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 5.75 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, 2004 was $197,000. The company began moving its operations to Pampa in September of 2000 and completed the relocation of all operations functions in February 2001.
UMC also maintains a corporate office in a 1200 square foot leased office space in Garland, Texas. The company signed a 36-month lease on this space with a lease term from October 1, 2003 through September 30, 2006. Lease payments are scheduled for $950 per month during the first year, $1000 per month during the second year, and $1050 per month during the third year of the lease term. Management believes that its facilities are well located and are in good condition.
UMC prices its off-site coding services according to the types of claims coded. In general, inpatient claims are more complex than outpatient claims, and are priced higher accordingly.
On May 30, 2002, the Company received notice from Valley Baptist Medical Center (VBMC) terminating their accounts receivable management contract dated March 13, 2000. The termination of the contract was pursuant to recommendations from outside consultants to consolidate VBMC's outsourcing projects, and according to VBMC management had nothing to do with UMC's performance. This contract provided revenues of $9,000, $25,000 and $245,000, which represented ..2%, .6% and 7% of total revenue for the years 2004, 2003 and 2002 respectively.
o On December 7, 2004 the Company executed a coding services contract with a hospital in Central Texas. o On October 29, 2004 the Company executed a contract for early stage patient balance collections with a hospital in Central Texas. o On October 6, 2004 the Company executed a coding services contract with a hospital in East Texas. o On October 1, 2004 the Company executed a contract for bad debt collections with a hospital in West Texas. o On August 26, 2004 the Company executed a contract for bad debt collections with a hospital in Central Texas. o On August 24, 2004 the Company executed a contract for early stage and bad debt collections with a hospital in West Texas. o On July 8, 2004 the Company executed a contract for bad debt collections with a hospital in East Texas. o On July 1, 2004 the Company executed a contract for bad debt collections with a hospital in East Texas. o On May 7, 2004 the Company executed a contract for day one medical claims billing and follow up service, early stage patient balance collection service, and bad debt patient balance collection service with a hospital located in East Texas. This contract supercedes a contract that was previously executed on February 23, 2004 for early stage and bad debt patient balance collection services. o On May 1, 2004 the Company executed a contract for bad debt second collections with a hospital in South Texas. o A collection services contract for early stage and bad debt patient balance accounts was executed on April 9, 2004, with a hospital in South Texas. 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. The term of this contract was only three months, and new placements to UMC were discontinued on June 11, 2004. 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. o A coding services contract with a hospital in Central Texas was executed on December 12, 2003.
(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 2004, 2003 and 2002 and recognized $24,000 of the incentive as income at December 31st of each 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. UMC recognized $40,000 in revenue from this incentive for each of the years 2004, 2003 and 2002.
(c) an incentive payment of $1,000 per job per calendar year (for a maximum of $80,000) for each FTEE from the 41st up to and including the 50th 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. UMC recognized $10,000 in revenue from this incentive for each of the years 2004, 2003 and 2002.
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. As of March 1, 2005 UMC had 57 full time, and 13 part time employees at its Pampa operations center.
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 December of 2005 for five licenses to be used during 2006.
The Company reports financial information on a consolidated basis. Therefore, unless there is an indication to the contrary, financial information is provided for the parent company, United Medicorp, Inc., and its subsidiaries as a whole. Transactions between the parent company and any subsidiaries are eliminated for this purpose. UMC owns all of the capital stock of its subsidiaries, and does not have any subsidiaries that are not consolidated. None of UMC's subsidiaries are "off balance sheet", UMC has not entered into any "off balance sheet" transactions, and UMC has no "special purpose entities".
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 2004, the Company capitalized $25,460 in costs incurred for new internal software development that was in the application development stage.
Factored accounts receivable are accounted for pursuant to SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). Pursuant to SFAS No. 140, the Company treats its factored accounts receivable as a sales transaction, and as such, no liability is recognized for the amount of the proceeds received from the transfer of the accounts receivable. UMC has a contingent liability to repurchase any invoices that remain unpaid after 90 days. At December 31, 2004 UMC had no factored invoices.
On March 7, 2005, the Company received notice from Brownsville Surgical Hospital (BSH) that effective April 15, 2005 they would be terminating the claims billing and follow up portions of their accounts receivable management contract with UMC dated October 31, 2000. The claims billing and follow up portion of this contract provided Ongoing Accounts Receivable Management Service revenue of $610,000, $547,000 and $400,000, in 2004, 2003 and 2002 respectively, which represented 25%, 28% and 23% of total Ongoing Accounts Receivable Management Services revenue for these years.
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, 2004, management believes that Ongoing Accounts Receivable Management Services will generate revenues from such customers of approximately $1.5 million in 2005.
On March 7, 2005, the Company received notice from Brownsville Surgical Hospital (BSH) that effective April 15, 2005 they would be terminating the early stage patient balance collection portion of their accounts receivable management contract with UMC dated October 31, 2000. The early stage patient balance collection portion of this contract provided Collection Agency Services revenue of $30,000, $27,000 and $20,000, in 2004, 2003 and 2002 respectively, which represented 2%, 2% and 1% of total Collection Agency Services revenue for these years
o Coding Services revenue of $224,000 in 2004 increased by $41,000 or 23% due primarily to fees from coding consulting services provided in conjunction with an ongoing accounts receivable management contract that was executed May 7, 2004. Total coding fees provided by this contract were $55,000. Fees from the Company's web based off-site coding services remained level at $91,000 in both 2004 and 2003. Coding fees from other on-site coding services decreased from $92,000 in 2003 to $78,000 in 2004.
o Other revenue of $126,000 in 2004 increased by $2,000 or 1.6% compared to 2003. Other revenue in 2004 and 2003 was comprised primarily of incentives received in accordance with the agreement with the PEDC. Assuming that the Company continues to meet the incentive requirements, this agreement will generate approximately $112,000 in incentive revenue in 2005.
Assuming no significant change in the Company's core services, management expects that SG&A should remain at approximately 19% of revenues in 2005.
Depreciation and amortization expense increased $57,000 or 52% in 2004 primarily as a result of the addition of approximately $404,000 in leased and purchased fixed assets during 2003. Management expects depreciation and amortization expense to be approximately 4% of revenues in 2005.
Cash flow from operations in 2004 provided cash of $250,000, compared to $165,000 provided from operations in 2003. This increase is primarily due to the 2004 net operating income of $338,000 increased by depreciation ($127,000), amortization ($38,000), and provision for doubtful accounts ($60,000), an increase in accrued liabilities ($30,000) offset by non-cash incentive income recognized ($24,000) an increase in accounts receivable ($177,000) prepaid expenses ($62,000) restricted cash ($14,000) and factor reserve ($3,000) and decreases in accounts payable ($54,000) and payables to customers ($9,000). In 2004, cash flow from operations was supplemented by incentives received from the Pampa Economic Development Commission to cover working capital and liquidity requirements.
During 2003, the Company applied and was approved for two $100,000 unsecured lines of credit, with two different banks. The first line was approved July 17, 2003, and carries an annual interest rate of prime plus 6 3/4 %. The outstanding balance on this line was $99,000 at December 31, 2004. The second line of credit was approved July 30, 2003 and bears interest at an annual rate of prime plus 2%. The outstanding balance on this line was $100,000 at December 31, 2004.
In December 2004, the FASB issued SFAS No.123 (Revised 2004), "Share-Based Payment," "(SFAS 123(R)". SFAS 123(R) is a revision of FASB Statement 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is to be recognized over the period during which an employee is required service in exchange for the award. This statement is effective for the Company as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 and the Company will adopt the standard in the third quarter of fiscal 2005. UMC does not expect a material effect on its financial condition, results of operations or cash flows.
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.
Coding Services revenue - In April of 2002, Janice K. Neal joined UMC as Vice President of Coding Services, and the Company began providing coding and related services to various hospitals. Revenue from coding services of $183,000 during 2003 increased by $66,000 compared to 2002, due primarily to having a full year of operation in 2003, compared to nine months during 2002.
o Other Revenue of $124,000 in 2003 decreased by $8,000 or 6% compared to 2002. Other revenue in 2003 and 2002 was comprised primarily of incentives received in accordance with the agreement with the PEDC.
Depreciation and amortization expense increased $28,000 or 34% in 2003 primarily as a result of the addition of approximately $404,000 in leased and purchased fixed assets during 2003