<PAGE>
- -------------------------------------------------------------------------------
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-10418
UNITED MEDICORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2217002
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10210 NORTH CENTRAL EXPRESSWAY
SUITE 400
DALLAS, TEXAS 75231
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 691-2140
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES NO X
--- ---
As of November 20, 1998, there were outstanding 27,910,217 shares of
Common Stock, $0.01 par value.
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<PAGE>
UNITED MEDICORP, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and December 31, 1997. . . . . . . . . . . . . . . 3
Notes to the Consolidated Financial Statements . . . . . . . . . . . . 4
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . 25
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . 26
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 27
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (Audited)
SEPTEMBER 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 282,861 $ 275,948
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . 94,847 154,096
Accounts receivable, net of allowance for doubtful accounts.
of $975,721 and $11,674, respectively . . . . . . . . . 604,510 430,069
Notes receivable . . . . . . . . . . . . . . . . . . . . . . 2,000 4,000
Prepaid expenses and other current assets. . . . . . . . . . 19,873 20,201
------------ ------------
Total current assets. . . . . . . . . . . . . . . . . . . 1,004,091 884,314
Property and equipment, net . . . . . . . . . . . . . . . . . . 236,411 188,248
Other non-current assets. . . . . . . . . . . . . . . . . . . . 16,505 11,999
Goodwill, net of accumulated amortization of $4,895 . . . . . . 582,499 --
Medicare provider numbers, net of accumulated
amortization of $5,417. . . . . . . . . . . . . . . . . . 644,583 --
------------ ------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . 2,484,089 1,084,561
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . 275,225 68,270
Payable to clients . . . . . . . . . . . . . . . . . . . . . 7,597 75,135
Accrued Medicare settlement. . . . . . . . . . . . . . . . . 459,893 --
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . 369,655 268,423
Deferred credit. . . . . . . . . . . . . . . . . . . . . . . -- 8,802
Payable to funding source. . . . . . . . . . . . . . . . . . 87,250 78,961
Current portion of long term debt. . . . . . . . . . . . . . 244,591 --
Current portion of capital lease obligations . . . . . . . . 66,777 53,171
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . 1,510,988 552,762
Accrued Medicare settlement . . . . . . . . . . . . . . . . . . 80,201 --
Long term debt, excluding current portion . . . . . . . . . . . 190,955 --
Long term capital lease obligations, excluding current portion. 52,707 84,368
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . 1,834,851 637,130
------------ ------------
Stockholders' equity:
Common stock; $0.01 par value; 50,000,000 shares authorized;
28,015,764 shares and 28,015,764 shares outstanding,
respectively. . . . . . . . . . . . . . . . . . . . . . . 280,157 280,157
10% Cumulative convertible preferred stock; $0.01 par value;
5,000,000 shares authorized; none issued. . . . . . . . . -- --
Less treasury stock at cost, 105,547 shares. . . . . . . . . (221,881) (221,881)
Additional paid-in capital . . . . . . . . . . . . . . . . . 18,695,829 18,695,829
Retained deficit . . . . . . . . . . . . . . . . . . . . . . (18,104,867) (18,306,674)
------------ ------------
Total stockholders' equity. . . . . . . . . . . . . . . . 649,238 447,431
------------ ------------
Total liabilities and stockholders' equity. . . . . . . . $ 2,484,089 $ 1,084,561
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
1
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Billing and collection services. . . . . . . . . . . . . . . $ 947,562 $735,537 3,251,460 $1,771,876
Net patient services . . . . . . . . . . . . . . . . . . . . 403,823 -- 403,823 --
Other revenues . . . . . . . . . . . . . . . . . . . . . . . 22,930 18,730 107,891 25,190
---------- -------- ---------- ----------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . 1,374,315 754,267 3,763,174 1,797,066
EXPENSES:
Wages and benefits . . . . . . . . . . . . . . . . . . . . . 911,729 548,072 2,399,120 1,277,492
Selling, general and administrative. . . . . . . . . . . . . 243,256 144,661 711,563 332,662
Professional fees. . . . . . . . . . . . . . . . . . . . . . 95,737 (5,687) 125,092 23,745
Office, vehicle and equipment rental . . . . . . . . . . . . 57,058 23,694 119,165 62,854
Provision for doubtful accounts. . . . . . . . . . . . . . . 92,164 -- 119,078 --
Depreciation and amortization. . . . . . . . . . . . . . . . 34,312 31,052 77,441 76,830
Interest, net. . . . . . . . . . . . . . . . . . . . . . . . 6,633 2,602 9,908 6,128
Other (income) expense, net. . . . . . . . . . . . . . . . . -- -- -- (316)
---------- -------- ---------- ----------
Total expenses. . . . . . . . . . . . . . . . . . . . . . 1,440,889 744,394 3,561,367 1,779,395
---------- -------- ---------- ----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . $ (66,574) $ 9,873 $ 201,807 $ 17,671
---------- -------- ---------- ----------
---------- -------- ---------- ----------
Basic earnings (loss) per common share. . . . . . . . . . . . . $ (.0024) $ .0004 $ .0072 $ .0007
---------- -------- ---------- ----------
---------- -------- ---------- ----------
Diluted earnings (loss) per common share. . . . . . . . . . . . $ (.0024) $ .0004 $ .0072 $ .0007
---------- -------- ---------- ----------
---------- -------- ---------- ----------
Weighted average common shares
outstanding. . . . . . . . . . . . . . . . . . . . . . . . . 27,910,217 27,718,913 27,910,217 26,790,803
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
2
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 201,807 $ 17,671
Adjustments to reconcile net income to net cash provided (used in)
operating activities:
Depreciation of fixed assets . . . . . . . . . . . . . . . . . . . . . 67,129 76,830
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . 4,895 --
Amortization of Medicare provider numbers. . . . . . . . . . . . . . . 5,417 --
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . 119,078 --
(Gain) on sales of assets. . . . . . . . . . . . . . . . . . . . . . . -- (316)
Changes in assets and liabilities net of effects from purchase of
Allied Health Options, Inc.:
(Increase) decrease in restricted cash . . . . . . . . . . . . . . . . 59,249 (176,193)
(Increase) in purchased claims . . . . . . . . . . . . . . . . . . . . -- (21,714)
(Increase) in accounts receivable, gross . . . . . . . . . . . . . . . (107,339) (208,725)
(Increase) decrease in notes receivable. . . . . . . . . . . . . . . . 2,000 (4,000)
Decrease in prepaid expenses and other assets. . . . . . . . . . . . . 762 10,897
Increase in accounts payable . . . . . . . . . . . . . . . . . . . . . 9,168 16,719
Increase (decrease) in payable to clients. . . . . . . . . . . . . . . (67,538) 115,389
Increase in accrued Medicare settlement. . . . . . . . . . . . . . . . (240,815) --
Increase in accrued liabilities. . . . . . . . . . . . . . . . . . . . 55,170 57,770
Increase in payable to funding source. . . . . . . . . . . . . . . . . 8,289 77,411
(Decrease) in deferred credits . . . . . . . . . . . . . . . . . . . . (8,802) (11,319)
---------- ---------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . 108,470 (49,580)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . (56,925) (118,068)
Acquisition of Allied Health Options, Inc., net of cash acquired . . . . . . 64,252 --
---------- ---------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . 7,327 (118,068)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock . . . . . . . . . . . . . . . . . . . -- 159,487
Principal payments on long term debt . . . . . . . . . . . . . . . . . . . . (58,291) --
Principal payments on capital lease obligations. . . . . . . . . . . . . . . (50,593) (42,729)
---------- ---------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . (108,884) 116,758
---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . 6,913 (50,890)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . 275,948 188,868
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . . . . . . . . . . . . . $ 282,861 $ 137,978
---------- ---------
---------- ---------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,829 $ 4,497
Non-cash investing and financing activities:
Additions to capital lease obligations . . . . . . . . . . . . . . . . . . . $ 32,538 $ 41,133
On August 7, 1998, United Medicorp, Inc. acquired 100% of the common stock
of Allied Health Options, Inc. for $1. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired, including Medicare provider numbers . . . . . $ 931,202
Purchase accounting goodwill . . . . . . . . . . . . . . . . . . . . . . . . 587,394
Cash paid for common stock . . . . . . . . . . . . . . . . . . . . . . . . . (1)
----------
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,518,595
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
3
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
United Medicorp, Inc. ("UMC" or the "Company") include its wholly owned
subsidiaries, United MoneyCorp. Inc. ("UMY"), and Allied Health Options,
Inc. ("AHO"). All material intercompany transactions and balances have
been eliminated. The financial information presented should be read in
conjunction with the audited financial statements of the Company for the
year ended December 31, 1997 included in the Company's Annual Report on
Form 10-K.
On August 7, 1998, UMC acquired 100% of the common stock of AHO, an
Alabama corporation, engaged in the business described below. AHO was
incorporated as an subchapter S corporation in the State of Alabama on
February 7, 1996 to provide: outpatient services, including specialized
outpatient services for children, the elderly, individuals who are
chronically mentally ill, and residents of the community mental health
services area who have been discharged from inpatient treatment at a
mental health facility; twenty four hour a day emergency care services;
day treatment, other partial hospitalization services, or psychosocial
rehabilitation services; screening for patients being considered for
admission to State mental health facilities to determine the
appropriateness of such admission; and consultation and education
services. AHO operates three Community Mental Health Centers ("CMHC's")
under the names: Behavioral Health of Mobile ("BHM"), Calhoun County
Behavioral Health ("CCBH"), and Pensacola Center for Behavioral Health
("PCBH"). BHM, located in Mobile, Alabama, began operations on March 8,
1996. CCBH, located in Oxford, Alabama, began operations on August 26,
1996. PCBH, located in Pensacola, Florida, began operations on October 9,
1996. BHM and CCBH obtained Health Care Financing Administration ("HCFA")
certification to provide partial hospitalization services as a CMHC under
Medicare Part A effective February 1, 1996. PCBH obtained HCFA
certification to provide partial hospitalization services as a CMHC under
Medicare Part A effective October 2, 1996.
The unaudited consolidated financial information has been prepared in
accordance with the Company's customary accounting policies and practices.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments necessary for a fair presentation of results for the
interim period, have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Significant estimates included in the accompanying
financial statements include: the allowance for bad debt with respect to
AHO accounts receivable, the accrued Medicare settlement and the
amortization periods for goodwill and capitalized Medicare provider
numbers. Actual results could differ from those estimates. The results
for interim periods are not necessarily indicative of results to be
expected for the year.
4
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2. SEGMENT REPORTING
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 supersedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. The adoption of SFAS did not
affect results of operations or financial position but did affect the
disclosure of segment information.
Management organizes consolidated UMC around differences in services
offered. UMC provides medical insurance claims processing, medical
accounts receivable management and other healthcare related ancillary
services. UMY provides early out, bad debt and secondary account
collection agency services to the health care industry. UMC and UMY are
aggregated into one reportable health care BUSINESS OFFICE SERVICES
segment based on the similarity of the nature of the medical claim or
account collection services, nature of the information technology and
human resource production process and service delivery methodologies, as
well as the predominantly health care industry customer base of both UMC
and UMY. On August 7, 1998, UMC acquired 100% of the common stock of AHO.
AHO provides direct partial hospitalization and outpatient behavioral
services programs and derives a substantial portion of its revenues and
cash flows from cost based Medicare reimbursement supplemented by Medicaid
and commercial insurance payments. AHO is organized into one reportable
BEHAVIORAL HEALTH SERVICES segment.
UMC evaluates the performance of its segments and allocates resources
to them based on revenues and net income. Segment data includes a "home
office" allocation of certain UMC corporate costs related to AHO. There
are no inter-segment sales.
In the following reportable segment table, the column heading "Three
Month Period Ended September 30, 1998" includes Business Office Services
for the three months ended September 30, 1998 and Behavioral Health
Services for the two months ended September 30, 1998. The column
heading "Nine Month Period Ended September 30, 1998" includes Business
Office Services for the nine months ended September 30, 1998 and
Behavioral Health Services for the two months ended September 30, 1998.
5
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Information for the Business Office Services and Behavioral Health
Services segments is as follows:
<TABLE>
<CAPTION>
THREE NINE
MONTH THREE MONTH NINE
PERIOD MONTHS PERIOD MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
EXTERNAL REVENUE:
Business Office Services. . . . . . . . . . . . $ 970,492 $754,267 $3,359,351 $1,797,066
Behavioral Health Services. . . . . . . . . . . 403,823 -- 403,823 --
---------- -------- ---------- ----------
1,374,315 754,267 3,763,174 1,797,066
---------- -------- ---------- ----------
---------- -------- ---------- ----------
OPERATING EXPENSES:
Business Office Services. . . . . . . . . . . . 967,879 710,740 3,015,039 1,696,437
Behavioral Health Services. . . . . . . . . . . 339,901 -- 339,901 --
---------- -------- ---------- ----------
1,307,780 710,740 3,354,940 1,696,437
---------- -------- ---------- ----------
---------- -------- ---------- ----------
MEDICARE HOME OFFICE COSTS ALLOCATION:
Business Office Services. . . . . . . . . . . . (50,000) -- (50,000) --
Behavioral Health Services. . . . . . . . . . . 50,000 -- 50,000 --
---------- -------- ---------- ----------
-- -- -- --
---------- -------- ---------- ----------
---------- -------- ---------- ----------
PROVISION FOR DOUBTFUL ACCOUNTS:
Business Office Services. . . . . . . . . . . . -- -- 26,914 --
Behavioral Health Services. . . . . . . . . . . 92,164 -- 92,164 --
---------- -------- ---------- ----------
92,164 -- 119,078 --
---------- -------- ---------- ----------
---------- -------- ---------- ----------
FIXED ASSETS DEPRECIATION:
Business Office Services. . . . . . . . . . . . 22,604 30,316 65,733 74,621
Behavioral Health Services. . . . . . . . . . . 1,396 -- 1,396 --
---------- -------- ---------- ----------
24,000 31,052 67,129 76,830
---------- -------- ---------- ----------
---------- -------- ---------- ----------
MEDICARE PROVIDER NUMBER AND GOODWILL AMORTIZATION:
Business Office Services. . . . . . . . . . . . -- -- -- --
Behavioral Health Services. . . . . . . . . . . -- -- -- --
Adjustments/eliminations. . . . . . . . . . . . 10,312 736 10,312 2,209
---------- -------- ---------- ----------
10,312 736 10,312 2,209
---------- -------- ---------- ----------
---------- -------- ---------- ----------
INTEREST EXPENSE:
Business Office Services. . . . . . . . . . . . 3,210 4,161 8,229 11,239
Behavioral Health Services. . . . . . . . . . . 7,600 -- 7,600 --
---------- -------- ---------- ----------
10,810 4,161 15,829 11,239
---------- -------- ---------- ----------
---------- -------- ---------- ----------
INTEREST (INCOME)
Business Office Services. . . . . . . . . . . . (4,177) (1,559) (5,921) (5,111)
Behavioral Health Services. . . . . . . . . . . -- -- -- --
---------- -------- ---------- ----------
(4,177) (1,559) (5,921) (5,111)
---------- -------- ---------- ----------
---------- -------- ---------- ----------
NET INCOME (loss)
Business Office Services. . . . . . . . . . . . 30,976 9,873 299,357 17,671
Behavioral Health Services. . . . . . . . . . . (87,238) -- (87,238) --
Adjustments/eliminations. . . . . . . . . . . . (10,312) -- (10,312) --
---------- -------- ---------- ----------
$ (66,574) $ 9,873 $ 201,807 $ 17,671
---------- -------- ---------- ----------
---------- -------- ---------- ----------
</TABLE>
6
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
CASH:
Business Office Services. . . . . . . . . . . . $ 215,394 $275,948
Behavioral Health Services. . . . . . . . . . . 67,467 --
----------- --------
282,861 275,948
----------- --------
----------- --------
ACCOUNTS RECEIVABLE, NET:
Business Office Services. . . . . . . . . . . . 381,129 430,069
Behavioral Health Services. . . . . . . . . . . 223,381 --
----------- --------
604,510 430,069
----------- --------
----------- --------
MEDICARE PROVIDER NUMBERS AND GOODWILL, NET:
Business Office Services. . . . . . . . . . . . -- --
Behavioral Health Services. . . . . . . . . . . -- --
Adjustments/eliminations. . . . . . . . . . . . 1,227,082 --
----------- --------
1,227,082 --
----------- --------
----------- --------
OTHER ASSETS:
Business Office Services. . . . . . . . . . . . 736,668 378,544
Behavioral Health Services. . . . . . . . . . . 31,966 --
Adjustments/eliminations. . . . . . . . . . . . (398,998) --
----------- --------
369,636 378,544
----------- --------
----------- --------
CURRENT INSTALLMENTS ON LONG TERM DEBT:
Business Office Services. . . . . . . . . . . . 66,777 53,171
Behavioral Health Services. . . . . . . . . . . 244,591 --
----------- --------
311,368 53,171
----------- --------
----------- --------
LONG TERM DEBT, EXCLUDING CURRENT PORTION:
Business Office Services. . . . . . . . . . . . 52,707 84,368
Behavioral Health Services. . . . . . . . . . . 190,955 --
----------- --------
243,662 84,368
----------- --------
----------- --------
ACCRUED MEDICARE SETTLEMENT:
Business Office Services. . . . . . . . . . . . -- --
Behavioral Health Services. . . . . . . . . . . 540,094 --
----------- --------
540,094 --
----------- --------
----------- --------
OTHER LIABILITIES:
Business Office Services. . . . . . . . . . . . 466,919 499,591
Behavioral Health Services. . . . . . . . . . . 671,805 --
Adjustments/eliminations. . . . . . . . . . . . (398,997) --
----------- --------
739,727 499,591
----------- --------
----------- --------
STOCKHOLDER'S EQUITY:
Business Office Services. . . . . . . . . . . . 746,788 447,431
Behavioral Health Services. . . . . . . . . . . (1,324,631) --
Adjustments/eliminations. . . . . . . . . . . . 1,227,081 --
----------- --------
$ 649,238 $447,431
----------- --------
----------- --------
</TABLE>
7
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3. ACCOUNTS RECEIVABLE - AHO
Accounts receivable represent amounts due from third-party payors for
services provided. Such amounts are recorded net of contractual
allowances, indigent write-off, provision for doubtful accounts and the
accrued Medicare settlement.
NOTE 4. GOODWILL
Goodwill represents the excess of the purchase price over the fair
value of net assets acquired and is amortized using the straight-line
method over the expected useful life which is twenty years. This
amortization period has not been reviewed by the Company's independent
accountants and is therefore subject to change. It is the Company's
policy to periodically review the net realizable value of goodwill through
an assessment of the estimated future cash flows related to goodwill to
determine whether future cash flows over the remaining estimated useful
life of goodwill provide for its recovery. In the event that goodwill is
found to be carried at an amount in excess of estimated future cash flows,
undiscounted and without interest, then goodwill will be adjusted for
impairment to a level commensurate with a discounted cash flow analysis.
As of November 20, 1998, the Company had not performed an impairment
analysis.
NOTE 5. MEDICARE PROVIDER NUMBERS
Medicare provider numbers are recorded at estimated fair market value
at the date of the acquisition of AHO and are amortized using the
straight-line over the expected useful life which is twenty years. This
amortization period has not been reviewed by the Company's independent
accountants and is therefore sunbject to change. It is the Company's
policy to periodically review the net realizable value of the Medicare
provider numbers through an assessment of the estimated future cash flows
related to the Medicare provider numbers to determine whether future cash
flows over the remaining estimated useful life of the Medicare provider
numbers provide for its recovery. In the event that the Medicare provider
numbers is found to be carried at an amount in excess of estimated future
cash flows, undiscounted and without interest, then the Medicare provider
numbers will be adjusted for impairment to a level commensurate with the
current fair market value. As of November 20, 1998, the Company had not
performed an impairment analysis.
NOTE 6. ACCRUED MEDICARE SETTLEMENT
AHO's Medicare cost reports have not yet been audited by the Medicare
fiscal intermediaries for the years ended December 31, 1997 and 1996. These
cost reports were filed with the fiscal intermediaries using unaudited
financial information. The accrued Medicare settlement includes estimates
representing probable differences between the unaudited financial
information used to complete the 1997 and 1996 cost reports as compared to
the preliminary financial statements currently being audited for the two
years ended December 31, 1997. The balance also includes Medicare
adjustments and reserves primarily related to Medicare reimbursable bad
debt and changes in the interim reimbursement rate which are accrued on an
estimated basis in the period the related services are rendered and
adjusted in future periods as final settlement is determined.
8
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7. NOTES PAYABLE
Long-term debt consists of:
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Vendor Note, bearing interest at 7.75% per annum,
monthly installments of $9,347, secured (Note 11). . $269,424
1996 Medicare Overpayment, bearing interest at
13.5% per annum, monthly installments of
$12,500, secured (Note 11) . . . . . . . . . . . . . 166,122
--------
Total long-term debt . . . . . . . . . . . . . . . . 435,546
Less current installments . . . . . . . . . . . . . . . 244,591
--------
Long-term debt, excluding current installments. . . . . $190,955
--------
--------
</TABLE>
NOTE 8. NET PATIENT SERVICES REVENUE - AHO
Net patient services revenue is reported at the estimated net
realizable amounts from third-party payors and patients for services
rendered, including contractual adjustments, indigent write-off and the
accrued Medicare settlement
Certain partial hospitalization services costs related to Medicare
beneficiaries are reimbursed to AHO from Medicare based on a cost
reimbursement methodology. AHO is reimbursed for cost reimbursable items
at a tentative rate with final settlement determined after submission of
annual cost reports by AHO and audits thereof by the Medicare fiscal
intermediaries.
Net patient services revenue, as reported in the accompanying
Consolidated Statements of Operations for the two months ended September
30, 1998, consists of:
<TABLE>
<CAPTION>
Two Months
Ended
September 30,
1998
-------------
<S> <C>
Gross patient charges . . . . . . . . . . . . . . . . . $887,719
Deductions from gross patient charges:
Contractual adjustments. . . . . . . . . . . . . . . 505,229
Indigent write-off . . . . . . . . . . . . . . . . . 42,560
Accrued Medicare settlement. . . . . . . . . . . . . (63,893)
--------
Net patient services revenue. . . . . . . . . . . . . . $403,823
--------
--------
</TABLE>
9
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9. OTHER REVENUES
Other revenues consists primarily of consulting and advance funding
fees. Consulting fees are recognized as services are rendered. Advance
funding fees are recognized upon receipt of payment of funded claims from
a third party payor.
NOTE 10. BAD DEBT EXPENSE
AHO bad debt expense is comprised of estimates of non-Medicare claims
that may not be collectible. Upon acquisition, due to the lack of a
uniform policy regarding bad debt reserve estimates, the following policy
was implemented for non-Medicare claims
<TABLE>
<CAPTION>
Claim Age (days) Reserve (%)
---------------- -----------
<S> <C>
> 120 100
91-120 75
61-90 50
30-60 25
</TABLE>
UMC accounts receivable are reserved on an account by account basis.
In general, accounts aged greater than 120 days are fully reserved.
NOTE 11. ASSETS PLEDGED AS COLLATERAL
Effective February 19, 1997, AHO executed a Medical Claims Purchase
Agreement with UMC whereby UMC purchased an undivided interest in certain
AHO claims. AHO pledged all current and future accounts receivable as
collateral for advances against purchased claims. At September 30, 1998,
there were no outstanding advances or purchased claims for which assets had
been pledged.
On March 7, 1997, a petition for relief under title 11, chapter 7 of
the US Bankruptcy Code was filed against AHO by certain vendors
("Vendors") seeking relief of unpaid claims totaling $526,861 related to:
loans; advances; rentals; management; computers and other services. As
final settlement of the bankruptcy petition, effective May 14, 1997, AHO
and Vendors executed a promissory note (the "Vendor Note") for $384,698.
As collateral for this note, AHO pledged the balance of all current and
future accounts receivable in excess of $200,000. In conjunction with
this pledge, UMC executed a subordination agreement with Vendors whereby
UMC subordinated to Vendors its security interest in AHO's current and
future accounts receivable in excess of $200,000. At September 30, 1998,
accounts receivable totaling $269,424 were pledged as collateral for the
Vendor Note.
For the year ended December 31, 1996, the tentative settlement due to
Medicare from BHM and CCBH for prospective reimbursement in excess of
reimbursable costs totaled $217,808 and 95,232, respectively (the "1996
Medicare Overpayment"). On August 6, 1997, AHO executed a thirty month
extended repayment plan with Medicare for the principal balance of
$313,040. The extended repayment plan is structured so that Medicare
collects its monthly payments directly from submitted
10
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
patient claims. The unpaid principal balance is de facto secured by future
Medicare claims. At September 30, 1998, accounts receivable totaling
$166,122 were pledged as collateral for the 1996 Medicare Overpayment.
NOTE 12. CONCENTRATIONS OF MARKET AND CREDIT RISK - AHO
Financial instruments which potentially subject AHO to concentrations of
credit risk are primarily cash equivalents and net accounts receivable. It
is AHO's practice to place its cash equivalents in high quality accounts.
The percentage mix of net accounts receivable from third-party payors at
September 30, 1998, was:
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Medicare ............................................ 46%
Commercial insurance including Medicare secondary.... 54
----
100%
----
----
</TABLE>
AHO does not expect its payors to fail to meet their obligations and, as
such, considers the credit risk associated with its net trade accounts
receivable to be minimal. AHO grants credit without collateral to its
patients.
All of AHO's revenue is generated from the healthcare industry. The
percentage market mix of net patient service revenue from third-party payors
for two months ended September 30, 1998, was:
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Medicare including Medicare secondary................ 81%
Commercial insurance................................. 19
----
100%
----
----
</TABLE>
NOTE 13. SUBSEQUENT EVENTS
On October 16, 1998, the Company received notice from the Florida
Medicare fiscal intermediary (the "Florida FI") indicating that a
tentative settlement of $186,512 was due from PCBH for prospective
reimbursement in excess of reimbursable costs for the nine months ended
September 30, 1998. To avoid suspension of interim payments, the Florida
FI required that this amount be repaid in full by October 31, 1998. As of
the date of this filing, no payments had been made to the Florida FI due
to insufficient cash and other working capital resources. Management has
been informed that effective November 12, 1998, all interim payments to
PCBH had been suspended until the overpayment is recovered through the
submission of future Medicare claims.
On October 27, 1998, the Company received notice from the Alabama
Medicare fiscal intermediary (the "Alabama FI") indicating that BHM had
been placed on one hundred percent medical review of its medical records
based on certain deficiencies identified by the Alabama FI in the medical
records. This review will affect all future Medicare claims submitted by
BHM until such time that deficiencies are corrected. Management estimates
that BHM will be required to demonstrate
11
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
improved quality of medical records for a period of at least three months
in order to be removed from one hundred percent medical review status.
During this period of time, management will vigorously pursue quality
improvements in the medical records and will seek a progressively
declining review percentage. Because of the medical review, it is
anticipated that Medicare payments made on those claims that pass future
medical review will be delayed by thirty to sixty days. Claims that do
not pass medical review by the Alabama FI will be submitted for
reconsideration and appeal as necessary.
Upon receiving the forgoing notices, management implemented the
following plan:
a) Employee headcount and other expenses at PCBH and BHM have been
reduced
b) Management has requested and intends to apply to the Florida FI for
an extended repayment plan. This plan if approved will allow for
repayment over a period from twelve to thirty six months.
c) Management has engaged specialized clinical oversight and quality
assurance consulting services to review, render an opinion on, and
where applicable, pursue reconsideration and appeal of denied claims.
Ongoing medical record quality assurance and clinical oversight
services will also be provided. As of the date of this report,
specialized in-service CMHC training has been completed at PCBH and
BHM.
d) Management has entered into various discussions with potential
sources of investment and working capital including application for
an increase in its existing credit facility in order to fund near
term cash requirements.
e) Management has entered into various discussions with parties
potentially interested in buying one or more of the Medicare provider
numbers.
There can be no assurance that any of these strategies can be
effected on satisfactory terms. Any failure with respect to the foregoing
plan will more likely than not have a material adverse effect on the
Company. Should management determine that the existing plan is inadequate
and/or that additional working capital cannot be raised, additional steps
may be required which may include the sale of one or more of the Medicare
provider numbers or termination of operations at one or more of the CMHCs.
NOTE 14. RECLASSIFICATION
Certain prior year balances have been reclassified to conform with
current year presentation.
12
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL CONSIDERATIONS
Except for the historical information contained herein, the matters
discussed may include forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. In order to comply with the terms
of the safe harbor, the Company notes that forward-looking statements include
the intent, belief, or current expectations of the Company and members of its
senior management team, as well as the assumptions on which such statements
are based. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. Important factors currently
known to management that could cause actual results to differ materially from
those in forward-looking statements are set forth in the safe harbor
compliance statement for forward-looking statements included as Exhibit 99.1
to this Form 10-Q, 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.
The Company provides medical insurance claims processing and accounts
receivable management services to health care providers. The Company employs
proprietary and purchased software to provide claims processing, management
and collection services to its customers, which are primarily hospitals and
medical clinics. The Company's basic service is designed to provide an
electronic claims processing, management and collection service that
expedites payment of claims from private insurance carriers or government
payors such as Medicare and Medicaid. The Company also offers to its
customers processing and collection services for uncollected "backlog" (aged)
claims that were not originally submitted through the Company's system. The
Company began providing bad debt collection services during 1996. In
addition, from time to time the Company also provides advance funding
services where the Company purchases and then funds a portion of an eligible
customer's claims in advance of payment of such claims by a private insurance
carrier. A service called UMClaimPros was introduced by the Company in
December 1994. UMClaimPros are experienced claims processors available for
customers' interim staffing needs. During 1997 the Company began providing
consulting services to two operators of Community Mental Health Centers
located in Alabama, Florida and Tennessee. Consulting services are for the
most part related to billing and collection services provided by the Company,
and are focused primarily on compliance with regulations promulgated by the
Healthcare Financing Administration.
Management believes that it has developed a computer hardware and
proprietary software system and a line of services which, together with its
experienced claims management personnel, are capable of effectively
addressing the claims management needs of health care providers. The Company
has also worked with several other companies that provide enhanced software,
electronic claim clearinghouse services, financing and other valuable
services specifically designed to meet the needs of health care provider.
Management believes these efforts have produced a system that provides the
Company's customers with enhanced claims editing, error detection and
management capabilities.
13
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Management further believes its application and refinement of electronic
and computer technologies in the health care claims management industry will
enable the Company to provide claims processing and receivables management
services that will significantly improve its customers' cash flow.
On August 7, 1998, UMC acquired 100% of the common stock of AHO, an
Alabama corporation, engaged in the business described below. AHO was
incorporated as an subchapter S corporation in the State of Alabama on
February 7, 1996 to provide: outpatient services, including specialized
outpatient services for children, the elderly, individuals who are
chronically mentally ill, and residents of the community mental health
services area who have been discharged from inpatient treatment at a mental
health facility; twenty four hour a day emergency care services; day
treatment, other partial hospitalization services, or psychosocial
rehabilitation services; screening for patients being considered for
admission to State mental health facilities to determine the appropriateness
of such admission; and consultation and education services. AHO operates
three Community Mental Health Centers ("CMHC's") under the names: Behavioral
Health of Mobile ("BHM"), Calhoun County Behavioral Health ("CCBH"), and
Pensacola Center for Behavioral Health ("PCBH"). BHM, located in Mobile,
Alabama, began operations on March 8, 1996. CCBH, located in Oxford, Alabama,
began operations on August 26, 1996. PCBH, located in Pensacola, Florida,
began operations on October 9, 1996. BHM and CCBH obtained Health Care
Financing Administration ("HCFA") certification to provide partial
hospitalization services as a CMHC under Medicare Part A effective February
1, 1996. PCBH obtained HCFA certification to provide partial hospitalization
services as a CMHC under Medicare Part A effective October 2, 1996.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send and receive electronic data, or engage in similar normal
business activities.
Based on a recent assessment, the Company determined that it will be
required to modify its proprietary claims processing and follow-up software,
its purchased collection agency software package, and certain other general
business use software applications in order to be Year 2000 compliant. The
Company presently believes that with modifications to the existing
proprietary and purchased claims processing and collection agency software as
well as replacement of certain general business use software, the Year 2000
issue can be mitigated. However, if such modifications and replacements are
not made, or completed timely, the Year 2000 issue would more likely than not
have a material adverse effect on the Company.
The Company has considered its interdependence of computer systems with
its significant customers and third party payors including the Healthcare
Financing Administration ("HCFA") (collectively the "Significant Third
Parties") to determine the extent to which the Company is vulnerable to those
Significant Third Parties' failure to remediate their own Year 2000 issues.
Management considers the vulnerability of the failure of Significant Third
Parties to remediate their own Year 2000 issues to be the greatest Year 2000
risk facing the Company. There can be no guarantee
14
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
that the systems of Significant Third Parties which the Company's customers
rely upon for a portion of their claim payments and which the Company relies
upon for the transmission of claims and account data will be timely
converted. Failure of a Significant Third Party to convert its computer
systems, or a conversion that is incompatible with the Company's systems,
would more likely than not, have a material adverse effect on the Company.
Currently, the Company has not developed a contingency plan to address this
scenario. Should management become aware of information that indicates that
a Significant Third Party more likely than not will not be Year 2000
compliant, a contingency plan will be developed.
The Company's current remediation plan calls primarily for the use of
existing internal resources to reprogram, replace, and test Year 2000
compliance. The total incremental costs associated with this project are
currently estimated to be about $30,000 intended to be funded through
operating cash flows.
To date, the Company has purchased and installed Year 2000 remediation
software. This software has identified all date fields that require
conversion to be Year 2000 compliant and all source code has been converted
to the eight byte date field. In addition, the Year 2000 test environment
has been created. Compliance testing began in August, 1998 and will continue
throughout the remainder of the year. Management currently plans to complete
the Year 2000 project by February 28, 1998.
15
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
ACCOUNTS RECEIVABLE MANAGEMENT SERVICES - PROCESSING VOLUMES
The following table sets forth for each period indicated the volume and
gross dollar amount of insurance claims received and fees recognized for each
of the Company's two principal accounts receivable management services. For
the thirty six months ended September 30, 1998, collections have averaged 36%
of total ongoing and backlog claims:
<TABLE>
<CAPTION>
1998 1997 1996 1995
---------------------- --------------------------------- ----------------------------------- ------
QUARTER
-------------------------------------------------------------------------------------------------------------
THIRD SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UMC
- ----------------
Number of Claims
Accepted for
Processing:
Ongoing 48,162 49,742 89,317 72,803 76,672 42,833 28,729 37,127 40,179 46,860 48,280 47,249
Backlog 1 72 8,518 23,739 28,361 - - - 1 1 41 3,455
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 48,163 49,814 97,835 96,542 105,033 42,833 28,729 37,127 40,180 46,861 48,321 50,704
Gross $ Amount
of Claims
Accepted for
Processing
(000's):
Ongoing 30,116 30,087 40,333 33,375 35,186 20,124 20,269 18,325 18,068 21,055 19,923 21,660
Backlog - 17 2,744 5,868 9,066 - - - - - 17 1,269
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 30,116 30,104 43,077 39,243 44,252 20,124 20,269 18,325 18,068 21,055 19,940 22,929
Collection $
(000's)
Ongoing 11,738 11,215 14,556 12,190 9,407 10,143 7,545 7,063 7,533 8,257 9,019 8,694
Backlog 9 156 128 626 - - - - - 6 70 60
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 11,747 11,371 14,684 12,816 9,407 10,143 7,545 7,063 7,533 8,263 9,089 8,754
Fees Earned $
(000's)
Ongoing 681 729 922 733 480 428 366 376 379 386 408 447
Backlog 1 11 9 46 - - - - - - 3 3
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 682 740 931 778 480 428 366 376 379 386 411 450
Average Fee %
Ongoing 5.8% 6.4% 6.3% 6.0% 5.1% 4.2% 4.9% 5.3% 5.0% 4.7% 4.5% 5.1%
Backlog 11.0% 7.1% 7.0% 13.7% - - - - - - 4.3% 5.0%
</TABLE>
For Ongoing claims, there is typically a time lag of approximately 5 to
45 days from contract execution to computer hardware installation and
training of customer personnel. During this period, Company personnel survey
the customer's existing operations and prepare for installation. Following
installation and training of the customer's personnel, the customer begins
entering claims and transmitting them to the Company. There is usually a time
lag of 30 to 90 days between transmission of a claim to a third party payor
and collection of a claim from that payor.
16
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
COLLECTION AGENCY SERVICES - PROCESSING VOLUME
The following table sets forth for each period indicated the volume and
gross dollar amount of collection accounts received and fees recognized for
UMY. For the twenty one months ended September 30, 1998, collections have
averaged 12% of total accounts. Collection fees percentages charged to the
customer vary for the three different placement categories: bad debt, early
out, and second placements.
<TABLE>
<CAPTION>
1998 1997 1996 1995
----------------------- --------------------------------- ----------------------------------- ------
QUARTER
------------------------------------------------------------------------------------------------------------
THIRD SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH
----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UMY
- ------------------
Number of Accounts
Accepted for
Collection: 31,861 22,130 27,399 27,177 27,801 22,209 3,916 N/A N/A N/A N/A N/A
Gross $Amount
of Accounts
Accepted for
Collection
(000's) 11,664 12,370 14,294 14,543 14,965 19,037 2,264 N/A N/A N/A N/A N/A
Collection $
(000's) 2,282 2,653 2,305 1,994 784 632 96 N/A N/A N/A N/A N/A
Fees Earned
(000's) 232 263 270 196 182 79 20 N/A N/A N/A N/A N/A
Average Fee % 10.2 9.9% 11.8% 9.8% 23.2% 12.5% 20.8% N/A N/A N/A N/A N/A
</TABLE>
For placements of collection accounts, there is typically a time lag of
approximately 15 to 45 days from contract execution to electronic transfer of
accounts from the customer.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
Consolidated Statements of Operations expressed as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
----- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue 100% 100% 100% 100%
----- ---- ---- ----
Wages and benefits 66.4 72.7 63.9 71.2
Selling, general and administrative 17.8 19.1 19.0 18.6
Office and equipment rental 4.2 3.0 3.2 3.6
Depreciation and amortization 2.5 4.0 2.0 4.4
Professional fees 7.1 (0.1) 3.3 1.4
Provision for doubtful accounts 6.8 - 3.2 -
Interest, and other (income) expense - - - -
----- ---- ---- ----
Total expenses 104.8 98.7 94.6 99.2
----- ---- ---- ----
Net income (loss) (4.8%) 1.3% 5.4% 0.8%
----- ---- ---- ----
----- ---- ---- ----
</TABLE>
17
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1998 TO THE QUARTER ENDED
SEPTEMBER 30, 1997
REVENUES increased $620,048, or 82% primarily due to the following:
- - UMC ONGOING ACCOUNTS RECEIVABLE MANAGEMENT SERVICES revenue of $620,739 in
the current quarter increased by $163,577 compared to the same quarter of
1997. This increase is primarily the result of the May 5, 1997 agreement
with the Washington Hospital Center ("WHC") to provide ongoing accounts
receivable management services to certain physician groups served by the
WHC Physician Billing Department ("WHCPBD"). During the current quarter,
the WHCPBD ongoing agreement provided revenue totaling $185,508 compared
to no such revenue during the same quarter of 1997. During the current
quarter, 28,900 physician claims totaling $9.8 million were placed
compared to 13,000 physician claims totaling $4.8 million placed during
the same quarter of 1997. Due to the start-up process for the WHCPBD
agreement and the associated payment lag time, payments on physician
claims placed with UMC in the third quarter of 1997, began in October,
1997. Revenue derived from these payments also began in October, 1997.
Revenue from the WHCPBD agreement exceeded management's estimation of
approximately $160,000 for the current quarter primarily due to a larger
claim volume than was originally anticipated and trailing fees earned as
the claim inventory is worked. Assuming that there are no significant
changes in the volume and mix of claims placed by WHCPBD, management
believes that the WHCPBD agreement will continue to generate revenues of
approximately $150,000 in the fourth quarter of 1998.
During the current quarter, the WHC Hospital Billing Department ("WHCHBD")
agreement provided revenue totaling $411,315 compared to $394,654 during
the same quarter of 1997. During the current quarter, 29,600 claims
totaling $22.2 million were placed compared to 31,900 claims totaling
$20.2 million placed during the same quarter of 1997. Assuming that there
are no significant changes in the volume and mix of claims placed by
WHCHBD, management believes that the WHCHBD agreement will generate
revenues of approximately $420,000 in the fourth quarter of 1998.
During the current quarter, other ONGOING ACCOUNTS RECEIVABLE MANAGEMENT
SERVICES customers provided revenue totaling $27,066 compared to $62,527
during the same quarter of 1997 primarily due to the loss of $9,000 per
month in billing revenue previously generated from AHO as well as other
changes in the customer base. Assuming that there are no significant
changes in the volume and mix of accounts placed from other customers,
or change in the existing customer base, management believes that other
customers will generate revenues of approximately $25,000 in the fourth
quarter of 1998.
- - UMY COLLECTION AGENCY SERVICES revenue of $233,329 in the current quarter
increased by $54,963 compared to the same quarter of 1997 primarily due to
increased collections of early out and bad debt accounts. UMY collector
headcount averaged 14 in the third quarter of each year. During the
current quarter, 31,900 accounts totaling $11.6 million were placed with
UMY compared to 27,800 accounts totaling $15 million placed during the
same quarter of 1997. During the current quarter, one customer provided
revenue from the collection of bad debt, early out and secondary
placements totaling $214,078 compared to $168,324 during the same quarter
of 1997. Assuming that there are no significant changes in the volume and
mix of accounts placed with UMY or change in the
18
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
existing customer base, management believes that UMY will continue to
generate revenues of approximately $175,000 in the fourth quarter of 1998.
Management continues to emphasize customer base growth in order to expand
its market presence and to reduce concentration risk. To that extent,
during the first quarter of 1998, the UMY sales force expanded into
central and south Texas. There can be no assurance that the expanded
sales force will produce significant new revenues during the remainder of
the year. UMY serviced an average of 11 active customers during the
current quarter compared to 7 during the same quarter of 1997.
- - OTHER revenue of $22,930 in the current quarter increased by $4,200
compared to the same quarter of 1997 primarily due to ADVANCE FUNDING
SERVICES revenues earned from a single customer and CONSULTING SERVICES
revenues earned from two customers. During the current quarter, ADVANCE
FUNDING SERVICES provided no revenue compared to $4,599 in the same
quarter of 1997 due to decreased funding and repayment of funded claims
from third party payors. During the current quarter, CONSULTING SERVICES
provided revenue totaling $23,218 compared to $16,513 in the same quarter
of 1997 due to decreased services related primarily to compliance with
regulations promulgated by HCFA as well as financial and human resources
management services. Assuming that there is no change in the existing
customer base, management believes that Other revenues will continue at
approximately $12,000 in the fourth quarter of 1998.
- - On August 7, 1998 UMC acquired 100% of the common stock of AHO. AHO NET
PATIENT SERVICES revenue for the two months ended September 30, 1998,
totaled $403,823.
WAGES AND BENEFITS expense increased $363,657 or 66% primarily due to
the acquisition of AHO, increased headcount exclusive of the AHO acquisition,
increased bonuses for UMY collectors related to increased UMY collections and
revenues, and bonus expense related to the 1998 Key Management Bonus Plan
(the "Bonus Plan"). Approximately $198,000 or 55% of this increase relates
to the AHO acquisition which increased headcount by a monthly average of 21
for the two months ended September 30, 1998. Approximately $190,000 or 52% of
this increase relates to increased headcount, excluding AHO headcount,
required to support increased processing volume as well as to enhance the
management infrastructure. During the current quarter, monthly employee
headcount, including AHO, averaged 97 compared to 65 during the same quarter
of 1997. Approximately $40,000 or (11%) of key management bonus expense was
reversed in the current quarter based on the expected 1998 results of
consolidated UMC. Approximately $16,000 or 4% of this increase relates to UMY
collector bonuses. Excluding AHO, it is managements' current intention to
maintain headcount at the existing level for the remainder of 1998 assuming
no significant changes to the existing revenue stream. AHO total headcount
has been reduced from 21 at September 30, 1998, to 15 at November 14, 1998,
as a result of the delay in Medicare claim payments as more fully explained
in Note 13 included in the attached Notes to the Consolidated Financial
Statements and in the following Liquidity and Capital Resources item of this
Form 10-Q. Future headcount adjustments are subject to change based on
unexpected changes in the revenue stream.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense increased $98,595
or 68% primarily due to the acquisition of AHO, increased travel associated
with supporting existing customers and developing new business, increased
printing, postage and telephone expense related to UMY and the WHCPBD
agreement, increased contract labor to temporally fill open positions,
increased recruiting expenses related to open positions and various other
expenses to support a larger customer base and
19
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
increased headcount. For the two months ended September 30, 1998,
approximately $44,500 or 45% of this increase relates to the AHO acquisition.
PROFESSIONAL FEES expense increased $101,424 primarily due to the AHO
acquisition and the reversal of accrued legal fees during the same quarter of
1997. For the two months ended September 30, 1998, approximately $76,500 or
75% of this increase relates to the AHO acquisition. AHO professional fees
are primarily related to Medicare regulatory consulting services, financial
statement audit expenses related to the acquisition as well as accruals for
the audit for the year ending December 31, 1998, and quality assurance and
clinical oversight consulting services. Of the $77,000 in AHO professional
fees, a one-time expense of $55,000 is included related to the audit of the
AHO financial statements for the two years ended December 31, 1997.
OFFICE, VEHICLE AND EQUIPMENT RENTAL expense increased $33,364 or 141%
primarily due to the acquisition of AHO, the lease of two company vehicles
utilized by the sales force at a monthly expense of approximately $1,000 per
month compared to no leased vehicles during the same quarter of 1997, as well
as leasing an additional 1,906 square feet of office space on July 31, 1997
required for UMY. For the two months ended September 30, 1998, approximately
$21,000 or 63% of this increase relates to the AHO acquisition. The Company's
existing Dallas office space is near capacity. Should the Company continue
to grow, management believes that additional office space in Dallas will be
required within the next six months. Given that current market rates on
leased office space have increased significantly from the rates that were in
effect when the Company signed its current lease agreements in 1995,
management believes that the rate per square foot will be approximately 50%
higher than the rate paid on the Company's current office space.
PROVISION FOR DOUBTFUL ACCOUNTS expense increased $92,164 due to the AHO
acquisition.
DEPRECIATION AND AMORTIZATION expense increased $3,260 or 10% primarily
due to additional depreciation and amortization expense related to AHO fixed
assets, Medicare provider numbers and goodwill amortization related to the
AHO acquisition partially offset by a decrease in UMC depreciation expense
primarily related to UMC's AS/400 which was fully depreciated at December 31,
1997. For the two months ended September 30, 1998, AHO's fixed asset
depreciation, goodwill and Medicare provider number amortization totaled
$1,396, $4,895 and $5,417, respectively.
INTEREST, NET increased $4,031 or 155% primarily due to the AHO
acquisition. For the two months ended September 30, 1998, approximately
$7,600 or 189% of this increase relates to AHO debt partially offset by a
decrease of $3,569 related to the reduction in capital lease obligations due
to normal recurring installment payments.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES increased $1,966,108, or 109% primarily due to the following:
- - UMC ONGOING ACCOUNTS RECEIVABLE MANAGEMENT SERVICES revenue of $2,195,316
for the current nine-month period increased by $983,329 compared to the
same period of 1997 primarily due to the aforementioned May 5, 1997
agreement with WHCPBD. During the current nine-month period, the WHCPBD
agreement provided revenue totaling $817,318 compared to no such revenue
during the
20
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
same period of 1997. During the current nine-month period, 100,900
physician claims totaling $32.8 million were accepted for processing
compared to 13,000 physician claims totaling $4.8 million accepted for
processing during the same period of 1997. Due to the start-up process
for the WHCPBD agreement and the associated payment lag time, payments on
physician claims accepted for processing with UMC in the third quarter,
began in October, 1997. Revenue derived from these payments also began in
October, 1997.
During the current nine-month period, the WHCHBD agreement provided
revenue totaling $1,183,204 compared to $1,088,228 during the same period
of 1997. During the current nine-month period, 92,200 claims totaling
$64.7 million were accepted for processing compared to 86,400 claims
totaling $51.4 million accepted for processing during the same period of
1997.
During the current nine-month period, other ONGOING ACCOUNTS RECEIVABLE
MANAGEMENT SERVICES customers provided revenue totaling $197,944 compared
to $123,778 during the same period of 1997 primarily due to the full
nine-month effect of two customers signed in September, 1997 partially
offset by the loss of $9,000 per month in billing revenue previously
generated from AHO as well as other changes in the customer base.
- - UMY COLLECTION AGENCY SERVICES revenue of $766,918 for the current
nine-month period increased by $489,532 compared to the same period of 1997
primarily due to the full nine-month effect in 1998 of a significant
customer agreement signed in the second quarter of 1997 as well as an
increase in UMY collectors. UMY collector headcount increased to an
average of 14 in the current nine-month period compared to 9 in the same
period of 1997. During the current nine-month period, 81,400 accounts
totaling $38.3 million were placed with UMY compared to 53,900 accounts
totaling $36.3 million placed during the same period of 1997. During the
current nine-month period, one customer provided revenue from the
collection of bad debt, early out and secondary placements totaling
$726,188 compared to $241,595 for the same period of 1997 primarily due to
the full nine-month effect of the agreement in 1998 compared to an
approximate five-month effect of the agreement in 1997.
- - OTHER revenue of $107,891 for the current nine-month period increased by
$82,701 compared to the same period of 1997 primarily due to ADVANCE
FUNDING SERVICES revenues earned from a single customer and CONSULTING
SERVICES revenues earned from two customers. During the current nine-month
period, ADVANCE FUNDING SERVICES provided revenue totaling $27,410 compared
to $8,677 in the same period of 1997 due to increased funding and repayment
of funded claims from third party payors. During the current nine-month
period, CONSULTING SERVICES provided revenue totaling $80,481 compared
$16,513 in the same period of 1997 due to increased services related
primarily to compliance with regulations promulgated by HCFA as well as
general financial and human resources management services.
- - On August 7, 1998 UMC acquired 100% of the common stock of AHO. AHO NET
PATIENT SERVICES revenue for the two months ended September 30, 1998,
totaled $403,823.
WAGES AND BENEFITS expense increased $1,121,628 or 88% primarily due to
the acquisition of AHO, increased headcount exclusive of the AHO acquisition,
increased bonuses for UMY collectors related to increased UMY collections and
revenues, and bonus expense related to the Bonus Plan. Approximately $786,000
or 72% of this increase relates to increased headcount, excluding AHO
21
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
headcount, required to support increased processing volume as well as to
enhance the management infrastructure. Approximately $198,000 or 18% of this
increase relates to the AHO acquisition which increased headcount by a
monthly average of 21 during the two months ended September 30, 1998.
Approximately $62,000 or 6% of this increase relates to key management bonus
expense as a result of the Bonus Plan. Approximately $46,000 or 4% of this
increase relates to UMY collector bonuses. During the current nine-month
period, monthly employee headcount, including AHO, averaged 87 compared to 51
during the same period of 1997.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense increased $378,901
or 114% primarily due to the acquisition of AHO, increased travel associated
with supporting existing customers and developing new business, increased
expenses related to the Year 2000 remediation plan, increased printing,
postage and telephone expense related to UMY and the WHCPBD agreement,
increased contract labor to temporarily fill open positions, increased
recruiting expenses related to open positions and various other expenses to
support a larger customer base and increased headcount. For the two months
ended September 30, 1998, approximately $44,500 or 12% of this increase
relates to the AHO acquisition.
PROFESSIONAL FEES expense increased $101,347 or 427% primarily due to
the AHO acquisition and the reversal of accrued legal fees during the same
quarter of 1997. For the two months ended September 30, 1998, approximately
$77,000 or 76% of this increase relates to the AHO acquisition.
OFFICE, VEHICLE AND EQUIPMENT RENTAL expense increased $56,311 or 90%
primarily due to the acquisition of AHO, the lease of two company vehicles
utilized by the sales force at a monthly expense of approximately $1,000 per
month compared to no leased vehicles during the same period of 1997, as well
as leasing an additional 1,906 square feet of office space on July 31, 1997
required for UMY. For the two months ended September 30, 1998, approximately
$21,000 or 37% of this increase relates to the AHO acquisition.
PROVISION FOR DOUBTFUL ACCOUNTS expense increased $119,078 primarily due
to the AHO acquisition. For the two months ended September 30, 1998, $92,000
or 77% of this increase relates to the AHO acquisition.
DEPRECIATION AND AMORTIZATION expense increased $611 or 1% primarily
due to additional depreciation and amortization expense related to AHO fixed
assets, Medicare provider numbers and goodwill depreciation related to the
AHO acquisition partially offset by a decrease in UMC depreciation expense
primarily related to UMC's AS/400 which was fully depreciated at December 31,
1997. For the two months ended September 30, 1998, AHO's fixed asset
depreciation, goodwill and Medicare provider number amortization totaled
$1,396, $4,895 and $5,417, respectively.
INTEREST, NET increased $3,780 or 62% primarily due to the AHO
acquisition. For the two months ended September 30, 1998, approximately
$7,600 or 201% of this increase relates to the AHO acquisition partially
offset by a decrease of $3,820 related to the reduction in UMC capital lease
obligations due to normal recurring installment payments.
LIQUIDITY AND CAPITAL RESOURCES
22
<PAGE>
UNITED MEDICORP. INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
At September 30, 1998, the Company's liquid assets, consisting of cash and
cash equivalents, totaled $282,861 compared to $275,948 at December 31, 1997.
Working capital was ($506,897) and $331,552 at September 30, 1998 and December
31, 1997, respectively. Working capital decreased in conjunction with the
acquisition of AHO which included the assumption of current liabilities in
excess of the fair market value of current assets. Significant AHO current
liabilities assumed include trade accounts payable, the accrued Medicare
settlement, and the current portion of long term debt. At September 30, 1998,
these liabilities totaled $202,652, $459,893 and 244,591, respectively.
Operating activities through September 30, 1998 provided net cash of
$108,470, compared to $49,580 net cash used in operating activities during the
same period of 1997. This improvement is primarily due to decreased trade
accounts receivable, increased net income, increased non-cash depreciation and
amortization expense, and increased accrued liabilities partially offset by
payments made since the AHO acquisition on the accrued Medicare settlement.
For the nine months ended September 30, 1998, cash flow from operations was
adequate to cover all capital resources and liquidity requirements.
Investing activities through September 30, 1998, consisted of the
acquisition of AHO and purchases of furniture, fixtures and equipment which
provided cash of $7,327 compared to $118,068 used in investing activities
during the same period of 1997. This increase is primarily due to net cash of
$64,252 provided from AHO upon acquisition and an overall reduction for capital
expenditures.
Financing activities through September 30, 1998, consisted of principal
payments on capital lease obligations and long term debt which used cash of
$108,884, compared to $116,758 provided by financing activities during the same
period of 1997. This decrease is primarily due to the net proceeds of $159,487
provided from the sale of common stock completed during the third quarter of
1997 and the additional debt service for AHO.
Effective April 29, 1998, the Company has had an available line of credit
under a secured credit facility (the "Credit Facility"). The maximum amount of
borrowing available under the Credit Facility (the "Borrowing Base") is equal
to the lesser of $200,000 or 60% of trade accounts receivable aged less than 60
days. For the three and five months ended September 30, 1998, the available
Borrowing Base has averaged approximately $157,000 and $120,000, respectively.
On September 30, 1998, the interest rate on this facility was reduced from 9.5%
to 9.25% due to the decrease in the base rate of the Wall Street Journal. On
November 17, 1998, $125,000 was drawn from the Facility. At November 20, 1998,
there were no borrowings under the Facility.
For various periods of time during the twelve months ending September 30,
1999, management anticipates the possibility that cash requirements could exceed
currently existing cash on hand, cash to be generated from operations and the
Borrowing Base. These periods of liquid deficiency are attributed to the
following circumstances:
1.) On October 16, 1998, the Company received notice from the Florida Medicare
fiscal intermediary (the "Florida FI") indicating that a tentative settlement
of $186,512 was due from PCBH for prospective reimbursement in excess of
reimbursable costs for the nine months ended September 30, 1998. To avoid
suspension of interim payments, the Florida FI required that this amount be
repaid in full by October 31, 1998. As of the date of this filing, no payments
had been made to the Florida FI due to insufficient cash
23
<PAGE>
UNITED MEDICORP. INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
and other working capital resources. Management has been informed that
effective November 12, 1998, all interim payments to PCBH had been suspended
until the overpayment is recovered through the submission of future Medicare
claims.
2.) On October 27, 1998, the Company received notice from the Alabama Medicare
fiscal intermediary (the "Alabama FI") indicating that BHM had been placed on
one hundred percent medical review of its medical records based on certain
deficiencies identified by the Alabama FI in the medical records. This review
will affect all future Medicare claims submitted by BHM until such time that
deficiencies are corrected. Management estimates that BHM will be required to
demonstrate improved quality of medical records for a period of at least three
months in order to be removed from one hundred percent medical review status.
During this period of time, management will vigorously pursue quality
improvements in the medical records and will seek a progressively declining
review percentage. Because of the medical review, it is anticipated that
Medicare payments made on those claims that pass future medical review will be
delayed by thirty to sixty days. Claims that do not pass medical review by the
Alabama FI will be submitted for reconsideration and appeal as necessary.
Upon receiving the forgoing notices, management implemented the following
plan:
a) Employee headcount and other expenses at PCBH and BHM have been
reduced
b) Management has requested and intends to apply to the Florida FI for
an extended repayment plan. This plan if approved will allow for
repayment over a period from twelve to thirty six months.
c) Management has engaged specialized clinical oversight and quality
assurance consulting services to review, render an opinion on, and
where applicable, pursue reconsideration and appeal of denied claims.
Ongoing medical record quality assurance and clinical oversight
services will also be provided. As of the date of this report,
specialized in-service CMHC training has been completed at PCBH and
BHM.
d) Management has entered into various discussions with potential
sources of investment and working capital including application for
an increase in its existing credit facility in order to fund near
term cash requirements
e) Management has entered into various discussions with parties
potentially interested in buying one or more of the Medicare provider
numbers.
Management estimates that due to the forgoing events, approximately
$400,000 to $600,000 of working capital will be required assuming that an
extended repayment is approved by the Florida FI.
3.) AHO's Medicare cost reports have not yet been audited by the Medicare
fiscal intermediaries for the years ended December 31, 1997 and 1996. These
cost reports were filed with the fiscal intermediaries using unaudited
financial information. Management has accrued estimated reserves of $360,000
for probable differences between the unaudited financial information used to
complete the cost reports as compared to the preliminary financial statements
currently being audited for the two years ended December 31, 1997. Additional
differences that are not currently known or reserved may arise due to
differences in interpretation of Medicare reimbursement regulations. The
financial impact related to reimbursement interpretation differences cannot
currently be estimated. The Medicare audit for BHM and CCBH began on November
16, 1998. The accrual balance related to BHM and CCBH totals $280,000. Should
this estimate be supported by the results of the Medicare
24
<PAGE>
UNITED MEDICORP. INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
audit, management believes that payment in full will be requested by the
Alabama FI on or about December 31, 1998.
Possible sources of cash anticipated to cover possible periods of liquid
deficiency include the following:
1.) At September 30, 1998, AHO's allowance for doubtful accounts for
non-Medicare claims totals $975,000. Approximately $418,000 of this balance
relates to claims with dates of service in 1998. It is management's opinion
that these claims have not been collected in large part due to the
inefficiency of AHO's prior management team. The current management team has
not identified specific reasons why these claims have not been paid and as
such, is vigorously pursuing collection. Management currently estimates that
completion of this collection effort will take three to six months to
complete.
2.) Management anticipates reimbursement of $100,000 - $200,000 within six
months related to claims submitted for appeal to Medicare's Provider
Reimbursement Review Board.
3.) Management is seeking an increase in the existing Credit Facility.
There can be no assurance that any of the forgoing strategies can be
effected on satisfactory terms. Any failure with respect to the foregoing plan
will more likely than not have a material adverse effect on the Company's
liquidity and financial position. If the Company is unable to service the
forgoing financial obligations as they become, it will be required to adopt
alternative strategies, which may include actions such as selling assets,
discontinuing the operations of one or more of the AHO CMHCs, seeking
additional equity capital or delaying capital expenditures.
PART 11. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
25
<PAGE>
UNITED MEDICORP. INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on August 28, 1998.
Of the total 27,933,567 outstanding shares, 64% or 17,826,913 shares were
represented at the meeting. The following items were voted upon:
To elect four (4) directors to hold office until the next annual election of
directors by stockholders or until their respective successors shall have been
duly elected and shall have been qualified:
<TABLE>
<CAPTION>
% OF SHARES % OF
REPRESENTED TOTAL
AT THE OUTSTANDING
NOMINEE VOTES FOR MEETING SHARES
------- --------- ------------ -----------
<S> <C> <C> <C>
Michael P. Bumgarner. . . . . . . . . . 17,822,279 99.9%
John F. Lewis . . . . . . . . . . . . . 17,822,291 99.9%
Thomas H. McConnell . . . . . . . . . . 17,822,291 99.9%
Peter W. Seaman . . . . . . . . . . . . 17,822,291 99.9%
</TABLE>
To consider and take action on a proposal to adopt the Company's 1998 Stock
Option Plan, adopted by the Board of Directors on May 15, 1998, for key
employees and non-employee directors of the Company:
Votes For . . . . . . . . . . . . . . . 10,059,528 56.4%
Votes Against . . . . . . . . . . . . . 7,765,459
Votes Withheld/Not Voted. . . . . . . . 10,108,580
----------
27,933,567
----------
----------
To ratify the appointment of PricewaterhouseCoopers LLP as independent public
accountants to audit the accounts of the Company for the fiscal year ending
December 31, 1998:
Votes For . . . . . . . . . . . . . . . 17,769,109 99.7%
Votes Against . . . . . . . . . . . . . 54,374
Votes Withheld/Not Voted. . . . . . . . 10,110,084
----------
27,933,567
----------
----------
To reaffirm the standby authority for a proposed reverse split under which, in
the discretion of the Board of Directors, every five outstanding shares of the
Company's Common Stock would be converted into one share of newly issued Common
Stock. Standby authority for this proposal was previously approved at the
Company's last meeting of stockholders on August 14, 1995:
Votes For . . . . . . . . . . . . . . . 17,393,386 62.3%
Votes Against . . . . . . . . . . . . . 431,704
Votes Withheld/Not Voted. . . . . . . . 10,108,477
----------
27,933,567
----------
----------
No other matters were voted upon at the Annual Meeting of Stockholders on
August 28, 1998.
26
<PAGE>
UNITED MEDICORP. INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements
(B) Reports on Form 8-K
The Company has filed the following reports on Form 8-K during
the quarter ended September 30, 1998:
ITEM REPORTED
Announcement of the Acquisition of 100% of the common stock of
Allied Health Options, Inc.
DATE OF EARLIEST EVENT REPORTED
August 7, 1998
DATE OF REPORT
August 21, 1998
FINANCIAL STATEMENTS FILED
Financial Statements for AHO were not filed with the Form 8-K filed
on August 21, 1998 as it was impractical to provide the required financial
information at the time of filing. As disclosed in the Form 8-K filed on
August 21, 1998, it was management's intent to file audited financial
information and to provide pro forma financial information by amendment to
the Form 8-K no later than October 19, 1998. To date, this financial
information has not been filed due to unanticipated delays in the audit
primarily as the result of incomplete accounting records maintained by AHO
with respect to certain transactions. The audit remains ongoing; however,
at this time, management cannot estimate when the audit will be completed
and audited financial information and pro forma information will be filed.
27
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
(REGISTRANT)
By: /s/ R. Kenyon Culver Date: November 20, 1998
------------------------------------------- -------------------
R. Kenyon Culver
Vice President and Chief Financial Officer
(Principal Accounting Officer)
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 282,861
<SECURITIES> 0
<RECEIVABLES> 1,580,231
<ALLOWANCES> (975,721)
<INVENTORY> 0
<CURRENT-ASSETS> 1,004,091
<PP&E> 1,144,578
<DEPRECIATION> (908,167)
<TOTAL-ASSETS> 2,484,089
<CURRENT-LIABILITIES> 1,510,988
<BONDS> 0
0
0
<COMMON> 280,157
<OTHER-SE> 369,081
<TOTAL-LIABILITY-AND-EQUITY> 2,472,113
<SALES> 0
<TOTAL-REVENUES> 1,374,315
<CGS> 0
<TOTAL-COSTS> 1,342,092
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 92,164
<INTEREST-EXPENSE> 6,633
<INCOME-PRETAX> (66,574)
<INCOME-TAX> 0
<INCOME-CONTINUING> (66,574)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (66,574)
<EPS-PRIMARY> (0.024)<F1>
<EPS-DILUTED> (0.024)<F2>
<FN>
<F1>BASIC EARNINGS PER SHARE COMPUTED PER SFAS NO. 128. SFAS NO. 128 HAD NO
AFFECT ON BASIC EPS FOR THE QUARTER ENDED MARCH 31, 1997.
<F2>DILUTED EARNINGS PER SHARE COMPUTED PER SFAS NO. 128. SFAS NO. 128 HAD NO
AFFECT ON DILUTED EPS FOR THE QUARTER ENDED MARCH 31, 1997.
</FN>
</TABLE>
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"reform Act"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe harbor to protect companies from securities
law liability in connection with forward-looking statements. United
Medicorp, Inc., including its wholly owned subsidiaries United MoneyCorp,
Inc, ("UMY") and Allied Health Options, Inc. ("AHO"), hereinafter
collectively referred at as "UMC" or the "Company," intends to qualify both
its written and oral forward-looking statements for protection under the
Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All forward
looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events, and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of UMC. The Company
undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, UMC 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 provides the following risk factor disclosure in connection with its
continuing effort to qualify its written and oral forward-looking statements for
the safe harbor protection of the Reform Act and any other similar safe harbor
provisions. Important factors currently known to management that could cause
actual results to differ materially from those in forward-looking statements
include the disclosures contained in the Quarterly Report on Form 10-Q to which
this statement is appended as an exhibit and also include, but are not limited
to:
CUSTOMER CONCENTRATION
A substantial portion of the Company's historical and current revenues and
cash flows are generated from numerous services provided to various departments
of two major customers. For the year ended December 31, 1997, these two
customers accounted for 63% and 23% of total revenue. For the three and nine
months ended September 30, 1998, these two customers accounted for 46% and 16%
of total revenue including AHO, and 57% and 19% of total revenue including AHO,
respectively. If the Company is unable to retain either or both of these
customers, it will be required to adopt substantially different strategies than
those in the existing business plan or could possibly become insolvent. These
strategies may include, but are not limited to, actions such as reducing
management and line employee headcount, selling assets, restructuring existing
financial obligations or seeking additional equity capital. There can be no
assurance that any of these strategies could be effected on satisfactory terms.
MEDICARE PROVIDER NUMBERS AND GOODWILL
Goodwill represents the excess of the cost of the business acquired
over the fair value of the net identifiable assets acquired. Goodwill may be
adjusted for up to twelve months following the
1
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
acquisition for changes in the balance of net assets acquired. Generally
Accepted Accounting Principles requires goodwill to be amortized over the
period benefited.
As of September 30, 1998, the Company's balance sheet included unamortized
goodwill and Medicare provider numbers totaling $582,499 and $644,583,
respectively, associated with the acquisition of AHO. Goodwill and the Medicare
provider numbers combined, account for 49% and 189% of the Company's total
assets and stockholder's equity, respectively. The current annual amortization
rate on goodwill and the Medicare provider numbers is $29,370 and $32,500,
respectively.
The Company amortizes goodwill and the Medicare provider numbers over a
period of 20 years based primarily on anticipated net cash flows of AHO as
well as taking into consideration the impact of the home office costs
allocation from UMC to AHO. These amortization periods have not been
reviewed by the Company's independent accountants and therefore are subject
to modification.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," requires that an entity review long-lived assets and certain identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Should
future events or changes in circumstances indicate that the carry amount of
goodwill and the Medicare provider numbers may not be recoverable, and should
projected undiscounted cash flows decrease to one dollar below the carry value
of goodwill and the Medicare provider numbers, the Company would be required to
record a non-cash impairment charge. For goodwill, this charge would most
likely be measured as the difference between the then current carrying value and
discounted future cash flows. For the Medicare provider numbers, this charge
would most likely be measured as the difference between the then current
carrying value and the fair value of the Medicare provider numbers based on
actual sales of comparable Medicare provider numbers. There can be no assurance
that there will not be future events or changes in circumstance that would
require a review of the recoverability of goodwill and the Medicare provider
numbers and that such a review would not have a material adverse effect on UMC.
As of November 20, 1998, the Company had not performed an impairment analysis.
MEDICARE CMHC COST REPORTS
AHO's Medicare cost reports have not yet been audited by the Medicare
fiscal intermediary for the years ended December 31, 1997 and 1996. These cost
reports were filed with the fiscal intermediary using unaudited financial
information. Management has accrued estimated reserves for known differences
between the unaudited financial information used to complete the cost reports as
compared to the preliminary financial statements currently being audited for the
two years ended December 31, 1997. However, additional differences that are not
currently known or reserved may arise due to differences in interpretation of
Medicare reimbursement regulations. The financial impact related to
reimbursement interpretation differences cannot currently be estimated. There
can be no assurance that reimbursement interpretation differences will not have
a material adverse effect on AHO and the Company.
2
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
KEY MANAGEMENT AND BOARD OF DIRECTORS
The Company's success in general and its continued ability to grow its
operations and increase its shareholder value, is heavily dependent upon, among
other things, the continued contributions of the Company's senior management and
members of the Board of Directors. The loss of services of any single member of
senior management or of the Board of Directors could have a material adverse
effect on the Company's business.
ON-GOING MANAGEMENT INITIATIVES
After reporting losses in each year since inception in 1989, due to
certain on-going management initiatives, the Company reported its first two
profitable fiscal years for the years ended December 31, 1997 and 1996. In
addition to the risks associated with any entity that has recorded substantial
losses in prior periods, the Company faces several challenges in order to
continue to be profitable in the future. These challenges include, but are not
limited to: (i) successfully integrating AHO into UMC, (ii) developing and
implementing initiatives to reduce costs and enhance efficiencies, (iii)
executing service agreements with new customers, (iv) exploring and exploiting
fragmented market niches, and (v) recruiting, hiring and retaining key
management employees. There can be no assurance that the Company will
successfully meet these or other operating challenges. Any failure with respect
to the foregoing could have a material adverse effect on UMC.
CREDIT AVAILABILITY
The Company currently leases its AS/400 computer and certain other office
equipment under long-term lease agreements. Management anticipates that
additional lease financing may be required to meet the future needs of the
Company. Should the Company not be able to secure lease financing or other
similar forms of credit at terms and conditions that are acceptable to the
Company, alternative strategies to fund equipment may be required. There can be
no assurance that any of these strategies could be effected on satisfactory
terms.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send and receive
electronic data, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify its proprietary claims processing and follow-up software, its
purchased collection agency software package, and certain other general business
use software applications in order to be Year 2000 compliant. The Company
presently believes that with modifications to the existing proprietary and
purchased claims processing and collection agency software as well as
replacement of certain general business use software, the Year 2000 issue can be
mitigated. However, if such modifications and
3
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
replacements are not made, or completed timely, the Year 2000 issue would
more likely than not have a material adverse effect on the Company.
The Company has considered its interdependence of computer systems with its
significant customers and third party payors including the Healthcare Financing
Administration ("HCFA") (collectively the "Significant Third Parties") to
determine the extent to which the Company is vulnerable to those Significant
Third Parties' failure to remediate their own Year 2000 issues. Management
considers the vulnerability of the failure of Significant Third Parties to
remediate their own Year 2000 issues to be the greatest Year 2000 risk facing
the Company. There can be no guarantee that the systems of Significant Third
Parties which the Company's customers rely upon for a portion of their claim
payments and which the Company relies upon for the transmission of claims and
account data will be timely converted. Failure of a Significant Third Party to
convert its computer systems, or a conversion that is incompatible with the
Company's systems, would more likely than not, have a material adverse effect on
the Company. Currently, the Company has not developed a contingency plan to
address this scenario. Should management become aware of information that
indicates that a Significant Third Party more likely than not will not be Year
2000 compliant, a contingency plan will be developed.
TECHNOLOGICAL ADVANCES
Rapid technological change is inherent in the industry in which UMC
competes. UMC's success will depend in part upon its continued ability to
enhance its existing technology supporting billing, accounts receivable
management and collection agency services quickly and cost-effectively to meet
evolving customer needs and respond to emerging industry standards and other
technological changes. There can be no assurance that UMC will be able to
respond effectively to technological changes or new industry standards.
Moreover, there can be no assurance that competitors of UMC will not develop a
technological advantage, or that any such technological advantage will not have
a material adverse effect upon the operating results of UMC.
COMPETITION
The business of medical insurance claims processing, accounts receivable
management and collections agency services is highly competitive. UMC competes
with certain national and regional electronic claims processing companies,
claims collection companies, claims management companies, factoring and
financing firms, software vendors and traditional in-house claims processing and
collections departments of hospitals and other healthcare providers. Many
competitors of UMC are several times larger than the Company and could, if they
chose to enter the market for the Company's line of services, devote resources
and capital to the market that are much greater than those which the Company
currently has available or may have available in the future. There can be no
assurance that competition from current or future competitors will not have a
material adverse effect upon the Company.
INDUSTRY AND MARKET CHANGES
4
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
Potential industry and market changes that could adversely affect the
billing and collection aspects of UMC include (i) a significant increase in
managed care providers relative to conventional fee-for-service providers,
potentially resulting in substantial changes in the medical reimbursement
process, or the Company's failure to respond to such changes, (ii) new alliances
between healthcare providers and reduction of central business offices, and
(iii) continued cost containment measures employed by healthcare providers as
healthcare expenditures have grown as a percentage of the U.S. Gross National
Product. There can be no assurance that potential industry and market changes
will not have a material adverse effect on UMC.
COMMUNITY MENTAL HEALTH CENTER ("CMHC") REGULATORY ENVIRONMENT
On September 29, 1998, The Department of Health and Human Services ("HHS")
announced new actions to ensure that Medicare beneficiaries with acute mental
illness obtain quality treatment in Community Mental Health Centers ("CMHCs")
such as those operated by AHO, and that Medicare pay appropriately for such
services. As part of a comprehensive action plan, The Department of Health and
Human Services' ("HHS") Health Care Financing Administration ("HCFA") has
initiated termination actions against CMHCs that appear unable to provide
Medicare's legally required core services, and will require others to come into
compliance. HCFA will demand repayment of money paid inappropriately for
non-covered services or ineligible beneficiaries. Twenty non-compliance
notices have been issued, with an estimated 80 notices to be sent by early
1999. Management is not aware of any material non-compliance issue nor has
management received any indication from HCFA regarding the possible
termination of any of AHO's CMHCs.
In addition, HCFA plans a number of long-term reforms. These efforts
include a new payment system for partial hospitalization that encourages
efficiency and eliminates financial incentives for abuse and a joint review of
the partial hospitalization benefit with the HHS Inspector General. HCFA also
will increase its review of partial hospitalization claims from CMHCs to ensure
Medicare pays only for appropriate services to qualified beneficiaries. The
financial impact of these long-term reforms cannot currently be estimated.
There can be no assurance that long-term reforms made by HCFA to the partial
hospitalization program will not have a material adverse effect on AHO.
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 1996, Congress enacted the Health Insurance Portability and Accounting
Act of 1996, which includes an expansion of provisions relating to fraud and
abuse, creates additional criminal offenses relating to healthcare benefit
programs, provides for forfeitures and asset-freezing orders in connection with
such healthcare offenses and contains provisions for instituting greater
coordination of federal, state and local enforcement agency resources and
actions.
5
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
In recent years, the focus of healthcare legislation has been on budgetary
and related funding mechanism issues. Both the Congress and the Clinton
Administration have made proposals to reduce the rate of increase in projected
Medicare and Medicaid expenditures and to change the funding mechanisms and
other aspects of both programs. In late 1995, Congress passed legislation that
would substantially reduce projected expenditure increases and would make
significant changes to Medicare and Medicaid programs. The Clinton
Administration has proposed alternate measures to reduce, to a lesser extent,
projected increases in Medicare and Medicaid expenditures. Neither proposal has
become law. Should measures such as these become law, there can be no assurance
that these changes will not have a material adverse effect on UMC.
6
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
EXISTING GOVERNMENT REGULATION
Existing government regulations can adversely affect UMC's business
through, among other things, its potential to reduce the amount of reimbursement
received by UMC's customers upon which UMC's billing and collection fees are
based, as well as received directly CMHC services. UMC's billing and
collections activities are also governed by numerous federal and state civil and
criminal laws. In general, these laws provide for various fines, penalties,
multiple damages, assessments and sanctions for violations, including possible
exclusion from Medicare, Medicaid and certain other federal and state healthcare
programs.
Submission of claims for services that were not provided as claimed, or
which violate the regulations, may lead to civil monetary penalties, criminal
fines, imprisonment and/or exclusion from participation in Medicare, Medicaid
and other federally funded healthcare programs. Specifically, the Federal False
Claims Act allows a private person to bring suit alleging false or fraudulent
Medicare or Medicaid claims or other violations of the statute. Such actions
have increased significantly in recent years and has increased the risk that a
company engaged in the healthcare industry, such as UMC and its customers, may
become the subject of a federal or state investigation, may ultimately be
required to defend a false claim action, may be subjected to government
investigation and possible criminal fines, may be sued by private payors and may
be excluded from Medicare, Medicaid and/or other federally funded healthcare
programs as a result of such an action. Any such proceedings or investigation
could have a material adverse effect on UMC.
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.
There can be no assurance that current or future government regulations or
current or future healthcare reform measures will not have a material adverse
effect on UMC.
7