(3) Certain items in the 1994, 1995, 1996 and 1997 selected consolidated financial data have been reclassified to conform to the 1998 presentation.
Revenues for health plan management services increased 12% or $7,559,000, from fiscal 1997 to fiscal 1998 (increasing from $62,723,000 to $70,282,000) and increased 15% or $8,216,000, from fiscal 1996 to fiscal 1997 (increasing from $54,507,000 to $62,723,000). This increase was the result of the growth of existing business and new contracts entered into by the Company.
Revenues from the managed care operations were the result of obtaining in the fourth quarter of fiscal 1998 the revenue from a client contract under which the Company is at risk for the total medical services costs and receives a significant portion of the total premium of an HMO. The Company did not have this business in fiscal 1996, fiscal 1997 and the first three quarters of fiscal 1998.
Cost of Health Plan Management Services: Cost of services increased 21% from fiscal 1997 to fiscal 1998 (from $44,640,000 to $53,969,000), and increased 17% from fiscal 1996 to fiscal 1997 (from $38,106,000 to $44,640,000). As a percentage of health plan management revenues, cost of services increased from 71% in fiscal 1997 to 77% in fiscal 1998. The increase in fiscal 1998 of cost of services as a percentage of revenues was primarily due to additional costs related to payroll and expenses for increased business, including depreciation and amortization, the start up of a major client in April 1998, and a change of accounting principles (described in Note 2 in the Notes to Consolidated Financial Statements) at the beginning of fiscal 1998.
Cost of Managed Care Operations: The cost of managed care operations increased by $23,625,000 in fiscal 1998 over fiscal 1997 due to the managed care operations beginning in April 1998. As a percentage of managed care revenues, this cost in fiscal 1998 was 98%.
Merger Termination Costs : On March 10, 1997, the Company and HealthPlan Services Corporation (HPS) announced that the merger agreement dated September 12, 1996, had been terminated by mutual arrangement. In the quarter ended March 31, 1997, the Company recorded a one-time charge of $390,000 for the write-off of costs related to the terminated merger agreement with HPS.
Cash has been used to invest in software and program enhancements ($9,057,000 and $7,396,000 in fiscal 1998 and fiscal 1997, respectively). The Company also acquired property and equipment of $2,734,000 and $2,966,000 for fiscal 1998 and 1997, respectively. HRM expects to continue to acquire property and equipment and enhance software and products.
The Company's current ratio was 1.1 at June 30, 1998, and 1.8 at June 30, 1997. The Company's working capital was $3,474,000 and $8,578,000 at June 30, 1998 and 1997, respectively.
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 and revolving loan (principal balance of $3,742,000 and $3,000,000, respectively as of June 30, 1998) with its bank and a revolving credit facility expiring January 31, 1999, under which the Company may borrow an additional $3,258,000 at June 30, 1998. The revolving credit and term loan are secured by liens on the assets of the Company. In light of changes in the Company's accounting policy and in the Company's core business, the Company did not meet three covenants under its bank loan documents (namely; consolidated net worth, consolidated leverage ratio and consolidated cash flow leverage) at June 30, 1998. Management has discussed these covenants with the bank and the bank has indicated orally that it has waived these covenants at June 30, 1998 and will waive these covenants for the current fiscal year.