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Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-10418
UNITED MEDICORP, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 75-2217002
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10210 NORTH CENTRAL EXPRESSWAY, SUITE 400
Dallas, Texas 75231
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (214) 691-2140
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class
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COMMON STOCK
Indicate by check mark whether the Registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if 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._____
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the average of the bid and asked prices of such stock
on March 15, 1997 was $635,012.
As of March 15, 1997 there were 26,310,217 shares of Common Stock, $.01 par
value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on August 18, 1997 are incorporated herein by
reference in Part III.
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UNITED MEDICORP, INC.
INDEX TO FORM 10-K
ITEM
NUMBER PART I PAGE
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1 Description of Business . . . . . . . . . . . . . . . . . . . . . 3
2 Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 11
4 Submission of Matters to a Vote of
Securities Holders . . . . . . . . . . . . . . . . . . . . . 11
PART II
5 Market for Registrant's Common Equity and
Related Stockholder Matters. . . . . . . . . . . . . . . . . 11
6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 13
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 13
8 Financial Statements and Supplementary Data . . . . . . . . . . . 24
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . 24
PART III
10 Directors and Executive Officers of the Registrant. . . . . . . . 25
11 Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 25
12 Securities Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . 25
13 Certain Relationships and Related Transactions. . . . . . . . . . 25
PART IV
14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 26
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
United Medicorp Texas, Inc., was incorporated in the State of Texas on
March 13, 1989 ("UMC-Texas"). On July 10, 1989, in an exchange of stock,
UMC-Texas was acquired by Gamma Resources, Inc., a publicly-owned Delaware
shell corporation, which simultaneously changed its name to United Medicorp,
Inc. (the "Company", "UMC" or the "Registrant"). All references herein to
the Company include UMC-Texas, unless the context requires otherwise.
The Company provides medical insurance claims processing and accounts
receivable management services to health care providers. The Company employs
proprietary and purchased software to provide claims processing, management
and collection services to its customers, which are primarily hospitals and
medical clinics. The Company's basic service is designed to provide an
electronic claims processing, management and collection service that
expedites payment of claims from private insurance carriers or government
payors such as Medicare and Medicaid. The Company also offers to its
customers processing and collection services for uncollected "backlog" (aged)
claims that were not originally submitted through the Company's system. The
Company began providing bad debt collection services during 1996. In
addition, from time to time the Company also provides advance funding
services where the Company purchases and then funds a portion of an eligible
customers's claims in advance of payment of such claims by a private
insurance carrier. A service called UMClaimPros was introduced by the
Company in December 1994. UMClaimPros are experienced claims processors
available for customers' interim staffing needs.
Management believes that it has developed a computer hardware and
proprietary software system and a line of services which, together with its
experienced claims management personnel, are capable of effectively addressing
the claims management needs of health care providers. The Company has also
worked with several other companies that provide enhanced software, computer
hardware and maintenance, electronic claim clearinghouse services, financing
and other valuable services specifically designed to meet the needs of health
care providers. Management believes these efforts have produced a system
that provides the Company's customers with enhanced claims editing, error
detection and management capabilities. Management further believes its
application and refinement of electronic and computer technologies in the
health care claims management industry will enable the Company to provide
claims processing services that will significantly improve its customers'
cash flow.
3
INDUSTRY OVERVIEW
The U.S. healthcare industry continues to experience tremendous change as
both federal and state governments as well as private industry work to bring
more efficiency and effectiveness to the healthcare system. UMC's business
is impacted by trends in the U.S. healthcare industry. As healthcare
expenditures have grown as a percentage of U.S. gross national product,
public and private healthcare cost containment measures have applied pressure
to the margins of healthcare providers. Historically, some payers have
willingly paid the prices established by providers while other payers,
notably the government and managed care companies, have paid far less than
established prices (in many cases less than the average cost of providing the
services). As a consequence, prices charged payers willing to pay
established prices increased in order to recover the cost of services
purchased by the government and others but not paid by them (i.e., cost
shifting). Increasing complexity in the reimbursement system and assumption
of greater payment responsibility by individuals have caused healthcare
providers to experience increased receivables and bad debt levels and higher
business office costs. Providers overcome these pressures on profitability
by increasing their prices, by relying on demographic changes to support
increases in the volume and intensity of medical procedures, and by cost
shifting. As providers experience limitations in their continued ability to
shift cost in these ways, the amount of reimbursement received by UMC's
clients may be reduced and UMC's rate of growth in revenues, assuming present
management fee levels, may decline. However, management believes UMC may
benefit from providers' attempts to offset declines in profitability through
seeking more effective and efficient business management services such as
those provided by UMC. UMC continues to evaluate governmental and industry
reform initiatives in an effort to position itself to take advantage of the
opportunities created thereby.
CUSTOMER SERVICES AND FEE STRUCTURE
ONGOING ACCOUNTS RECEIVABLE MANAGEMENT SERVICES: Customers using the
Company's "Ongoing" claims processing service typically receive computer
software from the Company that facilitates claims preparation, editing and
transmission. Under the Company's Ongoing service, the Company edits,
submits, performs follow-up, submits required additional information, and
collects claims on behalf of its customers. In order to implement this
package of services the Company often installs interface and editing software
on a computer located in the customer's offices. This "front end" system
assists the customer's personnel in the preparation and editing of claims,
which are then electronically transmitted to the Company and, in turn,
transmitted directly or through an electronic clearinghouse to the insurance
carrier or governmental payor, as the case may be. In cases where the
insurance carrier or governmental payor cannot receive or efficiently handle
the Company's electronically transmitted claims, the Company will print the
claim on a standard industry form and mail it to the insurance carrier.
After the claims are processed, the Company's claims operations personnel
utilize computer-assisted follow-up methods to ensure timely collection. The
payor is directed to send the claim payment directly to the customer or to
UMC. In most cases the Company charges a percentage of actual claim payment
amounts collected as its fee. Complete claims settlement reports are sent to
customers on a semi-weekly, weekly, or monthly interval. Management believes
that the Company's claims collection experience to date and increasing
awareness throughout the healthcare industry of the need to cut costs and
improve cash flow will increase demand for this type of service.
4
BACKLOG ACCOUNTS RECEIVABLE MANAGEMENT SERVICES: Customers using the
"Backlog" service engage the Company to collect aged claims which usually
have been previously filed with an insurance carrier or governmental payer,
but which remain uncollected. When a customer enters into a backlog
collection agreement, the customer submits completed insurance claim forms to
the Company. The claims are then entered into the Company's claims
management and collection system, and the Company's standard claims
processing and collection procedures are applied to collect these backlog
claims. The Company believes that this program is attractive to potential
backlog collection customers because the Company collects outstanding claims
at competitive rates. Backlog collection contracts generally involve a
one-time placement of claims for collection.
PATIENT BILLING SERVICES: The Company offers its customers the option of
having UMC bill the guarantor of each account the appropriate balance
remaining due after all insurance payments due on an account have been
collected and contractual allowances have been posted. Fees for this service
vary depending upon the average balance and collection ratio of the accounts
being worked.
BAD DEBT COLLECTION SERVICES: This service involves collections of
accounts which have been written off as bad debt.
ADVANCE FUNDING SERVICES: Customers who use the Company's advance
funding service submit claims to the Company, which in turn transmits them to
the appropriate insurance carrier. To implement this service, the Company
purchases an undivided interest in a claim and advances between 45 and 75
percent of the insurance claim amount to the customer within seven business
days of purchase by the Company. When the carrier pays the claim, it sends
the payment directly to the Company's post office box for deposit pursuant to
a special power-of-attorney granted by the customer to the Company. The
Company then disburses the balance of that insurance claim payment to the
customer, minus the funds previously advanced and the Company's fee. In the
event payment from an insurance carrier is not received within 120 days after
a given claim is funded, the Company has the right, under the terms of its
standard customer contract, to require that the customer repurchase the claim
or offset the amount of the payment against balances otherwise payable to the
customer by the Company. The Company generally continues its collection
efforts for at least 120 days. The advance funding fee is not payable by the
customer for any claim not collected.
To qualify for the Company's advance funding service, a customer is
required to allow the Company to file appropriate Uniform Commercial Code
financing statements to establish the Company's interest in the customer's
insurance claims receivable. In addition, the Company provides advance funding
services only on those claims written on insurance carriers whose financial
standing meets financial criteria established by the Company. Furthermore, the
Company requires that the customer verify the existence and amount of coverage
on each insurance claim with the insurance carrier before transmitting the claim
to the Company. The Company reverifies insurance coverage with the carrier
before advancing any funds to the customer. The Company's ability to raise
capital to fund the purchase of claims will determine the extent of the
Company's ability to offer advance funding services in the future.
5
MANAGED CARE CLAIMS REPRICING SERVICES: With the advent of managed care,
many healthcare providers are being asked to accept discounted pricing
arrangements in exchange for the opportunity to provide services to a given
group of patients. These discounted pricing arrangements may be structured
as a fixed percentage discount from standard charges, a defined "fee
schedule" which results in lower charges for selected services, or more
complicated structures involving caps, outliers, and per diems. These
discounted fee structures are collectively referred to as "contracted rates".
Many healthcare providers do not have the systems and personnel needed to
efficiently and accurately reprice large volumes of managed care claims
consistent with contracted rates. UMC has developed the specifications for a
claims repricing module to be developed within UMC's proprietary Claims
Automation Support System ("CLASS"), and has initiated program development
work to enhance CLASS to support repricing functions.
UMCLAIMPROS: The Company began providing interim staff services under the
UMClaimPros label early in 1995. UMClaimPros are experienced billing and
collection personnel who are employed by UMC and placed on temporary
assignments in hospital and physician business offices. During 1995 and
1996, the UMClaimPros service was only offered in the Dallas area.
ECSPRESS SERVICES: Customers using the Company's "ECSpress" service
typically receive computer software from the Company that facilitates claims
preparation, editing and transmission. Under the Company's ECSpress service,
the customer edits and transmits claims using the Company's software. This
"front end" system assists the customer's personnel in the preparation and
editing of claims, which are then electronically transmitted to the Company
and, in turn, transmitted directly or through an electronic clearinghouse to
the insurance carrier or governmental payor, as the case may be. In cases
where the insurance carrier or governmental payor cannot receive or
efficiently handle the Company's electronically transmitted claims, the
Company will print the claim on a standard industry form and mail it to the
insurance carrier. After the claims are sent to the insurance carriers,
customers are provided with acknowledgement and error reports for the claims
submitted. In most cases the Company charges a flat fee per claim or per
month. Management believes that the Company's front end software and
increasing awareness throughout the healthcare industry of the need to cut
costs and improve cash flow will increase demand for this type of service.
FEE STRUCTURE: The Company has established both contingency and
non-contingency based fee structures which are intended to allow prospects
for the Company's services a wide range of pricing options. Under the
Company's contingency based fee structure, fees are charged as a percentage
of amounts collected. For the Company's Ongoing service, the Company
generally charges healthcare providers contingency fees ranging from 1.5 to
14 percent of the amount the Company collects on behalf of these providers,
depending upon the average claim amount collected. Backlog collection
services are usually priced between 8 and 15 percent of the amount collected,
depending upon the age of the claims. Collection ratios generally range from
0 percent to about 40 percent for Backlog projects and about 25 percent to 80
percent for Ongoing projects. Fees for Patient Billing services range from
5.5 percent to 10 percent of the amounts collected, while Bad Debt Collection
services are priced at 13.5 to 25 percent of amounts collected. UMClaimPros
services are priced at a per hour rate based on the salary of the assigned
personnel. ECSpress services are priced at a flat fee per claim or per
month. Management believes that the Company's fee structure for its package
of services is competitive.
6
SOFTWARE AND DATA PROCESSING
The Company's ability to provide its services on a large scale depends on
the successful operation of computer hardware and software capable of
handling the processing and transmission of insurance claims from the
customer to the insurance carrier, and through the intermediate steps that
such claims must take during the process. Since then, the Company has
continued to develop and enhance its systems using programmers employed by
the Company and outside resources.
The computerized claims filing process involves the use of IBM
PC-compatible claims processing software. Such software is used in hospital
environments and in physician offices where integration with an existing
computer system is desirable. The Company installs its software at the
customer's site and trains the customer's personnel in the use of such
software.
The claims processing software packages currently used by the Company are
specifically designed to expedite claims preparation and processing and,
simultaneously, to reduce errors associated with manual claims processing.
Claims are edited for certain mistakes, such as invalid or missing
information, using the claims processing software. Claims are then
transmitted directly to the Company, which performs further editing before
they are forwarded to the insurance carrier directly or through any one of
several insurance claim clearinghouses used by the Company. The
clearinghouses format and electronically transmit the claim data according to
the specifications of the individual insurance carriers, which avoids delays
resulting from paper routing and the errors resulting from insurance carrier
data re-entry. If, however, the insurance carrier cannot receive or
efficiently handle the Company's electronically transmitted claims, the
Company will print the claim on a standard industry form and mail it to the
insurance carrier. The Company intends to continue to enhance and refine its
claims processing and repricing, customer reporting, claims tracking and
collection functions during 1997.
SALES AND MARKETING
The Company solicits potential customers through its own resources and
through independent sales representatives.
On August 13, 1996, the Company hired a Director of Sales and Marketing
to spearhead the Company's sales and marketing efforts and provide a
foundation for building a direct selling organization. A second salesperson
has hired early in 1997.
On June 2, 1994, the Company signed an agreement with Healthcare Advisory
Services of Puerto Rico, Inc. ("HAS"). Under the agreement, HAS was
responsible for all sales and marketing costs and activities to solicit
customers in Puerto Rico, and the Company was responsible for all billing and
collection costs and activities. The Company served as a sub-contractor to
HAS in processing claims for HAS' customers in Puerto Rico until September
30, 1996.
Following the termination of the Company's contract with HAS, the Company
completed an alliance on October 7, 1996 with an established physician billing
firm in Puerto Rico. Under this alliance, the Company will provide systems and
marketing expertise, and the Puerto Rican firm will provide on-island
management, staff resources, and sales contacts. There can be no
7
assurance that UMC will be successful in obtaining new business or producing
profitable revenues as a result of this alliance.
COMPETITION
The Company has competition for each segment of its package of services.
There are electronic claims processing companies, claims collection
companies, claims management companies, factoring and financing firms,
software vendors and temporary employment contractors. In addition, the
Company faces stiff competition from the traditional in-house claims
processing and collection departments of hospitals and other healthcare
providers. Management believes that the Company's principal competitive
strengths are the quality and reliability of its computer hardware and
software systems, compatibility of its systems with those of prospective
customers, technical support, service quality, industry experience, the
number of insurance carriers to whom claims can be submitted, the breadth of
services offered and the price of such services. The Company offers a broad
range of services and believes that its fee structure compares favorably with
that of its competitors. Nevertheless, many of the Company's competitors
currently have competitive advantages over the Company. In particular, some
competitors, particularly those in the financial services business, are many
times larger than the Company and could, if they chose to enter the market
for the Company's line of services, devote resources and capital to the
market that are much greater than those which the Company currently has
available or may have available in the future.
SIGNIFICANT CUSTOMERS
During 1996, 88% of fee revenue was earned from three customers, the
Washington Hospital Center (WHC), Healthcare Advisory Service of Puerto Rico,
Inc. (HAS), and Mimbres Memorial Hospital (MMH). The Washington Hospital
Center provided revenue totaling $1,315,508, or 67% of total fee revenue. Of
the revenue generated by WHC during 1996, 99% was generated as a result of
the ongoing contract described below and 1% was generated as a result of a
Patient Billing contract. HAS generated revenues totalling $287,020, or 15%
of total fee revenue. Of this revenue, 44% were fees generated from the
Yauco Hospital, 37% were generated from AFASS clinics, and 19% was a result
of the settlement agreement reached between the Company and HAS in August,
1996. Mimbres Memorial Hospital generated revenue of $119,351, or 6% of
total fees. Of this revenue, 98% were ongoing fees, 2% were backlog fees.
The Company's contract with HAS was terminated effective June 30, 1996 and
the Company's contract with MMH expired April 1, 1996.
During 1995, 91% of fee revenue was earned from three customers, the
Washington Hospital Center (WHC), Mimbres Memorial Hospital (MMH), and
Healthcare Advisory Service of Puerto Rico, Inc. (HAS). The Washington Hospital
Center provided revenue totaling $1,262,899, or 64% of total fee revenue. Of
the revenue generated by WHC during 1995, 99% was generated as a result of the
ongoing contract described below and 1% was generated as a result of backlog
contracts. Mimbres Memorial Hospital generated revenue of $364,365, or 18% of
total fees. Of this revenue, 82% were ongoing fees, 16% were backlog fees, and
1% were funded claims fees. HAS generated revenues totaling $176,635, or 9% of
total fees.
During 1994, 85% of fee revenue was earned from WHC. Of the revenue
generated by WHC during 1994, 99% was generated as a result of the ongoing
contract described below and 1% was generated as a result of backlog contracts.
8
On December 15, 1992, the Company entered into a contract with WHC to
provide ongoing processing of all of WHC's outpatient claims due from
Medicare, Medicaid, Blue Cross, and commercial insurance carriers. Consistent
with industry practice, this ongoing claims processing contract with WHC may
be terminated by WHC or the Company upon 30 days prior written notice.
PATENTS AND TRADE SECRETS
As has been typical in software-intensive industries, the Company does
not hold any patents. The Company believes that patent protection is of less
importance in an industry characterized by extremely rapid technological
change than the expertise, experience and creativity of the Company's product
development personnel. Employees of the Company are required to sign
non-disclosure agreements. The Company relies on these agreements, its
service contracts with customers, and trade secrets to protect its
proprietary software, and to date, has had no indication of any material
breach of these agreements.
EMPLOYEES
At March 14, 1997, the Company employed 40 permanent full time employees
and 3 permanent part time employees, none of which were employed in Puerto
Rico. From time to time the Company supplements its employee work force with
temporary personnel to assist in claims processing. The Company believes
that its relations with its employees are good. Its employees are not
currently, nor have they ever been, represented by a union and there have not
been any stoppages, strikes or organizational attempts. The Company believes
that its continued ability to recruit and maintain highly skilled management,
marketing, sales, technical, collections and customer service personnel is
essential to its future success.
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EXECUTIVE OFFICERS OF THE REGISTRANT
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The Company's executive officers are as follows:
NAME AGE POSITION
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Peter W. Seaman 47 Chairman and Chief Executive Officer,
and Director
(Principal Accounting Officer)
Mary E. Rogers 34 Vice President, Information Systems
Robert D. Powell 41 Secretary/Treasurer
MR. SEAMAN joined the Company on July 17, 1991 as Vice President and
Chief Financial Officer, was named President and Chief Executive Officer on
January 28, 1994 and elected Chairman of the Board of Directors on November
12, 1996. Mr. Seaman's prior employment includes two years as Director of
Business Development for TRW Receivables Management Services and three years
as Vice President, Planning and Systems Development, for the Accounts
Receivable Management Division of the Chilton Corporation. Prior to joining
the Chilton Corporation, Mr. Seaman was Vice President and Chief Financial
Officer for Corliss, Inc., a collection systems and services company. Before
that, Mr. Seaman held a number of finance, marketing and auditing positions
with the Datapoint Corporation, Rockwell International, and Coopers and
Lybrand. Mr. Seaman holds a B.A. in Accounting from Duke University and is a
Certified Public Accountant.
MRS. ROGERS joined the Company on September 22, 1993 and was promoted to
Vice President, Information Systems on December 16, 1994. Mrs. Rogers' prior
business experience includes two years as a Senior Systems Design Analyst for
CTI Limited, Inc., a property management software development firm, and three
years as a Senior Systems Design Analyst for Andersen Consulting. Mrs.
Rogers holds a B.B.A. in Finance from Southern Methodist University.
MR. POWELL joined the Company on November 9, 1995 as Accounting Manager,
and was promoted to Secretary/Treasurer on April 22, 1996. Mr. Powell's
prior employment includes three years as Administrative Director for the
collection division of CRW Financial, two years as Administrative Supervisor
for TRW Receivables Management Services, and eleven years in a number of
administrative jobs for the Accounts Receivable Management Division of the
Chilton Corporation.
ITEM 2. PROPERTIES
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The Company's corporate offices and operations are located in an 8,230
square feet leased office space in Dallas, Texas. On August 1, 1995, the
lease on this space was renegotiated with a five and one-half year term
10
extending until January 31, 2001. The first six months through January 31,
1996 were rent free. Effective February 1, 1996 through January 31, 1999,
the Company's monthly rent is $7,544. From February 1, 1999 through January
31, 2000, and February 1, 2000 through January 31, 2001, the monthly rent
will be $7,887 and $8,230 respectively. The Company has the option to
terminate this lease after three years of occupancy, providing it gives a
ninety day notice to the Lessor. Management believes that its facilities are
well-located and are in good condition. The Company's future facilities
requirements will depend upon the success of its business. Management
believes that there is adequate office space available should its space
requirements increase.
ITEM 3. LEGAL PROCEEDINGS
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The Company is the defendant in a lawsuit filed on March 2, 1995 by a
former employee of the Company. The lawsuit charges the Company with
wrongful discharge. The Plaintiff seeks reimbursement for unspecified past
and future economic loss, damages, exemplary damages, reinstatement,
attorney's fees and interest. Management believes this lawsuit to be without
merit and intends to vigorously defend against the claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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NONE
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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(a) Market Information
The Company's Common Stock began trading on a limited basis in the
over-the-counter market on August 3, 1989, and was approved for quotation on
the NASDAQ Inter-Dealer Quotation System ("NASDAQ") effective December 27,
1989, under the trading symbol UMCI. The Common Stock began trading under
the symbol UMI on the Boston Stock Exchange ("BSE") on December 22, 1989. On
August 18, 1992 the Company's Common Stock was deleted from NASDAQ due to
failure to maintain bid price, capital and surplus, and total assets at the
levels required for continued inclusion in NASDAQ. Trading of the Company's
Common Stock was suspended by the BSE, on June 2, 1995. The Company no
longer meets the minimum asset and stockholder equity requirements necessary
to trade on the BSE.
11
The following table sets forth, with respect to the NASDAQ (the Company's
primary market until August 18, 1992), the BSE, and quotes on the over the
counter market, Common Stock bid prices for the periods indicated.
OVER THE COUNTER (1)
---------------------
PERIOD HIGH ($) LOW
------ ---- ---
January 1 to March 31, 1994 3/8 7/32
April 1 to June 30, 1994 5/16 1/8
July 1 to September 30, 1994 3/8 5/32
October 1 to December 31, 1994 7/32 1/16
January 1 to March 31, 1995 1/8 1/32
April 1 to June 30, 1995 3/32 1/32
July 1 to September 30, 1995 1/16 1/32
October 1 to December 31, 1995 1/16 .01
January 1 to March 31, 1996 .05 .01
April 1 to June 30, 1996 .05 .01
July 1 to September 30, 1996 .05 .01
October 1 to December 31, 1996 .05 .01
(1) All bid prices between January 1, 1994 and June 2, 1995 were quoted on
the Boston Stock Exchange. All bid prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. All prices shown subsequent to June 2, 1995
reflect trade prices on the over the counter exchange ("pink sheets").
(b) Shareholders
At March 15, 1997 there were 26,310,217 shares of Common Stock
outstanding, held by 1,073 shareholders of record, not including 105,547
shares held in treasury by the Company.
(c) Dividends
The Company has never paid cash dividends. Management presently intends
to retain any earnings for the operation and expansion of the Company's
business and does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to the payment of dividends will depend
upon results of operations, capital requirements, the financial condition of
the Company and such other factors as the Board of Directors of the Company
may consider.
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ITEM 6. SELECTED FINANCIAL DATA
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The following table presents selected consolidated financial data at
December 31, 1996, 1995, 1994, 1993, and 1992, and for the years ended
December 31, 1996, 1995, 1994, 1993, and 1992. The information presented for
1996 and 1995 was derived from the consolidated financial statements of the
Company included elsewhere in this report. Information presented for 1994,
1993, and 1992 was derived from consolidated financial statements previously
filed by the Company.
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total revenues $2,027,823 $1,989,865 $1,342,848 $ 1,402,848 $ 872,501
Operating expenses 1,908,609 2,275,610 2,243,906 2,548,196 2,947,457
---------- ---------- ---------- ----------- -----------
Net income (loss) $ 119,214 $ (285,745) $ (901,058) $(1,145,582) $(2,074,956)
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
Net income (loss) $ .00 $ (.01) $ (.04) $ (.05) $ (.14)
per common share
AT DECEMBER 31: 1996 1995 1994 1993 1992
- --------------- ---- ---- ---- ---- ----
Cash and cash $ 188,868 $ 58,078 $ 351,233 $ 847,318 $ 113,145
equivalents
Restricted cash $ 8,143 $ 0 $ 4,851 $ 4,851 $ 4,851
Accounts
receivable $ 171,273 $ 138,970 $ 154,592 $ 169,982 $ 30,313
Working capital $ 115,986 $ (40,390) $ 139,306 $ 706,338 $ (675,677)
Net property and
equipment $ 120,142 $ 200,996 $ 322,300 $ 194,102 $ 329,595
Total assets $ 523,647 $ 436,058 $ 935,166 $ 1,250,899 $ 582,394
Long-term portion
of capital lease
obligations $ 100,344 $ 138,565 $ 164,187 $ 0 $ 0
Deferred Credits $ 23,891 $ 31,414 $ 31,319 $ 89,125 $ 125,274
Stockholders'
equity (deficit) $ 127,194 $ 7,980 $ 293,725 $ 841,102 $ (434,518)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------
The Company emerged from the development stage during the fourth quarter
of 1991. During the period from its inception on March 13, 1989 until the
fourth quarter of 1995, the Company raised capital and incurred significant
expenditures primarily for systems development, for developing and
implementing a marketing program and generally to build and maintain an
organization to facilitate the management of the Company. Accordingly, the
Company has reported a loss for every year since its inception up until 1996,
and any comparison between periods does not necessarily present a meaningful
analysis because of the Company's level of operations in each period.
13
GENERAL:
1994: On September 1, 1994, the Company completed a private offering to
offshore investors of 2,369,999 shares of UMC Common Stock at a price of $.15
per share. The offering generated net proceeds of $348,011 after deducting
legal fees and other expenses of the offering.
On September 30, 1994, the Company signed a promissory note to borrow
$200,000 from an offshore bank. The funds borrowed were used to purchase
claims under an Advance Funding Service contract provided to a new hospital
customer. At December 31, 1994, the Company had outstanding advances to a
customer, against the purchase price of claims, of $17,163.
On September 13 and October 1, 1994, the Company executed contracts with
the Mimbres Memorial Hospital to perform the initial processing, submission
to payers, and collection follow up of claims due from several payer classes.
In addition, the Company agreed to purchase certain medical accounts
receivable under a separate medical claims purchase contract. Revenues of
$42,347 were generated from this customer during 1994.
On December 30, 1994, the Company leased a new IBM A/S 400 Advanced
System 9406 Model 300 computer, for a term of 66 months including 6 months of
deferred payments. The total amount financed, including the rollover of the
remaining lease payments under the previous A/S 400 lease and financing of
the maintenance contract on the new computer, was $182,752.
1995: On January 30 and February 24, 1995, the Company made two
installments to complete repayment of all principal and interest due on a
$200,000 note due to an offshore bank. The Company borrowed this money on
September 30, 1994, to provide advance funding services to the Mimbres
Memorial Hospital in Deming, New Mexico. The Company completed collection of
all claims purchased from MMH under this advance funding contract in May
1995.
During 1995, the Company signed three contracts with domestic healthcare
providers. A contract was signed to deliver "patient balance" collection
services to a major hospital in the midwest. A contract was signed to
provide third party billing and patient balance collection services to
selected clinics to be opened by a national operator of clinics. A third
contract was signed to deliver claims repricing services to a managed care
provider network.
The Company's UMClaimPros interim staffing service, which was introduced
to the marketplace in late December, 1994, generated $116,489 in fees during
1995. The gross margin on UMClaimPros services is considerably lower than the
gross margin on UMC's other services.
The number of full time permanent employees increased from 45 at December
31, 1994 to 49 at December 31, 1995.
1996: Late in the first quarter of 1996, the Company was notified by its
third largest customer, Mimbres Memorial Hospital ("MMH"), that it had
accepted an offer to be acquired by a hospital chain. The chain has the
14
resources necessary to perform all of the billing and collection functions
which had been outsourced to UMC. Effective April 12, 1996, MMH discontinued
transmitting new claims to UMC for processing. MMH contributed $119,351 in
fees during 1996 and $364,365 in fees during 1995.
On August 13, 1996, the Company hired a Director of Sales and Marketing
to spearhead the Company's sales and marketing efforts and provide a
foundation for building a direct selling organization. In addition to
selling the Company's traditional claims management and UMClaimPros services,
the Director of Sales and Marketing will lead UMC's efforts to enter the bad
debt collection business.
Effective September 1, 1996, the Washington Hospital Center ("WHC")
executed an amendment to its existing agreement with UMC whereby WHC
authorized UMC to begin providing patient billing and collection services.
UMC's responsibilities under this amendment include billing and collecting
balances due from the guarantors of certain classes of patient accounts
following collection of medical insurance payments. UMC management believes
that revenues from this amendment will average $5K to $10K per month during
1997.
A contract to provide interim staffing services to a major hospital in
Texas was signed on September 18, 1996. Under this contract UMC provided
UMClaimPros personnel to assist the hospital with various tasks associated
with a major system conversion. This project is expected to continue through
April, 1997.
PUERTO RICAN OPERATIONS:
1994: On June 2, 1994, the Company signed agreements with Healthcare
Advisory Services of Puerto Rico, Inc., and its related company, Hospital
Advisory Service ("HAS"). Under the agreements, the Company provided claims
processing, submission to payers and collection follow up services to the
customers of HAS in the Puerto Rican market during a three year term. HAS is
responsible for marketing, sales and payer relations in the Puerto Rican
market. The Company agreed to pay HAS a monthly retainer of $12,000 for six
months, totalling $72,000.
On May 23, 1994, HAS signed a contract with the Municipio De Humacao
("Humacao") to provide the Company's services to a municipally funded clinic
in Humacao. Revenue of $2,003 was generated from the Humacao clinic during
1994.
On September 19, 1994, HAS signed a contract with the Administracion De
Facilidades Y Servicios De Salud ("AFASS"), the health department for the
Commonwealth of Puerto Rico, to provide claims processing services for four
clinics and one hospital which are funded by AFASS. No revenues were
generated from the AFASS contract during 1994. During 1994, the Company
incurred start up costs for operations in Puerto Rico of $155,978. These
expenses consisted of the HAS retainer of $72,000, travel of $22,613, payroll
costs of $37,285, and general office expenses of $24,080, all of which were
expensed as incurred in 1994. In addition, the Company purchased fixed
assets with an original cost of $25,828 for Puerto Rican operations.
15
1995: The Company's principal source of revenue in Puerto Rico results
from a contract between Healthcare Advisory Service of Puerto Rico, Inc.
("HAS"), and a government agency known as "AFASS." Under this contract, the
Company serves as a subcontractor to HAS in processing claims with dates of
service from October 1, 1994 to June 30, 1995 for a government funded
hospital ("GH") and four government funded clinics. UMC's fees for services
rendered to the clinics are computed at 10% of collections. During 1995, the
Company recognized fees totaling $108,008 for services rendered to the GH.
These revenues were based on a fee structure which required that the Company
meet a collections baseline requirement of $1,875,000, above which the
Company received fees based on a percentage of collections. In June 1995,
the HAS contract with AFASS was amended to allow the continuation of services
for an undefined period beginning July 1, 1995. The baseline for the GH
portion of the contract was reset at $2,500,000 for collections from claims
with dates of service during the period from July 1, 1995 to June 30, 1996.
In addition, HAS and UMC received the right to process claims from four
additional clinics, thus increasing the number of AFASS clinics served to
eight.
During 1995, the Company received cash payments from HAS totalling
$39,000 in repayment of a number of short term loans the Company made to HAS
to sustain HAS' operations during late 1994 and early 1995. As of December
31, 1995, HAS was current with respect to all invoices payable to UMC.
During 1995, the Company's Puerto Rican operation generated total
revenues of $176,635, with an operating loss of $58,837. The primary reasons
for the loss were the start up costs incurred primarily during the first half
of 1995 to train employees and develop UMC's claims entry, editing,
submission, and follow up processes consistent with the dynamics of the
Puerto Rican market; the costs incurred to set up UMC's office in Ponce; the
costs and expected delay in collections associated with the start up of
services for the four additional AFASS clinics for claims with dates of
service beginning July 1, 1995; and the costs associated with the start of a
new baseline measurement period for GH for claims with dates of service
beginning July 1, 1995.
On September 1, 1995, the Company signed a contract with a group of 15
emergency room physicians. This contract was significant in that it
established the first direct relationship between a customer and the Company
in Puerto Rico.
The Company's headcount in Puerto Rico at December 31, 1995 consisted of
one manager, one supervisor, five full time employees, and two part time
employees.
1996: During 1996, most of the Company's revenue in Puerto Rico was
derived from HAS, which the Company served as a subcontractor in regard to
HAS' contract for claims processing services with the Administration de
Facilidades y Servicios de Salud ("AFASS"). Under this contract, the Company
provided claims processing and follow up services to eight AFASS funded
clinics and one hospital in Yauco, Puerto Rico.
Effective June 30, 1996, the Company completed a Settlement and Termination
gAreement (the "Agreement") with HAS. Under the Agreement, on August 2, 1996
HAS paid to UMC a total of $172,000 representing the sum of $46,000 to
purchase UMC's interest in the claims inventory in process for the AFASS
clinics located at Coamo, Juana Diaz, Adjuntas,
16
Jayuya, Villalba, and Santa Isabel; $72,000 to purchase UMC's interest in the
claims inventory in process for the AFASS hospital located at Yauco; and
$54,000 as additional consideration for the Agreement. Following receipt of
these cash payments, the Company reported Fee Income of $118,000 and Other
Income of $54,000. The Agreement included a mutual release by UMC and HAS of
any claims either party may have against the other, and an indemnification of
UMC by HAS against any claim by AFASS for a refund of fees paid.
The Agreement also provided for the continuation of UMC's services to the
remaining three AFASS clinics and the AFASS hospital in Yauco for so long as
HAS contract with AFASS remained in force. HAS contract with AFASS was
terminated effective September 30, 1996.
Following the termination of HAS contract with AFASS, UMC gave notice to
terminate the lease on its office in Ponce, Puerto Rico. The office was
closed on January 3, 1997, and shortly after that date the last of UMC's
employees in Puerto Rico resigned to pursue other employment.
UMC's total revenues from Puerto Rican operations during 1996 were $298,555,
expenses totalled $204,492, and operating margin was $94,063.
MANAGEMENT: Robert D. Powell joined UMC on November 9, 1995 and was named
Secretary and Treasurer on April 22, 1996. On August 13, 1996, UMC hired
Robert C. Smith as Director of Sales and Marketing.
17
SALES AND PROCESSING VOLUME
The following table sets forth for each period indicated the volume and
gross dollar amount of insurance claims received and fees recognized for each
of the Company's two principal services. In general, collections on most
healthcare providers' new claims ("Ongoing") tend to average about 25 to 80
percent of the gross claim amount. Backlog collection ratios range from 0 to
about 40 percent of the aggregate gross claim amount because many backlog
claims have already been paid or denied by the insurance carriers prior to
submission of the claims to UMC. For these previously paid claims, UMC often
charges an administrative fee which is less than a collection fee.
PROCESSING VOLUME AND FEES
1994 1995 1996
---- ---- ----
First Second Third Fourth First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Number of
Claims Accepted
for Processing
Ongoing 24,690 32,552 32,280 38,779 46,972 46,021 43,161 47,249 48,280 46,860 40,179 37,127
Backlog 553 48 0 5,753 0 0 0 3,455 41 1 1 0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 25,243 32,600 32,280 44,532 46,972 46,021 43,161 50,704 48,321 46,861 40,180 37,127
Gross Amount of
Claims Accepted
for Processing
($000)
Ongoing 12,502 14,935 14,280 18,571 19,182 19,999 18,791 21,660 19,923 21,055 18,068 18,325
Backlog 1,067 207 0 3,362 0 0 0 1,269 17 0 0 0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 13,569 15,142 14,280 21,933 19,182 19,999 18,791 22,929 19,940 21,055 18,068 18,325
Collections ($000)
Ongoing 6,277 6,516 7,336 7,851 9,270 9,883 9,613 8,694 9,019 8,257 7,533 7,063
Backlog 375 136 194 130 272 159 28 60 70 6 0 0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 6,652 6,652 7,530 7,981 9,542 10,042 9,641 8,754 9,089 8,263 7,533 7,063
Fees Earned
($000)
Ongoing 278 290 332 371 549 482 449 447 408 386 379 376
Backlog 22 8 14 15 39 15 2 3 3 0 0 0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 300 298 346 386 588 497 451 450 411 386 379 376
For Ongoing claims, there is typically a time lag of approximately 5 to
30 days from contract execution to computer hardware installation and
training of customer personnel. During this period, Company personnel survey
the customer's existing operations and prepare for installation. Following
installation and training of the customer's personnel, the customer begins
entering claims and transmitting them to the Company. There is usually a time
lag of 30 to 90 days between transmission of a claim to a third party payor
and collection of a claim from that payor.
18
1995 COMPARED TO 1994
Fee income from UMC's advance funding service decreased 67%, from $14,058
in 1994 to $4,574 in 1995, due to the completion of the advance funding
services for MMH. Fee income from "Ongoing" claims processing, management
and collection services increased by 30%, from $1,247,730 in 1994 to
$1,620,868 in 1995, due to increased revenue from WHC and MMH. Backlog
collection fees decreased by 3%, from $58,584 in 1994 to $56,754 in 1995 due
to reduced backlog fees from WHC, offset by increased fees from MMH. Fees
from UMC's new UMClaimPros interim staffing service totalled $116,489 in
1995. No fees were earned from UMClaimPros in 1994. Patient billing fees
decreased from $2,921 in 1994 to $90 in 1995, and installation fees decreased
from $4,737 in 1994 to $0 in 1995.
Interest and other income decreased by 75%, from $14,819 in 1994 to
$3,632 in 1995. This was due to a lower level of investable cash upon which
to earn interest during 1995.
Salaries and benefits expense increased by 29%, from $1,157,518 in 1994
to $1,499,038 in 1995, which can be attributed to several factors. The
UMClaimPros service produced incremental salaries of $76,782 in 1995. Puerto
Rico salaries and benefits increased by $95,756 in 1995 over 1994, due to the
fact that the Company completed its first full year of operations in Puerto
Rico in 1995. Total headcount increased from 45 at December 31, 1994 to 49
at December 31, 1995.
Selling, general and administrative expenses decreased by 36%, from
$731,274 in 1994 to $467,397 in 1995 due to decreased expenses for claims
purchase, contract professional fees, contract clerical, employee
recruitment, property taxes, repair and maintenance, sales taxes, dealer
commissions, system usage fees and software maintenance, telephone service,
Puerto Rican operations, travel and marketing expenses offset by increased
expenses for bad debt, insurance, and office supplies.
Professional fees decreased by 25%, from $110,580 in 1994 to $82,794 in
1995 due to lower audit fees and professional fees to enhance software. This
decrease was partially offset by an increase in legal fees.
Office and equipment rental increased 26%, from $64,753 in 1994 to
$81,648, due to the office that the Company established in Puerto Rico in May
1995.
Depreciation and amortization increased by 7%, from $118,814 in 1994 to
$126,807 in 1995, due to depreciation on office equipment purchased for the
Company's Puerto Rico office.
Interest expense increased by 2% from $18,744 in 1994 to $19,169 in 1995.
Other expenses decreased by 103%, from $42,223 in 1994 to ($1,243) in
1995, due primarily to the loss on retirement and write off of fixed assets,
primarily computer equipment, in 1994.
19
1996 COMPARED TO 1995
Fee income from "Ongoing" claims processing, management and collection
services decreased by 9% from $1,620,868 in 1995 to $1,474,252 in 1996 due to
the loss of the MMH contract in 1996. Backlog collection fees decreased by
93% from $56,754 in 1995 to $4,132 in 1996 due to the completion of the
Backlog project for MMH during 1995. No new Backlog contracts have been
acquired since 1995. Fees from UMC's UMClaimPros interim staffing service
increased by 34% from $116,489 in 1995 to $155,910 in 1996 due primarily to
staffing services provided to a major hospital in the Dallas area. Patient
billing fees increased from $90 in 1995 to $50,484 in 1996 due to collection
services provided to Methodist Medical Center of Illinois. Repricing fees
increased significantly from $694 in 1995 to $13,036 in 1996 due to fees
generated from Integrated Medical Systems. Installation and Training fees
increased from $0 in 1995 to $6,900 in 1996 due to training and development
charges assessed to customers.
Fee income from Puerto Rican operations increased by 69% from $176,635 in
1995 to $298,555 in 1996 due to increased collections for the Yauco Hospital,
the AFASS clinics, and the settlement agreement reached between the Company
and HAS.
Interest income decreased by 32% from $3,632 in 1995 to $2,485 in 1996
due to a lower level of investable cash. Other income increased from $0 in
1995 to $74,649 in 1996 due to a gain on an insurance settlement paid to the
Company, and to the settlement agreement reached between the Company and HAS.
Salaries and benefits expense decreased by 22% from $1,499,038 in 1995 to
$1,171,721 in 1996 due to several factors. Puerto Rico headcount went down
from seven full-time and two part-time employees in 1995, to one full-time
employee at December 31, 1996. Also the Company's MIS, Sales, Finance,
Operations, and Operations Management departments' salaries expense decreased
from 1995 to 1996 due primarily to reduced headcount.
Selling, general, and administrative expenses decreased by 7% from
$467,397 in 1995 to $434,093 in 1996 due to decreased expenses for property
taxes, dealer commissions, marketing and advertising, travel and
entertainment, office supplies, telephone service (long distance), express
services, and contract clerical offset by increased expenses for Directors
and Officer's insurance, bad debts, recruitment, education and training, and
software maintenance.
Professional fees decreased by 5% from $82,794 in 1995 to $78,813 in 1996
due primarily to lower legal fees.
Office and equipment rental increased by 23% from $81,648 in 1995 to
$100,575 in 1996 due to increased rent expense on the office space in Dallas,
Texas and also twelve months of rent expense for the Ponce, Puerto Rico
office versus only six and a half months for that space in 1995.
Depreciation and amortization expense decreased by 17% from $126,807 in
1995 to $105,638 in 1996 due to assets becoming fully depreciated.
Interest expense decreased by 7% from $19,169 in 1995 to $17,842 in 1996
due to reduced
20
principal owed on the IBM AS/400 computer system currently leased by the
Company.
Other, net increased from ($1,243) in 1995 to ($73) in 1996 due to
reduced gains from the sale of assets.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents were $188,868 at December 31, 1996, an increase
of $130,790 from December 31, 1995. Net cash provided by operating activities
was $189,347 in 1996, contrasted with a net use of $79,311 in 1995 and a net
use of $855,424 in 1994. The most significant area of change in 1996 was a
net income of $119,214 in 1996 compared to a net loss of $285,745 in 1995.
Financing activities resulted in a net use of $33,846 in 1996 related to
payments made on capital lease obligations.
Net cash used in 1995 and 1994 was $293,155 and $496,086 respectively.
Investing activities required additional cash of $2,133 in 1995 and $165,110
in 1994. Financing activities resulted in net cash used of $211,711 in 1995
primarily related to the repayment of $200,000 note, compared to net cash
provided of $524,448 in 1994 from the sale of common stock and issuance of
$200,000 note.
The Company's current ratio at December 31, 1996, was 1.43 to 1, compared
to .84 to 1 at December 31, 1995. The increase in current ratio occurred
primarily as a result of the net income of $119,214 earned in 1996 and
positive cash flow from operations of $189,347 as mentioned above. During
1996, the Company was able to produce positive cash flow from operations for
the first time since its inception. If the Company is unsuccessful in
sustaining positive cash flow from operations, management may be forced to
sell additional shares of stock during 1997 in order to sustain the Company's
operating activities. There can be no assurance that management will be
successful in finding buyers for the Company's shares, or of the terms under
which shares might be sold.
CAPITAL SOURCES
The Company's operating activities during 1996 generated positive cash
flow. No additional capital was raised from the sale of the Company's Common
Stock or borrowings from private lenders or banks.
On January 30, 1995, the Company repaid $100,000 in principal plus
interest on a promissory note due to an offshore bank. The remaining
$100,000 plus interest due on this promissory note was repaid on February 24,
1995.
On September 30, 1994, the Company signed a promissory note to borrow
$200,000 from an offshore bank. The funds borrowed were used to provide the
Company's advance funding service to MMH.
On September 1, 1994, the Company completed a private offering to offshore
investors of 2,369,999 shares of UMC Common Stock at a price of $.15 per share.
The offering generated net
21
proceeds after expenses of $348,011, which were used to provide working
capital for operations.
ADVANCE FUNDING SERVICES
On May 3, 1995, the last of the claims that were advance funded in late
1994 were collected. The Company's ability to raise capital to fund the
purchase of claims will determine the extent of the Company's future
commitment to advance funding services.
On September 23, 1994, the Company reentered the advance funding services
market by signing a contract to purchase claims with an anticipated
realizable value of $145,643. As of December 31, 1994, $37,720 of these
purchased claims remained to be collected from commercial insurance
companies. The Company secured a short term bank loan to provide funds to
advance against the purchased claims.
During the second half of 1990 and the first three quarters of 1991, the
Company used some of the proceeds from the August 1990 public offering to
fund its advance funding services. The Company was forced to discontinue its
advance funding service from October 1991 until September 1994 due to capital
constraints brought on by operating losses.
CAPITAL EQUIPMENT LEASES
The Company leases a portion of the computer hardware used on its
premises under a 66 month lease agreement which expires in June 2000. The
total amount financed, including the rollover of the remaining lease payments
under a previous A/S 400 lease and financing of the maintenance contract on
the new computer, was $182,752. Monthly lease payments will be $4,196 from
June 1995 until May 2000. The Company's capitalized lease obligations
totaled $137,206 as of December 31, 1996, of which $50,352 is payable in each
year through 1999 and $20,980 is payable in 2000. The A/S 400 equipment
financed under this lease may be purchased at the end of the lease for $1.
ADEQUACY OF CAPITAL RESOURCES
At December 31, 1996, the Company had $188,868 in cash and cash
equivalents on hand. These funds along with forecasted revenues are
projected by management to be adequate to fund current levels of operations
through 1997. The Company continues to pursue new business through direct
contacts with prospective customers and through independent sales agents in
an effort to generate additional revenues. There is no assurance that
revenues generated from existing customers will continue as forecasted or
that the Company will be successful in securing new customers or sources of
revenue before the Company's remaining capital is depleted. In the event
such new customers or sources of revenue are not secured, management projects
that cash flow from operations may not be sufficient to provide for the
Company's working capital needs beyond 1997, in which case the Company will
be required to raise additional capital in order to continue operating in its
present form. Due to the Company's history of operating losses there can be
no assurance that additional investment capital can be raised in the event
the Company is not successful in securing new customers or new sources of
revenue.
22
OTHER ITEMS
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" was issued. This statement
requires the fair value of stock options and other stock-based compensation
issued to employees to either be included as compensation expense in the
income statement or the pro-forma effect on net income and earnings per share
of such compensation expense to be disclosed in the footnotes to the
Company's financial statements commencing with the Company's 1996 fiscal
year. The Company has adopted SFAS No. 123 on a disclosure basis.
CAPITAL STOCK
The Company's Certificate of Incorporation provides for 50,000,000
authorized shares of Common Stock, of which 26,310,217 shares were issued and
outstanding (excluding shares held in treasury) at December 31, 1996. The
Company's Certificate of Incorporation also provides for 5,000,000 authorized
shares of Preferred Stock, of which none were outstanding at December 31,
1996. The voting rights, designation, liquidation preference, redemption
rights, dividends and other rights of the Preferred Stock may be designated
from time to time by resolution of the Board of Directors.
At the Annual Meeting of Stockholders on August 14, 1995, the
stockholders of UMC approved a 1 for 5 reverse split of the Company's Common
Stock, to be implemented at the discretion of UMC's Board of Directors. As
of the date of this report, the 1 for 5 reverse split had not been
implemented.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that
forward-looking statements include the intent, belief, or current
expectations of the Company and members of its senior management team, as
well as the assumptions on which such statements are based. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those contemplated by such
forward-looking statements. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include, but are not limited to, the status of the
Company's billing and accounts receivable management services operations,
continued availability of credit on terms and conditions acceptable to the
Company, on-going management initiatives designed to reduce costs and enhance
efficiencies, continued availability of qualified personnel to serve in the
various functional capacities required to sustain the Company's operations,
sales of the Company's healthcare billing and collection services and
prospective changes in laws, regulations or policies affecting the Company's
business and/or operations. The Company undertakes no obligation to update
or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results
over time.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
Refer to the Index to Consolidated Financial Statements and Financial
Statement Schedules on page 31 for the required information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
The section entitled " Election of Directors" appearing in the
Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on August 18, 1997, sets forth certain information
with respect to the Directors and nominees for election as Directors of the
Registrant and is incorporated herein by reference. Certain information with
respect to executive officers of the Registrant is set forth under the
caption " Executive Officers of the Registrant" in Item 1 of Part I of this
Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The section entitled "Compensation of Executive Officers" appearing in
the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on August 18, 1997, sets forth certain information
with respect to the compensation of management of the Registrant, and is
incorporated herein by reference.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
- --------------------------------------------------------------------------------
The section entitled "Stock Ownership of Principal Stockholders and
Management" appearing in the Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on August 18, 1997, sets forth
certain information with respect to the ownership of the Registrant's voting
securities, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
The section entitled "Certain Transactions" appearing in the Registrant's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held
on August 18, 1997, sets forth certain information with respect to relations
of and transactions by management of the Registrant, and is incorporated
herein by reference.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
- --------------------------------------------------------------------------------
(a)(1)(2) See accompanying index to financial statements on page 31.
(a)(3) Exhibits
3.1 Certificate of Incorporation of the Company, filed with Secretary of
State of Delaware on February 26, 1988, is incorporated herein by
reference to Exhibit 3 (a) of the Company's Registration Statement on
Form S-1, Commission File No. 33-20989, filed with the Commission on
March 30, 1988 and declared effective June 7, 1988 (previously filed).
3.2 By-Laws of the Company are incorporated herein by reference to Exhibit
3 (b) of the Company's Registration Statement on Form S-1, Commission
File No. 33-20989, filed with the Commission on March 30, 1988 and
declared effective June 7, 1988 (previously filed).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, filed with Secretary of State of Delaware on July 12, 1989,
is incorporated herein by reference to Exhibit 3 of the Company's
Current Report on Form 8-K, filed with the Commission on July 25, 1989
(previously filed).
3.4 Certificate of Amendment to Certificate of Incorporation of the
Company, filed with Secretary of State of Delaware on August 9, 1989,
is incorporated herein by reference to Exhibit 3.2 of the Company's
Form 10-Q filed for the fiscal quarter ended September 30, 1989
(previously filed).
4.1 Certificate of Designations, Preferences and Rights of 10% Cumulative
Convertible Preferred Stock of the Company, filed with the Secretary
of State of Delaware on August 9, 1989, is incorporated herein by
reference to Exhibit 4 of the Company's Form 10-Q filed for the fiscal
quarter ended September 30, 1989 (previously filed).
4.2 First Amended Certificate of Designations, Preferences and Rights of
10% Cumulative Convertible Preferred Stock of the Company, filed with
the Secretary of State of Delaware on December 7, 1989 is incorporated
herein by reference to Exhibit 4.2 of the Company's Form 10-K filed
for the fiscal year ended December 31, 1989 (previously filed).
4.3 Specimen Form of Certificate of Common Stock of the Company is
incorporated herein by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-1, Commission File No. 33-35177,
originally filed with the Commission on June 1, 1990 and declared
effective July 27, 1990 (previously filed).
26
4.4 Article Fourth of the Company's Certificate of Incorporation is
incorporated herein by reference to Exhibit 3 of the Company's Current
Report on Form 8-K, filed with the Commission on July 25, 1989
(previously filed).
4.5 Certificate of Amendment to Certificate of Incorporation, filed
with the Secretary of State of Delaware on June 21, 1990 is
incorporated herein by reference to Exhibit 4.5 of the Company's
Registration Statement on Form S-1, Commission File No. 33-35177,
originally filed with the Commission on June 1, 1990 and declared
effective on July 27, 1990 (previously filed).
9. Not Applicable.
10.1 1989 Stock Option Plan of the Company is incorporated herein by
reference to Exhibit 10.1 of the Company's Form 10-Q filed for the
fiscal quarter ended September 30, 1989 (previously filed).
10.2 Form of Warrant to purchase shares of the Company's Common Stock
granted to certain persons during 1990 in connection with the
provision of interim financing is incorporated herein by reference to
Exhibit 10.14 of the Company's Registration Statement on Form S-1,
Commission File No. 33-35177, originally filed with the Commission on
June 1, 1990 and declared effective July 27, 1990 (previously filed).
10.3 Medical Claims Management/Collection Agreement, dated May 25, 1990, by
and between the Company and University Hospital is incorporated herein
by reference to Exhibit 10.20 of the Company's Registration Statement
on Form S-1, Commission File No. 33-35177, originally filed with the
Commission on June 1, 1990 and declared effective July 27, 1990
(previously filed).
10.4 Master Equipment Lease Agreement, dated February 2, 1990, by and
between the Company and Com Resources, Inc., together with certain
Schedules attached thereto is incorporated herein by reference to
Exhibit 10.22 of the Company's Registration Statement on Form S-1,
Commission File No. 33-35177, originally filed with the Commission on
June 1, 1990 and declared effective July 27, 1990 (previously filed).
10.5 First Amended and Restated 1989 Stock Option Plan of the Company is
incorporated herein by reference to Exhibit 10.23 of the Company's
Form 10-K filed for the fiscal year ended December 31, 1990
(previously filed).
10.6 Third Amended and Restated 1989 Stock Option Plan of the Company
(previously filed).
10.7 1992 Stock Option Plan of the Company is incorporated herein by
reference to Exhibit 10.24 of the Company's Registration Statement on
Form S-1, Commission File No. 33-35178 (previously filed).
27
10.8 Warrant dated August 21, 1992, issued to Gary R. Beauchamp is
incorporated herein by reference to Exhibit 10.25 of the Company's
Registration Statement on Form S-1, Commission File No. 33-35178
(previously filed).
10.9 Warrant dated August 21, 1992 issued to Walid E. Moukarzel is
incorporated herein by reference to Exhibit 10.26 of the Company's
Registration Statement on Form S-1, Commission File No. 33-35178
(previously filed).
10.10 Warrant dated August 14, 1992, issued to Mary G. Merritt is
incorporated herein by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1, Commission File No. 33-35178
(previously filed).
10.11 Customer Service Agreement dated December 15, 1992 by and between
the Company and the Washington Hospital Center is incorporated herein
by reference to Exhibit 10.27 of the Company's Registration Statement
on Form S-1, Commission File No. 33-35178 (previously filed).
10.12 Settlement and Termination Agreement dated as of February 19,
1993 by and between the Registrant, American Pacific Acceptance
Corporation and Summit Capital Corporation, is incorporated herein by
reference to Exhibit 10.1 of the Company's Current Report on Form 8-K,
filed with the Commission on March 3, 1993 (previously filed).
10.13 Warrant dated March 2, 1993, issued to Walid E. Moukarzel
(previously filed).
10.14 Standard Office Building Lease Agreement dated June 1, 1989,
between the Registrant and Aetna Life Insurance Company (previously
filed).
10.15 Third Amendment to Lease, dated May 1, 1992, between the
Registrant and Aetna Life Insurance Company (previously filed).
10.16 Sales Agent Agreement dated August 6, 1993, between UMC and
Consolidated Associates, Inc., is incorporated herein by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993 (previously filed).
10.17 Sales Agent Agreement dated August 6, 1993, between UMC and Tomar
Investments, is incorporated herein by reference to Exhibit 10.2 of
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993 (previously filed).
10.18 Warrant dated August 9, 1993 issued to Tomar Investments
(previously filed).
10.19 Certificate of Amendment to Certificate of Incorporation of the
Company, filed with Secretary of State of Delaware on August 3, 1993
(previously filed).
28
10.20 Promissory Note dated September 30, 1994 made by the Registrant
to BFI Banque de Financement et D'Investissement (previously filed).
10.21 Term Lease Supplement dated December 30, 1994 between the
Registrant and IBM Credit Corporation (previously filed).
10.22 1995 Stock Option Plan (previously filed).
10.23 Modification and Ratification of Lease, dated July 19, 1995
(previously filed).
10.24 HAS Settlement and Termination Agreement, dated August 1, 1996.
22.1 Subsidiaries of the Company (previously filed).
23.1 Consent of Price Waterhouse LLP, Independent Accountants
(b) Reports on Form 8-K
None
29
SIGNATURES
Pursuant to the requirement of Section 13 or 15 (d) 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.
United Medicorp, Inc.
Date: March 27, 1997 By: /s/ Peter W. Seaman
------------------- --------------------------------------
Peter W. Seaman, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Peter W. Seaman Chairman of the Board and March 27, 1997
- ------------------------ Chief Executive Officer
Peter W. Seaman (Principal Accounting Officer)
/s/ Michael P. Bumgarner Director March 27, 1997
- ------------------------
Michael P. Bumgarner
/s/ John F. Lewis Director March 27, 1997
- ------------------------
John F. Lewis
/s/ Thomas H. McConnell Director March 27, 1997
- ------------------------
Thomas H. McConnell, III
30
ITEM 8 AND 14 (a). UNITED MEDICORP, INC.
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS: PAGE
----
Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . . . . . . 32
Consolidated Statements of Revenues and Expenses for the Years
Ended December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . 33
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . 34
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 36
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . 48
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or the Notes thereto.
PRICE WATERHOUSE LLP
Dallas, Texas
March 12, 1997
31
UNITED MEDICORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 188,868 $ 58,078
Restricted cash 8,143 0
Accounts receivable, less allowance for
doubtful accounts of $18,177 and $7,493,
respectively 171,273 138,970
Notes receivable, less allowance for
doubtful accounts of $0 and $0,
respectively 0 214
Prepaid expenses and other 19,920 20,427
------------ ------------
Total current assets 388,204 217,689
PROPERTY AND EQUIPMENT (NET) 120,142 200,996
OTHER ASSETS 15,301 17,373
------------ ------------
TOTAL ASSETS $ 523,647 $ 436,058
------------ ------------
------------ ------------
CURRENT LIABILITIES:
Payable to clients $ 8,143 $ 19,902
Trade accounts payable 46,077 48,230
Accrued expenses 181,136 141,501
Deferred revenue 0 15,959
Current portion of capital lease obligations 36,862 32,487
------------ ------------
Total current liabilities 272,218 258,079
LONG TERM LEASE OBLIGATION 100,344 138,565
DEFERRED CREDITS 23,891 31,434
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 50,000,000
authorized, 26,415,764 shares issued and
outstanding at 12/31/96 and 12/31/95. 264,157 264,157
Less: 105,547 shares of treasury stock, at cost (221,881) (221,881)
Additional paid-in capital 18,552,341 18,552,341
Retained deficit (18,467,423) (18,586,637)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 127,194 7,980
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 523,647 $ 436,058
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
32
UNITED MEDICORP, INC.
CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES
YEAR YEAR YEAR
ENDED ENDED ENDED
DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
------------- ------------- -------------
REVENUES:
Fee income $ 1,950,689 $ 1,986,233 $ 1,328,029
Interest income 2,485 3,632 13,063
Other Income 74,649 -- 1,756
------------ ------------ ------------
Total revenues 2,027,823 1,989,865 1,342,848
EXPENSES:
Salaries and benefits 1,171,721 1,499,038 1,157,518
Selling, general and administrative 434,093 467,397 731,274
Professional fees 78,813 82,794 110,580
Office and equipment rental 100,575 81,648 64,753
Depreciation and amortization 105,638 126,807 118,814
Interest 17,842 19,169 18,744
Other, net (73) (1,243) 42,223
------------ ------------ ------------
Total expenses 1,908,609 2,275,610 2,243,906
------------ ------------ ------------
NET INCOME (LOSS) $ 119,214 ($285,745) ($901,058)
------------ ------------ ------------
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE $ 0.00 ($0.01) ($0.04)
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 26,310,217 26,310,217 24,730,218
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated
financial statements.
33
UNITED MEDICORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 119,214 ($285,745) ($901,058)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 105,638 126,807 118,814
Issuance of warrants and options -- -- 5,760
(Gain) Loss on disposal of assets (73) (1,298) 40,671
CHANGES IN ASSETS & LIABILITIES:
(Increase) Decrease in restricted cash (8,143) 4,851 --
(Increase) Decrease in purchased claims -- 37,721 (37,721)
(Increase) Decrease in accounts receivable, net (32,303) 15,622 15,390
(Increase) Decrease in notes receivable 214 12,000 (12,000)
(Increase) Decrease in prepaid expenses and other 507 4,203 (19,895)
Decrease in deposits and other 2,072 8,180 --
Increase (Decrease) in payable to clients (11,759) (6,738) 21,789
Increase (Decrease) in trade accounts payable (2,153) (15,027) 5,189
Increase (Decrease) in accrued expenses 39,635 4,039 (45,385)
Increase (Decrease) in deferred revenue (15,959) 15,959 --
Increase (Decrease) in deferred credits (7,543) 115 (46,978)
------------ ------------ ------------
Net cash provided by (used in) operating activities 189,347 189,347 (79,311) (855,424)
INVESTING ACTIVITIES:
Additions of property and equipment, net (24,711) (2,133) (165,110)
------------ ------------ ------------
Net cash used in investing activities (24,711) (2,133) (165,110)
FINANCING ACTIVITIES:
Sale of common stock -- -- 348,011
Proceeds of notes payable -- -- 200,000
Repayment of notes payable -- (200,000) (882)
Decrease in capital lease obligation (33,846) (11,711) (22,681)
------------ ------------ ------------
Net cash (used in) provided by financing activities (33,846) (211,711) 524,448
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 130,790 (293,155) (496,086)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58,078 351,233 847,319
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 188,868 $ 58,078 $ 351,233
------------ ------------ ------------
------------ ------------ ------------
ADDITIONAL CASH FLOW INFORMATION
Cash paid for interest $ 17,842 $ 20,122 $ 11,784
Leases Capitalized -- -- $ 131,330
The accompanying notes are an integral part of these consolidated
financial statements.
34
UNITED MEDICORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995, and 1994
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------------- PAID-IN ------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
------ ------ ---------- ------ ------ ----------- -------------
Balance at December 31, 1993 24,045,765 $240,457 $18,222,270 105,545 ($221,881) ($17,399,834) $ 841,012
Shares issued at $.15 per share 2,369,999 23,700 324,311 -- -- -- 348,011
Warrants and options issued -- -- 5,760 -- -- -- 5,760
Adjust fractional shares -- -- -- 2 -- -- --
Net income (loss) -- -- -- -- -- (901,058) (901,058)
---------- -------- ----------- ------- --------- ------------ -------------
Balance at December 31, 1994 26,415,764 $264,157 $18,552,341 105,547 ($221,881) ($18,300,892) $ 293,725
Net income (loss) -- -- -- -- -- (285,745) (285,745)
---------- -------- ----------- ------- --------- ------------ -------------
Balance at December 31, 1995 26,415,764 $264,157 $18,552,341 105,547 ($221,881) ($18,586,637) $ 7,980
Net income (loss) -- -- -- -- -- 119,214 119,214
---------- -------- ----------- ------- --------- ------------ -------------
Balance at December 31, 1996 26,415,764 $264,157 $18,552,341 105,547 ($221,881) ($18,467,423) $ 127,194
---------- -------- ----------- ------- --------- ------------ -------------
---------- -------- ----------- ------- --------- ------------ -------------
The accompanying notes are an integral part of these consolidated
financial statements.
35
UNITED MEDICORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------------------------
BASIS FOR FINANCIAL STATEMENT PRESENTATION AND GOING CONCERN
The consolidated financial statements of United Medicorp, Inc. (the
"Company" or "UMC") 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.
UMC has yet to generate sufficient consistent revenues to cover operating
expenses and has incurred cumulative losses since inception of $18,467,423.
Operating funds to date have been obtained primarily through the sale of the
Company's Common Stock. At December 31, 1996, UMC had $188,868 in unrestricted
cash and cash equivalents and $171,273 in receivables due from customers.
During 1996, the Company generated $287,020 in fees from its contract with
Healthcare Advisory Service of Puerto Rico, Inc. ("HAS"), and $119,351 in fees
from its contract with Mimbres Memorial Hospital ("MMH"). The Company's
contract with HAS was terminated effective June 30, 1996, and the contract with
MMH expired April 1, 1996. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern.
At December 31, 1996, the Company had $188,868 in cash and cash
equivalents on hand. These funds along with forecasted revenues are projected
by management to be adequate to fund current levels of operations through 1997.
The Company continues to pursue new business primarily through direct contacts
with prospective customers and through independent sales agents in an effort to
generate additional revenues. There is no assurance that revenues generated
from existing customers will continue as forecasted or that the Company will be
successful in securing new customers or sources of revenue before the Company's
remaining capital is depleted. In the event such new customers or sources of
revenue are not secured, management projects that cash flow from operations may
not be sufficient to provide for the Company's working capital needs beyond
1997, in which case the Company may be required to raise additional capital in
order to continue operating in its present form. Due to the Company's history
of operating losses there can be no assurance that additional investment capital
can be raised in the event the Company is not successful in securing new
customers or new sources of revenue.
USE OF ESTIMATES
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
36
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary, United MoneyCorp, Inc. All significant intercompany
transactions and accounts have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and liquid investments with
original maturities of ninety days or less. At December 31, 1996 and 1995, UMC
held $188,868 and $58,078 in cash and prime-rated short-term investments and
government securities, respectively.
RESTRICTED CASH
Restricted cash represents amounts, net of fees earned, collected by the
Company on behalf of its customers. These amounts are not subject to use by the
Company for its operations. At December 31, 1996 and 1995, the Company held
restricted cash of $8,143 and $0, respectively.
PURCHASED CLAIMS
Purchased claims represent claims purchased from a customer under a medical
claims purchase contract. At December 31, 1996, there were no outstanding
purchased claims.
ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1996 and 1995 represent fees which have
been billed to and are due from customers.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and include assets leased under
a capital lease agreement. Expenditures for repairs and maintenance are charged
to income as incurred, and expenditures for major renewals and betterments are
capitalized. Depreciation and amortization are computed using the straight-line
method over the estimated useful life of the asset, ranging from three to seven
years. Upon disposition of assets, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
included in "Other, net."
Property and equipment is reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset or group of
assets may not be recoverable. The impairment review includes a comparison of
future cash flows expected to be generated by the asset or group of assets with
their associated carrying value. If the carrying value of the asset or group of
assets exceeds expected cash flows (undiscounted and without interest charges),
an impairment loss is recognized for the excess of carrying amounts over fair
value.
37
PAYABLE TO CLIENTS
Payable to clients represents claim payments collected from insurance
carriers on behalf of UMC customers. These funds are remitted to the customer
by UMC on a weekly, semi-monthly, or monthly interval.
REVENUES
Fee income is generally recognized upon receipt of payment from a third
party payor or guarantor of a patient's account.
OTHER INCOME
Effective June 30, 1996, the Company completed a Settlement and Termination
Agreement (the "Agreement") was HAS. Under the Agreement, on August 2, 1996 HAS
paid to UMC a total of $172,000 representing the sum of $46,000 to purchase
UMC's interest in the claims inventory in process for the AFASS clinics located
at Coamo, Juana Diaz, Adjuntas, Jayuya, Villalba, and Santa Isabel; $72,000 to
purchase UMC's interest in the claims inventory in process for the AFASS
hospital located in Yauco; and $54,000 as additional consideration for the
Agreement, which is included in "Other Income" in the accompanying Consolidated
Statements of Revenues and Expenses. Income related to these cash payments was
recognized in the month of August, 1996, when the cash was received. The
Agreement included a mutual release by UMC and HAS of any claims either party
may have against the other, and an indemnification of UMC by HAS against any
claim by AFASS for a refund of fees paid.
INCOME (LOSS) PER SHARE OF COMMON STOCK
Net Income (Loss) per share of Common Stock is computed based on the
weighted average number of shares outstanding at December 31, 1996, 1995, and
1994 which were 26,310,217, 26,310,217, and 24,730,218 shares, respectively.
Common Stock options and warrants were not included in the net income (loss) per
common share calculation because their effect would be antidilutive.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), using
the asset and liability method. The asset and liability method requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement basis and
the tax basis of assets and liabilities. A valuation allowance has been
provided against the Company's net deferred income tax asset at December 31,
1996 and 1995 as, in the opinion of management, there can be no assurance that
the deferred tax asset will be realized.
38
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" was issued. This statement requires
the fair value of stock options and other stock-based compensation issued to
employees to either be included as compensation expense in the income statement
or the pro-forma effect on net income and earnings per share of such
compensation expense to be disclosed in the footnotes to the Company's financial
statements commencing with the Company's 1996 fiscal year. The Company has
adopted SFAS No. 123 on a disclosure basis, and the pro-forma impact of
implementation of SFAS No. 123 on the Company's consolidated statements of
revenues and expenses is disclosed in Footnote J.
NOTE B - THE COMPANY
- ----------------------------------------------------------------------------
United Medicorp, Inc. is a publicly held company which was established to
provide medical insurance claims management services to healthcare providers
throughout the United States. The Company was founded in March 1989 and as of
March 1997 has raised approximately $18.5 million in capital which has been
invested in market research, systems development, employee training and ongoing
operations.
The Company offers claims management and collection services to healthcare
providers, including the following:
1) Claims Management: This service involves processing, collection
follow-up, and accounting for current claims in an "ongoing" program.
2) Backlog Collections: UMC accepts portfolios of aged claims which in
most cases have been previously filed with third party payors, but have not been
paid. UMC determines the status of each claim, refiles claims, and then follows
up to effect collections.
3) Advance Funding: During September 1994 the Company reentered the
advance funding services market by signing a contract to purchase claims with
an anticipated realizable value of $145,643. To implement this service, the
Company purchases an undivided interest in a claim and advances between 45
and 60 percent of the insurance claim amount to the customer within seven
business days of purchase by the Company. When the carrier pays the claim,
it sends the payment directly to the Company's post office box for deposit
pursuant to a special power-of-attorney granted by the customer to the
Company. The Company then disburses the balance of that insurance claim
payment to the customer, minus the funds previously advanced and the
Company's fee. In the event payment from an insurance carrier is not
received within 60 days after a given claim is funded, the Company has the
right, under the terms of its standard customer contract, to require that the
customer repurchase the claim or offset the amount of the payment against
balances otherwise payable to the customer by the Company. The Company
generally continues its collection efforts for at least 120 days. The
advance funding fee is not payable by the customer unless the claim was
actually collected.
39
4) Patient Billing: This service involves billing the guarantor of an
account for the balance due after all insurance proceeds have been applied and
contractual allowances posted.
5) Bad Debt Collection: Under this service, collection letters are sent
and telephone calls made to debtors in attempts to collect receivables
previously charged off as bad debts.
6) Repricing Claims: This service involves repricing managed care claims
to conform with contracted rates. Claims are repriced according to a fee
schedule provided by UMC's customer. Although the Company views this activity
as an area for future growth in revenues, 1996 revenues were not significant to
the Company's operations.
7) UMClaimPros: UMC's UMClaimPros interim staffing service involves the
placement of experienced medical billing and collection personnel in temporary
assignments within hospital and physician business offices. During 1996, the
Company reported revenues totalling $155,910 from its UMClaimPros service.
UMC's marketing strategy is to offer Electronic Claims Submission ("ECS"),
claims processing and collection services with either transaction or contingency
based pricing to clinics and hospitals throughout the United States.
NOTE C - FINANCIAL INSTRUMENTS
- ----------------------------------------------------------------------------
The fair values of all financial instruments to which the Company is a
party approximate the recorded values at December 31, 1996 and 1995. The fair
value of such financial instruments is estimated by reference to market data.
NOTE D - PROPERTY AND EQUIPMENT
- -------------------------------------------------------------------------------
At December 31, 1996 property and equipment consisted of the following:
PURCHASED LEASED TOTAL
--------- ------ -------
Equipment $510,560 $118,480 $629,040
Software systems 120,261 0 120,261
Furniture and fixtures 99,816 0 99,816
Leasehold improvements 31,265 0 31,265
-------- --------- --------
761,902 118,480 880,382
Accumulated
depreciation and
amortization (681,253) (78,987) (760,240)
-------- --------- --------
Net Property and
equipment $80,649 $39,493 $120,142
-------- --------- --------
-------- --------- --------
40
At December 31, 1995 property and equipment consisted of the following:
PURCHASED LEASED TOTAL
--------- ------ -------
Equipment $503,186 $118,480 $621,666
Software systems 113,372 0 113,372
Furniture and fixtures 104,238 0 104,238
Leasehold improvements 31,265 0 31,265
-------- --------- --------
752,061 118,480 870,541
Accumulated
depreciation and
amortization (630,052) (39,493) (669,545)
-------- --------- --------
Net Property and
equipment $122,009 $78,987 $200,996
-------- --------- --------
-------- --------- --------
Depreciation and amortization expense related to property and equipment was
$105,638, $126,807, and $118,814, during 1996, 1995 and 1994, respectively.
NOTE E - ACCRUED EXPENSES
- ----------------------------------------------------------------------------
The Company's accrued expenses at December 31 consisted of the following:
1996 1997
---- ----
Accrued professional fees 59,210 73,773
Accrued payroll 48,289 38,054
Accrued other 73,637 29,674
-------- --------
Total $181,136 $141,501
-------- --------
-------- --------
NOTE F - INCOME TAXES
- ----------------------------------------------------------------------------
Current-year taxable income was offset by previously unbenefited net
operating loss carryforwards and, accordingly, no provision for income taxes has
been recorded in 1996. Due to operating losses, no provision or benefit for
income taxes was recorded by the Company in 1995 and 1994.
During 1992, an ownership change occurred which severely limits the use of
net operating loss carryforwards. Management estimates that the net operating
loss carryforwards which were generated prior to the ownership change and which
will be available as deductions against future taxable income, if and when the
Company achieves profitability, are limited to the $358,000 per year through
2007. Approximately $105,000 was utilized in 1996. Net operating loss
carryforwards generated in 1992 through 1995 which are not subject to limitation
are approximately $4.3 million and will expire at various times through 2010.
41
Deferred tax assets and liabilities are recorded based upon differences
between the financial statement and tax bases of assets and liabilities and
available carryforwards. Deferred tax assets at December 31 are comprised of the
following:
Description 1996 1997
- ----------- ---- ----
Net operating loss carryforwards $3,509,307 $3,594,727
Depreciation of property,
plant and equipment 58,083 24,994
Deferred credits 8,839 11,631
Other, net 12,763 13,748
---------- ----------
Total deferred tax asset 3,588,992 3,645,100
Valuation allowance (3,588,992) (3,645,100)
---------- ----------
Net deferred tax assets $ 0 $ 0
---------- ----------
---------- ----------
NOTE G - LEASE COMMITMENTS
- ----------------------------------------------------------------------------
On May 15, 1995, the Company leased a 1,260 square feet office space in
Ponce, Puerto Rico, for $2,250 a month. The term of the lease was five years,
with the Company having the option to terminate the lease after one year of
occupancy with ninety days written notice. Following such notice, the Company
closed the Ponce office on January 3, 1997.
On August 1, 1995, the Company renewed its lease on UMC's corporate offices
in Dallas. The lease term extends through January 31, 2001. The first six
months were rent free through January 31, 1996. Effective February 1, 1996
through January 31, 1999, the Company's monthly rent is $7,544. From February
1, 1999 through January 31, 2000, and February 1, 2000 through January 31, 2001,
the monthly rent will be $7,887 and $8,230 respectively. Rent expense during
1996, 1995 and 1994 related to this lease was $75,442, $64,111 and $63,498,
respectively. The Company has the option to terminate the lease after three
years of occupancy, providing it gives ninety days notice to the lessor.
Management believes that its facilities are well-located and are in good
condition. The Company's future facilities requirements will depend upon the
success of its business. Management believes that there is adequate office
space available should its space requirements increase.
On December 30, 1994, the Company leased a new IBM A/S 400 Advanced Series
9406 Model 300 computer, for a term of 66 months, with no payments due during
the first six months. The total amount financed, including the rollover of the
remaining lease payments under the previous A/S 400 lease and financing of the
maintenance contract on the new computer, was $182,752. Monthly lease payments
will be $4,196 from June 1995 until May 2000. The Company's capital lease
payment obligations totaled $172,036 as of December 31, 1996, of which $50,352
is payable each year through 1999 and $20,980 is payable in 2000. Of the total
future payments of $172,036 under this lease,
42
$17,266 represents interest, $9,389 represents maintenance and $8,175
represents sales tax. The equipment financed under this lease may be
purchased at the end of the lease for $1.
Interest expense on capital lease obligations was $17,842, $15,141, and
$11,055 during 1996, 1995 and 1994, respectively. Amortization expense on
leased assets was $39,494, $39,422, and $31,080 during 1996, 1995, and 1994,
respectively.
NOTE H - DEFERRED CREDITS
- ----------------------------------------------------------------------------
Deferred Credits of $23,891 and $31,434 as of December 31, 1996 and 1995,
respectively, relate to escalating lease payments as specified in the lease
contract for the Company's corporate office facilities which was executed on
August 1, 1995. The Company's current lease on its corporate offices is an
escalating rental schedule extending until January 31, 2001 with the first
six months of rent free. In order to properly record monthly rent expense
during the six month period when no cash outlay for rent was required, the
Company reported monthly rental expense and related deferred credits which
were calculated using the total of rentals due under the amended lease
agreement dated August 1, 1995, divided by the minimum non-cancelable term of
36 months. The deferred credits accumulated during the first six months of
the term of the amended lease are amortized on a straight line basis
beginning in February 1996, as a $1,257 per month reduction in rent expense
through the expiration of the non-cancelable term of the lease in July 1998.
NOTE I - COMMON STOCK
- ----------------------------------------------------------------------------
On September 1, 1994, the Company completed a private offering to
offshore investors of 2,369,999 shares of UMC Common Stock at a price of $.15
per share. The offering generated net proceeds of $348,011 after deducting
legal fees and other expenses of the offering.
At December 31, 1996 and 1995, there were 5,000,000 shares of Preferred
Stock authorized but unissued. There were 50,000,000 shares of $.01 par
value Common Stock authorized, of which 26,415,764 shares were issued and
outstanding, with 105,547 shares held in Treasury Stock. In addition,
2,295,500 shares of Common Stock were reserved at December 31, 1995 for
issuance of outstanding warrants and options.
NOTE J - WARRANTS AND OPTIONS
- ----------------------------------------------------------------------------
WARRANTS
During May, June, and July 1990, the Company issued warrants to purchase
88,750 shares of Common Stock, at $5.50 per share, to five parties as additional
compensation for extending Bridge Loans to the Company at the rate of one share
for each $8 loaned. Two trusts related to (and
43
beneficially attributable to) the person who was then the Company's Chairman
and Chief Executive Officer received warrants to purchase 38,750 shares in
these transactions. These warrants expire between November 1997 and January
1998.
On August 14, 1992, the Company issued a warrant to purchase 12,500
shares at $.25 per share to the Company's former Controller in consideration
of her past service to the Company following the elimination of her position
in a reduction-in-force. This warrant expired on August 14, 1996.
On August 21, 1992, the Company issued a warrant to purchase 25,000
shares at $.75 per share as additional consideration for the acquisition of
Sterling Hospital Systems, Inc. This warrant expired on August 21, 1996.
On August 6, 1993, warrants to purchase 750,000 shares of Common Stock at
an exercise price of $.25 per share were granted to a sales agent. Of these
150,000 warrants were exercisable immediately, with the remaining 600,000
warrants becoming exercisable based on fees billed to customers referred to
UMC by the sales agent over a three year period. The warrants expire on
August 6, 1998.
On August 9, 1993, warrants to purchase 85,000 shares of UMC Common Stock
were issued to two former directors of UMC. The warrants are exercisable
over a three year period at an exercise price of $.31. These warrants
expired on August 6, 1996. The Company recorded an expense of $6,205 upon
issuance of these warrants.
On August 29, 1994, a warrant to purchase 40,000 shares of UMC Common
Stock at $.31 per shares was issued to a former director of UMC.
On November 12, 1996, warrants to purchase 130,000 shares of UMC Common
Stock at $.06 per share were issued to three former directors of UMC. These
warrants expire on November 11, 2001.
The shares of common stock represented by the warrants, listed above,
have not been registered under the Securities Act of 1933.
OPTIONS
At the Annual Meeting of Stockholders on August 14, 1995, the Company's
stockholders approved the adoption of the 1995 Stock Option Plan (the 1995
Plan), which provides for the issuance of both "incentive" and "nonqualified"
stock options. A total of 1,000,000 shares are issuable under the 1995 Plan.
At the Annual Meeting of Stockholders on July 13, 1992, the Company's
stockholders approved the adoption of the 1992 Stock Option Plan (the 1992
Plan), which provides for the issuance of both "incentive" and "nonqualified"
stock options. A total of 1,000,000 shares are issuable under the Plan. In
addition, the Company's Third Amended And Restated 1989 Stock Option Plan
(the 1989 Plan) was revised such that no more options may be granted under
that plan. Options outstanding on July 13, 1992 under the 1989 Plan will
continue in force consistent with the terms and conditions under which
44
they were originally issued.
Under the terms of the Plan, the exercise price for both incentive and
nonqualified stock options to purchase shares of the Company's Common Stock
may be granted at a price not less than the market price of the stock at the
date of grant. Accordingly, no compensation cost has been recognized for the
Company's stock option plan. Stock options may be granted to holders of 10
percent or more of the Company's voting power at exercise prices no less than
110 percent of the market price of the stock at the date of grant. Both
option types are exercisable, in annual increments of one-third or one half
of the total options granted, on the anniversary dates following the award.
In 1996, the Company adopted the disclosure-only option under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). If the Company had recorded compensation expense
in 1996 and 1995 for the stock options and warrants granted in accordance
with the provisions of FAS 123, the pro forma net income (loss) would have
been $98,194 and ($290,341), and the pro forma net income (loss) per share
would have been $0.00 and ($.01) in 1996 and 1995, respectively. The
estimated fair value of the options granted during 1996 and 1995, using the
Black-Scholes pricing model, is $30,375 and $31,020, respectively. The
estimated fair value of the warrants granted in 1996 is $7,800. For purposes
of the pro forma disclosures, these values are expensed over the vesting
periods of the options and warrants.
The significant assumptions used to estimate the fair value of the stock
options and warrants granted in 1996 and 1995 include a risk-free rate of
return ranging from 6.11% to 7.9%, expected option and warrant lives of 10
years, expected volatility of 116.2% and no expected dividend payments.
A summary of stock option activity is as follows:
SUMMARY OF STOCK OPTIONS
1996 1995 1994
---- ---- ----
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
Options outstanding at
beginning of year 1,245,750 $.23 913,750 $.28 831,250 $.28
Options granted 607,500 $.05 362,000 $.10 330,000 $.30
Options exercised 0 $.00 0 $.00 0 $.00
Options canceled 613,750 $.25 30,000 $.13 247,500 $.30
------- ------ -------
Options outstanding at
end of year 1,239,500 $.13 1,245,750 $.23 913,750 $.28
--------- --------- -------
--------- --------- -------
Options exercisable at
end of year 604,500 $.18 628,917 $.21 392,084 $.27
45
The following information is presented for stock options outstanding at
December 31, 1996.
Outstanding Exercisable
---------------------------- -------------------
Average Average Average
Exercise Life Exercise Exercise
Price Range Shares (in Years) Price Shares Price
- ------------ ---------------------------- -------------------
$.05 to $.06 732,500 9 $.05 244,167 $.05
$.12 to $.13 130,000 9 $.13 43,333 $.13
$.25 to $.31 377,000 6 $.29 317,000 $.28
--------- -------
1,239,500 604,500
NOTE K - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Company paid approximately $4,413, $77,546, and $103,137 during 1996,
1995 and 1994, respectively, in sales commissions to marketing companies in
which a former member of the Board of Directors holds an interest.
In 1996, the Company paid consulting fees totalling $18,000 to Mr. John
Lewis. Mr. Lewis was elected to the Company's Board of Directors on November
12, 1996.
NOTE L - COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
The Company is the defendant in a lawsuit filed on March 2, 1995 by a
former employee of the Company. The lawsuit charges the Company with
wrongful discharge. The Plaintiff seeks compensation for unspecified past
and future economic loss, damages, exemplary damages, reinstatement,
attorney's fees and interest. The Plaintiff has requested a trial by jury.
Management believes this lawsuit to be without merit and intends to
vigorously defend against the claim.
NOTE M - SIGNIFICANT CUSTOMERS
- --------------------------------------------------------------------------------
During 1996, 88% of fee revenue was earned from three customers. The
Washington Hospital Center ("WHC") provided fees totalling 67% of total fee
revenue. Of the revenue generated by WHC during 1996, 99% was generated as a
result of an ongoing contract and 1% was generated as a result of a Patient
Billing contract. Accounts receivable from the three customers were
$132,535, $10,171, and $0 at December 31, 1996.
During 1995, 91% of fee revenue was earned from three customers. The
Washington Hospital Center (WHC) provided fees totaling 64% of total fee
revenue. Of the revenue generated by WHC during 1995, 99% was generated as a
result of an ongoing contract and 1% was generated as a result of backlog
contracts. Accounts receivable from the three customers were $80,505,
$36,579, and $3,614 at December 31, 1995.
46
During 1994, 90% of fee revenue was earned from three customers. The
Washington Hospital Center (WHC) provided fees totaling 85% of total fee
revenue. Of the revenue generated by WHC during 1994, 99% was generated as a
result of an ongoing contract and 1% was generated as a result of backlog
contracts. Accounts receivable from the three customers were $145,944,
$8,765, and $1,813 at December 31, 1994.
47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
United Medicorp, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of revenues and expenses, of cash flows and of
changes in stockholders' equity present fairly, in all material respects, the
financial position of United Medicorp, Inc. and its subsidiary at December
31, 1996 and 1995, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note A to the financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to this matter are also
described in Note A. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Dallas, Texas
March 12, 1997
48