HRM's principal corporate offices consist currently of approximately 125,000 square feet in two adjacent buildings in Minneapolis, Minnesota, 31,000 square feet in Kalamazoo, Michigan and 4,000 square feet in Sacramento, California. The leases on the Minneapolis and Sacramento offices expire in or by 1998. The lease on the Kalamazoo office expires in or by 2001. The Company also leases space for three sales offices located in the United States and Canada generally for one-year terms or less. All of the Company's facilities are used exclusively by the Company for office space or computer operations and are anticipated to be adequate, but will be expanded as business needs require.
(1) Earnings per share is computed using the weighted average number of Common Shares and Common Share equivalents outstanding during the period. Common Share equivalents include dilutive stock options and warrants using the treasury stock method.
The following table sets forth certain consolidated financial data as a percentage of total revenues for the three fiscal years ended June 30, 1995, 1996, and 1997 and compares the percentage change in the dollar amounts of these items for the period indicated.
Revenues: Total revenues increased $8,216,000 (15%) from fiscal 1996 to fiscal 1997 (from $54,507,000 to $62,723,000), and increased $5,205,000 (11%) from fiscal 1995 to fiscal 1996 (from $49,302,000 to $54,507,000). These increases are primarily attributable to increases in the number of clients and covered participants enrolled in the Company's health plan management services, sales of additional products to existing clients and increased sales of the QualityFIRST(R) healthcare practice guidelines. Revenues for fiscal 1997 also reflect the resolution of certain financial matters with a large client resulting in an amended contract in October, 1997.
Following is the approximate breakout of revenue by class of similar service categories:
There are variations between the percentage increases of revenue categories because clients purchasing services may choose all or a portion of these services and this varies from client to client and year to year.
Revenues for price control services increased 8%, or $306,000 from fiscal 1996 to fiscal 1997 (from $3,913,000 to $4,219,000), and decreased 9%, or $387,000 from fiscal 1995 to fiscal 1996 (from $4,300,000 to $3,913,000). Revenues in fiscal 1996 decreased in the first half of the year because of the loss of two major customers in fiscal 1995. Growth in revenues in the second half of fiscal 1996 and in fiscal 1997 are primarily the result of an increase in the CarePASS(R) customer base.
Claim administration services revenue increased 6%, or $1,435,000, from fiscal 1996 to fiscal 1997 (from $23,291,000 to $24,726,000), and increased 17% or $3,349,000 from fiscal 1995 to fiscal 1996 (from $19,942,000 to $23,291,000) because of an increase in the customer base or claim volume.
Depreciation and Amortization: Depreciation and amortization increased 10% from fiscal 1996 to fiscal 1997 (from $6,947,000 to $7,646,000), and decreased from 13% to 12% as a percentage of revenue. Depreciation and amortization increased 13% from fiscal 1995 to fiscal 1996 (from $6,127,000 to $6,949,000), and increased from 12% to 13% as a percentage of revenue. The increases in each period were primarily the result of depreciation from additional computer, telephone, and office equipment, and amortization of additional software and contract costs. Approximately 92% of depreciation and amortization expense is related to cost of services for fiscal 1997 and prior years.
Interest: Interest expense decreased 24% from fiscal 1996 to fiscal 1997 (from $708,000 to $535,000), and decreased as a percentage of revenue from 1.3% to 0.9%. Interest expense decreased 7% from fiscal 1995 to fiscal 1996 (from $759,000 to $708,000) and decreased as a percentage of revenue from 1.5% to 1.3%. Interest expense was impacted in fiscal 1997 and fiscal 1996 by lower interest rates and lower average principal balances outstanding.
Income Taxes: Income taxes increased in fiscal 1997 from fiscal 1996 by $160,000, or 13% (from $1,253,000 to $1,413,000), and increased in fiscal 1996 from fiscal 1995 by $718,000, or 134% (from $535,000 to $1,253,000). Net income had been reported as fully taxed in fiscal year 1997, 1996 and 1995 at the effective tax rate of 39%. See Note 6 in the Notes to Consolidated Financial Statements.
Cash has been used to invest in software and program enhancements ($7,396,000 and $5,799,000 in fiscal 1997 and fiscal 1996, respectively). The Company also acquired property and equipment of $2,966,000 and $2,256,000 for fiscal 1997 and 1996, respectively. HRM expects to continue to acquire property and equipment and enhance software and products.
The Company's current ratio was 1.8 at June 30, 1997, and 1.6 at June 30, 1996. The Company's working capital was $8,578,000 and $5,246,000 at June 30, 1997 and 1996, respectively.
The Company has a net operating loss carryforward of approximately $14,100,000 for income tax purposes at June 30, 1997, which can be used to reduce taxable income and reduce the current 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 1998. The Company has a term loan (principal balance of $1,048,000 as of June 30, 1997) with its bank due June 30, 1999 and a revolving credit facility expiring January 31, 1998, under which the Company may borrow a total of $3,750,000. The Company had available $1,552,000 under the $3,750,000 revolving credit facility at June 30, 1997. The revolving credit and term loan are secured by liens on the assets of the Company.
The consolidated financial statements of the Company and its subsidiaries are included in a separate section of this report.