The following are earlier events, which notably affected results of operations for fiscal years covered by the consolidated financial statements contained elsewhere in this annual report.
Effective July 1, 2001, OmniCare-TN entered into a new 42-month contract with the State of Tennessee's TennCare Program. The contract provided for an automatic renewal for calendar year 2005 with an expiration date of December 31, 2005 with future premium increases to be determined by the State of Tennessee.
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. 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.
TennCare responded to OmniCare-TN's situation individually as well. In September 2002, OmniCare-TN and the State of Tennessee, doing business as TennCare, amended the Contractor Risk Agreement between them. Pursuant to the amendment:
- - Retroactively effective July 1, 2001 through April 30, 2002, OmniCare-TN elected to operate under a shared risk arrangement, under which gains or losses are shared with the State of Tennessee;
- - retroactively effective beginning May 1, 2002, OmniCare-TN has been reimbursed under an administrative services only agreement with no risk of medical loss; and
Pursuant to a further agreement with OmniCare-TN in October 2002, the State of Tennessee 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 was 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. For the year ended June 30, 2004, an additional $0.5 million of such medical claims were processed, and the same amount was recognized as revenue by Omnicare-TN.
On May 25, 2004, and effective as of January 1, 2004, the Company's wholly owned subsidiary, United American of Tennessee, Inc. ("UA-TN"), which already owned 75% of the outstanding stock of OmniCare-TN, purchased the remaining 25% of the outstanding common stock of OmniCare-TN. OmniCare-TN thereby became a wholly owned subsidiary of UA-TN and a wholly owned second-tier subsidiary of the Company. The 25% minority interest was purchased under a longstanding option agreement for $500,000 evidenced by a Company promissory note payable by December 31, 2004.
As of June 30, 2004, OmniCare-TN's total enrollment was 129,484 members, compared to 130,080 at June 30, 2003.
The OmniCare-MI management agreement was amended on December 14, 2001, effective August 1, 2001 (the second month of fiscal 2002). Pursuant to the amendment, OmniCare-MI paid all of its own expenses commencing as of August 1, 2002, except for personnel, rent and depreciation, which the Company continued to pay. The amendment reduced the Company's
Because of its resulting workforce reduction, the Company made plans to sublease all of its then principal office premises in Detroit, Michigan, to OmniCare-MI, retroactive to November 1, 2002, and expiring at the lease end in May 2005, and to sell to OmniCare-MI furniture, a telephone system and certain computer hardware and software that the Company chose to leave there. OmniCare-MI commenced its occupancy of the premises on November 1, 2002 and the Company remained in a portion of the premises until it moved its principal offices to new leased premises in Detroit on February 3, 2003. Management had expected both parties to finalize and sign the sublease, and close the sale of such assets, in the fourth quarter of fiscal 2003, but was delayed as a result of the appointment by the Governor of Michigan of Linda A. Watters as the new Commissioner of the Office of Financial and Insurance Services on April 11, 2003. 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. Meanwhile, due to the subsequent sale of OmniCare-MI members to Coventry of Michigan approved on May 10, 2004 and effective October 1, 2004, Company management now does not expect to complete the sale of assets and accordingly has recorded a loss from discontinued operations of $0.7 million in the fourth quarter of fiscal year 2004. 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.
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 was doubtful. The recorded charges discussed above were offset by management fees from OmniCare-MI of $0.8 million.
Total revenues decreased $2.4 million (10%), to $22.1 million for the fiscal year ended June 30, 2004 from $24.5 million for the fiscal year ended June 30, 2003, principally as the result of the change in the reimbursement system of TennCare, discussed above.
Earnings from continuing operations were $7.9 million, or $1.09 per basic share, for the fiscal year ended June 30, 2004 compared to earnings from continuing operations of $7.3 million, or $1.06 per basic share, for the fiscal year ended June 30, 2003. Such increase in earnings from continuing operations of $0.5 million, or $0.03 per basic share, is principally due to the recognition of a deferred tax asset, an increase in members and an increase in reimbursement rates effective July 1, 2003.
Net earnings were $7.2 million, or $0.99 per basic share, for the fiscal year ended June 30, 2004 compared to net earnings of $5.2 million, or $0.75 per basic share, for the fiscal year ended June 30, 2003, principally due to the utilization of net operating loss carryforwards, an increase in members and an increase in reimbursement rates effective July 1, 2003.
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,
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 was 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.
The Company recognized a loss from discontinued operations of $2.1 million in the fiscal year ended June 30, 2003 compared to a loss from discontinued operations of $1.7 million in the fiscal year ended June 30, 2002 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.
Cash and marketable securities increased by $4.1 million at June 30, 2004 compared to June 30, 2003 due primarily to operating activities.
OmniCare-TN's application for a commercial HMO license was approved on September 7, 2001. Management is not yet actively pursuing that commercial business, however, due to OmniCare-TN's substantially increased enrollment from members TennCare assigned from defunct other plans, together with adapting to TennCare's stabilization program.
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 are 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.
The Company currently has a $0.6 million term loan with Standard Federal Bank, N.A. repayable in monthly installments of principal and interest of $0.1 million, with an interest rate equal to the bank's prime rate (4.0% at June 30, 2004) plus one percent per annum, and a maturity date of September 30, 2004. The loan agreement is collateralized by a security interest in all of the Company's personal property.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" was revised in December 2003. The revisions to SFAS132 are intended to improve financial statement disclosures for defined benefit plans by requiring more detail about plan assets, benefit obligations, cash flows, benefit costs and other relevant quantitative and qualitative information. The revisions are effective for fiscal years after December 15, 2003. The adoption of this standard had no effect on the Corporation's financial condition or results of operations.
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition", was issued by the Securities and Exchange Commission ("SEC") in December 2003. SAB No. 104 revises and rescinds certain sections of SAB No. 101 in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. Accordingly there is no impact the Corporation's financial condition or results of operations as a result of the issuance of SAB No. 104.