The Company currently leases approximately 86,000 aggregate square feet from which it conducts its operations in Michigan and Tennessee. The principal offices of the Company are located at 1155 Brewery Park Boulevard, Suite 200, Detroit, Michigan, where it currently leases approximately 54,000 square feet of office space. In conjunction with the Company's restructuring efforts, it vacated 10,000 square feet at its corporate headquarters and all of its 16,000 square feet of leased office space in the Renaissance Center, Detroit, Michigan, which housed its management information system operations. In consideration for negotiated lease concessions received by the Company, including rental reductions and being allowed to vacate leased space, the Company has agreed, among other things, that it will issue to its headquarters landlord 22,500 unregistered shares of common stock of the Company.
The following table sets forth selected consolidated financial data for the periods indicated:
Restructuring actions completed include the change in senior management, the sale of CHF for $17.75 million, the cessation of operations in Florida, Louisiana and Pennsylvania, renegotiations of the bank credit facility and of the proposed shareholder lawsuit settlement, employee downsizing, cancellation of certain facility leases, reduction of corporate overhead, establishing impairment losses on the Company's investments in affiliates and the write-off of certain property and equipment.
The pre-tax effect of these restructuring efforts included: a) employee downsizing, including attrition, at the Company's Corporate and Tennessee operations of approximately 120 persons, or approximately 35% of the work force at those locations, resulting in savings during fiscal 1998 of $1.8 million and with annualized savings estimated at $5.7 million, and the recognition of $.2 million of severance expenses; b) renegotiation of the Company's corporate office lease space which resulted in the reduction of accrued rent by $.6 million; c) expensing $.7 million and $.3 million of deferred HMO licensure-related costs in Louisiana and Pennsylvania, respectively; d) establishing impairment losses of $2.3 million and $2.1 million on the Company's investments in Advica and PhilCare, respectively; e) the write-off of certain property and equipment of $.8 million; and f) professional fees related to the restructuring efforts and the sale of CHF, of $3.0 million. The net of these efforts resulted in a pre-tax loss of approximately $9.0 million in fiscal 1998.
Additionally, the Company recognized $12.2 million in losses related to the operations and subsequent cessation of the Company's Florida operations.
Newspaper stories in May 1998 reported that the Michigan Insurance Bureau (the "Bureau") had obtained a sealed (confidential) court order on May 7, 1998 giving state regulators control over OmniCare-MI's assets. The Company responded with a public statement on May 12, 1998, stating that OmniCare-MI was not in receivership, but was in active discussion with the Bureau regarding compliance with certain regulatory issues. On July 1, 1998, the Bureau issued a public statement in which the Michigan Commissioner of Insurance announced reaching accord with OmniCare-MI on a four-month plan to revitalize the HMO and cited "three major positive developments respecting OmniCare": the Company's cash infusion of $4.6 million, the corrective action plan and the "experienced and capable leadership of Gregory H. Moses."
The State of Michigan, in an effort to reduce the cost of its Medicaid program, competitively bid its Medicaid contracts, with an effective date of July 1997. The affected southeastern Michigan counties include a significant portion of the Medicaid enrollment for OmniCare-MI. OmniCare-MI was selected to participate in the State's program. It was anticipated that approximately 90,000 additional eligible recipients would be assigned to the selected plans. The membership increase was expected to help offset the rate reductions under the program. Unsuccessful bidders to the State's request for proposal legally challenged the initiative and, as a result, the State did not assign the Medicaid eligible recipients to plans that were awarded contracts, but did institute the rate reduction component of the new program effective July 1997.
With the indefinite delay of the assignment of the eligible recipients and with Medicaid rate reductions of 20%, the operating revenues of OmniCare-MI and the resulting management fees to the Company decreased in fiscal 1998. The effect of the rate reductions on management fees from OmniCare-MI was an approximately $3.0 million decrease.
The Company reported a fiscal 1998 loss from continuing operations of $22.9 million, or $3.48 per share. Including discontinued operation, the loss totaled $25.5 million, or $3.88 per share. The effect of the Company's restructuring efforts, losses from and subsequent cessation of its Florida operation and other asset impairment charges represented approximately $17 million of the loss from continuing operations, or $2.56 per share.
Management fees were $25.0 million in fiscal 1998, a decrease of $15.0 million (38%) from fees of $40.0 million in fiscal 1997. The operating revenues of OmniCare-MI decreased in fiscal 1998 due primarily to a net decrease in premium and enrollment rates of approximately 10% and 2%, respectively, which contributed to the decrease in management fees to the Company of approximately $4.2 million. As noted in the overview, the State Medicaid initiative in Michigan was the primary factor in the reduced premium rates. Additionally, the reduction in the management fee percentage in June 1998 resulted in a decrease of management fees of $.4 million. The Company recognized a decrease in management fee revenues from fiscal 1997 of $10.4 million, related to the PPC management agreement, which was terminated in May 1997.
Total expenses before income taxes from continuing operations totaled $132.9 million in fiscal 1998, compared to $119.0 million in fiscal 1997, an increase of $13.9 million (12%).
Medical service expenses were $70.3 million in fiscal 1998, an increase of $12.5 million (22%) over medical service expenses of $57.8 million for fiscal 1997. Medical expenses for OmniCare-TN increased by $7.6 million (17%), from $45.4 million for fiscal 1997 to $53.0 million in fiscal 1998. Medical expenses for UltraMedix increased $4.9 million (40%), from $12.4 million in fiscal 1997 to $17.3 million in fiscal 1998. The percentage of medical service expenses to medical premium revenues, or the medical loss ratio ("MLR"), was 83% and 80% for OmniCare-TN in
fiscal 1998 and 1997, respectively, and 115% and 88% for UltraMedix in fiscal 1998 and 1997, respectively.
Marketing, general and administrative expenses ("MG&A") decreased $8.5 million (16%), from $52.8 million in fiscal 1997 to $44.3 million in fiscal 1998, due to the following: (i) termination of the PPC management agreement, which resulted in a $9.1 million decrease; (ii) an increase in professional fees of $4.6 million, related primarily to the financial restructuring program of $3.0 million, expensing deferred HMO licensure-related cost in Louisiana and Pennsylvania of $1.0 million and information system development and maintenance of $.6 million; (iii) a $2.3 million loss related to the liquidation of the assets and certain liabilities of the Florida operations; (iv) a $1.3 million decrease in occupancy related cost, of which $.6 million related to the renegotiation of the Company's corporate office lease space which reduced accrued rent; and (v) decreases in salary costs of $3.0 million, promotional and advertising activities of $.9 million, consumables of $.5 million and travel of $.6 million.
The average PMPM premium rate in fiscal 1997 for OmniCare-TN was $110 and for UltraMedix, $98.
Management fees were $40.0 million in fiscal 1997, a decrease of $15.9 million (28%) from fees of $55.9 million in fiscal 1996. $8.5 million of the decrease was due to the purchase of majority ownership interests in UltraMedix and OmniCare-TN in January 1996, resulting in the consolidation of these entities, including the elimination of inter-company management fees. $8.7 million of the decrease was due to an agreement reached in June 1996 between the Company and OmniCare-TN, pursuant to which OmniCare-TN agreed to reimburse the Company approximately $8.7 million for start-up costs and other expenses incurred for the period January 1994 through September 1995.
Total expenses before income taxes from continuing operations totaled $119.0 million in 1997, compared to $95.8 million in fiscal 1996, an increase of $23.2 million or 24%.
Interest expense increased approximately $.3 million (27%), from $1.1 million in fiscal 1996 to $1.4 million in fiscal 1997, due to increased borrowings against the line of credit.
Earnings from discontinued operation, net of income taxes, were $1.8 million in fiscal 1997, compared to $.9 million in fiscal 1996, an increase of $.9 million. This change is due primarily to a contract entered into with the State of Maryland's Injured Workers' Insurance Fund in June 1996.
At June 30, 1998, the Company had (i) cash and cash equivalents and short-term marketable securities of $14.7 million, compared to $17.4 million at June 30, 1997; (ii) working capital of negative $14.1 million, compared to negative $13.0 million at June 30, 1997; and (iii) a current assets-to-current liabilities ratio of .64-to-1, compared to .67-to-1 at June 30, 1997. The principal sources of funds for the Company during fiscal 1998 were $1.2 million provided from net operating activities, net sales of marketable securities of $9.9 million, debt borrowings of $.1 million and proceeds from the issuance of common stock of $.2 million--offset by furniture and equipment additions of $.8 million, investing cash used in discontinued operation of $.8 million, $1.6 million to repay long-term debt and $4.6 million to fund an unsecured loan evidenced by a surplus note issued by OmniCare-MI.
In previous fiscal years, to satisfy applicable statutory requirements, the Company provided $1.0 million in letters of credit on behalf of, and a $1.0 million capital contribution to, OmniCare-LA, and made a $2.1 million capital contribution to
The line of credit facility is secured by all of the Company's rights, title and interest in the secured and unsecured promissory notes of the purchaser of the stock of CHF representing part of the purchase price for such stock (which purchaser has covenanted with the bank to make all payments on such notes directly to the bank for credit against the Company's indebtedness to the bank) and in the pledged CHF stock and other documents related to such purchase. Financial covenants for minimum net worth, debt service coverage ratio, and maximum debt to worth ratio will be established prior to March 1, 1999.
The Company is unable at this time to assess the capital requirements, if any, related to the final disposition of UltraMedix.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), was issued in June, 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components. This Statement requires that all items that are required as components of comprehensive income be displayed in a financial statement. Management does not expect the adoption of SFAS 130 will have a significant impact on the financial statement disclosures of the Company.