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.
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.
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.
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
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.
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.
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.
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.
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.
Item 3. Legal Proceedings
None
Item 4.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
(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
(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.
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.
(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.
(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.
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).
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).
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)
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.
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
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)
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.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
A. THE COMPANY
United Medicorp Texas, Inc., was incorporated in the State of Texas on March 13, 1989 ("UMC-Texas"). On July 10, 1989, in an exchange of stock, UMC-Texas was acquired by Gamma Resources, Inc., a publicly-owned Delaware shell corporation, which simultaneously changed its name to United Medicorp, Inc. (the "Company", "UMC" or the "Registrant"). On November 18, 1996, the Company filed "Articles of Amendment to the Articles of Incorporation of Sterling Hospital Systems, Inc." whereby this wholly owned subsidiary of UMC was renamed United MoneyCorp, Inc. ("UMY"). UMY has been designated as the legal entity under which UMC operates a collection agency. On August 7, 1998, UMC acquired 100% of the common stock of Allied Health Options, Inc. ("AHO"), an Alabama corporation. Effective June 30, 1999, the Company discontinued the operations of AHO. On October 14, 1999, AHO filed a voluntary petition in the United States Bankruptcy Court for the Northern District of Texas to liquidate pursuant to Chapter 7 of Title 11 of the United States Bankruptcy code. On November 16, 1999, the Chapter 7 bankruptcy 341 creditors meeting was held. Unless the context indicates otherwise, references herein to the Company include UMC and its operating subsidiary UMY.
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.
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
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
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.
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.
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.
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.
Interest expense on capital lease obligations was $19,490, $12,261 and $1,259 during 2004, 2003 and 2002, respectively.
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.
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
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.
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
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.
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
- --------------------
(1) Represents write-off of uncollectible trade receivables.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements appear beginning at page 47.
Item 9.
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.
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.
Item 9B. Other Information
None
PART III
Item 10.
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.
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.
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.
(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
(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.
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.
(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.
(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.
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).
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).
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)
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.
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
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)
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.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
A. THE COMPANY
United Medicorp Texas, Inc., was incorporated in the State of Texas on March 13, 1989 ("UMC-Texas"). On July 10, 1989, in an exchange of stock, UMC-Texas was acquired by Gamma Resources, Inc., a publicly-owned Delaware shell corporation, which simultaneously changed its name to United Medicorp, Inc. (the "Company", "UMC" or the "Registrant"). On November 18, 1996, the Company filed "Articles of Amendment to the Articles of Incorporation of Sterling Hospital Systems, Inc." whereby this wholly owned subsidiary of UMC was renamed United MoneyCorp, Inc. ("UMY"). UMY has been designated as the legal entity under which UMC operates a collection agency. On August 7, 1998, UMC acquired 100% of the common stock of Allied Health Options, Inc. ("AHO"), an Alabama corporation. Effective June 30, 1999, the Company discontinued the operations of AHO. On October 14, 1999, AHO filed a voluntary petition in the United States Bankruptcy Court for the Northern District of Texas to liquidate pursuant to Chapter 7 of Title 11 of the United States Bankruptcy code. On November 16, 1999, the Chapter 7 bankruptcy 341 creditors meeting was held. Unless the context indicates otherwise, references herein to the Company include UMC and its operating subsidiary UMY.
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.
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
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
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.
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.
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.
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.
Interest expense on capital lease obligations was $19,490, $12,261 and $1,259 during 2004, 2003 and 2002, respectively.
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.
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
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.
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
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.
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
- --------------------
(1) Represents write-off of uncollectible trade receivables.
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.
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.
PART IV
Item 15.
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).
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).
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)
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.
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
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)
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.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
A. THE COMPANY
United Medicorp Texas, Inc., was incorporated in the State of Texas on March 13, 1989 ("UMC-Texas"). On July 10, 1989, in an exchange of stock, UMC-Texas was acquired by Gamma Resources, Inc., a publicly-owned Delaware shell corporation, which simultaneously changed its name to United Medicorp, Inc. (the "Company", "UMC" or the "Registrant"). On November 18, 1996, the Company filed "Articles of Amendment to the Articles of Incorporation of Sterling Hospital Systems, Inc." whereby this wholly owned subsidiary of UMC was renamed United MoneyCorp, Inc. ("UMY"). UMY has been designated as the legal entity under which UMC operates a collection agency. On August 7, 1998, UMC acquired 100% of the common stock of Allied Health Options, Inc. ("AHO"), an Alabama corporation. Effective June 30, 1999, the Company discontinued the operations of AHO. On October 14, 1999, AHO filed a voluntary petition in the United States Bankruptcy Court for the Northern District of Texas to liquidate pursuant to Chapter 7 of Title 11 of the United States Bankruptcy code. On November 16, 1999, the Chapter 7 bankruptcy 341 creditors meeting was held. Unless the context indicates otherwise, references herein to the Company include UMC and its operating subsidiary UMY.
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.
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
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
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.
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.
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.
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.
Interest expense on capital lease obligations was $19,490, $12,261 and $1,259 during 2004, 2003 and 2002, respectively.
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.
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
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.
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
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.
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
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(1) Represents write-off of uncollectible trade receivables.