The following table sets forth certain consolidated financial data as a percentage of total revenues for the three fiscal years ended June 30, 1997, 1998, and 1999 and compares the percentage change in the dollar amounts of these items for the period indicated.
Total Revenues: Total revenues increased $106,023,000 (112%) from fiscal 1998 to fiscal 1999 (from $94,837,000 to $200,860,000) and increased $31,927,000 (51%) from fiscal 1997 to fiscal 1998 (from $62,910,000 to $94,837,000). These increases are primarily attributable to revenues from HMO operations which began April 16, 1998, sales of additional products to existing clients and increased sales of the QualityFIRST(R) software, net of decreases in the number of covered participants enrolled in the Company's management services related to an HMO that terminated services on September 30, 1998.
Cost of Services, Net: Cost of services, net of amounts ceded, increased 1% or $300,000 from fiscal 1998 to fiscal 1999 (from $55,141,000 to $55,441,000), and increased 24% or $10,501,000 from fiscal 1997 to fiscal 1998 (from $44,640,000 to $55,141,000). The increases were primarily due to increased payroll and expenses related to the HMO and implementing management services for additional covered lives. As a percentage of net revenues, the cost of service, net of amounts ceded, was 71% in fiscal 1997, 58% in fiscal 1998 and 34% in fiscal 1999. These decreasing percentages were the result of higher premium revenue in fiscal 1998 and still higher premium revenue in fiscal 1999.
Interest Expense: Interest expense increased 99% or $485,000 from fiscal 1998 to fiscal 1999 (from $489,000 to $974,000), and increased as a percentage of net revenue from 0.5% to 0.6%. Interest expense decreased 9% or $46,000 from fiscal 1997 to fiscal 1998 (from $535,000 to $489,000) and decreased as a percentage of net revenue from 0.9% to 0.5%. Interest expense was impacted in fiscal 1998 by lower interest rates and lower average principal balances outstanding. In fiscal 1999, additional loans were obtained to acquire the HMO.
Income Taxes: Income taxes decreased in fiscal 1999 from fiscal 1998 by $586,000, or 68% (from $868,000 to $282,000), and decreased in fiscal 1998 from fiscal 1997 by $545,000, or 39% (from $1,413,000 to $868,000) primarily due to fluctuations in levels of income before income taxes. Net income had been reported as fully taxed in fiscal year 1999, 1998 and 1997 at the effective tax rate of 39%. See Note 10 in the Notes to Consolidated Financial Statements.
The Company's cash flow from operations was $6,892,000 and $23,685,000 for fiscal 1999 and 1998, respectively. Cash flow from operations has exceeded net income primarily due to non-cash charges such as depreciation and amortization, deferred income taxes, cumulative effect of the accounting change and changes in operating assets and liabilities, particularly the medical services payable.
Cash of $7,734,000, net of cash acquired, was used in the third quarter of fiscal 1999 to purchase Oxford Health Plans (PA), Inc. on January 27, 1999. Cash has been used to invest in software and program enhancements ($8,696,000 and $9,057,000 in fiscal 1999 and fiscal 1998, respectively). The Company also acquired property and equipment of $5,602,000 and $2,734,000 for fiscal 1999 and fiscal 1998, respectively. Approximately $3,000,000 of the fiscal 1999 property and equipment purchases were related to the corporate office move in the first quarter of fiscal 1999. HRM expects to continue to acquire property and equipment and enhance software and products but a lower rate in fiscal year 2000.
The Company had a working capital deficit of $8,438,000 at June 30, 1999 and working capital of $3,474,000 at June 30, 1998. The medical services payables reduced working capital by $21,215,000 and $15,452,000 at June 30, 1999 and 1998, respectively. The Company has fixed maturity investments of $8,406,000 available at June 30, 1999 to be used to pay medical services payables, if the need arises.
The Company began work on its Year 2000 Project in 1997 and established a Year 2000 Project Office and Year 2000 Project Team in early 1998. The Company's Year 2000 Project Office is comprised of the Company's senior Information Services ("I.S.") management team, which provides business support and resources for the overall project. The Company's Year 2000 Project Team, under the leadership of the CIO, consists of the Company's I.S. employees, independent consultants, and business representatives on an as-needed basis.
There are five phases to the Company's Year 2000 Project: Phase 1: Identify and Analyze; Phase 2: Plan and Schedule; Phase 3: Execute the Plan (Remediate; Upgrade; Replace; or Eliminate); Phase 4: Test and Integrate; and Phase 5: Maintain Year 2000 Integrity. The goal of the Company's Year 2000 Project is to prepare the Company's computer systems, applications, facilities (including non-information technology systems, such as security systems) and external relationships for the Year 2000. The primary focus of the Year 2000 Project effort has been, and continues to be, on the Company's mission critical systems, which are those that support and interface with our clients or vendors. The Company's Year 2000 Project is comprised of many different platforms and components and the Company is at varying Project phases with respect to the different components.
In Phase I of the Year 2000 Project, the Company completed a general inventory of its work environment. The inventory included system hardware, system software, utilities (phone, electric, etc.), as well as additional facility components. The Project Team has completed its inventory of mission critical components.
As of June 30, 1999, the Company had completed the majority of the remediation of its mission critical applications (Phase 3). The Company's QualityFIRST(R) product is Year 2000 ready in that it processes four-digit year dates, in accordance with the Software Release Note delivered to customers. Remediation of the Claims System, implementation of the remediated Claims System, and future-date testing on the Claims System were completed as of July 1999. The remediation of the critical elements of the Care Management System was completed in July 1999. The future-date testing on this system is scheduled to be completed in October 1999. The Company continues to seek and review year 2000 information of critical vendors, including phone service and utilities, to determine the impact of their year 2000 readiness on the Company's business and to request additional year 2000 information. We expect that the majority of the remaining Year 2000 Project activities, including the majority of contingency planning, will be completed by November 1999. Nevertheless, because of the unique nature of the year 2000 issue, there will be some contingency planning and ongoing maintenance activities that will continue into the year 2000.
Costs of the Company's Year 2000 Project through June 30, 1999 were approximately $1.1 million. An additional $.5 million is expected to be incurred during fiscal year 2000. The costs associated with the Year 2000 Project has been and will be expensed as incurred.
The Company is reliant on technology and outside vendors to deliver its services. While the Company may have more than one vendor to provide a specific service to the Company, for those services for which the Company does not have more than one vendor, the Company does not intend to hire backup vendors. There could be a material adverse effect on the Company if there is a failure by the Company, or a third party dealing with the Company, to be year 2000 ready with respect to such things as: (1) a mission critical computer system or software application; (2) facilities and equipment; or (3) the ability to provide necessary services or products. Possible consequences of such a failure include temporary disruption of the Company's ability to deliver services to its clients. The scope and length of time of such a disruption will depend upon the particular circumstances, some of which may be beyond the Company's control.
The Company's Year 2000 Project plans are subject to change and are necessarily dependent upon management's business decisions and other factors, both internal and external, and the Company is making adjustments to its Year 2000 Project as
it deems necessary. The information contained in this statement is based on management's best estimates. There can be no guarantee that these estimates will be achieved, or that third parties on which the Company relies, or that the Company itself, will be year 2000 ready. The results of the Year 2000 Project could differ materially from those anticipated as a result of factors such as: the impact of the Company's external relationships including the year 2000 readiness of the Company's business partners, its key vendors, its customers, and its customers' key vendors; the availability and cost of personnel trained in this area; and the ability to identify relevant computer codes.
In June 1999, the Company began to focus on contingency planning efforts. The Company will be using contingency plans already in place relating to back-up of information systems, as well as some business operations. The Company is developing additional and/or supplemental contingency plans where necessary. Contingency plans have been developed for most of the Company's significant business processes, and the Company will complete contingency plans for the remaining significant business processes by November 1999. Ongoing contingency planning activities will continue into the year 2000.