UMC and UMY's corporate offices and operations and AHO's home office 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 up to one-half of the space under 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 corporate office leased space is near capacity. Should the Company continue to grow, management believes that additional corporate office space may be required within the next twelve months.
AHO leases three behavioral health centers under operating leases which terminate at various times on or before August 31, 1999. The behavioral health centers are located in Pensacola, Florida; Mobile, Alabama; and Oxford, Alabama.
The following table presents selected consolidated financial data for and as of each of the five years ended December 31, 1998. The financial data presented for each of the five fiscal years has been derived from audited financial statements.
(1) In 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," and has retroactively restated all periods presented.
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. For the year ended December 31, 1998, approximately 89% 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 each year in connection with ongoing business, and accordingly exclude revenues from backlog accounts receivable management, advance funding, UMClaimPros, and consulting services.
o Ongoing Accounts Receivable Management Services revenue of $2,857,000 in 1998 increased by $925,000 compared to 1997 primarily due to full year effect in 1998 of the WHC Physician Billing Department ("WHCPBD") ongoing accounts receivable management services agreement executed on May 5, 1997. For the years ended December 31, 1998 and 1997, the WHCPBD agreement generated revenue of $972,000 and $221,000, respectively. Assuming that there are no significant changes in the existing volume and mix of claims placed by WHC, management believes that the WHC contracts will generate 1999 revenues of approximately $2.2 million. The expected decline in 1999 compared to 1998 is the result of a reduction of WHCPBD claims placed with the Company in the second quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense increased $433,000 or 88% primarily due to the acquisition of AHO, increased travel associated with supporting existing customers and developing new business, increased printing, postage and telephone expense related to UMY and the WHCPBD agreement, increased contract labor to temporarily fill open positions, increased recruiting expenses related to open positions and various other expenses to support a larger revenue stream and increased headcount. For the five months ended December 31, 1998, approximately $110,000 or 25% of this increase relates to the AHO acquisition.
Investing activities in 1998 consisted of the acquisition of AHO and purchases of furniture, fixtures and equipment. The acquisition of AHO provided net cash of $70,000. The purchase of furniture, fixtures and equipment used cash of $80,000 compared to $131,000 used in 1997.
Financing activities in 1998 consisted of borrowings of $200,000 from the Company's Credit Facility partially offset by principal payments on capital lease obligations and long term debt which used cash of $175,000. In 1997, net proceeds from the sale of common stock totaling $159,000 were partially offset by principal payments on capital lease obligations which used cash of $38,000. This overall decrease is primarily due to the decrease in cash provided from financing sources and the increase in principal payments on long term AHO debt. Effective December 31, 1998, UMC sold 1,000,000 shares of unregistered Common Stock in exchange for a $261,818 promissory note due from AHO to a third party note holder. The Common Stock was priced at $0.06 per share representing the last trading price prior to the execution of the transaction. The effect of this transaction reduced debt service, including cash required to pay interest, by $19,000, $112,000 and $131,000 in 1998, 1999 and thereafter, respectively.
During various periods of time for the twelve months ending December 31, 1999, management anticipates the possibility that cash requirements could exceed cash on hand, cash to be generated from operating activities, if any, and cash available from UMC's Credit Facility. These periods of possible liquid deficiency are attributed to the working capital deficiency of AHO at December 31, 1998 and by AHO's current cost based reimbursement methodology which eliminates the ability of AHO as a stand alone entity to generate positive cash flow. More specifically, the possible periods of liquid deficiency are attributed to the following factors:
1.) AHO's Medicare cost reports have not yet been audited by the Medicare fiscal intermediaries for the years ended December 31, 1998, 1997 or 1996. An audit of the 1997 and 1996 Alabama cost reports is currently in process. The 1997 and 1996 cost reports were prepared with unaudited financial information. The 1998 cost reports will be prepared using information obtained from audited financial statements and will be filed no later than May 31, 1999, as required. AHO has recorded certain reserves based on assumptions that may or may not ultimately prove to be correct. The accuracy of these assumptions will not be known until completion of the aforementioned audits. At December 31, 1998, the current portion of the Medicare settlement reserve totaled $879,000 and is comprised principally of:
It is UMC's opinion, supported by the opinion of legal counsel, that the liabilities of AHO, including the Medicare settlement reserve, do not ascend to UMC. Therefore, management believes UMC will continue as a going concern regardless of the status of AHO.
To the extent that the results of the aforementioned audit do not confirm all of the assumptions underlying the Medicare settlement reserve, the extent of the possible cash requirement to liquidate this reserve falls within the range of $0 to $879,000. Until such time as the assumptions underlying the Medicare settlement reserve are confirmed or denied, AHO cannot project the 1999 cash requirements with respect to this reserve.
AHO is vigorously pursuing the following potential sources which could provide up to $846,000 of cash:
2.) On October 16, 1998, AHO received notice from the Florida Medicare fiscal intermediary (the "Florida FI") indicating that a tentative settlement of $186,512 was due from AHO's Pensacola Center for Behavioral Health ("PCBH") for interim reimbursement in excess of reimbursable costs for the nine months ended September 30, 1998. Effective November 12, 1998, all interim payments to PCBH were suspended until such time as the interim overpayment is recovered by Medicare through the submission by PCBH of future Medicare claims. During this suspension period, the working capital deficiencies of AHO have been funded by UMC. At March 31, 1999, the remaining overpayment totals approximately $75,000. AHO continues to vigorously pursue the appeal of denied 1998 Medicare claims totaling approximately $96,000 as a possible source of cash to liquidate this overpayment. The projected interim reimbursement overpayment of $160,000 for the year ended December 31, 1998 is included in the Medicare settlement reserve above.
4.) Based upon a feasibility study of the BHM catchment area conducted in January, 1999, AHO has temporarily suspended the BHM partial hospitalization services pending further analysis of the viability of the catchment area and more specifically the referral sources. BHM continues to operate as an outpatient facility.
a.) Employee headcount and other expenses at PCBH and BHM have been reduced. b.) AHO applied for and was denied an extended repayment plan from the Florida FI. c.) AHO has engaged specialized clinical oversight and quality assurance consulting services to review, render an opinion on, and where applicable, pursue reconsideration and appeal of denied claims. Ongoing medical record quality assurance and clinical oversight services are also being provided. d.) UMC has increased its existing credit facility in order to fund near term cash requirements of AHO. e.) AHO has entered into various discussions with parties potentially interested in buying one or more of the AHO CMHCs. f.) AHO has identified and it is vigorously pursuing the aforementioned sources of cash.
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. The Company has considered its interdependence of computer systems with its significant customers and third party payors including the Healthcare Financing Administration ("HCFA") (collectively the "Significant Third Parties") to determine the extent to which the Company is vulnerable to those Significant Third Parties' failure to remediate their own Year 2000 issues. Management considers the vulnerability of the failure of Significant Third Parties to remediate their own Year 2000 issues to be the greatest Year 2000 risk facing the Company. There can be no guarantee that the systems of Significant Third Parties which the Company's customers rely upon for a portion of their claim payments and which the Company relies upon for the transmission of claims and account data will be timely converted. Failure of a Significant Third Party to convert its computer systems, or a conversion that is incompatible with the Company's systems, would more likely than not, have a material adverse effect on the Company. Currently, the Company has not developed a contingency plan to address this scenario. Should management become aware of information that indicates that a Significant Third Party more likely than not will not be Year 2000 compliant, a contingency plan will be developed.
The Company has completed substantially all of its Year 2000 project. The incremental costs associated with this project totaled approximately $30,000.
o 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.
o On May 5, 1997, the Company amended its existing WHC Customer Service Agreement to provide ongoing accounts receivable management services to certain groups within the WHC Physician Billing Department ("WHCPBD"). For the three months ended December 31, 1997, WHCPBD generated revenue totaling $221,000. This level of revenue may not be indicative of future revenue as it includes a catch-up of claims billed and collected back to the amendment's effective date.
o UMClaimPros revenue of $236,000 in 1997 increased by $85,000 compared to 1996 primarily due to increased utilization from existing customers. Management continues to refine its strategies related to UMClaimPros and continues to believe that this service provides a competitive advantage for the Company as well as providing a viable entree' to new customers.
SELLING, GENERAL AND ADMINISTRATIVE expense increased $70,488 or 17% primarily due to increased travel associated with supporting existing customers and developing new business, increased printing and postage expense related to the ramp up of UMY and the WHCPBD agreement, and various other expenses to support increased headcount.