Renaissance Center, Detroit, Michigan. Due to delays in establishing operations in Pennsylvania, the Company is finalizing negotiations to sub-lease approximately 12,000 of the 67,000 square feet it has leased in Philadelphia, Pennsylvania to third parties. There can be no assurance that the Company will be successful in reducing this rent obligation.
The Company believes that its facilities will provide sufficient space suitable for all of the Company's planned activities, and that sufficient additional space will be available on reasonable terms, if needed.
The following table sets forth selected consolidated financial data for the period indicated:
(1) The Company's contract with Wayne County was discontinued April 30, 1992.
In 1996, the Company acquired additional ownership in previously unconsolidated affiliates which affect the year to year comparability of its consolidated financial position and results of operations. On January 29 and 31, 1996, the Company purchased an additional 20.6% and 25% of the voting common stock, and 100% of the preferred stock, of Ultramedix and OmniCare-TN, respectively. This increased the Company's ownership in the voting common stock of Ultramedix and OmniCare-TN to 51% and 75%, respectively. The acquisitions were accounted for under the purchase method of accounting and accordingly, these now majority-owned entities are included in the Company's consolidated financial results. Overall revenues, excluding the effect of consolidation, increased $6.1 million (9%) due to increased management fees of $4.2 million (7%) and increased commission and service fee revenues of $1.9 million (21%). The owned Managed Plans experienced a medical loss ratio of approximately 87%. Excluding HMO medical services, expenses increased $18.6 million (32%). Marketing, general and administrative, depreciation and amortization and interest expense increased $8.5 million, $1.7 million and $.6 million, respectively and the net contract settlement expense was $9.7 million.
Total revenues increased $34.4 million (50%) from $68.6 million in 1995 to $103.0 million in 1996.
HMO medical premium revenues were $34.5 million, of which $28.7 million and $5.8 million related to OmniCare-TN and Ultramedix, respectively. The average per member per
Commission and service fees relate primarily to the activities of CHF and represent contract renewals and new contracts. Commission and service fees were $10.7 million in 1996, a $1.9 million (21%) increase over fees of $8.8 million in 1995. Approximately $1.4 million of the increase is due to the net increase in the number of groups (109 to 140) and approximately $.2 of the increase is due to the increase in the net average revenues per group ($46,000 to $48,000) for CHF. Management expects the new IWIF contract to generate approximately $7 million a year over the life of the contract in revenue beginning in 1997.
1996 and 1995 and for CHF decreased 3% from 78% in 1995 to 76% in 1996. MG&A as percentage of management fees for the management of OmniCare-MI, increased approximately 30%, from 32% in 1995 to 41% in 1996, due primarily to increased payroll and promotional efforts to expand the provider network, product development and preparation for NCQA accreditation reviews.
Contract settlement expense was $9.7 million in 1996. This expense represents a one-time non-recurring net charge to adjust management fee revenues and its effect on other related accounts based on the provisions of the revised management agreement as approved by the State of Tennessee in November 1995, retroactive to January 1, 1994. The contract settlement charge represents the effect of retroactively applying the provisions of the revised management agreement from January 1, 1994 to September 30, 1995. The effect on management fee revenues for the period January 1, 1994 to September 30, 1995, as adjusted in December 1995, was a reduction in management fees of approximately $11.7 million, offset by a decrease in goodwill of approximately $.6 million related to the Company's 50% equity ownership in OmniCare-TN at the
time. Additionally, the contract settlement charge was reduced by the $1.4 million reversal of the valuation allowance established in June 1995 representing a charge to adjust the carrying value of the Company's investments, advances and notes receivable from and related to OmniCare-TN to their estimated fair values at June 30, 1995. The Company subsequently acquired a majority interest in OmniCare-TN. See additional discussion under management fee revenues.
Equity in unconsolidated affiliates net losses decreased $2.2 million, from $2.8 million in 1995 to $.7 million in 1996, due to the Company's recognition of its share of the losses as a shareholder of OmniCare-TN (50%) and Ultramedix (30.4%) through January 1996, at which time the Company acquired a majority interest in these plans.
Total revenues in 1995 were $68.6 million, an increase of $23.3 million (51%) over revenues of $45.3 million in 1994.
Management fees were $57.9 million in 1995, an increase of $20.7 million (56%) over fees of $37.3 million in 1994, in part, to: (i) increased operating revenues of OmniCare-MI due primarily to increased enrollment and premium rates of 8% and 4%, respectively, which resulted in increased management fees of approximately $2.8 million, (ii) increased operating revenues of PPC due primarily to increased enrollment offset by a decrease in premium rates of 22% and 2%, respectively, which resulted in increased management fees of approximately $1.2 million, (iii) a net decrease in management fees of approximately $.1 million due to OmniCare-MI's recognition of retroactive rate adjustments in 1994, and (iv) an increase in management fees of $1.2 million from approximately $.7 million in 1994 to $1.9 million in 1995 related to the Company's administration of OmniCare-MI's COB program.
The Company's management of OmniCare-TN also contributed to the increase in
management fees. Management fees in 1995 were $15.6 million, an increase of $11.8 million over fees of $3.8 million in 1994. The OmniCare-TN management agreement with UA-TN was effective for five months in 1994 compared to 12 months in 1995. In November 1994, the TennCare Bureau notified the Company that management fees charged under the original management agreement, effective February 1, 1994, exceeded the guidelines of the TennCare contract. In April 1995, the Company submitted a revised management agreement to the TennCare Bureau. In June 1995, the State notified the Company of its rejection of such revised agreement. The Company submitted a second revised management agreement which was approved by the State in November 1995, retroactive to January 1994. However, the Company has continued its dispute with the State of Tennessee regarding the issue of whether such management fee should be assessed to gross or net capitation. The Company has raised other issues with the State of Tennessee which include (i) the imposition by the State of Tennessee of premium taxes on gross capitation payments, (ii) the deduction of charity and local government charges from gross capitation of approximately 27% deducted by and payable to the State of Tennessee. OmniCare-TN intends to continue to pursue these issues with the State of Tennessee.
OmniCare-TN and other managed care organizations who have contracted with the State of Tennessee under the TennCare program were audited by the State of Tennessee Comptroller Division of Audit. The findings by the Comptroller Division of Audit included a finding regarding OmniCare-TN marketing practices. Identified capitation payments of $78,206 were made to OmniCare-TN for improperly enrolled individuals from January 1994 through July 1995. See "Legal Proceedings."
Commission and service fees related primarily to the activities of CHF, representing contract renewals and new contracts in 1995, were $8.9 million, an increase of $2.0 million (29%) over fees of $6.8 million in 1994. The increase was due to a 26% increase in the number of groups (121 to 152) and a 2% increase in the average revenues per group.
YEAR ENDED JUNE 30, 1994 COMPARED TO YEAR ENDED JUNE 30, 1993
CHF commission and service fees increased $6.1 million from $.7 million for the period May 7, 1993 to June 30, 1993, to $6.8 million in 1994. 1993 revenues represented contract renewals for the month of June 1993. The 1994 activity is based on contract renewals of approximately 130 groups with 25 or more employees. The Company's revenue recognition policy is to recognize the contract period revenue in the effective month of coverage.
Interest and other income increased $.5 million (68%) from $.7 million in 1993 to $1.2 million in 1994, primarily due to increases in both average investment balances and interest rates.
Equity in unconsolidated affiliates net losses of $.09 million in 1994 was due to the Company's recognition of its share in the loss as a shareholder of Ultramedix (30.4%). The effective date of the Company's investment in Ultramedix was March 1994.
SFAS No. 121 - "Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed Off" and SFAS 123 - "Accounting for Stock Based Compensation" are effective for fiscal years beginning after December 15, 1995. Management believes that the adoption of SFAS Nos. 121 and 123 will not have a material effect on the Company's consolidated financial statements.
At June 30, 1996, the Company had (i) cash and cash equivalents and short-term marketable securities of $27.3 million compared to $13.5 million at June 30, 1995, (ii) working capital of $9.3 million compared to $15.1 million at June 30, 1995, and (iii) a current assets to current liabilities ratio of 1.3-to-1 and 3.1-to-1 at June 30, 1996 and June 30, 1995, respectively. The adoption of SFAS No. 115 resulted in a $.3 million pre-tax valuation adjustment, reducing the cost of marketable securities to market value. The principal sources of funds for the Company during the twelve months ended June 30, 1996 were long-term borrowings of $13.6 million, net sales of marketable securities of $4.1 million, and $9.7 million provided from net operating activities, offset by furniture and equipment additions of $3.5 million, loans to related parties of $2.3 million, $8.3 million used to invest in and advance funds to affiliates, increases in intangible and sundry assets of $3.3 million and $.2 million, respectively, development costs of $2.1 million, and $2.4 million to repay long term debt.
The Company has agreed to allow Ultramedix and HealthScope/United, Inc. to borrow up to $3.6 million and $4.3 million, respectively. As of June 30, 1996, $4.2 million had been advanced to HealthScope/United Inc. under these arrangements. The Company has set up allowances of $1.1 million for HealthScope to adjust the carrying values of investments, advances and notes receivables from these related parties to their estimated fair values.
The total cost of the management information client server project at June 30, 1996 is approximately $4.2 million. Capital costs to fund the project are significantly completed. See "Business - Management Information System."
The Company anticipates that additional cash flow and working capital may be necessitated by business expansion needs (including potential acquisitions) and new marketing program requirements. The Company has submitted and expects to continue to submit proposals to governmental, quasi-governmental and private entities to provide managed care services. Management believes that, as it continues to pursue other contractual relationships, the Company's cash reserves, marketable securities, cash flows from operations and proceeds from borrowings will be sufficient to enable the Company to continue to develop its operations, support its anticipated business expansion and satisfy its working capital needs for the foreseeable future.
The Company is pursuing initiatives in the following states, all of which are in various
In October 1994, the Company formed the wholly owned subsidiary, United American Healthcare of Georgia, Inc. ("UA-GA") and OmniCare Health Plan of Georgia, Inc. ("OmniCare-GA"), to pursue business opportunities initially in 19 metropolitan Atlanta counties. Application for a commercial Certificate of Authority to operate as a licensed HMO has been submitted to the Department of Human Resources ("DOHR") and the DOI for review. DOHR has granted approval for two counties. Management is resolving other licensing issues with the DOI. In connection therewith, the Company has funded OmniCare-GA's statutory reserve and net worth requirements in the aggregate amount of $4.1 million and anticipates licensure to occur in the near future; however, no assurance can be given that the license will be granted.
Georgia's Medicaid office has begun a seven phase state-wide initiative initially in five metro Atlanta counties. Marketing and enrollment will be performed by an independent group contracted by the state. Eligibles must choose an HMO or be assigned to the State's managed care program called Georgia Better Health Care. There are approximately 210,000 eligibles in the Atlanta area. The program for 19 Atlanta counties is expected to begin in September 1996. Only one HMO has been approved for the Medicaid program with other applications in process.