The Company believes that its current facilities 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.
In September 1998, effective August 31, 1998, CHF was sold 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. On August 16, 1999, the Company was paid $8.5 million, the remaining principal balance of both notes and accrued interest, net of a $0.25 million discount granted as an inducement for the buyer to prepay the
notes. As required by the Company's bank line of credit facility, the sale was approved by the Company's bank lender and all proceeds were used to reduce the Company's indebtedness to the bank.
In December 1998, a final court judgment approved the settlement of and dismissed shareholder litigation which had alleged securities law violations by certain former senior officers and the Company. 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 Company common stock 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. At the Company's election, the County Care contract will expire at the end of the current contract period on September 30, 2001. The contract has not provided significant earnings to the Company, and its termination is not expected to have a material effect on future operations of the Company.
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 require approval by the Michigan Office of Financial and Industry Services ("OFIS") and are repayable only from any statutory surplus earnings of OmniCare-MI. Note interest is payable annually and forfeited if not then paid. Interest income of $1.1, $0.5 and $0.4 million was forfeited for fiscal years 2001, 2000 and 1999, respectively. The note principal has no stated maturity or repayment date. The surplus note is subordinated to all other claimants of OmniCare-MI. Based on an analysis of OmniCare-MI's projected cash flows, the Company recorded impairment losses on the valuation of the surplus note which resulted in bad debt expense of$6.9 million and $3.1 million for the years ended June 30, 2001 and 2000, respectively. In fiscal 1999, the Company provided additional funding by forgiving $1.3 million
in management fees owed to the Company by OmniCare-MI to enable OmniCare-MI to meet its minimum statutory requirements for net worth and working capital.
On July 14, 2000, the State of Michigan notified OmniCare-MI that it was one of the successful bidders in the State's extensive bid process for increased Medicaid rates and continued eligibility as an HMO providing coverage to enrollees of the State's Comprehensive Health Care Program for Medicaid beneficiaries. As a result, OmniCare-MI was awarded a rate increase and an extension of its contract with the State to September 30, 2002, with the potential for three one-year extensions.
In fiscal 1998, based on an evaluation of the net recoverable value of the Company's investment in PhilCare, the Company recorded a full impairment loss against its $2.1 million investment. PhilCare was dissolved in the Company's fiscal 2000. PhilCare assets were then 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.
Effective July 1, 2000, OmniCare-TN entered into a new 42-month contract with the State of Tennessee's TennCare Program. The provisions of the contract provide for an approximate 4.5% increase in average premiums effective July 1, 2000 and a further 4% increase effective July 1, 2001, with future increases to be determined by the State of Tennessee. Such increases are in lieu of the quarterly adverse selection payments previously made by TennCare to compensate managed care organizations for substantial adverse costs incurred due to the nature of the services they offer and their treatment of a high risk population.
The Company currently has a $3.4 million bank loan with Michigan National Bank, which is scheduled to merge into Standard Federal Bank FSB ("Standard Federal") effective in early October 2001. The Company and Michigan National Bank have an agreement to refinance the present loan agreement, promissory note and security agreement promptly after the completion of the bank merger, replacing the prior one-year loan, originally due September 30, 2001, with a $3.4 million term loan from Standard Federal, repayable in monthly installments of principal and interest of approximately $105,000. Michigan National Bank has waived the requirement of payment of the current loan balance at September 30, 2001, pending the expected refinancing. The proposed new term loan will have an interest rate equal to the bank's prime rate (6.75% at June 30, 2001) plus one percent per annum, and a maturity date of September 30, 2004. The new loan agreement (like the prior one) will be collateralized by a security interest in all of the Company's personal property. As a result of this agreement, principal due subsequent to June 30, 2002 is classified as long-term debt in the "Consolidated Balance Sheets" at June 30, 2001. See Note 9 in "Notes to Consolidated Financial Statements" for further discussion of the refinancing of the term loan.
earnings before income taxes for the fiscal year ended June 30, 2001 of $10.4 million compared to a loss before income taxes of $3.0 million for the fiscal year ended June 30, 2000.
Total revenues increased $22.7 million (21%) to $131.7 million in the fiscal year ended June 30, 2001 from $109.1 million in the fiscal year ended June 30, 2000.
The total OmniCare-TN per member per month ("PMPM") revenue rate - based on an average membership of 50,500 for the fiscal year ended June 30, 2001 compared to 43,700 for the fiscal year ended June 30, 2000 - was $154 PMPM for the fiscal year ended June 30, 2001 compared to $147 PMPM for the fiscal year ended June 30, 2000, an increase of $7 PMPM (5%). The PMPM premium rate, based on the State of Tennessee's estimate, increased 7%, to $151 PMPM for the fiscal year ended June 30, 2001 from $141 PMPM for the fiscal year ended June 30, 2000, excluding excess adverse selection payments and adjustments for covered benefits.
Premium revenues from the County Care program totaled $9.7 million for the fiscal year ended June 30, 2001, compared to $9.2 million for the fiscal year ended June 30, 2000.
Total expenses were $132.1 million in the fiscal year ended June 30, 2001, compared to $107.5 million in the fiscal year ended June 30, 2000, an increase of $24.6 million (23%).
Medical services expenses for County Care were $7.8 million in the fiscal year ended June 30, 2001, a decrease of $0.3 million (4%) from medical services expenses of $8.1 million in the fiscal year ended June 30, 2000. The County Care MLR for the fiscal year ended June 30, 2001 was 88%. County Care operations began with inception of the contract in April 1999 and will cease, at the Company's election, after the contract's expiration on September 30, 2001.
Interest expense decreased $0.1 million (26%), to $0.4 million in the fiscal year ended June 30, 2001 from $0.5 million in the fiscal year ended June 30, 2000, due to debt reduction of $0.9 million as well as decreases in the prime rate.
The Company recognized a loss before income taxes of $0.3 million and earnings before income taxes of $1.6 million for the fiscal years ended June 30, 2001 and 2000, respectively, a decrease of $1.9 million (119%). Earnings net of income taxes for the fiscal years ended June 30, 2001 and 2000 were $1.2 million and $1.0 million, respectively, an increase of $0.2 million (20%).
YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999
Medical premium revenues were $86.2 million in the fiscal year ended June 30, 2000, an increase of $13.0 million (18%) from medical premium revenues of $73.2 million in the fiscal year ended June 30, 1999.
Premium revenues from the County Care program totaled $9.2 million for the fiscal year ended June 30, 2000, compared to $2.3 million for the fiscal year ended June 30, 1999. The $6.9 million (300%) increase was a result of the Company's having participated in the County Care program in only three months of fiscal 1999 versus a full year of participation in fiscal 2000.
Interest and other income increased $1.9 million (86%) to $4.1 million in the fiscal year ended June 30, 2000 from $2.2 million in the fiscal year ended June 30, 1999. Other income increased $2.5 million in fiscal 2000 as a result of a $2.1 million gain recorded on the Company's recovery of its $2.1 million investment in PhilCare following 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 in fiscal 2000 due primarily to the retirement of the CHF interest-bearing notes in August 1999.
Total expenses were $107.5 million in the fiscal year ended June 30, 2000, compared to $92.4 million in the fiscal year ended June 30, 1999, an increase of $15.1 million (16%).
The Company recognized earnings before income taxes of $1.6 million and $1.2 million for the fiscal years ended June 30, 2000 and 1999, respectively, an increase of $0.4 million (33%). Earnings net of income taxes for the fiscal 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.
At June 30, 2001, the Company had (i) cash and cash equivalents and short-term marketable securities of $24.8 million, compared to $10.6 million at June 30, 2000; (ii) positive working capital of $3.6 million, compared to negative working capital of $2.3 million at June 30, 2000; and (iii) a current assets-to-current liabilities ratio of 1.14-to-1, compared to .88-to-1 at June 30, 2000.
Net cash provided by operating activities was $17.9 million in fiscal 2001 compared to cash used of $1.9 million in fiscal 2000. Investing activities in fiscal 2001 included the purchase of equipment of $3.0 million and the purchase of marketable securities of $1.3 million, offset by proceeds from the sale of marketable securities of $0.9 million. Debt repayments were $0.9 million in fiscal 2001 and, subsequent to the fiscal year end, $3.4 million of debt originally due September 30, 2001 will be converted into a three-year term loan due September 30, 2004.
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 and used to reduce bank debt.
On May 1, 2000 approximately 28,000 members of the Detroit Medical Center's Medicaid managed care program were transferred to OmniCare-MI. Since then, OmniCare-MI's overall Medicaid enrollment has stayed relatively constant. During fiscal 2000, the additional membership generated management fee revenue of $0.6 million and approximately $4.0 million in fiscal 2001.
Effective July 1, 2000, OmniCare-TN entered into a new 42-month contract with the State of Tennessee's TennCare Program. The provisions of the contract provide for an approximate 4.5% increase in average premiums at July 1, 2000 and a further 4% increase at July 1, 2001 with future increases to be determined by the State of Tennessee. Such increases are in lieu of the quarterly adverse selection payments previously made by TennCare to compensate managed care organizations for substantial adverse costs incurred due to the nature of the services they offer and their treatment of a high risk population.
At June 30, 2001, OmniCare-TN was licensed in and served Shelby and Davidson Counties in Tennessee (which include the cities of Memphis and Nashville, respectively). Effective July 1, 2001, OmniCare-TN received approval from TennCare to expand its service area to western Tennessee and to withdraw from Davidson County. As of September 1, 2001, OmniCare-TN's total enrollment was approximately 77,000 members, an increase of approximately 40% from June 30, 2001.
As a Michigan HMO, OmniCare-MI is subject to oversight by the Commissioner of the Office of Financial & Insurance Services of the State of Michigan (the "Commissioner"). On July 31, 2001, pursuant to a motion by the Commissioner, a State circuit court judge entered an order of rehabilitation of OmniCare-MI (the "Order") and appointed the Commissioner to serve as Rehabilitator of OmniCare-MI. The Order directs the Rehabilitator to administer all of OmniCare-MI's assets and business while attempting to reform or revitalize OmniCare-MI by any means so as to effectuate its rehabilitation, preserve its provider network and maintain uninterrupted health care services to the greatest extent possible. Pursuant to the Order, the Rehabilitator's appointed special deputy, Bobby Jones (the "Special Deputy Rehabilitator"), who served some years ago as the Senior Vice President of OmniCare-MI, is now acting as the Chief Executive Officer of OmniCare-MI.
The Order expressly requires the Company to continue performing all services under its management agreement with OmniCare-MI until further order of the court, "as the continuation of these services is essential to the continuation of health care service to over 100,000 subscribers." The Company has continued to perform the management agreement without interruption and has been paid in full its 14% management fee pursuant to the agreement for July 2001. Meanwhile, the Company and the Special Deputy Rehabilitator have negotiated and
On July 20, 2001 the Financial Accounting Standards Board ("FASB) issued two new accounting standards, SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." All business combinations initiated after June 30, 2001 will be accounted for using the purchase method of accounting; the use of the pooling-of-interests method will be prohibited. Management has determined that the requirement of SFAS No. 141 will not have a significant impact on the financial statements.
SFAS No. 142 eliminates the amortization of goodwill. Instead, under SFAS No. 142, the carrying amount of goodwill should be tested for impairment at least annually at the reporting unit level, as defined, and will be reduced only if it is found to be impaired or is associated with assets sold or otherwise disposed of. The Statement is effective for fiscal years beginning after December 15, 200l, but early adoption is permitted for companies with a fiscal year beginning after March 15, 2001.
The adoption of SFAS No. 142 would have an impact of future results of operations. If the cessation of goodwill amortization had occurred on July 1, 1998, the Company's earnings before income taxes would have increased, on a proforma basis, by $0.7 million in each of the three