<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-10418
UNITED MEDICORP, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 75-2217002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10210 NORTH CENTRAL EXPRESSWAY
SUITE 400
DALLAS, TEXAS 75231
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 691-2140
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES NO X
----- -----
As of November May 10, 1999, there were outstanding 28,910,217 shares
of Common Stock, $0.01 par value.
<PAGE>
UNITED MEDICORP, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998......................... 1
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998............................................................... 2
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998.............................................................. 3
Notes to the Consolidated Financial Statements.............................................. 4
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 7
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings........................................................................... 16
ITEM 2. Changes in Securities....................................................................... 16
ITEM 3. Defaults Upon Senior Securities............................................................. 16
ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 16
ITEM 5. Other Information........................................................................... 16
ITEM 6. Exhibits and Reports on Form 8-K............................................................ 16
Signatures........................................................................................... 17
</TABLE>
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, December 31,
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 107,573 $ 74,096
Restricted cash.................................................. 661 1,064
Accounts receivable, net of allowance for doubtful accounts
of $238,882 and $216,388, respectively........................ 913,329 1,007,405
Notes receivable, net of allowance of $16,000 and $2,000,
respectively.................................................. 6,000 --
Prepaid expenses and other current assets........................ 22,706 35,445
--------------- --------------
Total current assets.......................................... 1,050,269 1,118,010
Other non-current assets............................................... 8,073 16,401
Property and equipment, net of accumulated depreciation of $808,948
and $789,318, respectively....................................... 175,820 187,301
Assets under capital leases, net of accumulated amortization of
$151,066 and $142,789, respectively.............................. 74,106 49,918
Goodwill, net of accumulated amortization of $44,155 and $25,779,
respectively..................................................... 1,421,105 1,439,481
--------------- --------------
Total assets.................................................. 2,729,373 2,811,111
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable........................................... 232,473 271,873
Payable to clients............................................... 661 1,064
Accrued liabilities.............................................. 333,553 319,865
Accrued Medicare settlement...................................... 747,149 878,805
Current portion of capital lease obligations..................... 78,487 67,614
Current portion of long term debt................................ 50,000 --
Short term borrowings............................................ 326,354 326,773
--------------- --------------
Total current liabilities..................................... 1,768,677 1,865,994
Long term capital lease obligations, excluding current portion......... 47,707 44,793
Long term debt......................................................... 37,500 --
Accrued Medicare settlement............................................ 226,185 217,342
--------------- --------------
Total liabilities............................................. 2,080,069 2,128,309
--------------- --------------
Stockholders' equity:
Common stock; $0.01 par value; 50,000,000 shares authorized;
29,015,764 shares and 28,015,764 shares outstanding,
respectively.................................................. 290,157 280,157
10% Cumulative convertible preferred stock; $0.01 par value;
5,000,000 shares authorized; none issued ..................... -- --
Less treasury stock at cost, 105,547 shares...................... (221,881) (221,881)
Additional paid-in capital....................................... 18,753,254 18,703,254
Retained deficit................................................. (18,172,226) (18,138,728)
--------------- --------------
Total stockholders' equity.................................... 649,304 682,802
--------------- --------------
Total liabilities and stockholders' equity.................... $ 2,729,373 $ 2,811,111
--------------- --------------
--------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
1
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Billing and collection services........................ $ 870,361 $ 1,254,044
Net patient services................................... 270,852 --
Other revenues......................................... 11,389 14,537
----------- -----------
Total revenues...................................... 1,152,602 1,268,581
EXPENSES:
Wages and benefits..................................... 763,681 776,647
Selling, general and administrative.................... 214,381 228,870
Office, vehicle and equipment rental................... 63,070 28,285
Depreciation and amortization.......................... 46,283 17,875
Professional fees...................................... 41,604 15,372
Provision for doubtful accounts........................ 40,848 26,914
Interest, net.......................................... 16,233 2,154
----------- -----------
Total expenses...................................... 1,186,100 1,096,117
----------- -----------
NET INCOME (LOSS).............................. $ (33,498) $ 172,464
----------- -----------
----------- -----------
Basic earnings (loss) per common share................... $ (.0012) $ 0.0062
----------- -----------
----------- -----------
Diluted earnings (loss) per common share................. $ (.0012) $ 0.0062
----------- -----------
----------- -----------
Weighted average common shares outstanding............... 28,243,217 27,910,217
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
2
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................... $ (33,498) $ 172,464
Adjustments to reconcile net income to net cash provided
(used in) operating activities:
Provision for doubtful accounts...................... 40,848 26,914
Depreciation of fixed assets......................... 19,630 15,224
Amortization of goodwill............................. 18,376 --
Amortization of assets under capital leases.......... 8,277 2,651
Changes in assets and liabilities:
(Increase) decrease in restricted cash............... 403 (68,010)
(Increase) in purchased claims....................... -- (41,946)
(Increase) decrease in accounts receivable, gross.... 67,228 (347,112)
(Increase) decrease in notes receivable.............. (20,000) 2,000
Decrease in prepaid expenses and other assets........ 21,067 1,339
Increase (decrease) in accounts payable.............. (39,400) 21,644
Increase (decrease) in payable to clients............ (403) 68,007
(Decrease) in accrued Medicare settlement............ (122,813) --
Increase in accrued liabilities...................... 13,688 147,840
(Decrease) in deferred credits....................... -- (3,772)
----------- -----------
Net cash provided by (used in) operating activities........ (26,587) (2,757)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment...................... (8,339) (31,998)
----------- -----------
Net cash provided by (used in) investing activities........ (8,339) (31,998)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from credit facility...................... 30,000 --
Repayment of current debt................................ (30,419) --
Proceeds from issuance of long term debt................. 100,000 --
Repayment of long term debt.............................. (12,500) --
Repayment of capital lease obligations................... (18,678) (21,688)
----------- -----------
Net cash provided by (used in) financing activities........ 68,403 (21,688)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... 33,477 (56,443)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... 74,096 275,948
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 107,573 $ 219,505
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest..................................... $ 16,569 $ 2,713
Non-cash investing and financing activities:
Additions to capital lease obligations................... $ 32,465 $ --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
3
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
United Medicorp, Inc. ("UMC" or the "Company") include its wholly owned
subsidiaries, United MoneyCorp. Inc. ("UMY"), and Allied Health Options, Inc.
("AHO"). All material intercompany transactions and balances have been
eliminated. The financial information presented should be read in conjunction
with the audited financial statements of the Company for the year ended
December 31, 1998 included in the Company's Annual Report on Form 10-K.
The unaudited consolidated financial information has been prepared
in accordance with the Company's customary accounting policies and practices.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation of results for the interim
period, have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Significant estimates included in the accompanying financial
statements include: the allowance for bad debt with respect to AHO accounts
receivable, the accrued Medicare settlement, the amortization period for
goodwill, and the contractual adjustment related to Medicare claims under
appeal. Actual results could differ from those estimates. The results for
interim periods are not necessarily indicative of results to be expected for
the year.
4
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2. SEGMENT REPORTING
Information for the Business Office Services and Behavioral Health
Services segments is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
EXTERNAL REVENUE:
Business Office Services..................... $ 881,750 $ 1,268,581
Behavioral Health Services................... 270,852 --
----------- -----------
1,152,602 1,268,581
----------- -----------
----------- -----------
OPERATING EXPENSES:
Business Office Services..................... 774,646 1,049,174
Behavioral Health Services................... 308,090 --
----------- -----------
1,082,736 1,049,074
----------- -----------
----------- -----------
MEDICARE HOME OFFICE COSTS ALLOCATION:
Business Office Services..................... (67,500) --
Behavioral Health Services................... 67,500 --
----------- -----------
-- --
----------- -----------
----------- -----------
PROVISION FOR DOUBTFUL ACCOUNTS:
Business Office Services..................... 37,774 26,914
Behavioral Health Services................... 3,074 --
----------- -----------
40,848 26,914
----------- -----------
----------- -----------
FIXED ASSETS DEPRECIATION & AMORTIZATION:
Business Office Services..................... 25,400 17,875
Behavioral Health Services................... 2,507 --
----------- -----------
27,907 17,875
----------- -----------
----------- -----------
GOODWILL AMORTIZATION:
Business Office Services..................... -- --
Behavioral Health Services................... -- --
Adjustments/eliminations..................... 18,376 --
----------- -----------
18,376 --
----------- -----------
----------- -----------
INTEREST EXPENSE, NET:
Business Office Services..................... 11,302 2,154
Behavioral Health Services................... 4,931 --
----------- -----------
16,233 2,154
----------- -----------
----------- -----------
NET INCOME (LOSS)
Business Office Services..................... 100,128 172,464
Behavioral Health Services................... (115,250) --
Adjustments/eliminations..................... (18,376) --
----------- -----------
$ (33,498) $ 172,464
----------- -----------
----------- -----------
</TABLE>
5
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
At At
March 31, December 31,
1999 1998
------------ -------------
<S> <C> <C>
CASH:
Business Office Services.................................. $ 49,583 $ 88,693
Behavioral Health Services................................ 57,990 (14,597)
------------ -------------
107,573 74,096
------------ -------------
------------ -------------
ACCOUNTS RECEIVABLE, NET:
Business Office Services.................................. 473,884 408,458
Behavioral Health Services................................ 439,445 598,947
------------ -------------
913,329 1,007,405
------------ -------------
------------ -------------
GOODWILL, NET:
Business Office Services.................................. -- --
Behavioral Health Services................................ -- --
Adjustments/eliminations.................................. 1,421,105 1,439,481
------------ -------------
1,421,105 1,439,481
------------ -------------
------------ -------------
OTHER ASSETS:
Business Office Services.................................. 1,146,111 1,004,787
Behavioral Health Services................................ 30,873 34,026
Adjustments/eliminations.................................. (889,618) (748,684)
------------ -------------
287,366 290,129
------------ -------------
------------ -------------
CURRENT INSTALLMENTS ON LONG TERM DEBT AND CAPITAL LEASES:
Business Office Services.................................. 358,487 267,614
Behavioral Health Services................................ 96,354 126,773
------------ -------------
454,841 394,387
------------ -------------
------------ -------------
LONG TERM DEBT AND CAPITAL LEASES, EXCLUDING CURRENT PORTION:
Business Office Services.................................. 85,207 44,973
Behavioral Health Services................................ -- --
------------ -------------
85,207 44,973
------------ -------------
------------ -------------
ACCRUED MEDICARE SETTLEMENT:
Business Office Services.................................. -- --
Behavioral Health Services................................ 973,334 1,096,147
------------ -------------
973,334 1,096,147
------------ -------------
------------ -------------
OTHER LIABILITIES:
Business Office Services.................................. 279,489 275,581
Behavioral Health Services................................ 1,176,816 1,065,905
Adjustments/eliminations.................................. (889,618) (748,684)
------------ -------------
566,687 592,802
------------ -------------
------------ -------------
STOCKHOLDER'S EQUITY:
Business Office Services.................................. 946,395 913,770
Behavioral Health Services................................ (1,718,196) (1,670,449)
Adjustments/eliminations.................................. 1,421,105 1,439,481
------------ -------------
$ 649,304 $ 682,802
------------ -------------
------------ -------------
</TABLE>
NOTE 3. RECLASSIFICATION
Certain prior year balances have been reclassified to conform with
current year presentation.
6
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
GENERAL CONSIDERATIONS
Except for the historical information contained herein, the matters
discussed may include forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that forward-looking statements include
the intent, belief, or current expectations of the Company and members of its
senior management team, as well as the assumptions on which such statements
are based. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. Important factors currently
known to management that could cause actual results to differ materially from
those in forward-looking statements are set forth in the safe harbor
compliance statement for forward-looking statements included as Exhibit 99.1
to this Form 10-Q and are hereby incorporated herein by reference. The
Company undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
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.
LOSS OF SIGNIFICANT CUSTOMER
On March 15, 1999, the Company received notice from Presbyterian
Healthcare System ("PHS") that it had not been selected to provide continuing
collection agency services. The Company was informed that this decision was
the result of the merger of PHS with another health care system and in no way
did it reflect the on the quality of the services provided by the Company to
PHS. The Company continued to receive weekly account placements through May
4, 1999. The Company has been informed that PHS will allow the Company to
continue to work the accounts placed prior to May 4, 1999, and to retain this
inventory indefinitely. Management estimates that revenue of approximately
$120,000 to $150,000 may be generated from the remaining PHS accounts in
active inventory assuming no decline in the historical collection rate of
approximately 13%. There can be no assurance that PHS will not request the
return of their accounts currently in inventory.
During the three months ended March 31, 1999, PHS provided revenues
totaling $98,000, or 11% of total revenue, excluding AHO net patient services
revenue. After taking into account AHO net patient services revenue, PHS
represented 9% of total revenue.
7
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
During 1998, PHS provided revenues totaling $985,000, or 23% of
total revenue, excluding AHO net patient services revenue. After taking into
account AHO net patient services revenue, PHS represented 20% of total
revenue.
During 1997, 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.
Management continues to vigorously pursue new business to replace
the loss of PHS revenue; however, there can be no assurance that management
will be successful in these efforts. Should management not be successful in
generating new business, it will be required to adopt alternative strategies
such as a significant reduction in payroll expense.
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.
The Company has completed substantially all of its Year 2000
project. The incremental costs associated with this project totaled
approximately $30,000.
8
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
ACCOUNTS RECEIVABLE MANAGEMENT SERVICES - PROCESSING VOLUMES
The following table sets forth for each period indicated the volume
and gross dollar amount of insurance claims received and fees recognized for
each of the Company's two principal accounts receivable management services:
<TABLE>
<CAPTION>
1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------
QUARTER
----------------------------------------------------------------------------------------------------------
FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UMC
Number of Claims
Accepted for
Processing:
Ongoing 45,265 48,722 48,162 49,742 89,317 72,803 76,672 42,833 28,729 37,127 40,179 46,860
Backlog - - 1 72 8,518 23,739 28,361 - - - 1 1
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 45,265 48,722 48,163 49,814 97,835 96,542 105,033 42,833 28,729 37,127 40,180 46,861
Gross $ Amount
of Claims
Accepted for
Processing (000's):
Ongoing 28,817 33,401 30,116 30,087 40,333 33,375 35,186 20,124 20,269 18,325 18,068 21,055
Backlog - - - 17 2,744 5,868 9,066 - - - - -
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 28,817 33,401 30,116 30,104 43,077 39,243 44,252 20,124 20,269 18,325 18,068 21,055
Collection $ (000's)
Ongoing 12,531 11,613 11,738 11,215 14,556 12,190 9,407 10,143 7,545 7,063 7,533 8,257
Backlog - - 9 156 128 626 - - - - - 6
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 12,531 11,613 11,747 11,371 14,684 12,816 9,407 10,143 7,545 7,063 7,533 8,263
Fees Earned $ (000's)
Ongoing 771 631 681 729 922 733 480 428 366 376 379 386
Backlog - - 1 11 9 46 - - - - - -
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 771 631 682 740 931 778 480 428 366 376 379 386
Average Fee %
Ongoing 6.2% 5.4% 5.8% 6.4% 6.3% 6.0% 5.1% 4.2% 4.9% 5.3% 5.0% 4.7%
Backlog - 11.0% 7.1% 7.0% 13.7% - - - - - -
</TABLE>
For Ongoing claims, there is typically a time lag of approximately 5
to 45 days from contract execution to computer hardware installation and
training of customer personnel. During this period, Company personnel survey
the customer's existing operations and prepare for installation. Following
installation and training of the customer's personnel, the customer begins
entering claims and transmitting them to the Company. There is usually a time
lag of 30 to 90 days between transmission of a claim to a third party payor
and collection of a claim from that payor.
9
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
COLLECTION AGENCY SERVICES - PROCESSING VOLUME
The following table sets forth for each period indicated the volume
and gross dollar amount of collection accounts received and fees recognized
for UMY:
<TABLE>
<CAPTION>
1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------
QUARTER
----------------------------------------------------------------------------------------------------------
FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UMY
Number of Accounts
Accepted for
Collection: 14,626 26,024 31,861 22,130 27,399 27,177 27,801 22,209 3,916 N/A N/A N/A
Gross $ Amount of
Accounts Accepted
for Collection (000's) 7,281 12,282 11,664 12,370 14,294 14,543 14,965 19,037 2,264 N/A N/A N/A
Collection $ (000's) 930 1,321 2,282 2,653 2,305 1,994 784 632 96 N/A N/A N/A
Fees Earned (000's) 137 150 232 263 270 196 182 79 20 N/A N/A N/A
Average Fee % 14.7 11.4% 10.2% 9.9% 11.8% 9.8% 23.2% 12.5% 20.8% 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. Collection fees percentages charged to the
customer vary for the three different placement categories: bad debt, early
out, and second placements.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
Consolidated Statements of Operations expressed as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
----------- -----------
Revenue 100% 100%
----------- -----------
<S> <C> <C>
Wages and benefits 66.3 61.2
Selling, general and administrative 18.6 18.0
Office and equipment rental 5.5 2.2
Depreciation and amortization 4.0 1.4
Professional fees 3.6 1.2
Provision for doubtful accounts 3.5 2.1
Interest, net, and other (income) expense 1.4 0.2
------ -------
Total expenses 102.9 86.3
------ -------
Net income (loss) (2.9%) 13.7%
------ -------
------ -------
</TABLE>
10
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
COMPARISON OF THE QUARTER ENDED MARCH 31, 1999 TO THE QUARTER ENDED
MARCH 31, 1998
REVENUES decreased $115,979, or 9% primarily due to the following:
- - Ongoing Accounts Receivable Management Services revenue of $720,000 in
the current quarter decreased by $225,000 compared to the first quarter
of 1998. During the current quarter, Washington Hospital Center
Hospital Billing Department ("WHCHBD") claims provided revenue of
$546,000 compared to $442,000 during the same quarter of 1998 due to an
increase in claims placed under existing contracts. Washington Hospital
Center Physician Billing Department ("WHCPBD") claims provided revenue
of $137,000 compared to $407,000 during the same quarter of 1998 due to
a decrease in claims submitted as a result of the Washington Hospital
Center's model office project. Other customer claims provided revenue
of $25,000 compared to $84,000 during the same quarter of 1998 due to
the loss of two customers and the acquisition of AHO which accounted
for $27,000 of 1998's first quarter's other customers' revenue.
- - Net patient services provided revenue of $271,000 in the current
quarter compared to no revenue during the same quarter of 1998 due to
the acquisition of AHO on August 7, 1998. 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's current quarter revenue is not necessarily
indicative of future results.
- - Collection Agency Services revenue of $139,000 in the current quarter
decreased by $131,000 compared to the first quarter of 1998. During the
current quarter, PHS accounts provided revenue of $98,000 compared to
$254,000 during the same quarter of 1998 due to a reduction in accounts
placed under early out and secondary collection agreements. Management
estimates that revenue of approximately $120,000 to $150,000 may be
generated from the remaining PHS accounts in active inventory assuming
no decline in the historical collection rate of approximately 13%.
There can be no assurance that PHS will not request the return of their
accounts currently in inventory.
- - UMClaimPros revenue of $23,000 in the current quarter decreased by
$28,000 compared to the first quarter of 1998 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 decreased $13,000 or 2% primarily due to
reduced headcount exclusive of the AHO acquisition, reduced management
bonuses, reduced collector bonuses for UMY collectors related to decreased
UMY revenues all of which was partially offset by increased headcount related
to the AHO acquisition. During the current quarter as compared to the first
quarter of 1998, wages and benefits, exclusive of AHO headcount, decreased by
approximately $97,000; management bonus decreased by approximately $86,000;
UMY collector bonus decreased by approximately $16,000; and wages and
benefits related to the AHO acquisition increased by approximately $186,000.
During the current quarter, AHO increased headcount by a monthly average of
16. During the current quarter, total monthly employee headcount averaged 79
compared to 84 during the same quarter of 1998.
11
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense decreased
$14,000 or 6% primarily due to decreased travel, decreased Year 2000
remediation expenditures, and decreased recruiting partially offset by SG&A
expenses related to the AHO acquisition. During the current quarter, AHO's
SG&A expenses increased $59,000 as compared to no such expense in the same
quarter of 1998.
OFFICE, VEHICLE AND EQUIPMENT RENTAL expense increased $35,000 or
123% primarily due to the acquisition of AHO and the lease of two company
vehicles utilized by the sales force at a monthly expense of approximately
$1,000 per month compared to no leased vehicles during the same quarter of
1998. During the current quarter, approximately $31,000 or 89% of this
increase relates to the AHO acquisition.
DEPRECIATION AND AMORTIZATION expense increased $28,000 or 159%
primarily due to additional depreciation expense related to AHO fixed assets
and goodwill amortization related to the AHO acquisition. During the current
quarter, AHO's fixed asset depreciation and goodwill amortization totaled
approximately $3,000 and $18,000, respectively, compared to no such expense
in the same quarter of 1998.
PROFESSIONAL FEES expense increased $26,000 or 171% primarily due to
the AHO acquisition. During the current quarter, approximately $33,000 or
127% of this increase is associated with the AHO quality assurance and
clinical oversight consulting services and financial statement audit and cost
report preparation accruals.
PROVISION FOR DOUBTFUL ACCOUNTS expense increased $14,000 or 52%
primarily due to note receivable reserves for a $20,000 loan to a customer
and trade accounts receivable reserves for the same customer.
INTEREST, NET increased $14,000 or 653% primarily due to borrowings
required to provide working capital loans to AHO as well as additional
interest expense related to AHO debt. During the current quarter,
approximately $5,000 or 36% of this increase relates to AHO debt with the
remaining increase attributable to the draw by the Company on its Credit
Facility as well as the promissory note executed on January 4, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's liquid assets, consisting of cash
and cash equivalents, totaled $108,000 compared to $74,000 at December 31,
1998. The working capital deficit was $718,408 and $747,984 at March 31, 1999
and December 31, 1998, respectively.
Operating activities in the first quarter of 1999 used net cash of
$27,000, compared to $3,000 net cash used in operating activities during the
same period of 1998. This decline is primarily due to decreased trade
payables and decreased accrued Medicare settlement partially offset by
decreased trade receivables. In the first quarter of 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
approximately $635,000 and $507,000 at March 31, 1999 and December 31, 1998,
respectively. These loans were required as a
12
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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 the first quarter 1999 consisted of the
purchase of furniture, fixtures and equipment which used cash of $8,000
compared to $32,000 used during the same period of 1998.
Financing activities in the first quarter of 1999 provided cash of
$68,000 and consisted primarily of net borrowings of $30,000 from the
Company's Credit Facility and borrowings of $100,000 from the Company's
promissory note partially offset by principal payments on capital lease
obligations and debt which used cash of $62,000. Cash of $68,000 provided
from financing activities in the first quarter of 1999 compares favorably to
the cash of $32,000 used in the same period of 1998 which consisted of
principal payments on capital lease obligations only.
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 the period from December 31, 1998 to March 31, 1999, the
available Borrowing Base under the Company's Credit Facility has averaged
approximately $310,000. At March 31, 1999, borrowings under the Credit
Facility totaled $230,000. The maximum borrowing base is the lesser of
$400,000 or 80% of trade account receivables aged less than 90 days.
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
March 31, 1999 and to 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. A
desk review of the 1996 Florida cost report is scheduled to begin on May 17,
1999. 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
June 30, 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 March 31, 1999, the current portion of the Medicare settlement
reserve totaled $747,000 and is comprised principally of:
13
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
<TABLE>
<S> <C>
$383,000 reserve related to the 1997 and 1996 Medicare reimbursable bad
debt logs,
185,000 reserve related to the estimated 1998 interim reimbursement,
(65,000) reserve related to the estimated year-to-date 1999 interim
reimbursement,
168,000 industry norm general reserve, and
76,000 reserve 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, 1998.
--------
$747,000
--------
--------
</TABLE>
Should the results of the audited 1997 and 1996 Alabama cost reports
and the 1996 Florida desk review 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.
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 $747,000. 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 February 5, 1999, AHO received notice from the Florida Medicare fiscal
intermediary (the "Florida FI") indicating that a tentative settlement of
$90,513 was due from AHO's Pensacola Center for Behavioral Health ("PCBH")
for interim reimbursement in excess of reimbursable costs for the twelve
months ended December 31, 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
14
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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, net of the projected interim reimbursement
underpayment of $34,000 for the three months ended March 31, 1999, 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 of its
partial hospitalization program ("PHP") based on certain deficiencies
identified by the Alabama FI in BHM's PHP 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 and are currently in various stages of appeal.
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.
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.) BHMs facility lease will terminate effective May 31, 1999. BHM
outpatient services will be relocated to a significantly
smaller shared office space,
c.) AHO applied for and was denied an extended repayment plan from
the Florida FI.
d.) 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.
e.) UMC has increased its existing credit facility in order to
fund near term cash requirements of AHO.
f.) AHO has entered into various discussions with parties
potentially interested in buying one or more of the AHO CMHCs.
g.) AHO has identified and it is vigorously pursuing the
aforementioned sources of cash.
h.) UMC has initiated discussions with various investment banking
firms regarding raising additional equity capital.
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.
15
<PAGE>
UNITED MEDICORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- ----------------------
<S> <C>
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements
</TABLE>
(B) Reports on Form 8-K
None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED MEDICORP, INC.
(REGISTRANT)
By: /s/ R. Kenyon Culver Date: May 14, 1999
------------------------------ -------------
R. Kenyon Culver
Vice President and Chief Financial Officer
(Principal Accounting Officer)
17
<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, one of which was terminated
effective May 4, 1999. In the current quarter, these two customers accounted
for 77% and 11% of total revenue, excluding AHO revenues, and 59% and 9% of
total revenue including AHO revenues. If the Company is unable to retain its
remaning significant customer, 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 in the current quarter accounted for 23% of total
revenue of which 52% was provided through Medicare claims. Until such time as
significant issues confronting AHO are resolved, AHO management does not
believe that it can accurately project future AHO revenues and further
believes that AHO revenue in the current quarter is not necessarily
indicative of futuer results.
1
<PAGE>
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
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 March 31, 1999, the Company's balance sheet included
unamortized goodwill of $1,439,481 associated with the acquisition of AHO.
Goodwill accounts for 52% and 219% 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 1997 and 1996 Alabama cost reports is currently in
process. A desk review of the 1996 Florida cost report is scheduled to begin
on May 17, 1999. 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 June 30, 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 March 31, 1999, the current portion of the Medicare
settlement reserve totaled $747,000 and is comprised principally of:
<TABLE>
<S> <C>
$383,000 reserve related to the 1997 and 1996 Medicare reimbursable
bad debt logs,
185,000 reserve related to the estimated 1998 interim reimbursement,
(65,000) reserve related to the estimated year-to-date 1999 interim
reimbursement,
168,000 industry norm general reserve, and
76,000 reserve 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, 1998.
--------
$747,000
--------
--------
</TABLE>
Should the results of the audited 1997 and 1996 Alabama cost reports
and the 1996 Florida desk review 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 March 31, 1999, the
intercompnay balance totaled $890,000. No liabilty 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 ($1,421,105
at March 31, 1999) 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 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 $747,000. 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.
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>
<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. These sources of cash are considered to be "gain" contingencies at
March 31, 1999 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 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
4
<PAGE>
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
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.
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.
5
<PAGE>
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
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 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.
6
<PAGE>
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
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.
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.
7
<PAGE>
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
EXISTING GOVERNMENT REGULATION
Existing government regulations can adversely affect UMC's business
through, among other things, its potential to reduce the amount of
reimbursement received by UMC's customers upon which UMC's billing and
collection fees are based, as well as received directly CMHC services. UMC's
billing and collections activities are also governed by numerous federal and
state civil and criminal laws. In general, these laws provide for various
fines, penalties, multiple damages, assessments and sanctions for violations,
including possible exclusion from Medicare, Medicaid and certain other
federal and state healthcare programs.
Submission of claims for services that were not provided as claimed,
or which violate the regulations, may lead to civil monetary penalties,
criminal fines, imprisonment and/or exclusion from participation in Medicare,
Medicaid and other federally funded healthcare programs. Specifically, the
Federal False Claims Act allows a private person to bring suit alleging false
or fraudulent Medicare or Medicaid claims or other violations of the statute.
Such actions have increased significantly in recent years and has increased
the risk that a company engaged in the healthcare industry, such as UMC and
its customers, may become the subject of a federal or state investigation,
may ultimately be required to defend a false claim action, may be subjected
to government investigation and possible criminal fines, may be sued by
private payors and may be excluded from Medicare, Medicaid and/or other
federally funded healthcare programs as a result of such an action. Any such
proceedings or investigation could have a material adverse effect on UMC.
Credit collection practices and activities are regulated by both
federal and state law. The Federal Fair Debt Collection Practices Act sets
forth various provisions designed to eliminate abusive, deceptive and unfair
debt collection practices by collection agencies. Various states have also
promulgated laws and regulations that govern credit collection practices.
There can be no assurance that current or future government
regulations or current or future healthcare reform measures will not have a
material adverse effect on UMC.
8
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