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, 1999, 1998 and 1997, approximately 91%, 89% and 90% 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
For Ongoing claims, there is typically a time lag of approximately 5 to 90 days from contract execution to complete development of system interfaces and definition of procedural responsibilities with customer personnel. During this period, Company personnel survey the customer's existing operations and prepare for installation. Once the customer begins transmitting claims to the Company, there is usually a time lag of 30 to 90 days between transmission of claims to third party payors and collection of those claims from payors.
During 1999, $2,486,000 or 79% of revenue was earned from the Washington Hospital Center ("WHC"). Of this WHC revenue, 63% was provided as a result of the Ongoing Accounts Receivable Management services contract, as amended, entered into in 1992, and 16% related to a physician billing contract amendment entered into in May, 1997.
On March 15, 1999, the Company was formally notified by PHS that it had not been selected to provide continuing collection agency services. The Company was informed that this decision was the result of the merger of PHS with another health care system and was in no way related to the quality of the services provided by the Company to PHS. The Company received weekly account placements through May 4, 1999, and generated its last revenue from PHS in August, 1999. Revenue from this contract accounted for approximately 4%, 23%, and 23% of total revenue during 1999, 1998, and 1997, respectively.
As a result of the aforementioned changes within its customer base, management has taken certain actions in an attempt to better position the Company. These actions include, but are not limited to:
o The Company restructured its sales organization to improve focus on the Texas market and increase the emphasis on services provided by UMY.
o Customer service contracts were executed on March 13, 2000 and December 10, 1999, respectively, with hospitals located in south and central Texas.
o During 1998 and 1999, UMC provided various forms of working and debt repayment capital to AHO totaling approximately $1,059,000. On October 14, 1999, AHO filed a voluntary petition in the United States Bankruptcy Court for the Northern District of Texas to liquidate pursuant to Chapter 7 of Title 11 of the United States Bankruptcy Code. In conjunction with the filing of the bankruptcy petition, UMC accrued approximately $68,000 related to lease guarantees, storage fees and professional fees.
o Ongoing Accounts Receivable Management Services revenue of $2,720,000 in 1999 decreased by $137,000 compared to 1998 primarily due to effect of the aforementioned loss and restructuring of significant WHC contracts. Assuming that there are no significant changes in the existing volume and mix of claims placed by the Company's customers as of December 31, 1999, management believes that ongoing accounts receivable management services will generate revenues from such customers of approximately $1.4 million in 2000.
o UMClaimPros revenue of $93,000 in 1999 decreased by $102,000 compared to 1998 primarily due to decreased utilization at PHS.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense decreased $201,000 or 25% primarily due to expense reductions in conjunction with the aforementioned revenue reductions. Assuming no significant change in the Company's core services, management expects that SG&A should remain at approximately 20% of revenues.
OFFICE, VEHICLE AND EQUIPMENT RENTAL expense increased $14,000 or 11% primarily due to the $14,000 payment required in conjunction with the August 2, 1999 office space reduction option whereby 3,300 square feet of office space was vacated on September 2, 1999 resulting in a monthly expense reduction of approximately $3,500. Under the current arrangement, monthly office rent through January 31, 2000 and 2001 will be $7,200 and 7,400, respectively. Monthly vehicle and other rental expenses will total approximately $1,000 and $500, respectively.
OTHER EXPENSE increased $26,000 primarily due to accruals related to AHO and a loss on the rollover financing of the Company's IBM AS/400. These expenses are non-recurring.
LOSS FROM DISCONTINUED OPERATIONS - AHO is comprised primarily of salaries paid, bad debt expense, professional fees and other SG&A.
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS - AHO represents the excess of AHO's liabilities liquidated via the aforementioned Chapter 7 bankruptcy over the working capital provided from UMC to AHO during the period from August 7, 1998 to October 14, 1999.
Operating activities from continuing operations in 1999 provided cash of $570,000, compared to $435,000 cash provided in operating activities from continuing operations in 1998. This increase is primarily due to factoring of invoices totaling $219,000 which provided cash of $179,000. In 1999, cash flow from continuing operations was adequate to cover all working capital and liquidity requirements of continuing operations. At September 30, 1999, UMC accrued certain AHO liabilities totaling approximately $68,000. With the exception of these accruals, Management does not anticipate using any additional cash in support of AHO.
Investing activities in 1999 consisted of the purchases of furniture, fixtures and equipment. The purchase of furniture, fixtures and equipment used cash of $15,000 compared to $78,000 used in 1998. This decrease in investing activities corresponds with the aforementioned revenue reduction and required cash conservation. The Company's fixed assets are in good working order and sufficient to support continuing operations.
Financing activities in 1999 consisted of net repayment of the Company's revolving line of credit totaling $200,000, borrowings under a bank note payable totaling $100,000, and principal payments on capital lease obligations and the note payable which used cash of $125,000.
Effective January 4, 1999, the Company executed a promissory note (the "Note") with a Bank Lender, for $100,000 bearing interest at the prime rate plus one percent. Throughout 1999, the interest rate ranged from 8.75% to 9.5%. On March 22, 2000, the interest rate increased to 10.0%. 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.
On December 7, 1999, the Company was informed by Bank United, which had acquired the Bank Lender, that its $400,000 revolving line of credit would not be renewed on its scheduled renewal date of December 11, 1999. This revolving line of credit was paid in full on December 28, 1999 and replaced with a factoring agreement as described below.
UMC has taken the following actions to address the possible periods of liquid deficiency:
o During 1999 and through March 31, 2000, UMY executed approximately 15 new customer service and collection agreements which provided revenues of approximately $73,000 in 1999.
o On August 2, 1999, management exercised its office space reduction option whereby 3,300 square feet of office space was vacated on September 2, 1999 resulting in a monthly expense reduction of approximately $3,500.
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send and receive electronic data, or engage in similar normal business activities.
The Company has experienced no adverse effect from the Year 2000 issue.
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.
o Other revenue of $113,000 in 1998 increased by $78,000 compared to 1997 primarily due to increased funding fees related to Advance Funding Services and increased Consulting Services. Approximately $77,000 of this revenue related to services performed for AHO. Upon the acquisition of AHO, billing for services performed by UMC was terminated.
WAGES AND BENEFITS expense increased $765,000 or 40% primarily due to increased headcount and increased bonuses for UMY collectors related to increased UMY collections and revenues. Approximately $727,000 or 95% of this increase relates to increased headcount required to support increased processing volume as well as to enhance the management infrastructure. During 1998, monthly employee headcount averaged 80 compared to 57 during 1997. Approximately $37,000 or 5% of this increase relates to UMY collector bonuses.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense increased $323,000 or 66% primarily due to 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.
PROFESSIONAL FEES expense decreased $9,000 or 17% primarily due to a reduction in financial statement audit fees in conjunction with the change in the Company's independent accountants.
OFFICE, VEHICLE AND EQUIPMENT RENTAL expense increased $40,000 or 46% primarily due to 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.