On August 21, 2000, United Medicorp, Inc. completed the purchase of a 20,000 square foot building that serves as its operations center in Pampa, Texas. The purchase price of the building was $100,000. In addition, the first mortgage included an additional $37,000 allowance for transaction costs and building improvements. The term of the first mortgage is 20 years, with monthly payments of principal and interest at a floating rate of prime plus one half percent (currently 4.75 percent per annum). Consistent with the terms of the previously disclosed Economic Development and Incentive Agreement with the Pampa Economic Development Corporation ("PEDC"), the full amount of the $137,000 mortgage is guaranteed by the PEDC. The Company has made numerous repairs and improvements to the building including the construction of two executive offices, a computer room, and a lavatory, and has refurbished the two previously existing lavatories. The total investment in the building and improvements at December 31, 2003 was $193,000. 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 their customers under service contracts that typically are cancelable with a 30 to 60 day notice. For the year ended December 31, 2003, 2002 and 2001, approximately 97%, 96% and 91% of UMC and UMY revenues were recurring. Recurring revenues are defined as revenues derived from services that are used by the UMC and UMY customers in connection with ongoing business, and accordingly exclude revenues from backlog accounts receivable management, UMClaimPros, and consulting services.
For Ongoing claims, there is typically a time lag of approximately 30 to 90 days from contract execution to complete development of system interfaces and definition of procedural responsibilities with customer personnel. During this period, Company personnel survey the customer's existing operations and prepare for installation. Once the customer begins transmitting claims to the Company, there is usually a time lag of 20 to 60 days between transmission of claims to third party payors and collection of those claims from payors.
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.
On October 22, 2003 UMC announced the resignation of its key contact at Presbyterian Healthcare Systems ("PHS"). On February 20, 2004 UMC announced that it had been informed by new management at PHS that most of the business outsourced to UMC would be re-bid, and that the remaining business would be brought back in house in mid 2004. On March 15, 2004 PHS informed UMC that it was not selected as one of the vendors to provide ongoing services for PHS. PHS management stated that the reason UMC was not selected was because other vendors had submitted proposals with fee percentages lower than those proposed by UMC. PHS management also stated that UMC will continue to receive placements of accounts from PHS through March 31, 2004. UMC management expects revenues from PHS to ramp down rapidly during the second quarter of 2004. This contract provided revenues of $2,434,000, $2,246,000 and $1,744,000, which represented 62%, 65%, and 63% of total revenue for the years 2003, 2002, and 2001 respectively.
During November of 2001, Inova Health Services notified the Company of the termination of their Ongoing Accounts Receivable Management contract. Inova did not place any new business with the Company after August of 2001. All billing and collection efforts made on behalf of Inova were discontinued on January 11, 2002. Revenues from this contract accounted for approximately 9% and 16% of total consolidated revenues during 2001 and 2000 respectively. It is UMC management's understanding that Inova's decision to terminate was due to poor collection performance during the third and fourth quarters of 2000 during the period when the Company's operations center was being moved from Dallas to Pampa.
o An offsite electronic medical records storage contract with a hospital in Central Texas was executed on March 17, 2004. o A medical claims management contract for day one billing and follow up was executed on March 12, 2004, with a hospital located in West Texas. o A collection services contract for early stage and bad debt patient balance accounts was executed on February 23, 2004, with a hospital in East Texas. o A coding services contract with a hospital in West Texas was executed on February 16, 2004. o A medical claims management contract for day one billing and follow up was executed on January 22, 2004, with a hospital located in West Texas. o A collection services contract for early stage patient balance accounts was executed on December 18, 2003 with a hospital in South Texas. o An offsite electronic medical records storage contract with a hospital in West Texas was executed on December 18, 2003.
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 enough new business to replace the lost business from PHS.
In exchange for providing jobs within the city limits of Pampa, Texas, the Agreement calls for the PEDC to provide the following incentives to UMC:
(d) an incentive payment of $500 per calendar year (with no cap or limit) for each FTEE from the 51st and over employed in its Pampa operations center during each of the eight calendar years of the Agreement commencing with the year ending December 31, 2001. UMC recognized $15,000, $13,250 and $5,875 in revenue from this incentive for 2003, 2002, and 2001 respectively.
(f) PEDC guaranteed up to $137,000 for the benefit of UMC's lender (the "Lender"), relative to the purchase of the operations center facility in Pampa. In addition, PEDC will pay to UMC $27,400 per year during each of the first five years of the Agreement (for a maximum of $137,000) commencing with the year ending December 31, 2001. After offsetting the total monthly payments made to Lender during the preceding 12 months from this annual payment, UMC will remit the balance to the Lender. On July 28, of 2003, 2002 and 2001 respectively, UMC received $27,400 from the PEDC in payment of this incentive. Of this, $11,533, $11,536 and $14,178 was remitted to National Bank of Commerce (the lien holder on the building) as principal payment on the loan on the building in accordance with The Agreement, for 2003, 2002 and 2001 respectively. PEDC will be released from paying any and all unpaid annual payments if UMC defaults on its obligations to its Lender or if UMC discontinues its operations in Pampa within five years of July 28, 2000.
On August 21, 2000 UMC purchased a building in Pampa, located at 200 N. Cuyler Street that serves as its Pampa operations center, and simultaneously received payment of the relocation incentive totaling $192,000 (as specified in paragraph (a) above). On December 31, 2000 UMC had 45 full time and 2 part time employees at its Pampa operations center, and qualified for the initial incentive payment as specified in paragraph (e) above. This payment was applied to the forgivable loan from the PEDC that is detailed below. As of March 1, 2004 UMC had 92 full time, and 10 part time employees at its Pampa operations center.
o Ongoing Accounts Receivable Management Services revenue of $1,930,000 in 2003 increased by $193,000 compared to 2002 as a result of multiple factors. The Company saw an increase in revenue from the secondary claims portion of an ongoing accounts receivable management services contract that was signed March 22, 2000. Revenues from secondary claims processed under this contract were $856,000 and $796,000 for 2003 and 2002 respectively. This increase in revenue was offset by reduced revenues from the primary claims processed under this contract. Revenues from such primary claims totaled $280,000 and $409,000 for the years 2003 and 2002 respectively. The Company also saw increased revenue from an ongoing accounts receivable management contract that was signed October 31, 2000. This contract provided revenues of $547,000 and $400,000 for 2003 and 2002 respectively. The Company recognized revenue of $218,000 from four new ongoing accounts receivable management contracts that were signed during 2003. This revenue was partially offset by revenue recognized during 2002 from four contracts that were cancelled during 2002 or early 2003. Total revenue from these contracts was $29,500 and $135,000 in 2003 and 2002 respectively.
the existing volume and mix of claims placed by the Company's customers as of December 31, 2003, management believes that Ongoing Accounts Receivable Management Services will generate revenues from such customers of approximately $1.6 million in 2004.
o Backlog Accounts Receivable Management Services revenue of $0 in 2003 decreased by $3,000 compared to 2002 as a result of the winding down of a Backlog medical claims management contract executed on March 22, 2000. This contract generated revenues of $0 and $3,000 in 2003 and 2002 respectively. Assuming that there are no significant changes in the existing volume and mix of claims placed by the Company's customers as of December 31, 2003, management does not anticipate any significant revenue from Backlog Accounts Receivable Management Services in 2004.
o Collection Agency Services revenue of $1,665,000 in 2003 increased by $215,000 compared to 2002 as a result of the following: The Company saw an increase in revenue from the bad debt portion of a collection agency services contract executed October 13, 2000. The bad debt portion of this contract generated revenue of $927,000 and $694,000 in 2003 and 2002 respectively. The Company also saw increased revenue from the early out patient balance portion of this contract. Revenue from the early out portion of the contract totaled $371,000 and $346,000 in 2003 and 2002 respectively. The increased revenue from this contract was offset by decreased revenue from a collection agency services contract executed in March of 2000 that was canceled in May 30, 2002. This contract provided revenue of $25,000 and $245,000 in 2003 and 2002 respectively. The Company also recognized revenue of $202,000 from new contracts signed during 2003. This revenue was partially offset by revenue recognized in 2002 from contracts that were cancelled in 2002 or in early 2003. The revenue generated by these contracts was $23,000 and $60,000 in 2003 and 2002 respectively.
As stated above under LOSS OF SIGNIFICANT CUSTOMERS, the revenue from PHS will be reduced in 2004 as a result of the termination of this contract. UMC will receive placements from PHS through March 31, 2004. Management expects revenues from PHS to ramp down rapidly through the second quarter of 2004. During the fourth quarter of 2003 and the first quarter of 2004 the Company executed several new collection services contracts that will generate revenue during 2004. Assuming that there are no other significant changes in the existing volume and mix of accounts placed by the Company's customers as of December 31, 2003, management believes that Collection Agency Services will generate revenues from such customers of approximately $1.2 million in 2004.
Assuming that there is no significant change in the existing volume of claims coded for existing customers at December 31, 2003, Coding Services will generate revenues from such customers of approximately $200,000 in 2004.
Wages and benefits expense increased $350,000 or 15% primarily due to increased headcount as a result of increased business requirements. During 2003 total full and part time employee headcount averaged 107 compared to 80 during 2002. As of March 1, 2004, UMC had a total of 98 full time and 21 part time employees. Total wage, salary and bonus expense of $2,098,000 in 2003 increased by $211,000 compared to 2002 primarily as a result of the increased headcount. Payroll tax expense of $199,000 in 2003 increased by $39,000 compared to 2002 as a result of increased salary and wages, and an increased state unemployment tax rate during 2003. Employee benefits expense of $368,000 increased by $99,000 compared to 2002 as a result of an increased number of employees being eligible to participate in the Company's benefit plans, and an increase in the cost of providing health insurance benefits. During 2003, an average of 71 employees were covered under the Company's health insurance plan compared to 62 in 2002. The average cost per employee per month for health insurance was $269 in 2003 compared to $234 in 2002. These changes resulted in an increase cost in 2003 of approximately $50,000. The Company also paid $12,000 in additional health insurance premium during April 2003 as a result of the dispute with UMC's former health care insurance provider. The Company also recognized $37,500 in compensation expense related to a stock purchase warrant for 1,500,000 shares of UMC common stock that was issued to the Company's CEO, Pete Seaman, in February 2000, but was not eligible for exercise until certain conditions were met in December 2003. Assuming no significant change in the Company's core services, management expects that wages and benefits should remain at approximately 68% of revenues in 2004.
Selling, general and administrative ("SG&A") expense increased $52,000 or 8% due to a net increase in telephone, postage, printing, and office supplies of $25,000 which was primarily attributable to and increased number of letters mailed and phone calls made as a result of increased collection agency services business volume; and increases in travel $21,000 which was primarily attributable to an increased number of sales personnel and increased number of customers to service; software maintenance $9,000; taxes and insurance $8,000; recruiting $6,000; and sales commissions $5,000, which were offset by decreases in factoring fees ($11,000), UMC did not factor invoices during the fourth quarter of 2003; and contract labor ($15,000), UMC used contract labor at a customer location in 2002 but not in 2003. All other expenses showed a net
increase of $4,000. Assuming no significant change in the Company's core services, management expects that SG&A should remain at approximately 19% of revenues in 2004.
Office, vehicle and equipment rental expense decreased $600 or 3% in 2003 as compared to 2002. Assuming no significant changes in office space and equipment leased at 12/31/03, management expects lease and rental expense to be less than 1% of revenues in 2004.
Interest, net increased $900 or 4 during 2003 compared to 2002.
Provision for doubtful accounts and notes decreased $1,700 due to good collection experience in 2003.
Other expense decreased $4,000 as a result of losses realized on the sale of company assets in 2002. No such losses were recognized in 2003.
Tax benefit In the past, UMC has not booked a tax asset to reflect any portion of the value of UMC's net operating loss ("NOL") carryforwards, due to the uncertainty of the benefit being realized. However, due to the Company's consistent profitability for the past three years, and management's projected profitability in 2004, management believes it to be more likely than not that a portion of the value remaining in the Company's NOLs will be realized. At December 31, 2003, the Company recorded a tax asset and an income statement tax benefit of $18,000 that represents the estimated value of the NOLs that will be utilized in 2004.
At December 31, 2003, the Company's liquid assets, consisting of cash, totaled $63,000 compared to $52,000 at December 31, 2002. Working capital was $324,000 at December 31, 2003 compared to $145,000 at December 31, 2002. Working capital increased primarily due to the net operating income for the year ended December 31, 2003 offset by capital investments in equipment, software and building improvements.
On December 28, 1999, the Company executed a $500,000 recourse factoring agreement, which may be terminated by either party with ten days notice. The agreement is secured by all of the Company's non-factored accounts receivable and was previously personally guaranteed by Peter Seaman, Chairman and CEO. The factoring company released this personal guarantee on December 23, 2003. Other significant terms of the factoring agreement include recourse for invoices remaining unpaid at 90 days, interest at prime plus 2.5%, and a factoring fee of 1% of the face value of each invoice. The Company had no factored invoices at 12/31/2003.
Effective January 1, 2003, the Company adopted Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN No. 45"). FIN No. 45 broadens the disclosures to be made by the guarantor about its obligations under certain guarantees. FIN No. 45 also requires a guarantor to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee at the inception of a guarantee. Adoption of FIN No. 45 did not have an impact on the Company's results of operations or financial position at December 31, 2003.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"), which was revised and superceded by FASB Interpretation No. 46R in December 2003 (FIN 46R). FIN 46R requires the consolidation of certain variable interest entities, as defined. FIN 46R is effective immediately for special purpose entities and variable interest entities created after December 31, 2003, and must be applied to other variable interest entities no later than December 31, 2004. The Company believes it has no such variable interest entities and as a result FIN No. 46R will have no impact on its results of operations, financial position or cash flows.
o Ongoing Accounts Receivable Management Services revenue of $1,737,000 in 2002 increased by $590,000 compared to 2001 as a result of multiple changes to the Company's claims processing and inventory mix. The increase was due primarily to the addition of secondary claims during the fourth quarter of 2001 to an ongoing accounts receivable management services contract that was signed March 22, 2000. Revenues from secondary claims processed under this contract were $796,000 and $54,000 for 2002 and 2001 respectively. This increase in revenue was offset by reduced revenues from the primary claims processed under this contract. Revenues from such primary claims totaled $409,000 and $586,000 for the years 2002 and 2001 respectively. During November of 2001, Inova Health Services notified the Company of the termination of their ongoing accounts receivable management contract. Inova did not place any new business with the Company after August, 2001. Total revenues from Inova were $2,800 and $247,000 for 2002 and 2001 respectively. The loss of revenue from Inova was partially offset by increased revenues from an ongoing accounts receivable management contract that was signed October 31, 2000. This contract provided revenues of $400,000 and $247,000 for 2002 and 2001 respectively. The Company also received $92,000 in revenue during 2002 from an ongoing accounts receivable management contract dated July 26, 2002. This contract was cancelled effective December 26, 2002 due the discontinuation of outsourcing by this customer.
o Backlog Accounts Receivable Management Services revenue of $3,000 in 2002 decreased by $136,000 compared to 2001 as a result of the winding down of a Backlog medical claims management contract executed on March 22, 2000 with a major hospital system located in New Mexico. This contract generated revenues of $3,000 and $139,000 in 2002 and 2001 respectively.
o Coding Services revenue - In April of 2002, Janice K. Neal joined UMC as Vice President of Coding Services, and the Company began providing such services to various hospitals. Total revenues from coding services were $117,000 during 2002.
Wages and benefits expense increased $546,000 or 31% primarily due increased headcount as a result of increased business requirements, and the addition of two corporate officers during March and April of 2002. During 2002 total employee headcount averaged 80 compared to 61 during 2001. As of March 15, 2003, UMC had a total of 82 full time and 9 part time employees.
Selling, general and administrative ("SG&A") expense increased $137,000 or 26% primarily due to increases in postage, travel, office supplies, advertising and marketing, employee training, and commission costs. These increases were the result of an increased number of self pay accounts requiring letters (postage and office supplies), additional travel requirements of the new Vice President of Sales and Marketing and the new Vice President of Coding Services, sponsorship costs for various healthcare association conferences (advertising and marketing), training costs associated with the start up of a new customer project, commission costs associated with the addition of a Vice President of Sales and Marketing, and the reversal of previously accrued expenses totaling $27,000 during the first quarter of 2001.
Office, vehicle and equipment rental expense decreased $270 or 1% in 2002 as compared to 2001.