(3) Certain items in the 1995, 1996, 1997 and 1998 selected consolidated financial data have been reclassified to conform to the 1999 presentation.
The Company's operating expenses are comprised of medical costs, net (consisting primarily of the net medical costs after the ceded portion of medical services and reinsurance, net of recoveries), its cost of services, net (consisting primarily of net costs after ceded portions of compensation of personnel, including nurses and physicians, telephone expenses, depreciation and amortization, rent, costs related to the Company's computer operations, costs related to customer service, and costs related to development of new services), and selling, marketing and administration expenses, net (consisting primarily of the net costs after ceded portions of sales commissions, advertising, sales account management personnel, bad debts, administration, professional services, insurance, compensation and depreciation). The medical costs, cost of services and selling, marketing and administration expenses are affected to varying degrees by the 50% quota share agreement related to the Medicaid block of business which became effective January 1, 1999.
(1) Computed as a % of HMO premiums, net (gross premiums less ceded premiums).
Revenues from the HMO operations were the result of obtaining in the fourth quarter of fiscal 1998 the revenue from a client contract under which the Company was at risk for the total medical services costs. The Company received a significant portion of the total premium from this HMO through December 31, 1998. The Company did not have this business in the first three quarters of fiscal 1998. The Company then acquired this HMO in January 1999. The premiums-gross increased 427% or $117,182,000, from fiscal 1998 to fiscal 1999 (increasing from $27,457,000 to $144,639,000). The increase was the result of two and one-half months of premium in fiscal 1998 compared to twelve months of premiums in fiscal 1999, membership category changes and rate adjustments effective January 1999. Total revenues include the ceding allowance and net revenues reflect the premiums that are ceded under the reinsurance agreement that was entered into January 1999.
Revenues from management services decreased 23% or $14,664,000, from fiscal 1998 to fiscal 1999 (decreasing from $63,395,000 to $48,731,000) mainly the result of the decrease in the number of covered participants enrolled in the Company's management services related to an HMO that terminated services on September 30, 1998 and other clients who terminated services. The management services revenue increased 7% or $4,319,000, from fiscal 1997 to fiscal 1998 (increasing from $59,076,000 to $63,395,000) which was the result of the growth of existing business and new contracts entered into by the Company.
Revenues from QualityFIRST(R) increased 11% or $416,000, from fiscal 1998 to fiscal 1999 (increasing from $3,648,000 to $4,064,000) and was unchanged between fiscal 1997 and fiscal 1998. The increase was the result of an increased number of clients or expansion of systems with existing clients.
Investment income increased 188% or $632,000 from fiscal 1998 to fiscal 1999 (increasing from $337,000 to $969,000 and increased 80% or $150,000 from fiscal 1997 to fiscal 1998 (increasing from $187,000 to $337,000). This increase is the result of higher levels of short-term investments in fiscal 1998 and fiscal 1999.
Medical Costs, Net: Medical costs, net of amounts ceded, for the HMO increased 283% or $66,947,000 from fiscal 1998 to fiscal 1999 (from $23,625,000 to $90,572,000) due to the HMO operations that began in the fourth quarter of fiscal 1998. As a percentage of HMO premiums, net medical costs was 86.0% in fiscal 1998 and 84.8% in fiscal 1999. The decrease in fiscal 1999 was the result of higher premium rates for the year versus the cost of medical expenses, net of insurance recoveries.
Selling, Marketing and Administration, Net: Selling, marketing and administration, net of amounts ceded, increased 5% or $663,000, from fiscal 1998 to fiscal 1999 (from $13,386,000 to $14,049,000), and decreased 5% or $695,000 from fiscal 1997 to fiscal 1998 (from $14,081,000 to $13,386,000). The increases
or decreases were due primarily to additions or decreases to staff, travel, commission, bad debts, insurance, training programs and other expenses. This expense as a percentage of net revenues (22%, 14%, and 9%) for fiscal 1997, fiscal 1998 and fiscal 1999, respectively, decreased because of the higher premium revenue in fiscal 1998 and still higher premium revenue in fiscal 1999.
Oxford Transition Costs : The Company incurred transition costs related to the purchase of Oxford Health Plans (PA), Inc. of approximately $920,000 in the quarter ended December 31, 1998, and $430,000 in the quarter ended September 30, 1998 , due to increased operational costs for HMO related activities without a corresponding increase in the management service fees.
HRM also used approximately $2,327,000 and $2,153,000 in fiscal 1999 and fiscal 1998, respectively, to repay principal on notes payable and capital leases. The Company borrowed $6,000,000 and $4,750,000 in fiscal 1999 and fiscal 1998, respectively. The Company received cash proceeds of $306,000 and $784,000 in fiscal 1999 and fiscal 1998, respectively, from stock option exercises for common stock by current or former employees and directors.
The Company has a net operating loss carryforward of approximately $35,000,000 for income tax purposes at June 30, 1999, which can be used to reduce taxable income and cash flow necessary to pay taxes.
The Company believes that its cash and cash flow from operations, together with credit facilities which the Company has obtained, will be sufficient to finance the Company's anticipated normal expansion in fiscal 2000. The Company has a term loan and revolving loan (principal balance of $5,245,000 and $5,765,000, respectively, as of June 30, 1999) with its bank and a revolving credit facility expiring January 31, 2000, under which the Company has borrowed the full amount available under the facility. The revolving credit and term loan are secured by liens on the assets of the Company.
During Phase 2 of the Company's Year 2000 Project, the Year 2000 Project Team provided initial size estimates for the scope of each mission critical system component that was identified, and developed a strategy including a timetable, for achieving compliance for each of these components. In addition, the Year 2000 Project Team developed a communication plan for internal and external communications regarding the year 2000.
The consolidated financial statements of the Company and its subsidiaries are included in a separate section of this report. See Part IV, Item 14.