The Company continues to implement the restructuring plan initiated in fiscal 1998, which during fiscal 1999 has included changes in senior management, sale of CHF, renegotiation of the bank credit facility, settlement of legal proceedings and continued efforts to achieve further cost reductions and maintain Company revenue.
In August 1998, the then Chief Executive Officer of the Company retired and the Board of Directors elected Gregory H. Moses, Jr. as the new Chief Executive Officer of the Company, and the Company's Corporate Controller became its new Treasurer and Interim Chief Financial Officer.
In September 1998, effective as of August 31, 1998, CHF was sold for $17.75 million, comprised of $2.0 million in cash and the buyer's secured and unsecured notes for $13.25 million and $2.5 million, respectively. Including payments on the secured note, $9.2 million of the sales price plus $0.8 million of interest in cash was received through June 30, 1999. On August 16, 1999, the Company was paid $8.5 million, the remaining principal balance of the secured and unsecured notes and accrued interest thereon, net of a $250,000 discount granted as an inducement for the buyer to prepay both notes. As required by the Company's line of credit facility, the sale was approved by the bank and all proceeds were used to reduce the Company's indebtedness to the bank.
In September 1998, the Company and its bank lender amended the Company's loan agreement and promissory note to: (i) decrease the principal amount to $20.94 million and (ii) require reductions in the outstanding balance owed to the bank at scheduled future dates, including the permanent reduction of the outstanding balance to the lesser of the then outstanding principal balance or $8.0 million by April 15, 1999.
In May 1999, the Company and its bank lender amended the Company's loan agreement and promissory note requiring the Company to: (i) decrease the principal sum to $16.6 million by September 1, 1999, (ii) permanently reduce the bank's commitment to the lesser of the then outstanding principal balance or $16.6 million by September 1, 1999, (iii) meet with the lender to establish financial covenants for minimum net worth, debt service coverage ratio and maximum debt to worth ratio prior to September 1, 1999, and (iv) obtain or arrange for the return or cancellation of the existing $0.5 million letter of credit provided by the Company on behalf of its wholly owned subsidiary, UA-LA and its wholly owned subsidiary, OmniCare Health Plan of Louisiana, Inc., by June 30, 1999. The bank subsequently granted the Company a waiver on items (iii) and (iv) above, extending the date to October 1, 1999. The maturity date of the line of credit is October 1, 1999. The bank and the Company have agreed to negotiate the restructuring of the loan agreement and promissory note within the next 90 days, and the bank has agreed to extend the maturity date during this period.
Certain former senior officers and the Company were named defendants in two shareholder lawsuits filed in the United States District Court for the Eastern District of Michigan in August 1995. The court consolidated these lawsuits into a single action. The consolidated action alleged that certain senior officers and the Company issued reports and statements that violated federal securities laws. The Company and the officers contended that all material facts were disclosed during the period in question and that certain material facts alleged not to have been disclosed were already available in the financial marketplace. Nevertheless, management concluded that continued defense of the litigation could have an adverse impact on the Company's financial position. Continuation of this litigation would have also diverted management's focus from operations. Based on these facts, management pursued settlement with the plaintiffs.
On September 14, 1998, the parties agreed to a proposed settlement requiring the release of all claims and damages sought by the plaintiffs in exchange for (a) $2.0 million in cash from the Company's insurance carrier, (b) a $625,000 promissory note of the Company payable in 15 equal monthly installments beginning 13 months after entry of a final court order approving the settlement, with interest at 4% per annum from the date of such order, and (c) newly issued shares of common stock of the Company with an aggregate value of $625,000 based on a share price equal to the greater of (i) the average closing price of the Company's common stock for the period from July 20, 1998 through the third trading day preceding the court hearing on approval of the settlement or (ii) $2.25.
In December 1998, final judgment was entered approving the Company's shareholder lawsuit settlement and dismissing the action. Pursuant thereto, all claims and damages sought by the plaintiffs were released in exchange for $2.0 million in cash from the Company's insurance carrier, a $625,000 promissory note from the Company payable in 15 equal monthly installments beginning January 3, 2000, with interest at 4% per annum from December 11, 1998, and 277,777 new shares of common stock of the Company valued at $625,000 and issued on March 29, 1999.
A demand for arbitration was filed on December 1, 1998 against the Company, seeking approximately $414,000 for alleged breach of a lease agreement for telecommunications equipment and related services. In April 1999, the parties reached a settlement agreement and the arbitration proceeding was dismissed in exchange for the Company's paying the claimant $120,000 in cash and issuing to the claimant 67,369 new shares of common stock of the Company valued at $80,000.
Effective April 1, 1999, the Company entered into the County Care contract to arrange for the delivery of health care services, including the assumption of underwriting risk, on a capitated basis to certain enrollees residing in Wayne County (Michigan) who lack access to private or employer sponsored health insurance or to another government health plan. The initial contract period was for six months, with automatic renewal for successive periods of one year unless terminated by either party as provided in the contract. It is known at this time that such renewal will occur for the first successive one-year period beginning October 1, 1999. Although Company management does not expect significant net earnings directly from the County Care contract, management believes that entering into this contract is consistent with the Company's strategic objective of expanding the client base and achieving size sufficient to enable the Company to negotiate better rates, save on administrative costs and build profits.
On May 6, 1999, the Company's Board of Directors authorized the repurchase by the Company of up to 250,000 of the Company's common shares (approximately 3.6% of the total outstanding common shares) in the open market. At June 30, 1999, 12,900 shares had been repurchased by the Company, and the additional 237,100 shares were repurchased in July 1999.
The Company's results of operations for fiscal 1999 have also been impacted by the cost reductions implemented in fiscal 1998, including an approximate 35% workforce reduction at the Company's corporate and Tennessee operations, and the cessation of operations in Florida, Louisiana and Pennsylvania. Payroll expenses at the corporate and Tennessee operations decreased approximately $5.1 million for the year ended June 30, 1999, compared to the same period one year earlier.
Medical premium revenues were $73.2 million in the year ended June 30, 1999, a decrease of $5.4 million (7%) from medical premium revenues of $78.6 million in the year ended June 30, 1998. Medical premiums for OmniCare Health Plan, Inc. in Tennessee ("OmniCare-TN"), a managed care organization owned 75% by the Company, increased $7.4 million (12%), from $63.5 million in the year ended June 30, 1998 to $70.9 million in the year ended June 30, 1999.
Management fees were $18.1 million in the year ended June 30, 1999, a decrease of $6.9 million (28%) from fees of $25.0 million in the year ended June 30, 1998, and represent management fees earned from OmniCare-MI. The decrease is due to the following: (i) reduction in the management fee percentage in June 1998 from 17% to 14%, which resulted in a decrease of $4.2 million; (ii) a decrease in operating revenues of OmniCare-MI in fiscal 1999 due primarily to an enrollment decrease of 6%, which resulted in a net decrease in management fees of $1.6 million; and (iii) forgiveness of management fee revenues from OmniCare-MI of $1.3 million.
Total expenses before income taxes from continuing operations totaled $92.4 million in the year ended June 30, 1999, compared to $132.9 million in the year ended June 30, 1998, a decrease of $40.5 million (30%).
As a result of the foregoing, the Company recognized earnings from continuing operations before income taxes of $1.1 million for the year ended June 30, 1999, compared to a loss from continuing operations before income taxes of $27.3 million for the year ended June 30, 1998, a $28.2 million change. Net earnings from continuing operations were $0.6 million for the year ended June 30, 1999, compared to a net loss from continuing operations of $22.9 million for the year ended June 30, 1998, a change of $23.5 million.
Medical premiums for UltraMedix increased $1.2 million (9%), from $13.9 million in fiscal 1997 to $15.1 million in fiscal 1998.
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 $0.6 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 $0.6 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 $0.9 million, consumables of $0.5 million and travel of $0.6 million.
Depreciation and amortization in fiscal 1998 was $9.7 million, compared to $4.1 million in fiscal 1997, an increase of $5.6 million (137%). Of this increase, $3.5 million was due to the write-off of the remaining goodwill related to the Company's purchase of UltraMedix due to the liquidation order as to UltraMedix in fiscal 1998. Additional increases included $0.3 million due to the change in estimate of the remaining useful life of the Company's managed care software and the write-off of certain property and equipment of approximately $0.8 million.
Bad debt expense increased $5.0 million (278%), from $1.8 million in fiscal 1997 to $6.8 million in fiscal 1998. The increase related to impairment losses established on certain of the Company's investments and the surplus note receivable.
As a result of the foregoing, the Company recognized a loss from continuing operations, before income taxes, of $27.4 million for fiscal 1998, compared to a loss from continuing operations, before income taxes, of $6.5 million for fiscal 1997, a $20.9 million change. The loss from continuing operations, net of income taxes, was $22.9 million for fiscal 1998, compared to a loss from continuing operations, net of income taxes, of $5.3 million for fiscal 1997, a change of $17.6 million. The federal statutory tax rate for continuing operations for both periods was approximately 34%. Goodwill amortization related to equity investments, the write-off of capital investments not deductible for tax purposes and state income taxes resulted in an effective tax rate of approximately 16% for fiscal 1998 compared to 19% for the prior fiscal year.
At June 30, 1999, the Company had (i) cash and cash equivalents and short-term marketable securities of $18.6 million, compared to $14.7 million at June 30, 1998; (ii) negative working capital of $1.7 million, compared to negative working capital of $14.1 million at June 30, 1998; and (iii) a current assets-to-current liabilities ratio of .96-to-1, compared to .64-to-1 at June 30, 1998. The principal sources of funds for the Company during the year ended June 30, 1999 were $6.2 million provided from net operating activities, including a federal income tax refund of $5.5 million, cash proceeds and payments received on the secured note from the sale of CHF of $9.2 million and proceeds from the sale of property and equipment of $0.1 million -- offset by discontinued operations of $1.0 million, $10.0 million to repay bank debt and the purchase of property and equipment of $0.7 million.
Company in two annual installments of $0.25 million with the balance due August 31, 2001, plus interest at 6% per annum. As required by the Company's line of credit facility, the sale was approved by the bank and all proceeds from the sale (including all payments on the two notes) were to be used to reduce the Company's indebtedness to the bank.
In April 1999, the parties agreed to modify the secured note payment terms, extending its maturity date to August 31, 1999, requiring additional principal and interest payments totaling $0.9 million to be paid over the extended period and requiring an additional limited personal guarantee by a principal of the buyer for $1.5 million of the principal of the secured note. In June 1999, as an inducement for the buyer to prepay both notes, the Company agreed to a discount of $250,000 if by mid-August 1999 the buyer would pay to the Company the balances of the secured and unsecured notes plus accrued and unpaid interest.
In May 1999, the Company and its bank lender amended the Company's loan agreement and promissory note requiring the Company to: (i) decrease the principal amount to $16.6 million by September 1, 1999, (ii) permanently reduce the outstanding balance to the lesser of the then outstanding principal balance or $16.6 million by September 1, 1999, (iii) meet with the lender to establish financial covenants for minimum net worth, debt service coverage ratio, and maximum debt to worth ratio prior to September 1, 1999, and (iv) obtain or arrange for the return or cancellation of the existing $0.5 million letter of credit provided by the Company on behalf of its wholly owned subsidiary, UA-LA and its wholly owned subsidiary, OmniCare Health Plan of Louisiana, Inc., by
June 30, 1999. The bank has granted the Company a waiver on items (iii) and (iv), extending the date to October 1, 1999. The maturity date of the line of credit is October 1, 1999. The bank and the Company have agreed to negotiate the restructuring of the loan agreement and promissory note within the next 90 days, and the bank has agreed to extend the maturity date during this period. Pursuant to the promissory note, interest is payable monthly at the bank's prime rate (7.75% at June 30, 1999) plus one percent.
The Company's restructuring efforts significantly contributed to the $22.9 million loss from continuing operations in fiscal 1998. However, after adjusting for non-cash activities and changes in assets and liabilities, the Company generated positive cash flows from operations in fiscal 1998. The Company's ability to generate adequate amounts of cash to meet its future cash needs will depend on a number of factors, including the continued stabilization of OmniCare-MI, continuation of its restructuring efforts and achieving increased operational efficiencies at its Tennessee operation.
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information," is effective for fiscal years beginning after December 15, 1997. This standard requires that an enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments.