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.
In June 1999, OmniCare-MI joined with Blue Cross Blue Shield of Michigan (the "CasinoCare Venture") to provide health care, dental and prescription drug benefits to casino employees in Detroit. There are currently approximately 3,000 CasinoCare Venture members receiving health coverage generating medical premiums of approximately $0.4 million monthly. The Company receives a management fee based on the medical premiums generated from those members who select the Company's products.
On May 1, 2000, approximately 28,000 members of the Detroit Medical Center's Medicaid managed care program were transferred to OmniCare-MI. Since then, OmniCare-MI's overall Medicaid enrollment has stayed relatively constant. During fiscal 2000, the additional membership generated management fee revenue of $0.6 million, and approximately $4.0 million in fiscal 2001.
As a Michigan HMO, OmniCare-MI is subject to oversight by the Commissioner of Financial & Insurance Services of the State of Michigan. 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 to serve as Rehabilitator of OmniCare-MI. The order directs the Rehabilitator to administer all of OmniCare-MI's assets and business while attempting to reform or revitalize OmniCare-MI by any means so as to effectuate its rehabilitation, preserve its provider network and maintain uninterrupted health care services to the greatest extent possible. Pursuant to the Order, the Rehabilitator's appointed Special Deputy Rehabilitator, Bobby Jones, who served some years ago as the Senior Vice President of OmniCare-MI, is now acting as the Chief Executive Officer of OmniCare-MI.
Two beneficial results of the Order are that management believes the Company will have no future occasion to make loans to or forgive management fees from OmniCare-MI, and the Order requires the Company to continue performing its management contract with OmniCare-MI until further order of the court. The Company has continued to perform the management contract without interruption and has been paid its 14% management fee pursuant to the contract for July 2001. Meanwhile, the Company and the Special Deputy Rehabilitator have reached agreement on an amendment to the contract, which is expected to be in final form and effective soon after the date of this 10-K annual report. Management expects the already agreed upon amendment will reduce the Company's management fee percentage from 14% to approximately 10% beginning in August 2001, will provide for adjustment from time to time to appropriately reflect the Company's future costs of performing the contract, and will continue unchanged the contract's other basic terms.
In April 1998, a Florida health care administration agency notified the Company of intent to enforce its agreement to reimburse UltraMedix's contracted Medicaid providers for certain services which the Agency had paid for on enrollees' behalf, limited to the amount of surplus UltraMedix would have had to maintain under the Medicaid contract absent such agreement.
On September 20, 2000, the Company made an additional cash contribution of $0.9 million to OmniCare-TN in exchange for additional preferred stock of OmniCare-TN. The cash contribution was made to enable OmniCare-TN to meet minimum statutory requirements for net worth.
The Company recognized a loss before income taxes of $0.3 million and earnings before income taxes of $1.6 million for the fiscal years ended June 30, 2001 and 2000, respectively, a decrease of $1.9 million (119%). The Company's earnings net of income taxes for the fiscal years ended June 30, 2001 and 2000 were $1.2 million and $1.0 million, respectively, an increase of $0.2 million (20%).
Excluding the earlier described reversal in part of an UltraMedix medical claims liability reserve, recording of bad debt expense against amounts owed to the Company by OmniCare-MI and recovery of the investment in PhilCare, resulting in a gain, the Company would have recognized
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
Depreciation and amortization decreased $1.4 million (42%), to $2.0 million in the fiscal year ended June 30, 2001 from $3.4 million in the fiscal year ended June 30, 2000. The Company
had previously capitalized costs for internally developed customized software. At June 30, 2001, these costs were fully depreciated and accounted for approximately $1.4 million of fiscal 2001 expense. The Company purchased $3.0 million of property and equipment, the majority of which was not yet placed in service and, therefore, did not have a significant effect on depreciation expense in the fiscal year ended June 30, 2001.
Excluding the earlier described reversal in part of an UltraMedix medical claims liability reserve, recording of bad debt expense against amounts owed to the Company by OmniCare-MI and recovery of the investment in PhilCare, resulting in a gain, the Company would have recognized earnings before income taxes for the fiscal year ended June 30, 2001 of $10.4 million compared to a loss before income taxes of $3.0 million for the fiscal year ended June 30, 2000.
Total revenues increased $15.6 million (17%), to $109.1 million in the fiscal year ended June 30, 2000 from $93.5 million in the fiscal year ended June 30, 1999.
Medical premium revenues for OmniCare-TN increased $6.1 million (9%), to $77.0 million in the fiscal year ended June 30, 2000, from $70.9 million in the fiscal year ended June 30, 1999. OmniCare-TN's premium rate increases accounted for $3.1 million of the increase. Member months decreased 16,000 (3%) to 524,000 in the fiscal year ended June 30, 2000 from 540,000 in the fiscal year ended June 30, 1999, and accounted for a $2.4 million decrease in premium revenues. TennCare provided additional adverse selection payments to managed care organizations for high cost chronic conditions of their members and payments earmarked as adjustments for covered benefits. In the fiscal year ended June 30, 2000, revenue adjustments for adverse selection and other covered benefits increased $4.5 million compared to the prior fiscal year. OmniCare-TN adverse selection revenue related to fiscal 1999, recognized in the fiscal year ended June 30, 2000, accounted for $0.9 million of the revenue increase.
Management fees earned from OmniCare-MI were $18.8 million in the fiscal year ended June 30, 2000, an increase of $0.7 million (4%) from fees of $18.1 million in the fiscal year ended June 30, 1999. Excluding the earlier described forgiveness in fiscal 1999 of $1.3 million of management fee revenue, management fees from OmniCare-MI earned in the fiscal year ended June 30, 2000 would have decreased $0.6 million (3%) compared to management fees of $19.4 million earned for the fiscal year ended June 30, 1999. 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 $70.3 million in the fiscal year ended June 30, 2000, an increase of $10.4 million (17%) from medical services expenses of $59.9 million in the fiscal year ended June 30, 1999. 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.
Medical services expenses for OmniCare-TN increased $10.0 million (17%), to $67.8 million in the fiscal year ended June 30, 2000 from $57.8 million in the fiscal year ended June 30, 1999. The OmniCare-TN MLR was 88% for the fiscal year ended June 30, 2000 and 82% for the fiscal year ended June 30, 1999. The fiscal 2000 OmniCare-TN MLR includes an approximate 4.5% increase due to a fourth quarter increase in the medical claims liability of $3.4 million related to the assignment of new members by TennCare. The fiscal 1999 OmniCare-TN MLR includes an approximate 3% reduction due to offsets to medical services expenses related to the net recovery of $0.5 million in refundable advances made to a third party dental administrator and an excess adverse selection payment of $1.0 million received in fiscal 1999 for the period June 1997 and prior.
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 approximately $0.8 million for such fiscal 2000 expenses.
Medical services expenses for County Care were $8.1 million in the fiscal year ended June 30, 2000, an increase of $6.0 million (286%) from medical services expenses of $2.1 million in the fiscal year ended June 30, 1999. The increase was a result of the Company's having participated in the County Care program in only three months in fiscal 1999 versus a full year of participation in fiscal 2000. The County Care MLR for the fiscal year ended June 30, 2000 was 88%. County Care operations began with inception of the contract in April 1999.
Marketing, general and administrative expenses increased $2.9 million (11%), to $30.2 million in the fiscal year ended June 30, 2000, from $27.3 million in the fiscal year ended June 30, 1999. The increase was due primarily to increases in wages and benefits of $1.8 million and increases in temporary labor costs of $0.9 million.
Depreciation and amortization remained relatively constant at $3.3 million and $3.4 million for the fiscal years ended June 30, 2000 and 1999, respectively. The Company had previously capitalized costs for internally developed customized software. At June 30, 2000, these costs were fully depreciated and accounted for approximately $1.4 million of fiscal 2000 expense. The Company purchased $2.5 million of property and equipment, the majority of which was placed in service in the last quarter of fiscal 2000 and therefore did not have a significant effect on depreciation expense in the fiscal year ended June 30, 2000.
Interest expense decreased $1.2 million (68%), to $0.5 million in the fiscal year ended June 30, 2000 from $1.7 million in the fiscal year ended June 30, 1999, due to reduction of outstanding debt from $13.1 million at June 30, 1999 to $4.3 million at June 30, 2000.
Bad debt expense in the fiscal year ended June 30, 2000 totaled $3.1 million as a result of recording an impairment loss on the valuation of the unsecured loan made to OmniCare-MI.
In previous fiscal years, to satisfy applicable statutory requirements, the Company provided $1.0 million in letters of credit on behalf of, and a $1.0 million capital contribution to, OmniCare-LA, and made a $2.1 million capital contribution to PhilCare. The funds were provided by the Company from its line of credit arrangement. Due to the cessation of its Louisiana operations, the Company withdrew the $1.0 million capital contribution and terminated its letter of credit commitments in May 2000. PhilCare was dissolved under applicable law in the Company's fiscal 2000. As a result of the dissolution, assets of PhilCare were distributed to UA-PA pursuant to agreements under which UA-PA contributed those assets, and the Company recovered its investment in PhilCare, receiving approximately $2.1 million of cash and U.S. Treasury obligations during fiscal 2000.
OmniCare-TN's application for a commercial HMO license was approved on September 7, 2001. Management believes that the receipt of the commercial license and OmniCare-TN's efforts to expand its provider network to Shelby County (southwestern Tennessee) will enable OmniCare-TN to increase its enrollment by marketing its managed care products to the various employer groups in the regions served. Management anticipates such increased enrollment beginning after fiscal 2002.
reached agreement on an amendment to the management agreement, which is expected to be in final written form, signed and effective soon after the date of this 10-K annual report. Company management expects the already mutually agreed upon amendment will reduce the Company's management fee percentage from 14% to approximately 10% beginning in August 2001 and will provide for reevaluation and adjustment from time to time to appropriately reflect the Company's actual future costs of performing the management agreement. The Company's management expects the amendment will continue unchanged the other basic terms of its management agreement with OmniCare-MI as summarized in Table A under "Managed Plans" above.
The Company's ability to generate adequate amounts of cash to meet its future cash needs depends on a number of factors noted above, including the rehabilitation of OmniCare-MI and the ability of the Company to control administrative costs related to managing OmniCare-MI and medical costs related to the TennCare program. Based on these factors, management believes it has the ability to generate sufficient cash to meet its current liabilities.
years ended June 30, 2001. Earnings per share, on a proforma basis, would have increased $0.10 per share in each of the three fiscal years ended June 30, 2001. The Company has not yet determined whether it will adopt the new standard as of July 1, 2001 or July 1, 2002.