The Company provides comprehensive management and consulting services to managed care organizations, including health maintenance organizations ("HMOs") in Tennessee and (until November 1, 2002) Michigan, with a targeted mix of Medicaid and commercial enrollment.
OmniCare Health Plan, in Michigan ("OmniCare-MI"), an HMO then administered by the Company under a management agreement, was placed in court-ordered rehabilitation proceedings on July 31, 2001, which relieved the Company from further funding OmniCare-MI's capital deficiencies and which continued its OmniCare-MI management agreement, with substantially reduced management fee revenues from OmniCare-MI beginning August 1, 2001. In March 2002, upon the court-appointed Rehabilitator's filing a proposed rehabilitation plan for OmniCare-MI, the Company announced it anticipated eventual termination of the management agreement. Such termination occurred November 1, 2002, after which the Company's only managed plan has been OmniCare Health Plan, Inc., in Tennessee ("OmniCare-TN"), an HMO which is owned by the Company's wholly owned subsidiary. Accordingly, the consolidated financial statements in this annual report have been restated to present the operations related to managing OmniCare-MI as a discontinued operation.
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 were generally compensated for administrative services only (commonly called "ASO"), earned fixed administrative fees, were not at risk for medical costs in excess of targets established based on various factors, were subject to increased oversight, and could incur financial penalties for not achieving certain performance requirements. Through an amendment completed on December 19, 2003, TennCare extended the ASO reimbursement system applicable to OmniCare-TN through June 30, 2004. A subsequent amendment completed on June 25,2004, further extended the ASO reimbursement system applicable to OmniCare-TN through December 31, 2004. There has been no specific indication yet of what TennCare reimbursement system will apply after that date to OmniCare-TN. These matters are more fully discussed and analyzed below under the heading "Review of Consolidated Results of Operations - 2004 Compared to 2003."
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - 2004 COMPARED TO 2003
OmniCare-TN's results of operations for fiscal 2003 are best understood in the context of certain events preceding that fiscal year involving several of TennCare's major contracted MCOs, which ceased doing business in fiscal 2002. Beginning in February, March and April 2002, OmniCare-TN unexpectedly noticed increases in its claims payments, investigated, and found that approximately 9,500 new members added in September-December 2001 represented children with special needs with medical costs over 100% of the premiums received, and that many members transferred to OmniCare-TN from failed MCOs also had medical costs in excess of OmniCare-TN's premiums received. Beginning in April 2002, OmniCare-TN wrote to TennCare seeking risk adjustments and reimbursements to compensate OmniCare-TN for such medical expenses, including for actuarially estimated claims incurred but not yet reported to OmniCare-TN.
management fee revenues from OmniCare-MI beginning August 1, 2001, by changing the methodology for determining the management fee from a fixed percentage (14%) of premiums earned by OmniCare-MI to a cost-based fee, which was equivalent to approximately 10% of premiums earned beginning in August 2001, subject to adjustment to reflect the Company's actual costs of performing the management agreement.
In connection with the November 1, 2002 termination of its OmniCare-MI management agreement, the Company recorded a $1.8 million loss from discontinued operations in the second quarter of fiscal 2003. Such loss was due in part to: (i) a $0.6 million write-down of assets held for sale in excess of the anticipated selling price for the expected sale of assets described above; (ii) the above-described sublease, with an expected cost to the Company of approximately $0.04
Medical premium revenues were $0.5 million for the fiscal year ended June 30, 2004, a decrease of $7.3 million (93%) from medical premium revenues of $7.8 million for the fiscal year ended June 30, 2003. The decrease came from OmniCare-TN as the result of TennCare's changing its reimbursement system to an ASO program for an initially declared 18-month stabilization period beginning July 1, 2002, subsequently extended through December 31, 2004.
Fixed administrative fees related to the ASO program were $20.4 million for the fiscal year ended June 30, 2004, an increase of $5.6 million (38%) from fixed administrative fees of $14.8 million for the fiscal year ended June 30, 2003. The increase in fixed administrative fees is principally due to an increase in members and an increase in reimbursement rates effective July 1, 2003.
Total expenses were $15.3 million for the fiscal year ended June 30, 2004, compared to $16.6 million for the year ended June 30, 2003, a decrease of $1.3 million (8%). The decreases were principally due to the TennCare ASO program for OmniCare-TN discussed above.
Because of TennCare's new ASO reimbursement system, medical services expenses were $0.5 million in the fiscal year ended June 30, 2004, an increase of $0.1 million (23%) as compared with medical services expenses of $0.4 million in the fiscal year ended June 30, 2003. The $0.5 million of medical services expenses represent fiscal 2002 claims processed and reimbursed by TennCare in fiscal 2004 as explained under the above heading "OmniCare-TN Developments."
Marketing, general and administrative expenses were $14.5 million for the fiscal year ended June 30, 2004, as compared with marketing, general and administrative expenses of $15.7 million for the comparable period a year earlier, a decrease of $1.2 million (8%). The decrease is principally due to TennCare's payment of premium tax as a result of the ASO arrangement discussed above, offset by the costs of claims processing associated with a membership increase.
The Company recognized a loss from discontinued operations of $0.7 million in the fiscal year ended June 30, 2004 compared to a loss from discontinued operations of $2.1 million in the fiscal year ended June 30, 2003 as the result of the termination of the Company's longstanding management agreement with OmniCare-MI, effective November 1, 2002. See "Overview" above for more detailed discussion and analysis of such loss from discontinued operations.
2002, as described under "Overview" above. Fixed administrative fees related to the ASO program were $14.8 million for the fiscal year ended June 30, 2003.
Total expenses were $16.6 million in the fiscal year ended June 30, 2003, compared to $173.6 million in the fiscal year ended June 30, 2002, a decrease of $157.1 million (90%).
The Company recognized earnings from continuing operations before income taxes of $8.0 million in the fiscal year ended June 30, 2003, compared to a loss before income taxes of $8.4 million in the fiscal year ended June 30, 2002. Earnings from continuing operations were $7.3 million, or $1.06 per basic share, in the fiscal year ended June 30, 2003, compared to a loss from continuing operations of $9.3 million, or $1.35 per basic share, in the fiscal year ended June 30, 2002, an increase of $16.6 million, or $2.41 per basic share. The increase in earnings is primarily due to the amendment to OmniCare-TN's TennCare contract in September 2002, retroactive to July 1, 2001 in some respects and to May 1, 2002 in other respects, as described
At June 30, 2004, the Company had (i) cash and cash equivalents and short-term marketable securities of $8.8 million, compared to $4.7 million at June 30, 2003; (ii) working capital of $8.1 million, compared to working capital of $1.7 million at June 30, 2003; and (iii) a current assets-to-current liabilities ratio of 2.56-to-1, compared to 1.26-to-1 at June 30, 2003.
Net cash from operating activities was $5.0 million in fiscal 2004 compared to net cash used in operating activities of $12.6 million in fiscal 2003. Investing activities in fiscal 2004 included the purchase of equipment of $0.07 million, the purchase of marketable securities of $0.2 million, and the issuance of a promissory note for $0.5 million. Debt repayments were $1.4 million in fiscal 2004.
Property, plant and equipment decreased by $0.2 million at June 30, 2004 compared to June 30, 2003, due to the recording of depreciation of $0.2 million.
Medical claims payable decreased by $0.2 million at June 30, 2004 compared to June 30, 2003, which is directly related to the payment of outstanding medical claims.
The Company's de facto sublease to OmniCare-MI of all of the Company's leased premises in Detroit, Michigan, from November 1, 2002 to the end of the lease in May 2005 has cost the Company approximately $40,000 per month through the remainder of the lease. While OmniCare-MI has been regularly paying monthly rent under such de facto sublease with the Company, based on preliminary discussions management now expects that OmniCare-MI's occupancy of the subleased premises will diminish at some unknown future date and then cease at some unknown later date, but sooner than the primary lease end in May 2005. Those events would increase the Company's rent expense under that lease, but management cannot currently predict the timing and amount thereof.
SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities" amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard had no effect on the Corporation's financial condition or results of operations.
FIN 46R, a revision to FIN 46, "Consolidation of Variable Interest Entities", was issued in December 2003. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is effective at the end of the first interim period ending after March 15, 2004. Entities that have adopted FIN 46 prior to this effective date can continue to apply the provisions of FIN 46 until the effective date of FIN 46R. The adoption of FIN 46R had no effect on the Corporation's financial condition or results of operations.