MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
For Ongoing claims, there is typically a time lag of approximately 5 to 30 days from contract execution to computer hardware installation and training of customer personnel. During this period, Company personnel survey the customer's existing operations and prepare for installation. Following installation and training of the customer's personnel, the customer begins entering claims and transmitting them to the Company. There is usually a time lag of 30 to 90 days between transmission of a claim to a third party payor and collection of a claim from that payor.
The following table sets forth for each period indicated the volume and gross dollar amount of collection accounts received and fees recognized for UMY. In general, collections on most new placements range from about 4 to 21 percent of the gross placement amount. Collection fee percentages charged to the customer vary for the three different placement categories: bad debt, early out, and second placements.
For placements of collection accounts, there is typically a time lag of approximately 15 to 45 days from contract execution to electronic transfer of accounts from the customer.
o Net patient services revenue for the five months ended December 31, 1998 associated with the acquisition of AHO accounts for $800,000 of the revenue increase. Until such time as significant issues confronting AHO are resolved, as more fully explained at Liquidity and Capital Sources below, AHO management does not believe that it can accurately project future AHO revenues and further believes that AHO revenue for the five months ended December 31, 1998, are not necessarily indicative of results to be expected in 1999.
o Collection Agency Services revenue of $915,000 in 1998 increased by $439,000 compared to 1997 primarily due to the full year effect in 1998 of the collection services agreements executed with PHS at various times in 1997. Management does not believe that the 1998 level of PHS revenue will be sustained in 1999 due to the stated intentions of PHS to reduce its outsourced collection services.
o UMClaimPros revenue of $195,000 in 1998 decreased by $41,000 compared to 1997 primarily due to decreased 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.
WAGES AND BENEFITS expense increased $1,377,000 or 72% primarily due to the acquisition of AHO, increased headcount exclusive of the AHO acquisition, and increased bonuses for UMY collectors related to increased UMY collections and revenues. For the five months ended December 31, 1998, approximately $613,000 or 45% of this increase relates to the AHO acquisition which increased headcount by a monthly average of 19 for the five months ended December 31, 1998. Approximately $727,000 or 52% of this increase relates to increased headcount, excluding AHO headcount, required to support increased processing volume as well as to enhance the management infrastructure. During 1998, monthly employee headcount, excluding AHO, averaged 80 compared to 57 during 1997. Approximately $37,000 or 3% of this increase relates to UMY collector bonuses.
OFFICE, VEHICLE AND EQUIPMENT RENTAL expense increased $104,000 or 117% primarily due to the acquisition of AHO, the lease of two company vehicles utilized by the sales force at a monthly expense of approximately $1,000 per month compared to no leased vehicles during 1997, as well as the full year effect in 1998 of leasing an additional 1,906 square feet of office space on July 31, 1997 required for UMY. For the five months ended December 31, 1998, approximately $64,000 or 62% of this increase relates to the AHO acquisition. The Company's existing Dallas office space is near capacity. Should the Company continue to grow, management believes that additional office space in Dallas will be required. Given that current market rates on leased office space have increased significantly from the rates that were in effect when the Company signed its current lease agreements in 1995, management believes that the rate per square foot will be approximately 40% higher than the rate paid on the Company's current office space.
DEPRECIATION AND AMORTIZATION expense increased $10,000 or 10% primarily due to additional depreciation expense related to AHO fixed assets and goodwill amortization related to the AHO acquisition partially offset by a $20,000 decrease in UMC depreciation expense primarily related to UMC's AS/400 which was fully depreciated at December 31, 1997. For the five months ended December 31, 1998, AHO's fixed asset depreciation and goodwill amortization totaled $4,000 and $26,000, respectively.
PROVISION FOR DOUBTFUL ACCOUNTS expense increased $68,000 primarily due to the AHO acquisition. For the five months ended December 31, 1998, approximately $35,000 or 51% of this increase relates to the AHO acquisition with the remaining increase primarily attributable to the write-off of UMC account balances totaling $21,000 and a $6,000 increase in the UMC provision .
transaction will reduce interest expense in 1999 and thereafter by approximately $16,000 and $9,000, respectively.
At December 31, 1998, the Company's liquid assets, consisting of cash and cash equivalents, totaled $74,000 compared to $276,000 at December 31, 1997. Working capital was ($747,984) and $331,552 at December 31, 1998 and December 31, 1997, respectively. Working capital decreased in conjunction with the acquisition of AHO which included the assumption of current liabilities in excess of the fair market value of current assets. Significant AHO current liabilities assumed include trade accounts payable, the Medicare settlement reserve, and the current portion of long term debt. At December 31, 1998, these liabilities totaled $191,000, $879,000 and 127,000, respectively.
Effective April 29, 1998, the Company has had an available line of credit under a secured credit facility (the "Credit Facility"). The maximum amount of borrowing available under the Credit Facility (the "Borrowing Base") was originally equal to the lesser of $200,000 or 60% of trade accounts receivable aged less than 60 days. On September 30, 1998, the interest rate on this facility was reduced from 9.5% to 9.25%. Effective December 11, 1998, the Credit Facility was restructured whereby the Borrowing Base was increased to the lesser of $400,000 or 80% of trade accounts receivable aged less than 90 days. The Credit Facility matures on December 11, 1999. During the period from December 11, 1998 to March 31, 1999, the available Borrowing Base has averaged approximately $318,000. At December 31, 1998, borrowings under the Credit Facility totaled $200,000. The terms of the Credit
Facility are such that the Company could be deemed, from time to time, to be in default due to a number of factors including, but not limited to: a.) a material adverse change in the Company's financial condition or if the lender believes the prospect of payment or performance of the Credit Facility is impaired and, b.) the lender in good faith deems itself insecure based on a change in the financial position of the Company. Upon default, the lender may declare the entire outstanding balance of the Credit Facility, plus accrued and unpaid interest, to be immediately due and payable.
Effective January 4, 1999, the Company executed a promissory note (the "Note") with the Credit Facility lender, for $100,000 bearing interest of 8.75%. The Note matures on January 4, 2001 and requires monthly principal payments of $4,167. Simple interest is computed and paid on a monthly basis. The Note is secured by the fixed assets of UMC.
Should the results of the audited 1997 and 1996 Alabama cost reports confirm all of the assumptions underlying the Medicare settlement reserve and if AHO is required to liquidate this reserve within thirty days of receipt of the Notice of Program Reimbursement (the formal notification of settlement after the audit is complete), AHO currently projects that it is likely that it will not have sufficient cash or sources of cash to liquidate this liability and will be forced to file for bankruptcy protection.
There can be no assurance that AHO will be successful in generating cash from these sources or that this cash can be generated in a timely manner. .
3.) On October 27, 1998, AHO received notice from the Alabama Medicare fiscal intermediary (the "Alabama FI") indicating that Behavioral Health of Mobile ("BHM") had been placed on one hundred percent medical records review based on certain deficiencies identified by the Alabama FI in the medical records. This review retroactively effected all BHM Medicare claims with dates of service beginning on August 1, 1998, and will continue until such time that deficiencies are corrected and the medical review is reduced or eliminated entirely. Substantially all BHM Medicare claims reviewed during this period were denied.
As a result of the foregoing circumstances, AHO implemented the following plan:
o 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.
o During 1997, growth in other new customers generated approximately $200,000 in ongoing revenues primarily related to physician practices.
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.