On August 21, 2000, United Medicorp, Inc. completed the purchase of a 20,000 square foot building that serves as its new operations center in Pampa, Texas. The purchase price of the building was $100,000. In addition, the first mortgage includes an additional $37,000 allowance for transaction costs and building improvements. The term of the first mortgage is 20 years, with monthly payments of principal and interest at a floating rate of prime plus one half percent (currently 9.0 percent per annum). Consistent with the terms of the previously disclosed Economic Development and Incentive Agreement with the Pampa Economic Development Corporation ("PEDC"), the full amount of the $137,000 mortgage is guaranteed by the PEDC. The Company has made numerous repairs and improvements to the building including the construction of two executive offices, a computer room, and a lavatory, and has refurbished the two previously existing lavatories. The total cost of the building and improvements at December 31, 2000 was $159,000. The company began moving its operations to Pampa in September of 2000 and completed the relocation of all operations functions in February 2001.
UMC 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, 2000, 1999 and 1998, approximately 82%, 91% and 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 in connection with ongoing business, and accordingly exclude revenues from backlog accounts receivable management, advance funding, UMClaimPros, and consulting services.
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. In many cases, collection accounts are transferred to UMY via hard copy media, which requires UMY employees to manually enter collection account data into the UMY system. Collection fee percentages charged to the customer vary depending on the service provided the age and average balance of accounts.
During 1998, 89% of revenue was earned from two customers: the WHC and Presbyterian Healthcare System of Dallas("PHSD"). WHC provided revenue totaling $2,740,000, or 66% of total 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, and 35% related to a physician billing contract amendment
On March 15, 1999, the Company was formally notified by PHSD 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 was in no way related to the quality of the services provided by the Company to PHS. The Company received weekly account placements through May 4, 1999, and generated its last revenue from PHS in August 1999. Revenue from this contract accounted for approximately 4% and 23% of total revenue during 1999 and 1998, respectively. See subsequent section herein entitled "Management's Plan With Regard to Lost Revenues".
(a) an incentive payment of $192,000 which was made upon the closing of the purchase of the new operations center facility in Pampa. The Agreement includes a claw back provision whereby if UMC does not maintain a minimum of 30 full time equivalent employees ("FTEE") employed in its Pampa operations center during any given year of the eight years of the Agreement beginning with the year ended December 31, 2001, UMC will be required to remit $24,000 back to PEDC for each such year.
(b) an incentive payment of $40,000 per calendar year (for a maximum of $320,000) so long as UMC provides a minimum average of 40 FTEE employed in its Pampa operations center during each of the eight calendar years of the Agreement commencing with the year ending December 31, 2001, and
There can be no assurance that UMC will be successful in: (a) continuing to meet the aforementioned initial minimum employment requirements to trigger incentive payments, (b) maintaining the minimum employment requirements to prevent triggering the aforementioned claw back provision, (c) averting a default to its Lender or discontinuing its operations in Pampa within five years to prevent PEDC from being released from paying any and all unpaid annual payments to UMC relative to the aforementioned terms of the PEDC Agreement.
o A medical claims management contract for ongoing claims was executed on March 1, 2001 with a hospital located in Dallas, Texas. This contract is expected to begin generating revenue in May 2001.
o On November 15, 2000 UMC moved it corporate office from its previous 6,836 square foot office space in Dallas, to a 937 square foot office space in Garland, Texas, resulting in a monthly expense reduction of approximately $6,800.
Management continues to vigorously pursue new business while rigorously managing expenses without negatively impacting service levels. However, there can be no assurance that UMC will be successful in obtaining new business and producing incremental profits and cash flow.
If management is unable to successfully develop and implement new profitable customer contracts and new service lines or align expenses with future cash requirements, it will be required to adopt alternative strategies, which may include but are not limited to actions such as reducing management and line employee headcount and compensation, restructuring existing financial obligations, seeking a strategic merger or acquisition, seeking the sale of the Company or the Company's public shell, and/or seeking additional debt or equity capital. There can be no assurance that any of these strategies could be effected on satisfactory terms.
o Ongoing Accounts Receivable Management Services revenue of $1,153,000 in 2000 decreased by $1,567,000 compared to 1999 primarily due to effect of the aforementioned loss of the WHC contract. On October 31, 2000 UMC executed a medical claims management contract with a hospital located in South Texas. This contract is fully implemented and began generating revenue in February 2001. On March 1, 2001, UMC executed a medical claims management contract for ongoing claims coding, billing and collection services with a hospital in Dallas, Texas. This contract is expected to begin generating revenue in May 2001. Assuming that there are no other significant changes in the existing volume and mix of claims placed by the Company's customers as of December 31, 2000, Ongoing Accounts Receivable Management Services will generate revenues from such customers of approximately $1.5 million in 2001.
o Collection Agency Services revenue of $563,000 in 2000 increased by $231,000 compared to 1999 of which $227,000 is due to a collection agency services contract executed October 13, 2000. Assuming that there are no significant changes in the existing volume and mix of accounts placed by the Company's customers as of December 31, 2000, Collection Agency Services will generate revenues from such customers of approximately $1.3 million in 2001.
WAGES AND BENEFITS expense decreased $416,000 or 20% primarily due to headcount reductions through attrition during the first months of 2000, and the gradual transition of jobs from Dallas to the new operations center in Pampa. As of March 15, 2001, UMC had a total of 66 full time and 3 part time employees in Pampa, and 2 remaining in Dallas. Due to discontinuing the outsourcing of payroll and human resource functions, the lower cost of human resources in Pampa as compared to Dallas, and assuming no significant change in the Company's core services, management expects that wages and benefits should be approximately 60% of revenues in 2001 compared to 72% of revenues in 2000.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense decreased $94,000 or 15% primarily due to expense reductions in conjunction with the aforementioned revenue reductions. Assuming no significant change in the Company's core services, management expects that SG&A should remain at approximately 20% of revenues.
Cash flow from operations in 2000 used cash of $162,000, compared to $271,000 cash provided in operating activities from continuing operations in 1999. This decrease is primarily due to reduction of the following accrued liabilities: accrued office relocation expenses (75,000); reversal of prior year accrued dealer commissions (36,000); accrued audit fees (13,000); accrued expense related to AHO (12,000); accrued payroll and benefit expenses (19,000); property taxes and other miscellaneous accruals (14,000) and a net operating loss of $199,000 for the year 2000. In 2000, cash flow from continuing operations was supplemented by incentives received from the Pampa Economic Development Commission to cover working capital and liquidity requirements for continuing operations.
Investing activities in 2000 consisted of the purchases of furniture, fixtures and equipment, and a building which serves as the Company's new operations center in Pampa. Total cash used for investments was $213,000, of which $54,000 was used for the purchase of furniture, fixtures and equipment, and $159,000 was for the purchase of the building, and subsequent improvements thereto. Total cash used in investing activities during 1999 was $15,000. The Company's fixed assets are in good working order and sufficient to support continuing operations.
Financing activities in 2000 consisted of borrowings under a real estate lien note for the purchase of the Pampa operations center, and transaction and improvement costs in the amount of $137,000; borrowings under a bank note payable totaling $12,500; Deferred incentive income totaling $192,000 received pursuant to the Economic Development and Incentive Agreement; a forgivable loan from the Pampa Economic Development Corporation in the amount of $50,000; and principal payments on capital lease obligations and notes payable which used cash of $130,000.
Management believes that current cash and cash equivalents and projected cash flows from operations together with the Company's factoring agreement, incentives under the Economic Development and Incentive Agreement, capital lease and other potential financing should be sufficient to support projected growth in revenues through fiscal 2001.
o Collection Agency Services revenue of $332,000 in 1999 decreased by $583,000 compared to 1998 primarily due to the aforementioned loss of the PHSD contact. Revenue in 1999 from PHSD was $112,000 compared to $854,000 in 1998.
o UMClaimPros revenue of $93,000 in 1999 decreased by $102,000 compared to 1998 primarily due to decreased utilization at PHSD.
WAGES AND BENEFITS expense decreased $594,000 or 22% primarily due to headcount reductions through attrition in conjunction with the aforementioned revenue reductions. During 1999, monthly employee headcount averaged 53 compared to 80 during 1998.
OFFICE, VEHICLE AND EQUIPMENT RENTAL expense increased $14,000 or 11% primarily due to the $14,000 payment required in conjunction with the August 2, 1999 office space reduction option whereby 3,300 square feet of office space was vacated on September 2, 1999 resulting in a monthly expense reduction of approximately $3,500. Under the arrangement, monthly office rent through January 31, 2000 and 2001 were reduced to $7,200 and 7,400, respectively. Monthly vehicle and other rental expenses were reduced to approximately $1,000 and $500, respectively.