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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, 2004
[ ] 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.)
200 N. Cuyler Street
Pampa, Texas 79065
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (972) 926-4950
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
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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 21, 2005 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $1,243,008 based on the last sales price of
$0.07 per share of such stock on March 18, 2005. As of March 18, 2005 there were
30,668,550 shares of Common Stock, $0.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part I, Item 7 of this Form 10-K incorporates by reference information in the
Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance
Statement for Forward Looking Statements
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UNITED MEDICORP, INC.
FORM 10-K
For the fiscal year ended December 31, 2004
TABLE OF CONTENTS
Page
PART I
ITEM 1. Business..................................................... 3
ITEM 2. Properties................................................... 10
ITEM 3. Legal Proceedings............................................ 10
ITEM 4. Submission of Matters to a Vote of Securities Holders........ 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 10
ITEM 6. Selected Consolidated Financial Data......................... 12
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 13
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk... 31
ITEM 8. Financial Statements and Supplementary Data.................. 31
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 31
ITEM 9A. Controls and Procedures.......................................... 31
ITEM 9B. Other Information................................................ 31
PART III
ITEM 10. Directors and Executive Officers of the Registrant........... 32
ITEM 11. Executive Compensation....................................... 35
ITEM 12. Securities Ownership of Certain Beneficial Owners and
Management.................................................. 38
ITEM 13. Certain Relationships and Related Transactions............... 39
ITEM 14. Principal Accountant Fees and Services....................... 39
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 40
Signatures ............................................................. 44
________________________________________________________________________________
PART I
Item 1. Business
GENERAL
United Medicorp Texas, Inc., was incorporated in the State of Texas on
March 13, 1989 ("UMC-Texas"). On July 10, 1989, in an exchange of stock,
UMC-Texas was acquired by Gamma Resources, Inc., a publicly-owned Delaware shell
corporation, which simultaneously changed its name to United Medicorp, Inc. (the
"Company", "UMC" or the "Registrant"). On November 18, 1996, the Company filed
"Articles of Amendment to the Articles of Incorporation of Sterling Hospital
Systems, Inc." whereby this wholly owned subsidiary of UMC was renamed United
MoneyCorp, Inc. ("UMY"). UMY has been designated as the legal entity under which
UMC operates a collection agency. On August 7, 1998, UMC acquired 100% of the
common stock of Allied Health Options, Inc. ("AHO"), an Alabama corporation.
Effective June 30, 1999, the Company discontinued the operations of AHO. On
October 14, 1999, AHO filed a voluntary petition in the United States Bankruptcy
Court for the Northern District of Texas to liquidate pursuant to Chapter 7 of
Title 11 of the United States Bankruptcy code. On November 16, 1999, the Chapter
7 bankruptcy 341 creditors' meeting was held. Unless the context indicates
otherwise, references herein to the Company include UMC and its operating
subsidiary UMY, and exclude AHO.
The Company provides medical insurance claims coding and processing,
electronic medical records storage and accounts receivable management services
to healthcare providers. The Company employs proprietary and purchased software
to provide claims coding and processing, billing and collection, and medical
records storage services to its customers, which are primarily hospitals. The
Company's medical claims processing service is designed to provide an electronic
claims processing, billing and collection service that expedites payment of
claims from private insurance carriers or government payors such as Medicare and
Medicaid. The Company also offers to its customers processing and collection
services for uncollected "backlog" (aged) claims that were not originally
submitted through the Company's electronic claims processing system. UMY
provides customer service and collection services to health care providers.
In April 2002 the Company established its Coding Services Division
("CSD"). CSD provides medical record coding and electronic medical record
storage services to primarily rural hospitals in Texas.
3
MEDICAL BILLING INDUSTRY OVERVIEW
The U.S. healthcare industry continues to experience tremendous change as
both federal and state governments as well as private industry work to bring
more efficiency and effectiveness to the healthcare system. UMC's business is
impacted by trends in the U.S. healthcare industry. As healthcare expenditures
have grown as a percentage of U.S. gross national product, public and private
healthcare cost containment measures have applied pressure to the margins of
healthcare providers. Historically, some payors have willingly paid the prices
established by providers while other payors, notably the government and managed
care companies, have paid far less than established prices (in many cases less
than the average cost of providing the services). As a consequence, prices
charged payors willing to pay "usual and customary" prices increased in order to
recover the cost of services purchased by the government and others but not paid
by them (i.e., cost shifting). Increasing complexity in the reimbursement system
and assumption of greater payment responsibility by individuals have caused
healthcare providers to experience increased receivables, bad debt levels and
higher business office costs. Providers overcome these pressures on
profitability by increasing their prices, by relying on demographic changes to
support increases in the volume and intensity of medical procedures, and by cost
shifting. As providers experience limitations in their continued ability to
shift cost in these ways, the amount of reimbursement received by UMC's clients
may be reduced and UMC's rate of growth in revenues, assuming present fee
levels, may decline. However, management believes UMC may benefit from
providers' attempts to offset declines in profitability through seeking more
effective and efficient business management services such as those provided by
UMC. UMC continues to evaluate governmental and industry reform initiatives in
an effort to position itself to take advantage of the opportunities created
thereby.
GOVERNMENTAL INVESTIGATIVE RESOURCES AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on
the billing and collection practices of healthcare providers and related
entities, and particularly on possible fraudulent billing practices. This
heightened scrutiny has resulted in a number of high profile civil and criminal
investigations, lawsuits and settlements.
In November 1998, the Office of Inspector General ("OIG") released
compliance plan guidance for third party billing companies, in which it
identified certain areas which it viewed as particularly problematic, including,
but not limited to, billing for undocumented services, unbundling, upcoding,
inappropriate balance billing, inadequate resolution of overpayments, lack of
integrity in computer systems, failure to maintain the confidentiality of
information records, misuse of provider identification numbers, duplicate
billing and illegal billing company incentives. While not mandatory, OIG
encourages billing companies and healthcare providers to adopt compliance plans.
The existence of an effective compliance plan may reduce the severity of
criminal sanctions for certain offenses and may be considered in the settlement
of civil investigations. Management believes that the operations of the Company
are in compliance with the OIG release.
In 1996, Congress enacted the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), which includes significant new
requirements governing the confidentiality of patient health information,
contains an expansion of provisions relating to fraud and abuse, creates
additional criminal offenses relating to healthcare benefit programs, provides
for forfeitures and asset-freezing orders in connection with certain offenses
and contains provisions for instituting greater coordination of federal, state
and local enforcement agency resources and actions.
4
EXISTING GOVERNMENT REGULATION
UMC's billing and collection activities are governed by numerous federal
and state civil and criminal laws. In general, these laws provide for various
fines, penalties, multiple damages, assessments and sanctions for violations,
including possible exclusion from Medicare, Medicaid and certain other federal
and state healthcare programs.
Submission of claims for services that were not provided as claimed, or
which violate the regulations, may lead to civil monetary penalties, criminal
fines, imprisonment and/or exclusion from participation in Medicare, Medicaid
and other federally funded healthcare programs. Specifically, the Federal False
Claims Act allows a private person to bring suit alleging false or fraudulent
Medicare or Medicaid claims or other violations of the statute. Such actions
have increased significantly in recent years and have increased the risk that a
company engaged in the healthcare industry, such as UMC and its customers, may
become the subject of a federal or state investigation, may ultimately be
required to defend a false claim action, may be subjected to government
investigation and possible criminal fines, may be sued by private payors and may
be excluded from Medicare, Medicaid and/or other federally funded healthcare
programs as a result of such an action.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act sets forth various
provisions designed to eliminate abusive, deceptive and unfair debt collection
practices by collection agencies. Various states have also promulgated laws and
regulations that govern credit collection practices.
Under Medicare law, physicians and hospitals are only permitted to assign
Medicare claims to a billing and collection services vendor in certain limited
circumstances. Medicare regulations provide that a billing company that prepares
and sends bills for the provider or physician and does not receive and negotiate
the checks made payable to the provider or physician does not violate the
restrictions on assignment of Medicare claims. Management believes that its
practices meet the restrictions on assignment of Medicare claims because, among
other things, it bills only in the name of the provider, checks and payments for
Medicare services are made payable to the provider and the Company lacks any
power, authority or ability to negotiate checks made payable to the provider.
The Company is also required to comply with the regulations of HIPAA.
HIPAA establishes national standards that all health care organizations and
insurers must use when they exchange health information electronically. HIPAA
also includes two sets of regulations to safeguard the privacy and
confidentiality of patients and members health information. 1) Security
regulations - deal with protection of electronic health information from
unauthorized access. 2) Privacy regulations - cover protected health information
that is verbal, written, or electronic.
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.
5
CUSTOMER SERVICES AND FEE STRUCTURE
Ongoing Accounts Receivable Management Services: Under the Company's
ongoing service, the Company edits, corrects, submits, performs follow-up,
submits required additional information, and collects claims on behalf of its
customers. In cases where an insurance carrier or governmental payor cannot
receive or efficiently handle the Company's electronically transmitted claims,
the Company will print the claim on a standard industry form and mail it to the
insurance carrier. After the claims are processed, the Company's claims
operations personnel utilize computer-assisted follow-up methods to ensure
timely collection. In most cases the Company charges a percentage of actual
claim payment amounts collected as its fee. In certain cases, the Company may
charge a flat fee per claim for this service. Complete claim settlement reports
are sent to customers on a weekly, semi-monthly 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 could increase demand for this type of service. Ongoing
accounts receivable management services revenue accounted for approximately 60%,
49% and 52% of total revenue in 2004, 2003 and 2002, 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. During 2004 the
Company received placements of backlog claims in conjunction with an ongoing
accounts receivable management service contract. Revenue from Backlog Accounts
Receivable Management Services was less than 1% of total revenue in 2004. The
Company did not recognize revenue from Backlog Accounts Receivable Management
Services in 2003 or 2002.
Claims Coding Services: In April of 2002, The Company began offering
claims coding services to its customers. These services include performing
coding reviews to assure compliance and reimbursement optimization, as well as
complete on-site and off-site UB92 and HCFA claims coding. To support the
off-site claims coding service, the Company developed proprietary software which
allows medical records to be scanned at a customer hospital's location,
encrypted, and transmitted to UMC's secure website. Medical records are then
queued to one of UMC's coders, who completes coding within two business days and
transmits a coding summary back to the hospital. The hospital then enters these
codes into its coding system, and bills the claim. Claims coding services
revenue accounted for approximately 5%, 5% and 3% of total revenue in 2004, 2003
and 2002 respectively.
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, age and collectibility of the accounts being worked.
Collection Agency Services: These services involve collections of either
(a) "early out" accounts due from individual guarantors which are active
receivables placed for collection within one hundred twenty days of either the
6
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 31%, 43% and 44% of total revenue in 2004, 2003 and 2002,
respectively.
Electronic Medical Records Storage: In September of 2003 the Company
completed the beta testing phase of the implementation of its web based
electronic medical records storage software, and began offering this service to
its customers. This service provides customers with the ability to store medical
records electronically on the Company's data storage vault which is
simultaneously backed up at a remote location on a duplicate system, and is also
backed up to tape media on a nightly, weekly, monthly, and annual basis. This
system provides customers with a solution for HIPAA compliance in regards to
medical records access, by limiting access to individuals authorized by each
customer's designated gatekeeper, and further limiting each user's access to
specified records. Each access to the system is electronically logged as to the
person accessing the record, the time and date, and the purpose for which the
record was accessed. This solution also eliminates the physical space
requirements for storing medical records in a hard copy format. Revenue from
Electronic Medical Records Storage Services accounted for less than 1% of total
revenue during 2004.
Chargemaster Review Services: During the first quarter of 2005, the
Company began offering Chargemaster Review Services. As a part of this service,
UMC reviews for accuracy and completeness the assignment of CPT and HCPCS codes,
the assignment of billing revenue codes and the assignment of modifiers. The
Company also identifies duplicate items, checks for consistency of pricing and
corrects narrative charge descriptions. The Company uses a purchased software
program to facilitate providing of this service.
Pricing Comparison Service: UMC also began offering a Comparative Pricing
Service during the first quarter of 2005. Through a purchased software license,
the Company can provide customer hospitals with the ability to compare their
line item pricing with any number of over 5,000 hospitals nationwide.
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 2.5
to 4.75 percent of the amount the Company collects on behalf of the providers,
depending upon the average claim amount, age, and type of claim collected.
Backlog Accounts Receivable Management services are usually priced from 2.5 to
25 percent of the amount the Company collects on behalf of the providers,
depending upon the average claim amount, type and age of the claims. Collection
ratios generally range from 0 to about 25 percent for Backlog projects and about
18 to 50 percent for Ongoing projects. Fees for Patient Billing services range
from 6 to 10 percent of the amounts collected, while Collection Agency services
are priced at 6 to 35 percent of amounts collected. Coding service fees are
billed on a per chart basis, a per hour basis, or a per day basis, and may also
add charges for travel time to and from the customer's location. Fees for
Electronic Medical Records Storage Services are billed on a per record or per
megabyte of storage space used basis. Fees for the Chargemaster Review and
Comparative Pricing Services are negotiated on a per engagement basis.
Management believes that the Company's fee structure for its package of services
is competitive.
7
SOFTWARE AND DATA PROCESSING
The Company's ability to provide its services on a large scale depends on
the successful operation of computer hardware and software capable of handling
the processing and transmission of insurance claims from the customer to the
insurance carrier, and through the intermediate steps that such claims must take
during the process. During 2004, 2003 and 2002, the Company accepted for
processing approximately 338,000, 344,000 and 307,000 claims and accounts. The
Company continuously develops and enhances its systems using programmers
employed by the Company and outside contractors and consultants.
The claims processing software packages currently used by the Company are
specifically designed to expedite claims preparation and processing and,
simultaneously, to reduce errors associated with manual claims processing.
Claims are edited for certain errors, such as invalid or missing information,
using the claims processing software. Claims are then transmitted by the Company
to the third party payor through a claims clearinghouse used by the Company. The
clearinghouse then formats and electronically transmits the claim data according
to the specifications of the individual third party payors, which avoids delays
resulting from paper routing and the errors resulting from third party payor
data re-entry. If, however, the third party payor cannot receive or efficiently
handle the Company's electronically transmitted claims, the Company will print
the claim on a standard industry form and mail it to the third party payor. The
Company intends to continue to enhance and refine its claims processing,
customer reporting, claims tracking and collection functions during 2005 and
thereafter in order to satisfy unique customer requirements.
The Company's claims coding division utilizes an internally developed web
based software package to receive and distribute medical records for offsite
coding. This software allows providers to upload files of scanned medical record
images into the Company's Secure Socket Layer ("SSL") Coding Website. These
files are then electronically assigned to one of UMC's certified coders. The
Company's certified coders access their assigned record files on the website and
complete a coding sheet for each record. When the coding is completed, the file,
along with the completed coding sheet, is stored on the website, and is
available for retrieval only by the provider's authorized users. When the
processing of the record is complete, it is automatically archived on the
website for a period of one year. The Company plans to continue enhancement of
this software to provide for even greater efficiencies and additional
functionality in the coding and reporting process.
UMC's Electronic Medical Record Storage service also utilizes internally
developed software to receive, store, and allow access to indexed files of
scanned medical record images. The scanned image files are loaded by the
customer into the Company's data storage vault through UMC's SSL secured Medical
Records Storage Website. These records are indexed by multiple data elements,
and are quickly accessible by persons authorized by the customer through the
secure website. The software also allows the customers "gatekeeper" to limit an
authorized user's access to only a specific record, or records. The software
requires each access to a medical record to be electronically logged as to the
person accessing the record, the time and date of access, and the reason that
the record was accessed. An additional enhancement notifies the gatekeeper of
each access of a record deemed "sensitive" by the provider. In compliance with
HIPAA regulations, providers may generate reports (upon request from a patient)
that list each access of such patient's records. The Company plans to continue
enhancing this software as needed to provide greater functionality to customers.
UMY uses a purchased software application for its collection agency
services. This application runs on the Company's AS/400 hardware platform, and
handles all of the necessary processing of accounts, telephone calls, collection
letters and reports. Custom programming for this application is handled
primarily through contract programmers. The Company owns the source code for
this application and is in the process of completely rewriting this application
to improve functionality and reduce costs. This software will continue to be
modified and enhanced to improve performance and customer satisfaction.
8
COMPETITION
The business of medical insurance claims processing, accounts receivable
management and collection agency services is highly competitive and fragmented.
UMC competes with certain national and regional electronic claims processing
companies, claims collection companies, claims management companies, collection
agencies, factoring and financing firms, software vendors and traditional
in-house claims processing and collections departments of hospitals and other
healthcare providers. Many competitors of UMC are several times larger than the
Company and can devote resources and capital to the market that are much greater
than those which the Company currently has available or may have available in
the future. There can be no assurance that competition from current or future
competitors will not have a material adverse effect upon the Company.
INDUSTRY SEGMENTS
Management organizes consolidated UMC around differences in services
offered. UMC provides medical insurance claims processing, medical accounts
receivable management, claims coding services, customer service functions,
payment monitoring and early out collection services, electronic medical records
storage services, and other healthcare related ancillary business office
services. UMY provides bad debt account collection agency services to the health
care industry. UMC and UMY are aggregated into one reportable health care
Business Office Services segment based on the similar nature of the medical
claim and patient account collection services, nature of the information
technology and human resource production processes and service delivery
methodologies, and the health care industry customer base of both UMC and UMY.
PATENTS AND TRADE SECRETS
As has been typical in software-intensive industries, the Company does not
hold any patents. The Company believes that patent protection is of less
importance in an industry characterized by 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 consulting agreements to protect its proprietary software, and to
date, has had no indication of any material breach of these agreements.
9
EMPLOYEES
At March 1, 2005, the Company had 61 full time, and 17 part time
employees. The Company believes that its relations with its employees are good.
UMC employees are not currently, nor have they ever been, represented by a union
and there have not been any stoppages, strikes or union organizing attempts.
Item 2. Properties
On August 21, 2000, United Medicorp, Inc. completed the purchase of a 20,000
square foot building that serves as its operations center in Pampa, Texas. The
purchase price of the building was $100,000. In addition, the first mortgage
included an additional $37,000 allowance for transaction costs and building
improvements. The term of the first mortgage is 20 years, with monthly payments
of principal and interest at a floating rate of prime plus one half percent
(currently 5.75 percent per annum). Consistent with the terms of the previously
disclosed Economic Development and Incentive Agreement with the Pampa Economic
Development Corporation ("PEDC"), the full amount of the $137,000 mortgage is
guaranteed by the PEDC. The Company has made numerous repairs and improvements
to the building including the construction of two executive offices, a computer
room, and a lavatory, and has refurbished the two previously existing
lavatories. The total investment in the building and improvements at December
31, 2004 was $197,000. The company began moving its operations to Pampa in
September of 2000 and completed the relocation of all operations functions in
February 2001.
UMC also maintains a corporate office in a 1200 square foot leased office
space in Garland, Texas. The company signed a 36-month lease on this space with
a lease term from October 1, 2003 through September 30, 2006. Lease payments are
scheduled for $950 per month during the first year, $1000 per month during the
second year, and $1050 per month during the third year of the lease term.
Management believes that its facilities are well located and are in good
condition.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders for a vote during 2004.
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 01, 2005, there were
approximately 1,040 stockholders of record of the Common Stock. The Common Stock
trades on the NASDAQ over-the-counter bulletin board ("OTCBB") market.
10
The following table sets forth the range of high and low bid prices for
the Common Stock as reported on the OTCBB. Such prices do not include retail
mark-up, markdown or commission and may not necessarily represent actual
transactions.
Year ended December 31, 2004 High Low
---------------------------- -------- --------
Fourth quarter $ 0.060 $ 0.040
Third quarter 0.050 0.020
Second quarter 0.050 0.030
First quarter 0.150 0.035
-------- --------
2004 annual average 0.078 0.031
Year ended December 31, 2003
----------------------------
Fourth quarter $ 0.070 $ 0.020
Third quarter 0.065 0.020
Second quarter 0.030 0.020
First quarter 0.070 0.020
-------- --------
2003 annual average 0.059 0.020
Year ended December 31, 2002
----------------------------
Fourth quarter $ 0.035 $ 0.006
Third quarter 0.020 0.006
Second quarter 0.030 0.020
First quarter 0.025 0.012
-------- --------
2002 annual average 0.028 0.011
The last reported sales price of the Common Stock as reported on the
OTCBB, on March 1, 2005 was $0.071 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.
11
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, 2004. The financial data
presented for each of the five fiscal years has been derived from audited
financial statements.
Year Ended December 31,
--------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Statements of Operations Data
Revenues $ 4,099,005 $ 3,901,296 $ 3,437,984 $ 2,785,697 $ 2,297,797
Wages and benefits 2,600,022 2,664,862 2,315,105 1,769,134 1,654,666
Selling, general and administrative 839,312 725,619 673,329 536,276 520,507
Depreciation and amortization 165,646 109,053 81,438 100,654 115,295
Professional fees 74,472 90,449 61,844 60,006 42,835
Other 105,500 40,962 46,437 53,789 163,426
------------ ------------ ------------ ------------ ------------
Net income (loss) before
Income taxes 314,053 270,351 259,831 265,841 (198,932)
Income tax expense (benefit) $ (23,750) $ (18,000) $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 337,803 $ 288,351 $ 259,831 $ 265,841 $ (198,932)
Basic earnings (loss) per common
share (1):
Net income (loss) $ 0.0112 $ 0.0099 $ 0.0089 $ 0.0091 $ (0.0069)
Weighted average shares
outstanding 30,113,550 29,212,217 29,210,217 29,110,000 28,710,217
12
As of December 31,
--------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Balance Sheet Data
Working capital (deficit) $ 628,442 $ 323,871 $ 145,706 $ (23,902) $ (225,830)
Total assets 1,863,388 1,559,869 893,995 602,357 512,154
Long term debt including capital
leases and deferred revenue 331,157 432,531 271,527 280,004 357,484
Total debt including capital leases
and deferred revenue 518,678 518,694 294,526 330,625 489,838
Total liabilities 938,887 971,596 631,624 599,817 775,455
Total stockholders' equity (deficit) 924,501 588,273 262,371 2,540 (263,301)
See Notes to the Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition.
Item 7. Management's Discussions and Analysis of Financial Condition and
Results of Operations
GENERAL CONSIDERATIONS
Except for the historical information contained herein, the matters
discussed may include forward-looking statements relating to such matters as
anticipated financial performance, legal issues, business prospects,
technological developments, new products, research and development activities
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that forward-looking statements
include the intent, belief, or current expectations of the Company and members
of its senior management team, as well as the assumptions on which such
statements are based. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth in the safe
harbor compliance statement for forward-looking statements included as Exhibit
99.1 to this Form 10-K and are hereby incorporated herein by reference. The
Company undertakes no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events or
changes to future operating results over time.
UMC and UMY derive their primary revenues from medical claims processing
and accounts receivable management services. A substantial portion of UMC and
UMY revenues are derived from recurring monthly charges to their customers under
service contracts that typically are cancelable with a 30 to 60 day notice. For
the year ended December 31, 2004, 2003 and 2002, approximately 97%, 97% and 96%
of UMC and UMY revenues were recurring. Recurring revenues are defined as
revenues derived from services that are used by the UMC and UMY customers in
connection with ongoing business, and accordingly exclude revenues from backlog
accounts receivable management, UMClaimPros, and consulting services.
13
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 claims management services.
CLAIMS MANAGEMENT SERVICES - PROCESSING VOLUMES
2004 2003 2002
--------------------------------- --------------------------------- ---------------------------------
Quarter Quarter Quarter
--------------------------------- --------------------------------- ---------------------------------
Fourth Third Second First Fourth Third Second First Fourth Third Second First
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Claims Mgmt
- ----------------
Number of Claims
Accepted for
Processing:
Ongoing 21,674 21,772 26,250 36,869 36,740 42,001 31,282 30,549 32,602 43,522 43,761 34,012
Backlog -- -- 1,588 -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 21,674 21,772 27,838 36,869 36,740 42,001 31,282 30,549 32,602 43,522 43,761 34,012
Gross $ Amount
of Claims
Accepted for
Processing
(000's):
Ongoing 51,753 56,806 84,830 34,232 40,723 36,662 24,272 23,033 26,717 30,772 22,085 23,336
Backlog -- -- 4,733 -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 51,753 56,806 89,563 34,232 40,723 36,662 24,272 23,033 26,717 30,772 22,085 23,336
Collection $
(000's)
Ongoing 14,604 18,806 20,635 8,780 7,897 6,923 6,098 5,010 6,126 6,091 4,840 4,710
Backlog 156 330 4 -- -- -- -- -- -- -- -- 6
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 14,760 19,136 20,639 8,780 7,897 6,923 6,098 5,010 6,126 6,091 4,840 4,716
Fees Earned
(000's)
Ongoing 496 586 830 560 522 500 448 460 460 471 405 401
Backlog 4 9 -- -- -- -- -- -- -- -- -- 1
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 500 595 830 560 522 500 448 460 460 471 405 402
Average Fee %
Ongoing 3.4% 3.1% 4.0% 6.4% 6.6% 7.2% 7.3% 8.6% 7.5% 7.7% 8.4% 8.8%
Backlog 2.5% 2.7% --% --% --% --% --% --% --% --% --% 16.6%
For Ongoing claims, there is typically a time lag of approximately 30 to
90 days from contract execution to complete development of system interfaces and
definition of procedural responsibilities with customer personnel. During this
period, Company personnel survey the customer's existing operations and prepare
for installation. Once the customer begins transmitting claims to the Company,
there is usually a time lag of 20 to 60 days between transmission of claims to
third party payors and collection of those claims from payors.
During the fourth quarter of 2001 through the first quarter of 2004, the
Company processed secondary claims under an ongoing accounts receivable
management services contract signed March 22, 2000. The Number of Claims
Accepted for Processing and the Gross $ Amount of Claims Accepted for Processing
shown in the preceding table include secondary claims that were subject to
automatic crossover payments from certain payors. The Company did not take
credit for, nor report as collections, such crossover payments that were
received by the customer within 35 days of the date that the claim was
transmitted to UMC. UMC management estimates that about 30% to 50% of the
secondary claims accepted for processing were due from crossover payors. Of
14
these, approximately 60% paid with no effort required (and no credit for
collections received was taken) by UMC. As a result, the ratio of Collections to
the Gross $ Amount of Claims Accepted for Processing shown in the preceding
table will be lower for periods beginning with the first quarter of 2002 through
the first quarter of 2004 than for the succeeding quarters shown.
The following table sets forth for each period indicated the volume and
gross dollar amount of patient balance customer service and collection accounts
received and fees recognized for UMC and UMY.
COLLECTION AGENCY SERVICES - PROCESSING VOLUME
2004 2003 2002
--------------------------------- --------------------------------- ---------------------------------
Quarter Quarter Quarter
--------------------------------- --------------------------------- ---------------------------------
Fourth Third Second First Fourth Third Second First Fourth Third Second First
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Collection Svcs
- -----------------
Number of
Accounts Accepted
for Collection:
(000's)
Early out 33,274 34,364 43,803 37,828 37,336 34,601 24,330 11,266 13,859 17,818 17,250 26,977
Bad debt 12,728 24,677 22,268 21,728 38,092 27,390 15,448 15,322 26,281 16,430 14,815 20,028
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 46,002 59,041 66,071 59,556 75,428 61,991 39,778 26,588 40,140 34,248 32,065 47,005
Gross $ Amount
of Accounts
Accepted for
Collection
(000's)
Early out 36,427 36,683 50,768 38,110 32,808 30,561 17,897 10,815 12,021 13,424 14,002 22,011
Bad debt 6,839 10,242 3,598 14,067 24,693 16,993 12,379 12,547 15,934 9,714 10,476 12,959
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 43,266 46,925 54,366 52,177 57,501 47,554 30,276 23,362 27,955 23,138 24,478 34,970
Collection $
(000's)
Early out 2,048 2,363 2,456 2,679 2,535 1,862 1,105 949 1,220 1,563 2,004 2,444
Bad debt 264 288 618 1,140 1,301 1,283 1,074 1,155 909 939 895 745
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 2,312 2,651 3,074 3,819 3,836 3,145 2,179 2,104 2,129 2,502 2,899 3,189
Fees Earned
(000's)
Early out 150 186 191 222 202 182 132 113 131 157 187 227
Bad debt 65 66 143 241 279 279 226 252 203 208 186 152
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 215 252 334 463 481 461 358 365 334 365 373 379
Average Fee %
Early out 7.3% 7.9% 7.9% 8.3% 8.0% 9.7% 11.9% 11.9% 10.7% 10.0% 9.3% 9.3%
Bad debt 24.6% 22.9% 23.5% 21.3% 21.4% 21.7% 21.0% 22.1% 22.3% 22.1% 20.8% 20.4%
For placements of collection accounts, there is typically a time lag of
approximately 15 to 180 days from contract execution to electronic transfer of
accounts from the customer. In many cases, collection accounts are transferred
to UMC via hard copy media, which requires UMC employees to manually enter
collection account data into the UMY system. Collection fee percentages charged
to the customer vary depending on the service provided, the age and average
balance of accounts.
15
In April of 2002, Janice K. Neal joined UMC as Vice President of Coding
Services, and the Company began providing coding and related services to various
hospitals. During the third quarter of 2002, the Company began offering online
coding services through its proprietary coding web site. The table below
displays the number of claims accepted and coded through the web site by
quarter.
CODING SERVICES - OFF-SITE PROCESSING VOLUME
2004 2003 2002
--------------------------------- --------------------------------- ---------------------------------
Quarter Quarter Quarter
--------------------------------- --------------------------------- ---------------------------------
Fourth Third Second First Fourth Third Second First Fourth Third Second First
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Collection Svcs
- -----------------
Number of
Claims Accepted
for Coding:
Inpatient 543 604 602 832 303 177 213 161 140 9 -- --
Outpatient 633 1,657 780 699 1,007 734 761 553 201 -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 1,176 2,261 1,382 1,531 1,310 911 974 714 341 9 -- --
Fees Earned
(000's)
Combined 18 25 22 27 20 17 18 14 5 -- -- --
UMC prices its off-site coding services according to the types of claims
coded. In general, inpatient claims are more complex than outpatient claims, and
are priced higher accordingly.
SIGNIFICANT CUSTOMERS
During 2004, 58% of revenue was earned from three customers: Marshall
Regional Medical Center ("MRMC"), Presbyterian Healthcare Services of New Mexico
("PHS") and Brownsville Surgical Hospital ("BSH"). MRMC provided revenue
totaling $823,000 or 20% of total revenue. Of this, 76% was from Ongoing
Accounts Receivable Management Services, 19 % was from Collection Agency
Services, 5% was from Claims Coding Services, and less than 1% was from
Consulting Services. PHS provided revenue totaling $833,000 or 20% of total
revenue. Of this, 54% was from Collection Agency Services, and 46% was from
Ongoing Accounts Receivable Management Services. BSH provided revenue of
$683,000 or 17% of total revenue. Of this, 89% was from Ongoing Accounts
Receivable Management Services, 8% was from Collection Agency Services, and 3%
was from Claims Coding Services.
During 2003, 79% of revenue was earned from two customers: Presbyterian
Healthcare Services of New Mexico ("PHS") and Brownsville Surgical Hospital
("BSH"). PHS provided revenue totaling $2,434,000 or 62% of total revenue. Of
this, 53% was from Collection Agency Services, and 47% was from Ongoing Accounts
Receivable Management Services. BSH provided revenue of $645,000 or 17% of total
revenue. Of this, 85% was from Ongoing Accounts Receivable Management Services,
7% was from Collection Agency Services, and 8% was from Claims Coding Services.
During 2002, 84% of revenue was earned from three customers: Presbyterian
Healthcare Services of New Mexico ("PHS"), Valley Baptist Medical Center
("VBMC"), and Brownsville Surgical Hospital ("BSH"). PHS provided revenue
totaling $2,246,000 or 65% of total revenue. Of this, 46% was from Collection
Agency Services, and 54% was from Ongoing Accounts Receivable Management
Services. VBMC provided revenue of $245,000 or 7% of total revenue. All of the
VBMC revenue was from Collection Agency Services. BSH provided revenue of
$428,000 or 12% of total revenue. Of this, 93% was from Ongoing Accounts
Receivable Management Services, and 7% was from Collection Agency Services.
16
LOSS OF SIGNIFICANT CUSTOMERS
On March 7, 2005, the Company received notice from Brownsville Surgical
Hospital (BSH) that effective April 15, 2005 they would be terminating the
claims billing and follow up, early stage patient balance collection, and coding
services portions of their accounts receivable management contract with UMC
dated October 31, 2000. Per BSH management, the hospital plans to bring these
services in house at that time. BSH management indicated their appreciation for
UMC's performance over the life of this contract, but believes that the hospital
will be able to provide these services more cost effectively in house. UMC will
continue to provide bad debt collection services for BSH. The cancelled portions
of this contract provided revenue of $662,000, $629,000 and $430,000, which
represented 16%, 16% and 13% of total revenue for the years 2004, 2003 and 2002
respectively.
On October 22, 2003 UMC announced the resignation of its key contact at
Presbyterian Healthcare Systems ("PHS"). On February 20, 2004 UMC announced that
it had been informed by new management at PHS that most of the business
outsourced to UMC would be re-bid, and that the remaining business would be
brought back in house in mid 2004. On March 15, 2004 PHS informed UMC that it
was not selected as one of the vendors to provide ongoing services for PHS. PHS
management stated that the reason UMC was not selected was because other vendors
had submitted proposals with fee percentages lower than those proposed by UMC.
UMC continued to receive placements of accounts from PHS through March 31, 2004,
and revenues from PHS ramped down rapidly through the end of 2004. This contract
provided revenues of $833,000, $2,434,000 and $2,246,000, which represented 20%,
62%, and 65% of total revenue for the years 2004, 2003, and 2002 respectively.
On May 30, 2002, the Company received notice from Valley Baptist Medical
Center (VBMC) terminating their accounts receivable management contract dated
March 13, 2000. The termination of the contract was pursuant to recommendations
from outside consultants to consolidate VBMC's outsourcing projects, and
according to VBMC management had nothing to do with UMC's performance. This
contract provided revenues of $9,000, $25,000 and $245,000, which represented
..2%, .6% and 7% of total revenue for the years 2004, 2003 and 2002 respectively.
MANAGEMENT'S PLAN WITH RESPECT TO LOST REVENUES
During the past several years, management has taken steps to lessen the
Company's concentration risk associated with its large customers. These steps
include, but are not limited to:
o In April 2002, the Company started up UMC's Coding Services Division. This
division generated revenue of $224,000, $183,000 and $117,000 during 2004,
2003 and 2002 respectively.
o In March 2003, the Company began development of its Electronic Medical
Records Storage service. The beta test of this product was completed in
September 2003, and the Company began offering this service to its
customers shortly thereafter.
o In March 2005, the Company began offering Chargemaster Review and Pricing
Comparison services.
17
o From 2000 to 2005 the annual budget for UMC's sales and marketing
department has increased from $0 to $273,000. In 2004 the Company's actual
expenses for sales and marketing were $293,000 compared to $233,000 in 2003
and $117,000 in 2002.
o From June 24, 2003 through March 1, 2005, the Company has executed the
following new contracts:
o On December 7, 2004 the Company executed a coding services contract
with a hospital in Central Texas.
o On October 29, 2004 the Company executed a contract for early stage
patient balance collections with a hospital in Central Texas.
o On October 6, 2004 the Company executed a coding services contract
with a hospital in East Texas.
o On October 1, 2004 the Company executed a contract for bad debt
collections with a hospital in West Texas.
o On August 26, 2004 the Company executed a contract for bad debt
collections with a hospital in Central Texas.
o On August 24, 2004 the Company executed a contract for early stage and
bad debt collections with a hospital in West Texas.
o On July 8, 2004 the Company executed a contract for bad debt
collections with a hospital in East Texas.
o On July 1, 2004 the Company executed a contract for bad debt
collections with a hospital in East Texas.
o On May 7, 2004 the Company executed a contract for day one medical
claims billing and follow up service, early stage patient balance
collection service, and bad debt patient balance collection service
with a hospital located in East Texas. This contract supercedes a
contract that was previously executed on February 23, 2004 for early
stage and bad debt patient balance collection services.
o On May 1, 2004 the Company executed a contract for bad debt second
collections with a hospital in South Texas.
o A collection services contract for early stage and bad debt patient
balance accounts was executed on April 9, 2004, with a hospital in
South Texas.
o An offsite electronic medical records storage contract with a hospital
in Central Texas was executed on March 17, 2004.
o A medical claims management contract for day one billing and follow up
was executed on March 12, 2004, with a hospital located in West Texas.
The term of this contract was only three months, and new placements to
UMC were discontinued on June 11, 2004.
o A collection services contract for early stage and bad debt patient
balance accounts was executed on February 23, 2004, with a hospital in
East Texas.
o A coding services contract with a hospital in West Texas was executed
on February 16, 2004.
o A medical claims management contract for day one billing and follow up
was executed on January 22, 2004, with a hospital located in West
Texas.
o A collection services contract for early stage patient balance
accounts was executed on December 18, 2003 with a hospital in South
Texas.
o An offsite electronic medical records storage contract with a hospital
in West Texas was executed on December 18, 2003.
o A coding services contract with a hospital in Central Texas was
executed on December 12, 2003.
18
o A collection services contract for bad debt patient balance accounts
was executed on December 10, 2003 with a hospital in South Texas.
o A coding services contract with two hospitals in Central Texas was
executed on November 28, 2003.
o A collection services contract for early stage patient balance
accounts was executed on November 20, 2003 with a hospital in West
Texas.
o A coding services contract for overflow coding was executed with a
hospital in East Texas was executed on November 5, 2003
o A collection services contract for bad debt patient balance accounts
was executed on September 15, 2003 with a hospital in West Texas.
o A medical claims management contract for claims follow up and patient
balance collections was executed on August 28, 2003 with a hospital
located in West Texas.
o A collection services contract for early stage patient balance
accounts was executed on August 6, 2003 with a hospital in West Texas.
o A medical claims management contract for day one billing and follow up
was executed on June 24, 2003, with a hospital located in Central
Texas. UMC management has received notice of this customer's intention
to cancel this contract at June 24, 2004 (the end of the initial
contract term), due to cost considerations.
With the loss of the PHS contract in 2004 and the loss of the BSH contract
in 2005, the Company will face a significant challenge in 2005 to maintain the
level of revenue that it produced in 2004. Management's forecast of revenue for
2005 from the Company's existing customers as of the date of this report plus
incentives from the Company's agreement with the Pampa Economic Development
Corporation is $2,733,000. The difference between this forecast and total 2004
revenue will have to be made up from new sales of services to new and existing
customers. As evidenced by the new contracts listed above, the investment that
UMC has made in sales and marketing over the past four years has produced
positive results. Revenue from contracts signed in 2004 or that were signed in
2003 and began production in 2004 accounted for $1.6 million or 39% of total
revenue in 2004. In 2005, management will continue to focus on marketing
traditional and new services to both existing and prospective customers. There
can be no assurance that UMC will attain the same level of new sales in 2005
that it attained in 2004, or that the operating margin on new business sold in
2005 will be consistent with past performance.
Management continues to vigorously pursue new business while rigorously
managing expenses without negatively impacting service levels.
19
INCENTIVE FINANCING RELATIVE TO RELOCATION OF OPERATIONS CENTER
During 1999 and the first seven months of 2000, UMC had experienced
increasing difficulty in recruiting and retaining medical billing and collection
staff in the Dallas area. This situation was the result of low unemployment and
strong competition from nearby major hospitals and physician groups for
experienced staff. Low unemployment and escalating competition for qualified
staff had resulted in an overall increase in hourly wage rates and turnover.
Effective July 28, 2000, UMC executed an Economic Development and
Incentive Agreement (the "Agreement"), with the Pampa Economic Development
Corporation ("PEDC"), (previously disclosed). Management entered into this
Agreement in order to: (a) create a new expense paradigm which includes reduced
hourly wages expense, (b) access a pool of applicants who are believed to be
capable of rapidly assimilating training in the job skills related to UMC's
business, and (c) put into place a facility with 20,000 square feet of space at
a cost far below that which would be incurred in the Dallas area.
In exchange for providing jobs within the city limits of Pampa, Texas, the
Agreement calls for the PEDC to provide the following incentives to UMC:
(a) an incentive payment of $192,000 which was made upon the closing of
the purchase of the new operations center facility in Pampa. The Agreement
includes a claw back provision whereby if UMC does not maintain a minimum of 30
full time equivalent employees ("FTEE") employed in its Pampa operations center
during any given year of the eight years of the Agreement beginning with the
year ended December 31, 2001, UMC will be required to remit $24,000 back to PEDC
for each such year. UMC met the FTEE requirement for this incentive in 2004,
2003 and 2002 and recognized $24,000 of the incentive as income at December 31st
of each year.
(b) an incentive payment of $40,000 per calendar year (for a maximum of
$320,000) so long as UMC provides a minimum average of 40 FTEE employed in its
Pampa operations center during each of the eight calendar years of the Agreement
commencing with the year ending December 31, 2001. UMC recognized $40,000 in
revenue from this incentive for each of the years 2004, 2003 and 2002.
(c) an incentive payment of $1,000 per job per calendar year (for a
maximum of $80,000) for each FTEE from the 41st up to and including the 50th
FTEE employed in its Pampa operations center during each of the eight calendar
years of the Agreement commencing with the year ending December 31, 2001. UMC
recognized $10,000 in revenue from this incentive for each of the years 2004,
2003 and 2002.
(d) an incentive payment of $500 per calendar year (with no cap or limit)
for each FTEE from the 51st and over employed in its Pampa operations center
during each of the eight calendar years of the Agreement commencing with the
year ending December 31, 2001. UMC recognized $13,500, $15,000 and $13,250 in
revenue from this incentive for 2004, 2003 and 2002 respectively.
(e) PEDC guaranteed up to $137,000 for the benefit of UMC's lender (the
"Lender"), relative to the purchase of the operations center facility in Pampa.
In addition, PEDC will pay to UMC $27,400 per year during each of the first five
20
years of the Agreement (for a maximum of $137,000) commencing with the year
ending December 31, 2001. After offsetting the total monthly payments made to
Lender during the preceding 12 months from this annual payment, UMC will remit
the balance to the Lender. On July 28, of 2004, 2003 and 2002 respectively, UMC
received $27,400 from the PEDC in payment of this incentive. Of this, $11,536,
$11,533 and $11,536 was remitted to National Bank of Commerce (the lien holder
on the building) as principal payment on the loan on the building in accordance
with The Agreement, for 2004, 2003 and 2002 respectively. PEDC will be released
from paying any and all unpaid annual payments if UMC defaults on its
obligations to its Lender or if UMC discontinues its operations in Pampa within
five years of July 28, 2000.
On August 21, 2000 UMC purchased a building in Pampa, located at 200 N.
Cuyler Street that serves as its Pampa operations center, and simultaneously
received payment of the relocation incentive totaling $192,000 (as specified in
paragraph (a) above). On December 31, 2000 UMC had 45 full time and 2 part time
employees at its Pampa operations center, and qualified for the initial
incentive payment as specified in paragraph (e) above. As of March 1, 2005 UMC
had 57 full time, and 13 part time employees at its Pampa operations center.
There can be no assurance that UMC will be successful in: (a) continuing
to meet the aforementioned minimum employment requirements to trigger incentive
payments, (b) maintaining the minimum employment requirements to prevent
triggering the aforementioned claw back provision, or (c) averting a default to
its Lender or discontinuing its operations in Pampa within five years to prevent
PEDC from being released from paying any and all unpaid annual payments to UMC
relative to the aforementioned terms of the PEDC Agreement.
SOFTWARE LICENSE PURCHASE COMMITMENT
In December 2004, the Company entered into an agreement with a software vendor,
in which UMC agreed to purchase five user licenses for two of the vendor's
products each year for two years. The agreement also gives UMC the ability to
purchase additional licenses each year at an agreed upon per license amount. In
accordance with the agreement, UMC paid the vendor $39,500 in December 2004 for
five user licenses to be used during 2005. UMC is also committed by the
agreement to pay an additional $39,500 in December of 2005 for five licenses to
be used during 2006.
MAINTENANCE AGREEMENT COMMITMENT
During 2002, the Company entered a maintenance agreement on leased mail
processing equipment, which requires quarterly payments through 2007. The total
commitments under the agreement are $6,420 for each of the years 2003 through
2006 and $4,815 in 2007. The Company paid $6,420, $6,420 and $1,605 during 2004,
2003 and 2002 respectively under this agreement.
CONTINGENT LIABILITY
On January 7, 2005 a personnel-related issue resulted in the resignation
of a UMC employee. Based on information received regarding the incident, UMC's
Board of Directors retained legal counsel to conduct an independent
investigation into the matter and to represent the Company in communications
with the former employee's attorney. As of the date of this filing, it appears
reasonably possible, that the Company will incur some expense to said former
employee in addition to legal fees in order to resolve this matter. Management
believes that the combined cost of legal fees and compensation could range from
$15,000 to $60,000. As of the date of this filing, the Company has received
invoices for legal fees relating to this matter totaling $13,400.
21
CRITICAL ACCOUNTING POLICIES
Accounting principles generally accepted in the United States of America
require the use of management's judgments and estimates in addition to the rules
and requirements imposed by the accounting pronouncements. More detailed
information about UMC's accounting policies is contained in Note B, Summary of
Significant Accounting Policies, to the Consolidated Financial Statements. Other
accounting policies not discussed here are described there, and readers should
review that information carefully. We have summarized below the accounting
policies that we believe are most critical to understanding UMC's financial
statements.
The Company reports financial information on a consolidated basis.
Therefore, unless there is an indication to the contrary, financial information
is provided for the parent company, United Medicorp, Inc., and its subsidiaries
as a whole. Transactions between the parent company and any subsidiaries are
eliminated for this purpose. UMC owns all of the capital stock of its
subsidiaries, and does not have any subsidiaries that are not consolidated. None
of UMC's subsidiaries are "off balance sheet", UMC has not entered into any "off
balance sheet" transactions, and UMC has no "special purpose entities".
The cost of software that is developed or purchased for internal use is
accounted for pursuant to AICPA Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
Pursuant to SOP 98-1, the Company capitalizes costs incurred during the
application development stage of software developed for internal use, and
expenses costs incurred during the preliminary project and the
post-implementation operation stages of development. During 2004, the Company
capitalized $25,460 in costs incurred for new internal software development that
was in the application development stage.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from these estimates.
The Company's billing and collection services revenue is recognized upon
receipt by the customer of payment from a third party payor or guarantor of a
patient's account and upon notification by the customer to the Company that such
payment has been received, or upon receipt of such payment by UMC. Coding
service revenue is recognized when the services are performed. Electronic
Medical Records Storage revenue is recognized when records are scanned into the
UMC coding website.
Factored accounts receivable are accounted for pursuant to SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 140"). Pursuant to SFAS No. 140, the Company treats
its factored accounts receivable as a sales transaction, and as such, no
liability is recognized for the amount of the proceeds received from the
transfer of the accounts receivable. UMC has a contingent liability to
repurchase any invoices that remain unpaid after 90 days. At December 31, 2004
UMC had no factored invoices.
22
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, 2004 2003 2002
----------------------------------- ----------- ----------- -----------
Revenue......................................... 100.0% 100.0% 100.0%
----------- ----------- -----------
Wages and benefits.............................. 63.4 68.3 67.3
Selling, general and administrative............. 20.5 18.6 19.6
Office and equipment rental..................... 0.4 0.5 0.6
Depreciation and amortization................... 4.0 2.8 2.4
Interest, net, and other income................. 0.7 0.5 0.7
Professional fees............................... 1.8 2.3 1.8
Provision for Doubtful Accounts................. 1.5 -- --
Provision for income tax expense (benefit)...... (0.5) (0.4) --
----------- ----------- -----------
Total expenses.................................. 91.8 92.6 92.4
----------- ----------- -----------
Net income (loss)............................... 8.2% 7.4% 7.6%
=========== =========== ===========
2004 COMPARED TO 2003
Revenues increased $198,000 or 5% primarily due to the following:
o Ongoing Accounts Receivable Management Services revenue of $2,468,000 in
2004 increased by $538,000 compared to 2003 as a result of multiple
factors. During 2004, the Company received $637,000 from an ongoing
accounts receivable management contract that was signed May 7, 2004. The
Company also recognized $467,000 in revenue from a short-term ongoing
accounts receivable management contract that was signed March 11, 2004. The
term of this contract was three months, and new placements to UMC were
discontinued on June 11, 2004. The Company received $102,000 from an
ongoing accounts receivable management contract that was signed January 22,
2004, and was cancelled on October 4, 2004. The Company saw increased
revenue from an ongoing accounts receivable management contract that was
signed October 31, 2000. This contract provided revenues of $610,000 and
$547,000 for 2004 and 2003 respectively. The Company recognized increased
revenue from two ongoing accounts receivable management contracts that were
signed during 2003 and were completed or cancelled in 2004. Revenue from
these contracts totaled $244,000 and $161,000 in 2004 and 2003
respectively. The Company also recognized $18,000 in increased revenue from
an ongoing accounts receivable management contract that was signed November
14, 2003. These increased revenues were partially offset by decreased
revenue from the PHS contract that was cancelled March 31, 2004. Total
Ongoing Accounts Receivable Management Services revenue from this contract
was $386,000 and $1,135,000 in 2004 and 2003 respectively. The Company also
saw decreased revenue from a contract that was signed April 5, 2002 and was
also discontinued on March 31, 2004 and from a contract that was cancelled
in December 2002. Total revenue from these contracts was $3,000 and $86,000
in 2004 and 2003 respectively.
23
On March 7, 2005, the Company received notice from Brownsville Surgical
Hospital (BSH) that effective April 15, 2005 they would be terminating the
claims billing and follow up portions of their accounts receivable
management contract with UMC dated October 31, 2000. The claims billing and
follow up portion of this contract provided Ongoing Accounts Receivable
Management Service revenue of $610,000, $547,000 and $400,000, in 2004,
2003 and 2002 respectively, which represented 25%, 28% and 23% of total
Ongoing Accounts Receivable Management Services revenue for these years.
Assuming that there are no other significant changes in the existing volume
and mix of accounts placed by the Company's customers as of December 31,
2004, management believes that Ongoing Accounts Receivable Management
Services will generate revenues from such customers of approximately $1.5
million in 2005.
o Backlog Accounts Receivable Management Services revenue of $16,000 in 2004
increased by $16,000 compared to 2003 as a result of the placement of
backlog claims received in June of 2004 in conjunction with the startup of
an ongoing accounts receivable management contract that was signed May 7,
2004. Management does not anticipate any significant revenue from Backlog
Accounts Receivable Management Services in 2005.
o Collection Agency Services revenue of $1,264,000 in 2004 decreased by
$401,000 compared to 2003 as a result of the following: The Company saw a
decrease in revenue due to the discontinuation of the PHS contract on March
31, 2004. Total Collection Agency Services revenue from this contract was
$446,000 and $1,298,000 in 2004 and 2003 respectively. The Company also saw
decreased revenue from a contract that was signed April 5, 2002 and was
also discontinued on March 31, 2004. Revenue from this contract totaled
$51,000 in 2004 and $100,000 in 2003. These decreases in revenue were
partially offset by $300,000 in revenue from new contracts executed in
2004. The Company also saw increased revenue from a two collection agency
services agreements executed April 18, 2003 and August 28, 2003. Combined
revenue from these contracts was $281,000 and $88,000 during 2004 and 2003
respectively. Combined revenue from all other contracts was $186,000 in
2004 and $178,000 in 2003.
On March 7, 2005, the Company received notice from Brownsville Surgical
Hospital (BSH) that effective April 15, 2005 they would be terminating the
early stage patient balance collection portion of their accounts receivable
management contract with UMC dated October 31, 2000. The early stage
patient balance collection portion of this contract provided Collection
Agency Services revenue of $30,000, $27,000 and $20,000, in 2004, 2003 and
2002 respectively, which represented 2%, 2% and 1% of total Collection
Agency Services revenue for these years
Assuming that there are no other significant changes in the existing volume
and mix of accounts placed by the Company's customers as of December 31,
2004, management believes that Collection Agency Services will generate
revenues from such customers of approximately $900,000 in 2005.
o Coding Services revenue of $224,000 in 2004 increased by $41,000 or 23% due
primarily to fees from coding consulting services provided in conjunction
with an ongoing accounts receivable management contract that was executed
May 7, 2004. Total coding fees provided by this contract were $55,000. Fees
from the Company's web based off-site coding services remained level at
$91,000 in both 2004 and 2003. Coding fees from other on-site coding
services decreased from $92,000 in 2003 to $78,000 in 2004.
24
During the first quarter of 2005, UMC began offering additional
chargemaster review and pricing comparison to its line of coding related
services. Assuming that there are no significant changes in the types of
coding services provided to current customers as of 12/31/04, and the
addition of a moderate amount of new customers for the Company's
traditional and new coding services, management believes that Coding
Services will generate revenues from such customers of approximately
$551,000 in 2005.
o Other revenue of $126,000 in 2004 increased by $2,000 or 1.6% compared to
2003. Other revenue in 2004 and 2003 was comprised primarily of incentives
received in accordance with the agreement with the PEDC. Assuming that the
Company continues to meet the incentive requirements, this agreement will
generate approximately $112,000 in incentive revenue in 2005.
Wages and benefits expense decreased $65,000 or 2.4%. Salary and wage
expense decreased by $7,000 due primarily to reduced average headcount during
2004 as compared to 2003. Other compensation decreased as a result of the
recognition of $37,500 in compensation expense recognized in 2003 related to a
stock purchase warrant. Payroll tax expense decreased by $11,000 due primarily
to a decrease in the Company's state unemployment tax rate. Benefits cost
increased by $20,000 as a result of more employees being eligible for benefits.
During 2004, an average of 78 employees were covered under the Company's health
insurance plan compared to 71 in 2003. In 2004, bonus expense decreased by
$29,000 as compared to 2003. During 2004 total full time employee headcount
averaged 87 compared to 95 during 2003. As of March 1, 2005, UMC had a total of
61 full time and 17 part time employees. Assuming no significant change in the
Company's core services, management expects that wages and benefits should
remain at approximately 64% of revenues in 2005.
Selling, general and administrative ("SG&A") expense increased $114,000 or
16% due to several factors: Taxes and insurance expense increased by $40,000 due
to accruals for property and other taxes. Software maintenance expense increased
$38,000 due to an increase in demand for system changes as a result of new
customer startups and associated customization required to accommodate
acceptance of new customer claims and report files and an increase in the number
of claims billed through a third party clearinghouse; sales commission expense
increase by $32,000 due to the addition of several new customers; other employee
costs increased by $29,000 due to the relocation of the Company's Vice President
of Sales from Midland, Texas to Garland, Texas; Contract labor expense increased
by $10,000 due to contract labor used on-site at a customer facility; Theses
increases were partially offset by decreases in telephone $8,000 as a result of
reduced head count in the Company's collection division during the year; travel
and entertainment $14,000 as a result of less travel required with the
relocation of the Company's Vice President of Sales and factor fees $15,000 due
to the Company not factoring invoices after the first quarter of 2004. All other
SG&A expenses increased by a combined $2,000 in 2004.
Assuming no significant change in the Company's core services, management
expects that SG&A should remain at approximately 19% of revenues in 2005.
Office, vehicle and equipment rental expense decreased $3,000 or 15% in
2004 as compared to 2003 primarily as a result of the maturity of an auto lease
in 2003. Assuming no significant changes in office space and equipment leased at
12/31/04, management expects lease and rental expense to be less than 1% of
revenues in 2005.
25
Depreciation and amortization expense increased $57,000 or 52% in 2004
primarily as a result of the addition of approximately $404,000 in leased and
purchased fixed assets during 2003. Management expects depreciation and
amortization expense to be approximately 4% of revenues in 2005.
Professional fees expense decreased $16,000 or 18% in 2004 primarily as a
result of legal fees paid during 2003 in connection with a dispute with UMC's
former health insurance provider. Management expects professional fees to be
approximately 2% of revenues in 2005.
Interest, net increased $8,000 or 40% during 2004 primarily as a result of
the addition of a capital lease on new phone equipment in September of 2003.
Management expects interest expense to be less than 1% of revenue in 2005.
Provision for doubtful accounts and notes increased $59,000 a result of
receivables reserved during the third and fourth quarters of 2004.
Tax benefit Prior to 2003, UMC had not booked a tax asset to reflect any
portion of the value of UMC's net operating loss ("NOL") carryforwards, due to
the uncertainty of the benefit being realized. However, due to the Company's
consistent profitability for the past four years, and management's projected
profitability in 2005, management believes it to be more likely than not that a
portion of the value remaining in the Company's NOLs will be realized. At
December 31, 2003, the Company recorded a tax asset and an income statement tax
benefit of $18,000 that represented the estimated value of the NOLs that would
be utilized in 2004. The actual value of the NOL's utilized in 2004 was
approximately $88,000. UMC's estimate of the NOL that will be utilized in 2005
is $41,750 and has increased the recorded tax asset accordingly, which resulted
in an income tax benefit of $23,750 in 2004.
Liquidity and Capital Sources
At December 31, 2004, the Company's liquid assets, consisting of cash,
totaled $264,000 compared to $63,000 at December 31, 2003. Working capital was
$628,000 at December 31, 2004 compared to $324,000 at December 31, 2003. Working
capital increased primarily due to the net operating income for the year ended
December 31, 2004 offset by capital investments in equipment, software and
building improvements.
Cash flow from operations in 2004 provided cash of $250,000, compared to
$165,000 provided from operations in 2003. This increase is primarily due to the
2004 net operating income of $338,000 increased by depreciation ($127,000),
amortization ($38,000), and provision for doubtful accounts ($60,000), an
increase in accrued liabilities ($30,000) offset by non-cash incentive income
recognized ($24,000) an increase in accounts receivable ($177,000) prepaid
expenses ($62,000) restricted cash ($14,000) and factor reserve ($3,000) and
decreases in accounts payable ($54,000) and payables to customers ($9,000). In
2004, cash flow from operations was supplemented by incentives received from the
Pampa Economic Development Commission to cover working capital and liquidity
requirements.
Investing activities in 2004 consisted of the purchases of furniture,
fixtures, equipment, building improvements, and the sale of a company automobile
and certain computer equipment. Total cash used for investments was $72,000, of
which $37,000 was used for the purchase of furniture, fixtures and equipment,
$39,000 was used to purchase and develop software and $4,000 was for the
purchase of building improvements. This use of cash was partially offset by
$8,000 in proceeds from the sale of Company automobile and certain computer
equipment. Total cash used in investing activities during 2003 was $214,000. The
Company's fixed assets are in good working order and sufficient to support
continuing operations.
26
Financing activities in 2004 consisted of total net proceeds from two
unsecured lines of credit from two banks of $103,000, borrowing for the purchase
of new accounting software in the amount of $12,000, cash used for the purchase
of treasury stock in the amount of $1,500 and principal payments on capital
lease obligations and notes payable which used cash of $91,000.
On December 28, 1999, the Company executed a $500,000 recourse factoring
agreement, which may be terminated by either party with ten days notice. The
agreement is secured by all of the Company's non-factored accounts receivable
and was previously personally guaranteed by Peter Seaman, Chairman and CEO. The
factoring company released this personal guarantee on December 23, 2003. Other
significant terms of the factoring agreement include recourse for invoices
remaining unpaid at 90 days, interest at prime plus 2.5%, and a factoring fee of
1% of the face value of each invoice. The Company had no factored invoices at
12/31/2004.
During 2003, the Company applied and was approved for two $100,000
unsecured lines of credit, with two different banks. The first line was approved
July 17, 2003, and carries an annual interest rate of prime plus 6 3/4 %. The
outstanding balance on this line was $99,000 at December 31, 2004. The second
line of credit was approved July 30, 2003 and bears interest at an annual rate
of prime plus 2%. The outstanding balance on this line was $100,000 at December
31, 2004.
Despite the loss of the contracts as described under LOSS OF SIGNIFICANT
CUSTOMERS above, management believes that current cash and cash equivalents and
projected cash flows from operations together with the Company's lines of
credit, factoring agreement, incentives under the Economic Development and
Incentive Agreement, capital leases and other potential financing should be
sufficient to support the Company's cash requirements through fiscal 2005.
27
CONTRACTUAL OBLIGATIONS
The following table sets forth UMC's contractual obligations at December
31, 2004, for the periods shown:
Within
Contractual Obligations Total 1 Year 2-3 Years 4-5 Years Thereafter
------------------------------------- ---------- ---------- ---------- ---------- ----------
Debt ................................ $ 422,679 $ 103,782 $ 164,882 $ 75,014 $ 79,001
Operating leases .................... 39,225 18,570 20,685 -- --
Purchase commitments ................ 39,500 39,500 -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations... $ 501,404 $ 161,852 $ 185,567 $ 75,014 $ 79,001
========== ========== ========== ========== ==========
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No.123 (Revised 2004), "Share-Based
Payment," "(SFAS 123(R)". SFAS 123(R) is a revision of FASB Statement 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. The Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost is to be recognized over the
period during which an employee is required service in exchange for the award.
This statement is effective for the Company as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005 and the
Company will adopt the standard in the third quarter of fiscal 2005. UMC does
not expect a material effect on its financial condition, results of operations
or cash flows.
28
2003 COMPARED TO 2002
Revenues increased $463,000 or 13% primarily due to the following:
o Ongoing Accounts Receivable Management Services revenue of $1,930,000 in
2003 increased by $193,000 compared to 2002 as a result of multiple
factors. The Company saw an increase in revenue from the secondary claims
portion of an ongoing accounts receivable management services contract that
was signed March 22, 2000. Revenues from secondary claims processed under
this contract were $856,000 and $796,000 for 2003 and 2002 respectively.
This increase in revenue was offset by reduced revenues from the primary
claims processed under this contract. Revenues from such primary claims
totaled $280,000 and $409,000 for the years 2003 and 2002 respectively. The
Company also saw increased revenue from an ongoing accounts receivable
management contract that was signed October 31, 2000. This contract
provided revenues of $547,000 and $400,000 for 2003 and 2002 respectively.
The Company recognized revenue of $218,000 from four new ongoing accounts
receivable management contracts that were signed during 2003. This revenue
was partially offset by revenue recognized during 2002 from four contracts
that were cancelled during 2002 or early 2003. Total revenue from these
contracts was $29,500 and $135,000 in 2003 and 2002 respectively.
o Backlog Accounts Receivable Management Services revenue of $0 in 2003
decreased by $3,000 compared to 2002 as a result of the winding down of a
Backlog medical claims management contract executed on March 22, 2000. This
contract generated revenues of $0 and $3,000 in 2003 and 2002 respectively.
o Collection Agency Services revenue of $1,665,000 in 2003 increased by
$215,000 compared to 2002 as a result of the following: The Company saw an
increase in revenue from the bad debt portion of a collection agency
services contract executed October 13, 2000. The bad debt portion of this
contract generated revenue of $927,000 and $694,000 in 2003 and 2002
respectively. The Company also saw increased revenue from the early out
patient balance portion of this contract. Revenue from the early out
portion of the contract totaled $371,000 and $346,000 in 2003 and 2002
respectively. The increased revenue from this contract was offset by
decreased revenue from a collection agency services contract executed in
March of 2000 that was canceled in May 30, 2002. This contract provided
revenue of $25,000 and $245,000 in 2003 and 2002 respectively. The Company
also recognized revenue of $202,000 from new contracts signed during 2003.
This revenue was partially offset by revenue recognized in 2002 from
contracts that were cancelled in 2002 or in early 2003. The revenue
generated by these contracts was $23,000 and $60,000 in 2003 and 2002
respectively.
Coding Services revenue - In April of 2002, Janice K. Neal joined UMC as
Vice President of Coding Services, and the Company began providing coding
and related services to various hospitals. Revenue from coding services of
$183,000 during 2003 increased by $66,000 compared to 2002, due primarily
to having a full year of operation in 2003, compared to nine months during
2002.
o Other Revenue of $124,000 in 2003 decreased by $8,000 or 6% compared
to 2002. Other revenue in 2003 and 2002 was comprised primarily of
incentives received in accordance with the agreement with the PEDC.
29
Wages and benefits expense increased $350,000 or 15% primarily due to
increased headcount as a result of increased business requirements. During 2003
total full and part time employee headcount averaged 107 compared to 80 during
2002. As of March 1, 2004, UMC had a total of 98 full time and 21 part time
employees. Total wage, salary and bonus expense of $2,098,000 in 2003 increased
by $211,000 compared to 2002 primarily as a result of the increased headcount.
Payroll tax expense of $199,000 in 2003 increased by $39,000 compared to 2002 as
a result of increased salary and wages, and an increased state unemployment tax
rate during 2003. Employee benefits expense of $368,000 increased by $99,000
compared to 2002 as a result of an increased number of employees being eligible
to participate in the Company's benefit plans, and an increase in the cost of
providing health insurance benefits. During 2003, an average of 71 employees
were covered under the Company's health insurance plan compared to 62 in 2002.
The average cost per employee per month for health insurance was $269 in 2003
compared to $234 in 2002. These changes resulted in an increase cost in 2003 of
approximately $50,000. The Company also paid $12,000 in additional health
insurance premium during April 2003 as a result of the dispute with UMC's former
health care insurance provider. The Company also recognized $37,500 in
compensation expense related to a stock purchase warrant for 1,500,000 shares of
UMC common stock that was issued to the Company's CEO, Pete Seaman, in February
2000, but was not eligible for exercise until certain conditions were met in
December 2003.
Selling, general and administrative ("SG&A") expense increased $52,000 or
8% due to a net increase in telephone, postage, printing, and office supplies of
$25,000 which was primarily attributable to and increased number of letters
mailed and phone calls made as a result of increased collection agency services
business volume; and increases in travel $21,000 which was primarily
attributable to an increased number of sales personnel and increased number of
customers to service; software maintenance $9,000; taxes and insurance $8,000;
recruiting $6,000; and sales commissions $5,000, which were offset by decreases
in factoring fees ($11,000), UMC did not factor invoices during the fourth
quarter of 2003; and contract labor ($15,000), UMC used contract labor at a
customer location in 2002 but not in 2003. All other expenses showed a net
increase of $4,000.
Office, vehicle and equipment rental expense decreased $600 or 3% in 2003
as compared to 2002.
Depreciation and amortization expense increased $28,000 or 34% in 2003
primarily as a result of the addition of approximately $404,000 in leased and
purchased fixed assets during 2003
Professional fees expense increased $29,000 or 45% in 2003 primarily as a
result of legal fees paid in connection with a dispute with UMC's former health
insurance provider.
Interest, net increased $900 or 4% during 2003 compared to 2002.
Provision for doubtful accounts and notes decreased $1,700 due to good
collection experience in 2003.
30
Other expense decreased $4,000 as a result of losses realized on the sale
of company assets in 2002. No such losses were recognized in 2003.
Tax benefit Prior to 2003, UMC had not booked a tax asset to reflect any
portion of the value of UMC's net operating loss ("NOL") carryforwards, due to
the uncertainty of the benefit being realized. However, due to the Company's
consistent profitability for the three preceding years, and management's
projected profitability in 2004, management believed it to be more likely than
not that a portion of the value remaining in the Company's NOLs will be
realized. At December 31, 2003, the Company recorded a tax asset and an income
statement tax benefit of $18,000 that represented the estimated value of the
NOLs that would be utilized in 2004.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....
The Company qualifies as a small business issuer as defined in Rule 12b-2
of the Securities Exchange Act of 1934. As such, the Company is not required to
provide information related to the quantitative and qualitative disclosures
about market risk.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements appear beginning at page
47.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with UMC's accountants
during the reporting period.
Item 9A. Controls and Procedures
In order to ensure that the information UMC must disclose in its filings
with the Securities and Exchange Commission is recorded, processed, summarized
and reported on a timely basis, UMC has adopted disclosure controls and
procedures. UMC's Chief Executive Officer, Peter W. Seaman, and UMC's Chief
Financial Officer, Nathan E. Bailey, have reviewed and evaluated UMC's
disclosure controls and procedures as of March 10, 2005, and concluded that
UMC's disclosure controls and procedures are appropriate and that no changes are
required at this time.
There have been no significant changes in UMC's internal controls, or in
other factors that could affect UMC's internal controls, since March 10, 2005.
Item 9B. Other Information
None
31
PART III
Item 10. Directors and Executive Officers of the Registrant
PETER W. SEAMAN (55) was elected President and Chief Executive Officer on
February 10, 1994, and Chairman of the Board of Directors on November 12, 1996.
Mr. Seaman joined the Company on July 17, 1991 as Vice President and Chief
Financial Officer and was elected to the Board of Directors on August 12, 1991.
Mr. Seaman's prior employment includes serving as Director of Business
Development for TRW Receivables Management Services from March 1989 to June
1991, and Vice President of Planning and Systems Development for the Accounts
Receivable Management Division of the Chilton Corporation from March 1986 to
March 1989. Prior to joining the Chilton Corporation, Mr. Seaman was Vice
President and Chief Financial Officer for Corliss, Inc., a collection systems
and services company. Before that, Mr. 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. Mr. Seaman was
elected to the Board of Directors of the South Texas Chapter of the Healthcare
Financial Management Association on June 1, 2001.
MICHAEL P. BUMGARNER (61) was elected to the Board of Directors on
November 12, 1996. Mr. Bumgarner is President/CEO of msi21, Inc., a Dallas,
Texas based medical management consulting firm positioned nationally to deliver
financing and funding, merger and acquisition, ongoing regulatory, and
reimbursement compliance and other management services to all types of medical
facilities through its strategically located Professional Affiliates. Mr.
Bumgarner's prior experience includes Chairman/CEO of Beacon Enterprises, Inc.,
a holding company which he co-founded in May, 1994 with interests in a number of
healthcare concerns including GSS "Gold Seal Services", one of the largest home
healthcare providers in the San Antonio area. GSS was sold to a Dallas based
public company in December 1996. Prior to starting Beacon Enterprises, Mr.
Bumgarner worked as a consultant for a number of national distributors of
cardiovascular equipment in the southwest United States. From 1977 to 1986, Mr.
Bumgarner was founder and president of a national healthcare company providing
arrhythmia monitoring by telephone to patients in their homes. During this
period, he developed the "continuous loop memory" arrhythmia transmitter and
received a patent registered in the U.S. Patent Office. After graduating from
Auburn University, he was honorably discharged from the USAF as a Captain and
carried his electronics background to the medical industry where he has spent
over 30 years gaining extensive senior business and management experience.
JOHN F. LEWIS (58) was elected to the Board of Directors on November 12,
1996, and currently serves as the chairman of the board's compensation
committee. Mr. Lewis is President/CEO of Lewis Consulting, LLC., a national
health care policy and financial assessment firm, specializing in Medicare and
Managed Care environments for over 18 years in both the private and governmental
sectors. From 1992 to 1996, Mr. Lewis served as Health Advisor to the office of
the Lt. Governor of the U.S. Virgin Islands, initiating and developing
healthcare strategies under the Health Care Reform for the Virgin Islands. From
1988 to 1992, Mr. Lewis was Assistant Vice President for Medicare Operations at
Seguros de Servicios de Salud, the Medicare Part B Carrier for Puerto Rico and
the Caribbean. Mr. Lewis holds his degree in Business Administration from the
American College of Switzerland and his MBA, University of Geneva, School of
Business and Socio-Economics, Switzerland. Mr. Lewis is nationally certified in
Healthcare Compliance, and has expertise in HIPAA compliance and issues.
32
VERNON C. ROSENBERY (76) was elected to the Board of Directors on November
13, 2002, and elected to the Compensation Committee on January 26, 2003. Mr.
Rosenbery has been retired since July 1, 1993. From 1988 to 1993 Mr. Rosenbery
performed consulting services for Stangeland Enterprises, an entity that had
purchased two companies from Mr. Rosenbery in 1988. These companies were Foley
Construction Company, and Clinton Engineering Company. These companies performed
earth moving, paving, and underground construction work and were located in
Clinton, Iowa. Mr. Rosenbery was either employed by, or owned these businesses
from 1960 to 1988. From 1955 to 1960 Mr. Rosenbery was a Resident Construction
Engineer for the Iowa Department of Transportation. From 1952 to 1955 Mr.
Rosenbery was employed as a plant engineer for the Dupont Company in Clinton,
Iowa. Mr. Rosenbery holds a Bachelor of Science degree in Civil Engineering from
the University of Illinois.
MARK A. MCVAY (42) was elected to the Board of Directors, and then elected
to the Audit Committee, on March 24, 2003. Mr. McVay is the chairman of the
Audit Committee. Mr. McVay is the Chief Financial Officer for Cree Companies, in
Pampa, Texas, where he has been employed since July 2003. His responsibilities
include the management and oversight of various privately owned companies in the
oil and gas and retail industries. Prior to his employment with the Cree
Companies, Mr. McVay was the Assistant Superintendent of Finance for the Pampa
Independent School District ("PISD") in Pampa, Texas, where was employed from
1989 to July 2003. His responsibilities with PISD included management and
oversight of $20 million budget with approximately 500 full time employees,
coordination of annual independent audit and management of PISD's self-funded
employee health insurance plan. Prior to his employment with PISD, Mr. McVay
worked in public accounting for Mike Ruff, CPA (1987 - 1989) and Stewart
Ferguson & Robinette, CPA's (1984 - 1987) where he performed audit and income
tax services. Mr. McVay holds a Bachelors degree in Business Administration from
West Texas State University and is a Certified Public Accountant. The UMC Board
of Directors believes that Mr. McVay meets the requirements to qualify as the
"audit committee financial expert" as defined under the Sarbanes-Oxley Act of
2002.
CLINT D. OWEN (45) was elected Vice President of Sales and Marketing on
May 1 2003. Mr. Owen was previously employed by Business Office Systems and
Solutions ("BOSS"), where he was a partner, and served as CEO from January 1996
through March 2003. Prior to his employment with BOSS, Mr. Owen was a National
Sales Executive with Nationwide Credit, Inc., from 1994 through December 1995.
From 1991 through July 1994 Mr. Owen was Sales Manager and Vice President of
Sales for Spectra Claims Collection Services and CRW Financial, Inc. Mr. Owen
began his career in healthcare collection services with TRW in May of 1989.
NATHAN E. BAILEY (44) was elected Vice President and Corporate Controller
on March 25, 2002 with primary responsibility for Finance and Accounting. Mr.
Bailey Joined the Company on August 27, 2000 as the Corporate Controller. Mr.
Bailey has previously served as an accountant for Engineered Carbons, Inc,
Borger, Texas from 1998 to 2000; Controller for Nunn Manufacturing, Amarillo,
Texas 1998; General Manager and Controller for West Texas Ford Lincoln Mercury,
Inc., Pampa Texas, from 1992 to 1998; and Controller for The Texas Cattle
Feeders Association in Amarillo, Texas from 1990 to 1992. Mr. Bailey practiced
public accounting from 1985 to 1990 with KPMG Peat Marwick, and H.V. Robertson
and Co. both in Amarillo, Texas. Mr. Bailey holds a BBA in accounting from West
Texas State University and is a Certified Public Accountant.
33
JANICE K. NEAL (51) was elected Vice President of Coding Services on April
1, 2002. Jan was previously employed as a coding consultant with Parrish, Moody
and Fikes, P.C., from 2000 through March 2002. From 1996 through 2000, Mrs. Neal
was self-employed, providing coding consulting services to hospitals. From 1991
through 1996, Mrs. Neal worked in the medical records department for a small
rural hospital. Mrs. Neal served as The Director of Medical Records and
Utilization for a large city hospital from 1988 through 1991, and as the
Utilization Review Manager of another large hospital from 1986 through 1988.
From 1985 through 1986, Mrs. Neal was employed by the Texas Medical Foundation,
the peer review organization for the State of Texas. Mrs. Neal has an
Associate's degree from The El Centro School of Nursing in Fort Worth and is an
RN and a Certified Coding Specialist (CCS).
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT OF 1934
Pursuant to Section 16(a) of the Securities Act of 1934 and the rules
issued thereunder, the Company's executive officers and directors are required
to file with the Securities and Exchange Commission reports of ownership and
changes in ownership of the Common Stock. Copies of such reports are required to
be furnished to the Company. All required forms have been timely filed.
34
Item 11. Executive Compensation
Set forth below are tables showing in summary form, the compensation paid
for the years shown in the table to Mr. Seaman, Ms. Neal and Mr. Owen, and
exercise and year end valuation information pertaining to stock options and
warrants granted to each. No other executive officer of the Company received
total annual salary and bonus in excess of $100,000 in the fiscal years 2004,
2003 or 2002:
SUMMARY COMPENSATION TABLE
Long Term Compensation
-----------------------------------------------
Annual Compensation Awards Payouts
------------------------------- ------------------------------------- -------
Other Restricted Securities
Name Annual Stock Underlying LTIP All Other
and Principal Compen- Award(s) Options/ Payouts Compen-
Position Year Salary ($) Bonus ($) sation ($) ($) Warrants (#) ($) sation ($)
- ----------------------------------------------------------------------------------------------------------------
Peter W. Seaman 2004 168,000 38,587 (1) - - - - -
Chairman and 2003 160,000 37,460 (2) - - - - 37,500 (4)
CEO 2002 153,708 29,136 (3) - - - -
Janice K. Neal 2004 107,059 9,143 (1) - - - - -
Vice President 2003 103,000 6,000 (2) - - - - -
Of Coding Svcs.
Clint Owen 2004 114,384 (5) - - - - 17,926 (6)
Vice President
Of Sales
(1) Represents 2003 bonus paid in 2004
(2) Represents 2002 bonus paid in 2003
(3) Represents 2001 bonus paid in 2002
(4) Represents value of stock purchase warrant that became exercisable in
December 2003
(5) Includes salary and commissions
(6) Represents taxable moving expenses paid by UMC
35
AGGREGATED OPTION/WARRANT EXERCISES
AND FISCAL YEAR-END OPTION/WARRANT VALUES
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-The-Money
Acquired Options/Warrants at Fiscal Options/Warrants at
on Value Year-End (#) Fiscal Year-End (4) ($)
Exercise Realized --------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------- --------- -------- ----------- ------------- ----------- -------------
Peter W. Seaman 2,000,000 $ 62,500 1,000,000 -- $3,000 --
Janice K. Neal -- -- 133,333 66,667 6,000 3,000
Clint D. Owen -- -- 66,667 133,333 1,533 3,067
(4) The last reported sale of the Company's Common Stock as reported on the
NASD OTC Bulletin Board as of December 31, 2004 was $0.06 per share. Value
is calculated on the basis of the difference between the option exercise
price and $0.06 multiplied by the number of shares of Common Stock
underlying the option or warrant.
COMPENSATION OF DIRECTORS
An officer of the Company who also serves as a Director of the Company
receives no additional compensation for serving as a Director or as a member or
chair of a committee. Beginning in 2002 non-employee Directors received
compensation for attendance of board meetings, in addition to reimbursement for
expenses of meeting attendance. The per-meeting compensation for non-employee
Directors was $750 in 2004 and 2003, and $500 in 2002. The Company paid director
fees of $15,750, $12,500 and $5,000 in 2004, 2003 and 2002 respectively.
Pursuant to the 1995 Stock Option Plan, each non-employee director shall
receive nonqualified stock options for the purchase of 25,000 shares of Common
Stock. These options shall be granted on the first and each subsequent
anniversary of the approval of the 1995 Stock Option Plan by stockholders, as
long as the director serves on the Board. The exercise price shall be the fair
market value of the Common Stock on the date the nonqualified stock options are
granted. One half of the option shall be exercisable immediately and the
remainder of the option shall become exercisable on the first anniversary date
of the grant. All options shall expire on the tenth anniversary of the date
granted.
Subsequent to stockholder approval of the 1995 Stock Option Plan, the
Board of Directors determined that in light of the condition of the Company
immediately prior to November 12, 1996 when the then current members of the
Board of Directors were elected, the provisions of the 1995 Stock Option Plan
regarding director compensation were inadequate to attract and retain qualified
board members. As such, on April 1, 1997, warrants to purchase a total of
1,200,000 shares of the Company's common stock at $0.08 per share were issued to
the three non-employee board members with each member receiving a warrant for
400,000 shares. These warrants were issued in lieu of the options that would
have been issued to the board members under the 1995 Stock Option Plan. One of
the board members resigned on February 26, 2001; the warrants issued to him
expired on May 26, 2001. These warrants are exercisable 33 1/3% immediately, 66
2/3% after twelve months from the effective date of the grant, and 100% after
twenty-four months from the effective date of the grant. These warrants expire
on the earlier of (a) March 31, 2007, (b) the date on which the Director's
services are terminated for cause, (c) three months after the expiration of the
Director's term, resignation from the Board of Directors, or termination of the
Director due to the sale of the Company or (d) twelve months after the services
as a Director are terminated by reason of the Director's death of disability.
None of these warrants had been exercised as of December 31, 2004.
36
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Messrs. Lewis, McVay
and Rosenbery. None of the members of the Company's Compensation Committee
served as a member of the compensation committee or other board committees
performing similar functions of any other registered entity in 2004.
37
Item 12. Securities Ownership of Certain Beneficial Owners and Management
The following table and the notes thereto set forth certain information
regarding the beneficial ownership of shares of the Company's Common Stock as of
March 3, 2005 by (i) each current director; (ii) all current directors and
officers of the Company as a group; and (iii) each person known to the Company
to own beneficially more than five percent (5%) of the currently outstanding
Common Stock. Unless there is a footnote to the contrary, sole voting and
investment power in the shares owned are held either by the named individual
alone or by the named individual and his or her spouse:
Number of Shares of United Medicorp, Inc. Common Stock (1)
----------------------------------------------------------
Shares Exercisable
Beneficially Warrants/ Percent of
Name Owned Options (3) Class (1)
- ---- ----- ----------- ----------
Mercury Asset Management plc. (2) 8,067,200 -- 26.3%
33 King William Street
London EC4R 9AS Great Britain
Tambura Limited 1,484,000 -- 4.8%
Rue du Moulin
Sark, Channel Islands
Peter W. Seaman 2,160,000 1,000,000 9.9%
Michael P. Bumgarner 100,000 400,000 1.6%
John F. Lewis -- 400,000 1.3%
Vernon Rosenbery 1,160,100 16,667 3.8%
Mark McVay 8,333 0.03%
Nathan Bailey 20,000 266,667 0.9%
Janice K. Neal 133,333 0.4%
Clint Owen 20,000 66,667 0.3%
All officers and directors as
a group (8 persons) 3,460,100 2,291,667 17.5%
(1) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to the shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable. Beneficial ownership as reported in the above table has
been determined in accordance with Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The percentages are based
upon 30,668,550 shares outstanding except with respect to certain persons
who hold presently exercisable options or warrants to purchase shares. The
percentage for each person who holds presently exercisable options or
warrants is based upon the sum of 30,668,550 shares outstanding plus the
number of shares subject to presently exercisable options or warrants held
by such person.
(2) According to a Schedule 13D filed with the Company, Mercury Asset
Management plc. ("MAM") manages investments for its clients and the
securities indicated are held solely for the accounts of such clients.
With respect to 3,267,200 of the shares held on behalf of a unit trust, a
wholly-owned subsidiary of MAM, as manager of the trust, has power to vote
the shares. MAM has the power to sell the shares for the benefit of the
trust. With respect to the remainder of the shares, MAM has dispositive
power, but not voting power, subject to its clients' guidelines. MAM does
not admit that it is the beneficial owner of any of the indicated shares.
38
(3) As required by the Securities and Exchange Commission, this column
includes shares available under exercisable options /warrants as well as
shares that may be acquired within 60 days of March 31, 2005, upon
exercise of options/warrants.
Item 13. Certain Relationship and Related Transactions
For the years ended December 31, 2004, 2003 and 2002, the Company
recognized $28,000, $28,000 and $30,000 respectively in commission expense for
new business introduction from a corporation of which the majority shareholder
is a non-employee Director of UMC. This commission expense was recognized
pursuant to a contract with the corporation in which UMC agrees to pay said
corporation a percentage of the fees billed and collected from any new customers
sold by or with the assistance of the corporation. The commission will be 10
percent during the first year of a contract with a given customer, 6 percent
during the second contract year, and 4 percent thereafter.
Item 14. Principal Accountant Fees and Services
Audit Fees
Audit fees billed and estimated fees to be billed to UMC by Hein &
Associates for the audit of our consolidated financial statements included in
our Annual Report of Form 10-K, and the review of the consolidated financial
statements included in our quarterly reports on Form 10-Q, for the years 2004
and 2003, totaled $27,542 and $28,953 respectively.
Audit Related Fees
UMC also paid $1,020 in 2004 to Hein & Associates for consulting in
regards to the Company's documentation of internal controls and audit committee
communication.
Tax Fees
UMC paid $742 to Hein & Associates during 2004 for consulting services
related to state tax reporting.
UMC's Audit Committee approves all audit and non-audit services provided
by our independent accountants prior to any engagement for services. The Audit
Committee approved 100% of the services provided by the independent accountants
captioned above, and believes that the services provided were compatible with
maintaining the independence of Hein & Associates.
39
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Reference is made to the Consolidated Financial Statements and
Financial Statement Schedules included at page 45.
2. Financial Statement Schedules
Reference is made to the Consolidated Financial Statements and
Financial Statement Schedules included at page 45.
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).
4.3 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).
40
4.5 Certificate of Amendment to Certificate of Incorporation,
filed with the Secretary of State of Delaware on June 21, 1990
is incorporated herein by reference to Exhibit 4.5 of the
Company's Registration Statement on Form S-1, Commission File
No. 33-35177, originally filed with the Commission on June 1,
1990 and declared effective on July 27, 1990 (previously
filed).
4.6 Form of Common Stock Purchase Warrant for 400,000 shares
issued to Thomas H. McConnell, III (previously filed).
4.7 Form of Common Stock Purchase Warrant for 400,000 shares
issued to Michael P. Bumgarner (previously filed).
4.8 Form of Common Stock Purchase Warrant for 400,000 shares
issued to John F. Lewis (previously filed).
4.9 Form of Common Stock Purchase Warrant issued to Peter W.
Seaman for 500,000 shares
4.10 Form of Common Stock Purchase Warrant issued to Peter W.
Seaman for 1,500,000 shares
4.11 Form of Common Stock Purchase Warrant issued to R. Kenyon
Culver for 500,000 shares
4.12 Form of Common Stock Purchase Warrant issued to R. Kenyon
Culver for 1,500,000 shares
9. Not Applicable.
10.7 1992 Stock Option Plan of the Company is incorporated herein
by reference to Exhibit 10.24 of the Company's Registration
Statement on Form S-1, Commission File No. 33-35178
(previously filed).
10.11 Customer Service Agreement dated December 15, 1992 by and
between the Company and the Washington Hospital Center is
incorporated herein by reference to Exhibit 10.27 of the
Company's Registration Statement on Form S-1, Commission File
No. 33-35178 (previously filed).
10.14 Standard Office Building Lease Agreement dated June 1, 1989,
between the Registrant and Aetna Life Insurance Company
(previously filed).
10.15 Third Amendment to Lease, dated May 1, 1992, between the
Registrant and Aetna Life Insurance Company (previously
filed).
10.19 Certificate of Amendment to Certificate of Incorporation of
the Company, filed with Secretary of State of Delaware on
August 3, 1993 (previously filed).
10.22 1995 Stock Option Plan (previously filed).
10.23 Modification and Ratification of Lease, dated July 19, 1995
(previously filed).
41
10.25 Severance Agreement by and between Registrant and Mary E.
Rogers (previously filed).
10.26 Severance Agreement by and between Registrant and Peter W.
Seaman (previously filed).
10.28 Director's Incentive Compensation Agreement by and between
Registrant and Thomas H. McConnell, III (previously filed).
10.29 Director's Incentive Compensation Agreement by and between
Registrant and John F. Lewis. (previously filed).
10.30 Director's Incentive Compensation Agreement by and between
Registrant and Michael P. Bumgarner. (previously filed).
10.31 Amendment No. 1 to Customer Service Agreement dated December
15, 1992 by and between the Company and the Washington
Hospital Center relating to collection of Department of
Emergency Medicine claims is incorporated herein by reference
to Exhibit 10.27 of the Company's Registration Statement on
Form S-1, Commission File No. 33-35178 (previously filed).
10.32 Amendment No. 2 to Customer Service Agreement dated December
15, 1992 by and between the Company and the Washington
Hospital Center relating to collection of physician claims is
incorporated herein by reference to Exhibit 10.27 of the
Company's Registration Statement on Form S-1, Commission File
No. 33-35178 (previously filed).
10.33 Collection Services Agreement dated January 17, 1997 by and
between the Registrant and Presbyterian Healthcare System
(previously filed).
10.34 Early Out Collection Agreement dated May 1, 1997 by and
between the Registrant and Presbyterian Healthcare System
(previously filed).
10.35 Secondary Collection Agreement dated October 31, 1997 by and
between the Registrant and Presbyterian Healthcare System
(previously filed).
10.36 Loan Agreement dated December 11, 1998 by and between the
Registrant and Texas Central bank (previously filed).
10.37 Promissory Note dated December 11, 1998 by and between the
Registrant and Texas Central bank (previously filed).
10.38 Factoring Agreement and Security Agreement dated December 28,
1999 by and between the Registrant and Metro Factors, Inc.
(previously filed).
10.39 Economic Development and Incentive Agreement by and between
the Registrant and the Pampa Economic Development Corporation.
(previously filed)
42
10.40 Forgivable Loan Agreement by and between the Registrant and
the Pampa Economic Development Corporation. (previously filed)
22.1 Subsidiaries of the Company (previously filed).
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
99.1 Safe Harbor Compliance Statement for Forward-Looking
Statements
99.2 Voluntary Petition United States Bankruptcy Court Northern
District of Texas - Chapter 7 (previously filed)
99.3 Code of Business Conduct and Ethics for United Medicorp Inc.
(b) Reports on Form 8-K
1) On November 18, 2004 the Company furnished a Current Report
on Form 8-K attaching a press release reporting the
Company's financial results for the third quarter of 2004
and year-to-date 2004.
43
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 25, 2005 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 25, 2005
- -------------------------- Executive Officer (Principal
Peter W. Seaman Executive Officer)
/s/ Nathan E. Bailey Vice President and Controller March 25, 2005
- -------------------------- (Principal Financial Officer and
Nathan E. Bailey Principal Accounting Officer)
/s/ Michael P. Bumgarner Director March 25, 2005
- --------------------------
Michael P. Bumgarner
/s/ John F. Lewis Director March 25, 2005
- --------------------------
John F. Lewis
/s/ Vernon Rosenbery Director March 25, 2005
- --------------------------
Vernon Rosenbery
/s/ Mark McVay Director March 25, 2005
- --------------------------
Mark McVay
44
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2004
Items 8 and 14(a)
45
UNITED MEDICORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[Item 8]
Consolidated Financial Statements: Page
----
Consolidated Balance Sheets as of December 31, 2004 and 2003.............. 47
Consolidated Statements of Operations for each of the three years ended
December 31, 2004 ....................................................... 48
Consolidated Statements of Changes in Stockholders' Equity for each of the
three years ended December 31, 2004...................................... 49
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2004 ....................................................... 50
Notes to Consolidated Financial Statements................................ 51
Report of Independent Registered Public Accounting Firm - Hein &
Associates LLP........................................................... 67
Consolidated Financial Statement Schedules:
II- Valuation and Qualifying Accounts..................................... 68
Other financial statement schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
46
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 263,640 $ 62,851
Restricted cash .............................................. 74,381 60,365
Accounts receivable, net of allowance for doubtful accounts
of $60,024 and $417, respectively ......................... 824,551 707,301
Factor reserve ............................................... 5,093 1,313
Prepaid expenses and other current assets .................... 68,507 31,106
------------ ------------
Total current assets ...................................... 1,236,172 862,936
Other non-current assets ........................................... 42,873 18,773
Property and equipment, net of accumulated depreciation of
$876,423 and $817,554, respectively .......................... 325,676 381,354
Developed and purchased software net of accumulated amortization of
$245,379 and $205,661 respectively ........................... 92,091 92,527
Assets under capital leases, net of accumulated amortization of
$270,354 and $232,514, respectively .......................... 166,576 204,279
------------ ------------
Total assets .............................................. 1,863,388 1,559,869
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations ................. 43,117 41,177
Current portion of notes payable ............................. 144,404 44,986
Trade accounts payable ....................................... 59,656 113,364
Payable to clients ........................................... 44,690 54,008
Accrued professional fees .................................... 24,251 19,662
Accrued payroll and benefits ................................. 200,098 209,461
Accrued expenses - Allied Health Options ..................... 42,457 43,284
Accrued expenses other ....................................... 49,057 13,123
------------ ------------
Total current liabilities .................................... 607,730 539,065
Long term liabilities:
Long term capital lease obligations, excluding current portion 104,016 146,535
Long term notes payable, excluding current portion ........... 131,141 165,996
Deferred revenue - Pampa Economic Development Corp. .......... 96,000 120,000
------------ ------------
Total liabilities ......................................... 938,887 971,596
------------ ------------
Contingency and Commitment (Notes D and E)
Stockholders' equity:
Common stock; $0.01 par value; 50,000,000 shares authorized;
31,019,097 and 29,519,097 shares issued respectively ...... 310,191 295,191
10% Cumulative convertible preferred stock; $0.01 par value;
5,000,000 shares authorized; none issued .................. -- --
Less treasury stock at cost, 350,547 and 305,547 shares
respectively ............................................. (223,456) (221,881)
Additional paid-in capital ................................... 18,800,771 18,815,771
Accumulated deficit .......................................... (17,963,005) (18,300,808)
------------ ------------
Total stockholders' equity ................................ 924,501 588,273
------------ ------------
Total liabilities and stockholders' equity ................ $ 1,863,388 $ 1,559,869
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
47
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Revenues:
Billing and collection services ......... $3,748,512 $3,594,851 $3,189,460
Coding services ......................... 224,341 182,689 117,211
Other revenues .......................... 126,152 123,756 131,313
---------- ---------- ----------
Total revenues ....................... 4,099,005 3,901,296 3,437,984
Expenses:
Wages and benefits ...................... 2,600,022 2,664,862 2,315,105
Selling, general and administrative ..... 839,312 725,619 673,329
Office, vehicle and equipment rental .... 16,356 19,743 20,366
Depreciation and amortization ........... 165,646 109,053 81,438
Professional fees ....................... 74,472 90,449 61,844
Interest, net ........................... 29,537 21,163 20,307
Provision for doubtful accounts and notes 59,607 56 1,756
Other expense, net ...................... -- -- 4,008
---------- ---------- ----------
Total expenses ....................... 3,784,952 3,630,945 3,178,153
---------- ---------- ----------
Income before income taxes .................... 314,053 270,351 259,831
---------- ---------- ----------
Deferred tax benefit .................... 23,750 18,000 --
---------- ---------- ----------
Net income .................................... $ 337,803 $ 288,351 $ 259,831
========== ========== ==========
Basic earnings per common share:
Net income .............................. $ .0112 $ .0099 $ .0089
========== ========== ==========
Diluted earnings per common share:
Net income .............................. $ .0108 $ .0092 $ .0083
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
48
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the period from December 31, 2001 to December 31, 2004
Common Stock Additional Treasury Stock
--------------------------- Paid-In --------------------------- Accumulated
Shares Amount Capital Shares Amount Deficit Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31,
2001 29,515,764 295,157 18,778,254 305,547 (221,881) (18,848,990) 2,540
Net income -- -- -- -- -- 259,831 259,831
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31,
2002 29,515,764 295,157 18,778,254 305,547 (221,881) (18,589,159) 262,371
Exercise of
Options 3,333 34 17 -- -- -- 51
Compensation
Expense related
To Warrants -- -- 37,500 -- -- -- 37,500
Net income -- -- -- -- -- 288,351 288,351
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31,
2003 29,519,097 295,191 18,815,771 305,547 (221,881) (18,300,808) 588,273
Exercise of
Warrants 1,500,000 15,000 (15,000) -- -- -- --
Purchase of
Treasury Stock -- -- -- 45,000 (1,575) -- (1,575)
Net income -- -- -- -- -- 337,803 337,803
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31,
2004 $ 31,019,097 $ 310,191 $ 18,800,771 $ 350,547 ($ 223,456) $(17,963,005) $ 924,501
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements
49
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years December 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net income $ 337,803 $ 288,351 $ 259,831
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of fixed assets 127,408 86,343 59,206
Amortization of assets under capital leases 38,238 22,710 22,232
Recognition of stock warrant expense -- 37,500 --
Provision for doubtful accounts and notes 59,607 (87) 69
Loss on disposition of assets 150 -- 4,008
PEDC Incentives (24,000) (24,000) (24,000)
Changes in assets and liabilities:
Restricted cash (14,016) (28,285) (31,490)
Accounts receivable (176,857) (508,979) 32,694
Factor reserve (3,780) 214,504 (160,860)
Prepaid expenses and other assets (61,501) (38,999) (2,116)
Accounts payable (53,708) 68,923 (3,925)
Payable to clients (9,318) 21,957 31,616
Accrued liabilities 30,333 24,924 40,215
--------- --------- ---------
Net cash provided by operating activities 250,359 164,862 227,480
--------- --------- ---------
Cash flows from investing activities:
Purchase of building and improvements thereto (4,100) (8,808) (17,344)
Purchase of furniture and equipment (36,862) (132,798) (118,582)
Purchase and development of software (39,282) (74,176) --
Sale of furniture and equipment 8,263 1,611 10,050
--------- --------- ---------
Net cash used in investing activities (71,981) (214,171) (125,876)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from loans 12,093 37,725 20,479
Net Proceeds from Line of Credit 103,000 100,000 --
Proceeds from sale of stock -- 50 --
Purchase of Treasury stock (1,575) -- --
Principal payments on notes payable (50,528) (40,096) (38,163)
Principal payments on capital lease obligations (40,579) (37,279) (35,731)
--------- --------- ---------
Net cash provided by (used in) financing activities 22,411 60,400 (53,415)
--------- --------- ---------
Increase in cash and cash equivalents 200,789 11,091 48,189
Cash and cash equivalents at beginning of year 62,851 51,760 3,571
--------- --------- ---------
Cash and cash equivalents at end of year $ 263,640 $ 62,851 $ 51,760
========= ========= =========
Supplemental disclosures:
Cash paid for interest $ 29,537 $ 21,163 $ 20,307
Non-cash investing and financing activities:
Additions to Capital Lease Obligations, $ -- $ 187,817 $ 41,315
The accompanying notes are an integral part of these consolidated financial
statements
50
A. THE COMPANY
United Medicorp Texas, Inc., was incorporated in the State of Texas on
March 13, 1989 ("UMC-Texas"). On July 10, 1989, in an exchange of stock,
UMC-Texas was acquired by Gamma Resources, Inc., a publicly-owned Delaware shell
corporation, which simultaneously changed its name to United Medicorp, Inc. (the
"Company", "UMC" or the "Registrant"). On November 18, 1996, the Company filed
"Articles of Amendment to the Articles of Incorporation of Sterling Hospital
Systems, Inc." whereby this wholly owned subsidiary of UMC was renamed United
MoneyCorp, Inc. ("UMY"). UMY has been designated as the legal entity under which
UMC operates a collection agency. On August 7, 1998, UMC acquired 100% of the
common stock of Allied Health Options, Inc. ("AHO"), an Alabama corporation.
Effective June 30, 1999, the Company discontinued the operations of AHO. On
October 14, 1999, AHO filed a voluntary petition in the United States Bankruptcy
Court for the Northern District of Texas to liquidate pursuant to Chapter 7 of
Title 11 of the United States Bankruptcy code. On November 16, 1999, the Chapter
7 bankruptcy 341 creditors meeting was held. Unless the context indicates
otherwise, references herein to the Company include UMC and its operating
subsidiary UMY.
The Company provides medical insurance claims coding and processing,
electronic medical records storage services, chargemaster review services,
pricing comparison services and accounts receivable management services to
healthcare providers. The Company employs proprietary and purchased software to
provide claims coding, processing, electronic medical records storage,
chargemaster review, pricing comparison and billing and collection services to
its customers, which are primarily hospitals, medical clinics, and physician
practices. The Company's medical claims processing service is designed to
provide an electronic claims processing, billing and collection service that
expedites payment of claims from private insurance carriers or government payors
such as Medicare and Medicaid. The Company also offers to its customers
processing and collection services for uncollected "backlog" (aged) claims that
were not originally submitted through the Company's electronic claims processing
system. UMY provides customer service and collection services to health care
providers.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include the accounts of
UMC and its wholly owned subsidiary UMY. All material intercompany transactions
and balances have been eliminated in consolidation. Certain prior year balances
have been reclassified to conform with current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Certain significant estimates include the allowance for doubtful
accounts and the deferred tax asset. Actual results could differ from these
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand. Cash held by the
Company on behalf of customers is classified as Restricted Cash on the
accompanying balance sheet.
51
Factored Accounts Receivable With Recourse
Factored accounts receivable are accounted for pursuant to SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 140") under which the Company treats its factored
accounts receivable as a sales transaction, and as such, no liability is
recognized for the amount of the proceeds received from the transfer of the
accounts receivable. The Company had no factored invoices as of 12/31/04.
Receivables and Credit Policies
Trade receivables consist of uncollateralized customer obligations due
under normal trade terms requiring payment within 30 days of the invoice date.
Past due receivables bear interest at the rate of 12% annually. Payments on
trade receivables are applied to the earliest unpaid invoices. Management
reviews trade receivables periodically and reduces the carrying amount by a
valuation allowance that reflects management's best estimate of the amount that
may not be collectable.
Property and Equipment, and Assets Held Under Capital Leases
Property and equipment are recorded at cost. Leased property meeting
certain criteria is capitalized and the present value of the related lease
payments is recorded as a capital lease obligation. Expenditures for repairs and
maintenance are charged to expense as incurred, and expenditures for major
renewals and betterments are capitalized. Depreciation and amortization are
computed using the straight-line method over the estimated useful life of the
asset, ranging from three to twenty years. Upon disposition of assets, the cost
and related accumulated depreciation or amortization is removed from the
accounts and the resulting gain or loss is recorded.
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 would include a comparison
of future cash flows expected to be generated by the asset or group of assets
with their associated carrying value. If the carrying value of the asset or
group of assets exceeds expected cash flows (undiscounted and without interest
charges), an impairment loss is recognized for the excess of carrying amounts
over fair value.
Purchased and Developed Software
The cost of software that is developed or purchased for internal use is
accounted for pursuant to AICPA Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
Pursuant to SOP 98-1, the Company capitalizes costs incurred during the
application development stage of software developed for internal use, and
expenses costs incurred during the preliminary project and the
post-implementation operation stage's of development. During 2004, the Company
capitalized $25,460 in costs incurred for new internal software development that
was in the application development stage. The cost of capitalized internally
developed software is amortized over a period of sixty (60) months on a
straight-line basis.
Billing and Collection Services and Coding Service Revenue Recognition
The Company's billing and collection services revenue is recognized upon
receipt by the customer of payment from a third party payor or guarantor of a
patient's account and upon notification by the customer to the Company that such
payment has been received, or upon receipt of such payment by UMC. Coding
52
service, chargemaster maintenance service, and pricing comparison service
revenue is recognized when the services are performed. Electronic Medical
Records Storage revenue is recognized when records are scanned into the system.
Other Revenue Recognition
For 2004, 2003 and 2002 other revenues consisted primarily of incentives
from the PEDC agreement, which were recognized when earned according to the
agreement.
Earnings Per Share
The Company applies SFAS No. 128, "Earnings Per Share" ("SFAS No. 128")
which requires companies to present on the face of the statement of operations,
basic earnings per share ("EPS") and diluted EPS. Companies with complex capital
structures are required to reconcile the numerator and denominator used in the
basic EPS computation to the numerator and denominator used in the diluted EPS
computation. For each of the three years ended December 31, 2004, 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.
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,
2004 2003 2002
----------- ----------- -----------
Net income available to common stockholders ........... $ 337,803 $ 288,351 $ 259,831
Weighted average number of common shares
in basic EPS ...................................... 30,113,550 29,212,000 29,210,000
Effect of dilutive weighted average common
share equivalents ................................. 1,262,000 2,020,000 1,948,000
----------- ----------- -----------
Weighted average number of common shares and
dilutive potential common shares in diluted EPS... 31,376,350 31,232,000 31,158,000
=========== =========== ===========
Income Taxes
Income taxes are accounted for pursuant to SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires that deferred income taxes
reflect the tax consequences on future years of differences between the tax
basis of assets and liabilities and their basis for financial reporting
purposes. Future tax benefits, such as Net Operating Loss Carryforwards (NOLs),
are required to be recognized to the extent that realization of such benefits is
more likely than not.
Stock-based Compensation
SFAS No. 123 and SFAS No. 148, "Accounting for Stock-based Compensation"
("Nos. 123 and 148") require Companies to include the fair value of stock
options and other stock-based compensation issued to employees and non-employees
as compensation expense in the income statement or to disclose the pro-forma
effect on net income and earnings per share of such compensation expense in the
footnotes to the Company's financial statements. The Company has elected to
continue to account for its employee stock options issued under approved Stock
Option Plans and warrants issued to the members of the Company's Board of
Directors on April 1, 1997 and November 12, 1996, pursuant to APB25 "Accounting
for Stock Issued to Employees." This decision results in recognition of no
compensation expense for employee or director stock options that are granted
with an exercise price at or greater than the market price on the date of grant.
However, in accordance with the disclosure provisions of Nos. 123 and 148, the
53
Company has provided proforma information to reflect results of operations and
earnings per share had compensation expense been recognized for these items
under the fair value method. All other equity instruments issued by the Company
to employees and non-employees will be recognized pursuant to Nos. 123 and 148,
which will impact the Company's consolidated balance sheet and statement of
operations.
SFAS NO. 148 PRO FORMA
Pro forma net income (loss) and earnings per share information presented
below reflect the results of the Company as if the fair value based accounting
method described in SFAS No. 148 had been used to account for stock compensation
costs, net of taxes and forfeitures of prior year grants:
Year Ended December 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
Net income as reported $ 337,803 $ 288,351 $ 259,831
SFAS No. 148 employee stock based
fair value compensation cost 7,525 6,239 7,085
--------- --------- ---------
Pro forma net income $ 330,278 $ 282,112 $ 252,746
========= ========= =========
Pro forma basic earnings per share $ .0111 $ 0.0097 $ 0.0087
========= ========= =========
Pro forma diluted earnings per share $ .0106 $ 0.0090 $ 0.0081
========= ========= =========
The fair value for options granted in 2003 and 2002 was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants during the years ended December 31:
Year Ended December 31,
---------------------------------
2003 2002
-------- --------
Dividend yield -- --
Expected volatility 220.0% 222.4%
Risk-free rate of return 2.5% 2.5%
Expected life, years 5 10
No options were granted during 2004. No warrants were granted during 2004,
2003 or 2002.
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No.123 (Revised 2004), "Share-Based
Payment," "(SFAS 123(R)". SFAS 123(R) is a revision of FASB Statement 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. The Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost is to be recognized over the
period during which an employee is required service in exchange for the award.
This statement is effective for the Company as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005 and the
Company will adopt the standard in the third quarter of fiscal 2005. UMC does
not expect a material effect on its financial condition, results of operations
or cash flows.
54
C. INCENTIVE FINANCING RELATIVE TO RELOCATION OF OPERATIONS CENTER
During 1999 and the first seven months of 2000, UMC had experienced
increasing difficulty in recruiting and retaining medical billing and collection
staff in the Dallas area. This situation was the result of low unemployment and
strong competition from nearby major hospitals and physician groups for
experienced staff. Low unemployment and escalating competition for qualified
staff had resulted in an overall increase in hourly wage rates and turnover.
Effective July 28, 2000, UMC executed an Economic Development and
Incentive Agreement (the "Agreement"), with the Pampa Economic Development
Corporation ("PEDC"), (previously disclosed). Management entered into this
Agreement in order to: (a) create a new expense paradigm which includes reduced
hourly wages expense, (b) access a pool of applicants who are believed to be
capable of rapidly assimilating training in the job skills related to UMC's
business, and (c) put into place a facility with 20,000 square feet of space at
a cost far below that which would be incurred in the Dallas area.
In exchange for providing jobs within the city limits of Pampa, Texas, the
Agreement calls for the PEDC to provide the following incentives to UMC:
(a) an incentive payment of $192,000 which was made upon the closing of
the purchase of the new operations center facility in Pampa. The Agreement
includes a claw back provision whereby if UMC does not maintain a minimum of 30
full time equivalent employees ("FTEE") employed in its Pampa operations center
during any given year of the eight years of the Agreement beginning with the
year ended December 31, 2001, UMC will be required to remit $24,000 back to PEDC
for each such year. UMC met the FTEE requirement for this incentive in 2004,
2003 and 2002 and recognized $24,000 of the incentive as income at December 31st
of each year.
(b) an incentive payment of $40,000 per calendar year (for a maximum of
$320,000) so long as UMC provides a minimum average of 40 FTEE employed in its
Pampa operations center during each of the eight calendar years of the Agreement
commencing with the year ending December 31, 2001. UMC recognized $40,000 in
revenue from this incentive for each of the years 2004, 2003 and 2002.
(c) an incentive payment of $1,000 per job per calendar year (for a
maximum of $80,000) for each FTEE from the 41st up to and including the 50th
FTEE employed in its Pampa operations center during each of the eight calendar
years of the Agreement commencing with the year ending December 31, 2001. UMC
recognized $10,000 in revenue from this incentive for each of the years 2004,
2003 and 2002.
(d) an incentive payment of $500 per calendar year (with no cap or limit)
for each FTEE from the 51st and over employed in its Pampa operations center
during each of the eight calendar years of the Agreement commencing with the
year ending December 31, 2001. UMC recognized $13,500, $15,000 and $13,250 in
revenue from this incentive for 2004, 2003 and 2002 respectively, and
(e) PEDC guaranteed up to $137,000 for the benefit of UMC's lender (the
"Lender"), relative to the purchase of the operations center facility in Pampa.
In addition, PEDC will pay to UMC $27,400 per year during each of the first five
years of the Agreement (for a maximum of $137,000) commencing with the year
ending December 31, 2001. After offsetting the total monthly payments made to
Lender during the preceding 12 months from this annual payment, UMC will remit
the balance to the Lender. On July 28, of 2004, 2003 and 2002 respectively, UMC
received $27,400 from the PEDC in payment of this incentive. Of this, $11,536,
$11,533 and $11,536 was remitted to National Bank of Commerce (the lien holder
on the building) as principal payment on the loan on the building in accordance
with The Agreement, for 2004, 2003, 2002 and 2001 respectively. PEDC will be
released from paying any and all unpaid annual payments if UMC defaults on its
obligations to its Lender or if UMC discontinues its operations in Pampa within
five years of July 28, 2000.
55
On August 21, 2000 UMC purchased a building in Pampa, located at 200 N.
Cuyler Street that serves as its Pampa operations center, and simultaneously
received payment of the relocation incentive totaling $192,000 (as specified in
paragraph (a) above). On December 31, 2000 UMC had 45 full time and 2 part time
employees at its Pampa operations center, and qualified for the initial
incentive payment as specified in paragraph (e) above. As of March 1, 2005 UMC
had 57 full time, and 13 part time employees at its Pampa operations center.
There can be no assurance that UMC will be successful in: (a) continuing
to meet the aforementioned minimum employment requirements to trigger incentive
payments, (b) maintaining the minimum employment requirements to prevent
triggering the aforementioned claw back provision, or (c) averting a default to
its Lender or discontinuing its operations in Pampa within five years to prevent
PEDC from being released from paying any and all unpaid annual payments to UMC
relative to the aforementioned terms of the PEDC Agreement.
D. CONTINGENCIES
Factored Accounts Receivable Reserve - On December 28, 1999, the Company
executed a $500,000 recourse factoring agreement, which may be terminated by
either party with ten days notice. The agreement is secured by all of the
Company's non-factored accounts receivable and was formerly personally
guaranteed by the Company's Chief Executive Officer. On December 23, 2003 this
personal guarantee was released by the factor. The factor has recourse against
the Company and its collateral should factored invoices remain unpaid at 90
days. Interest at prime plus 2.5% is charged against the net cash deployed by
the factor, which is computed as total advances to the Company less reserve in
excess of 20% of the face value of the factored invoices, if any. The company
receives a maximum advance of 80% for each invoice sold. Upon payment in full of
the invoice by the customer to the factor, the Company then has access to the
remaining 20% net of interest and fees. The Company did not factor any invoices
after the first quarter of 2004, and had no outstanding factored invoices at
December 31, 2004.
Year Ended December 31,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
Proceeds received.................... $ 0 $ 2,224,000 $ 2,304,000
Uncollected balance at year end...... $ 0 $ 0 $ 345,049
Contingent Liability - On January 7, 2005 a personnel-related issue
resulted in the resignation of a UMC employee. Based on information received
regarding the incident, UMC's Board of Directors retained legal counsel to
conduct an independent investigation into the matter and to represent the
Company in communications with the former employee's attorney. As of the date of
this filing, it appears reasonably possible, that the Company will incur some
expense to said former employee in addition to legal fees in order to resolve
this matter. Management believes that the combined cost of legal fees and
compensation could range from $15,000 to $60,000. There was no accrual for this
contingent liability at December 31, 2004. As of the date of this filing, the
Company has received invoices for legal fees relating to this matter totaling
$13,400.
56
E. COMMITMENTS
The Company entered into a maintenance agreement on certain equipment used
in processing collection letters in 2002 that requires monthly payments
through 2007. In December of 2004, the Company entered into an agreement
that requires the Company to purchase software licenses in 2005 for use in
2006. The Company's total commitments under these agreements are as
follows:
2005.............................................. $ 45,920
2006.............................................. $ 6,420
2007.............................................. $ 4,815
----------
Total $ 57,155
==========
The Company paid $45,920 during 2004 under these agreements.
F. PROPERTY AND EQUIPMENT / ASSETS UNDER CAPITAL LEASES
At December 31, 2004 property, equipment and software consisted of the
following:
Capital
Purchased Lease Total
----------- ----------- -----------
Building and Improvements .................. $ 197,198 $ -- $ 197,198
Equipment .................................. 779,494 436,930 1,216,424
Software systems ........................... 337,470 -- 337,470
Furniture and fixtures ..................... 131,255 -- 131,255
Automobiles ................................ 94,152 -- 94,152
----------- ----------- -----------
Gross property and equipment .......... 1,539,569 436,930 1,976,499
Accumulated depreciation and amortization... (1,121,802) (270,354) (1,392,156)
----------- ----------- -----------
Net property and equipment ............ $ 417,767 $ 166,576 $ 584,343
=========== =========== ===========
At December 31, 2003 property, equipment and software consisted of the
following:
Capital
Purchased Lease Total
----------- ----------- -----------
Building and Improvements .................. $ 193,098 $ -- $ 193,098
Equipment .................................. 768,480 436,793 1,205,273
Software systems ........................... 298,188 -- 298,188
Furniture and fixtures ..................... 131,254 -- 131,254
Automobiles ................................ 106,076 -- 106,076
----------- ----------- -----------
Gross property and equipment .......... 1,497,096 436,793 1,933,889
Accumulated depreciation and amortization... (1,023,215) (232,514) (1,255,729)
----------- ----------- -----------
Net property and equipment ............ $ 473,881 $ 204,279 $ 678,160
=========== =========== ===========
Depreciation expense related to property and equipment was $87,690,
$67,722 and $50,788 during 2004, 2003 and 2002, respectively. Amortization
expense relative to assets under capital leases was $38,238, $22,710 and $22,232
during 2004, 2003 and 2002, respectively. Amortization expense relative to
purchased and developed software was $39,718, $18,621 and $8,418 during 2004,
2003 and 2002 respectively.
57
G. CAPITAL LEASE OBLIGATIONS
On July 28, 2003, the Company leased a new Nortel telephone switch and
related equipment for a term of 60 months. The lease provides for a $1 purchase
option at the end of the lease term.
On February 28, 2003, the Company leased certain computer and peripheral
equipment for its electronic medical records storage service, for a term of 36
months. The lease provides a $1 purchase option for the equipment at the end of
the lease term.
During 2002, the Company leased certain mail processing equipment for a
term of 60 months. This equipment may be purchased at the end of the lease term
for the then fair market value.
At December 31, the remaining capital lease obligations are as follows:
2004 2003
--------- ---------
9.5% lease related to electronic medical record storage equipment
maturing in 2006 .............................................................. $ 14,001 $ 24,681
15.0% lease related to mail processing equipment maturing in 2007 .............. 25,816 31,868
8.0% lease related to telephone equipment maturing in 2008 ..................... 107,316 131,163
--------- ---------
Total capital lease obligations ....................................... 147,133 187,712
Less current portion of capital lease obligations ........................... (43,117) (41,177)
--------- ---------
Long-term capital lease obligations ......................................... $ 104,016 $ 146,535
========= =========
As of December 31, 2004, total lease payments due under capital leases are as
follows:
Year ending December 31:
2005 ........................................................................ $ 60,365
2006 ........................................................................ $ 49,640
2007 ........................................................................ $ 45,342
2008 ........................................................................ $ 25,235
Less amount representing interest ........................................... $ (33,499)
---------
Principal amount of net lease payments ...................................... $ 147,133
=========
Interest expense on capital lease obligations was $19,490, $12,261 and
$1,259 during 2004, 2003 and 2002, respectively.
58
H. NOTES PAYABLE
Notes payable at December 31, consists of the following: 2004 2003
--------- ---------
Bank line of credit, interest at prime plus 6% per annum,
(11.5% at December 31, 2004) monthly installments of
accrued interest, unsecured, no maturity date specified ............. $ 99,000 $ --
Bank line of credit, interest at prime plus 2% per annum,
(7.5% at December 31, 2004) monthly installments of $1,000
plus accrued interest, unsecured, matures November 19, 2011 ......... $ 100,000 $ 96,000
Installment loan, interest at 1.02% per annum, monthly installments of $341
including interest, matures December 31, 2007, secured
by Accounting Software .............................................. $ 12,093 $ --
Bank loan, interest at 6.25% per annum, monthly installments of $375
including interest, matures February 28, 2006, secured
by a 2000 Honda Accord .............................................. $ 5,040 $ 9,074
Bank loan, interest at 6.25% per annum, monthly installments of $314
including interest, matures December 26, 2005, secured
by a 2000 Toyota Camry .............................................. $ 3,645 $ 7,066
Bank loan, interest at 7.0% per annum, monthly installments of $335
including interest, matures December 26, 2005, secured
by a 2000 Toyota Camry .............................................. $ 3,867 $ 7,476
Bank loan, interest at 7.0% per annum, monthly installments of $293
including interest, matures December 26, 2005, secured
by a 2002 Honda Accord .............................................. $ -- $ 8,011
Bank loan, interest at 6.5% per annum, monthly installments of $628
including interest, matures July 10, 2005, secured
by a 2002 Toyota Camry .............................................. $ 4,193 $ 11,191
Real estate lien note, interest at prime plus 1/2% per annum (4.5%
at December 31, 2003), monthly installments of $1,322
including interest, matures August 20, 2020, secured
by land and building ................................................ 47,707 72,164
--------- ---------
Total notes payable ................................................. 275,545 210,982
Less current portion of notes payable ............................ (144,404) (44,986)
--------- ---------
Long term notes payable .......................................... $ 131,141 $ 165,996
========= =========
59
As of December 31, 2004, future maturities of notes payable were as follows:
Year ending December 31:
2005................................................... $ 144,404
2006................................................... 30,961
2007................................................... 30,978
2008................................................... 17,376
2009................................................... 12,000
Thereafter............................................. 39,826
-----------
Total.................................................. $ 275,545
===========
I. INCOME TAXES
There is no current or deferred tax expense for the years ended December
31, 2004, 2003 and 2002. The Company utilized NOL carryforwards to offset
taxable income in 2004, 2003 and 2002.
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. Prior to 2003, UMC has not recorded a tax
asset to reflect any portion of the potential future benefit of its NOLs, due to
the uncertainty of the benefit being realized. At December 31, 2003 due to the
Company's consistent profitability for the three previous years and management's
projection of profitability in 2004 it appeared more likely than not that a
portion of the future benefit remaining in the Company's NOLs would be realized.
Due to the loss of business from UMC's largest customer, management believed it
most reasonable to record only one year of projected benefit in 2003, and to
re-evaluate this approach each year. At December 31, 2003, the Company recorded
a deferred tax asset and an income statement tax benefit of $18,000 that
represented the estimated benefit of the NOLs that would be utilized in 2004.
The actual tax value of NOLs utilized in 2004 was approximately $88,000. Based
on management's projected taxable income for 2005, the Company has increased the
deferred tax asset and recorded an income statement benefit of $23,750 at
December 31, 2004, which represents the estimated benefit of the Company's NOLs
that will be utilized in 2005. At December 31, 2002 the Company's deferred tax
assets were fully reserved. The tax effects of temporary differences and NOLs
that give rise to the net deferred tax asset at December 31 are as follows:
Deferred tax assets: 2004 2003
----------- -----------
Net operating tax loss carryforward... $ 3,778,000 $ 3,994,504
Accrued liabilities .................. 28,000 27,068
Property and equipment ............... (21,600) (17,472)
Accounts receivable .................. 22,200 154
----------- -----------
Gross deferred tax assets ............ 3,806,600 4,004,254
Valuation allowance .................. (3,764,850) (3,986,254)
----------- -----------
Net deferred tax assets ........... $ 41,750 $ 18,000
=========== ===========
From inception in March 1989 to March 1992, the Company generated NOLs
totaling $13.9 million. In March 1992, the Company experienced an ownership
change as defined by Section 382 of the Internal Revenue Code. As a result of
this event, the Company will be limited in its ability to use pre-change NOL
carryforwards to reduce subsequent taxable income. The amount of taxable income
that can be offset by pre-change NOL carryforwards in any annual period is
limited to approximately $358,000 plus the unused portion of this $358,000 from
previous years. The pre-change NOLs will expire in 2007. Post-change NOL
carryforwards which are not subject to limitation total $6.5 million and will
expire in varying amounts between 2007 and 2020.
60
The difference between the Company's tax expense or benefit and the amount
that would be expected to be recorded based on the statutory rate of 34% is as
follows:
Years December 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
Expected income tax expense at statutory rate ...... $ 106,778 $ 91,919 $ 88,342
Effect of graduated tax rates and use of NOL ....... (106,778) (91,919) (88,342)
Effect of change in valuation allowance for deferred
tax asset ......................................... (23,750) (18,000) --
--------- --------- ---------
Tax benefit ........................................ $ (23,750) $ (18,000) $ --
========= ========= =========
J. STOCKHOLDERS' EQUITY
At December 31, 2004, there were 5,000,000 shares of 10% cumulative
preferred stock, par value $0.01 authorized but not issued. The preferred stock
may be issued in series and include rights and preferences as designated by the
Company's board of directors.
The Company has outstanding warrants and options as described in Notes L
and M. There were 3,041,667 shares of Common Stock reserved for issuance for
outstanding warrants and options at December 31, 2004.
K. WARRANTS
Effective December 28, 1999, warrants to purchase a total of 1 million
shares of UMC Common Stock at $0.00 per share were issued to the Company's
Chairman and Chief Executive Officer and to the Chief Financial Officer of the
Company (the "Holders') with each individual receiving a warrant to purchase
500,000 shares as consideration for their personal guarantees of the Company's
recourse factoring agreement. These warrants were 100% exercisable on the grant
date and expire on the earlier of (a) December 27, 2009, (b) the date on which
the Holder's services are terminated for cause, (c) three months after the
expiration of the Holder's term as a Director or resignation from the Board of
Directors or as an Officer, or termination of the Holder due to the sale of the
Company or (d) twelve months after the Holder's services as an Officer or
Director are terminated by reason of the individual's death or disability. On
November 15, 2000, one half, or warrants to purchase 500,000 shares expired, due
to the resignation of the Company's Chief Financial Officer three months prior.
On May 3, 2001 the warrant for the remaining 500,000 shares was exercised by the
Company's Chief Executive Officer.
Effective December 28, 1999, warrants to purchase a total of 3 million
shares of UMC Common Stock at $0.00 per share were issued to the Company's
Chairman and Chief Executive Officer and to the Chief Financial Officer with
each individual receiving a warrant to purchase 1,500,000 shares as incentive to
reposition the Company such that their personal guarantees would no longer be
required. These warrants will become fully exercisable upon: (i) release of any
and all personal guarantee(s) required to obtain financing from the Company's
factor or any other financing source which may succeed the factor, and (ii) the
61
Company qualifying for bank credit for which personal guarantees are not
required or, (iii) elimination of the Company's need for financing to meet its
working capital and other operating requirements. These warrants expire on the
earlier of (a) December 27, 2009, (b) the date on which the Holder's services
are terminated for cause, (c) three months after the expiration of the Holder's
term as a Director or resignation from the Board of Directors or as an Officer,
or termination of the Holder due to the sale of the Company, (d) twelve months
after the Holder's services as an Officer or Director are terminated by reason
of the individual's death or disability, or (e) upon revocation by the Holder of
any personal guarantee necessary to secure the Company's factoring agreement, or
any successor to the factor, provided, however, that these warrants shall
continue in force if all of the Company's obligations that are secured by the
Holder's personal guarantee(s) are repaid in full, and the Holder's personal
guarantee(s) are no longer necessary in order for the Company to meet its needs
for working capital and other operating requirements. These warrants were
accounted for pursuant to SFAS No. 123 and as such, for the year ended December
31, 1999 recognition of expense and additional paid-in capital was deferred
until such time that the aforementioned vesting requirements were achieved. On
November 15, 2000, one half, or warrants to purchase 1,500,000 shares expired
due to the resignation of the Chief Financial Officer three months prior. During
2003, the Company qualified for two unsecured bank lines of credit, which did
not require a personal guarantee, and satisfied requirement (ii) above. On
December 23, 2003 the personal guarantee of the CEO on the Company's factoring
line was unconditionally released by the factor, which satisfied requirement (i)
above, and qualified the CEO's purchase warrant to be fully exercisable. For the
year ended December 31, 2003, the Company recognized compensation expense and
additional paid in capital in the amount of $37,500, which represented the
number of shares exercisable under the warrant (1,500,000 shares) multiplied by
the market price of the Companies common stock ($.025) on December 23, 2003 (the
measurement date). These warrants were exercised on April 23, 2004.
On April 1, 1997, warrants to purchase 1,200,000 shares of UMC Common
Stock at $0.08 per share were issued to three directors of UMC with each
director receiving a warrant for 400,000 shares. These warrants are 100% vested
as of December 31, 2003. These warrants expire on the earlier of (a) March 31,
2007, (b) the date on which the Director's services are terminated for cause,
(c) three months after the expiration of the Director's term, resignation from
the Board of Directors, or termination of the Director due to the sale of the
Company or (d) twelve months after the services as a Director are terminated by
reason of the Director's death of disability. 400,000 of these warrants expired
on May 26, 2001 as a result of the resignation of one of the directors on
February 26, 2001. None of these warrants had been exercised as of December 31,
2004.
Neither the warrants nor 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 28, 1998, the Company's
stockholders approved the adoption of the 1998 Stock Option Plan (the "1998
Plan"), which provides for the issuance of both "incentive" and "nonqualified"
stock options. A total of 1,000,000 shares are issuable under the 1998 Plan. At
December 31, 2004, 460,000 options were outstanding under the 1998 Plan.
At the Annual Meeting of Stockholders on August 14, 1995, the Company's
stockholders approved the adoption of the 1995 Stock Option Plan (the "1995
Plan"), which provides for the issuance of both "incentive" and "nonqualified"
stock options. A total of 1,000,000 shares are issuable under the 1995 Plan. At
December 31, 2004, options for 937,500 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, 2004, options for 844,167 and 0 shares were outstanding under
the 1992 and 1989 Plans, respectively.
62
Under the terms of the aforementioned Plans, the exercise price for both
incentive and nonqualified stock options to purchase shares of the Company's
Common Stock may be granted at a price not less than the market price of the
stock at the date of grant. Accordingly, no compensation expense has been
recognized for the Company's stock option plans. Stock options may be granted to
holders of 10 percent or more of the Company's voting power at exercise prices
no less than 110 percent of the market price of the stock at the date of grant.
Both option types are exercisable, in annual increments of one-third or one half
of the total options granted, on the anniversary dates following the award. The
Compensation Committee of the board of directors approves the number of shares
to be granted to employees and the term of the vesting. Options that have
expired or that have been canceled are available for future grants under the
Plans.
None of the option plans or the shares of common stock represented by the
option plans have been registered under the Securities Act of 1933 except for
the 1992 Plan.
The following table summarizes activity for the years ended December 31:
2004 2003 2002
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
Options outstanding at
January 1, 2,291,667 $ 0.05 2,610,000 $ 0.05 1,710,000 $ 0.05
Granted -- -- 400,000 0.04 995,000 0.02
Exercised -- -- (3,333) 0.02 -- --
Canceled (50,000) 0.04 (715,000) 0.01 (95,000) 0.02
--------- --------- --------- --------- --------- ---------
Options outstanding at
December 31, 2,241,667 0.04 2,291,667 0.04 2,610,000 0.04
========= ========= ========= ========= ========= =========
Options exercisable at
December 31, 1,865,007 $ 0.05 1,533,329 $ 0.05 1,315,000 $ 0.06
========= ========= ========= ========= ========= =========
2004 2003 2002
--------- --------- ---------
Grant-date fair value per share -- 0.04 0.02
========= ========= =========
63
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 2004 Life Price 2004 Price
- --------------- ------------ ------------ ------------ ------------ ------------
$0.015 --- $0.04 1,241,667 7.3 years $ 0.02 865,007 $ 0.02
$0.05 --- $0.07 1,000,000 2.2 years 0.06 1,000,000 0.06
- ---------------- ------------ ------------ ------------ ------------ ------------
2,241,667 4.9 years $ 0.04 1,865,007 $ 0.04
============ ============ ============ ============ ============
M. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF MARKET AND CREDIT RISK
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate fair value due to the
short-term maturities of these instruments. The fair value of cash equivalents
is determined by reference to market data. The fair value of debt and capital
lease obligations approximate carrying value as the related interest rates
approximate current market rates.
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash equivalents and trade
receivables. It is the Company's practice to place its cash equivalents and
investments in high quality money market accounts. Generally, the Company does
not require collateral or other security to support customer receivables. When
possible, the Company will structure contracts such that provider payments are
remitted directly to UMC whereby UMC can collect its fee and remit a net payment
back to the customer. The Company does not expect its customers to fail to meet
their obligations and, as such, considers the credit risk associated with its
trade accounts receivable to be minimal.
The percentage market mix of total revenue for the years ended December
31, was:
2004 2003 2002
---------- ---------- ----------
Customer A........................ 20 62 65
Customer B........................ -- 1 7
Customer C........................ 17 17 13
Customer D........................ 20 -- --
Customer E........................ 11 -- --
Other customers................... 32 20 15
---------- ---------- ----------
100% 100% 100%
========== ========== ==========
The percentage market mix of total net accounts receivable for the years
ended December 31, for the customers identified above was:
2004 2003
---------- ----------
Customer A........................ --% 63%
Customer B........................ -- --
Customer C........................ -- 3
Customer D........................ 81 --
Customer E........................ 7 --
Other customers................... 12 34
---------- ----------
100% 100%
========== ==========
As of 12/31/04, 81 percent of UMC's outstanding trade receivables were
from customer D. During 2004, this customer experienced cash flow problems that
resulted in the aging of its payables to UMC. The total receivable from this
customer at December 31, 2004 was $704,320 of which $350,614 was outstanding
over 90 days. In January of 2005, UMC began receiving weekly payments from this
customer in amounts designed to not only cover the amount of weekly invoices
generated by UMC to this customer, but to also begin paying down the outstanding
amount. As of March 18, 2005, the total receivable from this customer was
$654,808, and the remaining balance of invoices that were over 90 days as of
64
December 31, 2004 was $30,427. Management believes that this customer's cash
flow has improved, and that the customer will be able to meet all of its
obligations to UMC. As of December 31, 2004, no portion of the outstanding
receivable from customer D was reserved. Although it is management's belief that
this customer will fulfill its obligations to the Company, there can be no
assurance that the customer will not experience financial difficulty that will
prevent the payment of the receivables due to UMC. A default by this customer on
its obligations to UMC would have a material adverse affect on the Company's
cash flow and financial position.
As of the date of this filing the Company has reserved $59,607 of the
outstanding accounts receivable from Customer E, which represents 100% of the
outstanding receivable balance from Customer E as of December 31, 2004. On
October 30, 2004 the Company received a letter from Customer E alleging that UMC
had failed in its contractual obligations in regards to the accounts receivable
management services provided to the Customer. It is management's opinion that
the customer's allegations have no merit, and are simply an attempt to persuade
UMC to discount its invoices due from the customer. UMC management believes that
it will eventually collect the monies due from the customer, but that it may
have to incur the cost of litigation in order to achieve this. If the Company is
required to pursue collection through litigation, there can be no assurance that
it will be successful or, if successful, the cost to the Company in terms of
legal and management time devoted to the effort.
N. RELATED PARTY TRANSACTIONS
On March 19, 1997, each non-employee member of the Board of Directors
entered into a Director's Incentive Compensation Agreement ("DICA"). This
agreement had an initial term of three years under which the director shall be
paid a commission based on fees billed and collected from new customers sold by
or with the assistance from such director. The commission will be 10 percent
during the first year of a contract with a given customer, 6 percent during the
second contract year, and 4 percent thereafter. The Director's compensation may
be paid in either cash, common stock, or stock purchase warrants upon approval
of the Compensation and Stock Option Committee. The Company did not pay any
commissions under DICA during the years 2004, 2003 or 2002. The Company has also
in the past issued certain warrants under DICA as described in Note L.
For the year ended December 31, 2004, the Company paid $27,723 in
commissions for new business introduction to a corporation of which the majority
shareholder is a non-employee Director of UMC. This commission was paid pursuant
to a contract with the corporation in which UMC agrees to pay said corporation a
percentage of the fees billed and collected from any new customers sold by or
with the assistance of the corporation. The commission will be 10 percent during
the first year of a contract with a given customer, 6 percent during the second
contract year, and 4 percent thereafter.
65
O. SEGMENT REPORTING
The Company applies SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
Management organizes consolidated UMC around differences in services
offered. UMC provides medical insurance claims processing, medical accounts
receivable management, claims coding services, electronic medical record storage
services, early stage patient balance collection services and other healthcare
related ancillary services. UMY provides bad debt and secondary account
collection agency services to the health care industry. UMC and UMY are
aggregated into one reportable health care Business Office Services segment
based on the similarity of the nature of the medical claim or account collection
services, nature of the information technology and human resource production
process and service delivery methodologies, as well as the predominantly health
care industry customer base of both UMC and UMY.
P. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 2004
Total revenues $ 1,093,470 $ 1,242,991 $ 952,456 $ 810,088
Net income 87,177 217,145 21,075 12,406
Net income per common share:
Basic $ 0.0029 $ 0.0074 $ 0.0006 0.0003
Diluted 0.0028 0.0071 0.0006 0.0003
Weighted average number of common
share outstanding:
Basic 29,213,550 29,213,550 30,713,550 30,713,550
Diluted 30,655,568 31,416,308 31,301,144 31,486,079
YEAR ENDED DECEMBER 31, 2003
Total revenues $ 886,239 $ 867,403 $ 1,047,037 $ 1,100,617
Net income 85,490 38,870 112,594 51,397
Net income per common share:
Basic $ 0.0029 $ 0.0013 $ 0.0039 0.0018
Diluted 0.0027 0.0012 0.0036 0.0016
Weighted average number of common
share outstanding:
Basic 29,210,217 29,213,550 29,213,550 29,213,550
Diluted 31,314,000 31,200,000 31,203,752 31,285,444
66
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
United Medicorp, Inc.
Pampa, Texas
We have audited the accompanying consolidated balance sheets of United Medicorp,
Inc. as of December 31, 2004 and 2003, and the related consolidated statements
of operations, stockholder's equity (deficit), and cash flows for the years
ended December 31, 2004, 2003 and 2002. Our audits also included the financial
statement schedule referred to in the index at Item 8. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Medicorp,
Inc. as of December 31, 2004 and 2003, and the consolidated results of its
operations and its cash flows for the years ended December 31, 2004, 2003 and
2002 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Hein & Associates LLP
March 11, 2005
Dallas, Texas
67
UNITED MEDICORP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2003, 2002 and 2001
Balance
at Balance
beginning at
of end of
Description year Additions Deductions Year
- ----------- ---------- ---------- ---------- ----------
(1)
YEAR ENDED DECEMBER 31, 2004
Allowance for doubtful accounts $ 417 $ 59,607 $ -- $ 60,024
YEAR ENDED DECEMBER 31, 2003
Allowance for doubtful accounts $ 504 $ -- $ (90) $ 417
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts $ 435 $ 1,756 $ (1,687) $ 504
- --------------------
(1) Represents write-off of uncollectible trade receivables.
68