenues, and the past experience of the Company. The Company reviews the net lease obligations quarterly and revises estimates as additional facts and circumstances require adjustment. The Company has accrued at September 30, 2001 an estimate of $96,000 for net lease obligations, as discussed above.
A schedule of total obligations without consideration of management's estimates for early terminations and sublease rentals not subject to long-term commitments is as follows at September 30, 2001:
15. Chapter 11 Bankruptcy Filing
On November 2, 2001, the Company (the "Debtors") filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court"). The Debtors remain in possession of their properties and assets and management of the Company continues to operate the business of the Debtors as a debtor-in-possession. As a debtor-in-possession, the Company is authorized to continue to operate its businesses, but may not engage in transactions outside the ordinary course of business without the approval, after notice and an opportunity for a hearing, of the Bankruptcy Court. Pursuant to the automatic stay provisions of the Bankruptcy Code, all actions to collect pre-petition indebtedness of the Debtors, as well as most other pending litigation against the Debtors are currently stayed. In addition, as debtor-in-possession, the Debtors have the right, subject to the approval of the Bankruptcy Court and certain other conditions, to assume or reject any pre-petition executory contracts or unexpired leases.
The Bankruptcy Court has approved payment of certain pre-petition liabilities, such as employee wages and benefits, and settlement of certain trade payable claims. In addition, the Bankruptcy Court has allowed for the retention of legal and financial professionals to advise in the bankruptcy proceedings.
The Company presently intends to reorganize the Company's business and restructure the Company's liabilities through a plan of reorganization to be filed with the Bankruptcy Court. In connection with the development of a plan or plans of reorganization alternatives, the Company will evaluate any and all proposals to maximize the value of the Debtors.
Currently, it is not possible to predict with certainty the length of time the Company will operate under the protection of Chapter 11, the outcome of the Chapter 11 proceedings in general, or the effect of the proceedings on the business of the Company or on the interests of the various creditors and security holders. Under the priority scheme established by the Bankruptcy Code, certain post-petition liabilities and pre-petition liabilities need to be satisfied before shareholders can receive any distribution. The ultimate recovery to shareholders, if any, will not be determined until confirmation of a plan of reorganization. There can be no assurance as to what value, if any, will be ascribed to the Company's common stock in the bankruptcy proceedings.
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.
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.
UCI MEDICAL AFFILIATES, INC. EXHIBIT INDEX