The Company is a tenant of approximately 67,000 square feet of office space it is not using in Philadelphia, Pennsylvania. The Company has sublet 80% of such premises to third parties for rent substantially equal to its own and is attempting to sublease all or nearly all of the remaining space and is currently negotiating with its landlord for a release from the Company's rental obligations. Company management is unable to predict the outcome of these negotiations.
requirements for net worth and working capital. Pursuant to the surplus note, interest and principal repayments are subject to approval by the Bureau and are payable only out of the statutory surplus earnings of OmniCare-MI. The interest rate is at prime, payable annually and if not paid is forfeited. The principal has no stated maturity or repayment date. The surplus note is subordinated to all other claimants of OmniCare-MI. The Company recorded an impairment loss against its investment in this surplus note based on its evaluation of the recoverable value of such investment and accordingly, recognized bad debt expense of $2.3 million for the year ended June 30, 1998.
The reduction of Medicaid rates and other factors were considered in developing the OmniCare-MI corrective action plan, which is in the process of implementation. The corrective action plan includes the reduction of medical costs through renegotiation of hospital provider contracts, reduction of pharmacy costs and a reduction in the management fee percentage paid to the Company. In fiscal 1998, the Company derived 24% of its total revenues from its management agreement with OmniCare-MI. Management believes that the continued viability of OmniCare-MI is critical to the Company's future operations and concluded that the unsecured loan, in the form of a surplus note, and reduction in the management fee percentage were necessary actions to strengthen the financial condition and support the continued viability of OmniCare-MI.
Medical premiums for UltraMedix increased $8.1 million (140%), from $5.8 million in fiscal 1996 to $13.9 million in fiscal 1997. The net increase is due to 12 months of activity in fiscal 1997 compared to 5 months in fiscal 1996. UltraMedix's enrollment at June 30, 1997 was approximately 18,100, an increase of 7,000 (63%) from the June 30, 1996 enrollment of approximately 11,100 members. UltraMedix made significant enrollment gains in the commercial market since approval of its HMO license in October 1995. The increase in the commercial market was due in part to the State of Florida's unsuccessful initiative to mandate the enrollment of Medicaid eligibles into managed care organizations. UltraMedix was selected to participate in this program and the contract award would have capped UltraMedix's Medicaid enrollment, including existing members, at approximately 48,000 during the contract period. Because of legal challenges from unsuccessful bidders to the State's request for proposal, the initiative was halted indefinitely. To minimize the uncertainty related to rate reductions contemplated by the initiative, UltraMedix retargeted its marketing efforts to expand its commercial business. This contributed to the change in UltraMedix's enrollment mix from 98%:2% (Medicaid-to-commercial) as of June 1996, to 53%:47% as of June 1997. As of September 1997, the mix was 46%:54%.
The contract settlement expense recorded in December 1995 of $9.7 million represented a one-time adjustment to management fee revenues and its effect on other related accounts based on the provisions of the revised management agreement between UA-TN and OmniCare-TN, as approved by the State of Tennessee in November 1995,