The Company currently leases approximately 34,000 aggregate square feet from which it conducts its operations in Michigan and Tennessee. In addition, the Company has arranged a sublease of all its former premises (approximately 54,000 square feet) in Detroit, Michigan, to OmniCare-MI, retroactive to November 1, 2002 and expiring at its lease end in May 2005. The principal offices of the Company are located at 300 River Place, Suite 4950, Detroit, Michigan, where it currently leases approximately 2,000 square feet of office space.
MCOs ceased doing business in fiscal 2002. In contrast, TennCare has expressly regarded OmniCare-TN as one of TennCare's viable MCOs.
TennCare responded to its MCOs' situation generally and in some instances individually. For all its contracted MCOs generally, TennCare changed its reimbursement system to an administrative services only ("ASO") program for an 18-month stabilization period (July 1, 2002 through December 31, 2003), during which the MCOs - including OmniCare-TN - have no medical cost risk (i.e., no risk for medical losses), earn fixed administrative fees and are subject to increased oversight. Under such ASO program as originally established, the Company expected to earn limited additional administrative fees, based on certain performance measures as an incentive to manage medical costs below the targets. However, the Governor of Tennessee and Tenncare representatives later publicly stated in discussions with the Tennessee legislature and elsewhere that no incentive payments would be made because of that state's and TennCare's budget situation. TennCare stated at the inception of the ASO program that it intends to return to a full risk system after the end of the 18-month stabilization period at January 1, 2004. This remains the Company's current understanding of TennCare's intention in this regard.
Beginning July 1, 2002 TennCare disenrolled approximately 166,000 enrollees statewide in an eligibility reverification process. In December 2002, a U.S. District Court judge in Tennessee ruled that such process was flawed. In March 2003, TennCare and Tennessee Governor Phil Bredesan announced that all disenrolled members will have a year-long grace period until March 31, 2004 to prove if they actually meet the eligibility requirements and thereby have their wrongful disenrollment cancelled and their enrollment restored retroactively. OmniCare-TN expects re-enrollment, in some instances retroactively to July 1, 2002, of some of its approximately 7,900 affected working uninsured or uninsurable members.
It should be noted initially in this discussion that the Company's longstanding management agreement with OmniCare-MI ended effective November 1, 2002. The consolidated financial statements have been restated to present the operations related to managing OmniCare-MI as a discontinued operation.
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.
The Order beneficially relieved the Company from further funding OmniCare-MI's capital deficiencies through unsecured loans and forgiving earned management fees. The Order required the Company to continue performing all services under its OmniCare-MI management agreement, which continued through October 31, 2002. That agreement terminated November 1, 2002 pursuant to notice received from OmniCare-MI in accordance with its amended rehabilitation plan, which a State circuit court judge approved on July 29, 2002.
On April 11, 2003, the Governor of Michigan appointed Linda A. Watters as the new Commissioner of the Office of Financial and Insurance Services. Ms. Watters had served on the Company's Board of Directors continually since 2000 and resigned that office on the same date she became the new Commissioner (as required to avoid any possible appearance of a conflict of interest and not as the result of any disagreement with the Company). Because of the new Commissioner's prior association with the Company, the State circuit court judge who retained jurisdiction over OmniCare-MI's rehabilitation proceedings then required that a designated independent person replace the Rehabilitator's (i.e., Commissioner's) special deputy who had been dealing with the sublease and assets purchase, which personnel change on OmniCare-MI's part accounts for the delay in signing the sublease and closing the assets sale. Management now expects to complete the signing of the sublease and the sale of assets in the next several months.
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 pending sale of assets described above; (ii) the above-described sublease, which is expected to cost the Company approximately $0.04 million per month through the remainder of the lease, ending in May 2005, resulting in a loss of $1.2 million recorded in the second quarter of fiscal 2003, which was offset by a $0.6 million write-down of a deferred rent liability associated with the original lease; and (iii) a bad debt charge of $0.3 million recorded because management determined the collectability of that amount of receivables from OmniCare-MI is doubtful. The recorded charges discussed above were offset by management fees from OmniCare-MI of $0.8 million.
Medical premium revenues were $7.9 million in the fiscal year ended June 30, 2003, a decrease of $155.3 million (95%) from $163.1 million in the fiscal year ended June 30, 2002. Such $7.9 million of medical premium revenues in fiscal 2003 represent the fiscal 2002 medical claims processed and disbursed pursuant to the TennCare commitment discussed above. The decrease from the prior year came from OmniCare-TN as the result of TennCare's changing its reimbursement system to an ASO program for an 18-month stabilization period beginning July 1, 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.
Marketing, general and administrative expenses decreased approximately $2.3 million (13%), to $15.7 million in the fiscal year ended June 30, 2003 from $18.0 million in the fiscal year ended June 30, 2002. The decrease is principally due to reduced advertising costs and TennCare's payment of premium tax as a result of the ASO arrangement referred to above.
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 under "Overview" above. In the amendment, the State of Tennessee agreed to pay OmniCare-TN up to $7.5 million as necessary to meet its statutory net worth requirement as of June 30, 2002. OmniCare-TN received a permitted practice letter from the State of Tennessee to include such $7.5 million receivable in its statutory net worth at June 30, 2002. Under generally accepted accounting principles, the $7.5 million receivable was not recorded in fiscal 2002 financial statements but has been recorded in fiscal 2003 financial statements. Based on an actuarial determination, an additional $0.4 million of fiscal 2002 medical claims liability was recorded during fiscal 2003. The change in the estimated reimbursement from the State of Tennessee offset the corresponding change in the medical claims liability, still resulting in $7.5 million of net earnings in fiscal year 2003. In all, fiscal 2002 medical claims of $7.9 million were processed in the fiscal year ended June 30, 2003, and the same aggregate amount was recognized as revenue by OmniCare-TN.
Total revenues increased $59.8 million (57%) to $165.1 million in the fiscal year ended June 30, 2002 from $105.3 million in the fiscal year ended June 30, 2001.
Medical premium revenues for OmniCare-TN increased $67.3 million (72%), to $160.6 million in the fiscal year ended June 30, 2002, from $93.3 million in the fiscal year ended June 30, 2001. This was attributable in part to an increase in member months, and in part to a decrease in the OmniCare-TN per member per month revenue rate as described in the following paragraph. Member months increased 524,000 (86%) to 1,130,000 in the fiscal year ended June 30, 2002 from 606,000 in the
The total OmniCare-TN per member per month ("PMPM") revenue rate - based on an average membership of 94,200 for the fiscal year ended June 30, 2002 compared to 50,500 for the fiscal year ended June 30, 2001 - was $142 PMPM for the fiscal year ended June 30, 2002 compared to $154 PMPM for the fiscal year ended June 30, 2001, a decrease of $12 PMPM (8%), which accounted for a decrease of $7.1 million in OmniCare-TN's medical premium revenues.
Premium revenues from the County Care program totaled $2.5 million for the fiscal year ended June 30, 2002, compared to $9.7 million for the fiscal year ended June 30, 2001. In fiscal 2002, such revenues were only in the three months ended September 30, 2001, when the County Care contract expired, at the Company's election.
Medical services expenses for OmniCare-TN increased $74.5 million (96%), to $152.4 million in the fiscal year ended June 30, 2002 from $77.9 million in the fiscal year ended June 30, 2001. The OmniCare-TN overall percentage of medical services expenses to medical premium revenues - the medical loss ratio ("MLR") - was 95% for the fiscal year ended June 30, 2002 and 85% for the fiscal year ended June 30, 2001. The fiscal 2002 OmniCare-TN MLR includes an approximate 11% increase due to a fourth quarter increase in the medical claims liability of $11.2 million related to the assignment of new members by TennCare.
Marketing, general and administrative expenses increased $2.8 million (18%) to $18.0 million in the fiscal year ended June 30, 2002 from $15.2 million in the fiscal year ended June 30, 2001. This included, however, for OmniCare-TN, $2.0 million of increased claims processing costs and $1.3 million of increased premium taxes due to OmniCare-TN's significant membership increases.
The Company recognized a loss from continuing operations before income taxes of $8.4 million for the year ended June 30, 2002 compared to earnings from continuing operations before income taxes of $3.0 million for the year ended June 30, 2001. The net loss for the year ended June 30, 2002 was $11.0 million, or $1.60 per share, compared to net earnings of $1.2 million, or $0.18 per share, for the year ended June 30, 2001.
At June 30, 2003, the Company had (i) cash and cash equivalents and short-term marketable securities of $4.7 million, compared to $18.8 million at June 30, 2002; (ii) positive working capital of $1.7 million, compared to negative working capital of $3.7 million at June 30, 2002; and (iii) a current assets-to-current liabilities ratio of 1.26-to-1.0, compared to 0.87-to-1 at June 30, 2002.
Net cash used in operating activities was $12.6 million in fiscal 2003 compared to net cash used in operating activities of $5.1 million in fiscal 2002. Investing activities in fiscal 2003 included the purchase of equipment of $0.07 million and the purchase of marketable securities of $0.3 million, offset by proceeds from the sale or maturity of marketable securities of $15.8 million. Debt repayments were $1.1 million in fiscal 2003.
Property, plant and equipment decreased by $1.9 million at June 30, 2003 compared to June 30, 2002, due an impairment charge associated with a pending sale of certain furniture, equipment and software and the recording of depreciation of $0.3 million.
Medical claims payable decreased by $23.9 million at June 30, 2003 compared to June 30, 2002, which is directly related to the payment of OmniCare-TN fiscal 2002 medical claims processed during the period, and TennCare's new ASO reimbursement system.
OmniCare-TN received a permitted practice letter from the State of Tennessee to include such $7.5 million receivable in its statutory net worth at June 30, 2002. Pursuant to an agreement between TennCare and OmniCare-TN in October 2002, TennCare further agreed to pay additional funds to OmniCare-TN if future certified actuarial data confirm they are needed by OmniCare-TN to meet its statutory net worth requirement as of June 30, 2002. Under generally accepted accounting principles, the $7.5 million receivable was not recorded in fiscal 2002 financial statements but has been recorded in fiscal 2003 financial statements. Based on an actuarial determination, an additional $0.4 million of fiscal 2002 medical claims liability was recorded during fiscal 2003. In all, fiscal 2002 medical claims of $7.9 million were processed in the fiscal year ended June 30, 2003, and the same aggregate amount was recognized as revenue by OmniCare-TN.
The Company has arranged for a sublease to OmniCare-MI of all of the Company's leased premises in Detroit, Michigan, retroactive to November 1, 2002 and expiring at the end of the lease in May 2005. This arrangement will cost the Company approximately $40,000 per month through the remainder of the lease.
The Financial Accounting Standards Board ("FASB") has issued the following new accounting standards and interpretations, which may be applicable in the future to the Company:
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company has adopted SFAS 148 according to the disclosure-only provisions of SFAS No. 123 and has implemented disclosure for all interim periods beginning March 31, 2003 of pro-forma earnings per share if the Company had elected to recognize compensation cost based on the fair value of the options at grant date.