The Company has leased an aggregate of approximately 224,000 square feet from which it conducts its principal operations. The Company has leased space in Michigan, Tennessee, Maryland, Florida, New York, Texas, Pennsylvania, Louisiana, and Georgia. The principal offices of the Company are located at 1155 Brewery Park Boulevard, Suite 200, Detroit, Michigan, where it has leased approximately 64,000 square feet of office space. The Company intends to house its management information department in 16,079 square feet of leased office space in the
month ("PMPM") premium rate for OmniCare-TN and Ultramedix was approximately $105 and $98, respectively. Based on historical annual contract adjustments by the respective state agencies, management expects nominal premium rate increases for the existing OmniCare-TN and Ultramedix membership in 1997.
Management fees were $55.9 million in 1996, a decrease of $2.0 million (4%) over fees of $57.9 million in 1995, due, in part, to the operated Managed Plans and included: (i) increased operating revenues of OmniCare-MI due primarily to an increase in the enrollment rates of approximately 4% offset by an approximate 1% decrease in the premium rates, which resulted in increased management fees of approximately $.9 million; (ii) increased operating revenues of PPC due to increased enrollment of approximately 26%, which resulted in increased management fees of approximately $1.8 million, and (iii) decreased management fees of $.5 million from approximately $1.3 million in 1995 to $.8 million for 1996 related to the Company's administration of OmniCare-MI's coordination of benefits ("COB") program. Management expectations are that the recently enacted Medicaid initiative in Ohio will continue to favorably affect PPC's 1997 enrollment, OmniCare-MI will recognize nominal enrollment gains, and premium rates for the current membership for OmniCare-MI will decline based on recently proposed state initiative carving out certain medical services while PPC's rates will remain relatively constant in 1997.
The change in management fees was also due, in part, to the owned Managed Plans and included: (i) a decrease of management fees under the Ultramedix management agreement of $1.8 million (36%) from $5.0 million in 1995 to $3.2 million in 1996 due to increased cost reimbursed operating expenses of $1.0 million, offset by the post acquisition consolidation elimination of management fees of $2.8 million, and (ii) a decrease of management fees under the OmniCare-TN management agreement of $1.6 million (10%) from $15.6 million in 1995 to $14.0 million in 1996 due to: (a) an approximate 29% decrease in enrollee member months that resulted in a decrease in enrollment from approximately 63,000 members at June 30, 1995 to approximately 48,000 members at June 30, 1996, due primarily to (i) the Bureau of TennCare's termination of coverage for Working Uninsured who were delinquent in the payment of their premiums to the State under the TennCare program, (ii) the Bureau of TennCare's disenrollment of approximately 3,400 members in April 1996 indicating that the action was taken because questionnaires to members were returned undeliverable. OmniCare-TN is contesting this disenrollment with TennCare on the basis that the disenrollment was in violation of the contract between TennCare and OmniCare-TN, and (iii) the Bureau's determination that approximately 4,500 enrollees were ineligible in December 1994. The enrollment decrease resulted in an approximate $4.6 million decrease in management fees to the Company, (b) a decrease in management fees due to the change in the net management fee percentage charged to the plan of approximately $4.3 million; (c) an approximate 12% rate increase of which 4% is due to rate increases from the state and 8% due to changes in the Plans membership mix. At September 1, 1995, 63% of the Plan's membership was Working Uninsured, compared to 45% at August 1, 1996. The increased rates resulted in increased management fees to the Company of approximately $1.9 million, and (d) post acquisition consolidation elimination of management fees of $3.4 million. These changes resulted in a decrease in management fees to UA-TN of approximately $10.4 million.
Interest and other income in 1996 was $1.9 million, an increase of $.1 million (4%) over income of $1.8 million in 1995.
Medical service expenses of $29.9 million relate to the owned Managed Plan and was $24.5 million and $5.4 million for OmniCare-TN and Ultramedix, respectively. The percentage of premium revenues to medical services or the medical loss ratio ("MLR") post acquisition was 86% and 93% for OmniCare-TN and Ultramedix, respectively. Ultimately the plans' profitability will be dependent on the plans' ability to control health care costs. In 1997 management believes that the MLR could increase at OmniCare-TN due primarily to the change in the membership mix from Working Uninsured to the higher utilizing Medicaid segment, and expects a decrease in the MLR for Ultramedix as a result of an expected increased membership base to spread the medical risk and the renegotiations of provider contracts. The installation of the health care client-server software at OmniCare-TN and the current installation at Ultramedix could mitigate the expected increase in medical cost.
Marketing, general and administrative expenses ("MG&A") increased $8.5 million (17%) from $50.6 million in 1995 to $59.1 million in 1996. MG&A as percentage of management fees and/or commissions and service fees for the management of PPC remained constant at 97% for
MG&A for the Company's owned Managed Plans, OmniCare-TN and Ultramedix, increased from $11.7 million in 1995 to $13.8 million in 1996, an increase of $2.1 million (18%) and excludes a $2.2 million valuation allowance established to adjust the carrying value of the Company's investments, advances and notes receivable from related parties to their estimated fair value in 1995. Approximately $1.2 million of the $2.1 million increase relates to consolidating the expenses of the owned Managed Plans, $1.6 million to increased payroll and $.9 million to increased promotional activities, offset by a decrease in professional services, primarily computer access fees, of $1.8 million.
The Company's development costs in Pennsylvania, Louisiana, Georgia and Illinois accounted for approximately $.4 million of the total MG&A increase. Salary related expenses at the Company's corporate office increased approximately $.9 million from 1995 to 1996 or 17% and the valuation allowance established to adjust the carrying value of the Company's notes receivable from HealthScope to their estimated fair value at June 30, 1996 increased approximately $1 million. Overall the Company's payroll and related expenses represented 54% and 50% of MG&A in 1996 and 1995, respectively. The approximate $6.5 million increase in salaries from $25.2 million in 1995 to $31.7 million (26%) is due substantially to the increase in the number of employees from 610 at June 30, 1995 to 690 at June 30, 1996 and an approximate 5-7% increase in the average salary.
Depreciation and amortization in 1996 was $4.3 million, an increase of $1.7 (64%) from $2.6 million in 1995. The increase was due to depreciation taken on approximately $7.0 million of furniture and equipment acquired over the past twenty-four months and the amortization of goodwill related to acquisitions of approximately $.9 million.
The Company proposed to the Board of Directors of OmniCare-TN that a second Promissory Note payable solely from future non-TennCare related revenues to UA-TN be issued for the amount of any accrued management fees not otherwise payable under the second revised management agreement, or from interest earnings and OmniCare-TN's share of savings not required to be returned to the State of Tennessee under TennCare regulations. On October 5, 1995, the Board of Directors of OmniCare-TN, approved such additional Promissory Note up to an aggregate principal amount of $6.0 million to be repaid solely from future non-TennCare related revenues.
Interest and other income in 1995 was $1.8 million, an increase of $.6 (52%) over income of $1.2 million in 1994. Approximately $.3 million (51%) of the increase was due to interest income on notes due from OmniCare-TN and Ultramedix of $.2 million and $.1 million, respectively.
Total expenses in 1995 were $56.5 million, an increase of $22.7 million (67%) over expenses of $33.9 million in 1994.
MG&A increased $18.5 million (58%) from $32.1 million in 1994 to $50.6 million in 1995, and represented approximately 71% and 74% as a percentage of total revenues in 1994 and 1995, respectively. The Company's activities in Tennessee and Florida represented approximately $4.5 million of the increase, due primarily to 12 months of operations in 1995 compared to approximately 5 months in 1994. Overall the Company's $7.5 million increase in salaries from $17.7 million in 1994 to $25.2 million in 1995 (42%) was due substantially to the increase in the number of employees from 456 at June 30, 1994 to 610 at June 30, 1995 and an approximate 5-7% increase in the average salary. The Company's development costs in Pennsylvania, Louisiana, Georgia and Illinois accounted for approximately $1.5 million of the total MG&A increase. Also included in the MG&A increase was $.5 million representing a charge to earnings in connection with an estimate of the effect of potential OmniCare-TN enrollment adjustments, and $1.8 million representing a charge to adjust the carrying value of the Company's investments, advances and notes receivable from related parties to their estimated fair value at June 30, 1995.
The $.2 million (54%) increase in interest expense from $.3 million in 1994 to $.5 million in 1995, was due primarily to interest cost on the term loan agreement entered into in August 1993 and increased borrowings against the line of credit.
Equity in unconsolidated affiliates net losses of $2.8 million in 1995 was due to the Company's recognition of its share of the losses as a shareholder of OmniCare-TN (50%) and Ultramedix (30.4%) of $2.6 million and $.2 million, respectively. Net equity losses in 1994 were $.1 million and related to the Company's investment in Ultramedix. The effective dates of the Company's investments in Ultramedix and OmniCare-TN were March 1994 and July 1994, respectively.
As a result of the foregoing, earnings before income taxes increased $.6 million (6%) from $11.4 million in 1994 to $12.0 million in 1995. The effective tax rate increased from approximately 35% to 43% for the respective twelve months ended June 30, primarily because the losses in affiliates and goodwill amortization related to equity investments were not fully tax deductible.
The most significant changes between 1994 and 1993 were primarily due to the activities of the newly formed subsidiaries UA-FL and UA-TN in Janauary and February of 1994, and twelve months versus approximately two months of activity for CHF.
Management fees in 1994 were $37.3 million, an increase of $9.7 million (35%) from $27.6 million in 1993, primarily due to the following factors: (1) OmniCare-MI and PPC experienced operating revenue increases due to average increases in both enrollment and rates of 8% and 11%, respectively, which resulted in increased management fees of approximately $4.9 million; (2) Ultramedix's reimbursement of administrative costs to UA-FL, which resulted in management fees of $1.3 million; and (3) operating revenues of OmniCare-TN, based on an average net capitation rate and total enrollee months of approximately $86 and 201,000, respectively, resulted in management fees to UA-TN of approximately $3.8 million.
Total expenses in 1994 were $33.9 million, an increase of $11.8 million (53%) over expenses of $22.1 million in 1993.
MG&A increased $10.7 million (50%) from $21.4 million in 1993 to $32.1 million in 1994, and represented approximately 74% and 71% as a percentage of total revenues in 1993 and 1994, respectively. Overall the Company's $6.3 million increase in salaries from $11.4 million in 1993 to $17.7 million in 1994 (55%) was due substantially to the increase in the number of employees from 308 at June 30, 1993 to 456 at June 30, 1994. The Company's expansion efforts in Maryland (CHF), UA-FL and UA-TN contributed significantly to the remaining MG&A increase.
Interest expense increased $.3 million from $.03 million in 1993 to $.3 million in 1994. The increase was due to long term borrowings in late 1993 being outstanding for the entire year in 1994.
As a result of the foregoing, earnings before income taxes increased $4.5 million (65%) from $6.9 million in 1993 to $11.4 million in 1994. The effective tax rate increased from approximately 33% to 35% for the respective twelve months ended June 30.
Statement of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 - "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" are effective for the Company's fiscal year beginning July 1, 1995. The Company earlier adopted SFAS Nos. 114 and 118 in the determination of certain allowances at June 30, 1995.
As noted above the Company in November 1995, entered into an agreement converting $6.1 million in borrowings under a line of credit to a term loan. This term loan bears interest at prime or 1.25% over the one, two, three or nine month LIBOR rate. The monthly principal payable is approximately $126,000, with the loan due in November 1999. The outstanding balance at June 30, 1996 is $5.0 million.
In August 1993, the Company entered into a $7.0 million bank term loan agreement. The term loan bears interest at prime or 1.5% over the nine month LIBOR rate, not to exceed a total rate of 6.5% per annum. The monthly principal payable is approximately $.1 million with the loan due in August 1998. Covenants of the term loan agreement provide for certain net worth and financial ratio requirements. At June 30, 1996, the Company was in violation of a covenant which sets a floor on a debt service coverage ratio. The Company obtained a waiver for this provision from the lending institution. The loan is collateralized by all the assets of the Company. The Company's outstanding borrowings at June 30, 1996 was $3.0 million.
The Company provided a $1 million letter of credit on behalf of OmniCare-LA and a $1 million capital contribution to OmniCare-LA and a $2.1 million capital contribution to PhilCare, in satisfaction of applicable statutory requirements. In addition, the Company funded $4.1 million on behalf of OmniCare of Georgia, Inc. in satisfaction of applicable reserve and net worth requirements. The foregoing funds were provided by the Company, from the line of credit arrangement. The Company anticipates additional funding requirements for its initiatives in Illinois, Georgia, Louisiana and Pennsylvania in the approximate aggregate amount of $7.6 million, to be applied toward the establishment of statutory reserves and payment of operational costs. There can be no assurance that the Company will fund these requirements. The source for these funding requirements is anticipated to be a combination of cash reserves and debt borrowings.
stages of mandating managed care programs for the Medicaid population. The Company is assisting with the formation, licensing and ownership of plans in each such state.
The Company has also formed, as wholly owned subsidiaries, United American Healthcare of Illinois, Inc. ("UA-IL") and OmniCare Health Plan of Illinois, Inc. ("OmniCare-IL") to participate in the creation and management of an HMO for the Illinois Medicaid initiative called MediPlan Plus and to pursue commercial opportunities, initially in the metropolitan Chicago area. The Company has had discussions with potential partners in the area. The HMO licensing application has been drafted; completion is dependent upon partner selection. The application will require approximately $2.0 million to satisfy applicable statutory requirements, which the Company would intend to fund.
For at least the last three years, health care costs have been rising and are reasonably expected by management to continue to rise at rates higher than the consumer price index. Management believes, however, that the Company's cost controls, risk management programs and related procedures will allow the Company to substantially mitigate the effects of inflation.
The consolidated financial statements, notes and the report of the independent certified public accountants thereon are presented beginning at page of this Form 10-K and are hereby incorporated by reference into this Item 8.