The Company currently leases approximately 86,000 aggregate square feet from which it conducts its operations in Michigan and Tennessee. The principal offices of the Company are located at 1155 Brewery Park Boulevard, Suite 200, Detroit, Michigan, where it currently leases
approximately 54,000 square feet of office space. Because of its workforce reduction as a result of the November 1, 2002 termination of its OmniCare-MI management agreement, the Company has arranged to sublease all of its present Detroit office space to OmniCare-MI, effective November 1, 2002 and expiring at the end of the lease in May 2005. The Company anticipates moving its principal offices to smaller premises yet to be determined, with prompt public notice of any new location when determined.
This Financial Review discusses the Company's results of operations, financial position and liquidity. This discussion should be read in conjunction with the consolidated financial statements and related notes thereto contained elsewhere in this annual report.
Pursuant to a stock repurchase plan of the Company's Board of Directors, 237,100 Company common shares were repurchased in the open market and retired in July 1999.
In fiscal 1998, based on an evaluation of the net recoverable value of the Company's investment in PhilCare, the Company recorded a full impairment loss against its $2.1 million investment. PhilCare was dissolved in fiscal 2000. PhilCare assets were then distributed to UA-PA pursuant to agreements under which UA-PA contributed those assets, and the Company recovered its $2.1 million investment in PhilCare, resulting in a gain in that amount for fiscal 2000.
Fiscal 2002 was a year of significant changes for OmniCare-TN and the other managed care organizations ("MCOs") having contracts with TennCare, a State of Tennessee program that provides medical benefits to Medicaid and working uninsured and uninsurable recipients. In a climate of continually rising medical costs, several of TennCare's major MCOs ceased doing business in fiscal 2002. In contrast, TennCare has expressly regarded OmniCare-TN as one of TennCare's viable MCOs.
At June 30, 2001, OmniCare-TN was licensed in and served Shelby and Davidson Counties in Tennessee (which include the cities of Memphis and Nashville, respectively). Effective July 1, 2001, OmniCare-TN received approval from TennCare to expand its service area to western Tennessee and to withdraw from Davidson County. Additionally, a significant competitor of OmniCare-TN ceased doing business in October 2001, and TennCare assigned approximately 40,000 of that failed plan's members to OmniCare-TN on February 15, 2002. As of October 1,
OmniCare-TN's TennCare contract which was in effect on July 1, 2001 had been renewed on July 1, 2000 for a 42-month term, expiring December 31, 2003. The new contract provided for increased capitation rates, but eliminated the earlier practice of providing retroactive payments to MCOs for high cost chronic conditions of their members ("adverse selection") and payments earmarked as adjustments for covered benefits.
TennCare responded to OmniCare-TN's situation individually as well. TennCare amended its contract with OmniCare-TN in September 2002, retroactive to July 1, 2001 in some respects and to May 1, 2002 in other respects. The amendment states that OmniCare-TN's outside actuary certified the plan required $7.5 million to meet its statutory net worth requirement for the year ended June 30, 2002 and that OmniCare-TN "is a viable HMO under contract with TennCare on the same basis as other comparable HMOs in the program effective July 1, 2002."
Pursuant to such contractual amendment: OmniCare-TN retroactively elected an available risk option for the ten months from July 1, 2001 through April 30, 2002; TennCare retroactively agreed to reimburse OmniCare-TN on a no-risk ASO basis for medical services effective beginning May 1, 2002, and TennCare agreed to pay OmniCare-TN up to $7.5 million as necessary to meet its statutory net worth requirement as of June 30, 2002. OmniCare-TN received a permitted practice letter from the State of Tennessee to include such $7.5 million receivable in its statutory net worth at June 30, 2002. Under generally accepted accounting principles, such $7.5 million is not recorded in
the Company's fiscal 2002 financial statements but will be recorded in its fiscal 2003 financial statements.
As a Michigan HMO, OmniCare-MI is subject to oversight by the State of Michigan's Commissioner of the Office of Financial and Insurance Services (the "Commissioner"). On July 31, 2001, pursuant to a motion by the Commissioner, a State circuit court judge entered an order of rehabilitation of OmniCare-MI (the "Order") and appointed the Commissioner as Rehabilitator of OmniCare-MI. The Order directed the Rehabilitator to administer all of OmniCare-MI's assets and business while attempting to effectuate its rehabilitation, preserve its provider network and maintain uninterrupted health care services to the greatest extent possible. Pursuant to and since the Order, the Rehabilitator's appointed special deputy has served as the Chief Executive Officer of OmniCare-MI.
Medical premium revenues were $163.1 million in the fiscal year ended June 30, 2002, an increase of $60.0 million (58%) from medical premium revenues of $103.0 million in the fiscal year ended June 30, 2001.
Management fees earned from OmniCare-MI were $14.9 million in the fiscal year ended June 30, 2002, a decrease of $11.5 million (43%) from fees of $26.4 million in the fiscal year ended June 30, 2001. Effective August 1, 2001, the management agreement was revised from a fixed 14% of OmniCare-MI revenues to a cost-based fee that approximated 10%. The fee structure was further reduced in the fourth quarter of fiscal 2002 because OmniCare-MI began paying most of its general and administrative expenses directly.
Total expenses were $190.2 million in the fiscal year ended June 30, 2002, compared to $132.1 million in the fiscal year ended June 30, 2001, an increase of $58.1 million (44%).
Medical services expenses were $155.1 million in the fiscal year ended June 30, 2002, an increase of $69.4 million (81%) from medical services expenses of $85.7 million in the fiscal year ended June 30, 2001.
Medical services expenses for OmniCare-TN increased $74.5 million (96%), to $152.4 million in the fiscal year ended June 30, 2002 from $77.9 million in the fiscal year ended June 30, 2001. The OmniCare-TN overall percentage of medical services expenses to medical premium revenues - the medical loss ratio ("MLR") - was 95% for the fiscal year ended June 30, 2002 and 85% for the fiscal year ended June 30, 2001. The fiscal 2002 OmniCare-TN MLR includes an approximate 11% increase due to a fourth quarter increase in the medical claims liability of $11.2 million related to the assignment of new members by TennCare. The fiscal 2001 contract with TennCare required that a minimum of 85% of capitation revenues be paid to medical service providers.
The Company recognized a loss before income taxes of $10.4 million for the year ended June 30, 2002 compared to a $0.3 million loss before income taxes for the year ended June 30, 2001. The net loss for the year ended June 30, 2002 was $11.0 million, or $1.60 per share, compared to net earnings of $1.2 million, or $0.18 per share, for the year ended June 30, 2001.
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 2001 COMPARED TO 2000
Medical premium revenues were $103.0 million in the fiscal year ended June 30, 2001, an increase of $16.8 million (20%) from medical premium revenues of $86.2 million in the fiscal year ended June 30, 2000.
Management fees earned from OmniCare-MI were $26.4 million in the fiscal year ended June 30, 2001, an increase of $7.6 million (41%) from fees of $18.8 million in the fiscal year ended June 30, 2000. The $18.8 million of management fees earned from OmniCare-MI in fiscal 2000 includes the portion of $3.7 million which was converted into an unsecured loan to OmniCare-MI, evidenced by a surplus note.
Medical services expenses were $85.7 million in the fiscal year ended June 30, 2001, an increase of $15.4 million (22%) from medical services expenses of $70.3 million in the fiscal year ended June 30, 2000. As described in "Overview" above, the Company established at December 31, 1997 and maintained until March 31, 2000 an estimated medical claims liability reserve of $6.4 million for UltraMedix. At March 31, 2000, Company management concluded that the continuing reserve requirement should be $0.8 million, and accordingly, the Company reduced the reserve by $5.6 million and offset that amount against medical services expenses. Without that reversal, medical services expenses would have been $75.9 million in the fiscal year ended June 30, 2000, an increase of $16.0 million (27%), resulting in an overall percentage of medical services expenses to medical premium revenues - the medical loss ratio ("MLR") - of 88% for OmniCare-TN and County Care for fiscal 2000.
In December 2001, the Securities and Exchange Commission ("SEC") requested that all registrants identify their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Determining reportable medical claims liability is a critical accounting policy of the Company. See Note 2i to the consolidated financial statements contained elsewhere in this annual report.
OmniCare-TN was assigned approximately 6,000 members by TennCare in the second half of fiscal 2000 as a result of three other managed care organizations, which had contracts with TennCare, ceasing to serve their enrollees or being unable to take on new enrollees. Medical services expenses for such new OmniCare-TN members disproportionately exceeded OmniCare-TN's normal PMPM experience and adversely affected its earnings for and since that period. OmniCare-TN received from TennCare in fiscal 2001 an adverse selection payment of $0.8 million for such fiscal 2000 expenses.
Medical services expenses for County Care were $7.8 million in the fiscal year ended June 30, 2001, a decrease of $0.3 million (4%) from medical services expenses of $8.1 million in the fiscal year
equipment of $1.0 million and the purchase of marketable securities of $19.4 million, offset by proceeds from the sale or maturity of marketable securities of $6.0 million. Debt repayments were $0.6 million in fiscal 2002. Cash and marketable securities decreased by $6.0 million at June 30, 2002 compared to June 30, 2001, due primarily to operating needs of $5.1 million, purchase of fixed assets of $1.0 million and payment of debt of $0.6 million.
Property, plant and equipment decreased by $3.2 million at June 30, 2002 compared to June 30, 2001, due to the recording of an impairment loss on software of $2.4 million, depreciation of $1.8 million and fixed asset additions of $1.0 million.
Effective July 1, 2000, OmniCare-TN entered into a new 42-month contract with the State of Tennessee's TennCare Program. The contract provided for an approximate 4.5% increase in average premiums at July 1, 2000 and a further 4% increase at July 1, 2001 with future increases to be determined by the State of Tennessee. Such increases were in lieu of the quarterly adverse selection payments previously made by TennCare to compensate managed care organizations for substantial adverse costs incurred due to the nature of the services they offer and their treatment of a high risk population.
At June 30, 2001, OmniCare-TN was licensed in and served Shelby and Davidson Counties in Tennessee (which include the cities of Memphis and Nashville, respectively). Effective July 1, 2001, OmniCare-TN received approval from TennCare to expand its service area to western Tennessee and to withdraw from Davidson County. Additionally, a significant competitor of OmniCare-TN ceased doing business in October 2001, and TennCare assigned approximately 40,000 of that plan's members to OmniCare-TN on February 15, 2002. As of September 1, 2002, OmniCare-TN's total enrollment was approximately 120,000 members, almost equally divided between Medicaid enrollees and Non-Medicaid enrollees.
Beginning July 1, 2002, TennCare implemented an 18-month stabilization program which entailed changes to TennCare's contracts with MCOs, including OmniCare-TN. During that period, MCOs are generally compensated for administrative services only (commonly called "ASO"), earn fixed administrative fees, are not at risk for medical costs in excess of targets established based on various factors, are subject to increased oversight, may earn limited additional administrative fees based on
Based on OmniCare-TN's significant membership growth, certain cost savings which OmniCare-TN has implemented, the TennCare program's change to ASO effective beginning May 1, 2002 for OmniCare-TN and OmniCare-TN's recently amended TennCare contract, Company management believes that OmniCare-TN has weathered the unusual circumstances of fiscal 2002 and expects OmniCare-TN will be in compliance with its statutory net worth requirements through June 30, 2003 and will have positive net earnings for fiscal 2003.
In the fourth quarter of fiscal 2002, OmniCare-MI began paying directly most of its general and administrative expenses, thus reducing both the Company's management fee revenue and marketing, general and administrative expense.
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and the other is SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities."
SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 also amends ARB No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company plans on adopting SFAS No. 144 during fiscal 2003, and management does not believe that SFAS No. 144 will have a material effect on the financial statements of the Company.