FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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, Minnesota 55439
(Address of principal executive offices, Zip Code)
(612) 829-3500
(Registrant's telephone number, including area code)
--
(Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of Common Stock, par value $.01 per share, outstanding on
October 24, 1997 was 4,502,019.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
INDEX
Part I. Financial Information Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- at September 30, 1997
and June 30, 1997..................................................3
Consolidated Statements of Net Income for the three months
ended September 30, 1997 and 1996..................................4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1997 and 1996..................................5
Notes to Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................7-9
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.......10
Item 6. Exhibits and Reports on Form 8-K..........................10
Signatures..............................................................11
Exhibit Index...........................................................12
Exhibit 11..............................................................13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
September 30,
1997 June 30,
(Unaudited) 1997
----------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,998 $ 5,349
Accounts receivable-net of allowance for doubtful accounts of $287
and $260 at September 30, 1997 and June 30, 1997, respectively 6,793 5,257
Unbilled receivables 6,662 7,110
Deferred income taxes 385 350
Other 1,074 989
----------------- ---------------
Total current assets 17,912 19,055
Computer software costs, net of amortization of $13,928 and $12,782 at
September 30, 1997 and June 30, 1997, respectively 21,399 20,385
Property and equipment less accumulated depreciation of $11,849
and $11,103 at September 30, 1997 and June 30, 1997, respectively 8,974 9,215
Contract rights, net of amortization of $955 and $914 at
September 30, 1997 and June 30, 1997, respectively 852 893
Other assets 2,142 2,175
----------------- ---------------
$ 51,279 $ 51,723
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,089 $ 1,645
Accrued expenses 2,640 3,018
Unearned revenues 3,744 3,826
Current maturities of notes payable 1,089 1,134
Current portion of capitalized equipment leases 802 854
----------------- ---------------
Total current liabilities 9,364 10,477
Deferred income taxes 4,099 3,715
Long-term portion of notes payable 1,897 2,166
Long-term portion of capitalized equipment leases 1,150 1,321
Commitments
Shareholders' equity:
Undesignated shares, $.01 par value, 9,750,000 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,
4,500,519 and 4,478,245 shares issued and outstanding at
September 30, 1997 and June 30, 1997, respectively 45 45
Additional paid-in capital 31,098 30,945
Retained earnings 3,626 3,054
----------------- ---------------
Total shareholders' equity 34,769 34,044
----------------- ---------------
$ 51,279 51,723
================= ===============
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
1997 1996
----------------- ---------------
<S> <C> <C>
Revenues $ 16,694 $ 14,395
Operating expenses:
Cost of services 10,902 8,648
Depreciation and amortization, principally cost of services 1,977 1,726
Selling and marketing 1,513 1,908
Administration 1,320 1,291
----------------- ---------------
Total operating expenses 15,712 13,573
----------------- ---------------
Operating income 982 822
Other income (expense):
Interest income 63 44
Interest expense (121) (146)
----------------- ---------------
Total other income (expense) (58) (102)
----------------- ---------------
Income before income taxes 924 720
Provision for income taxes:
Current 3 4
Deferred 349 278
----------------- ---------------
Total income taxes 352 282
----------------- ---------------
Net income $ 572 $ 438
================= ===============
Net income per common and common equivalent share $ .12 $ .10
================= ===============
Weighted average common and common equivalent shares 4,636,000 4,356,000
================= ===============
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 572 $ 438
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 746 636
Amortization 1231 1,090
Provision for deferred income tax 349 278
Changes in operating assets and liabilities:
Accounts receivable (1,536) 1,063
Unbilled receivables 448 (806)
Other assets (96) (339)
Accounts payable (448) (498)
Accrued expenses (378) (640)
Unearned revenues (82) 529
--------------- ---------------
Net cash provided by operating activities 806 1,751
Cash flows from investing activities:
Acquisition of assets, net of cash acquired -- (139)
Property and equipment (613) (615)
Capitalized software (2,160) (1,488)
--------------- ---------------
Net cash used in investing activities (2,773) (2,242)
Cash flows from financing activities:
Principal payments on notes payable (314) (342)
Principal payments on capital leases (223) (273)
Issuance of common shares 153 277
--------------- ---------------
Net cash used in financing activities (384) (338)
--------------- ---------------
Decrease in cash (2,351) (829)
Cash and cash equivalents at beginning of period 5,349 3,347
--------------- ---------------
Cash and cash equivalents at end of period $ 2,998 $ 2,518
=============== ===============
Supplemental disclosures:
Interest paid $ 121 $ 146
Income taxes paid 2 7
Equipment acquired under capital lease 0 0
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited consolidated financial statements herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. The accompanying interim financial statements have
been prepared under the presumption that users of the interim financial
information have either read or have access to the audited financial
statements for the latest fiscal year ended June 30, 1997. Accordingly,
footnote disclosures which would substantially duplicate the disclosures
contained in the June 30, 1997 audited financial statements have been
omitted from these interim financial statements. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These interim
financial statements should be read in conjunction with the annual
financial statements and the notes thereto.
2. Computer software and database development costs
<TABLE>
<CAPTION>
September 30,
1997 June 30,
(Unaudited) 1997
---------------- ------------------
(in thousands)
<S> <C> <C>
Computer software and database development costs consist if the following:
Computer Software (AutoPILOT(TM))
Cost $ 13,919 $ 12,932
Less accumulated amortization 5,662 5,177
---------------- ------------------
Net book value 8,257 7,755
Claim Administration Software
Cost 7,899 7,601
Less accumulated amortization 3,101 2,913
---------------- ------------------
Net book value 4,798 4,688
Guidelines, Protocols and Medical Analysis Software
Cost 13,509 12,634
Less accumulated amortization 5,165 4,692
---------------- ------------------
Net book value 8,344 7,942
================ ==================
Computer Software and Database Development Costs $ 21,399 $ 20,385
================ ==================
</TABLE>
Amortization of these costs was as follows for the three month period ended
September 30, 1997 and the year ended June 30, 1997:
<TABLE>
<CAPTION>
Three Months
Ended
September 30, Year Ended
1997 June 30,
(Unaudited) 1997
---------------- ------------------
(in thousands)
<S> <C> <C>
Computer Software (AutoPILOT(TM)) $ 485 $ 1,791
Claim Administration Software 188 735
Guidelines, Protocols and Medical Analysis Software 473 1,617
---------------- ------------------
Amortization Expense $ 1,146 $ 4,143
================ ==================
</TABLE>
<PAGE>
3. Earnings Per Share
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:
Current Standards
----------------- FAS 128
Fully ---------------------
Primary Diluted Basic Diluted
------- ------- ----- -------
Three months ended September 30,
1997 $ .12 $ .12 $ .13 $ .12
1996 $ .10 $ .10 $ .10 $ .10
<PAGE>
Item 2. 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 or member 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 revenue for the three months ended September 30, 1997 and
1996 and the fiscal year ended June 30, 1997.
<TABLE>
<CAPTION>
Year
Three Months Ended Ended
September 30, June 30,
----------------------------
1997 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
============= ============= =============
Operating expenses:
Cost of services 65.3% 60.1% 60.0%
Depreciation and amortization, principally cost of services 11.8% 12.0% 12.2%
Selling and marketing 9.1% 13.2% 11.7%
Administration 7.9% 9.0% 9.1%
Merger costs 0.0% 0.0% 0.6%
------------- ------------- -------------
Total operating expenses: 94.1% 94.3% 93.6%
------------- ------------- -------------
Income from operations 5.9% 5.7% 6.4%
Other income (expense):
Interest income 0.3% 0.3% 0.3%
Interest expense (0.7)% (1.0)% (0.9)%
------------- ------------- -------------
Total other income (expense) (0.4%) (0.7)% (0.6)%
Income before taxes 5.5% 5.0% 5.8%
Income taxes (2.1)% (2.0)% (2.2)%
------------- ------------- -------------
Net income 3.4% 3.0% 3.6%
============= ============= =============
</TABLE>
Revenues: Revenues for the three months ended September 30, 1997 increased
$2,299,000 (16%) over the corresponding period of the prior year (from
$14,395,000 to $16,694,000). This increase is primarily attributable to net
increases in the number of clients and covered participants enrolled in the
Company's healthcare management services, sales of additional services to
existing clients, and increased sales of the QualityFIRST healthcare practice
guidelines. Revenues for fiscal 1997 and the first quarter of fiscal 1998
reflect the resolution of certain financial matters with a large client
resulting in an amended contract in October, 1997.
<PAGE>
Following is the approximate breakout of revenue by class of similar service
categories:
<TABLE>
<CAPTION>
Three Months Ended
September 30, Change
--------------------------------- -------------------------------
1997 1996 Amount %
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Care review and case management $ 7,615,000 $ 5,761,000 $1,854,000 32%
Price control 859,000 1,116,000 (257,000) (23)%
Claim administration services 6,286,000 5,730,000 556,000 10%
Information management 1,934,000 1,788,000 146,000 8%
=============== =============== =============== =============
$16,694,000 $14,395,000 $2,299,000 16%
=============== =============== =============== =============
</TABLE>
There are variations in revenue by class because clients purchasing services may
choose all or a portion of these services, and this varies from client to client
and period to period.
Revenues for care review and case management services increased 32%, or
$1,854,000, from the first quarter of fiscal 1997 to fiscal 1998 (from
$5,761,000 to $7,615,000). The increase in fiscal 1998 was mainly the result of
added revenues in the HMO unit.
Revenues for price control services decreased 23%, or $257,000, from the first
quarter of fiscal 1997 to fiscal 1998 (from $1,116,000 to $859,000). The
decrease in fiscal 1998 was mainly the result of a decrease in the customer base
using the negotiations and bill review service.
Claim administration services revenues increased 10%, or $556,000, from the
first quarter of fiscal 1997 to fiscal 1998 (from $5,730,000 to $6,286,000)
because of increased interest in HRM's comprehensive services.
Information management revenues increased 8%, or $146,000, from the first
quarter of fiscal 1997 to fiscal 1998 (from $1,788,000 to $1,934,000). In fiscal
1996, fiscal 1997, the first quarter of fiscal 1997, and the first quarter of
fiscal 1998, revenues of $4,910,000, $7,577,000, $1,756,000, and $1,893,000,
respectively, were related to QualityFIRST(R) software and system licensing.
Cost of Services: Cost of services increased 26% from the first quarter of
fiscal 1997 to fiscal 1998 (from $8,648,000 to $10,902,000). As a percentage of
revenues, cost of services increased from 60% in fiscal 1997 to 65% in fiscal
1998 because the Company staffing for the quarter increased as a result of a
large HMO's expansion of membership and services.
Depreciation and Amortization: Depreciation and amortization expenses increased
15% from the first quarter of fiscal 1997 to fiscal 1998 (from $1,726,000 to
$1,977,000), but remained unchanged as a percentage of revenues at 12%. The
increase was primarily the result of depreciation on 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.
Selling and Marketing: Selling and marketing expenses decreased 21% from the
first quarter of fiscal 1997 to fiscal 1998 (from $1,908,000 to 1,513,000). The
decrease in fiscal 1998 was due primarily to decreased marketing, sales and
account management personnel, sales commissions and travel expenses because of
personnel lost as a result of the attempted 1997 merger. Selling and marketing
expenses as a percentage of revenues decreased to 9% in the first quarter of
fiscal 1998 from 13% in the first quarter of fiscal 1997.
Administration: Administration expenses increased 2% from the first quarter of
fiscal 1997 to fiscal 1998 (from $1,291,000 to $1,320,000), and decreased as a
percentage of revenues from 9% to 8%. The increase in administration expenses in
the first quarter of fiscal 1998 was due to increased expense for staff, and
other expenses, including salaries, bad debts, training programs and insurance.
<PAGE>
Interest: Interest income was $63,000 and $44,000 for the first quarter of
fiscal 1998 and fiscal 1997, respectively. The income resulted from available
funds invested in short-term investments. Interest expense decreased 17% from
the first quarter of fiscal 1997 to fiscal 1998 (from $146,000 to $121,000,
respectively) and decreased as a percentage of revenues from 1.0% to 0.7%.
Income Taxes: Income taxes increased in the first quarter of fiscal 1998 from
fiscal 1997 by $70,000. It is expected that the fiscal year 1998 effective tax
rate will approximate the 39% rate of fiscal 1997.
Liquidity and Capital Resources
The Company's cash flow from operations was $1,751,000 and $806,000 for the
first three months of fiscal 1997 and 1998, respectively. Cash flow from
operating activities was greater than net income because non-cash charges such
as depreciation and amortization exceeded the net changes in operating assets
and liabilities for the first three months of fiscal 1997 and fiscal 1998. Cash
has been used to invest in software and program enhancements ($1,488,000 and
$2,160,000 in the first three months of fiscal 1997 and fiscal 1998,
respectively). In addition, the Company acquired property and equipment,
including acquired assets, of $754,000 and $613,000 for the first three months
of fiscal 1997 and 1998, respectively. The Company expects to continue its
expansion and will acquire property and equipment, enhance software and
products, and develop products.
The Company has a net operating loss carryforward for income tax purposes in
excess of $14,100,000 as of June 30, 1997, which can be used to reduce the cash
flow necessary to pay taxes.
The Company's cash position at September 30, 1997 was $2,998,000 as compared to
$5,349,000 at June 30, 1997. The Company also used approximately $615,000 and
$537,000 for the first three months of fiscal 1997 and 1998, respectively, to
repay principal on notes payable and capital leases, net of proceeds. The
Company received $277,000 and $153,000 during the first quarter of fiscal 1997
and fiscal 1998, respectively, from stock option exercises for common stock. The
Company's current ratio was approximately 1.9 and 1.8 at September 30, 1997 and
June 30, 1997. The Company's working capital was $8,548,000 and $8,578,000 at
September 30, 1997 and June 30, 1997, respectively.
The Company believes that its cash and cash flow from operations, together with
credit facilities which the Company has obtained, will be sufficient to finance
the Company's anticipated, normal expansion in fiscal 1998. The Company has a
term loan (principal balance of $917,000 as of September 30, 1997) with its bank
due June 30, 1999 and a revolving credit facility expiring January 31, 1998
under which the Company may borrow up to $3,750,000. The Company had available
$1,691,000 under the $3,750,000 revolving credit facility at September 30, 1997.
The revolving credit and term loan are secured by liens on the assets of the
Company.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Company's shareholders was held on Tuesday,
June 17, 1997.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14A under the Securities Exchange Act of 1934, there was no solicitation in
opposition to management's nominees as listed in the proxy statement, and all
such nominees were elected.
(c) At the Annual Meeting the following matters were voted upon:
(i) The following persons were elcted as Class B Directors for a
three-year term:
Nominee Votes For Votes Withheld
------- --------- --------------
Marlene Travis 3,633,060 229,883
Vance K. Travis 3,633,260 229,683
(ii) By a vote of 1,543,068 shares in favor, with 741,724 shares
against, 87,254 shares abstaining and 1,488,897 shares represented by
broker nonvotes, the shareholders approved an amendment to the Company's
Amended and Restated 1992 Long-Term Incentive plan to increase the number
of shares authorized for issuance thereunder from 400,000 to 800,000.
(iii) By a vote of 3,851,533 shares in favor, with 3,110 shares
against and 8,300 shares abstaining, the shareholders approved the
selection of Ernst & Young LLP as independent auditors for the current
fiscal year.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 -- Computation of Earnings Per Common Share
Exhibit 27 -- Financial Data Schedule (filed in electronic format only)
(b) During the three months ended September 30, 1997, there was no report
filed on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities 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.
Dated: October 31, 1997 By /s/ GARY T. McILROY, M.D.
-------------------------
Gary T. McIlroy, M.D.
Chief Executive Officer
Dated: October 31, 1997 By /s/ THOMAS P. CLARK
-------------------
Thomas P. Clark
Chief Financial Officer
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX
to
FORM 10-Q
For Quarter Ended September 30, 1997
HEALTH RISK MANAGEMENT, INC.
(SEC File No. 0-18902)
Exhibit
Number Exhibit Description
- ------- -------------------
11 Computation of Earnings Per Share
27 Financial Data Schedule (filed in electronic format only)
EXHIBIT 11
HEALTH RISK MANAGEMENT, INC.
COMPUTATION OF EARNINGS PER SHARE (EPS)
(Unaudited)
<TABLE>
<CAPTION>
Primary EPS Fully Diluted EPS
Three Months Ended Three Months Ended
September 30 September 30
---------------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings (in thousands):
Earnings for period indicated $ 572 $ 438 $ 572 $ 438
==== === === ===
Number of Shares:
Weighted average number of
shares of common stock
outstanding 4,495,736 4,183,112 4,495,736 4,183,112
Weighted average number of
shares of common stock
equivalents 140,511 172,498 140,511 229,593
--------- --------- --------- ---------
Number of shares included in
per share computation for
the period indicated 4,636,247 4,355,610 4,636,247 4,412,705
========= ========= ========= =========
Net earnings per share $ 0.12 $ 0.10 $ 0.12 $ 0.10
==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FROM THE REGISTRANTS FORM 10-Q FOR THE QUARTER
ENDED 9-30-97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,998
<SECURITIES> 0
<RECEIVABLES> 13,742
<ALLOWANCES> 287
<INVENTORY> 0
<CURRENT-ASSETS> 17,912
<PP&E> 30,373
<DEPRECIATION> 25,777
<TOTAL-ASSETS> 51,279
<CURRENT-LIABILITIES> 9,364
<BONDS> 3,047
0
0
<COMMON> 45
<OTHER-SE> 34,724
<TOTAL-LIABILITY-AND-EQUITY> 51,279
<SALES> 16,694
<TOTAL-REVENUES> 16,694
<CGS> 10,902
<TOTAL-COSTS> 10,902
<OTHER-EXPENSES> 4,810
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> 924
<INCOME-TAX> 352
<INCOME-CONTINUING> 572
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 572
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
