The Company's principal corporate offices consist currently of approximately 142,500 square feet in a building in Minneapolis, MN with a lease expiring in or by 2009. In addition, the Company leases 31,000 square feet in Kalamazoo, MI with a lease expiring in or by 2006, 28,000 square feet in Philadelphia, PA with a lease expiring in or by 2004 and 8,000 square feet in Harrisburg, PA with a lease expiring in or by 2003. All of the Company's facilities are used exclusively by the Company for office space or computer operations and are anticipated to be adequate.
(1) As discussed in Note 4 of the consolidated financial statements, the Company changed its method of accounting for 4YourCare service revenue. On a pro-forma basis, this change would have decreased 1997 net income by $1,382,000, increased 1996 net income by $494,000, and decreased 1995 net income by $79,000.
(3) Certain items in the 1996, 1997, 1998 and 1999 selected consolidated financial data have been reclassified to conform to the December 31, 2000 presentation.
In order to manage its insurance risk and generate statutory surplus, the HMO entered into quota share reinsurance agreements to cede 33% of the Health Plan premiums, medical costs, costs of services and selling, marketing and administration expenses in the last six months of 2000 and 50% in 1999. Under terms of the quota share agreements, the Health Plan received an advance ceding allowance of $4,000,000 under the 33% agreement and $5,000,000 under the 50% agreement. For statutory accounting purposes, the ceding allowance was recognized as revenue upon receipt from the reinsurer. For GAAP, the ceding allowance is realized in relation to profits ceded to the reinsurer.
For the year ended December 31, 2000, the Company had a net loss of $27.6 million after taking into consideration several one time events including $2.7 million related to the settlement of a dispute over amounts the HMO allegedly owed to a previous provider, $5.8 million of additional amortization expense related to the write-off of the AutoPILOT Care Management software as the result of the implementation of a new Care Management system in March of 2001, $6.1 million write-down of certain accounts receivable for which full collection was in doubt, $.6 million write-down of fixed assets related to the closure of Nashville claims operation, $.5 million of expense incurred in efforts to raise external financing and $4.9 million related to the settlement of claims for prior years that were included in current operations. The net loss of $7.0 million before taking into consideration the one time events reflects losses experienced across all three business units in 2000. The Health Plan, largely as a result of the one-time events impacting its business unit, experienced a pre-tax loss of $5,645,000 in 2000.
The magnitude of the net loss for the year ended December 31, 2000, has reduced the Company's net worth from $33.1 million at December 31, 1999 to $6.1 million at December 31, 2000. The loss experienced at the HMO during 2000 created the risk of regulatory intervention or increased oversight. Subsequent to December 31, 2000, the Company has undergone a series of changes designed to strengthen the financial position of both the Company and the HMO as well as position the Company for strategic growth in the future. The prior CEO and President retired and have
Over 80% of the Company's total revenues are from the Health Plan Business Unit. Included in the results of the Health Plan are Oaktree (serving Philadelphia and surrounding counties) and HealthMate (serving Harrisburg and surrounding counties), which was acquired on February 1, 2001. Oaktree has experienced a continuing decline in membership while HealthMate has seen steady growth in membership. Future trends in membership are difficult to predict. This business is subject to regulatory risks such as re-negotiation of rates on an annual basis, changing and expanding reporting requirements, net worth requirements, government agendas and the general health of the membership served. Service utilization for contracted charges payable to providers of care, pharmacies, and other health care providers can significantly impact the profitability of the Health Plan.
(1) Computed as a % of HMO premiums, net (gross premiums less ceded premiums). (2) Computed as a % of net revenues. * Less than 1% on a rounded basis
Revenues: Total revenues prior to the reduction for ceded premiums increased $18,204,000 (9%) for the year ended December 31, 2000 compared to the same period in 1999 (from $212,137,000 to $230,341,000), and increased $106,023,000 (112%) from fiscal 1998 to fiscal 1999 (from $94,837,000 to $200,860,000) . These increases are primarily attributable to the Company's entrance into the HMO insurance business on April 16, 1998, the acquisition of HealthMate on February 1, 2000 and increased investment income, offset by lower 4YourCare and QualityFIRST revenues resulting from the loss of several key clients.
Investment income decreased 41% or $.4 million for the year ended December 31, 2000 compared to the same period in 1999 (decreasing from $1.0 million to $.6) and increased 188% or $.6 million from fiscal 1998 to fiscal 1999 (increasing from $.3 million to $.9 million). This decrease in 2000 is directly related to the sale of investments by the Health Plan, the proceeds of which were used to pay claims. The increase in 1999 is the result of higher levels of investments held by the Health Plan.
to $1.0 million), and increased as a percentage of net revenue from 0.5% to 0.6%. Interest expense was lower in 2000 due to lower balances outstanding under terms of bank loan.
Cash has been used to invest in software and program enhancements ($4.5 million for the year ended December 31, 2000 and $8.7 million and $9.1 million in fiscal 1999 and fiscal 1998, respectively). The Company also used cash to acquire property and equipment ($.4 million for the year ended December 31, 2000 and $5.6 million and $2.7 million for fiscal 1999 and fiscal 1998, respectively). Approximately $3.0 million of the fiscal 1999 property and equipment purchases were related to the corporate office move in the first quarter of fiscal 1999. The Company expects to continue to invest in software and program enhancements in 2001 on the core business units and will need to fund some of the prior year software and program enhancements.
The Company had a working capital deficit of $28.1 million at December 31, 2000 compared to a deficit of $7.6 million at December 31, 1999. The major factors for the increased deficit relate to $4.6 million increase in accounts payable, $7.2 million increase to medical services payable, $1.8 million increase to unearned revenue, a $2.2 million increase to current maturities of notes payable and a $1.3 million decrease to cash and cash equivalents. The Health Plan had fixed maturity investments of $6.7 million and $8.4 million available at December 31, 1999 and June 30, 1999, respectively, to be used to pay medical services payables. The investments were sold in 2000 to pay medical claims.
As a result of its financial position, the Pennsylvania Department of Insurance has required the Company to submit a risk based capital plan to the Department of Insurance. On April 19, 2001, the plan was submitted. On April 30, 2001, the health plan was notified that the Department would require a resubmission of the plan. The plan has been prepared and resubmitted; however there can be no assurance that the health plan will be successful in obtaining approval of the revised RBC plan. Failure to achieve approval may jeopardize the contracts for covered members with the Pennsylvania Department of Public Welfare.
In the year 2000, the NAIC and the Commonwealth of Pennsylvania adopted revised statutory accounting principles to further clarify and standardize admitted and non-admitted assets for statutory purposes. Referred to as Codification, the revised statutory accounting standards are effective January 1, 2001. The effects of adopting the revised standards indicate that surplus continues to be below the threshold control level.