The Company has leased an aggregate of approximately 167,000 square feet from which it conducts its principal operations. The Company has leased space in Michigan, Tennessee, Florida, Pennsylvania, and Louisiana. The principal offices of the Company are located at 1155 Brewery Park Boulevard, Suite 200, Detroit, Michigan, where it has leased approximately 64,000 square feet of office space. The Company has also leased 16,000 square feet of leased office space in the Renaissance Center, Detroit, Michigan, to house its management information system operations. The Company has subleased approximately 44,000 of the 67,000 square feet it leased in Philadelphia, Pennsylvania in anticipation of its participation in the HealthChoices program to third parties, and expects the facility to be fully subleased in the next fiscal year. The Company intends to retain a portion of leased space to pursue business opportunities. There can be no assurances that the Company will be successful in subleasing that portion of the facility it does not intend to use.
In fiscal 1996, the Company acquired additional ownership in previously unconsolidated affiliates that affect the year-to-date comparability of its consolidated results of operations. In late January 1996, the Company purchased an additional 20.6% and 25% of the voting common stock of UltraMedix and OmniCare-TN, respectively. This increased the Company's ownership in UltraMedix to 51% and in OmniCare-TN to 75%. Accordingly, these majority-owned affiliates are included in the Company's consolidated financial results effective February 1996. In September 1997, the Company announced its plans to sell the stock of its subsidiary, CHF. The sale is expected to be completed in January 1998, but is contingent upon the buyer obtaining financing. In accordance with accounting literature, CHF results are reported as discontinued operations in the consolidated financial statements for all periods presented. Also, see Note 3 to the Consolidated Financial Statements. The proposed sale for $30 million in cash will result in an
estimated gain to the Company in 1998 of approximately $6.5 million or $1.00 earnings per share after closing costs and income taxes, and will provide cash flow to reduce debt and support enhancements in existing operations. There can be no assurances that this sale will be consummated.
Net losses in the Company's Florida operations also impacted the 1997 results in the amount of $.50 per share. The constantly changing governmental environment in Florida has required the Company to change its marketing strategy to a commercial market focus. WITH THE REALIGNMENT OF THE MEMBERSHIP MIX, CONTINUED INCREASED ENROLLMENT AND OPERATIONAL IMPROVEMENTS, PARTICULARLY RELATED TO THE COMPLETE INTEGRATION AND TESTING OF THE CLIENT/SERVER INFORMATION SYSTEM, PROVIDER CONTRACTING AND UTILIZATION AND CASE MANAGEMENT PRACTICES, MANAGEMENT BELIEVES IT CAN REVERSE THE CURRENT LOSS TREND EXPERIENCED BY THE FLORIDA HMO. The Company's fiscal 1998 results will greatly depend on its ability to successfully implement these goals in Florida.
Effective May 31, 1997, the Company's management agreement with PPC was terminated. Earnings per share related to the Company's management of this contract were $.12 in 1997. Historically, the earning contributions from this management agreement had been nominal.
Management fee revenue in 1996 was affected by 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 revenues from continuing operations increased $20.1 million (22%), from $92.4 million in 1996 to $112.5 million in 1997.
To minimize the uncertainty related to rate reductions contemplated by the initiative, UltraMedix has retargeted its marketing efforts to expand its commercial business. This has 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%.
Management fees were $40.0 million in 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.
EXCLUDING THESE NON-RECURRING ADJUSTMENTS, MANAGEMENT BELIEVES THAT THE MLR FOR OMNICARE-TN COULD INCREASE 3% TO 6% OVER THE NEXT SEVERAL QUARTERS. This increase could be offset by an anticipated enrollment increase as a result of the Plan obtaining its commercial HMO license and expanding its service area. The Company also recently implemented a claims scanning system at OmniCare-TN. Management believes this new capability will greatly enhance the Plan's ability to improve operating efficiencies related to claims processing.
MANAGEMENT ALSO EXPECTS A 4% TO 7% DECREASE IN THE MLR FOR ULTRAMEDIX AS A RESULT OF AN EXPECTED INCREASE IN THE COMMERCIAL MEMBERSHIP BASE, RENEGOTIATION OF PROVIDER CONTRACTS, NEW SYSTEMS IMPLEMENTATION AND OTHER CORRECTIVE ACTIONS TO IMPROVE UTILIZATION AND CASE MANAGEMENT PRACTICES. Some of these actions will also be instituted at OmniCare-TN.
Marketing, general and administrative expenses ("MG&A") increased $2.7 million (5%), from $50.1 million in 1996 to $52.8 million in 1997, due to the following: (i) MG&A for the Company's operation of PPC increased $1.0 million, but PPC-related MG&A as a percentage of management fee revenues decreased 9% from 95% in 1996 to 86% in 1997, due primarily to the mandated Medicaid initiative that increased enrollment without a corresponding marketing effort; (ii) MG&A for corporate headquarters, including the cost to operate OmniCare-MI, increased $1.9 million, and MG&A as a percentage of management fee revenues increased 9%, from 93% in 1996 to 102% in 1997, due to several factors, including: a) a $1.4 million decrease in management fees from OmniCare-MI; b) an average 5% salary rate increase, and c) a $.3 million adjustment to increase rent expense in 1997 calculated as the difference between the lease obligations of the Company and the estimated rental income from sub-tenants for the remaining life of the Company's lease in Pennsylvania; and (iii) a net decrease of approximately $200,000 related to the Company's Florida and Tennessee operations.
Interest expense increased approximately $.3 million (27%), from $1.1 million in 1996 to $1.4 million in 1997, due to increased borrowings against the line of credit.
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 OmniCare-TN agreed to reimburse the Company approximately $8.7 million in June 1996 for the start-up and other costs incurred by the Company between January 1994 and September 1995, the transaction was not sufficiently documented to allow recognition of the same on the Company's financial statements in December 1995.
Total revenues from continuing operations increased $32.6 million (55%), from $59.8 million in 1995 to $92.4 million in 1996.
Medical premium revenues were $34.5 million in 1996, of which $28.7 million related to OmniCare-TN and $5.8 million to UltraMedix. The average 1996 PMPM for OmniCare-TN was $105 and for UltraMedix $98.
Management fees decreased $2.0 million (3%) to $55.9 million in 1996 from $57.9 million in 1995. The change was attributable to a decrease in management fees from the owned Managed Plans of $3.5 million, from $20.7 million in 1995 to $17.2 million in 1996, offset by an increase from the operated Managed Plans of $1.5 million, from $37.2 million in 1995 to $38.7 million in 1996. Of the $3.5 million decrease in management fees from the owned Managed Plans, $1.8 million and $1.7 million were from UltraMedix and OmniCare-TN, respectively. The approximate $1.8 million decrease in management fees from UltraMedix was due to increased cost reimbursement of $1.0 million, offset by the elimination of management fees due, to post-acquisition consolidation of $2.8 million.
Total expenses before income taxes from continuing operations totaled $95.8 million in 1996, compared to $49.0 million in 1995, an increase of $46.8 million or 96%.
MG&A increased $6.4 million (15%), from $43.7 million in 1995 to $50.1 million in 1996, due to the following: (i) MG&A for the Company's operation of PPC increased $1.6 million, but PPC - related MG&A as a percentage of management fee revenues remained constant at 95% for 1996 and 1995, due primarily to the mandated Medicaid initiative that increased enrollment without the corresponding marketing effort; (ii) MG&A for corporate headquarters, including the cost to operate OmniCare-MI, increased $4.8 million, and MG&A as a percentage of management fee revenues increased 21%, from 77% in 1995 to 93% in 1996, due to several factors, including: a) increased payroll and promotional efforts to expand the provider network, product development and preparation for NCQA accreditation reviews, and b) an approximately $.5 million increase related to the Company's development costs in Pennsylvania, Louisiana, Georgia and Illinois, and (iii) a net decrease of approximately $.1 million related to the Company's Florida and Tennessee operations.
Equity in net losses of unconsolidated affiliates decreased $2.1 million, from $2.8 million in 1995 to $.7 million in 1996, due to the Company's recognition of its share of the losses as a shareholder of OmniCare-TN (50%) and UltraMedix (30.4%) through January 1996, at which time the Company acquired a majority interest in these Plans.
The approximate $.6 million (120%) increase in interest expense, from approximately $.5 million in 1995 to $1.1 million in 1996, was due to increased borrowings against the line of credit.
Bad debt expense of $1.0 million in 1996 relates to a valuation reserve established to estimate the net recoverability of the Company's $4.0 million investment in HealthScope. Bad debt expense of approximately $.1 million related to this investment was also established in 1995.
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. The effect on management fee revenues for the period January 1, 1994 to September 30, 1995, as adjusted in December 1995, represents a reduction in management fees of approximately $11.7 million, offset by a decrease in goodwill of approximately $.6 million related to the Company's 50% equity ownership in OmniCare-TN at the time. Additionally, the contract settlement charge was reduced by the $1.4 million reversal of the valuation allowance established in June 1995, representing a charge to adjust the carrying value of the Company's investments, advances and notes receivable from and related to OmniCare-TN to their estimated fair values as of June 30, 1995.
The Company's management of OmniCare-TN also contributed to the increase in management fees. Management fees in 1995 were $15.6 million, an increase of $11.8 million over fees of $3.8 million in 1994. The OmniCare-TN management agreement with UA-TN was effective for five months in 1994, compared to 12 months in 1995. In November 1994, the TennCare Bureau notified the Company that management fees charged under the original
The Company proposed to the Board of Directors of OmniCare-TN that a second Promissory Note payable solely from future non-TennCare related revenues to UA-TN be issued for the amount of any accrued management fees not otherwise payable under the second revised management agreement, or from interest earnings and OmniCare-TN's share of savings not required to be returned to the State of Tennessee under TennCare regulations. On October 5, 1995, the Board of Directors of OmniCare-TN approved such additional Promissory Note up to an aggregate principal amount of $6.0 million, to be repaid solely from future non-TennCare related revenues.
Total expenses before income taxes from continuing operations totaled $49.0 million in 1995, compared to $28.7 million in 1994, an increase of $20.3 million or 71%.
MG&A increased $16.2 million (59%), from $27.5 million in 1994 to $43.7 million in 1995, and represented approximately 74% and 75% as a percentage of management fees in 1994 and 1995, respectively. The Company's activities in Tennessee and Florida represented approximately $10.7 million of the increase, due primarily to 12 months of operations in 1995 compared to approximately 5 months in 1994. Included in the MG&A increase for Tennessee and Florida was $.5 million representing a charge to earnings in connection with an estimate of the effect of potential OmniCare-TN enrollment adjustments and $1.8 million representing a charge to adjust the carrying value of the Company's investments, advances and notes receivable from related parties to their estimated fair value at June 30, 1995.
Equity in net losses of unconsolidated affiliates of $2.8 million in 1995 was due to the Company's recognition of its share of the losses as a shareholder of OmniCare-TN (50%) and UltraMedix (30.4%) of $2.6 million and approximately $.2 million, respectively. Net equity losses in 1994 were approximately $.1 million and related to the Company's investment in UltraMedix. The effective dates of the Company's investments in UltraMedix and OmniCare-TN were March 1994 and July 1994, respectively. In January 1996, the Company acquired a majority interest in these entities.
The $1.1 million (138%) increase in depreciation and amortization, from approximately
$.8 million in 1994 to $1.9 million in 1995, was due to depreciation taken on furniture and equipment acquired over the past 24 months and the amortization of goodwill related to investments in affiliates.
Bad debt expense of approximately $.1 million in 1995 represents a valuation reserve on the Company's investment in HealthScope.
As a result of the foregoing, the Company recognized earnings from continuing operations before income taxes of $10.8 million in 1995, compared to earnings from continuing operations before income taxes of $9.8 million in 1994, a $1.0 million change. The federal statutory tax rate for continuing operations for 1995 and 1994 was approximately 35%. Goodwill amortization related to equity investments and equity losses from unconsolidated affliates not deductible for tax purposes resulted in an effective tax rate of 42% in 1995 and 34% in 1994. Net earnings from continuing operations in 1995 were $6.2 million, compared to net earnings from continuing operations of $6.5 million in 1994, a change of $.3 million.
Earnings from discontinued operations, net of income taxes, was approximately $.4 million in 1995, compared to approximately $.9 million in 1994, a change of $.5 million.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128 ("SFAS 128"), Earnings Per Share, which (1) replaces the presentation of primary earnings per share (EPS) with a presentation of basic EPS; (2) requires dual presentation of basic and diluted EPS on the face of the consolidated statements of operations regardless of whether basic and diluted EPS are the same; and (3) requires a reconciliation of the numerator and denominator used in computing basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Accounting Principles Board Opinion 15. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. SFAS 128 requires restatement of all prior period EPS data presented. The Company does not expect the effects of applying SFAS 128 to be significant.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), is effective for fiscal years beginning after December 15, 1995.
The Company anticipates that additional cash flow and working capital may be necessitated by business expansion needs (including potential acquisitions) and new marketing program requirements. The Company has submitted and expects to continue to submit proposals to governmental, quasi-governmental and private entities to provide managed care services. Management believes that as it continues to pursue other contractual relationships, the Company's cash reserves, marketable securities, future cash flows from operations and proceeds from borrowings and the sale of CHF will be sufficient to enable the Company to continue to develop its operations, support its anticipated business expansion and satisfy its working capital needs for the foreseeable future. The proposed sale of CHF for $30 million in cash is expected to reduce debt by approximately $16 million and to provide adequate cash for other Company pursuits.
Management believes that the Company's cost controls, risk management programs and related procedures will allow the Company to substantially mitigate the effects of any inflation.