During the fourth quarter of 2001, the Company began processing 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 are subject to automatic crossover payments from certain payors. The Company does not take credit for, nor report as collections, such crossover payments that are received by the customer within 35 days of the date that the claim is transmitted to UMC. UMC management estimates that about 30% to 50% of the secondary claims accepted for processing are due from crossover
On May 30, 2002, the Company received notice from Valley Baptist Medical Center (VBMC) terminating their accounts receivable management contract dated March 13, 2000. The termination of the contract was pursuant to recommendations from outside consultants to consolidate VBMC's outsourcing projects, and according to VBMC management had nothing to do with UMC's performance. This contract provided revenues of $245,000, $272,000 and $35,000, which represented 7%, 10% and 1.5% of total revenue for the years 2002, 2001 and 2000 respectively.
o In April 2002, the Company started up UMC's Coding Services Division. During 2003 this division generated revenue of $183,000.
o From 2000 to 2004 the annual budget for UMC sales and marketing department has increased from $0 to $299,000. In 2003 the Company's actual expenses for sales and marketing were $233,000 compared to $117,000 in 2002 and $15,000 in 2001.
o From June 24, 2003 through March 18, 2004, the Company has executed the following new contracts:
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.
While it is encouraging that UMC has improved in its ability to close contracts with new customers, the contracts listed above are only projected to produce new annual revenues between 42% and 64 % of the 2003 total revenues from PHS. However, with the remaining revenue to be received during 2004 from PHS during the ramp down phase, the new contracts described above along with other existing customers are projected to place the Company's 2004 revenues between 75% and 93% of 2003 revenues. In addition, management believes it will acquire additional new contracts in 2004 that will make up most if not the entire amount of revenue lost from PHS. If management is unable to successfully develop and implement new profitable customer contracts and new service lines, payroll expense will be scaled down to the level required to service existing contracts, without sacrificing quality of service. If this adjustment in headcount is not sufficient to bring expenses in line with revenue and future cash requirements, management will be required to adopt other alternative strategies, which may include but are not limited to, actions such as further reducing management and line employee headcount and compensation, restructuring existing financial obligations, seeking a strategic merger or acquisition, seeking the sale of the Company or the Company's public shell, and/or seeking additional debt or equity capital. There can be no assurance that any of these strategies could be effected on satisfactory terms.
(a) an incentive payment of $192,000 which was made upon the closing of the purchase of the new operations center facility in Pampa. The Agreement includes a claw back provision whereby if UMC does not maintain a minimum of 30 full time equivalent employees ("FTEE") employed in its Pampa operations center during any given year of the eight years of the Agreement beginning with the year ended December 31, 2001, UMC will be required to remit $24,000 back to PEDC for each such year. UMC met the FTEE requirement for this incentive in 2003, 2002 and 2001 and recognized $24,000 of the incentive as income at December 31st of each year.
(c) an incentive payment of $1,000 per job per calendar year (for a maximum of $80,000) for each FTEE from the 41st up to and including the 50th FTEE employed in its Pampa operations center during each of the eight calendar years of the Agreement commencing with the year ending December 31, 2001. UMC recognized $10,000 in revenue from this incentive for each of the years 2003, 2002 and 2001.
(e) an incentive payment of $10,000 which was paid to UMC based on the condition that UMC had 40 persons employed in its Pampa operations center at December 31, 2000, and
During the first 60 days of operation in Pampa, UMC experienced difficulties with its data communications from Pampa to Dallas. This resulted in reduced productivity in Pampa, delays in revenue generation, and unexpected costs in diagnosing and managing data communications. In addition UMC expended $11,964 for moving expenses and $92,110 in capital expenditures for equipment and improvements to prepare the Pampa building for operations. Due to the effect of these issues, UMC developed a need for additional working capital. As a result, UMC executed a Forgivable Loan Agreement with the PEDC on October 31, 2000 (previously disclosed). Pursuant to the Forgivable Loan Agreement, the PEDC loaned UMC $50,000, as an advance against scheduled incentive payments for 2000 and 2001. The principal amount of the loan was due and payable or forgivable based on the terms and conditions of the Economic Development and Incentive Agreement executed with the PEDC on July 28, 2000. The loan had an interest rate of 9.5% per annum, which was not forgivable. The entire loan amount was satisfied by incentives earned by UMC under paragraphs (b), (c), (d) and (e) through the third quarter of 2001. The total interest paid by UMC on this loan during 2001 was $2,659.
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 and $1,605 during 2003 and 2002 respectively under this agreement.
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 stages of development. During 2003, the Company capitalized $42,885 in costs incurred for new internal software development that was in the application development stage.
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 is recognized when the services are performed. Electronic Medical Records Storage revenue is recognized when records are scanned into the system.
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 December 31, 2003 there were no factored invoices that had ages more than 90 days.
o Coding Services revenue - 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. Revenue from coding services of $183,000 during 2003 increased by $66,000 compared to 2002, due primarily to having a full year of operation in 2003, compared to nine months during 2002. 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.
o Other revenue of $124,000 in 2003 decreased by $8,000 or 6% compared to 2002. Other revenue in 2003 and 2002 was comprised primarily of incentives received in accordance with the agreement with the PEDC. Assuming that the Company continues to meet the incentive requirements, this agreement will generate approximately $120,000 in incentive revenue in 2004.
Depreciation and amortization expense increased $28,000 or 34% in 2003 primarily as a result of the addition of approximately $404,000 in leased and purchased fixed assets during 2003. Management expects depreciation and amortization expense to be approximately 4% of revenues in 2004.
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 (a description of this matter is included under Part 11 Item 1. Legal Proceedings). Management expects professional fees to be approximately 2% of revenues in 2004.
Cash flow from operations in 2003 provided cash of $165,000, compared to $227,000 provided from operations in 2002. This decrease is primarily due to the 2003 net operating income of $288,000 increased by depreciation ($89,000), amortization ($20,000), and stock warrant expense ($38,000), a decrease in factor reserve ($214,000) and increases in accounts payable ($69,000) payables to customers ($22,000) and accrued liabilities ($25,000) offset by increases in restricted cash ($28,000) accounts receivable ($509,000) and prepaid expenses and other assets ($39,000). In 2003, cash flow from operations was supplemented by incentives received from the Pampa Economic Development Commission to cover working capital and liquidity requirements.
Investing activities in 2003 consisted of the purchases of furniture, fixtures, equipment, building improvements, software, six company automobiles, and the sale of certain office furniture and equipment. Total cash used for investments was $214,000, of which $60,000 was used for the purchase of furniture, fixtures and equipment, $73,000 was used to purchase the six company automobiles, $74,000 was used to purchase and develop software and $9,000 was for the purchase of building improvements. This use of cash was partially offset by $1,600 in proceeds from the sale of various office furniture and equipment. Total cash used in investing activities during 2002 was $126,000. The Company's fixed assets are in good working order and sufficient to support continuing operations.
Financing activities in 2003 consisted of proceeds from an unsecured line of credit from a bank of $100,000, borrowings under bank loans for the purchase of four company automobiles in the amount of $38,000, proceeds from the exercise of an employee stock option to purchase UMC common stock of $50 and principal payments on capital lease obligations and notes payable which used cash of $77,000.
Despite the loss of the contract with PHS 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 2004.
In December 2002, the FASB issued Statements of Financial Accounting Standards No.148, "Accounting for Stock-Based compensation - Transition and Disclosure - an amendment of FASB Statement 123" (SFAS 123). For entities that change their accounting for stock-based compensation from the intrinsic method to the fair value method under SFAS 123, the fair value method is to be applied prospectively to those awards granted after the beginning of the period of adoption (the prospective method). The amendment permits two additional transition methods for adoption of the fair value method. In addition to the prospective method, the entity can choose to either (i) restate all periods presented (retroactive restatement method) or (ii) recognize compensation cost from the beginning of the fiscal year of adoption as if the fair value method had been used to account for awards (modified prospective method). For fiscal years beginning December 15, 2003, the prospective method will no longer be allowed. The Company currently accounts for its stock-based compensation using the intrinsic value method as proscribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and plans on continuing using this method to account for stock options, therefore, it does not intend to adopt the transition methods as specified in SFAS 148.
Effective January 1, 2003, the Company adopted Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("FAS 146"). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Adoption of FAS 146 had no impact on the Company's results of operations or financial position and December 31, 2003.
In May 2003, the FASB issued Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("FAS No. 150"). FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. FAS 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement's operational components did not have an impact on the Company's results of operations or financial position.
o Collection Agency Services revenue of $1,450,000 in 2002 increased by $74,000 compared to 2001 due primarily to the addition of bad debt accounts to a collection agency services contract executed October 13, 2000. This contract generated revenues of $1,040,000 and $965,000 in 2002 and 2001 respectively. This increase was offset by decreased revenue from a collection agency services contract executed in March of 2000 that was canceled in May 30, 2002. This contract provided revenues of $245,000 and $272,000 in 2002 and 2001 respectively.
o Other revenue of $132,000 in 2002 increased by $10,000 compared to 2001 which was primarily due to incentives received in accordance with the agreement with the PEDC.
o UMClaimPros revenue of $0 in 2002 decreased by $2,500 compared to 2001 due to the discontinuation of UMClaimPro services in February of 2001.
Depreciation and amortization expense decreased $19,000 or 19% in 2002 primarily as a result of leased computer equipment becoming fully amortized.
Provision for doubtful accounts and notes decreased $5,000 due to recovery of accounts previously reserved, and good collection experience in 2002.