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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-10418
UNITED MEDICORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2217002
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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[ ]
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. ____
As of March 31, 2000, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $897,950 based on the last sales
price of $0.05 per share of such stock on March 31, 2000. As of March 31, 2000
there were 28,710,217 shares of Common Stock, $0.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part I, Item 7 of this Form 10-K incorporates by reference information in the
Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance
Statement for Forward Looking Statements
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UNITED MEDICORP, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business............................................................................... 3
ITEM 2. Properties............................................................................. 9
ITEM 3. Legal Proceedings...................................................................... 9
ITEM 4. Submission of Matters to a Vote of Securities Holders.................................. 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 10
ITEM 6. Selected Consolidated Financial Data................................................... 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 12
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 23
ITEM 8. Financial Statements and Supplementary Data............................................ 23
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 23
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................................... 23
ITEM 11. Executive Compensation................................................................. 25
ITEM 12. Securities Ownership of Certain Beneficial Owners and Management....................... 27
ITEM 13. Certain Relationships and Related Transactions......................................... 28
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 28
Signatures....................................................................................... 32
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PART I
ITEM 1. BUSINESS
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"). On November 18, 1996, the Company filed
"Articles of Amendment to the Articles of Incorporation of Sterling Hospital
Systems, Inc." whereby this wholly owned subsidiary of UMC was renamed United
MoneyCorp, Inc. ("UMY"). UMY has been designated as the legal entity under which
UMC operates a collection agency. On August 7, 1998, UMC acquired 100% of the
common stock of Allied Health Options, Inc. ("AHO"), an Alabama corporation.
Effective June 30, 1999, the Company discontinued the operations of AHO. On
October 14, 1999, AHO filed a voluntary petition in the United States Bankruptcy
Court for the Northern District of Texas to liquidate pursuant to Chapter 7 of
Title 11 of the United States Bankruptcy code. On November 16, 1999, the Chapter
7 bankruptcy 341 creditors meeting was held. Unless the context indicates
otherwise, references herein to the Company include UMC and its operating
subsidiary UMY, and exclude AHO.
The Company provides medical insurance claims processing and accounts
receivable management services to healthcare providers. The Company employs
proprietary and purchased software to provide claims processing, billing and
collection services to its customers, which are primarily hospitals, medical
clinics, and physician practices. The Company's medical claims processing
service is designed to provide an electronic claims processing, billing 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
electronic claims processing system. UMY provides customer service and
collection services to health care providers.
The Company also provides interim staffing services under the name
style "UMClaimPros." This service line was introduced by the Company in December
1994. UMClaimPros are experienced claims processors available for customers'
interim staffing needs.
AHO was engaged in: outpatient services; twenty four hour a day
emergency care services; partial hospitalization services, or psychosocial
rehabilitation services; screening of patients being considered for admission to
State mental health facilities to determine the appropriateness of such
admission; and consultation and education services. AHO operated three Community
Mental Health Centers ("CMHC's") under the names: Behavioral Health of Mobile
("BHM"), Calhoun County Behavioral Health ("CCBH"), and Pensacola Center for
Behavioral Health ("PCBH"). BHM and CCBH obtained Health Care Financing
Administration ("HCFA") certification to provide partial hospitalization
services as a CMHC under Medicare Part A effective February 1, 1996. PCBH
obtained HCFA certification to provide partial hospitalization services as a
CMHC under Medicare Part A effective October 2, 1996.
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MEDICAL BILLING 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 payors have willingly paid the prices
established by providers while other payors, 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 payors 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, 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 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.
GOVERNMENTAL INVESTIGATIVE RESOURCES AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on
the billing and collection practices of healthcare providers and related
entities, and particularly on possible fraudulent billing practices. This
heightened scrutiny has resulted in a number of high profile civil and criminal
investigations, lawsuits and settlements.
In November 1998, the Office of Inspector General ("OIG") released
compliance plan guidance for third party billing companies, in which it
identified certain areas which it viewed as particularly problematic, including,
but not limited to, billing for undocumented services, unbundling, upcoding,
inappropriate balance billing, inadequate resolution of overpayments, lack of
integrity in computer systems, failure to maintain the confidentiality of
information records, misuse of provider identification numbers, duplicate
billing and illegal billing company incentives. While not mandatory, OIG
encourages billing companies and healthcare providers to adopt compliance plans.
The existence of an effective compliance plan may reduce the severity of
criminal sanctions for certain healthcare related offenses and may be considered
in the settlement of civil investigations. Management believes that the
operations of the Company are in compliance with the OIG release.
In 1996, Congress enacted the Health Insurance Portability and
Accounting Act of 1996, which includes an expansion of provisions relating to
fraud and abuse, creates additional criminal offenses relating to healthcare
benefit programs, provides for forfeitures and asset-freezing orders in
connection with such healthcare offenses and contains provisions for instituting
greater coordination of federal, state and local enforcement agency resources
and actions.
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EXISTING GOVERNMENT REGULATION
UMC's billing and collections activities are governed by numerous
federal and state civil and criminal laws. In general, these laws provide for
various fines, penalties, multiple damages, assessments and sanctions for
violations, including possible exclusion from Medicare, Medicaid and certain
other federal and state healthcare programs.
Submission of claims for services that were not provided as claimed, or
which violate the regulations, may lead to civil monetary penalties, criminal
fines, imprisonment and/or exclusion from participation in Medicare, Medicaid
and other federally funded healthcare programs. Specifically, the Federal False
Claims Act allows a private person to bring suit alleging false or fraudulent
Medicare or Medicaid claims or other violations of the statute. Such actions
have increased significantly in recent years and has increased the risk that a
company engaged in the healthcare industry, such as UMC and its customers, may
become the subject of a federal or state investigation, may ultimately be
required to defend a false claim action, may be subjected to government
investigation and possible criminal fines, may be sued by private payors and may
be excluded from Medicare, Medicaid and/or other federally funded healthcare
programs as a result of such an action.
Credit collection practices and activities are regulated by both
federal and state law. The Federal Fair Debt Collection Practices Act sets forth
various provisions designed to eliminate abusive, deceptive and unfair debt
collection practices by collection agencies. Various states have also
promulgated laws and regulations that govern credit collection practices.
Under Medicare law, physicians and hospitals are only permitted to
assign Medicare claims to a billing and collection services vendor in certain
limited circumstances. Medicare regulations provide that a billing company that
prepares and sends bills for the provider or physician and does not receive and
negotiate the checks made payable to the provider or physician does not violate
the restrictions on assignment of Medicare claims. Management believes that its
practices meet the restrictions on assignment of Medicare claims because, among
other things, it bills only in the name of the provider, checks and payments for
Medicare services are made payable to the provider and the Company lacks any
power, authority or ability to negotiate checks made payable to the provider.
As a participant in the healthcare industry, the Company's operations
are also subject to extensive and increasing regulation by a number of
governmental entities at the federal and state levels. The Company is also
subject to laws and regulations relating to business corporations in general.
Management believes its operations are in compliance with applicable laws.
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CUSTOMER SERVICES AND FEE STRUCTURE
ONGOING ACCOUNTS RECEIVABLE MANAGEMENT SERVICES: 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.
Customers using the Company's "Ongoing" claims processing service may opt to
receive computer software from the Company that facilitates claim preparation,
editing and transmission. In order to implement this package of services the
Company may install 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. In most cases the Company charges a percentage of actual claim
payment amounts collected as its fee. In certain cases, the Company may charge a
flat monthly fee for this service. Complete claim 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. Ongoing accounts receivable
management services revenue accounted for approximately 86%, 68% and 73% of
total revenue in 1999, 1998 and 1997, respectively.
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 payor, 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 collectibility of the accounts being
worked.
COLLECTION AGENCY SERVICES: These services involve collections of
either (a) "early out" accounts due from individual guarantors which are active
receivables placed for collection within one hundred twenty days of either the
date of service or the date payment was received from a third party payor such
as commercial insurance or Medicare, or (b) guarantor accounts which have been
written off as bad debt. Collection agency services revenue accounted for
approximately 11%, 22% and 17% of total revenue in 1999, 1998 and 1997,
respectively.
UMCLAIMPROS: The Company began providing interim staffing services
under the UMClaimPros label in December, 1994. UMClaimPros are experienced
billing and collection personnel who are employed by
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UMC and placed on temporary assignments in hospital and physician business
offices. Currently, the UMClaimPros service is only offered in the Dallas area.
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 payor. To implement this service, the Company purchases an
undivided interest in a claim and advances between 27% and 97% of the insurance
claim amount to the customer. Claim payments on purchased claims are made
directly to the Company. Following receipt of payment, the Company remits the
balance of the claims, net of fees earned, back to the customer. In the event
purchased claims are not paid within 120 days from funding, the Company has the
right to require the customer to 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.
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
claims. In addition, the Company provides advance funding services only on those
claims written for payors 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 claim with the payor before
transmitting the claim to the Company. The Company verifies coverage with the
payor 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.
CONSULTING SERVICES: During 1997 the Company began providing consulting
services to two operators of Community Mental Health Centers located in Alabama,
Florida and Tennessee. Consulting services were for the most part related to
billing and collection services provided by the Company, and were focused
primarily on compliance with regulations promulgated by the Healthcare Financing
Administration.
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 Accounts Receivable Management 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 the providers,
depending upon the average claim amount collected. Backlog Accounts Receivable
Management services are usually priced from 8 to 25 percent of the amount the
Company collects on behalf of the providers, depending upon the age of the
claims. Collection ratios generally range from 0 to about 40 percent for Backlog
projects and about 27 to 50 percent for Ongoing projects. Fees for Patient
Billing services range from 5.5 to 10 percent of the amounts collected, while
Collection Agency services are priced at 8 to 35 percent of amounts collected.
UMClaimPros services are priced at a per hour rate based on the fully burdened
salary of the assigned personnel. Management believes that the Company's fee
structure for its package of services is competitive.
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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. During 1999, 1998 and 1997, the Company accepted
for processing approximately 222,000, 352,000 and 354,000 claims and accounts.
The Company continuously develops and enhances its systems using programmers
employed by the Company and minimal outside resources.
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 errors, such as invalid or missing information,
using the claims processing software. Claims are then transmitted directly by
the Company to the third party payor or through any one of several insurance
claim clearinghouses used by the Company. The clearinghouses then format and
electronically transmit the claim data according to the specifications of the
individual third party payors, which avoids delays resulting from paper routing
and the errors resulting from third party payor data re-entry. If, however, the
third party 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 third party payor. The Company intends
to continue to enhance and refine its claims processing, customer reporting,
claims tracking and collection functions during 2000 and thereafter in order to
satisfy unique customer requirements.
UMY uses a purchased software application for its collection agency
services. This application runs on the Company's AS/400 hardware platform, and
handles all of the necessary processing of accounts, telephone calls, collection
letters and reports. Custom programming for this application is handled
primarily through the vendor. The Company has the source code for the
application and can modify the application whenever necessary. This software
will continue to be modified and enhanced to improve performance and customer
satisfaction.
COMPETITION
The business of medical insurance claims processing, accounts
receivable management and collections agency services is highly competitive and
fragmented. UMC competes with certain national and regional electronic claims
processing companies, claims collection companies, claims management companies,
factoring and financing firms, software vendors and traditional in-house claims
processing and collections departments of hospitals and other healthcare
providers. Many competitors of UMC are several 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.
There can be no assurance that competition from current or future competitors
will not have a material adverse effect upon the Company.
EMPLOYEE TRANSITION TO PROFESSIONAL EMPLOYER ORGANIZATION
Effective, August 26, 1999, UMC executed an agreement with Administaff,
Inc., a professional employer organization ("PEO") whereby Administaff became
the employer of record for all UMC employees. Adminstaff will serve as an
off-site, full service human resources department providing
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employment administration, regulatory and statutory compliance, employer
liability management, benefit management, and various other human resources
related services. Fees for this service are approximately 24% of gross salary
expense and are subject to change from time to time. Of this 24%, approximately
17% represents pass through payroll taxes and benefits, approximately 4%
represents salaries for human resource specialists no longer employed by the
Company and approximately 3% represents the incremental cost of the value added
services provided.
INDUSTRY SEGMENTS
Management organizes consolidated UMC around differences in services
offered. UMC provides medical insurance claims processing, medical accounts
receivable management and other healthcare related ancillary business office
services. UMY provides customer service functions, payment monitoring, early out
and bad debt account collection agency services to the health care industry. UMC
and UMY are aggregated into one reportable health care Business Office Services
segment based on the similar nature of the medical claim and account collection
services, nature of the information technology and human resource production
processes and service delivery methodologies, and the predominantly health care
industry customer base of both UMC and UMY.
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 31, 2000, the Company had 44 employees. 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.
ITEM 2. PROPERTIES
UMC and UMY's corporate offices and operations are located in a 6,836
square feet leased office space in Dallas, Texas. During the period from August
7, 1998 to October 14, 1999, AHO's home office was jointly located in this
Dallas office space. This lease expires in January, 2001. On August 2, 1999,
management exercised its office space reduction option whereby 3,300 square feet
of office space was vacated on September 2, 1999 resulting in a monthly expense
reduction of approximately $3,500. Management believes that its facilities are
well-located and are in good condition.
ITEM 3. LEGAL PROCEEDINGS
At and for the year ended December 31, 1999 and through March 31, 2000,
the Company has not been a party to any legal proceeding.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's $0.01 par value common stock (the "Common Stock"), is the
only class of common equity of the Company and represents the only issued and
outstanding voting securities of the Company. As of March 31, 2000, there were
approximately 1,070 stockholders of record of the Common Stock. The Common Stock
trades on the NASDAQ over-the-counter bulletin board("OTCBB") market.
The following table sets forth the range of high and low bid prices for
the Common Stock as reported on the OTCBB. Such prices do not include retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
YEAR ENDED DECEMBER 31, 1999 HIGH LOW
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Fourth quarter $0.030 $0.015
Third quarter 0.050 0.011
Second quarter 0.100 0.050
First quarter 0.090 0.050
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1999 annual average 0.067 0.031
YEAR ENDED DECEMBER 31, 1998
Fourth quarter $0.090 $0.052
Third quarter 0.094 0.040
Second quarter 0.130 0.050
First quarter 0.125 0.030
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1998 annual average 0.110 0.043
YEAR ENDED DECEMBER 31, 1997
Fourth quarter $0.070 $0.030
Third quarter 0.090 0.040
Second quarter 0.100 0.030
First quarter 0.040 0.020
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1997 annual average 0.075 0.030
The last reported sales price of the Common Stock as reported on the
OTCBB, on March 31, 2000 was $0.05 per share.
The Company has never declared or paid cash dividends on its Common
Stock. The payment of cash dividends in the future will depend on the Company's
earnings, financial condition and capital requirements. It is the present policy
of the Company's Board of Directors to retain earnings, if any, to finance the
operations and growth of the Company's business.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for
and as of each of the five years ended December 31, 1999. The financial data
presented for each of the five fiscal years has been derived from audited
financial statements.
YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
STATEMENTS OF OPERATIONS DATA
Revenues $ 3,158,341 $ 4,178,009 $ 2,803,001 $ 2,025,338 $ 1,986,233
Wages and benefits 2,070,936 2,664,694 1,900,182 1,171,721 1,499,038
Selling, general and administrative 614,688 815,431 492,607 422,119 467,397
Depreciation and amortization 117,568 87,265 106,783 105,638 126,807
Professional fees 68,788 44,784 54,188 78,813 82,794
Other 247,845 166,922 88,492 127,833 95,942
------------- ------------- ------------- ------------- -------------
Net income (loss) from
continuing operations 38,516 398,913 160,749 119,214 (285,745)
Loss from discontinued
operations-AHO (994,113) (230,967) -- -- --
Gain on disposal of discontinued
operations-AHO 178,426 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (777,171) $ 167,946 $ 160,749 $ 119,214 $ (285,745)
Basic earnings (loss) per common share (1):
Continuing operations $ .0013 $ 0.0142 $ 0.0059 $ 0.0045 $ (0.0109)
Discontinued operations-AHO (.0283) (0.0082) -- -- --
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (.0270) $ 0.0060 $ 0.0059 $ 0.0045 $ (0.0109)
Weighted average shares
outstanding 28,739,332 27,910,217 27,178,504 26,310,217 26,310,217
- ----------
(1) In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share," and has retroactively restated all periods
presented.
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AS OF DECEMBER 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA
Working capital (deficit) $ (198,749) $ (747,984) $ 331,552 $ 104,903 $ (40,390)
Net intangible assets -- -- -- 1,209 3,281
Net assets of
discontinued operations-AHO -- 1,251,119 -- -- --
Total assets 598,941 2,004,373 1,005,600 523,647 436,058
Long term debt including
capital leases 110,070 44,973 84,368 100,344 138,565
Total debt including capital leases 238,205 312,587 137,539 137,206 171,052
Net liabilities of
discontinued operations-AHO -- 733,403 -- -- --
Total liabilities 663,310 1,321,571 558,169 396,452 428,078
Total stockholders' equity (deficit) (64,369) 682,802 447,431 127,195 7,980
See Notes to the Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition.
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL CONSIDERATIONS
Except for the historical information contained herein, the matters
discussed may include forward-looking statements relating to such matters as
anticipated financial performance, legal issues, 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 are set forth in the safe
harbor compliance statement for forward-looking statements included as Exhibit
99.1 to this Form 10-K and are hereby incorporated herein by reference. 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.
UMC and UMY derive their primary revenues from medical claims
processing and accounts receivable management services. A substantial portion of
UMC and UMY revenues are derived from recurring monthly charges to its customers
under service contracts that typically are cancelable with a 30 to 60 day
notice. For the year ended December 31, 1999, 1998 and 1997, approximately 91%,
89% and 90% of UMC and UMY revenues were recurring. Recurring revenues are
defined as revenues derived from services that are used by the UMC and UMY
customers in connection with
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ongoing business, and accordingly exclude revenues from backlog accounts
receivable management, advance funding, UMClaimPros, and consulting services.
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 accounts receivable management services.
CLAIMS MANAGEMENT SERVICES - PROCESSING VOLUMES
1999 1998 1997
------------------------------------ ------------------------------------ ------------------------------------
QUARTER QUARTER QUARTER
------------------------------------ ------------------------------------ ------------------------------------
Fourth Third Second First Fourth Third Second First Fourth Third Second First
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
UMC
- ----------------
Number of Claims
Accepted for
Processing:
Ongoing 40,118 53,655 47,525 45,265 48,722 48,162 49,742 89,317 72,803 76,672 42,833 28,729
Backlog -- -- -- -- -- 1 72 8,518 23,739 28,361 -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 40,118 53,655 47,525 45,265 48,722 48,163 49,814 97,835 96,542 105,033 42,833 28,729
Gross $ Amount
of Claims
Accepted for
Processing
(000's):
Ongoing 28,919 33,947 29,360 28,817 33,401 30,116 30,087 40,333 33,375 35,186 20,124 20,269
Backlog -- -- -- -- -- -- 17 2,744 5,868 9,066 -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 28,919 33,947 33,947 28,817 33,401 30,116 30,104 43,077 39,243 44,252 20,124 20,269
Collection $
(000's)
Ongoing 14,349 13,503 12,436 12,531 11,613 11,738 11,215 14,556 12,190 9,407 10,143 7,545
Backlog -- -- -- -- -- 9 156 128 626 -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 14,349 13,503 12,436 12,531 11,613 11,747 11,371 14,684 12,816 9,407 10,143 7,545
Fees Earned
(000's)
Ongoing 637 721 675 771 631 681 729 922 733 480 428 366
Backlog -- -- -- -- -- 1 11 9 46 -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 637 721 675 771 631 682 740 931 778 480 428 366
Average Fee %
Ongoing 4.4% 5.3% 5.4% 6.2% 5.4% 5.8% 6.4% 6.3% 6.0% 5.1% 4.2% 4.9%
Backlog -- -- -- -- -- 11.0% 7.1% 7.0% 13.7% -- -- --
For Ongoing claims, there is typically a time lag of approximately 5 to
90 days from contract execution to complete development of system interfaces and
definition of procedural responsibilities with customer personnel. During this
period, Company personnel survey the customer's existing operations and prepare
for installation. Once the customer begins transmitting claims to the Company,
there is usually a time lag of 30 to 90 days between transmission of claims to
third party payors and collection of those claims from payors.
The following table sets forth for each period indicated the volume and
gross dollar amount of customer service and collection accounts received and
fees recognized for UMY.
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COLLECTION AGENCY SERVICES - PROCESSING VOLUME
1999 1998 1997
QUARTER QUARTER QUARTER
------------------------------------ ------------------------------------ ------------------------------------
Fourth Third Second First Fourth Third Second First Fourth Third Second First
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
UMY
- -------------------
Number of
Accounts Accepted
for Collection: 6,937 3,315 10,987 14,626 26,024 31,861 22,130 27,399 27,177 27,801 22,209 3,916
Gross $ Amount
of Accounts
Accepted for
Collection
(000's) 2,598 1,465 4,513 7,281 12,282 11,664 12,370 14,294 14,543 14,965 19,037 2,264
Collection $
(000's) 186 264 917 930 1,321 2,282 2,653 2,305 1,994 784 632 96
Fees Earned
(000's) 39 45 110 137 150 232 263 270 196 182 79 20
Average Fee % 21.0% 17.0% 12.0% 14.7% 11.4% 10.2% 9.9% 11.8% 9.8% 23.2% 12.5% 20.8%
For placements of collection accounts, there is typically a time lag of
approximately 15 to 45 days from contract execution to electronic transfer of
accounts from the customer. In many cases, collection accounts are transferred
to UMY via hard copy media, which requires UMY employees to manually enter
collection account data into the UMY system. Collection fee percentages charged
to the customer vary depending on the service provided, the age and average
balance of accounts.
SIGNIFICANT CUSTOMERS
During 1999, $2,486,000 or 79% of revenue was earned from the
Washington Hospital Center ("WHC"). Of this WHC revenue, 63% was provided as a
result of the Ongoing Accounts Receivable Management services contract, as
amended, entered into in 1992, and 16% related to a physician billing contract
amendment entered into in May, 1997.
During 1998, 89% of revenue was earned from two customers: the WHC and
Presbyterian Healthcare System ("PHS"). WHC provided revenue totaling
$2,740,000, or 66% of total revenue. Of this WHC revenue, 65% was provided as a
result of the Ongoing Accounts Receivable Management services contract, as
amended, entered into in 1992, and 35% related to a physician billing contract
amendment entered into in May, 1997. PHS provided revenues, primarily under
various early out and bad debt collection contacts entered into in 1997,
totaling $985,000, or 23% of total revenue. Of this PHS revenue, 87% was
provided from Collection Agency services, and 13% was provided from UMClaimPros
services.
During 1997, 86% of revenue was earned from two customers: WHC and PHS.
WHC provided revenue totaling $1,775,820, or 63% of total revenue. Of this
revenue, 94% was provided as a result of the Ongoing Accounts Receivable
Management services contract, as amended, entered into in 1992, of which 13%
related to a physician billing contract entered into in May, 1997, and 6% was
provided as a result of a Patient Billing services contract dated September,
1996. PHS provided revenues, primarily under various early out and bad debt
collection contacts entered into in 1997, totaling $645,697, or 23% of total
revenue.
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Of this revenue, 66% was provided from Collection Agency services, and 34% was
provided from UMClaimPros services.
LOSS OF SIGNIFICANT CUSTOMERS
In September, 1999, the Company was informally notified by WHC that
claim transmissions from the Department of Emergency Medicine ("WHCDEM") would
terminate effective November 1, 1999. Formal notification was subsequently
received on November 4, 1999. Revenue from this contract was generated through
November 30, 1999 consistent with revenues generated on a monthly basis through
September 30, 1999, and thereafter ramped down through and will terminate on or
about April 30, 2000. Revenue from this contract accounted for approximately 7%
and 6% of total revenue during 1999 and 1998, respectively. It is management's
understanding that this decision was related to changes in the outsourcing
strategy of WHCDEM that included combining the outsourced claims management
services with coding services not offered by UMC, and other factors.
On July 28, 1999, the Company was formally notified by WHC that claim
transmissions from the Department of Women's Services ("WHCDWS") would terminate
effective October 1, 1999. Revenue from this contract was generated through
November 1, 1999 consistent with revenues generated on a monthly basis through
September 30, 1999, and thereafter ramped down through and terminated on or
about December 31, 1999. Revenue from this contract accounted for approximately
9% and 1% of total revenue during 1999 and 1998, respectively. It is
management's understanding that this decision was related to cost reduction
measures in response to declining reimbursement attributable to the Balanced
Budget Act of 1997, and other factors.
On March 15, 1999, the Company was formally notified by PHS that it had
not been selected to provide continuing collection agency services. The Company
was informed that this decision was the result of the merger of PHS with another
health care system and was in no way related to the quality of the services
provided by the Company to PHS. The Company received weekly account placements
through May 4, 1999, and generated its last revenue from PHS in August, 1999.
Revenue from this contract accounted for approximately 4%, 23%, and 23% of total
revenue during 1999, 1998, and 1997, respectively.
CONTRACT RESTRUCTURING WITH SIGNIFICANT CUSTOMER
On July 28, 1999, WHC management verbally expressed its intent to
restructure the current Hospital Billing contract due to cost reduction
measurers in response to declining reimbursement attributable to the Balances
Budget Act of 1997. On December 27, 1999, the Hospital Billing contract
amendment was executed. This amendment called for UMC to continue to provide a
majority of its current services to WHC under a fifty percent fee reduction to
be effective for claims with dates of service on and after October 1, 1999.
Revenue from this contract was generated through November 1, 1999 consistent
with revenues generated on a monthly basis through September 30, 1999, and
thereafter ramped down through and stabilized at the new rate on or about
December 15, 1999. Revenue from this contract accounted for approximately 63%,
42%, and 52% of total revenue during 1999, 1998, and 1997, respectively.
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MANAGEMENT'S PLAN WITH RESPECT TO LOST REVENUES
As a result of the aforementioned changes within its customer base,
management has taken certain actions in an attempt to better position the
Company. These actions include, but are not limited to:
o Headcount at March 31, 2000, as compared to March 31, 1999, had been
reduced by 16 employees to 44 employees primarily through attrition. This
reduction resulted in a monthly gross salary expense reduction of
approximately $33,000.
o The Company restructured its sales organization to improve focus on the
Texas market and increase the emphasis on services provided by UMY.
o A medical claims management contract for ongoing claims was executed on
June 17, 1999, with a hospital system located in Virginia. This contract is
fully implemented and generated revenue of approximately $199,000 in 1999.
o During 1999 and through March 31, 2000, UMY executed approximately 15 new
customer service and collection agreements which provided revenues of
approximately $73,000 in 1999.
o The Company executed the following contracts which generated no revenue in
1999:
o A medical claims management contract for backlog and on-going claims
was executed on March 22, 2000, with a major hospital system located
in New Mexico.
o A collection services contract for backlog and on-going claims was
executed on February 10, 2000, with a central Texas diagnostic imaging
facility.
o Customer service contracts were executed on March 13, 2000 and
December 10, 1999, respectively, with hospitals located in south and
central Texas.
o A medical claims management contract for backlog claims was executed
on November 24, 1999, with a hospital located in the Caribbean.
o During 1998 and 1999, UMC provided various forms of working and debt
repayment capital to AHO totaling approximately $1,059,000. On October 14,
1999, AHO filed a voluntary petition in the United States Bankruptcy Court
for the Northern District of Texas to liquidate pursuant to Chapter 7 of
Title 11 of the United States Bankruptcy Code. In conjunction with the
filing of the bankruptcy petition, UMC accrued approximately $68,000
related to lease guarantees, storage fees and professional fees.
o On August 2, 1999, management exercised its office space reduction option
whereby 3,300 square feet of office space was vacated on September 2, 1999
resulting in a monthly expense reduction of approximately $3,500.
o Management is evaluating new service lines to compliment its traditional
medical claims processing and accounts receivable management services.
Possible new service lines include a focus on healthcare consumerism and
healthcare e-business leveraging the Company's industry experience and
technological infrastructure.
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17
Management continues to vigorously pursue new business while rigorously
managing expenses without negatively impacting service levels. However, there
can be no assurance that UMC will be successful in obtaining new business and
producing incremental profits and cash flow.
If management is unable to successfully develop and implement new
profitable customer contracts and new service lines or align expenses with
future cash requirements, it will be required to adopt alternative strategies,
which may include but are not limited to, actions such as reducing management
and line employee headcount and compensation, restructuring existing financial
obligations, seeking a strategic merger or acquisition, seeking the sale of the
Company or the Company's public shell, and/or seeking additional debt or equity
capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
Consolidated Statements of Operations expressed as a percentage of revenues:
Percentage of Revenues
-------------------------------------
Year ended December 31, 1999 1998 1997
---------------------- --------- --------- ---------
Revenue 100.0% 100.0% 100.0%
--------- --------- ---------
Wages and benefits 65.6 63.8 67.7
Selling, general and administrative 19.5 19.5 17.8
Office and equipment rental 4.5 3.1 3.2
Depreciation and amortization 3.7 2.1 3.7
Interest, net, and other income 2.3 0.2 --
Professional fees 2.2 1.1 1.9
Provision for doubtful accounts 1.0 0.7 --
--------- --------- ---------
Total expenses 98.8 90.5 94.3
--------- --------- ---------
Net income from continuing operations 1.2 9.5 5.7
Loss from discontinued operations-AHO (31.4) (5.5) --
Gain on disposal of discontinued operations-AHO 5.6 -- --
--------- --------- ---------
Net income (loss) (24.6%) 4.0% 5.7%
========= ========= =========
1999 COMPARED TO 1998
REVENUES decreased $1,020,000 or 24% primarily due to the following:
o Ongoing Accounts Receivable Management Services revenue of $2,720,000 in
1999 decreased by $137,000 compared to 1998 primarily due to effect of the
aforementioned loss and restructuring of significant WHC contracts.
Assuming that there are no significant changes in the existing volume and
mix of claims placed by the Company's customers as of December 31, 1999,
management believes that ongoing accounts receivable management services
will generate revenues from such customers of approximately $1.4 million in
2000.
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18
o Collection Agency Services revenue of $332,000 in 1999 decreased by
$583,000 compared to 1998 primarily due to the aforementioned loss of the
PHS contact. Revenue in 1999 from PHS was $112,000 compared to $854,000 in
1998. Assuming that there are no significant changes in the existing volume
and mix of accounts placed by the Company's customers as of December 31,
1999, management believes that collection agency services will generate
revenues from such customers of approximately $250,000 in 2000.
o Other revenue of $14,000 in 1999 decreased by $99,000 compared to 1998
primarily due to decreased funding fees related to Advance Funding Services
and decreased Consulting Services. Approximately $51,000 of 1998's other
revenue related to services provided to AHO. Upon the acquisition of AHO,
billing for services performed by UMC was terminated.
o UMClaimPros revenue of $93,000 in 1999 decreased by $102,000 compared to
1998 primarily due to decreased utilization at PHS.
WAGES AND BENEFITS expense decreased $594,000 or 22% primarily due to
headcount reductions through attrition in conjunction with the aforementioned
revenue reductions. During 1999, monthly employee headcount averaged 53 compared
to 80 during 1998. Assuming no significant change in the Company's core
services, management expects that wages and salaries should remain at
approximately 65% of revenues.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense decreased $201,000
or 25% primarily due to expense reductions in conjunction with the
aforementioned revenue reductions. Assuming no significant change in the
Company's core services, management expects that SG&A should remain at
approximately 20% of revenues.
OFFICE, VEHICLE AND EQUIPMENT RENTAL expense increased $14,000 or 11%
primarily due to the $14,000 payment required in conjunction with the August 2,
1999 office space reduction option whereby 3,300 square feet of office space was
vacated on September 2, 1999 resulting in a monthly expense reduction of
approximately $3,500. Under the current arrangement, monthly office rent through
January 31, 2000 and 2001 will be $7,200 and 7,400, respectively. Monthly
vehicle and other rental expenses will total approximately $1,000 and $500,
respectively.
DEPRECIATION AND AMORTIZATION expense increased $30,000 or 35%
primarily due to amortization expense related to assets under capital leases
recorded in 1999 and the full year effect of assets under capital leases and
fixed assets acquired throughout 1998.
PROFESSIONAL FEES expense increased $24,000 or 54% primarily due to
increased audit fees allocated to UMC in 1999 as compared to 1998 and $10,000 in
expense related to capital raising efforts throughout 1999.
INTEREST, NET increased $38,000 or 452% primarily due to increased
credit facility borrowings and promissory note borrowings required to support
AHO.
OTHER EXPENSE increased $26,000 primarily due to accruals related to
AHO and a loss on the rollover financing of the Company's IBM AS/400. These
expenses are non-recurring.
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LOSS FROM DISCONTINUED OPERATIONS - AHO is comprised primarily of
salaries paid, bad debt expense, professional fees and other SG&A.
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS - AHO represents the excess
of AHO's liabilities liquidated via the aforementioned Chapter 7 bankruptcy over
the working capital provided from UMC to AHO during the period from August 7,
1998 to October 14, 1999.
LIQUIDITY AND CAPITAL SOURCES
At December 31, 1999, the Company's liquid assets, consisting of cash,
totaled $122,000 compared to $89,000 at December 31, 1998. The working capital
deficit was $(199,000) and ($748,000) at December 31, 1999 and December 31,
1998, respectively. Working capital increased due to deconsolidation of AHO
effective October 14, 1999.
Operating activities from continuing operations in 1999 provided cash
of $570,000, compared to $435,000 cash provided in operating activities from
continuing operations in 1998. This increase is primarily due to factoring of
invoices totaling $219,000 which provided cash of $179,000. In 1999, cash flow
from continuing operations was adequate to cover all working capital and
liquidity requirements of continuing operations. At September 30, 1999, UMC
accrued certain AHO liabilities totaling approximately $68,000. With the
exception of these accruals, Management does not anticipate using any additional
cash in support of AHO.
Operating activities from the discontinued operations of AHO through
October 14, 1999 used cash of $298,000, compared to $687,000 cash used in the
discontinued operations of AHO for the five months ended December 31, 1998. Cash
flow from the discontinued operations of AHO was not adequate to cover all
working capital and debt requirements of the discontinued operations of AHO.
Financing from UMC in the form of intercompany loans totaling $704,000 and
$507,000 at October 14, 1999 and December 31, 1998, respectively, was required.
As a result of AHO's bankruptcy, AHO will not repay these loans to UMC.
Investing activities in 1999 consisted of the purchases of furniture,
fixtures and equipment. The purchase of furniture, fixtures and equipment used
cash of $15,000 compared to $78,000 used in 1998. This decrease in investing
activities corresponds with the aforementioned revenue reduction and required
cash conservation. The Company's fixed assets are in good working order and
sufficient to support continuing operations.
Financing activities in 1999 consisted of net repayment of the
Company's revolving line of credit totaling $200,000, borrowings under a bank
note payable totaling $100,000, and principal payments on capital lease
obligations and the note payable which used cash of $125,000.
Effective January 4, 1999, the Company executed a promissory note (the
"Note") with a Bank Lender, for $100,000 bearing interest at the prime rate plus
one percent. Throughout 1999, the interest rate ranged from 8.75% to 9.5%. On
March 22, 2000, the interest rate increased to 10.0%. The Note matures on
January 4, 2001 and requires monthly principal payments of $4,167. Simple
interest is computed and paid on a monthly basis. The Note is secured by the
fixed assets of UMC.
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On December 7, 1999, the Company was informed by Bank United, which had
acquired the Bank Lender, that its $400,000 revolving line of credit would not
be renewed on its scheduled renewal date of December 11, 1999. This revolving
line of credit was paid in full on December 28, 1999 and replaced with a
factoring agreement as described below.
On December 28, 1999, the Company executed a $500,000 recourse
factoring agreement which may be terminated by either party with ten days
notice. The agreement is secured by all of the Company's non-factored accounts
receivable and is personally guaranteed by Peter Seaman, Chairman and CEO and
Ken Culver, Vice President and Chief Financial Officer. Other significant terms
of the factoring agreement include recourse for invoices remaining unpaid at 90
days, interest at prime plus 2.5%, and a factoring fee of 1% of the face value
of each invoice.
During various periods of time for the twelve months ending March 31,
2001, management anticipates the possibility that cash requirements could exceed
cash on hand, cash to be generated from operating activities, if any, and cash
available from UMC's recourse factoring agreement, if any. These possible
periods of liquid deficiency are attributed to the reduction of revenues from
current and former customers as previously explained.
UMC has taken the following actions to address the possible periods of
liquid deficiency:
o Headcount at March 31, 2000, as compared to March 31, 1999, had been
reduced by 16 employees to 44 employees primarily through attrition. This
reduction resulted in a monthly gross salary expense reduction of
approximately $33,000.
o The Company restructured its sales organization to improve focus on the
Texas market and increase the emphasis on services provided by UMY.
o A medical claims management contract for ongoing claims was executed on
June 17, 1999, with a hospital system located in Virginia. This contract is
fully implemented and generated revenue of approximately $199,000 in 1999.
o During 1999 and through March 31, 2000, UMY executed approximately 15 new
customer service and collection agreements which provided revenues of
approximately $73,000 in 1999.
o The Company executed the following contracts which generated no revenue in
1999:
o A medical claims management contract for backlog and on-going claims
was executed on March 22, 2000, with a major hospital system located
in New Mexico.
o A collection services contract for backlog and on-going claims was
executed on February 10, 2000, with a central Texas diagnostic imaging
facility.
o Customer service contracts were executed on March 13, 2000 and
December 10, 1999, respectively, with hospitals located in south and
central Texas.
o A medical claims management contract for backlog claims was executed
on November 24, 1999, with a hospital located in the Caribbean.
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21
o During 1998 and 1999, UMC provided various forms of working and debt
repayment capital to AHO totaling approximately $1,059,000. On October
14, 1999, AHO filed a voluntary petition in the United States
Bankruptcy Court for the Northern District of Texas to liquidate
pursuant to Chapter 7 of Title 11 of the United States Bankruptcy
Code. In conjunction with the filing of the bankruptcy petition, UMC
accrued approximately $68,000 related to lease guarantees, storage
fees and professional fees.
o On August 2, 1999, management exercised its office space reduction
option whereby 3,300 square feet of office space was vacated on
September 2, 1999 resulting in a monthly expense reduction of
approximately $3,500.
o Management is evaluating new service lines to compliment its
traditional medical claims processing and accounts receivable
management services. Possible new service lines include a focus on
healthcare consumerism and healthcare e-business leveraging the
Company's industry experience and technological infrastructure.
Management continues to vigorously pursue new business while rigorously
managing expenses without negatively impacting service levels. However, there
can be no assurance that UMC will be successful in obtaining new business and
producing incremental profits and cash flow.
If management is unable to successfully develop and implement new
profitable customer contracts and new service lines or align expenses with
future cash requirements, it will be required to adopt alternative strategies,
which may include but are not limited to, actions such as reducing management
and line employee headcount and compensation, restructuring existing financial
obligations, seeking a strategic merger or acquisition, seeking the sale of the
Company or the Company's public shell, and/or seeking additional debt or equity
capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send and
receive electronic data, or engage in similar normal business activities.
The Company has experienced no adverse effect from the Year 2000 issue.
1998 COMPARED TO 1997
REVENUES increased $1,375,000 or 49% primarily due to the following:
o Ongoing Accounts Receivable Management Services revenue of $2,857,000 in
1998 increased by $925,000 compared to 1997 primarily due to full year
effect in 1998 of the WHC Physician Billing Department ("WHCPBD") ongoing
accounts receivable management services agreement executed on
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May 5, 1997. For the years ended December 31, 1998 and 1997, the WHCPBD
agreement generated revenue of $972,000 and $221,000, respectively.
o Collection Agency Services revenue of $915,000 in 1998 increased by
$439,000 compared to 1997 primarily due to the full year effect in 1998 of
the collection services agreements executed with PHS at various times in
1997.
o Other revenue of $113,000 in 1998 increased by $78,000 compared to 1997
primarily due to increased funding fees related to Advance Funding Services
and increased Consulting Services. Approximately $77,000 of this revenue
related to services performed for AHO. Upon the acquisition of AHO, billing
for services performed by UMC was terminated.
o UMClaimPros revenue of $195,000 in 1998 decreased by $41,000 compared to
1997 primarily due to decreased utilization from existing customers.
WAGES AND BENEFITS expense increased $765,000 or 40% primarily due to
increased headcount and increased bonuses for UMY collectors related to
increased UMY collections and revenues. Approximately $727,000 or 95% of this
increase relates to increased headcount required to support increased processing
volume as well as to enhance the management infrastructure. During 1998, monthly
employee headcount averaged 80 compared to 57 during 1997. Approximately $37,000
or 5% of this increase relates to UMY collector bonuses.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense increased $323,000
or 66% primarily due to increased travel associated with supporting existing
customers and developing new business, increased printing, postage and telephone
expense related to UMY and the WHCPBD agreement, increased contract labor to
temporarily fill open positions, increased recruiting expenses related to open
positions and various other expenses to support a larger revenue stream and
increased headcount.
PROFESSIONAL FEES expense decreased $9,000 or 17% primarily due to a
reduction in financial statement audit fees in conjunction with the change in
the Company's independent accountants.
OFFICE, VEHICLE AND EQUIPMENT RENTAL expense increased $40,000 or 46%
primarily due to the lease of two company vehicles utilized by the sales force
at a monthly expense of approximately $1,000 per month compared to no leased
vehicles during 1997, as well as the full year effect in 1998 of leasing an
additional 1,906 square feet of office space on July 31, 1997 required for UMY.
DEPRECIATION AND AMORTIZATION expense decreased $20,000 or 18%
primarily due to a $20,000 decrease in UMC depreciation expense related to the
AS/400 which was fully depreciated at December 31, 1997.
PROVISION FOR DOUBTFUL ACCOUNTS expense increased $33,000 primarily due
to the write-off of UMC account balances totaling $21,000 and a $6,000 increase
in the provision.
INTEREST, NET increased $3,000 or 70% primarily due to the draw by the
Company on its Credit Facility which first occurred in November, 1998 in order
to support AHO.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company qualifies as a small business issuer as defined in Rule
12b-2 of the Securities Exchange Act of 1934. As such, the Company is not
required to provide information related to the quantitative and qualitative
disclosures about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at
page 33.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 25, 1999, the Audit Committee of the Board of Directors of
the Company accepted the resignation of the firm of PricewaterhouseCoopers LLP
as the Company's independent auditor.
The reports of PricewaterhouseCoopers LLP on the Company's financial
statements for the two years ended December 31, 1997 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles, except that the report of
PricewaterhouseCoopers LLP on the Company's financial statements for the year
ended December 31, 1996 included an explanatory paragraph relating to an
uncertainty about the Company's ability to continue as a going concern.
There were no disagreements with PricewaterhouseCoopers LLP during the
audits of the Company's financial statements for the two years ended December
31, 1997, and any subsequent interim period preceding the change on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report.
On January 25, 1999, the Company appointed Hein + Associates LLP as its
independent accountant. Hein + Associates LLP accepted such appointment. The
Company had no relationship with Hein + Associates LLP required to be reported
pursuant to Regulation S-K Item 304(a)(2) during the two years ended December
31, 1997 or the subsequent interim period prior to and including March 31, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PETER W. SEAMAN (50) was elected President and Chief Executive Officer
on February 10, 1994, and Chairman of the Board of Directors on November 12,
1996. Mr. Seaman joined the Company on July 17, 1991 as Vice President and Chief
Financial Officer and was elected to the Board of Directors on August 12, 1991.
Mr. Seaman's prior employment includes serving as Director of Business
Development for TRW Receivables Management Services from March, 1989 to June,
1991, and Vice President of Planning and Systems Development for the Accounts
Receivable Management Division of the Chilton Corporation from March, 1986 to
March, 1989. 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.
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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.
MICHAEL P. BUMGARNER (55) was elected to the Board of Directors on
November 12, 1996. Mr. Bumgarner is the Chairman of the Audit Committee of the
Board of Directors. Mr. Bumgarner is President/CEO of msi21, Inc., a Dallas,
Texas based start-up medical management consulting firm positioned to deliver
accreditation preparation, ongoing compliance and other management services to
all types of medical facilities through its interactive multi-layered web site
and its strategically located Professional Affiliates, nationally. Mr.
Bumgarner's prior experience includes Chairman/CEO of Beacon Enterprises, Inc.,
a holding company which he co-founded in May, 1994 with interests in a number of
healthcare concerns including GSS "Gold Seal Services", one of the largest home
healthcare providers in the San Antonio area. GSS was sold to a Dallas based
public company in December, 1996. Prior to starting Beacon Enterprises, Mr.
Bumgarner worked as a consultant for a number of national distributors of
cardiovascular equipment in the southwest United States. From 1977 to 1986, Mr.
Bumgarner was founder and president of a national healthcare company providing
arrhythmia monitoring by telephone to patients in their homes. During this
period, he developed the "continuous loop memory" arrhythmia transmitter and
received a patent registered in the U.S. Patent Office. After graduating from
Auburn University, he was honorably discharged from the USAF as a Captain and
carried his electronics background to the medical industry where he has spent
over 25 years gaining extensive senior business and management experience.
JOHN F. LEWIS (51) was elected to the Board of Directors on November
12, 1996. Mr. Lewis is a consultant specializing in Medicare reimbursement and
regulatory compliance for a number of healthcare industry concerns in Puerto
Rico and the Caribbean market area. From 1992 to 1995, Mr. Lewis served as
Health Advisor to the Governor of the U.S. Virgin Islands. From 1988 to 1992,
Mr. Lewis was employed as Assistant Vice President for Medicare Operations at
Seguros de Servicios de Salud, the Medicare Part B Carrier for Puerto Rico and
the Caribbean. Mr. Lewis holds a B.A. in Business Administration from the
American College of Switzerland and a License in Economic and Social Sciences
from the University of Geneva.
THOMAS H. MCCONNELL, III, M.D. (62) was elected to the Board of
Directors on November 12, 1996. Dr. McConnell is the Chairman of the
Compensation and Stock Option Committees of the Board of Directors. Dr.
McConnell is former CEO of AM Laboratories, Inc., a medical testing laboratory,
and is active as an investor and consultant to a number of healthcare providers.
From 1992 to 1994, Dr. McConnell served as Chairman of the Executive Committee
and a member of the Board of Directors of AdvaCare, Inc., a publicly traded
medical billing and collection agency. From 1992 to 1995, Dr. McConnell served
as a member of the Board of Directors of Osprey Holdings, Inc., a publicly
traded holding company formerly in the medical laboratory software business. Dr.
McConnell is a past Governor of the College of American Pathologists, past
President of the Texas Society of Pathologists, and past member of the Board of
Directors of the Dallas County Medical Society. Dr. McConnell attended Rice
University, holds a Doctor of Medicine Degree from the University of Texas
Southwestern Medical School and an OPM certificate from the Harvard Business
School.
MARY E. ROGERS (37) 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
24
25
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.
R. KENYON CULVER (40) joined the Company on September 25, 1997 as Vice
President and Chief Financial Officer. Mr. Culver's prior employment includes
three years as Controller of the Professional Services division for Affiliated
Computer Services, Inc. Prior to joining Affiliated Computer Services, Inc., Mr.
Culver was employed for four years in the Audit and Business Advisory division
of Price Waterhouse, LLP. Before that, Mr. Culver served for nine years in the
United States Coast Guard. Mr. Culver holds a B.B.A. in Accounting from Southern
Methodist University and is a Certified Public Accountant.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT OF 1934
Pursuant to Section 16(a) of the Securities Act of 1934 and the rules
issued thereunder, the Company's executive officers and directors are required
to file with the Securities and Exchange Commission reports of ownership and
changes in ownership of the Common Stock. Copies of such reports are required to
be furnished to the Company. All required forms have been timely filed.
ITEM 11. EXECUTIVE COMPENSATION
Set forth below are tables showing in summary form, the compensation
paid for the years shown in the table to Mr. Seaman and exercise and year end
valuation information pertaining to stock options and warrants granted to Mr.
Seaman. No other executive officer of the Company received total annual salary
and bonus in excess of $100,000 in the fiscal years 1999, 1998 or 1997:
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
---------------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------- --------------------------------------------- ---------
OTHER RESTRICTED SECURITIES
NAME ANNUAL STOCK UNDERLYING LTIP ALL OTHER
AND PRINCIPAL COMPENS- AWARD(S) OPTIONS/ PAYOUTS COMPEN-
POSITION YEAR SALARY ($) BONUS ($) SATION ($) ($) SARS (#) ($) SATION ($)
---- ---------- -------- ------------- ------------- ------------- --------- -------------
Peter W. Seaman 1999 138,945 -- -- -- 2,000,000 -- --
Chairman and 1998 142,518 22,500(1) -- -- -- -- --
CEO 1997 120,931 -- -- -- 700,000 -- --
(1) Represents 1997 bonus paid in 1998.
25
26
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY
ON VALUE OPTIONS/SARS AT FISCAL OPTIONS/SARS AT
EXERCISE REALIZED YEAR-END (#) FISCAL YEAR-END (3) ($)
---------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- -------- ------------- ------------ ------------- ----------- -------------
Peter W. Seaman -- -- 1,266,667 1,733,333 15,000 45,000
(3) The last reported sale of the Company's Common Stock as reported on the
NASD OTC Bulletin Board as of December 31, 1999 was $0.03 per share. Value
is calculated on the basis of the difference between the option exercise
price and $0.03 multiplied by the number of shares of Common Stock
underlying the option.
COMPENSATION OF DIRECTORS
An officer of the Company who also serves as a Director of the Company
receives no additional compensation for serving as a Director or as a member or
chair of a committee. Members receive no cash compensation for serving on the
Board of Directors. Board members are reimbursed for expenses of meeting
attendance.
Pursuant to the 1995 Stock Option Plan, each non-employee director
shall receive nonqualified stock options for the purchase of 25,000 shares of
Common Stock. These options shall be granted on the first and each subsequent
anniversary of the approval of the 1995 Stock Option Plan by stockholders, as
long as the director serves on the Board. The exercise price shall be the fair
market value of the Common Stock on the date the nonqualified stock options are
granted. One half of the option shall be exercisable immediately and the
remainder of the option shall become exercisable on the first anniversary date
of the grant. All options shall expire on the tenth anniversary of the date
granted.
Subsequent to stockholder approval of the 1995 Stock Option Plan, the
Board of Directors determined that in light of the condition of the Company
immediately prior to November 12, 1996 when the current members of the Board of
Directors were elected, the provisions of the 1995 Stock Option Plan regarding
director compensation were inadequate to attract and retain qualified board
members. As such, on April 1, 1997, warrants to purchase a total of 1,200,000
shares of the Company's common stock at $0.08 per share were issued to the three
non-employee board members with each member receiving a warrant for 400,000
shares. These warrants are exercisable 33 1/3% immediately, 66 2/3% after twelve
months from the effective date of the grant, and 100% after twenty four months
from the effective date of the grant. These warrants expire on the earlier of
(a) March 31, 2007, (b) the date on which the Director's services are terminated
for cause, (c) three months after the expiration of the Director's term,
resignation from the Board of Directors, or termination of the Director due to
the sale of the Company or (d) twelve months after the services as a Director
are terminated by reason of the Director's death of disability. None of these
warrants had been exercised as of December 31, 1999.
On March 19, 1997, each non-employee member of the Board of Directors
entered into a Director's Incentive Compensation Agreement ("DICA"). This
agreement has a term of three years under which the director shall be paid a
commission based on fees billed and collected from new customers sold by or with
26
27
the assistance from such director. The commission will be 10 percent during the
first year of a contract with a given customer, 6 percent during the second
contract year, and 4 percent thereafter. The Director's compensation may be paid
in either cash, common stock, or stock purchase warrants upon approval of the
Compensation and Stock Option Committee. For the year ended December 31, 1999,
the Company recorded no commission expense related to a Director in conjunction
with commissions earned under the DICA.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Messrs.
McConnell, Lewis and Bumgarner. None of the members of the Company's
Compensation Committee served as a member of the compensation committee or other
board committees performing similar functions of any other registered entity in
1999.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the notes thereto set forth certain information
regarding the beneficial ownership of shares of the Company's Common Stock as of
March 31, 2000 by (i) each current director; (ii) all current directors and
officers of the Company as a group; and (iii) each person known to the Company
to own beneficially more than five percent (5%) of the currently outstanding
Common Stock. Unless there is a footnote to the contrary, sole voting and
investment power in the shares owned are held either by the named individual
alone or by the named individual and his or her spouse:
NUMBER OF SHARES OF UNITED MEDICORP, INC. COMMON STOCK (1)
----------------------------------------------------------
SHARES EXERCISABLE
BENEFICIALLY WARRANTS/ PERCENT OF
NAME OWNED OPTIONS (3) CLASS (1)
- --------------------------------------- ------------- ------------ -----------
Mercury Asset Management plc. (2) 8,067,200 -- 28.1%
33 King William Street
London EC4R 9AS Great Britain
Tambura Limited 1,484,000 -- 5.2%
Rue du Moulin
Sark, Channel Islands
Thomas H. McConnell, III 1,000,000 509,347 5.2%
Peter W. Seaman (4) 100,000 1,500,000 5.3%
Michael P. Bumgarner 100,000 400,000 1.7%
John F. Lewis -- 400,000 1.4%
All officers and directors as
a group (6 persons) (5) 1,200,000 3,692,680 15.1%
(1) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to the shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable. Beneficial ownership as reported in the above table has
been determined in accordance with Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The percentages are based
upon 28,710,217 shares outstanding except with respect to certain persons
who hold presently exercisable options or warrants to purchase shares.
27
28
The percentage for each person who holds presently exercisable options or
warrants is based upon the sum of 28,710,217 shares outstanding plus the
number of shares subject to presently exercisable options or warrants held
by such person.
(2) According to a Schedule 13D filed with the Company, Mercury Asset
Management plc. ("MAM") manages investments for its clients and the
securities indicated are held solely for the accounts of such clients. With
respect to 3,267,200 of the shares held on behalf of a unit trust, a
wholly-owned subsidiary of MAM, as manager of the trust, has power to vote
the shares. MAM has the power to sell the shares for the benefit of the
trust. With respect to the remainder of the shares, MAM has dispositive
power, but not voting power, subject to its clients' guidelines. MAM does
not admit that it is the beneficial owner of any of the indicated shares.
(3) As required by the Securities and Exchange Commission, this column includes
shares available under exercisable options /warrants as well as shares that
may be acquired within 60 days of March 31, 2000, upon exercise of
options/warrants.
(4) Excludes 1,500,000 unexercisable shares held under warrant.
(5) Excludes 3,216,667 unexercisable shares held under option and warrant.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The Company had consulting agreements for services provided primarily
by a non-employee director of the Company. These agreements were completed
simultaneously with consulting agreements between the Company and certain
customers. The director was paid approximately 78% of the consulting fees paid
to the Company. For the years ended December 31, 1998 and 1997, the Company paid
the director $210,000 and $24,000, respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Reference is made to the Consolidated Financial Statements and
Financial Statement Schedules included at page 33.
2. Financial Statement Schedules
Reference is made to the Consolidated Financial Statements and
Financial Statement Schedules included at page 33.
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).
28
29
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).
4.3 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).
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).
4.6 Form of Common Stock Purchase Warrant for 400,000 shares issued
to Thomas H. McConnell, III (previously filed).
4.7 Form of Common Stock Purchase Warrant for 400,000 shares issued
to Michael P. Bumgarner (previously filed).
4.8 Form of Common Stock Purchase Warrant for 400,000 shares issued
to John F. Lewis (previously filed).
4.9 Form of Common Stock Purchase Warrant issued to Peter W. Seaman
for 500,000 shares.
4.10 Form of Common Stock Purchase Warrant issued to Peter W. Seaman
for 1,500,000 shares.
4.11 Form of Common Stock Purchase Warrant issued to R. Kenyon Culver
for 500,000 shares.
29
30
4.12 Form of Common Stock Purchase Warrant issued to R. Kenyon Culver
for 1,500,000 shares.
9. Not Applicable.
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).
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).
10.14 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).
10.19 Certificate of Amendment to Certificate of Incorporation of the
Company, filed with Secretary of State of Delaware on August 3,
1993 (previously filed).
10.22 1995 Stock Option Plan (previously filed).
10.23 Modification and Ratification of Lease, dated July 19, 1995
(previously filed).
10.25 Severance Agreement by and between Registrant and Mary E. Rogers
(previously filed).
10.26 Severance Agreement by and between Registrant and Peter W.
Seaman (previously filed).
10.28 Director's Incentive Compensation Agreement by and between
Registrant and Thomas H. McConnell, III (previously filed).
10.29 Director's Incentive Compensation Agreement by and between
Registrant and John F. Lewis (previously filed).
10.30 Director's Incentive Compensation Agreement by and between
Registrant and Michael P. Bumgarner (previously filed).
10.31 Amendment No. 1 to Customer Service Agreement dated December 15,
1992 by and between the Company and the Washington Hospital
Center relating to collection of Department of Emergency Medicine
claims 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).
30
31
10.32 Amendment No. 2 to Customer Service Agreement dated December 15,
1992 by and between the Company and the Washington Hospital
Center relating to collection of physician claims 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).
10.33 Collection Services Agreement dated January 17, 1997 by and
between the Registrant and Presbyterian Healthcare System
(previously filed).
10.34 Early Out Collection Agreement dated May 1, 1997 by and between
the Registrant and Presbyterian Healthcare System (previously
filed).
10.35 Secondary Collection Agreement dated October 31, 1997 by and
between the Registrant and Presbyterian Healthcare System
(previously filed).
10.36 Loan Agreement dated December 11, 1998 by and between the
Registrant and Texas Central bank (previously filed).
10.37 Promissory Note dated December 11, 1998 by and between the
Registrant and Texas Central bank (previously filed).
10.38 Factoring Agreement and Security Agreement dated December 28,
1999 by and between the Registrant and Metro Factors, Inc.
22.1 Subsidiaries of the Company (previously filed).
27 Financial Data Schedule.
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements.
99.2 Voluntary Petition United States Bankruptcy Court Northern
District of Texas - Chapter 7.
(b) Reports on Form 8-K
No reports of Form 8-K were filed during the fourth quarter of 1999.
31
32
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: April 14, 2000 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 Chief April 14, 2000
- ------------------------------- Executive Officer (Principal Executive
PETER W. SEAMAN Officer)
/s/ R. Kenyon Culver Vice President and Chief Financial April 14, 2000
- ------------------------------- Officer (Principal Financial Officer
R. KENYON CULVER and Principal Accounting Officer)
/s/ Michael P. Bumgarner Director April 14, 2000
- -------------------------------
MICHAEL P. BUMGARNER
/s/ John F. Lewis Director April 14, 2000
- -------------------------------
JOHN F. LEWIS
/s/ Thomas H. McConnell, III Director April 14, 2000
- -------------------------------
THOMAS H. MCCONNELL, III
32
33
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
ITEMS 8 AND 14(a)
33
34
UNITED MEDICORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEM 8 AND 14(a)]
CONSOLIDATED FINANCIAL STATEMENTS: PAGE
----
Consolidated Balance Sheets as of December 31, 1999 and 1998 ................................... 35
Consolidated Statements of Operations for each of the three years ended December 31, 1999 ...... 36
Consolidated Statements of Changes in Stockholders' Equity for each of the three years ended
December 31, 1999 ....................................................................... 37
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1999 ...... 38
Notes to Consolidated Financial Statements ..................................................... 39
Report of Independent Accountants - Hein + Associates LLP ...................................... 57
Report of Independent Accountants - PricewaterhouseCoopers LLP ................................. 58
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Consolidated Financial Statement Schedules ................ 57
II- Valuation and Qualifying Accounts .......................................................... 59
Other financial statement schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements of Notes thereto.
34
35
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 121,702 $ 88,693
Restricted cash ...................................................... -- 1,064
Accounts receivable, net of allowance for doubtful accounts
of $8,219 and $17,973, respectively ............................... 141,201 408,458
Factor reserve (Note D) .............................................. 39,744 --
Prepaid expenses and other current assets ............................ 51,844 30,399
------------- -------------
Total current assets .............................................. 354,491 528,614
Other non-current assets ................................................... 4,817 13,142
Property and equipment, net of accumulated depreciation of
$845,005 and $782,845, respectively .................................. 108,211 161,301
Assets under capital leases, net of accumulated amortization of
$74,961 and $143,782, respectively ................................... 131,422 50,197
Net assets of discontinued operations-AHO (Note C) ......................... -- 1,251,119
------------- -------------
Total assets ...................................................... 598,941 2,004,373
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable ............................................... 82,942 81,188
Payable to clients ................................................... -- 1,064
Accrued liabilities .................................................. 342,163 193,329
Current portion of capital lease obligations ......................... 78,588 67,614
Promissory note ...................................................... 49,547 --
Short term borrowings from credit facility ........................... -- 200,000
Net liabilities of discontinued operations-AHO ....................... -- 733,403
------------- -------------
Total current liabilities ......................................... 553,240 1,276,598
Long term capital lease obligations, excluding current portion ............. 110,070 44,973
------------- -------------
Commitments (Note O)
Total liabilities ................................................. 663,310 1,321,571
------------- -------------
Stockholders' equity (deficit):
Common stock; $0.01 par value; 50,000,000 shares authorized;
29,015,764 and 28,015,764 shares outstanding, respectively ........ 290,157 280,157
Common stock subscribed; $0.01 par value; 1,000,000 shares ........... -- 60,000
10% Cumulative convertible preferred stock; $0.01 par value;
5,000,000 shares authorized; none issued .......................... -- --
Less treasury stock at cost, 305,547 and 105,547 shares,
respectively ...................................................... (221,881) (221,881)
Additional paid-in capital ........................................... 18,783,254 18,703,254
Retained deficit ..................................................... (18,915,899) (18,138,728)
------------- -------------
Total stockholders' equity (deficit) .............................. (64,369) 682,802
------------- -------------
Total liabilities and stockholders' equity (deficit) .............. $ 598,941 $ 2,004,373
============= =============
The accompanying notes are an integral part of these consolidated
financial statements
35
36
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
REVENUES:
Billing and collection services ............. $ 3,144,552 $ 4,065,118 $ 2,767,943
Other revenues (net of $210,000 and
and $24,000 paid to a director of the
Company in 1998 and 1997, respectively) .. 13,789 112,891 35,058
------------ ------------ ------------
Total revenues ........................... 3,158,341 4,178,009 2,803,001
EXPENSES:
Wages and benefits .......................... 2,070,936 2,664,694 1,900,182
Selling, general and administrative ......... 614,688 815,431 492,607
Office, vehicle and equipment rental ........ 142,899 129,095 88,672
Depreciation and amortization ............... 117,568 87,265 106,783
Professional fees ........................... 68,788 44,784 54,188
Interest, net ............................... 46,433 8,407 4,959
Provision for doubtful accounts and notes ... 32,176 29,420 (3,853)
Other (income) expense, net ................. 26,337 -- (1,286)
------------ ------------ ------------
Total expenses ........................... 3,119,825 3,779,096 2,642,252
------------ ------------ ------------
NET INCOME FROM CONTINUING OPERATIONS ............. 38,516 398,913 160,749
LOSS FROM DISCONTINUED OPERATIONS-AHO
NET OF INCOME TAXES ......................... (994,113) (230,967) --
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS-AHO
NET OF INCOME TAXES ........................ 178,426 -- --
------------ ------------ ------------
NET INCOME (LOSS) ................................. $ (777,171) $ 167,946 $ 160,749
============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations ....................... $ .0013 $ .0142 $ 0.0059
Discontinued operations-AHO ................. (.0283) (.0082) --
------------ ------------ ------------
Net income (loss) ........................... $ (.0270) $ .0060 $ 0.0059
============ ============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations ....................... $ .0013 $ .0139 $ 0.0059
Discontinued operations-AHO ................. (.0283) (.0081) --
------------ ------------ ------------
Net income (loss) ........................... $ (.0270) $ .0058 $ 0.0059
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements
36
37
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------------- PAID-IN --------------------------- ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT OTHER TOTAL
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31,
1996 26,415,764 $ 264,157 $ 18,552,342 105,547 $ (221,881) $(18,467,423) -- $ 127,195
Shares issued
at $0.10 per
share 1,600,000 16,000 143,487 -- -- -- -- 159,487
Net income -- -- -- -- -- 160,749 -- 160,749
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31,
1997 28,015,764 280,157 18,695,829 105,547 (221,881) (18,306,674) -- 447,431
Common stock
subscribed at
$0.06 per share -- -- -- -- -- -- $ 60,000 60,000
Compensation
expense related
to warrants -- -- 7,425 -- -- -- -- 7,425
Net income -- -- -- -- -- 167,946 -- 167,946
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31,
1998 28,015,764 280,157 18,703,254 105,547 (221,881) (18,138,728) 60,000 682,802
Shares issued
at $0.06 per
share 1,000,000 10,000 50,000 -- -- -- $ (60,000) --
Compensation
expense related
to warrants -- -- 30,000 -- -- -- -- 30,000
Donated treasury
stock -- -- -- 200,000 -- -- -- --
Net loss -- -- -- -- -- (777,171) -- (777,171)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31,
1999 29,015,764 $ 290,157 $ 18,783,254 305,547 $ (221,881) $(18,915,899) -- $ (64,369)
============ ============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements
37
38
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS DECEMBER 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................... $ (777,171) $ 167,946 $ 160,749
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss from discontinued operations-AHO................... 994,113 230,967 --
Gain on disposal of discontinued operations-AHO......... (178,426) -- --
Depreciation of fixed assets............................ 67,909 62,818 61,842
Amortization of assets under capital leases............. 49,659 24,447 44,941
Provision for doubtful accounts and notes............... 32,176 29,420 (3,853)
Deferred credit amortization............................ -- (8,802) (15,089)
Compensation expense related to warrants issued......... 30,000 7,425 --
Gain on sale of assets.................................. (1,290) -- (986)
Loss on capital lease rollover financing................ 7,883 -- --
Changes in assets and liabilities:
(Increase) decrease in restricted cash.................. 1,064 74,071 (66,992)
(Increase) decrease in accounts receivable.............. 235,081 (7,809) (256,656)
(Increase) decrease in factor reserve................... (39,744) -- --
Decrease in notes receivable............................ -- 2,000 --
(Increase) decrease in prepaid expenses and
other assets....................................... (1,168) (11,341) 734
Increase in accounts payable............................ 1,754 12,918 45,523
Increase (decrease) in payable to clients............... (1,064) (74,071) 66,992
Increase (decrease) in accrued liabilities.............. 148,834 (75,094) 59,076
------------- ------------- -------------
Net cash provided by continuing operations................... 569,610 434,895 96,281
Net cash used in discontinued operations-AHO................. (297,971) (686,683) --
------------- ------------- -------------
Net cash provided by (used in) operating activities................... 271,639 (251,788) 96,281
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment............................. (14,819) (77,857) (131,143)
Sale of furniture and equipment................................. 1,290 -- --
------------- ------------- -------------
Net cash used in investing activities................................. (13,529) (77,857) (131,143)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock.......................... -- -- 159,487
Short term borrowings from credit facility...................... (200,000) 200,000 --
Proceeds form issuance of long term debt........................ 100,000 -- --
Principal payments on long term debt............................ (50,453) -- --
Principal payments on capital lease obligations................. (74,648) (57,610) (37,545)
------------- ------------- -------------
Net cash provided by (used in) financing activities................... (225,101) 142,390 121,942
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... 33,009 (187,255) 87,080
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................ 88,693 275,948 188,868
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................. $ 121,702 $ 88,693 $ 275,948
============= ============= =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest................................................ $ 45,319 $ 9,698 $ 14,483
Non-cash investing and financing activities:
Additions to capital lease obligations............................. $ 150,720 $ 32,658 $ 42,760
The accompanying notes are an integral part of these consolidated
financial statements
38
39
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
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"). On November 18, 1996, the Company filed
"Articles of Amendment to the Articles of Incorporation of Sterling Hospital
Systems, Inc." whereby this wholly owned subsidiary of UMC was renamed United
MoneyCorp, Inc. ("UMY"). UMY has been designated as the legal entity under which
UMC operates a collection agency. On August 7, 1998, UMC acquired 100% of the
common stock of Allied Health Options, Inc. ("AHO"), an Alabama corporation.
Effective June 30, 1999, the Company discontinued the operations of AHO. On
October 14, 1999, AHO filed a voluntary petition in the United States Bankruptcy
Court for the Northern District of Texas to liquidate pursuant to Chapter 7 of
Title 11 of the United States Bankruptcy code. On November 16, 1999, the Chapter
7 bankruptcy 341 creditors meeting was held. Unless the context indicates
otherwise, references herein to the Company include UMC and its operating
subsidiary UMY, and exclude AHO.
The Company provides medical insurance claims processing and accounts
receivable management services to healthcare providers. The Company employs
proprietary and purchased software to provide claims processing, billing and
collection services to its customers, which are primarily hospitals, medical
clinics, and physician practices. The Company's medical claims processing
service is designed to provide an electronic claims processing, billing 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
electronic claims processing system. UMY provides customer service and
collection services to health care providers.
The Company also provides interim staffing services under the name
style "UMClaimPros." This service line was introduced by the Company in December
1994. UMClaimPros are experienced claims processors available for customers'
interim staffing needs.
AHO was engaged in: outpatient services; twenty four hour a day
emergency care services; partial hospitalization services, or psychosocial
rehabilitation services; screening of patients being considered for admission to
State mental health facilities to determine the appropriateness of such
admission; and consultation and education services. AHO operated three Community
Mental Health Centers ("CMHC's") under the names: Behavioral Health of Mobile
("BHM"), Calhoun County Behavioral Health ("CCBH"), and Pensacola Center for
Behavioral Health ("PCBH"). BHM and CCBH obtained Health Care Financing
Administration ("HCFA") certification to provide partial hospitalization
services as a CMHC under Medicare Part A effective February 1, 1996. PCBH
obtained HCFA certification to provide partial hospitalization services as a
CMHC under Medicare Part A effective October 2, 1996.
39
40
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of UMC and its wholly owned subsidiaries UMY and AHO. All material intercompany
transactions and balances have been eliminated in consolidation. Certain prior
year balances have been reclassified to conform with current year presentation.
Effective June 30, 1999, the Company discontinued the operations of AHO as
discussed in Note C. As such, AHO's results are classified as discontinued
operations for all periods presented.
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, liabilities, revenues
and expenses. Significant estimates included in the accompanying financial
statements include the net liabilities of AHO's discontinued operations. Actual
results could differ significantly from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand.
FACTORED ACCOUNTS RECEIVABLE WITH RECOURSE
Factored accounts receivable are accounted for pursuant to SFAS No. 77,
"Reporting by Transferors for Transfers of Receivables with Recourse" ("SFAS No.
77"). Pursuant to SFAS No. 77, the Company treats its factored accounts
receivable as a sales transaction, and as such, no liability is recognized for
the amount of the proceeds received from the transfer of the accounts
receivable.
PROVISION FOR DOUBTFUL ACCOUNTS
UMC accounts receivable are reserved on an account by account basis. In
general, accounts aged greater than 120 days are fully reserved.
PROPERTY AND EQUIPMENT, AND ASSETS HELD UNDER CAPITAL LEASES
Property and equipment are recorded at cost. Leased property meeting
certain criteria is capitalized and the present value of the related lease
payments is recorded as a capital lease obligation. Expenditures for repairs and
maintenance are charged to expense 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 or amortization are removed from the
accounts and the resulting gain or loss is included in "Other income, net."
Property and equipment are 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
40
41
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
impairment review would include 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. No such
impairment has been recognized by the Company in 1999, 1998 or 1997.
BILLING AND COLLECTION SERVICES REVENUE RECOGNITION
The Company's billing and collection services revenue is recognized
upon receipt by the customer of payment from a third party payor or guarantor of
a patient's account and upon notification by the customer to the Company that
such payment has been received, or upon receipt of such payment by UMC.
OTHER REVENUE RECOGNITION
For 1999, 1998 and 1997, other revenues consists primarily of advance
funding fees and consulting revenues recognized as services were performed.
Consulting revenues related to services performed by a non-employee member of
the Company's board of directors, have been netted against the associated cost
of services performed by the non-employee board member. Consulting revenues were
netted with the associated cost of services which totaled approximately $210,000
and $24,000 in 1998 and 1997, respectively.
EARNINGS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share" ("SFAS No.
128") which requires companies to present on the face of the income statement,
basic earnings per share ("EPS") and diluted EPS. Companies with complex capital
structures are required to reconcile the numerator and denominator used in the
basic EPS computation to the numerator and denominator used in the diluted EPS
computation. For each of the three years ended December 31, 1999, basic EPS
calculations are based on the weighted-average number of common shares
outstanding during the period, while diluted EPS calculations are based on the
weighted-average number of common shares and dilutive common share equivalents
outstanding during each period.
INCOME TAXES
Income taxes are accounted for pursuant to SFAS No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires that deferred income
taxes reflect the tax consequences on future years of differences between the
tax basis of assets and liabilities and their basis for financial reporting
purposes and that future tax benefits, such as NOLs, are required to be
recognized to the extent that realization of such benefits is more likely than
not.
41
42
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-based
Compensation" ("SFAS No. 123") which requires Company's to include the fair
value of stock options and other stock-based compensation issued to employees
and non-employees as compensation expense in the income statement or to disclose
the pro-forma effect on net income and earnings per share of such compensation
expense in the footnotes to the Company's financial statements, commencing with
all transactions entered into after December 15, 1995. The Company has elected
to continue to account for its employee stock options issued under approved
Stock Option Plans and warrants issued to the members of the Company's Board of
Directors on April 1, 1997 and November 12, 1996, pursuant to APB25 "Accounting
for Stock Issued to Employees." This decision results in recognition of no
compensation expense for employee stock options that are granted with an
exercise price at or greater than the market price on the date of grant.
However, in accordance with the disclosure provisions of SFAS No. 123, the
Company has provided proforma basis information to reflect results of operations
and earnings per share had compensation expense been recognized for these items.
All other equity instruments issued by the Company to employees and
non-employees will be recognized pursuant to SFAS No. 123 which will impact the
Company's consolidated balance sheet and statement of operations.
CONTINUATION AS A GOING CONCERN AND LIQUIDITY
In September, 1999, the Company was informally notified by the
Washington Hospital Center ("WHC") that claim transmissions from the Department
of Emergency Medicine ("WHCDEM") would terminate effective November 1, 1999.
Formal notification was subsequently received on November 4, 1999. Revenue from
this contract was generated through November 30, 1999 consistent with revenues
generated on a monthly basis through September 30, 1999, and thereafter ramped
down through and will terminate on or about April 30, 2000. Revenue from this
contract accounted for approximately 7% and 6% of total revenue during 1999 and
1998, respectively.
On July 28, 1999, the Company was formally notified by WHC that claim
transmissions from the Department of Women's Services ("WHCDWS") will terminate
effective October 1, 1999. Revenue from this contract was generated through
November 1, 1999 consistent with revenues generated on a monthly basis through
September 30, 1999, and thereafter ramped down through and terminated on or
about December 31, 1999. Revenue from this contract accounted for approximately
9% and 1% of total revenue during 1999 and 1998, respectively.
On March 15, 1999, the Company was formally notified by Presbyterian
Healthcare Services ("PHS") that it had not been selected to provide continuing
collection agency services. The Company was informed that this decision was the
result of the merger of PHS with another health care system that was not related
to the quality of the services provided by the Company to PHS. The Company
received weekly account placements through May 4, 1999, and generated its last
revenue from PHS in August, 1999. Revenue from this contract accounted for
approximately 4%, 20%, and 23% of total revenue during 1999, 1998, and 1997,
respectively.
On July 28, 1999, WHC management verbally expressed its intent to
restructure the current Hospital Billing contract. On December 27, 1999, the
Hospital Billing contract amendment was
42
43
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
executed. This amendment called for UMC to continue to provide a majority of its
current services to WHC under a fifty percent fee reduction to be effective for
claims with dates of service on and after October 1, 1999. Revenue from this
contract was generated through November 1, 1999 consistent with revenues
generated on a monthly basis through September 30, 1999, and thereafter ramped
down through and stabilized at the new rate on or about December 15, 1999.
Revenue from this contract accounted for approximately 63%, 42%, and 52% of
total revenue during 1999, 1998, and 1997, respectively.
As a result of the aforementioned changes within its customer base,
management has taken certain actions in an attempt to better position the
Company. These actions include, but are not limited to:
o Headcount at March 31, 2000, as compared to March 31, 1999, had been
reduced by 16 employees to 44 employees primarily through attrition. This
reduction resulted in a monthly gross salary expense reduction of
approximately $33,000.
o The Company restructured its sales organization to improve focus on the
Texas market and increase the emphasis on services provided by UMY.
o A medical claims management contract for ongoing claims was executed on
June 17, 1999, with a hospital system located in Virginia. This contract is
fully implemented and generated revenue of approximately $199,000 in 1999.
o During 1999 and through March 31, 2000, UMY executed approximately 15 new
customer service and collection agreements which provided revenues of
approximately $73,000 in 1999.
o The Company executed the following contracts which generated no revenue in
1999:
o A medical claims management contract for backlog and on-going claims
was executed on March 22, 2000, with a major hospital system located
in New Mexico.
o A collection services contract for backlog and on-going claims was
executed on February 10, 2000, with a central Texas diagnostic imaging
facility.
o Customer service contracts were executed on March 13, 2000 and
December 10, 1999, respectively, with hospitals located in south and
central Texas.
o A medical claims management contract for backlog claims was executed
on November 24, 1999, with a hospital located in the Caribbean.
o During 1998 and 1999, UMC provided various forms of working and debt
repayment capital to AHO totaling approximately $1,059,000. On October 14,
1999, AHO filed a voluntary petition in the United States Bankruptcy Court
for the Northern District of Texas to liquidate pursuant to Chapter 7 of
Title 11 of the United States Bankruptcy Code. In conjunction with the
filing of the bankruptcy petition, UMC accrued approximately $68,000
related to lease guarantees, storage fees and professional fees.
o On August 2, 1999, management exercised its office space reduction option
whereby 3,300 square feet of office space was vacated on September 2, 1999
resulting in a monthly expense reduction of approximately $3,500.
43
44
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
o Management is evaluating new service lines to compliment its traditional
medical claims processing and accounts receivable management services.
Possible new service lines include a focus on healthcare consumerism and
healthcare e-business leveraging the Company's industry experience and
technological infrastructure.
Management continues to vigorously pursue new business while rigorously
managing expenses without negatively impacting service levels. However, there
can be no assurance that UMC will be successful in obtaining new business and
producing incremental profits and cash flow.
If management is unable to successfully develop and implement new
profitable customer contracts and new service lines or align expenses with
future cash requirements, it will be required to adopt alternative strategies,
which may include but are not limited to, actions such as reducing management
and line employee headcount and compensation, restructuring existing financial
obligations, seeking a strategic merger or acquisition, seeking the sale of the
Company or the Company's public shell, and/or seeking additional debt or equity
capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms.
C. ALLIED HEALTH OPTIONS, INC. - BANKRUPTCY PETITION, DISCONTINUED OPERATIONS
AND GOODWILL WRITE-OFF
Effective June 30, 1999 (the "Measurement Date" pursuant to APB Opinion
No. 30 Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions), the Company discontinued the operations of
AHO for those reasons explained below. The Disposal Date was October 14, 1999,
at which time, AHO filed a voluntary petition in the United States Bankruptcy
Court for the Northern District of Texas to liquidate pursuant to Chapter 7 of
Title 11 of the United States Bankruptcy Code. The filing was made primarily due
to the insolvency of AHO. At October 14, 1999, the net liabilities of AHO
totaled approximately $2.7 million of which approximately $1,059,000 represented
unsecured intercompany loans and other forms of working capital provided by UMC.
Simultaneous with the filing of the Chapter 7 petition, and pursuant to SFAS No.
94, "Consolidation of All Majority-Owned Subsidiaries" the accounts of AHO were
deconsolidated.
Pursuant to APB Opinion No. 30, the Company's consolidated financial
statements are presented to reflect AHO's discontinued operations for all
periods presented. The net operating results of AHO and the loss on disposal of
AHO are reported in the Consolidated Statements of Operations as "Loss from
discontinued operations" and "Loss on disposal of discontinued operations"; the
net liabilities and assets are reported in the Consolidated Balance Sheets as
"Net liabilities of discontinued operations" and "Net assets of discontinued
operations;" and the net cash flows are reported in the Consolidated Statements
of Cash Flows as "Net cash used in discontinued operations."
44
45
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summarized financial information for the discontinued operations of AHO is
as follows:
Year Ended December 31,
--------------------------
1999 1998
----------- -----------
Net patient services revenue ............................... $ 84,553 $ 799,807
=========== ===========
Loss from discontinued operations before income tax ........ (994,113) (230,967)
Gain on disposal of discontinued operations ................ 178,426 --
Income tax effect .......................................... -- --
----------- -----------
Loss from discontinued operations, net of tax .............. (815,687) (230,967)
=========== ===========
Current assets ............................................. -- 589,396
Goodwill, net of accumulated amortization of $1,465,260
and $25,779, respectively ................................ -- 1,439,481
Total assets ............................................... -- 2,057,857
Current liabilities:
Accrued Medicare settlement .............................. -- 878,805
Current installments on long term debt ................... -- 126,773
Other .................................................... -- 317,221
----------- -----------
Total current liabilities .................................. -- 1,322,799
Accrued Medicare settlement ................................ -- 217,342
----------- -----------
Total liabilities .......................................... -- 1,540,141
Net liabilities of discontinued operations - current ....... -- 733,403
Net assets of discontinued operations - long term .......... $ -- $ 1,251,119
At June 30, 1999, in conjunction with the discontinuance of the
operations of AHO, the Company recorded a non-cash charge totaling $1,402,728,
pursuant to SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-lived Assets to be Disposed Of" ("SFAS No. 121") for the write-off of
all unamortized goodwill related to the acquisition of AHO. The SFAS No. 121
charge had no impact on the Company's year-to-date cash flow or its ability to
generate future cash flow.
During the second quarter of 1999, management believed there were
events and changes in circumstances that warranted the write-off of goodwill as
it was determined that the carrying value of goodwill was not recoverable. These
events included:
Behavioral Health of Mobile:
o Medicare's continuing one hundred percent medical records' review and
denial of Medicare claims
o termination of essentially all employees and cessation of patient care by
April 30, 1999
o continuing cash flow shortages as a result of the one hundred percent
medical records review
o processing delays in appealing denied 1998 Medicare claims
o unexpected delays in the completion of reimbursable bad debt logs for prior
years
o deterioration of the patient referral base
o AHO's cancellation of BHM's Medicare provider number effective June 8, 1999
Calhoun County Behavioral Health:
o termination of all employees and cessation of patient care by July 2 ,1999
due to continuing Company-wide cash flow shortages
o unexpected delays in the completion of reimbursable bad debt logs for prior
years
45
46
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pensacola Center for Behavioral Health:
o continuing suspension of all Medicare payments due to AHO's inability to
repay in full its 1998 Medicare overpayment
o processing delays in appealing denied 1998 Medicare claims
o unexpected delays in the completion of reimbursable bad debt logs for prior
years
o deterioration of patient referral base
D. FACTORED ACCOUNTS RECEIVABLE WITH RECOURSE
On December 28, 1999, the Company executed a $500,000 recourse
factoring agreement which may be terminated by either party with ten days
notice. The agreement is secured by all of the Company's non-factored accounts
receivable (Note Q) and is personally guaranteed by two officers of the Company.
The factor has recourse against the Company, its collateral and guarantors
should factored invoices remain unpaid at 90 days. Interest at prime plus 2.5%
is charged against the net cash deployed by the factor which is computed as
total advances to the Company less reserve in excess of 20% of the face value of
the factored invoices, if any. The company receives a maximum advance of 80% for
each invoice sold. Upon payment in full of the invoice by the customer to the
factor, the Company then has access to the remaining 20% net of interest and
fees.
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ----- ----
Proceeds received ............................... $179,138 $ -- $ --
Uncollected balance at year end ................. $218,882 $ -- $ --
E. PROPERTY AND EQUIPMENT / ASSETS UNDER CAPITAL LEASES
At December 31, 1999 property and equipment consist of the following:
Capital
Purchased Lease Total
------------- ------------- -------------
Equipment ........................................ $ 562,076 $ 206,383 $ 768,459
Software systems ................................. 178,164 -- 178,164
Furniture and fixtures ........................... 125,036 -- 125,036
Leasehold improvements ........................... 87,940 -- 87,940
------------- ------------- -------------
Gross property and equipment ................ 953,216 206,383 1,159,599
Accumulated depreciation and amortization ........ (845,005) (74,961) (919,966)
------------- ------------- -------------
Net property and equipment .................. $ 108,211 $ 131,422 $ 239,633
============= ============= =============
At December 31, 1998 property and equipment consist of the following:
Capital
Purchased Lease Total
------------- ------------- -------------
Equipment ........................................ $ 555,196 $ 193,979 $ 749,175
Software systems ................................. 170,225 -- 170,225
Furniture and fixtures ........................... 130,785 -- 130,785
Leasehold improvements ........................... 87,940 -- 87,940
------------- ------------- -------------
Gross property and equipment ................ 944,146 193,979 1,138,125
Accumulated depreciation and amortization ........ (782,845) (143,782) (926,627)
------------- ------------- -------------
Net property and equipment .................. $ 161,301 $ 50,197 $ 211,498
============= ============= =============
46
47
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation expense related to property and equipment was $67,909,
$72,470 and $61,812 during 1999, 1998 and 1997, respectively. Amortization
expense on assets under capital leases was $49,659, $18,831 and $44,971 during
1999, 1998 and 1997, respectively.
F. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following:
1999 1998
---------- ----------
Professional fees ................................ $ 108,123 $ 97,210
Payroll and benefits ............................. 83,691 84,470
Office relocation ................................ 75,000 --
AHO .............................................. 67,963 --
Accrued other .................................... 7,386 11,649
---------- ----------
$ 342,163 $ 193,329
========== ==========
G. CAPITAL LEASE OBLIGATIONS
On June 2, 1999, the Company leased a new IBM A/S 400 Model 620
computer for a term of 36 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 $174,278, of
which $98,420 represents the cost of the AS/400 and related equipment, $63,906
represents rollover financing and consolidation of all other IBM capital lease
obligations, and $11,952 represents financed maintenance. This equipment may be
purchased at the end of the lease for the then fair market value.
During 1999, the Company entered into one software lease through a
single lessor for a term of 36 months. This software may be purchased at the end
of the lease at no cost.
During 1998, the Company entered into various equipment leases through
a single lessor. This equipment may be purchased at the end of the lease for $1.
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, of which $118,480
represents the cost of the AS/400. This equipment was returned in conjunction
with the aforementioned June 2, 1999 IBM lease.
47
48
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, the remaining capital lease obligations are as follows:
1999 1998
-------- --------
6.9% lease related to IBM AS/400, rollover financing and maintenance,
maturing in 2002 ............................................... $147,662 $ --
17.5% lease related to software, maturing in 2001 .................... 23,074 --
15.7% lease related to office and telephone equipment maturing in 2001 17,922 28,040
6.9% lease related to IBM AS/400, rollover financing and maintenance,
maturing in 2000 ............................................... -- 60,845
Miscellaneous capital leases related to computer equipment with
rates of 5.9% to 9.75%, maturing through 2000 .................. -- 23,702
-------- --------
Total Capital lease obligations ............................. 188,658 112,587
Less current portion of capital lease obligations ................. 78,588 67,614
-------- --------
Long-term capital lease obligations ............................... $110,070 $ 44,973
======== ========
As of December 31, 1999, total lease payments due under capital leases are as
follows:
Year ending December 31:
2000...................................................... $ 92,160
2001...................................................... 84,723
2002...................................................... 32,225
-------
209,108
Less interest............................................. 20,450
-------
Principal amount of net lease payments.................... $188,658
========
Interest expense on capital lease obligations was $17,007, $11,100 and
$10,893 during 1999, 1998 and 1997, respectively.
H. DEBT
Debt at December 31, consist of the following: 1999 1998
-------- ---------
Promissory note, interest at prime plus 1% per annum, (9.5% at
December 31, 1999), monthly installments of $4,167 plus
simple interest, matures January 4, 2001, secured (Note Q) ...... $ 49,547 $ --
-------- ---------
Revolving credit facility, bore interest at prime plus 1% per annum,
matured December 11, 1999, secured .............................. -- 200,000
$ 49,547 $ 200,000
======== =========
I. INCOME TAXES
There is no current or deferred tax expense for the years ended
December 31, 1999, 1998 and 1997. The Company recorded a net operating tax loss
("NOL") in 1999 and utilized NOL carryforwards to offset taxable income in 1998
and 1997.
48
49
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SFAS No. 109 requires that deferred income taxes reflect the tax
consequences on future years of differences between the tax basis of assets and
liabilities and their basis for financial reporting purposes. In addition,
future tax benefits, such as NOLs, are required to be recognized to the extent
that realization of such benefits is more likely than not. Realization of the
future tax benefits related to deferred tax assets is dependent on many factors,
including the Company's ability to generate taxable income within the net
operating loss carryforward period. At December 31, 1999, 1998 and 1997, the
Company's deferred tax assets are fully reserved. At December 31, 1999, 1998 and
1997, the Company had no net deferred tax liability. The tax effects of
temporary differences and NOLs that give rise to the deferred tax assets at
December 31, are as follows:
Deferred tax assets: 1999 1998
----------- -----------
Net operating tax loss carryforward ..................................... $ 3,331,563 $ 3,363,196
Accrued liabilities ..................................................... 15,234 17,446
Paid in capital - warrants .............................................. 11,100 --
Property and equipment .................................................. 6,847 (5,374)
Accounts receivable ..................................................... 3,041 6,650
Discontinued operations - AHO ........................................... -- 59,536
----------- -----------
Gross deferred tax assets ............................................ 3,367,785 3,441,454
Valuation allowance ..................................................... (3,367,785) (3,441,454)
----------- -----------
Net deferred tax assets .............................................. $ -- $ --
=========== ===========
From inception in March 1989 to March 1992, the Company generated NOLs
totaling $13.9 million. In March 1992, the Company experienced an ownership
change as defined by Section 382 of the Internal Revenue Code. As a result of
this event, the Company will be limited in its ability to use pre-change NOL
carryforwards to reduce subsequent taxable income. The amount of taxable income
that can be offset by pre-change NOL carryforwards in any annual period is
limited to approximately $358,000 through 2007. Post-change NOL carryforwards
which are not subject to limitation total $5.1 million and will expire in
varying amounts between 2007 and 2019.
J. STOCKHOLDERS' EQUITY
Effective December 28, 1999, warrants to purchase a total of 4 million
shares of the Company's common stock were issued to one Officer and one
Officer/Director of the Company as further explained in Note L.
Effective December 31, 1998, UMC sold 1,000,000 shares of unregistered
Common Stock in exchange for a $261,818 promissory note due from AHO to a third
party note holder. The Common Stock subscribed totaling $60,000 was priced at
$0.06 per share representing the last trading price prior to the execution of
the transaction. The Common Stock was not registered under the Securities Act of
1933, as amended, in reliance on Section 4(2) of the Securities Act of 1933, as
amended, as the sale of these securities did not involve a public offering.
On March 12, 1998 and August 28, 1998, warrants to purchase 39,161 and
70,186 shares of the Company's common stock were issued to a director as further
explained in Note L. For the year ended December 31, 1998, the Company recorded
$7,425 of expense and additional paid-in capital to reflect the estimated fair
value of these warrants.
49
50
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On July 11, 1997, the Company completed a private offering of 1,600,000
shares of UMC Common Stock at a price of $0.10 per share. The offering generated
net proceeds of $159,487 after deducting legal fees and other expenses of the
offering.
At December 31, 1999, there were 5,000,000 shares of 10% cumulative
preferred stock, par value $0.01 authorized but not issued. The preferred stock
may be issued in series and include rights and preferences as designated by the
Company's board of directors. At December 31, 1999, 7,225,847 shares of Common
Stock are reserved for issuance of outstanding warrants and options.
K. EARNINGS PER SHARE
The following table shows the amounts used in computing EPS and the
effect on the weighted average number of shares of dilutive common stock
equivalents:
Year Ended December 31,
---------------------------------------
1999 1998 1997
---------- ----------- -----------
Net income (loss) available to common stockholders...... $ (777,171) $ 167,946 $ 160,749
Weighted average number of common shares
in basic EPS ........................................ 28,739,332 27,910,217 27,178,504
Effect of dilutive weighted average common
share equivalents ................................... 684,563 788,525 203,335
----------- ----------- -----------
Weighted average number of common shares and
dilutive potential common shares in diluted EPS ...... 29,423,895 28,698,742 27,381,839
=========== =========== ===========
L. WARRANTS
Effective December 28, 1999, warrants to purchase a total of 1 million
shares of UMC Common Stock at $0.00 per share were issued to the Company's
Chairman and Chief Executive Officer and to the Chief Financial Officer of the
Company (the "Holders') with each individual receiving a warrant to purchase
500,000 shares as consideration for their personal guarantees of the Company's
recourse factoring agreement. These warrants were 100% exerciseable on the grant
date and expire on the earlier of (a) December 27, 2009, (b) the date on which
the Holder's services are terminated for cause, (c) three months after the
expiration of the Holder's term as a Director or resignation from the Board of
Directors or as an Officer, or termination of the Holder due to the sale of the
Company or (d) twelve months after the Holder's services as an Officer or
Director are terminated by reason of the individual's death or disability. These
warrants were accounted for pursuant to SFAS No. 123 and as such, for the year
ended December 31, 1999, the Company recorded $30,000 of expense and additional
paid-in capital to reflect the estimated fair value of these warrants. None of
these warrants had been exercised as of December 31, 1999.
Effective December 28, 1999, warrants to purchase a total of 3 million
shares of UMC Common Stock at $0.00 per share were issued to the Company's
Chairman and Chief Executive Officer and to the Chief Financial Officer with
each individual receiving a warrant to purchase 1,500,000 shares as incentive to
reposition the Company such that their personal guarantees would no longer be
required. These warrants will become fully exercisable upon: (i) release of any
and all personal guarantee(s) required to obtain financing from the Company's
factor or any other financing source which may succeed the factor, and (ii) the
Company qualifying for bank credit for which personal guarantees are not
required or, (iii) elimination of the Company's need for financing to meet its
working capital and
50
51
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
other operating requirements. These warrants expire on the earlier of (a)
December 27, 2009, (b) the date on which the Holder's services are terminated
for cause, (c) three months after the expiration of the Holder's term as a
Director or resignation from the Board of Directors or as an Officer, or
termination of the Holder due to the sale of the Company, (d) twelve months
after the Holder's services as an Officer or Director are terminated by reason
of the individual's death or disability, or (e) upon revocation by the Holder of
any personal guarantee necessary to secure the Company's factoring agreement, or
any successor to the factor, provided, however, that these warrants shall
continue in force if all of the Company's obligations that are secured by the
Holder's personal guarantee(s) are repaid in full, and the Holder's personal
guarantee(s) are no longer necessary in order for the Company to meet its needs
for working capital and other operating requirements. These warrants were
accounted for pursuant to SFAS No. 123 and as such, for the year ended December
31, 1999 recognition of expense and additional paid-in capital of $90,000 has
been deferred until such time as the aforementioned vesting requirements have
been achieved. These warrants were not exercisable as of December 31, 1999 or as
of the date of this report.
The Company has a Director's Incentive Compensation Agreement ("DICA")
with each of its external directors. On March 12, 1998, a warrant to purchase
39,161 shares of the Company's common stock at $0.13 per share was issued to one
director in conjunction with commissions earned under the DICA. On August 28,
1998, a warrant to purchase 70,186 shares of the Company's common stock at $0.07
per share was issued to the same director in conjunction with commissions earned
under the DICA. Both warrants were immediately exercisable. Both warrants expire
on the earlier of (a) March 31, 2007, (b) the date on which the Director's
services are terminated for cause, (c) three months after the expiration of the
Director's term, resignation from the Board of Directors, or termination of the
Director due to the sale of the Company or (d) twelve months after the services
as a Director are terminated by reason of the Director's death or disability.
For the year ended December 31, 1998, the Company recorded $7,425 of expense and
additional paid-in capital to reflect the estimated fair value of these
warrants. None of these warrants had been exercised as of December 31, 1999.
On April 1, 1997, warrants to purchase 1,200,000 shares of UMC Common
Stock at $0.08 per share were issued to three directors of UMC with each
director receiving a warrant for 400,000 shares. These warrants are exercisable
33 1/3 % immediately, 66 2/3% after twelve months from the effective date of the
grant, and 100% after twenty four months from the effective date of the grant.
These warrants expire on the earlier of (a) March 31, 2007, (b) the date on
which the Director's services are terminated for cause, (c) three months after
the expiration of the Director's term, resignation from the Board of Directors,
or termination of the Director due to the sale of the Company or (d) twelve
months after the services as a Director are terminated by reason of the
Director's death of disability. None of these warrants had been exercised as of
December 31, 1999.
On November 12, 1996, warrants to purchase 130,000 shares of UMC Common
Stock at $0.06 per share were issued to three former directors of UMC. These
warrants were 100% exerciseable on the grant date and expire on November 11,
2001. None of these warrants had been exercised as of December 31, 1999.
Neither the warrants or the shares of common stock represented by these
warrants have been registered under the Securities Act of 1933.
51
52
UNITED MEDICOPR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
M. OPTIONS
At the Annual Meeting of Stockholders on August 28, 1998, the Company's
stockholders approved the adoption of the 1998 Stock Option Plan (the "1998
Plan"), which provides for the issuance of both "incentive" and "nonqualified"
stock options. A total of 1,000,000 shares are issuable under the 1998 Plan. At
December 31, 1999, options for 250,000 shares were outstanding under the 1998
Plan.
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
December 31, 1999, options for 897,500 shares were outstanding 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.
At December 31, 1999, options for 639,000 and 0 shares were outstanding under
the 1992 and 1989 Plans, respectively.
Under the terms of the aforementioned Plans, 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 expense 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. The
Compensation Committee of the board of directors approves the number of shares
to be granted to employees and the term of the vesting. Options that have
expired or that have been canceled are available for future grants under the
Plans.
None of the option plans or the shares of common stock represented by
the option plans have been registered under the Securities Act of 1933 except
for the 1992 Plan.
52
53
UNITED MEDICOPR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes activity for the years ended December
31:
1999 1998 1997
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
Options outstanding at
January 1, 1,935,500 $ 0.07 1,905,000 $ 0.07 1,239,500 $ 0.13
Granted 150,000 0.02 485,000 0.10 1,300,000 0.07
Exercised -- -- -- -- -- --
Canceled (299,000) 0.11 (454,500) 0.07 (634,500) 0.21
---------- -------- ---------- -------- ---------- --------
Options outstanding at
December 31, 1,786,500 0.06 1,935,500 0.07 1,905,000 0.07
========== ======== ========== ======== ========== ========
Options exerciseable at
December 31, 1,142,667 $ 0.07 773,500 $ 0.06 403,333 $ 0.05
========== ======== ========== ======== ========== ========
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
---------------------------------------------- ---------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISEABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
- --------------- ------------ ------------------- -------- -------------- -------------
--- $0.02 150,000 9.8 years $0.02 -- $ --
$0.05 --- $0.07 1,236,500 7.1 years 0.06 959,334 0.06
$0.08 --- $0.10 400,000 8.5 years 0.09 183.333 0.08
- -------------- ---------- --------- ----- -------------- -------------
$0.05 --- $0.13 1,786,500 7.7 years $0.06 1,142,667 $ 0.07
============== ========== ========= ===== ============== =============
N. SFAS NO. 123 PRO FORMA
Pro forma net income and earnings per share presented below reflect the
results of the Company as if the fair value based accounting method described in
SFAS No. 123 had been used to account for stock and warrant-based compensation
costs, net of taxes and forfeitures of prior year grants:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
---------- ---------- ----------
Net income (loss) $ (771,171) $ 167,946 $ 160.749
SFAS No. 123 employee compensation cost 11,179 12,778 12,825
SFAS No. 123 director costs 7,423 25,476 18,421
---------- ---------- ----------
Pro forma net income (loss) $ (789,773) $ 129,692 $ 129,503
========== ========== ==========
Pro forma basic earnings per share $ (0.0274) $ 0.0046 $ 0.0048
========== ========== ==========
53
54
UNITED MEDICOPR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value for options granted in 1999, 1998 and 1997 was estimated at
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants during the years ended
December 31:
Year Ended December 31,
------------------------------------------------
1999 1998 1997
---------- ---------- ----------
Dividend yield -- -- --
Expected volatility 110.9% 110.0% 112.3%
Risk-free rate of return 6.2% 5.5% 6.4%
Expected life, years 3 3 3
Grant-date fair value per share $ 0.05 $ 0.07 $ 0.05
The fair value for warrants granted in 1999, 1998 and 1997 was estimated at
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants during the years ended
December 31:
Year Ended December 31,
------------------------------------------------
1999 1998 1997
---------- ---------- ----------
Dividend yield -- -- --
Expected volatility 92.8% 108.7% 98.8%
Risk-free rate of return 5.9% 5.5% 6.4%
Expected life, years 4 4 4
Grant-date fair value per share $ 0.5 $ 0.07 $ 0.06
O. COMMITMENTS
The Company has various operating lease agreements for equipment and
facilities. A summary of the lease commitments under noncancelable operating
leases at December 31, 1999 is as follows:
Year ending December 31:
2000............................................................................ $ 96,024
2001............................................................................ 7,442
-----------
$ 103,466
===========
P. FINANCIAL INSTRUMENTS & CONCENTRATIONS OF MARKET AND CREDIT RISK
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate fair value due to the short
term maturities of these instruments. The fair value of cash equivalents is
determined by reference to market data. The fair value of debt and capital lease
obligations approximate carrying value as the related interest rates approximate
current market rates.
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash equivalents and trade
receivables. It is the Company's practice to place its cash equivalents and
investments in high quality money market accounts. Generally, the Company does
not require collateral or other security to support customer receivables. When
possible, the Company will structure contracts such that provider payments are
remitted directly to UMC whereby UMC can collect its fee and remit a net payment
back to the customer. The Company does not expect its
54
55
UNITED MEDICOPR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
customers to fail to meet their obligations and, as such, considers the credit
risk associated with its trade accounts receivable to be minimal.
The percentage market mix of total revenue from continuing operations
for the years ended December 31, was:
1999 1998 1997
------ ------ ------
Customer A .............. 79% 66% 63%
Customer B .............. 4 23 23
Other customers ......... 17 11 14
------ ------ ------
100% 100% 100%
====== ====== ======
The percentage market mix of total net accounts receivable for the years
ended December 31, was:
1999 1998 1997
------ ------ ------
Customer A .............. 54% 82% 54%
Customer B .............. -- 13 23
Customer C .............. 17 -- --
Other customers ......... 29 5 23
------ ------ ------
100% 100% 100%
====== ====== ======
Q. ASSETS PLEDGED AS COLLATERAL
Effective January 4, 1999, the Company executed a bank promissory note
(the "Note"), for $100,000. The Note matures on January 4, 2001 and is secured
by the fixed assets of UMC.
On December 28, 1999, the Company executed a $500,000 recourse
factoring agreement which may be terminated by either party with ten days
notice, which is secured by all of the Company's non-factored accounts
receivable.
R. RELATED PARTY TRANSACTIONS
The Company has consulting agreements for services provided primarily
by a non-employee director of the Company. These agreements were completed
simultaneously with consulting agreements between the Company and certain
customers. The director was paid approximately 78% of the consulting fees paid
to the Company. For the years ended December 31, 1998 and 1997, the Company paid
the director $210,000 and $24,000, respectively.
The Company has a Director's Incentive Compensation Agreements ("DICA")
with each of its non-employee directors. On March 12, 1998, a warrant to
purchase 39,161 shares of the Company's common stock at $0.13 per share was
issued to one director in conjunction with commissions earned under the DICA. On
August 28, 1998, a warrant to purchase 70,186 shares of the Company's common
stock at $0.07 per share was issued to the same director in conjunction with
commissions earned under the DICA. For the year ended December 31, 1998, the
Company recorded $7,425 of expense to reflect the estimated fair value of these
warrants. For the year ended December 31, 1998, the Company recorded commission
expense of $3,420 related to a second director in conjunction with commissions
earned under the DICA.
55
56
UNITED MEDICOPR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During 1998, the Company provided services to an entity controlled by a
director of the Company. For the year ended December 31, 1998, the Company
recorded a loss of $15,500 related to these services.
The Company completed a private offering of 1,600,000 shares of UMC
Common Stock at a price of $.10 per share on July 11, 1997. The offering
generated net proceeds of $159,487 after deducting legal fees and other expenses
of the offering. Of the shares sold, 1,300,000 shares were purchased by a
director of the Company, who subsequently donated 300,000 of such shares to
trusts in which the director holds no beneficial interest. An additional 100,000
shares were purchased by another director of the Company.
S. SEGMENT REPORTING
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. The adoption of SFAS No. 131
did not effect results of operations, financial position or disclosure.
Management organizes consolidated UMC around differences in services
offered. UMC provides medical insurance claims processing, medical accounts
receivable management and other healthcare related ancillary services. UMY
provides customer services, early out, bad debt and secondary account collection
agency services to the health care industry. UMC and UMY are aggregated into one
reportable health care Business Office Services segment based on the similarity
of the nature of the medical claim or account collection services, nature of the
information technology and human resource production process and service
delivery methodologies, as well as the predominantly health care industry
customer base of both UMC and UMY.
56
57
INDEPENDENT AUDITOR'S REPORT
Board of Directors
United Medicorp, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of United Medicorp,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholder's equity (deficit), and cash flows for the years then
ended. Our audits also included the financial statement schedule referred to in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Medicorp,
Inc. as of December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, during 1999, the Company suffered the loss of several
significant customers and had the service fee arrangement renegotiated with its
largest customer. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note B. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Hein + Associates LLP
April 10, 2000
Dallas, Texas
57
58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of United Medicorp, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
United Medicorp, Inc. and its subsidiary at December 31, 1997, and the results
of their operations and their cash flows for the year ended December 31, 1997,
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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 23, 1998
58
59
UNITED MEDICORP, INC.
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1999
BALANCE ADDITIONS
AT CHARGED CHARGED BALANCE
BEGINNING TO COSTS TO AT
OF AND OTHER END OF
DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ----------- ---------- ---------- ---------- ---------- ----------
(1) (2)
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts $ 216,388 $ 32,176 $ (198,415) $ (41,930) $ 8,219
Allowance for doubtful notes $ 2,000 $ -- $ -- $ (2,000) $ --
---------- ---------- ---------- ---------- ----------
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts........... $ 11,674 $ 62,405 $ 163,430 $ (21,121) $ 216,388
Allowance for doubtful notes.............. $ -- $ 2,000 $ -- $ -- $ 2,000
---------- ---------- ---------- ---------- ----------
- --------------------
DECEMBER 31, 1999:
(1) Represents the allowance for doubtful accounts balance associated with the
acquisition of Allied Health Options, Inc. included in loss on discontinued
operations of AHO.
(2) Represents write-off of uncollectible trade receivables and the note
receivable.
DECEMBER 31, 1998:
(1) Represents the allowance for doubtful accounts balance associated with the
acquisition of Allied Health Options, Inc. included in goodwill.
(2) Represents write-off of uncollectible trade receivables and the note
receivable.
Information at and for the year ended December 31, 1997 has been excluded due to
lack of materiality or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
59
60
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.9 Form of Common Stock Purchase Warrant issued to Peter
W. Seaman for 500,000 shares
4.10 Form of Common Stock Purchase Warrant issued to Peter
W. Seaman for 1,500,000 shares
4.11 Form of Common Stock Purchase Warrant issued to R.
Kenyon Culver for 500,000 shares
4.12 Form of Common Stock Purchase Warrant issued to R.
Kenyon Culver for 1,500,000 shares
10.38 Factoring Agreement and Security Agreement dated
December 28, 1999 by and between the Registrant and
Metro Factors, Inc.
27 Financial Data Schedule
99.1 Safe Harbor Compliance Statement for Forward-Looking
Statements
99.2 Voluntary Petition United States Bankruptcy Court
Northern District of Texas - Chapter 7