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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-10418
UNITED MEDICORP, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 75-2217002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 N. Cuyler Street
Pampa, Texas 79065
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (806) 669-9223
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _
As of May 4, 2005, there were outstanding 30,668,550 shares of Common
Stock, $0.01 par value.
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UNITED MEDICORP, INC.
FORM 10-Q
For the quarterly period ended March 31, 2005
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2005
(Unaudited) and December 31, 2004............................ 1
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2005 and 2004........... 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2005 and 2004........... 3
Notes to the Condensed Consolidated Financial Statements.......... 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 7
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk............................................ 18
ITEM 4. Controls and Procedures........................................... 18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................. 18
ITEM 2. Changes in Securities............................................. 18
ITEM 3. Defaults Upon Senior Securities................................... 18
ITEM 4. Submission of Matters to a Vote of Security Holders............... 18
ITEM 5. Other Information................................................. 18
ITEM 6. Exhibits and Reports on Form 8-K.................................. 18
Signatures .............................................................. 19
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 215,249 $ 263,640
Restricted cash .............................................. 144,508 74,381
Accounts receivable, net of allowance for doubtful accounts
of $70,542 and $60,024 .................................... 863,257 824,551
Deposits with factor ......................................... 7,062 5,093
Prepaid expenses and other current assets .................... 63,215 68,507
------------ ------------
Total current assets ............................................... 1,293,291 1,236,172
Other non-current assets ........................................... 42,873 42,873
Property and equipment, net of accumulated depreciation of $898,204
and $876,423, respectively ................................... 317,363 325,676
Developed and purchased software, net of accumulated amortization of
$255,323 and $245,379, respectively .......................... 104,076 92,091
Assets under capital leases, net of accumulated amortization of
$279,814 and $270,354, respectively .......................... 157,116 166,576
------------ ------------
Total assets ....................................................... 1,914,719 1,863,388
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations ................. 44,368 43,117
Current portion of notes payable ............................ 140,471 144,404
Trade accounts payable ....................................... 62,464 59,656
Payable to clients ........................................... 121,288 44,690
Accrued professional fees .................................... 32,776 24,251
Accrued payroll and benefits ................................. 177,531 200,098
Accrued expenses - Allied Health Options ..................... 42,262 42,457
Accrued expenses other ....................................... 40,531 49,057
------------ ------------
Total current liabilities .......................................... 661,691 607,730
Long-term capital lease obligations ................................ 91,796 104,016
Long-term notes payable, excluding current portion ................. 125,391 131,141
Deferred revenue - Pampa Economic Development Corporation .......... 96,000 96,000
------------ ------------
Total liabilities .................................................. 974,878 938,887
------------ ------------
Stockholders' equity:
Common stock; $0.01 par value; 50,000,000 shares authorized;
31,019,097 shares issued .................................. 310,191 310,191
10% Cumulative convertible preferred stock; $0.01 par value;
5,000,000 shares authorized; none issued .................. -- --
Less treasury stock at cost, 350,547 shares .................. (223,456) (223,456)
Additional paid-in capital ................................... 18,800,771 18,800,771
Accumulated deficit .......................................... (17,947,665) (17,963,005)
------------ ------------
Total stockholders' equity ................................ 939,841 924,501
------------ ------------
Total liabilities and stockholders' equity ................ $ 1,914,719 $ 1,863,388
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
1
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2005 2004
----------- -----------
Revenues:
Billing and collection services ............ $ 741,955 $ 1,022,618
Coding services ............................ $ 63,891 $ 47,133
Other revenues ............................. 16,613 23,719
----------- -----------
Total revenues .......................... 822,459 1,093,470
Expenses:
Wages and benefits ......................... 501,839 745,340
Selling, general and administrative ........ 197,325 188,647
Office, vehicle and equipment rental ....... 3,572 4,838
Depreciation and amortization .............. 41,185 41,257
Professional fees .......................... 47,569 18,006
Interest, net .............................. 5,110 8,205
Provision for doubtful accounts and notes... 10,519 --
----------- -----------
Total expenses ............................. 807,119 1,006,293
----------- -----------
Net income ....................................... $ 15,340 $ 87,177
=========== ===========
Basic earnings per common share:
Net income ................................. $ .0005 $ .0030
=========== ===========
Weighted average shares outstanding .............. 30,668,550 29,213,550
Diluted earnings per common share:
Net income ................................. $ .0005 $ .0028
=========== ===========
Weighted average shares outstanding .............. 31,418,090 30,655,568
The accompanying notes are an integral part of
these consolidated financial statements
2
UNITED MEDICORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2005 2004
---------- ----------
Cash flows from operating activities:
Net income ................................................ $ 15,340 $ 87,177
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of assets under capital leases ....... 9,460 9,460
Depreciation of fixed assets ...................... 31,725 31,797
Provision for doubtful accounts ................... 10,519 --
Changes in assets and liabilities:
Restricted cash ................................... (70,127) 11,995
Accounts receivable ............................... (49,226) 187,073
Factor reserve .................................... (1,970) (203,016)
Prepaid expenses and other assets ................. 5,292 (15,565)
Accounts payable .................................. 2,808 (70,517)
Payable to clients ................................ 76,599 (14,341)
Accrued liabilities ............................... (22,763) 31,536
---------- ----------
Net cash provided by operating activities ....................... 7,657 55,599
Cash flows from investing activities:
Purchase of equipment and software ........................ (14,517) (5,786)
Capitalized software development .......................... (20,879) (11,300)
---------- ----------
Net cash used in investing activities ........................... (35,396) (17,086)
---------- ----------
Cash flows from financing activities:
Repayment of capital lease obligations .................... (10,969) (9,801)
Repayment of notes ........................................ (9,683) (11,030)
---------- ----------
Net cash used in financing activities ........................... (20,652) (20,831)
---------- ----------
Change in cash and cash equivalents ............................. (48,391) 17,682
Cash and cash equivalents at beginning of period ................ 263,640 62,851
---------- ----------
Cash and cash equivalents at end of period ...................... $ 215,249 $ 80,533
========== ==========
Supplemental disclosures:
Cash paid for interest .......................................... $ 5,110 $ 8,205
The accompanying notes are an integral part of
these consolidated financial statements
3
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of United
Medicorp, Inc. ("UMC" or the "Company") include its wholly owned subsidiary,
United Moneycorp. Inc. ("UMY"). All material intercompany transactions and
balances have been eliminated. The financial information presented should be
read in conjunction with the audited financial statements of the Company for the
year ended December 31, 2004 included in the Company's Form 10-K.
The unaudited consolidated financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation of results for the interim period,
have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. The results for interim periods are not necessarily indicative of
results to be expected for the year.
ACCOUNTS RECEIVABLE CONCENTRATION
The following table shows the concentration of total accounts receivable at
March 31, 2005 and December 31, 2004.
03/31/05 12/31/04
--------- ---------
Customer A..................................... 75% 81%
Customer B..................................... 8 7
Other customers................................ 17 12
--------- ---------
100% 100%
========= =========
As of March 31, 2005, 75 percent of UMC's outstanding trade receivables were
from Customer A. During 2004, this customer experienced cash flow problems that
resulted in the aging of its payables to UMC. The total receivable from this
customer at December 31, 2004 was $704,320 of which $350,614 was outstanding
over 90 days. In January of 2005, UMC began receiving weekly payments from this
customer in amounts designed to not only cover the amount of weekly invoices
generated by UMC to this customer, but to also begin paying down the outstanding
amount. As of March 31, 2005, the total receivable from this customer was
$696,852, and the remaining balance of invoices that were over 90 days as of
December 31, 2004 was $5,619. Management believes that this customer's cash flow
has improved, and that the customer will be able to meet all of its obligations
to UMC. As of March 31, 2005, no portion of the outstanding receivable from
Customer A was reserved. Although it is management's belief that this customer
will fulfill its obligations to the Company, there can be no assurance that the
customer will not experience financial difficulty that will prevent the payment
of the receivables due to UMC. A default by this customer on its obligations to
UMC would have a material adverse affect on the Company's cash flow and
financial position.
As of the date of this filing the Company has reserved $70,126 of the
outstanding accounts receivable from Customer B, which represents 100% of the
outstanding receivable balance from Customer B as of March 31, 2005. On October
30, 2004 the Company received a letter from Customer B alleging that UMC had
failed in its contractual obligations in regard to the accounts receivable
management services provided to the Customer. It is management's opinion that
the customer's allegations have no merit, and are simply an attempt to persuade
UMC to discount its invoices due from the customer. If the Company is required
4
to pursue collection through litigation, there can be no assurance that it will
be successful or, if successful, the cost to the Company in terms of legal and
management time devoted to the effort.
SOFTWARE DEVELOPMENT COSTS
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 stages of development. During the first quarter of 2005, the
Company capitalized $20,879 in costs incurred for new internal software
development that was in the application development stage.
FACTOR RESERVE
The Factor Reserve account includes 20% of outstanding invoices purchased
by the factoring company (required reserve) and the excess above this 20%, which
is available to be drawn by UMC as cash upon demand (available reserve). At
March 31, 2005 and December 31, 2004, UMC had no factored invoices outstanding,
therefore the balance in the factor reserve account represents cash reserves on
deposit at the factoring company. The factoring company pays interest at the
rate of prime minus two percent on excess funds that remain on deposit with the
factoring company. The balances of the available reserves included in the Factor
Reserve as of March 31, 2005 and December 31, 2004 were as follows:
March 31, December 31,
2005 2004
------------ ------------
Required Reserve.............................. $ -- $ --
Available Reserve............................. 7,062 5,093
------------ ------------
Factor Reserve at end of period............... $ 7,062 $ 5,093
============ ============
5
SFAS NO. 148 PRO FORMA
Pro forma net income and earnings per share presented below reflect the
results of the Company as if the fair value based accounting method described in
SFAS No. 148 had been used to account for stock and warrant-based compensation
costs, net of taxes and forfeitures of prior year grants:
Three Months Ended March 31,
2005 2004
------------- -------------
Pro forma impact of fair value method (FAS 148)
Net income.......................................... $ 15,340 $ 87,177
SFAS No. 148 employee compensation cost............. (1,630) (1,066)
------------- -------------
Pro forma net income................................ 13,710 86,111
Earnings per common share
Basic as reported................................... $ .0005 $ .0030
Diluted as reported................................. .0005 .0028
Basic - pro forma................................... .0004 .0029
Diluted - pro forma................................. $ .0004 $ .0028
Weighted average Black-Scholes fair value assumptions
Risk free interest rate............................. 2.5% 2.5%
Expected life....................................... 10 years 10 years
Expected volatility................................. 228% 228%
Expected dividend yield............................. -- --
CONTINGENT LIABILITY
On January 7, 2005 a personnel-related issue resulted in the resignation
of a UMC employee. Based on information received regarding the incident, UMC's
Board of Directors retained legal counsel to conduct an independent
investigation into the matter and to represent the Company in communications
with the former employee's attorney. As of the date of this filing, it appears
reasonably possible, that the Company will incur some expense in order to
resolve this matter. Management believes that the combined cost of legal fees
and compensation could range from $25,000 to $60,000. As of the date of this
filing, the Company has received invoices for legal fees relating to this matter
totaling $13,400 and has accrued an additional $10,000 for future legal and
other potential expenses.
6
ITEM 2 - Management's Discussion and Analysis Of Financial Condition and Results
of Operation
GENERAL CONSIDERATIONS
Except for the historical information contained herein, the matters
discussed may include forward-looking statements relating to such matters as
anticipated financial performance, legal issues, business prospects,
technological developments, new products, research and development activities
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that forward-looking statements
include the intent, belief, or current expectations of the Company and members
of its senior management team, as well as the assumptions on which such
statements are based. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth in the safe
harbor compliance statement for forward-looking statements included as Exhibit
99.1 to this Form 10-Q and are incorporated herein by reference. The Company
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
7
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.
CLAIMS MANAGEMENT SERVICES - PROCESSING VOLUMES
2005 2004 2003 2002
------- --------------------------------- --------------------------------- ------------------------
Quarter Quarter Quarter Quarter
------- --------------------------------- --------------------------------- ------------------------
First Fourth Third Second First Fourth Third Second First Fourth Third Second
------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Number of Claims
Accepted for
Processing:
Ongoing 24,667 21,674 21,772 26,250 36,869 36,740 42,001 31,282 30,549 32,602 43,522 43,761
Backlog -- -- -- 1,588 -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 24,667 21,674 21,772 27,838 36,869 36,740 42,001 31,282 30,549 32,602 43,522 43,761
Gross $ Amount
of Claims
Accepted for
Processing
(000's):
Ongoing 53,700 51,753 56,806 84,830 34,232 40,723 36,662 24,272 23,033 26,717 30,772 22,085
Backlog -- -- -- 4,733 -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 53,700 51,753 56,806 89,563 34,232 40,723 36,662 24,272 23,033 26,717 30,772 22,085
Collection $
(000's)
Ongoing 15,912 14,604 18,806 20,635 8,780 7,897 6,923 6,098 5,010 6,126 6,091 4,840
Backlog 71 156 330 4 -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 15,983 14,760 19,136 20,639 8,780 7,897 6,923 6,098 5,010 6,126 6,091 4,840
Fees Earned
(000's)
Ongoing 472 496 586 830 560 522 500 448 460 460 471 405
Backlog 2 4 9 -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 474 500 595 830 560 522 500 448 460 460 471 405
Average Fee %
Ongoing 3.0% 3.4% 3.1% 4.0% 6.4% 6.6% 7.2% 7.3% 8.6% 7.5% 7.7% 8.4%
Backlog 2.8% 2.5% 2.7% --% --% --% --% --% --% --% --% --%
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.
During the fourth quarter of 2001 through the first quarter of 2004, the
Company processed secondary claims under an ongoing accounts receivable
management services contract signed March 22, 2000. The Number of Claims
Accepted for Processing and the Gross $ Amount of Claims Accepted for Processing
shown in the preceding table include secondary claims that were subject to
automatic crossover payments from certain payors. The Company did not take
credit for, nor report as collections, such crossover payments that were
8
received by the customer within 35 days of the date that the claim was
transmitted to UMC. UMC management estimates that about 30% to 50% of the
secondary claims accepted for processing were due from crossover payors. Of
these, approximately 60% paid with no effort required (and no credit for
collections received was taken) by UMC. As a result, the ratio of Collections to
the Gross $ Amount of Claims Accepted for Processing shown in the preceding
table will be lower for periods beginning with the first quarter of 2002 through
the first quarter of 2004 than for the succeeding quarters shown.
The following table sets forth for each period indicated the volume and
gross dollar amount of customer service and collection accounts received and
fees recognized for UMY.
COLLECTION AGENCY SERVICES - PROCESSING VOLUME
2005 2004 2003 2002
------- --------------------------------- --------------------------------- ------------------------
Quarter Quarter Quarter Quarter
------- --------------------------------- --------------------------------- ------------------------
First Fourth Third Second First Fourth Third Second First Fourth Third Second
------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
UMY
- ---------------
Number of
Accounts
Accepted
for Collection:
(000's)
Early out 36,936 33,274 34,364 43,803 37,828 37,336 34,601 24,330 11,266 13,859 17,818 17,250
Bad debt 13,949 12,728 24,677 22,268 21,728 38,092 27,390 15,448 15,322 26,281 16,430 14,815
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 50,885 46,002 59,041 66,071 59,556 75,428 61,991 39,778 26,588 40,140 34,248 32,065
Gross $ Amount
of Accounts
Accepted for
Collection
(000's)
Early out 35,915 36,427 36,683 50,768 38,110 32,808 30,561 17,897 10,815 12,021 13,424 14,002
Bad debt 12,507 6,839 10,242 3,598 14,067 24,693 16,993 12,379 12,547 15,934 9,714 10,476
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 48,422 43,266 46,925 54,366 52,177 57,501 47,554 30,276 23,362 27,955 23,138 24,478
Collection $
(000's)
Early out 2,072 2,048 2,363 2,456 2,679 2,535 1,862 1,105 949 1,220 1,563 2,004
Bad debt 250 264 288 618 1,140 1,301 1,283 1,074 1,155 909 939 895
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 2,322 2,312 2,651 3,074 3,819 3,836 3,145 2,179 2,104 2,129 2,502 2,899
Fees Earned
(000's)
Early out 207 150 186 191 222 202 182 132 113 131 157 187
Bad debt 61 65 66 143 241 279 279 226 252 203 208 186
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 268 215 252 334 463 481 461 358 365 334 365 373
Average Fee %
Early out 9.9% 7.3% 7.9% 7.9% 8.3% 8.0% 9.7% 11.9% 11.9% 10.7% 10.0% 9.3%
Bad debt 24.4% 24.6% 22.9% 23.5% 21.3% 21.4% 21.7% 21.0% 22.1% 22.3% 22.1% 20.8%
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 a few 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.
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. During the third quarter of 2002, the Company began offering online
coding services through its proprietary coding web site. The table below
displays the number of claims accepted and coded through the web site by
quarter.
9
CODING SERVICES - OFF-SITE PROCESSING VOLUME
2005 2004 2003 2002
------- --------------------------------- --------------------------------- ------------------------
Quarter Quarter Quarter Quarter
------- --------------------------------- --------------------------------- ------------------------
First Fourth Third Second First Fourth Third Second First Fourth Third Second
------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Collection Svcs
- ---------------
Number of
Claims Accepted
for Coding:
Inpatient 1,221 543 604 602 832 303 177 213 161 140 9 --
Outpatient 820 633 1,657 780 699 1,007 734 761 553 201 -- --
------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 2,041 1,176 2,261 1,382 1,531 1,310 911 974 714 341 9 --
Fees Earned
(000's)
Combined 32 18 25 22 27 20 17 18 14 5 -- --
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.
LOSS OF SIGNIFICANT CUSTOMERS
On March 7, 2005, the Company received notice from Brownsville Surgical
Hospital ("BSH") that effective April 15, 2005 BSH would terminate the claims
billing and follow up, early stage patient balance collection, and coding
services portions of their accounts receivable management contract with UMC
dated October 31, 2000. Per BSH management, the hospital plans to bring these
services in house at that time. BSH management indicated their appreciation for
UMC's performance over the life of this contract, but believes that the
hospital's staff will be able to provide these services more cost effectively in
house. UMC will continue to provide bad debt collection services for BSH. The
cancelled portions of this contract provided revenue of $188,000, $662,000 and
$629,000, which represented 23%, 16% and 16% of total revenue for the first
quarter of 2005 and for the years 2004 and 2003 respectively.
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.
UMC continued to receive placements of accounts from PHS through March 31, 2004,
and revenues from PHS ramped down rapidly through the end of 2004. This contract
provided revenues of $0, $833,000 and $2,434,000, which represented 0%, 20% and
62% of total revenue for the first quarter of 2005 and for the years 2004 and
2003 respectively.
MANAGEMENT'S PLAN WITH RESPECT TO LOST REVENUES
During the past several years, management has taken steps to lessen the
Company's concentration risk associated with its large customers. These steps
include, but are not limited to:
o In April 2002, the Company started up UMC's Coding Services Division.
This division generated revenue of $64,000, $224,000 and $183,000 during
the first quarter of 2005 and for the years 2004 and 2003 respectively.
o In March 2003, the Company began development of its Electronic Medical
Records Storage service. The beta test of this product was completed in
September 2003, and the Company began offering this service to its
customers shortly thereafter.
10
o In March 2005, the Company began offering Chargemaster Review and Pricing
Comparison services.
o From 2000 to 2005 the annual budget for UMC's sales and marketing
department has increased from $0 to $273,000. The Company's actual
expenses for sales and marketing were $63,109 during the first quarter of
2005 and $293,000 and $233,000 for the years 2004 and 2003 respectively.
o From June 24, 2003 through May 1, 2005, the Company has executed the
following new contracts:
o On April 20, 2005 the Company executed a contract for coding
assessment services with a hospital in East Texas.
o On March 11, 2005 the Company executed a contract for early stage
and bad debt collections with a hospital in West Texas.
o On March 1, 2005 the Company executed a contract for coding
assessment services with a hospital in West Texas.
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.
11
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.
o A collection services contract for bad debt patient balance
accounts was executed on December 10, 2003 with a hospital in
South Texas.
o A coding services contract with two hospitals in Central Texas was
executed on November 28, 2003.
o A collection services contract for early stage patient balance
accounts was executed on November 20, 2003 with a hospital in West
Texas.
o A coding services contract for overflow coding was executed with a
hospital in East Texas was executed on November 5, 2003
o A collection services contract for bad debt patient balance
accounts was executed on September 15, 2003 with a hospital in
West Texas.
o A medical claims management contract for claims follow up and
patient balance collections was executed on August 28, 2003 with a
hospital located in West Texas.
o A collection services contract for early stage patient balance
accounts was executed on August 6, 2003 with a hospital in West
Texas.
o A medical claims management contract for day one billing and
follow up was executed on June 24, 2003, with a hospital located
in Central Texas. UMC management has received notice of this
customer's intention to cancel this contract at June 24, 2004 (the
end of the initial contract term), due to cost considerations.
With the loss of the PHS contract in 2004 and the loss of the BSH
contract in 2005, the Company faces a significant challenge in 2005 to maintain
profitability and attain the level of revenue that it produced in 2004.
Management's forecast of revenue for 2005 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 $2,910,000. The difference between
this forecast and total 2004 revenue will have to be made up from new sales of
services to new and existing customers. As evidenced by the new contracts listed
above, the investment that UMC has made in sales and marketing over the past
four years has produced positive results. Revenue from contracts signed in 2004
or that were signed in 2003 and began production in 2004 accounted for $1.6
million or 39% of total revenue in 2004. In 2005, management will continue to
focus on marketing traditional and new services to both existing and prospective
customers. There can be no assurance that UMC will attain the same level of new
sales in 2005 that it attained in 2004, or that the operating margin on new
business sold in 2005 will be consistent with past performance.
Management continues to vigorously pursue new business while rigorously
managing expenses without negatively impacting service levels.
12
CONTINGENT LIABILITY
On January 7, 2005 a personnel-related issue resulted in the resignation
of a UMC employee. Based on information received regarding the incident, UMC's
Board of Directors retained legal counsel to conduct an independent
investigation into the matter and to represent the Company in communications
with the former employee's attorney. As of the date of this filing, it appears
reasonably possible, that the Company will incur some expense in order to
resolve this matter. Management believes that the combined cost of legal fees
and compensation could range from $25,000 to $60,000. As of the date of this
filing, the Company has received invoices for legal fees relating to this matter
totaling $13,400 and has accrued an additional $10,000 for future legal and
other potential expenses.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
Consolidated Statements of Operations expressed as a percentage of revenues:
Three Months
Ended March 31,
---------------------
2005 2004
--------- ---------
Revenue............................................. 100.0% 100.0%
--------- ---------
Wages and benefits................................ 61.0 68.2
Selling, general and administrative............... 24.0 17.3
Office, vehicle and equipment rental.............. .4 .4
Depreciation and amortization..................... 5.0 3.8
Professional fees................................. 5.8 1.6
Interest, net..................................... .6 .7
Provision for doubtful accounts................... 1.3 --
--------- ---------
Total expenses.................................... 98.1 92.0
--------- ---------
Net income ....................................... 1.9% 8.0%
========= =========
Comparison of the Quarter Ended March 31, 2005 to the Quarter Ended March 31,
2004
Revenues decreased $271,000, or 25% primarily due to the following:
o Ongoing Accounts Receivable Management Services revenue of $474,000 in
the current quarter decreased by $86,000 compared to the same quarter in
2004 primarily as a result of the discontinuation of five ongoing
accounts receivable management service contracts during 2004. These
contracts provided combined revenue of $4,000 and $407,000 during the
first quarter of 2005 and 2004 respectively. The Company also saw a
decrease of $9,000 in revenue from a contract dated November 14, 2003.
These decreases were partially offset by revenue from an ongoing accounts
receivable management service contract dated April 26, 2004. This
contract provided revenue of $292,000 during the first quarter of 2005.
The Company also received increased revenue from an ongoing accounts
receivable management contract that was signed October 31, 2000. This
contract provided revenue or $177,000 and $143,000 during the first
quarter of 2005 and 2004 respectively.
13
In March 2005, UMC received notice from Brownsville Surgical Hospital
("BSH") that the Company's ongoing accounts receivable management service
contract with this customer would terminate on April 15, 2005. According
to BSH management the contract with UMC was being terminated in order to
bring the claims billing and follow up, coding and early out self pay
collection functions in house, which they believed would result in cost
savings to the hospital. BSH management expressed their appreciation to
UMC for the quality of service provided to the hospital during its start
up and the first four years of the hospital's operations. UMC continued
to receive placements of new business from BSH through April 18, 2005.
UMC management expects revenue from this contract to ramp down rapidly
during the second quarter of 2005. This contract provided ongoing
accounts receivable management service revenue of $177,000, $610,000 and
$547,000, which represented 22%, 15% and 14% of UMC's total revenue for
the first quarter of 2005 and for the years 2004 and 2003 respectively.
o Collection Agency Services revenue of $268,000 in the current quarter
decreased by $195,000 compared to the same quarter of 2004, due primarily
to the loss of the PHS contract and the contract with a subsidiary of PHS
in March of 2004. These contracts produced revenue of $0 and $318,000
during the first quarter of 2005 and 2004 respectively. This decrease in
revenue was partially offset by revenue from six collection agency
services contracts that were signed after the first quarter of 2004.
Revenue from these contracts totaled $46,000 during the first quarter of
2005. The Company also received increased revenues from contracts signed
August 23, 2003, December 15, 2003 and February 23, 2004 Combined revenue
from these contracts totaled $129,000 and $44,000 during the first
quarter of 2005 and 2004 respectively. Revenue from other collection
agency services contracts decreased by $8,000 during the first quarter of
2005 as compared to the first quarter of 2004.
o Coding Services revenue -Revenue from coding services of $64,000 during
the first quarter of 2005 increased by $17,000 compared to first quarter
of 2004, due primarily to the addition of two offsite coding customers,
and two onsite coding customers following the first quarter of 2004.
Combined revenue from these customers during the first quarter of 2005
totaled $26,000. This increase was partially offset by decreased revenue
from the onsite coding services portion of a contract dated October 31,
2000. Revenue from this contract provided revenue of $3,000 and $12,000
during the first quarter of 2005 and 2004 respectively.
o Other Income of $16,600 in the current quarter decreased by $7,000
compared to the first quarter of 2004. Other income in the current
quarter consisted of: Incentives from the Pampa Economic Development
Corporation ("PEDC") of $13,400; consulting fees of $600; fees for the
Medical Records Storage services of $200; Set up fees for onsite Coding
Services of $1,900 and other miscellaneous income of $500. Other income
during the first quarter of 2004 consisted of: Incentives from the Pampa
Economic Development Corporation ("PEDC") of $17,500; Interest charges on
past due invoices of $4,000; and installation charges and service fees
for the Medical Records Storage service of $2,100.
Wages and benefits expense decreased $244,000 or 33% due primarily to
decreased headcount. During the first quarter of 2005, the Company's headcount
averaged 65 full time employees and 8 part time employees, compared to an
average headcount of 105 full time employees and 11 part time employees during
the first quarter of 2004. Wage and salary expense was $382,000 during the first
quarter of 2005 compared to $542,000 during the first quarter of 2004. Payroll
tax expense was $44,000 during the first quarter of 2005 compared to $63,000
during the first quarter of 2004. Employee benefit costs also decreased as a
result of reduced headcount. Total employee benefit cost was $59,000 and
$104,000 for the first quarter of 2005 and 2004 respectively. Bonus expense also
decreased from $36,000 in the first quarter of 2004 to $16,000 in the first
quarter of 2005.
14
Selling, general and administrative expense increased $9,000 or 5%
primarily due to increases in software maintenance and system usage fees,
$11,000; advertising and marketing $10,000; and employee training expense,
$5,000, partially offset by decreases in travel and entertainment, $8,000;
telephone expense, $5,000; and postage $4,000. The increase in software
maintenance and system usage expense was primarily the result of $10,000 in
expense recognized for the use of chargemaster review and pricing comparison
software. The Company paid $40,000 in December of 2004 for the use of this
software in 2005, and will ratably amortize this cost over the course of 2005.
The increase in advertising and marketing expense was the result of costs
associated with a direct mail advertising campaign, and the development of
product brochures for distribution at trade shows during the first quarter of
2005. Employee training costs increased from $2,000 in the first quarter of 2004
to $7,000 in the first quarter of 2005 primarily as a result of coding and
management training courses attended by certain UMC employees during the first
quarter of 2005. The decrease in travel and entertainment expense was primarily
the result of the relocation of UMC's Vice President of Sales and Marketing from
Midland, Texas to a more convenient travel location in Garland, Texas in July of
2004, decreased travel expense associated with onsite customer meetings by UMC's
CEO, and the elimination of one sales position in November of 2004. The decrease
in telephone and postage expense was primarily the result of a decreased number
of self-pay collection accounts in UMC's inventory during the first quarter of
2005 as compared to the first quarter of 2004.
Office, vehicle and equipment rental expense decreased $1,200 or 26% due
to the move of the Company's redundant offsite server from a rented space to the
Company's office in Garland in September of 2004.
Depreciation and amortization expense decreased $72 or less than 1%
during the first quarter of 2005 as compared to the first quarter of 2004.
Professional fees expense increased $30,000 or 164% due to primarily to
legal fees of $24,000 incurred during the first quarter of 2005 for a
personnel-related issue. No legal fees were incurred during the first quarter of
2004. The Company's director fees increased by $3,000 during the first quarter
of 2005 as compared to the first quarter of 2004 due to a special Board of
Director's meeting held in February of 2005. The Company also accrued an
additional $3,000 in professional fees during the first quarter of 2005 for
anticipated audit and other professional fees associated with Sarbanes Oxley
compliance.
Interest expense decreased $3,000 or 38% due to the reimbursement of
interest charges incurred on UMC's two bank lines of credit by a UMC customer in
lieu of interest charges on the outstanding invoices payable to UMC by this
customer.
Provision for doubtful account increased by $10,500 as a result of
receivables reserved during the first quarter of 2005. The Company did not
reserve any receivables during the first quarter of 2004.
15
Liquidity and Capital Resources
At March 31, 2005, the Company's liquid assets, consisting of cash,
totaled $215,249 plus unencumbered cash due from the factoring company of
$7,062, compared to cash of $263,640 and unencumbered cash due from the
factoring company of $5,093 at December 31, 2004. The cash due from the
factoring company is available to be wired to UMC by the factoring company upon
UMC's request. Working capital was $632,000 at March 31, 2005 compared to
working capital of $628,000 at December 31, 2004.
Operating activities during the current quarter provided cash of $8,000
compared to cash of $56,000 provided by operating activities during the same
period of 2004.
Cash of $14,000 was expended on investing activities during the current
quarter for the purchase of computer and phone equipment, and $21,000 was
expended for new internal software development during the first quarter of 2005.
The Company expended cash of $6,000 for the purchase of equipment and $11,000
for new internal software development during the same period of 2004.
Financing activities during the current quarter used cash of $21,000 and
consisted of principal payments totaling $10,000 for notes payable plus
principal payments on capital lease obligations totaling $11,000. Financing
activities during the same quarter of 2004 used cash of $21,000 and consisted of
principal payments totaling $11,000 for notes payable and principal payments on
capital lease obligations totaling $10,000.
During the current quarter, cash flow from operations along with funds
drawn from the Company's bank lines of credit were adequate to cover all working
capital and liquidity requirements. As of the date of this filing, the Company
faces two significant risks with regard to cash flow and liquidity. The loss of
the BSH contract effective April 15, 2005 will have a significant impact on the
Company's revenue and profitability beginning in the second quarter of 2005. UMC
management will continue its efforts to bring in new business, and to reduce
expenses, however, there can be no assurance that the Company will be successful
in increasing revenue or reducing expenses to a level that will be adequate to
maintain the Company's cash position and profitability. The Company also faces a
significant risk with regard to the Company's concentration of accounts
receivable. At March 31, 2005 $696,852 or 75% of UMC's outstanding accounts
receivable were from one customer, and $273,558 or 39% of the outstanding
balance from this customer was aged over 90 days. During 2004, this customer
experienced cash flow problems that resulted in the aging of its payables to
UMC. In January of 2005, UMC began receiving weekly payments from this customer
in amounts intended to not only cover the amount of weekly invoices generated by
UMC to this customer, but to also begin paying down the outstanding amount.
Although it is management's belief that this customer will fulfill its
obligations to the Company, there can be no assurance that the customer will not
experience financial difficulty that will prevent the payment of the receivables
due to UMC. Further delays in payment or a default by this customer on its
obligations to UMC would have a material adverse affect on the Company's cash
flow and financial position.
If UMC's cash flows from operations together with the Company's lines of
credit, factoring agreement and incentives under the Economic Development and
Incentive Agreement are not sufficient to service its financial obligations as
they become due, 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, attempting to restructure existing
financial obligations, seeking a strategic merger or acquisition, seeking the
sale of the company, and/or seeking additional debt or equity capital. There can
be no assurance that any of these strategies could be effected on satisfactory
terms.
16
CRITICAL ACCOUNTING POLICIES
Accounting principles generally accepted in the United States of America
require the use of management's judgments and estimates in addition to the rules
and requirements imposed by the accounting pronouncements. More detailed
information about UMC's accounting policies is contained in Note B, Summary of
Significant Accounting Policies, to our Condensed Consolidated Financial
Statements included in our 2004 Form 10-K. Other accounting policies not
discussed here are described there, and readers should review that information
carefully. We have summarized below the accounting policies that we believe are
most critical to understanding UMC's interim financial statements.
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 Subsidiary as
a whole. Transactions between the parent company and its subsidiary are
eliminated for this purpose. UMC owns all of the capital stock of its
subsidiary, and does not have any subsidiaries that are not consolidated. UMC
does not have any subsidiaries that are "off balance sheet", UMC has not entered
into any "off balance sheet" transactions, and UMC has no "special purpose
entities".
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from these estimates.
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 and fees for medical record storage services are recognized when
the services are performed.
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 March 31, 2005
there were no factored invoices outstanding.
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 stage's of development. During the first quarter
of 2005, the Company capitalized $20,879 in costs incurred for new internal
software development that was in the application development stage.
17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company qualifies as a small business issuer as defined in Rule 12b-2
of the Securities Exchange Act of 1934. As such, the Company is not required to
provide information related to the quantitative and qualitative disclosures
about market risk.
Item 4 - Controls and Procedures.
In order to ensure that the information that UMC must disclose in its
filings with the Securities and Exchange Commission is recorded, processed,
summarized and reported on a timely basis, we have adopted disclosure controls
and procedures. Our Chief Executive Officer, Peter W. Seaman, and our Chief
Financial Officer, Nathan E. Bailey, have reviewed and evaluated our disclosure
controls and procedures as of May 6, 2005, and concluded that our disclosure
controls and procedures are appropriate and that no changes are required at this
time.
There have been no significant changes in our internal controls, or in other
factors that could affect our internal controls, since May 6, 2005.
PART 11. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
31-1 Section 302 - Certification of Chief Executive Officer
31-2 Section 302 - Certification of Chief Financial Officer
32-1 Section 906 - Certification of Chief Executive Officer
32-2 Section 906 - Certification of Chief Financial Officer
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements
18
(B) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the quarter
ended March 31, 2005:
1) On March 10, 2005 the Company furnished a Current Report on Form
8-K attaching a press release reporting notification from one of
the Company's significant customer's of its intent to bring back
in-house the majority of the work currently outsourced to the
Company.
2) On April 1, 2005 the Company furnished a Current Report on Form
8-K attaching a press release reporting the Company's financial
results for the fourth quarter and year ended December 31, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED MEDICORP, INC.
(Registrant)
By: /s/ Nathan E. Bailey Date: May 12, 2005
----------------------------------- ------------
Nathan E. Bailey
Vice President and Controller
(Principal Accounting Officer)
19