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 8.25 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, 2005 was $202,000. The Company began moving its operations to Pampa in September of 2000 and completed the relocation of all operations functions in February 2001.
Management's Discussions and Analysis of Financial Condition and Results of Operations
o In April 2002, the Company started up UMC's Coding Services Division. This division generated revenue of $222,000, $224,000, and $183,000 during 2005, 2004, and 2003 respectively.
o In March 2005, the Company began offering Chargemaster Review and Pricing Comparison services. These services will be discontinued in May 2006 due to disappointing results.
o From 2000 to 2006 the annual budget for UMC's sales and marketing department has increased from $0 to $175,000. In 2005 the Company's actual expenses for sales and marketing were $271,000 compared to $293,000 in 2004 and $233,000 in 2003.
With the loss of the PHS and LHH contracts in 2004, the loss of the BSH contract in 2005, and the loss of the MRMC billing contract in 2006, the Company will face a significant challenge in 2006 to maintain the level of revenue that it produced in 2005. Management's forecast of revenue for 2006 from the Company's existing customers as of the date of this report plus incentives from the Company's agreement with the Pampa Economic Development Corporation is $2,550,000. The difference between this forecast and total 2005 revenue will have to be made up from new sales of services to new and existing customers.
Management continues to vigorously pursue new business while rigorously managing expenses without negatively impacting service levels.
During 1999 and the first seven months of 2000, UMC had experienced increasing difficulty in recruiting and retaining medical billing and collection staff in the Dallas area. This situation was the result of low unemployment and strong competition from nearby major hospitals and physician groups for experienced staff. Low unemployment and escalating competition for qualified staff had resulted in an overall increase in hourly wage rates and turnover.
(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. UMC met the FTEE requirement for this incentive in 2005, 2004 and 2003 and recognized $24,000 of the incentive as other revenue at December 31st of each year.
(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 $1,625, $13,500 and $15,000 in other revenue from this incentive for 2005, 2004 and 2003 respectively, and
(e) 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 2005, 2004 and 2003 respectively, UMC received $27,400 from the PEDC in payment of this incentive. Of this, $11,533, $11,536 and $11,533 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 2005, 2004 and 2003 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.
In December 2004, the Company entered into an agreement with a software vendor, in which UMC agreed to purchase five user licenses for two of the vendor's products each year for two years. The agreement also gives UMC the ability to purchase additional licenses each year at an agreed upon per license amount. In accordance with the agreement, UMC paid the vendor $39,500 in December 2004 for five user licenses to be used during 2005. UMC is also committed by the agreement to pay an additional $39,500 in January of 2006 for five licenses to be used during 2006. This payment was made on January 5, 2006.
During 2002, the Company entered a maintenance agreement on leased mail processing equipment, which requires quarterly payments through 2007. The total commitments under the agreement are $6,420 for each of the years 2003 through 2006 and $4,815 in 2007. The Company paid $6,420, $6,420, and $6,420 during 2005, 2004, and 2003 respectively under this agreement.
entered into a Dispute Resolution Agreement and Full And Final Release (the "Dispute Resolution Agreement"). Pursuant to the Dispute Resolution Agreement, the Company paid a total of $32,500, plus payroll taxes on back wages of $705. In addition, the Company paid legal fees related to this matter totaling $21,464.
The cost of software that is developed or purchased for internal use is accounted for pursuant to AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). Pursuant to SOP 98-1, the Company capitalizes costs incurred during the application development stage of software developed for internal use, and expenses costs incurred during the preliminary project and the post-implementation operation stages of development. During 2005 and 2004, the Company capitalized $25,800 and $25,460, respectively, in costs incurred for new internal software development that was in the application development stage.
o On March 7, 2005, the Company received notice from Brownsville Surgical Hospital (BSH) that effective April 15, 2005 they would terminate their accounts receivable management contract with UMC dated October 31, 2000. This contract provided revenue of $292,000 and $610,000 in 2005 and 2004 respectively, which represented 21% and 25% of total Ongoing Accounts Receivable Management Services revenue for these years.
o Collection Agency Services revenue of $1,040,000 in 2005 decreased by $224,000, or 18% compared to 2004 as a result of the following: The Company saw a decrease in revenue due to the discontinuation of the PHS contract on March 31, 2004. Total Collection Agency Services revenue from this contract was $446,000 in 2004 and $0 in 2005. This decrease in revenue was partially offset by revenue generated from a new contract with a hospital in East Texas that was executed in April 2004. This contract generated $164,000 in fees in 2004 and $305,000 in 2005, for an increase of $141,000 in 2005.
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, 2005, management believes that Collection Agency Services will generate revenues from such customers of approximately $2,000,000 in 2006.
During the first quarter of 2005, UMC began offering additional chargemaster review and pricing comparison to its line of coding related services. During the fourth quarter of 2005 UMC had sold three chargemaster reviews, which increased revenue by $15,000 in 2005. Assuming that there
are no significant changes in the types of coding services provided to current customers as of 12/31/05, and the addition of a moderate amount of new customers for the Company's traditional and new coding services, management believes that Coding Services will generate revenues from such customers of approximately $137,000 in 2006
Other revenue of $109,000 decreased $12,000, or 10%, from 2004 primarily due to the reduced head count in 2005. Other revenue was comprised mainly of the PEDC incentives, which is based on head count.
Wages and benefits expense decreased $750,000 or 29% due primarily to reduced average headcount during 2005 as compared to 2004. Salaries, wages and bonuses decreased $568,000, or 28%, due primarily to the reduced headcount for 2005. Payroll taxes and benefits decreased by $182,000 also due to the reduced headcount in 2005. The average headcount in 2004 was 87 and in 2005 the average headcount was 66.
Depreciation and amortization expense increased $1,300 or 1% in 2005 as a result of the addition of approximately $81,000 in leased and purchased fixed assets during 2004, and additions of $81,500 in 2005.
Professional fees expense decreased $600, or 1%, as a result of an increase legal fees paid during 2005, and a decrease of audit and accounting fees.
Tax benefit of $41,750 was fully reserved on UMC's books in 2005. At December 31, 2004 and 2003, the Company recorded a tax asset and an income statement tax benefit of $23,750 and $18,000 respectively. Based on the Company's 2005 operating loss and a projected loss for 2006, management has decided to reverse the deferred tax asset recorded as of December 31, 2004.
At December 31, 2005, the Company's liquid assets, consisting of cash, totaled $180,000 compared to $264,000 at December 31, 2004. Working capital was $575,000 at December 31, 2005 compared to $628,000 at December 31, 2004. Working capital decreased primarily due to the net operating loss for the year ended December 31, 2005.
projecting a net loss for both the first and second quarters of 2006. Due to uncertainties regarding a number of new customer contracts that are in the Company's sales pipeline, it is difficult for management to project the Company's revenue performance, operating profits or loss, or cash requirements for more than a few months. It is possible that the Company will need to raise additional capital during 2006 to satisfy working capital and debt service requirements. There is no assurance that the Company will be able to raise the amount of debt or equity capital that may be required to meet its objectives. The Company's challenging financial circumstances may make the terms, conditions, and cost of any available capital relatively unfavorable. If additional debt or equity capital is not readily available, the Company will be forced to further scale back its operations, including its efforts to complete new sales. The Company's short term needs for capital may force it to consider and potentially pursue other strategic options sooner than it might otherwise have desired. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability of and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. Statement 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company will adopt Statement 123R on January 1, 2006.
In May 2005, the FSB issued SFAS No. 154, Accounting Changes and Error Corrections - a Replacement of APB Opinion No. 20 and FASB Statement No. 3 (FAS 154). FAS 154 changes the requirements for the accounting for , and reporting of, a change in accounting principle. FAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented using the new accounting principle. FAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. The Company will apply the requirements of FAS 154 on any changes in principle made on or after January 1, 2006.
o Ongoing Accounts Receivable Management Services revenue of $2,468,000 in 2004 increased by $538,000 compared to 2003 as a result of multiple factors. During 2004, the Company received $637,000 from an ongoing accounts receivable management contract that was signed May 7, 2004. The Company also recognized $467,000 in revenue from a short-term ongoing accounts receivable management contract that was signed March 11, 2004. The term of this contract was three months, and new placements to UMC were discontinued on June 11, 2004. The Company received $102,000 from an ongoing accounts receivable management contract that was signed January 22, 2004, and was cancelled on October 4, 2004. The Company saw increased revenue from an ongoing accounts receivable management contract that was signed October 31, 2000. This contract provided
On March 7, 2005, the Company received notice from Brownsville Surgical Hospital (BSH) that effective April 15, 2005 they would terminate their accounts receivable management contract with UMC dated October 31, 2000. This contract provided revenue of $610,000 and $547,000 in 2004 and 2003 respectively, which represented 25% and 28% of total Ongoing Accounts Receivable Management Services revenue for these years.
Interest, net increased $8,000 or 40% during 2004 primarily as a result of the addition of a capital lease on new phone equipment in September of 2003. Management expects interest expense to be less than 1% of revenue in 2005.
Tax benefit Prior to 2003, UMC had 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 profitability during 2001 - 2004, and management's projected profitability in 2005, management believed it to be more likely than not that a portion of the value remaining in the Company's NOLs would be realized. At December 31, 2003, the Company recorded a tax asset and an income statement tax benefit of $18,000 that represented the estimated value of the NOLs that would be utilized in 2004. The actual value of the NOL's utilized in 2004 was approximately $88,000. UMC's estimate of the NOL that would be utilized in 2005 was $41,750, and the valuation allowance was reduced accordingly, which resulted in an income tax benefit of $23,750 in 2004.