Consolidated losses from continuing operations totaled $5.3 million in 1997, compared to losses of $3.7 million in 1996 and earnings of $6.2 million in 1995, or losses per share of $.80 in 1997 and $.56 in 1996 and earnings per share of $.95 in 1995. Including discontinued operations, consolidated losses totaled $3.4 million in 1997 and $2.7 million in 1996 and earnings of $6.6 million in 1995, or losses per share of $.52 in 1997 and $.42 in 1996 and earnings per share of $1.01 in 1995.
Results for 1997 include the pending settlement of the consolidated class action shareholder lawsuit for $3.25 million, of which $1.15 million approximates the Company's expense, net of insurance coverage limits. The pending settlement is subject to federal court approval. The Company also established a bad debt expense in the amount of $1.1 million related to the valuation of an account receivable of OmniCare-TN from a third party administrator and $.7 million for its investment in HealthScope. Valuation reserves of $1.0 million and $.1 million related to this investment were also established in 1996 and 1995, respectively. Management intends to vigorously pursue the collection of the account receivable and, based on the rollout of the State of New York's mandatory Medicaid enrollment initiative, hopes to recover the HealthScope investment. Additionally, in 1997 a $.3 million rent expense estimate was established for the difference between the Company's lease obligation and the expected sub-lease rental income for the remaining life of the Company's lease in Pennsylvania. The fiscal 1997 after-tax effect of these non-recurring items totaled a $.39 loss per share.
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, retroactive to January 1994. Despite the fact that the Company and OmniCare-TN took certain actions related to the costs reimbursed under the agreement, the transaction was not sufficiently documented to allow recognition of the same on the Company's financial statements in December 1995.
Medical premium revenues were $70.4 million in 1997, of which $56.5 million related to OmniCare-TN and $13.9 million to UltraMedix, an increase of $35.9 million (104%) over medical premium revenues of $34.5 million in 1996. Medical premiums for OmniCare-TN increased $27.8 million (97%), from $28.7 million in 1996 to $56.5 million in 1997. The net increase is due to 12 months of activity in 1997 compared to 5 months in 1996, offset by a net decrease in member months resulting from enrollment adjustments. The enrollment at OmniCare-TN was approximately 40,100 at June 30, 1997, compared to approximately 48,200 at June 30, 1996, a decrease of 8,100 members or 17%. The State of Tennessee's disenrollment of approximately 7,000 members in the quarter ending December 1996 was the primary reason for the decrease. This action was taken by the State based upon the return of undeliverable questionnaires mailed to members, which the State requested for continued participation. OmniCare-TN has contested the validity of this method of determining the continued eligibility of the Medicaid recipients and has contacted approximately 3,000 of these disenrolled members to request that they contact the State to regain their eligibility, retroactive from the date of disenrollment. The outcome of this effort is pending.
Medical premiums for UltraMedix increased $8.1 million (140%), from $5.8 million in 1996 to $13.9 million in 1997. The net increase is due to 12 months of activity in 1997 compared to 5 months in 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 has 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. 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 has been halted indefinitely.
The average per member per month ("PMPM") premium rate in 1997 for OmniCare-TN was $110 and for UltraMedix $98. BASED ON CURRENT TRENDS AND HISTORICAL CONTRACT ADJUSTMENTS BY THE RESPECTIVE STATE AGENCIES, MANAGEMENT EXPECTS A 3% TO 4% RATE INCREASE FOR THE EXISTING OMNICARE-TN MEDICAID MEMBERS AND 7% TO 11% INCREASE IN THE ULTRAMEDIX MEDICAID RATES. MANAGEMENT EXPECTS THAT THE ULTRAMEDIX PMPM ALSO WILL BE AFFECTED BY THE CHANGE IN THE MEMBERSHIP MIX, REFLECTING HIGHER COMMERCIAL RATES.
The Company's management agreement with PPC was terminated pursuant to binding arbitration, effective May 31, 1997, based in part on a dispute between the parties with respect to the payment of non-emergent transportation costs for enrollees as a marketing expense to be incurred under the management agreement.
OmniCare-MI was notified in May 1997 that it had been selected to participate in the State of Michigan's initiative to mandate Medicaid enrollment into managed care organizations. Similar to the initiative in Florida, the State's initiative was legally challenged by unsuccessful bidders responding to the State's request for proposal. Because of these legal challenges, the State did not assign the Medicaid eligibles to plans that were awarded contracts in the bid process, but did, however, institute the rate reduction component of this new program effective July 1997. With the indefinite delay in the assignment of approximately 90,000 eligible recipients and the implementation of the rate reductions of 10% to 15%, the operating revenues of OmniCare-MI and the resulting management fees to the Company are likely to be affected in 1998. There can be no assurances that OmniCare-MI can control health care costs at the rate of the premium reductions.
Total expenses before income taxes from continuing operations totaled $119.0 million in 1997, compared to $95.8 million in 1996, an increase of $23.2 million or 24%.
Of the total medical service expenses of $57.8 million in 1997, $45.4 million relates to OmniCare-TN and $12.4 million to UltraMedix, an increase of $27.9 million (93%) over medical service expenses of $29.9 million in 1996. The percentage of medical service expenses to medical premium revenues, or the medical loss ratio ("MLR"), was 80% for OmniCare-TN and 88% for UltraMedix in 1997. The OmniCare-TN MLR for 1997 was positively affected by the State of Tennessee's $2.4 million settlement to adjust the amount of claims saving paid and/or accrued to the State of Tennessee prior to the Plan obtaining its TennCare HMO license and the recognition of duplicate claims paid to providers.
Equity in net losses of unconsolidated affiliates decreased approximately $.7 million, from $.7 million in 1996 to zero in 1997, due to the Company's acquisition of a majority interest in OmniCare-TN and UltraMedix in January 1996.
Depreciation and amortization in 1997 was $4.1 million, compared to $3.4 million in 1996, an increase of $.7 million (21%). The increase was due primarily to the amortization of goodwill related to acquisitions and computer software.
Of the bad debt expense of $1.8 million in 1997, $1.1 million relates to a valuation reserve established to estimate the net recovery of $1.2 million in refundable advances made by OmniCare-TN to a third party administrator. The third party administrator has denied the obligation and, as a result, the Company is pursuing legal action to collect the receivable. The balance of the 1997 bad debt expense is due to an additional write-down of approximately $.7 million recorded to reduce the Company's $4.0 million investment in HealthScope. Prior year reserves totaled $1.1 million. As the investment was capital in nature, no tax credits have been taken against the cumulative reserve of $1.8 million. MANAGEMENT BELIEVES THAT THE CONTINUED OPERATIONAL IMPROVEMENTS MADE BY THE NEW MANAGEMENT OF HEALTHSCOPE, THE REDUCTION OF MONTHLY OPERATING COST, CLIENT GROWTH AND THE ANNOUNCED ROLLOUT OF THE STATE OF NEW YORK'S MANDATORY MEDICAID INITIATIVE IN EARLY 1998, ARE ALL CRITICAL FACTORS IN DETERMINING THE ULTIMATE RECOVERABILITY OF THIS INVESTMENT.
The estimated Company expense related to the pending shareholder class action lawsuit settlement, net of insurance coverage, is $1.15 million. The pending settlement is subject to federal court approval. See also - "Legal Proceedings".
As a result of the foregoing, the Company recognized losses from continuing operations before income taxes of $6.5 million in 1997, compared to losses from continuing operations before income taxes of $3.4 million in 1996, a $3.1 million change. The federal statutory tax rate for continuing operations for 1997 and 1996 was approximately 34%. Goodwill amortization related to equity investments, equity losses from unconsolidated affliates and losses related to capital investments not deductible for tax purposes resulted in an effective tax rate of approximately 19% in 1997. These differences resulted in a tax expense on the 1996 losses. Net losses from continuing operations in 1997 were $5.3 million, compared to net losses from continuing operations of $3.7 million in 1996, a change of $1.6 million.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Of the $1.5 million increase in management fees from the operated Managed Plans, increased operating revenues of PPC due to increased enrollment of approximately 26% resulted in increased management fees of approximately $1.8 million, offset by a net decrease in management fees from OmniCare-MI of approximately $.3 million. The Company's management agreement with PPC was terminated effective May 31, 1997.
Of the total medical service expenses of $29.9 million in 1996, $24.6 million relates to
OmniCare-TN and $5.3 million to UltraMedix. The MLR was 86% for OmniCare-TN and 93% for UltraMedix.
Depreciation and amortization in 1996 was $3.4 million, compared to $1.9 million in 1995, an increase of $1.5 million (79%). The increase was due primarily to the amortization of goodwill related to acquisitions and computer software.
As a result of the foregoing, the Company recognized losses from continuing operations before income taxes of $3.4 million in 1996, compared to earnings from continuing operations before income taxes of $10.8 million in 1995, a $14.2 million change. The federal statutory tax rate for continuing operations for 1996 and 1995 was approximately 34% and 35%, respectively. Goodwill amortization related to equity investments, equity losses from unconsolidated affliates and losses related to capital investments not deductible for tax purposes resulted in an effective tax rate of zero in 1996 and approximately 42% in 1995. Net losses from continuing operations in 1996 were $3.7 million, compared to net earnings from continuing operations of $6.2 million in 1995, a change of $9.9 million.
Earnings from discontinued operations, net of income taxes, was approximately $.9 million in 1996, compared to approximately $.4 million in 1995, an increase of $.5 million. This change is due primarily to the number of new contracts entered into during the year.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
Total revenues from continuing operations increased $21.4 million (56%), from $38.4 million in 1994 to $59.8 million in 1995.
Management fees were $57.9 million in 1995, an increase of $20.6 million (55%) over fees of $37.3 million in 1994, due in part to: (i) increased operating revenues of OmniCare-MI, due primarily to increased enrollment and premium rates of 8% and 4%, respectively, that resulted in increased management fees of approximately $2.8 million; (ii) increased operating revenues of PPC, due primarily to increased enrollment offset by a decrease in premium rates of 22% and 2%, respectively, that resulted in increased management fees of approximately $1.2 million; (iii) a net decrease in management fees of approximately $.1 million, due to OmniCare-MI's recognition of retroactive rate adjustments in 1994, and (iv) an increase in management fees of $1.2 million, from approximately $.7 million in 1994 to $1.9 million in 1995, related to the Company's administration of OmniCare-MI's COB program.
The Company's management of UltraMedix also contributed to the increase in management fees. Under the UltraMedix management agreement, which became effective February 1, 1994, the Company was reimbursed the administrative cost to manage the Plan, plus a percentage of the Plan's income before income taxes and extraordinary expenses. Effective February 1995, the management agreement was amended to provide the Company with reimbursement of the administrative cost to manage the Plan, plus 3/4 of 1% of the Plan's gross revenues. In 1995, the Company recognized $5.0 million in management fees compared to $1.3 million in 1994, an increase of $3.7 million.
management agreement, effective February 1, 1994, exceeded the guidelines of the TennCare contract. In April 1995, the Company submitted a revised management agreement to the TennCare Bureau. In June 1995, the State notified the Company of its rejection of the revised agreement. The Company submitted a second revised management agreement that was approved by the State in November 1995, retroactive to January 1994.
Interest and other income in 1995 were $1.9 million, an increase of approximately $.7 million (58%) over income of $1.2 million in 1994. Approximately $.3 million (43%) of the increase was due to interest income on notes due from OmniCare-TN and UltraMedix.
The MG&A increase related to operations of the Corporate headquarters and PPC was $4.0 million and $1.5 million, respectively. Included in the Corporate headquarters increase was $1.3 million related to the Company's development costs in Pennsylvania and Louisiana.
The approximate $.2 million (67%) increase in interest expense, from approximately $.3 million in 1994 to approximately $.5 million in 1995, was due primarily to interest costs on the term loan agreement entered into in August 1993, and increased borrowings against the line of credit.
Effective July 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Management has elected to follow the provisions of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123. The adoption of SFAS 123 has not had a material effect on the Company's consolidated financial statements.
At June 30, 1997, the Company had (i) cash and cash equivalents and short-term marketable securities of $17.4 million, compared to $30.9 million at June 30, 1996, (ii) working capital of negative $13.0 million, compared to $6.9 million at June 30, 1996, and (iii) a current assets-to-current-liabilities ratio of .67-to-1 and 1.2-to-1 at June 30, 1997 and June 30, 1996, respectively. The principal sources of funds for the Company during the 12 months ended June 30, 1997 were long-term borrowings of $5.1 million, proceeds from the sale of furniture and equipment of approximately $.4 million, investments and advances to affiliates of approximately $.1 million, offset by $9.8 million used in net operating activities, net purchase of marketable securities of $.4 million, furniture and equipment additions of $3.3 million, investing cash used in discontinued operations of $3.2 million, $2.9 million to repay long-term debt and repurchase of common stock of approximately $.1 million.
In November 1995, the Company entered into an agreement with a bank amending an earlier loan agreement that increased the line of credit facility and converted prior borrowings of $6.1 million under a line of credit to a term loan. Based on the revised agreement, the Company has a $20 million unsecured line-of-credit commitment that expires in February 1998, and bears interest at prime, or 1% over the one, two, three or six-month LIBOR rate. The Company's outstanding line of credit borrowings at June 30, 1997 were $19.4 million. The $6.1 million term loan bears interest at prime, or 1.25% over the one, two, three or six-month LIBOR rate. The monthly principal payable is approximately $126,000, with the loan due in November 1999. The outstanding balance at June 30, 1997 is $3.5 million.
In August 1993, the Company entered into a $7.0 million bank term loan agreement. The term loan bears interest at prime, or 1.5% over one, three, or six-month LIBOR rate, not to exceed a total rate of 5% per annum. The monthly principal payable is approximately $117,000, with the loan due in August 1998. Covenants of the term loan agreement provide for certain net worth and financial ratio requirements. At June 30, 1997, the Company was in violation of a covenant that set a floor on a debt service coverage ratio. The Company obtained a waiver for this provision from the lending institution. The loan is collateralized by all of the assets of the Company. The Company's outstanding borrowings at June 30, 1997 were approximately $1.0 million.
In previous fiscal years, the Company provided a $1 million letter of credit on behalf of
In May 1997, the Company responded to a request for proposals from a North Carolina-based organization (the "NCO") to provide HMO management services. The NCO conducted a site visit during July 1997. The Company is one of two finalists for a management and development contract. It is anticipated that final negotiations will be completed by the NCO with the final decision to be made during the third quarter of fiscal 1998.