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, 2002 was $184,000. 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, 2002, 2001 and 2000, approximately 96%, 91% and 82% 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.
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 claims management services.
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 operation center was being moved from Dallas to Pampa.
(e) an incentive payment of $10,000 which has been paid to UMC based on the condition that UMC had 40 persons employed in its Pampa operations center at December 31, 2000, and
(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, 2002 and July 28, 2001 UMC received $27,400 from the PEDC in payment of this incentive. Of this, $11,536 and $14,178 was remitted to National Bank of Commerce (the lien holder on the building) as principal payment on the building on the loan in accordance with The Agreement, for 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.
The Company's billing and collection services revenue is recognized upon receipt by the customer of payment from a third party payor or guarantor of a patient's account and upon notification by the customer to the Company that such payment has been received, or upon receipt of such payment by UMC. Coding service revenue is recognized when the services are performed.
- - 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. 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, 2002, Ongoing Accounts Receivable Management Services will generate revenues from such customers of approximately $1.5 million in 2003.
- - Backlog Accounts Receivable Management Services revenue of $3,000 in 2002 decreased by
DEPRECIATION AND AMORTIZATION expense decreased $19,000 or 19% in 2002 primarily as a result of leased computer equipment becoming fully amortized. Management expects depreciation and amortization expense to remain at approximately 2.4% of revenues in 2003.
PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES decreased $5,000 due to recovery of accounts previously reserved, and good collection experience in 2002.
OTHER EXPENSE increased $4,000 as a result of losses realized on the sale of company assets in 2002.
Cash flow from operations in 2002 provided cash of $227,000, compared to $181,000 provided from operations in 2001. This increase is primarily due to the 2002 net operating income of $260,000 increased by depreciation ($59,000) and amortization ($22,000), a decrease in accounts receivable ($33,000) and increases in payables to customers ($32,000) and accrued liabilities ($40,000) offset by increases in restricted cash ($31,000) and factor reserve ($161,000). In 2002, 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 2002 consisted of the purchases of furniture, fixtures, equipment, building improvements, two company automobiles, and the sale of two company automobiles. Total cash used for investments was $126,000, of which $86,000 was used for the purchase of furniture, fixtures and equipment, $33,000 was used to purchase the two company automobiles, and $17,000 was for the purchase of building improvements. This use of cash was partially offset by $10,000 in proceeds from the sale of two company automobiles. Total cash used in investing activities during 2001 was $90,000. The Company's fixed assets are in good working order and sufficient to support continuing operations.
Financing activities in 2002 consisted of borrowings under a bank loan for the purchase of a company automobile in the amount of $20,000, and principal payments on capital lease obligations and notes payable which used cash of $74,000.
In July 2002, the FASB issued Statements of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by SFAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material effect on the Company's financial position or results of its operations.
In December 2002, the FASB issued Statements of Financial Accounting Standards No.148, "Accounting for Stock-Based compensation - Transition and Disclosure - an amendment of FASB Statement 123" (SFAS 123). For entities that change their accounting for stock-based compensation from the intrinsic method to the fair value method under SFAS 123, the fair value method is to be applied prospectively to those awards granted after the beginning of the period of adoption (the prospective method). The amendment permits two additional transition methods for adoption of the fair value method. In addition to the prospective method, the entity can choose to either (i) restate all periods
presented (retroactive restatement method) or (ii) recognize compensation cost from the beginning of the fiscal year of adoption as if the fair value method had been used to account for awards (modified prospective method). For fiscal years beginning December 15, 2003, the prospective method will no longer be allowed. The Company currently accounts for its stock-based compensation using the intrinsic value method as proscribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and plans on continuing using this method to account for stock options , therefore, it does not intend to adopt the transition requirements as specified in SFAS 148. The Company has adopted the new SFAS 148 disclosure requirements of SFAS 148 in these financial statements.
- - Ongoing Accounts Receivable Management Services revenue of $1,147,000 in 2001 decreased by $172,321 compared to 2000 primarily due to the effect of the previously disclosed loss of the Washington Hospital Center contract, which was partially offset by increased placements from new and existing customers during 2001.
WAGES AND BENEFITS expense increased $114,000 or 7% primarily due to increased headcount as a result of increased business placements during 2001. As of March 15, 2002, UMC had a total of 73 full time and 5 part time employees in Pampa, and 4 full time employees in Dallas.
INTEREST, NET decreased $3,000 or 8% primarily due to lower interest rates, and paid down balances on notes and leases payable.