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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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Title of Each Class Name of Each Exchange on which Registered
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NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES __ NO X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
As of March 26,1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $1,715,902 based on the last sales price
of $0.10 per share of such stock on March 26, 1999. As of March 26, 1999 there
were 27,910,217 shares of Common Stock, $0.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part I, Item 7 of this Form 10-K incorporates by reference information in the
Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance
Statement for Forward Looking Statements
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UNITED MEDICORP, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I
ITEM 1. Business.................................................................................... 3
ITEM 2. Properties.................................................................................. 12
ITEM 3. Legal Proceedings........................................................................... 12
ITEM 4. Submission of Matters to a Vote of Securities Holders....................................... 12
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 12
ITEM 6. Selected Consolidated Financial Data........................................................ 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 26
ITEM 8. Financial Statements and Supplementary Data................................................. 26
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 26
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......................................... 27
ITEM 11. Executive Compensation...................................................................... 29
ITEM 12. Securities Ownership of Certain Beneficial Owners and Management........................... 31
ITEM 13. Certain Relationships and Related Transactions.............................................. 32
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 32
Signatures ............................................................................................ 36
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PART I
ITEM 1. BUSINESS
GENERAL
United Medicorp Texas, Inc., was incorporated in the State of Texas on
March 13, 1989 ("UMC-Texas"). On July 10, 1989, in an exchange of stock,
UMC-Texas was acquired by Gamma Resources, Inc., a publicly-owned Delaware shell
corporation, which simultaneously changed its name to United Medicorp, Inc. (the
"Company", "UMC" or the "Registrant"). The Company's principal executive offices
are located at 10210 North Central Expressway, Suite 400, Dallas, Texas 75231
and its telephone number at that address is (214) 691-2140. The Company also
transacts business directly through its wholly owned subsidiaries, United
MoneyCorp, Inc. ("UMY") and Allied Health Options, Inc. ("AHO"). Unless the
context otherwise requires, references herein to the Company include its
subsidiaries and UMC-Texas.
The Company provides medical insurance claims processing and accounts
receivable management services to healthcare providers. The Company employs
proprietary and purchased software to provide claims processing, management and
collection services to its customers, which are primarily hospitals, medical
clinics, and physician practices. The Company's basic service is designed to
provide an electronic claims processing, management and collection service that
expedites payment of claims from private insurance carriers or government payors
such as Medicare and Medicaid. The Company also offers to its customers
processing and collection services for uncollected "backlog" (aged) claims that
were not originally submitted through the Company's electronic claims processing
system. On November 18, 1996, the Company filed "Articles of Amendment to the
Articles of Incorporation of Sterling Hospital Systems, Inc." whereby this
wholly owned subsidiary of UMC was renamed UMY. UMY has been designated as the
legal entity under which UMC operates a collection agency. Management believes
that there is a large and growing market for bad debt and "early out" collection
agency services, and that offering these services to the healthcare market will
complement the medical claims processing and billing services already offered.
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 a 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
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Part A effective October 2, 1996. On October 19, 1998, AHO filed Articles of
Incorporation with the State of Florida whereby PCBH became a wholly owned
subsidiary of AHO.
From time to time the Company also provides advance funding services where
the Company purchases and then funds a portion of an eligible customer's claims
in advance of payment of such claims by a private insurance carrier or
governmental payor such as Medicare. In addition, UMClaimPros was introduced by
the Company in December 1994. UMClaimPros are experienced claims processors
available for customers' interim staffing needs.
Management believes that it has developed a computer hardware and
proprietary software system and a line of services which, together with its
experienced claims management personnel, are capable of effectively addressing
the claims management needs of healthcare providers. The Company has also worked
with several other companies that provide enhanced software, computer hardware
and maintenance, electronic claim clearinghouse services, financing and other
valuable services specifically designed to meet the needs of healthcare
providers. Management believes these efforts have produced a system that
provides the Company's customers with enhanced claims editing, error detection
and management capabilities. Management further believes its application and
refinement of electronic and computer technologies in the healthcare claims
management industry will enable the Company to provide claims processing
services that will significantly improve its customers' cash flow.
MEDICAL BILLING INDUSTRY OVERVIEW
The U.S. healthcare industry continues to experience tremendous change as
both federal and state governments as well as private industry work to bring
more efficiency and effectiveness to the healthcare system. UMC's business is
impacted by trends in the U.S. healthcare industry. As healthcare expenditures
have grown as a percentage of U.S. gross national product, public and private
healthcare cost containment measures have applied pressure to the margins of
healthcare providers. Historically, some payors have willingly paid the prices
established by providers while other payors, notably the government and managed
care companies, have paid far less than established prices (in many cases less
than the average cost of providing the services). As a consequence, prices
charged payors willing to pay established prices increased in order to recover
the cost of services purchased by the government and others but not paid by them
(i.e., cost shifting). Increasing complexity in the reimbursement system and
assumption of greater payment responsibility by individuals have caused
healthcare providers to experience increased receivables, bad debt levels and
higher business office costs. Providers overcome these pressures on
profitability by increasing their prices, by relying on demographic changes to
support increases in the volume and intensity of medical procedures, and by cost
shifting. As providers experience limitations in their continued ability to
shift cost in these ways, the amount of reimbursement received by UMC's clients
may be reduced and UMC's rate of growth in revenues, assuming present fee
levels, may decline. However, management believes UMC may benefit from
providers' attempts to offset declines in profitability through seeking more
effective and efficient business management services such as those provided by
UMC. UMC continues to evaluate governmental and industry reform initiatives in
an effort to position itself to take advantage of the opportunities created
thereby.
COMMUNITY MENTAL HEALTH CENTER REGULATORY ENVIRONMENT
The Department of Health and Human Services ("HHS") has announced new
actions to ensure that Medicare beneficiaries with acute mental illness obtain
quality treatment in CMHCs such as those
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operated by AHO, and that Medicare pay appropriately for such services. As part
of a comprehensive action plan, 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 through a non-compliance
notice.
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.
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.
EXISTING GOVERNMENT REGULATION
UMC's billing and collections activities are governed by numerous federal
and state civil and criminal laws. In general, these laws provide for various
fines, penalties, multiple damages, assessments and sanctions for violations,
including possible exclusion from Medicare, Medicaid and certain other federal
and state healthcare programs.
Submission of claims for services that were not provided as claimed, or
which violate the regulations, may lead to civil monetary penalties, criminal
fines, imprisonment and/or exclusion from participation in Medicare, Medicaid
and other federally funded healthcare programs. Specifically, the Federal False
Claims Act allows a private person to bring suit alleging false or fraudulent
Medicare or Medicaid claims or other violations of the statute. Such actions
have increased significantly in recent years and has
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increased the risk that a company engaged in the healthcare industry, such as
UMC and its customers, may become the subject of a federal or state
investigation, may ultimately be required to defend a false claim action, may be
subjected to government investigation and possible criminal fines, may be sued
by private payors and may be excluded from Medicare, Medicaid and/or other
federally funded healthcare programs as a result of such an action.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act sets forth various
provisions designed to eliminate abusive, deceptive and unfair debt collection
practices by collection agencies. Various states have also promulgated laws and
regulations that govern credit collection practices.
Under Medicare law, physicians and hospitals are only permitted to assign
Medicare claims to a billing and collection services vendor in certain limited
circumstances. Medicare regulations provide that a billing company that prepares
and sends bills for the provider or physician and does not receive and negotiate
the checks made payable to the provider or physician does not violate the
restrictions on assignment of Medicare claims. Management believes that its
practices meet the restrictions on assignment of Medicare claims because, among
other things, it bills only in the name of the provider, checks and payments for
Medicare services are made payable to the provider and the Company lacks any
power, authority or ability to negotiate checks made payable to the provider.
As a participant in the healthcare industry, the Company's operations are
also subject to extensive and increasing regulation by a number of governmental
entities at the federal and state levels. The Company is also subject to laws
and regulations relating to business corporations in general. Management
believes its operations are in compliance with applicable laws.
CUSTOMER SERVICES AND FEE STRUCTURE
ONGOING ACCOUNTS RECEIVABLE MANAGEMENT SERVICES: Customers using the
Company's "Ongoing" claims processing service sometimes receive computer
software from the Company that facilitates claims preparation, editing and
transmission. In order to implement this package of services the Company may
install interface and editing software on a computer located in the customer's
offices. This "front end" system assists the customer's personnel in the
preparation and editing of claims, which are then electronically transmitted to
the Company and, in turn, transmitted directly or through an electronic
clearinghouse to the insurance carrier or governmental payor, as the case may
be. Under the Company's Ongoing service, the Company edits, submits, performs
follow-up, submits required additional information, and collects claims on
behalf of its customers. In cases where the insurance carrier or governmental
payor cannot receive or efficiently handle the Company's electronically
transmitted claims, the Company will print the claim on a standard industry form
and mail it to the insurance carrier. After the claims are processed, the
Company's claims operations personnel utilize computer-assisted follow-up
methods to ensure timely collection. The payor is directed to send the claim
payment directly to the customer or to UMC. In most cases the Company charges a
percentage of actual claim payment amounts collected as its fee. In certain
cases, the Company charges a flat monthly fee for this service. Complete claims
settlement reports are sent to customers on a semi-weekly, weekly or monthly
interval. Management believes that the Company's claims collection experience to
date and increasing awareness throughout the healthcare industry of the need to
cut costs and improve cash flow will increase demand for this type of service.
Ongoing accounts receivable management services revenue accounted for
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approximately 68%, 73% and 76% of total revenue, excluding AHO net patient
services revenue, in 1998, 1997, and 1996, respectively.
BACKLOG ACCOUNTS RECEIVABLE MANAGEMENT SERVICES: Customers using the
"Backlog" service engage the Company to collect aged claims which usually have
been previously filed with an insurance carrier or governmental payor, but which
remain uncollected. When a customer enters into a backlog collection agreement,
the customer submits completed insurance claim forms to the Company. The claims
are then entered into the Company's claims management and collection system, and
the Company's standard claims processing and collection procedures are applied
to collect these backlog claims. The Company believes that this program is
attractive to potential backlog collection customers because the Company
collects outstanding claims at competitive rates. Backlog collection contracts
generally involve a one-time placement of claims for collection.
PATIENT BILLING SERVICES: The Company offers its customers the option of
having UMC bill the guarantor of each account the appropriate balance remaining
due after all insurance payments due on an account have been collected and
contractual allowances have been posted. Fees for this service vary depending
upon the average balance and collectibility of the accounts being worked.
COLLECTION AGENCY SERVICES: These services involve collections of either
(a) "early out" accounts due from individual guarantors which are active
receivables placed for collection within one hundred twenty days of either the
date of service or the date payment was received from a third party payor such
as commercial insurance or Medicare, or (b) guarantor accounts which have been
written off as bad debt. Collection agency services revenue accounted for
approximately 22% and 17% of total billing and collection services revenue in
1998 and 1997, respectively.
ADVANCE FUNDING SERVICES: Customers who use the Company's advance funding
service submit claims to the Company, which in turn transmits them to the
appropriate payor. To implement this service, the Company purchases an undivided
interest in a claim and advances between 27% and 97% of the insurance claim
amount to the customer. Claim payments on purchased claims are made directly to
the Company. Following receipt of payment, the Company remits the balance of the
claims, net of fees earned, back to the customer. In the event purchased claims
are not paid within 120 days from funding, the Company has the right to require
the customer to repurchase the claim or offset the amount of the payment against
balances otherwise payable to the customer by the Company. The Company generally
continues its collection efforts for at least 120 days.
To qualify for the Company's advance funding service, a customer is
required to allow the Company to file appropriate Uniform Commercial Code
financing statements to establish the Company's interest in the customer's
claims. In addition, the Company provides advance funding services only on those
claims written for payors whose financial standing meets financial criteria
established by the Company. Furthermore, the Company requires that the customer
verify the existence and amount of coverage on each claim with the payor before
transmitting the claim to the Company. The Company verifies coverage with the
payor before advancing any funds to the customer. The Company's ability to raise
capital to fund the purchase of claims will determine the extent of the
Company's ability to offer advance funding services in the future.
UMCLAIMPROS: The Company began providing interim staffing services under
the UMClaimPros label in December, 1994. UMClaimPros are experienced billing and
collection personnel who are
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employed by UMC and placed on temporary assignments in hospital and physician
business offices. Currently, the UMClaimPros service is only offered in the
Dallas area.
CONSULTING SERVICES: During 1997 the Company began providing consulting
services to two operators of Community Mental Health Centers located in Alabama,
Florida and Tennessee. Consulting services are for the most part related to
billing and collection services provided by the Company, and are focused
primarily on compliance with regulations promulgated by the Healthcare Financing
Administration.
FEE STRUCTURE: The Company has established both contingency and
non-contingency based fee structures which are intended to allow prospects for
the Company's services a wide range of pricing options. Under the Company's
contingency based fee structure, fees are charged as a percentage of amounts
collected. For the Company's Ongoing Accounts Receivable Management service, the
Company generally charges healthcare providers contingency fees ranging from 1.5
to 14 percent of the amount the Company collects on behalf of the providers,
depending upon the average claim amount collected. Backlog Accounts Receivable
Management services are usually priced from 8 to 15 percent of the amount the
Company collects on behalf of the providers, depending upon the age of the
claims. Collection ratios generally range from 0 to about 40 percent for Backlog
projects and about 27 to 50 percent for Ongoing projects. Fees for Patient
Billing services range from 5.5 to 10 percent of the amounts collected, while
Collection Agency services are priced at 9 to 27.5 percent of amounts collected.
UMClaimPros services are priced at a per hour rate based on the fully burdened
salary of the assigned personnel. Management believes that the Company's fee
structure for its package of services is competitive.
SOFTWARE AND DATA PROCESSING
The Company's ability to provide its services on a large scale depends on
the successful operation of computer hardware and software capable of handling
the processing and transmission of insurance claims from the customer to the
insurance carrier, and through the intermediate steps that such claims must take
during the process. The Company continuously develops and enhances its systems
using programmers employed by the Company and outside resources.
The computerized claims filing process involves the use of IBM
PC-compatible claims processing software. Such software is used in hospital
environments and in physician offices where integration with an existing
computer system is desirable. The Company installs its software at the
customer's site and trains the customer's personnel in the use of such software.
The claims processing software packages currently used by the Company are
specifically designed to expedite claims preparation and processing and,
simultaneously, to reduce errors associated with manual claims processing.
Claims are edited for certain errors, such as invalid or missing information,
using the claims processing software. Claims are then transmitted directly to
the Company, which performs further editing before they are forwarded to the
third party payor directly or through any one of several insurance claim
clearinghouses used by the Company. The clearinghouses then format and
electronically transmit the claim data according to the specifications of the
individual third party payors, which avoids delays resulting from paper routing
and the errors resulting from third party payor data re-entry. If, however, the
third party payor cannot receive or efficiently handle the Company's
electronically transmitted claims, the Company will print the claim on a
standard industry form and mail it to the third party payor. The Company intends
to continue to enhance and refine its claims processing and repricing, customer
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reporting, claims tracking and collection functions during 1999 and thereafter
in order to satisfy unique customer requirements.
UMY uses a purchased software application for its collection agency
services. This application runs on the Company's AS/400 hardware platform, and
handles all of the necessary processing of accounts, telephone calls, letters
and reports. Custom programming for this application is handled primarily
through the vendor. The Company has the source code for the application and can
modify the application whenever necessary. This software will continue to be
modified and enhanced to improve performance and customer satisfaction.
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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.
SIGNIFICANT CUSTOMERS
During 1998, 89% of revenue, excluding AHO net patient services revenue,
was earned from two customers: the Washington Hospital Center ("WHC") and
Presbyterian Healthcare System ("PHS"). WHC provided revenue totaling
$2,740,000, or 66% of revenue, excluding AHO net patient services revenue. Of
this WHC revenue, 65% was provided as a result of the Ongoing Accounts
Receivable Management services contract, as amended, entered into in 1992, 33%
related to a physician billing contract amendment entered into in May, 1997. PHS
provided revenues, primarily under various early out and bad debt collection
contacts entered into in 1997, totaling $985,000, or 23% of revenue, excluding
AHO net patient services revenue. Of this PHS revenue, 87% was provided from
Collection Agency services, and 13% was provided from UMClaimPros services.
Management does not believe that the 1998 level of PHS revenue will be sustained
in 1999 due to the stated intentions of PHS to reduce its outsourced collection
services. After taking into account AHO net patient services revenue, WHC and
PHS represent 55% and 20%, respectively, of total revenue or a combined 75% of
total revenue.
During 1998, AHO net patient services revenue of $800,000 for the five
months ended December 31, 1998, accounted for 16% of total revenues of which 90%
was provided through Medicare claims. Until such time as significant issues
confronting AHO are resolved, as more fully explained at Liquidity and Capital
Sources below, AHO management does not believe that it can accurately project
future AHO revenues and further believes that AHO revenue for the five months
ended December 31, 1998, are not necessarily indicative of results to be
expected in 1999.
During 1997, 86% of revenue was earned from two customers: WHC and PHS.
WHC provided revenue totaling $1,775,820, or 63% of total revenue. Of this
revenue, 94% was provided as a result of the Ongoing Accounts Receivable
Management services contract, as amended, entered into in 1992, of which 13%
related to a physician billing contract entered into in May, 1997, and 6% was
provided as a result of a Patient Billing services contract dated September,
1996. PHS provided revenues, primarily under various early out and bad debt
collection contacts entered into in 1997, totaling $645,697, or 23% of total
revenue. Of this revenue, 66% was provided from Collection Agency services, and
34% was provided from UMClaimPros services.
During 1996, 85% of revenue was earned from three customers: WHC,
Healthcare Advisory Service of Puerto Rico, Inc. ("HAS"), and Mimbres Memorial
Hospital ("MMH"). WHC provided revenue totaling $1,315,508, or 65% of total
revenue. Of this revenue, 99% was provided as a result of the
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Ongoing Accounts Receivable Management services contract entered into in 1992,
and 1% was provided as a result of a Patient Billing services contract. HAS
provided revenues totaling $287,020, or 14% of total revenue. Of this revenue,
44% was provided from the Yauco Hospital, 37% was provided from Administracion
De Facilidades Y Servicios De Salud clinics, and 19% was a result of the
settlement agreement reached between the Company and HAS in August, 1996. MMH
provided revenue of $119,351, or 6% of total revenue. Of this revenue, 98% was
Ongoing Accounts Receivable Management services, and 2% was Backlog Accounts
Receivable Management services. The Company's contract with HAS was terminated
effective June 30, 1996 and the Company's contract with MMH expired April 1,
1996.
INDUSTRY SEGMENTS
Management organizes consolidated UMC around differences in services
offered. UMC provides medical insurance claims processing, medical accounts
receivable management and other healthcare related ancillary 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. 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. Reference is made to the Segment Reporting
information contained in the Company's Consolidated Financial Statements
included at page 34.
PATENTS AND TRADE SECRETS
As has been typical in software-intensive industries, the Company does not
hold any patents. The Company believes that patent protection is of less
importance in an industry characterized by extremely rapid technological change
than the expertise, experience and creativity of the Company's product
development personnel. Employees of the Company are required to sign
non-disclosure agreements. The Company relies on these agreements, its service
contracts with customers, and trade secrets to protect its proprietary software,
and to date, has had no indication of any material breach of these agreements.
EMPLOYEES
At March 31, 1999, the Company had 76 employees. The Company believes that
its relations with its employees are good. Its employees are not currently, nor
have they ever been, represented by a union and there have not been any
stoppages, strikes or organizational attempts.
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ITEM 2. PROPERTIES
UMC and UMY's corporate offices and operations and AHO's home office are
located in an 10,136 square feet leased office space in Dallas, Texas. The lease
expires in January, 2001. The Company has the option to terminate up to one-half
of the space under this lease after August 1, 1998, providing it gives a ninety
day notice to the lessor. Management believes that its facilities are
well-located and are in good condition. The current corporate office leased
space is near capacity. Should the Company continue to grow, management believes
that additional corporate office space may be required within the next twelve
months.
AHO leases three behavioral health centers under operating leases which
terminate at various times on or before August 31, 1999. The behavioral health
centers are located in Pensacola, Florida; Mobile, Alabama; and Oxford, Alabama.
ITEM 3. LEGAL PROCEEDINGS
At and for the year ended December 31, 1998, the Company has not been a
party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's $0.01 par value common stock (the "Common Stock"), is the
only class of common equity of the Company and represents the only issued and
outstanding voting securities of the Company. As of March 31, 1999, there were
approximately 1,070 stockholders of record of the Common Stock. The Common Stock
trades on the NASDAQ over-the-counter ("OTC") market.
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The following table sets forth the range of high and low bid prices for
the Common Stock as reported on the NASD OTC Bulletin Board, the automated
system for reporting NON-NASDAQ quotes. Such prices do not include retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 HIGH LOW
- ---------------------------- ---- ---
<S> <C> <C>
Fourth quarter $0.090 $0.052
Third quarter 0.094 0.040
Second quarter 0.130 0.050
First quarter 0.125 0.030
------ ------
1998 annual average 0.110 0.043
YEAR ENDED DECEMBER 31, 1997
- ----------------------------
Fourth quarter $0.070 $0.030
Third quarter 0.090 0.040
Second quarter 0.100 0.030
First quarter 0.040 0.020
------ ------
1997 annual average 0.075 0.030
YEAR ENDED DECEMBER 31, 1996
- ----------------------------
Fourth quarter $0.050 $0.010
Third quarter 0.050 0.010
Second quarter 0.050 0.010
First quarter 0.050 0.010
------ ------
1996 annual average 0.050 0.010
</TABLE>
The last reported sales price of the Common Stock as reported on the NASD
OTC Bulletin Board, on March 26, 1999 was $0.10 per share.
The Company has never declared or paid cash dividends on its Common Stock.
The payment of cash dividends in the future will depend on the Company's
earnings, financial condition and capital requirements. It is the present policy
of the Company's Board of Directors to retain earnings, if any, to finance the
operations and growth of the Company's business.
Effective December 31, 1998, UMC sold 1,000,000 shares of unregistered
Common Stock in exchange for a $261,818 promissory note due from AHO to a third
party note holder. The Common Stock was priced at $0.06 per share representing
the last trading price prior to the execution of the transaction. The Common
Stock was not registered under the Securities Act of 1933, as amended, in
reliance on Section 4(2) of the Securities Act of 1933, as amended, as the sale
of these securities did not involve a public offering.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for and
as of each of the five years ended December 31, 1998. The financial data
presented for each of the five fiscal years has been derived from audited
financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues $ 4,977,816 $ 2,803,001 $ 2,025,338 $ 1,986,233 $ 1,342,848
Wages and benefits 3,277,230 1,900,182 1,171,721 1,499,038 1,157,518
Selling, general and administrative 925,834 492,607 422,119 467,397 731,274
Professional fees 212,989 54,188 78,813 82,794 110,580
Depreciation and amortization 117,080 106,783 105,638 126,807 118,814
Other 276,737 88,492 127,833 95,942 125,720
------------ ------------ ------------ ------------ ------------
Net income (loss) 167,946 160,749 119,214 (285,745) (901,058)
Basic earnings (loss) per common
share (1) $ 0.0060 $ 0.0059 $ 0.0045 $ (0.0109) $ (0.0364)
Weighted average shares
outstanding 27,910,217 27,178,504 26,310,217 26,310,217 24,730,218
</TABLE>
(1) In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share," and has retroactively restated all periods
presented.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit) $ (747,984) $ 331,552 $ 104,903 $ (40,390) $ 139,306
Net intangible assets 1,439,481 -- 1,209 3,281 5,353
Total assets 2,811,111 1,005,600 523,647 436,058 935,166
Long term debt including
capital leases 44,973 84,368 100,344 138,565 164,187
Total debt including capital leases 439,360 137,539 137,206 171,052 382,763
Total liabilities 2,128,309 558,169 396,452 428,078 641,441
Total stockholders' equity 682,802 447,431 127,195 7,980 293,725
</TABLE>
See Notes to the Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL CONSIDERATIONS
Except for the historical information contained herein, the matters
discussed may include forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that forward-looking statements include the
intent, belief, or current expectations of the Company and members of its senior
management team, as well as the assumptions on which such statements are based.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those contemplated by such
forward-looking statements. Important factors currently known to management that
could cause actual results to differ materially from those in forward-looking
statements are set forth in the safe harbor compliance statement for
forward-looking statements included as Exhibit 99.1 to this Form 10-K and are
hereby incorporated herein by reference. The Company undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
UMC and UMY derive their primary revenues from medical claims processing
and accounts receivable management services. A substantial portion of UMC and
UMY revenues are derived from recurring monthly charges to its customers under
service contracts that typically are cancelable with a 30 to 60 day notice. For
the year ended December 31, 1998, approximately 89% of UMC and UMY revenues were
recurring. Recurring revenues are defined as revenues derived from services that
are used by the UMC and UMY customers each year in connection with ongoing
business, and accordingly exclude revenues from backlog accounts receivable
management, advance funding, UMClaimPros, and consulting services.
15
<PAGE>
ACCOUNTS RECEIVABLE MANAGEMENT SERVICES - PROCESSING VOLUMES
The following table sets forth for each period indicated the volume and
gross dollar amount of insurance claims received and fees recognized for each of
the Company's two principal accounts receivable management services . In
general, collections on most healthcare providers' new claims ("Ongoing") tend
to average about 27 to 50 percent of the gross claim amount. Backlog collection
ratios range from 0 to about 40 percent of the aggregate gross claim amount
because many backlog claims have already been paid or denied by the insurance
carriers prior to submission of the claims to UMC:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- -------------------------------- ---------------------------------
Quarter Quarter Quarter
--------------------------------- -------------------------------- ---------------------------------
Fourth Third Second First Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UMC
Number of Claims
Accepted for
Processing:
Ongoing 48,722 48,162 49,742 89,317 72,803 76,672 42,833 28,729 37,127 40,179 46,860 48,280
Backlog -- 1 72 8,518 23,739 28,361 -- -- -- 1 1 41
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 48,722 48,163 49,814 97,835 96,542 105,033 42,833 28,729 37,127 40,179 46,861 48,321
Gross $ Amount
of Claims
Accepted for
Processing
(000's):
Ongoing 33,401 30,116 30,087 40,333 33,375 35,186 20,124 20,269 18,325 18,068 21,055 19,923
Backlog -- -- 17 2,744 5,868 9,066 -- -- -- -- -- 17
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 33,401 30,116 30,104 43,077 39,243 44,252 20,124 20,269 18,325 18,068 21,055 19,940
Collection $
(000's)
Ongoing 11,613 11,738 11,215 14,556 12,190 9,407 10,143 7,545 7,063 7,533 8,257 9,019
Backlog -- 9 156 128 626 -- -- -- -- -- 6 70
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 11,613 11,747 11,371 14,684 12,816 9,407 10,143 7,545 7,063 7,533 8,263 9,089
Fees Earned
(000's)
Ongoing 631 681 729 922 733 480 428 366 376 379 386 408
Backlog -- 1 11 9 46 -- -- -- -- -- -- 3
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 682 740 931 778 480 428 366 376 379 386 411
Average Fee %
Ongoing 5.4% 5.8% 6.4% 6.3% 6.0% 5.1% 4.2% 4.9% 5.3% 5.0% 4.7% 4.5%
Backlog -- 11.0% 7.1% 7.0% 13.7% -- -- -- -- -- -- 4.3%
</TABLE>
For Ongoing claims, there is typically a time lag of approximately 5 to 30
days from contract execution to computer hardware installation and training of
customer personnel. During this period, Company personnel survey the customer's
existing operations and prepare for installation. Following installation and
training of the customer's personnel, the customer begins entering claims and
transmitting them to the Company. There is usually a time lag of 30 to 90 days
between transmission of a claim to a third party payor and collection of a claim
from that payor.
16
<PAGE>
COLLECTION AGENCY SERVICES - PROCESSING VOLUME
The following table sets forth for each period indicated the volume and
gross dollar amount of collection accounts received and fees recognized for UMY.
In general, collections on most new placements range from about 4 to 21 percent
of the gross placement amount. Collection fee percentages charged to the
customer vary for the three different placement categories: bad debt, early out,
and second placements.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------ ------------------------------------ ------------------------------
Quarter Quarter Quarter
------------------------------------ ------------------------------------ ------------------------------
Fourth Third Second First Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UMY
Number of
Accounts Accepted
for Collection: 26,024 31,861 22,130 27,399 27,177 27,801 22,209 3,916 N/A N/A N/A N/A
Gross $ Amount
of Accounts
Accepted for
Collection
(000's) 12,282 11,664 12,370 14,294 14,543 14,965 19,037 2,264 N/A N/A N/A N/A
Collection $
(000's) 1,321 2,282 2,653 2,305 1,994 784 632 96 N/A N/A N/A N/A
Fees Earned
(000's) 150 232 263 270 196 182 79 20 N/A N/A N/A N/A
Average Fee % 11.4% 10.2% 9.9% 11.8% 9.8% 23.2% 12.5% 20.8% 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>
Percentage of Revenues
----------------------
Year Ended December 31, 1998 1997 1996
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
----- ----- -----
Wages and benefits 65.8 67.7 57.9
Selling, general and administrative 18.6 17.8 20.8
Professional fees 4.3 1.9 3.9
Office and equipment rental 3.9 3.2 5.0
Depreciation and amortization 2.4 3.7 5.2
Provision for doubtful accounts 1.3 -- 0.1
Interest, net, and other income 0.3 -- 1.2
----- ----- -----
Total expenses 96.6 94.3 94.1
----- ----- -----
Net income 3.4% 5.7% 5.9%
----- ----- -----
----- ----- -----
</TABLE>
17
<PAGE>
1998 COMPARED TO 1997
REVENUES increased $2,174,815 or 76% primarily due to the following:
o Ongoing Accounts Receivable Management Services revenue of $2,857,000 in
1998 increased by $925,000 compared to 1997 primarily due to full year
effect in 1998 of the WHC Physician Billing Department ("WHCPBD") ongoing
accounts receivable management services agreement executed on May 5, 1997.
For the years ended December 31, 1998 and 1997, the WHCPBD agreement
generated revenue of $972,000 and $221,000, respectively. Assuming that
there are no significant changes in the existing volume and mix of claims
placed by WHC, management believes that the WHC contracts will generate
1999 revenues of approximately $2.2 million. The expected decline in 1999
compared to 1998 is the result of a reduction of WHCPBD claims placed with
the Company in the second quarter of 1998.
o Net patient services revenue for the five months ended December 31, 1998
associated with the acquisition of AHO accounts for $800,000 of the revenue
increase. Until such time as significant issues confronting AHO are
resolved, as more fully explained at Liquidity and Capital Sources below,
AHO management does not believe that it can accurately project future AHO
revenues and further believes that AHO revenue for the five months ended
December 31, 1998, are not necessarily indicative of results to be expected
in 1999.
o Collection Agency Services revenue of $915,000 in 1998 increased by
$439,000 compared to 1997 primarily due to the full year effect in 1998 of
the collection services agreements executed with PHS at various times in
1997. Management does not believe that the 1998 level of PHS revenue will
be sustained in 1999 due to the stated intentions of PHS to reduce its
outsourced collection services.
o Other revenue of $113,000 in 1998 increased by $78,000 compared to 1997
primarily due to increased funding fees related to Advance Funding Services
and increased Consulting Services. Approximately $77,000 of this revenue
related to services performed for AHO. Upon the acquisition of AHO, billing
for services performed by UMC was terminated. Unless the Company is
successful in generating new customers for these services, management
believes that 1999 Other revenue will decrease accordingly.
o UMClaimPros revenue of $195,000 in 1998 decreased by $41,000 compared to
1997 primarily due to decreased utilization from existing customers.
Management continues to refine its strategies related to UMClaimPros and
continues to believe that this service provides a competitive advantage for
the Company as well as providing a viable entree' to new customers.
WAGES AND BENEFITS expense increased $1,377,000 or 72% primarily due to the
acquisition of AHO, increased headcount exclusive of the AHO acquisition, and
increased bonuses for UMY collectors related to increased UMY collections and
revenues. For the five months ended December 31, 1998, approximately $613,000 or
45% of this increase relates to the AHO acquisition which increased headcount by
a monthly average of 19 for the five months ended December 31, 1998.
Approximately $727,000 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 1998, monthly employee
headcount, excluding AHO, averaged 80 compared to 57 during 1997. Approximately
$37,000 or 3% of this increase relates to UMY collector bonuses.
18
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense increased $433,000 or
88% 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 temporarily fill open positions, increased recruiting expenses
related to open positions and various other expenses to support a larger revenue
stream and increased headcount. For the five months ended December 31, 1998,
approximately $110,000 or 25% of this increase relates to the AHO acquisition.
PROFESSIONAL FEES expense increased $159,000 or 293% primarily due to the
AHO acquisition. For the five months ended December 31, 1998, approximately
$168,000 or 106% of this increase is associated with the AHO acquisition. AHO
professional fees are primarily related to Medicare regulatory consulting
services, financial statement audit expenses related to the acquisition,
accruals for cost report preparation and the financial statement audit for the
year ending December 31, 1998, and quality assurance and clinical oversight
consulting services. Of the $168,000 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 $104,000 or 117%
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 1997, as well as the full year
effect in 1998 of leasing an additional 1,906 square feet of office space on
July 31, 1997 required for UMY. For the five months ended December 31, 1998,
approximately $64,000 or 62% 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. 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 40% higher than the rate paid on the
Company's current office space.
DEPRECIATION AND AMORTIZATION expense increased $10,000 or 10% primarily
due to additional depreciation expense related to AHO fixed assets and goodwill
amortization related to the AHO acquisition partially offset by a $20,000
decrease in UMC depreciation expense primarily related to UMC's AS/400 which was
fully depreciated at December 31, 1997. For the five months ended December 31,
1998, AHO's fixed asset depreciation and goodwill amortization totaled $4,000
and $26,000, respectively.
PROVISION FOR DOUBTFUL ACCOUNTS expense increased $68,000 primarily due to
the AHO acquisition. For the five months ended December 31, 1998, approximately
$35,000 or 51% of this increase relates to the AHO acquisition with the
remaining increase primarily attributable to the write-off of UMC account
balances totaling $21,000 and a $6,000 increase in the UMC provision .
INTEREST, NET increased $15,000 or 294% primarily due to the AHO
acquisition. For the five months ended December 31, 1998, approximately $11,000
or 73% of this increase relates to AHO debt with the remaining increase
attributable to the draw by the Company on its Credit Facility which first
occurred in November, 1998. Effective December 31, 1998, UMC sold 1,000,000
shares of unregistered Common Stock in exchange for a $261,818 promissory note
due from AHO to a third party note holder. This
19
<PAGE>
transaction will reduce interest expense in 1999 and thereafter by approximately
$16,000 and $9,000, respectively.
20
<PAGE>
LIQUIDITY AND CAPITAL SOURCES
At December 31, 1998, the Company's liquid assets, consisting of cash and
cash equivalents, totaled $74,000 compared to $276,000 at December 31, 1997.
Working capital was ($747,984) and $331,552 at December 31, 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 Medicare settlement
reserve, and the current portion of long term debt. At December 31, 1998, these
liabilities totaled $191,000, $879,000 and 127,000, respectively.
Operating activities in 1998 used net cash of $218,000, compared to $96,000
net cash provided in operating activities during 1997. This decline is primarily
due to increased trade accounts receivable primarily related to AHO Medicare
claims in various stages of appeal, and decreased accrued liabilities including
the Medicare settlement reserve partially offset by increased non-cash
depreciation, goodwill amortization and provision for doubtful accounts expense.
In 1998, cash flow from operations was not adequate to cover all working capital
and liquidity requirements. Additional financing from the Company's Credit
Facility was required. UMC has provided working capital loans to AHO totaling
$635,000 and $507,000 at March 31, 1999 and December 31, 1998, respectively.
These loans were required as a result of AHO cash shortages as explained below.
Although it is UMC's intent to recover these loans, there can be no assurance
that AHO will be able to repay these loans.
Investing activities in 1998 consisted of the acquisition of AHO and
purchases of furniture, fixtures and equipment. The acquisition of AHO provided
net cash of $70,000. The purchase of furniture, fixtures and equipment used cash
of $80,000 compared to $131,000 used in 1997.
Financing activities in 1998 consisted of borrowings of $200,000 from the
Company's Credit Facility partially offset by principal payments on capital
lease obligations and long term debt which used cash of $175,000. In 1997, net
proceeds from the sale of common stock totaling $159,000 were partially offset
by principal payments on capital lease obligations which used cash of $38,000.
This overall decrease is primarily due to the decrease in cash provided from
financing sources and the increase in principal payments on long term AHO debt.
Effective December 31, 1998, UMC sold 1,000,000 shares of unregistered Common
Stock in exchange for a $261,818 promissory note due from AHO to a third party
note holder. The Common Stock was priced at $0.06 per share representing the
last trading price prior to the execution of the transaction. The effect of this
transaction reduced debt service, including cash required to pay interest, by
$19,000, $112,000 and $131,000 in 1998, 1999 and thereafter, respectively.
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") was
originally equal to the lesser of $200,000 or 60% of trade accounts receivable
aged less than 60 days. On September 30, 1998, the interest rate on this
facility was reduced from 9.5% to 9.25%. Effective December 11, 1998, the Credit
Facility was restructured whereby the Borrowing Base was increased to the lesser
of $400,000 or 80% of trade accounts receivable aged less than 90 days. The
Credit Facility matures on December 11, 1999. During the period from December
11, 1998 to March 31, 1999, the available Borrowing Base has averaged
approximately $318,000. At December 31, 1998, borrowings under the Credit
Facility totaled $200,000. The terms of the Credit
21
<PAGE>
Facility are such that the Company could be deemed, from time to time, to be in
default due to a number of factors including, but not limited to: a.) a material
adverse change in the Company's financial condition or if the lender believes
the prospect of payment or performance of the Credit Facility is impaired and,
b.) the lender in good faith deems itself insecure based on a change in the
financial position of the Company. Upon default, the lender may declare the
entire outstanding balance of the Credit Facility, plus accrued and unpaid
interest, to be immediately due and payable.
Effective January 4, 1999, the Company executed a promissory note (the
"Note") with the Credit Facility lender, for $100,000 bearing interest of 8.75%.
The Note matures on January 4, 2001 and requires monthly principal payments of
$4,167. Simple interest is computed and paid on a monthly basis. The Note is
secured by the fixed assets of UMC.
During various periods of time for the twelve months ending December 31,
1999, management anticipates the possibility that cash requirements could exceed
cash on hand, cash to be generated from operating activities, if any, and cash
available from UMC's Credit Facility. These periods of possible liquid
deficiency are attributed to the working capital deficiency of AHO at December
31, 1998 and by AHO's current cost based reimbursement methodology which
eliminates the ability of AHO as a stand alone entity to generate positive cash
flow. More specifically, the possible periods of liquid deficiency are
attributed to the following factors:
1.) AHO's Medicare cost reports have not yet been audited by the Medicare
fiscal intermediaries for the years ended December 31, 1998, 1997 or 1996. An
audit of the 1997 and 1996 Alabama cost reports is currently in process. The
1997 and 1996 cost reports were prepared with unaudited financial
information. The 1998 cost reports will be prepared using information
obtained from audited financial statements and will be filed no later than
May 31, 1999, as required. AHO has recorded certain reserves based on
assumptions that may or may not ultimately prove to be correct. The accuracy
of these assumptions will not be known until completion of the aforementioned
audits. At December 31, 1998, the current portion of the Medicare settlement
reserve totaled $879,000 and is comprised principally of:
<TABLE>
<S> <C>
$383,000 reserves related to the 1997 and 1996 Medicare reimbursable bad debt logs,
252,000 reserves related to the estimated 1998 interim reimbursement,
168,000 industry norm general reserves, and
76,000 reserves for estimates representing possible differences between
the unaudited financial information used to complete the 1997 and 1996 cost
reports as compared to the subsequently audited financial statements for the
two years ended December 31, 1997.
--------
$879,000
--------
--------
</TABLE>
Should the results of the audited 1997 and 1996 Alabama cost reports
confirm all of the assumptions underlying the Medicare settlement reserve and if
AHO is required to liquidate this reserve within thirty days of receipt of the
Notice of Program Reimbursement (the formal notification of settlement after the
audit is complete), AHO currently projects that it is likely that it will not
have sufficient cash or sources of cash to liquidate this liability and will be
forced to file for bankruptcy protection.
22
<PAGE>
It is UMC's opinion, supported by the opinion of legal counsel, that the
liabilities of AHO, including the Medicare settlement reserve, do not ascend to
UMC. Therefore, management believes UMC will continue as a going concern
regardless of the status of AHO.
To the extent that the results of the aforementioned audit do not confirm
all of the assumptions underlying the Medicare settlement reserve, the extent of
the possible cash requirement to liquidate this reserve falls within the range
of $0 to $879,000. Until such time as the assumptions underlying the Medicare
settlement reserve are confirmed or denied, AHO cannot project the 1999 cash
requirements with respect to this reserve.
AHO is vigorously pursuing the following potential sources which could
provide up to $846,000 of cash:
<TABLE>
<S> <C>
$319,000 related to completion of the 1997 and 1996 Alabama and Florida
reimbursable bad debt logs to be resubmitted,
247,000 related to completion of the 1998 reimbursable bad debt logs,
146,000 related to 1998 BHM denied Medicare claims under appeal, and
134,000 outstanding outpatient claims not yet billed.
--------
$846,000
--------
--------
</TABLE>
There can be no assurance that AHO will be successful in generating cash
from these sources or that this cash can be generated in a timely manner. .
2.) On October 16, 1998, AHO received notice from the Florida Medicare fiscal
intermediary (the "Florida FI") indicating that a tentative settlement of
$186,512 was due from AHO's Pensacola Center for Behavioral Health ("PCBH") for
interim reimbursement in excess of reimbursable costs for the nine months ended
September 30, 1998. Effective November 12, 1998, all interim payments to PCBH
were suspended until such time as the interim overpayment is recovered by
Medicare through the submission by PCBH of future Medicare claims. During this
suspension period, the working capital deficiencies of AHO have been funded by
UMC. At March 31, 1999, the remaining overpayment totals approximately $75,000.
AHO continues to vigorously pursue the appeal of denied 1998 Medicare claims
totaling approximately $96,000 as a possible source of cash to liquidate this
overpayment. The projected interim reimbursement overpayment of $160,000 for the
year ended December 31, 1998 is included in the Medicare settlement reserve
above.
3.) On October 27, 1998, AHO received notice from the Alabama Medicare fiscal
intermediary (the "Alabama FI") indicating that Behavioral Health of Mobile
("BHM") had been placed on one hundred percent medical records review based on
certain deficiencies identified by the Alabama FI in the medical records. This
review retroactively effected all BHM Medicare claims with dates of service
beginning on August 1, 1998, and will continue until such time that deficiencies
are corrected and the medical review is reduced or eliminated entirely.
Substantially all BHM Medicare claims reviewed during this period were denied.
4.) Based upon a feasibility study of the BHM catchment area conducted in
January, 1999, AHO has temporarily suspended the BHM partial hospitalization
services pending further analysis of the viability of the catchment area and
more specifically the referral sources. BHM continues to operate as an
outpatient facility.
23
<PAGE>
As a result of the foregoing circumstances, AHO implemented the following
plan:
a.) Employee headcount and other expenses at PCBH and BHM have been
reduced.
b.) AHO applied for and was denied an extended repayment plan from the
Florida FI.
c.) AHO 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 are also being provided.
d.) UMC has increased its existing credit facility in order to fund near
term cash requirements of AHO.
e.) AHO has entered into various discussions with parties potentially
interested in buying one or more of the AHO CMHCs.
f.) AHO has identified and it is vigorously pursuing the aforementioned
sources of cash.
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 AHO's liquidity and
financial position. If AHO is unable to service the forgoing financial
obligations as they become due, 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, or filing for bankruptcy protection.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send and receive
electronic data, or engage in similar normal business activities.
The Company has initiated communications with significant customers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 Issue. 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.
24
<PAGE>
The Company has completed substantially all of its Year 2000 project. The
incremental costs associated with this project totaled approximately $30,000.
1997 COMPARED TO 1996
REVENUES increased $777,663 or 38% primarily due to the following:
o Collection Agency services revenue of $476,000 in 1997 increased by
$435,000 compared to 1996 primarily due to management's initiative to grow
this service in order to present a more complete healthcare business office
service package to the market. During 1997, a concentrated sales and
marketing effort was deployed which resulted in UMY successfully closing
bad debt, early out and secondary placement agreements with four PHS Dallas
metroplex hospitals as well as gaining approximately 9 other customers
throughout 1997. A majority of the 1997 revenue was generated in the last
six months of the year.
o On May 5, 1997, the Company amended its existing WHC Customer Service
Agreement to provide ongoing accounts receivable management services to
certain groups within the WHC Physician Billing Department ("WHCPBD"). For
the three months ended December 31, 1997, WHCPBD generated revenue totaling
$221,000. This level of revenue may not be indicative of future revenue as
it includes a catch-up of claims billed and collected back to the
amendment's effective date.
o On September 1, 1996, the Company amended its existing WHC Customer Service
Agreement to provide patient billing and collection services due from
guarantors of certain classes of patient account balances. During 1996,
revenue from this project totaled $13,000. During 1997, revenue from this
project totaled $104,000.
o UMClaimPros revenue of $236,000 in 1997 increased by $85,000 compared to
1996 primarily due to increased utilization from existing customers.
Management continues to refine its strategies related to UMClaimPros and
continues to believe that this service provides a competitive advantage for
the Company as well as providing a viable entree' to new customers.
o During 1997, growth in other new customers generated approximately $200,000
in ongoing revenues primarily related to physician practices.
o During 1996, HAS and MMH provided total revenue of $406,000. The HAS
contract was terminated on June 30, 1996. The MMH contract expired on April
1, 1996.
WAGES AND BENEFITS increased $728,461 or 62% due to an increase in
employees required to support customer growth as well as to enhance the
management infrastructure. Approximately 7% of this increase related to merit
and market raises for existing employees. The remaining portion of the increase
related to headcount increasing 93% during the past twelve months, from 40 to 77
employees at December 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE expense increased $70,488 or 17%
primarily due to increased travel associated with supporting existing customers
and developing new business, increased printing and postage expense related to
the ramp up of UMY and the WHCPBD agreement, and various other expenses to
support increased headcount.
25
<PAGE>
OFFICE AND EQUIPMENT RENTAL expense decreased $11,903 or 12% primarily due
to the closing of the Company's Ponce, Puerto Rico office on January 3, 1997
partially offset by the lease of an additional 1,906 square feet of office space
on July 31, 1997 required for UMY.
PROFESSIONAL FEES decreased $24,625 or 31% primarily due to adjustment of
accrued expenses related to the settlement of previously pending litigation.
This litigation was settled in the fourth quarter of 1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company qualifies as a small business issuer as defined in Rule 12b-2
of the Securities Exchange Act of 1934. As such, the Company is not required to
provide information related to the quantitative and qualitative disclosures
about market risk...
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
37.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 25, 1999, the Audit Committee of the Board of Directors of the
Company accepted the resignation of the firm of PricewaterhouseCoopers LLP as
the Company's independent auditor.
The reports of PricewaterhouseCoopers LLP on the Company's financial
statements for the two years ended December 31, 1997 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles, except that the report of
PricewaterhouseCoopers LLP on the Company's financial statements for the year
ended December 31, 1996 included an explanatory paragraph relating to an
uncertainty about the Company's ability to continue as a going concern.
There were no disagreements with PricewaterhouseCoopers LLP during the
audits of the Company's financial statements for the two years ended December
31, 1997, and any subsequent interim period preceding the change on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report.
On January 25, 1999, the Company appointed Hein + Associates LLP as its
independent accountant. Hein + Associates LLP accepted such appointment. The
Company had no relationship with Hein + Associates LLP required to be reported
pursuant to Regulation S-K Item 304(a)(2) during the two years ended December
31, 1997 or the subsequent interim period prior to and including March 31, 1999.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PETER W. SEAMAN (49) was elected President and Chief Executive Officer on
February 10, 1994, and Chairman of the Board of Directors on November 12, 1996.
Mr. Seaman joined the Company on July 17, 1991 as Vice President and Chief
Financial Officer and was elected to the Board of Directors on August 12, 1991.
Mr. Seaman's prior employment includes serving as Director of Business
Development for TRW Receivables Management Services from March, 1989 to June,
1991, and Vice President of Planning and Systems Development for the Accounts
Receivable Management Division of the Chilton Corporation from March, 1986 to
March, 1989. Prior to joining the Chilton Corporation, Mr. Seaman was Vice
President and Chief Financial Officer for Corliss, Inc., a collection systems
and services company. Before that, Mr. Seaman held a number of finance,
marketing, and auditing positions with the Datapoint Corporation, Rockwell
International, and Coopers and Lybrand. Mr. Seaman holds a B.A. in Accounting
from Duke University, and is a Certified Public Accountant.
MICHAEL P. BUMGARNER (54) was elected to the Board of Directors on November
12, 1996. Mr. Bumgarner is the Chairman of the Audit Committee of the Board of
Directors. Mr. Bumgarner is President/CEO of AHC Texas, Inc., a San Antonio,
Texas based start-up Managed Service Organization positioned to deliver a
comprehensive managed healthcare program to employers in the State of Texas. Mr.
Bumgarner's prior experience includes Chairman/CEO of Beacon Enterprises, Inc.,
a holding company which he co-founded in May, 1994 with interests in a number of
healthcare concerns including GSS "Gold Seal Services", one of the largest home
healthcare providers in the San Antonio area. GSS was sold to a Dallas based
public company in December, 1996. Prior to starting Beacon Enterprises, Mr.
Bumgarner worked as a consultant for a number of national distributors of
cardiovascular equipment in the southwest United States. From 1977 to 1986, Mr.
Bumgarner was founder and president of a national healthcare company providing
arrhythmia monitoring by telephone to patients in their homes. During this
period, he developed the "continuous loop memory" arrhythmia transmitter and
received a patent registered in the U.S. Patent Office. After graduating from
Auburn University, he was honorably discharged from the USAF as a Captain and
carried his electronics background to the medical industry where he has spent
over 25 years gaining extensive senior business and management experience.
JOHN F. LEWIS (50) was elected to the Board of Directors on November 12,
1996. Mr. Lewis is a consultant specializing in Medicare reimbursement and
regulatory compliance for a number of healthcare industry concerns in Puerto
Rico and the Caribbean market area. From 1992 to 1995, Mr. Lewis served as
Health Advisor to the Governor of the U.S. Virgin Islands. From 1988 to 1992,
Mr. Lewis was employed as Assistant Vice President for Medicare Operations at
Seguros de Servicios de Salud, the Medicare Part B Carrier for Puerto Rico and
the Caribbean. Mr. Lewis holds a B.A. in Business Administration from the
American College of Switzerland and a License in Economic and Social Sciences
from the University of Geneva.
THOMAS H. MCCONNELL, III, M.D. (61) was elected to the Board of Directors
on November 12, 1996. Dr. McConnell is the Chairman of the Compensation and
Stock Option Committees of the Board of Directors. Dr. McConnell is former CEO
of AM Laboratories, Inc., a medical testing laboratory, and is active as an
investor and consultant to a number of healthcare providers. From 1992 to 1994,
Dr. McConnell served as Chairman of the Executive Committee and a member of the
Board of
27
<PAGE>
Directors of AdvaCare, Inc., a publicly traded medical billing and collection
agency. From 1992 to 1995, Dr. McConnell served as a member of the Board of
Directors of Osprey Holdings, Inc., a publicly traded holding company formerly
in the medical laboratory software business. Dr. McConnell is a past Governor of
the College of American Pathologists, past President of the Texas Society of
Pathologists, and past member of the Board of Directors of the Dallas County
Medical Society. Dr. McConnell attended Rice University, holds a Doctor of
Medicine Degree from the University of Texas Southwestern Medical School and an
OPM certificate from the Harvard Business School.
MARY E. ROGERS (36) joined the Company on September 22, 1993 and was
promoted to Vice President, Information Systems on December 16, 1994. Mrs.
Rogers' prior business experience includes two years as a Senior Systems Design
Analyst for CTI Limited, Inc., a property management software development firm,
and three years as a Senior Systems Design Analyst for Andersen Consulting. Mrs.
Rogers holds a B.B.A. in Finance from Southern Methodist University.
R. KENYON CULVER (39) joined the Company on September 25, 1997 as Vice
President and Chief Financial Officer. Mr. Culver's prior employment includes
three years as Controller of the Professional Services division for Affiliated
Computer Services, Inc. Prior to joining Affiliated Computer Services, Inc., Mr.
Culver was employed for four years in the Audit and Business Advisory division
of Price Waterhouse, LLP. Before that, Mr. Culver served for nine years in the
United States Coast Guard. Mr. Culver holds a B.B.A. in Accounting from Southern
Methodist University and is a Certified Public Accountant.
COMPLIANCE WITH SECTION 16(A)..OF THE SECURITIES ACT OF 1934
Pursuant to Section 16(a) of the Securities Act of 1934 and the rules
issued thereunder, the Company's executive officers and directors are required
to file with the Securities and Exchange Commission reports of ownership and
changes in ownership of the Common Stock. Copies of such reports are required to
be furnished to the Company. Mary E. Rogers filed a late Form 4 reporting the
receipt of a single stock option grant in 1998. R. Kenyon Culver filed a late
Form 4 reporting the receipt of a single stock option grant in 1998. Dr. Thomas
H. McConnell filed a late Form 4 reporting the receipt of two stock purchase
warrant grants in 1998.
28
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Set forth below are tables showing in summary form, the compensation paid
for the years shown in the table to Mr. Seaman and exercise and year end
valuation information pertaining to stock options granted to Mr. Seaman. There
were no options granted to Mr. Seaman in 1998. No other executive officer of the
Company received total annual salary and bonus in excess of $100,000 in the
fiscal years 1998, 1997 or 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------- ---------------------------------------- -------
OTHER RESTRICTED SECURITIES
NAME ANNUAL STOCK UNDERLYING LTIP ALL OTHER
AND PRINCIPAL COMPENS- AWARD(S) OPTIONS/ PAYOUTS COMPEN-
POSITION YEAR SALARY ($) BONUS ($) SATION ($) ($) SARS (#) ($) SATION ($)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter W. Seaman 1998 142,518 22,500 (1) -- -- -- -- --
Chairman and 1997 120,931 -- -- -- 700,000 -- --
CEO 1996 106,556 11,333 (2) -- -- 300,000 -- --
</TABLE>
(1) Represents 1997 bonus paid in 1998.
(2) Represents 1995 bonus including accrued interest of $1,333, paid in 1996.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY
ON VALUE OPTIONS/SARS AT FISCAL OPTIONS/SARS AT
EXERCISE REALIZED YEAR-END (#) FISCAL YEAR-END (3) ($)
-------------------------------- -------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Peter W. Seaman -- -- 531,000 469,000 3,000 --
</TABLE>
(3) The last reported sale of the Company's Common Stock as reported on the
NASD OTC Bulletin Board as of December 31, 1998 was $0.06 per share. Value
is calculated on the basis of the difference between the option exercise
price and $0.06 multiplied by the number of shares of Common Stock
underlying the option.
COMPENSATION OF DIRECTORS
An officer of the Company who also serves as a Director of the Company
receives no additional compensation for serving as a Director or as a member or
chair of a committee. Members receive no cash compensation for serving on the
Board of Directors. Board members are reimbursed for expenses of meeting
attendance.
29
<PAGE>
Pursuant to the 1995 Stock Option Plan, each non-employee director shall
receive nonqualified stock options for the purchase of 25,000 shares of Common
Stock. These options shall be granted on the first and each subsequent
anniversary of the approval of the 1995 Stock Option Plan by stockholders, as
long as the director serves on the Board. The exercise price shall be the fair
market value of the Common Stock on the date the nonqualified stock options are
granted. One half of the option shall be exercisable immediately and the
remainder of the option shall become exercisable on the first anniversary date
of the grant. All options shall expire on the tenth anniversary of the date
granted.
Subsequent to stockholder approval of the 1995 Stock Option Plan, the Board
of Directors determined that in light of the condition of the Company
immediately prior to November 12, 1996 when the current members of the Board of
Directors were elected, the provisions of the 1995 Stock Option Plan regarding
director compensation were inadequate to attract and retain qualified board
members. As such, on April 1, 1997, warrants to purchase a total of 1,200,000
shares of the Company's common stock at $0.08 per share were issued to the three
non-employee board members with each member receiving a warrant for 400,000
shares. These warrants are exercisable 33 1/3% immediately, 66 2/3% after twelve
months from the effective date of the grant, and 100% after twenty four months
from the effective date of the grant. These warrants expire on the earlier of
(a) March 31, 2007, (b) the date on which the Director's services are terminated
for cause, (c) three months after the expiration of the Director's term,
resignation from the Board of Directors, or termination of the Director due to
the sale of the Company or (d) twelve months after the services as a Director
are terminated by reason of the Director's death of disability. None of these
warrants had been exercised as of December 31, 1998.
On March 19, 1997, each non-employee member of the Board of Directors
entered into a Director's Incentive Compensation Agreement ("DICA"). This
agreement has a term of three years under which the director shall be paid a
commission based on fees billed and collected from new customers sold by or with
the assistance from such director. The commission will be 10 percent during the
first year of a contract with a given customer, 6 percent during the second
contract year, and 4 percent thereafter. The Director's compensation may be paid
in either cash, common stock, or stock purchase warrants upon approval of the
Compensation and Stock Option Committee. On March 12, 1998, a warrant to
purchase 39,161 shares of the Company's common stock at $0.13 per share was
issued to one director in conjunction with commissions earned under the DICA. On
August 28, 1998, a warrant to purchase 70,186 shares of the Company's common
stock at $0.07 per share was issued to the same director in conjunction with
commissions earned under the DICA. Both warrants expire on the earlier of (a)
March 31, 2007, (b) the date on which the Director's services are terminated for
cause, (c) three months after the expiration of the Director's term, resignation
from the Board of Directors, or termination of the Director due to the sale of
the Company or (d) twelve months after the services as a Director are terminated
by reason of the Director's death or disability. For the year ended December 31,
1998, the Company recorded $7,425 of expense to reflect the estimated fair value
of these warrants. For the year ended December 31, 1998, the Company recorded
commission expense of $3,420 related to a second director in conjunction with
commissions earned under the DICA.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Messrs. McConnell,
Lewis and Bumgarner. None of the members of the Company's Compensation Committee
served as a member of the compensation committee or other board committees
performing similar functions of any other registered entity in 1998.
30
<PAGE>
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the notes thereto set forth certain information
regarding the beneficial ownership of shares of the Company's Common Stock as of
March 31, 1999 by (i) each current director; (ii) all current directors and
officers of the Company as a group; and (iii) each person known to the Company
to own beneficially more than five percent (5%) of the currently outstanding
Common Stock. Unless there is a footnote to the contrary, sole voting and
investment power in the shares owned are held either by the named individual
alone or by the named individual and his or her spouse:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF UNITED MEDICORP, INC. COMMON STOCK (1)
----------------------------------------------------------
SHARES EXERCISABLE
BENEFICIALLY WARRANTS/ PERCENT OF
NAME OWNED OPTIONS (3) CLASS (1)
- ---- ----- ----------- ------------
<S> <C> <C> <C>
Mercury Asset Management plc. (2) 8,067,200 -- 28.9%
33 King William Street
London EC4R 9AS Great Britain
Tambura Limited 1,484,000 -- 5.3%
Rue du Moulin
Sark, Channel Islands
Thomas H. McConnell, III 1,000,000 509,347 5.3%
Peter W. Seaman (4) 100,000 766,666 3.0%
Michael P. Bumgarner 100,000 400,000 1.8%
John F. Lewis -- 400,000 1.4%
All officers and directors as
a group (6 persons) (5) 1,200,000 2,292,680 11.6%
</TABLE>
(1) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to the shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable. Beneficial ownership as reported in the above table has
been determined in accordance with Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The percentages are based
upon 27,910,217 shares outstanding except with respect to certain persons
who hold presently exercisable options or warrants to purchase shares. The
percentage for each person who holds presently exercisable options or
warrants is based upon the sum of 27,910,217 shares outstanding plus the
number of shares subject to presently exercisable options or warrants held
by such person.
(2) According to a Schedule 13D filed with the Company, Mercury Asset
Management plc. ("MAM") manages investments for its clients and the
securities indicated are held solely for the accounts of such clients. With
respect to 3,267,200 of the shares held on behalf of a unit trust, a
wholly-owned subsidiary of MAM, as manager of the trust, has power to vote
the shares. MAM has the power to sell the shares for the benefit of the
trust. With respect to the remainder of the shares, MAM has dispositive
power, but not voting power, subject to its clients' guidelines. MAM does
not admit that it is the beneficial owner of any of the indicated shares.
(3) As required by the Securities and Exchange Commission, this column includes
shares available under exercisable options /warrants as well as shares that
may be acquired within 60 days of March 31, 1999, upon exercise of
options/warrants.
(4) Excludes 233,334 unexercisable shares held under option.
(5) Excludes 616,667 unexercisable shares held under option.
31
<PAGE>
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The Company has consulting agreements for services provided primarily by a
non-employee director of the Company. These agreements were completed
simultaneously with consulting agreements between the Company and certain
customers. The director was paid approximately 78% of the consulting fees paid
to the Company. For the years ended December 31, 1998, 1997 and 1996, the
Company paid the director $210,000, $24,000 and $18,000, respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements and
Financial Statement Schedules included at page 37.
2. FINANCIAL STATEMENT SCHEDULES
Reference is made to the Consolidated Financial Statements and
Financial Statement Schedules included at page 37.
3. EXHIBITS
2.1 Stock Purchase Agreement by and among United Medicorp, Inc.,
Brian K. Norris and Allied Health Options, Inc. dated August 7,
1998, is incorporated herein by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K, filed with the commission
on August 21, 1998.
3.1 Certificate of Incorporation of the Company, filed with Secretary
of State of Delaware on February 26, 1988, is incorporated herein
by reference to Exhibit 3 (a) of the Company's Registration
Statement on Form S-1, Commission File No. 33-20989, filed with
the Commission on March 30, 1988 and declared effective June 7,
1988 (previously filed).
3.2 By-Laws of the Company are incorporated herein by reference to
Exhibit 3 (b) of the Company's Registration Statement on Form
S-1, Commission File No. 33-20989, filed with the Commission on
March 30, 1988 and declared effective June 7, 1988 (previously
filed).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, filed with Secretary of State of Delaware on July 12,
1989, is incorporated herein by reference to Exhibit 3 of the
Company's Current Report on Form 8-K, filed with the Commission
on July 25, 1989 (previously filed).
32
<PAGE>
3.4 Certificate of Amendment to Certificate of Incorporation of the
Company, filed with Secretary of State of Delaware on August 9,
1989, is incorporated herein by reference to Exhibit 3.2 of the
Company's Form 10-Q filed for the fiscal quarter ended September
30, 1989 (previously filed).
4.1 Certificate of Designations, Preferences and Rights of 10%
Cumulative Convertible Preferred Stock of the Company, filed with
the Secretary of State of Delaware on August 9, 1989, is
incorporated herein by reference to Exhibit 4 of the Company's
Form 10-Q filed for the fiscal quarter ended September 30, 1989
(previously filed).
4.2 First Amended Certificate of Designations, Preferences and Rights
of 10% Cumulative Convertible Preferred Stock of the Company,
filed with the Secretary of State of Delaware on December 7, 1989
is incorporated herein by reference to Exhibit 4.2 of the
Company's Form 10-K filed for the fiscal year ended December 31,
1989 (previously filed).
4.3 Specimen Form of Certificate of Common Stock of the Company is
incorporated herein by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-1, Commission File No. 33-35177,
originally filed with the Commission on June 1, 1990 and declared
effective July 27, 1990 (previously filed).
4.4 Article Fourth of the Company's Certificate of Incorporation is
incorporated herein by reference to Exhibit 3 of the Company's
Current Report on Form 8-K, filed with the Commission on July 25,
1989 (previously filed).
4.5 Certificate of Amendment to Certificate of Incorporation, filed
with the Secretary of State of Delaware on June 21, 1990 is
incorporated herein by reference to Exhibit 4.5 of the Company's
Registration Statement on Form S-1, Commission File No. 33-35177,
originally filed with the Commission on June 1, 1990 and declared
effective on July 27, 1990 (previously filed).
4.6 Form of Common Stock Purchase Warrant issued to Thomas H.
McConnell, III (previously filed).
4.7 Form of Common Stock Purchase Warrant issued to Michael P.
Bumgarner (previously filed).
4.8 Form of Common Stock Purchase Warrant issued to John F. Lewis
(previously filed).
9. Not Applicable.
10.7 1992 Stock Option Plan of the Company is incorporated herein by
reference to Exhibit 10.24 of the Company's Registration
Statement on Form S-1, Commission File No. 33-35178 (previously
filed).
33
<PAGE>
10.11 Customer Service Agreement dated December 15, 1992 by and
between the Company and the Washington Hospital Center is
incorporated herein by reference to Exhibit 10.27 of the
Company's Registration Statement on Form S-1, Commission File No.
33-35178 (previously filed).
10.14 Standard Office Building Lease Agreement dated June 1, 1989,
between the Registrant and Aetna Life Insurance Company
(previously filed).
10.15 Third Amendment to Lease, dated May 1, 1992, between the
Registrant and Aetna Life Insurance Company (previously filed).
10.19 Certificate of Amendment to Certificate of Incorporation of the
Company, filed with Secretary of State of Delaware on August 3,
1993 (previously filed).
10.21 Term Lease Supplement dated December 30, 1994 between the
Registrant and IBM Credit Corporation (previously filed).
10.22 1995 Stock Option Plan (previously filed).
10.23 Modification and Ratification of Lease, dated July 19, 1995
(previously filed).
10.24 HAS Settlement and Termination Agreement, dated August 1, 1996
(previously filed).
10.25 Severance Agreement by and between Registrant and Mary E. Rogers
(previously filed).
10.26 Severance Agreement by and between Registrant and Peter W.
Seaman (previously filed).
10.27 Registrant's 1998 Key Management Bonus Plan (previously filed).
10.28 Director's Incentive Compensation Agreement by and between
Registrant and Thomas H. McConnell, III (previously filed).
10.29 Director's Incentive Compensation Agreement by and between
Registrant and John F. Lewis. (previously filed).
10.30 Director's Incentive Compensation Agreement by and between
Registrant and Michael P. Bumgarner. (previously filed).
10.31 Amendment No. 1 to Customer Service Agreement dated December 15,
1992 by and between the Company and the Washington Hospital
Center relating to collection of Department of Emergency Medicine
claims is incorporated herein by reference to Exhibit 10.27 of
the Company's Registration Statement on Form S-1, Commission File
No. 33-35178 (previously filed).
34
<PAGE>
10.32 Amendment No. 2 to Customer Service Agreement dated December 15,
1992 by and between the Company and the Washington Hospital
Center relating to collection of physician claims is incorporated
herein by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1, Commission File No. 33-35178
(previously filed).
10.33 Collection Services Agreement dated January 17, 1997 by and
between the Registrant and Presbyterian Healthcare System
(previously filed).
10.34 Early Out Collection Agreement dated May 1, 1997 by and between
the Registrant and Presbyterian Healthcare System (previously
filed).
10.35 Secondary Collection Agreement dated October 31, 1997 by and
between the Registrant and Presbyterian Healthcare System
(previously filed).
10.36 Loan Agreement dated December 11, 1998 by and between the
Registrant and Texas Central bank.
10.37 Promissory Note dated December 11, 1998 by and between the
Registrant and Texas Central bank.
22.1 Subsidiaries of the Company (previously filed).
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements
(b) REPORTS ON FORM 8-K
No reports of Form 8-K were filed during the fourth quarter of 1998.
35
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENT OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
United Medicorp, Inc.
Date: April 9, 1999 By: /s/ Peter W. Seaman
--------------------------------------
PETER W. SEAMAN,
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Peter W. Seaman Chairman of the Board and Chief April 9, 1999
- ------------------------------ Executive Officer (Principal Executive
PETER W. SEAMAN Officer)
/s/ R. Kenyon Culver Vice President and Chief Financial April 9, 1999
- ------------------------------ Officer (Principal Financial Officer
R. KENYON CULVER and Principal Accounting Officer)
/s/ Michael P. Bumgarner Director April 9, 1999
- ------------------------------
MICHAEL P. BUMGARNER
/s/ John F. Lewis Director April 9, 1999
- ------------------------------
JOHN F. LEWIS
/s/ Thomas H. McConnell, III Director April 9, 1999
- ------------------------------
THOMAS H. MCCONNELL, III
</TABLE>
36
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
ITEMS 8 AND 14(A)
37
<PAGE>
UNITED MEDICORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEM 14(A)]
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS: PAGE
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and 1997.............................................. 39
Consolidated Statements of Operations for each of the three years ended December 31, 1998 ................ 40
Consolidated Statements of Changes in Stockholders' Equity for each of the three years ended
December 31, 1998.................................................................................. 41
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1998 ................ 42
Notes to Consolidated Financial Statements................................................................ 43
Report of Independent Accountants - Hein + Associates LLP................................................. 65
Report of Independent Accountants - PricewaterhouseCoopers LLP............................................ 66
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Consolidated Financial Statement Schedules........................... 65
II- Valuation and Qualifying Accounts..................................................................... 67
</TABLE>
Other financial statement schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements of Notes thereto.
38
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 74,096 $ 275,948
Restricted cash ................................................ 1,064 75,135
Accounts receivable, net of allowance for doubtful accounts
of $216,388 and $11,674, respectively ....................... 1,007,405 430,069
Notes receivable, net of allowance of
$2,000 and $0, .............................................. -- 4,000
Prepaid expenses and other current assets ...................... 35,445 20,201
------------ ------------
Total current assets ........................................ 1,118,010 805,353
Other non-current assets ............................................. 16,401 11,999
Property and equipment, net .......................................... 237,219 188,248
Goodwill, net of accumulated amortization of $25,779 ................. 1,439,481 --
------------ ------------
Total assets ................................................ 2,811,111 1,005,600
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ......................................... 271,873 68,270
Payable to clients ............................................. 1,064 75,135
Accrued liabilities ............................................ 319,865 268,423
Accrued Medicare settlement .................................... 878,805 --
Current portion of capital lease obligations ................... 67,614 53,171
Short term borrowings .......................................... 326,773 --
Deferred credit ................................................ -- 8,802
------------ ------------
Total current liabilities ................................... 1,865,994 473,801
Long term capital lease obligations, excluding current portion ....... 44,973 84,368
Accrued Medicare settlement .......................................... 217,342 --
------------ ------------
Commitments and contingencies (Note N)
Total liabilities ........................................... 2,128,309 558,169
------------ ------------
Stockholders' equity:
Common stock; $0.01 par value; 50,000,000 shares authorized;
28,015,764 at December 31, 1997 and 1998 .................... 280,157 280,157
Common stock subscribed; $0.01 par value; 1,000,000 shares ..... 60,000 --
10% Cumulative convertible preferred stock; $0.01 par value;
5,000,000 shares authorized; none issued .................... -- --
Less treasury stock at cost, 105,547 shares .................... (221,881) (221,881)
Additional paid-in capital ..................................... 18,703,254 18,695,829
Retained deficit ............................................... (18,138,728) (18,306,674)
------------ ------------
Total stockholders' equity .................................. 682,802 447,431
------------ ------------
Total liabilities and stockholders' equity .................. $ 2,811,111 $ 1,005,600
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
39
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Billing and collection services ......... $ 4,065,118 $ 2,767,943 $ 1,950,689
Net patient services .................... 799,807 -- --
Other revenues (net of $210,000, $24,000,
and $18,000 paid to a director of the
company in 1998, 1997 and 1996,
respectively) ......................... 112,891 35,058 74,649
----------- ----------- -----------
Total revenues ....................... 4,977,816 2,803,001 2,025,338
EXPENSES:
Wages and benefits ...................... 3,277,230 1,900,182 1,171,721
Selling, general and administrative ..... 925,834 492,607 422,119
Professional fees ....................... 212,989 54,188 78,813
Office, vehicle and equipment rental .... 192,776 88,672 100,575
Depreciation and amortization ........... 117,080 106,783 105,638
Provision for doubtful accounts and notes 64,405 (3,853) 11,974
Interest, net ........................... 19,556 4,959 15,357
Other (income), net ..................... -- (1,286) (73)
----------- ----------- -----------
Total expenses ....................... 4,809,870 2,642,252 1,906,124
----------- ----------- -----------
NET INCOME .................................... $ 167,946 $ 160,749 $ 119,214
----------- ----------- -----------
----------- ----------- -----------
Basic earnings per common share ............... $ 0.0060 $ 0.0059 $ 0.0045
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings per common share ............. $ 0.0059 $ 0.0059 $ 0.0045
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
40
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
---------------------- Paid-in -------------------- Accumulated
Shares Amount Capital Shares Amount Deficit Other Total
---------- -------- ----------- ------- --------- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995 26,415,764 $264,157 $18,552,342 105,547 ($221,881) ($18,586,637) -- $ 7,981
Net income -- -- -- -- -- 119,214 -- 119,214
---------- -------- ----------- ------- --------- ------------ ------- --------
Balance at
December 31,
1996 26,415,764 264,157 18,552,342 105,547 (221,881) (18,467,423) -- 127,195
Shares issued
at $0.10 per
share 1,600,000 16,000 143,487 -- -- -- -- 159,487
Net income -- -- -- -- -- 160,749 -- 160,749
---------- -------- ----------- ------- --------- ------------ ------- --------
Balance at
December 31,
1997 28,015,764 280,157 18,695,829 105,547 (221,881) (18,306,674) -- 447,431
Common stock
subscribed at
$0.06 per share -- -- -- -- -- -- $60,000 60,000
Compensation
expense related
to warrants -- -- 7,425 -- -- -- -- 7,425
Net income -- -- -- -- -- 167,946 -- 167,946
---------- -------- ----------- ------- --------- ------------ ------- --------
Balance at
December 31,
1998 28,015,764 $280,157 $18,703,254 105,547 ($221,881) ($18,138,728) $60,000 $682,802
---------- -------- ----------- ------- --------- ------------ ------- --------
---------- -------- ----------- ------- --------- ------------ ------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
41
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 167,946 $ 160,749 $ 119,214
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Fixed asset depreciation .................... 91,301 106,783 105,638
Goodwill amortization ....................... 25,779 -- --
Provision for doubtful accounts and notes ... 64,405 (3,853) 11,974
Deferred credit amortization ................ (8,802) (15,089) (7,543)
Warrants issued ............................. 7,425 -- --
(Gain) on sale of assets .................... -- (986) (73)
Changes in assets and liabilities net of effects from
purchase of Allied Health Options, Inc.:
(Increase) decrease in restricted cash ...... 74,071 (66,992) (8,143)
(Increase) in accounts receivable ........... (494,343) (256,656) (42,564)
(Increase) decrease in notes receivable ..... 2,000 -- (3,786)
(Increase) decrease in prepaid expenses and
other assets ........................... (14,706) 734 4,866
Increase (decrease) in accounts payable ..... 5,799 45,523 (25,483)
Increase (decrease) in payable to clients ... (74,071) 66,992 (11,759)
Decrease in accrued Medicare settlement ..... (56,524) -- --
Increase (decrease) in accrued liabilities .. (7,908) 59,076 62,965
(Decrease) in deferred revenue .............. -- -- (15,959)
--------- --------- ---------
Net cash provided by (used in) operating activities ....... (217,628) 96,281 189,347
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment ................. (79,970) (131,143) (24,711)
Acquisition of Allied Health Options, Inc., net of
cash acquired .................................... 70,315 -- --
--------- --------- ---------
Net cash used in investing activities ..................... (9,655) (131,143) (24,711)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock .............. -- 159,487 --
Short term borrowings ............................... 200,000 -- --
Principal payments on debt .......................... (116,959) -- --
Principal payments on capital lease obligations ..... (57,610) (37,545) (33,846)
--------- --------- ---------
Net cash provided by (used in) financing activities ....... 25,431 121,942 (33,846)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... (201,852) 87,080 130,790
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............ 275,948 188,868 58,078
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................. $ 74,096 $ 275,948 $ 188,868
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest .................................... $ 27,222 $ 14,483 $ 17,842
Non-cash investing and financing activities:
Additions to capital lease obligations ................. $ 32,658 $ 42,760 $ --
Conversion of debt to common stock ..................... $ 261,818 $ -- $ --
On August 7, 1998, United Medicorp, Inc. acquired 100% of the common stock of Allied Health Options, Inc.
for $1. Liabilities associated with the acquisition were as follows:
Fair value of assets acquired .................. $ 177,983
Cash acquired .................................. 70,316
Purchase accounting goodwill ................... 1,667,077
Cash paid for common stock ..................... (1)
-----------
Liabilities .................................... $ 1,915,375
-----------
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
42
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
United Medicorp Texas, Inc., was incorporated in the State of Texas
on March 13, 1989 ("UMC-Texas"). On July 10, 1989, in an exchange of stock,
UMC-Texas was acquired by Gamma Resources, Inc., a publicly-owned Delaware shell
corporation, which simultaneously changed its name to United Medicorp, Inc. (the
"Company" or "UMC"). All references herein to the Company include UMC-Texas,
unless the context requires otherwise.
The Company provides medical insurance claims processing and accounts
receivable management services to healthcare providers. The Company employs
proprietary and purchased software to provide claims processing, management and
collection services to its customers, which are primarily hospitals, medical
clinics, and physician practices. The Company's basic service is designed to
provide an electronic claims processing, management and collection service that
expedites payment of claims from private insurance carriers or government payors
such as Medicare and Medicaid. The Company offers claims management and
collection services to healthcare providers. In 1998, the Company began
providing mental health services as described in Note B.
B. ACQUISITION OF ALLIED HEALTH OPTIONS, INC.
On August 7, 1998, UMC acquired 100% of the common stock of Allied Health
Options, Inc. ("AHO"), an Alabama corporation for $1. 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.
43
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AHO's results of operations have been included in the accompanying
Consolidated Statements of Operations as of August 1, 1998. In connection with
this acquisition, which was accounted for as a purchase, assets acquired and
liabilities assumed were $248,299 and $1,915,375, respectively. Assuming the
acquisition of AHO had occurred as of January 1, 1998 or 1997, respectively, pro
forma unaudited condensed consolidated results of operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues .................. $ 5,925,000 $ 4,708,000
------------ ------------
Net loss .................. (231,000) (477,131)
------------ ------------
Basic loss per common share $ (0.0083) $ (0.0176)
</TABLE>
The above pro forma information is not necessarily indicative of the actual
results that would have been achieved had these acquisitions occurred as of the
dates noted above and is not necessarily indicative of future results.
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
United Medicorp, Inc. ("UMC") and its wholly owned subsidiaries, United
MoneyCorp, Inc. ("UMY") and AHO, hereafter collectively referred to as the
"Company." All significant intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets, liabilities, revenues and expenses.
Significant estimates included in the accompanying financial statements include:
the provision for doubtful accounts, the carrying value of goodwill and its
amortization period, the Medicare settlement reserve, and the contractual
adjustment related to Medicare claims under appeal at December 31, 1998. Actual
results could differ significantly from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and liquid investments in
money market accounts. Such investments have an original maturity of three
months or less.
ACCOUNTS RECEIVABLE - AHO
Accounts receivable principally represents receivables from third-party
payors for services provided. Such amounts are recorded net of contractual
adjustments and provision for doubtful accounts.
44
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and include assets leased under
capital lease agreements. Leased property meeting certain criteria is
capitalized and the present value of the related lease payments is recorded as a
capital lease obligation. Expenditures for repairs and maintenance are charged
to income as incurred, and expenditures for major renewals and betterments are
capitalized. Depreciation and amortization are computed using the straight-line
method over the estimated useful life of the asset, ranging from three to seven
years. Upon disposition of assets, the cost and related accumulated depreciation
are removed from the accounts and the resulting gain or loss is included in
"Other income, net."
Property and equipment are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset or group of assets may
not be recoverable. The impairment review would include a comparison of future
cash flows expected to be generated by the asset or group of assets with their
associated carrying value. If the carrying value of the asset or group of assets
exceeds expected cash flows (undiscounted and without interest charges), an
impairment loss is recognized for the excess of carrying amounts over fair
value. No such impairment has been recognized by the Company.
GOODWILL
Goodwill, representing the excess of the cost over the net tangible and
identifiable tangible assets of AHO (see Note B) is stated at cost and is
amortized on a straight-line basis, over the estimated future periods to be
benefited (20 years). Goodwill at December 31, 1998 was $1,439,481, net of
$25,779 of amortization charged to expense in 1998. On an annual basis or
whenever events or changes in circumstances indicate that the carry value of
goodwill may not be recoverable, the Company reviews the recoverability of
goodwill based primarily upon analysis of undiscounted cash flows from the
acquired business. 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, through a non-cash
charge to earnings in the period that such determination is made, to a level
commensurate with a discounted cash flow analysis. No impairment losses have
been recognized in any of the periods presented (See note N).
MEDICARE SETTLEMENT RESERVE
Medicare settlement reserves are accrued as a liability on an estimated basis in
the period the related services are rendered and adjusted in future periods as
final settlements are determined. The Medicare settlement reserve consisted of
the following at December 31:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Reimbursable bad debt logs ................................ $ 550,389
General ................................................... 267,708
1998 interim reimbursement ................................ 252,212
1996 and 1997 cost reports, excluding reimbursable bad debt 25,838
-----------
1,096,147
Less current portion ...................................... (878,805)
-----------
Long term portion ......................................... $ 217,342
-----------
-----------
</TABLE>
45
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BILLING AND COLLECTION SERVICES REVENUE RECOGNITION
Billing and collection services revenue is recognized upon receipt of
payment from a third party payor or guarantor of a patient's account and upon
notification by the customer that such payment has been made.
NET PATIENT SERVICE REVENUE RECOGNITION
Net patient service revenue is reported at the estimated net realizable
amounts from third-party payors and patients for services rendered, including
estimated Medicare contractual adjustments and settlement reserves.
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 intermediary. AHO's Medicare cost
reports have not yet been audited by the Medicare fiscal intermediary for the
years ended December 31, 1998, 1997 or 1996.
Net patient service revenue, as reported in the accompanying statements of
operations, for the year ended December 31, 1998, consists of:
<TABLE>
<CAPTION>
<S> <C>
Gross patient charges ................ $ 1,921,010
Deductions from gross patient charges:
Contractual adjustments ........... 1,177,727
Medicare settlement reserve ....... (56,524)
-----------
Net patient service revenue ...... $ 799,807
-----------
-----------
</TABLE>
OTHER REVENUE RECOGNITION
For 1998, 1997 and 1996, Other revenues consists primarily of advance funding
fees and consulting revenue recognized as services were performed. Consulting
revenues related to services performed by a non-employee member of the Company's
board of directors, have been netted against the associated cost of services
performed by the non-employee board member. Consulting revenues were netted with
the associated cost of services which totaled approximately $210,000, $24,000
and $18,000 in 1998, 1997 and 1996, respectively.
Effective June 30, 1996, the Company completed a Settlement and Termination
Agreement (the "Termination") with Healthcare Advisory Service of Puerto Rico,
Inc. ("HAS"). Under the Termination, on August 2, 1996 HAS paid to UMC a total
of $172,000 representing the sum of $46,000 to purchase UMC's interest in the
claims inventory in process for six clinics; $72,000 to purchase UMC's interest
in the claims inventory in process for a hospital; and $54,000 as additional
consideration for certain contract rights included in the Termination, which is
included in "Other revenues" in the accompanying Consolidated Statements of
Operations. Income related to these cash payments was recognized in the month of
August, 1996, when the cash was received.
46
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Termination included a mutual release by UMC and HAS of any claims either
party may have against the other, and an indemnification of UMC by HAS against
any claim for a refund of fees paid.
INDIGENT WRITE-OFFS
AHO has established policies which define the assessment of patient indigence,
the corresponding collection process and the Medicare bad debt write-off process
with respect to Medicare co-insurance and Medicare bad debt reimbursement. AHO
utilizes the federal poverty level in assessing a patient's ability to pay
either the 20% Medicare co-coinsurance or that portion of the 20% Medicare
co-insurance that is not covered by secondary insurance. Since AHO does not
pursue collections of amounts which meet its indigency criteria and there is no
related secondary insurance, charges related to indigent write-offs are excluded
from net patient service revenue.
PROVISION FOR DOUBTFUL ACCOUNTS
AHO's provision for doubtful accounts expense is comprised of estimates for
non-Medicare primary or secondary 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>
greater than 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.
EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") was issued requiring companies to present
on the face of the income statement, basic earnings per share (EPS) and diluted
EPS, instead of the primary and fully diluted EPS that was previously required.
Companies with complex capital structures are required to reconcile the
numerator and denominator used in the basic EPS computation to the numerator and
denominator used in the diluted EPS computation. For each of the three years
ended December 31, 1998, basic EPS calculations are based on the
weighted-average number of common shares outstanding during the period, while
diluted EPS calculations are based on the weighted-average number of common
shares and dilutive common share equivalents outstanding during each period.
SFAS No. 128 was required to be adopted by all public companies for reporting
periods ending after December 15, 1997, and requires restatement of EPS for all
prior periods reported.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
47
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS No. 123") was issued. This
statement requires the fair value of stock options and other stock-based
compensation issued to employees to either be included as compensation expense
in the income statement or the pro-forma effect on net income and earnings per
share of such compensation expense to be disclosed in the footnotes to the
Company's financial statements commencing with the Company's 1996 fiscal year.
The Company has adopted SFAS No. 123 on a disclosure basis. As such,
implementation of SFAS No. 123 has not impacted the Company's consolidated
balance sheets or statements of operations.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with current
year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." In February 1998, the FASB issued SFAS No.
132, "Employers' Disclosure About Pension and Other Postretirement Benefits."
Also in 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." With the exception of SFAS 131, none of the new
accounting pronouncements are expected to impact the Company. SFAS 131 required
only additional disclosures in the Company's notes to the financial statements,
and its adoption did not have any effect on the Company's financial position or
results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement was adopted in
1998, and it did not have a significant effect on the Company's financial
position or results of operations.
48
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
D. PROPERTY AND EQUIPMENT
At December 31, 1998 property and equipment consist of the following:
<TABLE>
<CAPTION>
CAPITAL
PURCHASED LEASE TOTAL
---------------- --------------- ----------------
<S> <C> <C> <C>
Equipment................................................. $ 568,155 $ 192,707 $ 760,862
Software systems.......................................... 169,262 -- 169,262
Furniture and fixtures.................................... 140,878 -- 140,878
Leasehold improvements.................................... 98,324 -- 98,324
---------------- --------------- ----------------
Gross property and equipment......................... 976,619 192,707 1,169,326
Accumulated depreciation and amortization................. (789,318) (142,789) (932,107)
--------------- --------------- ----------------
Net property and equipment........................... $ 187,301 $ 49,918 $ 237,219
--------------- --------------- ----------------
--------------- --------------- ----------------
</TABLE>
At December 31, 1997 property and equipment consist of the following:
<TABLE>
<CAPTION>
CAPITAL
PURCHASED LEASE TOTAL
---------------- --------------- ----------------
<S> <C> <C> <C>
Equipment................................................. $ 513,417 $ 160,049 $ 673,466
Software systems.......................................... 165,508 -- 165,508
Furniture and fixtures.................................... 128,133 -- 128,133
Leasehold improvements.................................... 61,947 -- 61,947
---------------- --------------- ----------------
Gross property and equipment......................... 869,005 160,049 1,029,054
Accumulated depreciation and amortization................. (716,848) (123,958) (840,806)
---------------- --------------- ----------------
Net property and equipment........................... $ 152,157 $ 36,091 $ 188,248
---------------- --------------- ----------------
---------------- --------------- ----------------
</TABLE>
Depreciation expense related to property and equipment was $72,470,
$61,812 and $66,144 during 1998, 1997 and 1996, respectively. Amortization
expense on assets under capital leases was $18,831, $44,971 and $39,494 during
1998, 1997, and 1996, respectively.
E. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Accrued professional fees.......................................................... $ 173,243 $ 130,558
Accrued payroll and benefits....................................................... 119,008 97,887
Accrued other...................................................................... 27,614 39,978
----------- -----------
$ 319,865 $ 268,423
----------- -----------
----------- -----------
</TABLE>
49
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
F. CAPITAL LEASE OBLIGATIONS
On December 30, 1994, the Company leased a new IBM A/S 400 Advanced Series
9406 Model 300 computer, for a term of 66 months, with no payments due during
the first six months. The total amount financed, including the rollover of the
remaining lease payments under the previous A/S 400 lease and financing of the
maintenance contract on the new computer, was $182,752, of which $118,480
represents the cost of the AS/400. This equipment may be purchased at the end of
the lease for $1.
During 1998, the Company entered into various equipment leases through a
single lessor. This equipment may be purchased at the end of the leases for $1.
At December 31, the remaining capital lease obligations are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
6.9% lease related to IBM AS/400, rollover financing and maintenance,
maturing through 2000........................................................ $ 60,845 $ 100,344
15.7% lease related to office and telephone equipment maturing in 2001.......... 28,040 - -
Miscellaneous capital leases related to computer equipment with
rates of 5.9% to 9.75%, maturing through 2000 ............................... 23,702 37,195
----------- -----------
Total Capital lease obligations........................................... 112,587 137,539
Less current portion of capital lease obligations............................... 67,614 53,171
----------- -----------
Long-term capital lease obligations............................................. $ 44,973 $ 84,368
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1998, total lease payments due under capital leases are as
follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999............................................................................ $ 77,584
2000............................................................................ 43,495
2001............................................................................ 6,670
-----------
127,749
Less interest................................................................... 15,162
-----------
Principal amount of net lease payments.......................................... $ 112,587
-----------
-----------
</TABLE>
Interest expense on capital lease obligations was $11,100, $10,893 and
$17,842 during 1998, 1997 and 1996, respectively.
50
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
G. SHORT-TERM BORROWINGS
Short-term borrowings at December 31, consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Credit Facility, bearing interest at 8.75% per annum, monthly
installments of $4,167 plus simple interest, matures December 11,
1999, secured (Note P).................................................... 200,000 --
1996 Medicare Overpayment, bearing interest at 13.5% per annum,
monthly installments of $12,500, matures November 18, 1999,
secured (Note P).......................................................... 126,773 --
----------- -----------
$ 326,773 --
----------- -----------
----------- -----------
</TABLE>
H. INCOME TAXES
There is no current or deferred tax expense for the years ended December
31, 1998, 1997 and 1996. The Company utilized net operating tax loss ("NOL")
carryforwards to offset taxable income in 1998, 1997 and 1996.
SFAS No. 109 requires that deferred income taxes reflect the tax
consequences on future years of differences between the tax basis of assets and
liabilities and their basis for financial reporting purposes. In addition,
future tax benefits, such as NOLs, are required to be recognized to the extent
that realization of such benefits is more likely than not. Realization of the
future tax benefits related to deferred tax assets is dependent on many factors,
including the Company's ability to generate taxable income within the net
operating loss carryforward period. Although the Company generated taxable
income in 1998, 1997 and 1996, management believes that in order to consider a
reduction in the valuation allowance which would result in an immediate tax
benefit and reporting of a deferred tax asset, the Company will need to
substantially resolve the uncertainty of the collectibility of inter-company
loans with AHO. As such, management believes that a full valuation allowance is
required at December 31, 1998 and 1997. At December 31, 1998 and 1997, the
Company had no deferred tax liabilities. The tax effects of temporary
differences and NOLs that give rise to the deferred tax assets at December 31,
are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1998 1997
--------------- ----------------
<S> <C> <C>
Net operating tax loss carryforward................. $ 3,363,196 $ 3,432,027
Property and equipment.............................. 27,887 56,188
Accrued liabilities................................. 21,239 14,520
Deferred credits.................................... -- 3,257
Accounts receivable................................. 19,594 1,544
Goodwill............................................ 9,538 --
--------------- ----------------
Gross deferred tax assets........................ 3,441,454 3,507,536
Valuation allowance................................. (3,441,454) (3,507,536)
---------------- ----------------
Net deferred tax assets.......................... $ -- $ --
---------------- ----------------
---------------- ----------------
</TABLE>
51
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The net change in the valuation allowance for deferred tax assets was a
decrease of $66,082 and $81,456 in 1998 and 1997, respectively. The changes all
relate to utilization of NOL carryforwards and changes in the underlying
temporary book to tax differences.
From inception in March 1989 to March 1992, the Company generated NOLs
totaling $13.9 million. In March 1992, the Company experienced an ownership
change as defined by Section 382 of the Internal Revenue Code. As a result of
this event, the Company will be limited in its ability to use pre-change NOL
carryforwards to reduce subsequent taxable income. The amount of taxable income
that can be offset by pre-change NOL carryforwards in any annual period is
limited to approximately $358,000 through 2007. Post-change NOL carryforwards
generated through 1995 which are not subject to limitation total $4.2 million
and will expire in varying amounts between 2007 and 2010.
I. STOCKHOLDERS' EQUITY
Effective December 31, 1998, UMC sold 1,000,000 shares of unregistered
Common Stock in exchange for a $261,818 promissory note due from AHO to a third
party note holder. The Common Stock subscribed totaling $60,000 was priced at
$0.06 per share representing the last trading price prior to the execution of
the transaction. The Common Stock was not registered under the Securities Act of
1933, as amended, in reliance on Section 4(2) of the Securities Act of 1933, as
amended, as the sale of these securities did not involve a public offering.
On July 11, 1997, the Company completed a private offering of 1,600,000
shares of UMC Common Stock at a price of $0.10 per share. The offering generated
net proceeds of $159,487 after deducting legal fees and other expenses of the
offering.
At December 31, 1998, there were 5,000,000 shares of 10% cumulative
preferred stock, par value $0.01 authorized but not issued. The preferred stock
may be issued in series and include rights and preferences as designated by the
Company's board of directors. At December 31, 1998, 3,374,847 shares of Common
Stock are reserved for issuance of outstanding warrants and options.
J. EARNINGS PER SHARE
The following table shows the amounts used in computing EPS and the effect
on the weighted average number of shares of dilutive common stock equivalents:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Net income available to common stockholders............. $ 167,946 $ 160,749 $ 119,214
Weighted average number of common shares
in basic EPS........................................ 27,910,217 27,178,504 26,310,217
Effect of dilutive weighted average common
share equivalents................................... 788,525 203,335 --
--------------- -------------- ---------------
Weighted average number of common shares and
dilutive potential common shares in diluted EPS...... 28,698,742 27,381,839 26,310,217
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
52
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For the year ended December 31, 1996, assumed exercise of options from
employee stock based compensation plans and outstanding warrants would have been
anti-dilutive and, therefore, they were not included in the computation of
diluted EPS.
K. WARRANTS
The Company has a Director's Incentive Compensation Agreement ("DICA")
with each of its external directors. On March 12, 1998, a warrant to purchase
39,161 shares of the Company's common stock at $0.13 per share was issued to one
director in conjunction with commissions earned under the DICA. On August 28,
1998, a warrant to purchase 70,186 shares of the Company's common stock at $0.07
per share was issued to the same director in conjunction with commissions earned
under the DICA. Both warrants were immediately exercisable. Both warrants expire
on the earlier of (a) March 31, 2007, (b) the date on which the Director's
services are terminated for cause, (c) three months after the expiration of the
Director's term, resignation from the Board of Directors, or termination of the
Director due to the sale of the Company or (d) twelve months after the services
as a Director are terminated by reason of the Director's death or disability.
For the year ended December 31, 1998, the Company recorded $7,425 of expense to
reflect the estimated fair value of these warrants.
On April 1, 1997, warrants to purchase 1,200,000 shares of UMC Common
Stock at $0.08 per share were issued to three directors of UMC with each
director receiving a warrant for 400,000 shares. These warrants are exercisable
33 1/3 % immediately, 66 2/3% after twelve months from the effective date of the
grant, and 100% after twenty four months from the effective date of the grant.
These warrants expire on the earlier of (a) March 31, 2007, (b) the date on
which the Director's services are terminated for cause, (c) three months after
the expiration of the Director's term, resignation from the Board of Directors,
or termination of the Director due to the sale of the Company or (d) twelve
months after the services as a Director are terminated by reason of the
Director's death of disability. None of these warrants had been exercised as of
December 31, 1998.
On November 12, 1996, warrants to purchase 130,000 shares of UMC Common
Stock at $0.06 per share were issued to three former directors of UMC. These
warrants were 100% exerciseable on the grant date and expire on November 11,
2001. None of these warrants had been exercised as of December 31, 1998.
Neither the warrants or the shares of common stock represented by these
warrants have been registered under the Securities Act of 1933.
L. OPTIONS
At the Annual Meeting of Stockholders on August 28, 1998, the Company's
stockholders approved the adoption of the 1998 Stock Option Plan (the "1998
Plan"), which provides for the issuance of both "incentive" and "nonqualified"
stock options. A total of 1,000,000 shares are issuable under the 1998 Plan. At
December 31, 1998, options for 250,000 shares were outstanding under the 1998
Plan.
At the Annual Meeting of Stockholders on August 14, 1995, the Company's
stockholders approved the adoption of the 1995 Stock Option Plan (the "1995
Plan"), which provides
53
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
for the issuance of both "incentive" and "nonqualified" stock options. A total
of 1,000,000 shares are issuable under the 1995 Plan. At December 31, 1998,
options for 877,500 shares were outstanding under the 1995 Plan.
54
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At the Annual Meeting of Stockholders on July 13, 1992, the Company's
stockholders approved the adoption of the 1992 Stock Option Plan (the "1992
Plan"), which provides for the issuance of both "incentive" and "nonqualified"
stock options. A total of 1,000,000 shares are issuable under the Plan. In
addition, the Company's Third Amended and Restated 1989 Stock Option Plan (the
1989 Plan) was revised such that no more options may be granted under that plan.
At December 31, 1998, options for 808,000 and 0 shares were outstanding under
the 1992 and 1989 Plans, respectively.
Under the terms of the aforementioned Plans, the exercise price for both
incentive and nonqualified stock options to purchase shares of the Company's
Common Stock may be granted at a price not less than the market price of the
stock at the date of grant. Accordingly, no compensation cost has been
recognized for the Company's stock option plan. Stock options may be granted to
holders of 10 percent or more of the Company's voting power at exercise prices
no less than 110 percent of the market price of the stock at the date of grant.
Both option types are exercisable, in annual increments of one-third or one half
of the total options granted, on the anniversary dates following the award. The
Compensation Committee of the board of directors approves the number of shares
to be granted to employees and the term of the vesting. Options that have
expired or that have been canceled are available for future grants under the
Plans.
None of the option plans or the shares of common stock represented by the
option plans have been registered under the Securities Act of 1933 except for
the 1992 Plan.
55
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes activity for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
January 1, 1,905,000 $ 0.07 1,239,500 $ 0.13 1,245,750 $ 0.23
Granted 485,000 0.10 1,300,000 0.07 607,500 0.05
Exercised -- -- -- -- -- --
Canceled (454,500) 0.07 (634,500) 0.21 (613,750) 0.25
------------ ----------- ----------- ----------- ----------- -----------
Options outstanding at
December 31, 1,935,500 0.07 1,905,000 0.07 1,239,500 0.13
------------ ----------- ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- ----------- -----------
Options exerciseable at
December 31, 773,500 $ 0.06 403,333 $ 0.05 604,500 $ 0.18
------------ ----------- ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
------------------------------------------------------ ---------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISEABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
- --------------- --------------- --------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.05 --- $0.07 1,350,500 8.2 years $ 0.06 723,500 $ 0.06
$0.08 --- $0.10 400,000 9.5 years 0.09 50,000 0.08
$0.11 --- $0.13 185,000 9.3 YEARS 0.13 --
- ------------------ --------------- --------------- ------------------ --------------- ----------------
$0.05 --- $0.13 1,935,500 8.6 years $ 0.07 773,500 $ 0.06
- ------------------ --------------- --------------- ------------------ --------------- ----------------
- ------------------ --------------- --------------- ------------------ --------------- ----------------
</TABLE>
M. SFAS NO. 123 PRO FORMA
In 1996, the Company adopted the disclosure-only option under SFAS No.
123. Pro forma net income and earnings per share presented below reflect the
results of the Company as if the fair value based accounting method described in
SFAS No. 123 had been used to account for stock and warrant-based compensation
costs, net of taxes and forfeitures of prior year grants:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Net income $ 167,946 $ 160,749 $ 119,214
SFAS No. 123 employee compensation cost 12,778 12,825 20,857
SFAS No. 123 director costs 25,476 18,421 163
------------- ----------- -----------
Pro forma net income $ 129,692 $ 129,503 $ 98,194
------------- ----------- -----------
------------- ----------- -----------
Pro forma basic earnings per share $ 0.0046 $ 0.0048 $ 0.0037
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
56
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value for options granted in 1998, 1997 and 1996 was estimated at
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants during the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ---------- -----------
<S> <C> <C> <C>
Dividend yield -- -- --
Expected volatility 110.0% 112.3% 116.2%
Risk-free rate of return 5.5% 6.4% 6.7%
Expected life, years 3 3 10
Grant-date fair value per share $0.07 $0.05 $0.05
</TABLE>
The fair value for warrants granted in 1998, 1997 and 1996 was estimated
at the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants during the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ---------- -----------
<S> <C> <C> <C>
Dividend yield -- -- --
Expected volatility 108.7% 98.8% 116.2%
Risk-free rate of return 5.5% 6.4% 6.3%
Expected life, years 4 4 10
Grant-date fair value per share $0.07 $0.06 $0.06
</TABLE>
N. COMMITMENTS AND CONTINGENCIES
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 CMHCs and that Medicare pay appropriately
for such services. As part of a comprehensive action plan, HHS' HCFA has
initiated termination actions against centers 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 have they
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.
AHO's Medicare cost reports have not yet been audited by the Medicare
fiscal intermediaries for the years ended December 31, 1998, 1997 or 1996. An
audit of the 1997 and 1996 Alabama cost reports is currently in process. The
1997 and 1996 cost reports were prepared with unaudited financial information.
The 1998 cost reports will be prepared using information obtained from audited
financial statements and will be filed no later than May 31, 1999, as required.
AHO has recorded certain reserves (see Note C) based on assumptions that may
or may not ultimately prove to be correct. The accuracy of these assumptions
will not be known until completion of the aforementioned
57
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
audits. At December 31, 1998, the current portion of the Medicare settlement
reserve totaled $879,000 and is comprised principally of:
<TABLE>
<CAPTION>
<S> <C>
$383,000 reserves related to the 1997 and 1996 Medicare reimbursable bad
debt logs,
252,000 reserves related to the estimated 1998 interim reimbursement,
168,000 industry norm general reserves, and
76,000 reserves for estimates representing possible differences between
the unaudited financial information used to complete the 1997
and 1996 cost reports as compared to the subsequently audited
financial statements for the two years ended December 31, 1997.
--------
$879,000
--------
--------
</TABLE>
Should the results of the audited 1997 and 1996 Alabama cost reports
confirm all of the assumptions underlying the Medicare settlement reserve and if
AHO is required to liquidate this reserve within thirty days of receipt of the
Notice of Program Reimbursement (the formal notification of settlement after the
audit is complete), AHO currently projects that it is likely that it will not
have sufficient cash or sources of cash to liquidate this liability. As a
result, AHO will be forced to file for bankruptcy protection, and UMC would
record a loss for unrecoverable inter-company loans with AHO. At December 31,
1998, the intercompany balance totaled approximately $749,000. No liability has
been recorded for this contingent loss due to the uncertainty of occurrence.
In the event AHO files for bankruptcy protection, management believes that
most of the goodwill on the Company's balance sheet ($1,439,841 at December 31,
1998) will be offset by liabilities of AHO, and that the charge to earnings for
the remaining goodwill would not be material. It is UMC's opinion, supported by
the opinion of legal counsel, that the liabilities of AHO, including the
Medicare settlement reserve, do not ascend to UMC. Therefore, management
believes that UMC will continue as a going concern regardless of the status of
AHO.
To the extent that the results of the aforementioned audit do not confirm
all of the assumptions underlying the Medicare settlement reserve, the extent of
the possible cash requirement to liquidate this reserve falls within the range
of $0 to $879,000. Until such time as the uncertainties underlying the Medicare
settlement reserve are resolved, AHO cannot project the 1999 cash requirements
with respect to this reserve.
AHO is vigorously pursuing the following potential sources which could
provide up to $846,000 of cash:
<TABLE>
<CAPTION>
<S> <C>
$319,000 related to completion of the 1997 and 1996 Alabama and Florida
reimbursable bad debt logs to be resubmitted,
247,000 related to completion of the 1998 reimbursable bad debt log
146,000 related to 1998 BHM denied Medicare claims under appeal
134,000 outstanding outpatient claims not yet billed
----------
$846,000
----------
----------
</TABLE>
There can be no assurance that AHO will be successful in generating cash
from these sources or that this cash can be generated in a timely manner. These
sources of cash are considered to be "gain"
58
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
contingencies at December 31, 1998 and; therefore, they are not recorded in the
Company's financial statements.
AHO practitioners are insured with respect to professional liability on a
claims-made basis. The annual limits of liability are $1 million for each claim
with a total limit for all claims of $3 million. There are no known claims and
incidents that may result in the assertion of additional claims, as well as
claims from unknown incidents that may be asserted. Management is not aware of
any claims against AHO which might have a material adverse effect on AHO.
The Company has various operating lease agreements for equipment and
facilities. A summary of the lease commitments under noncancelable operating
leases at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999............................................................................ $ 179,800
2000............................................................................ 145,300
2001............................................................................ 29,900
2002............................................................................ 3,100
-----------
$ 358,100
-----------
-----------
</TABLE>
O. FINANCIAL INSTRUMENTS & CONCENTRATIONS OF MARKET AND CREDIT RISK
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate fair value due to the short
term maturities of these instruments. The fair value of cash equivalents is
determined by reference to market data. The fair value of debt and capital lease
obligations approximate carrying value as the related interest approximates
current market rates.
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash equivalents and trade
receivables. It is the Company's practice to place its cash equivalents and
investments in high quality money market accounts. Generally, the Company does
not require collateral or other security to support customer receivables. When
possible, the Company will structure contracts such that provider payments are
remitted directly to UMC whereby UMC can collect its fee and remit a net payment
back to the customer.
The percentage mix of total net accounts receivable from third-party
payors at December 31, was:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Medicare secondary insurance claims....................... 38% --
Washington Hospital Center................................ 33 54%
Medicare primary insurance claims......................... 19 --
Presbyterian Healthcare System............................ 5 23
Other customers/payers.................................... 5 23
----------- -----------
100% 100%
----------- -----------
----------- -----------
</TABLE>
The Company does not expect its customers to fail to meet their
obligations and, as such, considers the credit risk associated with its trade
accounts receivable to be minimal. The Company grants credit without collateral
to its patients. To the extent that Medicare secondary claims are not paid by
the secondary payer, generally, these claims are then submitted to Medicare for
reimbursement
59
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
as a component of the annual cost report. Prior to submission of bad debts to
Medicare for reimbursement, collection efforts consistent with Medicare
regulation must be completed.
The percentage market mix of total revenue from customers and third-party
payers for the years ended December 31, was:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ----------------
<S> <C> <C> <C>
Washington Hospital Center.......................... 55% 63% 67%
Presbyterian Healthcare System...................... 20 23 --
Medicare claims..................................... 14 -- --
Other customers/payers.............................. 11 14 18
Healthcare Advisory Service of Puerto Rico, Inc..... -- -- 15
---------------- --------------- ----------------
100% 100% 100%
---------------- --------------- ----------------
---------------- --------------- ----------------
</TABLE>
P. ASSETS PLEDGED AS COLLATERAL
For the period ended December 31, 1996, the tentative settlements due to
Medicare from BHM and CCBH for prospective reimbursement in excess of
reimbursable costs totaled $313,040 (the "1996 Medicare Overpayment"). On August
6, 1997, AHO executed a thirty month extended repayment plan with Medicare for
this balance. The extended repayment plan is structured so that Medicare
collects its monthly payments directly from submitted patient claims. The unpaid
principal balance of $126,773 at December 31, 1998, is de facto secured by
unpaid Medicare claims at December 31, 1998 and future Medicare claims to the
extent that an unpaid balance remains.
At December 31, 1998, the Medicare settlement reserve of $1,096,147 is de
facto secured by unpaid Medicare claims at December 31, 1998 and future Medicare
claims to the extent that this balance may ultimately be liquidated.
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") was
originally equal to the lesser of $200,000 or 60% of trade accounts receivable
aged less than 60 days. On September 30, 1998, the interest rate on this
facility was reduced from 9.5% to 9.25%. Effective December 11, 1998, the Credit
Facility was restructured whereby the Borrowing Base was increased to the lesser
of $400,000 or 80% of trade accounts receivable aged less than 90 days. During
the period from December 11, 1998 to March 31, 1999, the available Borrowing
Base has averaged approximately $318,000. At December 31, 1998, borrowings under
the Credit Facility totaled $200,000. The terms of the Credit Facility are such
that the Company could be deemed, from time to time, to be in default due to a
number of factors including, but not limited to: a.) a material adverse change
in the Company's financial condition or if the lender believes the prospect of
payment or performance of the Credit Facility is impaired and, b.) the lender in
good faith deems itself insecure based on a change in the financial position of
the Company. Upon default, the lender may declare the entire outstanding balance
of the Credit Facility, plus accrued and unpaid interest, to be immediately due
and payable.
60
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Q. RELATED PARTY TRANSACTIONS
The Company has consulting agreements for services provided primarily by a
non-employee director of the Company. These agreements were completed
simultaneously with consulting agreements between the Company and certain
customers. The director was paid approximately 78% of the consulting fees paid
to the Company. For the years ended December 31, 1998, 1997 and 1996, the
Company paid the director $210,000, $24,000 and $18,000, respectively.
The Company has a Director's Incentive Compensation Agreements ("DICA")
with each of its non-employee directors. On March 12, 1998, a warrant to
purchase 39,161 shares of the Company's common stock at $0.13 per share was
issued to one director in conjunction with commissions earned under the DICA. On
August 28, 1998, a warrant to purchase 70,186 shares of the Company's common
stock at $0.07 per share was issued to the same director in conjunction with
commissions earned under the DICA. For the year ended December 31, 1998, the
Company recorded $7,425 of expense to reflect the estimated fair value of these
warrants. For the year ended December 31, 1998, the Company recorded commission
expense of $3,420 related to a second director in conjunction with commissions
earned under the DICA.
The Company provided services to an entity controlled by a director of the
Company. For the year ended December 31, 1998, the Company recorded a loss of
$15,500 related to these services.
The Company completed a private offering of 1,600,000 shares of UMC Common
Stock at a price of $.10 per share on July 11, 1997. The offering generated net
proceeds of $159,487 after deducting legal fees and other expenses of the
offering. Of the shares sold, 1,300,000 shares were purchased by a director of
the Company, who subsequently donated 300,000 of such shares to trusts in which
the director holds no beneficial interest. An additional 100,000 shares were
purchased by another director of the Company.
The Company paid $4,413 in 1996 for sales commissions to marketing
companies in which a former director holds an interest.
61
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
R. 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 131 did not effect results of operations or financial position
but did effect 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 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
"December 31, 1998" includes Business Office Services for the twelve months
ended December 31, 1998 and Behavioral Health Services for the five months ended
December 31, 1998.
62
<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>
DECEMBER 31,
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
EXTERNAL REVENUE:
Business Office Services......................... $ 4,178,009 $ 2,803,001 $ 2,025,338
Behavioral Health Services....................... 799,807 - - - -
------------- -------------- -------------
4,977,816 2,803,001 2,025,338
------------- -------------- -------------
------------- -------------- -------------
OPERATING EXPENSES:
Business Office Services......................... 3,796,278 2,533,154 1,771,083
Behavioral Health Services....................... 812,553 - - - -
------------- -------------- -------------
4,608,831 2,533,154 1,771,083
------------- -------------- -------------
------------- -------------- -------------
MEDICARE HOME OFFICE COSTS ALLOCATION:
Business Office Services......................... (142,274) - - - -
Behavioral Health Services....................... 142,274 - - - -
------------- -------------- -------------
- - - - - -
------------- -------------- -------------
------------- -------------- -------------
PROVISION FOR DOUBTFUL ACCOUNTS:
Business Office Services......................... 29,420 (3,853) 11,974
Behavioral Health Services....................... 34,985 - - - -
------------- -------------- -------------
64,405 (3,853) 11,974
------------- -------------- -------------
------------- -------------- -------------
FIXED ASSETS DEPRECIATION:
Business Office Services......................... 87,265 105,574 103,566
Behavioral Health Services....................... 4,036 - - - -
------------- -------------- -------------
91,301 105,574 103,566
------------- -------------- -------------
------------- -------------- -------------
GOODWILL AMORTIZATION:
Business Office Services......................... - - - - - -
Behavioral Health Services....................... - - - - - -
Adjustments/eliminations......................... 25,779 1,209 2,072
------------- -------------- -------------
25,779 1,209 2,072
------------- -------------- -------------
------------- -------------- -------------
INTEREST EXPENSE, NET:
Business Office Services......................... 8,407 4,959 15,357
Behavioral Health Services....................... 11,149 - - - -
------------- -------------- -------------
19,556 4,959 15,357
------------- -------------- -------------
------------- -------------- -------------
NET INCOME (LOSS)
Business Office Services......................... 398,913 161,958 121,286
Behavioral Health Services....................... (205,190) - - - -
Adjustments/eliminations......................... (25,779) (1,209) (2,072)
------------- -------------- -------------
$ 167,946 $ 160,749 $ 119,214
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
63
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
CASH:
Business Office Services.................................. $ 88,693 $ 275,948
Behavioral Health Services................................ (14,597) --
------------- -------------
74,096 275,948
------------- -------------
------------- -------------
ACCOUNTS RECEIVABLE, NET:
Business Office Services.................................. 408,458 430,069
Behavioral Health Services................................ 598,947 --
------------- -------------
1,007,405 430,069
------------- -------------
------------- -------------
GOODWILL, NET:
Business Office Services.................................. -- --
Behavioral Health Services................................ -- --
Adjustments/eliminations.................................. 1,439,481 --
------------- -------------
1,439,481 --
------------- -------------
------------- -------------
OTHER ASSETS:
Business Office Services.................................. 1,004,787 299,583
Behavioral Health Services................................ 34,026 --
Adjustments/eliminations.................................. (748,684) --
------------- -------------
290,129 299,583
------------- -------------
------------- -------------
CURRENT INSTALLMENTS ON LONG TERM DEBT AND CAPITAL LEASES:
Business Office Services.................................. 267,614 53,171
Behavioral Health Services................................ 126,773 --
------------- -------------
394,387 53,171
------------- -------------
------------- -------------
LONG TERM CAPITAL LEASES, EXCLUDING CURRENT PORTION:
Business Office Services.................................. 44,973 84,368
Behavioral Health Services................................ -- --
------------- -------------
44,973 84,368
------------- -------------
------------- -------------
ACCRUED MEDICARE SETTLEMENT:
Business Office Services.................................. -- --
Behavioral Health Services................................ 1,096,147 --
------------- -------------
1,096,147 --
------------- -------------
------------- -------------
OTHER LIABILITIES:
Business Office Services.................................. 275,581 420,630
Behavioral Health Services................................ 1,065,905 --
Adjustments/eliminations.................................. (748,684) --
------------- -------------
592,802 420,630
------------- -------------
------------- -------------
STOCKHOLDER'S EQUITY:
Business Office Services.................................. 913,770 447,431
Behavioral Health Services................................ (1,670,449) --
Adjustments/eliminations.................................. 1,439,481 --
------------- -------------
$ 682,802 $ 447,431
------------- -------------
------------- -------------
</TABLE>
64
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
United Medicorp, Inc.
We have audited the accompanying consolidated balance sheet of United Medicorp.,
Inc. as of December 31, 1998, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the year then
ended. Our audit also included the financial statement schedule referred to in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Medicorp., Inc. at December 31, 1998, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Dallas, Texas
March 31, 1999
65
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of United Medicorp, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
United Medicorp, Inc. and its subsidiary at December 31, 1997, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 23, 1998
66
<PAGE>
UNITED MEDICORP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED CHARGED BALANCE
BEGINNING TO COSTS TO AT
OF AND OTHER END OF
DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ----------- ----------- ------------ ----------- ------------- -----------
(1) (2)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts........... $ 11,674 $ 62,405 $ 163,430 $ (21,121) $ 216,388
Allowance for doubtful notes.............. $ - - $ 2,000 $ - - $ - - $ 2,000
</TABLE>
- --------------------
(1) Represents the allowance for doubtful accounts balance associated with the
acquisition of Allied Health Options, Inc. included in goodwill.
(2) Represents write-off of uncollectible trade receivables
Information at and for the years ended December 31, 1997 and 1996 has been
excluded due to lack of materiality or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
67
<PAGE>
EXHIBIT 10.36
LOAN AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$400,000.00 12-11-1998 12-11-1999 7197700 500 30 1313 JHP
- -------------------------------------------------------------------------------------------------
References in the shaded area for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Borrower: UNITED MEDICORP, INC. (TIN: 75-2217002) Lender: TEXAS CENTRAL BANK, N. A.
10210 North Central Expwy., Suite 400 8144 Walnut Hill Lane, Suite 180
Dallas, TX 75231 Dallas, TX 75231
</TABLE>
==============================================================================
THIS LOAN AGREEMENT between UNITED MEDICORP, INC. ("Borrower") and TEXAS
CENTRAL BANK, N. A. ("Lender") is made and executed on the following terms
and conditions. Borrower has received prior commercial loans from Lender or
has applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations
from Lender to Borrower, are referred to in this Agreement individually as
the "Loan" and collectively as the "Loans." Borrower understands and agrees
that: (a) in granting, renewing, or extending any Loan, Lender is relying
upon Borrower's representations, warranties, and agreements, as set forth in
this Agreement; (b) the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole judgment and
discretion; and (c) all such Loans shall be and shall remain subject to the
following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of December 11, 1998, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable,
or other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under
this Agreement.
BORROWER. The word "Borrower" means UNITED MEDICORP, INC.. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates
of Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lessor of (a) $400,000.00; or (b) 80.000% or the
aggregate amount of Eligible Accounts.
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted in
the form of a security interest, mortgage, deed of trust, assignment,
pledge, chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien, charge, lien or title retention
contract, lease or consignment intended as a security device, or any
other security or lien interest whatsoever, whether created by law,
contract, or otherwise. The word "Collateral" includes without
limitation all collateral described below in the section titled
"COLLATERAL."
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all
of Borrower's Accounts which contain selling terms and conditions
acceptable to Lender. The net amount of any Eligible Account against
which Borrower may borrow shall exclude all returns, discounts, credits,
and offsets of any nature. Unless otherwise agreed to by Lender in
writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer,
an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a
resident of the United States, except to the extent such Accounts are
supported by insurance, bonds or other assurances satisfactory to
Lender.
(e) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
(i) Accounts or any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief
under any provision of any state or federal bankruptcy, insolvency,
or debtor-in-relief acts; or who has had appointed a trustee,
custodian, or receiver for the assets of such Account Debtor; or who
has made an assignment for the benefit of creditors or has become
insolvent or fails generally to pay its debts (including its payrolls)
as such debts become due.
(j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 days from the
invoice date. The entire balance of any Account of any single Account
Debtor will be ineligible whenever the portion of the Account which
has not been paid within 90 days from the invoice date is in excess of
16.000% of the total amount outstanding on the Account.
(l) That portion of the Accounts of any single Account Debtor which
exceeds 25.000% of all of Borrower's Accounts. Excluding any
and all Accounts of the Washington Hospital Center and Presbyterian
Healthcare System.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of
termination of Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the indebtedness, including without limitation all
Borrowers granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness.
INDEBTEDNESS. The word "indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise.
LENDER. The word "Lender" means TEXAS CENTRAL BANK, N. A., its
successors and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
LOAN. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.
NOTE. The word "Note" means and includes without limitation
Borrower's promissory note or notes, if any, evidencing Borrower's
Loan obligations in favor of Lender, as well as any substitute,
replacement or refinancing note or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and
security interests securing indebtedness owed by Borrower to Lender; (b)
liens for taxes, assessments, or similar charges either not yet due or
being contested in good faith; (c) liens of materialmen, mechanics,
<PAGE>
12-11-1998 LOAN AGREEMENT PAGE 2
LOAN NO 7197700 (CONTINUED)
===============================================================================
warehousemen, or carriers, or other like liens arising in the ordinary
course of business and securing obligations which are not yet
delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of this Agreement titled "Indebtedness and Liens"; (e) liens and
security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those liens
and security interests which in the aggregate constitute an immaterial
and insignificant monetary amount with respect to the net value of
Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form
of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the
aggregate amount of such Advances outstanding at any time does not exceed the
Borrowing Base. Within the foregoing limits, Borrow may borrow, partially or
wholly prepay, and reborrow under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is
subject to the following conditions precedent, with all documents,
instruments, opinions, reports, and other items required under this
Agreement to be in form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered
by Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall
have been executed by each Guarantor, delivered to Lender, and be in
full force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, books, records, and
operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and
Borrower shall have delivered to Lender the compliance certificate
called for in the paragraph below titled "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
only in writing by authorized persons. Each Advance shall be
conclusively deemed to have been made at the request of and for the
benefit of Borrower (a) when credited to any deposit account of Borrower
maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, after which all requests for Advances will be treated as
having been requested on the next succeeding Business Day. Under no
circumstances shall Lender be required to make any Advance in an amount
less than $1,000.00.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount
of the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay
to Lender an amount equal to the difference between the outstanding
principal balance of the Advances and the Borrowing Base. On the
Expiration Date, Borrower shall pay to Lender in full the aggregate
unpaid principal amount of all Advances then outstanding and all accrued
unpaid interest, together with all other applicable fees, costs and
charges, if any, not yet paid.
FACILITY CHARGE. Borrower recognizes that Lender has incurred and will
continue to incur certain costs and expenses in connection with
establishing, maintaining, servicing, and administering the credit
facility. To ensure that Lender is able to recover such costs and
expenses, Borrower agrees that, notwithstanding any other provision of
this Agreement, the promissory note for the Line of Credit, or the
Related Documents, Lender shall be entitled to collect the following
facility charge, which Borrower hereby promises and agrees to pay: ONE
PERCENT (1%) OF THE LINE OF CREDIT EXTENDED.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits
and credits as shall be appropriate in connection with the credit
facility. Lender shall provide Borrower with periodic statements of
Borrower's account, which statements shall be considered to be correct
and conclusively binding on Borrower unless Borrower notifies Lender to
the contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of
all other Loans, obligations and duties owed by Borrower to Lender,
Borrower (and others, if required) shall grant to Lender Security
interests in such property and assets as Lender may require (the
"Collateral"), including without limitation Borrower's present and
future Accounts and general intangibles. Lender's Security Interests in
the Collateral shall be continuing liens and shall include the proceeds
and products of the Collateral, including without limitation the
proceeds of any insurance. With respect to the Collateral, Borrower
agrees and represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such
financing statements and to take whatever other actions are requested by
Lender to perfect and continue Lender's Security Interests in the
Collateral. Upon request of Lender, Borrower will deliver to Lender any
and all of the documents evidencing or constituting the Collateral, and
Borrower will note Lender's interest upon any and all chattel paper if
not delivered to Lender for possession by Lender. Contemporaneous with
the execution of this Agreement, Borrower will execute one or more UCC
financing statements and any similar statements as may be required by
applicable law, and will file such financing statements and all such
similar statements in the appropriate location or locations. Borrower
hereby appoints Lender as its irrevocable attorney-in-fact for the
purpose of executing any documents necessary to perfect or to continue
any Security Interest. Lender may at any time, and without further
authorization from Borrower, file a carbon, photograph, facsimile, or
other reproduction of any financing statement for use as a financing
statement. Borrower will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of
Lender's security interest in the Collateral. Borrower promptly will
notify Lender of any change in Borrower's name including any change to
the assumed business names of Borrower. Borrower also promptly will
notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify Lender
in writing prior to any change in address or location of Borrower's
principal governance office or should Borrower merge or consolidate with
any other entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which
records shall be available to Lender or Lender's representative upon
demand for inspection and copying at any reasonable time. With respect
to the Accounts, Borrower agrees to keep and maintain such records as
Lender may require, including without limitation information concerning
Eligible Accounts and Account balances and agings. The following is an
accurate and complete list of all locations at which Borrower keeps or
maintains business records concerning Borrowers Accounts: 10210 NORTH
CENTRAL EXPWY., SUITE 400, DALLAS TX 75231.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of
this Agreement, Borrower shall execute and deliver to Lender a schedule
of Accounts and Eligible Accounts, in form and substance satisfactory to
the Lender. Thereafter Borrower shall execute and deliver to Lender such
supplemental schedules of Eligible Accounts and such other matters and
information relating to Borrower's Accounts as Lender may request.
Supplemental schedules shall be delivered according to the following
schedule: MONTHLY, WITHIN TEN (10) DAYS OF MONTH END; ACCOUNTS
RECEIVABLE AGEINGS ARE TO BE ACCOMPANIED BY CURRENT BORROWING BASE
CERTIFICATE AND ACCOUNTS PAYABLE AGEING OF EVEN DATE.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and
to confirm with Account Debtors the accuracy of such Accounts.
REMITTANCE ACCOUNT. Borrower agrees that Lender may at any time require
Borrower to institute procedures whereby the payments and other proceeds
of the Accounts shall be paid by the Account Debtors under a remittance
account or lock box arrangement with Lender, or Lender's agent, or with
one or more financial institutions designated by Lender. Borrower
further agrees that, if no Event of Default exists under this
<PAGE>
12-11-1998 LOAN AGREEMENT PAGE 3
LOAN NO 7197700 (CONTINUED)
===============================================================================
Agreement, any and all of such funds received under such a remittance
account of lock box arrangement shall, at Lender's sole election and
discretion, either be (a) paid or turned over to Borrower; (b) deposited
into one or more accounts for the benefit of Borrower (which deposit
accounts shall be subject to a security assignment in favor of Lender);
(c) deposited into one or more accounts for the joint benefit of
Borrower and Lender (which deposit accounts shall likewise be subject to
a security assignment in favor of Lender); (d) paid or turned over to
Lender to be applied to the indebtedness in such order and priority as
Lender may determine within its sole discretion; or (e) any combination
of the foregoing as Lender shall determine from time to time. Borrower
further agrees that, should one or more Events of Default exist, any and
all funds received under such a remittance account or lock box
arrangement shall be paid or turned over to Lender to be applied to the
indebtedness, again such order and priority as Lender may determine
within its sole discretion.
ADDITIONAL CREDIT FACILITIES. In addition to the Line of Credit facility, the
following credit accommodations are either in place or will be made available
to Borrower:
TERM LOAN. Subject to the terms and conditions of this Agreement and the
exhibit, a term loan is either in place or will be made available to
Borrower as set forth in an exhibit, which is attached hereto and made a
part hereof.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender,
as of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any
Loan, and at all times any indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duty organized, validly
existing, and in good standing under the laws of the State of Texas and
is validly existing and in good standing in all states in which Borrower
is doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified
as a foreign corporation and is in good standing in all states in which
the failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly authorized
by all necessary action by Borrower; do not require the consent or
approval of any other person, regulatory authority or governmental body;
and do not conflict with, result in a violation of, or constitute a
default under (a) any provision of its articles of incorporation or
organization, or bylaws, or any agreement or other instrument binding
upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as
of the date of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered will
constitute, legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title
to all of Borrower's properties free and clear of all Security
Interests, and has not executed any security documents or financing
statements relating to such properties. All of Borrower's properties
are titled in Borrower's legal name, and Borrower has not used, or filed
a financing statement under, any other name for at least the last five
(5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in
this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901, et seq., or other applicable state or Federal laws,
rules, or regulations adopted pursuant to any of the foregoing. Except
as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened release
of any hazardous waste or substance by any person on, under, about or
from any of the properties. (b) Borrower has no knowledge of, or reason
to believe that there has been (i) any use, generation, manufacture,
storage, treatment, disposal, release, or threatened release of any
hazardous waste or substance on, under, about or from the properties by
any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant,
contractor, agent or other authorized user of any of the properties
shall use, generate, manufacture, store, treat, dispose of, or release
any hazardous waste or substance on, under, about or from any of the
properties; and any such activity shall be conducted in compliance with
all applicable federal, state, and local laws, regulations, and
ordinances, including without limitation those laws, regulations end
ordinances described above. Borrower authorizes Lender and its agents to
enter upon the properties to make such inspections and tests as Lender
may deem appropriate to determine compliance of the properties with this
section of the Agreement. Any inspections or tests made by Lender shall
be at Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of
Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous
substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under any such laws, and (b)
agrees to indemnify and hold harmless Lender against any and all claims,
losses, liabilities, damages, penalties, and expenses which Lender may
directly or indirectly sustain or suffer resulting from a breach of this
section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release of a
hazardous waste or substance on the properties. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the indebtedness and the termination or
expiration of this Agreement and shall not be affected by Lender's
acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event has
occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other events,
if any, that have been disclosed to and acknowledged by Lender in
writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in
good faith in the ordinary course of business and for which adequate
reserves have been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and rights
in and to such Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are legally
enforceable in accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred with
respect to any such plan, (ii) Borrower has not withdrawn from any such
plan or initiated steps to do so, (iii) no steps have been taken to
terminate any such plan, and (iv) there are no unfunded liabilities other
than those previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 10210 North Central Expwy., Suite 400,
Dallas, TX 75231. Unless Borrower has designated otherwise in writing
this location is also the office or offices where Borrower keeps its
records concerning the Collateral.
YEAR 2000. Borrower warrants and represents that all software utilized
in the conduct of Borrower's business will have appropriate capabilities
and compatibility for operation to handle calendar dates falling on or
after January 1, 2000, and all information pertaining to such calendar
dates, in the same manner and with the same functionality as the
software does respecting calendar dates falling on or before December
31, 1999. Further, Borrower warrants and represents that the
date-related user interface functions, data-fields, and data-related
program instructions and functions of the software include the
indication of the century.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations and
warranties shall be continuing in nature and shall remain in full force
and effect until such time as Borrower's indebtedness shall be paid in
full, or until this Agreement shall be terminated in the manner provided
above, whichever is the last to occur.
<PAGE>
12-11-1998 LOAN AGREEMENT PAGE 4
LOAN NO 7197700 (CONTINUED)
===============================================================================
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all existing
and all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor which
could materially affect the financial condition of Borrower or the
financial condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at
all reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in
no event later than one hundred twenty (120) days after the end of each
fiscal year, Borrower's balance sheet and income statement for the year
ended, audited by a certified public accountant satisfactory to Lender,
and, as soon as available, but in no event later than forty five (45)
days after the end of each fiscal quarter, Borrower's balance sheet and
profit and loss statement for the period ended, prepared and certified
as correct to the best knowledge and belief by Borrower's chief
financial officer or other officer or person acceptable to Lender. All
financial reports required to be provided under this Agreement shall be
prepared in accordance with generally accepted accounting principles,
applied on a consistent basis, and certified by Borrower as being true
and correct.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, and coverages
reasonably acceptable to Lender. BORROWER MAY FURNISH THE REQUIRED
INSURANCE WHETHER THROUGH EXISTING POLICIES OWNED OR CONTROLLED BY
BORROWER OR THROUGH EQUIVALENT INSURANCE FROM ANY INSURANCE COMPANY
AUTHORIZED TO TRANSACT BUSINESS IN THE STATE OF TEXAS. If Borrower
fails to provide any required insurance or fails to continue such
insurance in force, Lender may, but shall not be required to, do so at
Borrower's expense, and the cost of the insurance will be added to the
indebtedness. If any such insurance is procured by Lender at a rate or
charge not fixed or approved by the State Board of Insurance, Borrower
will be so notified, and Borrower will have the option for five (5) days
of furnishing equivalent insurance through any insurer authorized to
transact business in Texas. Borrower, upon request of Lender, will
deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that
coverages will not be canceled or diminished without at least ten (10)
days' prior written notice to Lender. Each insurance policy also shall
include an endorsement providing that coverage in favor of Lender will
not be impaired in any way by any act, omission or default of Borrower
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest for the Loans,
Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the Insurer; (b) the risks insured; (c) the amount of the
policy; (d) the properties insured; (e) the then current property values
on the basis of which insurance has been obtained, and the manner of
determining those values; and (f) the expiration date of the policy.
GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantor named
below, on Lender's forms, and in the amount and under the conditions
spelled out in those guaranties,
<TABLE>
<CAPTION>
Guarantor Amount
--------- ------
<S> <C>
UNITED MONEYCORP, INC. Unlimited
</TABLE>
OTHER AGREEMENTS. Comply with all terms and conditions at
all other agreements, whether now or hereafter existing, between
Borrower and any other party and notify Lender immediately in writing of
any default in connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any of
Borrower's properties, income, or profits. Provided however, Borrower
will not be required to pay and discharge any such assessment, tax,
charge, levy, lien or claim so long as (a) the legality of the same
shall be contested in good faith by appropriate proceedings, and (b)
Borrower shall have established on its books adequate reserves with
respect to such contested assessment, tax, charge, levy, lien, or claim
in accordance with generally accepted accounting practices. Borrower,
upon demand of Lender, will furnish to Lender evidence of payment of the
assessments, taxes, charges, levies, liens and claims and will authorize
the appropriate governmental official to deliver to Lender at any time a
written statement of any assessments, taxes, charges, levies, liens and
claims against Borrower's properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in a
timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under this
Agreement or under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender of
any change in executive and management personnel; conduct its business
affairs in a reasonable and prudent manner and in compliance with all
applicable federal, state and municipal laws, ordinances, rules and
regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the Americans
With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time
to inspect any and all Collateral for the Loan or Loans and Borrower's
other properties and to examine or audit Borrower's books, accounts, and
records and to make copies and memoranda of Borrower's books, accounts,
and records. If Borrower now or at any time hereafter maintains any
records (including without limitation computer generated records and
computer software programs for the generation of such records) in the
possession of a third party, Borrower, upon request of Lender, shall
notify such party to permit Lender free access to such records at all
reasonable times and to provide Lender with copies of any records it may
request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide
Lender at least annually and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement are
true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default
exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to
exist, as a result of an intentional or unintentional action or omission
on its part or on the part of any third party, on property owned and/or
occupied by Borrower, any environmental activity where damage may result
to the environment, unless such environmental activity is pursuant to
and in compliance with the conditions of a permit issued by the
appropriate federal, state or local governmental authorities; shall
furnish to Lender promptly and in any event within thirty (30) days
after receipt thereof a copy of any notice, summons, lien, citation,
directive, letter or other communication from any governmental agency or
instrumentality concerning any intentional or unintentional action or
omission on Borrower's part in connection with any environmental
activity whether or not there is damage to the environment and/or other
natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
except capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in,
or encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, transfer, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that notwithstanding
the foregoing, but only so long as no Event of Default has occurred and
is continuing or would result from the payment of dividends, if Borrower
is a "Subchapter S Corporation" (as defined in the Internal Revenue Code
of 1986, as amended), Borrower
<PAGE>
12-11-1998 LOAN AGREEMENT PAGE 5
LOAN NO 7197700 (CONTINUED)
===============================================================================
may pay cash dividends on its stock to its shareholders from time to
time in amounts necessary to enable the shareholders to pay income taxes
and make estimated income tax payments to satisfy their liabilities under
federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership of
shares of stock of Borrower, or (d) purchase or retire any of Borrower's
outstanding shares or alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds
if: (a) Borrower or any Guarantor is in default under the terms of this
Agreement or any of the Related Documents or any other agreement that
Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor
becomes insolvent, files a petition in bankruptcy or similar proceedings, or
is adjudged a bankrupt; (c) there occurs a material adverse change in
Borrower's financial condition, in the financial condition of any Guarantor,
or in the value of any Collateral securing any Loan; (d) any Guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such Guarantor's
guaranty of the Loan or any other loan with Lender; or (e) Lender in good
faith deems itself insecure, even though no Event of Default shall have
occurred, based on a change in the financial condition of Borrower.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest
in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender
all Borrower's right, title and interest in and to, Borrower's accounts with
Lender (whether checking, savings, or some other account), including without
limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on the
indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement,
purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of the
Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security
Interest) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for the
benefit of creditors, any type of creditor workout, or the commencement
of any proceeding under any bankruptcy or insolvency laws by or against
Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
indebtedness, or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Borrower or Grantor, as the case may
be, as to the validity or reasonableness of the claim which is the basis
of the creditor or forfeiture proceeding, and if Borrower or Grantor
gives Lender written notice of the creditor or forfeiture proceeding and
furnishes reserves or a surety bond for the creditor or forfeiture
proceeding satisfactory to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the indebtedness. Lender, at its
option, may, but shall not be required to, permit the Guarantor's estate
to assume unconditionally the obligations arising under the guaranty in
a manner satisfactory to Lender, and, in doing so, cure the Event of
Default.
ADVERSE CHANGE. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure, based on a
change in the financial condition of Borrower.
RIGHT TO CURE. If any default, other than a Default on indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been
given a notice of a similar default within the preceding twelve (12)
months, it may be cured (and no Event of Default will have occurred) if
Borrower or Grantor, as the case may be, after receiving written notice
from Lender demanding cure of such default: (a) cures the default within
fifteen (15) days; or (b) if the cure requires more than fifteen (15)
days, immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option,
all indebtedness immediately will become due and payable, all without notice
of any kind to Borrower, except that in the case of an Event of Default of
the type described in the "Insolvency" subsection above, such acceleration
shall be automatic and not optional. In addition, Lender shall have all the
rights and remedies provided in the Related Documents or available at law, in
equity, or otherwise. Except as may be prohibited by applicable law, all of
Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or
to take action to perform an obligation of Borrower or of any Grantor shall
not affect Lender's right to declare a default and to exercise its rights and
remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED
BY LENDER IN THE STATE OF TEXAS. IF THERE IS A LAWSUIT, AND IF THE
TRANSACTION EVIDENCED BY THIS AGREEMENT OCCURRED IN DALLAS COUNTY,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF
THE COURTS OF DALLAS COUNTY, THE STATE OF TEXAS. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS AND APPLICABLE FEDERAL LAWS.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the
provisions of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower. This means that each of the
persons signing below is responsible for all obligations in this
Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any rights
to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such participation
interests. Borrower also agrees that the purchasers of any such
participation interests will be considered as the absolute owners of
such interests in the Loans and will have all the rights granted under
the participation agreement or agreements governing the sale of such
participation interests. Borrower further waives all rights of offset or
counterclaim that it may have now or later against Lender or against any
purchaser of such a participation interest and unconditionally agrees
that either Lender or such purchaser may enforce Borrower's obligation
under the Loans irrespective of the failure or insolvency of any holder
of any interest in the Loans. Borrower further agrees that the purchaser
of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
COSTS AND EXPENSES. Except as otherwise limited by the Texas Credit
Title and the Texas Finance Code, Borrower agrees to pay upon demand all
of Lender's expenses, including without limitation attorneys' fees,
incurred in connection with the enforcement, modification and collection
of this Agreement or in connection with the Loans made pursuant to this
Agreement. Lender may hire one or more attorneys to help collect the
indebtedness if Borrower does not pay, and Borrower will pay Lender's
reasonable attorneys' fees. Borrower also will
<PAGE>
12-11-1998 LOAN AGREEMENT PAGE 6
LOAN NO 7197700 (CONTINUED)
===============================================================================
pay Lender all other amounts actually incurred by Lender as court costs,
lawful fees for filing, recording, or releasing to any public office any
instrument securing the indebtedness; the reasonable cost actually
expended for repossessing, storing, preparing for sale, and selling any
security; and fees for noting a lien on or transferring a certificate of
title to any motor vehicle offered as security for the indebtedness, or
premiums or identifiable charges received in connection with the sale of
authorized insurance.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise
required by law), and shall be effective when actually delivered or when
deposited with a nationally recognized overnight courier or deposited in
the United States mail, first class, postage prepaid, addressed to the
party to whom the notice is to be given at the address shown above. Any
party may change its address for notices under this Agreement by giving
formal written notice to the other parties, specifying that the purpose
of the notice is to change the party's address. To the extent permitted
by applicable law, if there is more than one Borrower, notice to any
Borrower will constitute notice to all Borrowers. For notice purposes,
Borrower will keep Lender informed at all times of Borrower's current
address(es).
PAYMENT OF INTEREST AND FEES. Notwithstanding any other provision of
this Agreement or any provision of any Related Document, Borrower does
not agree or intend to pay, and Lender does not agree or intend to
contract for, charge, collect, take, reserve or receive (collectively
referred to herein as "charge or collect"), any amount in the nature of
interest or in the nature of a fee for this Loan, or any other Loan with
Borrower, which would in any way or event (including demand, prepayment,
or acceleration) cause Lender to charge or collect more for the Loan
than the maximum Lender would be permitted to charge or collect by any
applicable federal law or any applicable law of the State of Texas. Any
such excess interest or unauthorized fee shall, instead of anything
stated to the contrary, be applied first to reduce the unpaid principal
balance of the Loan, and when the principal has been paid in full, be
refunded to Borrower. The right to accelerate maturity of sums due under
this Agreement does not include the right to accelerate any interest
which has not otherwise accrued on the date of such acceleration, and
Lender does not intend to charge or collect any unearned interest in the
event of acceleration. All sums paid or agreed to be paid to Lender for
the use, forbearance or detention of sums paid under this Agreement
shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of the loan
evidenced by this Agreement until payment in full so that the rate or
amount of interest on account of the loan evidenced by this Agreement
does not exceed the applicable usury ceiling. When the term "interest"
is used in the context of "payment of interest," it is the intent of the
parties that all such references shall be to accrued and unpaid
interest, and in no event will Borrower ever be required to pay unearned
interest.
SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending
provision cannot be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall remain valid
and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of
any provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower"
as used herein shall include all subsidiaries and affiliates of
Borrower. Notwithstanding the foregoing however, under no circumstances
shall this Agreement be construed to require Lender to make any Loan or
other financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure
to the benefit of Lender, its successors and assigns. Borrower shall
not, however, have the right to assign its rights under this Agreement
or any interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by
Borrower in this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be considered
to have been relied upon by Lender and will survive the making of the
Loan and delivery to Lender of the Related Documents, regardless of any
investigation made by Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of
this Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Borrower, or
between Lender and any Grantor, shall constitute a waiver of any of
Lender's rights or of any obligations of Borrower or of any Grantor as
to any future transactions. Whenever the consent of Lender is required
under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent instances
where such consent is required, and in all cases such consent may be
granted or withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT,
AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS Of DECEMBER 11,
1998.
BORROWER:
UNITED MEDICORP, INC.
By: /s/ R. Kenyon Culver As V.P.
----------------------------------------------
R. Kenyon Culver, Vice President
LENDER:
TEXAS CENTRAL BANK, N. A.
By:
----------------------------------------------
Authorized Officer
===============================================================================
<PAGE>
Exhibit 10.37
PROMISSORY NOTE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$400,000.00 12-11-1998 12-11-99 7197700 500 30 1313 JHP
- -------------------------------------------------------------------------------------------------------
REFERENCES IN THE SHADED AREA ARE FOR LENDER'S USE ONLY AND DO NOT LIMIT THE APPLICABILITY OF THIS
DOCUMENT TO ANY PARTICULAR LOAN OR ITEM.
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <S> <C>
BORROWER: UNITED MEDICORP, INC. (TIN: 76-2217002) LENDER: TEXAS CENTRAL BANK, N. A.
10210 NORTH CENTRAL EXPWY., SUITE 400 8144 WALNUT HILL LANE, SUITE 180
DALLAS, TX 75231 DALLAS, TX 75231
</TABLE>
==============================================================================
<TABLE>
<S> <C> <C> <C> <C> <C>
PRINCIPAL AMOUNT: $400,000.00 INITIAL RATE: 8.750% DATE OF NOTE: DECEMBER 11, 1998
</TABLE>
PROMISE TO PAY. UNITED MEDICORP, INC. ("BORROWER") PROMISES TO PAY TO TEXAS
CENTRAL BANK, N. A. ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED
STATES OF AMERICA, THE PRINCIPAL AMOUNT OF FOUR HUNDRED THOUSAND & 00/100
DOLLARS ($400,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH
INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE.
INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF
EACH ADVANCE OR MATURITY, WHICHEVER OCCURS FIRST. THE INTEREST RATE WILL NOT
INCREASE ABOVE 18.000%.
CHOICE OF USURY CEILING AND INTEREST RATE. The interest rate on this Note has
been implemented under the "Weekly Rate" as referred to in Section 303.201 of
the Texas Finance Code and Articles 1D.002 and 1D0.003 of the Texas Credit
Title. The terms, including the rate, or index, formula, or provision of law
used to compute the rate on the Note, will be subject to revision as to
current and future balances, from time to time by notice from Lender in
compliance with Section 303.403 of the Texas Finance Code.
PAYMENT. BORROWER WILL PAY THIS LOAN ON DEMAND, OR IF NO DEMAND IS MADE, IN
ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON
DECEMBER 11, 1999. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF
ACCRUED UNPAID INTEREST BEGINNING JANUARY 11, 1999, AND ALL SUBSEQUENT
INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. The
annual interest rate for this Note is computed on a 365/360 basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding, unless such calculation
would result in a usurious rate, in which case interest shall be calculated
on a per diem basis of a year of 365 or 366 days, as the case may be.
Borrower will pay Lender at Lender's address shown above or at such other
place as Lender may designate in writing. Unless otherwise agreed or required
by applicable law, payments will be applied first to accrued unpaid interest,
then to principal, and any remaining amount to any unpaid collection costs
and late charges. Notwithstanding any other provision of this Note, Lender
will not charge interest on any undisbursed loan proceeds. No scheduled
payment, whether of principal or interest or both, will be due unless
sufficient loan funds have been disbursed by the scheduled payment date to
justify the payment.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the WALL
STREET JOURNAL PRIME RATE (the "Index"). The index is not necessarily the
lowest rate charged by Lender on its loans. If the index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notice to Borrower. Lender will tell Borrower the current index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each day. The index currently is 7.750% per annum. THE INTEREST RATE TO BE
APPLIED PRIOR TO MATURITY TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL
BE AT A RATE OF 1.000 PERCENTAGE POINT OVER THE INDEX, ADJUSTED IF NECESSARY
FOR THE MINIMUM AND MAXIMUM RATE LIMITATIONS DESCRIBED BELOW, RESULTING IN AN
INITIAL RATE OF 8.750% PER ANNUM. NOTWITHSTANDING ANY OTHER PROVISION OF
THIS NOTE, THE VARIABLE INTEREST RATE OR RATES PROVIDED FOR IN THIS NOTE WILL
BE SUBJECT TO THE FOLLOWING MINIMUM AND MAXIMUM RATES. NOTICE: Under no
circumstances will the interest rate on this Note be less than 4.000% per
annum or more than the lesser of 18.000% per annum or the maximum rate
allowed by applicable law. For purposes of this Note, the "maximum rate
allowed by applicable law" means the greater of (a) the maximum rate of
interest permitted under federal or other law applicable to the indebtedness
evidenced by this Note, or (b) the "Weekly Rate" as referred to in Section
303.201 of the Texas Finance Code and Articles 1D.002 and 1D0.003 of the Texas
Credit Title.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject
to refund upon early payment (whether voluntary or as a result of default),
except as otherwise required by law. Except for the foregoing, Borrower may
pay without penalty all or a portion of the amount owed earlier than it is
due. Early payments will not, unless agreed to by Lender in writing, relieve
Borrower of Borrower's obligation to continue to make payments of accrued
unpaid interest. Rather, they will reduce the principal balance due.
POST MATURITY RATE. The Post Maturity Rate on this Note is the maximum rate
allowed by applicable law. Borrower will pay interest on all sums due after
final maturity, whether by acceleration or otherwise, at that rate, with the
exception of any amounts added to the principal balance of this Note based on
Lender's payment of insurance premiums, which will continue to accrue
interest at the pre-maturity rate.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related
Documents. (d) Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (e) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding
is commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (f) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies
or any of the other events described in this default section occurs with
respect to any guarantor of this Note. (h) A material adverse change occurs
in Borrower's financial condition or Lender believes the prospect of payment
or performance of the indebtedness is impaired. (i) Lender in good faith
deems itself insecure based on a change in the financial condition of
Borrower.
If any default, other than a default in payment, is curable, it may be cured
(and no event of default will have occurred) if Borrower, after receiving
written notice from Lender demanding cure of such default: (a) cures the
default within fifteen (15) days, or (b) if the cure requires more than
fifteen (15) days, immediately initiates steps which Lender deems in Lender's
sole discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire indebtedness,
including the unpaid principal balance on this Note, all accrued unpaid
interest, and all other amounts, costs and expenses for which Borrower is
responsible under this Note or any other agreement with Lender pertaining to
this loan, immediately due, without notice, and then Borrower will pay that
amount. Lender may hire an attorney to help collect this Note if Borrower
does not pay, and Borrower will pay Lender's reasonable attorneys' fees.
Borrower also will pay Lender all other amounts actually incurred by Lender
as court costs, lawful fees for filing, recording, or releasing to any public
office any instrument securing this loan; the reasonable cost actually
expended for repossessing, storing, preparing for sale, and selling any
security, and fees for noting a lien on or transferring a certificate of
title to any motor vehicle offered as security for this loan, or premiums or
identifiable charges received in connection with the sale of authorized
insurance. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN
THE STATE OF TEXAS. IF THERE IS A LAWSUIT, AND IF THE TRANSACTION EVIDENCED
BY THIS NOTE OCCURRED IN DALLAS COUNTY, BORROWER AGREES UPON LENDER'S REQUEST
TO SUBMIT TO THE JURISDICTION OF THE COURTS OF DALLAS COUNTY, THE STATE OF
TEXAS. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAWS.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest
in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender
all Borrower's right, title and interest in and to, Borrower's accounts with
Lender (whether checking, savings, or some other account), including without
limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested only in writing by Borrower or by an
authorized person. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office shown
above. Borrower agrees to be liable for all sums either: (a) advanced in
accordance with the instructions of an authorized person or (b) credited to
any of Borrower's accounts with Lender. The unpaid principal balance owing on
this Note at any time may be evidenced by endorsements on this Note or by
Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Note if: (a) Borrower or any
guarantor is in default under the terms of this Note or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor
ceases doing business or is insolvent; (c) any guarantor seeks, claims or
otherwise attempts to limit, modify or revoke such guarantor's guarantee of
this Note or any other loan with Lender; (d) Borrower has applied funds
provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or
any other agreement between Lender and Borrower. THIS REVOLVING LINE OF
CREDIT SHALL NOT BE SUBJECT TO SEC. 348 OF THE TEXAS FINANCE CODE.
RENEWAL AND EXTENSION. This Note is given in renewal and extension and not in
novation of the following described indebtedness: the Promissory Note from
Borrower to Lender dated April 29, 1998.
<PAGE>
12-11-1998 PROMISSORY NOTE PAGE 2
LOAN NO 719770 (CONTINUED)
===============================================================================
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of
specific default provisions or rights of Lender shall not preclude Lender's
right to declare payment of this Note on its demand. If any part of this
Note cannot be enforced, this fact will not affect the rest of the Note. In
particular, this section means (among other things) that Borrower does not
agree or intend to pay, and Lender does not agree or intend to contract for,
charge, collect, take, reserve or receive (collectively deterred to herein as
"charge or collect"), any amount in the nature of interest or in the nature
of a fee for this loan, which would in any way or event (including demand,
prepayment, or acceleration) cause Lender to charge or collect more for this
loan than the maximum Lender would be permitted to charge or collect by
federal law or the law of the State of Texas (as applicable). Any such excess
interest or unauthorized fee shall, instead of anything stated to the
contrary, be applied first to reduce the principal balance of this loan, and
when the principal has been paid in full, be refunded to Borrower. The right
to accelerate maturity of sums due under this Note does not include the right
to accelerate any interest which has not otherwise accrued on the date of
such acceleration, and Lender does not intend to charge or collect any
unearned interest in the event of acceleration. All sums paid or agreed to be
paid to Lender for the use, forbearance or detention of sums due hereunder
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of the loan evidenced by this
Note until payment in full so that the rate or amount of interest on account
of the loan evidenced hereby does not exceed the applicable usury ceiling.
Lender may delay or forgo enforcing any of its rights or remedies under this
Note without losing them. Borrower and any other person who signs, guarantees
or endorses this Note, to the extent allowed by law, waive presentment,
demand for payment, protest, notice of dishonor, notice of intent to
accelerate the maturity of this Note, and notice of acceleration of the
maturity of this Note. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether
as maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral without the consent of or notice to anyone. All
such parties also agree that Lender may modify this loan without the consent
of or notice to anyone other than the party with whom the modification is
made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY
OF THE NOTE.
BORROWER:
UNITED MEDICORP, INC
By: /s/ R. Kenyon Culver, V.P.
-------------------------------------------
R. Kenyon Culver, Vice President
===============================================================================
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 74,096
<SECURITIES> 0
<RECEIVABLES> 1,225,793
<ALLOWANCES> (218,388)
<INVENTORY> 0
<CURRENT-ASSETS> 1,118,010
<PP&E> 1,169,326
<DEPRECIATION> (932,107)
<TOTAL-ASSETS> 2,811,111
<CURRENT-LIABILITIES> 1,865,994
<BONDS> 0
0
0
<COMMON> 280,157
<OTHER-SE> 402,645
<TOTAL-LIABILITY-AND-EQUITY> 2,811,111
<SALES> 0
<TOTAL-REVENUES> 4,977,816
<CGS> 0
<TOTAL-COSTS> 4,725,909
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 64,405
<INTEREST-EXPENSE> 19,556
<INCOME-PRETAX> 167,946
<INCOME-TAX> 0
<INCOME-CONTINUING> 167,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,946
<EPS-PRIMARY> 0.006
<EPS-DILUTED> 0.006
</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 Annual Report on Form 10-K to which
this statement is appended as an exhibit and also include, but are not limited
to:
CUSTOMER CONCENTRATION RISK
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, 1998, these two
customers accounted for 66% and 23% of total revenue, excluding AHO revenues,
and 55% and 20% of total revenue including AHO revenues. If the Company is
unable to retain either or both of these customers, or if there is a significant
decrease in the amount of claims and accounts placed with the Company, the
Company 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 debt or equity capital. There can be
no assurance that any of these strategies could be effected on satisfactory
terms.
AHO revenues for the five months ended December 31, 1998 accounted for 16% of
total revenue of which 90% was provided through Medicare claims. Until such time
as significant issues confronting
1
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
AHO are resolved, AHO management does not believe that it can accurately project
future AHO revenues and further believes that AHO revenue for the five months
ended December 31, 1998, are not necessarily indicative of results to be
expected in 1999.
The Company continues to pursue new business in order to reduce the
customer concentration risk, but there can be no assurance that the Company will
be successful in these efforts.
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 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 December 31, 1998, the Company's balance sheet included unamortized
goodwill of $1,439,481 associated with the acquisition of AHO. Goodwill accounts
for 51% and 211% of the Company's total assets and stockholder's equity,
respectively. The current annual amortization rate on goodwill is $73,500.
The Company amortizes goodwill and the Medicare provider numbers over a
period of twenty 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.
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, 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. 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 that such a review would not have a material adverse effect on the Compnay.
Management has determined that an accurate assessment of the estimated
future cash flows related to goodwill cannot be determined due to the
uncertainty of the future net cash flow related to the Medicare settlement
reserve as more fully explained below. Management is of the opinion that until
the uncertainties imbedded in the Medicare settlement reserve are resolved or
more clearly defined, a meaningful impairment assessment of goodwill cannot be
completed. It is anticipated that significant clarification will be provided
thereby allowing for the completion of a meaningful net cash flow projection
upon completion of the audit by the fiscal intermediary of the 1996 and 1997
Alabama Medicare cost reports which is currently in progress.
2
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
MEDICARE SETTLEMENT RESERVE
AHO's Medicare cost reports have not yet been audited by the Medicare
fiscal intermediaries for the years ended December 31, 1998, 1997 or 1996. An
audit of the 1996 and 1997 Alabama cost reports is currently in process. The
1997 and 1996 cost reports were prepared with unaudited financial
information. The 1998 cost reports will be prepared using information
obtained from audited financial statements and will be filed no later than
May 31, 1999, as required. AHO has recorded certain reserves based on
assumptions that may or may not ultimately prove to be correct. The accuracy
of these assumptions will not be known until completion of the aforementioned
audits. At December 31, 1998, the current portion of the Medicare settlement
reserve totaled $879,000 and is comprised principally of:
<TABLE>
<CAPTION>
<S> <C>
$383,000 reserves related to the 1997 and 1996 Medicare reimbursable bad
debt logs,
252,000 reserves related to the estimated 1998 interim reimbursement,
168,000 industry norm general reserves, and
76,000 reserves for estimates representing possible differences
between the unaudited financial information used to complete
the 1997 and 1996 cost reports as compared to the subsequently
audited financial statements for the two years ended
December 31, 1997.
--------
$879,000
</TABLE>
Should the results of the audited 1996 and 1997 Alabama cost reports
confirm all of the assumptions underlying the Medicare settlement reserve and if
AHO is required to liquidate this reserve within thirty days of receipt of the
Notice of Program Reimbursement (the formal notification of settlement after the
audit is complete), AHO currently projects that it is likely that it will not
have sufficient cash or sources of cash to liquidate this liability. As a
result, AHO will be forced to file for bankruptcy protection, and UMC would
record a loss for unrecoverable inter-company loans with AHO. At December 31,
1998, the intercompany balance totaled approximately $749,000. No liability has
been recorded for this contingent loss due to the uncertainty of occurrence.
In the event AHO files for bankruptcy protection, management believes that
most of the goodwill on the Company's balance sheet ($1,439,841 at December 31,
1998) will be offset by liabilities of AHO, and that the charge to earnings for
the remaining goodwill would not be material. It is UMC's opinion, supported by
the opinion of legal counsel, that the liabilities of AHO, including the
Medicare settlement reserve do not ascend to UMC. Therefore, management believes
that UMC will continue as a going concern regardless of the status of AHO.
To the extent that the results of the aforementioned audit do not confirm
all of the assumptions underlying the Medicare settlement reserve, the extent of
the possible cash requirement to liquidate this reserve falls within the range
of $0 to $879,000. Until such time as the uncertainties underlying the Medicare
settlement reserve are resolved, AHO cannot project the 1999 cash requirements
with respect to this reserve.
3
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
AHO is vigorously pursuing the following potential sources which could
provide up to $846,000 of cash:
<TABLE>
<CAPTION>
<S> <C>
$319,000 related to completion of the 1996 and 1997 Alabama and
Florida reimbursable bad debt logs to be resubmitted,
247,000 related to completion of the 1998 reimbursable bad debt
log
146,000 related to 1998 BHM denied Medicare claims under appeal
134,000 outstanding outpatient claims not yet billed
----------
$846,000
</TABLE>
There can be no assurance that AHO will be successful in generating cash
from these sources or that this cash can be generated in a timely manner. These
sources of cash are considered to be "gain" contingencies at December 31, 1998
and; therefore, they are not recorded in the Company's financial statements.
ASCENDING LIABILITY TO A PARENT CORPORATION FOR THE OBLIGATIONS OF ITS WHOLLY
OWNED MEDICARE CERTIFIED SUBSIDIARY
It is UMC's opinion, supported by the opinion of legal counsel, that the
liabilities of AHO, including the Medicare settlement reserve, do not ascend to
UMC as the soul shareholder of AHO. This opinion is based on managements'
assertion that it has maintained appropriate organizational and operational
segregation and control in order to preserve the corporate integrity and
separateness of UMC and AHO. It is managements' opinion that the corporate veil
of AHO is in tack and will provide adequate protection of UMC as the soul
shareholder of AHO should it become necessary for AHO to seek bankruptcy
protection in the future. Any failure with respect to preserving or defending
the corporate veil of AHO could have a material adverse effect on UMC.
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 a profit in each
of the three years ended December 31, 1998. 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
4
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
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.
The Company has 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
$400,000 or 80% of trade accounts receivable aged less than 90 days. The Credit
Facility matures on December 11, 1999. The terms of the Credit Facility are such
that the Company could be deemed, from time to time, to be in default due to a
number of factors including, but not limited to: a.) a material adverse change
in the Company's financial condition or if the lender believes the prospect of
payment or performance of the Credit Facility is impaired and, b.) the lender in
good faith deems itself insecure based on a change in the financial position of
the Company. Upon default, the lender may declare the entire outstanding balance
of the Credit Facility, plus accrued and unpaid interest, to be immediately due
and payable. There can be no assurance that the Company will be able to prevent
the aforementioned events of default from occurring. Any failure to prevent
default could have a material adverse effect on UMC.
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.
The Company has initiated communications with significant customers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 Issue. There can be no guarantee that
the systems of other companies on which the Company relies for the transmission
of claims data will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
5
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
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
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
6
<PAGE>
Exhibit 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
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.
7
<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.
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.
8
