The Company's corporate offices and operations are located in an 10,136 square feet leased office space in Dallas, Texas. The lease expires in January, 2001. The Company has the option to terminate this lease after August 1, 1998, providing it gives a ninety day notice to the lessor. Management believes that its facilities are well-located and are in good condition. The current office lease space is near capacity. Should the Company continue to grow at its current rate, management believes that additional office space will be required within the next twelve months.
- ---------------- (1) In 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," and has retroactively restated all periods presented.
Except for the historical information contained herein, the matters discussed may include forward-looking statements relating to such matters as anticipated financial performance, 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 include, but are not limited to, the ability to sustain earnings from UMY, the efficiency of the Company's billing and accounts receivable management services operations, continued availability of credit on terms and conditions acceptable to the Company, continued services of existing key employees and Directors, availability of qualified new employees to staff the Company's operations, on-going management initiatives designed to reduce costs and enhance efficiencies, retaining existing significant customers, and prospective changes in laws, regulations, or policies affecting the healthcare industry and or operations of the Company. 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.
1997: During the third quarter of 1997, the Company signed two contracts to rebill and collect backlogs of aged third party receivables owned by two bankrupt physician practice management companies in Texas. One of these contracts was terminated in January 1998. In addition to this new business, UMY signed contracts to provide ongoing bad debt collection and other related services to four small hospitals in Texas.
follow-up of outpatient claims. During the first quarter of 1998, management was informed by this hospital that it intended to terminate this contact effective March 31, 1998.
Effective May 9, 1997, the Company entered into two amendments to its existing Customer Service Agreement with WHC. Under the amendments, the Company agreed to provide the following services to the WHC Physician Billing Department:
- collection follow-up, rebilling and collection services with respect to a backlog of aged claims
- Initial claims editing, submission, follow-up and collection services with respect to all claims originated by physicians in the WHC Department of Emergency Medicine.
Effective May 1, 1997, UMY entered into an, "Early Out Collection Agreement" with a prominent hospital in Texas.
Effective January 17, 1997, UMY entered into a Collection Services Agreement ("SA") with a prominent hospital in Texas. Under this SA, UMY will provide bad debt collection services for primary and second placement accounts. In addition, during the first quarter of 1998, UMY entered into contracts to provide bad debt collection services for two smaller hospital customers.
1996: Effective September 1, 1996, WHC executed an amendment to its existing agreement with UMC whereby WHC authorized UMC to begin providing patient billing and collection services. UMC's responsibilities under this amendment include billing and collecting balances due from the guarantors of certain classes of patient accounts following collection of medical insurance payments. This service provided $104,132 of revenue in 1997. Management believes that this service will provide a similar amount of revenue in 1998.
A contract to provide interim staffing services to a major hospital in Texas was signed on September 18, 1996. Under this contract UMC provides UMClaimPros personnel to assist the hospital with various tasks associated with a major system conversion.
1995: On January 30 and February 24, 1995, the Company made two installments to complete repayment of all principal and interest due on a $200,000 note due to an offshore bank. The Company borrowed this money on September 30, 1994, to provide advance funding services to the MMH. The Company completed collection of all claims purchased from MMH under this advance funding contract in May 1995.
by a national operator of clinics. A third contract was signed to deliver claims repricing services to a managed care provider network.
The Agreement also provided for the continuation of UMC's services to three AFASS clinics and the AFASS hospital in Yauco for so long as HAS' contract with AFASS remained in force. HAS' contract with AFASS was terminated effective September 30, 1996.
Following the termination of HAS' contract with AFASS, UMC gave notice to terminate the lease on its office in Ponce, Puerto Rico. The office was closed on January 3, 1997, and shortly after that date the last of UMC's employees in Puerto Rico resigned to pursue other employment.
UMC's total revenues from Puerto Rican operations during 1996 were $298,555, expenses totaled $204,492, and operating margin was $94,063.
1995: The Company's principal source of revenue in Puerto Rico was a contract between HAS and AFASS. Under this contract, the Company served as a subcontractor to HAS in processing claims for a government funded hospital ("GH") and four government funded clinics. UMC's fees for services rendered to the clinics computed at 10% of collections. During 1995, the Company recognized fees totaling $108,008 for services rendered to the GH. In June 1995, the HAS contract with AFASS was amended to allow the continuation of services for an undefined period beginning July 1, 1995. In addition, HAS and UMC received the right to process claims from four additional clinics, thus increasing the number of AFASS clinics served to eight.
During 1995, the Company's Puerto Rican operation generated total revenues of $176,635, with an operating loss of $58,837. The primary reasons for the loss were the start up costs incurred primarily during the first half of 1995 to train employees and develop UMC's claims entry, editing, submission, and follow up processes consistent with the dynamics of the Puerto Rican market; the costs incurred to set up UMC's office in Ponce; the costs and expected delay in collections associated with the start up of services for the four additional AFASS clinics.
- - Collection Agency services revenue of $476,000 in 1997 increased by $435,000 compared to 1996 primarily due to management's initiative to grow this service in order to present a more complete healthcare business office service package to the market. During 1997, a concentrated sales and marketing effort was deployed which resulted in UMY successfully closing bad debt, early out and secondary placement agreements with four PHS Dallas metroplex hospitals as well as gaining approximately 9 other customers throughout 1997. A majority of the 1997 revenue was generated in the last six months of the year.
- - On September 1, 1996, the Company amended its existing WHC Customer Service Agreement to provide patient billing and collection services due from guarantors of certain classes of patient account balances. During 1996, revenue from this project totaled $13,000. During 1997, revenue from this project totaled $104,000. Management believes that 1997 revenue for this project is indicative of the revenue potential for 1998.
- - During 1997, growth in other new customers generated approximately $200,000 in ongoing revenues primarily related to physician practices. Management believes that this historical revenue is indicative of the revenue potential for 1998.
WAGES AND BENEFITS increased $728,461 or 62% due to an increase in employees required to support customer growth as well as to enhance the management infrastructure. Approximately 7% of this increase related to merit and market raises for existing employees. The remaining portion of the increase related to headcount increasing 93% during the past twelve months, from 40 to 77 employees at December 31, 1997. It is managements' current intention to continue to add management and line employees in 1998. As headcount is expected to increase in 1998, this historical trend should be indicative of anticipated 1998 activity.
OFFICE AND EQUIPMENT RENTAL expense decreased $11,903 or 12% primarily due to the closing of the Company's Ponce, Puerto Rico office on January 3, 1997 partially offset by the lease of an additional 1,906 square feet of office space on July 31, 1997 required for UMY. The Company's existing office space is near capacity. Should the Company continue to grow, management believes that additional office space will be required at an increased market rate within the next twelve months.
Operating activities provided $96,281 of cash which comprised principally cash provided by net income and adjustments partially offset by increased accounts receivable. Adjustments to net income primarily comprised of depreciation and amortization provided $105,797 of cash. Growth in trade receivables mainly from strong claim processing and collection growth in the fourth quarter used $260,509 of cash. Further use of cash to fund additional growth in trade receivables is anticipated in fiscal 1998 because of expected growth in revenues. Growth in trade payables and accrued liabilities provided $104,599 of cash of which trade payables provided $45,523 of cash. In spite of increased revenue in fiscal 1997, trade payables and accrued liabilities grew only nominally because of the Company's ability to leverage its existing infrastructure.
Management believes that current cash and cash equivalents, projected cash flows from operations together with capital lease and other potential financing should be sufficient to support projected growth in revenues through fiscal 1998.
Based on a recent assessment, the Company determined that it will be required to modify its proprietary claims processing and follow-up software, its purchased collection agency software package, and certain other general business use software applications in order to be Year 2000 compliant. The Company presently believes that with modifications to the existing proprietary and purchased claims processing and collection agency software as well as replacement of certain general business use software, the Year 2000 Issue can be mitigated. However, if such modifications and replacements are not made, or completed timely, the Year 2000 Issue could have a material adverse effect on the operations of the Company.
The Company has initiated communications with significant customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. There can be no guarantee that the systems of other companies on which the Company relies for the transmission of claims data will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company.
BILLING AND COLLECTION SERVICES REVENUE from "Ongoing" claims processing, management and collection services decreased 9% due to the loss of the MMH contract in 1996. Backlog collection revenues decreased 93% due to the completion of the Backlog project for MMH during 1995. Revenue from UMC's UMClaimPros interim staffing service increased 34% due primarily to staffing services provided to a major hospital in the Dallas area. Patient billing revenue increased from $90 in 1995 to $50,484 in 1996 due to collection services provided to a major hospital in the midwest.
Billing and collection services revenue from Puerto Rican operations increased 69% due to collections for the Yauco Hospital, the AFASS clinics, and the settlement agreement reached between the Company and HAS.
SELLING, GENERAL, AND ADMINISTRATIVE expenses decreased 7% due to decreased expenses for property taxes, dealer commissions, marketing and advertising, travel and entertainment, office supplies, telephone service (long distance), express services, and contract clerical employees offset by increased expenses for Directors and Officer's insurance, bad debts, recruitment, education and training, and software maintenance.
DEPRECIATION AND AMORTIZATION expense decreased 17% due to assets becoming fully depreciated.
OTHER INCOME increased from $0 in 1995 to $74,649 in 1996 due to a gain on an insurance settlement paid to the Company, and to the settlement agreement reached between the Company and HAS.