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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, 1997
[ ] 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 10,1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $3,070,124 based on the last sales price of
$0.11 per share of such stock on March 10, 1998. As of March 10, 1998 there
were 27,910,217 shares of Common Stock, $0.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference information in the Proxy
Statement for the Annual Meeting of Stockholders of United Medicorp, Inc. to be
held on August 14,1998.
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UNITED MEDICORP, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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. . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . 11
ITEM 6. Selected Consolidated Financial Data. . . . . . . . . . . . 12
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 13
ITEM 8. Financial Statements and Supplementary Data . . . . . . . . 22
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . 22
PART III
ITEM 10. Directors and Executive Officers of the Registrant. . . . . 23
ITEM 11. Executive Compensation. . . . . . . . . . . . . . . . . . . 23
ITEM 12. Securities Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 13. Certain Relationships and Related Transactions. . . . . . . 23
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . 24
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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"). All references herein to the Company
include UMC-Texas, unless the context requires otherwise. The Company's
principal executive offices are located at 10210 North Central Expressway, Suite
400, Dallas, Texas 75231 and its telephone number at that address is (214)
691-2140.
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, management and
collection services to its customers, which are primarily hospitals, medical
clinics, and physician practices. The Company's basic service is designed to
provide an electronic claims processing, management and collection service that
expedites payment of claims from private insurance carriers or government payors
such as Medicare and Medicaid. The Company also offers to its customers
processing and collection services for uncollected "backlog" (aged) claims that
were not originally submitted through the Company's electronic claims processing
system. 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. Management believes that there is a large and growing market for bad
debt and "early out" collection agency services, and that offering these
services to the healthcare market will complement the medical claims processing
and billing services already offered.
From time to time the Company also provides advance funding services where
the Company purchases and then funds a portion of an eligible customer's claims
in advance of payment of such claims by a private insurance carrier or
governmental payor such as Medicare. In addition, UMClaimPros was introduced by
the Company in December 1994. UMClaimPros are experienced claims processors
available for customers' interim staffing needs.
Management believes that it has developed a computer hardware and
proprietary software system and a line of services which, together with its
experienced claims management personnel, are capable of effectively addressing
the claims management needs of healthcare providers. The Company has also worked
with several other companies that provide enhanced software, computer hardware
and maintenance, electronic claim clearinghouse services, financing and other
valuable services specifically designed to meet the needs of healthcare
providers. Management believes these efforts have produced a system that
provides the Company's customers with enhanced claims editing, error detection
and management capabilities. Management further believes its application and
refinement of electronic and computer technologies in the healthcare claims
management industry will enable the Company to provide claims processing
services that will significantly improve its customers' cash flow.
3
INDUSTRY OVERVIEW
The U.S. healthcare industry continues to experience tremendous change as
both federal and state governments as well as private industry work to bring
more efficiency and effectiveness to the healthcare system. UMC's business is
impacted by trends in the U.S. healthcare industry. As healthcare expenditures
have grown as a percentage of U.S. gross national product, public and private
healthcare cost containment measures have applied pressure to the margins of
healthcare providers. Historically, some 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 management
fee levels, may decline. However, management believes UMC may benefit from
providers' attempts to offset declines in profitability through seeking more
effective and efficient business management services such as those provided by
UMC. UMC continues to evaluate governmental and industry reform initiatives in
an effort to position itself to take advantage of the opportunities created
thereby.
GOVERNMENT REGULATION
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.
CUSTOMER SERVICES AND FEE STRUCTURE
ONGOING ACCOUNTS RECEIVABLE MANAGEMENT SERVICES: Customers using the
Company's "Ongoing" claims processing service typically receive computer
software from the Company that facilitates claims preparation, editing and
transmission. In order to implement this package of services the Company often
installs interface and editing software on a computer located in the customer's
offices. This "front end" system assists the customer's personnel in the
preparation and editing of claims, which are then electronically transmitted to
the Company and, in turn, transmitted directly or through an electronic
clearinghouse to the insurance carrier or governmental payor, as the case may
be. Under the Company's Ongoing service, the Company edits, submits, performs
follow-up, submits required additional information, and collects claims on
behalf of its customers. In cases where the insurance carrier or governmental
payor cannot receive or efficiently handle the Company's
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electronically transmitted claims, the Company will print the claim on a
standard industry form and mail it to the insurance carrier. After the
claims are processed, the Company's claims operations personnel utilize
computer-assisted follow-up methods to ensure timely collection. The payor
is directed to send the claim payment directly to the customer or to UMC. In
most cases the Company charges a percentage of actual claim payment amounts
collected as its fee. In certain cases, the Company charges a flat monthly
fee for this service. Complete claims settlement reports are sent to
customers on a semi-weekly, weekly or monthly interval. Management believes
that the Company's claims collection experience to date and increasing
awareness throughout the healthcare industry of the need to cut costs and
improve cash flow will increase demand for this type of service. Ongoing
accounts receivable management services revenue accounted for approximately
73%, 76% and 97% of total revenue in 1997, 1996, and 1995, 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 sixty 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 17% of total revenue in 1997.
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 37% 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
5
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.
MANAGED CARE CLAIMS REPRICING SERVICES: With the advent of managed care,
many healthcare providers are being asked to accept discounted pricing
arrangements in exchange for the opportunity to provide services to a given
group of patients. These discounted pricing arrangements may be structured as a
fixed percentage discount from standard charges, a defined "fee schedule" which
results in lower charges for selected services, or more complicated structures
involving caps, outliers, and per diems. These discounted fee structures are
collectively referred to as "contracted rates."
Many healthcare providers do not have the systems and personnel needed to
efficiently and accurately reprice large volumes of managed care claims
consistent with contracted rates. UMC has developed the specifications for a
claims repricing module to be developed within UMC's proprietary Claims
Automation Support System ("CLASS"), and has initiated program development work
to enhance CLASS to support repricing functions.
UMCLAIMPROS: The Company began providing interim staffing services under
the UMClaimPros label in December, 1994. UMClaimPros are experienced billing
and collection personnel who are employed by UMC and placed on temporary
assignments in hospital and physician business offices. Currently, the
UMClaimPros service is only offered in the Dallas area.
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 are for the most part related to
billing and collection services provided by the Company, and are 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 15 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 51 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 9 to 27.5 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.
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. The Company continuously develops and enhances its systems
using programmers employed by the Company and outside resources.
6
The computerized claims filing process involves the use of IBM
PC-compatible claims processing software. Such software is used in hospital
environments and in physician offices where integration with an existing
computer system is desirable. The Company installs its software at the
customer's site and trains the customer's personnel in the use of such software.
The claims processing software packages currently used by the Company are
specifically designed to expedite claims preparation and processing and,
simultaneously, to reduce errors associated with manual claims processing.
Claims are edited for certain mistakes, such as invalid or missing information,
using the claims processing software. Claims are then transmitted directly to
the Company, which performs further editing before they are forwarded to the
third party payor directly 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 and repricing,
customer reporting, claims tracking and collection functions during 1998 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, letters
and reports. Customer 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.
SALES AND MARKETING
The Company solicits potential customers through its own resources and
through independent sales representatives.
On August 13, 1996, the Company hired a Director of Sales and Marketing to
lead the Company's sales and marketing efforts and provide a foundation for
building a direct sales organization. A second salesperson was hired in
January, 1997.
COMPETITION
The Company has competition for each of its services. There are many other
electronic claims processing companies, claims collection companies, claims
management companies, factoring and financing firms, software vendors and
temporary employment contractors. In addition, the Company faces competition
from the traditional in-house claims processing and collection departments of
hospitals and other healthcare providers. Management believes that the
Company's principal competitive strengths are the quality, reliability and
flexibility of its computer hardware and software systems, compatibility of its
systems with those of prospective customers, technical support, service quality,
industry experience, the number of insurance carriers to whom claims can be
submitted, the breadth of services offered and the price of such services. The
Company offers a broad range of services and believes that its fee structure
compares favorably with that of its competitors. Nevertheless, many of the
Company's competitors currently have competitive advantages over the Company.
In particular, some competitors, particularly those in the financial services
business, are substantially larger than the Company and could, if they chose to
enter the market for the Company's lines of service, devote resources and
capital to the
7
market that are much greater than those which the Company currently has
available or may have available in the future.
SIGNIFICANT CUSTOMERS
During 1997, 86% of revenue was earned from two customers: the Washington
Hospital Center ("WHC") and Presbyterian Healthcare System ("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. Of
this revenue, 66% was provided from Collection Agency services, and 34% was
provided from UMClaimPros services.
During 1996, 85% of revenue was earned from three customers: WHC,
Healthcare Advisory Service of Puerto Rico, Inc. ("HAS"), and Mimbres Memorial
Hospital ("MMH"). WHC provided revenue totaling $1,315,508, or 65% of total
revenue. Of this revenue, 99% was provided as a result of the Ongoing Accounts
Receivable Management services contract entered into in 1992, and 1% was
provided as a result of a Patient Billing services contract. HAS provided
revenues totaling $287,020, or 14% of total revenue. Of this revenue, 44% was
provided from the Yauco Hospital, 37% was provided from Administracion De
Facilidades Y Servicios De Salud clinics, and 19% was a result of the settlement
agreement reached between the Company and HAS in August, 1996. MMH provided
revenue of $119,351, or 6% of total revenue. Of this revenue, 98% was Ongoing
Accounts Receivable Management services, and 2% was Backlog Accounts Receivable
Management services. The Company's contract with HAS was terminated effective
June 30, 1996 and the Company's contract with MMH expired April 1, 1996.
During 1995, 91% of revenue was earned from three customers: WHC, MMH, and
HAS. WHC provided revenue totaling $1,262,899, or 64% of total revenue. Of
this revenue, 99% was provided as a result of the Ongoing Accounts Receivable
Management services contract entered into in 1992, and 1% was provided as a
result of Backlog Accounts Receivable Management services. MMH provided revenue
of $364,365, or 18% of total revenue. Of this revenue, 82% was Ongoing Accounts
Receivable Management services, 17% was Backlog Accounts Receivable Management
services, and 1% was Advance Funding services. HAS provided revenues totaling
$176,635, or 9% of total fees.
INDUSTRY SEGMENTS
The Company considers its current operating units to operate in one
industry segment: healthcare business office services.
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.
8
EMPLOYEES
At March 20, 1998, the Company had 79 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
The Company's corporate offices and operations are located in an 10,136
square feet leased office space in Dallas, Texas. The lease expires in
January, 2001. The Company has the option to terminate this lease after August
1, 1998, providing it gives a ninety day notice to the lessor. Management
believes that its facilities are well-located and are in good condition. The
current office lease space is near capacity. Should the Company continue to
grow at its current rate, management believes that additional office space will
be required within the next twelve months.
ITEM 3. LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit filed on March 2, 1995 by a former
employee of the Company. The lawsuit charged the Company with wrongful
discharge. The lawsuit was settled by the Company on December 4, 1997.
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 1997.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of December 31, 1997:
Name Age Position
- ---- --- --------
Peter W. Seaman 48 Chairman and Chief Executive Officer,
and Director
Mary E. Rogers 35 Vice President, Information Systems
R. Kenyon Culver 38 Vice President and Chief Financial
Officer
PETER W. SEAMAN joined the Company on July 17, 1991 as Vice President and
Chief Financial Officer, was named President and Chief Executive Officer on
January 28, 1994 and elected Chairman of the Board of Directors on November 12,
1996. Mr. Seaman's prior employment includes two years as Director of Business
Development for TRW Receivables Management Services and three years as Vice
President, Planning and Systems Development, for the Accounts Receivable
Management Division of the Chilton Corporation. Prior to joining the Chilton
Corporation, Mr. Seaman was Vice President and Chief Financial Officer for
Corliss, Inc., a collection systems and services company. Before that, Mr.
Seaman held a number of finance, marketing and auditing positions with the
Datapoint Corporation, Rockwell International, and Coopers and Lybrand. Mr.
Seaman holds a B.A. in Accounting from Duke University and is a Certified Public
Accountant.
MARY E. ROGERS joined the Company on September 22, 1993 and was promoted to
Vice President, Information Systems on December 16, 1994. Mrs. Rogers' prior
business experience includes two years as a Senior Systems Design Analyst for
CTI Limited, Inc., a property management software development firm, and three
years as a Senior Systems Design Analyst for Andersen Consulting. Mrs. Rogers
holds a B.B.A. in Finance from Southern Methodist University.
R. KENYON CULVER 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.
10
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 10, 1998, there were
approximately 1,067 stockholders of record of the Common Stock. The Common
Stock trades on the NASDAQ over-the-counter ("OTC") market.
The following table sets forth the range of high and low bid prices for the
Common Stock as reported on the NASD OTC Bulletin Board, the automated system
for reporting NON-NASDAQ quotes, for the period June 3, 1995 through December
31, 1997. For the period prior to June 3, 1995, bid prices were quoted on the
Boston Stock Exchange. Such prices do not include retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
---------------------------- ---- ---
Fourth quarter $0.070 $0.030
Third quarter 0.090 0.040
Second quarter 0.100 0.030
First quarter 0.040 0.020
YEAR ENDED DECEMBER 31, 1996
----------------------------
Fourth quarter 0.050 0.010
Third quarter 0.050 0.010
Second quarter 0.050 0.010
First quarter 0.050 0.010
YEAR ENDED DECEMBER 31, 1995
----------------------------
Fourth quarter 0.063 0.010
Third quarter 0.063 0.031
Second quarter 0.094 0.031
First quarter 0.125 0.031
The last reported sales price of the Common Stock as reported on the NASD
OTC Bulletin Board, on March 10, 1998 was $0.11 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.
On July 11, 1997, the Company completed a private offering of 1,600,000
shares of unregistered Common Stock to accredited investors at a price of $0.10
per share. The offering generated net cash proceeds of $159,487 after deducting
legal fees and other expenses of the offering. 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 sale of these securities did
not involve a public offering.
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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, 1997. The financial data
presented for each of the five fiscal years has been derived from audited
financial statements.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA
Revenues $2,803,001 $2,025,338 $1,986,233 $1,342,848 $1,402,614
Wages and benefits 1,900,182 1,171,721 1,499,038 1,157,518 1,218,826
Selling, general and administrative 488,754 434,093 467,397 731,274 821,789
Depreciation and amortization 106,783 105,638 126,807 118,814 142,215
Professional fees 54,188 78,813 82,794 110,580 254,353
Other 92,345 115,859 95,942 125,720 111,013
---------- ---------- ---------- ---------- ----------
Net income (loss) 160,749 119,214 (285,745) (901,058) (1,145,582)
Basic earnings (loss) per common
share (1) $0.0059 $0.0045 $(0.0109) $ (0.0364) $ (0.0543)
Weighted average shares
outstanding 27,178,504 26,310,217 26,310,217 24,730,218 21,078,278
AS OF DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $331,552 $104,903 $(40,390) $139,306 $706,338
Total assets 1,084,561 523,647 436,058 935,166 1,250,899
Total liabilities 637,130 396,452 428,078 641,441 409,887
Long term debt, capital leases 84,368 100,344 138,565 164,187 -
Total stockholders' equity 447,431 127,195 7,980 293,725 841,102
See Notes to the Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition.
- ----------------
(1) In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share," and has retroactively restated all periods
presented.
12
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, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that forward-looking statements include the
intent, belief, or current expectations of the Company and members of its senior
management team, as well as the assumptions on which such statements are based.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those contemplated by such
forward-looking statements. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include, but are not limited to, the ability to
sustain earnings from UMY, the efficiency of the Company's billing and accounts
receivable management services operations, continued availability of credit on
terms and conditions acceptable to the Company, continued services of existing
key employees and Directors, availability of qualified new employees to staff
the Company's operations, on-going management initiatives designed to reduce
costs and enhance efficiencies, retaining existing significant customers, and
prospective changes in laws, regulations, or policies affecting the healthcare
industry and or operations of the Company. 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.
The Company derives its primary revenues from medical claims processing and
accounts receivable management services. A substantial portion of the Company's
revenues is 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, 1997, approximately 90% of the Company's revenue was
recurring. Recurring revenues are defined as revenues derived from services
that are used by the Company's customers each year in connection with ongoing
business, and accordingly exclude revenues from backlog accounts receivable
management, advance funding, UMClaimPros, and consulting services.
The Company emerged from the development stage during the fourth quarter of
1991. During the period from its inception on March 13, 1989 until the fourth
quarter of 1995, the Company raised capital and incurred significant
expenditures primarily for systems development, for developing and implementing
a marketing program and generally to build and maintain an organization to
facilitate the management of the Company.
1997: During the third quarter of 1997, the Company signed two contracts to
rebill and collect backlogs of aged third party receivables owned by two
bankrupt physician practice management companies in Texas. One of these
contracts was terminated in January 1998. In addition to this new business, UMY
signed contracts to provide ongoing bad debt collection and other related
services to four small hospitals in Texas.
Effective June 16, 1997, the Company entered into a contract with a
hospital in Oklahoma which is owned by a nationally prominent hospital chain.
Under this contract, the Company is to provide collection
13
follow-up of outpatient claims. During the first quarter of 1998, management
was informed by this hospital that it intended to terminate this contact
effective March 31, 1998.
Effective May 9, 1997, the Company entered into two amendments to its
existing Customer Service Agreement with WHC. Under the amendments, the Company
agreed to provide the following services to the WHC Physician Billing
Department:
- collection follow-up, rebilling and collection services with respect
to a backlog of aged claims
- collection follow-up, rebilling and collection services with respect
to WHC non-emergency physician claims with balances less than $5,000
beginning at 31 days from date of service
- Initial claims editing, submission, follow-up and collection services
with respect to all claims originated by physicians in the WHC
Department of Emergency Medicine.
Effective May 1, 1997, UMY entered into an, "Early Out Collection
Agreement" with a prominent hospital in Texas.
Effective January 17, 1997, UMY entered into a Collection Services
Agreement ("SA") with a prominent hospital in Texas. Under this SA, UMY will
provide bad debt collection services for primary and second placement accounts.
In addition, during the first quarter of 1998, UMY entered into contracts to
provide bad debt collection services for two smaller hospital customers.
1996: Effective September 1, 1996, WHC executed an amendment to its existing
agreement with UMC whereby WHC authorized UMC to begin providing patient billing
and collection services. UMC's responsibilities under this amendment include
billing and collecting balances due from the guarantors of certain classes of
patient accounts following collection of medical insurance payments. This
service provided $104,132 of revenue in 1997. Management believes that this
service will provide a similar amount of revenue in 1998.
A contract to provide interim staffing services to a major hospital in
Texas was signed on September 18, 1996. Under this contract UMC provides
UMClaimPros personnel to assist the hospital with various tasks associated with
a major system conversion.
Late in the first quarter of 1996, the Company was notified by its third
largest customer, MMH, that it had accepted an offer to be acquired by a
hospital chain. The chain has the resources necessary to perform all of the
billing and collection functions which had been outsourced to UMC. Effective
April 12, 1996, MMH discontinued transmitting new claims to UMC for processing.
MMH contributed $119,351 in fees during 1996 and $364,365 in fees during 1995.
1995: On January 30 and February 24, 1995, the Company made two installments
to complete repayment of all principal and interest due on a $200,000 note due
to an offshore bank. The Company borrowed this money on September 30, 1994, to
provide advance funding services to the MMH. The Company completed collection
of all claims purchased from MMH under this advance funding contract in May
1995.
During 1995, the Company signed three contracts with domestic healthcare
providers. A contract was signed to deliver "patient balance" collection
services to a major hospital in the midwest. A contract was signed to provide
third party billing and patient balance collection services to selected clinics
to be opened
14
by a national operator of clinics. A third contract was signed to deliver
claims repricing services to a managed care provider network.
The Company's UMClaimPros interim staffing service, which was introduced to
the marketplace in late December, 1994, generated $116,489 in fees during 1995.
PUERTO RICAN OPERATIONS:
1997: There were no operations in Puerto Rico in 1997.
1996: During 1996, most of the Company's revenue in Puerto Rico was derived
from HAS, which the Company served as a subcontractor in regard to HAS' contract
for claims processing services with the Administration de Facilidades y
Servicios de Salud ("AFASS"). Under this contract, the Company provided claims
processing and follow up services to nine AFASS funded clinics and one hospital
in Yauco, Puerto Rico.
Effective June 30, 1996, the Company completed a Settlement and Termination
Agreement (the "Agreement") with HAS. Under the Agreement, on August 2, 1996
HAS paid to UMC a total of $172,000 representing the sum of $46,000 to purchase
UMC's interest in the claims inventory in process for the AFASS clinics located
at Coamo, Juana Diaz, Adjuntas, Jayuya, Villalba, and Santa Isabel; $72,000 to
purchase UMC's interest in the claims inventory in process for the AFASS
hospital located at Yauco; and $54,000 as additional consideration for the
Agreement. Following receipt of these cash payments, the Company reported Fee
Income of $118,000 and Other Income of $54,000. The Agreement included a mutual
release by UMC and HAS of any claims either party may have against the other,
and an indemnification of UMC by HAS against any claim by AFASS for a refund of
fees paid.
The Agreement also provided for the continuation of UMC's services to three
AFASS clinics and the AFASS hospital in Yauco for so long as HAS' contract with
AFASS remained in force. HAS' contract with AFASS was terminated effective
September 30, 1996.
Following the termination of HAS' contract with AFASS, UMC gave notice to
terminate the lease on its office in Ponce, Puerto Rico. The office was closed
on January 3, 1997, and shortly after that date the last of UMC's employees in
Puerto Rico resigned to pursue other employment.
UMC's total revenues from Puerto Rican operations during 1996 were
$298,555, expenses totaled $204,492, and operating margin was $94,063.
1995: The Company's principal source of revenue in Puerto Rico was a
contract between HAS and AFASS. Under this contract, the Company served as a
subcontractor to HAS in processing claims for a government funded hospital
("GH") and four government funded clinics. UMC's fees for services rendered to
the clinics computed at 10% of collections. During 1995, the Company recognized
fees totaling $108,008 for services rendered to the GH. In June 1995, the HAS
contract with AFASS was amended to allow the continuation of services for an
undefined period beginning July 1, 1995. In addition, HAS and UMC received the
right to process claims from four additional clinics, thus increasing the number
of AFASS clinics served to eight.
15
During 1995, the Company received cash payments from HAS totaling $39,000
in repayment of a number of short term loans the Company made to HAS to sustain
HAS' operations during late 1994 and early 1995. As of December 31, 1995, HAS
was current with respect to all invoices payable to UMC.
During 1995, the Company's Puerto Rican operation generated total revenues
of $176,635, with an operating loss of $58,837. The primary reasons for the
loss were the start up costs incurred primarily during the first half of 1995 to
train employees and develop UMC's claims entry, editing, submission, and follow
up processes consistent with the dynamics of the Puerto Rican market; the costs
incurred to set up UMC's office in Ponce; the costs and expected delay in
collections associated with the start up of services for the four additional
AFASS clinics.
On September 1, 1995, the Company signed a contract with a group of 15
emergency room physicians. This contract was significant in that it established
the first direct relationship between a customer and the Company in Puerto Rico.
The Company's headcount in Puerto Rico at December 31, 1995 consisted of
one manager, one supervisor, five full time employees, and two part time
employees.
16
ACCOUNTS RECEIVABLE MANAGEMENT SERVICES - PROCESSING VOLUMES
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 . In
general, collections on most healthcare providers' new claims ("Ongoing") tend
to average about 27 to 51 percent of the gross claim amount. Backlog collection
ratios range from 0 to about 40 percent of the aggregate gross claim amount
because many backlog claims have already been paid or denied by the insurance
carriers prior to submission of the claims to UMC:
1997 1996 1995
------------------------------------ ------------------------------------ ------------------------------
QUARTER QUARTER QUARTER
------------------------------------ ------------------------------------ ------------------------------
Fourth Third Second First Fourth Third Second First Fourth Third Second First
UMC
- -----------------
Number of Claims
Accepted for
Processing:
Ongoing 72,803 76,672 42,833 28,729 37,127 40,179 46,860 48,280 47,249 43,161 46,021 46,972
Backlog 23,739 28,361 - - - 1 1 41 3,455 - - -
------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total 96,542 105,033 42,833 28,729 37,127 40,179 46,861 48,321 50,704 43,161 46,021 46,972
Gross $ Amount
of Claims
Accepted for
Processing
(000's):
Ongoing 33,375 35,186 20,124 20,269 18,325 18,068 21,055 19,923 21,660 18,791 19,999 19,182
Backlog 5,868 9,066 - - - - - 17 1,269 - - -
------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total 39,243 44,252 20,124 20,269 18,325 18,068 21,055 19,940 22,929 18,791 19,999 19,182
Collection $
(000's)
Ongoing 12,190 9,407 10,143 7,545 7,063 7,533 8,257 9,019 8,694 9,613 9,883 9,270
Backlog 626 - - - - - 6 70 60 28 159 272
------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total 12,816 9,407 10,143 7,545 7,063 7,533 8,263 9,089 8,754 9,641 10,042 9,542
Fees Earned
(000's)
Ongoing 733 480 428 366 376 379 386 408 447 449 482 549
Backlog 46 - - - - - - 3 3 2 15 39
------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total 778 480 428 366 376 379 386 411 450 451 497 588
Average Fee %
Ongoing 6.0% 5.1% 4.2% 4.9% 5.3% 5.0% 4.7% 4.5% 5.1% 4.7% 4.8% 5.9%
Backlog 13.7% - - - - - - 4.3% 5.0% 7.1% 9.4% 14.3%
For Ongoing claims, there is typically a time lag of approximately 5 to
30 days from contract execution to computer hardware installation and
training of customer personnel. During this period, Company personnel survey
the customer's existing operations and prepare for installation. Following
installation and training of the customer's personnel, the customer begins
entering claims and transmitting them to the Company. There is usually a time
lag of 30 to 90 days between transmission of a claim to a third party payor
and collection of a claim from that payor.
17
COLLECTION AGENCY SERVICES - PROCESSING VOLUME
The following table sets forth for each period indicated the volume and gross
dollar amount of collection accounts received and fees recognized for UMY. In
general, collections on most new placements range from about 0 to 27 percent of
the gross placement amount. Collection fees percentages charged to the customer
vary for the three different placement categories: bad debt, early out, and
second placements.
1997 1996 1995
---------------------------------- ---------------------------- -------------------------------
QUARTER QUARTER QUARTER
---------------------------------- ---------------------------- -------------------------------
Fourth Third Second First Fourth Third Second First Fourth Third Second First
UMY
- -----------------------
Number of
Accounts Accepted
for Collection: 27,177 27,801 22,209 3,916 N/A N/A N/A N/A N/A N/A N/A N/A
Gross $ Amount
of Accounts
Accepted for
Collection
(000's) 14,543 14,965 19,037 2,264 N/A N/A N/A N/A N/A N/A N/A N/A
Collection $
(000's) 1,994 784 632 96 N/A N/A N/A N/A N/A N/A N/A N/A
Fees Earned
(000's) 196 182 79 20 N/A N/A N/A N/A N/A N/A N/A N/A
Average Fee % 9.8% 23.2% 12.5% 20.8% N/A N/A N/A N/A N/A N/A N/A N/A
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.
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, 1997 1996 1995
----------------------- ------ ------ ------
Revenue......................................... 100.0% 100.0% 100.0%
------ ------ ------
Wages and benefits.............................. 67.7 57.8 75.5
Selling, general and administrative............. 17.4 21.4 23.5
Depreciation and amortization................... 3.8 5.2 6.3
Office and equipment rental..................... 3.2 5.0 4.1
Professional fees............................... 1.9 3.9 4.2
Interest, net, and other income................. 0.3 0.8 0.8
------ ------ ------
Total expenses.................................. 94.3 94.1 114.4
------ ------ ------
Net income (loss)............................... 5.7% 5.9% (14.4%)
------ ------ ------
18
1997 COMPARED TO 1996
REVENUES increased $777,663 or 38% primarily due to the following:
- - Collection Agency services revenue of $476,000 in 1997 increased by $435,000
compared to 1996 primarily due to management's initiative to grow this
service in order to present a more complete healthcare business office
service package to the market. During 1997, a concentrated sales and
marketing effort was deployed which resulted in UMY successfully closing bad
debt, early out and secondary placement agreements with four PHS Dallas
metroplex hospitals as well as gaining approximately 9 other customers
throughout 1997. A majority of the 1997 revenue was generated in the last
six months of the year.
- - On May 5, 1997, the Company amended its existing WHC Customer Service
Agreement to provide ongoing accounts receivable management services to
certain groups within the WHC Physician Billing Department ("WHCPBD").
For the three months ended December 31, 1997, WHCPBD generated revenue
totaling $221,000. This level of revenue may not be indicative of future
revenue as it includes a catch-up of claims billed and collected back to the
amendment's effective date. Management continues to estimate that this
ongoing project will generate approximately $50,000 of recurring monthly
revenues.
- - On September 1, 1996, the Company amended its existing WHC Customer Service
Agreement to provide patient billing and collection services due from
guarantors of certain classes of patient account balances. During 1996,
revenue from this project totaled $13,000. During 1997, revenue from this
project totaled $104,000. Management believes that 1997 revenue for this
project is indicative of the revenue potential for 1998.
- - UMClaimPros revenue of $236,000 in 1997 increased by $85,000 compared to 1996
primarily due to increased utilization from existing customers. Management
continues to refine its strategies related to UMClaimPros and continues to
believe that this service provides a competitive advantage for the Company as
well as providing a viable entree' to new customers. Management believes
that historical revenue for this project is indicative of the revenue
potential for 1998.
- - During 1997, growth in other new customers generated approximately $200,000 in
ongoing revenues primarily related to physician practices. Management
believes that this historical revenue is indicative of the revenue potential
for 1998.
- - During 1996, HAS and MMH provided total revenue of $406,000. The HAS contract
was terminated on June 30, 1996. The MMH contract expired on April 1, 1996.
WAGES AND BENEFITS increased $728,461 or 62% due to an increase in employees
required to support customer growth as well as to enhance the management
infrastructure. Approximately 7% of this increase related to merit and market
raises for existing employees. The remaining portion of the increase related to
headcount increasing 93% during the past twelve months, from 40 to 77 employees
at December 31, 1997. It is managements' current intention to continue to add
management and line employees in 1998. As headcount is expected to increase in
1998, this historical trend should be indicative of anticipated 1998 activity.
19
SELLING, GENERAL AND ADMINISTRATIVE expense increased $54,661 or 13%
primarily due to increased travel associated with supporting existing customers
and developing new business, increased printing and postage expense related to
the ramp up of UMY and the WHCPBD agreement, and various other expenses to
support increased headcount.
OFFICE AND EQUIPMENT RENTAL expense decreased $11,903 or 12% primarily due to
the closing of the Company's Ponce, Puerto Rico office on January 3, 1997
partially offset by the lease of an additional 1,906 square feet of office space
on July 31, 1997 required for UMY. The Company's existing office space is near
capacity. Should the Company continue to grow, management believes that
additional office space will be required at an increased market rate within the
next twelve months.
PROFESSIONAL FEES decreased $24,625 or 31% primarily due to adjustment of
accrued expenses related to the settlement of previously pending litigation.
This litigation was settled in the fourth quarter of 1997.
LIQUIDITY AND CAPITAL SOURCES
The Company's strategies for enhanced customer service, additional services
offerings and growth in sales and profits in fiscal 1997 were to utilize its
cash resources to pursue available opportunities. Principal among these
resources was working capital derivable from operations cash flows, net cash
proceeds of $159,487 from the July 11, 1997 private placement of 1.6 million
shares of common stock at $0.10 per share, and capital lease financing.
Expenditures for investing activities that were within affordability of these
resources were also seen as a critical element of the Company's strategy. At
December 31, 1997, the Company had cash of $275,948, up from $188,868 when the
year began.
Operating activities provided $96,281 of cash which comprised principally
cash provided by net income and adjustments partially offset by increased
accounts receivable. Adjustments to net income primarily comprised of
depreciation and amortization provided $105,797 of cash. Growth in trade
receivables mainly from strong claim processing and collection growth in the
fourth quarter used $260,509 of cash. Further use of cash to fund additional
growth in trade receivables is anticipated in fiscal 1998 because of expected
growth in revenues. Growth in trade payables and accrued liabilities provided
$104,599 of cash of which trade payables provided $45,523 of cash. In spite of
increased revenue in fiscal 1997, trade payables and accrued liabilities grew
only nominally because of the Company's ability to leverage its existing
infrastructure.
Investing activities, which were comprised of purchases of equipment used
$131,143 of cash, a modest expenditure in view of the level of revenue growth
for the fiscal year. Greater levels of capital expenditures are anticipated to
support the continued growth in revenues expected in fiscal 1998.
Financing activities comprised of the aforementioned net proceeds from the
private placement of common stock provided $159,487 of cash. Principal payments
on capital lease obligations used $37,545 of cash. Management anticipates that
addition capital lease obligations will be necessary in 1998 primarily to
upgrade the existing IBM AS/400 computer. Management is currently seeking a
working capital revolving line of credit to supplement working capital and
capital lease financing; however, there is no assurance that such a line of
credit will be secured at terms and conditions acceptable to the Company. Based
on current expectations, plans and assumptions, management currently does not
anticipate a need to sell additional shares of common stock in the foreseeable
future to finance internal growth.
20
The Company's working capital increased to $331,552 at the end of fiscal 1997
compared to $104,903 at the end of fiscal 1996. Long term capital lease
obligations decreased from $100,344 to $84,368 during the same period.
Management believes that current cash and cash equivalents, projected cash
flows from operations together with capital lease and other potential financing
should be sufficient to support projected growth in revenues through fiscal
1998.
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 is 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.
Based on a recent assessment, the Company determined that it will be required
to modify its proprietary claims processing and follow-up software, its
purchased collection agency software package, and certain other general business
use software applications in order to be Year 2000 compliant. The Company
presently believes that with modifications to the existing proprietary and
purchased claims processing and collection agency software as well as
replacement of certain general business use software, the Year 2000 Issue can be
mitigated. However, if such modifications and replacements are not made, or
completed timely, the Year 2000 Issue could have a material adverse effect on
the operations of the Company.
The Company has initiated communications with significant customers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 Issue. There can be no guarantee that
the systems of other companies on which the Company relies for the transmission
of claims data will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
The Company's current remediation plan calls primarily for the use of
existing internal resources to reprogram, replace, and test the software for
Year 2000 modification. The Company currently plans to complete the Year 2000
project by December 31, 1998. The total incremental costs associated with this
project are currently estimated to be about $30,000 intended to be funded
through operating cash flows.
21
1996 COMPARED TO 1995
BILLING AND COLLECTION SERVICES REVENUE from "Ongoing" claims processing,
management and collection services decreased 9% due to the loss of the MMH
contract in 1996. Backlog collection revenues decreased 93% due to the
completion of the Backlog project for MMH during 1995. Revenue from UMC's
UMClaimPros interim staffing service increased 34% due primarily to staffing
services provided to a major hospital in the Dallas area. Patient billing
revenue increased from $90 in 1995 to $50,484 in 1996 due to collection services
provided to a major hospital in the midwest.
Billing and collection services revenue from Puerto Rican operations
increased 69% due to collections for the Yauco Hospital, the AFASS clinics, and
the settlement agreement reached between the Company and HAS.
SALARIES AND BENEFITS expense decreased 22% due to several factors: Puerto
Rico headcount went down from seven full-time and two part-time employees in
1995, to one full-time employee at December 31, 1996. Also the Company's MIS,
Sales, Finance, Operations, and Operations Management departments' salaries
expense decreased from 1995 to 1996 due primarily to reduced headcount.
SELLING, GENERAL, AND ADMINISTRATIVE expenses decreased 7% due to decreased
expenses for property taxes, dealer commissions, marketing and advertising,
travel and entertainment, office supplies, telephone service (long distance),
express services, and contract clerical employees offset by increased expenses
for Directors and Officer's insurance, bad debts, recruitment, education and
training, and software maintenance.
PROFESSIONAL FEES decreased 5% due primarily to lower legal fees.
OFFICE AND EQUIPMENT RENTAL increased by 23% due to increased rent expense on
the office space in Dallas, Texas and also twelve months of rent expense for the
Ponce, Puerto Rico office versus only six and a half months for that space in
1995.
DEPRECIATION AND AMORTIZATION expense decreased 17% due to assets becoming
fully depreciated.
INTEREST EXPENSE decreased 7% due to reduced principal owed on the IBM AS/400
computer system currently leased by the Company.
OTHER INCOME increased from $0 in 1995 to $74,649 in 1996 due to a gain on an
insurance settlement paid to the Company, and to the settlement agreement
reached between the Company and HAS.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page 30.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and executive
officers of the Registrant, except certain information regarding executive
officers which is contained in Part I, Item 4 of this report pursuant to General
Instruction G of this Form 10-K, is included in the section entitled "Management
of the Company" of the Proxy Statement for the Annual Meeting of Stockholders to
be held on August 14, 1998 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item with respect to executive compensation
is included in the section entitled "Compensation of Directors and Executive
Officers" of the Proxy Statement for the Annual Meeting of Stockholders to be
held on August 14, 1998 and is incorporated herein by reference.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item with respect to securities ownership of
certain beneficial owners and management is included in the section entitled
"Stock Ownership of Principal Stockholders and Management" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on August 14, 1998
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this Item with respect to certain relationships
and related transactions is included in the section entitled "Certain
Transactions" of the Proxy Statement for the Annual Meeting of Stockholders to
be held on August 14, 1998 and is incorporated herein by reference.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Reference is made to the Index to the Consolidated Financial
Statements and Financial Statement Schedules included at page 31.
2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because of the absence of the conditions under
which they are required.
3. EXHIBITS
3.1 Certificate of Incorporation of the Company, filed with
Secretary of State of Delaware on February 26, 1988, is
incorporated herein by reference to Exhibit 3 (a) of the
Company's Registration Statement on Form S-1, Commission File
No. 33-20989, filed with the Commission on March 30, 1988 and
declared effective June 7, 1988 (previously filed).
3.2 By-Laws of the Company are incorporated herein by reference to
Exhibit 3 (b) of the Company's Registration Statement on Form
S-1, Commission File No. 33-20989, filed with the Commission on
March 30, 1988 and declared effective June 7, 1988 (previously
filed).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, filed with Secretary of State of Delaware on July 12,
1989, is incorporated herein by reference to Exhibit 3 of the
Company's Current Report on Form 8-K, filed with the Commission
on July 25, 1989 (previously filed).
3.4 Certificate of Amendment to Certificate of Incorporation of the
Company, filed with Secretary of State of Delaware on August 9,
1989, is incorporated herein by reference to Exhibit 3.2 of the
Company's Form 10-Q filed for the fiscal quarter ended September
30, 1989 (previously filed).
4.1 Certificate of Designations, Preferences and Rights of 10%
Cumulative Convertible Preferred Stock of the Company, filed
with the Secretary of State of Delaware on August 9, 1989, is
incorporated herein by reference to Exhibit 4 of the Company's
Form 10-Q filed for the fiscal quarter ended September 30, 1989
(previously filed).
4.2 First Amended Certificate of Designations, Preferences and Rights
of 10% Cumulative Convertible Preferred Stock of the Company,
filed with the Secretary of State of Delaware on December 7,
1989 is incorporated herein by reference to Exhibit 4.2 of the
Company's Form 10-K filed for the fiscal year ended December 31,
1989 (previously filed).
24
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 issued to Thomas H.
McConnell, III
4.7 Form of Common Stock Purchase Warrant issued to Michael P.
Bumgarner
4.8 Form of Common Stock Purchase Warrant issued to John F. Lewis
9. Not Applicable.
10.1 1989 Stock Option Plan of the Company is incorporated herein by
reference to Exhibit 10.1 of the Company's Form 10-Q filed for
the fiscal quarter ended September 30, 1989 (previously filed).
10.2 Form of Warrant to purchase shares of the Company's Common Stock
granted to certain persons during 1990 in connection with the
provision of interim financing is incorporated herein by
reference to Exhibit 10.14 of the Company's Registration
Statement on Form S-1, Commission File No. 33-35177, originally
filed with the Commission on June 1, 1990 and declared
effective July 27, 1990 (previously filed).
10.3 Medical Claims Management/Collection Agreement, dated May 25,
1990, by and between the Company and University Hospital is
incorporated herein by reference to Exhibit 10.20 of the
Company's Registration Statement on Form S-1, Commission
File No. 33-35177, originally filed with the Commission on
June 1, 1990 and declared effective July 27, 1990 (previously
filed).
10.4 Master Equipment Lease Agreement, dated February 2, 1990, by
and between the Company and Com Resources, Inc., together with
certain Schedules attached thereto is incorporated herein by
reference to Exhibit 10.22 of the Company's Registration
Statement on Form S-1, Commission File No. 33-35177, originally
filed with the Commission on June 1, 1990 and declared
effective July 27, 1990 (previously filed).
25
10.5 First Amended and Restated 1989 Stock Option Plan of the Company
is incorporated herein by reference to Exhibit 10.23 of the
Company's Form 10-K filed for the fiscal year ended December 31,
1990 (previously filed).
10.6 Third Amended and Restated 1989 Stock Option Plan of the Company
(previously filed).
10.7 1992 Stock Option Plan of the Company is incorporated herein by
reference to Exhibit 10.24 of the Company's Registration
Statement on Form S-1, Commission File No. 33-35178 (previously
filed).
10.8 Warrant dated August 21, 1992, issued to Gary R. Beauchamp is
incorporated herein by reference to Exhibit 10.25 of the
Company's Registration Statement on Form S-1, Commission File
No. 33-35178 (previously filed).
10.9 Warrant dated August 21, 1992 issued to Walid E. Moukarzel is
incorporated herein by reference to Exhibit 10.26 of the
Company's Registration Statement on Form S-1, Commission File
No. 33-35178 (previously filed).
10.10 Warrant dated August 14, 1992, issued to Mary G. Merritt is
incorporated herein by reference to Exhibit 10.27 of the
Company's Registration Statement on Form S-1, Commission File
No. 33-35178 (previously filed).
10.11 Customer Service Agreement dated December 15, 1992 by and between
the Company and the Washington Hospital Center is incorporated
herein by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1, Commission File No. 33-35178
(previously filed).
10.12 Settlement and Termination Agreement dated as of February 19,
1993 by and between the Registrant, American Pacific
Acceptance Corporation and Summit Capital Corporation, is
incorporated herein by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K, filed with the Commission on March 3,
1993 (previously filed).
10.13 Warrant dated March 2, 1993, issued to Walid E. Moukarzel
(previously filed).
10.14 Standard Office Building Lease Agreement dated June 1, 1989,
between the Registrant and Aetna Life Insurance Company
(previously filed).
10.15 Third Amendment to Lease, dated May 1, 1992, between the
Registrant and Aetna Life Insurance Company (previously filed).
10.16 Sales Agent Agreement dated August 6, 1993, between UMC and
Consolidated Associates, Inc., is incorporated herein by
reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993 (previously
filed).
10.17 Sales Agent Agreement dated August 6, 1993, between UMC and Tomar
Investments, is incorporated herein by reference to Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 (previously filed).
26
10.18 Warrant dated August 9, 1993 issued to Tomar Investments
(previously filed).
10.19 Certificate of Amendment to Certificate of Incorporation of
the Company, filed with Secretary of State of Delaware on
August 3, 1993 (previously filed).
10.20 Promissory Note dated September 30, 1994 made by the
Registrant to BFI Banque de Financement et D'Investissement
(previously filed).
10.21 Term Lease Supplement dated December 30, 1994 between the
Registrant and IBM Credit Corporation (previously filed).
10.22 1995 Stock Option Plan (previously filed).
10.23 Modification and Ratification of Lease, dated July 19, 1995
(previously filed).
10.24 HAS Settlement and Termination Agreement, dated August 1, 1996
(previously filed).
10.25 Severance Agreement by and between Registrant and Mary E.
Rogers
10.26 Severance Agreement by and between Registrant and Peter W.
Seaman
10.27 Registrant's 1998 Key Management Bonus Plan
10.28 Director's Incentive Compensation Agreement by and between
Registrant and Thomas H. McConnell, III
10.29 Director's Incentive Compensation Agreement by and between
Registrant and John F. Lewis.
10.30 Director's Incentive Compensation Agreement by and between
Registrant and Michael P. Bumgarner.
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).
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).
27
10.33 Collection Services Agreement dated January 17, 1997 by and
between the Registrant and Presbyterian Healthcare System.
10.34 Early Out Collection Agreement dated May 1, 1997 by and
between the Registrant and Presbyterian Healthcare System.
10.35 Secondary Collection Agreement dated October 31, 1997 by and
between the Registrant and Presbyterian Healthcare System.
22.1 Subsidiaries of the Company (previously filed).
23.1 Consent of Price Waterhouse LLP, Independent Accountants
(b) REPORTS ON FORM 8-K
None
28
SIGNATURES
PURSUANT TO THE REQUIREMENT OF SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
United Medicorp, Inc.
Date: March 20, 1998 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 March 20, 1998
PETER W.SEAMAN Executive Officer (Principal
Executive Officer)
/s/ R. Kenyon Culver
- ------------------------------ Vice President and Chief Financial March 20, 1998
R. KENYON CULVER Officer (Principal Financial Officer
and Principal Accounting Officer)
/s/ Michael P. Bumgarner
- ------------------------------ Director March 20, 1998
MICHAEL P. BUMGARNER
/s/ John F. Lewis
- ------------------------------ Director March 20, 1998
JOHN F. LEWIS
/s/ Thomas H. McConnell, III
- ------------------------------ Director March 20, 1998
THOMAS H. MCCONNELL, III
29
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1997
ITEMS 8 AND 14(a)
30
UNITED MEDICORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEM 14(a)]
Page
----
Consolidated Balance Sheets as of December 31, 1997 and 1996........................................... 32
Consolidated Statements of Operations for each of the three years ended December 31, 1997............. 33
Consolidated Statements of Changes in Stockholders' Equity for each of the three years ended
December 31, 1997.................................................................................... 34
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1997.............. 35
Notes to Consolidated Financial Statements............................................................. 36
Report of Independent Accountants - Price Waterhouse LLP............................................... 50
Schedules are omitted because of the absence of the conditions under which
they are required.
31
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
----------------------------------
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 275,948 $ 188,868
Restricted cash 154,096 8,143
Accounts receivable, net of allowance for doubtful accounts
of $11,674 and $18,177, respectively 430,069 169,560
Notes receivable 4,000 4,000
Prepaid expenses and other current assets 20,201 21,633
------------- -------------
Total current assets 884,314 392,204
Property and equipment, net 188,248 120,142
Other non-current assets 11,999 11,301
------------- -------------
Total assets $ 1,084,561 $ 523,647
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 68,270 $ 22,747
Payable to clients 75,135 8,143
Accrued liabilities 268,423 209,347
Deferred credit 8,802 15,084
Payable to funding source 78,961 -
Current portion of capital lease obligations 53,171 31,980
------------- -------------
Total current liabilities 552,762 287,301
Deferred credit - 8,807
Long term portion of capital lease obligations 84,368 100,344
------------- -------------
Commitments and contingencies (Note H)
Total liabilities 637,130 396,452
------------- -------------
Stockholders' equity:
Common stock; $0.01 par value; 50,000,000 shares authorized;
28,015,764 shares and 26,415,764 shares outstanding,
respectively 280,157 264,157
10% Cumulative convertible preferred stock; $0.01 par value;
5,000,000 shares authorized; none issued - -
Less treasury stock at cost, 105,547 shares (221,881) (221,881)
Additional paid-in capital 18,695,829 18,552,342
Retained deficit (18,306,674) (18,467,423)
------------- -------------
Total stockholders' equity 447,431 127,195
------------- -------------
Total liabilities and stockholders' equity $ 1,084,561 $ 523,647
------------- -------------
------------- -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
32
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31,
----------------------------------------------------
1997 1996 1995
------------- ------------- --------------
Revenues:
Billing and collection services.......................... $ 2,767,943 $ 1,950,689 $ 1,986,233
Other revenues........................................... 35,058 74,649 -
------------- ------------- --------------
Total revenues......................................... 2,803,001 2,025,338 1,986,233
Expenses:
Wages and benefits....................................... 1,900,182 1,171,721 1,499,038
Selling, general and administrative...................... 488,754 434,093 467,397
Depreciation and amortization............................ 106,783 105,638 126,807
Office and equipment rental.............................. 88,672 100,575 81,648
Professional fees........................................ 54,188 78,813 82,794
Interest, net............................................ 4,959 15,357 15,537
Other income, net........................................ (1,286) (73) (1,243)
------------- ------------- --------------
Total expenses......................................... 2,642,252 1,906,124 2,271,978
------------- ------------- --------------
Net income (loss)................................... $ 160,749 $ 119,214 $ (285,745)
------------- ------------- --------------
------------- ------------- --------------
Basic earnings (loss) per common share..................... $ 0.0059 $ 0.0045 $ (0.0109)
------------- ------------- --------------
------------- ------------- --------------
Diluted earnings (loss) per common share................... $ 0.0059 $ 0.0045 $ (0.0109)
------------- ------------- --------------
------------- ------------- --------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
33
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional Treasury Stock Accumulated
----------------------- Paid-In ---------------------- ---------------------------
Shares Amount Capital Shares Amount Deficit Total
---------- --------- ----------- -------- --------- --------------- -----------
Balance at
December 31, 1994......... 26,415,764 $ 264,157 $18,552,342 105,547 ($221,881) ($18,300,892) $293,726
Net loss.................. - - - - - ($ 285,745) ($285,745)
---------- --------- ----------- -------- --------- --------------- -----------
Balance at
December 31, 1995......... 26,415,764 $264,157 $18,552,342 105,547 ($221,881) ($18,586,637) $ 7,981
Net income................ - - - - - $ 119,214 $ 119,214
---------- --------- ----------- -------- --------- --------------- -----------
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
---------- --------- ----------- -------- --------- --------------- -----------
---------- --------- ----------- -------- --------- --------------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
34
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
----------------------------------------------------
1997 1996 1995
------------- ------------- --------------
Cash flows from operating activities:
Net income (loss)......................................... $ 160,749 $ 119,214 $ (285,745)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization........................ 106,783 105,638 126,807
(Gain) on sales of assets............................ (986) (73) (1,298)
Changes in assets and liabilities:
(Increase) decrease in restricted cash............... (145,953) (8,143) 4,851
Decrease in purchased claims......................... - - 37,721
(Increase) decrease in accounts receivable, net...... (260,509) (30,590) 15,622
Decrease in notes receivable......................... - (3,786) 12,000
Decrease in prepaid expenses and other assets........ 734 4,866 12,383
Increase (decrease) in accounts payable.............. 45,523 (25,483) (15,027)
Increase (decrease) in payable to clients............ 66,992 (11,759) (6,738)
Increase in accrued liabilities...................... 59,076 62,965 4,039
Increase in payable to funding source................ 78,961 - -
Increase (decrease) in deferred revenue.............. - (15,959) 15,959
Increase (decrease)in deferred credits............... (15,089) (7,543) 115
------------- ------------- --------------
Net cash provided by (used in) operating activities......... 96,281 189,347 (79,311)
------------- ------------- --------------
Cash flows from investing activities:
Purchase of property and equipment........................ (131,143) (24,711) (2,133)
------------- ------------- --------------
Net cash used in investing activities....................... (131,143) (24,711) (2,133)
------------- ------------- --------------
Cash flows from financing activities:
Net proceeds on sale of common stock...................... 159,487 - -
Principal payment on notes payable........................ - - (200,000)
Principal payments on capital lease obligations........... (37,545) (33,846) (11,711)
------------- ------------- --------------
Net cash provided by (used in) financing activities......... 121,942 (33,846) (211,711)
------------- ------------- --------------
Increase (decrease) in cash and cash equivalents............ 87,080 130,790 (293,155)
Cash and cash equivalents at beginning of year.............. 188,868 58,078 351,233
------------- ------------- --------------
Cash and cash equivalents at end of year.................... $ 275,948 $ 188,868 $ 58,078
------------- ------------- --------------
------------- ------------- --------------
Supplemental disclosures:
Cash paid for:
Interest.................................................. $ 14,483 $ 17,842 $ 20,122
Non-cash investing activities:
Additions to capital lease obligations.................... $ 42,760 $ - $ -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
35
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
United Medicorp, Inc. ("UMC") and its wholly owned subsidiary, United MoneyCorp,
Inc. ("UMY"), hereafter collectively referred to as the "Company." All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and liquid investments in
money market accounts. Such investments have an original maturity of three
months or less.
RESTRICTED CASH
Restricted cash represents payments ("Payments") collected from insurance
carriers, patients, guarantors of patient accounts on behalf of UMC customers
and funds ("Funds") held as the agent of the Funding Source described below.
Payments are remitted to customers by UMC on a weekly, semi-monthly, or monthly
interval. Funds are remitted to the Funding Source upon mutual agreement or
termination of the underlying agreement between UMC and the Funding Source.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and include assets leased under
capital lease agreements. Leased property meeting certain criteria is
capitalized and the present value of the related lease payments is recorded as
a liability. Expenditures for repairs and maintenance are charged to income as
incurred, and expenditures for major renewals and betterments are capitalized.
Depreciation and amortization are computed using the straight-line method over
the estimated useful life of the asset, ranging from three to seven years. Upon
disposition of assets, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is included in "Other 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 impairment review includes a comparison
of future cash flows expected to be generated by the asset or group of assets
with their associated carrying value. If the carrying value of the asset or
group of assets exceeds expected cash flows (undiscounted and without
interest charges), an impairment loss is recognized for the excess of
carrying amounts over fair value. No such impairment has been recognized by
the Company.
36
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
PAYABLE TO CLIENTS
Payable to clients includes payments collected from insurance carriers,
patients and guarantors of patient accounts on behalf of UMC customers. These
payments are remitted to clients by UMC on a weekly, semi-monthly, or monthly
interval.
PAYABLE TO FUNDING SOURCE
In order to access capital with which to provide advance funding services to
a new customer, UMC completed an Assignment and Agency Agreement on January 31,
1997 (the "Agreement"). Under the Agreement, UMC assigned certain rights under
a Medical Claims Purchase Contract between UMC and its customer to two members
of the UMC Board of Directors (the "Directors"). The Directors provided UMC
with $127,327 in funds, which UMC in turn used to advance fund certain eligible
receivables of one of its customers. During 1997, funds provided by one
Director were repaid in full. At December 31, 1997, the "Payable to funding
source" represents a liability of UMC because of restricted cash held by UMC in
its capacity as the agent of the remaining Director ("Funding Source"), which is
payable to Funding Source to the extent not invested in eligible receivables.
Fees earned attributable to capital provided by the Funding Source are credited
to the Funding Source and not recognized by UMC. UMC acts as the agent of the
Funding Source for the purchase of eligible receivables and has custodial
responsibility for the cash held as the agent of the Funding Source pending
investment in eligible receivables. Return of capital to the Funding Source is
based upon mutual agreement or termination of the underlying agreement between
UMC and the Funding Source.
REVENUE RECOGNITION
Billing and collection service revenue is recognized upon receipt of payment
from a third party payor or guarantor of a patient's account and upon
notification by a customer that payment has been made.
OTHER REVENUES
For 1997, Other Revenues consists primarily of consulting revenue recognized
as services were performed.
Effective June 30, 1996, the Company completed a Settlement and Termination
Agreement (the "Termination") with Healthcare Advisory Service of Puerto Rico,
Inc. ("HAS"). Under the Termination, on August 2, 1996 HAS paid to UMC a total
of $172,000 representing the sum of $46,000 to purchase UMC's interest in the
claims inventory in process for six clinics; $72,000 to purchase UMC's interest
in the claims inventory in process for a hospital; and $54,000 as additional
consideration for certain contract rights included in the Termination, which is
included in "Other Income" in the accompanying Consolidated Statements of
Revenues and Expenses. Income related to these cash payments was recognized in
the month of August, 1996, when the cash was received. The Termination included
a mutual release by UMC and HAS of any claims either party may have against the
other, and an indemnification of UMC by HAS against any claim for a refund of
fees paid.
37
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
EARNINGS (loss) PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") was issued requiring companies to present
on the face of the income statement, basic earnings per share (EPS) and diluted
EPS, instead of the primary and fully diluted EPS that was previously required.
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, 1997, 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.
SFAS No. 128 is required to be adopted by all public companies for reporting
periods ending after December 15, 1997, and requires restatement of EPS for all
prior periods reported.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS No. 123") was issued. This
statement requires the fair value of stock options and other stock-based
compensation issued to employees to either be included as compensation expense
in the income statement or the pro-forma effect on net income and earnings per
share of such compensation expense to be disclosed in the footnotes to the
Company's financial statements commencing with the Company's 1996 fiscal year.
The Company has adopted SFAS No. 123 on a disclosure basis. As such,
implementation of SFAS No. 123 has not impacted the Company's consolidated
balance sheets or statements of income.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with current
year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income," and No.
131, "Disclosure About Segments of an Enterprise and Related Information." In
February 1998, the Board issued No. 132, "Employers' Disclosure About Pension
and Other Postretirement Benefits." These statements will be adopted in 1998.
As these statements require only additional disclosures in the Company's notes
to the financial statements, their adoption will not have any effect on the
Company's financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This
38
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
statement will be adopted in 1998. The Company anticipates that the adoption
of this statement will not have a significant effect on the Company's
financial position or results of operations.
B. 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" or "UMC"). All references herein to the Company include UMC-Texas,
unless the context requires otherwise.
The Company provides medical insurance claims processing and accounts
receivable management services to healthcare providers. The Company employs
proprietary and purchased software to provide claims processing, management and
collection services to its customers, which are primarily hospitals, medical
clinics, and physician practices. The Company's basic service is designed to
provide an electronic claims processing, management and collection service that
expedites payment of claims from private insurance carriers or government payors
such as Medicare and Medicaid. The Company offers claims management and
collection services to healthcare providers, including the following:
ONGOING ACCOUNTS RECEIVABLE MANAGEMENT SERVICES: Customers using the
Company's "Ongoing" claims processing service typically receive computer
software from the Company that facilitates claims preparation, editing and
transmission. In order to implement this package of services the Company often
installs interface and editing software on a computer located in the customer's
offices. This "front end" system assists the customer's personnel in the
preparation and editing of claims, which are then electronically transmitted to
the Company and, in turn, transmitted directly or through an electronic
clearinghouse to the insurance carrier or governmental payor, as the case may
be. Under the Company's Ongoing service, the Company edits, submits, performs
follow-up, submits required additional information, and collects claims on
behalf of its customers. In cases where the insurance carrier or governmental
payor cannot receive or efficiently handle the Company's electronically
transmitted claims, the Company will print the claim on a standard industry form
and mail it to the insurance carrier. After the claims are processed, the
Company's claims operations personnel utilize computer-assisted follow-up
methods to ensure timely collection. The payor is directed to send the claim
payment directly to the customer or to UMC. In most cases the Company charges a
percentage of actual claim payment amounts collected as its fee. In certain
cases, the Company charges a flat monthly fee for this service. Complete claims
settlement reports are sent to customers on a semi-weekly, weekly or monthly
interval. Management believes that the Company's claims collection experience to
date and increasing awareness throughout the healthcare industry of the need to
cut costs and improve cash flow will increase demand for this type of service.
Ongoing accounts receivable management services revenue accounted for
approximately 73%, 76% and 97% of total revenue in 1997, 1996, and 1995,
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.
39
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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 sixty 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 17% of total revenue in 1997.
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 37% 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.
MANAGED CARE CLAIMS REPRICING SERVICES: With the advent of managed care,
many healthcare providers are being asked to accept discounted pricing
arrangements in exchange for the opportunity to provide services to a given
group of patients. These discounted pricing arrangements may be structured
as a fixed percentage discount from standard charges, a defined "fee
schedule" which results in lower charges for selected services, or more
complicated structures involving caps, outliers, and per diems. These
discounted fee structures are collectively referred to as "contracted rates."
Many healthcare providers do not have the systems and personnel needed to
efficiently and accurately reprice large volumes of managed care claims
consistent with contracted rates. UMC has developed the specifications for a
claims repricing module to be developed within UMC's proprietary Claims
Automation Support System ("CLASS"), and has initiated program development work
to enhance CLASS to support repricing functions.
UMCLAIMPROS: The Company began providing interim staffing services under the
UMClaimPros label in December, 1994. UMClaimPros are experienced billing and
collection personnel who are employed by UMC
40
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
and placed on temporary assignments in hospital and physician business
offices. Currently, the UMClaimPros service is only offered in the Dallas
area.
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 are for the most part related to
billing and collection services provided by the Company, and are 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 15 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 51 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 9 to 27.5 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.
C. FINANCIAL INSTRUMENTS, MARKET AND CREDIT RISK
The carrying amount of cash and cash equivalents approximates fair value due
to the short term maturities of these instruments. The fair value of cash
equivalents is determined by reference to market data.
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. At December 31, 1997, trade
receivables were concentrated from two prominent hospitals at 54% and 23% of
total receivables, respectively. At December 31, 1996, trade receivables
were concentrated from the same two hospitals at 71% and 10% of total
receivables, respectively. The Company does not expect any significant
customer to fail to meet their obligations under these contracts given their
high credit ratings and, as such, considers the credit risk associated with
its trade accounts receivable to be minimal. Substantially all of the
Company's revenue is generated from the healthcare industry.
During 1997, 86% of billing and collection revenue was earned from two
customers. The Washington Hospital Center ("WHC") provided ongoing contract
fees totaling 63% of total revenue.
During 1996, 85% of billing and collection revenue was earned from three
customers. WHC provided fees totaling 65% of total revenue. Of the revenue
generated by WHC during 1996, 99% was generated as a result of an ongoing
contract, and 1% was generated as a result of a Patient Billing contract.
41
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
During 1995, 91% of billing and collection revenue was earned from three
customers. WHC provided fees totaling 64% of total revenue. Of the revenue
generated by WHC during 1995, 99% was generated as a result of an ongoing
contract, and 1% was generated as a result of backlog contracts.
D. PROPERTY AND EQUIPMENT
At December 31, 1997 property and equipment consisted of the following:
PURCHASED LEASED TOTAL
---------- --------- ------------
Equipment.......................................... $ 513,417 $ 160,049 $ 673,466
Software systems................................... 165,508 0 165,508
Furniture and fixtures............................. 128,133 0 128,133
Leasehold improvements............................. 61,947 0 61,947
---------- --------- ------------
Gross property and equipment.................... 869,005 160,049 1,029,054
Accumulated depreciation and amortization.......... (716,848) (123,958) (840,806)
---------- --------- ------------
Net property and equipment...................... $ 152,157 $ 36,091 $ 188,248
---------- --------- ------------
---------- --------- ------------
At December 31, 1996 property and equipment consisted of the following:
PURCHASED LEASED TOTAL
---------- --------- ------------
Equipment.......................................... $ 510,560 $ 118,480 $ 629,040
Software systems................................... 120,261 0 120,261
Furniture and fixtures............................. 99,816 0 99,816
Leasehold improvements............................. 31,265 0 31,265
---------- --------- ------------
Gross property and equipment.................... 761,902 118,480 880,382
Accumulated depreciation and amortization.......... (681,253) (78,987) (760,240)
---------- --------- ------------
Net property and equipment...................... $ 80,649 $ 39,493 $ 120,142
---------- --------- ------------
---------- --------- ------------
Depreciation expense related to property and equipment was $61,812, $66,144
and $87,385 during 1997, 1996 and 1995, respectively. Amortization expense on
assets under capital leases was $44,971, $39,494 and $39,422 during 1997, 1996,
and 1995, respectively.
E. ACCRUED EXPENSES
The Company's accrued expenses at December 31 consisted of the following:
1997 1996
----------- -----------
Accrued professional fees.......................... $ 130,558 $ 141,943
Accrued payroll and benefits....................... 97,887 41,518
Accrued other...................................... 39,978 25,886
----------- -----------
Total.............................................. $ 268,423 $ 209,347
----------- -----------
----------- -----------
42
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
F. CAPITAL LEASE OBLIGATIONS
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 fair value of the AS/400. This equipment may
be purchased at the end of the lease for $1.
During 1997, the Company entered into various equipment leases through a
single lessor. This equipment may be purchased at the end of the leases for $1.
At December 31, the remaining capital lease obligations are as follows:
1997 1996
------------ ------------
6.9% lease related to IBM AS/400, rollover financing and maintenance,
maturing through 2000..................................................... $ 100,344 $ 132,324
Miscellaneous capital leases related to computer equipment with
rates of 5.9% to 9.75%, maturing through 2000............................. 37,195 -
------------ ------------
Total Capital lease obligations....................................... 137,539 132,324
Less current portion of capital lease obligations........................... 53,171 31,980
------------ ------------
Long-term capital lease obligations......................................... $ 84,368 $ 100,344
------------ ------------
------------ ------------
As of December 31, 1997, total lease payments due under capital leases are as
follows:
Year ending December 31:
1998........................................................ $ 63,864
1999........................................................ 63,864
2000........................................................ 29,775
-------------
157,503
Less interest............................................... 19,964
-------------
Principal amount of net lease payments...................... $ 137,539
-------------
-------------
Interest expense on capital lease obligations was $10,893, $17,842 and
$15,141 during 1997, 1996 and 1995, respectively.
G. INCOME TAXES
There is no current or deferred tax expense for the years ended December 31,
1997, 1996 and 1995. The Company in 1997 and 1996 utilized net operating tax
loss ("NOL") carryforwards to offset taxable income and in 1995 was in a tax
loss position.
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. Although the Company generated taxable
income in 1997 and 1996, management
43
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
believes that in order to overcome the objective negative evidence of
cumulative losses in recent years and to consider a reduction in the
valuation allowance which would result in an immediate tax benefit and
reporting of a deferred tax asset, the Company will need to generate taxable
income for three consecutive years. As such, management believes that a full
valuation allowance is required at December 31, 1997 and 1996. At December
31, 1997 and 1996, the Company had no deferred tax liabilities. 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: 1997 1996
------------- --------------
Net operating tax loss carryforward................... $3,432,027 $3,509,307
Property and equipment................................ 56,188 58,083
Accrued liabilities................................... 14,520 9,007
Deferred credits...................................... 3,257 8,839
Accounts receivable................................... 1,544 3,756
------------- --------------
Gross deferred tax assets ........................ 3,507,536 3,588,992
Valuation allowance................................... (3,507,536) (3,588,992)
------------- --------------
Net deferred tax assets $ 0 $ 0
------------- --------------
------------- --------------
The net change in the valuation allowance for deferred tax assets was a
decrease of $81,456 and $56,108 in 1997 and 1996, respectively. The changes all
relate to utilization of NOL carryforwards and changes in the underlying
temporary book to tax differences.
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 $358,115 through 2007. Post-change NOL carryforwards generated
through 1995 which are not subject to limitation total $4.2 million and will
expire in varying amounts between 2007 and 2010.
H. COMMITMENTS AND CONTINGENCIES
On May 15, 1995, the Company leased a 1,260 square feet office space in
Ponce, Puerto Rico, for $2,250 a month. The term of the lease was five years,
with the Company having the option to terminate the lease after one year of
occupancy with ninety days written notice. Following such notice, the Company
closed the Ponce office and terminated the lease on January 3, 1997.
On August 1, 1995, the Company renewed its lease on UMC's corporate
offices in Dallas. The lease term extends through January 31, 2001. The first
six months were rent free through January 31, 1996. Effective February 1, 1996
through January 31, 1999, monthly rent is $7,544. From February 1, 1999 through
January 31, 2000, and February 1, 2000 through January 31, 2001, monthly rent
will be $7,887 and $8,230, respectively. Rent expense, net of deferred credit
amortization expense, during 1997, 1996 and 1995 related to this lease was
$75,442, $75,442 and $64,111, respectively. The Company has the option to
terminate the lease after three years of occupancy, providing it gives ninety
days notice to the lessor.
44
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
On July 31, 1997, the Company leased an additional 1,906 square feet
office space in Dallas for UMY. The lease term extends through January 31,
2001. Effective September 1, 1997 through January 31, 1999, monthly rent is
$1,747. From February 1, 1999 through January 31, 2000, and February 1, 2000
through January 31, 2001, monthly rent will be $1,827 and $1,906,
respectively. Rent expense during 1997 related to this lease was $6,988.
I. DEFERRED CREDITS
Deferred Credits of $8,802 and $23,891 as of December 31, 1997 and 1996,
respectively, relate to escalating lease payments as specified in the lease
contract for the Company's corporate office facilities which was executed on
August 1, 1995. The Company's current lease on its corporate offices is an
escalating rental schedule extending until January 31, 2001 although the
first six months were rent free. In order to properly record monthly rent
expense during the six month period when no cash outlay for rent was
required, the Company reported monthly rental expense and related deferred
credits which were calculated using the total of rentals due under the
amended lease agreement dated August 1, 1995, divided by the minimum
non-cancelable term of 36 months. The deferred credits accumulated during the
first six months of the term of the amended lease are amortized on a straight
line basis beginning in February 1996, as a $1,257 per month reduction in
rent expense through the expiration of the non-cancelable term of the lease
in July 1998.
J. STOCKHOLDERS' EQUITY
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, 1997, there were 5,000,000 shares of 10% cumulative
preferred stock, par value $0.01 authorized but not issued and 50,000,000
shares of $0.01 par value Common Stock authorized, of which 28,015,764 shares
were issued and outstanding, with 105,547 shares held in Treasury Stock. In
addition, 3,591,250 shares of Common Stock are reserved at December 31, 1997
for issuance of outstanding warrants and options.
K. WARRANTS
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 warrants 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 March 31, 2007.
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.
On August 18, 1995, warrants to purchase 200,000 shares of Common Stock
at an exercise price of $0.12 per share were granted to a sales agent. These
warrants become exercisable based on fees billed to
45
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
customers referred to UMC by the sales agent over a three year period. The
warrants expire on August 18, 1998.
On August 6, 1993, warrants to purchase 150,000 shares of Common Stock at an
exercise price of $0.25 per share were granted to a sales agent. These warrants
were 100% exerciseable on the grant date and expire on August 6, 1998.
On July 9, 1990, the Company issued warrants to purchase 6,250 shares of
Common Stock, at $5.50 per share, to one party as additional compensation for
extending Bridge Loans to the Company at the rate of one share for each $8
loaned. These warrants expire on January 8, 1998.
Neither the warrants or the shares of common stock represented by these
warrants have been registered under the Securities Act of 1933.
L. OPTIONS
At the Annual Meeting of Stockholders on August 14, 1995, the Company's
stockholders approved the adoption of the 1995 Stock Option Plan (the 1995
Plan), which provides for the issuance of both "incentive" and "nonqualified"
stock options. A total of 1,000,000 shares are issuable under the 1995 Plan.
As December 31, 1997, options for 997,500 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, 1997, options for 907,500 and 0 shares were
outstanding under the 1992 and 1989 Plans, respectively.
Under the terms of the Plan, the exercise price for both incentive and
nonqualified stock options to purchase shares of the Company's Common Stock may
be granted at a price not less than the market price of the stock at the date of
grant. Accordingly, no compensation cost has been recognized for the Company's
stock option plan. Stock options may be granted to holders of 10 percent or
more of the Company's voting power at exercise prices no less than 110 percent
of the market price of the stock at the date of grant. Both option types are
exercisable, in annual increments of one-third or one half of the total options
granted, on the anniversary dates following the award. 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.
46
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following table summarizes activity for the years ended December 31:
1997 1996 1995
------------------------ ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- ---------- ---------- ----------
Options outstanding at
January 1,.................. 1,239,500 $0.13 1,245,750 $0.23 913,750 $0.28
Granted....................... 1,300,000 0.07 607,500 0.05 362,000 0.10
Exercised..................... - 0.00 - 0.00 - 0.00
Canceled...................... (634,500) 0.21 (613,750) 0.25 (30,000) 0.13
---------- --------- ---------- ---------- ---------- ----------
Options outstanding at
December 31,................ 1,905,000 $0.07 1,239,500 $0.13 1,245,750 $0.23
---------- --------- ---------- ---------- ---------- ----------
Options exerciseable at
December 31,................ 403,333 $0.05 604,500 $0.18 628,917 $0.21
---------- --------- ---------- ---------- ---------- ----------
---------- --------- ---------- ---------- ---------- ----------
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 1997 LIFE PRICE 1997 PRICE
- --------------- ------------- ----------- -------- --------------- ---------
$0.05 -- $0.07 1,620,000 9.1 years $0.06 403,333 $0.05
$0.08 -- $0.10 285,000 9.6 years $0.09 - -
- ----------------- ------------- ----------- -------- --------------- ---------
$0.05 -- $0.10 1,905,000 9.2 years $0.07 403,333 $0.05
- ----------------- ------------- ----------- -------- --------------- ---------
M. SFAS NO. 123 PRO FORMA
In 1996, the Company adopted the disclosure-only option under SFAS No. 123.
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:
1997 1996
-------------- -------------
Net income............................................... $ 160,749 $ 119,214
SFAS No. 123 employee compensation cost.................. 12,825 20,857
SFAS No. 123 director costs.............................. 18,421 163
-------------- -------------
Pro forma net income..................................... $ 129,503 $ 98,194
-------------- -------------
Pro forma earnings per share............................. $ 0.0048 $ 0.0037
-------------- -------------
-------------- -------------
47
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The fair value for options granted in 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, 1997 and 1996:
1997 1996
------- -------
Dividend yield........................ - -
Expected volatility................... 112.3% 116.2%
Risk-free rate of return.............. 6.4% 6.7%
Expected life, years.................. 3 10
Grant-date fair value per share....... $0.05 $0.05
The fair value for warrants granted in 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,
1997 and 1996:
\
1997 1996
------- -------
Dividend yield........................ - -
Expected volatility................... 98.8% 116.2%
Risk-free rate of return.............. 6.4% 6.3%
Expected life, years.................. 4 10
Grant-date fair value per share....... $0.06 $0.06
N. 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,
------------------------------------------------
1997 1996 1995
----------- ----------- ------------
Net income (loss) available to common stockholders............... $ 160,749 $ 119,214 $ (285,745)
Weighted average number of common shares in basic EPS............ 27,178,504 26,310,217 26,310,217
Effect of dilutive common stock equivalents...................... 203,335 - -
----------- ----------- ------------
Weighted average number of common shares and
diluitve potential common shares in diluted EPS................ 27,381,839 26,310,217 26,310,217
----------- ----------- ------------
----------- ----------- ------------
For the years ended December 31, 1996 and 1995, assumed exercise of options
from employee stock based compensation plans would have been anti-dilutive and,
therefore, were not considered in the computation of diluted EPS.
48
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
O. RELATED PARTY TRANSACTIONS
The Company paid approximately $4,413 and $77,546 during 1996 and 1995,
respectively, in sales commissions to marketing companies in which a former
member of the Board of Directors holds an interest.
In 1997 and 1996, the Company paid consulting fees totaling $24,000 and
$18,000 to Mr. John Lewis. Mr. Lewis was elected to the Company's Board of
Directors on November 12, 1996.
On July 11, 1997, the Company completed a private offering of 1,600,000
shares of UMC Common Stock at a price of $.10 per share. 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 member of
the UMC Board of Directors, who subsequently donated 300,000 of such shares to
trusts in which that director holds no beneficial interest. An additional
100,000 shares were purchased by another member of the UMC Board of Directors.
As discussed more fully in Note A, two members of the UMC Board of Directors
provided $127,327 in funds to be used by UMC to advance fund certain eligible
receivables. At December 31, 1997, funds totaling $78,961 were owed by UMC to
one member of the UMC Board of Directors.
49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of United Medicorp, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
United Medicorp, Inc. and its subsidiary at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period 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 audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Dallas, Texas
March 23, 1998
50