During 2005 UMC also maintained an office in a 1,200 square foot leased office space in Garland, Texas. The Company signed a 36-month lease on this space with a lease term from October 1, 2003 through September 30, 2006. Lease payments are scheduled for $950 per month during the first year, $1000 per month during the second year, and $1050 per month during the third year of the lease term.
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 their customers under service contracts that typically are cancelable with a 30 to 60 day notice. For the year ended December 31, 2005, 2004, and 2003, approximately 91%, 97%, and 97% respectively 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 in connection with ongoing business, and accordingly exclude revenues from backlog accounts receivable management and consulting services.
During 2005, 64% or revenue was earned from two customers: Marshall Regional Medical Center ("MRMC") and Brownsville Surgical Hospital ("BSH"). MRMC provided revenue totaling $1,463,036 or 52% of total revenue. Of this, 76% was from Ongoing Accounts Receivable Management Services, 21% was from Collection Agency Services, and 3% was from Consulting Services. BSH provided revenue totaling $334,236 or 12% of total revenue. Of this, 87% was from Ongoing Accounts Receivable Management Services, 12% was from Collection Agency Services, and 1% was from Claims Coding Services.
On January 19, 2006 the Company received notice from Marshall Regional Medical Center ("MRMC") that MRMC would discontinue using the Registrant's Claims Billing Services, effective March 1, 2006. MRMC management advised UMC that with the Company's assistance and guidance, MRMC will be able to bring this service back in-house. Total revenues earned by the Registrant from Claims Billing Services provided to MRMC were $1,119,633 and $653,088, which represented 40% and 16% of the Registrant's total revenue for the years 2005 and 2004, respectively.
On March 11, 2004, the Company executed a day one claims management agreement with Lubbock Heart Hospital ("LHH"). This contract had an original term of three months and new placements to UMC were discontinued on June 11, 2004. This contract generated revenue of $467,000 during 2004, which represents 11% of revenue for the year.
Effective July 28, 2000, UMC executed an Economic Development and Incentive Agreement (the "Agreement"), with the Pampa Economic Development Corporation ("PEDC"), (previously disclosed). Management entered into this Agreement in order to: (a) create a new expense paradigm which includes reduced hourly wages expense, (b) access a pool of applicants who are believed to be capable of rapidly assimilating training in the job skills related to UMC's business, and (c) put into place a facility with 20,000 square feet of space at a cost far below that which would be incurred in the Dallas area.
(b) an incentive payment of $40,000 per calendar year (for a maximum of $320,000) so long as UMC provides a minimum average of 40 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 $40,000 in other revenue from this incentive for each of the years 2005, 2004 and 2003.
(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 $8,000, $10,000 and $10,000 respectively in other revenue from this incentive for each of the years 2005, 2004 and 2003.
On August 21, 2000 UMC purchased a building in Pampa, located at 200 N. Cuyler Street that serves as its Pampa operations center, and simultaneously received payment of the relocation incentive totaling $192,000 (as specified in paragraph (a) above). On December 31, 2000 UMC had 45 full time and 2 part time employees at its Pampa operations center, and qualified for the initial incentive payment as specified in paragraph (e) above. As of March 28, 2006 UMC had 39 full time, and 7 part time employees at its Pampa operations center.
The PEDC income is recorded in the Company's books as "other revenue".
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. Although management and the board of directors believe that the Company would have prevailed if this matter were litigated, in order to avoid the cost of litigation on June 30, 2005 the Company
On June 14, 2005, the Company was notified of a lawsuit alleging violation of Section 392 of the Texas Finance Code and for using unreasonable and wrongful collection efforts. Although management and the board of directors believed that the Company would have prevailed if this matter were litigated, in order to avoid the cost of litigation the Company entered into a "Settlement Agreement" effective July 15, 2005, in which the Company agreed to pay $4,000. In addition, the Company paid legal fees related to this matter totaling $4,280.
and $0 fees in 2005; the loss of Hamilton, which produced $172,130 in fees for 2004 and $139 in fees for 2005; the BSH contract, which produced $291,538 in fees in 2005 compared to $609,925 in 2004; and the restructuring of a contract with a hospital in West Texas which produced $102,000 in fees for 2004 and $3,700 in fees for 2005; and reduced fees earned under other contracts. The reduction in fees earned from these customers was partially offset by fees earned from a contract signed on April 26, 2004 with a hospital in East Texas, which produced fees of $653,000 in 2004 versus $1,120,000 in 2005, for an increase of $467,000 in 2005.
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, 2005, management believes that Ongoing Accounts Receivable Management Services will generate revenues from such customers of approximately $375,000 in 2006.
On March 7, 2005, the Company received notice from Brownsville Surgical Hospital (BSH) that effective April 15, 2005 they would terminate the early stage patient balance collection portion of their accounts receivable management contract with UMC dated October 31, 2000. The early stage patient balance collection portion of this contract provided Collection Agency Services revenue of $18,000, $30,000 and $27,000 in 2005, 2004 and 2003 respectively, which represented 2%, 2% and 2% of total Collection Agency Services revenue for these years
o Coding Services revenue of $222,000 in 2005 decreased by $2,000 or 1% due primarily to fees from coding consulting services provided in conjunction with an ongoing accounts receivable management contract with a hospital in East Texas. Total coding fees provided by this contract were $56,000 in 2004 and $39,000 in 2005. Fees from the Company's web based off-site coding services remained level at $90,000 in both 2005 and 2004.
Selling, general and administrative ("SG&A") expense decreased $113,000 or 14% due primarily to reductions in telephone, postage, office supplies, and sales commissions. Telephone expenses decreased by $13,000, and office supplies by $14,000, due primarily to the reduced headcount in 2005. Postage decreased by $8,000 due to the decrease in the number of collection letters being sent during 2005, and sales commissions decreased by $60,000 as a result of reduced sales. Travel expenses decreased by $17,000 as a result of reduced travel required by a smaller customer base and employee relocation decreased by $25,000 as a result of the relocation of UMC's Vice President of Sales and Marketing from Midland, Texas to Garland, Texas in 2004.
Office, vehicle and equipment rental expense decreased $3,000 or 20% in 2005 as compared to 2004 primarily as a result of closing the UMC sales office in Midland, Texas concurrent with the relocation of UMC's Vice President of Sales and Marketing to the Garland, Texas office.
Interest, net decreased $12,000 or 41% during 2005 due to the reimbursement of interest charges 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, and the pay off of notes from automobile purchases.
Provision for doubtful accounts and notes decreased $50,000 a result of receivables reserved in 2004 and little reserved in 2005.
Cash flow from operations in 2005 provided cash of $71,000, compared to $250,000 provided from operations in 2004. This is primarily due to the 2005 net operating loss of $102,000 increased by depreciation $129,000; amortization $38,000; accounts payable $31,000; accounts receivable $163,000; prepaid expenses $46,000; restricted cash $63,000; factor reserve $5,000 and decreased by accrued liabilities ($178,000); payables to customers ($41,000); doubtful accounts ($58,000); non-cash incentive income recognized ($24,000). In 2005 and 2004, cash flow from operations was supplemented by incentives received from the Pampa Economic Development Commission.
Investing activities in 2005 consisted of the purchases of furniture, fixtures, equipment, software, building improvements, and the sale of company automobiles and certain computer equipment. Total cash used for investments was $67,000, of which $22,000 was used for the purchase of furniture, fixtures and equipment, $55,000 was used to purchase and develop software and $5,000 was for the purchase of building improvements. This use of cash was partially offset by $14,000 in proceeds from the sale of two Company automobiles and certain computer equipment. Total cash used in investing activities during 2004 was $72,000. The Company's fixed assets are in good working order and sufficient to support continuing operations.
Financing activities in 2005 used cash of $88,000. This consisted of net proceeds of $4,500 from issuance of stock, offset by cash used for principal payments on capital lease obligations of $47,000 and principal payments on notes payable which used cash of $45,500.
On December 28, 1999, the Company executed a $500,000 recourse factoring agreement, which may be terminated by either party with ten days notice. The agreement is secured by all of the Company's non-factored accounts receivable and was previously personally guaranteed by Peter Seaman, Chairman and CEO. The factoring company released this personal guarantee on December 23, 2003. Other significant terms of the factoring agreement include recourse for invoices remaining unpaid at 90 days, interest at prime plus 2.5%, and a factoring fee of 1% of the face value of each invoice. The Company had no factored invoices at 12/31/2004 or 12/31/2005.
As described above under LOSS OF SIGNIFICANT CUSTOMERS, the Company has suffered the loss of several significant customer contracts during the last two years. In addition, the Company has not been successful in completing the sale of new contracts sufficient to replace all or at least a significant portion of the revenues lost. The Company generated a net loss of $101,635 in 2005, and is
Management has implemented several actions to improve the financial performance of the Company. The Company has reduced staff aggressively to control expenses, reduced the hours worked by hourly employees by 10%, reduced the pay of salaried employees by 10%, reduced the pay of its CEO by 20%, and eliminated the monthly accrual for Paid Time Off. The Company's telecommunications resources have been restructured to reduce cost. On February 17, 2006, the Company released its Vice President of Sales & Marketing; on March 30, the Company hired a new Director of Sales & Marketing. The Company has invested about $21,500 in sales and legal costs and a significant amount of management time in its efforts to enter the healthcare debt purchasing market. These efforts are still in progress, and there can be no assurance that the Company will be successful in completing new sales in this market, or that the revenues derived from debt purchasing will yield operating profits in the future. In addition, there can be no assurance that the Company will be able to obtain funding with which to engage in debt purchasing should the Company's efforts to complete the sale of these services be successful.
The Company is evaluating the impact of adopting SFS 123R and expects that it will record non-cash stock compensation expense. The adoption of SFAS 123R is not expected to have a significant effect on the Company's financial condition, cash flows or its results of operations. The future impact of the adoption of SFAS 123R cannot be predicted at this time because it will depend on the levels of share-based payments granted by the Company in the future.
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 Backlog Accounts Receivable Management Services revenue of $16,000 in 2004 increased by $16,000 compared to 2003 as a result of the placement of backlog claims received in June of 2004 in conjunction with the startup of an ongoing accounts receivable management contract that was signed May 7, 2004. Management does not anticipate any significant revenue from Backlog Accounts Receivable Management Services in 2005.
Wages and benefits expense decreased $65,000 or 2.4%. Salary and wage expense decreased by $7,000 due primarily to reduced average headcount during 2004 as compared to 2003. Other compensation decreased as a result of the recognition of $37,500 in compensation expense recognized in 2003 related to a stock purchase warrant. Payroll tax expense decreased by $11,000 due primarily to a decrease in the Company's state unemployment tax rate. Benefits cost increased by $20,000 as a result of more employees being eligible for benefits. During 2004, an average of 78 employees were covered under the Company's health insurance plan compared to 71 in 2003. In 2004, bonus expense decreased by $29,000 as compared to 2003. During 2004 total full time employee headcount averaged 87 compared to 95 during 2003. As of March 1, 2005, UMC had a total of 61 full time and 17 part time employees. Assuming no significant change in the Company's core services, management expects that wages and benefits should remain at approximately 64% of revenues 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. Assuming no significant change in the Company's core services, management expects that SG&A should remain at approximately 19% of revenues in 2005.