The following table shows the Company's results of operations as a percentage of revenue, and is used in the year-to-year comparisons discussed below.
Health care services expense increased by $1.6 million, or 2.3%, from $66.0 million in 1998 to $67.6 million in 1999. Health care services expense as a percentage of premium revenue (the "loss ratio") increased from 67.7% in 1998 to 70.2% in 1999. This increase is primarily due to an increase in the loss ratio for the managed care plans, which is due to an increase in specialist referral claims and an increase in supplemental payments to capitated providers, both as a percentage of managed care premium revenue. The increase in specialist referral claims is primarily due to a shift in the managed care product mix toward richer benefit plans that include coverage of more specialist services. The increase in supplemental payments is due to the fact that the richer benefit plans also cover more services for which general dentists receive supplemental payments from the Company, in addition to the monthly capitation payments.
Loss on impairment of assets increased from $2.4 million in 1998 to $24.6 million in 1999. The loss on impairment in 1999 is primarily due to a reduction in the carrying value of the goodwill and non-compete covenants related to the acquisition of First American Dental Benefits, Inc. in 1996, and the acquisition of Advantage Dental HealthPlans in 1997. The amount of the impairment loss was determined in accordance with Accounting Principles Board Opinion No. 17, as discussed in Note 6 to the accompanying consolidated financial statements.
Interest expense increased by $1.6 million, or 35.8%, from $4.3 million in 1998 to $5.9 million in 1999. This increase was primarily due to expenses incurred in connection with restructuring the credit agreements related to the senior notes payable and the revolving line of credit in May 1999. Those expenses consisted of $1.0 million of consulting and legal fees and the issuance of stock warrants with an estimated value of $320,000 to the holder of the senior notes payable.
Health care expenses increased 0.5% or $318 for the twelve months ended December 31, 1998. As a percent of revenues, health care expenses improved 1.2% from 68.9% of revenues for the twelve months ended December 31, 1997 to 67.7% for the same period in 1998. Including the Advantage acquisition for twelve months of 1997, health care expenses for the period would have been $66,452 or 68.3% of revenues. The comparison to 1998 then shows a decrease of $432 in health care expenses and a decrease of 0.6% in health care expenses as a percentage of revenues. The Company continues to improve the health care cost ratios in its existing business, including the business provided by its recent acquisitions.
Loss on impairment of assets in the amount of $2,397 for the twelve months ended December 31, 1998 primarily represents a reduction in the carrying value of certain promissory notes related to the sale of discontinued operations, and a charge to reduce the book value of the old corporate head quarters building to estimated net realizable value.
Net cash used by operating activities was $492,000 during 1999, compared to $1.7 million during 1998. Although the net loss increased from $9.9 million in 1998 to $52.0 million in 1999, substantially all of the increase was due to non-cash expenses. Net cash provided by investing activities was $1.9 million during 1999, compared to $3.0 million during 1998. The Company sold certain long-term assets in both 1999 and 1998, as shown on the accompanying statements of cash flows, to meet it cash requirements in both years. Net cash used in financing activities was $2.6 million during 1999, compared to $1.8 million during 1998. The cash used in financing activities consisted primarily of debt payments in both years.
The Company's total short-term and long-term debt decreased from $42.4 million at December 31, 1998, to $39.8 million at December 31, 1999, due to payments of $2.6 million during 1999. The payments included $1.6 million paid to the former owners of acquired businesses in connection with non-competition agreements, and a $1.0 million reduction in the balance outstanding under the revolving line of credit. Outstanding debt at December 31, 1999 consists of $32.5 million of senior notes payable, an outstanding balance of $7.0 million under a revolving line of credit, and a $255,000 note payable to the former owner of an acquired business in connection with a non-competition agreement.
In September 1997 the Company issued $32.5 million of unsecured senior notes payable. The senior notes are payable in annual installments of $6.5 million on each September 30, beginning in 2001, with a final maturity date of September 30, 2005. The interest rate on the notes was fixed at 8.91% at December 31, 1999.
In May 1999 the Company executed restructured credit agreements with respect to both the senior notes payable and the revolving line of credit facility. The restructured agreements provide for changes in interest rates and modifications to the financial covenants and reporting requirements, as well as required principal repayments. In connection with the execution of the restructured agreements, the Company obtained waivers for all prior and existing defaults and events of default under the previous credit agreements through May 28, 1999. In connection with the restructured agreements, the Company issued warrants to purchase 382,000 shares of common stock for $4.51 per share to the holder of the senior notes payable. The warrants are exercisable at any time from January 1, 2000 to December 31, 2003. Those warrants were cancelled in March 2000 in connection with the transaction described below.
In connection with the restructured agreements related to both the senior notes payable and the revolving line of credit facility, the Company is subject to various loan covenant requirements. The Company was not in compliance with those requirements as of December 31, 1999. However, the outstanding balances under the senior notes payable and the revolving line of credit facility are classified as long-term on the accompanying consolidated balance sheet, due to the transaction completed on March 1, 2000, as discussed below. The Company expects that all of its outstanding debt under the senior notes payable and the revolving credit line will be converted to convertible preferred stock in 2000, pursuant to the transaction described below.
On March 1, 2000, the Company entered into an agreement with an investor group (the "Investors"), the holder of the senior notes payable (the "Senior Note Holder"), and its revolving line of credit lender (the "Bank"). Under this agreement, the Investors loaned $8.0 million to the Company in the form of notes payable due April 30, 2001, which bear interest at 10% annually. The Investors, the Senior Note Holder, and the Bank all agreed to convert the new $8.0 million loan, the outstanding balance of $32.5 million under the senior notes payable, and the outstanding balance of $7.0 million under the revolving line of credit, to convertible preferred stock, subject to regulatory approval. Under this agreement, both the Senior Note Holder and the Bank agreed not to demand or accept any payment under the credit agreements, and not to take any enforcement actions of any kind under the agreements until April 30, 2001.
preferred stock is convertible, with respect to all matters voted on by the common stockholders of the Company. As a result of this transaction, after regulatory approval is obtained, the existing stockholders of the Company would own approximately 13.7% of the common stock interests of the Company. Under this agreement, the Company agreed to place new directors on its board of directors, who represent the Investors, the Senior Note Holder and the Bank, and who, collectively, constitute a majority of the board of directors.
There can be no assurance that the Company will remain in compliance with applicable regulatory financial requirements in the future, or that there will be no other unforeseen events that could have a material adverse impact on the Company's financial position and the adequacy of its cash balances. The Company does not expect to have the financial resources to grow its business through acquisition for the foreseeable future.
The Year 2000 issue results from computer programs that use two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software, and that use two digits to define the applicable year, may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing a disruption of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in normal business activities.
The Company's operations are potentially impacted by inflation, which can affect premium rates, health care services expense, and selling, general and administrative expenses. The Company expects that its earnings will be positively impacted by inflation in premium rates, because premium rates for dental benefit plans in general have been increasing due to inflation in recent years. The Company expects that its earnings will be negatively impacted by inflation in health care costs, because fees charged by dentists and other dental providers have been increasing due to inflation in recent years. The impact of inflation on the Company's health care expenses is mitigated to some extent by the fact that 45-50% of total health care services expense consists of capitation payments to providers. In addition, most of the Company's selling, general and administrative expenses are impacted by general inflation in the economy.