SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
Commission file number 0-18902
Health Risk Management, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1407404
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
8000 West 78th Street, Minneapolis, MN 55439
(Address of principal executive offices, the zip codes)
Registrant's telephone number, including area code: 612/829-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Preferred Stock Purchase Rights
--------------------------
Indicate by check mark, whether the Registrant (1) has filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of October 7, 1997 was approximately $62,250,000 based upon the
closing sale price of the Registrant's Common Stock on such date.
Shares of $.01 par value Common Stock outstanding at October 7, 1997:
4,502,019 shares.
Documents Incorporated by Reference
NONE
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PART I
Item 1. Business.
(a) General Development of Business.
Unless the context otherwise requires, references in this Form 10-K to
"HRM" and the "Company" refer to Health Risk Management, Inc., its wholly
owned domestic subsidiaries, HRM Claim Management, Inc., Institute of
Healthcare Quality, Inc., Health Benefit Reinsurance, Inc., and Health
Program Managers, Inc., and its wholly owned Canadian subsidiary, Health
Resource Management Ltd. Health Risk Management, Inc. was incorporated in
Minnesota in 1977.
HRM provides comprehensive, integrated total health plan management and
information services from diagnosis through claim payment supported by the
Company's QualityFIRST(R) clinical practice guidelines for self-funded
health benefit plans, fully insured health benefit plans, workers'
compensation care and disability care using electronic data interchange
(EDI) technology. The Company provides these services for self-insured
employers, unions, governmental entities, insurance companies, health
maintenance organizations (HMOs), preferred provider organizations (PPOs),
hospitals, and others to manage the quality, volume, cost, and payment for
health care. The Company's managed healthcare services include a 24-hours a
day, 7 days a week (24/7) health information line ; care review management
services, which apply diagnostic and utilization review; case management
services for a variety of catastrophic or long-term illnesses and
conditions; price control management services such as preferred provider
networks, fee negotiations, and audits of hospital and physician charges;
claims administration management services; and health care information
management and software services. The Company has developed its managed
healthcare services based upon proprietary clinical practice protocols
(QualityFIRST(R) Healthcare Practice Guidelines), Company-developed medical
and cost databases, and extensive medical expertise.
(b) Financial Information about Industry Segments.
The Company is engaged at the present time in only one industry segment,
namely, managed healthcare services. Financial information concerning the
Company's business is included in Items 6, 7, 8, and 14.
(c) Narrative Description of Business.
(1) Products.
The principal services currently offered by HRM are 24/7 CareCALL(SM)
(health information hotline), care review management (both inpatient
and outpatient), case management, price control management, claims
administration management, and information services.
HRM's fees for these services are generally based on the number of
lives covered by the particular benefit plan or on a fee per
transaction basis. The Company typically contracts with a client to
provide 24/7 CareCALL(SM), precertification and concurrent review
services, and some or all of HRM's other care review management, case
management, price control management, or claim administration
management services under contracts generally of one to three year
terms. The Company also offers QualityFIRST(R) Healthcare Practice
Guidelines software, certain health care information management
computer systems, and consulting services on an hourly, project or
software license and subscription fee basis.
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Care Review Management
HRM's Care Review Management Services, accredited by the Utilization
Review Accreditation Committee (URAC) in Washington, D.C., promote
quality care though the software technology and medical expertise
required for prospective, concurrent, and retrospective care management
of significant health care events: medical/surgical procedures,
long-term care management, prenatal care management and selected
outpatient medical/surgical care. All care management for total health
plan management activity takes place within medical specialty teams
using QualityFIRST(R) guidelines for self-funded benefit plans, fully
insured benefit plans, HMOs, providers and workers' compensation and
disability insurance programs.
HRM's medically driven approach is grounded in its use of clinical
specialty teams rather than generalist care managers. HRM care managers
are organized by clinical specialty review teams to provide the same
level of specialization in managing care as is practiced by the medical
professions. Each case is evaluated at the initial stage and
immediately directed to the appropriate specialty review team to begin
the review process. HRM's clinical specialty review teams enable HRM to
review the spectrum of medical, surgical and specialty care.
HRM's review teams are constructed in the following specialty areas:
* Cardiology * Surgical
* Gastroenterology * Obstetrics/Gynecology
* Otolaryngology (EENT) * Orthopedics
* Pediatrics * Home Care
* Neurology * Internal Medicine
* Urology/Nephrology * Behavioral Health
* AIDS/Hospice * Transplants
The specialty team evaluates the patient's symptoms, diagnosis, and
proposed treatment plan and setting in consultation with the patient's
physician, before evaluating secondary factors such as length of stay
and price, thus reducing the cost and risk associated with
inappropriate care.
The Company's Care Review Management applies diagnostic and utilization
review for all inpatient and outpatient care eligible under the health
plan of HRM's clients.
Diagnostic review determines whether the proposed diagnostic and
therapeutic selections by the hospital or physician for a patient's
particular illness or condition are medically appropriate. Utilization
review which follows the diagnostic review evaluates the
appropriateness of the proposed location of services (e.g. hospital
intensive care unit, hospital general ward, hospital outpatient, or
physician's office), the proposed length of stay, and any proposed
ancillary services.
These evaluations are performed using QualityFIRST(R) guidelines which
are proprietary clinical practice protocols developed by HRM's
subsidiary, Institute of Healthcare Quality, Inc., using international
medical databases, selected medical specialist experts in the field,
and clinical information from a variety of clinical resources and
professional organizations.
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Under HRM's Care Management Services, a plan participant or the
participant's physician must call a toll-free telephone number a number
of days prior to commencement of elective medical or surgical
treatment, or whenever possible, prior to an emergency admission. This
toll-free call can be placed by the plan participant or the
participant's physician 24 hours per day, seven days per week, 365 days
per year. From these calls, HRM gathers information on the
participant's medical condition and the attending physician's proposed
treatment plan, and then compares these against HRM's QualityFIRST(R)
guidelines to determine the reasonableness of the diagnosis and
appropriateness of treatment. In the event of any discrepancies between
the proposed diagnosis and treatment and HRM's QualityFIRST(R)
guidelines, or at the request of the attending physician (and in all
cases involving certain complicated illnesses), these determinations
are reviewed by a Company physician who is available 24 hours a day,
seven days per week, 365 days per year, and, in certain instances, by
an independent physician (second opinion). A second opinion provides
the patient with additional information to enable him or her to make an
informed decision concerning the advisability of proceeding with a
certain treatment. The determination of whether the diagnosis, plan of
treatment, and setting for care are medically necessary and appropriate
is entered into the Company's computer system to determine health plan
reimbursement and to communicate the determination to the client's
health plan administrator and the patient. Under no circumstances does
HRM prohibit the provision of any clinical services. If HRM does not
authorize the payment of the physician's or hospital's fee, the health
plan administrator may nonetheless choose to pay such fee. Even if the
health plan administrator chooses not to pay such fee, the patient
remains free to engage any physician, hospital, or outpatient facility
to perform any treatment based upon any diagnosis, at the patient's
expense.
The following Care Management Services are offered by the Company
generally on a fixed monthly fee per covered life based on expected
transaction volume, or on a per transaction or case basis:
24/7 CareCALL. HRM's 24-hour health information line provides personal
health management by educating and empowering consumers to make better
decisions about their healthcare and the resources they use. At the
same time, it reduces claim expenditures through reductions in
unnecessary emergency room and office visits.
The health information line is staffed by registered nurses who use
on-line pediatric and adult triage guidelines to assess symptoms and
triage callers to the appropriate level of care.
In addition, this service provides medical information and unlimited,
confidential access to more than 500 audio health library topics
covering prevention, self-care, behavioral health issues and advice on
parenting. It also enables members to precertify inpatient and
outpatient care and locate appropriate network providers any time of
the day or night. HRM's health line is objective, friendly, easy to use
and accessible when community healthcare resources are unavailable.
Medical/Surgical Review. The Company's Care and Management
precertification and concurrent review service for medical and surgical
procedures is designed to reduce employer medical and surgical costs by
identifying and approving for reimbursement the most appropriate and
cost-effective plan of treatment and setting for care.
Behavioral Health Review. HRM also offers precertification and
concurrent review of mental health and chemical dependency treatment.
HRM's mental health and chemical dependency review service evaluates
the medical necessity and appropriateness of the type, frequency and
location of planned inpatient and outpatient mental health and chemical
dependency treatment for the purpose of determining what the plan
should consider eligible for coverage. HRM also identifies alternative
treatments. HRM uses a multidisciplinary approach to mental health and
substance abuse care management. HRM's strategy draws on the
professional expertise of behavioral health teams that specialize in
chemical dependency; child, adolescent, and adult mental health; and
behavioral medicine. Cases are matched with behavioral health teams
trained to manage specific types of care.
<PAGE>
Case Management
Case management services provide special coordination of the full
range of managed care services in complex, unpredictable medical and
social cases. These include catastrophic and long-term care,
behavioral health illnesses being managed under both health plans and
employee assistance programs (EAPs), illnesses covered simultaneously
under health plans and workers' compensation plans, prenatal care
management, and specialized care under chiropractic plans. Due to the
complex and long-term nature of these cases, a single case manager may
coordinate all managed care services for a patient for periods ranging
from one month to several years. Case management services are billed
most frequently on a per hour basis or a per transaction basis.
The following case management services are offered by the Company:
Coordinated Care Management (CCM). The Company manages cases which
require costly medical treatment such as AIDS, cancer, complex mental
illness, transplants, chemical dependency, and major trauma. The
Company identifies these cases by reviewing the health claims history
and the information obtained during the precertification and
concurrent review process. In these cases, HRM helps identify
cost-effective health care alternatives, including transferring the
patient from a hospital to an alternative care facility such as a
skilled nursing facility, a hospice or the patient's home. HRM also
coordinates all of the services or care that will be required as a
result of such a transfer and may arrange for special pricing of
required services. In cases where the alternative treatment may not be
covered under the employer's health plan, the employer is advised that
it may save money by electing to pay for these more cost effective
services outside of the plan. The Company's chiropractic review
program involves precertification review of chiropractic services
involving the spine for authorized length of treatment and proposed
charges.
Employee Assistance Programs. HRM and subcontractors have jointly
developed an employee assistance program ("EAP") which combines
employee assistance services with HRM's mental health and chemical
dependency review. EAP services performed by subcontractors include:
telephone and in-person assessment of mental health, chemical
dependency, legal, financial, employment, and other problems; crisis
intervention; specialist consultation; and referral to screened
services. EAP services performed by HRM include: diagnostic and
utilization review, large case management, fee negotiation, auditing
of charges, and claims administration. EAP is independently marketed
by both HRM and subcontractors.
QualityBIRTH(SM) Prenatal Care Management. HRM's prenatal care
management program, QualityBIRTH, is a service for expectant mothers
for early identification and management of pregnancies at risk for
premature delivery. HRM OB/GYN specialists consult with the
mother-to-be and her physician to screen for risk factors that suggest
premature birth, thereby avoiding the need for crisis management. The
primary responsibilities of HRM's staff are patient education and
advocacy, and support throughout the pregnancy.
DisabilityCARE(SM). HRM's disability management program,
DisabilityCARE, promotes quality medical care and early return-to-work
for short- and long-term disability and worker's compensation cases.
DisabilityCARE is initiated with identification of injury through
24-hour access to CareCall(SM), seven-days-a-week, and its experienced
staff, and continues through successful return-to-work. DisabilityCARE
care managers use QualityFIRST(R) workers' compensation/disability
guidelines to confirm the diagnosis, establish a treatment plan, and
through use of on-line return-to-work guidelines, help get injured
workers back to the job as soon as medically appropriate. These
guidelines cover more than 80% of the disability/workers' compensation
related diagnoses. Additionally, HRM is committed to reducing its
customer's lost productivity, indemnity benefit payments and medical
expenses surrounding disabilities.
<PAGE>
Price Control Management
HRM's principal price management activities are fee negotiation,
preferred provider contract pricing, and bill review. HRM's price
control management is designed to help locate and negotiate for clients
and covered plan participants the most reasonable fees possible for
health care services. These services are provided for a fee based on
the number of lives covered based on expected transactions, on a per
transaction or case basis, or on a percentage of savings basis.
Services provided under price control management are as follows:
Preferred Provider Organizations (PPOs). HRM's CarePASS(R) service
assists employers with the evaluation and selection of health care
providers, similar to traditional PPOs. PPOs are groups of hospitals,
key physicians and other health care providers that offer services at
negotiated rates to employer groups or insurers. Most PPOs negotiate a
specified percentage discount in prices which does not, however,
prevent price increases during the term of the PPO contract. HRM, on
the other hand, uses its medical expertise and claims database to
evaluate bid prices submitted by participating providers for each
specific treatment during the contract term.
HRM establishes CarePASS in selected markets based on the number and
size of current and prospective clients in those markets, and on the
anticipated level of acceptance by employees in those markets. In some
cases, employers pay the Company to develop a network in a specified
market.
The Company can also provide its clients with access to PPOs organized
by others which meet the Company's criteria for provider selection.
HRM's criteria in selecting PPOs established by third-parties are the
same as are used by the Company in developing CarePASS. The Company
evaluates quality, cost, and financial stability of the providers and
the third-party organization, and reviews the contracts between the
third-party organization and providers. HRM received monthly reports
from the third-party organization, integrates them with the Company's
own management reports, and provides the clients with a unified report.
Prospective Case-by-Case Fee Negotiation. In situations where its
clients are not participants in a PPO, HRM will negotiate the cost of
covered services, on a case-by-case basis, on behalf of clients and
covered participants prior to the services being performed. At the time
medical treatments are being reviewed under HRM's care review services,
a separate staff of price negotiators and bill reviewers simultaneously
negotiates the amount of the covered fees with the provider.
Audit of Hospital and Physician Bills. HRM also retrospectively reviews
the charges billed by hospitals and physicians with respect to covered
participants. Under Company procedures, hospital bills in excess of
specified amounts and the associated physician bills are reviewed to
determine whether services were actually delivered to the patient and
whether the charges for the delivered services were reasonable in view
of prevailing fees for such services in that geographic area.
<PAGE>
Claims Administration Management
HRM's claims administration management handles processing and payment
of health care bills under the terms of a client's health plan,
providing for adequate funding (fully insured premium or self-funded),
easy access, efficient processes, accurate payment and timely reporting
through plan design, underwriting services and claim administration
services. The Company's claims administration management maintains
enrollment and eligibility data for covered participants and dependents
and eligible providers located in all states. Reimbursement rules are
based on levels of co-insurance, co-dependency, segregation, provider
contracts, care management, and negotiated fee arrangements specified
in the health plan and allowable under ERISA regulations. The Company
also administers continuation of benefit programs for terminated
employees under the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA") and flexible benefit programs under Internal Revenue
Code (IRC) Section 125. The Company also coordinates benefit payments
with other group health plans.
Effective claim administration is a critical part of the health
management system. Claims administrative management services highlight
the value of HRM's totally integrated process by working to ensure that
care and price management goals are attained within the proper bounds
of each client's health plan. Claim personnel, using HRM's
electronically integrated systems, quickly verify that decisions made
during a patient's care are accurately reflected in the billing
process. Consolidated administrative reporting provides clients with
information to monitor and manage their health benefit programs
effectively. HRM's management report format combines Care Management
results and claim payment decisions in an easy-to-read document. The
Company's claim subsidiary was the first claim administrator in North
America to be awarded I.S.O. 9002 certification.
Electronic data interchange (EDI) links providers, through a third
party clearinghouse, to payers, and processes claims electronically.
Electronic submission, processing, and payment of claims cuts
administrative costs and allows benefits analysts to apply their skills
to problem cases. EDI technology is a key to streamlining
administrative operations. HRM has developed software which allows its
claim payment system to connect with third party EDI networks.
HRM offers a full range of administrative services to help clients
manage and supplement their health plans. HRM's underwriting division
can produce valuation reports to support the financial integrity of
clients' self-funded plans. HRM can also help produce a cost analysis
of additional benefits and define the funding levels needed to support
those benefits. HRM's systems and strategies support the use of
flexible benefit plans, and can assist clients in determining flex-plan
objectives and deciding whether a full-blown cafeteria plan, a Section
125 plan with 401(k), or a simple flexible spending account can best
suit the client's needs. HRM's underwriting group provides a variety of
reinsurance and stop-loss insurance strategies and products to meet
clients' needs, including group life and term disability products.
COBRA administration services are also available to help clients handle
COBRA compliance.
<PAGE>
HRM fees for claim administration services generally are based on a
monthly fee per covered life based on the expected number of
transactions or on a per transaction basis.
During fiscal year 1996, the Company formed a wholly-owned subsidiary,
Health Benefit Reinsurance, Inc. (HBRe) to act, independent of HRM and
subsidiaries, as a managing general underwriter for products including
specific and aggregate stop loss insurance, life and disability
insurance, fully insured underwriting and other underwriting services
needed for customers that contract with HRM and subsidiaries, or others
that purchase services directly from HBRe. The services offered by HBRe
include underwriting, premium billing, collection and distribution,
policy or certificate issue, customer service and claim administration
for that product.
Information Services
HRM's information services are complementary to its health plan
management services. These are offered by HRM on an hourly, project or
software license fee basis.
QualityFIRST(R) Healthcare Practice Guidelines Software and Related
Systems Software. QualityFIRST(R) guidelines and system software
provide decision support for evaluating diagnosis, treatment selection
and resource use for each episode of care. In addition, the guidelines
provide consistent criteria and practice standards against which care
quality and related costs can be measured. These diagnosis-driven
guidelines, which promote consistency in decision making, are used to
influence quality of care; promote clinically appropriate decisions
prospectively, concurrently, and retrospectively; promote optimal
outcomes; and allow the practitioner flexibility in care decisions on
the basis of individual patient factors. The guidelines software
operates under standard, easy-to-use software and provides primary
baseline data needed for Continuous Quality Improvement (CQI) such as
usage characteristics and patterns of care for a given organization or
practitioner.
The Company offers Medical/Surgical, Workers' Compensation/Disability,
Behavioral Health, Specialist Referral and Alternative Setting
guideline software packages or modules. These modules comprise over 430
guidelines and 2,700 treatments/procedures covering more than
approximately 90% of significant clinical events. The Workers'
Compensation/Disability package includes on-line-return-to-work
parameters to identify the expected length of disability and to
expedite return to work as well as on-line access to individual state
workers' compensation treatment guidelines to facilitate compliance
with local workers' compensation regulations. Alternative Setting
<PAGE>
guidelines are designed to help streamline the transfer of care from an
acute setting to the next appropriate care level based on medical,
physical, economic and psychosocial issues particular to each patient.
Specialist Referral guidelines are used to facilitate the referral
decision process from the primary care physician to the specialist.
These guidelines are designed to ensure appropriate referrals, to
ensure appropriate timing of referrals, to support first line treatment
by the primary care physician and to document referral decisions so the
result is optimal, cost-effective care. Each of the Company's
guidelines is reviewed at least yearly and is updated as necessary to
reflect the latest clinical advances.
QualityFIRST(R) software and systems are made available to clients on a
software license basis. In late fiscal 1992, HRM entered into its first
software license agreement. Its licensees include hospitals, insurance
companies, HMOs and PPOs. Fees are based on a license fee at inception
with a monthly subscription fee during the term of the license
agreement based on covered lives or number of workstations utilizing
the guidelines.
Health Care Information Management. The Company manages health care
data for large organizations and governments, including acquisition,
verification and analysis of health care data, comparison of data sets
to normative data standards developed by HRM, and interpretation of
practice and utilization standards. HRM seeks to obtain the right to
use internally in HRM's managed health care services data collected and
developed in such projects. Clients are generally charged a set fee for
information management projects, payable in installments over the
anticipated length of the project, or incorporated into the basic fees
charged for care management, price control management, or claim
administration management services.
HRM's information management services also provide various reports to
employers to define current services, identify inappropriate practice
patterns and utilization problems, and compare costs to normative data
set prepared by the Company. Recommendations for benefit plan changes
and managed care services are provided. Clients are generally charged a
fee based on hourly rates and required resources for these services, or
these products are incorporated into the basic fee charged for managed
care, price control, or claim administration management services.
Health Benefit Plan Design and Consulting Services. HRM works with
clients, independent brokers, and consultants in designing specific
health care management programs and health plans to meet the needs of
individual clients. These services include assistance in the design of
plan documents describing benefit coverage. Health benefit plans
designed by HRM utilize employee co-payments, deductibles, and flexible
benefits to improve the effectiveness of employer health care
management programs. The Company also designs continuation of benefit
programs for terminated employees under COBRA, and flexible benefit
programs under IRC Section 125. HRM also produces pamphlets, brochures,
videos, educational talks and other materials to explain the client's
benefit plan to its employees. The Company's client service
representatives and sales personnel work together to implement each
health care benefit program. Clients are generally charged a fixed
hourly rate for HRM's benefit plan design and consulting services.
(2) Status of products in development.
HRM continually expands its medical and cost databases and medical
expertise for self-funded benefit plans, fully insured benefit plans,
HMOs, providers, and workers' compensation and disability insurance
programs; refines its QualityFIRST(R) healthcare practice guidelines to
address an ever enlarging number of conditions, and will continue
expanding its software package containing HRM's proprietary
QualityFIRST(R) healthcare practice guidelines for license to third
parties. HRM also expects to continue to develop programs for
management of health care services and costs associated with particular
illnesses or conditions. HRM anticipates that, as computer hardware,
computer software and telecommunications equipment become more
technologically sophisticated, the Company will create new or enhanced
software products utilizing the Company's medical expertise, database
system and technology. HRM will also respond to changes required by
healthcare reform in the nation.
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(3) Source and Availability of Raw Materials.
Not applicable.
(4) Patents, trademarks, licenses, franchises and concessions.
The Company has filed a patent application covering its "Health Care
Management System" which is an automated, real-time, interactive health
care management data processing system for use by hospitals,
physicians, insurance companies, health maintenance organizations
(HMOs) and others in the health care field to serve as a diagnostic,
evaluation and utilization tool for health care providers to
individuals. The system is implemented on computer hardware and
software and is used by the Company in providing healthcare management
services.
HRM claims copyrights to software developed by the Company. In
addition HRM has obtained perpetual licenses to use certain software
developed by other companies which HRM uses in providing services to
its clients. HRM has various safeguards in place, including
authorization codes and encryption, to limit access to the Company's
databases and operating systems. HRM markets its services and products
under a number of trade names and trademarks. The following are
principal trademarks or registered trademarks of HRM of its
subsidiaries: HRM(R), AutoPILOT(TM), CareCALL(SM), CarePASS(R),
CarePLUS(SM), DisabilityCARE(SM), HRMMEDIA(SM), QualityBIRTH(R),
ReviewPLUS(R), QualityFIRST(R), Together We Can Make a Healthy
Difference(R), Institute for Healthcare Quality(R), and IHQ(R). HRM
relies to varying degrees upon its common law rights of trademark
ownership, copyrights and registration of its trademarks.
(5) Seasonality.
HRM's revenues have historically been higher in the second half of each
fiscal year than in the first half. Because a large number of health
plans operate on a calendar year basis, a significant portion of the
Company's new clients become clients as of January 1, which is the
beginning of HRM's third quarter. The Company recognizes revenues as it
performs services under a contract, and the Company typically performs
a greater portion of annual services during the first few months of a
new contract. In fiscal 1997, 1996 and 1995 revenues totaled 48%, 50%
and 48% in the first half of the fiscal year and 52%, 50% and 52% in
the second half of the fiscal year, respectively.
(6) Working Capital.
HRM's working capital requirements are not generally subject to
significant fluctuations. The consolidated statements of cash flows
show sources and uses of working capital.
(7) Major Customers.
The Company services a small number of large clients that have
accounted for a significant portion of the Company's revenues in prior
years. Columbia/HCA Healthcare Corporation accounted for 16%, 17% and
16% in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. Keystone
Mercy Health Plan was a new customer and accounted for approximately
17% of revenues in fiscal 1997. Ohio Permanente Medical Group (OPMG)
accounted for 11% of revenues in fiscal 1996, and transitioned the
majority of the services provided by HRM back to OPMG effective at the
beginning of fiscal 1997, but continues as a QualityFIRST(R) customer.
<PAGE>
(8) Backlog.
The Company's revenues are principally derived through the provisions
of services as and when needed by the contracting client and no backlog
amounts are maintained. The Company's revenues from care review
management, price control management, and claim administration
management services are generally derived pursuant to contracts,
generally for a term of one to three years, obligating clients to pay a
fixed monthly charge for each covered employee based on anticipated
case or claim volume experience basis, or on a case or percentage of
savings basis. Revenues from information services are generally derived
from QualityFIRST(R) license fees and subscription fees, and from
contracts to perform specific projects or consulting services for a
specific fee or hourly basis. Revenues from case management are
generally derived on a case-by-case or hourly basis.
(9) Government contracts.
No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts or subcontracts
at the election of the government.
(10)Competition.
The health care management industry historically has been highly
fragmented and competitive. The Company competes directly with
approximately 100 independent utilization review firms as well as
approximately 120 insurance carriers, approximately 200 third-part
administrators which have established their own utilization review
procedures, and a limited number of software vendors. In addition the
Company's care management services compete indirectly with HMOs and
several hundred PPOs. Some of the Company's competitors are
substantially larger and possess greater financial resources than the
Company. The Company, however, believes that the trend toward
consolidation of services will continue as employers recognize the
convenience of dealing with a single health care management
organization. HRM's principal competitive strengths are its medical
expertise, medical and cost databases, QualityFIRST(R) healthcare
practice guidelines, and the proprietary software systems. The Company
is able to provide clients with a full range of integrated health care
management services, focusing not only on reducing the price of health
care, but also on improving its quality.
(11)Research and development.
HRM continually enhances its databases and proprietary software
systems. Costs capitalized for these enhancements, excluding acquired
software, by the Company were $7,396,000 in fiscal 1997, $5,779,000 in
fiscal 1996, and $5,337,000 in fiscal 1995.
(12)Effect of environmental regulation.
To the extent that the Company's management can determine, there are no
federal, state or local provisions regulating the discharge of
materials into the environment or otherwise relating to the protection
of the environment, with which compliance by the Company has had or is
expected to have a material effect upon the capital expenditures,
earnings, or competitive position of the Company.
(13)Employees.
As of September, 1997, the Company employed approximately 950 persons,
including approximately 300 physicians, nurses, and other health
professionals. The Company uses approximately 150 independent
consulting physicians. None of the Company's employees is covered by a
collective bargaining agreement.
<PAGE>
(d) Foreign Operations and Export Sales.
In Canada, health care prices and payments are set and administered by the
provincial governments. HRM markets all of its managed health care services
and software, other than price control services, to employers, insurance
companies, hospitals and governmental agencies in Canada through HRM's
wholly owned Canadian subsidiary. Revenues derived from Canada totaled U.
S. $325,000 in fiscal 1997, U.S. $233,000 in fiscal 1996, and U. S.
$174,000 in fiscal 1995. The Company's assets attributable to Canada
consist of leased offices in Alberta.
Item 2. Properties.
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.
Item 3. Legal Proceedings.
The Company is not a party to any material pending legal proceedings. Care
Management Services provided by the Company are advisory in nature, and
determinations as to payment or nonpayment of benefits are made by the plan
sponsor or its administrator, which can be the Company as a health plan third
party administrator. All determinations as to the medical care rendered to the
patient are made by the patient or the attending physician. Nevertheless
patients or others might assert claims against the Company for damages due to
adverse medical consequences. New or existing legal theories by which patients
or attending physicians may seek to assert liability against the Company or
other companies in the health care industry are evolving and are expect to
continue to evolve. Although the Company believes that its procedures for making
care management and claims benefit recommendations and decisions result in
reasonable and accurate recommendations, there can be no assurance that the
Company's procedures for limiting liability are effective or that the Company
will not be subject to liability from litigation which might adversely affect
the Company's business. The Company maintains professional liability insurance
and such other coverages as the Company believes are reasonable in light of the
Company's experience to date.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's shareholders during the
quarter ended June 30, 1997.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
a) Health Risk Management, Inc. Common Shares are traded on the Nasdaq
National Market under the symbol HRMI. The following table shows the
quarterly range of high and low sale prices of the Common Shares on the
National Market during the fiscal periods indicated.
High Low
Fiscal 1995
First Quarter 7-1/4 5-3/4
Second Quarter 8-1/4 4-1/2
Third Quarter 8-1/8 5-3/16
Fourth Quarter 11-1/2 7-3/8
Fiscal 1996
First Quarter 11-1/2 9-1/2
Second Quarter 10-7/8 7-3/4
Third Quarter 18-1/8 9-1/4
Fourth Quarter 18-3/8 10
Fiscal 1997
First Quarter 16-3/4 9-3/4
Second Quarter 16-1/2 14
Third Quarter 16-5/8 9-3/8
Fourth Quarter 13-7/8 9-1/2
Fiscal 1998
First Quarter 14-3/11 11
b) Holders
As of October 7, 1997 there were approximately 125 holders of record of the
Company's Common Stock.
c) Dividends
The Company has never paid cash dividends on its Common Shares and has no
present intention to pay cash dividends in the foreseeable future. Under
the Company's Revolving Credit and Term Loan Agreement with its bank, the
Company is prohibited form paying cash dividends on its stock without the
bank's consent.
<PAGE>
Item 6. Selected Financial Data.
Health Risk Management, Inc.
SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------
1993 1994 1995 1996 1997
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $40,871 $45,824 $49,302 $54,507 $62,723
Operating expenses:
Cost of Services 24,135 26,784 30,290 31,762 37,657
Depreciation and amortization, principally cost of
services 4,331 5,227 6,127 6,947 7,646
Selling and marketing 5,605 6,485 6,064 6,767 7,346
Administration 4,177 4,792 4,811 5,232 5,682
Merger costs 0 0 0 0 390
--------- --------- --------- --------- -------
Total operating expenses 38,248 43,288 47,292 50,708 58,721
Operating income 2,623 2,536 2,010 3,799 4,002
Other income (expense):
Interest income 64 65 128 158 187
Interest expense (373) (436) (759) (708) (535)
------- ------- ------- ------- -------
Income before income taxes 2,314 2,165 1,379 3,249 3,654
Provision for income taxes:
Current 20 24 12 22 15
Deferred 0 425 523 1,231 1,398
--------- ------ ------ ------ ------
Total income taxes 20 449 535 1,253 1,413
Net income $ 2,294 $ 1,716 $ 844 $ 1,996 $ 2,241
========= ======= ====== ====== ======
Net income per common and common equivalent share(1) $ .57 $ .43 $ .21 $ .47 $ .50
========= ======= ====== ====== ======
Weighted average common and common equivalent shares(1) 3,993 4,015 3,982 4,219 4,458
June 30,
---------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 3,089 $ 5,491 $ 3,763 $ 5,246 $ 8,578
Total assets 32,501 37,844 39,962 44,822 51,723
Current portion of notes payable and capitalized equipment
leases 3,499 1,950 1,946 2,427 1,988
Long term portion of notes payable and capitalized
equipment leases 2,394 6,046 5,155 4,550 3,487
Shareholders' equity 21,668 23,677 25,101 28,474 34,044
</TABLE>
- ------------------------
(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.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
A majority of the Company's revenues consist of fees for services provided under
contracts obligating clients to pay a fixed monthly charge for each covered
employee based on anticipated case volume experience, a percentage of savings, a
transaction or case fee, or on an hourly basis. In addition, each new client is
typically charged a one-time set-up fee to cover the related set-up costs
incurred by the Company. Such revenue is recognized as services are rendered
under each contract.
The Company's expenses are comprised of its cost of services (consisting
primarily of compensation of personnel, including nurses and physicians,
telephone expenses, rent, costs related to the Company's computer operations,
costs related to customer service, and costs related to development of new
services), selling and marketing expenses (including sales commissions,
advertising, and account management personnel), general and administration
expenses (including bad debts and compensation of personnel in the corporate
finance, human resources, and general administration departments) and
depreciation and amortization (primarily capitalized leased equipment and
software costs).
Results of Operations
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.
<TABLE>
<CAPTION>
Year Ended June 30, Period to Period Increase (Decrease)
------------------- ------------------------------------
1995 1996 1997 1995 vs 1996 1996 vs 1997
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 11% 15%
=== === ====
Operating expenses:
Cost of services 62 58 60 5 19
Depreciation and amortization,
principally cost of services 12 13 12 13 10
Selling and marketing 12 12 12 12 9
Administration 10 10 9 9 9
Merger costs -- -- 1 -- --
--- --- ----
Total operating expenses 96 93 94 7 16
-- -- --
Operating income 4 7 6 89 5
-- -- --
Other income (expense):
Interest income * * * 23 18
Interest expense (1) (1) (1) (7) (24)
-- -- --
Income before taxes 3 6 6 136 12
Income taxes (1) (2) (2) 134 13
-- -- --
Net income 2% 4% 4% 136 12
=== === ===
</TABLE>
*Less than 1% on a rounded basis.
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Care review and case management $ 21,640,000 $ 21,935,000 $ 25,798,000
Price control management 4,300,000 3,913,000 4,219,000
Claim administration management 19,942,000 23,291,000 24,726,000
Information management 3,420,000 5,368,000 7,980,000
---------- ---------- ----------
$ 49,302,000 $ 54,507,000 $ 62,723,000
========== ========== ==========
</TABLE>
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 care review and case management services increased 18%, or
$3,863,000, from fiscal 1996 to fiscal 1997 (increasing from $21,935,000 to
$25,798,000) and increased 1%, or $295,000, from fiscal 1995 to fiscal 1996
(increasing from $21,640,000 to $21,935,000). In fiscal 1996, growth in revenue
came from disability management services, with an overall decrease in care
review revenue in general. In fiscal 1996, there was a decrease in revenue in
the fourth quarter, from approximately $1.5 million of growth for the first
three quarters of fiscal 1996, down to $.3 million growth for the year
principally because a significant client transitioned services to itself during
the fourth quarter. The client continues to use HRM's QualityFIRST(R) software.
In fiscal 1997, growth was mainly the result of adding a large customer.
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.
Information management revenues increased 49%, or $2,612,000, from fiscal 1996
to fiscal 1997 (from $5,368,000 to $7,980,000) and increased 57%, or $1,948,000
from fiscal 1995 to fiscal 1996 (from $3,420,000 to $5,368,000). In fiscal 1997,
fiscal 1996 and fiscal 1995, revenue of $7,577,000, $4,910,000, and $2,628,000,
respectively, was related to QualityFIRST(R) software and system licensing
revenues. The balance of revenue in the three years was from communication and
consulting services.
Cost of Services: Cost of services increased 19% from fiscal 1996 to fiscal 1997
(from $31,762,000 to $37,657,000), and increased 5% from fiscal 1995 to fiscal
1996 (from $30,290,000 to $31,762,000). As a percentage of revenues, cost of
services increased from 58% in fiscal 1996 to 60% in fiscal 1997. The increase
in fiscal 1997 of cost of services as a percentage of revenues was primarily due
to additional costs related to payroll and expenses for increased business, and
underutilization of the managed care, disability, and 24/7 CareCALL(SM) units.
<PAGE>
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.
Selling and Marketing: Selling and marketing expenses increased 9% from fiscal
1996 to fiscal 1997 (from $6,767,000 to $7,346,000), and increased 12% from
fiscal 1995 to fiscal 1996 (from $6,064,000 to $6,767,000). Selling and
marketing expenses as a percentage of revenue remained unchanged at 12% for
fiscal 1997, fiscal 1996, and fiscal 1995. The increase in fiscal 1997 and
fiscal 1996 was primarily due to changes in marketing, sales and account
management personnel, sales commissions and travel expenses.
Administration: Administration expenses increased 9% from fiscal 1996 to fiscal
1997 (from $5,232,000 to $5,682,000), and increased 9% from fiscal 1995 to
fiscal 1996 (from $4,811,000 to $5,232,000), but decreased as a percentage of
revenues from 10% to 9% in fiscal 1997. The increase in administration expenses
in fiscal 1996 and 1997 was due to the expense of additional staff, and other
expenses, including salaries, bad debts, training programs and insurance. Bad
debt expense was $127,000, $242,000, and $333,000 in fiscal 1997, fiscal 1996
and fiscal 1995, respectively.
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.
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.
Interest income was $187,000, $158,000, and $128,000 for fiscal years 1997, 1996
and 1995, respectively, and increased in fiscal 1997 and fiscal 1996 because of
additional available funds invested in short-term investments.
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.
Liquidity and Capital Resources
The Company's cash flow from operations was $10,127,000 and $7,435,000 for
fiscal 1997 and 1996, respectively. Cash flow from operations has exceeded net
income primarily due to non-cash charges such as depreciation and amortization,
deferred income taxes, and changes in operating assets and liabilities.
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.
<PAGE>
HRM also used approximately $2,277,000 and $2,056,000 in fiscal 1997 and fiscal
1996, respectively, to repay principal on notes payable and capital leases (net
of proceeds from notes payable). The Company borrowed $1,275,000 and $1,500,000
in fiscal 1997 and fiscal 1996, respectively. The Company received cash proceeds
of $775,000 and $1,157,000 in fiscal 1997 and fiscal 1996, respectively, from
stock option exercises for common stock by current or former employees and
directors, and $2,500,000 from the sale of 200,000 shares of unregistered common
stock.
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.
Forward Looking Statements
Forward looking statements in this report reflected as expectations, plans,
anticipations, prospects or future estimates are subject to the risks and the
uncertainties present in the Company's business and the competitive healthcare
market place where clients and vendors commonly experience mergers or
acquisitions, reconciliations, volume fluctuations, participant enrollment
fluctuations, fixed price contracts, contract disputes, contract modifications,
contract renewals and non-renewals, various business reasons for delaying
contract closings, and the operational challenges of matching case volume with
optimum staffing, having fully trained staff, having computer and telephonic
supported operations and managing turnover of key employees and outsourced
services to performance standards. While occurrences of these risks, and others
detailed in this report and the Company's other SEC reports can not be predicted
exactly, such occurrences can be expected to have an impact on the Company's
anticipated level of revenue growth or profitability.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company and its subsidiaries are
included in a separate section of this report.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
The following table provides certain information with respect to all directors
of the Company.
<TABLE>
<CAPTION>
Name of Director Current Position(s) Principal Occupation(s) Director
(Class) Age with Company During Past Five Years Since
- ---------------- --- ------------------- ----------------------- --------
<S> <C> <C> <C> <C>
Gary T. McIlroy, M.D. 57 Chairman of the Board, Chairman and Chief Executive Officer of 1977
(Class C) Chief Executive Officer the Company since 1977. Dr. McIlroy is
and Director married to Marlene O. Travis.
Marlene O. Travis 58 President, Chief President of the Company since 1987 and 1977
(Class B) Operating Officer, Chief Operating Officer of the Company
Secretary and Director from 1987 to 1992 and since June 1993;
and Chief Administrative Officer from
1992 to June 1993. Ms. Travis is married
to Gary T. McIlroy, M.D.
Gary L. Damkoehler 58 Director Chairman, Chief Executive Officer and 1996
(Class A) President since 1988 of JSA Healthcare
Corporation of St. Petersburg, Florida, a
direct provider of healthcare services.
Raymond G. Schultze, 63 Director Professor of Medicine at the UCLA School 1996
M.D. (Class A) of Medicine from 1978 to 1997, Dr. Schultze
served as Director of the UCLA Medical
Center from 1980 to 1995; and Administrative
Vice Chancellor for UCLA from 1986 to
1992. Dr. Schultze currently is providing
consulting services to the County of Los
Angeles for the re-engineering of their
healthcare system.
Vance Kenneth Travis 71 Director Chairman of the Board of Triad 1984
(Class B) International, Inc., a plant engineering
and project management operation for
petro-chemical and refinery process
plants located in Calgary, Alberta,
Canada. Mr. Travis is Marlene Travis'
uncle.
Ronald R. Hahn 53 Director Chairman and President, ESE Partners, 1992
(Class C) LLC, a venture capital management
company, since 1996 and President of
Stroben & Hahn, Inc., a venture capital
management company, since 1981. Consultant
regarding the U.S. healthcare industry
to Union d'Etudes et d'Investissements
("UI"), the merchant banking subsidiary of
Credit Agricole, currently, Mr. Hahn also
serves on the Board of Directors of Protein
Databases, Inc., a publicly traded computer
software company and JAMS/Endispute, a
provider of dispute resolution services.
<PAGE>
Robert L. Montgomery 60 Director President-Western Division of Sutter 1993
(Class C) Health since 1996. Prior to this, he was
President and Chief Executive Officer of
Alta Bates Health System of Emeryville,
California, a vertically integrated full
service healthcare system, from 1989
to 1996, and from 1979 to March 1983.
</TABLE>
The Company's Articles of Incorporation provide for the election of three
classes of directors with terms staggered so as to require the election of only
one class of directors each year. The term of the Class C directors expires at
the 1998 annual meeting, the term of the Class A directors expires at the 1999
annual meeting, and the term of the Class B Directors expires at the 2000 annual
meeting.
Executive Officers
The following sets forth the names and ages of current executive officers of the
Company, in addition to information regarding their positions with the Company,
their periods of service in such positions, and their business experience for at
least the past five years.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gary T. McIlroy, M. D. 57 Chairman of the Board, Chief Executive Officer and
Director
Marlene O. Travis 58 President, Chief Operating Officer, Secretary and
Director
Thomas P. Clark 49 Senior Vice President, Finance and Chief Financial
Officer
Adele M. Kimpell 51 Executive Vice President, Healthplan Operations
John R. Higbee 54 Chief Information Officer
Alexander E. Gourley 59 President, Canadian Operations
Michael T. McKim 53 Vice President and General Counsel
</TABLE>
Gary T. Mcllroy, M. D., a co-founder of the Company, has been an officer of the
Company since 1977 and Chairman of the Board, Chief Executive Officer, and a
director of the Company since 1984. Dr. McIIroy has owned and operated three
medically-related businesses. Dr. McIIroy was co-founder, President, and Chief
Executive Officer of Midwest Laboratory Associates, a medical testing laboratory
from 1977 until its sale in 1980. From 1973 to 1978, he was President and Chief
Executive Officer of Upper Mississippi Pathologists, P.A., serving several
hospitals in central Minnesota. Dr. McIIroy holds an M. D. degree from the
University of California-Los Angeles, and is Board Certified in Anatomical and
Clinical Pathology following four years of specialty training at the Mayo Clinic
in Rochester, Minnesota. He is also a member of the American College of
Utilization Review Physicians. Dr. McIIroy is married to Marlene O. Travis.
Marlene O. Travis, a co-founder of the Company, has been the Secretary, a
director and an officer of the Company since 1977, and currently serves as
President and Chief Operating Officer. Ms. Travis has served as Chief Operating
Officer since June 1993 and also held the position from January 1987 through
December 1991. Ms. Travis has been President since 1987, and Chief
Administrative Officer from January 1992 to June 1993, and Executive Vice
President prior to 1987. Ms. Travis is Chairman and Chief Executive Officer of
the Company's subsidiaries, Health Resource Management Ltd. and Institute for
Healthcare Quality, Inc. Ms. Travis was co-founder, Vice President and Director
of Operations of Midwest Laboratory Associates from 1977 to 1980. She was
Business Manager of Upper Mississippi Pathologists, P. A. from 1973 to 1978. Ms.
Travis is married to Dr. Gary T. McIIroy.
<PAGE>
Thomas P. Clark joined the Company as Controller in 1985, and has been Senior
Vice President, Finance and Chief Financial Officer of the Company since 1986.
From 1976 to 1985, Mr. Clark maintained his own public accounting practice.
Prior to such time Mr. Clark was an accountant with the accounting firms of KPMG
Peat Marwick and Breitman, Orenstein & Schweitzer.
Adele M. Kimpell, R. N., became Executive Vice President, Health Plan Operations
in March, 1996, and had previously served as Senior Vice President, Health Plan
Operations since August, 1993, and Senior Vice President, Care Management
Services since August 1993. Ms. Kimpell joined the Company as a Clinical
Reviewer in March 1985. Ms. Kimpell has served in various capacities within HRM
since January 1990, including Vice President, Strategic Business Implementation,
Vice President, Special Projects, Vice President, Claims Administration and
Assistant Vice President, Sales Operations. Ms. Kimpell has a B.S. degree in
nursing and had 15 years experience in intensive care and emergency room units
prior to joining HRM.
John R. Higbee, became Chief Information Officer in August, 1994. Prior to
joining HRM, Mr. Higbee was with Blue Cross Blue Shield of Minnesota in 1993 and
1994 in the capacity of Director, Dedicated Service Units. Mr. Higbee was
employed by Blue Cross Blue Shield of Michigan from 1968 through 1992 and served
in several capacities including Vice President, Information Systems Group
(1988-1992), Vice President, Government Business Group (1985-1988), Director,
Membership Rating and Utilization Review Systems (1982-1985), and Director, Data
Conversion (1979-1982).
Alexander E. Gourley became President, Canadian Operations in July, 1991, and
had been Executive Vice President since May 1990. Mr. Gourley joined the Company
in 1984 and served as Vice President, Finance from July 1985 to August 1986, as
Executive Vice President, Provider Contracting from August 1986 to May 1990, and
as a director from 1984 to 1986. Mr. Gourley was Managing Partner of the
Edmonton, Canada management consulting office of Woods Gordon (now Ernst & Young
LLP) from 1967 to 1984. Mr. Gourley is a Chartered Accountant (Canada), and a
Fellow of the Institute of Management Consultants of Alberta, and has 25 years
of business and management consulting experience.
Michael T. McKim, Esq., joined the Company as Vice President and General Counsel
in December 1992. Prior to joining the Company, Mr. McKim was a partner in the
Minneapolis law firm of Larkin, Hoffman, Daly & Lindgren, Ltd. from 1986 to
1992. Mr. McKim received his B. A. degree from the University of Notre Dame and
his J. D. degree from Creighton University School of Law in Omaha. He is a
member of the Ramsey County, Minnesota State and Nebraska State Bar
associations, where he serves on various standing and ad hoc committees.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Such forms include: Form 3, due within 10 days after becoming an
officer, director or greater than ten-percent holder; Form 4, due within 10 days
after any calendar month during which a reportable transaction occurred; and
Form 5 due within 45 days after the end of the fiscal year. Officers, directors
and greater than ten-percent shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they files.
Based on its review of the copies of such forms received by it, or written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that, during the period from July 1, 1996
through June 30, 1997, all Section 16(a) filing requirements applicable to its
current and former officers, directors, and greater than ten-percent beneficial
owners were complied with except that one Form 5 was filed late by Adele M.
Kimpell, and one Form 5 was filed late by Michael T. McKim.
<PAGE>
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth the cash and noncash compensation for each of the
last three fiscal years, of the Company's Chief Executive Officer and the four
other highest paid executive officers of the Company whose salary and bonus for
fiscal 1997 exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation(1) Awards
---------------------- ------
Other
Annual Restircted Securities
Compen- Stock Underlying LTIP All Other
Name and Position Year Salary Bonus sation Awards Options Payouts Compensation
- ----------------- ---- ------ ----- ------- ---------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary T. McIlroy, M.D. 1997 $278,000 $ 0(2) $9,395(10) 0 15,000(2) 0 $23,150(6)
Chairman & CEO 40,000(4)
1996 278,000 13,510 9,395(10) 0 33,138(3) 0 22,655(6)
1995 278,000 0(2) 9,395(10) 0 4,000(2) 0 23,127(6)
16,000(4)
30,000(9)
Marlene Travis 1997 250,000 0(2) 9,395(10) 0 12,500(2) 0 20,150(7)
President & COO 33,333(4)
1996 222,000 13,510 9,395(10) 0 23,298(3) 0 19,655(7)
1995 222,000 0(2) 9,395(10) 0 3,500(2) 0 19,943(7)
12,000(4)
25,000(9)
Thomas P. Clark 1997 200,000 0(2) 10,460(10) 0 10,000(2) 0 9,150(8)
CFO 26,667(4)
1996 167,500 11,580 10,460(10) 0 17,759(3) 0 8,655(8)
1995 167,500 0(2) 10,460(10) 0 3,000(2) 0 8,388(8)
12,000(4)
20,000(9)
Adele M. Kimpell 1997 153,542 0(2) 0 0 4,000(2) 0 2,663(5)
Executive V.P., 9,000(4)
Health Plan 1996 128,169 6,000 0 0 5,000(3) 0 1,882(5)
Operations 1995 106,795 6,000 0 0 2,000(2) 0 1,796(5)
John R. Higbee 1997 128,544 0(2) 0 0 1,500(2) 0 2,671(3)
CIO 1,500(4)
1996 122,400 0 0 0 0 0 1,101(5)
1995 107,840 10,000 0 0 4,500(2) 0 0(5)
</TABLE>
(1) Does not include the payment of professional and monthly club dues, term
group life insurance and other personal benefits, the aggregate amount of
which was less than 10% of the individual's listed compensation.
(2) Stock options were issued under the Amended and Restated 1992 Long-Term
Incentive Plan or the 1990 Stock Option Plan in lieu of cash bonus under
the annual Executive Incentive Plan and are fully exercisable.
(3) Stock options were issued under the 1990 Stock Option Plan, and become
exercisable in annual increments of one-fourth per year.
(4) Stock options were issued under the Amended and Restated 1992 Long-Term
Incentive Plan and become exercisable in annual increments of one-third per
year.
<PAGE>
(5) The Company matching contribution under its 401(k) Salary Savings Plan.
(6) The amount reflected includes $3,127, $2,655, and $3,150 as Company
matching contributions under its (401(k) Salary Savings Plan or other
retirement payments for fiscal 1995, 1996, and 1997, respectively, and
$20,000 per year for the total premiums paid by the Company on the life
insurance policy covered by the Split-Dollar Agreement referred to below in
"Employment Agreements" for fiscal 1995, 1996 and 1997, respectively.
(7) The amount reflected includes $2,943, $2,655, and $3,150 as Company
matching contributions under its 402(k) Salary Savings Plan or other
retirement payments for fiscal 1995, 1996 and 1997, respectively, and
$17,000 per year for a total premiums paid by the Company on the life
insurance policy covered by the Split-Dollar Agreement referred to below in
"Employment Agreements" for fiscal 1995, 1996 and 1997, respectively.
(8) The amount reflected includes $2,388, $2,655, and $3,150 as Company
matching contributions under its 401(k) Salary Savings Plan or other
retirement payments for fiscal 1995, 1996 and 1997, respectively, and
$6,000 per year for the total premiums paid by the Company on the life
insurance policy covered by the Split-Dollar Agreement referred to below in
"Employment Agreements" for fiscal 1995, 1996 and 1997, respectively.
(9) Stock options were issued to Dr. McIIroy, Ms. Travis and Mr. Clark, for
30,000, 25,000 and 20,000 shares, respectively, in lieu of performance unit
awards for fiscal 1995, cancellation of performance unit awards for fiscal
1994 and fiscal 1993 issued under the 1992 Long-Term Incentive Plan, and
cancellation of stock options issued in fiscal 1993 of 27,643, 19,588 and
15,827 respectively, which were originally issued in lieu of a cash bonus.
One-half of these stock options became exercisable on August 1, 1995, and
one-half became exercisable on August 1, 1996.
(10) Includes auto allowance and medical coverage.
The following two stock option tables summarize option grants and exercises
during fiscal 1997 for the Chief Executive Officer and other named executive
officers, and the values of options granted during fiscal 1997 and held by such
persons at June 30, 1997.
Stock Option Grants in Fiscal 1997
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed Annual
Rates of Stock Price Appreciation for
Option Term
---------------------------------------------
Individual Grants 5%(2) 10%(3)
------------------------------------------------- --------------------- --------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise or Expiration Stock Stock
Name Granted Fiscal Year Base Price Date(1) Price Gain Price Gain
---- --------- ------------ ----------- ---------- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary McIlroy, M.D. 15,000(1) 5.7% $11.00 06/30/02 $14.04 $45,600 $17.72 $100,800
40,000(2) 15.1% $13.25 06/30/02 $16.91 $146,400 $21.34 $323,600
Marlene Travis 12,500(1) 4.7% $11.00 06/30/02 $14.04 $38,000 $17.72 $84,000
33,333(2) 12.6% $13.25 06/30/02 $16.91 $121,999 $21.34 $269,664
Thomas P. Clark 10,000(1) 3.8% $11.00 06/30/02 $14.04 $30,400 $17.72 $67,200
26,667(2) 10.1% $13.25 06/30/02 $16.91 $97,601 $21.34 $215,736
Adele M. Kimpell 4,000(1) 1.5% $11.00 06/30/02 $14.04 $12,160 $17.72 $26,880
9,000(2) 3.4% $13.25 06/30/02 $16.91 $32,940 $21.34 $72,810
John R. Higbee 1,500(1) 0.6% $11.00 06/30/02 $14.04 $4,560 $17.72 $10,080
1,500(2) 0.6% $13.25 06/30/02 $16.91 $5,490 $21.34 $12,135
</TABLE>
- -----------------
(1) The stock options granted as fiscal 1997 incentives to the individuals
become exercisable six months after May 23, 1997, the date of the grant.
Under the terms of the Plan, the Board may provide for the protection of
all optionees to whom options have been granted in the event of a merger,
liquidation, reorganization or similar transaction.
<PAGE>
(2) One-third of the stock options granted as a long-term incentive to the
individuals became exercisable one year after June 30, 1997, the date of
grant, and on the next two anniversaries of the date of grant. Under the
terms of the Plan, the Board may provide for the protection of all
optionees to whom options have been granted in the event of a merger,
liquidation, reorganization or similar transaction.
(3) The stock price is calculated using a 5% and 10% rate of appreciation
(solely for illustrative purposes) for the term of the option, compounded
annually. The gain is the difference between the resulting illustrative
compounded stock price and the exercise price times the number of options
granted.
Aggregated Option Exercises in Fiscal 1997 and Fiscal Year-End Option Value
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Shares Acquired Value Year-End Exercisable/ at Fiscal Year-End(1)
on Exercise Realized Unexercisable Exercisable/Unexercisable
--------------- -------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
Gary T. McIlroy, M.D. 16,862 $82,211 81,235/76,903 $456,450/$173,301
Marlene Travis 11,202 $54,615 63,149/61,482 $357,570/$129,653
Thomas P. Clark 42,241 $302,550 19,880/49,546 $ 83,090/$106,500
Adele M. Kimpell -- -- 7,000/15,500 $ 30,000/$ 26,000
John R. Higbee -- -- 4,500/3,000 $ 29,875/$ 4,125
</TABLE>
(1) Market value of underlying securities at June 30, 1997 ($13.50), the
closing price of the Common Stock, minus the exercise price.
Director Fees and Options
Annual Retainer and Meeting Fees. All directors of the Company are reimbursed
for expenses incurred by them in connection with attending meetings of the Board
and performing duties as a director. Each nonemployee director receives an
annual retainer of $12,500 and meeting fees as follows: $750 for each Board
meeting attended; $500 ($650 for committee chairs) for each committee meeting
attended unless the committee meeting is held in conjunction with a Board
meeting; $500 for each meeting of the board of directors of a subsidiary of the
Company that is attended; $500 for each Board meeting in which the nonemployee
director participates by telephone; and $250 for each committee meeting in which
the nonemployee director participates by telephone. A director of the Company
may elect to receive the payment of his or her annual retainer, meeting fees and
committee fees on a monthly basis or in one lump sum at the end of the fiscal
year.
Deferred Compensation Plan for Directors. The Board of Directors of the Company
adopted the Deferred Compensation Plan for Directors, effective for fiscal 1994,
and for all fiscal years thereafter until the Plan is terminated. Under the
Deferred Compensation Plan, members of the Company's Board of Directors and
members of the Board of any subsidiary may elect, prior to July 1 of any fiscal
year, to defer the receipt of all or any portion of any annual retainer and
meeting fees that may be payable to the director during the fiscal year for
which the election is effective. The Deferred Compensation Plan is administered
by the Compensation Committee. All amounts deferred by the director are credited
to an account established for the director for accounting purposes only, and the
amounts credited to such account generally accrue interest, compounded
quarterly, at a rate equal to two percentage points above the Prime Rate. The
Deferred Compensation Plan is and will remain unfunded, and the director will
stand in the position of a general unsecured creditor of the Company with
respect to all payments made pursuant to the Deferred Compensation Plan.
<PAGE>
Director Options. Under the Amended and Restated 1992 Long-Term Incentive Plan,
directors who are not employees of the Company are eligible for nonqualified
stock options. As specified in the Plan, an option for 3,800 shares of the
Company's Common Stock was granted to each nonemployee director who was serving
on the Board on September 14, 1992, the date the Board originally adopted the
Plan and is granted to each new nonemployee director on the date that such new
director is first elected to the Board. All nonemployee directors will also
receive an option for 1,900 shares of the Company's Common Stock at the end of
each fiscal year during which such director continues to serve on the Board. The
Board may, in its discretion, grant additional nonqualified stock options to
nonemployee directors, subject to such terms and conditions as the Board may
deem appropriate.
In addition, a nonemployee director may elect in writing to receive a
nonqualified stock option in lieu of all or any portion of the annual retainer
and meeting fees to which such director may be entitled and which would
otherwise be payable to such director during the fiscal year for which the
election has been made. The number of shares subject to such option is
determined by dividing the total dollar amount specified in the election by 25%
of the fair market value of the Company's Common Stock as of the date the option
is granted, which shall be the last day of the fiscal year for which the
election has been made. Any election by the nonemployee director to receive a
nonqualified stock option in lieu of annual retainer and meeting fees must be
made prior to the date the option is granted.
Except for options granted in lieu of retainer or meeting fees, the option price
per share for all nonqualified stock options granted to nonemployee directors is
generally the fair market value of a share of the Company's Common Stock as of
the date such option is granted. The exercise price per share for all
nonqualified stock options granted to nonemployee directors in lieu of retainer
or meeting fees pursuant to the election described above equals 75% of the fair
market value of a share of the Company's Common Stock as of the date such option
is granted. All nonqualified stock options granted to the nonemployee directors
ordinarily expire five years after the date they are granted, and become
exercisable as to one-third of the shares subject to the option on each of the
succeeding three anniversaries of the option grant.
Employment Agreements
The Company has an Employment Agreement, dated June 20, 1996, with Gary T.
McIlroy, M.D. whereby Dr. McIlroy will continue to serve as Chief Executive
Officer with the term continuing indefinitely unless terminated under the terms
of the Agreement. Dr. McIlroy received a base salary for fiscal 1997 of $278,000
(subject to increase upon annual review by the Compensation Committee of the
Board) and is eligible to receive an annual incentive bonus under the Executive
Incentive Plan. The Employment Agreement is terminable by the Company for cause,
in which case the Company is obligated to pay only Dr. McIlroy's accrued base
salary and a portion of annual incentive bonus for the fiscal year in which his
termination occurs. The Agreement is also terminable by the Company upon thirty
(30) days written notice, without cause, in which case the Company is obligated
to (i) pay the then-current annualized base salary and provide health, dental,
life and other benefits for a twenty-four month period; (ii) pay out-placement
services; (iii) pay a portion of any annual incentive bonus for the fiscal year
in which his termination occurs; and (iv) transfer all cash value and life
insurance policies owned by the Company to Dr. McIlroy. In the event Dr. McIlroy
resigns for "good reason" or within twelve (12) months after a "change of
control" of the Company, the Company is obligated to make all of the payments
and provide all of the benefits described in the preceding sentence, and shall
accelerate the vesting of all stock options which shall then remain exercisable
until the options expire. The Agreement also addresses the benefits payable and
the treatment of the life insurance policies owned by the Company upon
termination for death or disability and, in the event of disability, provides
for supplemental disability payments and health, dental and life benefits for a
twelve (12) month period.
The Company also has a Split Dollar Agreement, dated June 5, 1991, which
requires the Company to pay the premiums on a life insurance policy owned by Dr.
McIlroy (or his assignee) and which requires repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater, upon Dr. McIlroy's death or termination of employment. Under the
Employment Agreement, if Dr. McIlroy's employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company, or if Dr.
McIlroy resigns for "good reason," the repayment obligations under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.
<PAGE>
The Company has an Employment Agreement, dated June 21, 1996, with Marlene
Travis whereby Ms. Travis will continue to serve as President and Chief
Operating Officer with the term continuing indefinitely unless and until
terminated under the terms of the Agreement. Ms. Travis received a base salary
for fiscal 1997 of $250,000 (subject to increase upon annual review by the Chief
Executive Officer) and is eligible to receive an annual incentive bonus under
the Executive Incentive Plan. The Employment Agreement is terminable by the
Company for cause, in which case the Company is obligated to pay only Ms.
Travis' accrued base salary and a portion of any annual incentive bonus for the
fiscal year in which her termination occurs. The Agreement is also terminable by
the Company upon thirty (30) days written notice, without cause, in which case
the Company is obligated to (i) pay the then-current annualized base salary and
provide health, dental, life and other benefits for a twenty-four (24) month
period; (ii) pay out-placement services; (iii) pay a portion of any annual
incentive bonus for the fiscal year in which her termination occurs; and (iv)
transfer all cash value and life insurance policies owned by the Company to Ms.
Travis. In the event Ms. Travis resigns for "good reason" or within twelve (12)
months after a "change of control" of the Company, the Company is obligated to
make all of the payments and provide all of the benefits described in the
preceding sentence and shall accelerate the vesting of all stock options which
shall then remain exercisable until the options expire. The Agreement also
addresses the benefits payable and the treatment of the life insurance policies
owned by the Company upon termination for death or disability and, in the event
of disability, provides for supplemental disability payments and health, dental
and life benefits for a twelve (12) month period.
The Company also has a Split Dollar Agreement, dated June 5, 1991, which
requires the Company to pay the premiums on a life insurance policy owned by Ms.
Travis (or her assignee) and which requires repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater, upon Ms. Travis' death or termination of employment. Under the
Employment Agreement, if Ms. Travis' employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company, or if Ms.
Travis resigns for "good reason," the repayment obligations under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.
The Company has an Employment Agreement dated June 21, 1996, with Thomas P.
Clark whereby Mr. Clark will continue to serve as Chief Financial Officer, with
the term continuing indefinitely unless and until terminated under the terms of
the Agreement. Mr. Clark received an annual base salary for fiscal 1997 of
$200,000 (subject to increase upon annual review by the Chief Executive Officer)
and is eligible to receive an annual incentive bonus under the Executive
Incentive Plan. The Employment Agreement is terminable by the Company for cause,
in which case the Company is obligated to pay only Mr. Clark's accrued base
salary and a portion of any annual incentive bonus for the fiscal year in which
his termination occurs. The Agreement is also terminable by the Company upon
thirty (30) days written notice, without cause, in which case the Company is
obligated to (i) pay the then-current annualized base salary and provide health,
dental, life and other benefits for a twenty-four (24) month period; (ii) pay
out-placement services; (iii) pay a portion of any annual incentive bonus for
the fiscal year in which his termination occurs; and (iv) transfer all cash
value and life insurance policies paid by the Company to Mr. Clark. In the event
Mr. Clark resigns for "good reason" or within twelve (12) months after a "change
of control" of the Company, the Company is obligated to make all of the payments
and provide all of the benefits described in the preceding sentence and shall
accelerate the vesting of all stock options which shall then remain exercisable
until the options expire. The Agreement also addresses the benefits payable and
the treatment of the life insurance policies owned by the Company upon
termination for death or disability and, in the event of disability, provides
for supplemental disability payments and health, dental and life benefits for a
twelve (12) month period.
The Company also has a Split Dollar Agreement, dated September 19, 1991, which
requires the Company to pay the premiums on a life insurance policy owned by Mr.
Clark (or his assignee) and which requires repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater, upon Mr. Clark's death or termination of employment. Under the
Employment Agreement, if Mr. Clark's employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company, or if Mr.
Clark resigns for "good reason," the repayment obligations under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.
<PAGE>
Report of the Compensation Committee on Executive Compensation
Compensation Committee's Responsibility
The Compensation Committee's (the "Committee") principal responsibility with
respect to executive level compensation is to ensure the Company's executive
compensation plans are aligned with and support the Company's business
objectives. The Committee evaluates the overall design and administration of the
plans in order to fulfill its responsibility. In addition, to enhance the
objectivity and independence of the Committee, it is comprised entirely of
outside directors.
Compensation Philosophy
The primary elements of the executive officers' total compensation program are
based on salary, annual incentives, and long-term incentives. The elements are
designed to:
(i) motivate executive officers to achieve strategic objectives which
promote the future success of the Company and increase shareholder value;
(ii) reward outstanding performance at the corporate, department, and
individual levels;
(iii) aid the Company in attracting and retaining executives capable of
assuring the future success of the Company; and
(iv) promote a pay-for-performance philosophy by placing a significant
portion of the total compensation "at risk" while providing compensation
opportunities which are comparable to market levels.
Recent tax law changes may disallow deductions for compensation paid by a
company to each of the company's named executives if the officer's compensation
exceeds $1 million. Special rules apply for "performance-based" compensation,
including compensation resulting from stock options. The Company intends to take
steps as are necessary to comply with the deduction limits imposed by the new
tax provisions.
Base Salary
Base salaries for certain executive officers are reviewed by the Committee on an
annual basis. Each year the Committee assesses the executive employees' level of
responsibility, experience, individual performance, accountabilities relative to
other Company executives, and external market practices. Each year the Committee
also reviews Company performance and recommends to the full Board the salary
levels for the coming year, and the base salaries are adjusted accordingly. In
fiscal 1997,the base salary for the chief executive was the same as fiscal 1996,
which was generally toward the mid-point of base salary levels for comparable
health care organizations. In fiscal 1997, the chief executive's base salary was
the same as fiscal 1996 because of a pay-for-performance philosophy for base
compensation which places a significant portion of the total compensation "at
risk" while providing compensation opportunities which are comparable to market
levels. Other executives' salaries are reviewed annually and changed based on
their performance and responsibilities.
Annual Incentives
Executive Incentive Plan. The Company's Board of Directors has an Executive
Incentive Plan which provides for the payment of annual incentive bonuses to
certain executive employees. The Executive Incentive Plan is administered by the
Compensation Committee, whose members are not eligible to participate in the
Executive Incentive Plan.
<PAGE>
Generally, an executive employee does not earn a bonus under the Executive
Incentive Plan unless specified revenue, net profit or other performance goals
are met by the Company. The Compensation Committee sets a range of bonus levels
based on the performance goals set for the year. The Committee determines the
amount of such cash bonus that may be paid to an executive employee by applying
a payment percentage that corresponds to such goals to the employee's salary at
the beginning of the applicable fiscal year. The Committee may also use stock
options if it believes that stock options will provide executive officers with
appropriate incentives. Fiscal 1997 incentives under this Plan were stock
options and no cash bonuses were paid. These options become fully exercisable
November 23, 1997.
For fiscal 1997, the chief executive officer received options for 15,000 shares
as an annual incentive and did not receive any cash bonus under the Plan.
Long-Term Incentives
The Company may grant some executive level employees long-term awards, including
stock options, performance awards, and restricted stock pursuant to the
Long-Term Incentive Plan. The purpose of these awards are to:
(i) focus executives on the achievement of performance objectives which
enhance shareholder value;
(ii) emphasize the importance of balancing present business needs and
long-term goals critical to the future success of the Company; and
(iii) attract and retain executives of superior ability.
Stock Options. Stock options allow the executives to purchase shares of the
Company's common stock at an exercise price equal to the fair market value at
the date of grant over a period of five years. Generally, one-third to one-
fourth of the executive's option becomes exercisable within the first six to
twelve months after grant with the remainder over a period ranging up to three
or four years following the date of grant. During fiscal 1997, in addition to
the options for 15,000 shares discussed above under Annual Incentives, the
Company issued the chief executive officer options for 40,000 shares at an
exercise price of $13.25 per share under the Amended and Restated 1992 Long-Term
Incentive Plan on June 30, 1997.
Performance Units. The Compensation Committee authorized awards of performance
units ("Units") in fiscal 1993 and fiscal 1994 that generally would have
provided executive recipients with the opportunity to receive cash awards if the
Company's financial goals and other business objectives were achieved over a
three-year period.
In fiscal 1995, the Committee determined that only annual cash incentives and
stock options should be granted to executives to simplify their compensation
program, canceled the Units previously awarded and decided that no additional
Units should be granted under the Amended and Restated 1992 Long-Term Incentive
Plan for the foreseeable future.
Ronald R. Hahn, Chairperson
V. Kenneth Travis
Robert L. Montgomery
Raymond G. Schultze, M.D.
<PAGE>
Performance Graph
Set forth below are line graphs comparing the Company's cumulative total
shareholder return on the Company's Common Stock, from June 30, 1992, through
June 30, 1997, with the cumulative total return of The Nasdaq Market Index (U.S.
Companies) and of the selected peer group (the "SIC Peer Group Index"). The SIC
Peer Group Index includes all Nasdaq companies which are in the same three-digit
SIC ("Standard Industrial Classification") labeled 632 Accident and Health
Insurance and Medical Service Plans.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
06/30/92 06/30/93 06/30/94 06/30/95 06/30/96 06/30/97
--------------- --------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
HRM 100.00 141.67 108.33 175.00 175.00 225.00
Peer Group Index 100.00 134.93 151.65 153.79 199.42 259.67
Nasdaq Index 100.00 122.76 134.61 157.88 198.73 239.40
</TABLE>
The Nasdaq Market Index and SIC Peer Group Index is provided by Media General
Financial Services. The Peer Group includes the following companies: Aetna,
Inc.; AFLAC Incorporated; Chartwell RE Corp.; Citizens Financial Corp.; Compdent
Corporation; Conseco, Inc.; Equisure, Inc..; Everest Reinsurance Hld.; First
Commonwealth of America; Health Power, Inc.; Healthplex, Inc.; Healthsource,
Inc.; Humana, Inc.; Maxicare Health Plans; Medical Control, Inc.; Mid Atlantic
Medical Services, Inc.; Oxford Health Plans, Inc.; Pacificare Health Services,
Inc.; Penncorp Financial Group; Physicians Health Services; Provident American
Corp.; RightChoice Managed Care; Safeguard Health Enterprises; Sierra Health
Services, Inc.; Torchmark Corporation; Transamerica Corporation; Trigon
Healthcare, Inc.; Union American Holding; United Dental Care, Inc.; United
Healthcare Corporation; United Wisconsin Services; Unum Corporation; Value
Health, Inc.; Washington National CP; and Westbridge Capital Corp.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned by each person known to the Company to beneficially own
more than 5% of the Company's Common Stock, by each of the Company's current
directors, by each executive officer named in the Summary Compensation Table (on
page 21), and by all of the Company's current directors and current executive
officers as a group, as of October 7, 1997.
<TABLE>
<CAPTION>
Name of Director, Executive Officer or Identity of Group Number of Shares Beneficially Percent of
Owned(1) Class
- -------------------------------------------------------- ----------------------------- ----------
<S> <C> <C>
NOLA, LLC
916 Sommerset Street
Watchung, NJ 07060 293,565( 2) 6.52%
Chiplease, Inc.
640 N. LaSalle Street, Suite 300
Chicago, IL 60610 270,000( 3) 6.00%
Gary T. McIlroy, M.D.
8000 West 78th Street
Minneapolis, MN 55439 309,322( 4) 6.72%
Marlene Travis
8000 West 78th Street
Minneapolis, MN 55439 356,309( 5) 7.78%
Thomas P. Clark 91,448( 6) 2.02%
Adele M. Kimpell 11,000( 7) *
John R. Higbee 7,000( 8) *
Vance Kenneth Travis 9,502( 9) *
Ronald R. Hahn 9,500(10) *
Robert L. Montgomery 5,700(11) *
Gary L. Damkoehler 1,267(12) *
Raymond G. Schultze, M.D 1,267(13) *
All Current Executive Officers and Current Directors as a
Group (12 persons) 821,765(14) 17.24%
</TABLE>
- -----------
* Less than one percent.
(1) Except as otherwise noted, each person or group named in the table has sole
voting and investment power with respect to all shares of Common Stock
listed opposite the name of such person or group. Shares not outstanding
but deemed beneficially owned by virtue of the right of a person to acquire
them as of October 7, 1997, or within 60 days of such date are treated as
outstanding only when determining the amount and percent owned by such
person or group named in the table.
<PAGE>
(2) Includes 293,565 shares for which NOLA, LLC represents it has sole voting
power and which was owned on May 1, 1997, the date of the most recent
Schedule 13D received by the Company from such shareholder.
(3) Includes 270,000 shares for which Chiplease, Inc. represents it has sole
voting power and which was owned on March 21, 1997, the date of the most
recent Schedule 13D received by the Company from such shareholder.
(4) The number of shares set forth in the above table (i) includes 207,753
shares held by the Gary T. McIlroy Revocable Trust, for which Dr. McIlroy
is grantor and trustee, (ii) includes 101,569 shares which Dr. McIlroy has
the right to acquire upon exercise of options, (iii) excludes 75 shares
beneficially owned by Dr. McIlroy's and Ms. Travis' adult children, and
(iv) excludes the shares beneficially owned by Ms. Travis. Dr. McIlroy
disclaims beneficial ownership of such excluded shares.
(5) The number of shares set forth in the above table (i) includes 276,660
shares held by the Marlene O. Travis Revocable Trust, for which Ms. Travis
is grantor and trustee, (ii) includes 79,649 shares which Ms. Travis has
the right to acquire upon exercise of options, (iii) excludes 75 shares
beneficially owned by Ms. Travis' and Dr. McIlroy's adult children, and
(iv) excludes the shares beneficially owned by Dr. McIlroy. Ms. Travis
disclaims beneficial ownership of such excluded shares.
(6) Includes 57,568 shares held by Mr. Clark and 33,880 shares which Mr. Clark
has the right to acquire upon exercise of options.
(7) Includes 11,000 shares which Ms. Kimpell has the right to acquire upon
exercise of options.
(8) Includes 1,000 shares held by Mr. Higbee and 6,000 shares which Mr. Higbee
has the right to acquire upon exercise of options.
(9) Includes 3,802 shares held by Mr. Travis and 5,700 shares which Mr. Travis
has the right to acquire upon exercise of options.
(10) Includes 3,800 shares held by Mr. Hahn and 5,700 shares which Mr. Hahn has
the right to acquire upon exercise of options.
(11) Includes 5,700 shares which Mr. Montgomery has the right to acquire upon
exercise of options.
(12) Includes 1,267 shares which Mr. Damkoehler has the right to acquire upon
exercise of options.
(13) Includes 1,267 shares which Mr. Schultze has the right to acquire upon
exercise of options.
(14) Includes 556,033 shares held by the current officers and directors, and
265,732 shares that current executive officers and directors as a group
have the right to acquire as of October 7, 1997, or within 60 days of such
date, upon exercise of options.
Item 13. Certain Relationships and Related Transactions.
None.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this report.
(1) Financial Statements. The financial statements listed below are
included in this Annual Report on Form 10-K on the pages indicated.
Page in this
Form 10-K
Report of Independent Auditors............................ 37
Consolidated Balance Sheets as of June 30, 1997
and 1996.................................................. 38
Consolidated Statements of Net Income for the years
ended June 30, 1997, 1996 and 1995........................ 39
Consolidated Statements of Changes in Shareholders'
Equity for the years ended June 30, 1997, 1996
and 1995.................................................. 40
Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995........................ 41
Notes to Consolidated Financial Statements................ 42
(2) Financial Statement Schedules. The following schedule is included in
this Annual Report on Form 10-K on the pages indicated.
Page in this
Form 10-K
II. Valuation and Qualifying Accounts............. 53
Schedules I, III, IV, and V are omitted for the reason that they are
not applicable, not required or the information is presented in the
consolidated financial statements or related notes.
<PAGE>
(3) Exhibits.
3.1 Amended and Restated Articles of Incorporation, as amended to date --
incorporated by reference to Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997 (SEC File No.
0-18902).
3.2 Composite Bylaws of the Company, as of May 17, 1997.
4.1 Specimen form of the Company's Common Share Certificate --
incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (SEC File No. 33-37595).
4.2 Amended and Restated Articles of Incorporation, as amended to date
(see Exhibit 3.1).
4.3 Composite Bylaws of the Company, as of May 17, 1997 (see Exhibit 3.2).
4.4 Rights Agreement dated as of April 4, 1997 between health Risk
Management, Inc. and Norwest Bank Minnesota, N.A. as Rights Agent,
together with the following exhibits thereto:
(a) Certificate of Designations of Series A Preferred Stock,
(b) Summary of Rights to Purchase Shares of Series A Preferred Stock,
(c) Form of Rights Certificate --
incorporated by reference to Exhibit 1 to the Company's Form 8-A
Registration Statement filed April 10, 1997 (SEC File No. 0-18902).
10.1 Lease Agreement dated August 14, 1987 between The Mutual Insurance
Company of New York and Health Risk Management, Inc., as amended by
First Amendment to Lease dated June 25, 1990, related to the Company's
offices at 7900 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (SEC File No. 33-37595).
10.2 Lease Agreement dated August 14, 1987 between The Mutual Insurance
Company of New York and Health Risk Management, Inc., as amended by
First Amendment to Lease dated October 8, 1987 and Second Amendment to
Lease dated June 25, 1990, related to the Company's offices at 8000
West 78th Street, Minneapolis, Minnesota -- incorporated by reference
to Exhibit 10.2 to the Company's Registration Statement on Form S-1
(SEC File No. 33-37595).
10.3fEmployment Agreement dated as of June 20, 1996 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy -- incorporated by refernce
to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
10.4fSplit Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy and the Amendment to Split
Dollar Agreement dated July 28, 1992 between Health Risk Management,
Inc. and Gary T. McIlroy -- incorporated by refernce to Exhibit 10.4
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18902).
10.5fEmployment Agreement dated as of June 21, 1996 between Health Risk
Management, Inc. and Marlene O. Travis -- incorporated by refernce to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
- --------------
f Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
<PAGE>
10.6fSplit Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Marlene O. Travis and the Amendment to Split
Dollar Agreement dated July 28, 1992 between Health Risk Management,
Inc. and Marlene O. Travis -- incorporated by refernce to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18902).
10.7fEmployment Agreement dated June 21, 1996 between Health Risk
Management, Inc. and Thomas P. Clark -- incorporated by refernce to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
10.8fSplit Dollar Agreement dated as of September 1, 1991 between Health
Risk Management, Inc. and Thomas P. Clark -- incorporated by refernce
to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
10.9fHealth Risk Management, Inc. 1990 Stock Option Plan -- incorporated
by reference to Exhibit 10.16 to the Company's Registration Statement
on Form S-1 (SEC File No. 33-37595).
10.10f Form of Stock Option Agreement to be used pursuant to 1990 Stock
Option Plan -- incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1991 (SEC File No. 0-18902).
10.11Second Amendment to Lease dated January 8, 1992 for the Lease
Agreement dated August 14, 1987 between The Mutual Life Insurance
Company of New York and Health Risk Management, Inc., related to the
Company's offices at 7900 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended june 30, 1992 (SEC File
No. 0-18902).
10.12Third Amendment to Lease dated January 8, 1992 for the Lease
Agreement dated August 14, 1987 between The Mutual Life Insurance
Company of New York and Health Risk Management, Inc., related to the
Company's offices at 8000 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1992 (SEC File
No. 0-18902).
10.13f Amended and Restated 1992 Long-Term Incentive Plan.
10.14f Form of Non-Employee Director Initial/Annual Option Agreement under
the 1992 Long-Term Incentive Plan -- incorporated by reference to
Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992 (SEC File No. 0-18902).
10.15f Form of Non-Employee Director Elective Option Agreement under the
1992 Long-Term Incentive Plan -- incorporated by reference to Exhibit
10.31 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992 (SEC File No. 0-18902).
10.16f Form of Incentive Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.32 to
theCompany's Annual Report on Form 10-K for the fiscal year ended June
30, 1992 (SEC File No. 0-18902).
10.17f Form of Non-Qualified Stock Option Agreement under the 1992
Long-Term Incentive Plan -- incorporated by reference to Exhibit 10.33
to theCompany's Annual Report on Form 10-K for the fiscal year ended
June 30, 1992 (SEC File No. 0-18902).
- --------------
f Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
<PAGE>
10.18f Form of Performance Unit Award under the 1992 Long-Term Incentive
Plan -- incorporated by reference to Exhibit 10.34 to theCompany's
Annual Report on Form 10-K for the fiscal year ended June 30, 1992
(SEC File No. 0-18902).
10.19f Deferred Compensation Plan for Directors -- incorporated by
reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1992 (SEC File No. 0-18902).
10.20f Executive Incentive Plan -- incorporated by reference to the
description of such Plan as set forth under "Compensation Pursuant to
Plans - Executive Incentive Plan" in the Company's Proxy Statement for
its 1992 Annual Meeting of Shareholders (SEC File No. 0-18902).
10.21Lease Agreement dated January 11, 1993 between Thomas L. Koster,
Inc., d/b/a/ Realvesco Properties and Health Risk Management, Inc., as
amended by First Amendment to Lease Agreement dated January 29, 1993,
related to the Company's offices at 5250 Lovers Lane, Portage,
Michigan -- incorporated by reference to Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1993 (SEC File No. 0-18902).
10.22Second Amendment to Lease dated July 22, 1997 for the Lease Agreement
dated January 11, 1993 between Thomas L. Koster, Inc., d/b/a/
Realvesco Properties and Health Risk Management, Inc., related to the
Company's offices at 5250 Lovers Lane, Portage, Michigan.
10.23Fourth Amendment to Lease dated July 12, 1993 for the Lease Agreement
dated August 14, 1987 between The Mutual Life Insurance Company of New
York and Health Risk Management, Inc., related to the Company's
offices at 7900 and 8000 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 (SEC File
No. 0-18902).
10.24Fifth Amendment to Lease dated May 12, 1994 for the Lease Agreement
dated August 14, 1987 between The Mutual Life Insurance Company of New
York and Health Risk Management, Inc., related to the Company's
offices at 8000 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 (SEC File
No. 0-18902).
10.25Sixth Amendment to Lease dated October 18, 1995 for the Lease
Agreement dated August 14, 1987 between The Mutual Life Insurance
Company of New York and Health Risk Management, Inc., related to the
Company's offices at 8000 West 78th Street, Minneapolis, Minnesota.
10.26Third Amendment to Lease dated May 12, 1994 for the Lease Agreement
dated August 14, 1987 between The Mutual Life Insurance Company of New
York and Health Risk Management, Inc., related to the Company's
offices at 7900 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.29 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 (SEC File
No. 0-18902).
10.27Fourth Amendment to Lease dated October 18, 1995 for the Lease
Agreement dated August 14, 1987 between The Mutual Life Insurance
Company of New York and Health Risk Management, Inc., related to the
Company's offices at 7900 West 78th Street, Minneapolis, Minnesota.
- --------------
f Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
<PAGE>
10.28Revolving Credit and Term Loan Agreement dated June 24, 1994 between
First Bank National Association and Health Risk Management, Inc. --
incorporated by reference to Exhibit 10.30 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 (SEC File
No. 0-18902).
10.29First Amendment to Revolving Credit and Term Loan Agreement dated
March 31, 1995 for the Revolving Credit and Term Loan Agreement dated
June 24, 1994 between First Bank National Association and Health Risk
Management, Inc. -- incorporated by reference to Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1995 (1994 (SEC File No. 0-18902).
10.30Second Amendment to Revolving Credit and Term Loan Agreement dated
January 19, 1996 for the Revolving Credit and Term Loan Agreement
dated June 24, 1994 between First Bank National Association and Health
Risk Management, Inc. -- incorporated by reference to Exhibit 10.27 to
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18902).
10.31Third Amendment to Revolving Credit and Term Loan Agreement dated
January 31, 1997 for the Revolving Credit and Term Loan Agreement
dated June 24, 1994 between First Bank National Association and Health
Risk Management, Inc.
10.32Security Agreement dated June 24, 1994 relating to Revolving Credit
and Term Loan Agreement of same date -- incorporated by reverence to
Exhibit 10.31 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994 (SEC File No. 0-18902).
10.33Managed Health Care Service Agreement dated April 4, 1994 between
Health Risk Management, Inc. and Hospital Corporation of America, as
amended by Amendment No. 1 to the Managed Health Care Service
Agreement dated May 11, 1995 between Health Risk Management, Inc. and
Columbia/HCA Healthcare Corporation -- incorporated by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 (SEC File No. 0-18903).
10.34Second Amendment to Managed Health Care Service Agreement effective
January 1, 1996 for the Managed Health Care Service Agreement dated
April 4, 1994 between Health Risk Management, Inc. and Columbia/HCA
Healthcare Corporation -- incorporated by reference to Exhibit 10.30
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18903).
10.35Claim Administration Service Agreement dated April 4, 1994 between
Health Risk Management, Inc. and Hospital Corporation of America, as
amended by Amendment No. 1 to the Claim Administration Service
Agreement dated May 11, 1995 between Health Risk Management, Inc. and
Columbia/HCA healthcare Corporation -- incorporated by reference to
Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 (SEC File No. 0-18903).
10.36Second Amendment to Claim Administration Service Agreement effective
January 1, 1996 for the Claim Administration Service Agreement dated
April 4, 1994 between Health Risk Management, Inc. and Columbia/HCA
Healthcare Corporation -- incorporated by reference to Exhibit 10.32
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18903).
- --------------
f Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
<PAGE>
10.37Lease Agreement dated May 26, 1989 between The Hornet Group and Health
Program Managers, Inc. related to the Company's offices at 7801 Folsom
Boulevard, Sacramento, California and First Amendment to Lease
Agreement dated December 12, 1994 between the Hornet Group and Health
Program Managers, Inc -- incorporated by reference to Exhibit 10.33 to
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18903).
10.38Managed Care Service Agreement dated October 29, 1996 between Health
Risk Management, Inc. and Keystone Mercy Health Plan.
10.39QualityFIRST(R)License Agreement dated July 11, 1996 between Health
Risk Management, Inc. and Keystone Mercy Health Plan.
10.40Amendment No. 1 to the Managed Care Service Agreeement between Health
Risk Management, Inc. and Keystone Mercy Health Plan effective October
1, 1997.
11. Statement of computation of earnings per share.
21. List of subsidiaries.
23. Consent of Independent Auditors.
27. Financial Data Schedule (filed in electronic format only).
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended June 30,
1997.
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
of Health Risk Management, Inc.
We have audited the accompanying consolidated balance sheets of Health Risk
Management, Inc. as of June 30, 1997 and 1996, and the related consolidated
statements of net income, changes in shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Health
Risk Management, Inc. at June 30, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
October 10, 1997
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
June 30,
------------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,349 $ 3,347
Accounts receivable-net of allowance for doubtful accounts of
$260 ($200 in 1996) 5,257 5,134
Unbilled receivables 7,110 4,642
Deferred income taxes 350 235
Other 989 1,394
-------- ----------
Total current assets 19,055 14,752
Computer software costs, net of amortization of $12,782 ($9,816 in 1996) 20,385 17,132
Property and equipment less accumulated depreciation of $11,103 ($9,272 in
1996) 9,215 9,788
Contract rights, net of amortization of $914 ($748 in 1996) 893 1,030
Other assets 2,175 2,120
------- -------
$ 51,723 $ 44,822
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,645 $ 1,863
Accrued expenses 3,018 2,638
Unearned revenues 3,826 2,578
Current maturities of notes payable 1,134 1,076
Current portion of capitalized equipment leases 854 1,351
-------- -------
Total current liabilities 10,477 9,506
Deferred income taxes 3,715 2,292
Long-Term portion of notes payable 2,166 2,152
Long-Term portion of capitalized equipment leases 1,321 2,398
Commitments
Shareholders' equity:
Undesignated shares, $.01 par value, 9,700,000 authorized, none issued
Series A preferred shares, $.01 par value, 300,000 authorized, none issued
Common shares, $.01 par value, 20,000,000 shares authorized,
4,478,245 issued and outstanding (4,180,476 in 1996) 45 42
Additional paid-in capital 30,945 27,619
Retained earnings 3,054 813
------- --------
Total shareholders' equity 34,044 28,474
------- --------
$ 51,723 $ 44,822
======= ========
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 62,723 $ 54,507 $ 49,302
Operating expenses:
Cost of services 37,657 31,762 30,290
Depreciation and amortization, principally cost of services 7,646 6,947 6,127
Selling and marketing 7,346 6,767 6,064
Administration 5,682 5,232 4,811
Merger costs 390 -- --
-------- ---------- ----------
Total operating expenses 58,721 50,708 47,292
-------- ---------- ----------
Operating income 4,002 3,799 2,010
Other income (expense):
Interest income 187 158 128
Interest expense (535) (708) (759)
-------- -------- --------
Total other expense ( 348) ( 550) ( 631)
-------- -------- --------
Income before income taxes 3,654 3,249 1,379
Income taxes 1,413 1,253 535
------- ------- -------
Net income $ 2,241 $ 1,996 $ 844
======= ======= =======
Net income per common and common equivalent share $ .50 $ .47 $ .21
======== ======== ========
Weighted average common and common equivalent shares 4,458,101 4,219,186 3,982,093
========= ========= =========
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Shares
Outstanding Additional Retained
-------------------------------
Number of Paid-In Earnings
Shares Amount Capital (Deficit) Total
------------- ------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 3,943,199 $ 39 $ 25,665 $ (2,027) $ 23,677
Options to purchase common
shares issued for services 18 18
Option exercised 85,500 1 554 555
Common shares issued for
services 1,000 7 7
Net income 844 844
------------- ------------- -------------- --------------- ------------
Balance at June 30, 1995 4,029,699 40 26,244 (1,183) 25,101
Options to purchase common
shares issued for services 19 19
Options exercised, including
tax benefit of $120 143,277 2 1,275 1,277
Common shares issued for
contract rights 7,500 81 81
Net income 1,996 1,996
------------- ------------- -------------- --------------- ------------
Balance at June 30, 1996 4,180,476 42 27,619 813 28,474
Common shares issued 200,000 2 2,462 2,464
Options exercised, including
tax benefit of $90 97,769 1 864 865
Net income 2,241 2,241
------------- ------------- -------------- --------------- ------------
Balance at June 30, 1997 4,478,245 $ 45 $ 30,945 $ 3,054 $ 34,044
============= ============= ============== =============== ============
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,241 $ 1,996 $ 844
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,816 2,832 2,406
Amortization 4,830 4,115 3,721
Provision for deferred income taxes 1,398 1,231 523
Other -- 19 25
Changes in operating assets and liabilities:
Accounts receivable (89) (2,374) 153
Unbilled receivables (2,468) 303 (1,371)
Other assets 7 (1,002) 51
Accounts payable (238) (6) 318
Accrued expenses 382 39 416
Unearned revenues 1,248 282 228
------------- ------------- -------------
Net cash provided by operating activities 10,127 7,435 7,314
Cash flows from investing activities:
Acquisition of net assets, net of cash acquired (139) -- --
Property and equipment (2,827) (2,256) (1,891)
Capitalized software (7,396) (5,779) (5,337)
------------- ------------- -------------
Net cash used in investing activities (10,362) (8,035) (7,228)
Cash flows from financing activities:
Proceeds from notes payable 1,275 1,500 --
Principal payments on notes payable (1,278) (904) (935)
Principal payments on capital leases (999) (1,152) (1,231)
Issuance of common shares 3,239 1,155 555
------------- ------------- -------------
Net cash provided by (used in) financing activities 2,237 599 (1,611)
------------- ------------- -------------
Increase (decrease) in cash 2,002 (1) (1,525)
Cash and cash equivalents at beginning of year 3,347 3,348 4,873
------------- ------------- -------------
Cash and cash equivalents at end of year $ 5,349 $ 3,347 3,348
=========== =========== ===========
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated.
B. Nature of Operations
The Company is engaged in a single business consisting of managed
health care services providing comprehensive, integrated health plan
management and related information services. The Company's principal
health plan management services include care review, case management,
price control, and claims administration. The Company's information
services revenues are derived principally from software license and
subscription fees related to its QualityFIRST(R) clinical practice
guidelines (the Guidelines). A significant percentage of the Company's
revenues are derived from the care review management and claims
administration management services. Integrated health plan management
and information services are marketed to self-insured employers,
unions, government entities, insurance companies, HMOs, PPOs and
hospitals. Contractual relationships maintained by the Company with
its clients subjects the Company to revenue fluctuations resulting
from changes in client employment levels or covered lives,
restructuring of benefit plan offerings, and price adjustments based
upon contract experience. In addition, the Company services a small
number of large clients. In 1997, sales to two clients were seventeen
percent (17%) and sixteen percent (16%) of revenues, and in 1996 sales
to two clients were seventeen percent (17%), and eleven percent (11%)
of revenues. The markets serviced by the Company are principally
domestic.
C. Uses of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could
differ from those estimates.
D. Revenue Recognition
The Company's revenues for health plan management services are derived
from services provided under contracts obligating clients to generally
pay: a capitated monthly charge for each covered member based on
anticipated case volume experience, a percentage of savings, a
transaction or case fee, or an hourly fee. In addition, each new
client is typically charged a one-time set-up fee to cover the related
set-up costs incurred by the Company. Revenue for health plan
management services is recognized as services are rendered under each
contract. Revenue from license fees is recognized upon delivery of the
Guidelines while subscription fees are recognized as revenue in the
month the Guidelines are utilized by the clients.
E. Unbilled Receivables
Unbilled receivables represent costs and related profit incurred for
contract services which have not been billed.
<PAGE>
F. Unearned Revenues
Unearned revenues represent amounts billed to clients for contract
services yet to be performed.
G. Computer Software Costs
The Company capitalizes computer software costs in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.
The capitalized costs are amortized based on the greater of the amount
computed using (a) the ratio of current gross revenues for the product
to the total of current and anticipated future gross revenues or (b) a
straight-line basis over their estimated useful lives, ranging from
three to ten years.
H. Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the assets using straight-line
methods for financial reporting purposes and accelerated methods for
tax purposes. Estimated useful lives range from three to ten years.
Equipment under capital leases is amortized over the term of the
respective lease or over the service lives of the assets for those
leases which substantially transfer ownership.
I. Contract Rights
The fair value of purchased customer lists and relationships is
amortized over their respective estimated useful lives of three to
twelve years. Amortization expense was $166,000, $144,000 and $161,000
for the years ended June 30, 1997, 1996 and 1995, respectively.
J. Income Taxes
The Company reports income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
The statement requires that all deferred tax balances be determined by
using the tax rate expected to be in effect when the taxes will
actually be paid. A deferred income tax provision or credit is
provided based on changes in deferred tax asset or liability balances.
K. Net Income Per Common and Common Equivalent Share
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 using
the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share." This statement establishes
standards for computing and presenting basic and diluted earnings per
share for financial statements issued for periods ending after
December 15, 1997. Basic and diluted earnings per share under
Statement No. 128 as compared to current accounting standards would
have been as follows:
<TABLE>
<CAPTION>
Current Standards
----------------- FAS 128
Fully -------
Primary Diluted Basic Diluted
------- ------- ----- -------
<S> <C> <C> <C> <C>
Year ended June 30, 1997 $.50 $.50 $.52 $.50
Year ended June 30, 1996 $.47 $.47 $.49 $.47
</TABLE>
<PAGE>
L. Series A Preferred Stock
On April 4, 1997, the HRM Board of Directors created a series of
preferred stock with a par value of $.01 per share for the shareholder
rights plan. The shares of such series were designated as "Series A
Preferred Stock". The number of shares authorized and unissued
constituting the Series A Preferred Stock is 300,000 shares.
M. Shareholder Rights Plan
On April 4, 1997, the HRM Board of Directors established a shareholder
rights plan which provides for a dividend distribution of one
preferred stock purchase right (a "Right") to be attached to each
share of common stock of HRM then outstanding or thereafter issued.
The Rights are currently not exercisable or transferable apart from
the common stock. Each Right entitles the holder to purchase from HRM
one one-hundredth of a share of Series A Preferred Stock of HRM at a
price of $50.00 per one one-hundredth of a preferred share, subject to
adjustment. The Rights become exercisable if a person or group
acquires 15% or more of HRM common stock or announces a tender offer
for 15% or more of HRM common stock, subject to certain exceptions.
After the Rights become exercisable, each Right entitles the holder
(other than the 15% holder) to purchase HRM's common stock having a
market value of two times the Right's exercise price. Also, if after a
person acquires 15% without Board approval, HRM is acquired in a
merger or similar transaction, each right thereafter would entitle a
holder (other than the 15% holder) to acquire shares of the acquiring
company or an affiliate having a market value of two times the Right's
exercise price. Each Right is redeemable at $.001 at any time up to
ten days after a person acquires 15% of HRM's common stock. The Rights
expire on April 4, 2007 unless earlier redeemed by HRM.
N. Cash and Cash Equivalents
Short-term investments purchased within three months of their
maturities are considered cash equivalents. The Company invests in
U.S. government securities and high rated money market funds. The
carrying amount reported in the consolidated balance sheets for cash
and cash equivalents approximates its fair value.
O. Merger Termination
On March 10, 1997, HRM and HealthPlan Services Corporation (HPS)
announced that the merger agreement dated September 12, 1996, had been
terminated by mutual arrangement and HPS purchased 200,000
unregistered shares of common stock from HRM at a price of $2.5
million ($12.50 per share). The consolidated net income for the year
ended June 30, 1997 includes a one-time charge of $390,000 ($0.05 per
share, net of tax benefit) for the write-off of costs related to the
terminated merger agreement with HPS.
<PAGE>
2. COMPUTER SOFTWARE COSTS
Computer software costs consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Computer Software (AutoPILOT(TM))
Cost.................................................. $ 12,932 $ 10,347
Less accumulated amortization......................... 5,177 4,307
------- -------
Net book value........................................ 7,755 6,040
Claim Administration Software
Cost.................................................. 7,601 6,705
Less accumulated amortization......................... 2,913 2,178
------- -------
Net book value........................................ 4,688 4,527
Guidelines, Protocols and Medical Analysis Software
Cost.................................................. 12,634 9,896
Less accumulated amortization......................... 4,692 3,331
------- -------
Net book value........................................ 7,942 6,565
------- -------
Computer Software and Database Development Costs........... $ 20,385 $ 17,132
====== ======
</TABLE>
Amortization of these costs was as follows for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- ---------
(in thousands)
<S> <C> <C> <C>
Computer Software (AutoPILOT(TM)).................... $ 1,791 $ 1,485 $ 1,255
Claim Administration Software........................ 735 645 552
Guidelines, Protocols and Medical Analysis Software.. 1,617 1,279 982
----- ----- -----
Amortization Expense................................. $ 4,143 $ 3,409 $ 2,789
===== ===== =====
</TABLE>
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30:
1997 1996
---- ----
(in thousands)
Owned
Office equipment, furniture and fixtures........$ 5,435 $ 5,037
Leasehold improvements.......................... 1,594 1,387
Data processing equipment....................... 8,175 5,951
------- -------
15,204 12,375
Less accumulated depreciation................... 8,374 6,431
------- -------
Net property and equipment owned................ 6,830 5,944
------- -------
Capitalized leases
Office equipment and furniture.................. 1,271 1,372
Data processing equipment....................... 3,843 5,313
------- -------
5,114 6,685
Less accumulated depreciation................... 2,729 2,841
------- -------
Net capitalized leases.......................... 2,385 3,844
------- -------
Property and equipment..........................$ 9,215 $ 9,788
===== =====
4. NOTES PAYABLE
Notes payable consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Term loan payable to bank in monthly installments of $43,667 plus interest
at bank's reference rate plus 0.375% (8.875% at June 30, 1997), with the
last payment due June 30, 1999. Secured by accounts receivable, equipment,
fixtures and general intangibles............................................... $ 1,048 $ 1,572
Notes payable to bank under revolving credit agreement in monthly
installments of $46,250 plus interest at the bank's reference rate plus
0.375% (8.875% at June 30, 1997), with the last payment due December 31, 2001
Secured by accounts receivable, equipment, fixtures and general intangibles.... 2,198 1,350
Note payable to bank in monthly installments of $22,325 including interest
at the bank's base rate (8.50% at June 30, 1997) until September 30, 1997
when the remaining principal balance is due. Secured by accounts receivable
and equipment.................................................................. 54 306
-------- --------
3,300 3,228
Less Current Maturities........................................................ 1,134 1,076
----- -----
Long-Term Portion.............................................................. $ 2,166 $ 2,152
===== =====
</TABLE>
<PAGE>
The Company has entered into a revolving credit agreement with a bank
whereby it may borrow up to $3,750,000 under a revolving loan. The loan is
secured by accounts receivable, equipment, fixtures and general
intangibles. The revolving credit agreement terminates on January 31, 1998.
The Company had available $1,552,000 under the revolving credit facility at
June 30, 1997.
The carrying amounts of the Company's borrowings under its term loan and
notes payable approximate their fair value.
Under terms of the revolving credit and term loan agreements, the Company
is prohibited from paying dividends on its stock without the bank's
consent.
Scheduled payments by fiscal year under terms of the notes payable will be
$1,134,000 in 1998, $1,078,000 in 1999, $555,000 in 2000, $405,000 in 2001,
and $128,000 in 2002.
Total interest paid on notes payable was $299,000, $281,000, and $298,000
for the years ended June 30, 1997, 1996 and 1995, respectively.
5. OPTIONS
At June 30, 1997, the Company's 1992 Long-Term Incentive Plan and the 1990
Stock Option Plan ("the Plans") permitted the granting of 800,000 options
to officers, directors and employees. These can be either incentive stock
options or non-qualified options. Options are generally granted at not less
than market value at the date of grant and generally for a five-year
period. The Options have been granted at prices ranging from $4.875 to
$15.25. No common shares are available for future issuance under the Plans
at June 30, 1997. On August 28, 1997, the Company registered 400,000 shares
of common stock for issuance under the 1992 long-term Incentive Plan.
At June 30, 1997, the Company had outstanding 250 unregistered options to
purchase common shares, not granted under the Plans, at $6.50 per share.
Transactions related to outstanding options during the last three years are
summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Total Exercisable Exercise Price
----- ----------- --------------
<S> <C> <C> <C>
Balance at June 30, 1994 689,352 485,906 $ 9.81
Granted 178,657 -- 7.02
Became exercisable -- 125,320 9.09
Exercised (85,500) (85,500) 6.49
Expired (93,482) (90,482) 12.92
-------- -------- -----
Balance at June 30, 1995 689,027 435,244 9.04
Granted 139,283 -- 9.04
Became exercisable -- 224,117 8.26
Exercised (143,277) (143,277) 8.05
Expired (151,219) (151,219) 11.09
------- ------- -----
Balance at June 30, 1996 533,814 364,865 8.72
Granted 260,550 -- 12.32
Became exercisable 99,324 7.41
Exercised (97,769) (97,769) 9.06
Expired (24,536) (24,536) 8.85
-------- -------- ----
Balance at June 30, 1997 672,059 341,884 $ 10.06
======= ======= =====
</TABLE>
<PAGE>
The following table summarizes information about the stock options at June
30, 1997
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
--------------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$4.875 - $5.50 21,951 2.01 $ 4.90 21,951 $ 4.90
$6.375 - $6.75 12,904 1.94 6.55 12,904 6.55
$7.00 110,500 2.59 7.00 97,166 7.00
$7.25-$9.00 113,154 2.98 8.07 70,447 8.13
$9.75 62,750 1.06 9.75 58,750 9.75
$10.00-$10.75 33,200 1.97 10.26 26,232 10.20
$11.00 100,500 5.00 11.00 0 0.00
$11.25-$13.00 51,750 2.83 11.87 43,434 11.93
$13.25-$13.50 154,600 4.99 13.25 250 13.50
$15.25 10,750 0.57 15.25 10,750 15.25
------ ---- ----- ------ -----
$4.875-$15.25 672,059 3.35 $10.06 341,884 $ 8.69
======= ==== ===== ======= ======
</TABLE>
The number of options scheduled to expire by fiscal year is 51,700 in 1998,
103,619 in 1998, 131,407 in 2000, 130,483 in 2000, and 254,850 in 2002.
As permitted by FAS 123, "Accounting for Stock-Based Compensation", the
Company has elected to follow Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees," to measure compensation cost
for employee stock options. Under APB 25, if the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for the years ended June 30, 1997 and 1996:
risk-free interest rates ranging from 5.85% to 6.73%; dividend yield of 0%;
volatility factor of the expected market price of the Company's common
stock of .513; and a weighted average expected life of the option of 3.5
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restriction and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the option's vesting period. The Company's pro
forma information follows:
Year ended June 30
1997 1996
---- ----
Pro forma net income $1,917,000 $1,763,000
Pro forma net income per share $.44 $.42
<PAGE>
6. INCOME TAXES
The components of the provision for income taxes for the three years ended
June 30 were as follows:
1997 1996 1995
-------------- -------------- ----------
Current:
Federal............ $ 5,000 $ 8,000 $ 0
State.............. 10,000 14,000 12,000
Deferred................ 1,398,000 1,231,000 523,000
--------- --------- ---------
$1,413,000 $1,253,000 $ 535,000
========= ========= =========
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
components of the deferred income tax liabilities and assets as of June 30
were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Prepaid expenses.......................... $ 24,000 $ 130,000
Other assets.............................. 253,000 196,000
Computer software costs................... 7,437,000 6,251,000
Tax over book depreciation................ 758,000 917,000
----------- -----------
Total deferred tax liabilities........ 8,472,000 7,494,000
Deferred tax assets:
Allowance for doubtful accounts........... 94,000 75,000
Accrued expenses.......................... 280,000 290,000
Net operating loss carryforwards.......... 5,248,000 5,496,000
--------- ---------
Total deferred tax assets............. 5,622,000 5,861,000
Less valuation allowance.................. (515,000) (424,000)
-------- --------
Total net deferred tax assets......... 5,107,000 5,437,000
--------- ---------
Net deferred tax liabilities................... $ 3,365,000 $ 2,057,000
========= =========
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -------
<S> <C> <C> <C>
Statutory rate................ 34.0% 34.0% 34.0%
State income taxes............ 2.7% 2.7% 2.8%
Non-deductible meals and entertainment
expenses.................... .8% .7% 1.1%
Other......................... 1.2% 1.2% .9%
----- ----- -----
38.7% 38.6% 38.8%
==== ==== ====
</TABLE>
At June 30, 1997, the Company had net operating loss (NOL) carryforwards of
$14,100,000 for income tax purposes only that expire in years 1999 through
2012. Included in the NOL is approximately $1,426,000 of deductions
resulting from stock options. These deductions currently have a full
valuation allowance and when realized for financial statement purposes they
will not result in a reduction in income tax expense.
Rather, the benefit will be recorded as additional paid-in capital.
Total income tax paid for the years ended June 30, 1997, 1996 and 1995 was
$15,090, $20,600 and $4,600, respectively.
<PAGE>
7. COMMITMENTS
The Company leases its office facilities and various equipment under
operating and capital leases. Rental expense was approximately $3,564,000,
$2,881,000 and $2,754,000, for the years ended June 30, 1997, 1996, and
1995, respectively. The following is a schedule by years of future minimum
rental payments required under operating leases as of June 30, 1997 (in
thousands):
Year ending June 30:
1998 $ 3,487
1999 1,954
2000 1,217
2001 921
2002 ` 90
--------
Total minimum rental payments $ 7,669
========
In addition to the above amounts, additional rental payments are due under
the office facility leases based on the lessor's operating costs.
The following is a schedule of future minimum lease payments under capital
leases as of June 30, 1997 (in thousands):
Years ending June 30:
1998 $ 999
1999 682
2000 303
2001 295
2002 223
------
Total minimum lease payments 2,502
Less amount representing interest 327
Net minimum lease payments 2,175
Less current maturities 854
-----
Long-Term portion $ 1,321
=====
The Company entered into capital lease agreements aggregating $460,000,
$432,000, and $1,271,000 for the years ended June 30, 1997, 1996 and 1995,
respectively, in connection with the purchase of office equipment,
furniture and fixtures, and data processing equipment.
8. SAVINGS PLAN
The Company has a tax deferred savings plan in accordance with the
provisions of Section 401(k) of the Internal Revenue Code covering
substantially all employees. Under the plan, the Company will match a
minimum of 10% of eligible employees' contributions up to 6% of the
employee's salary for the plan year ending June 30, 1997 and 1996 compared
to 5% of the employee's salary for the plan year ending June 30, 1995.
Employee and employer matching contributions to the plan are remitted to a
trustee on a biweekly basis. Company contribution expenses were $350,000,
$240,000 and $200,000 for the years ended June 30, 1997, 1996, and 1995,
respectively.
<PAGE>
9. QUARTERLY FINANCIAL DATA (Unauditied)
The following table presents certain unaudited quarterly results for fiscal
1997 and 1996.
<TABLE>
<CAPTION>
Fiscal 1997
---------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Revenues $14,395 $15,597 $16,058 $16,673 $62,723
====== ====== ====== ====== ======
Gross Profit(1) $ 5,747 $ 6,438 $ 6,162 $ 6,719 $25,066
====== ====== ====== ====== ======
Net Income $ 438 $ 697 $ 438(2) $ 668 $ 2,241
====== ====== ====== ====== ======
Net Income per share $ .10 $ .16 $ .10(2) $ .15 $ .50
====== ====== ====== ====== ======
Weighted average number of shares 4,356 4,431 4,466 4,581 4,458
====== ====== ====== ====== ======
Fiscal 1996
----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Revenues $13,371 $13,689 $14,045 $13,402 $54,507
====== ====== ====== ====== ======
Gross Profit(1) $ 5,491 $ 5,838 $ 6,034 $ 5,382 $22,745
====== ====== ====== ====== ======
Net Income $ 529 $ 612 $ 784 $ 71 $ 1,996
====== ====== ====== ====== ======
Net Income per share $ .13 $ .15 $ .18 $ .02 $ .47
====== ====== ====== ====== ======
Weighted average number of shares 4,140 4,107 4,277 4,353 4,219
====== ====== ====== ====== ======
</TABLE>
(1) Represents revenues less cost of services.
(2) Includes a one-time charge of $239,000, net of tax benefit ($.05 per
share), for the write-off of costs related to the terminated merger
agreement with HPS.
<PAGE>
Schedule II
HEALTH RISK MANAGEMENT, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
------------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended June 30, 1997:
Allowance for uncollectible accounts $200,000 $127,014 $67,014(1) $260,000
Year ended June 30, 1996:
Allowance for uncollectible accounts $300,000 $241,725 $341,725(1) $200,000
Year ended June 30, 1995:
Allowance for uncollectible accounts $150,000 $333,000 $183,000(1) $300,000
</TABLE>
- ----------------
(1) Uncollectible accounts written off.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HEALTH RISK MANAGEMENT, INC.
October 13, 1997 By: /s/ Gary T. McIlroy, M.D.
Gary T. McIlroy, M.D.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
October 13, 1997 By: /s/ Gary T. McIlroy, M.D.
Gary T. McIlroy, M.D.
Chairman of the Board, Chief
Executive Officer and Director
(principal executive officer)
October 13, 1997 By: /s/ Marlene Travis
Marlene Travis
President, Secretary, Chief Operating
Officer and Director
October 13, 1997 By: /s/ Thomas P. Clark
Thomas P. Clark
Senior Vice President, Finance and
Chief Financial Officer (principal
financial officer and principal
accounting officer)
October 13, 1997 By: /s/ Vance Kenneth Travis
Vance Kenneth Travis, Director
October 13, 1997 By: /s/ Gary L. Damkoehler
Gary L. Damkoehler, Director
October 13, 1997 By: /s/ Raymond G. Schultze, M.D.
Raymond G. Schultze, M.D., Director
October 13, 1997 By: /s/ Ronald R. Hahn
Ronald R. Hahn, Director
October 13, 1997 By: /s/ Robert L. Montgomery
Robert L. Montgomery, Director
<PAGE>
EXHIBIT INDEX
-------------
3.1 Amended and Restated Articles of Incorporation, as amended to date --
incorporated by reference to Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997 (SEC File No.
0-18902).
3.2 Composite Bylaws of the Company, as of May 17, 1997.
4.1 Specimen form of the Company's Common Share Certificate --
incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (SEC File No. 33-37595).
4.2 Amended and Restated Articles of Incorporation, as amended to date
(see Exhibit 3.1).
4.3 Composite Bylaws of the Company, as of May 17, 1997 (see Exhibit 3.2).
4.4 Rights Agreement dated as of April 4, 1997 between health Risk
Management, Inc. and Norwest Bank Minnesota, N.A. as Rights Agent,
together with the following exhibits thereto:
(a) Certificate of Designations of Series A Preferred Stock,
(b) Summary of Rights to Purchase Shares of Series A Preferred Stock,
(c) Form of Rights Certificate --
incorporated by reference to Exhibit 1 to the Company's Form 8-A
Registration Statement filed April 10, 1997 (SEC File No. 0-18902).
10.1 Lease Agreement dated August 14, 1987 between The Mutual Insurance
Company of New York and Health Risk Management, Inc., as amended by
First Amendment to Lease dated June 25, 1990, related to the Company's
offices at 7900 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (SEC File No. 33-37595).
10.2 Lease Agreement dated August 14, 1987 between The Mutual Insurance
Company of New York and Health Risk Management, Inc., as amended by
First Amendment to Lease dated October 8, 1987 and Second Amendment to
Lease dated June 25, 1990, related to the Company's offices at 8000
West 78th Street, Minneapolis, Minnesota -- incorporated by reference
to Exhibit 10.2 to the Company's Registration Statement on Form S-1
(SEC File No. 33-37595).
10.3fEmployment Agreement dated as of June 20, 1996 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy -- incorporated by refernce
to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
10.4fSplit Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy and the Amendment to Split
Dollar Agreement dated July 28, 1992 between Health Risk Management,
Inc. and Gary T. McIlroy -- incorporated by refernce to Exhibit 10.4
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18902).
10.5fEmployment Agreement dated as of June 21, 1996 between Health Risk
Management, Inc. and Marlene O. Travis -- incorporated by refernce to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
- --------------
f Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
<PAGE>
10.6fSplit Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Marlene O. Travis and the Amendment to Split
Dollar Agreement dated July 28, 1992 between Health Risk Management,
Inc. and Marlene O. Travis -- incorporated by refernce to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18902).
10.7fEmployment Agreement dated June 21, 1996 between Health Risk
Management, Inc. and Thomas P. Clark -- incorporated by refernce to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
10.8fSplit Dollar Agreement dated as of September 1, 1991 between Health
Risk Management, Inc. and Thomas P. Clark -- incorporated by refernce
to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
10.9fHealth Risk Management, Inc. 1990 Stock Option Plan -- incorporated
by reference to Exhibit 10.16 to the Company's Registration Statement
on Form S-1 (SEC File No. 33-37595).
10.10f Form of Stock Option Agreement to be used pursuant to 1990 Stock
Option Plan -- incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1991 (SEC File No. 0-18902).
10.11Second Amendment to Lease dated January 8, 1992 for the Lease
Agreement dated August 14, 1987 between The Mutual Life Insurance
Company of New York and Health Risk Management, Inc., related to the
Company's offices at 7900 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended june 30, 1992 (SEC File
No. 0-18902).
10.12Third Amendment to Lease dated January 8, 1992 for the Lease
Agreement dated August 14, 1987 between The Mutual Life Insurance
Company of New York and Health Risk Management, Inc., related to the
Company's offices at 8000 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1992 (SEC File
No. 0-18902).
10.13f Amended and Restated 1992 Long-Term Incentive Plan.
10.14f Form of Non-Employee Director Initial/Annual Option Agreement under
the 1992 Long-Term Incentive Plan -- incorporated by reference to
Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992 (SEC File No. 0-18902).
10.15f Form of Non-Employee Director Elective Option Agreement under the
1992 Long-Term Incentive Plan -- incorporated by reference to Exhibit
10.31 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992 (SEC File No. 0-18902).
10.16f Form of Incentive Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.32 to
theCompany's Annual Report on Form 10-K for the fiscal year ended June
30, 1992 (SEC File No. 0-18902).
10.17f Form of Non-Qualified Stock Option Agreement under the 1992
Long-Term Incentive Plan -- incorporated by reference to Exhibit 10.33
to theCompany's Annual Report on Form 10-K for the fiscal year ended
June 30, 1992 (SEC File No. 0-18902).
- --------------
f Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
<PAGE>
10.18f Form of Performance Unit Award under the 1992 Long-Term Incentive
Plan -- incorporated by reference to Exhibit 10.34 to theCompany's
Annual Report on Form 10-K for the fiscal year ended June 30, 1992
(SEC File No. 0-18902).
10.19f Deferred Compensation Plan for Directors -- incorporated by
reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1992 (SEC File No. 0-18902).
10.20f Executive Incentive Plan -- incorporated by reference to the
description of such Plan as set forth under "Compensation Pursuant to
Plans - Executive Incentive Plan" in the Company's Proxy Statement for
its 1992 Annual Meeting of Shareholders (SEC File No. 0-18902).
10.21Lease Agreement dated January 11, 1993 between Thomas L. Koster,
Inc., d/b/a/ Realvesco Properties and Health Risk Management, Inc., as
amended by First Amendment to Lease Agreement dated January 29, 1993,
related to the Company's offices at 5250 Lovers Lane, Portage,
Michigan -- incorporated by reference to Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1993 (SEC File No. 0-18902).
10.22Second Amendment to Lease dated July 22, 1997 for the Lease Agreement
dated January 11, 1993 between Thomas L. Koster, Inc., d/b/a/
Realvesco Properties and Health Risk Management, Inc., related to the
Company's offices at 5250 Lovers Lane, Portage, Michigan.
10.23Fourth Amendment to Lease dated July 12, 1993 for the Lease Agreement
dated August 14, 1987 between The Mutual Life Insurance Company of New
York and Health Risk Management, Inc., related to the Company's
offices at 7900 and 8000 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 (SEC File
No. 0-18902).
10.24Fifth Amendment to Lease dated May 12, 1994 for the Lease Agreement
dated August 14, 1987 between The Mutual Life Insurance Company of New
York and Health Risk Management, Inc., related to the Company's
offices at 8000 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 (SEC File
No. 0-18902).
10.25Sixth Amendment to Lease dated October 18, 1995 for the Lease
Agreement dated August 14, 1987 between The Mutual Life Insurance
Company of New York and Health Risk Management, Inc., related to the
Company's offices at 8000 West 78th Street, Minneapolis, Minnesota.
10.26Third Amendment to Lease dated May 12, 1994 for the Lease Agreement
dated August 14, 1987 between The Mutual Life Insurance Company of New
York and Health Risk Management, Inc., related to the Company's
offices at 7900 West 78th Street, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.29 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 (SEC File
No. 0-18902).
10.27Fourth Amendment to Lease dated October 18, 1995 for the Lease
Agreement dated August 14, 1987 between The Mutual Life Insurance
Company of New York and Health Risk Management, Inc., related to the
Company's offices at 7900 West 78th Street, Minneapolis, Minnesota.
- --------------
f Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
<PAGE>
10.28Revolving Credit and Term Loan Agreement dated June 24, 1994 between
First Bank National Association and Health Risk Management, Inc. --
incorporated by reference to Exhibit 10.30 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 (SEC File
No. 0-18902).
10.29First Amendment to Revolving Credit and Term Loan Agreement dated
March 31, 1995 for the Revolving Credit and Term Loan Agreement dated
June 24, 1994 between First Bank National Association and Health Risk
Management, Inc. -- incorporated by reference to Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1995 (1994 (SEC File No. 0-18902).
10.30Second Amendment to Revolving Credit and Term Loan Agreement dated
January 19, 1996 for the Revolving Credit and Term Loan Agreement
dated June 24, 1994 between First Bank National Association and Health
Risk Management, Inc. -- incorporated by reference to Exhibit 10.27 to
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18902).
10.31Third Amendment to Revolving Credit and Term Loan Agreement dated
January 31, 1997 for the Revolving Credit and Term Loan Agreement
dated June 24, 1994 between First Bank National Association and Health
Risk Management, Inc.
10.32Security Agreement dated June 24, 1994 relating to Revolving Credit
and Term Loan Agreement of same date -- incorporated by reverence to
Exhibit 10.31 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994 (SEC File No. 0-18902).
10.33Managed Health Care Service Agreement dated April 4, 1994 between
Health Risk Management, Inc. and Hospital Corporation of America, as
amended by Amendment No. 1 to the Managed Health Care Service
Agreement dated May 11, 1995 between Health Risk Management, Inc. and
Columbia/HCA Healthcare Corporation -- incorporated by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 (SEC File No. 0-18903).
10.34Second Amendment to Managed Health Care Service Agreement effective
January 1, 1996 for the Managed Health Care Service Agreement dated
April 4, 1994 between Health Risk Management, Inc. and Columbia/HCA
Healthcare Corporation -- incorporated by reference to Exhibit 10.30
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18903).
10.35Claim Administration Service Agreement dated April 4, 1994 between
Health Risk Management, Inc. and Hospital Corporation of America, as
amended by Amendment No. 1 to the Claim Administration Service
Agreement dated May 11, 1995 between Health Risk Management, Inc. and
Columbia/HCA healthcare Corporation -- incorporated by reference to
Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 (SEC File No. 0-18903).
10.36Second Amendment to Claim Administration Service Agreement effective
January 1, 1996 for the Claim Administration Service Agreement dated
April 4, 1994 between Health Risk Management, Inc. and Columbia/HCA
Healthcare Corporation -- incorporated by reference to Exhibit 10.32
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18903).
- --------------
f Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
<PAGE>
10.37Lease Agreement dated May 26, 1989 between The Hornet Group and Health
Program Managers, Inc. related to the Company's offices at 7801 Folsom
Boulevard, Sacramento, California and First Amendment to Lease
Agreement dated December 12, 1994 between the Hornet Group and Health
Program Managers, Inc -- incorporated by reference to Exhibit 10.33 to
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18903).
10.38Managed Care Service Agreement dated October 29, 1996 between Health
Risk Management, Inc. and Keystone Mercy Health Plan.
10.39QualityFIRST(R)License Agreement dated July 11, 1996 between Health
Risk Management, Inc. and Keystone Mercy Health Plan.
10.40Amendment No. 1 to the Managed Care Service Agreeement between Health
Risk Management, Inc. and Keystone Mercy Health Plan effective October
1, 1997.
11. Statement of computation of earnings per share.
21. List of subsidiaries.
23. Consent of Independent Auditors.
27. Financial Data Schedule (filed in electronic format only).
COMPOSITE BYLAWS
OF
HEALTH RISK MANAGEMENT, INC.
AS OF
MAY 17, 1997
ARTICLE I.
OFFICES, CORPORATE SEAL
Section 1.01. Registered Office. The registered office of the
corporation in Minnesota shall be that set forth in the Articles of
Incorporation or in the most recent amendment of the Articles of Incorporation
or resolution of the directors filed with the Secretary of State of Minnesota
changing the registered office.
Section 1.02. Other Offices. The corporation may have such other
offices, within or without the State of Minnesota, as the directors shall, from
time to time, determine.
Section 1.03. Corporate Seal. The corporation shall have no seal.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 2.01. Place and time of Meetings. Except as provided otherwise
by Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at
any place, within or without the State of Minnesota, as may from time to time be
designated by the directors and, in the absence of such designation, shall be
held at the registered office of the corporation in the State of Minnesota. The
directors shall designate the time of day for each meeting and, in the absence
of such designation, every meeting of shareholders shall be held at ten o'clock
a.m.
Section 2.02. Regular Meetings.
(a) A regular meeting of the shareholders shall be held on such date as
the Board of Directors shall by resolution establish.
(b) At the regular meeting the shareholders, voting as provided in the
Articles of Incorporation and these Bylaws, shall elect qualified successors for
directors who serve for an indefinite term or whose terms have expired or are
due to expire within six months after the date of the meeting.
<PAGE>
(c) At any regular meeting of shareholders, only such business shall be
conducted, and only such proposals shall be acted upon, as properly brought
before the meeting. In order for business to be properly brought before the
meeting, the business must either be (i) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
(ii) otherwise properly brought before the meeting by or at the direction of the
Board, or (iii) otherwise properly brought before the meeting by a shareholder.
In addition to any other applicable requirements, for business to be properly
brought before a regular meeting by a shareholder, the shareholder must have
given timely notice thereof in writing to the Secretary of the corporation. To
be timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation, not less than 50 days and no
more than 75 days prior to the meeting. A shareholder's notice to the Secretary
shall set forth as to each matter that the shareholder proposes to bring before
the regular meeting (i) a brief description of the business desired to be
brought before the regular meeting and the reasons for conducting such business
at the regular meeting, (ii) the name and record address of the shareholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the shareholder, and (iv) any material interest
of the shareholder in such business. For purposes of this Section 2.02 and
Section 2.10 of these Bylaws, reference to a requirement to deliver notice of
information to the corporation within a set number of days in advance of a
regular meeting shall mean that such notice must be delivered within such number
of days in advance of the first anniversary of the preceding year's regular
meeting; provided, however, that in the event that the date of the regular
meeting is advanced by more than 20 days or delayed by more than 60 days from
the first anniversary of the preceding year's regular meeting, notice by the
shareholder to be timely must be so delivered not later than the close of
business on the later of the 50th day prior to such regular meeting or the 10th
day following the day on which notice of such meeting is first given to
shareholders. For purposes of these Bylaws, notice shall be deemed to be first
given to shareholders when disclosure of such date is first made in a press
release reported by a national news service or a report disseminated by any
comparable media for the dissemination of information or any document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934.
(d) Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at the regular meeting except in accordance with the
procedures set forth in this Section, provided, however, that nothing in this
Section shall be deemed to preclude discussion by any shareholder of any
business properly brought before the regular meeting.
(e) The chairman of the regular meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section, and if the
chairman should so determine, the chairman shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted.
Section 2.03. Special Meetings. Special meetings of the shareholders
may be held at any time and for any purpose and may be called by the President,
Treasurer, any two directors, or by a shareholder or shareholders holding 10% or
more of the shares entitled to vote on the matters to be presented to the
meeting.
<PAGE>
Section 2.04. Quorum, Adjourned Meetings. The holders of a majority of
the shares entitled to vote shall constitute a quorum for the transaction of
business at any regular or special meeting. In case a quorum shall not be
present at a meeting, those present may adjourn to such day as they shall, by
majority vote, agree upon. If a quorum is present, a meeting may be adjourned
from time to time without notice other than announcement at the meeting. At
adjourned meetings at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally noticed. If a
quorum is present, the shareholders may continue to transact business until
adjournment notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
Section 2.05. Voting. At each meeting of the shareholders every
shareholder having the right to vote shall be entitled to vote either in person
or by proxy. Each shareholder, unless the Articles of Incorporation or statute
provide otherwise, shall have one vote for each share having voting power
registered in such shareholder's name on the books of the corporation. Jointly
owned shares may be voted by any joint owner unless the corporation receives
written notice from any one of them denying the authority of that person to vote
those shares. Upon the demand of any shareholder, the vote upon any question
before the meeting shall be by ballot. All questions shall be decided by a
majority vote of the number of shares entitled to vote and represented at the
meeting at the time of the vote except if otherwise required by statute, the
Articles of Incorporation, or these Bylaws.
Section 2.06. Record Date. The Board of Directors may fix a time, not
exceeding 60 days preceding the date of any meeting of shareholders, as a record
date for the determination of the shareholders entitled to notice of, and to
vote at, such meeting, notwithstanding any transfer of shares on the books of
the corporation after any record date so fixed. If the Board of Directors fails
to fix a record date for determination of the shareholders entitled to notice
of, and to vote at, any meeting of shareholders, the record date shall be the
20th day preceding the date of such meeting.
Section 2.07. Notice of Meetings. There shall be mailed to each
shareholder, shown by the books of the corporation to be a holder of record of
voting shares, at his address as shown by the books of the corporation, a notice
setting out the time and place of each regular meeting and each special meeting,
except where the meeting is an adjourned meeting and the date, time and place of
the meeting were announced at the time of adjournment, which notice shall be
mailed at at least five days prior thereto; except that notice of a meeting at
which an agreement of merger or exchange is to be considered shall be mailed to
all shareholders of record, whether entitled to vote or not, at least fourteen
days prior thereto. Every notice of any special meeting called pursuant to
Section 2.03 hereof, shall state the purpose or purposes for which the meeting
has been called, and the business transacted at all special meetings shall be
confined to the purpose stated in the notice.
Section 2.08. Waiver of Notice. Notice of any regular or special
meeting may be waived by any shareholder either before, at or after such meeting
orally or in a writing signed by such shareholder or a representative entitled
to vote the shares of such shareholder. A shareholder, by his attendance at any
meeting of shareholders, shall be deemed to have waived notice of such meeting,
except where the shareholder objects at the beginning of the meeting to the
transaction of business because the item may not lawfully be considered at that
meeting and does not participate in the consideration of the item at that
meeting.
<PAGE>
Section 2.09. Written Action. Any action which might be taken at a
meeting of the shareholders may be taken without a meeting if done in writing
and signed by all of the shareholders entitled to vote on that action.
Section 2.10. Shareholder Nomination of Directors. Not less than 50
days and no more than 75 days prior to the date of the regular meeting, any
shareholder who intends to make a nomination at the regular meeting shall
deliver a notice in writing to the Secretary of the corporation setting forth
(a) as to each nominee whom the shareholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of the nominee, (ii) the principal occupation or employment of the
nominee, (iii) the class and number of shares of stock of the corporation which
are beneficially owned by the nominee, and (iv) any other information concerning
the nominee that would be required, under the rules of the Securities and
Exchange Commission, in a proxy statement soliciting proxies for the election of
such nominee; and (b) as to the shareholder giving the notice, (i) the name and
record address of the shareholder, and (ii) the class and number of shares of
stock of the corporation which the shareholder beneficially owns. Such notice
shall include a signed consent to serve as a director of the corporation if
elected of such nominee. The corporation may require any proposed nominee to
furnish such further information as may reasonably be required by the
corporation to determine the eligibility of such proposed nominee to serve as a
director of the corporation.
ARTICLE III.
DIRECTORS
Section 3.01. General Powers. The business and affairs of the
corporation shall be managed by or under the direction of the Board of
Directors, except as otherwise permitted by statute.
Section 3.02. Number, Qualification and Term of Office. The number of
directors of the corporation shall be determined from time to time by resolution
duly adopted by the Board of Directors. Unless otherwise provided by the
Articles of Incorporation, each director shall hold office until the regular
meeting of shareholders next held after such director's election and until such
director's successor shall have been elected and shall qualify, or until the
earlier death, resignation, removal or disqualification of such director.
Section 3.03. Board Meetings. Meetings of the Board of Directors may
be held from time to time at such time and place within or without the State of
Minnesota as may be designated by the Board. In the absence of designation by
the Board of Directors, Board meetings shall be held at the principal executive
office of the corporation, except as may be otherwise unanimously agreed orally,
or in writing, or by attendance. If a meeting schedule is adopted by the Board,
or if the date and time of a Board meeting has been announced at a previous
meeting, no notice is required.
Section 3.04. Calling Meetings; Notice. Meetings of the Board of
Directors may be called by the Chairman of the Board by giving at least
twenty-four hours notice, or by any other director by giving at least five days
notice, of the date, time and place thereof to each director by mail, telephone,
telegram or in person.
Section 3.05. Waiver of Notice. Notice of any meeting of the Board of
Directors may be waived by any director either before, at, or after such meeting
orally or in a writing signed by such director. A director, by his attendance at
any meeting of the Board of Directors, shall be deemed to have waived notice of
such meeting, except where the director objects at the beginning of the meeting
to the transaction of business because the meeting is not lawfully called or
convened and does not participate thereafter in the meeting.
<PAGE>
Section 3.06. Quorum. A majority of the directors holding office
immediately prior to a meeting of the Board of Directors shall constitute a
quorum for the transaction of business at such meeting.
Section 3.07. Absent Directors. A director may give advance written
consent or opposition to a proposal to be acted on at a meeting of the Board of
Directors. If such director is not present at the meeting, consent or opposition
to a proposal does not constitute presence for purposes of determining the
existence of a quorum, but consent or opposition shall be counted as a vote in
favor of or against the proposal and shall be entered in the minutes or other
record of action at the meeting, if the proposal acted on at the meeting is
substantially the same or has substantially the same effect as the proposal to
which the director has consented or objected.
Section 3.08. Conference Communications. Any or all directors may
participate in any meeting of the Board of Directors, or of any duly constituted
committee thereof, by any means of communication through which the directors may
simultaneously hear each other during such meeting. For the purposes of
establishing a quorum and taking any action at the meeting, such directors
participating pursuant to this Section 3.08 shall be deemed present in person at
the meeting, and the place of the meeting shall be the place of origination of
the conference communication.
Section 3.09. Vacancies; Newly Created Directorships. Vacancies in the
Board of Directors of this corporation occurring by reason of death,
resignation, removal or disqualification shall be filled for the unexpired term
by a majority of the then Continuing Directors (as defined in Section 3.10
below) although less than a quorum; newly created directorships resulting from
an increase in the authorized number of directors by action of the Board of
Directors as permitted by Section 3.02 may be filled by a majority vote of the
directors serving at the time of such increase; and each director elected
pursuant to this Section 3.09 shall be a director until such director's
successor is elected by the shareholders at their next regular meeting at which
directors of the same class are scheduled to be elected.
Section 3.10. Removal. Any or all of the directors may be removed from
office at any time only by one of the following two methods: (a) for cause, by
the affirmative vote of the holders of at least 75% of the outstanding shares of
the corporation entitled to vote at an election of directors, considered for
purposes of this section to be voting as a class; or (b) with or without cause,
by the affirmative vote of both (i) a majority of the entire Board of Directors
and (ii) a majority of the then Continuing Directors. For purposes of this
section, a "Continuing Director" at a particular time shall mean a person who is
then a member of the Board and either (i) was a member of the Board on the date
of adoption of this bylaw or (ii) subsequently became a member of the Board if
such person's election to the Board was recommended or approved by a majority of
the then Continuing Directors.
Section 3.11. Committees. A resolution approved by the affirmative vote
of a majority of the Board of Directors may establish committees having the
authority of the board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
persons, who need not be directors, appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the Board of
Directors, except as provided by Minnesota Statutes Section 302A.243.
A majority of the members of the committee present at a meeting is a
quorum for the transaction of business, unless a larger or smaller proportion or
number is provided in a resolution approved by the affirmative vote of a
majority of the directors present.
<PAGE>
Section 3.12. Written Action. Any action which might be taken at a
meeting of the Board of Directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by all of the
directors or committee members, unless the Articles provide otherwise and the
action need not be approved by the shareholders.
Section 3.13. Compensation. Directors who are not salaried officers of
this corporation shall receive such fixed sum per meeting attended or such fixed
annual sum or both as shall be determined, from time to time, by resolution of
the Board of Directors. The Board of Directors may, by resolution, provide that
all directors shall receive their expenses, if any, of attendance at meetings of
the Board of Directors or any committee thereof. Nothing herein contained shall
be construed to preclude any director from serving this corporation in any other
capacity and receiving proper compensation therefor.
ARTICLE IV.
OFFICERS
Section 4.01. Number. The officers of the corporation shall consist of
a Chairman of the Board (if one is elected by the Board), a President, a
Treasurer, a Secretary (if one is elected by the Board) and such other officers
and agents as may, from time to time, be elected or appointed by the Board of
Directors. Any number of offices may be held by the same person.
Section 4.02. Election, Term of Office and Qualifications. The Board
of Directors shall elect or appoint, by resolution approved by the affirmative
vote of a majority of the directors present, from within or without their
number, the President, Treasurer and such other officers as may be deemed
advisable, each of whom shall have the powers, rights, duties, responsibilities,
and terms in office provided for in these Bylaws or a resolution of the Board of
Directors not inconsistent therewith. The President and all other officers who
may be directors shall continue to hold office until the election and
qualification of their successors, notwithstanding an earlier termination of
their directorship.
Section 4.03. Removal and Vacancies. Any officer may be removed from
his office by the Board of Directors at any time, with or without cause. Such
removal, however, shall be without prejudice to the contract rights of the
person so removed. If there be a vacancy among the officers of the corporation
by reason of death, resignation or otherwise, such vacancy shall be filled for
the unexpired term by the Board of Directors.
Section 4.04. Chairman of the Board. The Chairman of the Board, if one
is elected, shall preside at all meetings of the shareholders and directors and
shall have such other duties as may be prescribed, from time to time, by the
Board of Directors.
Section 4.05. President. The President shall be the chief executive
officer and shall have general active management of the business of the
corporation. In the absence of the Chairman of the Board, he shall preside at
all meetings of the shareholders and directors. He shall see that all orders and
resolutions of the Board of Directors are carried into effect. He shall execute
and deliver, in the name of the corporation, any deeds, mortgages, bonds,
contracts or other instruments pertaining to the business of the corporation
unless the authority to execute and deliver is required by law to be exercised
by another person or is expressly delegated by the Articles or Bylaws or by the
Board of Directors to some other officer or agent of the corporation. He shall
maintain records of and, when necessary, certify all proceedings of the Board of
Directors and the shareholders, and in general, shall perform all duties usually
incident to the office of the President. He shall have such other duties as may,
from time to time, be prescribed by the Board of Directors.
<PAGE>
Section 4.06. Vice President. Each Vice President, if one or more are
elected, shall have such powers and shall perform such duties as may be
specified in the Bylaws or prescribed by the Board of Directors or by the
President. In the event of the absence or disability of the President, Vice
Presidents shall succeed to his power and duties in the order designated by the
Board of Directors.
Section 4.07. Secretary. The Secretary, if one is elected, shall give
proper notice of meetings of shareholders and directors. He shall perform such
other duties as may, from time to time, be prescribed by the Board of Directors
or by the President.
Section 4.08. Treasurer. The Treasurer shall be the chief financial
officer and shall keep accurate financial records for the corporation. He shall
deposit all moneys, drafts and checks in the name of, and to the credit of, the
corporation in such banks and depositaries as the Board of Directors shall, from
time to time, designate. He shall have power to endorse, for deposit, all notes,
checks and drafts received by the corporation. He shall disburse the funds of
the corporation, as ordered by the Board of Directors, making proper vouchers
therefor. He shall render to the President and the directors, whenever
requested, an account of all his transactions as Treasurer and of the financial
condition of the corporation, and shall perform such other duties as may, from
time to time, be prescribed by the Board of Directors or by the President.
Section 4.09. Compensation. The officers of this corporation shall
receive such compensation for their services as may be determined, from time to
time, by resolution of the Board of Directors.
ARTICLE V.
SHARES AND THEIR TRANSFER
Section 5.01. Certificates for Shares. All shares of the corporation
shall be certificated shares. Every owner of shares of the corporation shall be
entitled to a certificate, to be in such form as shall be prescribed by the
Board of Directors, certifying the number of shares of the corporation owned by
such shareholder. The certificates for such shares shall be numbered in the
order in which they shall be issued and shall be signed, in the name of the
corporation, by the chief executive officer or by such other officer as the
Board of Directors may designate. A signature on a certificate may be a
facsimile. Every certificate surrendered to the corporation for exchange or
transfer shall be cancelled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled, except in cases provided for in Section 5.04.
Section 5.02. Issuance of Shares. The Board of Directors is authorized
to cause to be issued shares of the corporation up to the full amount authorized
by the Articles of Incorporation in such amounts as may be determined by the
Board of Directors and as may be permitted by law. No shares shall be issued
except in consideration of cash or other property, tangible or intangible,
received or to be received by the corporation under a written agreement, of
services rendered or to be rendered to the corporation under a written
agreement, or of an amount transferred from surplus to capital upon a share
dividend. At the time of such issuance of shares, the Board of Directors shall
state, by resolution, their determination of the fair value to the corporation
in monetary terms of any consideration other than cash for which shares are
issued.
Section 5.03. Transfer of Shares. Transfer of shares on the books of
the corporation may be authorized only by the shareholder named in the
certificate, or the shareholder's legal representative, or the shareholder's
duly authorized attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat as the absolute owner of
shares of the corporation, the person or persons in whose name shares are
registered on the books of the corporation.
<PAGE>
Section 5.04. Loss of Certificates. Except as otherwise provided by
Minnesota Statutes Section 302A.419, any shareholder claiming a certificate for
shares to be lost, stolen or destroyed shall make an affidavit or that fact in
such form as the Board of Directors shall require and shall, if the Board of
Directors so requires, give the corporation a bond of indemnity in form, in an
amount, and with one or more sureties satisfactory to the Board of Directors, to
indemnify the corporation against any claim which may be made against it on
account of the reissue of such certificate, whereupon a new certificate may be
issued in the same tenor and for the same number of shares as the one alleged to
have been lost, stolen or destroyed.
ARTICLE VI.
DIVIDENDS, RECORD DATE
Section 6.01. Dividends. Subject to the provisions of the Articles of
Incorporation, of these Bylaws, and of law, the Board of Directors may declare
dividends whenever, and in such amounts as, in its opinion, are deemed
advisable.
Section 6.02. Record Date. Subject to any provisions of the Articles
of Incorporation, the Board of Directors may fix a date not exceeding 120 days
preceding the date fixed for the payment of any dividend as the record date for
the determination of the shareholders entitled to receive payment of the
dividend and, in such case, only shareholders of record on the date so fixed
shall be entitled to receive payment of such dividend notwithstanding any
transfer of shares on the books of the corporation after the record date.
ARTICLE VII.
BOOKS AND RECORDS, FISCAL YEAR
Section 7.01. Share Register. The Board of Directors of the
corporation shall cause to be kept at its principal executive office, or at
another place or places within the United States determined by the board:
(1) a share register not more than one year old, containing the
names and addresses of the shareholders and the number and
classes of shares held by each shareholder; and
(2) a record of the dates on which certificates or transaction
statements representing shares were issued.
Section 7.02. Other Books and Records. The Board of Directors shall
cause to be kept at its principal executive office, or, if its principal
executive office is not in Minnesota, shall make available at its registered
office within ten days after receipt by an officer of the corporation of a
written demand for them made by a shareholder or other person authorized by
Minnesota Statutes Section 302A.461, originals or copies of:
(1) records of all proceedings of shareholders for the last
three years;
(2) records of all proceedings of the board for the last three
years;
(3) its articles and all amendments currently in effect;
(4) its bylaws and all amendments currently in effect;
(5) financial statements required by Minnesota Statutes Section
302A.463 and the financial statement for the most recent
interim period prepared in the course of the operation of
the corporation for distribution to the shareholders or to a
governmental agency as a matter of public record;
<PAGE>
(6) reports made to shareholders generally within the last three
years;
(7) a statement of the names and usual business addresses of its
directors and principal officers;
(8) any shareholder voting or control agreements of which the
corporation is aware; and
(9) such other records and books of account as shall be
necessary and appropriate to the conduct of the corporate
business.
ARTICLE VIII.
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. The corporation may lend money to, guarantee an
obligation of, become a surety for, or otherwise financially assist a person if
the transaction, or a class of transactions to which the transaction belongs, is
approved by the affirmative vote of a majority of the directors present and:
(1) is in the usual and regular course of business of the
corporation;
(2) is with, or for the benefit of, a related corporation, an
organization in which the corporation has a financial
interest, an organization with which the corporation has a
business relationship, or an organization to which the
corporation has the power to make donations;
(3) is with, or for the benefit of, an officer or other employee
of the corporation or a subsidiary, including an officer or
employee who is a director of the corporation or a
subsidiary, and may reasonably be expected, in the judgment
of the board, to benefit the corporation; or
(4) has been approved by the affirmative vote of the holders of
two-thirds of the outstanding shares.
The loan, guarantee, surety contract or other financial assistance may be with
or without interest, and may be unsecured, or may be secured in the manner as a
majority of the directors approve, including, without limitation, a pledge of or
other security interest in shares of the corporation. Nothing in this section
shall be deemed to deny, limit, or restrict the powers of guaranty or warranty
of the corporation at common law or under a statute of the State of Minnesota.
ARTICLE IX.
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. The corporation shall indemnify such persons, for such
expenses and liabilities, in such manner, under such circumstances, and to such
extent as permitted by Minnesota Statutes Section 302A.521, as now enacted or
hereafter amended.
<PAGE>
ARTICLE X.
AMENDMENTS
Section 10.01. Unless otherwise provided in the Articles of
Incorporation, these Bylaws may be amended or altered by a vote of the majority
of the whole Board of Directors at any meeting provided that notice of such
proposed amendment shall have been given in the notice given to the directors of
such meeting. Unless otherwise provided in the Articles of Incorporation, such
authority in the Board of Directors is subject to the power of the shareholders
to change or repeal such Bylaws by a majority vote of the shareholders present
or represented at any regular or special meeting of shareholders called for such
purpose, and the Board of Directors shall not make or alter any Bylaws fixing a
quorum for meetings of shareholders, prescribing procedures for removing
directors of filling vacancies in the Board of Directors, or fixing the number
of directors or their classifications, qualifications, or terms of office,
except that the Board of Directors may adopt or amend any Bylaw to increase
their number.
ARTICLE XI.
SECURITIES OF OTHER CORPORATIONS
Section 11.01. Voting Securities Held by the Corporation. Unless
otherwise ordered by the Board of Directors, the President shall have full power
and authority on behalf of the corporation (a) to attend any meeting of security
holders of other corporations in which the corporation may hold securities and
to vote such securities on behalf of this corporation; (b) to execute any proxy
for such meeting on behalf of the corporation; or (c) to execute a written
action in lieu of a meeting of such other corporation on behalf of this
corporation. At such meeting, the President shall possess and may exercise any
and all rights and powers incident to the ownership of such securities that the
corporation possesses. The Board of Directors may, from time to time, grant such
power and authority to one or more other persons and may remove such power and
authority from the President upon any other person or persons.
Section 11.02. Purchase and Sale of Securities. Unless otherwise
ordered by the Board of Directors, the President shall have full power and
authority on behalf of the corporation to purchase, sell, transfer or encumber
any and all securities of any other corporation owned by the corporation, and
may execute and deliver such documents as may be necessary to effectuate such
purchase, sale, transfer or encumbrance. The Board of Directors may, from time
to time, confer like powers upon any other person or persons.
HEALTH RISK MANAGEMENT, INC.
AMENDED AND RESTATED 1992 LONG-TERM INCENTIVE PLAN
ARTICLE I - INTRODUCTION
1.01 History. On September 14, 1992, the Board adopted the Health Risk
Management, Inc. 1992 Long-Term Incentive Plan, which the shareholders
of the Company approved on November 19, 1992, and which has been
amended from time to time.
1.02 Purpose. The primary purpose of the Amended and Restated 1992
Long-Term Incentive Plan (the Plan) is to advance the interests of
Health Risk Management, Inc. and its stockholders by affording
officers and other key employees of the Corporation and its
Subsidiaries, upon whose judgment, initiative and efforts the
Corporation and its Subsidiaries largely depend for the successful
conduct of their business, a proprietary interest in the growth and
performance of the Corporation.
ARTICLE II - DEFINITIONS
2.01 "Affiliate" means a Parent or Subsidiary of the Corporation.
2.02 "Award" means the grant of any form of Incentive Stock Option,
Nonqualified Stock Option, Restricted Stock Award, or any number of
Performance Units, whether granted singly, in combination or in
tandem, to a Plan Participant pursuant to the Plan on such terms,
conditions and limitations as the Committee may establish in order to
fulfill the objectives of the Plan.
2.03 "Award Agreement" means the agreement executed by the Corporation or
its Subsidiary and a Participant that sets forth the terms, conditions
and limitations applicable to the Award.
2.04 "Board" means, at any particular time, the then duly elected and
acting directors of the Corporation.
2.05 "Committee" means the Compensation Committee of the Board (or any
successor to such Committee), which shall consist solely of two or
more directors who shall be appointed by and serve at the pleasure of
the Board. To the extent necessary for compliance with Rule 16b-3, or
any successor provision, each of the members of the Committee shall be
a `Non-Employee Director,' as such term is defined in Rule 16b-3 of
the General Rules and Regulations under the Securities Exchange Act of
1934, as amended from time to time.
2.06 "Corporation" means Health Risk Management, Inc., a Minnesota
corporation, and any successor in interest by way of consolidation,
operation of law, merger or otherwise.
2.07 "Date of Grant" means the date an Award is approved by resolution of
the Committee, or such later date as may be specified in such
resolution; provided, however, that for Nonqualified Stock Options
granted to Outside Directors pursuant to Article VIII, the "Date of
Grant" shall be the date specified in Section 8.01.
<PAGE>
2.08 "Effective Date" means the date the Plan is adopted by the Board under
Section 14.01 of Article XIV of the Plan.
2.09 "Eligible Employee" means those key employees and officers of the
Corporation or a Subsidiary upon whose judgment, initiative and
efforts the Corporation and its Subsidiaries largely depend for the
successful conduct of their business.
2.10 "Fair Market Value" means, with respect to shares of Stock on any
applicable date:
(a) If the Stock is reported in the national market
system or is listed upon an established exchange
or exchanges, the closing price of such Stock in
such national market system or on such stock
exchange or exchanges on the applicable date or,
if no sale of such Stock shall have occurred on
that date, the next preceding date on which there
was such a reported sale; or
(b) If the Stock is not so reported in the national
market system or listed upon an exchange, the mean
between the "bid" and "asked" prices quoted by a
recognized specialist in the Stock on the
applicable date or, if there are no quoted "bid"
and "asked" prices on such date, on the next
preceding date for which there are such quotes; or
(c) If the Stock is not publicly traded as of the
applicable date, the Fair Market Value of the
Stock on the applicable date as determined by the
Committee by applying principals of valuation, and
the Committee shall have full authority and
discretion in establishing the Fair Market Value.
2.11 "Fiscal Year" means the twelve (12) month period beginning on July 1
and ending on June 30 of each year.
2.12 "Incentive Stock Option" means an option to purchase Stock awarded to
a Participant under Article VI of this Plan that qualifies as an
Incentive Stock Option within the meaning of Internal Revenue Code
Section 422.
2.13 "Incumbent Director" means an Outside Director who was serving as a
member of the Board on September 14, 1992.
2.14 "Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended from time to time, and the regulations thereunder.
2.15 "Market Value Threshold" means the first date following the September
14, 1992, upon which the average of the closing price of a share of
Stock for thirty (30) consecutive trading days equals or exceeds
$15.00, subject to adjustment pursuant to Section 4.03 of the Plan;
provided, however, that in the event of a sale of substantially all of
the Corporation's assets or in the event of a merger, consolidation,
exchange, reorganization, liquidation, divestiture (including a
spin-off) or similar transaction in which the shareholders of the
Corporation have the opportunity to receive consideration having a
value of at least $15.00 per share of Stock, the Market Value
Threshold shall be deemed to be satisfied upon the date that such
transaction becomes effective.
<PAGE>
2.16 "New Director" means an Outside Director who becomes a member of the
Board on or after the Effective Date of the Plan.
2.17 "Nonqualified Stock Option" means an option to purchase Stock awarded
to a Participant under Article VII or to an Outside Director under
Article VIII of this Plan but which does not qualify as an Incentive
Stock Option.
2.18 "Outside Director" means a member of the Board who is not an employee
of the Corporation or any of its Affiliates.
2.19 "Parent" means a corporation as defined in Internal Revenue Code
Section 424(e) applying such Section 424(e) by treating the
Corporation as the employer corporation.
2.20 "Participant" means an Eligible Employee to whom an Award has been
made under the Plan.
2.21 "Performance Goal" means, with respect to a Performance Unit Award, a
specified initial or cumulative business or financial objective
whether or not related to any equity security of the Corporation, the
satisfaction of which shall be a condition precedent to the vesting of
all or a portion of that Performance Unit Award.
2.22 "Performance Period" means, with respect to a Performance Unit Award,
the designated period set forth in an Award Agreement over which the
Performance Units may vest. Participants who receive a Performance
Unit Award for any Performance Period shall be entitled to receive
additional Performance Unit Awards for subsequent Performance Periods
whether or not such Performance Periods overlap.
2.23 "Performance Unit" means a unit having a cash equivalent value
determined by the Committee on the basis of achievement by the
Corporation, by a specified Subsidiary, or by a specified operating
unit within the Corporation or Subsidiary of business or financial
objectives which shall be set forth in the terms of an Award Agreement
and which may or may not be related to any equity security of the
Corporation.
2.24 "Plan" means the Amended and Restated Health Risk Management, Inc.
1992 Long-Term Incentive Plan, as set forth herein, as the same may be
from time to time amended.
2.25 "Restricted Stock Award" means shares of Stock awarded to a
Participant under Article IX of this Plan.
2.26 "Section 16(b) Participant" means a Participant who is subject to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, or
its successor, as amended.
2.27 "Stock" means the Corporation's Common Stock, par value $0.01 per
share.
2.28 "Subsidiary" means a corporation as defined in Internal Revenue Code
Section 424(f) applying such Section 424(f) by treating the
Corporation as the employer corporation.
2.29 "Subsidiary Board" means, at any particular time, the then duly
elected and acting directors of any Subsidiary of the Corporation.
2.30 "Subsidiary Director" means a member of any Subsidiary Board.
<PAGE>
ARTICLE III - ADMINISTRATION
3.01 Administration. Except for those matters expressly reserved to the
Board pursuant to any provisions of the Plan, and except for all
matters relating to the grant of Nonqualified Stock Options to Outside
Directors and Subsidiary Directors pursuant to Article VIII, the
Committee shall have full responsibility for administration of the
Plan, which responsibility shall include, but shall not be limited to,
the following:
(a) The Committee shall review and approve any and all
Awards to be made to Eligible Employees
recommended by the management of the Corporation
or its Subsidiaries in accordance with and subject
to the provisions of the Plan;
(b) The Committee shall, subject to the provisions of
the Plan, establish, adopt and revise such rules
and procedures for administering the Plan, shall
prescribe the form of the Award Agreements (which
may vary from Participant to Participant)
evidencing each Award, and shall make all other
determinations as it may deem necessary or
advisable for the administration of the Plan;
(c) With the exception of the Nonqualified Stock
Options granted to Outside Directors and
Subsidiary Directors pursuant to Article VIII, the
Committee shall, subject to the provisions of the
Plan, determine the number and type of Awards and
all terms and conditions that shall apply to such
Awards, including, but not limited to, the
Performance Goals, the Performance Period and the
formula for the valuation of Performance Units in
connection with the Performance Unit Awards. The
Committee may, in its discretion, consider the
recommendations of the management of the
Corporation or its Subsidiaries when determining
such terms and conditions for such Awards.
(d) The Committee shall have the exclusive authority
to interpret the provisions of the Plan, and each
such interpretation or determination shall be
conclusive and binding for all purposes and on all
persons, including, but not limited to, the
Corporation and its Subsidiaries, the stockholders
of the Corporation and its Subsidiaries, the
Committee and each of its members thereof, the
directors, officers and employees of the
Corporation and its Subsidiaries, and the
Participants and the respective
successors-in-interest of all of the foregoing;
(e) The Committee shall keep minutes of its meetings
regarding the Plan and shall provide copies to the
Board.
3.02 Options Granted to Directors. The Board shall have full responsibility
for administering all matters relating to the grant of any
Nonqualified Stock Options to Outside Directors and Subsidiary
Directors pursuant to Article VIII of this Plan.
<PAGE>
ARTICLE IV - STOCK SUBJECT TO PLAN
4.01 Number. Subject to the approval of the Corporation's shareholders, the
total number of shares of Stock available for grants to Participants
directly or indirectly under all forms of Awards under the Plan shall
not exceed Eight Hundred Thousand (800,000) shares, except to the
extent adjustments are made pursuant to Section 4.03 of the Plan.
Shares of Stock to be awarded may be either treasury or authorized but
unissued shares. If the shareholders do not approve the reservation of
Eight Hundred Thousand (800,000) shares of Stock for Awards under the
Plan, the number of shares of Stock available under the Plan shall
remain at Four Hundred Thousand (400,000) shares, which was the number
of shares of Stock originally reserved under the Plan as adopted by
the Board on September 14, 1992, and approved by the shareholders on
November 19, 1992.
4.02 Unused Shares. In the event a Restricted Stock Award, an Incentive
Stock Option Award or a Nonqualified Stock Option Award granted under
the Plan for any reason expires or is terminated prior to the exercise
thereof, the shares of Stock allocable to the unexercised portion of
such Restricted Stock Award, Incentive Stock Option or Nonqualified
Stock Option shall continue to become available for grants of
Restricted Stock Awards, Incentive Stock Options or Nonqualified Stock
Options under the Plan.
4.03 Capital Adjustments. In the event of an increase or decrease in the
number of shares of Stock or in the event the Stock is changed into or
exchanged for a different number or kind of shares of stock or other
securities of the Corporation or of another corporation by reason of a
reorganization, merger, consolidation, divestiture (including a
spin-off), liquidation, recapitalization, reclassification, stock
dividend, stock split, combination of shares, rights offering or any
other change in the corporate structure or shares of the Corporation,
the Board (or, if the Corporation is not the surviving corporation in
any such transaction, the board of directors of the surviving
corporation), in its sole discretion, shall adjust the number and kind
of securities subject to and reserved under the Plan and, to prevent
the dilution or enlargement of rights of Participants, Subsidiary
Directors and Outside Directors, shall adjust the number and kind of
securities subject to outstanding Awards and, where applicable, the
option price per share for such securities. Additional shares which
may be credited to such outstanding Awards shall be subject to the
same restrictions that apply to the securities with respect to which
the adjustment relates.
Notwithstanding the foregoing or any other provision in this Plan to
the contrary, and subject to Section 11.04 of Article XI, in the event
of a sale by the Corporation of substantially all of its assets and
the consequent discontinuance of its business or in the event of a
merger, consolidation, exchange, reorganization, reclassification,
extraordinary dividend, divestiture (including a spin-off) or
liquidation of the Corporation (collectively referred to as a
"transaction') after which the Corporation is not the surviving
corporation, the Board may, in connection with the Board's adoption of
the plan for such transaction, in its sole discretion, provide for one
or more of the following:
<PAGE>
(a) That all outstanding Incentive Stock Options and
Nonqualified Stock Options shall become
exercisable in full;
(b) That this Plan shall terminate and that all
outstanding Incentive Stock Options and
Nonqualified Stock Options not exercised prior to
a date specified by the Board (which date shall
give Participants, Outside Directors and
Subsidiary Directors the right to exercise such
Options prior to the effectiveness of the
transaction) shall be canceled;
(c) That this Plan shall continue with respect to the
exercise of Incentive Stock Options and
Nonqualified Stock Options which were outstanding
as of the date of the Board's adoption of the plan
for such transaction and, if applicable, provide
Participants, Outside Directors and Subsidiary
Directors the right to exercise their respective
Options as to an equivalent number of shares of
stock of any corporation succeeding the
Corporation by reason of such transaction;
(d) That Participants, Outside Directors and
Subsidiary Directors holding outstanding Incentive
Stock Options and Nonqualified Stock Options shall
receive, with respect to each share of Stock
subject to such Options, as of the effective date
of any such transaction, cash in an amount equal
to the excess of the Fair Market Value of such
Stock on the date immediately preceding the
effective date of such transaction over the option
price per share of such Options; provided that the
Board may, in lieu of such cash payment,
distribution to such Participants, Outside
Directors and Subsidiary Directors shares of Stock
of the Corporation or shares of stock of any
corporation succeeding the Corporation by reason
of such transaction, such shares having a value
equal to the cash payment provided by this Section
4.03(d);
(e) That all restrictions on the transferability of
shares subject to Restricted Stock Awards shall
lapse;
(f) That, to the extent Performance Units granted
under Article X have vested prior to the effective
date of the transaction as the Committee, in its
sole discretion, shall determine, Participants
shall receive payment for the value of such
Performance Units as provided in Sections 10.03
and 10.04.
provided, however, that the Board may restrict the rights of, or the
applicability of this Section 4.03 to Section 16(b) Participants,
Outside Directors and Subsidiary Directors to the extent necessary to
comply with the requirements of Section 16(b), or any successor
provision, of the Securities Exchange Act of 1934, as amended. The
grant of an Award pursuant to the Plan shall not limit in any way the
right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes in its capital or
business structure or to merge, exchange or consolidate or to
dissolve, liquidate, sell or transfer all or any part of its business
or assets.
<PAGE>
ARTICLE V - PARTICIPATION
5.01 Participants. Participants in the Plan shall be those Eligible
Employees who, in the judgment of the Committee, following
recommendation by management of the Corporation or its Subsidiaries,
have performed, are performing or during the period of their Award
will perform, vital services in the management, operation and
development of the Corporation or its Subsidiaries, and have
significantly contributed, are significantly contributing or are
expected to significantly contribute to the achievement of long-term
corporate objectives. Participants may be granted from time to time
one or more Restricted Stock Awards, Performance Units, Incentive
Stock Options, or Nonqualified Stock Options; provided, however, that
the grant of each Award shall be separately approved by the Committee;
and, provided further, that the receipt of one such Award shall not
result in the automatic receipt of any other Award. Upon determination
by the Committee that an Award is to be granted to a Participant, an
Award Agreement shall be executed by the Corporation and by such
Participant, specifying the terms, conditions, rights and duties
related thereto.
5.02 Directors. Outside Directors and Subsidiary Directors shall be
eligible for grants of Nonqualified Stock Options pursuant to the
provisions of Article VIII.
ARTICLE VI - INCENTIVE STOCK OPTIONS
6.01 Grant of Incentive Stock Options. In accordance with the provisions of
the Plan, the Committee shall approve, following recommendation by
management of the Corporation or its Subsidiaries, the Eligible
Employees to whom Incentive Stock Options shall be granted. The
Committee shall determine the number of shares to be subject to each
Incentive Stock Option, the time at which such Option shall be
granted, whether such Option shall be granted in exchange for the
cancellation and termination of a previously granted Incentive Stock
Option under the Plan or otherwise, the extent to which an Incentive
Stock Option may be exercisable upon the Participant's termination of
employment, which may differ depending upon the reason for such
termination, the manner in which an Incentive Stock Option may be
exercised and the form of the Award Agreement that shall evidence each
Incentive Stock Option. Except as otherwise provided in this Article
VI, the Committee shall determine the terms, conditions and other
provisions of each Award Agreement, which may vary from Participant to
Participant and which may contain such limitations and restrictions as
shall be necessary to ensure that such Option will be considered an
Incentive Stock Option as defined in Internal Revenue Code Section 422
or to conform to any change therein. Each Participant shall enter into
an Award Agreement with the Corporation with respect to the grant of
each Incentive Stock Option.
6.02 Option Price. To the extent required to qualify the Option as an
Incentive Stock Option under Internal Revenue Code Section 422, the
option price per share shall not be less than one hundred percent
(100%) of the Fair Market Value of one share of Stock as of the Date
of Grant except that, if a Participant owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of
stock of the Corporation or its Affiliate, the option price per share
shall not be less than one hundred ten percent (110%) of the Fair
Market Value of one share of Stock as of the Date of Grant.
<PAGE>
6.03 Duration and Exercise of Options.
(a) Duration of Incentive Stock Options. The period
during which an Incentive Stock Option granted
under the Plan may be exercised shall be
established by the Committee, and shall be set
forth in the Award Agreement, but in no event
shall any Incentive Stock Option be exercisable
during a term of more than ten (10) years after
the Date of Grant; provided, however, that if a
Participant owns stock possessing more than ten
percent (10%) of the total combined voting power
of all classes of stock of the Corporation or its
Affiliate, the Incentive Stock Option shall be
exercisable during a period of not more than five
(5) years after the Date of Grant.
(b) Exercisability of Incentive Stock Options.
(1) The Committee shall have discretion to
determine when an Incentive Stock Option
becomes exercisable and may provide that
the Incentive Stock Option shall become
exercisable in installments. If the
Participant does not purchase in any
year the full number of shares which the
Participant is entitled to purchase in
that year, the Participant may, if
provided in the Award Agreement,
purchase in any subsequent year such
previously unpurchased shares in
addition to those that the Participant
is otherwise entitled to purchase.
(2) In the event an Incentive Stock Option
is immediately exercisable at the Date
of Grant, the manner of exercising such
Option in the event it is not
immediately exercised in full shall be
specified in the Award Agreement.
(3) The Committee may accelerate the
exercise date of any Incentive Stock
Option which is not immediately
exercisable at the Date of Grant as the
Committee, in its discretion, deems
advisable.
(4) The Award Agreement shall set forth all
provisions relating to the
exercisability of Incentive Stock
Options.
6.04 Payment of Option Price. Upon the exercise of any Incentive Stock
Option granted pursuant to this Plan, the purchase price for such
shares of Stock subject to such Option shall be paid in cash unless
the Committee, in its sole discretion and subject to any applicable
rules or regulations it may adopt, allows such payment to be made, in
whole or in part, by the transfer from the Participant to the
Corporation of previously acquired shares of Stock. Any Stock so
transferred shall be valued at Fair Market Value on the day
immediately preceding the effective exercise of the Incentive Stock
Option. For purposes of this Section 6.04, "previously acquired shares
of Stock" shall include shares of Stock that are already owned by the
Participant at the time of exercise.
<PAGE>
6.05 Rights as a Shareholder. The Participant shall have no rights as a
shareholder with respect to any shares of Stock subject to an
Incentive Stock Option until the Participant becomes the holder of
record of such shares. Except as provided in Section 4.03, no
adjustments shall be made for dividends or other cash distributions or
for other rights that have a record date preceding the date the
Participant becomes the holder of record of such shares of Stock.
ARTICLE VII - NONQUALIFIED STOCK OPTIONS
7.01 Grant of Nonqualified Stock Options. In accordance with the provisions
of the Plan, the Committee shall approve, following recommendation by
management of the Corporation or its Subsidiaries, the Eligible
Employees to whom Nonqualified Stock Options shall be granted under
this Article VII. The Committee shall determine the number of shares
to be subject to each Nonqualified Stock Option, the time at which
such Option shall be granted, whether such Option shall be granted in
exchange for the cancellation and termination of a previously granted
Nonqualified Stock Option under the Plan or otherwise, the extent to
which a Nonqualified Stock Option may be exercisable upon the
Participant's termination of employment, which may differ depending
upon the reason for such termination, the manner in which a
Nonqualified Stock Option may be exercised and the form of the Award
Agreement that shall evidence each Nonqualified Stock Option. Except
as otherwise provided in this Article VII, the Committee shall
determine the terms, conditions and other provisions of each Award
Agreement, which may vary from Participant to Participant. Each
Participant shall enter into an Award Agreement with the Corporation
with respect to the grant of each Nonqualified Stock Option.
7.02 Option Price. Unless otherwise determined by the Committee, the option
price per share shall not be less than one hundred percent (100%) of
the Fair Market Value of one share of Stock as of the Date of Grant.
7.03 Duration and Exercise of Options.
(a) Duration of Nonqualified Stock Options. The period
during which a Nonqualified Stock Option granted
under the Plan may be exercised shall be
established by the Committee, and shall be set
forth in the Award Agreement, but in no event
shall any Nonqualified Stock Option be exercisable
during a term of more than ten (10) years after
the Date of Grant.
<PAGE>
(b) Exercisability of Nonqualified Stock Options.
(1) The Committee shall have discretion to
determine when a Nonqualified Stock
Option becomes exercisable and may
provide that the Nonqualified Stock
Option shall become exercisable in
installments. If the Participant does
not purchase in any year the full number
of shares which the Participant is
entitled to purchase in that year, the
Participant may, if provided in the
Award Agreement, purchase in any
subsequent year such previously
unpurchased shares in addition to those
that the Participant is otherwise
entitled to purchase.
(2) In the event a Nonqualified Stock Option
is immediately exercisable at the Date
of Grant, the manner of exercising such
Option in the event it is not
immediately exercised in full shall be
specified in the Award Agreement.
(3) The Committee may accelerate the
exercise date of any Nonqualified Stock
Option which is not immediately
exercisable at the Date of Grant as the
Committee, in its discretion, deems
advisable.
(4) The Award Agreement shall set forth all
provisions relating to the
exercisability of Nonqualified Stock
Options.
7.04 Payment of Option Price. Upon the exercise of any Nonqualified Stock
Option granted pursuant to this Plan, the purchase price for such
shares of Stock subject to such Option shall be paid in cash unless
the Committee, in its sole discretion and subject to any applicable
rules or regulations it may adopt, allows such payment to be made, in
whole or in part, by the transfer from the Participant to the
Corporation of previously acquired shares of Stock. Any Stock so
transferred shall be valued at Fair Market Value on the day
immediately preceding the effective exercise of the Nonqualified Stock
Option. For purposes of this Section 7.04, "previously acquired shares
of Stock" shall include shares of Stock that are already owned by the
Participant at the time of exercise.
7.05 Rights as a Shareholder. The Participant shall have no rights as a
shareholder with respect to any shares of Stock subject to a
Nonqualified Option until the Participant becomes the holder of record
of such shares. Except as provided in Section 4.03, no adjustments
shall be made for dividends or other cash distributions or for other
rights that have a record date preceding the date the Participant
becomes the holder of record of such shares of Stock.
<PAGE>
ARTICLE VIII - NONQUALIFIED STOCK OPTIONS
FOR DIRECTORS
8.01 Grant of Nonqualified Stock Options.
(a) In accordance with the provisions of the Plan, the
Board shall determine the Outside Directors and
Subsidiary Directors to whom Nonqualified Stock
Options shall be granted under this Article VIII.
The Board shall determine the number of shares of
Stock to be subject to each Nonqualified Stock
Option, the time at which such Option shall be
granted, whether such Option shall be granted in
exchange for the cancellation and termination of a
previously granted Nonqualified Stock Option under
the Plan or otherwise, the extent to which a
Nonqualified Stock Option may be exercisable upon
the Outside Director's or Subsidiary Director's
termination of membership on the Board, which may
differ depending on the reason for such
termination, the manner in which a Nonqualified
Stock Option may be exercised and the form of the
Award Agreement that shall evidence each
Nonqualified Stock Option. Except as otherwise
provided in this Article VIII, the Board shall
determine the terms, conditions and other
provisions of each Award Agreement, which may vary
from Outside Director to Outside Director and from
Subsidiary Director to Subsidiary Director. Each
Outside Director or Subsidiary Director shall
enter into an Award Agreement with the Corporation
with respect to the grant of each Nonqualified
Stock Option.
In addition to the foregoing discretionary grants,
each Outside Director and Subsidiary Director
shall automatically be granted Nonqualified Stock
Options as provided in Sections 8.01(b) and
8.01(c).
(b) Initial Grants.
(1) On September 14, 1992, each Incumbent
Director was granted a Nonqualified
Stock Option to purchase three thousand
eight hundred (3,800) shares of stock,
Such Option shall remain subject to the
terms and conditions of this Plan.
(2) Each New Director who first becomes
elected to the Board on or after
September 14, 1992, shall be granted a
Nonqualified Stock Option to purchase
three thousand eight hundred (3,800)
shares of Stock on the date of such
election.
<PAGE>
(c) Annual Grants.
(1) If an Outside Director receives an
initial grant pursuant to Section
8.01(b) during the first six (6) months
of a Fiscal Year, the Outside Director
shall be granted a Nonqualified Stock
Option to purchase one thousand nine
hundred (1,900) shares of Stock on the
last day of the Fiscal Year in which the
Outside Director received such initial
grant and on the last day of each Fiscal
Year thereafter during which the Outside
Director continues to serve on the
Board.
(2) If an Outside Director receives an
initial grant pursuant to Section
8.01(b) during the last six (6) months
of a Fiscal Year, the Outside Director
shall be granted a Nonqualified Stock
Option to purchase one thousand nine
hundred (1,900) shares of Stock on the
last day of the Fiscal Year immediately
following the Fiscal Year in which the
Outside Director received such initial
grant and on the last day of each Fiscal
Year thereafter during which the Outside
Director continues to serve on the
Board.
(3) An Outside Director or a Subsidiary
Director may elect in writing to receive
a Nonqualified Stock Option in lieu of
all or any portion of the cash fees for
which the Outside Director or Subsidiary
Director may be entitled to receive
payment following the date of such
election, whether in the form of an
annual retainer or in the form of fees
for attending or chairing meetings of
the Board or Subsidiary Board or any
committee to which the Outside Director
or Subsidiary Director has been
appointed, and which would otherwise be
payable to the Outside Director or
Subsidiary Director during the Fiscal
Year for which such election has been
made. The number of shares subject to
such Nonqualified Stock Option shall be
determined by dividing the total dollar
amount subject to the election by an
amount equal to twenty-five percent
(25%) of the Fair Market Value of the
Stock of the Corporation as of the Date
of Grant. For purposes of this Section
8.01(c)(3), the "Date of Grant" shall be
the last day of the Fiscal Year for
which the election has been made.
Beginning with the 1998 Fiscal Year, an
election by an Outside Director or
Subsidiary Director to receive a
Nonqualified Stock Option pursuant to
this Section 8.01(c)(3) may be made at
any time prior to the Date of Grant on a
form prescribed by the Board.
<PAGE>
8.02 Option Price.
(a) The option price per share for all Nonqualified
Stock Options granted pursuant to Sections
8.01(b), 8.01(c)(1) and 8.01(c)(2) shall be one
hundred percent (100%) of the Fair Market Value of
one share of Stock as of the Date of Grant.
(b) The option price per share for all Nonqualified
Stock Options granted pursuant to Section
8.01(c)(3) shall be seventy-five percent (75%) of
the Fair Market Value of one share of Stock as of
the Date of Grant.
8.03 Duration and Exercise of Options.
(a) Duration of Options. Unless otherwise determined
by the Board and specified in the Award Agreement,
the period during which any Nonqualified Stock
Option granted to Outside Directors or Subsidiary
Directors under this Article VIII may be exercised
shall be five (5) years after the Date of Grant.
(b) Exercisability of Nonqualified Stock Options.
(1) Unless otherwise determined by the Board
and specified in the Award Agreement,
all Nonqualified Stock Options granted
to Outside Directors or Subsidiary
Directors pursuant to Section 8.01 shall
become exercisable with respect to
one-third of the shares subject to the
Nonqualified Stock Options on each of
the three succeeding anniversaries of
the Date of Grant; provided, however,
that the Outside Director or the
Subsidiary Director shall not be
entitled to exercise any portion of such
Nonqualified Stock Option that has
become exercisable until the Market
Value Threshold has been satisfied.
(2) If the Outside Director does not
purchase in any year the full number of
shares which the Outside Director is
entitled to purchase in that year, the
Outside Director shall be entitled to
purchase in any subsequent year such
previously unpurchased shares in
addition to those shares the Outside
Director is otherwise entitled to
purchase.
(3) In the event a Nonqualified Stock Option
is immediately exercisable at the Date
of Grant, the manner of exercising such
Option in the event it is not
immediately exercised in full shall be
specified in the Award Agreement.
<PAGE>
(4) The Board may accelerate the exercise
date of any Nonqualified Stock Option
which is not immediately exercisable at
the Date of Grant as the Board, in its
discretion, deems advisable.
(5) The Award Agreement shall set forth all
provisions relating to the
exercisability of Nonqualified Stock
Options.
8.04 Manner of Option Exercise. A Nonqualified Stock Option may be
exercised by an Outside Director or a Subsidiary Director in whole or
in part, subject to the conditions of this Plan and subject to such
other administrative rules as the Board may deem advisable, by
delivering to the principal office of the Corporation written notice
of the number of whole shares with respect to which the Nonqualified
Stock Option is being exercised and by paying the purchase price for
such shares in full. The exercise of the Nonqualified Stock Option
shall be deemed effective upon receipt of such notice by the
Corporation and upon payment that complies with the terms of this
Plan. As soon as practicable after the effective exercise of the
Nonqualified Stock Option, the Outside Director or Subsidiary Director
shall be recorded on the stock transfer books of the Corporation as
the owner of the shares purchased and the Corporation shall deliver to
the Outside Director or Subsidiary Director one or more duly issued
stock certificates evidencing such ownership.
8.05 Payment of Option Price. Upon the exercise of any Nonqualified Stock
Option granted to an Outside Director or Subsidiary Director pursuant
to this Article VIII, the purchase price for such shares of Stock
subject to such Option shall be paid in cash unless the Board, in its
sole discretion and subject to any applicable rules or regulations it
may adopt, allows such payment to be made, in whole or in part, by the
transfer from the Outside Director or Subsidiary Director to the
Corporation of previously acquired shares of Stock. Any Stock so
transferred shall be valued at Fair Market Value on the day
immediately preceding the effective exercise of the Nonqualified Stock
Option. For purposes of this Section 8.05, "previously acquired shares
of Stock" shall include shares of Stock that are already owned by the
Outside Director or Subsidiary Director at the time of exercise.
8.06 Rights as a Shareholder. The Outside Director or Subsidiary Director
shall have no rights as a shareholder with respect to any shares of
Stock subject to a Nonqualified Stock Option until the Outside
Director or Subsidiary Director becomes the holder of record of such
shares. Except as provided in Section 4.03, no adjustments shall be
made for dividends or other cash distributions or for other rights
that have a record date preceding the date the Outside Director or
Subsidiary Director becomes the holder of record of such shares of
Stock.
8.07 Termination of Status as a Director. Unless otherwise determined by
the Board and specified in the Award Agreement, in the event that an
Outside Director's membership on the Board or a Subsidiary Director's
membership on the Subsidiary Board terminates, the following
provisions shall apply:
<PAGE>
(a) If the Outside Director's membership on the Board
or the Subsidiary Director's membership on the
Subsidiary Board terminates for any reason other
than the Outside Director's or Subsidiary
Director's death or disability, the Outside
Director or Subsidiary Director shall be entitled
to exercise any Nonqualified Stock Option granted
to such Outside Director or Subsidiary Director
pursuant to this Article VIII to the extent such
Option was exercisable as of the date of such
termination for a period of three (3) months
following the date of such termination unless such
Option, by its terms, expires before the end of
such three-month period; provided, however, that
the Outside Director or Subsidiary Director shall
not be entitled to exercise any Nonqualified Stock
Option pursuant to this Section 8.07(a) unless,
prior to the expiration of the exercise period
specified herein, the Market Value Threshold has
been satisfied. To the extent that the
Nonqualified Stock Option is not exercisable as of
the date the Outside Director's membership on the
Board or the Subsidiary Director's membership on
the Subsidiary Board terminates for any reason
other than death or disability, or to the extent
the Outside Director or Subsidiary Director does
not exercise such Option within the period
specified in this Section 8.07(a), all rights of
the Outside Director or Subsidiary Director under
such Option shall be forfeited.
(b) If the Outside Director's membership on the Board
or the Subsidiary Director's membership on the
Subsidiary Board terminates because of disability,
the Outside Director or Subsidiary Director shall
be entitled to exercise any Nonqualified Stock
Option to the extent such Option was exercisable
as of the date the Outside Director's membership
on the Board or the Subsidiary Director's
membership on the Subsidiary Board is terminated
by reason of disability for a period of twelve
(12) months following the date of such termination
unless such Option, by its terms, expires before
the end of such twelve-month period; provided,
however, that the Outside Director or Subsidiary
Director shall not be entitled to exercise any
Nonqualified Stock Option pursuant to this Section
8.07(b) unless, prior to the expiration of the
exercise period specified herein, the Market Value
Threshold has been satisfied. To the extent that
such Option was not exercisable as of the date the
Outside Director's membership on the Board or the
Subsidiary Director's membership on the Subsidiary
Board terminates because of disability, or if the
Outside Director or Subsidiary Director does not
exercise the Nonqualified Stock Option within the
twelve-month period specified in this Section
8.07(b), all rights of the Outside Director or
Subsidiary Director under such Option shall be
forfeited. For purposes of this Section 8.07(b),
"disability" shall mean a mental or physical
condition of the Outside Director or Subsidiary
Director resulting from illness, injury or disease
which, as determined by the Board, causes the
Outside Director to resign from the Board or the
Subsidiary Director to resign from the Subsidiary
Board and is reasonably expected to be of long and
indefinite duration or result in death.
<PAGE>
(c) If the Outside Director or Subsidiary Director
dies (i) while a member of the Board or Subsidiary
Board, (ii) within the three (3) months following
the termination of the Outside Director's
membership on the Board or the termination of the
Subsidiary Director's membership on the Subsidiary
Board in the case of Section 8.07(a) above, or
(iii) within the twelve (12) months following the
termination of the Outside Director's membership
on the Board or the termination of the Subsidiary
Director's membership on the Subsidiary Board in
the case of Section 8.07(b) above, any
Nonqualified Stock Option granted to such Outside
Director or Subsidiary Director shall become
immediately exercisable in full and may be
exercised by the Outside Director's or Subsidiary
Director's estate or any person who acquired the
right to exercise any Nonqualified Stock Option
granted to such Outside Director or Subsidiary
Director pursuant to this Article VIII by bequest
or inheritance until the date such Option expires
as specified in Section 8.03(a) above.
Notwithstanding the foregoing, the Outside
Director's or Subsidiary Director's estate or any
person who acquired the right to exercise such
Nonqualified Stock Option by bequest or
inheritance shall not be entitled to exercise any
portion of such Option pursuant to this Section
8.07(c) unless, prior to the expiration of the
exercise period specified herein, the Market Value
Threshold has been satisfied.
8.08 Investment Purpose. The Corporation shall require, as a condition to
the grant and exercise of any Nonqualified Stock Option pursuant to
this Article VIII, that any Stock acquired pursuant to such
Nonqualified Stock Option shall be acquired only for investment if, in
the opinion of counsel for the Corporation, such condition is required
or deemed advisable under securities laws or any other applicable law,
regulation or rule of any government or governmental agency. In this
regard, if requested by the Corporation, the Outside Director or
Subsidiary Director, prior to the acquisition of any shares of Stock
pursuant to any Nonqualified Stock Option, shall execute an investment
letter to the effect that the Outside Director or Subsidiary Director
is acquiring shares of Stock pursuant to such Option for investment
purposes only and not with the intention of making any distribution of
such shares and will not dispose of the shares in violation of the
applicable federal and state securities laws.
ARTICLE IX - RESTRICTED STOCK AWARDS
9.01 Grant of Restricted Stock Awards. In accordance with the provisions of
the Plan, the Committee shall approve, following recommendation by
management of the Corporation or its Subsidiaries, the Eligible
Employees to whom Restricted Stock Awards shall be granted, shall
determine the number of shares to be subject to each Restricted Stock
Award, the time at which the Restricted Stock Award is to be granted,
the manner in which restrictions on the transferability of shares of
Stock represented by the Restricted Stock Award will lapse including
the extent to which such restrictions may lapse upon the Participant's
termination of employment, which may differ depending upon the reason
for such termination, subject to the provisions of Section 9.03, and
such other provisions of the Restricted Stock Award as the Committee
may deem necessary or desirable. The Committee shall determine the
form of Award Agreement that shall evidence each Restricted Stock
Award and shall determine the terms, conditions and other provisions
of each Award Agreement, which may vary from Participant to
Participant. Each participant shall enter into an Award Agreement with
the Corporation with respect to the grant of each Restricted Stock
Award.
<PAGE>
9.02 Restrictions on Transfer. The shares of Stock awarded pursuant to a
Restricted Stock Award shall be subject to the following restrictions:
(a) No such share of Stock may be sold, transferred,
assigned, pledged, encumbered or otherwise
alienated or hypothecated unless and only to the
extent that restrictions shall have lapsed in
accordance with the Plan and the Award Agreement.
(b) Upon the grant of a Restricted Stock Award, the
Corporation shall cause to be issued stock
certificates representing the shares subject to
such Restricted Stock Award in the Participant's
name. The Corporation shall hold such stock
certificates until the restrictions set forth in
Section 9.02(a) lapse in accordance with the Plan
and the Award Agreement. Once the restrictions
have lapsed with respect to all or part of the
shares subject to the Restricted Stock Award, such
stock certificates shall be distributed to the
Participant.
(d) Notwithstanding the provisions of Section 9.02(b),
and subject to any terms, conditions or other
restrictions set forth in the Award Agreement, a
Participant receiving a Restricted Stock Award
shall, as of the Date of Grant, have the right to
vote such shares of Stock and to receive dividends
and other distributions made with respect to such
shares, but the Participant shall not, unless
otherwise determined by the Committee, have any
other rights as a shareholder. The terms,
conditions and restrictions set forth in the Award
Agreement shall also apply to any additional
shares of Stock received by a Participant as the
result of any dividend paid on the shares of Stock
subject to the Restricted Stock Award or as the
result of any stock split, stock distribution or
combination of shares that affects the shares of
Stock subject to the Restricted Stock Award.
9.03 Lapsing of Restrictions. The Committee shall have the discretion to
determine the times and extent to which restrictions on the
transferability of shares under each Restricted Stock Award shall
lapse, and the Award Agreement shall set forth all provisions relating
to the lapsing of such restrictions.
9.04 Modification of Lapsing Schedule. The Committee may, in its sole
discretion, modify the rate at which restrictions on transferability
of shares under a Restricted Stock Award shall lapse. Any such
modification shall apply only to those shares of Stock which are
restricted as of the effective date of the modification, and shall be
reflected in a resolution adopted by the Committee and, if deemed
appropriate by the Committee, in an amendment to any Award Agreement
with respect to which it applies.
<PAGE>
ARTICLE X - PERFORMANCE UNITS
10.01 Grant of Performance Units. In accordance with the provisions of the
Plan, the Committee shall approve, following recommendation by the
management of the Corporation or its Subsidiary, the Eligible
Employees to whom Performance Unit Awards shall be granted, and shall
determine the number of Performance Units to be subject to each
Performance Unit Award, the time at which such Performance Unit Award
shall be granted, the extent to which Performance Units may vest upon
the Participant's termination of employment, which may differ
depending upon the reason for such termination, and such other
provisions of the Performance Unit Award as the Committee may deem
necessary or desirable. The Committee shall determine the form of
Award Agreement that shall evidence each Performance Unit Award and
shall determine the terms, conditions and other provisions of each
Award Agreement, which may vary from Participant to Participant. Each
Participant shall enter into an Award Agreement with the Corporation
with respect to the grant of each Performance Unit Award.
10.02 Vesting of Performance Units. Each Performance Unit Award Agreement
shall set forth:
(a) The Performance Period over which Performance
Units may vest;
(b) The initial or cumulative Performance Goals which
must be satisfied prior to vesting of any portion
of the Performance Units represented by the
Performance Unit Award. Unless otherwise
determined by the Committee, such Performance
goals shall, for purposes of valuing each
Performance Unit under Section 10.03, include
threshold, target and maximum levels.
(c) The vesting schedule with respect to the
Performance Units, shall be determined by the
Committee and shall depend upon the attainment of
the initial or cumulative Performance Goals set
forth in the Award Agreement.
10.03 Valuation of Performance Units. The dollar value of each Performance
Unit that becomes vested and payable to a Participant pursuant to
Section 10.02(c) shall be determined by the Committee in accordance
with the formula set forth in the Award Agreement and in accordance
with any corresponding initial or cumulative Performance Goals.
10.04 Payment of Performance Unit Awards. The value of Performance Units
that have vested shall be paid to the Participant within thirty (30)
calendar days after the Committee determines whether the applicable
Performance Goals have been attained after the end of the Performance
Period. Such payment may, at the discretion of the Committee, be made
in cash, stock or any combination thereof. Any payment to be made to a
Participant shall be subject to the applicable withholding
requirements described in Section 15.06.
10.05 Amendment of Performance Unit Awards. The Committee may, at any time
during a Performance Period, suspend, modify or terminate a
Performance Unit Award upon the occurrence of any extraordinary event
which substantially affects the Corporation or the Subsidiary,
including, but not limited to, a merger, consolidation, exchange,
divestiture (including a spin-off), reorganization or liquidation of
the Corporation or Subsidiary or the sale by the Corporation or
Subsidiary of substantially all of its assets and the consequent
discontinuance of its business.
<PAGE>
ARTICLE XI - CHANGE OF CONTROL
11.01 Definitions. For purposes of this Article XI, the following
definitions shall apply:
(a) "Change of Control" shall mean any of the
following events:
(1) A merger or consolidation to which the
Corporation is a party if the
individuals and entities who were
shareholders of the Corporation
immediately prior to the effective date
of such merger or consolidation have,
immediately following the effective date
of such merger or consolidation,
beneficial ownership (as defined in Rule
13d-3 under the Securities Exchange Act
of 1934) of less than fifty percent
(50%) of the total combined voting power
of all classes of securities issued by
the surviving corporation for the
election of directors of the surviving
corporation;
(2) The direct or indirect beneficial
ownership (as defined in Rule 13d-3
under the Securities Exchange Act of
1934) of securities of the Corporation
representing, in the aggregate, twenty
percent (20%) or more of the total
combined voting power of all classes of
the Corporation's then issued and
outstanding securities by any person or
entity or by a group of associated
persons or entities acting in concert;
(3) The sale of the properties and assets of
the Corporation substantially as an
entirety, to any person or entity which
is not a wholly-owned subsidiary of the
Corporation;
(4) The shareholders of the Corporation
approve any plan or proposal for the
liquidation of the Corporation; or
<PAGE>
(5) A change in the composition of the Board
at any time during any consecutive
twenty-four (24) month period such that
the "Continuity Directors" cease for any
reason to constitute at least a seventy
percent (70%) majority of the Board. For
purposes of this event, "Continuity
Directors" means those members of the
Board who either:
(i) were directors at the
beginning of such consecutive
twenty-four (24) month period;
or
(ii) were elected by, or on the
nomination or recommendation
of, at least a two-thirds
(2/3) majority of the
then-existing Board of
Directors.
(b) "Change of Control Action" shall mean any payment
(including any benefit or transfer of property) in
the nature of compensation to or for the benefit
of a Participant, Outside Director or Subsidiary
Director under any arrangement which is considered
to be contingent on a Change of Control for
purposes of Internal Revenue Code Section 280G. As
used in this definition, the term "arrangement"
means any agreement between a Participant, Outside
Director or Subsidiary Director and the
Corporation or its Subsidiary and shall include,
without limitation, any and all of the
Corporation's or Subsidiary's salary, bonus,
incentive, restricted stock, stock option,
compensation or benefit plans, programs or
arrangements and this Plan.
<PAGE>
(c) "Change of Control Termination" shall mean, with
respect to a Participant, Outside Director or
Subsidiary Director, any of the following events
occurring within two (2) years after a Change of
Control:
(1) The termination of the Participant's
employment by the Corporation or its
Subsidiary for any reason, with or
without cause, except for conduct by the
Participant constituting (i) a felony
involving moral turpitude under either
federal law or the law of the state of
the Corporation's incorporation or (ii)
the Participant's willful failure to
fulfill his employment duties with the
Corporation or its Subsidiary; provided,
however, that for purposes of this
clause (ii), an act or failure to act by
the Participant shall not be "willful"
unless it is done, or omitted to be
done, in bad faith and without any
reasonable belief that the Participant's
action or omission was in the best
interests of the Corporation or its
Subsidiary; or
(2) The termination of employment with the
Corporation or its Subsidiary by the
Participant for Good Reason.
With respect to an Outside Director or Subsidiary
Director, "Change of Control Termination" shall
mean the termination of the Outside Director's
status as a member of the Board for any reason
within two (2) years after a Change of Control.
(d) "Good Reason" shall mean a good faith
determination by the Participant, in the
Participant's sole and absolute judgment, that any
one or more of the following events has occurred
without the Participant's express written consent
after a Change of Control:
(1) A change in the Participant's reporting
responsibilities, titles or offices as
in effect immediately prior to the
Change of Control, or any removal of the
Participant from or any failure to
re-elect the Participant to any of such
positions, which has the effect of
diminishing the Participant's
responsibility or authority;
(2) A reduction by the Corporation or its
Subsidiary in the Participant's base
salary as in effect immediately prior to
the Change of Control or as the same may
be increased from time to time
thereafter;
<PAGE>
(3) A requirement imposed by the Corporation
or its Subsidiary on the Participant
that results in the Participant being
based at a location that is outside of a
twenty-five (25) radius mile of the
Participant's job location at the time
of the Change of Control;
(4) Without the adoption of a replacement
plan, program or arrangement that
provides benefits to the Participant
that are equal to or greater than those
benefits that are discontinued or
adversely affected:
(a) The failure by the Corporation
or Subsidiary to continue in
effect, within its maximum
stated term, any pension,
bonus, incentive, stock
ownership, purchase, option,
life insurance, health,
accident, disability, or any
other employee compensation or
benefit plan, program or
arrangement, in which the
Participant is participating
immediately prior to a Change
of Control; or
(b) The taking of any action by
the Corporation or its
Subsidiary that would
adversely affect the
Participant's participation or
materially reduce the
Participant's benefits under
any of such plans, programs or
arrangements; or
(5) Any action by the Corporation or its
Subsidiary that would materially
adversely affect the physical conditions
existing at the time of the Change of
Control in or under which the
Participant performs his or her
employment duties; or
(6) If the Participant's primary employment
duties are with a Subsidiary of the
Corporation, the sale, merger,
contribution, transfer or any other
transaction relating to the
Corporation's ownership interest in such
Subsidiary and which decreases such
ownership interest below the level
specified in Section 2.28; or
(7) Any material breach by the Corporation
or its Subsidiary of any employment
agreement between the Participant and
the Corporation or its Subsidiary.
"Good Reason" shall not include the Participant's
death or termination for any reason other than the
events specified in clauses (1) through (7) above.
11.02 Acceleration of Vesting/Put Option. Subject to the "Limitation on
Change of Control Compensation" contained in Section 11.03, in the
event of a Change of Control Termination of a Participant, Outside
Director or Subsidiary Director, and without further action of the
Board, the Committee or otherwise:
<PAGE>
(a) Each Incentive Stock Option or Nonqualified Stock
Option granted to such Participant, Outside
Director or Subsidiary Director pursuant to this
Plan shall become immediately exercisable in full,
any restrictions that may apply to the
exercisability of the Incentive Stock Option or
Nonqualified Stock Option, including but not
limited to the Market Value Threshold if
applicable, shall be deemed to be satisfied
(notwithstanding any provision in the Plan or the
Award Agreement to the contrary), and the
Incentive Stock Option or Nonqualified Stock
Option shall remain exercisable until the
expiration of such Option;
(b) All restrictions on the transferability of shares
of Stock subject to each Restricted Stock Award
granted to such Participant shall immediately
lapse and be of no further force or effect;
(c) The value of all Performance Units awarded to such
Participant shall immediately become payable,
notwithstanding any provision in the Plan or Award
Agreement to the contrary. For purposes of this
Section 11.02(c), the value of such Performance
Units shall be calculated (i) by determining the
value of such Performance Units pursuant to the
formula set forth in the Award Agreement and
assuming that the Company has achieved the target
level of any Performance Goals relating to such
Performance Units, and (ii) by multiplying the
value determined in (i) by a fraction, the
numerator of which shall be the number of days the
Participant worked for the Corporation or its
Subsidiary during the Performance Period relating
to such Performance Units immediately prior to the
Change in Control Termination, and the denominator
of which shall be the number of days in such
Performance Period.
(d) Within thirty (30) days following the Change of
Control Termination, the Participant may, by
written election delivered to an officer of the
Corporation, require the Corporation to purchase,
within five (5) days following delivery of the
election, the shares of the Participant's Stock
with respect to which restrictions have lapsed in
accordance with Section 11.02(b), at a price equal
to the Fair Market Value of such shares of Stock
on the day prior to the Change of Control;
provided, however, that if a Participant is a
Section 16(b) Participant and if the Change of
Control Termination occurs within the six (6)
month period following the later of the
Participant's most recent purchase of Stock which
is subject to Section 16(b) of the 1934 Act or the
grant of the applicable Restricted Stock Award,
then, to the extent necessary to comply with Rule
16b-3, as amended, the Participant shall be
entitled to deliver the written election specified
herein within thirty (30) days following the
expiration of such six-month period, and the
thirty-five (35) day period referenced in clause
Section 11.02(e) shall commence upon the
expiration of such six-month period. For purposes
of this Section 11.02(d), a "purchase of Stock
which is subject to Section 16(b) of the 1934 Act"
shall, to the extent provided by Section 16(b) of
the Securities and Exchange Act of 1934 and the
General Rules and Regulations issued thereunder,
include the establishment of or increase in a call
equivalent position or the liquidation of or
decrease in a put equivalent position with respect
to such Stock.
<PAGE>
(e) To the extent a Participant has not sold shares of
Stock to the Corporation pursuant to Section
11.02(d), certificates for such shares of Stock,
with no restrictive language, shall be delivered
to the Participant within thirty-five (35) days
following the Change of Control Termination.
11.03 Limitation on Change of Control Compensation. A Participant, Outside
Director or Subsidiary Director shall not be entitled to receive any
Change of Control Action which would, with respect to the Participant,
constitute a "parachute payment" for purposes of Internal Revenue Code
Section 280G. In the event any Change of Control Action would, with
respect to the Participant, constitute a "parachute payment," the
Participant shall have the right to designate those Change of Control
Action(s) which would be reduced or eliminated so that the Participant
will not receive a "parachute payment."
11.04 Limitations on Committee's and Board's Actions. Prior to a Change of
Control, a Participant, Outside Director or Subsidiary Director shall
have no rights under this Article XI, and the Board shall have the
power and right, within its sole discretion, by a resolution adopted
by a two-thirds (2/3) majority to rescind, modify or amend this
Article XI without any consent of the Participant, Outside Director or
Subsidiary Director. In all other cases, and notwithstanding the
authority granted to the Committee or Board to exercise discretion in
interpreting, administering, amending or terminating this Plan,
neither the Committee nor the Board shall, following a Change of
Control, have the power to exercise such authority or otherwise take
any action which is inconsistent with the provisions of this Article
XI.
Notwithstanding anything in this Article XI to the contrary, the Board
may restrict the rights of, or the applicability of this Article XI
to, Section 16(b) Participants, Outside Directors or Subsidiary
Directors to the extent necessary to comply with Section 16(b), or any
successor provision, of the Securities Exchange Act of 1934, as
amended.
<PAGE>
ARTICLE XII - RIGHTS OF ELIGIBLE EMPLOYEES AND PARTICIPANTS
12.01 Relationship to Employment. Nothing contained in the Plan, nor in any
Award granted pursuant to the Plan, shall confer upon any Participant
any right with respect to continuance of employment by the Corporation
or its Subsidiaries, nor interfere in any way with the right of the
Corporation or its Subsidiaries to terminate the Participant's
employment at any time.
12.02 Nontransferability of Award. No Incentive Stock Options, Restricted
Stock Awards or Performance Units shall be transferable, in whole or
in part, by the Participant, either voluntarily or involuntarily,
except by will or the laws of descent or distribution. If the
Participant attempts to transfer an Incentive Stock Option, Restricted
Stock Award or Performance Unit, or any portion of such Option, Award
or Unit, such transfer shall be void and the Incentive Stock Option,
Restricted Stock Award or Performance Unit shall terminate. An
Incentive Stock Option shall be exercisable during the Participant's
lifetime only by the Participant or by such Participant's guardian or
other legal representative.
Subject to the approval of the Committee, or, in the case of Outside
Directors or Subsidiary Directors, subject to the approval of the
Board, Nonqualified Stock Options granted under the Plan may be
transferred, for no consideration, by the Participant, the Outside
Director or Subsidiary Director to a member of the Participant's,
Outside Director's or Subsidiary Director's immediate family, to a
trust for the benefit of such family members or to a partnership in
which such family members are the only partners. The family member to
whom, or the trust or partnership to which, a Nonqualified Stock
Option has been transferred shall not be permitted to subsequently
transfer the Option, either voluntarily or involuntarily, unless such
transfer is to another family member, trust or partnership which meets
the requirements of this Section 12.02. No other transfers of
Nonqualified Stock Options, in whole or in part, by the Participant,
Outside Director or Subsidiary Director shall be permitted,
voluntarily or involuntarily, except by will or the laws of descent
and distribution. If the Participant, Outside Director or Subsidiary
Director attempts to transfer a Nonqualified Stock Option, or any
portion of such Option, in a manner not permitted by this Section
12.02, such transfer shall be void and the Nonqualified Stock Option
shall terminate.
ARTICLE XIII - AMENDMENT OR MODIFICATION
13.01 Authority to Amend and Procedure. Subject to the provisions of Article
XI, the Board or the Committee may, at any time and without further
action on the part of the shareholders of the Corporation, terminate
this Plan or make such amendments thereto as it deems advisable and in
the best interests of the Corporation or its Subsidiaries; provided,
however, that no such termination or amendment shall, without the
consent of a Participant, Outside Director, or Subsidiary Director
materially adversely affect or impair the right of a Participant,
Outside Director or Subsidiary Director with respect to an Award
already granted; and provided, further, that no amendment shall,
either directly or indirectly:
<PAGE>
(a) Materially increase the total number of shares of
Stock that may be awarded under this Plan to all
Participants, Outside Directors and Subsidiary
Directors, except for adjustments described in
Section 4.03 of this Plan;
(b) Materially increase the benefits accruing to
Participants, Outside Directors and Subsidiary
Directors under the Plan; or
(c) Materially modify the requirements as to
eligibility for participation in the Plan;
without the approval of the shareholders of the Corporation, but only
if such approval is required for compliance with the requirements of
any applicable law or regulation. Furthermore, the Plan may not,
without the approval of the shareholders of the Corporation, be
amended in any manner that will cause Incentive Stock Options to fail
to meet the requirements of Internal Revenue Code Section 422.
ARTICLE XIV - EFFECTIVE DATE AND DURATION OF PLAN
14.01 Effective Date of Plan. The Plan shall be deemed effective upon its
adoption by the Board, subject to the approval of Section 4.01 by the
shareholders of the Corporation within twelve (12) months following
the adoption of the Plan by the Board. If Section 4.01 of the Plan is
not approved by the shareholders of the Corporation, all provisions of
the Plan, including Section 4.01, as originally adopted on September
14, 1992, shall continue in full force and effect.
14.02 Duration of the Plan. Incentive Stock Options may be granted pursuant
to this Plan from time to time during a period of ten (10) years from
the Effective Date of the Plan. Nonqualified Stock Options, Restricted
Stock Awards and Performance Unit Awards may be granted pursuant to
this Plan from time to time after the Effective Date of the Plan and
until the Plan is discontinued or terminated by the Board or the
Committee.
ARTICLE XV - GENERAL PROVISIONS
15.01 Construction and Headings. The headings of the Articles, Sections and
their subparts within the Plan are for convenience only and are not
meant to be of substantive significance, and such headings shall not
add to or detract from the meaning of such Article, Section or
subpart.
15.02 Governing Law. The Plan and all rights and obligations thereunder
shall be construed in accordance with and governed by the laws of the
State of Minnesota, without regard to the conflict of laws provisions
of any jurisdiction.
15.03 Successor and Assigns. This Plan shall be binding upon and inure to
the benefit of the successors and assigns of the Corporation and its
Subsidiaries, including, without limitation, whether by way of merger,
consolidation, operation of law, assignment, purchase or other
acquisition of substantially all of the assets or business of the
Corporation or any of its Subsidiaries, and any and all such
successors and assigns shall absolutely and unconditionally assume all
of the Corporation's or the Subsidiary's obligations hereunder;
provided, however, that this Section 15.03 shall not apply with
respect to the successors or assigns of a Subsidiary in the event
that, prior to a Change of Control, the Subsidiary is sold, merged,
contributed or in any other manner transferred or for any other reason
ceases to be a Subsidiary of the Corporation.
<PAGE>
15.04 Survival of Provisions. The rights, remedies, agreements, obligations
and covenants of the parties contained in or made pursuant to the
Plan, any Award Agreement and any other notices or agreements in
connection therewith, including, without limitation, any notice of
exercise of an Incentive Stock Option or a Nonqualified Stock Option,
shall survive the execution and delivery of such notices and
agreements and shall survive the exercise of any Incentive Stock
Option or Nonqualified Stock Option, the payment of such Option's
exercise price and the delivery and receipt of the shares of Stock
subject to such Option, and shall remain in full force and effect.
15.05 Absence of Liability of Directors and Committee Members. No member of
the Board or of the Committee shall be liable, with respect to this
Plan, for any act, whether by commission or omission, taken by any
other member of the Board or the Committee, or by any officer, agent,
or employee of the Corporation or its Subsidiaries, nor shall any
member of the Board or the Committee be liable, except in
circumstances involving such member's own bad faith, for anything done
or omitted to be done by any person in connection with this Plan.
15.06 Withholding Taxes. The Corporation or its Subsidiaries is entitled to:
(a) Withhold and deduct from future wages of a
Participant or from the cash portion of any Award,
or make other arrangements for the collection of,
all legally required amounts necessary to satisfy
any and all federal, state and local withholding
and employment-related tax requirements
attributable to the Participant's exercise of a
Nonqualified Stock Option, attributable to the
lapse of restrictions on a Restricted Stock Award,
attributable to the payment of any Performance
Unit Award, or otherwise incurred with respect to
any other provisions of the Plan; or
(b) Require the Participant promptly to remit the
amount of such withholding tax obligations to the
Corporation or the Subsidiary before acting on the
Participant's notice of exercise of a Nonqualified
Stock Option or before taking any further action
with respect to the Nonqualified Stock Option or
the issuance of any certificate with respect to
any shares of stock awarded under a Restricted
Stock Award or a Nonqualified Stock Option.
Subject to such rules as the Committee may adopt, the Committee may,
in its sole discretion, permit a Participant to satisfy such
withholding tax obligations, in whole or in part, with shares of Stock
of having an equivalent Fair Market Value or by electing to have the
Corporation or Subsidiary withhold shares of Stock having an
equivalent Fair Market Value and that are payable under an Award;
provided, however, that if the Participant is a Section 16(b)
Participant, such Participant must comply with the applicable
provisions of Rule 16b-3 or its successor, as then in effect, of the
General Rules and Regulations under the Securities and Exchange Act of
1934, as amended.
SECOND AMENDMENT TO LEASE
WHEREAS, By Lease Agreement dated January 11, 1993, between THOMAS L
KOSTER, INC., d/b/a Realvesco Properties, a Court Receiver, as Landlord, and HRM
CLAIM MANAGEMENT, as Tenant, pertaining to the leased premise located at 5250
Lovers Lane, Portage, MI 49024.
WHEREAS, By First Amendment to Lease dated January 29, 1993, Landlord and
Tenant modified the terms of the Agreement, and
WHEREAS, By a certain Deed and Purchase Agreement dated July 20, 1993,
Northwestern Life Insurance Co. as Landlord, sold, transferred and assigned all
of its interest, rights and obligations unto Hinman-Trestlebridge Limited
Partnership, Successor Landlord, in the Trestlebndge Complex including those
premises located at 5250 Lovers Lane, Portage, Ml 49024; and
WHEREAS, the parties now desire to further modify said Lease Agreement and
First Amendment to Lease; and
NOW, THEREFORE, it is mutually agreed that the Lease dated January 11,
1993, and First Amendment to Lease dated January 29, 1993, is hereby amended as
follows:
1. TERM:
The term for purpose of this Second Amendment shall be extended for the
period which commenced on July 1, 1993 and shall now expire June 30, 2001.
2. BASE RENT :
Exhibit C (attached to Lease Agreement) is amended as follows:
a. For the Fifth Year of the Lease Agreement, commencing July 1, 1997 and
ending June 30, 1998, the annual minimum rental shall be THREE HUNDRED
SIXTY-EIGHT THOUSAND EIGHT HUNDRED SIXTY-SEVEN AND 75/100
($368,867.75) DOLLARS ($11.75 per rentable square foot of the premises
per annum), payable by Tenant in equal monthly installments of THIRTY
THOUSAND SEVEN HUNDRED THIRTY-EIGHT AND 98/100 ($30,738.98) DOLLARS.
b. For the Sixth Year of the Lease Agreement, commencing July 1, 1998 and
ending June 30, 1999, the annual minimum rental shall be THREE HUNDRED
EIGHTY- FOUR THOUSAND FIVE HUNDRED SIXTY-FOUR AND 25/100 ($384,564.25)
DOLLARS ($12.25 per rentable square foot of the premises per annum),
payable by Tenant in equal monthly installments of THIRTY-TWO THOUSAND
FORTY-SEVEN AND 02/100 ($32,047.02) DOLLARS.
c. The rental obligation for the 7th and 8th years, commencing July 1,
1999, shall be adjusted by the Cost of Living Adjustment as described
below.
<PAGE>
3. COST OF LIVING ADJUSTMENT:
The monthly rent to be paid Landlord by Tenant shall be increased annually
effective on the anniversary of the Seventh and Eighth years of this Lease
by a percentage equal to the annual percentage increase in the Consumer
Price Index. The base of the Index for computation of the increase, if any,
shall be forty-five (45) days prior to the month in which the base year
commences (i.e. May, 1999 and May, 2000). The Index for the same month
shall be compared annually to determine the percentage increase and the
resulting percentage shall be applied to the monthly rental rate then in
effect to determine the monthly rent to be paid for the ensuing year.
Landlord shall notify Tenant of any increase in the monthly rental rate
resulting from such computation and Tenant shall pay Landlord the amount of
such increase retroactively to the effective date thereof (i.e. July, 1999
and July 2000). Reference to the Cost of Living Index is to be the official
Consumers Price Index for Urban Wage Earners and Clerical Workers for the
United States City Average, published by the Bureau of Labor Statistics
United States Department of Labor.
4. The additional rent for Building Operating Expenses pursuant to Paragraph
4(a) of the Lease Agreement is hereby deleted in its entirety. Tenant shall
have no responsibility for additional rent of Building Operating Expenses
which shall be deemed waived by the Landlord entirely for the calendar
years 1994 through and including 1997
5. TAXES:
The amounts due and payable by which building taxes exceed Base Year Taxes,
pursuant to paragraph 4(b) of the Lease Agreement shall be deemed waived
entirely for the calendar years 1994 (first full Base Year), 1995 and 1996.
6. ABATEMENT:
Upon completion and execution of this Second Amendment, Tenant shall
receive one (1) month full base rental abatement for the month of August,
1997, toward improvements made thereon to the premises.
In all other respects, the terms, conditions, stipulations and
covenants of the Lease Agreement dated January 11, 1993, and First Amendment to
Lease dated January 29, 1993 are to be continued with like effect to all intents
and purposes as if contained in a new and formal lease agreement including this
Second Amendment to Lease.
This Second Amendment to Lease is entered into this 22 day of July,
1997.
WITNESS LANDLORD:
HINMAN-TRESTLEBRIDGE, L.P.
Illegible By: Illegible
Its: The Hinman Co. General Partner
WITNESS TENANT: HRM CLAIM MANAGEMENT
By: /s/Thomas P. Clark
Its: Chief Financial Officer
SIXTH AMENDMENT TO LEASE
This Sixth Amendment to Lease is made and entered into this 18th day of
October, 1995, by and between THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK,
hereinafter called "Landlord", and HEALTH RISK MANAGEMENT, INC., hereinafter
called "Tenant".
WHEREAS, Landlord and Tenant entered into a lease agreement dated August
14, 1987 which was amended on October 8, 1987, June 25, 1990, January 8, 1992,
July 12, 1993 and May 12, 1994 (the lease agreement and amendments are
hereinafter collectively lease agreement referred to as the "Lease"), wherein
Landlord leased to Tenant the Demised Premises as defined in the Lease located
at 8000 West 78th Street, Edina, Minnesota (the "Building").
WHEREAS, Landlord and Tenant mutually desire to further amend the Lease
with respect to base and additional rent for the Existing Space as hereinafter
provided.
NOW THEREFORE. it is mutually agreed as follows:
1. Existing Space Base Rent. Section 4 of the Fifth Amendment to Lease (which
amended Section 3 of the August 14, 1987 lease agreement) is hereby deleted.
Section 3 of the Lease is hereby amended to provide the following schedule of
Base Rent for the Existing Space:
<PAGE>
Rentable
Period Area Per S.F. Rate Monthly Rate
1/1/95 - 6/30/95 51,872 $14.54 $62,851.57
7/1/95 - 6/30/96 51,872 $14.79 $63,932.24
7/1/96 - 6/30/97 51,872 $15.04 $65,012.91
7/1/97 - 9/30/98 51,872 $35.29 $66,093.57
2. Section 6 of the Fifth Amendment to Lease (which amended Section 4 of the
August 14, 1987 lease agreement) is hereby deleted. For the period commencing
January 1, 1995 and continuing for the remaining term of the Lease, the
introductory paragraph of Section 4 of the Lease shall read as follows:
Operating Costs Adjustment. The Base Rent payable pursuant to Section 1
of the Sixth Amendment to Lease is predicated, in part, upon an
operating cost "stop" for the Building of $5.79 per rentable square
foot. Tenant shall pay to Landlord as additional rent for the Existing
Space the amount derived by multiplying 51,872 (being the rentable area
of the Existing Space)by the amount by which the total annual operating
costs of the Building exceed $5.79 per rentable square foot.
3. Section 4(B) of the Lease as originally agreed by Landlord and Tenant on
August 14, 1987 is reinstated as to the Existing Space as of January 1, 1995 and
any contrary provisions of the Lease shall be disregarded as to such period.
<PAGE>
4. The parties acknowledge that projected Operating Costs for 1995 are $ 6.90.
Commencing with rent due on January 1, 1995 and continuing until Landlord's
projection shall be revised, Tenant shall pay in addition to Base Rent adjusted
Operating Costs of $ l.ll per rentable square foot per month.
TENANT: LANDLORD:
HEALTH RISK MANAGEMENT, INC. THE MUTUAL LIFE INSURANCE
COMPANY OF NEW YORK
BY: /s/Thomas P. Clark BY: Illegible
ITS: Chief Financial Officer ITS: Vice President
DATE: 10/17/95 DATE: 12/6/95
FOURTH AMENDMENT TO LEASE
This Fourth Amendment to Lease is made and entered into this 18th day of
October, 1995, by and between THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK,
hereinafter called "Landlord", and HEALTH RISK MANAGEMENT, INC., hereinafter
called "Tenant".
WHEREAS, Landlord and Tenant entered into a lease agreement dated August
14, 1987 which was amended on June 25, 1990, January 8, 1992, and May 12, 1994
(the lease agreement and amendments are hereinafter collectively referred to as
the "Lease"), wherein Landlord leased to Tenant the Demised Premises as defined
in the Lease located at 7900 West 78th Street, Edina, Minnesota (the
"Building").
WHEREAS, Landlord and Tenant mutually desire to further amend the Lease
with respect to base and additional rent for the Existing Space as hereinafter
provided.
NOW THEREFORE, it is mutually agreed as follows:
1. Existing Space Base Rent. Section 4 of the Third Amendment to Lease (which
amended Section 3 of the August 14, 1987 lease agreement) is hereby deleted.
Section 3 of the Lease is hereby amended to provide the following schedule of
Base Rent for the Existing Space:
<PAGE>
Rentable
Period Area Per S.F. Rate Monthly Rate
1/1/95 - 6/30/95 51,393 $14.54 $62,271.85
7/1/95 - 6/30/96 51,393 $14.79 $63,341.87
7/1/96 - 6/30/97 51,393 $15.04 $64,412.56
7/1/97 - 9/30/98 51,393 $15.29 $65,483.25
2. Section 6 of the Third Amendment to Lease (which amended August 14, 1987
lease agreement) is hereby Section 4 of the deleted. For the period commencing
January 1, 1995 and continuing for the remaining term of the Lease, the
introductory paragraph of Section 4 of the Lease shall read as follows:
Operating Costs Adjustment. The Base Rent payable pursuant to Section 1
of the Fourth Amendment to Lease is predicated, in part, upon an
operating cost "stop" for the Building of $5.79 per rentable square
foot. Tenant shall pay to Landlord as additional rent for the Existing
Space the amount derived by multiplying 51,393 (being the rentable area
of the Existing Space)by the amount by which the total annual operating
costs of the Building exceed $5.79 per rentable square foot.
3. Section 4(B) of the Lease as originally agreed by Landlord and Tenant on
August 14, 1987 is reinstated as to the Existing Space as of January 1, 1995 and
any contrary provisions of the Lease shall be disregarded as to such period.
<PAGE>
4. The parties acknowledge that projected Operating Costs for 1995 are $6.83.
Commencing with rent due on January 1, 1995 and continuing until Landlord's
projection shall be revised, Tenant shall pay in addition to Base Rent adjusted
Operating Costs of $ 1.04 per rentable square foot per month.
TENANT: LANDLORD:
HEALTH RISK MANAGEMENT, INC. THE MUTUAL LIFE INSURANCE
COMPANY OF NEW YORK
BY: /s/Thomas P. Clark BY: Illegible
ITS: Chief Financial Officer ITS: Vice President
DATE: 10/18/95 DATE: 12/6/95
THIRD AMENDMENT TO
REVOLVING CREDIT AND TERM LOAN AGREEMENT
THIS THIRD AMENDMENT, dated as of January 31, 1997, amends and modifies
that certain Revolving Credit and Term Loan Agreement, dated as of June 24,
1994, as amended by First Amendment to Revolving Credit and Term Loan agreement,
dated as of March 31, 1995 and Second Amendment to Revolving Credit and Term
Loan Agreement dated as of January 19, 1996 (as so amended, the "Loan
Agreement"), between HEALTH RISK MANAGEMENT, INC., a Minnesota corporation (the
"Borrower") and FIRST BANK NATIONAL ASSOCIATION, a national banking association
(the "Bank"). Terms not otherwise expressly defined herein shall the meanings
set forth in the Loan Agreement.
RECITALS
WHEREAS, The Borrower and the Bank desire to extend the maturity of the
loan facilities as hereinafter set forth.
NOW THEREFORE, for value received, the Borrower and the Bank agree as
follows.
ARTICLE I - AMENDMENTS TO THE LOAN AGREEMENT
1.1 Definitions.
(a) The definition of "Termination Date" is amended by deleting the
date "January 31, 1997" and inserting the date "January 31, 1998" in lieu
thereof.
(b) The definition of "Revolving Credit Commitment" is amended by
deleting the amount "$2,500,000.00" and inserting the amount
"$3,750,000.00" in lieu thereof.
1.2 Confirmation of Security Agreement. The Borrower hereby reaffirms its
Security Agreement, dated as of June 24, 1994 (the "Security Agreement") and
further agrees that the Security Agreement secures all of the Borrower's
obligations to the Bank, including the Borrower's obligations under the Loan
Agreement, as amended by this Amendment.
1.3 Construction. All references in the Loan Agreement to "this Agreement",
"herein" and similar references shall be deemed to refer to the Loan Agreement
as amended by this Amendment
<PAGE>
ARTICLE II - REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to make and maintain
the Loans under the Loan Agreement as amended hereby, the Borrower hereby
warrants and represents to the Bank that it is duly authorized to execute and
deliver this Amendment, and to perform its obligations under the Loan Agreement
as amended hereby, and that this Amendment constitutes the legal, valid and
binding obligation of the Borrower, enforceable in accordance with its terms.
ARTICLE III- CONDITIONS PRECEDENT
This Amendment shall become effective on the date first set forth above;
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions precedent:
3.1 Warranties. Before and after giving effect to this Amendment, the
representations and warranties in ARTICLE Vll of the Loan Agreement shall be
true and correct as though made on the date hereof, except for changes that are
permitted by the terms of the Loan Agreement. The execution by the Borrower of
this Amendment shall be deemed a representation that the Borrower has complied
with the foregoing condition.
3.2 Defaults. Before and after giving effect to this Amendment, no Default
or Event of Default shall have occurred and be continuing under the Loan
Agreement. The execution by the Borrower of this Amendment shall be deemed a
representation that the Borrower has complied with the foregoing condition.
3.3 Documents. The following shall have been delivered to the Bank, each
duly executed and dated, or certified, as of the date hereof. as the case may
be:
(a) Amendment. This Amendment, appropriately completed and duly
executed by the Borrower.
(b) Resolutions. Certified copies of resolutions of the Board of
Directors of the Borrower authorizing or ratifying the execution, delivery
and performance, respectively, of this Amendment and other documents
provided for in this Amendment.
(c) Consents. Certified copies of all documents evidencing any
necessary corporate action, consent or governmental or regulatory approval
(if any) with respect to this Amendment
(d) Incumbency and Signatures. A certificate of the Secretary or an
Assistant Secretary of the Borrower certifying the names of the officer or
officers of the Borrower authorized to sign this Amendment and other
documents provided for in this Amendment, together with a sample of the
true signature of each such officer.
(e) Certificate of Incorporation and By-laws. A certified copy of any
amendment or restatement of the Certificate or Articles of Incorporation or
the By-laws of the Borrower made or entered following date of the most
recent certified copies furnished to the Bank.
<PAGE>
(f) Confirmation of Security Agreement. A Confirmation of Security
Agreement, appropriately completed and duly executed by HRM Claim
Management, inc.
(g) Confirmation of Security Agreement. A Confirmation of Security
Agreement, appropriately completed and duly executed by Institute for
Healthcare Quality, Inc.
(h)Confirmation of Security Agreement. A Confirmation of Security
Agreement, appropriately completed and duly executed by Health Resource
Management, Ltd.
ARTICLE IV - GENERAL
4.1 Expenses. The Borrower agrees to reimburse the Bank upon demand for all
reasonable expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Bank in the preparation, negotiation and execution of this
Amendment and any other document required to be furnished herewith, and in
enforcing the obligations of the Borrower hereunder, and to pay and save the
Bank harmless from all liability for any stamp or other taxes which may be
payable with respect to the execution or delivery of this Amendment, which
obligations of the Borrower shall survive any termination of the Loan Agreement.
4.2 Counterparts. This Amendment may be executed in as many counterparts as
may be deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
4.3 Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions hereof or affecting the validity or enforceability of such
provisions in any other jurisdiction.
4.4 Law. This Amendment shall be a contract made under the laws of the
State of Minnesota, which laws shall govern all the rights and duties hereunder.
4.5 Successors: Enforceability. This Amendment shall be binding upon the
Borrower and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Bank and the successors and assigns
of the Bank. Except as hereby amended, the Loan Agreement shall remain in full
force and effect and is hereby ratified and confirmed in all respects. IN
WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers "hereunto duly authorized as of the date
first written above.
HEALTH RISK MANAGEMENT. INC.
By: /s/ Thomas P. Clark
Title: CFO
FIRST BANK NATIONAL ASSOCIATION
By: Illegible
Title: Illegible
MANAGED CARE SERVICE AGREEMENT
This Agreement is made and entered into as of the 29th day of October,
1996, by and between HEALTH RISK MANAGEMENT, INC., a Minnesota corporation
having offices at 8000 West 78th Street, Minneapolis, Minnesota 55439
(hereinafter "HRM"), and KEYSTONE MERCY HEALTH PLAN, having offices at 200
Stevens Drive, Philadelphia, Pennsylvania 19113 (hereinafter "KMHP").
WHEREAS, KMHP desires to utilize certain HRM systems, software and
resource management and to engage HRM to provide certain related health care
cost management services to KMHP with respect to KMHP participating members to
whom managed health care services are delivered under KMHP programs (each, a
"Program");
WHEREAS, KMHP desires to utilize HRM staff to perform certain health
care cost management services for an indefinite period of time;
WHEREAS, this Agreement is being entered into in an effort to enhance
KMHP's utilization management staff skills and provide them with the tools to
provide better services to KMHP members; and
WHEREAS, HRM is willing to accept such engagement in accordance with
the terms and conditions set forth below
NOW THEREFORE, in consideration of the premises and the mutual
covenants and promises set forth below, and for other good and valuable
consideration the receipt and sufficiency of which is hereby acknowledged. the
parties agree as follows:
1. Definitions
a. "Covered Member" shall mean individuals residing in the Service
Area enrolled for medical benefits under a Program and determined in accordance
with KMHP's policies and procedures to be covered by this Agreement, from time
to time.
b. "DPW" shall mean the Pennsylvania Department of Public Welfare or
its successor agency.
c. "DPW Contract" shall mean the contract(s) with DPW pursuant to
which KMHP operates its Pennsylvania managed care plan(s), either as prime
contractor or as a subcontractor to the prime contractor with DPW.
d. "Effective Date" shall mean November 9th, 1996.
e. "KMHP" shall mean Keystone Mercy Health Plan and its designated
affiliates.
f. "License Agreement" shall mean that certain QualityFIRST(R) License
Agreement dated as of July 11, 1996 between KMHP and Institute for Healthcare
Quality, Inc. ("IHQ").
g. "Service Area" shall mean the following area within the
Commonwealth of Pennsylvania: Philadelphia County; Bucks County; Delaware
County; Montgomery County; Chester County; Lehigh County; Berks County;
Lancaster County and any other areas designated by KMHP.
2. General Agreement - Provision of Services
a. KMHP hereby authorizes HRM, and HRM hereby agrees, to provide the
managed care services listed on the attached Schedule 2, as modified from time
to time, and otherwise specified in this Agreement. In furtherance thereof, HRM
will advise and assist KMHP in the development, implementation and operation of
utilization and medical cost management programs including those using the HRM
systems, guidelines and criteria. In accordance with policies and procedures
developed by KMHP in consultation with HRM, HRM will review cases referred by
KMHP and make recommendations as to medical necessity and appropriateness of
treatment plans, utilization and alternative treatment modalities, and HRM will
further assist in the training of KMHP staff in the implementation and uses of
the QualityFIRST(R) guidelines and other related HRM systems
<PAGE>
b. To the extent that this Agreement contains provisions or terms
inconsistent with any portion of the Schedules, the provisions or terms of the
applicable schedule shall control.
c. Except as otherwise provided herein, KMHP agrees to pay HRM for the
managed care services described above in accordance with Section 4 of this
Agreement.
3. Further Agreements
a. HRM will develop and make available to KMHP and its participating
providers a summary of the QualityFIRST(R) medical management guidelines that is
suitable for clinicians and reasonably adequately describes the guidelines and
criteria used therein. In the event DPW or other applicable regulatory agency
requires distribution to providers of more detailed or different descriptions of
utilization management guidelines or criteria, HRM will assist in the
preparation of such a description that will comply with any such requirements.
b. HRM will review cases and make its findings within time frames that
shall be mutually agreed upon by the parties. The parties shall further mutually
agree upon and comply with standards for information regarding each case that
will be collected and maintained, procedures and media for the storage and
transmittal of such information between the parties, and the contents and time
frames for reports thereon.
c. KMHP is responsible for determining Covered Member eligibility. HRM
may rely on information supplied by KMHP concerning Covered Member eligibility,
and KMHP will hold HRM harmless from any liability arising as a result of any
inaccuracies in the eligibility information supplied by KMHP. Further, KMHP will
transfer daily to HRM electronic eligibility information in a configuration
mutually agreed upon by the parties hereto.
d. KMHP shall establish from time to time and maintain policies and
procedures by which its providers may seek and obtain prompt review by KMHP of a
recommendation or determination concerning Covered Members whose proposed plan
of treatment or referral has been determined not to be medically necessary. KMHP
may reverse a finding made by HRM whether or not the provider has appealed.
e. HRM will not be liable to KMHP with respect to health care services
sought or obtained by any Covered Member that are subsequently determined to be
ineligible for the coverage or benefits of a Program. HRM shall be entitled to
rely on any determination by KMHP that any person or any health care services
are ineligible for the coverage or benefits of a Program.
f. KMHP and HRM will keep confidential and not disclose to any third
parties the terms, conditions, content and substance of this Agreement unless
required to disclose the same to or by regulatory authorities or by operation of
law and except to the extent disclosure is necessary for such party to carry out
its duties under this Agreement. The parties hereby consent to KMHP furnishing
this Agreement to DPW.
g. HRM will operationalize the Mercy Health Plan Missions and Values,
as defined on Schedule 4, into the KMHP program.
h. KMHP's Chief Medical Officer, and his staff at KMHP shall have
responsibility for oversight of the quality of health care delivered to KMHP's
members. From a quality point of view, KMHP shall review over/under utilization
of services, and KMHP and HRM shall implement corrective action plans in
response to those reviews.
<PAGE>
i. All utilization criteria, guidelines and procedures used in the
course of this Agreement will be established by or otherwise subject to the
prior approval of, and continuing review and revision by, KMHP and will comply
with the requirements of the DPW and other regulatory requirements.
j. The KMHP utilization management employees transferred to and
employed by HRM to perform services under this Agreement will receive from HRM
their present levels of compensation and will be employed and utilized by HRM
solely to perform services for KMHP. Initially, HRM will make offers of
employment to at least 33 individuals for employment in the Philadelphia office.
Thereafter, HRM will employ at least the minimum staffing otherwise specified in
this Agreement. All HRM staff located in Philadelphia will be located at KMHP
offices, and KMHP will provide adequate space, office equipment, supplies and
furniture at no additional cost to HRM, (the cost of such facilities having been
incorporated into the compensation arrangements hereunder). HRM and KMHP will
use their best efforts to maintain continuity of staff at the Philadelphia
location.
k. KMHP and HRM anticipate a termination of the managed care services
rendered by HRM, with a continuation of the relationship between the parties for
the QualityFIRST(R) guidelines, AutoPILOT(SM) system and resource management
components. In the event of such a transition, the following terms shall apply:
i. KMHP shall give HRM at least one hundred eighty (180) days
advance written notice of its intent to transition the managed care services
function on a date to be specified in such written notice ("Transition Date").
ii. In consideration of such transition of the managed care
services, KMHP shall pay to HRM a sum(s) sufficient to cover the cost of the
following items:
(1) Two (2) months of gross salary of HRM's dedicated
Minneapolis staff (i.e., full-time equivalents ["FTEs"]) then working on KMHP
services; and
(2) Usage fees calculated at $0.11 per Covered Member per
month (based on the number of Covered Members as of the Transition Date), and
shall be payable monthly to HRM for the six (6) month period following the
Transition Date.
iii. Transition of the managed care services function of this
Agreement pursuant to this Section (1) shall terminate as of the Transition
Date the utilization management fee and (2) shall not terminate the License
Agreement, the AutoPILOT(SM) and computer usage fees, and the resource
management fees between the parties hereto, and such fees shall remain in effect
until December 31, 2001, and shall continue under the terms and conditions
set forth in Schedule 1 and the License Agreement.
Notwithstanding any other provision of this Agreement to the contrary,
KMHP may give the notice described in clause (i) of this subsection (k) of a
termination of managed care services at any time during the term hereof and the
parties recognize that, accordingly the Transition Date may be earlier than
January 1. 1999.
l. KMHP shall rehire, at the Transition Date or upon termination of
this Agreement as provided in Section 11 (h) hereof, HRM's Philadelphia staff at
their then current salaries, and HRM agrees that prior thereto they will not
reassign the Philadelphia staff to provide services other than to KMHP.
m. HRM will take steps to ensure that it is knowledgeable of the needs
and concerns of KMHP providers and members. KMHP will develop mechanisms to
review with HRM complaints from its members and providers, and HRM will, in
conjunction with KMHP, develop strategies to address problems and complaints
from the community.
<PAGE>
n. HRM shall at all times during the term of this Agreement maintain,
at its expense, insurance coverages of the following types and minimum amounts:
comprehensive general liability for $2,000,000; professional and managed care
liability for $10,000,000; and Workers' Compensation in amounts as required by
applicable laws. HRM shall name KMHP as an additional insured on such coverages
and furnish to KMHP evidence of such coverages prior to implementation of
services hereunder and otherwise upon request of KMHP.
o. All business and medical records relating to the operations of KMHP
shall be and remain the sole property of KMHP.
p. HRM will allow KMHP, and KMHP will allow HRM, or their respective
appointed representatives access to books and records during normal business
hours for the purpose of auditing the services provided under this Agreement,
upon reasonable prior notice from KMHP or HRM. HRM or KMHP will allow such
access to, and furnish such information as may be requested by representatives
of appropriate governmental agencies.
q. The parties shall at all times operate in accordance with the DPW
Contract and NCQA and URAC requirements and shall cooperate in and abide by such
oversight programs and procedures as KMHP shall adopt pursuant to NCQA, URAC, or
DPW or other regulatory requirements.
r. Nothing in this Agreement shall be construed to impose
responsibilities on HRM or KMHP to provide any services in connection with
family planning services or services having the purpose of the prevention or
termination of pregnancy including without limitation abortion, tubal ligation
or vasectomy.
s. Whenever practicable, HRM will use its best efforts to utilize
KMHP's staff physicians for physician review services performed pursuant to this
Agreement; provided, however, that each KMHP staff physician who HRM determines
is qualified as a physician reviewer under HRM's usual standards and processes,
will perform such physician review services in accordance with the standard
policies and procedures established hereunder. HRM will reimburse KMHP at the
rate of one hundred dollars ($100.00) per hour for each hour of services
rendered for such physician review services. KMHP and HRM agree to establish
mutually acceptable procedures for using KMHP's physicians as physician
reviewers.
t. HRM agrees to establish a process for informing and consulting with
KMHP's Director of Human Resources concerning any disciplinary actions proposed
to be taken by HRM with respect to HRM's Philadelphia staff which process shall
include the prior consent by such an employee to disclosures by HRM to KMHP. HRM
will use its best efforts to keep KMHP's Director of Human Resources informed of
such actions, but reserves the right to make the ultimate decision concerning
the status of employment for all of HRM's Philadelphia staff.
u. For a period of one (1) year commencing on the date of this
Agreement and ending on its first anniversary, HRM shall not contract to perform
or deliver services similar to those performed by HRM hereunder for or on behalf
of a health maintenance organization, health insurer or managed care
organization providing health coverage or benefits with respect to Medical
Assistance recipients residing in the initial Service Area; provided, however,
that if the number of Covered Members falls below 150,000 at any time during
said one year period, HRM may, by written notice to KMHP terminate the
prohibition under this Section 3.u. on such contracts.
<PAGE>
v. KMHP shall, and HRM shall and shall cause IHQ to, comply with and
fulfill its obligations and duties under the License Agreement. The breach of
such obligation under the License Agreement shall constitute a breach of this
Agreement. The parties understand that upon the termination of this Agreement
either party may at its option terminate the License Agreement upon written
notice to the other party. The exercise of such option by a party shall not
constitute a waiver of any rights or remedies of such party under this Agreement
or the License Agreement.
4. Service Fees
a. In consideration of the provision of services by HRM to KMHP, KMHP
shall pay to HRM the fee amounts and expense reimbursements set forth in the
attached Fee Schedule attached hereto as Schedule 1.
b. The fees set forth in Schedule 1 will remain in effect until
December 31, 2001. For each twelve (12) month term beginning after December 31,
2001, HRM may raise its fees, effective as of the beginning of a calendar year,
upon one hundred eighty (180) days written notice to KMHP prior to the end of
the current calendar year. Any price increase will not be effective if such
notice is received later than one hundred eighty (180) days prior to that date.
c. All fees are subject to year-end audit and reconciliation by the
parties. Any rights or obligations to review, audit, adjust or reconcile fees
will survive this Agreement for a period of twelve (12) months.
d. Fees will be invoiced on an estimated basis in advance on or before
the tenth day of each month for the following service month and will be due and
payable on the first day of each service month. HRM will reconcile estimated
fees to actual fees on the basis described in Schedule 1 as eligibility
information is available. Such reconciliations will normally be completed within
thirty (30) to forty-five (45) days of the end of each service month. If service
fees are not paid within fourteen (14) days of the due date, such nonpayment
shall constitute a material breach of this Agreement entitling HRM to the
remedies set forth in Section 11 of this Agreement.
e. For fee calculation purposes, the number of Covered Members shall
be calculated in accordance with KMHP's records and will be reconciled on a
monthly basis. The deletion or addition of a Covered Member shall only be
effective in the month in which HRM receives notice from KMHP of the termination
or addition of that Covered Member's eligibility under the Plan. HRM shall then
adjust its service fees for the actual month in which such notice of termination
of eligibility is received from KMHP and prospectively for the months following
thereafter.
5. Relationship of the Parties
HRM and KMHP agree that HRM is an independent contractor and its
employees will at all times be under its sole direction and control.
6. Representations. Warranties and Covenants
Both HRM and KMHP hereby represent, warrant and covenant to and with
one another as follows:
a. HRM and KMHP are fully authorized to execute and deliver this
Agreement and to bind themselves to perform fully their respective duties and
obligations under this Agreement.
b. HRM and KMHP and their designated agents will use any confidential
Covered Member information solely to perform their respective duties hereunder,
develop statistical information and resolve administrative issues concerning
medical benefits.
<PAGE>
c. KMHP will comply with applicable state and federal statutes,
regulations, rulings and judicial and administrative orders and HRM will
likewise comply with respect to provision of the services pursuant to this
Agreement. In furtherance thereof, HRM shall obtain and maintain any licenses,
registration, qualification, or other authorization required by law or the DPW
Contract to perform its obligations hereunder.
7. Non-Interference with the Physician-Patient Relationship
Nothing contained herein shall be construed to interfere with the
physician-patient relationship. All parties agree that HRM has not been retained
to diagnose or treat individual Covered Members. The determinations and
recommendations made by HRM are not controlling or binding upon KMHP in KMHP
reaching decisions concerning the existence or extent of benefit coverage
available to the Covered Member. The decision to provide treatment or to make a
specialist referral that has not been determined to be medically necessary or
appropriate or has not been recommended remains with the attending physician and
the Covered Member, and the decision to pay for such treatment remains
ultimately with KMHP. In the event that HRM has determined that a proposed plan
of treatment or referral is not medically necessary or appropriate, the
attending physician and/or the Covered Member shall have the right to seek a
prompt review by KMHP of HRM's determination or recommendation pursuant to the
policies and procedures to be established and maintained by KMHP in accordance
with Section 3.b. of this Agreement. Further, Covered Members will have the
right to file a grievance in accordance with the DPW Contract and regulatory
requirements.
8. Confidentiality
a. Covered Member Information
i. HRM agrees to keep confidential any information that it
receives in the course of performing services under this Agreement, to the
extent such information identifies a particular Covered Member; provided,
however, that HRM may retain and use for its database and statistical purposes
any information that HRM obtains concerning the costs charged, procedures used,
or treatments employed in treating any Covered Member so long as the retained
information does not disclose the identity of that Covered Member.
ii. HRM agrees that it will not transfer any of such KMHP data to
any third parties.
iii. KMHP agrees to provide reasonable assistance to HRM in
obtaining authorizations or releases from Covered Members and contracted
providers as necessary to permit HRM to perform its obligations hereunder. HRM
shall have no obligation to provide services hereunder with respect to any
Covered Member to the extent such authorizations or releases are necessary and
are not obtained from such Covered Member.
iv. HRM agrees, subject to any limitations imposed by applicable
statutes, regulations or judicial decisions, to release to KMHP written provider
medical records that HRM receives in the course of providing services hereunder;
statements of the outcome of HRM's medical review activities and the reasons
therefore, in the case of any determinations by HRM that proposed medical care
is partially or entirely inappropriate or unnecessary; and written provider
medical records submitted in appealing any decision made by HRM, together with
any alteration in such decision by HRM.
<PAGE>
b. HRM Proprietary Information
KMHP recognizes that HRM is able to meet its obligations only because
it has developed and maintained (i) a unique pool of information (the
"Databases") concerning prospective and retrospective pricing for various
medical services and (ii) unique methods (the "Service Methods") for processing,
utilizing and delivering such information and performing its services hereunder.
KMHP further recognizes that the sources and contents of the Databases and the
nature and constituents of the Service Methods are essential to HRM and its
business. In recognition of the foregoing, KMHP for itself, its affiliates, its
officers, employees and agents, hereby agrees to retain in strictest confidence,
and refrain from unauthorized use of, all proprietary information concerning the
Databases and Service Methods provided to it or obtained by it after the date of
this Agreement, except as required by applicable laws or the DPW Contract. HRM
may, prior to disclosing any information deemed confidential by HRM, and as a
condition to such disclosure, require the recipient to execute a written
agreement to retain in the strictest confidence and to refrain from any
unauthorized use of any confidential or proprietary information concerning HRM
that he or she may obtain, directly or indirectly, from HRM or its officers,
employees and agents.
In addition to the foregoing, each party agrees to preserve and cause
its affiliates to preserve the confidentiality of all Confidential Information
(as hereinafter defined) of the other party and its affiliates which is obtained
in connection with this Agreement, and shall not, and shall cause its affiliates
not to, without the prior written consent of the other party, disclose or make
available to any person, or use for its own benefit other than as contemplated
by this Agreement, or as required by law or the DPW Contract, any such
Confidential Information of the other party or its affiliates. For purposes of
this section, "Confidential Information" shall mean information pertaining to
the business of either party, or their respective affiliates, which is: (i)
actually confidential; and (ii) disclosed at the request of, or with the consent
of, the receiving party; provided, however, that all financial records, medical
utilization and expense data, provider information and rates, marketing and
other business methods and systems, and member records of each party and their
respective affiliates, shall be deemed Confidential Information; and, provided
further, that Confidential Information shall not include any information which
is or becomes publicly available or was known to the receiving party prior to
its disclosure hereunder.
9. Communications with Covered Members and KMHP Providers
KMHP shall review and approve before use any and all forms of written
communication by HRM to Covered Members or to KMHP participating providers. To
the extent that KMHP undertakes general descriptions of utilization management
policy or otherwise engages in communications with respect to HRM services to
Covered Members or KMHP participating providers, KMHP will provide HRM a
reasonable period of time in which to review such communications in advance of
their distribution. HRM will not be bound by misstatements about its services
that result from the failure of KMHP to comply with such review requirement or
with respect to which HRM has furnished timely notice to KMHP of its
disagreement. KMHP intends to continually inform members and providers, as
appropriate, of changes in its utilization management program in a timely
manner.
10. Term
The initial term of this Agreement shall commence on the Effective
Date and continue through December 31, 2001. Thereafter, this Agreement will be
automatically renewed for successive twelve (12) month terms, unless terminated
as provided below.
<PAGE>
11. Termination
a. Termination at End of Term. Either party may terminate this
Agreement at the end of the initial term (December 31, 2001) or any renewal term
hereof by giving written notice of intent to terminate to the other party at
least one hundred twenty (120) days prior to the end of the initial or any
renewal term.
b. Termination for Breach of Non-Payment Obligations. Either party may
give notice of intent to terminate this Agreement at any time upon the
occurrence of a material breach by the other party of any material term or
obligation of this Agreement, other than a payment obligation specified in
Section 11.c. below, by providing written notice of the claimed breach with
sufficient factual detail to permit the other party to clearly identify and
investigate the claimed breach. If the recipient of the notice of breach does
not respond within fifteen (15) days of the date of notice of such breach with a
written explanation of cure or a written rebuttal of the claimed breach, this
Agreement will terminate upon thirty (30) days written notice of termination. If
such a written explanation of cure or written rebuttal has been provided within
the specified period, but such breach has not been cured within sixty (60) days
of the original notice of breach, or, if the breaching party shall fail to
diligently proceed to cure such breach within a reasonable period of such
notice, the non-breaching party may, at its sole option, terminate this
Agreement upon ninety (90) days written notice to the breaching party. Failure
of either party to exercise such right to terminate shall not operate as a
waiver thereof or preclude any other or further exercise of such right.
If the breaching party defaults in the performance of the same
obligation with respect to which a notice of claimed breach and cure thereof had
previously occurred, and written notice of such subsequent claimed breach was
given by the non-breaching party within six (6) months of the next previous
notice of claimed breach, then the non-breaching party shall have the option to
terminate this Agreement upon thirty (30) days written notice without affording
an additional opportunity to the breaching party to cure such claimed breach.
c. Termination for Breach of Payment Obligations. Either party may give
notice of intent to terminate this Agreement at any time upon the occurrence of
a material breach by the other party of any material, payment obligation under
Section 4 or Schedule 1 of this Agreement by providing written notice of the
claimed breach with sufficient factual detail to permit the other party to
clearly identify and investigate the claimed breach. If the recipient of the
notice of breach does not respond within fifteen (15) days of the date of notice
of said breach with a written explanation of cure or a written rebuttal of the
claimed breach, this Agreement will terminate upon thirty (30) days written
notice of termination. If a written explanation of cure or a written rebuttal of
the claimed breach has been provided within the specified period, but the
material breach of a financial obligation has not been cured within sixty (60)
days of the original notice of the material breach, or if the breaching party
shall fail to diligently proceed to cure such material breach within a
reasonable period following such notice of material breach, the non-breaching
party may, at its sole option, immediately terminate this Agreement upon written
notice to the breaching party. Failure of either party to exercise such rights
to terminate shall not operate as a waiver thereof or preclude any other or
further exercise of such rights.
<PAGE>
d. In the event the DPW or any other governmental agency having
jurisdiction should require alteration or modification of any term or condition
of this Agreement, or in the performance of this Agreement by either of the
parties hereto, or should there be a change in law, regulation, or the DPW
Contract affecting the conduct of either party hereunder, and in the further
event that such alteration, modification or change would have a materially
adverse effect on the interests of a party hereto directly or as a result of the
impact of such alteration, modification or change on the performance of this
Agreement, or the operations, financial condition or business prospects of such
party, the party hereto so affected may give written notice to the other party
hereto setting forth its objection to such alteration or modification, or
advising it of the change of law, and may request mutual consultation with the
other party hereto relative to the same. Not later than ten (10) days after
dispatch by a party of such notice, the parties shall discuss in good faith the
possibilities of a mutually satisfactory resolution of this issue; provided,
however, that in the event the parties fail to reach written agreement upon a
mutually satisfactory resolution within forty-five (45) days after the date of
dispatch of the notice, the party which has given such notice shall have the
right to terminate this Agreement upon sixty (60) days written notice to the
other party.
e. If any of the following events occur: (i) Net Inpatient Days Per
Thousand exceeds the Net Inpatient Days Goal (as each such term is defined
below) in 1997 or in 1998; (ii) KMHP ceases to operate under a DPW Contract or
otherwise terminates doing business in the Service Area; (iii) a sale of HRM or
of all or substantially all of HRM's assets; (iv) a merger or consolidation of
HRM or a change of direct or indirect control of HRM or a change of HRM's
executive management; or (v) HRM, or an affiliate of HRM or an entity in which
HRM holds an equity or ownership interest, is a competitor of KMHP, then KMHP
may terminate the Managed Care Service Agreement with at least sixty (60) days
written notice to HRM; provided, however, except for a termination under clause
(iii), (iv) or (v) above, KMHP shall pay the cost of termination, with no
further obligation of any kind to HRM, as follows:
i. Two (2) months of gross salary of HRM's dedicated Minneapolis
staff (i.e., full-time equivalents ["FTE's"] then working on KMHP services).
ii. Usage fees calculated at $0.11 per Covered Member per month
for a six (6) month period after the termination date.
For the purposes of this subsection, an entity shall be considered a
competitor of KMHP if such entity is engaged in, has agreed to engage in, or has
submitted a proposal or filing to a governmental agency or other party to engage
in the provision of managed care services to Medical Assistance recipients in
the Service Area.
For purposes of this subsection, the term "affiliate" of any entity
shall mean a party that directly or indirectly controls, is controlled by, or
under common control with such entity.
For the purposes of this subsection, "Net Inpatient Days" shall mean
the gross inpatient days for Covered Members minus inpatient days subject to or
not reimbursed due to coordination of benefits, medical denials, administrative
denials, and reinsurance. There shall be excluded from inpatient days for the
purposes of this definition behavioral health inpatient stays and stays of
newborns except detained baby days and there shall be included stays in
hospital, rehabilitation, SNF, subacute and other inpatient facilities.
"Net Inpatient Days Per Thousand" with respect to any calendar year
shall equal the total Net Inpatient Days for such year divided by an amount
equal to (i) the total Covered Member months for such calendar year divided by
twelve (12), divided by (ii) 1.000.
<PAGE>
"Net Inpatient Days Goal" shall mean (i) with respect to calendar year
1997, 503 Net Inpatient Days Per Thousand, and (ii) with respect to 1998, 440
Net Inpatient Days Per Thousand.
f. After December 31, 1997, if KMHP desires to cancel all obligations
remaining with HRM through the expiration of the Agreement for any reason not
otherwise specified in this Section 11, KMHP may, with ninety (90) days written
notice to HRM, cancel all obligations to HRM with a lump sum payment by KMHP of
the following:
i. Two (2) months of gross salary of HRM's dedicated Minneapolis
staff (i.e., full-time equivalents ["FTE's"] then working on KMHP services.
ii. Usage fees calculated at $0.11 per Covered Member per month
for a six (6) month period after the Transition Date
iii. An early termination fee of the lesser of a.) 24 months
multiplied by the minimum Covered Members (125,000) multiplied by $1.25 per
Covered Member per month; or b.) the number of months remaining from the
termination date to December 31, 2001, multiplied by the minimum Covered Members
(125,000) multiplied by $1.25 per Covered Member per month.
g. Either party may at its option terminate this Agreement upon
written notice to the other party in the event of the termination of the License
Agreement. The exercise of such option shall not constitute a waiver of any
party's other rights or remedies under this Agreement or the License Agreement.
h. Upon the termination of this Agreement, KMHP shall rehire, at the
termination date, HRM's Philadelphia staff, if any, at their then-current
salaries.
12. Indemnification
a. Each party agrees to indemnify and defend the other party and its
affiliates and their officers, directors and employees, and hold them harmless
from any and all losses, costs, claims, demands, damages and attorneys' fees
incurred by the party to be indemnified, arising out of or caused by any
negligent act or omission, fraud, wrongful conduct or any other intentional
misconduct committed by the indemnifying party, its directors, officers, agents,
contractors, or employees.
b. In the event a claim is made or a lawsuit is filed against any
party entitled to indemnification under this paragraph, that party (the
"Indemnified Party") will give the other party (the "Indemnitor") written notice
of the lawsuit within five (5) days after the claim is first made or the
complaint is served. Within seven (7) days after receipt of such notice (the
"Notice Period"), the Indemnitor will notify the Indemnified Party (i) whether
or not it disputes the liability of the Indemnitor to the Indemnified Party
hereunder with respect to such claim or demand, and (ii) whether or to the
extent to which the Indemnitor will defend the claim or suit, and retain counsel
reasonably acceptable to the Indemnified Party. In the event the Indemnitor
elects not to defend the Indemnified Party against such claim or fails to
provide the notice required above within the Notice Period, the Indemnified
Party may, at its option, retain counsel and undertake its own defense of the
lawsuit; provided, however, that the entire matter, including the costs of
defending the claim or action, shall be preserved for submission to arbitration
pursuant to Section 14 of this Agreement by either party following the
conclusion and disposition of the claim or lawsuit.
<PAGE>
c. In the event that the Indemnitor notifies the Indemnified Party
within the Notice Period that it desires to defend the Indemnified Party against
such claim or demand then, except as hereinafter provided, the Indemnitor shall
have the right to defend against such claim or demand by all appropriate
proceedings, which proceedings shall be promptly settled or prosecuted by the
Indemnitor; provided, however, the Indemnitor shall not, without the prior
written consent of the Indemnified Party, consent to the entry of any judgment
against the Indemnified Party or enter into any settlement or compromise which
does not include, as an unconditional term thereof, the giving by the claimant
or plaintiff to the Indemnified Party of a release, in form and substance
satisfactory to the Indemnified Party, from all liability in respect of such
claim or litigation. If the Indemnified Party desires to participate in, but not
control, any such defense or settlement, it may do so at its sole cost and
expense; provided, however, that if in the reasonable judgment of the
Indemnified Party there may be a conflict of interest between the Indemnitor and
the Indemnified Party in the conduct of the defense of such action, the fees and
expenses of counsel to the Indemnified Party shall be at the expense of the
Indemnifying Party. If requested by the Indemnifying Party, the Indemnified
Party agrees to cooperate with the Indemnifying Party and its counsel in
contesting any claim or demand which the Indemnifying Party elects to contest,
or, if appropriate and related to the claim in question, in making any
counterclaim including a counterclaim against the person asserting the third
party cross complaint against any person.
<PAGE>
Any party entitled to indemnification will cooperate with the
Indemnitor in providing evidence and expert witnesses reasonably required for
defending lawsuits subject to indemnification under this paragraph, provided,
however, that the reasonable costs of such cooperation will be borne by the
indemnitor.
d. The provisions of this section remain effective following
termination of this Agreement for the period of any applicable statute of
limitations for any cause of action or claim subject to indemnification under
this paragraph.
13. Force Majeure
HRM shall not be liable in damages to KMHP or its Covered Members as a
result of any interruptions in or cessation of services by HRM due to the damage
or destruction of its equipment, software or data, or interruption of
communication or computer service as a result of causes beyond the control of
HRM, strikes or work stoppages by personnel of HRM and other events beyond HRM's
control. Upon the occurrence of any such event, HRM shall notify KMHP promptly
and KMHP shall promptly take all actions reasonably necessary to notify its
Covered Members or KMHP physicians of the interruption in HRM services and to
ensure that no delays in Covered Members' medical care result from such
interruption. If HRM is unable to restore its services within seven (7) business
days of the commencement of the interruption, KMHP may consider this to be a
material breach pursuant to Section 11.b.
14. Arbitration
Any controversy, claim, dispute or disagreement arising out of or
relating to this Agreement, or the breach thereof, shall be settled by binding
arbitration in Philadelphia, Pennsylvania in accordance with the National Health
Lawyers Association Alternative Dispute Resolution Service Rules of Procedure
for Arbitration. The judgment upon the award rendered by the arbitrators or
arbitrator may be entered in any court having jurisdiction thereof. Except as
otherwise provided in Section 12 hereof, the expenses of arbitration will be
borne equally by the parties, provided that each party will bear the cost of its
own experts, evidence and attorney's fees, except that, in the discretion of the
arbitrators, any award may include attorney's fees if the arbitrator expressly
determines that the party against whom such an award is entered has caused the
dispute to be submitted to arbitration in bad faith or as dilatory tactic. No
arbitration will be commenced after the date when institution of legal or
equitable proceedings based upon the same subject matter would be barred by the
applicable statute of limitations.
15. Protection of Employment Relations
Each of the parties hereby agrees, covenants and warrants with and to
the other party that it will not, without the advance written permission of such
other party, directly or indirectly, solicit, make offers to, or hire or retain
any person in any capacity who is, or was at any time during the preceding
twelve (12) months, an employee, consultant or contractor of or for the other
party. This provision shall not apply to KMHP hiring HRM Philadelphia staff at
the termination of this Agreement or the transition to KMHP from HRM pursuant to
this Agreement. HRM shall not unreasonably withhold permission for KMHP to hire
at any time individuals who were employees or consultants of or for KMHP.
<PAGE>
16. Notices
Any notice or other communication required or permitted hereunder
shall be in writing and shall be deemed to have been given, when received, if
delivered by hand or telegram, and within three (3) working days after
deposited, if placed in the mails for delivery by certified mail, return receipt
requested, postage pre-paid and addressed to the appropriate Party at the
following addresses:
If notice to KMHP:
Keystone Mercy Health Plan
200 Stevens Drive
Philadelphia, PA 19113
ATTN: President
If notice to HRM:
Health Risk Management, Inc.
8000 West 78th Street
Minneapolis, MN 55439
ATTN: Chief Financial Officer
Addresses may be changed by written notice given pursuant to this Section;
however, any such notice shall not be effective, if mailed, until three (3)
working days after depositing in the mails or when actually received, whichever
occurs first.
17. Subcontractors
HRM shall not delegate or subcontract any of its functions or
responsibilities covered by this Agreement to any other person or third party
without the prior written consent of KMHP.
18. Regulatory Provisions
HRM will comply with the following provisions:
a. HRM shall adhere to the applicable requirements of 42 CFR
Subsection 434.6, including but not limited to those regarding maintaining an
appropriate record system for services provided hereunder and safeguarding
information concerning Covered Members in accordance with applicable federal
statutes and regulations governing Medical Assistance programs;
b. DPW, the Commonwealth of Pennsylvania Department of Health and the
United States Department of Health and Human Services (collectively, "the
Departments"), may evaluate, through inspection or other means, the quality,
appropriateness and timeliness of services performed hereunder;
c. Upon termination of this Agreement, HRM shall be required to
promptly supply to KMHP all information necessary for the reimbursement of any
outstanding claims;
d. HRM shall be required to comply with all policies and procedures as
developed and amended from time to time by KMHP and/or the Departments, for the
detection and prevention of fraud and abuse committed by providers, employees,
or Covered Members. Such compliance may include, but not be limited to, the
submission of statistical and narrative reports regarding fraud and abuse
detection activities, referral or information of suspected or confirmed fraud or
abuse to KMHP, and KMHP will immediately notify the Departments, as appropriate,
regarding such suspected or confirmed fraud or abuse;
<PAGE>
e. In the event that any dispute arises between HRM and KMHP, HRM
hereby agrees to indemnify and hold harmless the Departments and Covered Members
from any legal or financial liability arising out of or in connection with any
such dispute;
f. HRM shall not discriminate in the hiring of its employees on the
basis of sex, marital status, age, disability, race, color, religion, or any
other basis prohibited by law. Furthermore, HRM shall not discriminate or
differentiate in the provision of services hereunder on the basis of sex.
marital status, age, disability, race, color, religion, sexual orientation, or
any other basis prohibited by law;
g. Pursuant to federal regulation promulgated under the authority of
the Americans With Disabilities Act, as amended, HRM understands and agrees that
no individual with a disability shall, on the basis of the disability, be
excluded from participation in this Agreement or from activities provided for
under this Agreement. HRM shall be responsible for and agrees to indemnify and
hold harmless the Departments and the Commonwealth of Pennsylvania (the
"Commonwealth") from all losses, damages, expenses, claims, demands, suits, and
actions brought by any party against the Departments or the Commonwealth as a
result of HRM's failure to comply with this provision;
h. HRM agrees to hold harmless the Commonwealth, all Commonwealth
officers and employees, and all KMHP Covered Members in the event of nonpayment
by KMHP to HRM. HRM shall further indemnify and hold harmless the Commonwealth
and its agents, officers and employees against all injuries, death, losses,
damages, claims, suits, liabilities, judgments, costs and expenses which may in
any manner accrue against the Commonwealth or their agents, officers, or
employees, through the intentional conduct or negligent acts or omissions of
HRM, its agents, officers, employees or KMHP;
i. HRM shall retain the source records for its data reports for a
minimum of seven (7) years and shall develop and maintain written policies and
procedures for the storing of these records;
j. HRM shall deliver all information submitted pursuant to this
Agreement in a format which will allow KMHP to transmit required data to the
Department electronically, in a format identical to or consistent with the
format used or otherwise required by the Department.
It is the intent of the parties hereto that the provisions of Section
18 of this Agreement be interpreted in a manner that is consistent with the
interpretation and intent of the other sections of this Agreement. To the
extent, however, that this Section 18 contains provisions or terms which are
inconsistent with any other portion of this Agreement and cannot be interpreted
consistently with such other provisions, the provisions or terms of this Section
18 shall control.
The parties hereto recognize that the effectiveness of this Agreement
may be subject to applicable regulatory approval and that if such approvals are
not obtained the parties will comply with and abide by the directives of DPW or
other applicable regulatory agency regarding the effectiveness of this Agreement
including without limitation the delay, suspension or termination of the
effectiveness hereof, and will negotiate in good faith any modifications hereto
which may be required by such regulatory agency.
<PAGE>
19. Binding Effect
This Agreement will be binding upon and inure to the benefit of and be
enforceable against the parties hereto and their respective successors and
assigns; provided, however, that no party may assign its obligations under this
Agreement without the prior written consent of the other. To the extent required
by the DPW Contract, no assignment of this Agreement shall be effective without
notice to DPW.
20. Entire Agreement
This Agreement, together with any or all schedules, amendments or
attachments hereto, sets forth the entire Agreement between the parties and
supersedes all prior agreements of the parties on the subject matter hereof. No
change in, addition to, or waiver of any of the provisions of this Agreement
will be binding upon any party unless presented in writing and signed by an
authorized representative of each party to this Agreement. No waiver by any
party of any breach by the other party is to be construed as a waiver of any
subsequent breach, whether of the same or a different provision of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date and year set forth below.
HEALTH RISK MANAGEMENT, INC.
By: /s/ GARY McILORY
Name: Gary McIlroy
Title: Chairman/Chief Executive Officer
KEYSTONE MERCY HEALTH PLAN
By: /s/ DANIEL J. HILFERTY
Name: Daniel J. Hilferty
Title: President and Chief Executive Officer
QualityFIRST(R)
LICENSE AGREEMENT
This License Agreement (the "Agreement") is effective as of the 11th day of
July, 1996, by and between the Institute for Healthcare Quality, Inc. ("IHQ"), a
Minnesota corporation and a wholly-owned subsidiary of Health Risk Management,
Inc. ("HRM"), a Minnesota corporation having a place of business at 8000 West
78th Street, Minneapolis, Minnesota 55439 and Keystone Mercy Health Plan
("Licensee"), a Pennsylvania general partnership with its principal place of
business at 200 Stevens Drive, Philadelphia, Pennsylvania 19113.
WHEREAS, IHQ has developed a software program described in the attached
Exhibit A, which incorporates a guideline system useful in the healthcare
industry for utilization review, confirmation of diagnoses of certain illnesses
and diseases, therapeutic selection, resource selection and acute care
management; and
WHEREAS, Licensee desires to obtain a license to use such software program
and its accompanying user documentation pursuant to the terms and conditions of
this Agreement.
NOW THEREFORE, in consideration of the premises and the covenants contained
herein, and other good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, the parties agree as follows:
<PAGE>
LICENSE AGREEMENT
Definitions
1.1 "Authorized User" shall mean any agent, employee or consultant of Licensee
who has received the training described in Schedule 2 of this Agreement,
including those trained by trainers.
1.2 "Documentation" shall mean any IHQ user manuals or written specifications
for the installation, operation or maintenance of the Software.
1.3 "Effective Date" shall mean the date first written above.
1.4 "Key Person" shall mean a person employed by Licensee, designated by
Licensee in Schedule 3 of this Agreement, and authorized by Licensee (i) to
receive, retain custody of, and to make backup copies of the Software and
updates for the Software; (ii) to procure any technical assistance from IHQ
needed in connection with the use of the Software; (iii) make arrangements for
any training services and consulting services to be provided by IHQ pursuant to
Schedule 3 of this Agreement, and (iv) to receive bulletins and announcements
concerning updates and supplements for the Software.
1.5 "Royalty Period" shall mean each calendar month during the term of this
Agreement.
1.6 "Software" shall mean the QualityFIRST(R) software program as described in
Exhibit A, and any modifications, enhancements, revisions, additions or updates
to this program.
1.7 "Terminated" or "Termination" shall mean the expiration, cancellation,
revocation or rescission of this Agreement.
<PAGE>
License of Software
2.1 Grant. IHQ hereby grants to Licensee pursuant to the following terms and
conditions, and Licensee hereby accepts, a terminable, nonexclusive,
nontransferable right and license to use the Software solely in nonprinted,
machine readable form on the computers and at the locations identified on the
attached Exhibit B, as amended from time to time, and solely for the purposes
defined herein. The license granted pursuant to this section shall not entitle
Licensee to grant sublicenses for the Software.
2.2 Licensed Use. Licensee's right to use the Software shall be limited to the
stand alone and local area network computers at Licensee's own installation
sites identified in Exhibit B, as amended from time to time, provided such
computers are supported by a single file server per site. Licensee shall not,
without the prior approval of IHQ, install or use the Software on any additional
computers or file servers whether remote or on site, except as provided in
Schedule 1 of this Agreement. Licensee shall only permit Authorized Users and
Key Persons to have access to the Software.
2.3 Scope of Licensed Use. The parties agree that Licensee shall have the
limited right to use the Software in accordance with the terms of this Agreement
solely by Authorized Users for Licensee's own internal business purposes within
the United States, and that Licensee shall not, and shall not permit others to
(i) copy the Software or any information contained therein (the "Information")
except as provided in Section 6.3, (ii) use the Software in any public computer
based information system, (iii) allow any third party to use or have access to
the Software or any portion thereof, or (iv) create derivative works of the
Software. This Section shall not prohibit Licensee from making copies of the
Position Papers contained in the Software for distribution to its physicians
during the term of this Agreement.
<PAGE>
2.4 Additional Uses Prohibited. Except as provided in Section 2, any other use
of the Software or Information contained in the Software is expressly
prohibited, including, by way of illustration and not by way of limitation,
using the Software in connection with a public computer-based information
system; disassembling, translating, decompiling, reverse engineering or creating
derivative works based on the Information contained in the Software; selling,
assigning, leasing, sublicensing or otherwise transferring the right to use the
Software or any portion of it; or permitting access to the Software by any
unauthorized party. Licensee agrees that its obligations under the terms of this
section shall survive the Termination of this Agreement.
2.5 Unauthorized Access to the Software. Licensee agrees to take reasonable
steps, by contract, instruction or otherwise, to ensure that anyone having
authorized access to the Software agrees to comply with the terms of this
Agreement.
2.6 Third Party License. CPT data as contained in the Software is licensed to
HRM and IHQ by a third party. Incorporation of the most current version of CPT
in the Software by IHQ is subject to continuation of such third party license.
2.7 No Other Rights Granted. It is mutually understood and agreed that Licensee
receives no licenses or rights, whatsoever, by implication or otherwise, under
any other patents, patent applications, trade secrets, copyrights, or other
property or rights owned or controlled by IHQ, except those specifically granted
to Licensee pursuant to the terms of this Agreement.
2.8 Fees. Fees for the license of rights granted to Licensee pursuant to this
Agreement shall be as set forth in Schedule 1 to this Agreement.
<PAGE>
Records and Reports
3.1 Reports. For each Royalty Period, Licensee shall be responsible for
determining and providing written or electronic eligibility information to IHQ
on a monthly basis in a form mutually acceptable to both parties. IHQ may rely
in good faith on such eligibility information in calculating its Subscription
Fee pursuant to Schedule 1 of this Agreement. Following each Royalty Period,
Licensee shall provide to IHQ a written report setting forth the Subscription
Fee due for the Royalty Period. Licensee's written report shall be accompanied
by a check for all fees due pursuant to Schedule 1 and shall be forwarded to
IHQ, or its designee, HRM, by first class mail, postage prepaid, within thirty
(30) days after the end of each Royalty Period.
3.2 Inspection of Records. Licensee shall, from time to time, permit IHQ to
conduct inspections at its locations and installation sites identified in
Exhibit B, as amended from time to time, to verify Licensee's compliance with
this Agreement and to verify any fee due pursuant to this Agreement, provided,
however, (i) such inspection shall take place at Licensee's principal place of
business, during normal business hours and only to the extent necessary for IHQ
to verify the reports and payments made pursuant to Section 3.1, (ii) IHQ shall
give Licensee three (3) days written notice prior to any such inspection, and
(iii) IHQ shall bear all costs of any such inspection unless the inspection
reveals that any fees paid by Licensee have been understated by an amount equal
to or greater than five percent (5%) of the actual fees due, in which
circumstances, Licensee shall promptly pay to IHQ (i) all of IHQ's reasonable
costs of such inspection, and (ii) all fees past due including any interest that
has accrued as provided in Section 3.1.
3.3 Data Collection. Licensee shall, during the term of this Agreement, keep a
record of (i) diagnosis and clinical decisions, and (ii) resource needs and
variations, generated by its use of the Software. Licensee shall from time to
time at the request of IHQ forward a copy of such records to IHQ on diskette or
electronically as agreed to by both parties. Records so provided shall remain
strictly confidential between IHQ and Licensee and their affiliates provided
that IHQ may integrate the information in such records into its aggregate
reports so long as Licensee is not identified.
<PAGE>
Delivery
4.1 Generally. On or before July 1, 1996, IHQ shall deliver to Licensee's Key
Person (or other designated agent at HRM's facility in Minneapolis, Minnesota)
one (1) copy of the Software for the KMHP dedicated care management unit at HRM
in Minneapolis, Minnesota, and one (1) copy of the Software for Licensee's site
located in Philadelphia, Pennsylvania. The Software shall be considered
delivered, and Licensee shall be deemed to have accepted the Software, upon
installation of the Software. Licensee shall have sole responsibility for the
installation of the Software.
Modifications and Updates to the
Software
5.1 Restrictions on Modifications. IHQ shall have the sole right to modify,
maintain, enhance or otherwise alter the Software. The parties agree that
Licensee shall not develop or create, or assist in the development or creation
of any modifications, enhancements or alterations to the Software.
5.2 Updates for the Software. IHQ anticipates that it will update the Software
at least once every calendar year. IHQ shall provide Licensee at no charge with
one (1) copy of the updated Software, including any user documentation thereof.
If requested, Licensee shall within thirty (30) days of receipt of the updated
Software, either return the original Software and all copies thereof to IHQ by
registered mail, return receipt requested or certify in writing that the
Software has been destroyed and cannot be returned. Unless certified as
destroyed, the failure to return the original Software as specified herein shall
render all warranties made by IHQ null and void, and shall entitle IHQ to
terminate this Agreement as provided in Section 9.3.
Software Ownership and Confidentiality
6.1 Ownership of Software. The parties agree that the Software, including all
source code and documentation for the Software is proprietary to IHQ or third
party licensors and is protected by patent applications and/or copyright and/or
trade secret interests of IHQ and third party licensors, that title to the
Software shall at all times remain with IHQ or third party licensors, and that
nothing in this Agreement shall be construed to release, transfer or assign any
such rights to Licensee as a result of this license, or to give Licensee any
ownership rights in the Software, or any modifications, enhancements or
alterations that IHQ may subsequently make to the Software, but rather, gives
Licensee the right to use the Software in accordance with the terms and
conditions of this Agreement.
<PAGE>
6.2 Confidential Nature of the Software. Licensee acknowledges that the Software
and Information, including all source code and documentation for the Software,
is confidential to IHQ. Due to the confidential nature of the source code for
the Software, Licensee, including its employees, consultants and agents, shall
(i) limit access to the Software to its Authorized Users who require access to
the Software in order to use it as permitted under this Agreement; (ii) maintain
the Software in strict confidence by not making available or disclosing the
Software in whole or in part, to any third party without the prior written
permission of a Vice President of IHQ, except for any disclosure which may be
required by applicable law or court order (iii) not use the Software for any
purpose other than to perform a term or condition of this Agreement; and (iv)
take all reasonable precautions to maintain the confidentiality of the Software
and employ at least those precautions as Licensee employs to protect its own
confidential or proprietary information. Licensee agrees to treat as
confidential, to the full extent permitted by applicable law, and shall not, at
any time, directly or indirectly, use or disclose Confidential Information of
IHQ received by Licensee, or with respect to which Licensee is given access,
without the prior written consent of IHQ. As used in this Agreement,
"Confidential Information" is defined as: (i) all information, written or oral,
not generally known outside IHQ or proprietary to it, about its products and
services, product and service design, marketing, accounting, computer programs
and information gathering techniques and methods, and all accumulated data,
listings, or similar recorded matters used or useful in the business of health
care cost containment through group benefit design, utilization review, employee
rehabilitation, health care provider negotiations and medical claims management,
including, but not limited to, customer information files, business forms,
computer software, advertisements and marketing aids; and (ii) all information
disclosed to Licensee, or to which Licensee has access, from whatever source,
during the term of this Agreement, which Licensee knows or has reason to know is
Confidential Information. Notwithstanding the foregoing:
(01) nothing in this Agreement shall limit in any way:
(a) disclosure of information
required by a public
authority; or
(b) disclosure of information
that is necessary to prevent
imminent danger to the
public.
<PAGE>
(02) information received from IHQ shall not be deemed Confidential
Information, and Licensee shall have no obligation with respect to such
information:
(a) which, as of the Effective
Date of this Agreement, is
part of the public domain;
(b) which subsequently be-
comes part of the public
domain through no fault of
Licensee;
(c) which Licensee can show was in Licensee's possession, as
evidenced by written records kept in the ordinary course of
business or by the proof of actual use at the time of
executing this Agreement, and which information had not been
wrongfully acquired, directly or indirectly, from IHQ; or
(d) which is subsequently disclosed to Licensee by a third party
not in violation of any right of, or obligation to, IHQ.
This Section shall survive the Termination of this Agreement.
6.3 Copies of Software. Licensee may make one (1) copy of the Software solely to
be used as a back-up copy and one (1) additional copy for installation on each
stand alone computer or file server designated in Exhibit B; provided, however,
that Licensee reproduces the Software in its entirety including all of the
titles, trademarks, copyright notices and other proprietary markings including
those of any third party licensor which appear on the Software. Licensee shall
not remove or obscure any such notices.
6.4 Reverse Engineering of Software. Licensee acknowledges that the object code
and source code for the Software, including all updates for the Software, which
are embodied on the magnetic storage media contain confidential and trade secret
material which is not readily susceptible to reverse compilation or reverse
assembly. Licensee or any of its employees, agents or consultants shall not
attempt to decompile or disassemble the object code of the Software in whole or
in part. Licensee further agrees that it will use its best efforts to prevent
decompilation and disassembly of the object code of the Software by any person
or entity by securing and protecting each copy of the Software or update, in a
manner consistent with the maintenance of Licensee's proprietary rights and by
taking appropriate action by instruction or agreement. Violation of any
provision in this section shall be the basis for the immediate Termination of
this Agreement.
<PAGE>
6.5 Guideline System. During the term of this Agreement and continuing for six
(6) months after Termination, Licensee shall not use the Software, its
algorithms, position papers, user interfaces, reports or printouts as a basis or
model to create, directly or indirectly, its own guideline system useful in the
healthcare industry for utilization review, confirmation of diagnoses of certain
illnesses and diseases, therapeutic selection, resource selection or acute care
management nor shall Licensee approach any employee of IHQ for the purpose of
extending an offer of employment.
Remedies
7.1 Irreparable Harm Caused by Breach. Licensee recognizes the confidential and
proprietary nature of the Software and, in such connection, acknowledges that a
breach by Licensee of any of its covenants, agreements or undertakings in this
Agreement will cause IHQ irreparable damage, which cannot be readily remedied in
damages in an action at law and may constitute an infringement of IHQ copyrights
entitling IHQ to equitable remedies, costs and reasonable attorneys' fees.
Warranties and Indemnification
8.1 Warranty by Licensee. Licensee warrants and represents to IHQ that it shall
use the Software in accordance with all applicable laws, rules and regulations
and that it will use the Software solely as a guidance or research tool in the
review of diagnosis, therapeutic selection, and resource utilization of patients
and not as a substitute for health care practice activities by an examining
physician or other authorized professional.
8.2 Warranty of Title. IHQ warrants that it has the right to license the
Software to Licensee and that IHQ shall, at its own expense, defend Licensee
against any claim and indemnify Licensee against and hold it harmless from any
damages, liabilities, costs and expenses (including reasonable attorneys' fees)
arising out of or related to any claim that the unmodified Software (except as
modified or updated by IHQ) infringes any U.S. patent or copyright; provided
that (i) Licensee notifies IHQ in writing within ten (10) days of notice of any
such claim made against it; (ii) IHQ shall have sole control of the settlement
or defense of any action against Licensee to which this indemnity relates; and
(iii) Licensee cooperates with IHQ in every reasonable way to facilitate such
defense.
8.3 Indemnification for Misuse of Software. Licensee shall, at its own expense,
defend IHQ against any claim and shall indemnify IHQ against and hold it
harmless from any damages, liabilities, costs and expenses (including attorneys'
fees) arising out of Licensee's or any of its agents' or employees' misuse of
the Software, provided that (i) IHQ promptly notifies Licensee in writing of any
such claim made against it, and (ii) IHQ cooperates with Licensee in every
reasonable way to facilitate such defense.
<PAGE>
8.4 Warranty. IHQ warrants to Licensee that during the Initial Term and any
Renewal Term of this Agreement (i) the media on which the original Software and
the Documentation are recorded will be free from defects in material and
workmanship under normal use, and (ii) the Software will conform to the
specifications set forth in the Documentation. This warranty and any obligations
on the part of IHQ shall be null and void if defects result from Licensee's use
of the Software or the media on which the Software is recorded in a manner not
contemplated by this Agreement. In addition, any support provided to Licensee by
IHQ for defects resulting from Licensee's use of the Software other than as
contemplated in this Agreement will be billed to Licensee on a
time-and-materials basis, at the rates set forth in Schedule 3 hereto.
Licensee's exclusive remedy under this warranty pursuant to this section shall
be as follows:
a. IHQ will provide Licensee with access to a customer support
telephone line between the hours of 9:00 a.m. and 5:00 p.m., Central Time, on
business days and any other times that may be agreed upon. Licensee may use the
customer support line to report suspected defects to IHQ. Based upon Licensee's
verbal reports, IHQ will attempt to resolve Licensee's technical problems and
issues using the customer support telephone line.
b. In the event that IHQ is not able to resolve Licensee's suspected
defects using the customer support telephone line, Licensee shall provide prompt
written notification to IHQ, including all documentation necessary to identify
the suspected defect or cause.
c. If the technical problem or suspected defect is a non-critical one,
(i.e., it does not materially affect Licensee's use of the Software), IHQ will
use its best efforts to identify the suspected defect, provide Licensee with a
suitable replacement or a temporary work-around or other alternative in the
interim and correct the defect in the earliest possible update release.
d. If the problem or suspected defect is critical (i.e., it materially
affects Licensee's use of the Software as contemplated in this Agreement), IHQ
will, within five (5) business days after its receipt of Licensee's written
notification and documentation of the suspected defect, provide Licensee with a
plan designed to correct the suspected defect within the following thirty (30)
days. In the event IHQ is not able to correct a critical defect within thirty
(30) days of its receipt of written notification and documentation from
Licensee, Licensee shall be entitled to credit against future Subscription Fees
payable by Licensee under this Agreement, those Subscription Fees paid by it
during the period commencing on the thirtieth day following its written
notification to IHQ of the critical defect, to the date of the delivery of the
critical defect correction. Notwithstanding the preceding sentence, at any time
after thirty (30) days after IHQ's receipt of notification, if IHQ has failed to
deliver the critical defect correction, then Licensee shall also have the right
to terminate this Agreement in accordance with Section 9 hereof, and return to
IHQ the Software and Documentation, including all copies thereof.
<PAGE>
If this Agreement is terminated by Licensee pursuant to Section 8.4(d) during
the Initial Term or any Renewal Term, IHQ shall pay to Licensee within a
reasonable time following the termination date, a refund of those Subscription
Fees paid by Licensee from the time of Licensee's written report of the critical
defect to the termination date.
8.5 Liability Limitation. The Software and help screens incorporated therein
consist of a series of research-based works prepared and distributed by IHQ for
the health care professionals who use the Software. The Software is based on
clinical experience and a review of the relevant scientific literature
reflecting the state of knowledge current at the time of publication. The
Software defines the diagnostic and treatment principles upon which each
guideline is based, but should not be considered inclusive of all relevant and
proper methods of diagnosis and treatment interventions or all possible
indications, outcomes, contraindications, and adverse effects for the listed
diagnostic procedures and treatment interventions. Nor should the Software be
considered to be exclusive of other methods of care reasonably directed at
obtaining the appropriate results. Adherence to the information contained in the
Software and help screens is strictly voluntary. The ultimate judgement
regarding the appropriateness of any specific diagnostic procedure or treatment
intervention must be made by the physician in light of the individual
circumstances presented by the patient.
In no event shall IHQ or third party licensor be liable for any indirect,
incidental, consequential or special damages of any kind (including damages for
lost profits, loss of business, loss of data or use of data, personal injury or
the like) resulting from any diagnosis, therapeutic selection, or resource
selection, regardless of whether such diagnosis or selection was a result of an
error in the Software or on the help screens, from a breach of warranty or any
other type of claim arising from the use or inability to use the Software or
help screens, including without limitation, liability arising out of contract,
negligence, and strict liability in tort or warranty, even if IHQ and/or third
party licensors have been advised of the possibility of such damages. Third
party licensors disclaim any and all liability to Licensee including liability
for the sequence, accuracy or completeness of information provided in the
Software.
8.6 Warranty Limitation. IHQ and third party licensor do not warrant that the
Software will meet Licensee's requirements or that its operation will be
uninterrupted or without error. Licensee acknowledges that the Software has not
been developed according to Licensee's specifications or is otherwise
custom-made. The remedies stated in this Section constitute Licensee's sole and
exclusive remedies with respect to the warranties made hereunder. Except as
expressly set forth in this Section, THE SOFTWARE IS PROVIDED "AS IS" WITHOUT
WARRANTY OF ANY KIND OTHER THAN AS STATED ABOVE. IHQ AND THIRD PARTY LICENSOR
MAKE NO EXPRESS OR IMPLIED WARRANTIES RELATING TO THE SOFTWARE OR ITS USE OR
FUNCTIONALITY, AND SPECIFICALLY DISCLAIM ALL WARRANTIES, EITHER EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANT-
ABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
Licensee understands and agrees that the limitation of IHQ's liability stated
above represents a deliberate allocation of risk that effects the price of the
program. Without this exculpation of liability the License Fee charged by IHQ
would necessarily be much greater. By the use of this Software, Licensee
expressly accepts the above disclaimer of liability.
<PAGE>
Term and Termination
9.1 Term. Unless terminated earlier as provided in this Agreement, this
Agreement shall commence as of the date the Software is delivered to Licensee
and shall continue in force through December 31, 2001 (the "Initial Term").
Thereafter, this Agreement will be automatically renewed for successive twelve
(12) month terms (a "Renewal Term") unless terminated as provided below.
9.2 Termination Without Cause. Either party may terminate this Agreement at the
end of the Initial Term or any Renewal Term hereof by giving written notice of
intent to terminate to the other party at least one hundred twenty (120) days
prior to the end of the Initial Term or any Renewal Term.
9.3 Termination for Breach. If at any time during the term of this Agreement
either party fails to perform any material covenant, condition, duty, obligation
or limitation herein, provided the breaching party shall not have remedied (or
taken reasonable steps to remedy) its failure within thirty (30) days after
receipt of written notice of such failure, the non-breaching party shall have
the right, in addition to any other rights it may have, to terminate this
Agreement.
9.4 Termination for Insolvency. This Agreement shall be terminated automatically
in any one or more of the following circumstances: (i) in the event that either
party is insolvent or is placed in the hands of a receiver, or otherwise enters
into a composition agreement with any of its creditors or makes any unauthorized
assignment for the benefit of creditors; or (ii) in the event that any of the
assets of either party are seized or attached, in conjunction with any action
against it by any third party, and such attachment materially affects the
ability of that party to perform this Agreement.
9.5 Effect of Termination. Upon Termination of this Agreement for any reason,
Licensee shall immediately cease all use of the Software and deliver all copies
of the Software and accompanying Documentation to IHQ by certified mail, return
receipt requested. Licensee shall have no right of any kind with respect to the
Software after the date of Termination. In the event that Licensee fails to
comply with this provision, IHQ shall have the right, at any time, to take
immediate possession of the Software and all copies wherever located, without
demand or notice.
Bankruptcy
10.1 Agreement to Assume or Reject. In the event a voluntary or involuntary
petition in bankruptcy is filed by or against Licensee, Licensee agrees to
either assume or reject this Agreement within sixty (60) days of the date the
petition was filed.
<PAGE>
10.2 Assumption of Agreement. If it assumes this Agreement, Licensee agrees to
cure, or provide adequate assurance that it will promptly cure, any default
under the Agreement; compensate, or provide adequate assurance that it will
promptly compensate, IHQ for any actual pecuniary loss to IHQ resulting from
Licensee's default; and provide adequate assurance of its future performance
under the Agreement.
10.3 Rejection of Agreement. If Licensee fails to assume this Agreement, or
rejects the same, within sixty (60) days of the filing date, then the parties
agree that this Agreement is terminated without further actions or proceedings.
Licensee then agrees it is obligated to surrender, and shall surrender,
immediate possession of the Software and accompanying Documentation, and all
copies thereof wherever located to IHQ without demand or notice. If Licensee
fails to voluntarily return the Software and all copies thereof, then Licensee
agrees and consents that IHQ is entitled to an order from a court of competent
jurisdiction lifting the automatic stay and entitling it to exercise its state
law remedies to immediately recover the Software and accompanying Documentation,
and all copies thereof, wherever located.
10.4 Enforceability. The covenants and agreements set forth in this Section 10
are deemed by the parties to follow the Software and shall be enforceable
against Licensee's successor, trustee or debtor in possession. This Section 10
shall be enforceable pursuant to the provisions of 11 U.S.C., Section 365.
General
11.1 Notice. Any notice or other communication required or allowed to be given
under this Agreement shall be deemed delivered when in writing and personally
delivered or sent by registered or certified U.S. mail, postage prepaid, return
receipt requested, and addressed to the appropriate party at the following
addresses:
KMHP:
Chief Financial Officer
Keystone Mercy Health Plan
1700 Market Street
Philadelphia, PA 19103
<PAGE>
IHQ:
Chief Financial Officer
Institute for Healthcare Quality, Inc.
8000 West 78th Street
Minneapolis, MN 55439
Addresses may be changed by written notice given pursuant to this Section;
however, any such notice shall not be effective, if mailed, until three (3) days
after depositing in the mail or when actually received, whichever occurs first.
11.2 Entire Agreement. This Agreement, including the attached Schedule 1 and
Exhibits A and B, constitutes the entire understanding and agreement between the
parties and supersedes any prior written or oral understandings or agreements
relating to its subject matter. This Agreement may not be modified or amended
except by a writing signed by both parties.
This Agreement is contemplated by the parties to be executed and performed in
conjunction with, and as part of, a managed care services agreement (the "MCS
Agreement") between Licensee and HRM intended to be negotiated and executed by
the parties hereto. In the event either party make a good faith determination
that it will not be able to reach agreement with the other and finalize the MCS
Agreement, then such party may terminate this Agreement upon sixty (60) days
prior written notice. In the event the MCS Agreement is executed and delivered
by the parties thereto, the provisions of the MCS Agreement will supersede
Sections 9.1 and 9.2 and paragraphs 1, 2 and 3 of Schedule 1 and paragraphs 1
and 2 of Schedule 3 hereof. In the event any inconsistency between the MCS
Agreement and this Agreement, the MCS Agreement shall govern.
11.3 Assignment. The rights and obligations of the parties hereunder shall not
be assigned without the prior written consent of the other party; provided,
however, that IHQ may assign this Agreement to a parent, wholly-owned subsidiary
or other affiliated company or purchaser of all or substantially all of the
assets or capital stock of IHQ without the written consent of Licensee. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns.
11.4 Headings. The headings of the various sections of this Agreement are for
convenience purposes only and shall not control or affect the meaning or
construction of any provision of this Agreement.
11.5 Severability. If any provision of this Agreement is held invalid or
unenforceable by a court of competent jurisdiction, such provision shall be
considered stricken from the Agreement and the remainder of the Agreement shall
continue in full force and effect.
<PAGE>
11.6 Relationship of Parties. Nothing contained in this Agreement shall be
construed to make either party the agent for the other for any purpose, and
neither party hereto shall have any right whatsoever to incur any liabilities or
obligations on behalf of or binding upon the other party. This Agreement is not
intended, and shall not be construed, to create a joint-venture, a partnership,
an agency or a franchise between the parties.
11.7 Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota applicable to contracts made
and performed therein.
11.8 Force Majeure. Any failure of either party to perform the obligations
hereunder shall not constitute default under this Agreement, nor give rise to
any claim for damage if and to the extent such delay or failure is caused by
occurrences beyond the control of the party affected, including, but not limited
to, acts of God, acts of war, public disorders, sabotage, floods, riots,
strikes, or other causes which, by the exercise of reasonable diligence, the
affected party is unable to prevent, mitigate or remove.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.
INSTITUTE FOR HEALTHCARE
QUALITY, INC.
By:
Title:
Print Name:
KEYSTONE MERCY HEALTH PLAN
By:
Title:
Print Name:
<PAGE>
SCHEDULE 1
1. License Fees. Upon delivery of the Software to Licensee's dedicated care
management units at HRM in Minneapolis, Minnesota and Philadelphia,
Pennsylvania, pursuant to the Managed Care Service Agreement between
Licensee and HRM, Licensee shall pay to IHQ a one-time License Fee of
Seventy-five Thousand Dollars ($75,000) ("License Fee"). This License Fee
covers the single file server and/or computers ("Workstations") located at
the two (2) locations described in Exhibit B.
If Licensee desires to use the Software on additional file servers or at
additional locations, Licensee must inform IHQ in writing of this intent
and pay IHQ an additional one-time License Fee upgrade of Two Thousand
Dollars ($2,000) for each additional file server or location.
2. Subscription Fees. Commencing on August 1, 1996, a monthly QualityFIRST(R)
Subscription Fee, to be paid on the first day of each month, will be
charged for all licensed file server sites. This monthly Subscription Fee
will be the greater of the following:
(01) Thirty Three Thousand Seven Hundred Fifty Dollars ($33,750) per month;
OR
(02) The total number of Members, multiplied by $.27 per Member per month
("PMPM").
For purposes of this Agreement, "Member" shall be defined as any person
enrolled as a subscriber or dependent in Licensee's health care plan
designated by Licensee to be served utilizing the Software. This Agreement
anticipates that Licensee will, initially, estimate the number of Members
for the purpose of determining Subscription Fees due hereunder, and
following the initial estimate, a reconciliation of the number of Members
shall be prepared within ninety (90) days following each Royalty Period.
3. Subscription Fee Increases. IHQ guarantees that the Subscription Fees set
forth above will remain in effect during the Initial Term of this
Agreement. After the Initial Term of this Agreement, based on experience
and market conditions, IHQ may raise its Subscription Fee upon one hundred
eighty (180) days written notice to Licensee prior to each anniversary
date. Any price increase will not be effective if such notice is received
less than one hundred eighty (180) days prior to that date.
4. Taxes. Licensee shall be responsible for all sales tax due hereunder and
IHQ shall be responsible for all taxes imposed on IHQ's income. All other
state, local and federal taxes applicable to any of the services provided
pursuant to the Agreement, whether imposed now or later by the applicable
taxing authorities, shall be paid by the party responsible under such law
for such payment.
<PAGE>
5. Billing Contact. Licensee designates its Chief Financial Officer to be its
billing contact for receiving invoices and handling billing related
questions. This contact can be reached at the following address and
telephone number:
Keystone Mercy Health Plan
1700 Market Street
Philadelphia, Pennsylvania 19103
(215) 937-8870
<PAGE>
SCHEDULE 2
TRAINING FEES BELOW ARE APPLICABLE ONLY FOR ADDITIONAL TRAINING REQUESTED BY
LICENSEE AFTER BOTH (1) LICENSEE'S RECEIPT OF THE SOFTWARE FOR USE BY LICENSEE'S
STAFF AT ITS PENNSYLVANIA FACILITIES AND (2) THE TRANSITION DATE SPECIFIED IN
THE MCS AGREEMENT.
1. Overview. IHQ is committed to providing training to support the successful
integration of QualityFIRST(R)into a care management program. IHQ is
available to provide implementation planning at the customer site to assist
with implementation strategy development. This includes an assessment of
the Licensee's implementation and training needs. On the basis of this
assessment, IHQ will recommend an individualized implementation schedule to
the Licensee. Although additional consulting services may be provided, in
all cases the Licensee is required to participate in the User Training
Program described below.
2. User Training Program. IHQ will provide a User Training Program for
Licensee's care managers and physician consultants at Licensee's place of
business. The training program provided by IHQ pursuant to this paragraph
will cover care management process, guideline application, specialist
referral procedures, system usage documentation requirements, and reports
management. Licensee agrees to provide adequate training facilities and a
separate Workstation for each attendee. A working knowledge of Microsoft(R)
Windows(TM) is a prerequisite for this program.
3. User Training Program Fee. The User Training Program will consist of a
training session for up to five care managers and a one (1) day follow-up
training session, which will occur within ninety (90) days after the
initial training session. The fee for this User Training Program is Six
Thousand Dollars ($6,000) (the "User Training Program Fee"); provided,
however that Licensee shall pay all reasonable travel and other associated
expenses incurred by IHQ in conducting such training.
In the event the Licensee desires to have more than (5) care managers
attend future IHQ training courses, Licensee shall pay IHQ an additional
Training Fee of One Thousand Dollars ($1,000) per attendee.
4. Train-the-Trainer Program. In the event that Licensee desires to have its
employees train other employees or consultants of Licensee, IHQ will
provide an optional Train-the-Trainer Program for the sum of Twelve
Thousand Dollars ($12,000) (the "Train-the-Trainer Program Fee"); provided,
however that Licensee shall pay all reasonable travel and other associated
expenses incurred by IHQ in conducting such training. This
Train-the-Trainer Program will consist of:
o Session 1 will consist of a sixteen (16) hour User Training course
that may include up to seven (7) attendees. (Two (2) designated
trainers and five (5) Authorized Users). The User Training course will
be followed by an eight (8) hour briefing session specifically for the
designated trainers; this session will focus on training techniques,
training preparation, use of case scenarios and role playing.
<PAGE>
o Session 2 will be a User Training course scheduled by Licensee no
later than 3-4 weeks following Session 1. This session includes a
team-teaching approach in which Licensee's new trainers assist the IHQ
trainer in the training preparation and delivery of training. The
optimal trainer/trainee ratio is two (2) trainers to five (5) new
Authorized User trainers.
o Session 3 will be a User Training course scheduled by Licensee no
later than six to eight weeks following Session 2. Licensee's new
trainers will be responsible for conducting Session 3, including
training preparation (logistics and agenda) and presentation of the
rationale for selecting QualityFIRST(R) guidelines for Licensee's
environment and how the guidelines will be used. The role of the IHQ
trainer at Session 3 will be to observe and assist in the delivery of
training.
Following Session 3, additional training sessions may be scheduled
based on Licensee's needs and IHQ trainer evaluation. Any subsequent
training sessions will be provided upon the terms and conditions,
including fees, as set forth in Schedule 3 of this Agreement.
5. Physician Training Program. If Licensee so desires, IHQ will provide an
optional half-day Physician Training Program for up to five (5) physician
managers for the sum of Two Thousand Dollars ($2,000); provided, however,
that Licensee shall pay all reasonable travel and other associated expenses
incurred by IHQ in conducting such training.
6. Fees and expenses due pursuant to this schedule shall be invoiced by IHQ
and shall be due within thirty (30) days from the date of such invoice.
<PAGE>
SCHEDULE 3
TECHNICAL/CUSTOMER SUPPORT AND CONSULTING SERVICES.
1. Technical/Customer Support Following Licensee's Receipt of the Software for
Use by Licensee's Staff at its Facilities in Pennslyvania. In order to
assist Licensee in the effective use of the Software, IHQ shall during the
initial term of this Agreement, at the request of Licensee, provide
Licensee with up to forty (40) hours of telephone technical/customer
support for questions related to use of the Software and to assist with the
implementation plan and definition of the care management process. All
requests for technical/customer support services must be made by Licensee's
Key Person or Key Person Alternate. In addition, Licensee's Key Person
shall inform IHQ when there is a configuration change in the number of
Workstations using the Software. This requires that the Key Person maintain
Exhibit B and communicate changes thereon to IHQ as they occur. For the
purposes of this Agreement, Licensee designates _______________________ to
be its Key Person and _______________________ to be its Key Person
Alternate. Licensee's Key Person can be reached at the following telephone
number during regular business hours ( ) . Licensee may change the identity
of its Key Person or Key Person Alternate provided it notifies IHQ in
writing of such a change within fifteen (15) days thereafter.
2. Consulting Services. In addition to the technical/customer support services
provided as described above, IHQ is available to provide Licensee with
consultation services upon the oral or written request of Licensee. During
the Initial Term of this Agreement, Licensee shall pay a consulting fee to
IHQ for consulting services provided by IHQ at the following hourly rates:
Vice President Level $250 per hour
Physician Consultant Level $175 per hour
Director Level $150 per hour
Programming Consultant Level $ 75 per hour
provided, however, that Licensee shall reimburse IHQ for all travel and
other associated expenses incurred by IHQ in rendering such consulting
services. Fees due pursuant to this paragraph shall be invoiced by IHQ and
shall be due within thirty (30) days from the date of such invoice.
<PAGE>
EXHIBIT B
Identification of Computers and Location
Site Computer Description Date of Installation
Health Risk KMHP Dedicated Care
Management, Inc. Management Unit
Minneapolis, MN
KMHP KMHP Medical Affairs Unit
Philadelphia, PA
AMENDMENT NO. 1
to the
MANAGED CARE SERVICE AGREEMENT
between
HEALTH RISK MANAGEMENT, INC.
and KEYSTONE MERCY HEALTH PLAN
THIS AMENDMENT NO. 1 is made and entered into effective as of the 1st day
of October, 1997, ("Effective Date"), by and between HEALTH RISK MANAGEMENT,
INC., having offices at 8000 West 78th Street, Minneapolis, Minnesota ("HRM")
and KEYSTONE MERCY HEALTH PLAN, having offices at 200 Stevens Drive,
Philadelphia, Pennsylvania ("KMHP").
RECITALS:
WHEREAS, HRM and KMHP are parties to that certain Managed Care Service
Agreement dated October 29, 1996, whereby KMHP utilizes certain HRM systems,
software and resource management services, and HRM provides certain related
health care cost management services to KMHP with respect to KMHP's
participating members to whom managed health care services are delivered under
KMHP programs (the "Agreement"); and
WHEREAS, by executing this Amendment No. 1, HRM and KMHP desire to amend
certain provisions of the Agreement to address and clarify issues that have
arisen during the course of performance under the Agreement;
NOW, THEREFORE, in consideration of the foregoing and in consideration of
the mutual promises of the parties hereto and the mutual benefits to be gained
by the performance hereof, the parties hereto agree as follows:
1. Section 3.k., including subsections 3.k.i, ii and iii thereof, is deleted
in its entirety and is not to be replaced or restated.
2. Section 11.e. is hereby deleted in its entirety and the following is hereby
inserted in its place.
"e. If any of the following events occur: (i) the actual Per Covered
Member Per Month ("PMPM") calculation for Inpatient (LOB 100), pursuant to
Section 6 of the Amended Schedule 1 - Fee Schedule, "Performance Bonus," is
greater than ninety-two percent (92%) of the 1996 Baseline PMPM used for
the Target PMPM for calendar year 1998. (The Target PMPM is eighty-five
percent (85%) of the 1996 Baseline PMPM.); (ii) KMHP ceases to operate
under a DPW Contract or otherwise terminates doing business in the Service
Area; (iii) a sale of HRM or of all or substantially all of HRM's assets;
(iv) a merger or consolidation of HRM or a change of direct or indirect
control of HRM or a change of HRM's executive management; or (v) HRM, or an
affiliate of HRM or an entity in which HRM holds an equity or ownership
interest, is a competitor of KMHP, then KMHP may terminate the Managed Care
Service Agreement with at least sixty (60) days written notice to HRM;
provided, however, except for a termination under clause (iii), (iv) or (v)
above, KMHP shall pay the cost of termination, with no further obligation
of any kind to HRM, as follows:
<PAGE>
i. Two (2) months of gross salary of HRM's dedicated Minneapolis staff
(i.e., full-time equivalents ["FTE's"] then working on KMHP services).
ii. Usage fees calculated at $0.11 per Covered Member per month for a
six (6) month period after the termination date.
For the purposes of this subsection 11.e., an entity shall be
considered a competitor of KMHP if such entity is engaged in, has agreed to
engage in, or has submitted a proposal or filing to a governmental agency
or other party to engage in the provision of managed care services to
Medical Assistance recipients in the Service Area.
For the purposes of this subsection 11.e., the term "affiliate" of any
entity shall mean a party that directly or indirectly controls, is
controlled by, or under common control with such entity."
3. Section 11.f., including subsections 11.f.i, ii and iii thereof, is hereby
amended and restated in its entirety to read as follows:
"f. Ninety (90) days prior to October 1, 1999, KMHP shall give written
notice to HRM of its intent to exercise its option to terminate any or all
of the Utilization Management services referred to in Section 3.b.(i) of
Amended Schedule 1 Fee Schedule to the Agreement, the QualityFIRST(R)
Guidelines, HRM's AutoPILOT services, and HRM's Resource Management
services, together with the respective fees for said services, at any time
on or after September 30, 1999, with no payment to be due HRM for the
terminated service(s) in connection therewith, except for those transition
costs specified in Section 3.a.v. of Amended Schedule 1 - Fee Schedule to
the Agreement. If KMHP chooses to continue any or all of the Utilization
Management services referred to in Section 3.b.(i) of Amended Schedule 1,
the QualityFIRST Guidelines, HRM's AutoPILOT services, and HRM's Resource
Management services, KMHP shall specify in its advance written notice to
HRM, as specified above, the service(s) it intends to continue and the date
upon which such service(s) is to terminate, if sooner than December 31,
2001. In the event the service(s) is to continue beyond September 30, 1999,
all fees except for Utilization Management will continue as specified
herein and, with respect to Utilization Management fees, KMHP and HRM will
mutually agree on the fees for Utilization Management within a reasonable
time following HRM's receipt of KMHP's written notice."
4. Section 21, entitled, "Changes Effective October 1, 1997," is hereby added
to the Agreement and shall read as follows:
"21. Changes Effective October 1, 1997
a. The parties will mutually develop and agree upon two (2) transition
plans which will be added to the Agreement in an amendment to be
executed at such time.
<PAGE>
Transition Plan 1 will involve the plan to transition to KMHP certain
services which have been the subject of dispute. The reimbursement for
such services will be as agreed to in the Amended Schedule 1 - Fee
Schedule. Once the transition plan is agreed to, the fee schedule and
timings for these services will be adjusted to reflect those change in
services. The transition plan members for such services are (see
attachment). The transition team will finalize this transition plan to
be completed no later than November 15, 1997. This transition plan
will then be presented to the joint senior management committee
consisting of (see attachment). Final approval will be by the joint
senior management decision committee.
Transition Plan 2 will involve a transition team consisting of (see
attachment) will deliver to the senior management team of (see
attachment) a transition plan for transitioning the capitated managed
care services to KMHP at any time after October 1, 1998. On or before
December 23, 1997, the parties shall agree on the specific terms to be
included in a written Transition Plan to be appended to the Agreement.
The intent is to be able to have transitioned all of the capitated
services to KMHP no later than October 1, 1999. KMHP shall, at their
discretion, continue to have HRM perform the services beyond September
30, 1999, if they so choose. The transition plan will anticipate that
as any portion of the capitated services is transferred to KMHP prior
to September 30, 1999, there will be an adjustment to the fees payable
to HRM, but that HRM will be entitled to its full profit structure
that was anticipated for that service through September 30, 1999.
b. Claim Performance Standards. In the performance of the managed care
services under the Agreement, HRM and KMHP will perform such services
in a manner that will satisfy such performance standards as shall be
defined in a performance standards plan. The performance standards
plan will be developed by a team consisting of (see attachment). The
team will deliver the performance standards plan to the joint senior
management committee (consisting of (see attachment)) on or before
November 15, 1997. The performance standards plan shall include, among
others to be developed and agreed upon, the following standards:
i) Ninety-five percent (95%) of all authorizations will load to the
KMHP healthcare information system without critical errors on a
daily basis
ii) Ninety-eight percent (98%) accuracy rate on all authorizations
iii)Case Exception Report - 100% resolved within two (2) business days
iv) Certification Extract Report - 100% resolved within two (2)
business days
v) Authorization issues communicated from KMHP's Claims Department -
100% resolved within two (2) business days
<PAGE>
vi) Audit and measurement standards and remedies for corrective
action in the event the performance standards are not being
achieved, which remedies would not be KMHP's exclusive remedies
and would not preclude the exercise of other rights.
With respect to the performance standards iii., iv., and v. set forth
above, HRM agrees to meet, commencing on the date hereof, such
performance standards when the ability to "resolve" such performance
standards is within HRM's control.
c. On or before November 1, 1997, the parties will mutually develop and
agree upon a written joint management process which will be added to
the Agreement in an amendment to be executed at such time. This
written joint management process shall address the following:
i) The management structure of how both parties will relate to each
other.
ii) A defined set of procedures to control the interface process
between all KMHP and all HRM affected operations. These
procedures will address, but not be limited to, HRM interfaces
with the following KMHP departments: IS, Claims,
Telecommunications, Regulatory Affairs, Member Services, and
Medical Affairs.
iii)Define the control of the HRM/Philadelphia staff and its'
relationship to the KMHP staff.
iv) Develop performance measures for:
(1) claims interface and claims turnaround between HRM/UM group
and the KMHP claims group.
(2) delineate the reporting processes and data fields
communication processes for the reporting of all activities
between HRM and KMHP.
(3) delineate the management issues and staffing of the HRM/
Philadelphia staff.
(4) delineate desirable and required features and performance
capabilities of AutoPILOT.
v) Provide KMHP with a diskette containing detailed line item
records used by HRM to create summaries for month-end close
information on inpatient cases.
<PAGE>
d. On or before November 1, 1997, the parties will mutually develop and
agree upon more precise descriptions of each of the services
contemplated under the Agreement, the responsibilities of the parties
with respect thereto and performance standards thereof, including
those listed in Section 21.c.(iv) above. For each service provided,
the detail to be agreed upon may include, without limitation, the
telecommunications interfaces, HRM case manager processes, the data
fields to be filled out in AutoPILOT or the Mercy Healthcare System,
and the data fields to be transmitted on each case to KMHP claims.
These details, once agreed upon, will be added to this Agreement in an
amendment to be executed at such time and, thereafter, these
descriptions will constitute the extent of the service provided by
HRM. Any modifications desired or requested by KMHP or HRM for that
service will go through the change order process described below.
e. On or before November 1, 1997, the parties will agree on the use of a
change order process to be added to the Agreement by amendment to be
executed at such time and by which the parties will abide in
addressing changes to the services and responsibilities from and after
the adoption of said amendment.
f. HRM and all those who may claim under, by or through HRM, and all
affiliates of HRM, hereby release and forever discharge KMHP and its
successors, agents, owners, partners, affiliates, employees, officers,
directors and assigns of and from any and all claims, causes of
action, suits and demands whatsoever (except those with respect to
third party claims subject to indemnification under Section 12 of the
Agreement), which HRM now has or ever had against KMHP in connection
with or related to (i) the subject matters of a request for dispute
resolver list for arbitration filed by HRM with the NHLA Alternative
Dispute Resolution Service; (ii) payment by KMHP for, in connection
with, related to, or resulting from, the provision of services by HRM
except as expressly set forth in this Amendment No. 1; and (iii) any
alleged breaches of the Agreement by KMHP related to clauses (i) and
(ii) of this paragraph which occurred prior to the date of this
Amendment No. 1.
KMHP and all those who may claim under, by or through KMHP, and all
affiliates of KMHP, hereby release and forever discharge HRM and its
successors, agents, owners, partners, affiliates, employees, officers,
directors and assigns of and from any and all claims, causes of
action, suits and demands whatsoever (except those with respect to
third party claims subject to indemnification under Section 12 of the
Agreement), which KMHP now has or ever had against HRM in connection
with or related to (i) the subject matter of KMHP's alleged claims
against HRM as referenced in the letter of Robert H. Gilman of KMHP to
Gary T. McIlroy, M.D. of HRM, dated September 5, 1997; (ii) payment by
HRM for, in connection with, related to, or resulting from the
rendering of services or the alleged failure to render appropriate
services, by HRM, except as expressly set forth in this Amendment No.
1; and (iii) any alleged breaches of the Agreement by HRM related to
clauses (i) and (ii) of this paragraph which occurred prior to the
date of this Amendment No. 1.
<PAGE>
The parties further acknowledge and agree that the services, functions
and responsibilities performed by HRM through this date in connection
with the operations of KMHP and its affiliates are, among others,
included in the obligations, services and responsibilities of HRM
under the Agreement, as amended, and that HRM does not and will not
have any right to compensation for any services, functions and
responsibilities currently performed by HRM, except as set forth in
the Agreement, as amended and will not have any right to terminate any
such services, functions and responsibilities currently performed by
HRM, except as set forth in the Agreement, as amended.
g. Upon execution of this Amendment No. 1 to the Agreement, HRM will
withdraw, without prejudice, its request for arbitration filed with
the National Health Lawyers Association Alternative Dispute Resolution
Service on October 3, 1997.
h. On or before November 1, 1997, the parties will mutually agree upon
further amendments to the Agreement which are intended to:
i) replace ambiguous responsibilities to specific processes and
procedures;
ii) eliminate ambiguity in many of the breach of contract provisions;
and
iii)insert a mediation process prior to any arbitration process."
5. Schedule 1 - Fee Schedule to the Agreement is hereby amended and restated
as follows: (see attachment)
6. Reaffirmation of Agreement - Any and all provisions of the Agreement, other
than those modified and amended as set forth in this Amendment No. 1, shall
hereby remain in full force and effect. Any further amendment to the
Agreement shall be subject and pursuant to a definitive written document
executed by the parties hereto.
7. Counterparts. This Amendment No. 1 may be executed in one or more
counterparts, and each such counterpart shall be deemed part of the
original document. This Amendment No. 1 shall be binding upon the parties
hereto as of the Effective Date set forth above at such time as both
parties have executed a counterpart of this Amendment No. 1.
<PAGE>
8. Facsimile Signatures. Original signatures of the parties hereto on copies
of this Amendment No. 1 transmitted by facsimile shall be deemed originals
for all purposes hereunder, and such copies shall be binding on the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
to the Managed Care Service Agreement on the dates shown below.
HRM: KMHP:
HEALTH RISK MANAGEMENT, INC. KEYSTONE MERCY HEALTH PLAN
By /s/ GARY McILROY By /S/ DANIEL J. HILFERTY
Its Chief Executive Officer Its President and Chief Executive Officer
Dated 10/9/97 Dated 10/09/97
EXHIBIT 11
HEALTH RISK MANAGEMENT, INC.
COMPUTATION OF EARNINGS PER SHARE (EPS)
<TABLE>
<CAPTION>
Primary EPS Fully Diluted EPS
Year Ended June 30 Year Ended June 30
--------------------------------------- ---------------------------------------
1995 1996 1997 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings (in thousands):
Earnings for period indicated $ 844 $ 1,996 $ 2,241 $ 844 $ 1,996 $ 2,241
==== ===== ===== === ===== =====
Number of Shares:
Weighted average number of
shares of common stock
outstanding 3,946,933 4,080,542 4,291,349 3,946,933 4,080,542 4,291,349
Weighted average number of
shares of common stock
equivalents 35,160 138,644 166,752 47,472 175,001 199,230
--------- --------- --------- --------- --------- ---------
Number of shares included in
per share computation for
the period indicated 3,982,093 4,219,186 4,458,101 3,994,405 4,255,543 4,490,579
========= ========= ========= ========= ========= =========
Net earnings per share $ 0.21 $ 0.47 $ 0.50 $ 0.21 $ 0.47 $ 0.50
==== ==== ==== ==== ==== ====
</TABLE>
EXHIBIT 22
List of Subsidiaries
of
Health Risk Management, Inc.
Health Resource Management Ltd., an Alberta corporation
HRM Claim Management, Inc., a Minnesota corporation
Institute for Healthcare Quality, Inc., a Minnesota corporation
Health Benefit Reinsurance, Inc., a Michigan corporation
Health Program Managers, Inc., a California corporation
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-38623) pertaining to the Health Risk Management, Inc. Non-Incentive
Stock Option Plan, and in the Registration Statement (Form S-8 No. 33-38624)
pertaining to the Health Risk Management, Inc. 1990 Stock Option Plan, and in
the Registration Statements (Form S-8 No. 33-60390) and (Form S-8 No. 333-34497)
pertaining to the Health Risk Management, Inc. 1992 Long-Term Incentive Plan of
our report dated October 10, 1997, with respect to the consolidated financial
statements and schedule of Health Risk Management, Inc. included in this Annual
Report (Form 10-K) for the year ended June 30, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FROM THE REGISTRANT'S FORM 10-K FOR THE YEAR ENDED
6-30-97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 5,349
<SECURITIES> 0
<RECEIVABLES> 12,367
<ALLOWANCES> 260
<INVENTORY> 0
<CURRENT-ASSETS> 19,055
<PP&E> 29,600
<DEPRECIATION> 23,885
<TOTAL-ASSETS> 51,723
<CURRENT-LIABILITIES> 10,477
<BONDS> 3,487
0
0
<COMMON> 45
<OTHER-SE> 33,999
<TOTAL-LIABILITY-AND-EQUITY> 51,723
<SALES> 62,723
<TOTAL-REVENUES> 62,723
<CGS> 37,657
<TOTAL-COSTS> 37,657
<OTHER-EXPENSES> 21,064
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 535
<INCOME-PRETAX> 3,654
<INCOME-TAX> 1,413
<INCOME-CONTINUING> 2,241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,241
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
