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-K and are hereby 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.
During 2004, 58% of revenue was earned from three customers: Marshall Regional Medical Center ("MRMC"), Presbyterian Healthcare Services of New Mexico ("PHS") and Brownsville Surgical Hospital ("BSH"). MRMC provided revenue totaling $823,000 or 20% of total revenue. Of this, 76% was from Ongoing Accounts Receivable Management Services, 19 % was from Collection Agency Services, 5% was from Claims Coding Services, and less than 1% was from Consulting Services. PHS provided revenue totaling $833,000 or 20% of total revenue. Of this, 54% was from Collection Agency Services, and 46% was from Ongoing Accounts Receivable Management Services. BSH provided revenue of $683,000 or 17% of total revenue. Of this, 89% was from Ongoing Accounts Receivable Management Services, 8% was from Collection Agency Services, and 3% was from Claims Coding Services.
During 2003, 79% of revenue was earned from two customers: Presbyterian Healthcare Services of New Mexico ("PHS") and Brownsville Surgical Hospital ("BSH"). PHS provided revenue totaling $2,434,000 or 62% of total revenue. Of this, 53% was from Collection Agency Services, and 47% was from Ongoing Accounts Receivable Management Services. BSH provided revenue of $645,000 or 17% of total revenue. Of this, 85% was from Ongoing Accounts Receivable Management Services, 7% was from Collection Agency Services, and 8% was from Claims Coding Services.
During 2002, 84% of revenue was earned from three customers: Presbyterian Healthcare Services of New Mexico ("PHS"), Valley Baptist Medical Center ("VBMC"), and Brownsville Surgical Hospital ("BSH"). PHS provided revenue totaling $2,246,000 or 65% of total revenue. Of this, 46% was from Collection Agency Services, and 54% was from Ongoing Accounts Receivable Management Services. VBMC provided revenue of $245,000 or 7% of total revenue. All of the VBMC revenue was from Collection Agency Services. BSH provided revenue of $428,000 or 12% of total revenue. Of this, 93% was from Ongoing Accounts Receivable Management Services, and 7% was from Collection Agency Services.
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 $833,000, $2,434,000 and $2,246,000, which represented 20%, 62%, and 65% of total revenue for the years 2004, 2003, and 2002 respectively.
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 $224,000, $183,000 and $117,000 during 2004, 2003 and 2002 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.
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. In 2004 the Company's actual expenses for sales and marketing were $293,000 compared to $233,000 in 2003 and $117,000 in 2002.
o From June 24, 2003 through March 1, 2005, the Company has executed the following new contracts:
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 will face a significant challenge in 2005 to maintain 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 $2,733,000. 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.
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 2004, 2003 and 2002 respectively, UMC received $27,400 from the PEDC in payment of this incentive. Of this, $11,536, $11,533 and $11,536 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 2004, 2003 and 2002 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.
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 $1,605 during 2004, 2003 and 2002 respectively under this agreement.
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 to said former employee in addition to legal fees in order to resolve this matter. Management believes that the combined cost of legal fees and compensation could range from $15,000 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.
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. Electronic Medical Records Storage revenue is recognized when records are scanned into the UMC coding website.
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 revenues of $610,000 and $547,000 for 2004 and 2003 respectively. The Company recognized increased revenue from two ongoing accounts receivable management contracts that were signed during 2003 and were completed or cancelled in 2004. Revenue from these contracts totaled $244,000 and $161,000 in 2004 and 2003 respectively. The Company also recognized $18,000 in increased revenue from an ongoing accounts receivable management contract that was signed November 14, 2003. These increased revenues were partially offset by decreased revenue from the PHS contract that was cancelled March 31, 2004. Total Ongoing Accounts Receivable Management Services revenue from this contract was $386,000 and $1,135,000 in 2004 and 2003 respectively. The Company also saw decreased revenue from a contract that was signed April 5, 2002 and was also discontinued on March 31, 2004 and from a contract that was cancelled in December 2002. Total revenue from these contracts was $3,000 and $86,000 in 2004 and 2003 respectively.
o Collection Agency Services revenue of $1,264,000 in 2004 decreased by $401,000 compared to 2003 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 and $1,298,000 in 2004 and 2003 respectively. The Company also saw decreased revenue from a contract that was signed April 5, 2002 and was also discontinued on March 31, 2004. Revenue from this contract totaled $51,000 in 2004 and $100,000 in 2003. These decreases in revenue were partially offset by $300,000 in revenue from new contracts executed in 2004. The Company also saw increased revenue from a two collection agency services agreements executed April 18, 2003 and August 28, 2003. Combined revenue from these contracts was $281,000 and $88,000 during 2004 and 2003 respectively. Combined revenue from all other contracts was $186,000 in 2004 and $178,000 in 2003.
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 Collection Agency Services will generate revenues from such customers of approximately $900,000 in 2005.
During the first quarter of 2005, UMC began offering additional chargemaster review and pricing comparison to its line of coding related services. Assuming that there are no significant changes in the types of coding services provided to current customers as of 12/31/04, 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 $551,000 in 2005.
Selling, general and administrative ("SG&A") expense increased $114,000 or 16% due to several factors: Taxes and insurance expense increased by $40,000 due to accruals for property and other taxes. Software maintenance expense increased $38,000 due to an increase in demand for system changes as a result of new customer startups and associated customization required to accommodate acceptance of new customer claims and report files and an increase in the number of claims billed through a third party clearinghouse; sales commission expense increase by $32,000 due to the addition of several new customers; other employee costs increased by $29,000 due to the relocation of the Company's Vice President of Sales from Midland, Texas to Garland, Texas; Contract labor expense increased by $10,000 due to contract labor used on-site at a customer facility; Theses increases were partially offset by decreases in telephone $8,000 as a result of reduced head count in the Company's collection division during the year; travel and entertainment $14,000 as a result of less travel required with the relocation of the Company's Vice President of Sales and factor fees $15,000 due to the Company not factoring invoices after the first quarter of 2004. All other SG&A expenses increased by a combined $2,000 in 2004.
Professional fees expense decreased $16,000 or 18% in 2004 primarily as a result of legal fees paid during 2003 in connection with a dispute with UMC's former health insurance provider. Management expects professional fees to be approximately 2% of revenues in 2005.
Provision for doubtful accounts and notes increased $59,000 a result of receivables reserved during the third and fourth quarters of 2004.
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 consistent profitability for the past four years, and management's projected profitability in 2005, management believes it to be more likely than not that a portion of the value remaining in the Company's NOLs will be realized. At December 31, 2003, the Company recorded a tax asset and an income statement tax benefit of $18,000 that 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 will be utilized in 2005 is $41,750 and has increased the recorded tax asset accordingly, which resulted in an income tax benefit of $23,750 in 2004.
At December 31, 2004, the Company's liquid assets, consisting of cash, totaled $264,000 compared to $63,000 at December 31, 2003. Working capital was $628,000 at December 31, 2004 compared to $324,000 at December 31, 2003. Working capital increased primarily due to the net operating income for the year ended December 31, 2004 offset by capital investments in equipment, software and building improvements.
Investing activities in 2004 consisted of the purchases of furniture, fixtures, equipment, building improvements, and the sale of a company automobile and certain computer equipment. Total cash used for investments was $72,000, of which $37,000 was used for the purchase of furniture, fixtures and equipment, $39,000 was used to purchase and develop software and $4,000 was for the purchase of building improvements. This use of cash was partially offset by $8,000 in proceeds from the sale of Company automobile and certain computer equipment. Total cash used in investing activities during 2003 was $214,000. The Company's fixed assets are in good working order and sufficient to support continuing operations.
Financing activities in 2004 consisted of total net proceeds from two unsecured lines of credit from two banks of $103,000, borrowing for the purchase of new accounting software in the amount of $12,000, cash used for the purchase of treasury stock in the amount of $1,500 and principal payments on capital lease obligations and notes payable which used cash of $91,000.
Despite the loss of the contracts as described under LOSS OF SIGNIFICANT CUSTOMERS above, management believes that current cash and cash equivalents and projected cash flows from operations together with the Company's lines of credit, factoring agreement, incentives under the Economic Development and Incentive Agreement, capital leases and other potential financing should be sufficient to support the Company's cash requirements through fiscal 2005.
Wages and benefits expense increased $350,000 or 15% primarily due to increased headcount as a result of increased business requirements. During 2003 total full and part time employee headcount averaged 107 compared to 80 during 2002. As of March 1, 2004, UMC had a total of 98 full time and 21 part time employees. Total wage, salary and bonus expense of $2,098,000 in 2003 increased by $211,000 compared to 2002 primarily as a result of the increased headcount. Payroll tax expense of $199,000 in 2003 increased by $39,000 compared to 2002 as a result of increased salary and wages, and an increased state unemployment tax rate during 2003. Employee benefits expense of $368,000 increased by $99,000 compared to 2002 as a result of an increased number of employees being eligible to participate in the Company's benefit plans, and an increase in the cost of providing health insurance benefits. During 2003, an average of 71 employees were covered under the Company's health insurance plan compared to 62 in 2002. The average cost per employee per month for health insurance was $269 in 2003 compared to $234 in 2002. These changes resulted in an increase cost in 2003 of approximately $50,000. The Company also paid $12,000 in additional health insurance premium during April 2003 as a result of the dispute with UMC's former health care insurance provider. The Company also recognized $37,500 in compensation expense related to a stock purchase warrant for 1,500,000 shares of UMC common stock that was issued to the Company's CEO, Pete Seaman, in February 2000, but was not eligible for exercise until certain conditions were met in December 2003.
Selling, general and administrative ("SG&A") expense increased $52,000 or 8% due to a net increase in telephone, postage, printing, and office supplies of $25,000 which was primarily attributable to and increased number of letters mailed and phone calls made as a result of increased collection agency services business volume; and increases in travel $21,000 which was primarily attributable to an increased number of sales personnel and increased number of customers to service; software maintenance $9,000; taxes and insurance $8,000; recruiting $6,000; and sales commissions $5,000, which were offset by decreases in factoring fees ($11,000), UMC did not factor invoices during the fourth quarter of 2003; and contract labor ($15,000), UMC used contract labor at a customer location in 2002 but not in 2003. All other expenses showed a net increase of $4,000.
Office, vehicle and equipment rental expense decreased $600 or 3% in 2003 as compared to 2002.
Professional fees expense increased $29,000 or 45% in 2003 primarily as a result of legal fees paid in connection with a dispute with UMC's former health insurance provider.
Interest, net increased $900 or 4% during 2003 compared to 2002.
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 consistent profitability for the three preceding years, and management's projected profitability in 2004, management believed it to be more likely than not that a portion of the value remaining in the Company's NOLs will be realized. At December 31, 2003, the Company recorded a tax asset and an income statement tax benefit of $18,000 that represented the estimated value of the NOLs that would be utilized in 2004.