All applicable periods have been restated for the 1995 pooling transaction with Diagnostek, Inc.
Revenues in 1996 of $1,963.8 million increased $95.2 million or 5.1% over 1995, and 1995 revenues of $1,868.5 million were 15.3% ahead of 1994. The Company had earnings before income taxes of $116.1 million for 1996, compared to a loss of $21.7 million in 1995 and earnings of $99.6 million in 1994.
Amortization of goodwill arising from acquisitions was $8.9 million in 1996 as compared with $7.0 million in 1995 and $5.7 million in 1994. The higher levels of amortization in each year were due to purchase acquisitions completed in 1996, 1995 and 1994.
In 1995, the Company recognized $46.6 million of expense to accrue future estimated losses on certain risk-based or full risk pharmacy benefits management contracts. As more fully described in note 4, during the first and third quarters of 1995, it was determined that certain contracts, including the State of New Jersey, Ford Motor Company and others, would result in losses over their remaining terms. Losses of $12.6 million and $34.0 million were accrued during the first and third quarters of 1995, respectively. The Company computed losses by estimating future revenues and variable expenses associated with these contracts. As of December 31, 1996, $5.4 million of the $46.6 million remained accrued. The future estimated losses of $5.4 million will result in cash outflows during future periods but will not have a material impact on the Company's financial condition or results of operations.
The Company's remaining contingent payments for CCN under its Acquisition Agreement dated May 18, 1994, are expected to approximate $61 million through the first half of 1997.
Restricted cash consists of amounts on deposit in compliance with state regulatory requirements and building and equipment lease agreements.
Goodwill related to acquisitions represents the excess of cost over fair value of net tangible and separately identifiable intangible assets acquired, and is amortized on a straight-line basis over 15 to 40 years. Accumulated amortization was $26,818,000 and $20,623,000 at December 31, 1996 and 1995, respectively. The Company reviews its amortization policy and carrying value of goodwill on an ongoing basis. This review includes an analysis of whether carrying values and amortization periods are appropriate based upon projected cash flows, product life cycle, company performance compared to expectations and industry practice.
During the fourth quarter of 1995, the Company's senior management approved plans to re-engineer certain operations in the Company's prescription drug, mental health and workers' compensation businesses. In connection with this comprehensive plan, the Company recognized a fourth quarter charge in 1995 of $31.1 million, including $8.2 million in severance and related benefits and $22.9 million in expected lease vacation and other associated costs. Principal locations identified for re-engineering include Wilton, CT, Tampa, FL, Irvine and Marina Del Ray, CA, Seattle, WA, Hawthorne, NY, and Farmington Hills, MI. These re-engineering efforts eliminated approximately 800 operations and administrative positions Company-wide and resulted in vacation of approximately 222,400 square feet of leased space. At December 31, 1996, the plan had been substantially implemented.
Preferred's Stock Incentive Plan (the "Preferred Plan") provided that up to 1,751,000 shares of Preferred common stock were available for granting of stock options or awards of restricted stock. On the date of the merger with Preferred, the Company replaced all options outstanding under the Preferred Plan with options to purchase shares of the Company's Common Stock based on the exchange ratio of .88 to 1.
Common stock option transactions under the 1987 Plan, the 1991 Plan, the Preferred Plan, and the Diagnostek plans, follow:
Options exercisable to purchase shares of common stock under the above plans at December 31, 1996, 1995 and 1994 were 981,933, 3,205,496, and 2,561,637 respectively. The options exercisable at December 31, 1996 have exercise prices ranging from $5.81 to $37.13.
Taxes payable for 1996, 1995 and 1994 were reduced by $2,888,000, $4,421,000 and $11,305,000 respectively for the tax benefit of disqualified dispositions of common stock and the exercise of non-qualified common stock options.
The Company's effective tax rate on earnings from continuing operations before income taxes differs from the Federal statutory regular tax rate as follows:
On March 28, 1995, the Company sold its National Foot Care Program, Inc. ("NFCP") subsidiary to a former executive officer. As consideration, the Company received a promissory note of $2,582,000 at 5.5%. This note is collateralized by the stock of NFCP. In addition, the Company received a separate promissory note of $325,000 at 5.5%. This note is not collateralized. These notes are due November 30, 2007.