-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BLNbhUljaOvj0twJPt2zQIiDIaZ4aJe5pAj5j6H3dQ9+equ7R6VhCeJ3SG5AOsfo +bknz1hzjhZfxVZArREJDw== 0000737561-99-000023.txt : 19991229 0000737561-99-000023.hdr.sgml : 19991229 ACCESSION NUMBER: 0000737561-99-000023 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UCI MEDICAL AFFILIATES INC CENTRAL INDEX KEY: 0000737561 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 592225346 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13265 FILM NUMBER: 99781800 BUSINESS ADDRESS: STREET 1: 1901 MAIN ST MAIL CODE 1105 STREET 2: STE 1200 CITY: COLUMBIA STATE: SC ZIP: 29201 BUSINESS PHONE: 8032523661 MAIL ADDRESS: STREET 1: 1901 MAIN ST MAIL CODE 1105 STREET 2: SUITE 1200 CITY: COLUMBIA STATE: SC ZIP: 29201 10-K 1 FORM 10-K FOR UCI MEDICAL AFFILIATES, INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) ( X ) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1999 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _________________ Commission File Number: 0-13265 UCI MEDICAL AFFILIATES, INC. (Name of Small Business Issuer in its charter) Delaware 59-2225346 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number) 1901 Main Street, Suite 1200, Mail Code 1105, Columbia, SC 29201 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (803) 252-3661 ---------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.05 par value ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of voting stock held by nonaffiliates of the registrant on December 15, 1999, was approximately $1,762,000.* The number of shares outstanding of the registrant's common stock, $.05 par value, was 9,650,515 at December 15, 1999. Documents Incorporated by Reference Portions of the Registrant's Proxy Statement to be furnished in connection with its 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. * Calculated by excluding all shares held by officers, directors and controlling shareholder of registrant without conceding that all such persons are Affiliates of registrant for purposes of the federal securities laws. UCI MEDICAL AFFILIATES, INC. INDEX TO FORM 10-K PART I PAGE Item 1. Business.............................................................................................3 Item 2. Properties..........................................................................................11 Item 3. Legal Proceedings...................................................................................11 Item 4. Submission of Matters to a Vote of Security Holders.................................................11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................12 Item 6. Selected Financial Data.............................................................................13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........................................23 Item 8. Financial Statements and Supplementary Data.........................................................23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................23 PART III Item 10. Directors and Executive Officers of the Registrant..................................................24 Item 11. Executive Compensation..............................................................................24 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................24 Item 13. Certain Relationships and Related Transactions......................................................24 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................25
PART I Item 1. Business General UCI Medical Affiliates, Inc. ("UCI") is a Delaware corporation incorporated on August 25, 1982. Operating through its wholly-owned 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 40 freestanding medical centers (the "Centers") located throughout South Carolina, Georgia and Tennessee (28 operating as Doctor's Care in South Carolina, five as Doctor's Care in Georgia, two as Doctor's Care in Tennessee, and five as Progressive Physical Therapy Services in South Carolina). 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 Doctor's Care, P.A., Doctor's Care of Georgia, P.C. or Doctor's Care of Tennessee, P.C. (collectively 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, with the P.A.'s 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. The P.A. and UCI-SC share a common management team, and the Georgia and Tennessee P.C.'s and UCI-GA 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 Georgia and Tennessee P.C.'s 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. 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, Georgia and Tennessee. There are sixteen primary care Centers in the Columbia region (including four of the physical therapy offices), five in the Charleston region, four in the Myrtle Beach region, one in the Aiken region, seven in the Greenville-Spartanburg region (including the other physical therapy office), five in Georgia and two in Tennessee. The Company may consider further introduction of its medical model into neighboring states as management believes that the same conditions that led to the Company's growth to date exist in other states. Although management believes that expansion into neighboring states is possible, there can be no assurance that expansion into other states would be successful. 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: Routine care of general medical problems, including colds, flu, ear infections, hypertension, asthma, pneumonia and other conditions typically treated by primary care providers; Treatment of injuries, such as simple fractures, dislocations, sprains, bruises and cuts; Minor surgery, including suturing of lacerations and removal of cysts and foreign bodies; Diagnostic tests, such as x-rays, electrocardiograms, complete blood counts, urinalysis and various cultures; and 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 three largest health maintenance organizations ("HMOs") operating in South Carolina - Companion HealthCare Corporation, 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 1999: Percent of Percent of Payor Patient Visits Revenue - ------------------------------- ------------------- -------------- Patient Pay 18% 18% Employer Paid 15% 9% HMO 11% 9% Workers Compensation 8% 16% Medicare/Medicaid 7% 6% Managed Care Insurance 34% 31% Other (Commercial Indemnity, Champus, etc.) 7% 11% In accordance with the Administrative Services Agreements described above, UCI-SC and UCI-GA, as the agents for the P.A.'s, process all billings and capitation payments for the P.A.'s. When the billings and capitation 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 billings and capitation 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 either a discounted fee-for-service basis or through capitation payments based on the number of members covered, regardless of the amount of necessary medical care required within the covered benefit period. The Company negotiates contracts with one significant HMO for the P.A.s' physicians to provide health care on a capitated reimbursement basis. Under this contract, which typically is automatically renewed on an annual basis, the P.A. physicians provide virtually all covered primary care services in exchange for a fixed monthly capitation payment from the HMO for each member who chooses a P.A. physician as his or her primary care physician. Note that the Company is only capitated for and obligated to provide the primary care services for the patient. The Company is not at risk for specialty care or hospital services. The capitation amount is fixed depending upon the age and sex of the HMO enrollee. Contracts with capitated HMOs accounted for approximately 3% of the Company's net revenues in fiscal year 1999. To the extent that enrollees require more care than is anticipated, aggregate capitation payments may be insufficient to cover the costs associated with the treatment of enrollees. Neither of the contracts currently in place at the Company has been determined to be insufficient to cover related costs of treatment. Higher capitation rates are typically received for senior patients because their medical needs are generally greater and consequently the cost of covered care is higher. 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 substantially increased its 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 PA's pursuant to contracts with the Company's wholly-owned subsidiaries. The PA's are organized so that all physician services are offered by the physicians who are employed by the PA'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 Agreements with each of the PA's operating in Georgia and Tennessee pursuant to which UCI-SC and UCI-GA, as applicable, perform all non-medical management of the applicable PA's and have exclusive authority over all aspects of the business of the PA'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 PA'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 Georgia, South Carolina and Tennessee. Georgia, 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. Georgia Georgia's "Patient Self-Referral Act of 1993" forbids a health care provider from referring a patient for the provision of designated health services to an entity in which the provider has an investment interest. Designated health services are defined as clinical laboratory services, physical therapy services, rehabilitation services, diagnostic imaging services, pharmaceutical services, durable medical equipment, home infusion therapy services (including related pharmaceuticals and equipment), home health care services, and outpatient surgical services. Under the Company's current operations, the Company does not believe it is an entity providing designated health services for purposes of Georgia's Patient Self-Referral Act. Further, the Company believes that the Georgia Patient Self-Referral Act does not prohibit referrals for designated health services by providers employed by the PA in Georgia, including referrals to physical therapy centers, because the health care providers that refer patients for designated health services are not investors in the Centers except the sole physician shareholder of the PA in Georgia. The Company believes that referrals by the sole physician shareholder of the PA are not within the definition of referrals and would not be prohibited under Georgia law. Georgia's Patient Self-Referral Act also prohibits the payment of any consideration which is intended to compensate a person for a referral. This prohibition applies to all payors. The Company believes that all payments between the Company and the Centers are reasonable compensation for services rendered and are not intended as compensation for referrals. 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 PA. There are no provider investors in the PA 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 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 PA. There are no provider investors in the PA that refer patients for designated health care services except the sole physician shareholder of the PA. The Company believes that referrals by the sole shareholder of the PA 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 PA'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. Under Georgia law, pursuant to regulations issued by the Georgia Insurance Commissioner in 1996, a provider sponsored health care corporation may obtain a certificate of authority to establish, maintain and operate one or more health plans to provide service to enrollees if the corporation has an initial net worth of one million dollars and meets certain filing and administrative requirements. The Company believes that the acceptance of capitated payments by the Centers under managed care agreements with payors does not constitute the operation of a health plan that would require the Company to obtain a certificate of authority under Georgia law. 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, Georgia 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 Georgia, 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, 1999, the Company had 672 employees (455 on a full-time equivalent basis). This includes 121 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. 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. Four Centers are leased from Companion HealthCare Corporation and one Center is leased from Companion Property and Casualty Insurance Company, principal shareholders of the Company. Three of the Centers are leased from physician employees of the P.A.'s. The Company's Centers are broadly distributed throughout the states of South Carolina, Georgia and Tennessee. There are 16 primary care Centers in the Columbia, South Carolina region (including four physical therapy offices), five in the Charleston, South Carolina region, 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 of the physical therapy offices), five in the Atlanta, Georgia region and two in the Knoxville, Tennessee region. The Company's corporate offices are located in downtown Columbia, South Carolina in 13,000 square feet of leased space. The Centers are all in free-standing buildings in good repair. 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. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II 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 NASDAQ SmallCap Market through October 20, 1998 and on the over-the-counter bulletin board thereafter. The quotations reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily reflect actual transactions. Bid Price ------------------------------- High Low ------- ------- Fiscal Year Ended September 30, 1999 1st quarter (10/01/98 - 12/31/98) $.56 $.41 2nd quarter (01/01/99 - 03/31/99) .59 .34 3rd quarter (04/01/99 - 06/30/99) .80 .45 4th quarter (07/01/99 - 09/30/99) .75 .50 Fiscal Year Ended September 30, 1998 1st quarter (10/01/97 - 12/31/97) 3.25 1.75 2nd quarter (01/01/98 - 03/31/98) 2.50 2.00 3rd quarter (04/01/98 - 06/30/98) 2.06 1.38 4th quarter (07/01/98 - 09/30/98) 1.47 .75 As of December 15, 1999, there were 484 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. Selected Financial Data STATEMENT OF OPERATIONS DATA - ------------------------------------------------------------------------------- (In thousands, except per share data) -------------------------------------------------------------------------- For the year ended September 30, -------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ----------- ----------- ------------ ---------- Revenues $40,470 $ 37,566 $27,925 $23,254 $17,987 Net income (loss) 910 (10,508) 466 (1,360) (84) Basic and diluted earnings (loss) per .11 .11 share (1.61) (.02) (.43) Basic weighted average number of shares outstanding 8,537 5,005 4,294 3,137 6,545 Diluted weighted average number of shares outstanding 8,544 6,545 5,005 4,294 3,137 BALANCE SHEET DATA - ----------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) ------------------------------------------------------------------------- At September 30, ------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------ ----------- ----------- ----------- --------- Working capital $(2,289) $(3,718) $ 2,921 $ 2,020 $ (383) Property and equipment, net 4,797 5,475 4,003 3,300 2,795 Total assets 23,354 26,202 21,082 15,733 10,216 Long-term debt 9,444 11,988 7,939 5,373 4,366 Stockholders' equity 6,373 9,488 7,822 3,253 987
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 PA'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 ten years. All employment agreements have clauses that allow for early termination of the agreement if certain events occur such as the loss of a medical license. Over 79% of the physicians employed by the P.A.'s are paid on an hourly basis for time scheduled and worked at the medical centers. The other physicians are salaried. Approximately 25 of the physicians have incentive compensation arrangements, however, no amounts were accrued or paid during the Company's three prior fiscal years that were significant. Any incentive compensation is based upon a percentage of non-ancillary collectible charges for services performed by a provider. Percentages range from 3% to 17% and vary by individual employment contract. As of September 30, 1999 and 1998, the P.A.'s employed 121 and 115 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, 1999, the Company has shown an increase in revenues. This growth is a direct result of actions taken by management to increase marketing efforts, to expand the state-wide network in South Carolina and to focus on the field of occupational and industrial medicine. 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. Comparison of Results of Operations for Fiscal Years 1999, 1998 and 1997 Revenues of $40,470,000 in fiscal year 1999 reflected an increase of 8% from the fiscal year 1998 revenues of $37,566,000 which reflected an increase of 35% from the amount reported for fiscal year 1997. The following reflects revenue trends from fiscal year 1995 through fiscal year 1999: For the year ended September 30, (in thousands) -------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ---------- ---------- ----------- ----------- $40,470 $37,566 Revenues $27,925 $23,254 $17,987 35,975 39,094 Operating Costs 26,466 21,525 18,180 4,495 Operating Margin (1,528) 1,459 1,729 (193)
The increase in revenue for fiscal year 1999 was approximately 8% and was derived almost exclusively from growth in "same center" patient visits and charges. Approximately $2,900,000 of this was the result of center maturation for the locations opened in the prior fiscal year and was offset somewhat by the revenues of the centers open in fiscal year 1998 and closed during fiscal year 1999. The number of centers operated by the Company decreased from 41 to 40 from September 30, 1998 to September 30, 1999. The orthopedic center in Columbia and one other Columbia, South Carolina location were closed due to poor performance. This was offset by the opening of the fifth physical therapy location. The difference in the revenues for the two centers closed in fiscal year 1999 and the one new location was not significant to the overall change in revenue from fiscal year 1998 to fiscal year 1999. The increase in revenue for fiscal year 1998 is attributable to a number of factors. The Company engaged in a significant expansion, increasing the number of primary care medical Centers from 33 to 41 (as of September 30, 1998). The expansion included the addition of fourteen Centers and the closure or divestiture of six Centers, for a net addition of eight Centers. The fourteen additions were: 1. Doctor's Care Conway Myrtle Beach, SC Region Opened as a start-up facility in November 1997. 2. Doctor's Care New Ellenton Aiken, SC Region Acquired from Primary Care Provider/Owner in November 1997. 3. Doctor's Care Ridgeview Columbia, SC Region Opened as a start-up facility in December 1997. 4. Progressive Therapy Bush River Columbia, SC Region Acquired from Therapist/Owner in October 1997. 5. Progressive Therapy West Columbia Columbia, SC Region Acquired from Therapist/Owner in October 1997. 6. Progressive Therapy Columbia East Columbia, SC Region Acquired from Therapist/Owner in October 1997. 7. Progressive Therapy Forest Acres Columbia, SC Region Opened as a start-up facility in November 1997. 8. Doctor's Care Stone Mountain Atlanta, GA Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 9. Doctor's Care Tucker Atlanta, GA Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 10. Doctor's Care Lawrenceville Atlanta, GA Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 11. Doctor's Care Austell Atlanta, GA Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 12. Doctor's Care Snellville Atlanta, GA Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 13. Doctor's Care Knoxville West Knoxville, TN Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee. 14. Doctor's Care Knoxville North Knoxville, TN Region Acquired in May 1998 from MainStreet Healthcare, Inc. as part of five centers in Atlanta, Georgia and two in Knoxville, Tennessee.
The six closures or divestitures were: 1. Doctor's Care Waccamaw Myrtle Beach, SC Region This acquired center (01/95) was closed effective September 1998 and the provider and patient records were transferred to the near-by Doctor's Care Strand Medical Center. 2. Doctor's Care Camden Columbia, SC Region This acquired center (09/97) was closed in August 1998 and the provider and patient records were transferred to near-by Doctor's Care Wateree. 3. Doctor's Surgical Group Columbia, SC Region This start-up facility (06/93) was closed effective February 1998. 4. Springwood Lake Family Practice Columbia, SC Region Acquired in August 1997 along with two more centers and were divested of (sold back to the seller on November 1, 1998) effective September 1998. 5. Woodhill Family Practice Columbia, SC Region Acquired in August 1997 along with two more centers and were divested of (sold back to the seller on November 1, 1998) effective September 1998. 6. Midtown Family Practice Columbia, SC Region Acquired in August 1997 along with two more centers and were divested of (sold back to the seller on November 1, 1998) effective September 1998.
The revenue from the increase in centers in fiscal year 1998 and from the full year of operations of the locations added in fiscal year 1997 represented the most significant portion of the revenue growth. Of the $9,641,000 in revenue growth, approximately $4,999,000 was from the fourteen locations opened during fiscal year 1998 and approximately $900,000 was the result of having the four locations opened during fiscal year 1997 operating for all of fiscal year 1998. The remainder of the revenue growth in fiscal year 1998 (approximately $3,742,000) was the result of two factors: 1. Approximately $2,960,000 was from revenue for centers acquired at the end of fiscal year 1997 and divested of on November 1, 1998, to be effective September 30, 1998 (Springwood Lake Family Practice, Woodhill Family Practice and Midtown Family Practice). 2. The remaining $782,000 in revenue growth represents approximately a three (3%) percent growth in "same center" patient visits and charges. 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 year 1999 compared to 19,000 in fiscal year 1998 and 20,000 in fiscal year 1997. One of the HMOs was a capitation scheme for payments and three pay on a discounted fee-for-service basis. 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. For fiscal year 1998, capitated revenue declined to $2,700,000 from $3,100,000 in fiscal year 1997. This decline was primarily the result of one of the "gatekeeper" HMO's (Companion) switching from a capitation payment scheme to a discounted fee for service scheme during the middle of fiscal year 1998. 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. The Company currently negotiates contracts with one significant HMO for the P.A.'s physicians to provide health care on a capitated reimbursement basis. Under this contract, which typically is automatically renewed on an annual basis, the P.A. physicians provide virtually all covered primary care services and receive a fixed monthly capitation payment from the HMOs for each member who chooses a P.A. physician as his or her primary care physician. The capitation amount is fixed depending upon the age and sex of the HMO enrollee. Contracts with capitated HMOs accounted for approximately 3% of the Company's net revenue in fiscal year 1999 compared to 7% in fiscal year 1998 and 11% in fiscal year 1997. To the extent that enrollees require more care than is anticipated, aggregate capitation payments may be insufficient to cover the costs associated with the treatment of enrollees. No capitation contracts currently in place at the Company have been determined to be insufficient to cover related costs of treatment. Higher capitation rates are typically received for senior patients because their medical needs are generally greater and consequently the cost of covered care is higher. Increased and sustained revenues in fiscal years 1999 and 1998 also reflect the Company's heightened focus on occupational medicine and industrial health services (these revenues are referred to as "employer paid" on the table below). Focused marketing materials, including quarterly newsletters for employers, were developed to spotlight the Company's services for industry. 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 increased to 509,000 in fiscal year 1999, from 497,000 in fiscal year 1998 and 393,000 in fiscal year 1997. The increase from fiscal year 1998 to fiscal year 1999 was achieved despite the net reduction of one location during the year due to center maturation and marketing efforts. Of the 104,000 increase in fiscal year 1998, 55,000 is attributable to the Centers opened during the fiscal year. A decrease in patient encounters in fiscal year 1998 is not believed to have resulted from the six center closures noted above due to timing (divestiture or closure in September 1998) or because the Company had a nearby operating location. No new significant competition entered the Company's market during fiscal year 1999. However, revenues were short of goals for fiscal years 1998 and 1997, due in part to the increased competition from hospitals and other providers in Columbia, Greenville, Myrtle Beach and Atlanta during fiscal year 1998 and in Columbia, Greenville, Myrtle Beach and Sumter during fiscal year 1997. In each of these areas, regional hospitals have acquired or opened new primary care physician practices that compete directly with the Company for patients. In each case, the hospital owner of the Company's competition is believed to have significantly greater resources than the Company. Management believes that such competition will continue into the future and plans to compete on a basis of quality service and accessibility. An operating margin of $4,495,000 was achieved in fiscal year 1999. This significant improvement 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, previously noted, 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. An operating deficit of $(1,528,000) was realized in fiscal year 1998 as compared to an operating margin of $1,459,000 in fiscal year 1997. This margin deterioration was primarily the result of the increased cost-cutting pressures being applied by managed care insurance payors that cover many of the Company's patients and to the incurred and accrued restructuring charges posted in fiscal year 1998 resulting from the closed or divested centers as discussed below (approximately $3,700,000 in total). The following table breaks out the Company's revenue and patient visits by revenue source for fiscal years 1999, 1998 and 1997. Percent of Percent of Revenue Payor Patient Visits ------------------------------------------- ------------------------ ----------------------- 1999 1998 1997 1999 1998 1997 ------- ------- -------- ------ ------- -------- 18 20 24 24 Patient Pay 18 18 15 11 Employer Paid 15 13 9 9 10 9 11 HMO 11 13 12 10 14 Workers Compensation 8 10 16 14 12 7 Medicare/Medicaid 7 11 6 7 24 28 Managed Care Insurance 34 27 31 30 7 6 5 11 10 5 Other (Commercial Indemnity, Champus, etc.)
As managed care plans attempt to cut costs, they typically increase the administrative burden of providers such as the Company by requiring referral approvals and by requesting hard copies of medical records before they will pay claims. The number of patients at the Company's Centers that are covered by a managed care plan versus a traditional indemnity plan continues to grow. Management expects this trend to continue. The operating margin deterioration during fiscal year 1998 and 1997 was also contributed to by the high costs of the six centers closed during fiscal year 1998 and the three centers closed during fiscal year 1997. Aggregate costs exceeded revenues by $770,000 at the six centers closed during the fiscal year 1998 and by $253,000 at the three centers closed during the fiscal year 1997. Five of the six centers closed during fiscal year 1998 were acquisitions and the closure or divestiture resulted in significant write-offs of intangible assets (goodwill) and/or the recognition of a loss on the divestiture. Bad debt expense, a component of operating costs, was approximately $2,289,000 (or approximately 6% of revenue) for fiscal year 1999; $2,978,000 (or approximately 8% of revenue) for fiscal year 1998; and approximately $1,106,000 (or approximately 4% of revenue) for fiscal year 1997. This increase is believed to be primarily due to the difficulties encountered in the collection of amounts associated with patients seen at the centers acquired during fiscal year 1998. Management is not yet certain if the collection difficulties being encountered will continue but intends to evaluate collectibility on a monthly basis. November 1, 1998, the Company sold the three centers of the Springwood Lake Family Practice that had been acquired approximately one year earlier in September 1997. The three centers were operated by the Company as Springwood Lake Family Practice, Woodhill Family Practice and Midtown Family Practice. These centers operated more along the lines of traditional family practices (taking appointments, doing hospital admissions, etc.) than the Company's other centers and had not been profitable. They were also a drain on cash flow to the Company of approximately $460,000 during fiscal year 1998. The time needed to correct these problems was determined to be excessive by the Company's management and these three centers were sold back to the former owners (providers). As of September 30, 1998, the Company recorded a loss on the disposition of approximately $1,668,000. This is a component of the line item Realignment and Other Expenses. 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 fourth quarter of fiscal year 1998, the above analysis resulted in an impairment change of approximately $1,642,000 to goodwill for centers that had been closed (i.e., Waccamaw and Camden) and for two underperforming centers. This is a component of the line item Realignment and Other Expenses. It should be noted that the Company also has launched medical centers as start-up operations, which have contributed in fiscal years 1999, 1998 and 1997 to the Company's overall cash used in operations. Costs of starting up new centers are expensed as incurred. Depreciation and amortization expense increased to $1,954,000 in fiscal year 1999, up from $1,950,000 in fiscal year 1998 and $1,250,000 in fiscal year 1997. This increase reflects higher depreciation expense as a result of significant leasehold improvements and equipment upgrades at a number of the Company's Centers, as well as an increase in amortization expense related to the intangible assets acquired from the Company's purchase of existing practices in Atlanta, Knoxville, Aiken and Columbia in fiscal year 1998 and in Greenville and Columbia in fiscal year 1997. Net interest expense increased to $1,472,000 in fiscal year 1999 from $1,464,000 in fiscal year 1998 and $813,000 in fiscal year 1997 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, and debt associated with the acquisitions noted above. In determining that it was more likely than not that the recorded deferred tax asset would be realized, management of the Company considered the following: Recent historical operating results. Lack of sufficient liquidity to support operations. The budgets and forecasts that management and the Board of Directors had adopted for the next five fiscal years including plans for expansion. The ability to utilize NOL's prior to their expiration. The potential limitation of NOL utilization in the event of a change in ownership. The generation of future taxable income in excess of income reported on the consolidated financial statements. A valuation allowance of $6.3 million and $6.6 million at September 30, 1999 and 1998, 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 $6.6 million at September 30, 1998, leaving no 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, an accumulated deficit, and the line of credit agreement which expires in March 2000 and the Company currently is in violation of a loan covenant related to its line of credit. 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 Company is currently seeking sources of financing from other financing sources with terms more suitable and favorable to the Company's financing requirements. The Company anticipates that a new financing arrangement will be in place prior to the expiration of the current line of credit agreement. The Company management believes that due to the improved financial results for 1999 and the existence of an adequate asset base, lenders will be interested in finalizing a financial agreement. The Company expects to have availability of the existing line of credit until the expiration date of the credit agreement. Results of Operations for the Three Months Ended September 30, 1999 as Compared to the Three Months Ended September 30, 1998: The following summarizes the fiscal 1999 fourth quarter results of operations as compared to the prior year: For the Three Months Ended (in 000's) September 30, 1999 September 30, 1998 ---------------------- ----------------------- Revenues $ 10,360 $ 10,941 9,907 13,345 Operating Costs (2,404) Operating Margin 453 General and Administrative Expenses 26 46 Realignment and Other Expenses 3,703 0 Depreciation and Amortization 600 486 Interest Expense, net 616 412 Benefit for Income Taxes (1,753) 0 (9,148) Net Income (loss) (471)
Revenues of $10,360,000 for the quarter ending September 30, 1999 reflect a decrease of five (5%) percent from those of the quarter ending September 30, 1998. As noted earlier, many of the centers closed during fiscal year 1998 were closed in the fourth quarter of that year and, therefore, produced some revenue. The increase in "same center" patient visits and charges due to center maturation was offset by the loss of the revenue from the centers open for parts of the fourth quarter of fiscal year 1998 but closed for all of the fourth quarter of fiscal year 1999. Patient encounters decreased to 125,000 in the fourth quarter of fiscal year 1999 from 137,000 in the fourth quarter of fiscal year 1998 due to the reduction in the number of centers as discussed above. The decreases in depreciation, amortization and interest expenses are all related to the divestitures and closures of the centers discussed above and the related realignment expenses posted in fiscal year 1998 (i.e., the write-off of goodwill). Financial Condition at September 30, 1999 and September 30, 1998 Cash and cash equivalents decreased by $270,000 from September 30, 1998 to September 30, 1999. Accounts receivable decreased from $8,789,000 at September 30, 1998 to $8,400,000 at September 30, 1999. This decrease was attributable to increased focus on collections at the Corporate billing department that involved a reorganization of functional duties and lower revenues in the fourth quarter of 1999 as compared to 1998. As the payor mix of the Company continues to change, the billing and collection functions will need to be continually modified and updated. 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. The reductions in long-term debt and accounts payable from September 30, 1998 to September 30, 1999 were the result of the overall improved operating results of the Company. 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. The Company has a $7,000,000 bank line of credit with an outstanding indebtedness of $2,678,000 at September 30, 1999. The availability under this line of credit is limited by accounts receivable type and age as defined in the agreement. As of the fiscal year end, the Company had borrowed approximately the maximum allowable amounts. The line of credit bears interest of prime plus 2.5% with a maturity of March 2000. (Prime rate was 8.25% as of September 30, 1999.) The line of credit is used to fund the working capital needs of the Company. At September 30, 1999, the Company is in default of a debt covenant related to the Line of Credit in regard to a net worth. The covenant requires that net worth of the Company not drop below $7,650,000. The Company believes that the financial institution does not intend to take action related to this default and continues to utilize the Line on a daily basis. This Line of Credit expires under its original terms on March 24, 2000 and the Company is currently in negotiations with its current lender and various other potential lenders to refinance this debt. As of September 30, 1999, the Company had no material commitments for capital expenditures or for acquisition or start-ups. Operating activities generated $2,645,000 of cash during fiscal year 1999, compared to using $1,495,000 during fiscal year 1998. This is indicative of the overall improvement in the operations of the Company due to the cost reductions, divestitures and closures discussed above. Investing activities used only $448,000 of cash during fiscal year 1999 compared with $1,399,000 used in fiscal year 1998 as a result of a slow-down in expansion activity. 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. The Company received $1,102,000 in cash during fiscal year 1998 resulting from private placements of stock which was used in part to manage the Company's rapid growth. Should additional needs arise, the Company may consider additional capital sources to obtain funding. 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, 1999 and 1998 by $2,289,000 and $3,718,000. The Year 2000 It is possible that the Company's currently installed computer systems, or other business systems, or those of the Company's vendors, working either alone or in conjunction with other software or systems, will not accept input of, store, manipulate or output dates in the years 1999, 2000 or thereafter without error or interruption (commonly known as the "Year 2000" problem). The Company has conducted a review of its business systems, including its computer systems, on a system-by-system basis, and has queried third parties with whom it conducts business as to their progress in identifying and addressing problems that their computer systems may face in correctly processing date information as the Year 2000 approaches and is reached. The Company has upgraded its general accounting systems (which includes invoicing, accounts receivable, payroll, etc.) to make the systems Year 2000 compliant. The Company estimates that the cost of this upgrade to the accounting systems was approximately $20,000. The Company has reviewed its information technology ("IT") hardware and software, including personal computers, application and network software for Year 2000 compliance readiness. The review process entailed evaluation of hardware/software and testing. The costs of the necessary upgrades were approximately $25,000. The Company's review of non-IT systems (including voice communications) is complete and the estimated costs to remedy non-IT systems was not material. The Company believes that its most significant internal risk posed by the Year 2000 Problem is the possibility of a failure of its accounting systems. If the accounting systems were to fail, the Company would have to implement manual processes, which may slow the timeliness of information needed to manage the business. As discussed above, the Company plans to avoid this risk through its recent upgrading of its accounting systems; however, there can be no assurance that such actions will avoid problems that may arise. The third parties whose Year 2000 problems could have the greatest effect on the Company are believed by the Company to be banks that maintain the Company's depository accounts' credit card processing systems (including related telecommunication systems), the companies which supply the Company with medical supplies, and the insurance company payors for the Company's patients' medical claims. There can be no assurance that the Company has identified all Year 2000 problems in its computer systems or those of third parties in advance of their occurrence or that the Company will be able to successfully remedy any problems that are discovered. The expenses of the Company's efforts to identify and address such problems, or the expenses or liabilities to which the Company may become subject as a result of such problems, could have a material adverse effect on the Company's business, financial condition and results of operations. Maintenance or modification costs will be expensed as incurred. 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 $5,500,000 of the Company's debt at September 30, 1999 was subject to fixed interest rates and principal payments. Approximately $4,000,000 of the Company's debt at September 30, 1999 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at September 30, 1999, the Company's interest expense on an annualized basis would increase approximately $40,000 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. Financial Statements and Supplementary Data Reference is made to the Index to Financial Statements on Page 25. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Information called for by Part III (Items 10, 11, 12 and 13) of this report on Form 10-K has been omitted as the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year ended September 30, 1999, a definitive Proxy Statement pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934. Such information will be set forth in such Proxy Statement and is incorporated herein by reference. Item 10. Directors and Executive Officers of the Registrant The information required by this Item is incorporated herein by reference to the Proxy Statement for the Company's forthcoming Annual Meeting of Shareholders. Item 11. Executive Compensation The information required by this Item is incorporated herein by reference to the Proxy Statement for the Company's forthcoming Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated herein by reference to the Proxy Statement for the Company's forthcoming Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions The information required by this Item is incorporated herein by reference to the Proxy Statement for the Company's forthcoming Annual Meeting of Shareholders. PART IV 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 26 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, 1999. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page(s) Report of Independent Accountants............................................................................27 Consolidated Balance Sheets at September 30, 1999 and 1998...................................................28 Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997.............................................................29 Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 1999, 1998 and 1997...............................................30 Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997.............................................................31 Notes to Consolidated Financial Statements................................................................32-51
Schedule II, Valuation and Qualifying Accounts, is omitted because the information is included in the financial statements and notes. Independent Auditor's Report December 9, 1999 To the Board of Directors and Stockholders of UCI Medical Affiliates, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with accounting principles generally accepted in the United States. 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, 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 the opinion expressed above. 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 an accumulated deficit, a working capital deficiency, the Company's working capital line of credit expires in March 2000, and the Company is currently in violation of a loan covenant related to the line of credit. 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 ORIGINAL SIGNED OPINION ON PRICEWATERHOUSECOOPERS LLP LETTERHEAD IS ON FILE WITH UCI MEDICAL AFFILIATES, INC. UCI Medical Affiliates, Inc. Consolidated Balance Sheets September 30, ---------------------------------------- 1999 1998 ------------------- ---------------- Assets Current assets Cash and cash equivalents $ 66,159 $ 335,923 Accounts receivable, less allowance for doubtful accounts of $1,482,522 and $3,758,771 8,399,743 8,788,620 Inventory 590,318 539,564 Prepaid expenses and other current assets 748,467 875,409 ------------------- ---------------- Total current assets 9,804,687 10,539,516 Property and equipment less accumulated depreciation of $4,921,458 and $3,762,865 4,796,643 5,475,051 Excess of cost over fair value of assets acquired, less accumulated amortization of $2,650,249 and $2,097,149 8,711,255 9,944,039 Other assets 41,500 243,677 ------------------- ---------------- Total Assets $ 23,354,085 $ 26,202,283 =================== ================ Liabilities and Stockholders' Equity Current liabilities Book overdraft $ 803,257 $ 1,128,917 Current portion of long-term debt 4,557,797 5,540,552 Current portion of long-term debt payable to employees 0 190,452 Accounts payable 3,341,712 4,154,106 Accrued salaries and payroll taxes 2,292,542 1,837,880 Other accrued liabilities 1,098,859 1,406,033 ------------------- ---------------- Total current liabilities 12,094,167 14,257,940 Long-term debt, net of current portion 4,886,435 5,755,502 Long-term debt payable to employees, net of current portion 0 501,783 Common stock to be issued 0 4,700,262 ------------------- ---------------- Total Liabilities 16,980,602 25,215,487 ------------------- ---------------- Commitments and contingencies (Note 13) Stockholders' Equity Preferred stock, par value $.01 per share: Authorized shares - 10,000,000; none issued 0 0 Common stock, par value $.05 per share: Authorized shares - 50,000,000 and 10,000,000 Issued and outstanding- 9,650,515 and 7,299,245 shares 482,526 364,962 Paid-in capital 21,723,628 17,364,263 Accumulated deficit (15,832,671) (16,742,429) ------------------- ---------------- Total Stockholders' Equity 6,373,483 986,796 ------------------- ---------------- Total Liabilities and Stockholders' Equity $ 23,354,085 $ 26,202,283 =================== ================
The accompanying notes are an integral part of these consolidated financial statements. UCI Medical Affiliates, Inc. Consolidated Statements of Operations For the Years Ended September 30, ----------------------------------------------------------------- 1999 1998 1997 ----------------- ------------------- ------------------- Revenues $ 40,470,462 $ 37,566,037 $ 27,924,772 Operating costs 35,975,055 39,094,276 26,466,294 ----------------- ------------------- ------------------- Operating margin 4,495,407 (1,528,239) 1,458,478 General and administrative expenses 94,431 113,172 153,445 Realignment and other expenses 0 3,702,546 0 Depreciation and amortization 1,954,109 1,950,148 1,250,349 ----------------- ------------------- ------------------- Income (loss) from operations 2,446,867 (7,294,105) 54,684 Other income (expenses) Interest expense, net of interest income (1,471,864) (1,463,792) (812,749) Gain (loss) on disposal of equipment (65,245) 1,936 8,809 ----------------- ------------------- ------------------- Other income (expense) (1,537,109) (1,461,856) (803,940) Income (loss) before income tax (expense) benefit 909,758 (8,755,961) (749,256) Income tax (expense) benefit 0 (1,752,182) 665,530 ================= =================== =================== Net income (loss) $ 909,758 $(10,508,143) $ (83,726) ================= =================== =================== Basic and diluted earnings (loss) per share $ $ (1.61) $ .11 (.02) ================= =================== =================== Basic weighted average common shares outstanding 8,536,720 6,545,016 5,005,081 ================= =================== =================== Diluted weighted average common shares outstanding 8,543,515 6,545,016 5,005,081 ================= =================== ===================
The accompanying notes are an integral part of these consolidated financial statements. UCI Medical Affiliates, Inc. Consolidated Statements of Changes in Stockholders' Equity Common Stock Paid-In Accumulated -------------------------------- Shares Par Value Capital Deficit Total ---------------- ------------- --------------- ------------------ ---------------- ---------------- ------------- --------------- ------------------ ---------------- Balance, September 30, 1996 4,807,807 $ 240,390 $ 13,732,393 $ (6,150,560) $ 7,822,223 ---------------- ------------- --------------- ------------------ ---------------- Net income (loss) (83,726) -- -- -- (83,726) Issuance of common stock 937,162 46,858 1,703,142 -- 1,750,000 Other -- (4) -- -- -- ---------------- ------------- --------------- ------------------ ---------------- Balance, September 30, 1997 5,744,965 287,248 15,435,535 (6,234,286) 9,488,497 ---------------- ------------- --------------- ------------------ ---------------- Net income (loss) (10,508,143) (10,508,143) -- -- -- Issuance of common stock 1,554,280 77,714 1,928,728 -- 2,006,442 ---------------- ------------- --------------- ------------------ ---------------- Balance, September 30, 1998 7,299,245 364,962 17,364,263 (16,742,429) 986,796 ---------------- ------------- --------------- ------------------ ---------------- Net income (loss) 909,758 909,758 -- -- -- Issuance of common stock 2,901,396 145,070 4,555,192 -- 4,700,262 Retirement of common stock (550,126) (27,506) (195,827) -- (223,333) ---------------- ------------- --------------- ------------------ ---------------- Balance, September 30, 1999 9,650,515 $ 482,526 $ 21,723,628 $ (15,832,671) $ 6,373,483 ================ ============= =============== ================== ================
The accompanying notes are an integral part of these consolidated financial statements. UCI Medical Affiliates, Inc. Consolidated Statements of Cash Flows For the Years Ended September 30, ----------------------------------------------------------- 1999 1998 1997 ------------------ ---------------- ---------------- Operating activities: Net income (loss) $ 909,758 $(10,508,143) $ (83,726) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: (Gain) loss on disposal of equipment 65,245 (1,936) (8,809) Provision for losses on accounts receivable 2,289,187 2,978,024 1,106,252 Depreciation and amortization 1,954,109 1,950,148 1,250,349 Deferred taxes 0 1,752,182 (700,000) Realignment and other expenses 0 3,724,215 0 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (1,900,310) (4,337,212) (2,679,489) (Increase) decrease in inventory (99,977) (40,466) (83,521) (Increase) decrease in prepaid expenses and other current assets 126,942 (256,092) (137,833) Increase (decrease) in accounts payable and accrued expenses (699,626) 3,244,172 876,253 ------------------ ---------------- ---------------- Cash provided by (used in) operating activities 2,645,328 (1,495,108) (460,524) ------------------ ---------------- ---------------- Investing activities: Purchases of property and equipment (617,566) (334,121) (531,941) Disposals of property and equipment 41,083 3,500 Acquisitions of goodwill (73,763) (1,090,978) (286,896) (Increase) decrease in other assets 202,177 22,701 11,042 ------------------ ---------------- ---------------- Cash used in investing activities (448,069) (1,398,898) (807,795) ------------------ ---------------- ---------------- Financing activities: Proceeds from issuance of common stock, net of redemptions 0 1,102,072 600,000 Net borrowings (payments) under line-of-credit agreement (767,704) 539,899 2,030,844 Proceeds from increase in long-term debt 0 2,091,232 280,000 Increase (decrease) in book overdraft (325,660) 1,122,243 218,837 Payments on long-term debt (1,373,659) (1,859,030) (1,865,533) ------------------ ---------------- ---------------- Cash provided by (used in) financing activities (2,467,023) 2,996,416 1,264,148 ------------------ ---------------- ---------------- Increase (decrease) in cash and cash equivalents (269,764) 102,410 (4,171) Cash and cash equivalents at beginning of year 335,923 233,513 237,684 ------------------ ---------------- ------------------ ---------------- ---------------- Cash and cash equivalents at end of year $ 66,159 $ 335,923 $ 233,513 ================== ================ ================
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 PA 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 PA and compensation guidelines for the licensed medical professionals. The Administrative Services Agreements have an initial term of forty years. According to EITF 97-2 the application of FASB Statement No. 94 (Consolidation of All Majority-Owned Subsidiaries), and APB No. 16 (Business Combinations), the Company must consolidate the results of the affiliated practices with those of the Company. All significant intercompany accounts and transactions are eliminated in consolidation, including management fees. The method of computing the management fees 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. Over 79% of the physicians employed by the P.A. are paid on an hourly basis for time scheduled and worked at the medical centers, while other physicians are salaried. Approximately 25 of the physicians have incentive compensation arrangements which are contractually based upon factors such as productivity, collections and quality. 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. The Company operates as one segment. 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 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 Prior to September 30, 1994, the excess of cost over fair value of assets acquired (goodwill) was amortized on the straight-line method over periods from 15 to 30 years. Since October 1, 1994, goodwill arising from acquisitions has been amortized on the straight line method over 15 years. During fiscal year 1998, the Company changed prospectively the estimated life recorded on all goodwill acquired prior to September 30, 1994 to a maximum life of 15 years. This reduced net income by approximately $252,000 for fiscal year 1998. 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 a 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. Capitation payments from payors are paid monthly and are recognized as revenue during the period in which enrollees are entitled to receive services. The Company recognizes capitation revenue from HMOs that contract with the Company for the delivery of health care services on a monthly basis. This capitation revenue is at the contractually agreed-upon per-member, per-month rates. Capitation revenue was approximately $1,400,000, $2,700,000, and $3,100,000 for the fiscal years ended September 30, 1999, 1998 and 1997, respectively. 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, 1999 and 1998. 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. Reclassifications Certain 1998 and 1997 amounts have been reclassified to conform with the 1999 presentation. Note 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, an accumulated deficit, a line of credit agreement which expires in March 2000, and the Company is currently in violation of a loan covenant related to the line of credit agreement. 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 Company is currently seeking sources of financing from other financing sources with terms more suitable and favorable to the Company's financing requirements. The Company anticipates that a new financing arrangement will be in place prior to the expiration of the current line of credit agreement. The Company's management believes that due to the improved financial results for 1999 and the existence of an adequate asset base, lenders will be interested in finalizing a financial agreement more favorable to the Company. The Company expects to have availability of the existing line of credit until the expiration date of the credit agreement. 3. Property and Equipment Property and equipment consists of the following at September 30: September 30, 1999 September 30, 1998 ------------------------------ --------------------------------- Useful Life Range Accum Accum (in years) Cost Depreciation Cost Depreciation 5-40 $412,750 $59,781 Building $ 437,583 $ 49,672 N/A 66,000 0 Land 66,000 0 5-39 1,128,841 694,406 Leasehold Improvements 1,055,715 510,945 1-5 1,447,516 731,348 Furniture & Fixtures 1,309,483 520,683 1-5 1,404,267 835,735 EDP - Companion 1,464,985 623,376 1-5 898,973 485,500 EDP - Other 733,539 366,338 5-10 3,527,323 1,671,350 Medical Equipment 3,495,054 1,345,783 1-5 797,332 418,688 Other Equipment 640,458 326,619 3-10 35,099 24,650 Autos 35,099 19,449 ============== =============== ================ ================ $9,718,101 $4,921,458 Totals $ 9,237,916 $ 3,762,865 ============== =============== ================ ================
At September 30, 1999 and 1998 capitalized leased equipment included above amounted to approximately $3,904,000 and $3,776,000, net of accumulated depreciation of $1,961,000 and $1,470,000, respectively. Depreciation expense equaled $1,209,262, $1,092,579, and $796,179 for the years ended September 30, 1999, 1998 and 1997, respectively. 4. Business Combinations During the fiscal year ended September 30, 1998, the Company acquired the net assets of 12 medical practices, and in most cases, entered into employment agreements with the physician owners of those practices. The Company values stock issued in business combinations based on the market price of the securities over a two to three day period before and after the companies have reached agreement on the purchase price and the transaction is announced. The acquisitions were accounted for under the purchase method, and the financial activity since the date of acquisition of these acquired practices has been included in the accompanying consolidated financial statements. The combined pro forma results listed below reflect purchase price accounting adjustments assuming the acquisitions occurred at the beginning of each fiscal year presented. Individual pro forma disclosures are not provided here as the information is deemed to be insignificant for separate presentation. Refer to Note 13 for details regarding business combinations in fiscal year 1997. Unaudited -------------------------------------- 1998 1997 ---------------- ----------------- $ 35,571,950 Revenue $41,216,534 $ (2,854,912) Net income (loss) $(12,177,005) Basic earnings (loss) per share $(1.86) $ (0.53) The Company acquired substantially all the assets of MainStreet Healthcare Corporation ("MHC") effective for accounting purposes as of May 1, 1998 (the "Acquisition"). The closing of the Acquisition was completed on May 13, 1998. This Acquisition is part of the above unaudited pro forma presentation. As partial consideration for the Acquisition, the Company delivered to MHC at the closing of the Acquisition a Conditional Delivery Agreement (the "Conditional Delivery Agreement") by and between the Company and MHC which requires the Company to issue to MHC 2,901,396 shares of the common stock of the Company upon the approval to increase the number of authorized shares of the Company by the shareholders. The Company treated the Acquisition as a purchase for accounting purposes per APB 16. Total consideration amounted to $5,255,347, consisting of 2,901,396 shares of common stock of the Company valued at $1.62 per share, a cash payment of $450,010, note payable of $800,000 bearing interest per annum at 10.5%, due October 1, 1998 and acquisition related expense of approximately $894,000. The excess purchase price over the fair value of assets of $5,492,404 is amortized using the straight-line method over 15 years. The Company has reflected the obligation to issue the common shares under the Conditional Delivery Agreement as a long term liability described as common stock to be issued. The stock was issued upon shareholder approval in February 1999. The Company also purchased the assets of other physician practices during the year ended September 30, 1998. The total purchase price of the acquisitions was $1,118,760 including acquisition related costs. The purchase price consisted of cash of $17,468, notes payable to the physicians of $159,536 and the issuance of common stock of $829,370. The excess purchase price over the fair value of assets acquired of the practices is amortized over a 15-year period. The purchase price for all asset purchases has been allocated to the assets purchased, and liabilities assumed based upon the fair values on the dates of acquisitions as follows: Working capital, other than cash $ 289,390 Property and equipment 157,295 Goodwill 685,910 Other assets 264,130 Liabilities assumed (277,965) ================= Purchase price $ 1,118,760 ================= 5. Income Taxes The components of the (benefit) provision for income taxes for the years ended September 30 are as follows: 1999 1998 ------------- --------------- Deferred: $ 0 Federal $1,610,113 0 State 142,069 ============= =============== $ 0 Total income tax expense (benefit) $1,752,182 ============= =============== 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, 1999, 1998 and 1997 the Company's deferred tax assets (liabilities) and the related valuation allowances are as follows: 1999 1998 1997 ------------------ ----------------- ---------------- $ 548,533 $ 1,302,267 Accounts receivable $ 325,033 9,512 Other 52,604 58,420 5,860,524 Operating loss carryforwards 4,069,762 2,993,578 (200,761) Fixed assets 923,200 (279,548) Accounts payable 104,670 295,068 0 ----------------- ---------------- ================== $6,322,478 $ 6,642,901 $ 3,097,483 ================== ================= ================ $6,322,478 Valuation allowance $ 6,642,901 $ 1,345,301 ================== ================= ================
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: 1999 1998 1997 ------------------ ----------------- ---------------- $ 309,318 Tax at federal statutory rate $ (2,977,027) $ (254,747) Effect on rate of: (66,442) Amortization of goodwill 893,281 67,528 50,752 Non deductible expenses 33,502 12,068 815 Life insurance premiums 887 815 25,980 State income taxes & other (262,679) 114,882 0 Acquisitions of medical practices (1,233,382) 0 (320,423) Change in valuation allowance 5,297,600 (606,076) ================== ================= ================ $ 0 $ 1,752,182 $ (665,530) ================== ================= ================
At September 30, 1999, the Company has net tax operating loss (NOL) carryforwards expiring in the following years ending September 30, 2000 $ 910,935 2001 1,783,595 2002 1,802,220 2003 458,112 2005 470,006 2006 76,306 2010 1,944,371 2012 645,206 2018 2,908,607 2019 4,839,897 ---------------- $15,839,255 ================ 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. The Company may use $893,507 of net operating losses on an annual basis. The Company has $8,450 of investment tax credit carryforwards which expire in 2000. In determining that it was more likely than not that the recorded deferred tax asset would be realized, management of the Company considered the following: Recent historical operations results. The budgets and forecasts that management and the Board of Directors had adopted for the next fiscal year. The ability to utilize NOL's prior to their expiration. The potential limitation of NOL utilization in the event of a change in ownership. The generation of future taxable income in excess of income reported on the consolidated financial statements. A valuation allowance of $6.3 million and $6.6 million at September 30, 1999 and 1998, 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. 6. Long-Term Debt Long-term debt consists of the following at September 30: 1999 1998 ----------------- ----------------- Revolving line of credit with a financial institution in the maximum amount of $7,000,000 dated March 24, 1998, bearing interest at a rate of prime plus 2.5% (prime rate is 8.25% as of September 30, 1999), collateralized by accounts receivable from third party payors , fixed assets, and inventory, renewable annually after first term of two years. Availability is limited by accounts receivable type and age as defined in $2,678,039 $ 3,445,743 the agreement. Convertible subordinated debenture (to the Company's common stock at $3.20 per share) with a national physician practice management company, in the amount of $1,500,000, dated October 6, 1997, interest only payable annually at the rate of 6.5%, maturing October 5, 2002. 1,500,000 1,500,000 Note payable in the amount of $1,600,000 with monthly installments of $8,889 plus interest at prime plus 6% (prime rate is 8.25 % as of September 30, 1999), through February 1, 2009 collateralized by accounts 1,021,889 1,102,222 receivable from patients and leasehold interests and the guarantee of the P.A. Note payable to MainStreet Healthcare Corporation in the amount of $800,000 dated July 31, 1998, payable in monthly installments of interest only at a rate of 10.5% maturing January 31, 2000. 593,579 800,000 Note payable to a financial institution in the amount of $500,000, dated February 23, 1999, payable in monthly installments of principal and interest at a rate of prime plus 1% (prime rate is 8.25% as of September 30, 1999) maturing on March 15, 2000, collateralized by common stock of the Company owned by the President as well as a life insurance policy of 450,000 500,000 president of the Company. Note payable to Companion Property & Casualty Insurance Company (a shareholder) in the amount of $400,000, with monthly installments of $4,546 (including 11% interest) from April 1, 1995 to March 1, 2010, 337,446 353,888 collateralized by accounts receivable from patients. Note payable to a financial institution in the amount of $280,000, dated March 11, 1997, with monthly installments (including interest at a variable rate of prime plus 1%) (prime rate is 8.25% as of September 30, 1999) of $3,100 from April 1997 to February 2002, with a final payment of all remaining principal and accrued interest due in March 2002, 249,520 263,525 collateralized by a mortgage on one of the Company's medical facilities. Note payable to a financial institution in the amount of $293,991, payable in monthly installments of principal and interest at a rate of prime plus .5%, maturing on January 1, 2005, personally guaranteed by three former 227,113 263,915 physician employees of the P.A. Note payable in the amount of $250,000 with monthly installments of $1,389 plus interest at prime plus 2% (prime rate is 8.25% as of September 30, 1999), through February 1, 2009 collateralized by a condominium. 0 172,222
1999 1998 ----------------- ----------------- Note payable in the amount of $43,500 dated September 1, 1997, with monthly installments (including 8% interest) of $1,500, payable from 17,302 January 1998 to September 2000. 31,966 Notes payable in monthly installments over three to four years at interest 4,091 rates ranging from 3.9% to 10.5%, collateralized by related vehicles. 10,060 Note payable to a former physician employee of the P.A. in the amount of $90,536 with monthly installments (including 6.5% interest) of $2,468 from December 1997 to April 2001. 42,225 0 Note payable to a former physician employee of the P.A. in the amount of $69,000 with monthly installments of $1,500 plus interest at 6.5% from December 1997 to September 2001. 34,500 0 ----------------- ----------------- 7,155,704 8,443,541 Subtotal Note payable to a physician employee of the P.A. in the amount of $294,000 with monthly installments (including 8.5% interest) of $6,032 from August 0 236,090 1997 to August 2002. Note payable to a physician employee of the P.A. in the amount of $294,000 with monthly installments (including 8.5% interest) of $6,032 from August 0 236,090 1997 to August 2002. Note payable to a physician employee of the P.A. in the amount of $110,000 with monthly installments (including 6% interest) of $3,346 from April 1998 to March 2001. 0 89,741 Note payable to a former physician employee of the P.A. in the amount of $90,536 with monthly installments (including 6.5% interest) of $2,468 from December 1997 to April 2001. 0 68,179 Note payable to a former physician employee of the P.A. in the amount of $69,000 with monthly installments of $1,500 plus interest at 6.5% from December 1997 to September 2001. 0 52,500 Note payable to a physician employee of the P.A. in the amount of $12,000 with monthly installments (including 8.5% interest) of $246 from August 0 1997 to August 2002. 9,635 ----------------- ----------------- 0 692,235 Subtotal - payable to employees 2,288,528 2,852,513 Capitalized lease obligations ----------------- ----------------- 9,444,232 11,988,289 (4,557,797) (5,540,552) Less, current portion 0 (190,452) Less, current portion payable to employees ----------------- ----------------- $4,886,435 $ 6,257,285 ================= =================
Aggregate maturities of notes payable and capital leases in each of the five years 2000 through 2004 are as follows: Notes Payable Capital Leases Year ending September 30: Total ---------------- ---------------- ---------------- $ 3,870,914 $ 686,883 $ 4,557,797 2000 107,045 556,072 663,117 2001 80,502 455,189 535,691 2002 1,585,513 374,596 1,960,109 2003 71,104 190,711 261,815 2004 1,440,626 25,077 1,465,703 Thereafter ================ ================ ================ $ 7,155,704 $ 2,288,528 $ 9,444,232 ================ ================ ================
As of September 30, 1999, the Company had borrowed approximately the maximum allowable amount under its operating line of credit and was in violation of one of its debt covenants. The covenant requires that the net worth of the Company did not drop below $7,650,000. This line of credit expires under its original terms on March 24, 2000 and the Company is currently in negotiations with its current lender and various other potential lenders to refinance this debt. 7. 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 $159,201, $182,681, and $172,792 in fiscal years 1999, 1998, and 1997, 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 $49,640 and $34,189 in fiscal years 1999 and 1998, respectively. 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 8, "Stockholders' Equity" for activity information regarding these four stock option plans. 8. Stockholders' Equity On June 30, 1994, the Company's shareholders approved an amendment to, and a restatement of, the Restated Certificate of Incorporation to provide for a 1 for 5 reverse stock split. The Amended and Restated Certificate of Incorporation increased the number of authorized shares of common stock from 4,000,000 to 10,000,000 (as adjusted for the reverse stock split as discussed above) and increased the par value per share of common stock from one cent ($.01) to five cents ($.05). In addition, the Amended and Restated Certificate of Incorporation authorized the Company to issue up to 10,000,000 shares of $.01 par value preferred stock to be issued in one or more series. The Board of Directors is authorized, without further action by the stockholders, to designate the rights, preferences, limitations and restrictions of and upon shares of each series, including dividend voting, redemption and conversion rights. All references in the financial statements to average number of shares outstanding and related prices, per share amounts, common stock and stock option plan data have been restated to reflect the split . 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 7, "Employee Benefit Plans.") 1996 1996 Non- 1997 1997 Non- 1984 1984 1994 1994 Non-Employee Employee Non-Employee Employee Stock Options Plan Plan Plan Plan Plan Plan Plan Plan - ----------------------------- ------- --------- ----------- ----------- ----------- ---------- ---------- ----------- Outstanding at 09/30/96 12,800 359,500 10,000 Granted FY 96/97 0 445,500 0 20,000 Forfeited FY 96/97 0 (55,000) 0 0 ---------- ---------- ----------- ----------- Outstanding at 09/30/97 12,800 750,000 10,000 20,000 ---------- ---------- ----------- ----------- Exercisable at 09/30/97 12,800 164,500 0 0 Weighted average fair value of options granted during fiscal year 96/97 for options whose exercise price: (1) (1) equals N/A $2.1608 N/A $2.5000 fair value N/A 2.6250 N/A N/A (2) exceeds fair value Forfeited FY 97/98 (13,000) (500) 0 (5,000) ---------- ---------- ----------- ----------- Outstanding at 09/30/98 737,000 12,300 10,000 15,000 ---------- ---------- ----------- ----------- Exercisable at 09/30/98 12,300 0 0 0 Forfeited FY 98/99 0 (83,950) 0 0 ---------- ---------- ----------- ----------- Outstanding at 09/30/99 653,050 12,300 10,000 15,000 ---------- ---------- ----------- ----------- Exercisable at 09/30/99 12,300 0 0 0
The Company has not granted options under any plans during fiscal years 1999 and 1998 and there have been no shares exercised during 1999, 1998, or 1997. The following table summarizes the weighted average exercise price of stock options exercisable at the end of each of the three previous fiscal years: 1996 1997 Weighted Average Non-Employee Plan Non-Employee Exercise Price 1984 Plan 1994 Plan Plan - ------------------------------------- ------------- ------------- ------------------ ------------------ Outstanding at 09/30/96 $ .25 $3.2797 $3.50 $ 0 ------------- ------------- ------------------ ------------------ Granted FY 96/97 0 2.1934 0 2.50 Exercised FY 96/97 0 0 0 0 Forfeited FY 96/97 0 3.3409 0 0 ------------- ------------- ------------------ ------------------ Outstanding at 09/30/97 .25 2.6320 3.50 2.50 ------------- ------------- ------------------ ------------------ Exercisable at 09/30/97 .25 3.1591 0 0 ------------- ------------- ------------------ ------------------ Granted FY 97/98 0 0 0 0 Exercised FY 97/98 0 0 0 0 Forfeited FY 97/98 0.25 3.2596 0 2.50 ------------- ------------- ------------------ ------------------ Outstanding at 09/30/98 0.25 2.6209 3.50 2.50 ------------- ------------- ------------------ ------------------ Exercisable at 09/30/98 0.25 0 0 0 ------------- ------------- ------------------ ------------------ Granted FY 98/99 0 0 0 0 Exercised FY 98/99 0 0 0 0 Forfeited FY 98/99 0 2.4143 0 0 ------------- ------------- ------------------ ------------------ Outstanding at 09/30/99 0.25 2.6475 3.50 0 ------------- ------------- ------------------ ------------------ Exercisable at 09/30/99 0.25 0 0 0 ------------- ------------- ------------------ ------------------
The following table summarizes options outstanding and exercisable by price range as of September 3, 1999: Options Outstanding Options Exercisable - -------------------- --- --------------------------------------------------- -- ------------------------------ Weighted- Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Range of Price Outstanding Life Price Exercisable Price - -------------------- --------------- --------------- ------------ -------------- ------------ $0.00 to $ .99 12,300 3.25 years $ .25 12,300 $ .25 173,375 $1.00 to $1.99 7.67 1.9375 0 N/A 335,675 $2.00 to $2.99 4.72 2.560 0 N/A 126,000 $3.00 to $3.99 4.65 3.352 0 N/A $4.00 to $4.99 43,000 2.68 4.279 0 N/A =============== ============== 690,350 12,300 =============== ==============
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards 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 1998, 1997 and 1996 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. Fiscal Year Ended September 30 -------------------------------------------------------- 1999 1998 1997 ------------- ------------------ ----------------- $909,758 $(10,508,143) Net income (loss) - as reported $ (83,726) 774,143 (10,687,809) Net income (loss) - pro forma (171,232) Basic and diluted earnings (loss) per .11 (1.61) share - as reported (.02) Basic and diluted earnings (loss) per .09 (1.63) share - pro forma (.03) 8,536,720 6,545,016 Basic weighted average number of shares 5,005,081 Diluted weighted average number of shares 8,543,515 6,545,016 5,005,081
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: Expected Dividend Yield 0 Expected Stock Price Volatility 35.77% Risk-free Interest Rate 5.45% to 6.75% Expected Life of Options 1 to 6 years 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 FPA Medical Management, Inc. 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. The following is a schedule of warrants issued and outstanding during the years ended September 30, 1999 and 1998: Number of Exercise Date Expiration Warrants Price Exercisable Date -------------- --------------- --------------- -------------- 0 Outstanding at 09/30/96 Activity during FY 96/97: Issued at $1.9375 30,000 $1.9375 06/18/97 06/18/02 Issued at $3.125 137,500 $3.1250 10/09/96 09/16/99 Issued at $5.00 137,500 $5.0000 10/09/96 09/16/99 Exercised 0 Expired 0 -------------- Outstanding at 09/30/97 305,000 Activity during FY 97/98: Issued at $2.5625 25,000 $2.5625 10/06/97 09/30/00 Issued at $2.5625 10,000 2.5625 04/06/98 04/05/01 Cancelled at $3.125 (125,000) 3.1250 Cancelled at $5.00 (125,000) 5.0000 Exercised 0 Expired 0 -------------- Outstanding at 09/30/98 90,000 Activity during FY 98/99: Issued at 0.7188 10,000 0.7188 10/06/98 10/05/01 Issued at 1.00 150,000 1.00 03/03/99 03/03/04 Exercised 0 Expired (12,500) 5.00 10/09/96 09/16/99 Expired (12,500) 3.125 10/09/96 09/16/99 -------------- Outstanding at 09/30/99 225,000 ==============
9. 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, 1999, are as follows: Operating Leases ---------------------- Year ending September 30: $ 2,621,344 2000 2,419,578 2001 2,108,017 2002 1,849,411 2003 2004 1,794,205 12,924,292 Thereafter ---------------------- $ 23,716,847 Total minimum lease payments ======================
Total rental expense under operating leases for fiscal 1999, 1998 and 1997 was approximately $2,510,000, $2,499,000, and $1,475,000, respectively. 10. 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 30,1999, 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 During fiscal year 1999, UCI-SC leased six medical center facilities from CHC and one from CP&C. At September 30, 1999, UCI-SC leases four medical center facilities from CHC and one medical center facility from CP&C under operating leases with fifteen-year terms expiring in 2008, 2009 and 2010. Each of these leases has a five year renewal option, and a rent guarantee by the South Carolina P.A. One of the leases has a purchase option allowing UCI-SC to purchase the center at fair market value after February 1, 1995. Total lease payments made by UCI-SC under these leases during the Company's fiscal years ended September 30, 1999, 1998, and 1997 were $257,025, $326,093 and $319,730, respectively. 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, 1999, 1998 and 1997 were $103,200, $62,400, and $45,600, respectively. Ten of the medical center facilities operated by UCI-SC are or were 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, 1999, 1998 and 1997 were $205,981, $444,153, and $258,026, respectively. Other Transactions with Related Parties At September 30, 1999, BCBS and its subsidiaries controls 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 maintain 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). In June 1997, CP&C purchased 400,000 shares of the Company's common stock for $600,000. The purchase price was below fair value due to lower issuance costs by 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, 1999 is $1,053,687. 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. The employees of the Company are offered health, life, and dental insurance coverage at group rates from BCBS and its subsidiaries. Effective March 1999, the Company is self-insured through BCBS and has contracted BCBS to perform all administrative services. During fiscal year 1999, the Company paid $102,687 to BCBS in administrative fees. In fiscal years 1999, 1998 and 1997, the Company paid $508,000, $939,000 and $654,000, respectively, in premiums. During fiscal year 1999, 1998 and 1997, the Company paid BCBS and its subsidiaries $208,000, $70,000 and $97,000, respectively, in interest. Revenues generated from BCBS and its subsidiaries totaled approximately 18% for fiscal years 1999, 1998 and 1997. The Company contracted with Adams and Associates for its workers compensation and professional liability insurance coverage through fiscal year 1997. Aggregate premiums paid during the fiscal year ended September 30, 1997 in connection with such policies were approximately $155,000. Adams and Associates contracted with CP&C to be the insurance carrier for the Company's workers compensation insurance coverage. Harold H. Adams, Jr. is the President and owner of Adams and Associates and is also a director of the Company. 11. Income (Loss) Per Share The calculation of basic income (loss) per share is based on the weighted average number of shares outstanding (8,356,720 in fiscal 1999, 6,545,016 in fiscal 1998, and 5,005,081 in fiscal 1997). Fully diluted weighted average common shares outstanding during fiscal year 1999 were 8,543,515. Warrants and options to purchase 903,050 shares, 852,000 shares and 920,500 shares of common stock were excluded from the calculation at September 30, 1999, September 30, 1998 and September 30, 1997, respectively, because of their antidilutive effect. 12. 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. Future revenues of the Company are largely dependent on third-party payors and private insurance companies, especially in instances where the Company accepts assignment. 13. Commitments and Contingencies 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, 1999, and management intends to vigorously defend the Company in such matters. 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. 14. Supplemental Cash Flow Information Supplemental Disclosure of Cash Flow Information The Company made interest payments of $1,374,364, $1,463,991, and $813,569, in the years ended September 30, 1999, 1998, and 1997, respectively. The Company made no income tax payments in the years ended September 30, 1999, 1998 and 1997, respectively. Supplemental Non-Cash Financing Activities Capital lease obligations of $255,862, $1,138,231, and $1,004,837 were incurred in fiscal 1999, 1998, and 1997. In October 1996, the Company acquired certain assets of a medical practice in Aiken, South Carolina for $80,000 by financing $80,000 with the seller. In October 1996, the Company acquired certain assets of a medical practice in Simpsonville, South Carolina for $25,000 by financing $25,000 with the seller. In August 1997, the Company acquired a three facility medical practice in Columbia, South Carolina for $2,271,250, by paying $200,000 at closing, assuming $371,250 in notes payable, financing $600,000 with the seller and issuing 517,649 shares of the common stock of the Company. In September 1997, the Company acquired certain assets of a medical practice in Camden, South Carolina for $45,000 by paying $1,500 at closing and financing $43,500 with the seller. In September 1997, the Company acquired certain assets of a medical practice in Summerville, South Carolina for $100,000 by paying $7,000 at closing, financing $43,000 with the seller and issuing 19,513 shares of the common stock of the Company. In October 1997, the Company acquired certain assets of a three facility physical therapy practice in Columbia, South Carolina for $856,756 by assuming certain liabilities and issuing 276,976 shares of the common stock of the Company. In November 1997, the Company acquired certain assets of a medical practice in New Ellenton, South Carolina for $262,004 by paying $17,468 at closing, financing $159,536 with the seller, and issuing 30,223 shares of the common stock of the Company. In May 1998, the Company acquired certain assets of an seven facility medical practice (five in Georgia and two in Tennessee) for $5,255,437 by assuming certain liabilities, paying $450,010 at closing, financing $800,000 with the seller, and committing to issue 2,901,396 shares of the common stock of the Company. In February 1999, the shares were issued to the seller with the Board's approval, in satisfaction of the liability for $4,700,262. The Company sold the three centers of the Springwood Lake Family Practice back to the physicians in November 1998 in exchange for the return of 550,126 shares of the Company's stock valued at $223,333 and the forgiveness of loans totaling $658,554. A loss of $1,668,000 was recorded in fiscal year 1998. The centers were purchased from the physicians in September 1997. The three centers were operated by the Company as Springwood Lake Family Practice, Woodhill Family Practice and Midtown Family Practice. 15. Realignment and Other Expenses 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 costs line item). 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 since three landlords released the Company from its obligation. Estimated lease obligation accrued for closed centers: Balance, September 30, 1998 $ 599,975 Lease payments (108,381) Change in estimated lease obligations (329,094) ================ Balance, September 30, 1999 $ 162,500 ================ SIGNATURES Pursuant to the requirements of Section 13 or 15() of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Signature Title Date --------- ----- --- /S/ M.F. MCFARLAND, III, M.D. President, Chief Executive Officer - ------------------------------ M.F. McFarland, III, M.D. and Chairman of the Board December 22, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /S/ M.F. MCFARLAND, III, M.D. President, Chief Executive Officer December 22, 1999 - ------------------------------- M.F. McFarland, III, M.D. and Chairman of the Board /S/ JERRY F. WELLS, JR. Executive Vice President of Finance December 22, 1999 - ------------------------------------- Jerry F. Wells, Jr. and Chief Financial Officer /S/ A. WAYNE JOHNSON Director December 22, 1999 - ----------------------- A. Wayne Johnson /S/ HAROLD H. ADAMS, JR. Director December 22, 1999 - -------------------------------- Harold H. Adams, Jr. /S/ CHARLES M. POTOK Director December 22, 1999 - --------------------------------- Charles M. Potok /S/ THOMAS G. FAULDS Director December 22, 1999 - -------------------------------- Thomas G. Faulds /S/ ASHBY JORDAN, M.D. Director December 22, 1999 - ------------------------------ Ashby Jordan, M.D. /S/ JOHN M. LITTLE, Jr., M.D. Director December 22, 1999 - ------------------------------ John M. Little, Jr., M.D.
UCI MEDICAL AFFILIATES, INC. EXHIBIT INDEX PAGE NUMBER OR INCORPORATION BY EXHIBIT NUMBER REFERENCE TO DESCRIPTION - ----------------- ------------------------------------------------------- ------------------------------------ 3.1 Amended and Restated Certificate of Incorporation of Exhibit 3.1 on the Form 10-KSB UCI Medical Affiliates, Inc. ("UCI") filed for fiscal year 1995 3.2 Amended and Restated Bylaws of UCI Exhibit 3.2 on the Form 10-KSB filed for fiscal year 1995 3.3 Amendment to Amended and Restated Bylaws of UCI Exhibit 3.3 on the Form 10-KSB filed for fiscal year 1996 Exhibit 4.1 on the Form 10-KSB 4.1 Convertible Subordinated Debenture of UCI dated filed for fiscal year 1997 October 6, 1997 payable to FPA Medical Management, Inc. (AFPAMM") 4.2 Stock Purchase Warrant Agreement dated October 6, Exhibit 4.2 on the Form 10-KSB 1996 between UCI and FPAMM filed for fiscal year 1997 10.1 Facilities Agreement dated May 8, 1984 by and between Exhibit 10.1 on the Form 10-KSB UCI Medical Affiliates of South Carolina, Inc. filed for fiscal year 1996 (AUCI-SC") and Doctor's Care, P.A., as amended September 24, 1984 and January 13, 1995 10.2 Amendment No. 3 dated September 17, 1996 to the Exhibit 10.2 on the Form 10-KSB Facilities Agreement listed as Exhibit 10.1 to this filed for fiscal year 1997 report 10.3 Employment Agreement dated October 1, 1995 between Exhibit 10.4 on the Form 10-KSB UCI-SC and M.F. McFarland, III, M.D. filed for fiscal year 1995 10.4 Employment Agreement dated October 1, 1995 between Exhibit 10.5 on the Form 10-KSB Doctor's Care, P.A. and M.F. McFarland, III, M.D. filed for fiscal year 1995 10.5 Employment Agreement dated November 1, 1995 between Exhibit 10.6 on the Form 10-KSB UCI-SC and D. Michael Stout, M.D. filed for fiscal year 1995 10.6 Employment Agreement November 1, 1995 between Exhibit 10.7 on the Form 10-KSB Doctor's Care, P.A. and D. Michael Stout, M.D. filed for fiscal year 1995
PAGE NUMBER OR INCORPORATION BY EXHIBIT NUMBER REFERENCE TO DESCRIPTION - ----------------- ------------------------------------------------------- ------------------------------------ 10.7 Lease and License Agreement dated March 30, 1994 Exhibit 10.8 on the Form 10-KSB between Doctor's Care, P.A. and Blue Cross Blue filed for fiscal year 1995 Shield of South Carolina Exhibit 10.8 on the Form 10-KSB 10.8 Note Payable dated February 28, 1995 between UCI-SC, filed for fiscal year 1997 as payor, and Companion Property and Casualty Insurance Company, as payee Exhibit 10.9 on the Form 10-KSB 10.9 Revolving Line of Credit dated November 11, 1996 filed for fiscal year 1997 between Carolina First Bank and UCI Exhibit 10.10 on the Form 10-KSB 10.10 Stock Option Agreement dated March 20, 1996 between filed for fiscal year 1997 UCI and Harold H. Adams, Jr. Exhibit 10.11 on the Form 10-KSB 10.11 Stock Option Agreement dated March 20, 1996 between filed for fiscal year 1997 UCI and Russell J. Froneberger Exhibit 10.12 on the Form 10-KSB 10.12 Stock Option Agreement dated March 27, 1997 between filed for fiscal year 1997 UCI and Charles P. Cannon Exhibit 10.13 on the Form 10-KSB 10.13 Stock Option Agreement dated March 27, 1997 between filed for fiscal year 1997 UCI and Thomas G. Faulds Exhibit 10.14 on the Form 10-KSB 10.14 Stock Option Agreement dated March 27, 1997 between filed for fiscal year 1997 UCI and Ashby Jordan, M.D. Exhibit 10.15 on the Form 10-KSB 10.15 Stock Option Agreement dated March 27, 1997 between filed for fiscal year 1997 UCI and Charles M. Potok 10.16 UCI Medical Affiliates, Inc. 1994 Incentive Stock Exhibit 10.9 on the Form 10-KSB Option Plan filed for fiscal year 1995 10.17 Consulting Agreement dated December 10, 1996 between Exhibit 10.17 on the Form 10-KSB UCI and Global Consulting, Inc. filed for fiscal year 1997 10.18 Amendment dated August 10, 1998 to Employment Exhibit 10.18 on the Form 10-KSB Agreement dated October 6, 1995 between Doctor's filed for fiscal year 1998 Care, P.A. and M.F. McFarland, III, M.D. 10.19 Administrative Services Agreement dated April 24, Exhibit 10.19 on the Form 10-QSB 1998 by and between Doctor's Care of Georgia, P.C. filed for the quarter ended March and UCI Medical Affiliates of Georgia, Inc. 31, 1998 10.20 Administrative Services Agreement dated April 24, Exhibit 10.20 on the Form 10-QSB 1998 by and between Doctor's Care of Tennessee, P.C. filed for the quarter ended March and UCI Medical Affiliates of Tennessee, Inc. 31, 1998
PAGE NUMBER OR INCORPORATION BY EXHIBIT NUMBER REFERENCE TO DESCRIPTION - ----------------- ------------------------------------------------------- ------------------------------------ 10.21 Administrative Services Agreement dated August 11, Exhibit 10.21 on the Form 10-KSB 1998 between UCI Medical Affiliates of South filed for fiscal year 1997 Carolina, Inc. and Doctor's Care, P.A. 10.22 Stock Purchase Option and Restriction Agreement dated Exhibit 10.22 on the Form 10-KSB August 11, 1998 by and among M.F. McFarland, III, filed for fiscal year 1998 M.D.; UCI Medical Affiliates of South Carolina, Inc.; and Doctor's Care, P.A. 10.23 Stock Purchase Option and Restriction Agreement dated Exhibit 10.23 on the Form 10-KSB September 1, 1998 by and among D. Michael Stout, filed for fiscal year 1998 M.D.; UCI Medical Affiliates of Georgia, Inc.; and Doctor's Care of Georgia, P.C. 10.24 Stock Purchase Option and Restriction Agreement dated Exhibit 10.24 on the Form 10-KSB July 15, 1998 by and among D. Michael Stout, M.D.; filed for fiscal year 1998 UCI Medical Affiliates of Georgia, Inc.; and Doctor's Care of Tennessee, P.C. 10.25 Acquisition Agreement and Plan of Reorganization Exhibit 2 on the Form 8-K filed dated February 9, 1998, by and among UCI Medical February 17, 1998 Affiliates of Georgia, Inc., UCI Medical Affiliates, Inc., MainStreet Healthcare Corporation; MainStreet Healthcare Medical Group, P.C.; MainStreet Healthcare Medical Group, P.C.; Prompt Care Medical Center, Inc.; Michael J. Dare; A. Wayne Johnson; Penman Private Equity and Mezzanine Fund, L.P.; and Robert G. Riddett, Jr. 10.26 First Amendment to Acquisition Agreement and Plan of Exhibit 2.1 on Form 8-K/A filed Reorganization (included as Exhibit 10.25 hereof) April 20, 1998 dated April 15, 1998. 10.27 Second Amendment to Acquisition Agreement and Plan of Exhibit 2.2 on Form 8-K/A filed Reorganization (included as Exhibit 10.25 hereof) May 28, 1998 dated May 7, 1998. 10.28 Conditional Delivery Agreement dated effective as of Exhibit 2.3 on Form 8-K/A filed May 1, 1998, by and among UCI Medical Affiliates, July 24, 1998 Inc.; UCI Medical Affiliates of Georgia, Inc.; and MainStreet Healthcare Corporation. 10.29 Amendment to Conditional Delivery Agreement dated as Exhibit 2.4 on Form 8-K/A filed of July 21, 1998, by and among UCI Medical July 24, 1998 Affiliates, Inc.; UCI Medical Affiliates of Georgia, Inc.; and MainStreet Healthcare Corporation. 10.30 Second Amendment to Conditional Delivery Agreement Exhibit 2.5 on Form 8-K/A filed on dated as of December 7, 1998, by and among UCI December 7, 1998 Medical Affiliates, Inc.; UCI Medical Affiliates of Georgia, Inc.; and MainStreet Healthcare Corporation. 10.31 Amended Employment Agreement dated August 19, 1999 57 between UCI Medical Affiliates of South Carolina, Inc. and M.F. McFarland, III, M.D. PAGE NUMBER OR INCORPORATION BY EXHIBIT NUMBER REFERENCE TO DESCRIPTION 10.32 Second Amended Employment Agreement dated August 19, 66 1999 between Doctor's Care, P.A. and M.F. McFarland, III, M.D. 21 Subsidiaries of the Registrant Exhibit 21 on the Form 10-QSB filed for period ending December 31, 1997 27 Financial Data Schedule Filed separately as Article Type 5 via Edgar
EX-10 2 AMENDED EMPLOYMENT AGREEMENT Exhibit 10.31 Amended Employment Agreement dated August 19, 1999 between UCI Medical Affiliates of South Carolina, Inc. and M.F. McFarland, III, M.D. STATE OF SOUTH CAROLINA ) AMENDED EMPLOYMENT AGREEMENT ) BETWEEN UCI MEDICAL AFFILIATE OF SOUTH CAROLINA, INC. AND COUNTY OF RICHLAND ) M.F. McFARLAND, III, M.D. UCI Medical Affiliates of South Carolina, Inc., a South Carolina corporation ("UCI" or "Employer"), has entered into an Employment Agreement dated October 1, 1995 ("Agreement") with M.F. McFarland, III, M.D. ("McFarland"), whereby McFarland is employed to serve as President and Chief Executive Officer of Employer for a term commencing October 1, 1995, and ending October 1, 2000. Employer and McFarland desire to amend the Agreement to extend the term and modify the termination procedures thereof and to restate the Agreement, as amended, in its entirety. Accordingly, the parties have entered into this Amended Employment Agreement Between UCI Medical Affiliates of South Carolina, Inc. and M. F. McFarland, III, M.D., to be effective as of this 19TH day of August, 1999. 1. Employment. UCI hereby agrees to employ McFarland to perform the duties described in Section 3 below subject to and in accordance with the terms and conditions hereof, and McFarland hereby accepts such employment. 2. Term. The employment shall commence on the date hereof, and shall continue through August 19, 2004, unless earlier terminated in accordance with the provisions of Section 8 of this Agreement. 3. Duties of McFarland. A. In accepting employment by UCI, McFarland shall undertake and assume the responsibility of performing for and on behalf of UCI the duties of the President and Chief Executive Officer of UCI in Columbia, South Carolina. Except with his written consent, McFarland shall not be permanently assigned to (i) any position of lower professional status, or (ii) a location outside of Richland or Lexington Counties, South Carolina. B. Other than McFarland's duties as an employee of Doctor's Care, P.A., McFarland shall be a full-time employee of UCI, and shall devote his full working time and efforts to his duties hereunder. McFarland shall perform all of his duties hereunder to the best of his ability and shall not, directly or indirectly, engage or participate in any activities in conflict with the best interests of UCI. Without limiting the generality of the foregoing, McFarland shall not engage in any activity for compensation or pecuniary gain other than his employment hereunder, his association with Doctor's Care, P.A., and passive investing for the account of himself or members of his household. McFarland agrees that his total compensation for his service to UCI shall be described in Section 4 of this Agreement. McFarland has entered into a separate Employment Agreement with respect to his association with Doctor's Care, P.A. His compensation for services to Doctor's Care, P.A. is described in Section 4 of that Agreement. McFarland agrees that his total compensation for his service to Doctor's Care, P.A. is set forth in Section 4 of that Agreement. 4. Compensation. As compensation for the services to be rendered by McFarland for UCI under this Agreement, McFarland shall be compensated by UCI on the following basis: A. Base Salary. During the term of this Agreement, McFarland shall receive from UCI an annual salary of One Hundred Fifty-Seven Thousand Five Hundred and no/100 ($157,500), payable in pay periods as determined by UCI, but in no event less frequently than monthly, subject to an annual increase upon approval by the Board of Directors. B. Dues. During the term of this Agreement, UCI shall pay all dues of McFarland as a member of one private club not to exceed Five Hundred Dollars and No/100 ($500.00) per month for the purpose of entertainment of UCI's clients in connection with the performance of McFarland's duties. C. Vacation. During the term of this Agreement, McFarland shall be entitled to a total of thirty (30) business days of paid leave to attend conventions and professional meetings and vacation time each calendar year. Such vacation and leave days are to be taken at such time or times as McFarland may reasonably request, subject to UCI's convenience and prior approval, which approval shall not be unreasonably withheld. Vacation and leave time may cumulate year-to-year up to a maximum of 60 days. D. Automobile. During the term of this Agreement, UCI shall provide to McFarland the ----------- use of one (1) automobile. E. Reimbursement for Expenses. During the term of this Agreement, UCI shall reimburse McFarland for all reasonable expenses in an aggregate amount equal to, or less than Seven Thousand Five Hundred Dollars and No/100 ($7,500.00) per annum incurred by McFarland for the benefit of UCI in the performance of his duties hereunder. Reimbursement for aggregate expenses each calendar year in excess of such amount shall require the prior written approval of the Board of Directors of UCI. F. Other Benefits. During the term of McFarland's employment with UCI, McFarland shall receive from UCI such other benefits (e.g. health insurance coverage, life insurance coverage, participation in pension plans, and participation in stock option plans, etc.) reasonably comparable to, and no worse than, those benefits, if any, generally provided to other senior executives of UCI. Additionally, during his employment with UCI, McFarland will be provided at UCI's costs, with a term life insurance policy that at the time of McFarland's death will pay One Million Dollars ($1,000,000) to his spouse or other designated beneficiary(s). G. Incentive Bonus. On or about the end of UCI's fiscal year, the Board shall determine what, if any, Incentive Bonus payment shall be made to McFarland. This Incentive Bonus payment, if any, shall be based on two variables: UCI's Net Income (Loss) for the previous fiscal year and the Gross Revenue for the same year, as set forth in Addendum A, which is attached hereto. The attached Addendum specifies the total Incentive Bonus, if any, to be paid to McFarland under differing scenarios based on UCI's Net Income (Loss) and Gross Revenue for the previous year. The Board, in making its decision as to what, if any, Incentive Bonus shall be paid to McFarland, shall be governed by Addendum A, and shall have no authority to alter or deviate from the amount, if any, of the Inventive Bonus payment mandated by the Net Income/Gross Revenues grid in Addendum A. In the event UCI pays McFarland an Incentive Bonus, payment shall be in the form of cash. H. Discretionary Bonus. On or about the end of UCI's fiscal year, the Board shall, in its sole discretion, determine whether or not McFarland is to be awarded a discretionary bonus, not to exceed 10% of his annual base salary. This Discretionary Bonus, if any, shall be in addition to, and distinct from any other compensation or bonus payment to McFarland, provided, however, nothing contained herein shall be construed in any way to obligate UCI to pay a Discretionary Bonus to McFarland. The factors to be reviewed by the Board in determining whether or not a Discretionary Bonus, if any, shall be paid to McFarland shall include the following: 1. McFarland's ability and success in recruiting and retaining quality physicians. 2. McFarland's ability and success in recruiting and retaining a quality senior management team. 3. McFarland's ability and success in positioning UCI for implementation of managed care. 4. McFarland's ability and success in developing a long-term strategic plan for UCI. In the event UCI pays McFarland a Discretionary Bonus, payment shall be in the form of cash. 5. Confidentiality and Secrecy. McFarland acknowledges that in and as a result of his employment hereunder, he will be making use of, acquiring, and/or adding to confidential information of a special and unique nature and value relating to UCI business, including without limitation technological know-how, copyrights, proprietary information, trade secrets, systems, procedures, manuals, confidential reports, records, operational expertise, lists of customers and projects, the nature and type of services rendered by UCI, the equipment and methods used and preferred by UCI customers, and the fees paid by inducement to UCI to enter into this Agreement and to pay to McFarland the compensation stated in Section 4 herein, McFarland covenants and agrees that during the term of his employment hereunder, and for five (5) years after the termination thereof, he shall not, directly or indirectly, make use of, or disclose to any person, any confidential information of UCI or its affiliates. McFarland agrees that he will never disclose trade secrets of UCI and assigns his rights to confidential information as "work made for hire" to UCI. 6. Covenants Against Competition. In view of the unique value to UCI of the services of McFarland for which UCI has contracted hereunder, because of the confidential information to be obtained by or disclosed to McFarland, as herein above set forth, and because McFarland's employment hereunder will result in McFarland's development of a unique relationship with customers, suppliers and employees as a material inducement to UCI to enter into this Agreement and to pay to McFarland the compensation stated in Section 4 hereof, McFarland covenants and agrees as follows: A. During McFarland's employment hereunder, and for a period of two (2) years after the termination of McFarland's employment hereunder for any reason, McFarland shall not directly or indirectly solicit or divert employment of any employee of UCI's business or employ any person previously employed by UCI or its affiliates. B. During McFarland's employment hereunder, and for a period of two (2) years after the termination of McFarland's employment whereunder for any reason, McFarland shall not directly or indirectly solicit, divert, or convert, or assist another person or entity to solicit, divert or convert, the customers of UCI or its affiliates to any other company or entity. C. During McFarland's employment hereunder, and for a period of two (2) years after the termination of McFarland's employment with UCI, McFarland shall not within the geographic area specified below engage in any business or perform any services, directly or indirectly, in competition with the business of UCI or its affiliates or have any interest, whether as a proprietor, partner, employee, stockholder (directly or beneficially), principal, agent, consultant, director, officer or in any other capacity or manner whatsoever, in any enterprise that shall so engage, except that McFarland shall be permitted to own for investment purposes only, directly or beneficially, up to (but not more than) 2% in the aggregate of the stock of a competing corporation which is publicly-traded on a national stock exchange or the NASDAQ National Market System, so long as McFarland is not a controlling person of, or a member of a group that controls, such corporation and McFarland is not otherwise affiliated in any capacity with such corporation. The restrictions to this Section 6(C) shall apply everywhere within a five (5) mile radius of (i) any primary or urgent care facility owned or operated by UCI or an affiliate, and (ii) each other location where UCI or any affiliate maintains an office, in existence as of the date of such termination. 7. Reasonableness, Enforceability and Remedies. A. McFarland has carefully read and considered the provisions of Section 5, 6 and 7, and, having done so, agrees that the restrictions set forth in these Sections, including, but not limited to, the time period of restriction and geographic limitations set forth in Section 6, are fair and reasonable and are reasonably required for the protection of the interest of UCI and its officers, directors, shareholders, employees, and affiliates. B. In the event that, notwithstanding the foregoing, any of the provisions of Sections 5, 6 and 7 hereof or any parts thereof shall be held to be invalid or unenforceable, the remaining provisions or parts thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable portions or parts had not been included therein. In the event that any provision of Sections 5 and 6 hereof relating to the time period and/or geographic restrictions and/or related aspects shall be declared by a court of competent jurisdiction to exceed the maximum restrictiveness such court deems reasonable and enforceable, the time period and/or geographic restrictions and/or related aspects deemed reasonable and enforceable by the court shall become and thereafter be the maximum restriction in such regard, and the restriction shall remain enforceable to the fullest extent deemed reasonable by such court. C. McFarland acknowledges that the services he is to render are of a special and unusual character with a unique value to UCI and its affiliates, the loss of which cannot adequately be compensated by damages in an action at law. In the event of a breach or threatened breach by McFarland of any of the provisions of Section 5 or 6 hereof, UCI or its affiliates, in addition to and not in limitation of, any other rights, remedies, or damages available to UCI or its affiliates under this Agreement, shall be entitled to a permanent injunction in order to prevent or restrain any such breach by McFarland or by McFarland's partners, agents, representatives, servants, employees, consulting clients, and/or any and all persons directly or indirectly acting for or with him. D. McFarland covenants and agrees that if he shall violate any of his covenants or agreements under Section 5 or 6 hereof, UCI or its affiliates shall be entitled to: (i) an accounting and repayment of all profits, compensation, commissions, remuneration, or other benefits that McFarland directly or indirectly has realized and/or may realize as a result of, growing out of, or in connection with, any such violation; (ii) recover actual damages incurred by UCI or its affiliates as a result of any such violation; (iii) any injunctive relief to which UCI or its affiliates is or may be entitled by law, in equity, or under this Agreement; and (iv) exercise its other rights respecting a breach of this Agreement as set forth herein. E. McFarland's obligations under Section 5 and 6 hereof shall survive any termination --------------- of employment hereunder. 8. Termination A. For Cause by UCI. Notwithstanding any other provisions hereof, UCI may terminate McFarland's employment under this Agreement immediately at any time for "cause". For purposes hereof the term "cause" shall be limited to the commission of any of the following by McFarland: dishonesty; theft; unethical business conduct; indictment for a felony; willful failure to perform material duties on behalf of UCI; violation of the terms and provisions of this Agreement; willful or recurring insubordination; failure to attempt, in good faith, to comply with reasonable instructions of UCI; McFarland's license to practice medicine in the State of South Carolina is revoked or otherwise terminated; or McFarland fails to follow accepted medical practices or is guilty of misconduct under the principles of medical ethics of the American Medical Association. If the termination is for "cause," all compensation (including without limitation the Base Salary, and all perquisites and fringe benefits) to which McFarland would otherwise be entitled shall be discontinued and forfeited as of the effective date of such termination. B. Without Cause by UCI. UCI may terminate this Agreement "without cause" at any time upon written notice to McFarland. In the event that McFarland is terminated without cause from his position as President of Doctor's Care, P.A. ("Doctor's Care") or as President and Chief Executive Officer of Employer, Doctor's Care and Employer shall pay McFarland a lump sum severance payment of Nine Hundred Thousand Dollars and no/100 ($900,000.00). All other compensation (including without limitation any perquisites and fringe benefits, if any) to which McFarland would otherwise be entitled (for periods after the effective date of such termination) shall be discontinued and forfeited as of the effective date of such termination. In no event shall the total amount payable by Employer and Doctor's Care, jointly or severally, under this Paragraph 8(B) and/or under Paragraph 8(E) of the Second Amended Employment Agreement between McFarland and Doctor's Care exceed the sum of Nine Hundred Thousand Dollars and No/100 ($900,000.00) C. Termination by McFarland. McFarland may with or without cause terminate this Agreement upon (60) days prior written notice to UCI. In the event of such termination, all compensation (including without limitation the Base Salary and any prerequisites and fringe benefits, if any) to which McFarland would otherwise be entitled (for periods after the effective date of the termination) shall be discontinued and forfeited as of the effective date of such termination. D. Disability. In the event of McFarland's disability during employment under this Agreement, then employment under this Agreement shall terminate. For purposes of this Agreement, except as provided herein below, "disability" shall mean the inability of McFarland, due to sickness or other incapacity, to perform his duties under his Agreement for a period in excess of one hundred and eighty (180) substantially consecutive days. Such termination shall become effective at UCI's election upon the expiration of such one hundred and eighty (180) day period of disability. Upon termination of employment under this Agreement due to McFarland's disability, McFarland shall be entitled to payment of his Base Salary up to the date of termination. E. Death. In the event McFarland dies during this term of this Agreement, this Agreement shall terminate and UCI shall pay to McFarland's estate all Base Salary accrued but unpaid through the date of McFarland's death. F. Personal Guarantee Assumption in the Event of Termination. In the event of McFarland's termination by Employer under any circumstances, Employer shall assume any and all liabilities that McFarland has personally guaranteed for the benefit of Employer. Said guarantee assumption shall take place within thirty (30) days of McFarland's termination. If Employer fails to assume any and all liabilities personally guaranteed by McFarland for the benefit of Employer within thirty (30) days of termination, Employer shall pay McFarland One Thousand Dollars and no/100 ($1,000.00) per day starting on the 30th day after termination, and each day thereafter until Employer assumes such liabilities. The outstanding liabilities personally guaranteed by McFarland for the benefit of Employer as of the date hereof are listed on the attached Schedule A. McFarland shall seek approval from Employer's Board of Directors before making any future guarantees for the benefit of Employer in excess of Twenty-Five Thousand Dollars and no/100 ($25,000.00). In addition, McFarland shall provide Employer's Board of Directors prompt written notice of any future guarantees involving Twenty-Five Thousand Dollars and no/100 ($25,000.00) or less. 9. Burden of Benefit. This Agreement shall be binding upon, and shall inure to the benefit of UCI, McFarland, UCI's affiliates, and their respective heirs, personal and legal representatives, successors, and assigns. 10. Assignment. This Agreement and any rights hereunder are personal to McFarland and shall not be assigned or otherwise transferred by McFarland. 11. Governing Law/Jurisdiction. The construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of South Carolina. McFarland and UCI hereby (i) agree that any litigation, action or proceeding arising out of or relating to this Agreement may be instituted in a state or federal court in Columbia, South Carolina, (ii) waive any objection which they might have now or hereafter to any litigation, action or proceeding based upon improper venue or inconvenient forum, and (iii) irrevocably submit to the jurisdiction of such courts in any such litigation, action or proceeding. For all purposes of this Agreement, McFarland and UCI hereby further agree that service of process upon McFarland and UCI may be effected pursuant to United States mail. 12. Usage. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Terms such as "hereof", "herein", and words of similar import shall refer to this Agreement in its entirety and all references shall refer to specified portions of this Agreement, unless the context clearly requires otherwise. 13. Severability. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions of this Agreement shall not affect validity and enforceability of the other provisions. 14. Notice. Any notice, request, approval, consent, demand or other communication hereunder shall be effective if in writing and upon the first to occur of the following: (i) upon receipt by the party to whom such notice, request, approval, consent, demand or other communications being given; or (ii) three (3) business days after being duly deposited in the U. S. Mail, certified, return receipt requested, and addressed as follows: McFarland M. F. McFarland, III, M. D. UCI Medical Affiliates, Inc. Doctor's Care, P.A. 1901 Main St., Ste. 1200 (MC1105) Columbia, S.C. 29201 With a copy to: David E. Dubberly, Esq. Duff, Dubberly, Turner, White & Boykin, L.L.C. P. O. Box 1486 Columbia, S.C. 29202 UCI: UCI Medical Affiliates of South Carolina, Inc. Doctor's Care, P.A. 1901 Main St., Ste. 1200 (MC1105) Columbia, S.C. 29201 With a copy to: Frank H. Gibbes, III, Esq. Gibbes, Gallivan, White & Boyd, P.A. P. O. Box 10000 Greenville, South Carolina 29603 The parties hereto may change their respective addresses by notice in writing given to the other parties of this Agreement. 15. Entire Agreement. This Agreement contains the entire agreement and understanding by and between UCI and McFarland with respect to the employment of McFarland, and no representations, promises, agreements, or understandings, written or oral not contained herein shall be of any force or effect. No change or modification of this Agreement shall be valid or binding unless it is in writing and signed by the party intended to be bound. No waiver of any provision of this Agreement shall be valid unless it is in writing and signed by the party against whom the waiver is sought to be enforced. No valid waiver of any provision of this Agreement at any time shall be deemed a waiver of any other provision of this Agreement at such time or at any other time. IN WITNESS WHEREOF, UCI and McFarland have duly executed this Agreement under seal to be effective as of the day and year first above written. IN THE PRESENCE OF: UCI: /s/ Diane D. Dent UCI MEDICAL AFFILIATES OF SOUTH Witness CAROLINA, INC. (SEAL) /s/ M. Yvonne Northcutt By: /s/ Harold H. Adams Witness Its: Director, HHC MCFARLAND: /s/ Hannah H. James /s/ M.F. McFarland, III, M.D. (SEAL) Witness M.F. McFarland, III, M.D. /s/ Brenda C. Sanders Witness
SCHEDULE A Outstanding Liabilities Personally Guaranteed By McFarland - --------------------------------------- -------------------------------------- -------------------------------------- Lender Remaining Term Balance at 5/31/99 - --------------------------------------- -------------------------------------- -------------------------------------- - --------------------------------------- -------------------------------------- -------------------------------------- - --------------------------------------- -------------------------------------- -------------------------------------- - --------------------------------------- -------------------------------------- -------------------------------------- Carolina First 54 months $ 450,000 - --------------------------------------- -------------------------------------- -------------------------------------- - --------------------------------------- -------------------------------------- -------------------------------------- AT&T Leasing 9 months 10,000 - --------------------------------------- -------------------------------------- --------------------------------------
EX-10 3 SECOND AMENDED EMPLOYMENT AGREEMENT Exhibit 10.32 Second Amended Employment Agreement dated August 19, 1999 between Doctor's Care, P.A. and M.F. McFarland, III, M.D. STATE OF SOUTH CAROLINA ) SECOND AMENDED ) EMPLOYMENT AGREEMENT COUNTY OF RICHLAND ) BETWEEN DOCTOR'S CARE, P.A. AND M.F. MCFARLAND, III, M.D. Doctor's Care, P.A., a South Carolina professional corporation ("Doctor's Care" or "Employer"), has entered into an Employment Agreement dated October 1, 1995 ("Agreement") with M.F. McFarland, III, M.D. ("McFarland"), whereby McFarland is employed to serve as President of Employer for a term commencing October 1, 1995, and ending October 1, 2000. Employer and McFarland amended the Agreement on August 10, 1998 to extend the term, increase the compensation, and modify the termination procedures thereof. Employer and McFarland now desire to amend the Agreement further to make additional amendments to the term, compensation, and termination procedures thereof and to restate the Agreement, as amended, in its entirety. Accordingly, the parties have entered into this Second Amended Employment Agreement Between Doctor's Care, P.A. and M. F. McFarland, III, M.D., to be effective as of this 19th day of August, 1999. 1. Employment. Employer hereby agrees to employ McFarland to perform the duties described in Section 3 below subject to and in accordance with the terms and conditions hereof, and McFarland hereby accepts such employment. 2. Term. The employment shall commence on the date hereof, and shall continue through August 19, 2004, unless earlier terminated in accordance with the provisions of Section 8 of this Agreement. 3. Duties of McFarland. A. In accepting employment by Employer, McFarland shall undertake and assume the responsibility of performing for and on behalf of Employer the duties of the President of Employer in Columbia, South Carolina. Except with his written consent, McFarland shall not be permanently assigned to (i) any position of lower professional status, or (ii) a location outside of Richland or Lexington Counties, South Carolina. B. Other than McFarland's duties as an employee of UCI Medical Affiliates of South Carolina, Inc., during the term of this Agreement McFarland shall be a full-time employee of Employer, and shall devote his full working time and efforts to his duties hereunder. McFarland shall perform all of his duties hereunder to the best of his ability and shall not, directly or indirectly, engage or participate in any activities in conflict with the best interests of Employer, and will conduct all activities in strict loyalty to Employer. Without limiting the generality of the foregoing, McFarland shall not engage in any activity for compensation or pecuniary gain other than his employment hereunder, his employment with UCI Medical Affiliates of South Carolina, Inc., and passive investing for the account of himself or members of his household. 4. Compensation. As compensation for the services to be rendered by McFarland for Employer under this Agreement, McFarland shall be compensated by Employer on the following basis: A. Base Salary. Commencing on October 1, 1998, McFarland shall receive from Employer an annual salary of One Hundred Sixty-Seven Thousand Five Hundred Dollars and no/100 ($167,500.00), payable in pay periods as determined by Employer, but in no event less frequently than monthly. Commencing on October 1, 1999, and on the anniversary date thereof every year until termination of this Agreement, McFarland's annual salary shall be increased by three percent (3%) per year to compensate for increases in the cost of living. The three percent (3%) annual increase shall be calculated based upon McFarland's annual salary on the anniversary date. B. Vacation. During the term of this Agreement, McFarland shall be entitled to a total of thirty (30) business days of paid leave to attend conventions and professional meetings and vacation time each calendar year. Such vacation and leave days are to be taken at such time or times as McFarland may reasonably request, subject to the Employer's convenience and prior approval, which approval shall not be unreasonably withheld. Vacation and leave time may cumulate year to year up to a maximum of 60 days. C. Other Benefits. During the term of this Agreement, McFarland shall receive from Employer such other benefits (e.g., health insurance coverage, life insurance coverage, participation in pension plans, and participation in stock option plans, etc. ) reasonably comparable to, and no worse than, those benefits, if any, generally provided to other senior executives of Employer. The compensation stated above is intended to be the total compensation paid to McFarland. 5. Confidentiality and Secrecy. McFarland acknowledges that in and as a result of his employment hereunder, he will be making use of, acquiring, and/or adding to confidential information of a special and unique nature and value relating to Employer's business, including without limitation technological know-how, copyrights, proprietary information, trade secrets, systems, procedures, manuals, confidential reports, records, operational expertise, lists of customers and projects, the nature and type of services rendered by Employer, the equipment and methods used and preferred by Employer's customers, and the fees paid by them (all of which are deemed for all purposes confidential and proprietary). As a material inducement to Employer to enter into this Agreement and to pay to McFarland the compensation stated in Section 4 herein, McFarland covenants and agrees that during the term of his employment hereunder, and for five (5) years after the termination thereof, he shall not, directly or indirectly, make use of, or disclose to any person, any confidential information of Employer or its affiliates. 6. Covenants Against Competition. In view of the unique value to Employer of the services of McFarland for which Employer has contracted hereunder, because of the confidential information to be obtained by or disclosed to McFarland, as hereinabove set forth, and because McFarland's employment hereunder will result in McFarland's development of a unique relationship with customers, suppliers and employees, as a material inducement to Employer to enter into this Agreement and to pay to McFarland the compensation stated in Section 4 hereof, McFarland covenants and agrees as follows: A. During McFarland's employment hereunder, and for a period of two (2) years after the termination of McFarland's employment hereunder for any reason, McFarland shall not directly or indirectly solicit or divert employment of any employee of Employer's business or employ any person previously employed by Employer or its affiliates. B. During McFarland's employment hereunder, and for a period of two (2) years after the termination of McFarland's employment hereunder for any reason, McFarland shall not directly or indirectly solicit, divert, or convert, or assist another person or entity to solicit, divert or convert, the customers of Employer or its affiliates to any other company or entity. C. During McFarland's employment hereunder, and for a period of one (1) year after the termination of McFarland's employment with Employer for any reason, McFarland shall not within the geographic area specified below engage in any business or perform any services, directly or indirectly, in competition with the business of Employer or its affiliates or have any interest, whether as a proprietor, partner, employee, stockholder (directly or beneficially), principal, agent, consultant, director, officer, or in any other capacity or manner whatsoever, in any enterprise that shall so engage; except that McFarland shall be permitted to own for investment purposes only, directly or beneficially, up to (but not more than) 2% in the aggregate of the stock of a competing corporation which is publicly-traded on a national stock exchange or the NASDAQ National Market System, so long as McFarland is not a controlling person of or a member of a group that controls, such corporation and McFarland is not otherwise affiliated in any capacity with such corporation. The restrictions of this Section 6(C) shall apply everywhere within a five (5) mile radius of (i) any primary or urgent care facility owned or operated by Employer or an affiliate, and (ii) each other location where Employer or any affiliate maintains an office, in existence as of the date of such termination. 7. Reasonableness, Enforceability and Remedies. A. McFarland has carefully read and considered the provisions of Section 5,6, and 7, and , having done so, agrees that the restrictions set forth in these Sections, including, but not limited to, the time period of restriction and geographic limitations set forth in Section 6, are fair and reasonable and are reasonably required for the protection of the interest of Employer and its officers, directors, shareholders, employees, and affiliates. B. In the event that, notwithstanding the foregoing, any of the provisions of Sections 5, 6, or 7 hereof or any parts thereof shall be held to be invalid or unenforceable, the remaining provisions or parts thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable portions or parts had not been included therein. In the event that any provision of Sections 5 or 6 hereof relating to the time period and/or geographic restrictions and/or related aspects shall be declared by a court of competent jurisdiction to exceed the maximum restrictiveness such court deems reasonable and enforceable, the time period and/or geographic restrictions and/or related aspects deemed reasonable and enforceable by the court shall become and thereafter be the maximum restriction in such regard, and the restriction shall remain enforceable to the fullest extent deemed reasonable by such court. C. McFarland acknowledges that the services he is to render are of a special and unusual character with a unique value to Employer and its affiliates, the loss of which cannot adequately be compensated by damages in an action at law. In the event of a breach or threatened breach by McFarland of any of the provisions of Sections 5 or 6 hereof, Employer or its affiliates, in addition to and not in limitation of, any other rights, remedies, or damages available to Employer or its affiliates under this Agreement, shall be entitled to a permanent injunction in order to prevent or restrain any such breach by McFarland or by McFarland's partners, agents, representatives, servants, employers, employees, consulting clients, and/or any and all persons directly or indirectly acting for or with him. D. McFarland covenants and agrees that if he shall violate any of his covenants or agreements under Section 5 or 6 hereof, Employer or its affiliates shall be entitled to: (i) an accounting and repayment of all profits, compensation, commissions, remuneration, or other benefits that McFarland directly or indirectly has realized and/or may realize as a result of, growing out of, or in connection with, any such violation; (ii) recover actual damages incurred by Employer or its affiliates as a result of any such violation; (iii) any injunctive relief to which Employer or its affiliates is or may be entitled at law, in equity, or under this Agreement; and (iv) exercise its other rights respecting a breach of this Agreement as set forth herein. E. McFarland's obligations under Sections 5 and 6 hereof shall survive any - ------------------- termination of employment hereunder. 8. Termination. A. For Cause By Employer. Notwithstanding any other provision hereof, Employer may terminate McFarland's employment under this Agreement immediately at any time for "cause". For purposes hereof the term "cause" shall be limited to the commission of any of the following by McFarland: dishonesty; theft; unethical business conduct; indictment for a felony; willful failure to perform material duties on behalf of Employer; violation of the terms and provisions of this Agreement; willful or recurring insubordination; failure to attempt, in good faith, to comply with reasonable instructions of Employer; McFarland's license to practice medicine in the State of South Carolina is revoked or otherwise terminated; or McFarland fails to follow accepted medical practices or is guilty of misconduct under the principles of medical ethics of the American Medical Association. If the termination is for "cause," all compensation (including without limitation the Base Salary, and all perquisites and fringe benefits) to which McFarland would otherwise be entitled shall be discontinued and forfeited as of the effective date of such termination. B. Termination By McFarland. McFarland may with or without cause terminate this Agreement upon sixty(60) days prior written notice to Employer. In the event of such termination, all compensation (including without limitation the Base Salary and any perquisites and fringe benefits, if any) to which McFarland would otherwise be entitled (for periods after the effective date of the termination) shall be discontinued and forfeited as of the effective date of such termination. C. Disability. In the event of the McFarland's disability during employment under this Agreement, then employment under this Agreement shall terminate. For purposes of this Agreement, except as provided herein below, "disability" shall mean the inability of McFarland, due to sickness or other incapacity, to perform his duties under this Agreement for a period in excess of one hundred eighty (180) substantially consecutive days. Such termination shall become effective at Employer's election upon the expiration of such one hundred eighty (180) day period of disability. Upon termination of employment under this Agreement due to McFarland's disability, McFarland shall be entitled to payment of his Base Salary up to the date of termination. D. Death. In the event McFarland dies during the term of this Agreement, this Agreement shall terminate and Employer shall pay to McFarland's estate all Base Salary accrued but unpaid through the date of McFarland's death. E. Without Cause By Employer. Employer may terminate this Agreement "without cause" at any time upon 30 days' written notice to McFarland. In the event that McFarland is terminated without cause from his position as President of Employer or as President and Chief Executive Officer of UCI, Employer and UCI shall pay McFarland a lump sum payment of Nine Hundred Thousand Dollars and no/100 ($900,000.00). All other compensation (including without limitation any perquisites and fringe benefits, if any) to which McFarland would otherwise be entitled (for periods after the effective date of such termination) shall be discontinued and forfeited as of the effective date of such termination. In no event shall the total amount payable by Employer and UCI, jointly or severally, under this Paragraph 8(E) and/or under Paragraph 8(B) of the Amended Employment Agreement between McFarland and UCI exceed the sum of Nine Hundred Thousand Dollars and no/100 ($900,000.00). F. Personal Guarantee Assumption in the Event of Termination. In the event of McFarland's termination by Employer under any circumstances, Employer shall assume any and all liabilities that McFarland has personally guaranteed for the benefit of the Employer. Said guarantee assumption shall take place within thirty (30) days of McFarland's termination. If Employer fails to assume any and all liabilities personally guaranteed by McFarland for the benefit of the Employer within thirty (30) days of termination, Employer shall pay McFarland One Thousand Dollars and no/100 ($1,000.00) per day starting on the 30th day after termination, and each day thereafter until Employer assumes such liabilities. The outstanding liabilities personally guaranteed by McFarland for the benefit of the Employer as of the date hereof are listed on Schedule A to this Agreement. McFarland shall seek approval from Employer's Board of Directors before making any future guarantees for the benefit of the Employer in excess of Twenty-Five Thousand Dollars and no/100 ($25,000.00). In addition, McFarland shall provide Employer's Board of Directors prompt written notice of any future guarantees involving Twenty-Five Thousand Dollars and no/100 ($25,000.00) or less. 9. Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of Employer, McFarland, Employer's affiliates, and their respective heirs, personal and legal representatives, successors, and assigns. 10. Patients and Records. Employer and McFarland agree that all patient lists, records, and charts are the property of the Employer, and that upon termination of this Agreement, McFarland shall not be entitled to receive any patient lists, records, or charts. 11. Assignment. This Agreement and any rights hereunder are personal to McFarland and shall not be assigned or otherwise transferred by McFarland. 12. Governing Law/Jurisdiction. The construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of South Carolina. McFarland and Employer hereby (i) agree that any litigation, action or proceeding arising out of or relating to this Agreement may be instituted in a state or federal court in Columbia, South Carolina, (ii) waive any objection which they might have now or hereafter to any such litigation, action or proceeding based upon improper venue or inconvenient forum, and (iii) irrevocably submit to the jurisdiction of such courts in any such litigation, action or proceeding. For all purposes of this Agreement, McFarland and Employer hereby further agree that service of process upon McFarland and Employer may be effected pursuant to United States mail. 13. Usage. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Term such as "hereof", "hereunder", "herein", and words of similar import shall refer to this Agreement in its entirety and all references shall refer to specified portions of this Agreement, unless the context clearly requires otherwise. 14. Severability. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions of this Agreement shall not affect validity and enforceability of the other provision. 15. Notice. Any notice, request, approval, consent, demand or other communication hereunder shall be effective if in writing and upon the first to occur of the following: (i) upon receipt by the party to whom such notice, request, approval, consent, demand or other communications being given; or (ii) three (3) business days after being duly deposited in the U.S. Mail, certified, return receipt requested, and addressed as follows: McFarland: M. F. McFarland, III, M. D. Doctor's Care, P.A. 1901 Main St., Ste. 1200 (MC1105) Columbia, S.C. 29201 With a copy to: David E. Dubberly, Esq. Duff, Dubberly, Turner, White & Boykin, L.L.C. P.O. Box 1486 Columbia, SC 29202 Employer: Doctor's Care, P.A. 1901 Main St., Ste. 1200 (MC1105) Columbia, S.C. 29201 Attn: M.F. McFarland, III, M. D. The parties hereto may change their respective addresses by notice in writing given to the other parties this Agreement. 16. Entire Agreement. This Agreement contains the entire agreement and understanding by and between Employer and McFarland with respect to the employment of McFarland, and no representations, promises, agreements, or understandings, written or oral (including that Amendment to this Agreement dated August 10 (17), 1998) not contained herein shall be of any force or effect. No change or modification of this Agreement shall be valid or binding unless it is in writing and signed by the party intended to be bound. No waiver of any provision of this Agreement shall be valid unless it is in writing and signed by the party against whom the waiver is sought to be enforced. No valid waiver of any provision of this Agreement at any time shall be deemed a waiver of any other provision of this Agreement at such time or at any other time. IN WITNESS WHEREOF, Employer and McFarland have duly executed this Agreement under seal to be effective as of the day and year first above written. IN THE PRESENCE OF: EMPLOYER: /s/ Hannah H. James DOCTOR'S CARE, P.A. (SEAL) Witness /s/ Brenda G. Sanders By: /s/ M.F. McFarland, III, M.D. Witness Its: President MCFARLAND: /s/ Hannah H. James /s/ M.F. McFarland, III, M.D. (SEAL) Witness M.F. McFarland, III, M.D. /s/ Brenda G. Sanders Witness SCHEDULE A Outstanding Liabilities Personally Guaranteed By McFarland - --------------------------------------- -------------------------------------- -------------------------------------- Lender Remaining Term Balance at 5/31/99 - --------------------------------------- -------------------------------------- -------------------------------------- - --------------------------------------- -------------------------------------- -------------------------------------- - --------------------------------------- -------------------------------------- -------------------------------------- - --------------------------------------- -------------------------------------- -------------------------------------- Carolina First 54 months $ 450,000 - --------------------------------------- -------------------------------------- -------------------------------------- - --------------------------------------- -------------------------------------- -------------------------------------- AT&T Leasing 9 months 10,000 - --------------------------------------- -------------------------------------- --------------------------------------
EX-27 4 FDS --
5 1,000 Year SEP-30-1999 OCT-01-1998 SEP-30-1999 66,159 0 8,399,743 1,482,522 590,318 9,804,687 4,796,643 4,921,458 23,354,085 12,094,167 0 0 0 482,526 5,890,957 23,354,085 0 40,470,462 0 33,685,868 2,113,785 2,289,187 1,471,864 909,758 0 0 0 0 0 909,758 .11 .11
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