After implementation of the restructuring plan initiated in fiscal 1998, which included changes in senior management, sale of the Company's subsidiary, CHF, renegotiation of the bank credit facility and settlement of legal proceedings, the Company continues its efforts to achieve
further cost reductions and maintain Company revenue, as well as pursue worthwhile mergers and joint ventures.
On September 25, 2000, the Company replaced its $4.0 million bank line of credit, originally due July 1, 2000, with a new $4.0 million term loan from the same bank lender. The term loan requires monthly installments of approximately $85,000, based upon a five-year amortization, through September 30, 2001 when the remaining unpaid principal of approximately $3.4 million will be due. As a result of this refinancing, principal due subsequent to June 30, 2001 is classified as long-term debt in the "Consolidated Balance Sheets" at June 30, 2000. See Notes 10 and 16 in "Notes to Consolidated Financial Statements" for further discussion of the refinancing of the line of credit.
On September 14, 1998, the parties agreed to a proposed settlement requiring the release of all claims and damages sought by the plaintiffs in exchange for (a) $2.0 million in cash from the Company's insurance carrier, (b) a $0.625 million promissory note of the Company payable in 15 equal monthly installments beginning 13 months after entry of a final court order approving the settlement, with interest at 4% per annum from the date of such order, and (c) newly issued shares of common stock of the Company with an aggregate value of $0.625 million based on a share price equal to the greater of (i) the average closing price of the Company's common stock for the period from July 20, 1998 through the third trading day preceding the court hearing on approval of the settlement or (ii) $2.25 per share.
In December 1998, final judgment was entered approving the Company's shareholder lawsuit settlement and dismissing the action. Pursuant thereto, all claims and damages sought by the plaintiffs were released in exchange for $2.0 million in cash from the Company's insurance carrier, a $0.625 million promissory note from the Company payable in 15 equal monthly installments through March 2001, with interest at 4% per annum from December 11, 1998, and 277,777 new shares of common stock of the Company valued at $0.625 million and issued on March 29, 1999.
Effective April 1, 1999, the Company entered into the County Care contract to arrange for the delivery of health care services, including the assumption of underwriting risk, on a capitated basis to certain enrollees residing in Wayne County (Michigan) who lack access to private or employer sponsored health insurance or to another government health plan. The current contract period is through September 30, 2001, with automatic renewal for successive periods of one year unless terminated by either party as provided in the contract. Although management does not expect significant net earnings directly from the County Care contract, management believes that entering into this contract is consistent with the Company's strategic objective of expanding the client base and achieving size sufficient to enable the Company to negotiate better rates, save on administrative costs and build profits.
The Company has implemented a corrective action plan, developed in 1998 and revised in 2000, for OmniCare-MI. The corrective action plan implemented in 1998 included strategic initiatives to reduce medical costs through renegotiating its hospital and physician provider contracts, and the reduction of the management fee percentage paid to the Company from 17% to 14% effective June 1, 1998. The 1998 corrective action plan was effective in reducing costs for OmniCare-MI's Medicaid members, but not as effective in regard to OmniCare-MI's point-of-service members. The management fee percentage reduction decreased the Company's management fee revenue for fiscal 1999 by approximately $4.2 million compared to fiscal 1998.
The Company's revised corrective action plan for OmniCare-MI, developed in 2000, includes the development of new underwriting guidelines, implementation of new renewal rates representing an average per-member premium increase of 40% and institution of pharmacy and office visit co-pays for all member groups. In addition, OmniCare-MI is taking measures to further manage its medical costs through renegotiations of hospital contracts, and cost reduction efforts in the areas of pharmacy, castastrophic case management and behavioral health.
On April 13, 2000 and June 30, 1998, the Company funded unsecured loans to OmniCare-MI, evidenced by surplus notes of $7.7 million and $4.6 million, respectively, to enable OmniCare-MI to meet its minimum statutory requirements for net worth and working capital. The $7.7
million loan consisted of $4.0 million in cash and conversion of $3.7 million of management fees owed to the Company. Pursuant to the terms of the surplus notes, interest and principal payments are subject to approval by the Bureau and shall be repaid only out of the statutory surplus earnings of OmniCare-MI. The interest rate on the $7.7 million surplus note is fixed at 8.5% per annum, while the interest rate on the $4.6 million surplus note is at the prime rate (9.5% at June 30, 2000). Interest is payable annually and if not paid annually is forfeited. Interest income of $0.5 and $0.4 million was forfeited for fiscal 2000 and 1999, respectively. The principal on the notes has no stated maturity or repayment date. The surplus notes are subordinated to all other claimants of OmniCare-MI. Based on an analysis of OmniCare-MI's projected future cash flows, the Company recorded impairment losses on the valuation of the surplus notes. The impairment losses resulted in bad debt expense of $3.1 million and $2.3 million for the years ended June 30, 2000 and 1998, respectively. In addition, during fiscal 1999, the Company forgave $1.3 million in management fees owed by OmniCare-MI to enable OmniCare-MI to meets its minimum statutory requirements for net worth and working capital.
On April 15, 1998, the Florida Agency for Health Care Administration notified the Company of the Agency's intent to enforce the Company's Guarantee Agreement, under which the Company had agreed to reimburse UltraMedix's contracted Medicaid providers for authorized, covered Medicaid services rendered to covered Medicaid enrollees, for which the Agency had made payment on behalf of such enrollees, limited to an amount equal to the amount of surplus UltraMedix would have been required to maintain under the Medicaid contract in the absence of such Guarantee Agreement.
In February 2000, Healthmate was sold, and the buyer agreed to assume Healthmate's liabilities. As a result of the Healthmate sale, on June 22, 2000, PhilCare's Board of Directors and shareholders approved the voluntary dissolution of PhilCare. 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 $2.1 million investment in PhilCare, resulting in a gain in that amount for the fiscal year ended June 30, 2000.
Total revenues increased $15.6 million (17%), to $109.1 million in the year ended June 30, 2000 from $93.5 million in the year ended June 30, 1999.
Medical premium revenues for OmniCare-TN increased $6.1 million (9%), to $77.0 million in the year ended June 30, 2000, from $70.9 million in the 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 year ended June 30, 2000 from 540,000 in the year ended June 30, 1999, and accounted for a $2.4 million decrease in premium revenues. TennCare provides 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 year ended June 30, 2000, revenue adjustments for adverse selection and other covered benefits increased $4.5 million. OmniCare-TN adverse selection revenue related to fiscal 1999, recognized in the year ended June 30, 2000, accounted for $0.9 million of the revenue increase.
The total OmniCare-TN PMPM revenue rate - based on an average membership of 43,700 for the year ended June 30, 2000 compared to 45,000 for the year ended June 30, 1999 - was $147 for the year ended June 30, 2000 compared to $131 for the year ended June 30, 1999, an increase of $16 (12%). The PMPM premium rate, based on the State of Tennessee's estimate, increased 5%, to $129 for the year ended June 30, 2000 from $122 for the year ended June 30, 1999, excluding excess adverse selection payments and adjustments for covered benefits.
Premium revenues from the County Care program totaled $9.2 million for the year ended June 30, 2000, compared to $2.3 million for the year ended June 30, 1999. The $6.9 million (300%) increase is a result of the Company having only participated in the County Care program three months of fiscal 1999 versus a full year of participation in fiscal 2000.
Management fees earned from OmniCare-MI were $18.8 million in the year ended June 30, 2000, an increase of $0.7 million (4%) from fees of $18.1 million in the year ended June 30, 1999. Excluding the earlier described forgiveness in fiscal 1999 of $1.3 million of management fee revenue, management fees earned in the fiscal year ended June 30, 2000 would have decreased $0.6 million (3%) compared to management fees of $19.4 million for the 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.
Interest and other income increased $1.9 million (86%) to $4.1 million in the year ended June 30, 2000 from $2.2 million in the year ended June 30, 1999. Other income increased $2.5 million as a result of a $2.1 million gain recorded on the Company's recovery of its $2.1 million investment in PhilCare upon PhilCare's dissolution and $0.4 million for fees received for management of the Women, Infants and Children program for the City of Detroit. Interest income decreased $0.6 million due primarily to the retirement of the CHF interest-bearing notes in August 1999.
Medical services expenses were $70.3 million in the year ended June 30, 2000, an increase of $10.4 million (17%) from medical services expenses of $59.9 million in the 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 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.
Depreciation and amortization remained relatively constant at $3.4 million for the years ended June 30, 2000 and 1999. 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 year ended June 30, 2000.
Interest expense decreased $1.2 million (68%), to $0.5 million in the year ended June 30, 2000 from $1.7 million in the 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.
The Company recognized earnings before income taxes of $1.6 million and $1.2 million for the years ended June 30, 2000 and 1999, respectively, an increase of $0.4 million (33%). Earnings net of income taxes for the years ended June 30, 2000 and 1999 were $1.0 million and $0.6 million, respectively, an increase of $0.4 million (67%). 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 a loss before income taxes of $3.0 million for the fiscal year ended June 30, 2000.
Medical premium revenues were $73.2 million in the year ended June 30, 1999, a decrease of $5.4 million (7%) from medical premium revenues of $78.6 million in the year ended June 30, 1998.
Premium revenues from the County Care program, which began in April 1999, totaled $2.3 million in fiscal 1999.
The discontinued operation did not contribute earnings or loss for the year ended June 30, 1999, compared to a net loss of $2.6 million for the year ended June 30, 1998.
During fiscal 2000, the Company incurred operating losses in the last three quarters, excluding the effect of revised estimates of the medical claims payable of $5.6 million in the third quarter. At June 30, 2000, the Company had (i) cash and cash equivalents and short-term marketable securities of $10.6 million, compared to $18.6 million at June 30, 1999; (ii) negative working capital of $2.3 million, compared to negative working capital of $1.7 million at June 30, 1999; and (iii) a current assets-to-current liabilities ratio of .88-to-1, compared to .96-to-1 at June 30, 1999. The principal uses of funds for the year ended June 30, 2000 were $1.9 million used in operating activities, repayment of $8.5 million of bank debt from the same amount of cash proceeds received on the notes from the sale of CHF, a $4.0 million cash infusion to OmniCare-MI, purchases of property and equipment of $2.5 million, repurchase of common stock of $0.4 million and purchases of marketable securities of $1.3 million. In addition, the Company's investing activities included the funding of an additional $3.7 million unsecured loan to OmniCare-MI through conversion of management fees owed to the Company, and receipt of approximately $2.1 million of cash and U.S. Treasury obligations on the dissolution of PhilCare.
The stock of CHF was sold effective August 31, 1998, for $17.75 million, comprised of $2.0 million in cash and the buyer's secured and unsecured notes for $13.25 million and $2.5 million, respectively. Including payments on the secured note, $9.2 million of the sale price, plus $0.8 million of interest, in cash was received through June 30, 1999. The remaining principal balance on the secured and unsecured notes and accrued interest, net of a prepayment discount, in the sum of $8.5 million was paid to the Company on August 16, 1999.
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. 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.
On May 1, 2000, the Company and OmniCare-MI commenced their previously announced strategic partnership with DMC, a major health care provider system in southeastern Michigan. The alliance is intended to strengthen their respective core businesses and improve the quality of care and services for their patients and members. In addition, it was announced that DMC and OmniCare-MI would develop a joint marketing campaign designed to increase OmniCare-MI's membership and DMC's facility utilization rate.
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 continued stabilization of OmniCare-MI and the ability of the Company to control 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.
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities," SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivatives and Certain Hedging Activities" are effective for fiscal years beginning after June 15, 2000. These Statements establish accounting and reporting standards for derivative instruments and hedging activities and require that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Management has determined that the
requirements of SFAS Nos. 133, 137 and 138 will not have a significant impact on the financial statements of the Company.
Statement of Position ("SOP") 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," is effective for fiscal years beginning after June 15, 1999. SOP 98-7 requires that when an insurance contract does not provide for indemnification of the insured, or when a reinsurance contract does not indemnify against loss relating to insurance risk, the contract should be accounted for as a deposit. Management has determined that the requirements of SOP 98-7 will not have a significant impact on the financial statements of the Company.