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, 1998
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)
10900 Hampshire Avenue South, Minneapolis, MN 55438
(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 September 18, 1998 was approximately $52,880,000 based upon the
closing sale price of the Registrant's Common Stock on such date.
Shares of $.01 par value Common Stock outstanding at September 18, 1998:
4,598,285 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 for
Healthcare Quality, Inc., Health Benefit Reinsurance, Inc., and
Pennsylvania HRM, Inc., and its wholly owned Canadian subsidiary, Health
Resource Management Ltd. Health Risk Management, Inc. was incorporated in
Minnesota in 1977.
HRM provides managed healthcare services which includes integrated total
health plan management services and managed care operations.
The Company's principal health plan management services include care
management, price control, claim administration and risk management and
information services. Revenue from such services are derived principally
from software licenses and subscription fees related to its QualityFIRST(R)
Medical Risk Management System. HRM packages its services into two
components based on the market being served. The integrated product
grouping serving the provider market (e.g., Health Maintenance
Organizations (HMOs), governmental health plans, preferred provider
organizations (PPOs) and hospitals) is called the QualityFIRST(R) Medical
Risk Management System, which includes HRM's QualityFIRST(R) guidelines
along with specific financial and risk management services. This product
grouping helps organizations manage their medical and financial risk. The
integrated product grouping serving the payer market (e.g., employer
self-funded health benefit plans, unions, fully insured benefit plans,
etc.) is called CarePASS(R) USA. This product grouping provides effective
total health plan management to help clients ensure their employees or
health plan members have the right diagnosis, the right therapy, the right
setting, with the right resources, at the right time, at the right cost for
the optimal outcome. This sales objective for each product grouping is to
sell all service components to a client in order to provide total health
plan management. Achieving this objective will maximize the effectiveness
and efficiency of the health plan and provide the greatest returns for both
the client and the Company. When all components cannot be sold together,
individual components may be sold. Through product mixing and product
packaging within and between the two main market categories, the Company is
able to manage the quality, volume, cost and payment for health care
specific to the unique requirements of its payer and provider clients.
Basic components of health plan management services offered to the payer
market include:
o Acute care management (review) services--which apply diagnostic and
utilization management for inpatient and outpatient acute medical,
surgical, and behavioral health cases--and other services such as a
24-hour, 7-day-a-week (24/7) health information and triage line
(CareCALL). Care management is based primarily on the Company's
QualityFIRST(R) guidelines;
o Coordinated care management for a variety of catastrophic or long-term
illnesses and conditions;
o Price control management services such as preferred provider and
centers of excellence networks, fee negotiations and audits of
hospital and physician charges;
o Claim administration services using EDI (electronic) technology,
reinsurance, fraud detection, pharmacy management and COBRA services.
Basic components of managed care operations for use by providers in helping
control medical and financial risk include:
o Medical management (based on QualityFIRST(R) Guidelines), and
including disease management, disability management, pharmacy
management, high risk pregnancy management, emergency room management
and personal health management (CareCALL), and others.
o Consulting services such as strategic communications, provider network
analysis, customer satisfaction enhancement, strategic planning,
provider contracting and NCQA (National Council on Quality
Assurance)/HEDIS(Health Employer Data Information Set) consulting, and
financial management services such as medical loss ratio analysis and
provider profiling.
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In February 1998, HRM signed, through its wholloy-owned subsidiary, HRM, PA, its
first full-risk, total health plan management contract with Oxford Health Plans
(PA), Philadelphia, a 65,000-member Medicaid HMO. The five-year contract is
expected to produce approximately $100 million in revenues annually. Under the
terms of the Agreement, the Company will provide health plan management services
and assumption of the medical cost risk under the Health Choices Physical Health
Agreement between the Commonwealth of Pennsylvania and Oxford. HRM will manage
this anticipated growth by employing its QualityFIRST(R) Medical Risk Management
SystemSM which integrates virtually all of HRM's clinical and administrative
management systems.
(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 health plan management services currently offered by HRM
(described in "a" above) fall into the following categories: care
management; coordinated care management; price control management;
claim administration services; risk management and consulting services;
and clinical and administrative information systems services.
HRM's fees for these services (sold individually or in various
combinations depending on the needs of each client) 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 CareCALLSM, precertification and concurrent
review services, and some or all of HRM's other care 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) software, certain health
care information management computer systems, and consulting services
on an hourly, project or software license and subscription fee basis.
The Company also may enter into contracts under which it either shares
in the financial risk for plan performance or accepts the full
financial risk for the plan's total performance. This approach is for
clients in the Provider market who contract for the QualityFIRST(R)
Medical Risk Management System. When accepting contracted financial
risk, the Company obtains reinsurance against losses above specific
levels. Contracts also may include the awarding of specified bonus
payments for the achievement of specific performance targets.
Care Management Services
The Company's care management services are designed to maintain health;
to improve health; to manage a timely, resource-appropriate return to
health; and to reduce the financial risk of health service costs to
employees, employers, health plans, insurers and providers. The
Company's service begins with preventive, personal health management
services, progresses (when necessary) to management of acute
occupational and non-occupational conditions, and includes management
of chronic and/or catastrophic conditions throughout the life of the
patient.
The Company's care management services are of maximum benefit to HRM
clients when utilized as a single, integrated health risk management
service. However, individual components may be selected according to a
client's specific needs. The Company offers the following care
management service components generally on a fixed monthly fee per
covered lives based on expected transaction volume or on a per
transaction or case basis:
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HRM CareCALL HRM's 24-hour health information, assessment, triage and
referral line provides personal health management by educating and
empowering consumers to make appropriate decisions about their health,
their health care and the health care resources they use. At the same
time, CareCALL reduces claim expenditures by promoting illness and
injury prevention and by providing information, options and timely
support to avoid, for example, unnecessary emergency room and office
visits. CareCALL nurses have 24-hour access to physician specialists
for consultation, and are able to provide callers with medical
information, health event counseling, and national and local sources of
additional information.
The service also offers medical information and unlimited,
confidential, toll-free 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, interface with claim administration services and
locate appropriate network medical and health care providers any time
of the day or night. CareCALL is objective, friendly, easy to use and
accessible when community health care resources are unavailable.
Acute Health Care Management The Company's Care Management Services,
accredited by American Accreditation Healthcare Commission/URAC
(Utilization Review Accreditation Committee) in Washington, D.C.,
promote quality care and appropriate resource use through
guideline-based acute medical/surgical procedures, long-term care
management, long-and-short-term disability management, outpatient care,
active illness management, collegial specialist-to-specialist
consultation and resource evaluation. All care management for total
health plan management activity takes place within medical specialty
teams using QualityFIRST(R) guidelines.
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 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 team to begin the
management of the care. HRM's clinical specialty teams enable HRM to
review the spectrum of medical, surgical, behavioral health and
specialty care.
The Company's care management teams are constructed in the following
specialty areas:
o Cardiology o Surgical
o Gastroenterology o Obstetrics/Gynecology
o Otolaryngology (EENT) o Orthopedics
o Pediatrics o Home Care
o Neurology o Internal Medicine
o Urology/Nephrology o Behavioral Health
o AIDS/Hospice o Transplants
o Rehabilitation
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 management system assesses diagnostic findings,
therapeutic modalities and utilization aspects for all inpatient and
outpatient care eligible under the health plan of the clients.
Diagnostic assessment determines whether the provider-proposed
diagnostic and therapeutic selections by the hospital or physician for
a patient's particular illness or condition are medically appropriate.
Utilization management which follows the diagnostic assessment,
evaluates the appropriateness of the proposed location of services
(e.g. hospital intensive care unit, hospital general ward, hospital
outpatient area, or physician's office), the proposed length of stay,
and any proposed ancillary services.
<PAGE>
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 evidence-based clinical information from a variety of clinical
resources and professional organizations.
Under HRM's Care Management Services, a plan participant or the
participant's physician must call a toll-free telephone number several
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 with HRM's QualityFIRST(R) guidelines to determine
the reasonableness of the proposed diagnosis and appropriateness of the
proposed 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 before 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:
Medical/Surgical Care Management. The Company's Care Management
precertification and concurrent review service for medical and surgical
procedures is designed to enhance health care quality by helping assure
clinical decisions are appropriate and consistent, thus resulting in
reduced employer medical and surgical costs through identification and
approval of reimbursing the most appropriate and cost-effective plan of
treatment and setting for care.
Behavioral Health Care Management. HRM also offers precertification and
concurrent management of mental health and chemical dependency
treatment. HRM's mental health and chemical dependency care management
service evaluates the clinical 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 clinically appropriate alternative treatments and employs
QualityFIRST(R) Behavioral Health Guidelines. 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. Patient
cases are matched with behavioral health teams trained to manage
specific types of care.
Coordinated Care (Case) Management
Coordinated care management services provide special coordination of
the full range of managed care services in complex, chronic,
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
<PAGE>
plans. Due to the complex and long-term nature of these cases, a single
case manager may coordinate all health care services for a patient for
periods ranging from one month to several years, to a life time. Case
management services outlined below are billed most frequently on a per
hour basis or a per transaction basis.
The following coordinated care management services are offered by the
Company:
Coordinated Care Management (CCM). The Company manages cases which
require costly medical treatment such as cancer, complex mental
illness, transplants, chemical dependency, and major trauma. The
Company identifies these cases by reviewing the health claim history
and the information obtained during the precertification and concurrent
care management process. In these cases, HRM helps identify health care
alternatives that might be overlooked in complex cases, as well as
cost-effective clinically appropriate 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 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.
HRM Disease Management. This service, designed for participants with
long-term or chronic conditions, is proactive and prospective in its
management approach. It is designed to reduce incidences of acute
episodes (and resulting costs) through a combination of technology,
medical expertise and on-going education, outreach, support and focused
assistance. Examples of diseases managed include asthma, diabetes and
cardiac disease. The Company's approach has four distinct but
strategically linked components: identification, intervention, ongoing
support and evaluation.
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 management services. 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
assessment and utilization management, large case management, fee
negotiation, auditing of charges, and claim administration. EAP is
independently marketed by both HRM and subcontractors.
QualityBIRTHSM 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.
HRM DisabilityCARESM. HRM's disability management program,
DisabilityCARE, promotes quality medical care and early return-to-work
for short- and long-term disability and workers' compensation cases.
DisabilityCARE is initiated with identification of injury through
24-hour access to CareCallSM 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, to help establish a treatment plan, and through use of
on-line return-to-work guidelines, help return injured workers 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 customers' lost
productivity, indemnity benefit payments and medical expenses involving
disabilities.
<PAGE>
Price Control Management
HRM's principal price management activities are network management, fee
negotiation and bill review, and centers of excellence. 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:
HRM Network Management. The Company offers a national network of
hospitals, physicians and other health care providers who have agreed
to deliver appropriate care at competitive, contracted rates. This
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 networks 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 that meet the Company's criteria for provider selection.
HRM's criteria in selecting PPOs established by third-parties are the
same criteria used by the Company in developing its own network. 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 receives
monthly reports from the third-party organization, integrates them with
the Company's own management reports, and provides HRM clients with a
unified report of savings realized through the use of network
management services.
HRM Fee Negotiation and Bill Review. 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 assessed under HRM's care management services, a
separate staff of price negotiators and bill reviewers simultaneously
negotiates the amount of the covered fees with the provider. 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.
HRM Centers of Excellence This service assists those in need of organ
and bone marrow transplants through a subcontractor network. This
network provides assessment of the need for transplant, coordination of
the treatment plan, identification of an appropriate network treatment
facility and assistance with travel and lodging.
<PAGE>
Claim Administration Services
HRM's claim 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 electronic processes, accurate payment and timely
reporting through plan design, underwriting services and claim
administration services and reinsurance brokerage services. The
Company's claims administration system 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, subrogation, 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.
Claim Adminstration Services include:
HRM mEDIasm Effective claim administration is a critical part of the
health management system. Claim services adjudicates submitted claims
for all medical, dental, prescription drug and disability claims. Claim
management services are totally integrated with the health care
management system, helping 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 enables processing of 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 Reinsurance Health Benefit Reinsurance, Inc. (HBRe), a wholly-owned
subsidiary of HRM, acts independently 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 services 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. It can produce valuation reports to support the
financial integrity of clients' self-funded plans, and it 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 Pharmacy Program The Company, through national subcontractors,
provides prescription drug dispensing services that clients may
purchase as a component of their health plan. The program manages
prices and fees and monitors appropriate drug use and over-prescribing
patterns. The program uses a preferred drug formulary, incorporates
pharmacist review and offers mail order drug service and discounts.
COBRA Services COBRA administration services help clients comply with
the Consolidated Omnibus Budget Reconciliation Act of 1985. HRM's
Client Accounting Division provides COBRA notification, election and
premium collection services along with comprehensive monthly reports.
<PAGE>
Other Services Claim administrative management capabilities and
services also include: dental, vision, and prescription drug claim
administration; MedRe (Executive Medical) administration;
administrative/premium billing; VRU (voice response) capable; fraud
detection; ID card production; subrogation; eligibility coordination
with other vendors; PHO administration (capitation, withholds); and
price/PPO management.
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.
QualityFIRST(R) Medical Risk Management SystemSM
This integrated system for providers offers tools to assist in the
management of medical and financial risk, including control of the
provider's medical loss ratio. It is based on QualityFIRST(R)
guidelines, which may be sold as a stand alone product, as well. The
QualityFIRST(R) System uses guidelines to evaluate and confirm proposed
diagnoses, suggest treatment selection options, identify resource
options, and to capture decisions for profiling, accountability
reporting and outcomes measurement. This information is especially
valuable for financial risk and outcomes management and for management
of the medical loss ratio. The QualityFIRST(R) Medical Risk Management
System integrates medical and financial management to create a
portfolio of risk management solutions.
HRM Medical Management This component includes a broad range of
integrated services (see Care Management above) designed to improve the
quality and cost-efficiency of care management and is based on
QualityFIRST(R) guidelines.
Financial Management. For the most part, the financial management
component also is based on data and information derived from use of the
QualityFIRST(R) System. As noted earlier, these features include
medical loss ratio analysis and management, premium collection, cost
tracking, underwriting, resource management, productivity management,
disbursement and provider profiling. Financial management also offers
contractual options ranging from no risk to full risk agreements.
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 a standard, easy-to-use platform 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 clinical evidence-based guideline content is supported by full
academic research and clinical outcome analysis and addresses the
clinical value of a particular intervention both on an individual basis
and on an aggregate long-term basis. On-line access to clinical
documentation of guideline recommendations, research abstracts and full
bibliographic references to the clinical literature contribute to the
product's high acceptance. The interactive operating platform promotes
quality care through its ability to facilitate and document acute care
clinical decisions. The patented, directed questioning format mirrors
the sequential "decision tree" process of clinical decision making,
promotes clinical consistency and is user friendly. The product's
capability to document clinical decisions, including variances to
guideline recommendations, provides a consistent baseline for
measurement, assessment, education and continuous quality improvement.
<PAGE>
QualityFIRST(R) offers Medical/Surgical, Workers' Compensation/
Disability, Behavioral Health, and Specialist Referral guidelines as
well as Alternative Setting indicators. These modules comprise over
450 guidelines and 3,100 treatments/procedures covering 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
indicators 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 help ensure appropriate referrals and
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 is 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 others. 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
using 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
sets 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 use 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 health education
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.
<PAGE>
(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) System to address an ever
enlarging number of provider organizations medical conditions, and will
continue expanding its software package containing HRM's proprietary
QualityFIRST(R) System 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.
(3) Source and Availability of Raw Materials.
Not applicable.
(4) Patents, trademarks, licenses, franchises and concessions.
The Company has filed patent applications 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 health care management
services. One U. S. patent has been issued on a component of the health
care management system. Three other applications remain pending.
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 or its subsidiaries: HRM(R), AutoPILOTTM,
CareCALLSM, CarePASS(R), CarePLUSSM, DisabilityCARESM, HRMMEDIASM,
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 health plan management revenues have, in recent history, not been
seasonal. In April 1998, the Company began its managed care operations
which accounted for approximately 26% of fiscal 1998 revenues. However,
such operations are not expected to be seasonal.
<PAGE>
(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. Oxford Health Plan (PA) Inc., became a new client in fiscal 1998
and accounted for approximately 26% of revenue. Keystone Mercy Health
Plan (KMHP) accounted for approximately 16% and 17% of revenues in
fiscal 1998 and 1997, respectively. The contract with KMHP will
terminate September 30, 1998. See "Item 3." Columbia/HCA Healthcare
Corporation accounted for 16% and 17% in fiscal 1997 and fiscal 1996,
respectively. 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.
(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.
(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-party
administrators that 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 $9,057,000 in fiscal 1998, $7,396,000 in
fiscal 1997 and $5,779,000 in fiscal 1996.
<PAGE>
(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 1998, the Company employed approximately 920 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.
(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.
$195,000 in fiscal 1998, U. S. $325,000 in fiscal 1997 and U.S. $233,000 in
fiscal 1996. 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 142,500
square feet in a building in Minneapolis, Minnesota, 31,000 square feet in
Kalamazoo, Michigan and 4,000 square feet in Sacramento, California. The lease
on the Minneapolis office expires in or by 2009 and the Sacramento office lease
expires in or by 1999. The lease on the Kalamazoo office expires in or by 2001.
The Company also leases space for four 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.
<PAGE>
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.
In July 1998, Keystone Mercy Health Plan commenced arbitration proceedings
seeking to terminate its contract with the Company and asserting that the
Company had breached the contract to provide health care cost management
services to Keystone. The Company strongly believed the claim was without merit
and asserted monetary counterclaims against Keystone, also alleging breach of
contract. On September 12, 1998, Keystone and the Company reached a settlement
agreement providing for a mutual release of claims and termination of the
contract as of September 30, 1998, one year earlier than its normal expiration
date. On September 25, 1998, Keystone filed a complaint in U.S. District Court
for the Eastern District of Pennsylvania against the Company in which Keystone
alleges the Company has failed to perform, through the September 30, 1998
termination date, the services required of it under the September 12, 1998
settlement agreement. Keystone is seeking injunctive relief and unspecified
monetary damages for such alleged breach of the settlement agreement.
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, 1998.
<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 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 14-1/8 11
Second Quarter 16 9-5/8
Third Quarter 16-1/8 8-3/8
Fourth Quarter 16-3/8 13-1/8
b) Holders
As of September 18, 1998 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 from 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,
---------------------------------------------------------
1994 1995 1996 1997 1998
---------- --------- --------- --------- ---------
(in thousands, except per share data)
Revenues:
<S> <C> <C> <C> <C> <C>
Health plan management services $45,824 $49,302 $54,507 $62,723 $70,282
Managed care operations -- -- -- -- 24,218
Investment income 65 128 158 187 337
---------- --------- --------- --------- ---------
Total revenues 45,889 49,430 54,665 62,910 94,837
Operating expenses:
Cost of health plan management services 31,369 35,834 38,106 44,640 53,969
Cost of managed care operations 0 0 0 0 23,625
Selling, marketing and administration 11,919 11,458 12,602 13,691 14,558
Interest expense 436 759 708 535 489
Merger costs 0 0 0 390 0
---------- --------- --------- --------- ---------
Total operating expenses 43,724 48,051 51,416 59,256 92,641
---------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of accounting change 2,165 1,379 3,249 3,654 2,196
Income taxes 449 535 1,253 1,413 868
---------- --------- --------- --------- ---------
Income before cumulative effect
of accounting change 1,716 844 1,996 2,241 1,328
Cumulative effect
of accounting change, net of
income tax benefit of $1,342(1) 0 0 0 0 (2,371)
---------- --------- --------- --------- ---------
Net income (loss) $ 1,716 $ 844 $ 1,996 $ 2,241 $ (1,043)
========== ========= ========= ========= =========
Basic earnings per share(2):
Income before cumulative effect
of accounting change $ .44 $ .21 $ .49 $ .52 $ .29
Cumulative effect of accounting change (1) -- -- -- -- (.52)
---------- --------- --------- --------- ---------
Net income (loss) $ .44 $ .21 $ .49 $ .52 $ (.23)
========== ========= ========= ========= =========
Diluted earnings per share(2):
Income before cumulative effect
of accounting change $ .43 $ .21 $ .47 $ .50 $ .29
Cumulative effect of accounting change (1) -- -- -- -- (51)
---------- --------- --------- --------- ---------
Net income (loss) $ .43 $ .21 $ .47 $ .50 $ (.22)
========== ========= ========= ========= =========
Weighted average number of shares outstanding:
Basic 3,930 3,947 4,081 4,291 4,524
Diluted 4,015 3,982 4,219 4,458 4,663
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 5,491 $ 3,763 $ 5,246 $ 8,578 $ 3,474
Total assets 37,844 39,962 44,822 51,723 70,514
Current portion of notes payable and capitalized equipment
leases 1,950 1,946 2,427 1,988 5,025
Long term portion of notes payable and capitalized
equipment leases 6,046 5,155 4,550 3,487 3,047
Shareholders' equity 23,677 25,101 28,474 34,044 33,785
</TABLE>
- ------------------------
(1) As discussed in Note 2 of the consolidated financial statements, the
Company changed its method of accounting for health plan management
revenue. On a pro-forma basis, this change would have decreased 1997 net
income by $1,382,000, increased 1996 net income by $494,000, decreased 1995
net income by $79,000 and decreased 1994 net income by $493,000.
(2) Earnings per share amounts prior to 1998 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share." For further discussion of earnings per share, see the notes to
the consolidated financial statements.
(3) Certain items in the 1994, 1995, 1996 and 1997 selected consolidated
financial data have been reclassified to conform to the 1998 presentation.
<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 health plan management
and managed care operations.
The Company's expenses are comprised of its cost of health plan management
services (consisting primarily of compensation of personnel, including nurses
and physicians, telephone expenses, depreciation and amortization, rent, costs
related to the Company's computer operations, costs related to customer service,
and costs related to development of new services), cost of managed care
operations (consisting primarily of the cost of medical services and
reinsurance, net of recoveries), and selling, and marketing administration
expenses (including sales commissions, advertising, sales account management
personnel, bad debts, compensation and depreciation).
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, 1996,
1997, and 1998 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)
-------------------------- ------------------------------------
1996 1997 1998 1996 vs 1997 1997 vs 1998
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 15% 51%
==== ==== ====
Operating expenses:
Cost of health plan management services 70(1) 71(1) 77(1) 17 21
Cost of managed care operations -- -- 98(2) -- --
Selling, marketing and administration 23(1) 22(1) 21(1) 9 6
Interest expense 1(3) 1(3) 1(3) (24) (9)
Merger costs 0 1 0 -- --
---- ---- ----
Total operating expenses 93(3) 94(3) 98(3) 15 56
---- ---- ----
Income before income taxes and cumulative
effect of accounting change 6 6 2 12 (40)
Income taxes 2 2 1 13 (39)
---- ---- ----
Income before cumulative effect
of accounting change 4 4 1 12 (41)
Cumulative effect of accounting change
net of income tax 0 0 (2) -- --
---- ---- ----
Net income (loss) 4% 4% (1)% 12 (147)
==== ==== ====
</TABLE>
(1) Computed as a % of health plan management revenues.
(2) Computed as a % of managed care operations revenues.
(3) Computed as a % total revenues.
<PAGE>
Total Revenues: Total revenues increased $31,927,000 (51%) from fiscal 1997 to
fiscal 1998 (from $62,910,000 to $94,837,000), and increased $8,245,000 (15%)
from fiscal 1996 to fiscal 1997 (from $54,665,000 to $62,910,000). These
increases are primarily attributable to revenues from managed care operations
which began April 16, 1998, and 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) Medical Risk Management System. 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 a breakout of revenue:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Health plan management services $ 54,507,000 $ 62,723,000 $ 70,282,000
Managed care operations -- -- 24,218,000
Investment income 158,000 187,000 337,000
------------- ------------- -------------
Total revenues $ 54,665,000 $ 62,910,000 $ 94,837,000
============= ============= =============
</TABLE>
Revenues for health plan management services increased 12% or $7,559,000, from
fiscal 1997 to fiscal 1998 (increasing from $62,723,000 to $70,282,000) and
increased 15% or $8,216,000, from fiscal 1996 to fiscal 1997 (increasing from
$54,507,000 to $62,723,000). This increase was the result of the growth of
existing business and new contracts entered into by the Company.
Revenues from the managed care operations were the result of obtaining in the
fourth quarter of fiscal 1998 the revenue from a client contract under which the
Company is at risk for the total medical services costs and receives a
significant portion of the total premium of an HMO. The Company did not have
this business in fiscal 1996, fiscal 1997 and the first three quarters of fiscal
1998.
Investment income increased 80% or $150,000 from fiscal 1997 to fiscal 1998
(increasing from $187,000 to $337,000). This increase is the result of
higher levels of short-term investments in fiscal 1998.
Cost of Health Plan Management Services: Cost of services increased 21% from
fiscal 1997 to fiscal 1998 (from $44,640,000 to $53,969,000), and increased 17%
from fiscal 1996 to fiscal 1997 (from $38,106,000 to $44,640,000). As a
percentage of health plan management revenues, cost of services increased from
71% in fiscal 1997 to 77% in fiscal 1998. The increase in fiscal 1998 of cost of
services as a percentage of revenues was primarily due to additional costs
related to payroll and expenses for increased business, including depreciation
and amortization, the start up of a major client in April 1998, and a change of
accounting principles (described in Note 2 in the Notes to Consolidated
Financial Statements) at the beginning of fiscal 1998.
Cost of Managed Care Operations: The cost of managed care operations increased
by $23,625,000 in fiscal 1998 over fiscal 1997 due to the managed care
operations beginning in April 1998. As a percentage of managed care revenues,
this cost in fiscal 1998 was 98%.
Selling, Marketing and Administration: Selling, marketing and administration
expenses increased 6% from fiscal 1997 to fiscal 1998 (from $13,691,000 to
$14,558,000), and increased 9% from fiscal 1996 to fiscal 1997 (from $12,602,000
to $13,691,000). This expense as a percentage of health plan management revenues
(23%, 22%, and 21%) for fiscal 1996, fiscal 1997 and fiscal 1998, respectively.
The increases were due primarily to additional staff, travel, commission, bad
debts, insurance, training programs and other expenses.
<PAGE>
Interest Expense: Interest expense decreased 9% from fiscal 1997 to fiscal 1998
(from $535,000 to $489,000), and decreased as a percentage of revenue from 0.9%
to 0.5%. 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 was impacted in fiscal 1998 and fiscal 1997 by lower
interest rates and lower average principal balances outstanding.
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.
Income Taxes: Income taxes decreased in fiscal 1998 from fiscal 1997 by
$545,000, or 39% (from $1,413,000 to $868,000), and increased in fiscal 1997
from fiscal 1996 by $160,000, or 13% (from $1,253,000 to $1,413,000) primarily
due to fluctuations in levels of income before income taxes and cumulative
effect of accounting change. Net income had been reported as fully taxed in
fiscal year 1998, 1997 and 1996 at the effective tax rate of 39%. See Note 8 in
the Notes to Consolidated Financial Statements.
Cumulative effect of accounting change: See Note 2 in the Notes to Consolidated
Financial Statements.
Liquidity and Capital Resources
The Company's cash flow from operations was $23,685,000 and $10,127,000 for
fiscal 1998 and 1997, respectively. Cash flow from operations has exceeded net
income primarily due to non-cash charges such as depreciation and amortization,
deferred income taxes, cumulative effect of the accounting change and changes in
operating assets and liabilities, particularly the medical services payable.
Cash has been used to invest in software and program enhancements ($9,057,000
and $7,396,000 in fiscal 1998 and fiscal 1997, respectively). The Company also
acquired property and equipment of $2,734,000 and $2,966,000 for fiscal 1998 and
1997, respectively. HRM expects to continue to acquire property and equipment
and enhance software and products.
HRM also used approximately $2,153,000 and $2,277,000 in fiscal 1998 and fiscal
1997, respectively, to repay principal on notes payable and capital leases. The
Company borrowed $4,750,000 and $1,275,000 in fiscal 1998 and fiscal 1997,
respectively. The Company received cash proceeds of $784,000 and $775,000 in
fiscal 1998 and fiscal 1997, 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 in fiscal 1997.
The Company's current ratio was 1.1 at June 30, 1998, and 1.8 at June 30, 1997.
The Company's working capital was $3,474,000 and $8,578,000 at June 30, 1998 and
1997, respectively.
The Company has a net operating loss carryforward of approximately $14,500,000
for income tax purposes at June 30, 1998, 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 and revolving loan (principal balance of $3,742,000 and $3,000,000,
respectively as of June 30, 1998) with its bank and a revolving credit facility
expiring January 31, 1999, under which the Company may borrow an additional
$3,258,000 at June 30, 1998. The revolving credit and term loan are secured by
liens on the assets of the Company. In light of changes in the Company's
accounting policy and in the Company's core business, the Company did not meet
three covenants under its bank loan documents (namely; consolidated net worth,
consolidated leverage ratio and consolidated cash flow leverage) at June 30,
1998. Management has discussed these covenants with the bank and the bank has
indicated orally that it has waived these covenants at June 30, 1998 and will
waive these covenants for the current fiscal year.
<PAGE>
Year 2000
The Company is reliant on technology to deliver its managed healthcare services.
If a computer system or software application used by the Company or a third
party dealing with the Company fails because of the inability of the system or
application to properly read the year "2000," the results could conceivably have
a material adverse effect on the Company.
Management is monitoring a program to prepare the Company's computer systems or
software applications and external relationships for the year 2000. Utilizing a
national consulting firm, the Company has completed a systematic survey of its
hardware, software and facilities. A strategy for achieving compliance for each
system component has been prepared. Costs of the Company's Year 2000 Project
through June 30, 1999, are estimated at approximately $1.4 million of which
approximately $.3 million has been incurred through June 30, 1998. The cost of
the Year 2000 Project will be expensed as incurred.
The Company has targeted its Year 2000 efforts to address the critical systems
that support and interface with our clients and vendors. The Company is in the
process of requesting information from critical vendors regarding their state of
readiness. As of June 30, 1998, QualityFIRST(R) is Year 2000 ready in that it
processes four-digit year dates. The Company's claims system is scheduled to
complete Year 2000 testing in the Fall of 1998 and the remediation of the care
management system is scheduled to be completed in the quarter ending June 30,
1999. There ae expected to be ongoing maintenance tasks which will continue into
the year 2000. These tasks are not expected to be significant.
Successful completion of the Company's Year 2000 Project is affected by many
factors, and the information contained in this statement is based on
management's best estimates. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated based on factors such as availability and cost of personnel
trained in this area, the ability to identify relevant computer codes, and the
impact of the Company's external relationships. The Company will be using
contingency plans already in place and will be developing additional and/or
supplemental contingency plans where necessary in an effort to be prepared
should a Year 2000 issue arise.
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, cannot 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.
The Company's market risk is limited to interest rate risk on unpaid term and
revolving loans and capital lease obligations. The risk to the Company is not
material since such debt has floating rates.
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. See Part IV, Item 14.
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. 58 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 59 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 59 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, 64 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 72 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 54 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. Mr. Hahn currently 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.
Robert L. Montgomery 61 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>
<PAGE>
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 A directors expires at
the 1999 annual meeting, the term of the Class B directors expires at the 2000
annual meeting, and the term of the Class C Directors expires at the 2001 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.
Name Age Position
Gary T. McIlroy, M. D. 58 Chairman of the Board, Chief Executive
Officer and Director
Marlene O. Travis 59 President, Chief Operating Officer,
Secretary and Director
Thomas P. Clark 50 Senior Vice President, Finance and Chief
Financial Officer
Adele M. Kimpell 52 Executive Vice President, Health Plan
and Systems Development
Gerald E. Osband 50 Executive Vice President, Corporate
Medical Director
Russell A. Peterson 57 Chief Information Officer
William M. Smith 38 Vice President, Managed Care Sales
Steven K. Isaacs 43 Vice President, Indemnity Sales
Michael T. McKim 54 Vice President and General Counsel
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.
Gerald E. Osband, M.D., joined the Company as Executive Vice President
andCorporate Medical Director in January 1998. Prior to joining the Company, Dr.
Osband was Vice President of Medical Affairs Company in Wausau, Wisconsin from
1991 to 1998. Dr. Osband served as a Family Practice physician for Family Health
Specialists from 1981 to 1991. Dr. Osband received his B.A. degree from the
University of California-Los Angeles, and holds an M.D. degree from the
University of California San Francisco. He is a member of the American College
of Physician Executives, American Academy of Family Physicians and the American
Medical Association.
Russell A. Peterson, became Chief Information Officer in April 1998. Mr.
Peterson joined the Company as Vice President, Applications Software in March
1993. Prior to joining the Company, Mr. Peterson was a director for Medtronic,
Inc. in Fridley Minnesota from 1989 to 1992. Mr. Peterson received his B.A.
degree from Macalester College in 1963 and his MBA from the University of St.
Thomas in 1979.
William M. Smith, joined the Company as Vice President, Managed Care Markets in
June 1997. Prior to joining the Company, Mr. Smith was Vice President, Sales and
Marketing for Healthsource, Inc. in Aurora, OH from 1992 to 1997. He also served
as Sales District Manager for Plymouth Savings Bank in Foxborough, MA from 1988
to 1992. Mr. Smith received his B.S.B.A. from Central Michigan University in
1983.
Steven K. Isaacs joined the Company as Vice President, Sales, Payer Markets in
September 1997. Prior to joining the Company, Mr. Isaacs served as Vice
President, Group Sales, for Ameritas Life Insurance Corporation from 1993 to
1997. He also served as Regional Vice President for Fortis Benefits Insurance
Company in Kansas City, MO from 1986-1993. Mr. Issacs received his B.S.B.A. from
the University of Nebraska in 1978.
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, 1997
through June 30, 1998, 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 Robert
Montgomery.
<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 1998 exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------------
Annual Compensation Awards
-------------------------------------- ----------------------
Other
Annual Restircted Securities
Compen- Stock Underlying LTIP All Other
Name and Position Year Salary Bonus sation(1) Awards Options Payouts Compensation
- ----------------- ---- ------ ----- --------- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary T. McIlroy, M.D. 1998 $278,000 $ 0(2) $9,837(10) 40,000(4) $23,484(6)
Chairman & CEO 1997 $278,000 $ 0(2) $9,395(10 0 15,000(2) 0 $23,150(6)
40,000(4)
1996 278,000 13,510 9,395(10) 0 33,138(3) 0 22,655(6)
Marlene Travis 1998 $250,000 0(2) 9,837(10) 30,000(4) 20,336(7)
President & COO 1997 250,000 0(2) 9,395(10) 0 12,500(2) 0 20,150(7)
33,333(4)
1996 222,000 13,510 9,395(10) 0 23,298(3) 0 19,655(7)
Thomas P. Clark 1998 $200,000 0(2) 10,902(10) 30,000(4) 9,555(8)
CFO 1997 200,000 0(2) 10,460(10) 0 10,000(2) 0 9,150(8)
26,667(4)
1996 167,500 11,580 10,460(10) 0 17,759(3) 0 8,655(8)
Adele M. Kimpell 1998 $156,420 0(2) 3,600(4) 3,361(5)
Executive V.P., 1997 153,542 0(2) 0 0 4,000(2) 0 2,663(5)
Health Plan 9,000(4)
and System 1996 128,169 6,000 0 0 5,000(3) 0 1,882(5)
Development
William M. Smith 1998 128,181 15,000 0 0 6,000(4) 0 11,074(9)
Vice President
Managed Care Sales
</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.
(5) The Company matching contribution under its 401(k) Salary Savings Plan.
<PAGE>
(6) The amount reflected includes $2,655, $3,150, and $3,484 as Company
matching contributions under its 401(k) Salary Savings Plan or other
retirement payments for fiscal 1996, 1997, and 1998, 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 1996, 1997 and 1998, respectively.
(7) The amount reflected includes $2,655, $3,150, and $3,336 as Company
matching contributions under its 401(k) Salary Savings Plan or other
retirement payments for fiscal 1996, 1997 and 1998, 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 1996, 1997 and 1998, respectively.
(8) The amount reflected includes $2,655, $2,150, and $3,555 as Company
matching contributions under its 401(k) Salary Savings Plan or other
retirement payments for fiscal 1996, 1997 and 1998, 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 1996, 1997 and 1998, respectively.
(9) The amount reflected includes $2,492 as Company matching contributions
under its 401(k) Salary Savings Plan for 1998 and moving allowance of
$8,582.
(10) Includes auto allowance and medical coverage.
The following two stock option tables summarize option grants and exercises
during fiscal 1998 for the Chief Executive Officer and other named executive
officers, and the values of options granted during fiscal 1998 and held by such
persons at June 30, 1998.
<TABLE>
<CAPTION>
Stock Option Grants in Fiscal 1998
Potential Realizable Value at Assumed Annual
Rates of Stock Price Appreciation for Option Term
---------------------------------------------
Individual Grants 5%(3) 10%(3)
------------------------------------------------- --------------------- --------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise Expiration Stock Stock
Name Granted in Fiscal or Base Date(1) Price Gain Price Gain
Year Price
- ----------------- ---------- ---------- -------- ---------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary McIlroy, M.D. 40,000(1) 16.8% $12.625 06/30/02 $15.60 $119,000 $19.10 $259,000
Marlene Travis 30,000(1) 12.6% $12.625 06/30/02 $15.60 $89,250 $19.10 $194,220
Thomas P. Clark 30,000(1) 12.6% $12.625 06/30/02 $15.60 $89,250 $19.10 $194,250
Adele M. Kimpell 3,600(1) 1.5% $12.625 06/30/02 $15.60 $10,710 $19.10 $23,310
William M. Smith 6,000(2) 2.5% $12.875 06/30/02 $16.24 $20,190 $20.26 $44,310
</TABLE>
(1) One-third of the stock options granted as a long-term incentive to the
individuals become exercisable one year after January 1, 1998, the date of
grant, and 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.
(2) One-third of the stock options granted as a long-term incentive became
exercisable one year after September 24, 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.
<PAGE>
(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.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal 1998 and Fiscal Year-End Option Value
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. 20,000 $122,500 103,188/74,950 $683,110/$218,391
Marlene Travis 15,000 $91,615 81,585/58,046 $536,154/$165,418
Thomas P. Clark 15,000 $68,445 32,209/52,217 $160,848/$146,489
Adele M. Kimpell -- -- 10,750/10,850 $50,188/$30,512
William M. Smith -- -- 2,000/4,000 $4,750/$9,500
</TABLE>
(1) Market value of underlying securities at June 30, 1998 ($15.25), 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.
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.
<PAGE>
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 75%
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 1998 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 to Dr. McIlroy all cash value
and life insurance policies owned by the Company. 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 1998 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 to Ms. Travis all cash value and life insurance policies owned by the
Company. 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 1998 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 to Mr. Clark
all cash value and life insurance policies paid by the Company. 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>
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, 1993, through
June 30, 1998, 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.
<TABLE>
<CAPTION>
06/30/93 06/30/94 06/30/95 06/30/96 06/30/97 06/30/98
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
HRM 100.00 76.47 123.53 123.53 158.82 179.41
Peer Group Index 100.00 112.39 113.98 147.80 192.45 203.24
Nasdaq Market 100.00 109.66 128.61 161.89 195.02 258.52
</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; American Medical SEC Inc., Chartwell RE Corp.;
Citizens Financial Corp.; Compdent Corporation; Conseco, Inc. Everest
Reinsurance Hld.; First Commonwealth of America; Health Power, 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; Reinsurance Group of
America RightChoice Managed Care; Safeguard Health Enterprises; Sierra Health
Services, Inc.; Torchmark Corporation; Transamerica Corporation; Trigon
Healthcare, Inc.; United Dental Care, Inc.; United Healthcare Corporation; Unum
Corporation; 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 September 18, 1998.
Name of Director, Executive Officer Number of Shares Beneficially Percent of
or Identity of Group Owned(1) Class
- ----------------------------- ----------------------------- ----------
Chiplease, Inc. 672,500(2) 14.69%
640 N. LaSalle Street, Suite 300
Chicago, IL 60610
Summit Capital Management, LLC 507,108(3) 11.03%
601 Union Street Suite 3900
Seattle, WA 98101
NOLA, LLC 643,738(4) 14.05%
916 Sommerset Street
Watchung, NJ 07060
Dimensional Fund Advisors, Inc. 237,800(5) 5.17%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Gary T. McIlroy, M.D. 311,158(6) 6.62%
8000 West 78th Street
Minneapolis, MN 55439
Marlene Travis 356,533(7) 7.62%
8000 West 78th Street
Minneapolis, MN 55439
Thomas P. Clark 79,777(8) 1.72%
Adele M. Kimpell 10,750(9) *
W. Michael Smith 2,000(10) *
Vance Kenneth Travis 10,344(11) *
Ronald R. Hahn 11,401(12) *
Robert L. Montgomery 15,771(13) *
Gary L. Damkoehler 10,168(14) *
Raymond G. Schultze, M.D 3,168(15) *
All Current Executive Officers and
Current Directors as a
Group (14 persons) 822,504(16) 16.63%
- -----------
<PAGE>
* 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 September 18, 1998, 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.
(2) Includes 672,500 shares for which Chiplease, Inc. represents it has
sole voting power and which was owned on August 28, 1998, the date of
the most recent Schedule 13D received by the Company from such
shareholder.
(3) Includes 507,108 shares for which Summit Capital Management, LLC
represents it has sole voting power and which was owned on March 13,
1998, the date of the most recent Schedule 13D received by the Company
from such shareholder.
(4) Includes 643,738 shares for which NOLA, LLC represents it has sole
voting power and which was owned on September 14, 1998, the date of the
most recent Schedule 13D received by the Company from such shareholder.
(5) In its most recent Schedule 13G filing with the Securiites and Exchange
Commission on February 28, 1998, Dimensional Fund Advisors, Inc.
represents it has sole voting power as to 158,700 of such shares and
sole dispositive power over all such shares.
(6) The number of shares set forth in the above table (I) includes 207,970
shares held by Gary T. McIlroy Revocable Trust, for which Dr. McIlroy
is grantor and trustee, (ii) includes 103,188 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.
(7) The number of shares set forth in the above table (i) includes 274,948
shares held by the Marlene O. Travis Revocable Trust, for which Ms.
Travis is grantor and trustee, (ii) includes 81, 585 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.
(8) Includes 47,568 shares held by Mr.Clark and 32,209 shares which Mr.
Clark has the right to acquire upon exercise of options.
(9) Includes 10,500 shares which Ms. Kimpell has the right to acquire upon
exercise of options.
(10) Includes 2,000 shares which Mr. Smith has the right to acquire upon
exercise of options.
(11) Includes 4,643 shares held by Mr. Travis and 5,701 shares which Mr.
Travis has the right to acquire upon exercise of options.
(12) Includes 7,600 shares held by Mr. Hahn and 3,801shares which Mr. Hahn
has the right to acquire upon exercise of options.
(13) Includes 9,163 shares held by Mr. Montgomery and 6,608 shares which Mr.
Montgomery has the right to acquire upon exercise of options.
(14) Includes 7,000 shares held by Mr. Damkoehler and 3,168 shares which Mr.
Damkoehler has the right to acquire upon exercise of options.
(15) Includes 3,168 shares which Mr. Schultze has the right to acquire upon
exercise of options.
(16) Includes 559,542 shares held by the current officers and directors, and
262,962 shares that current executive officers and directors as a group
have the right to acquire as of September 18, 1998, 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.............................. 44
Consolidated Balance Sheets as of June 30, 1998
and 1997.................................................... 46
Consolidated Statements of Operations for the years
ended June 30, 1998, 1997 and 1996.......................... 47
Consolidated Statements of Changes in Shareholders'
Equity for the years ended June 30, 1998, 1997
and 1996.................................................... 48
Consolidated Statements of Cash Flows for the years
ended June 30, 1998, 1997 and 1996.......................... 49
Notes to Consolidated Financial Statements.................. 50
(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...................... 63
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, 1998 (SEC File No.
0-18902).
3.2 Composite Bylaws of the Company, as of May 17, 1997--incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902)
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).
10.3* Employment Agreement dated as of June 20, 1996 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy -- incorporated by reference
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).
10.4* Split 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 reference 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).
10.5* Employment Agreement dated as of June 21, 1996 between Health Risk
Management, Inc. and Marlene O. Travis -- incorporated by reference 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).
10.6* Split 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 reference 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).
<PAGE>
10.7* Employment Agreement dated June 21, 1996 between Health Risk
Management, Inc. and Thomas P. Clark -- incorporated by reference 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).
10.8* Split Dollar Agreement dated as of September 1, 1991 between Health
Risk Management, Inc. and Thomas P. Clark -- incorporated by reference
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).
10.9* Health 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).
10.10* 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).
10.11 Second 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).
10.12 Third 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).
10.13* Amended and Restated 1992 Long-Term Incentive Plan--incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.14* 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).
10.15* 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).
10.16* Form of Incentive Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.17* Form of Non-Qualified Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.18* Form of Performance Unit Award under the 1992 Long-Term Incentive Plan
-- incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1992 (SEC File
No. 0-18902).
10.19* 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).
<PAGE>
10.20* 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).
10.21 Lease 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).
10.22 Second 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--incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.23 Fourth 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).
10.24 Fifth 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).
10.25 Sixth 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--incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.26 Third 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).
10.27 Fourth 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--incorporated by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997 (SEC File
No. 0-18902).
10.28 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 10.30 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 (SEC File
No. 0-18902).
10.29 First 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).
<PAGE>
10.30 Second 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).
10.31 Third 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--incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1997
(SEC File No. 0-18902).
10.32 Security 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).
10.33 Managed 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).
10.34 Second 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).
10.35 Claim 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, 1996 (SEC File No. 0-18903).
10.36 Second 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).
10.37 Lease 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).
<PAGE>
10.38 Managed Care Service Agreement dated October 29, 1996 between Health
Risk Management, Inc. and Keystone Mercy Health Plan--incorporated by
reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.39 QualityFIRST(R) License Agreement dated July 11, 1996 between Health
Risk Management, Inc. and Keystone Mercy Health Plan--incorporated by
reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.40 Amendment No. 1 to the Managed Care Service Agreement between Health
Risk Management, Inc. and Keystone Mercy Health Plan effective October
1, 1997--incorporated by reference to Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997 (SEC File
No. 0-18902).
10.41 Management Services Agreement dated February 24, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Oxford Health Plans (PA), Inc.
10.42 Health Care Excess Risk Insurance Policy dated April 13, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Kentucky Medical Insurance Company.
10.43 Lease agreement dated May 5, 1998, between MEPC O &I, Inc. and Health
Risk Management, Inc. related to the Company's offices at 10900
Hampshire Avenue South, Minneapolis, Minnesota and Amendment of Lease
dated September 16, 1998.
10.44 Amended and Restated Revolving Credit and Term Loan Agreement between
Health Risk Management, Inc. and U.S. Bank National Association dated
May 1, 1998.
18. Letter regarding change in accounting principle.
21. List of subsidiaries.
23. Consent of Independent Auditors.
27.1 Financial Data Schedule for the Year ended June 30, 1998 (filed in
electronic format only).
27.2 Restated Financial Data Schedule for the 3 months ended September 30,
1997 (filed in electronic format only).
27.3 Restated Financial Data Schedule for the 6 months ended December 31,
1997 (filed in electronic format only).
27.4 Restated Data Schedule for the 9 months ended March 31, 1998 (filed in
electronic format only).
- --------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended June
30, 1998.
<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, 1998 and 1997, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1998, 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.
As discussed in Note 2 of the consolidated financial statements, the Company
changed its method of accounting for health plan management revenue during the
year ended June 30, 1998.
September 23, 1998
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
June 30,
------------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,624 $ 5,349
Accounts receivable, less of allowance for doubtful accounts of 11,019 12,367
$265 ($260 in 1997)
Deferred income taxes 900 350
Other 837 989
-------- --------
Total current assets 33,380 19,055
Computer software costs, less amortization of $17,940 ($12,782 in 1997) 24,284 20,385
Property and equipment, less accumulated depreciation of
$14,299 ($11,103 in 1997) 8,670 9,215
Other assets 4,180 3,068
------- -------
$ 70,514 $ 51,723
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,125 $ 1,645
Medical services payable
15,452 --
Accrued expenses 3,596 3,018
Unearned revenues 3,708 3,826
Current maturities of notes payable 4,429 1,134
Current portion of capitalized equipment leases 596 854
-------- ---------
Total current liabilities 29,906 10,477
Deferred income taxes 3,776 3,715
Long-Term portion of notes payable 2,313 2,166
Long-Term portion of capitalized equipment leases 734 1,321
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, 4,583,694
issued and outstanding (4,478,245 in 1997) 46 45
Additional paid-in capital 31,728 30,945
Retained earnings 2,011 3,054
-------- ---------
Total shareholders' equity 33,785 34,044
-------- ---------
$ 70,514 $ 51,723
======== =========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Health plan management services $ 70,282 $ 62,723 $ 54,507
Managed care operations 24,218 -- --
-------- -------- --------
Investment income 337 187 158
-------- -------- --------
Total revenues 94,837 62,910 54,665
Operating expenses:
Cost of health plan management services 53,969 44,640 38,106
Cost of managed care operations 23,625 -- --
Selling, marketing and administration 14,558 13,691 12,602
Interest expense 489 535 708
Merger costs -- 390 --
-------- -------- --------
Total operating expenses 92,641 59,256 51,416
-------- -------- --------
Income before income taxes and cumulative
effect of accounting change 2,196 3,654 3,249
Income taxes 868 1,413 1,253
-------- -------- --------
Income before cumulative effect
of accounting change 1,328 2,241 1,996
Cumulative effect of accounting change,
net of income tax benefit of $1,342 (2,371) -- --
-------- -------- --------
Net income (loss) $ (1,043) $ 2,241 $ 1,996
======== ======== ========
Basic earnings per share:
Income before cumulative effect
of accounting change $ .29 $ .52 $ .49
Cumulative effect of accounting change (.52) -- --
-------- -------- --------
Net income (loss) $ (.23) $ .52 $ .49
======== ======== ========
Diluted earnings per share:
Income before cumulative effect
of accounting change $ .29 $ .50 $ .47
Cumulative effect of accounting change (.51) -- --
-------- -------- --------
Net income (loss)
$ (.22) $ .50 $ .47
======== ======== ========
Pro forma net income and per share amounts
assuming the new revenue recognition
accounting policy is approved retroactively:
Net income $ 1,328 $ 859 $ 2,490
Basic earnings per share $ .29 $ .20 $ .61
Diluted earnings per share $ .29 $ .19 $ .59
Weighted average number of shares outstanding:
Basic 4,524 4,291 4,081
======== ======== ========
Diluted 4,663 4,458 4,219
======== ======== ========
</TABLE>
See accompanying notes.
<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, 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
Options exercised 105,449 1 783 784
Net loss (1,043) (1,043)
============= ============= ============== ============ ============
Balance at June 30, 1998 4,583,694 $ 46 $ 31,728 $ 2,011 $ 33,785
============= ============= ============== ============ ============
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,043) $ 2,241 $ 1,996
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 3,199 2,816 2,832
Amortization 5,558 4,830 4,115
Cumulative effect of accounting change 2,371 -- --
Provision for deferred income taxes (489) 1,398 1,231
Changes in operating assets and liabilities:
Accounts receivable (1,023) (2,557) (2,071)
Other assets (1,360) 7 (1,002)
Accounts payable 560 (238) (6)
Medical services payable 15,452 -- --
Accrued expenses 578 382 39
Unearned revenues (118) 1,248 282
------------- ------------- -------------
Net cash provided by operating activities 23,685 10,127 7,416
Cash flows from investing activities:
Acquisition of net assets, net of cash acquired -- (139) --
Property and equipment (2,734) (2,827) (2,256)
Capitalized software (9,057) (7,396) (5,779)
------------- ------------- -------------
Net cash used in investing activities (11,791) (10,362) (8,035)
Cash flows from financing activities:
Proceeds from notes payable 4,750 1,275 1,500
Principal payments on notes payable (1,308) (1,278) (904)
Principal payments on capital leases (845) (999) (1,152)
Issuance of common shares 784 3,239 1,174
------------- ------------- -------------
Net cash provided by financing activities 3,381 2,237 618
------------- ------------- -------------
Increase (decrease) in cash 15,275 2,002 (1)
Cash and cash equivalents at beginning of year 5,349 3,347 3,348
------------- ------------- -------------
Cash and cash equivalents at end of year $ 20,624 $ 5,349 $ 3,347
=========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
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 engages in a single business of managed healthcare services
which includes health plan management services and managed care
operations.
The Company's principal health plan management services include care
management, price control, claims administration, and information
services revenues which are derived principally from software license
and subscription fees related to its QualityFIRST(R) Medical Risk
Management System. A significant percentage of the Company's health
plan managment revenues are derived from the care 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
such clients subject 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, and performance bonuses.
The Company's managed care operations began on April 16, 1998 when the
Company's wholly owned subsidiary, Pennsylvania HRM, Inc., entered into
a five-year contract with Oxford Health Plans (PA), Inc. (Oxford). In
addition to providing health plan management services, the Company also
assumes the medical cost risk under the HealthChoices Physical Health
Agreement between the Commonwealth of Pennsylvania and Oxford. Oxford
is a health maintenance organization (HMO) duly licensed by the
Commonwealth of Pennsylvania to offer certain insurance products to
covered members in the HealthChoices program for Medical Assistance
recipients in the Oxford service area. The Company receives a fixed
amount per enrolled member per month to assume the medical cost risk.
In 1998, revenues from two clients were twenty-six percent (26%) and
sixteen percent (16%) of total revenues. The contract with the client
representing 16% of 1998 revenues will terminate September 30, 1998. In
1997, revenues from two clients were seventeen percent (17%) and
sixteen percent (16%) of total 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, the most significant of
which relates to incurred but not yet reported claims included in
medical services payable and performance bonus accruals included in
accounts receivable. Actual results could differ from such estimates.
<PAGE>
D. Revenue Recognition
Revenue for health plan management services and managed care operations
is generally recognized ratably over the contract periods. See also
Note 2. Included in health plan management services and manged care
operations revenue are estimated amounts for performance bonuses and
contract adjustments. These estimates are recognized when reasonably
determinable. Adjustments to these estimates are recorded in current
operations
E. Unearned Revenues
Unearned revenues represent amounts billed to clients for contract
services yet to be performed.
F. 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.
In March 1998, the AICPA issued SOP 98-1 "Accounting for Computer
Software Developed For or Obtained For Internal Use" (the SOP) which is
effective for the Company beginning on July 1, 1999. The SOP will
require the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for
internal use. The Company currently capitalizes internal-use software
related to its Care Management software and Claim Administration
software. The Company has not completed its assessment of the impact of
the SOP's provisions.
G. 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.
H. 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.
I. Cost of Managed Care Operations
Cost of managed care operations principally includes the estimated
ultimate net cost of all reported and unreported claims incurred during
the year. The liability for medical services payable is estimated
primarily by the use of cost per contract data and completion factors
developed from historical lag patterns. Because the Company began
managed care operations in April 1998, limited historical information
is available to determine such estimate. Although considerable
variability is inherent in such estimates, management believes that the
liability for medical services payable is adequate. The estimates are
continually reviewed and adjusted as experience develops or new
information becomes known. Such adjustments are included in current
operations.
<PAGE>
J. Net Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128, "Earnings Per Share." Statement 128 replaced
the previously reported primarily and fully diluted earnings per share
with basic and diluted earninsg per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of
options. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share
amounts for all periods have been restated to conform to the Statement
128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share for the years ended June 30 (in thousands, except
per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Numerator:
Income before cumulative effect of
accounting change $ 1,328 $ 2,241 $ 1,996
Cumulative effect of accounting change (2,371) -- --
------------- ------------ ------------
Net income (loss) $ (1,043) $ 2,241 $ 1,996
============= ============ ============
Denominator:
Weighted-average shares-basic
Effect of dilutive stock options 4,524 4,291 4,081
Weighted-average shares-diluted 139 167 138
============= ============ ============
4,663 4,458 4,219
============= ============ ============
Basic earnings per share:
Income before cumulative effect of
accounting change $ .29 $ .52 $ .49
Cumulative effect of accounting change (.52) -- --
============= ============ ============
Net income (loss) $ (.23) $ .52 $ .49
============= ============ ============
Diluted earnings per share:
Income before cumulative effect of
accounting change $ .29 $ .50 $ .47
Cumulative effect of accounting change (.51) -- --
------------- ------------- -------------
Net income (loss) $ (.22) $ .50 $ .47
============= ============= =============
</TABLE>
K. 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)
<PAGE>
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.
L. 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.
M. 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 diluted, net of
tax benefit) for the write-off of costs related to the terminated
merger agreement with HPS.
N. Segment Reporting
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments
of an Enterprise and Related Information" (SFAS No. 131) which is
effective for fiscal years beginning after December 15, 1997.
Accordingly, the Company plans to adopt SFAS No. 131 in the fiscal year
ending June 30, 1999. SFAS No. 131 requires that a publicly-held
company report financial and descriptive information about its
operating segments in financial statements issued to shareholders for
interim and annual periods. SFAS No. 131 also requires additional
disclosures with respect to products and services, geographic areas of
operation, and major customers. While the Company has previously
disclosed that it is engaged in only one industry segment, namely,
providing managed healthcare services, it has not yet determined the
segment or other disclosure impacts of SFAS No. 131. Since SFAS No. 131
deals only with footnote disclosures, it will not have any impact on
the consolidated financial results or financial condition of the
Company.
O. Comprehensive Income
In the year ended June 30, 1998, the Company adopted SFAS No. 130
"Reporting Comprehensive Income." The adoption had no impact on the
consolidated financial statements of the Company.
P. Reclassification
Certain items in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentations.
2. Accounting Change
Effective July 1, 1997, the Company changed its method of accounting
for service revenue related to the Company's health plan management
services from a policy of revenue being generally recognized based on
an estimate of the services to be provided over the service period to a
policy under which revenue is recognized ratably over the contract
period. The change was made
<PAGE>
because management believes that the new method will provide for consistent
accounting methods for its health plan management revenue services and the
Company's new managed care operations revenue, is more prevalent in the
health management industry, and will reduce the administrative burden.
The cumulative effect of the change in accounting principles as of July 1,
1997 resulted in a pre-tax, non-cash charge of $3,713,000 ($2,371,000 after
tax benefit or $.52 per share for basic and $.51 per share for diluted).
Income before cumulative effect of accounting change and basic and diluted
earnings per share for 1998 would have been $1,826,000, $.40 and $.39,
respectively, without the accounting change compared to $1,328,000, $.29
and $.29, respectively, with the accounting change. On a pro-forma basis
this change would have decreased 1997 and increased 1996 net income by
$1,382,000 and $494,000, respectively. The pro-forma impact on the related
basic and diluted earnings per share would have been a decrease in 1997 of
$.32 per share and $.31 per share, respectively, and an increase in 1996 of
$.12 per share for each.
3. COMPUTER SOFTWARE COSTS
Computer software costs consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Care Management Software
Cost..................................................... $ 17,268 $ 12,932
Less accumulated amortization............................ 7,391 5,177
------- ------
Net book value........................................... 9,877 7,755
Claim Administration Software
Cost..................................................... 8,852 7,601
Less accumulated amortization............................ 3,708 2,913
------- -------
Net book value........................................... 5,144 4,688
Guidelines, Protocols and Medical Analysis Software
Cost..................................................... 16,104 12,634
Less accumulated amortization............................ 6,841 4,692
------- -------
Net book value........................................... 9,263 7,942
------- ------
Computer Software Costs, ..................................... $ 24,284 $ 20,385
====== ======
</TABLE>
Amortization of these costs was as follows for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- ---------
(in thousands)
<S> <C> <C> <C>
Care Management Software............................. $ 2,214 $ 1,791 $ 1,485
Claim Administration Software........................ 795 735 645
Guidelines, Protocols and Medical Analysis Software.. 2,149 1,617 1,279
----- ----- -----
Amortization Expense................................. $ 5,158 $ 4,143 $ 3,409
===== ===== =====
</TABLE>
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
-------- -----
(in thousands)
Owned
<S> <C> <C>
Office equipment, furniture and fixtures...................... $ 5,788 $ 5,435
Leasehold improvements........................................ 1,719 1,594
Data processing equipment..................................... 10,348 8,175
-------- -----
17,855 15,204
Less accumulated depreciation................................. 10,676 8,374
-------- -----
Net property and equipment owned.............................. 7,179 6,830
------- -----
Capitalized leases
Office equipment and furniture................................ 1,271 1,271
Data processing equipment..................................... 3,843 3,843
------- -----
5,114 5,114
Less accumulated depreciation................................. 3,623 2,729
------- -----
Net capitalized leases........................................ 1,491 2,385
------ -----
Property and equipment........................................ $ 8,670 $ 9,215
===== =====
</TABLE>
5. NOTES PAYABLE
Notes payable consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
(in thousands)
<S> <C> <C>
Term loans payable to bank in monthly installments of $119,084 plus
interest at bank's reference rate plus 0.375% (8.875% at June 30, 1998),
with the last payment due December 31, 2002. Secured by accounts
receivable, equipment, fixtures and general intangibles........................ $ 3,742 $ 3,246
Note payable to bank under revolving credit agreement with interest payable
monthly at the bank's reference rate plus 0.375% (8.875% at June 30, 1998),
due January 31, 1999. Secured by accounts receivable, equipment, fixtures
and general intangibles........................................................ 3,000 --
Note payable to bank........................................................... -- 54
----- -----
6,742 3,300
Less Current Maturities........................................................ 4,429 1,134
----- -----
Long-Term Portion.............................................................. $ 2,313 $ 2,166
===== =====
</TABLE>
<PAGE>
The Company's revolving credit agreement with a bank permits it to borrow
up to $10,000,000 under a revolving loan. The revolving credit agreement
terminates on January 31, 1999. The Company had available $3,258,000 under
the revolving credit facility at June 30, 1998.
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
$4,429,000 in 1999, $905,000 in 2000, $734,000 in 2001, $499,000 in 2002
and $175,000 in 2003.
Total interest paid on notes payable was $335,000, $299,000, and $281,000
for the years ended June 30, 1998, 1997 and 1996, respectively.
6. REINSURANCE AGREEMENT
The Company maintains a reinsurance contract to control exposure to
potential medical losses arising from large risks associated with managed
care operations. To the extent that the reinsurer does not meet its
obligations assumed under the reinsurance contract, the Company remains
primarily liable for the medical losses. Reinsurance premiums, were
$445,000 in 1998 and are included in cost of managed care operations. No
amounts were recoverable under terms of the reinsurance contract in fiscal
1998.
7. OPTIONS
At June 30, 1998, the Company's 1992 Long-Term Incentive Plan and the 1990
Stock Option Plan ("the Plans") permitted the granting of 1,200,000 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
$15.50. A total of 108, 462 common shares are available for future issuance
under the Plans at June 30, 1998.
Transactions related to outstanding options during the last three years are
summarized as follows:
Weighted
Average
Total Exercisable Exercise Price
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
Granted 237,600 -- 12.61
Became exercisable -- 161,523 10.36
Exercised (105,449) (105,449) 8.89
Expired (77,341) (71,041) 11.23
-------- -------- -----
Balance at June 30, 1998 726,869 326,917 $10.72
======== ======== =====
<PAGE>
The following table summarizes information about the stock options at June
30, 1998
<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 - $6.50 14,723 1.00 $ 5.29 14,723 $ 5.29
$7.00 103,250 1.59 7.00 103,250 7.00
$7.25 - $8.50 91,613 2.34 7.97 69,404 7.96
$9.75 10,500 0.14 9.75 10,500 9.75
$10.125 72,150 4.00 10.13 32,668 10.13
$10.375-$10.69 24,533 3.23 10.44 14,634 10.47
$11.00 52,000 4.00 11.00 45,670 11.00
$11.25-$12.00 31,600 3.01 11.58 25,068 11.54
$12.625 181,600 4.00 12.63 2,500 12.63
$12.875-$13.25 126,900 4.00 13.21 5,000 12.88
$14.75 - $15.50 18,000 4.75 14.83 3,500 15.04
------ ---- ----- ----- -----
$4.875-$15.50 726,869 3.28 $10.72 326,917 $ 8.81
======= ==== ===== ======= ======
</TABLE>
The number of options scheduled to expire by fiscal year is 29,023 in 1999,
112,507 in 2000, 117,689 in 2001, 454,150 in 2002, and 13,500 in 2003.
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, 1998 and 1997:
risk-free interest rates ranging from 5.25% to 5.625% in 1998 and from
5.85% to 6.73% in 1997 and 1996; dividend yield of 0%; volatility factor of
the expected market price of the Company's common stock of .577 in 1998 and
.513 in 1997 and 1996; and a weighted average expected life of the option
of 3.5 years.
<PAGE>
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. Had the compensation
cost been determined consistent with FAS 123, on a pro-forma basis, the
Company's net loss for 1998 would have increased $282,000 or $.06 per share
for basic and diluted earnings per share purposes. For 1997 and 1996, net
income would have been reduced $324,000 and $233,000, respectively, or $.07
and $.06 per share for basic and diluted earnings per share purposes,
respectively.
8. INCOME TAXES
The components of the provision for income taxes for the three years ended
June 30 were as follows:
1998 1997 1996
----------- -------------- ----------
(in thousands)
Current:
Federal............. $ -- $ 5 $ 8
State............... 15 10 14
Deferred................. 853 1,398 1,231
------- ------- -----
$ 868 $ 1,413 $ 1,253
======= ======= ======
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:
1998 1997
(in thousands)
Deferred tax liabilities:
Prepaid expenses...................... $ 58 $ 24
Other assets.......................... 172 253
Computer software costs............... 8,519 7,437
Tax over book depreciation............ 1,016 758
----- -----
Total deferred tax liabilities.... 9,765 8,472
Deferred tax assets:
Receivables........................... 1,747 94
Accrued expenses...................... 428 280
Net operating loss carryforwards...... 5,487 5,248
----- -----
Total deferred tax assets......... 7,662 5,622
Less valuation allowance................... (773) (515)
----- -----
Total net deferred tax assets..... 6,889 5,107
----- -----
Net deferred tax liabilities............... $ 2,876 $ 3,365
===== =====
<PAGE>
A reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
1998 1997 1996
------ ------ ------
Statutory rate................ 34.0% 34.0% 34.0%
State income taxes............ 2.8% 2.7% 2.7%
Non-deductible meals and
entertainment expenses....... 1.4% .8% .7%
Other......................... 1.3% 1.2% 1.2%
----- ----- -----
39.5% 38.7% 38.6%
===== ===== =====
At June 30, 1998, the Company had net operating loss (NOL) carryforwards of
$14,500,000 for income tax purposes only that expire in years 2000 through
2012. Included in the NOL is approximately $2,124,000 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, 1998, 1997 and 1996 was
$14,786, $15,090 and $20,600, respectively.
9. COMMITMENTS
The Company leases its office facilities and various equipment under
operating and capital leases. Rental expense was approximately $4,276,000,
$3,564,000 and $2,881,000, for the years ended June 30, 1998, 1997, and
1996, respectively. The following is a schedule by years of future minimum
rental payments required under operating leases as of June 30, 1998 (in
thousands):
Year ending June 30:
1999 $3,302
2000 2,846
2001 2,486
2002 1,580
2003 1,475
Thereafter 9,861
-------
Total minimum rental payments $21,550
=======
In addition to the above amounts, additional rental payments are due under
the office facility leases based on the lessor's operating costs.
<PAGE>
The following is a schedule of future minimum lease payments under capital
leases as of June 30, 1998 (in thousands):
Years ending June 30:
1999 $ 682
2000 303
2001 295
2002 223
------
Total minimum lease payments 1,503
Less amount representing interest 173
------
Net minimum lease payments 1,330
Less current maturities 596
------
Long-Term portion $ 734
======
The Company entered into no capital leases in the year ended June 30, 1998.
The Company entered into capital lease agreements aggregating $460,000, and
$432,000 for the years ended June 30, 1997 and 1996, respectively, in
connection with the purchase of office equipment, furniture and fixtures,
and data processing equipment.
10. 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 matches a minimum
of 10% of eligible employees' contributions up to 6% of the employee's
salary. Employee and employer matching contributions to the plan are
remitted to a trustee on a biweekly basis. Company contribution expenses
were $442,000, $350,000 and $240,000 for the years ended June 30, 1998,
1997, and 1996, respectively.
<PAGE>
11. QUARTERLY FINANCIAL DATA (Unaudited)
The following table presents certain unaudited quarterly results for fiscal
1998 and 1997 (in thousands, except per share data).
<TABLE>
<CAPTION>
Fiscal 1998
-----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total revenues(1) $17,046 $17,989 $16,972 $42,830 $94,837
====== ====== ====== ====== ======
Income (loss) before cumulative
effect of accounting change(1) $ 751 $ 787 $ 31 $ (241) $ 1,328
Cumulative effect of
accounting change (2,371) -- -- -- (2,371)
------- ---------- ---------- ---------- -------
Net Income (loss) $ (1,620) $ 787 $ 31 $ (241) $(1,043)
======== ======== ========== ========= ========
Basic earnings per share:
Income (loss) before cumulative
effect of accounting change(1) $ .17(3) $ .18 $ .01 $ (.05) $ .29
Accounting change (.53) -- -- -- (.52)
--------- ---------- ---------- ---------- --------
Net income (loss) $ (.36) $ .18 $ .01 $ (.05) $ (.23)
========= ========= ========== =========== ========
Diluted earnings per share:
Before accounting change $ .16(3) $ .17 $ .01 $ (.05) $ .29
Accounting change (.51) -- -- -- (.51)
--------- ---------- ---------- ---------- ---------
Net income (loss) $ (.35) $ .17 $ .01 $ (.05) $ (.22)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1997
----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Total revenues $14,439 $15,628 $16,100 $16,743 $62,910
====== ====== ====== ====== ======
Net Income $ 438 $ 697 $ 438(2) $ 668 $ 2,241
====== ====== ====== ====== ======
Earnings per share:
Basic(3) $ .10 $ .17 $ .10(2) $ .15 $ .52
========= ====== ======= ====== ======
Diluted(3) $ .10 $ .16 $ .10(2) $ .15 $ .50
========= ====== ======= ====== ======
</TABLE>
(1) Amounts for the quarters ended September 30, 1997, December 31, 1997, and
March 31, 1998 have been restated from the amounts previously reported. The
restated amounts reflect the change in accounting method for revenue
recognition of health plan management services adopted in the fourth
quarter but effective under Accounting Principles Board Opinion No. 20,
Accounting Changes, as of July 1, 1997. The effect of the restatement was
to recognize in the first quarter ended September 30, 1997 the cumulative
effect of this change in accounting principle, which reduced net income by
$2,371,000 ($.52 per share for basic and $.51 per share for diluted, and to
increase net income before cumulative effect of the accounting change by
$179,000 ($.04 per share diluted) and $142,000 ($.03 per share diluted) in
the first and second quarters ended September 30 and December 31, 1997,
respectively, and reduce net income for the third quarter ended March 31,
1998 by $139,000 ($.03 per share diluted) from the amount previously
reported.
(2) Includes a one-time charge of $239,000, net of tax benefit ($.05 per share
diluted), for the write-off of costs related to the terminated merger
agreement with HPS.
(3) The earnings per share amounts have been restated to comply with statement
of Financial Accounting Standards No. 128, Earnings per share.
<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> <C>
Year ended June 30, 1998:
Allowance for uncollectible accounts $260,000 $113,339 $108,339(1) $265,000
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
- ----------------
(1) Uncollectible accounts written off.
</TABLE>
<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.
September 28, 1998 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.
September 28, 1998 By: /s/ Gary T. McIlroy, M.D.
Gary T. McIlroy, M.D.
Chairman of the Board, Chief Executive Officer
and Director (principal executive officer)
September 28, 1998 By: /s/ Marlene Travis
Marlene Travis
President, Secretary, Chief Operating Officer
and Director
September 28, 1998 By: /s/ Thomas P. Clark
Thomas P. Clark
Senior Vice President, Finance and Chief
Financial Officer (principal financial
officer and principal accounting officer)
September 28, 1998 By: /s/ Vance Kenneth Travis
Vance Kenneth Travis, Director
September 28, 1998 By: /s/ Gary L. Damkoehler
Gary L. Damkoehler, Director
September 28, 1998 By: /s/ Raymond G. Schultze, M.D.
Raymond G. Schultze, M.D., Director
September 28, 1998 By: /s/ Ronald R. Hahn
Ronald R. Hahn, Director
September 28, 1998 By: /s/ Robert L. Montgomery
Robert L. Montgomery, Director
<PAGE>
EXHIBIT INDEX
No. Description
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, 1998 (SEC File No.
0-18902).
3.2 Composite Bylaws of the Company, as of May 17, 1997--incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902)
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).
10.3* Employment Agreement dated as of June 20, 1996 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy -- incorporated by reference
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).
10.4* Split 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 reference 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).
10.5* Employment Agreement dated as of June 21, 1996 between Health Risk
Management, Inc. and Marlene O. Travis -- incorporated by reference 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).
10.6* Split 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 reference 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).
<PAGE>
10.7* Employment Agreement dated June 21, 1996 between Health Risk
Management, Inc. and Thomas P. Clark -- incorporated by reference 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).
10.8* Split Dollar Agreement dated as of September 1, 1991 between Health
Risk Management, Inc. and Thomas P. Clark -- incorporated by reference
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).
10.9* Health 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).
10.10* 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).
10.11 Second 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).
10.12 Third 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).
10.13* Amended and Restated 1992 Long-Term Incentive Plan--incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.14* 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).
10.15* 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).
10.16* Form of Incentive Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.17* Form of Non-Qualified Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.18* Form of Performance Unit Award under the 1992 Long-Term Incentive Plan
-- incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1992 (SEC File
No. 0-18902).
10.19* 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).
<PAGE>
10.20* 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).
10.21 Lease 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).
10.22 Second 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--incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.23 Fourth 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).
10.24 Fifth 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).
10.25 Sixth 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--incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.26 Third 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).
10.27 Fourth 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--incorporated by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997 (SEC File
No. 0-18902).
10.28 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 10.30 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 (SEC File
No. 0-18902).
10.29 First 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).
<PAGE>
10.30 Second 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).
10.31 Third 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--incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1997
(SEC File No. 0-18902).
10.32 Security 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).
10.33 Managed 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).
10.34 Second 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).
10.35 Claim 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, 1996 (SEC File No. 0-18903).
10.36 Second 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).
10.37 Lease 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).
<PAGE>
10.38 Managed Care Service Agreement dated October 29, 1996 between Health
Risk Management, Inc. and Keystone Mercy Health Plan--incorporated by
reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.39 QualityFIRST(R) License Agreement dated July 11, 1996 between Health
Risk Management, Inc. and Keystone Mercy Health Plan--incorporated by
reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.40 Amendment No. 1 to the Managed Care Service Agreement between Health
Risk Management, Inc. and Keystone Mercy Health Plan effective October
1, 1997--incorporated by reference to Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997 (SEC File
No. 0-18902).
10.41 Management Services Agreement dated February 24, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Oxford Health Plans (PA), Inc.
10.42 Health Care Excess Risk Insurance Policy dated April 13, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Kentucky Medical Insurance Company.
10.43 Lease agreement dated May 5, 1998, between MEPC O &I, Inc. and Health
Risk Management, Inc. related to the Company's offices at 10900
Hampshire Avenue South, Minneapolis, Minnesota and Amendment of Lease
dated September 16, 1998.
10.44 Amended and Restated Revolving Credit and Term Loan Agreement between
Health Risk Management, Inc. and U.S. Bank National Association dated
May 1, 1998.
18. Letter regarding change in accounting principle.
21. List of subsidiaries.
23. Consent of Independent Auditors.
27.1 Financial Data Schedule for the Year ended June 30, 1998 (filed in
electronic format only).
27.2 Restated Financial Data Schedule for the 3 months ended September 30,
1997 (filed in electronic format only).
27.3 Restated Financial Data Schedule for the 6 months ended December 31,
1997 (filed in electronic format only).
27.4 Restated Data Schedule for the 9 months ended March 31, 1998 (filed in
electronic format only).
- --------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT ("Agreement") entered into as of
February 24, 1998, between PA HRM and Oxford.
RECITALS
WHEREAS, Oxford is a health maintenance organization ("HMO") duly
licensed by the Commonwealth of Pennsylvania pursuant to the Health Maintenance
Organization Act to operate an HMO and to offer certain health insurance
products to covered members in a mandatory medical assistance managed care
program called the "HealthChoices Program" for Medical Assistance recipients in
the Oxford Service Area.
WHEREAS, Oxford is charged with specific oversight responsibilities in
areas including, but not limited to, provider credentialing, utilization
management, quality assurance, member services, and other administrative
responsibilities as an HMO under Pennsylvania Department of Insurance
regulations;
WHEREAS, as an HMO, Oxford arranges for certain medical services to
Covered Members who reside in and around the Oxford Service Area through
physician clinics, independent physicians, physician group practices, hospitals
and other ancillary providers, and assumes certain risk and financial
liabilities for providing such services to Covered Members;
WHEREAS, PA HRM provides management services related to the
administration of health benefit plans and the management of health care
delivery including, but not limited to, total medical cost risk assumption,
claim administration, utilization management, and other related administrative
services;
WHEREAS, Oxford desires to engage PA HRM to provide certain claims
administration, utilization management, quality assurance, network management,
member services, and other related health care cost management services with
respect to Covered Members, and to assume and share certain medical claim cost
risk and financial liabilities in the Oxford Service Area; and
WHEREAS, PA HRM is willing to accept such engagement in accordance with
the terms and conditions set forth below, and the requisite approval of the
Pennsylvania regulatory authorities.
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:
TERMS AND CONDITIONS
1 INCORPORATION OF HEALTHCHOICES PHYSICAL HEALTH AGREEMENT
1.1 Operative Documents. The HealthChoices Physical Health Agreement
between the Commonwealth of Pennsylvania and Oxford Health Plans (PA), Inc.,
dated January ___, 1997, including any amendments (the "HCPH Agreement") is
specifically incorporated herein and is made a part of this Agreement. With
regard to the governance of such documents, it is hereby acknowledged and agreed
by the parties hereto that:
1.1(a) In the event that any of the terms of this Agreement conflict
with, are inconsistent with, or are in addition to, the terms
of the HCPH Agreement, the terms of this Agreement shall be
construed in such a manner as to allow this Agreement and the
HCPH Agreement to be read together and to be enforceable as
executed.
<PAGE>
2 DEFINITIONS
The following terms shall have the meanings indicated:
2.0 "Affiliate" means any individual, corporation, partnership, joint
venture, trust, unincorporated organization or association, or other similar
organization (hereinafter "Person"), controlling, controlled by or under common
control with PA HRM or Oxford or their parent(s), whether such common control be
direct or indirect. Without limitation, all officers or Persons, holding five
percent (5%) or more of the outstanding ownership interests of PA HRM or Oxford
or their parent(s), directors and subsidiaries of PA HRM or Oxford or parent(s)
shall be deemed to be affiliates for purposes of this Agreement. For purposes of
this definition, "control" means the possession, directly or indirectly, of the
power (whether or not exercised) to direct or cause the direction of the
management or policies of a Person, whether through the ownership of voting
securities, other ownership interests, or by contract or otherwise, including,
but not limited to, the power to elect a majority of the directors of a
corporation or trustees of a trust, as the case may be.
2.1 "Applicable Law(s)" means any statute, law, ordinance, regulation,
order, rule, judgment, decree, injunction, or ruling of any federal, state,
local or other governmental agency, body or court, or of any other type of
regulatory body that is applicable to the obligations or duties of a party under
this Agreement.
2.2 "Authorization(s)" is the means by which an Oxford Primary Care
Physician refers Covered Members to Oxford Par Providers, including, but not
limited to, Specialist Physicians, hospitals, and other ancillary providers for
Covered Services.
2.3 "Best Efforts" means an undertaking by a party to perform or
satisfy an obligation or duty or otherwise act in a manner reasonably calculated
to obtain the intended result by action or expenditure not disproportionate in
the circumstances, which means, among other things, that such party shall not be
required to: (i) expend substantial funds other than for payment of the
reasonable and customary costs and expenses of employees, counsel, consultants,
representatives, or agents of such party, and regulatory, license, or other
similar fees and proper taxes in connection with the performance or satisfaction
of such obligation or duty or other action; or (ii) institute litigation or
arbitration as a part of its Best Efforts.
2.4 "Coverage Certificate(s)" means any of the coverage certificates,
benefit plan descriptions, or other similar documents issued by Oxford in
connection with the HC Program.
2.5 "Covered Member" means any person who is properly enrolled with
Oxford or who is otherwise entitled to receive Covered Services under a Coverage
Certificate.
2.6 "Covered Service(s)" means the Medically Necessary hospital,
physician, and ancillary services and other benefits such as preventive services
to which Covered Members are entitled under the Coverage Certificates.
2.7 "Credentialing and Credentialing Criteria" means both the process
by which Provider credentials and qualifications are reviewed by Oxford, or its
designee, including recredentialing, and the specific credentialing standards
and guidelines established by Oxford from time-to-time and generally applicable
to Oxford Par Providers.
2.8 "Effective Date" means the later of the date which falls [six (6)
weeks after the first] Monday following the execution of this Agreement, or
April 1, 1998.
2.9 "DOH" means the Pennsylvania Department of Health.
2.10 "DOI" means the Pennsylvania Department of Insurance.
2.11 "DPW" means the Pennsylvania Department of Public Welfare.
<PAGE>
2.12 "HC Program" means the HealthChoices Program implemented by Oxford
for Medical Assistance recipients in the Oxford Service Area.
2.13 "Oxford Non Par Provider" means a hospital, physician or ancillary
provider who or which does not have an agreement with Oxford pertaining to
payment for Covered Services rendered to a Covered Member.
2.14 "Oxford Par Provider" means an approved hospital, physician or
ancillary provider who or which has an agreement with Oxford pertaining to
payment for Covered Services rendered to a Covered Member.
2.15 "Oxford Par Provider Agreement" means a contract between an Oxford
Par Provider and Oxford pursuant to which the Provider provides Covered Services
to Covered Members.
2.16 "Oxford Plan(s)" mean those health benefit plans offered or
administered by Oxford under the HC Program from time to time during the term of
this Agreement.
2.17 "Oxford Service Area" means the service area in which Oxford is
licensed by the Commonwealth of Pennsylvania to offer and administer Oxford
Plans. As of the Effective Date, the Oxford Service Area consists of the
following Pennsylvania counties: Bucks, Chester, Delaware, Montgomery and
Philadelphia.
2.18 "Oxford Member" means a Covered Member who has selected an Oxford
Par Provider as his or her Primary Care Physician.
2.19 "Oxford Network" means the network of Oxford Par Providers
established heretofore.
2.21 "HCFA" means the Health Care Financing Administration.
2.22 "HEDIS", means the current Health Plan Data Information Set as
published by NCQA, as amended from time to time.
2.23 "Medical Director" means a licensed physician appointed by Oxford
as its Medical Director and, where designated by Oxford or the Medical Director,
an Associate Medical Director or Assistant Medical Director.
2.24 "Medically Necessary" or "Medical Necessity" means with respect to
health care services and supplies, those services or supplies provided by a
hospital, skilled nursing facility, physician, or other ancillary provider, that
are required to identify or treat a Covered Member's illness or injury, and
which are generally consistent with standards used by the Medical Director or
utilization review committee of Oxford and which are:
2.24(a) Appropriate for the symptoms and diagnosis or treatment of the
Covered Member's condition, illness, disease, or injury; and
2.24(b) Provided for the diagnosis, or the direct care and treatment
of the Covered Member's condition, illness, disease or injury;
and
2.24(c) In accordance with current standards of medical practice as
recognized and accepted by the medical community; and
2.24(d) Not primarily for the convenience of the Covered Member, or
the Covered Member's provider; and
<PAGE>
2.24(e) The most appropriate source or level of service that can be
safely provided to the Covered Member. When applied to
hospitalization, this further means that the Covered Member
requires acute care as a bed patient due to the nature of the
services rendered or the Covered Member's condition, and the
Covered Member cannot receive safe or adequate care as an
outpatient.
In the event that the Oxford Plans are changed generally to include a definition
of Medically Necessary different from this definition, this definition shall be
deemed to have been automatically modified to be such definition of Medical
Necessity so included in such Oxford Plans; provided that any such change shall
be subject to Section 5.1 below.
2.25 "NCQA" means the National Committee on Quality Assurance.
2.26 "Oxford" means OXFORD HEALTH PLANS (PA), INC., a Pennsylvania
business corporation having offices at 601 Walnut Street, Suite 900,
Independence Square West, Philadelphia, Pennsylvania, and its parent
corporation, OXFORD HEALTH PLANS, INC., a Delaware business corporation having
offices at 800 Connecticut Avenue, Norwalk, Connecticut, 06854, and any other
affiliates.
2.27 "PA HRM" means PENNSYLVANIA HRM, INC., a Pennsylvania business
corporation having offices at 7900 West 78th Street, Minneapolis, Minnesota,
55439 including, but not limited to, its related organizations, Health Risk
Management, Inc., its parent corporation, and HRM Claim Management, Inc. and the
Institute for HealthCare Quality, Inc., both of which are wholly-owned
subsidiaries of Health Risk Management, Inc. Health Risk Management, Inc., HRM
Claim Management, Inc., and the Institute For Healthcare Quality, Inc. are all
Minnesota business corporations. Unless otherwise indicated, Pennsylvania HRM,
Inc. and its related organizations are collectively referred to hereinafter as
"PA HRM".
2.28 "Primary Care Physician" means a physician who supervises,
coordinates and provides initial care and basic medical services as a general or
family care practitioner, or in some cases, as an internist or a pediatrician to
Covered Members, initiates their referrals for specialist care and maintains
continuity of patient care.
2.29 "Provider" means a physician or physician group, hospital, health
professional, vendor or facility who or which delivers health care services.
2.30 "Specialist Physician" means a physician who provides medical care
in any generally accepted medical specialty or sub-specialty.
2.31 "Regulatory Approval" means any approval or consent by, filing
with, or notice to any federal, state, local or other governmental agency or
body, or any other type of regulatory body (including without limitation the
DOH, DOI and DPW) required with respect to the specified matter by any statute,
law, ordinance, regulation, order or rule of any such regulatory body.
2.32 "State" means the Commonwealth of Pennsylvania.
2.33 "Term" means the term of this Agreement which shall begin on the
Effective Date and continue for a period of five (5) years or until terminated
pursuant to Section 8.2 of this Agreement.
2.34 "Transition Plan" means the plan described in Section 3.10.
<PAGE>
3 RESPONSIBILITIES OF OXFORD
3.1 Contractual Relationships. Oxford, as the licensed HMO and as the
party which entered into the HCPH Agreement with the Commonwealth of
Pennsylvania, shall have the primary responsibility to maintain its HMO license
and the HCPH Agreement with the State and its political subdivisions. Moreover,
Oxford shall have the primary responsibility to maintain in good standing its
current license and relationships with the DPW, DOI and DOH.
3.2 Responsibilities As HMO. During the Term, Oxford, as an HMO, shall
be responsible for and perform the following services relating to the HC
Program.
3.2(a) Marketing. Oxford shall remain responsible for developing and
organizing all marketing efforts, as permitted by the DPW's
policies and regulations in the Oxford Service Area in a
manner which is generally consistent with the policies and
regulations of the DPW and is consistent with the way in which
Oxford markets Oxford Plans generally. PA HRM shall reimburse
Oxford for the costs of any marketing under this Agreement
requested by PA HRM.
3.2(b) Oxford Marketing Materials. Oxford shall ensure that Oxford
Par Providers agree to use only marketing or non-medical
informational materials which Oxford provides for purposes of
Covered Member interaction. PA HRM shall reimburse Oxford for
the costs of any marketing under this Agreement requested by
PA HRM.
3.2(c) Collection of Premiums. Oxford shall be responsible to see
that all premiums from DPW with respect to Oxford Plans and
riders, if applicable, are handled in accordance with the
banking arrangement established by mutual agreement in the
Transition Plan.
3.2(d) Member Eligibility Verification: Eligibility List.
3.2(d)(i) Oxford shall have the primary responsibility for
the performance of all enrollment and eligibility
functions including providing to or for the
benefit of each Covered Member, Oxford enrollment
forms, identification cards and plan booklets.
The identification card shall be presented by the
Covered Member for the purpose of assisting
Oxford Par Providers in verifying Covered Member
eligibility. In addition, Oxford shall maintain
other verification procedures by which PA HRM may
confirm the eligibility of Covered Members.
<PAGE>
3.2(d)(ii) Oxford shall provide PA HRM with a record of
Oxford Covered Members who are enrolled for
Covered Services ("Eligibility List") promptly
upon Oxford's receipt of such information from
DPW. The Eligibility List shall be adjusted by
Oxford to reflect retroactive additions and
deletions in accordance with the policy
established by the DPW. Oxford represents that
the Eligibility List provided to PA HRM is an
accurate reflection of the eligibility status of
Covered Members based on information then
available to Oxford. Both parties agree that the
data is first provided to Oxford by the State,
and that Oxford shall not be responsible or
liable for delays by the State, or for inaccurate
data provided by the State.
3.2(d)(iii) Any Covered Member who selects a Primary Care
Physician located outside of the Oxford Service
Area shall automatically be transferred out of
membership to the extent permitted by DPW rules.
Oxford shall notify PA HRM as soon as possible
after Oxford learns of any such selection. Such
transfer shall be effective on the date of the
Covered Member's selection. This section shall
not apply to Covered Members who seek emergency
treatment outside the Oxford Service Area, or
those Covered Members who are properly referred
to Specialist Physicians outside the Oxford
Service Area.
3.2(e) Oxford Plan Administration.
3.2(e)(i) Oxford shall be responsible for certain
administrative responsibilities of all Oxford
Plans including such functions as: maintaining
all required regulatory accountability, grievance
procedures, customer relations and run-out claims
administration services for all claims relating
to services incurred prior to the Effective Date,
data entry/electronic transfer as agreed by the
parties, development and distribution of Coverage
Certificates, enrollment forms, identification
cards and other Covered Member materials,
development and distribution of Provider manuals
(subject to PA HRM's prior review and opportunity
to suggest comments thereon insofar as they
relate to the Oxford Plans), and the production
of an Oxford Par Provider directory (which shall
be subject to PA HRM's reasonable prior review
and opportunity to suggest changes therein with
respect to the listing of Oxford Providers).
3.2(e)(ii) Oxford shall provide to PA HRM copies of all
Coverage Certificates, coverage guidelines and
procedures, Provider manuals, Oxford Par Provider
directories, Oxford Plans promotional materials,
and any other documents and materials of a
similar nature as PA HRM may reasonably request
in connection with the performance of its duties
hereunder.
<PAGE>
3.2(f) Regulatory Filings and Compliance. Oxford shall have the
primary right and responsibility to perform all regulatory
compliance and oversight services, including all filings and
documents necessary to obtain the permits, consents, approvals
and authorizations of those third parties, administrative
agencies and governmental instrumentalities as are necessary.
The parties agree that Oxford shall obtain all necessary
consents, approvals and authorizations ("Required Approvals"),
including, without limitation, obtaining from the DOH, DPW and
DOI any necessary approvals of this Agreement and the Oxford
Par Provider Agreements This Agreement is expressly contingent
upon and shall not be effective unless and until the parties
receive all Required Approvals. Oxford and PA HRM recognize
that time is of the essence and they shall use Best Efforts in
making required regulatory filings and responding to agency
requests for information; provided, however, that each party
hereby acknowledges and agrees that the time frames in which
agencies issue the Required Approvals are not within Oxford's
or PA HRM's control. Oxford and PA HRM have heretofore
cooperated with the other to the extent reasonably necessary
to obtain the Required Approvals and each agrees they will
continue to furnish all information reasonably necessary in
the future in connection with any statement, application or
filing to any administrative agency or governmental
instrumentality in connection with this Agreement or the
transactions contemplated herein.
3.2(g) Patient Consents. Oxford shall use its Best Efforts on behalf
of PA HRM to obtain, in connection with the enrollment and
continuing participation of Covered Members in an Oxford Plan
or otherwise, such written consents, releases, and
authorizations from all Oxford Members as shall be legally
sufficient to enable Oxford to obtain such information as
necessary for Oxford to perform the services under this
Agreement, and to share such information with PA HRM as
provided herein. Both parties shall treat such information
confidentially consistent with applicable laws and
regulations.
3.2(h) Reports. Oxford shall maintain primary responsibility for the
filing of such reports as may be required of Oxford by any
regulatory or accreditation agency having jurisdiction,
including DOH, DPW and DOI.
3.2(i) Statutory Reserve Requirements. Oxford shall have sole
responsibility for compliance with all State and DOI financial
reserve requirements applicable to Oxford and for maintaining
such reserves as are required and necessary to maintain its
HMO license in good standing.
3.2(j) Insolvency Guaranty. Oxford shall have sole responsibility for
providing the DOI with its corporate guaranty of the solvency
of PA HRM throughout the Term of this Agreement. Oxford's
insolvency guaranty shall be in substantially the form of that
guaranty attached hereto as Exhibit 1. Oxford shall advise PA
HRM of any changes in the insolvency guaranty that are made,
for whatever reason, during the Term of this Agreement.
<PAGE>
3.3 Management of Provider Network. Oxford shall maintain
responsibility for any revisions to the Oxford Par Provider Agreement and shall
entertain, in good faith, reasonable recommendations made by PA HRM relating to
proposed revisions.
3.4 Network Development and other Network Services.
3.4(a) Oxford shall use its Best Efforts to see that the Oxford
Network shall continue to consist of those Oxford Par
Providers whose Oxford Par Provider Agreements are identified
on that list attached hereto as Exhibit 3.
3.4(b) A Provider who enters into an Oxford Par Provider Agreement
after the Effective Date shall not become or be deemed to be
an Oxford Par Provider until such Provider has satisfied the
Oxford Credentialing process.
3.4(c) Oxford and PA HRM acknowledge and agree that Oxford has
established, operates and maintains a health service delivery
system, quality assurance system, provider relations system,
member grievance system and other systems meeting DOH
standards, and is directly accountable to the DOH for
compliance with the standards and for the provision of
high-quality effective care to Covered Members. Nothing in
this Agreement shall be construed to in any way limit Oxford's
authority or responsibility to timely meet standards or take
prompt corrective action to address a quality of care problem,
resolve a Covered Member grievance or to comply with a
regulatory requirement of the DOH.
3.5 Credentialing of Oxford Par Providers.
3.5(a) Oxford shall continue to be responsible for all Credentialing
of Oxford Par Providers. PA HRM shall accept all Oxford Par
Providers who, in the reasonable judgment of Oxford, meet all
of Oxford's applicable Credentialing Criteria. Oxford shall
continue to list all Oxford Par Providers in Oxford's Par
Provider directories.
3.5(b) Oxford and PA HRM acknowledge and agree that only those
Providers who meet Oxford's Credentialing standards may become
Oxford Par Providers and that ultimate authority to accept
such Providers for participation or to terminate participation
is retained by Oxford. Oxford agrees that PA HRM may select
from among the Providers in the Provider Network only those
Providers with whom PA HRM wishes to work. PA HRM shall not be
obligated to use all Providers under contract to Oxford, but
PA HRM may not terminate a Provider's Agreement without
Oxford's consent. Oxford agrees that, in its role as the HMO,
Oxford will consider recommendations made to it by PA HRM to:
(i) accept a Provider for participation or, (ii) terminate a
Par Provider from participation, but only to the extent that
such recommendation made by PA HRM in that regard would not or
could not, in Oxford's reasonable judgment, constitute or lead
to a violation or breach of any Applicable Law (including any
DOH, DPW or DOI regulation) or any accreditation standard. PA
HRM shall not act in any manner to violate the terms of any
Oxford Par Provider Agreement. Notwithstanding any other
provisions herein to the contrary, Oxford and PA HRM agree
that Oxford's pharmacy benefit management agreement with PCS
shall be terminated on the Effective Date, subject to all
necessary Regulatory Approvals from the State.
<PAGE>
3.6 Medical Records.
3.6(a) Oxford shall continue to require that its Par Providers
maintain clear and complete medical records that reflect all
health care services rendered to each Oxford Covered Member,
in accordance with all applicable statutory and regulatory
requirements. Oxford Par Providers shall maintain the
confidentiality of information contained in such medical
records in compliance with all applicable federal and state
laws and regulations regarding the confidentiality of patient
records.
3.6(b) To the extent authorized by Oxford Covered Members and
permitted by Applicable Law, Oxford shall make available to PA
HRM each Oxford Member's medical record information and shall
promptly provide copies of any documents contained therein, if
requested, for the purpose of determining eligibility,
liability, or appropriate care issues or reviewing payments
received by Oxford Par Providers from Covered Members or
others on their behalf. Oxford agrees to allow inspection of
Oxford Covered Members' records to the extent that such
inspection may be required by properly authorized governmental
agencies or accrediting agencies.
3.6(c) Oxford agrees to provide PA HRM and the DOH with access to
medical and other records concerning the provision of services
to Covered Members by and through Oxford and Oxford Par
Providers.
3.6(d) Oxford Par Providers shall maintain medical and other records
for such time periods as required by law or by Oxford's or PA
HRM's risk management policies, whichever is longer.
3.6(e) Oxford and PA HRM agree that any delegation of authority or
responsibility for Provider relations, quality assessment,
utilization review and other functions by Oxford to PA HRM,
shall ultimately be subject to performance monitoring by
Oxford and the DOH and is subject to independent validation by
Oxford, the DOH or an independent quality review/assessment
organization approved by the DOH.
3.7 Member Complaint and Grievance System. Oxford shall develop,
implement and maintain oversight for a complaint and grievance system which
provides for informal settlement of Covered Members' complaints and grievances
at the lowest administrative level, and a formal process for appeal ("Covered
Member Complaint and Grievance System"). The development and implementation of
the Covered Member Complaint and Grievance System shall be in complete
accordance with the requirements of Oxford's HCPH Agreement.
3.8 Provider Appeal Procedures. Oxford shall develop, implement and
maintain oversight for a Provider complaint and appeals system which provides
for informal settlement of Providers' complaints at the lowest level, and a
formal process for appeal ("Provider Complaint and Appeal System"). The
development and implementation of the Provider Complaint and Appeal System shall
be in complete accordance with the requirements of Oxford's HCPH.
<PAGE>
3.9 Member Grievances. Oxford shall use its Best Efforts to ensure that
Oxford Par Providers cooperate and abide by the Oxford Covered Member Complaint
and Grievance System in resolving any Oxford Covered Member grievances related
to the provision of services provided pursuant to this Agreement. Oxford shall
notify PA HRM of all Oxford Covered Member complaints brought to the attention
of Oxford and/or Oxford Par Providers. Oxford shall notify PA HRM promptly of
any action taken or proposed with respect to the resolution of such complaints
and the avoidance of similar complaints in the future.
3.10 Transition Plan. Oxford shall cooperate with PA HRM on the
adoption and implementation of a Transition Plan between the execution of this
Agreement and the Effective Date. Both parties shall use their Best Efforts in
meeting all of the objectives and time frames required or contemplated by the
Transition Plan. The Transition Plan shall be in substantially the form of that
attached hereto as Exhibit 4 and made a part hereof. As a condition precedent to
the adoption of the Transition Plan, Oxford shall provide to PA HRM all material
information it has in its possession about the HC Program, including data tapes
of the Oxford claims systems and other systems in a mutually acceptable format.
3.11 Sybase Training. Oxford shall provide PA HRM personnel with
reasonable and necessary training on Oxford's Sybase enrollment system as part
of the Transition Plan.
3.12 Acquisition. Oxford shall acquire no more than an aggregate of
four (4) percent of the outstanding common shares of stock of Health Risk
Management, Inc. ("HRM") without the prior approval of PA HRM's board of
directors.
4 RESPONSIBILITIES OF PA HRM
Beginning on the Effective Date and continuing throughout the Term, PA
HRM shall be responsible for and shall perform those network management, claim
administration, member services, and medical management services relating to the
Oxford Par Providers and Oxford Covered Members as described in this Section 4,
and shall provide all systems necessary for such performance.
4.1 Delivery of Covered Services.
4.1(a) Beginning on the Effective Date, PA HRM shall assume the full
risk and financial responsibility for the medical claim costs
associated with the provision of all Covered Services pursuant
to this Agreement.
4.1(b) Oxford Par Providers shall continue to be expected to provide
Covered Services as and when required in accordance with
general Oxford policies and procedures regarding the provision
of Covered Services generally. Oxford Par Providers shall
continue to be compensated for the provision of such services
in accordance with their Oxford Par Provider Agreement. Oxford
shall not have financial responsibility for the cost of any
medical services from and after the Effective Date subject to
Section 5.
<PAGE>
4.1(c) With respect to the provision of Covered Services pursuant to
this Agreement, PA HRM shall, and shall cause each Oxford Par
Provider to:
4.1(c)(i)Adhere to mutually agreed-upon policies and
procedures regarding coverage, referrals and
preauthorization, use Oxford's referral and other
forms, and obtain preauthorization of those Covered
Services for which Oxford as preauthorization
requirements, unless otherwise specifically approved
in writing by Oxford, and to use only selected Oxford
ancillary providers, such as radiology, pharmacy or
specialized laboratory services unless, with respect
to a referral for specific services to a specific
Covered Member, written approval to do otherwise is
first obtained from Oxford. Notwithstanding this
paragraph and any other provision of this Agreement
to the contrary, Oxford and PA HRM agree that
Oxford's pharmacy benefit management program
agreement with PCS shall be terminated on the
Effective Date, and PA HRM shall have the authority
to enter into a similar agreement with ValueRX for
replacement services, subject to all necessary
Regulatory Approvals from the State.
4.1(c)(ii) Ensure that the provision of Covered Services is
not delayed, reduced, denied or otherwise
hindered because of the financial or contractual
relationship between PA HRM and Oxford or between
Oxford or PA HRM and an Oxford Par Provider.
4.2 Medical Management; Additional Network Management Services.
4.2(a) PA HRM shall be responsible for the development and
implementation of a medical management program for review of
Oxford Covered Services utilizing, at a minimum, the standards
of Oxford who shall have oversight responsibility. Standard
Oxford medical management services to be performed by PA HRM
shall include but are not limited to: Utilization Management,
including:
Prospective Review
Concurrent Review
Discharge Planning
Retrospective Review
Development and Establishment of Clinical Protocols
Outcomes Management
Quality Assurance Services, including:
Development and Monitoring of Quality Management Standards
4.2(b) In connection with Oxford's quality management programs, PA
HRM shall conduct among other activities, surveys of Oxford
Members, as contemplated by the HCPH Agreement. PA HRM's
utilization management and quality management personnel may
visit Oxford Members admitted to or receiving services from
Oxford Par Providers and Oxford Non Par Providers and to the
extent consented to by the Oxford Member and permitted by
Applicable Laws, may inspect and copy, for quality assurance
purposes, health records (including medical records) of Oxford
Members maintained by Oxford Par Providers.
<PAGE>
4.2(c) In performing its medical management responsibilities, PA HRM
shall comply with all standards and requirements of the DOH,
NCQA (as applicable to the HCPH Agreement or required under
other Oxford programs by the State), and other applicable
regulatory or accreditation agencies, as amended from time to
time, including but not limited to the confidentiality of
medical records. PA HRM also shall be responsible for the
development and implementation of a network management program
for review and management of the Oxford Provider Network
utilizing, at a minimum, the standards of Oxford, who shall
have oversight responsibility. Network management services to
be performed by PA HRM shall include but not be limited to:
Establishment of Provider Reimbursement Methodologies
Network Performance Review and Management
Network Development and Maintenance
Provider Relations
Provider Relations and Staff Training
4.2(d) Development of Performance Criteria. The most current version
of HEDIS, or other measurement acceptable to the DPW, shall,
where required by the HCPH Agreement, be utilized by Oxford
and PA HRM as the minimum performance criteria for the
services contemplated in this Agreement. PA HRM shall use its
Best Efforts to implement and adhere to such performance
criteria to the fullest extent reasonable and within PA HRM's
control. The parties shall use standard Member surveys, on a
basis not more frequently than quarterly, for the purpose of
determining Member satisfaction with the PA HRM services. The
parties shall consult from time to time as necessary in order
to resolve any issues arising in connection with performance
criteria and/or Member satisfaction. PA HRM agrees to meet all
HEDIS reporting requirements, if applicable to Medicaid
programs or required under other Oxford programs by the State.
4.2(e) Provider Relations. PA HRM shall assure that provider
relations are managed to assure competent operation of the HC
Program. PA HRM may select from among the Providers in the
Provider Network only those Providers with whom PA HRM wishes
to work. PA HRM shall not be obligated to use all Providers
under contract to Oxford, but PA HRM may not terminate a
Provider's Agreement without Oxford's consent. PA HRM shall
not act in any manner to violate the terms of any Oxford Par
Provider Agreement. PA HRM shall be authorized to enter into a
pharmacy benefit management program agreement with ValueRX on
or after the Effective Date to replace the existing agreement
with PCS, subject to all required Regulatory Approvals from
the State.
4.3 Member Hold Harmless. PA HRM and Oxford agree that in no event,
including without limitation, Oxford's insolvency, PA HRM's insolvency, or
breach of this Agreement, shall PA HRM or Oxford bill, charge, collect a deposit
from, seek compensation from, or otherwise have any recourse against a Covered
Member for Covered Services. This Section 4.3 shall not prohibit collection of
Covered Member deductibles or copayments (if permitted under the HC Program) or
coordination of benefits, subrogation payments for services other than Covered
Services, or other payments by other insurers or plans. PA HRM further agrees
that: (i) this provision shall survive the termination of this Agreement
regardless of the cause and shall be construed to be for the benefit of Covered
Members; and (ii) this provision supersedes any oral or written agreement now
existing or hereafter entered into between Oxford and Oxford Par Providers,
Covered Members, or persons acting on their behalf. Any modification, additions,
or deletions to the provisions of this Section shall become effective on a date
no earlier than the later of: (i) 15 days after the DOI, DPW and the DOH have
received written notice of such proposed changes; or (ii) the first date on
which PA HRM and Oxford have obtained all requisite Regulatory Approvals for
such change. The provisions of this Section shall be binding on all Oxford Par
Providers, PA HRM and Oxford.
Each Oxford Par Provider Agreement shall contain a "hold harmless"
provision, consistent with the provisions of this Section, to the effect that in
no event, including without limitation, the insolvency of Oxford or PA HRM,
shall Oxford or PA HRM or any Oxford Par Provider bill, charge, collect a
deposit from, or otherwise have any recourse against any Covered Member for
payment of Covered Services. The foregoing shall not preclude the collection by
Oxford Par Providers of deductibles and copayments or payments for services
other than Covered Services from Covered Members as permitted under the
applicable Oxford Plan and applicable HC Program provisions.
<PAGE>
4.4 Insurance.
4.4(a) Stop Loss Insurance. PA HRM shall purchase and maintain in
force during the term of this Agreement insurance to cover PA
HRM's medical cost aggregate exposure above a level
established by the parties from time to time (see Exhibit 2,
II, (b)) on a Covered Member per month basis as a percentage
of total DPW compensation for the period beginning as of the
Effective Date and ending December 31, 1998, and for each
calendar year thereafter during the term of this Agreement.
This stop loss insurance shall cover PA HRM and Oxford from
risk of excess medical costs and will also protect Oxford from
losses flowing through PA HRM to Oxford. PA HRM shall notify
Oxford immediately if said coverage has terminated or will
terminate. Failure to maintain said coverage constitutes a
material breach of this Agreement. Such coverage shall be with
a carrier acceptable to Oxford. PA HRM shall provide evidence
acceptable to Oxford that such coverage will be in force on
the Effective Date.
4.4(b) Professional Liability Insurance. PA HRM will maintain a
minimum of $10 million of insurance coverage during the term
of this Agreement to cover general and utilization management
and claim administration; professional liability and errors
and omissions risks. Such coverage shall be with a carrier
acceptable to Oxford. PA HRM shall provide evidence acceptable
to Oxford that such coverage will be in force on the Effective
Date.
4.5 Data Collection and Reporting.
4.5(a) PA HRM shall comply with data reporting requirements,
including encounter, utilization (including maternity
services) and reimbursement methodology required by the DOH.
PA HRM shall generate, in a format suitable for submission to
appropriate regulatory authorities, all reports necessary to
administer and operate the HPCH Agreement.
4.5(b) PA HRM agrees to collect and provide Oxford with utilization,
financial and other data for the purposes of comparative
performance analysis of Oxford and PA HRM effectiveness.
4.6 Processing and Payment of Certain Claims; Reports. PA HRM shall
process all Covered Member claims and pay approved claims in accordance with PA
HRM claims processing and payment procedures (including PA HRM's share under
Sections 5.15, 5.16, 5.17 and 5.18), which procedures shall be subject to Oxford
approval and shall comply with all requirements of the HCPH Agreement. PA HRM
shall administer and pay all capitated contracts, including but not limited to
vision, dental, pharmacy and DME. PA HRM shall produce on behalf of Oxford
utilization and cost reports necessary for Oxford to perform services under this
Agreement pertaining to Covered Members.
4.7 Deposit and Disbursement of Funds. PA HRM, shall open and maintain
separate bank accounts to administer the funds under this Agreement and shall
deposit in such bank accounts all DPW receipts and monies as are required under
this Agreement. PA HRM shall pay all expenses and bank charges related to said
accounts and shall be entitled to all investment income therefrom.
4.8 Collection of Coordination of Benefit Amounts. After the Effective
Date, PA HRM shall use its Best Efforts to collect on behalf of Oxford amounts
due Oxford under coordination of benefits ("COB") or subrogation provisions in
Oxford Plans or otherwise, including, but not limited to, workers' compensation,
SSI and Medicare.
<PAGE>
4.9 Access; Maintenance of Records. PA HRM shall maintain on behalf of
Oxford all necessary and appropriate records relating to this Agreement
(including, without limitation, monthly claims reports and other records
relating to claims for Covered Services and other benefits under Oxford Plans)
and, subject to Applicable Law (including anti-trust restrictions), Oxford shall
have the right to inspect, audit, and duplicate those records upon reasonable
notice during regular working hours.
4.10 Accounting Records. PA HRM, in accordance with the policies,
procedures and guidelines established by Oxford, shall direct and maintain on
behalf of Oxford suitable accounting records for Oxford and shall cause to be
prepared for Oxford financial statements as follows:
4.10(a) 10 days after the close of each month, a balance sheet and a
related statement of revenue and expenses showing the results
of PA HRM operations for the preceding month and of the fiscal
year to date;
4.10(b) 90 days after the close of the fiscal year, a balance sheet
and related statement of revenue and expenses showing the
results of PA HRM's operations during that fiscal year,
audited by a mutually acceptable independent certified public
accounting firm.
4.11 Management Information. PA HRM, upon consultation with and at the
reasonable direction of Oxford, shall prepare on behalf of Oxford timely
management information reports sufficient to support the operations of Oxford
and to carry out the terms of this Agreement. PA HRM at the reasonable direction
of Oxford, shall design, institute, supervise, and from time to time revise and
amend such management and information reports as it prepares. PA HRM shall
immediately notify Oxford of any regulatory issues or deficiencies of which it
becomes aware.
4.12 Contractual Undertakings. PA HRM, in accordance with the
reasonable policies, procedures and guidelines established by Oxford, shall
negotiate and enter into such agreements as it may deem necessary or advisable
for the furnishing of office space, personnel, utilities, services, concessions
and supplies for the maintenance and operation of PA HRM, including the
rendering of the services contemplated by this Agreement.
Oxford shall not be liable for any such undertaking.
4.13 Premium Allocation. Each month during the Term, PA HRM shall
perform any required billings, and allocate all collected premiums between the
parties in a manner to be agreed upon and specified in the Transition Plan.
4.14 Member Services. PA HRM shall assume full responsibility for the
member services that are required under the HC Program and Oxford standards and
policies.
4.15 Appeals and Grievances. PA HRM shall cooperate with and assist
Oxford in processing and resolving all member appeals pursuant to Oxford's
Member Complaint and Grievance System and assume responsibility for the Member
Complaint and Grievance System as permitted by Pennsylvania Code.
4.16 Systems Maintenance and Training. PA HRM shall provide all systems
necessary for the delivery of services pursuant to this Agreement, and shall
also provide Oxford with any necessary training on PA HRM's enrollment system
during the conversion from Oxford's Sybase system.
<PAGE>
5 MUTUAL RESPONSIBILITIES OF THE PARTIES
During the Term, Oxford and PA HRM shall be mutually responsible and
perform those services described in this Section 5.
5.1 Changes and Revisions to Benefit Plan. Initially, the Oxford
Covered Services shall consist of those Covered Services described in the Oxford
Plans. PA HRM and Oxford may change Oxford's Covered Services during the Term to
maintain compliance with Applicable Law or to satisfy Oxford's and PA HRM's
mutual objectives, as reasonably necessary due to changes in market conditions
or DPW directives. In the event of any such material change which is not
appropriately reflected in the premiums related thereto, PA HRM and Oxford will
seek to negotiate an adjustment to the payments made pursuant to Exhibit 2.
To the extent practicable, Oxford shall provide at least 30 days
advance written notice to PA HRM of any proposed material changes in Oxford
Covered Services or in the copayments or conditions of coverage applicable
thereto (but in the case of changes resulting from regulatory filings by Oxford
with the DOH, the DPW or the DOI, not later than the date such filing is made).
Such changes shall be reflected in the premium rates filed with the DPW for
approval in accordance with Sections 5.2 & 5.14 below. In the event of such
change in Oxford Covered Services, if either party deems the change to require a
modification in the allocation of premiums established pursuant to Section 6
hereof, the party requesting such change shall notify the other party in writing
of such request as soon as practicable but in no event later than 30 days after
the notice of the proposed change. If no agreement is reached within 60 days
after notice of the change, the issue shall be submitted to dispute resolution
in accordance with Section 9 below.
5.2 Premiums. Oxford and PA HRM shall exercise joint responsibility for
the bidding, negotiation and establishment of premium rates with the DPW and
shall jointly file such premium rates and forms with the DOI and attend to any
matters relating thereto or bearing thereon.
5.3 Regulatory Compliance. Oxford and PA HRM shall be jointly
responsible for general, ongoing regulatory compliance with the rules and
regulations of the DOI, DPW and DOH, and for compliance with the requirements of
the Pennsylvania Secretary of State as such requirements may relate to this
Agreement.
5.4 Regulatory Reporting Requirements. Oxford and PA HRM shall be
jointly responsible for compliance with all regulatory reporting requirements,
including, but not limited to, those of DOI, DPW and DOH.
5.5 Network Development and Provider Contracting. Beginning on the
Effective Date, Oxford and PA HRM shall be jointly responsible for the continued
development and maintenance of the Oxford Network as an appropriate Provider
network to timely and efficiently provide Oxford Covered Services to Oxford
Covered Members. Oxford and PA HRM shall also be jointly responsible for all
provider contracting. Oxford and PA HRM shall use their Best Efforts to
appropriately size the Oxford Provider Network as required to maintain Oxford's
financial integrity and to provide quality, accessible care to Oxford Covered
Members. Oxford and PA HRM shall, at a minimum, maintain the Oxford Network in
accordance with joint minimum staffing and composition requirements and the
regulatory requirements of the DOH, DPW and the DOI, and HCFA requirements for
Medicaid Programs.
5.6 Provider Contracts. New Oxford Par Provider Agreements entered into
with Providers by Oxford and PA HRM shall be in the appropriate (based upon the
Provider type) form with only such changes as are approved in advance by PA HRM
and Oxford.
<PAGE>
5.7 Annual Budget and Business Plan. Oxford and PA HRM shall have joint
responsibility for the preparation (and regulatory filing, if required) of an
annual budget for the operation of the Oxford HealthChoices Program. The parties
shall also cooperate in the creation and/or revision of a business plan relating
to Oxford's HealthChoices Program.
5.8 Expansion of Oxford's Service Area. Oxford and PA HRM shall review
any proposal by either party to extend the Oxford HMO license into new service
areas in Pennsylvania. Where PA HRM requests Oxford to extend the existing
Oxford service area and Oxford concurs (which shall not be unreasonably
withheld), Oxford will use its Best Effort to do so and PA HRM will reimburse
Oxford for all reasonable costs associated with such effort, whether or not such
effort is ultimately successful.
5.9 Parties Not Engaged in Practice. Neither PA HRM nor Oxford engages
in the performance of medical or hospital services or other types of health care
and nothing in this Agreement shall be construed to imply that PA HRM or Oxford
have been retained to diagnose or treat Covered Members or are otherwise engaged
in the practice of medicine or other professions related thereto. All matters
related to such fields shall be the exclusive province of Oxford Par Providers
and Oxford Non Par Providers and their respective staffs, agents, and employees.
The parties acknowledge and agree that the utilization management services to be
provided by PA HRM are not intended to interfere with the physician-patient
relationship between Oxford's Par Providers and the Covered Members whom they
treat. Recommendations made by PA HRM are not controlling or binding upon Oxford
or its Par Providers in reaching decisions concerning the existence or extent of
benefit coverage available to Covered Members. Decisions to provide treatment
that has not been recommended by PA HRM remain with the attending physician and
the Covered Member, and the decision to pay for such treatment remains with
Oxford.
5.10 Employees; Space; Physical Assets.
5.10(a) Oxford and PA HRM each assume sole responsibility for the
hiring, training, and evaluation of, and all other personnel
matters (including assignment, removal, reassignment) with
respect to, their respective employees including, but not
limited to, those employees who are assigned to work in
conjunction with the other party's employees/agents.
5.10(b) PA HRM shall have no obligation to assume the current Oxford
Medicaid staff, space or physical assets. However, PA HRM does
intend to evaluate the staff of Oxford and its space and
physical assets at the outset of this Agreement and reserves
the right, subject to Oxford approval, to hire any staff,
sublease any space, and purchase any assets that PA HRM deems
appropriate to conduct the services covered by this Agreement.
Any staff, space or assets not acquired by PA HRM remain the
liability of Oxford. In the course of PA HRM's evaluation and
staffing, qualified Oxford employees, as reasonably determined
by PA HRM, shall be given access to similar positions created
as a result of this Agreement.
5.10(c) During the Term and for one year thereafter, PA HRM and Oxford
shall not directly or indirectly employ, or offer or promise
to offer or otherwise solicit for employment, or induce the
termination of employment of, employees or former employees of
the other party hereto or employees or former employees of any
Affiliate of such party without such party's prior written
consent. This provision shall not apply to PA HRM's retention
of some or all of Oxford's Philadelphia staff at the outset of
this Agreement, as provided for in Section 5.10(b) above.
5.11 Confidentiality and Non-Disclosure. The terms of this Agreement,
including in particular the provisions hereof regarding compensation, as well as
discounts, financial arrangements, and other non-public information and data
relating to this Agreement and the transactions contemplated herein are
confidential and shall not be disclosed by either party except as required in
the performance of this Agreement or as required by law.
<PAGE>
5.12 Compliance with Applicable Law. Both Oxford and PA HRM shall
comply with all Applicable Law in the performance of their obligations
hereunder. No regulatory order or requirement of the DOI, DOH, or DPW is subject
to arbitration between the parties.
5.13 SERB Program Management. Oxford and PA HRM shall have joint
responsibility for the management of the Socially and Economically Restricted
Businesses ("SERB") Program established by Oxford and both parties shall work
together to satisfy any regulatory compliance requirements or issues.
5.14 Cooperation; Representatives of the Parties. The parties
acknowledge that the successful implementation of this Agreement and the
successful consummation of the transactions contemplated herein are dependent on
close cooperation between the personnel of both parties. PA HRM and Oxford shall
each appoint a representative to serve as liaison to the other party. PA HRM and
Oxford shall not interfere with each other's performance of their respective
obligations under this Agreement and shall take all reasonable actions requested
by the other party in connection with the transactions contemplated herein.
5.15 Maternity Care. Consistent with the payment scheme set forth in
Section 8 of Oxford's HCPH Agreement, if a birth or other second or third
trimester pregnancy outcome, other than an elective abortion, occurs before the
Effective Date, Oxford shall remain responsible for, and pay, the medical claim
cost incurred by a Covered Member for inpatient hospital expenses for maternity
care, notwithstanding the fact that the maternity care, including the inpatient
hospital stay, began prior to the Effective Date of this Agreement but extended
beyond the Effective Date. Pursuant to Section 8 of the HCPH Agreement and this
Agreement, Oxford shall be entitled to the one-time maternity care payment made
by the DPW for each such maternity case.
Likewise, if the birth or other second or third trimester pregnancy
outcome, other than an elective abortion, occurs on or after the Effective Date,
PA HRM shall be entitled to the one-time maternity care payment made by the DPW
pursuant to Section 8 of the HCPH Agreement for such a maternity case, and PA
HRM shall be responsible for, and pay, the medical claim costs incurred by a
Covered Member for inpatient hospital expenses for maternity care,
notwithstanding the fact that the maternity care, including the inpatient
hospital stay, began prior to the Effective Date and extended beyond the
Effective Date.
5.16 Hospital Stays Beginning Before and Ending After the Effective
Date. With respect to non-maternity inpatient hospital stays, Oxford shall
remain responsible for, and pay the medical claim costs associated with any and
all expenses for services which a Covered Member received during that segment of
an inpatient hospital stay which precedes the Effective Date, even though such
stay extends beyond the Effective Date.
With respect to non-maternity inpatient hospital stays, PA HRM shall be
responsible for, and pay, the medical claim costs associated with any and all
expenses for services which a Covered Member receives during that inpatient
hospital stay from and after the Effective Date of this Agreement, even though
the hospital stay may have begun prior to the Effective Date.
5.17 Hospital Services Scheduled After the Effective Date. Oxford shall
remain responsible for the payment of any and all Covered Services approved by
Oxford prior to the Effective Date but scheduled for delivery after the
Effective Date, unless such services are reviewed and re-approved by PA HRM
prior to the Effective Date, in which case PA HRM shall be responsible for, and
pay, the medical claim costs associated with any and all expenses for such
re-approved Covered Services from and after the Effective Date. Four (4) weeks
prior to the Effective Date, PA HRM shall assign a reviewer(s) to Oxford to
approve or to re-approve Medical Necessity determinations on cases where
services are scheduled to be delivered after the Effective Date. If PA HRM and
Oxford agree on the Medical Necessity determinations for such cases, Oxford
shall be relieved of its payment obligations under this paragraph on and after
the Effective Date for medical costs relating to such pre-approved cases. Any
services Oxford has authorized that extend into the service period for which PA
HRM will be responsible will be identified by Oxford on a patient list delivered
during the four (4) week period prior to the Effective Date. This is expected to
involve such things as prior authorized pregnancies, multiple therapy sessions,
transplants to be occurring in the future, etc. The parties will agree to
resolve any differences between them regarding Medical Necessity issues.
<PAGE>
5.18 All Other Covered Services. With respect to all other Covered
Services not specifically addressed in Sections 5.15, 5.16 and 5.17 above, the
parties agree that the Effective Date shall control. Oxford shall be responsible
for the payment of all claim costs for any and all expenses relating to Covered
Services delivered prior to the Effective Date.
PA HRM shall be responsible for the payment of all claim costs for any
and all expenses relating to Covered Services delivered during the term of this
Agreement beginning on the Effective Date.
6 FINANCIAL TERMS AND COMPENSATION
6.1 COMPENSATION:
Oxford's and PA HRM's compensation for services after the Effective
Date shall be as set forth on Exhibit 2, which is attached hereto and
incorporated herein by reference.
7 EXCLUSIVITY
Oxford engages PA HRM exclusively to provide management services for
the HC Program within the Commonwealth of Pennsylvania. During the Term, Oxford
shall not contract with any third party to provide management services within
Pennsylvania under any of the Oxford Plans without the approval of PA HRM. PA
HRM agrees not to contract with the DPW as an HMO during the first two years of
this Agreement; provided, however, that PA HRM may contract with DPW during that
two-year period for the delivery of services related to non-HMO businesses. Any
contract between PA HRM and DPW shall not be grounds for termination of this
Agreement. During the term of this Agreement, PA HRM agrees not to become
licensed as a Medicare or commercial HMO in the original, (five county) Oxford
Service Area.
8 TERM OF AGREEMENT
8.1 Five (5) years, commencing on the Effective Date. Beginning April
1, 2003, the Agreement will automatically renew for successive twelve (12) month
terms, commencing April 1 each calendar year, unless either party gives written
notice to the other of its intent to terminate no later than one hundred eighty
(180) days prior to the end of the initial term or any renewal term.
The parties will mutually agree to proceed each year with the Medicaid
business in Pennsylvania. If they agree not to participate, this Agreement will
remain in force with no activity.
8.2 Termination.
This Agreement shall be terminated upon the occurrence of any of the
following events:
(a) Expiration of the initial term or any renewal term following
the proper notice.
(b) Material adverse change caused by DPW in the contract between
Oxford and DPW, which significantly impairs a party's ability
to perform its responsibilities under this Agreement between
Oxford and PA HRM, or termination of the DPW contract with
Oxford. Examples of "material adverse change" are significant
decreases in premium (e.g., carve out) or significant increase
in covered services.
<PAGE>
(c) A material breach of a material term of this Agreement between
PA HRM and Oxford or of the contract between Oxford and DPW,
including, but not limited to, termination of that contract
due to Oxford's loss of its Pennsylvania HMO license, or due
to a material breach caused by PA HRM or Oxford.
(d) In the event that three percent (3%) of the annual aggregate
DPW premium falls below Two Million Five Hundred Thousand
Dollars ($2,500,000) in any year during the term of this
Agreement.
(e) The inability of PA HRM to maintain the levels of any of the
insurance or reinsurance coverages required by this Agreement.
(f) Material adverse change in the financial condition of either
Oxford or PA HRM. Each party shall notify the other
immediately if it appears that it is, or is likely to become,
insolvent. Insolvency shall not be eligible for cure, as
described below.
(g) The assignment of this Agreement by PA HRM without the
required prior written consent to such assignment by Oxford or
its successors or assigns.
(h) Nothing in this Agreement shall prohibit Oxford from
terminating all HMO business in Pennsylvania. In the event
that Oxford, or its successors or assigns, decides to
terminate all of its HMO business in Pennsylvania without
selling, assigning or otherwise transferring the same to a
third party as permitted under Section 10.1(c) of this
Agreement, PA HRM shall have an option to purchase all of the
issued and outstanding shares of stock of Oxford Health Plans
(PA), Inc. at its then current fair market value upon such
terms and conditions as the parties shall then agree upon,
provided that PA HRM is not then in default under Sections
8.2(a) through 8.2(g) above. PA HRM's exercise of its purchase
option under this Section 8.2(h) shall be subject to all
appropriate Regulatory Approvals. If PA HRM chooses not to
exercise this option, Oxford, or its successors or assigns,
may proceed to terminate the HMO business in Pennsylvania, in
which case this Agreement will terminate.
In the event that either party wishes to terminate this Agreement
pursuant to Section 8.2, the parties agree that the following procedures will be
followed. The party seeking to terminate must provide written notice of the
claimed event of default with sufficient factual detail to permit the other
party to clearly identify and investigate the claimed event of default. If the
recipient of the notice does not respond within thirty(30) days of the date of
notice with a written explanation of cure or a written rebuttal of the claimed
event of default, this Agreement will terminate sixty(60) days from the date of
the original notice. If such a written explanation of cure or written rebuttal
has been provided within the specified period, but such event of default has not
been cured within sixty (60) days of the original notice, or, if the breaching
party fails to diligently proceed to cure such event of default within a
reasonable period of such notice, this Agreement will terminate sixty (60) days
from the date of the original notice. Disputes as to the existence of an event
of default or the sufficiency of cure shall be submitted for independent third
party mediation pursuant to Section 9 below.
If either party terminates this Agreement pursuant to this Section 8.2,
PA HRM shall, upon such termination, provide administrative services to Oxford
to administer the services under this Agreement for a period, determined by
Oxford, but not to exceed one hundred fifty (150) days, at the rate of $20.00
per Covered Member per month.
<PAGE>
8.3 Post-Termination Treatment Obligation. Notwithstanding any other
provision of this Agreement, upon termination of this Agreement, Oxford shall,
and shall cause Oxford Par Providers to: (i) continue to provide Covered
Services for the duration of the period for which a premium has been paid to
Oxford by, or on behalf of, Covered Members; and (ii) cause continued provision
of services to Covered Members as Medically Necessary, and, subject to Sections
5.15, 5.16, 5.17 and 5.18. Oxford shall pay for such continued treatment at its
then standard payment rates or according to other terms mutually agreed to by
the parties.
8.4 Indemnification. Each party shall indemnify, defend, and hold the
other party harmless from and against and in respect of any and all third party
claims, demands, losses, costs, expenses, obligations, liabilities, damages,
recoveries and deficiencies, including interest, penalties and reasonable
attorneys' fees, that the party to be indemnified shall incur or suffer, which
arise, result from, or relate to any negligent acts or omissions or intentional
or unlawful misconduct by the indemnifying party, or any of its agents,
employees or subcontractors, in the performance of any of its responsibilities,
warranties, covenants, or agreements in this Agreement, or in any schedule,
certificate, exhibit or other instruments furnished or to be furnished under
this Agreement. Oxford shall further indemnify, defend and hold PA HRM harmless
from and against any liability or claim arising from the operation of the HC
Program prior to the Effective Date.
9 DISPUTE RESOLUTION
9.1 Disputes Relating to Regulatory Compliance.
9.1(a) In the event that a dispute or disagreement should arise
between Oxford and PA HRM regarding any of the network
management, provider management or medical management services
being performed by PA HRM pursuant to this Agreement which, in
Oxford's judgment, raises compliance issues for Oxford under
any Applicable Law or accreditation criteria (such as NCQA
standards), Oxford shall notify PA HRM of its concerns, and PA
HRM shall have 30 days, or such less time as may then be
required by a particular regulatory or accrediting agency, or
other governmental body with appropriate authority, to address
and resolve the concern(s), to the satisfaction of Oxford or
the applicable regulatory or accrediting agency, as the case
may be, or Oxford shall have the authority to address and
resolve such concern(s) in the name of PA HRM in a manner that
satisfies the regulatory or accreditation concerns.
9.2 Disputes Not Relating to Regulatory Compliance
9.2(a) Mediation/Arbitration. The parties shall in good faith attempt
to resolve any controversy, dispute or disagreement arising
out of or relating to this Agreement, or the breach thereof,
by negotiation. If any such controversy, dispute or
disagreement is not resolved by negotiation within ten (10)
days of arising, then that controversy, dispute or
disagreement shall be submitted to mediation which shall be
conducted in Philadelphia, Pennsylvania in accordance with the
rules and procedures for mediation adopted by Endispute or
<PAGE>
other mediation mutually agreed to by the parties. If the
controversy, dispute or disagreement is not resolved by
mediation within thirty (30) days of submission to mediation,
the parties may mutually agree to submit the controversy,
dispute or disagreement to arbitration in accordance with the
rules and procedure for arbitration adopted by Endispute. Any
arbitration award will be final and binding upon the parties,
and a judgment enforcing such award may be entered in any
court of competent jurisdiction. If the controversy, dispute,
or disagreement is not resolved by mediation and the parties
do not agree to submit the matter to arbitration, then the
parties shall be entitled to pursue their respective legal and
equitable remedies in a court having appropriate jurisdiction.
In no event will either party to this Agreement be liable to
the other party for special, indirect, incidental,
consequential, exemplary or punitive damages which the other
party may incur or experience on account of any breach of this
Agreement. This provision shall not be interpreted as
prohibiting indemnification for such damages incurred by a
third party.
9.2(b) Expenses of Mediation/Arbitration. Except as otherwise may be
provided in this Agreement, the expenses of mediation and
arbitration, if agreed to, will be borne equally by the
parties, provided that each party will bear the cost of its
own experts, evidence and attorneys' fees, except that, in the
discretion of the arbitrator, any award in arbitration may
include attorneys' 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 a dilatory tactic. No mediation or 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. Each party
will bear its own expenses incurred in pursuing its legal and
equitable remedies.
10 MISCELLANEOUS
10.1 Entire Agreement; Amendment; Assignment.
10.1(a) This Agreement, including all Exhibits and Schedules hereto,
contains the entire agreement between the parties relating to
the subject matter herein and all prior proposals, discussions
and writings by and between the parties and relating to the
subject matter herein are superseded hereby.
10.1(b) None of the terms of this Agreement may be amended unless such
amendment is in writing and signed by all parties hereto, and
recites specifically that it is an amendment to the terms of
this Agreement. Notwithstanding the foregoing, Exhibits and
Schedules hereto may be amended from time to time by either
handwritten amendments directly thereon or preparing amended
and restated Exhibits or Schedules; provided, however, that no
such amendment shall be effective unless and until such
handwritten change or restated Exhibit or Schedule has been
initialed in writing by an authorized representative of PA HRM
and Oxford and a true copy delivered to each of PA HRM and
Oxford.
<PAGE>
10.1(c) In the event there is a merger, consolidation or change of
control of Oxford, this Agreement shall be assigned to
Oxford's successor and this Agreement shall continue to be
binding upon and inure to the benefit of PA HRM and Oxford and
Oxford's successors and assigns. In addition to the above, in
the event Oxford decides to sell or effectively transfer its
Pennsylvania HMO business to a third party, which is not an
Affiliate, PA HRM shall be given a reasonable opportunity to
make a proposal for the purchase of the Pennsylvania HMO or
its business, notwithstanding PA HRM's rights in connection
with any assignment under this Section 10.1(c), provided that
PA HRM is not then in default under Sections 8.2(a) through
8.2(g) of this Agreement. Any such purchase shall be subject
to all appropriate Regulatory Approvals. This obligation shall
be binding upon Oxford's successors and assigns, as set forth
above.
10.1(d) In the event there is a merger, consolidation or change of
control of PA HRM or its parent corporation, Health Risk
Management, Inc., this Agreement may be assigned by PA HRM
only with the prior written consent of Oxford or its
successor, which consent shall not be unreasonably withheld.
If Oxford or its successor consents to such an assignment,
this Agreement shall continue to be binding upon and inure to
the benefit of PA HRM's successor and Oxford or its successor.
If Oxford's consent is not obtained for such an assignment,
Oxford shall have the option to terminate this Agreement under
Section 8.
10.1(e) No other assignment of this Agreement is permitted without the
prior written consent of the non-assigning party. Such consent
shall not be unreasonably withheld.
10.2 Waiver. No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this Agreement or under any other
instruments given in connection with or pursuant to this Agreement shall impair
any such right, power or privilege or be construed as a waiver of any event of
default hereunder or any acquiescence therein. No single or partial exercise of
any such right, power or privilege shall preclude the further exercise of such
right, power or privilege, or the exercise of any other right, power or
privilege. No waiver shall be valid against any party hereto unless made in
writing and signed by the party against whom enforcement of such waiver is
sought and then only to the extent expressly specified therein.
10.3 Severability. In the event that either: (i) a court of competent
jurisdiction holds that a particular provision or requirement of this Agreement
is in violation of any Applicable Law; or (ii) the parties are definitively
advised by the DOH, the DPW, the DOI or other government agency which has
jurisdiction that a feature or provision of this Agreement violates laws or
regulations over which such department or agency has jurisdiction, then each
such provision, feature or requirement shall be fully severable and: (i) this
Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof; (ii) the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the severable provision; and (iii) the parties shall in good faith
negotiate and substitute a provision similar in terms to such severable
provision as may be possible and still be legal, valid and enforceable.
10.4 Governing Law. This Agreement is deemed to have been entered into
in the Commonwealth of Pennsylvania and its interpretation, its construction,
and the remedies for its enforcement or breach are to be applied pursuant to and
in accordance with the laws of the Commonwealth of Pennsylvania (excluding the
choice of law rules thereof).
<PAGE>
10.5 Headings. Article, section and subsection headings contained in
this Agreement are inserted for convenience of reference only, shall not be
deemed to be a part of this Agreement for any purpose, and shall not in any way
define or affect the meaning, construction or scope of any of the provisions
hereof.
10.6 Notices. All notices, demands, requests, or other communications
which may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be hand
delivered (including delivery by courier or overnight delivery service), mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid, telegram, telex, or facsimile transmission, addressed as follows:
If to PA HRM: Pennsylvania HRM, Inc.
7900 West 78th Street
Minneapolis, Minnesota, 55439
Attn.: Chief Financial Officer
If to Oxford: Oxford Health Plans (PA), Inc.
601 Walnut Street, Suite 900
Independence Square West
Philadelphia, PA 19106
Attn.: Michael Gaffney
Each party may designate by notice in writing a new address to which
any notice, demand, request or communication may thereafter be so given, served
or sent. Each notice, demand, request, or communication which shall be mailed,
delivered or transmitted in the manner described above shall be deemed
sufficiently given, served, sent or received for all purposes at such time as it
is delivered to the addressee with the return receipt, the delivery receipt, the
affidavit of messenger or (with respect to a telex) the answer back being deemed
conclusive, but not exclusive, evidence of such delivery or at such time as
delivery is refused by the addressee upon presentation.
10.7 Force Majeure. Neither party shall be held responsible for any
delay or failure in performance under this Agreement arising out of any cause
beyond its control or without its fault or negligence. Such causes may include,
but are not limited to damage or destruction of its equipment, software or data,
interruption of communication or computer service, fires, floods, strikes,
embargoes, shortages of supplies or raw materials or components or finished
goods, acts of God, labor problems, power outages and blackouts, or national
disasters.
10.8 Additional Action and Documents. Each of the parties hereto hereby
agrees to take or cause to be taken such further actions, to execute, deliver
and file or cause to be executed, delivered and filed such further documents and
instruments as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Agreement.
10.9 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and, subject to Section 10.1 (c)-(e) above,
their successors and assigns.
10.10 Survival. Termination of this Agreement shall not terminate those
obligations and rights of the parties that have arisen from performance during
the Term, or that by their express terms are intended to survive, and such
rights, obligations and provisions shall survive the termination of this
Agreement.
10.11 Construction. Each party hereto hereby acknowledges that it was
represented by counsel and participated equally in the drafting and negotiation
of this Agreement and that, accordingly, no court construing this Agreement
shall construe it more stringently against one party than against the other.
<PAGE>
10.12 Cooperation; Approvals. The parties shall cooperate with each
other and their respective affiliates to effectuate the purposes, terms, and
conditions of this Agreement. Whenever this Agreement contemplates or requires
the consent or approval of a party hereto, such consent or approval shall not be
unreasonably withheld or delayed.
10.13 Execution in Counterparts. To facilitate execution, this
Agreement may be executed in as many counterparts as may be required. All
counterparts shall collectively constitute a single agreement. It shall not be
necessary in making proof of this Agreement to produce or account for more than
a number of counterparts containing the respective signatures of, or on behalf
of, all of the parties hereto.
10.14 Facsimile Signatures. Original signatures of the parties hereto
on copies of this Agreement, transmitted by facsimile, shall be deemed originals
for all purposes hereunder, and such copies shall be binding on the parties
hereto.
10.15 Corporate Authority. The parties represent that the individuals
signing this Agreement on behalf of the parties have all requisite corporate
authority to execute this Agreement and to bind the respective parties.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed in its name and on its behalf, on the date first
indicated above.
Oxford Health Plans (PA), Inc. Oxford Health Plans, Inc.
By: /s/ Michael G. Gaffney By: /s/ Stephen F. Wiggins
Michael C. Gaffney Stephen F. Wiggins
Title: Pennsylvania CEO Title: CEO
Date: February 24, 1998 Date: February 24, 1998
Pennsylvania HRM, Inc. Health Risk Management, Inc.
By: /s/ Gary T. McIlroy, M.D. By: /s/ Gary T. McIlroy, M.D.
Gary T. Mc Ilroy, M.D. Gary T. Mc Ilroy, M.D.
Title: President/Secretary Title: Chairman/CEO
Date: February 24, 1998 Date: February 24, 1998
<PAGE>
The following exhibits to the Management Services Agreement are not being
filed herewith but will be provided to the Commission upon request:
Exhibit 1 - Guaranty
Exhibit 2 - Financial Terms & Compensation
Exhibit 3 - List of Oxford Par Provider Agreements
Exhibit 4 - Transition Plan
EXHIBIT 10.42
HEALTH CARE EXCESS RISK INSURANCE POLICY
SECTION I
COMMENCEMENT AND TERMINATION
A. This POLICY replaces all prior insurance policies between the Company
and the Named Insured, shall take effect on the EFFECTIVE DATE at 12:01
A.M., E.S.T. at the address of the Named Insured, and shall be in
continuous force and effect until terminated. Named Insureds are
Pennsylvania HRM, Inc. and Health Risk Management, Inc., its parent.
B. 1. If payment for any premium is not received by the Company from the
Named Insured as specified in SECTION IV, this POLICY shall
automatically terminate effective at the end of the last day of the
last month for which the premium was due and fully paid. If the Company
receives the premium by the due date or before the end of the GRACE
PERIOD, coverage under this POLICY shall be continuous.
2. The Named Insured and the Company shall each have the right to
terminate this POLICY with or without cause, on any anniversary of the
EFFECTIVE DATE of the POLICY, by giving the other party written notice
of such intention to terminate at least thirty (30) days in the case of
the Insured or ninety (90) days in the case of the Company prior to the
anniversary date.
3. Subject to the United States Bankruptcy Code, this POLICY shall
automatically terminate on the date of the Named Insured's INSOLVENCY,
as defined in SECTION III, or upon cessation of operations, if earlier.
The Named Insured shall give the Company written notice of any such
event as soon as the Named Insured is aware that such event will occur
or has occurred.
4. The Company shall have the right to terminate this POLICY by giving
thirty (30) days written notice if the Named Insured:
a. is acquired by, comes under control of, or is merged with,
any other company, corporation, or foundation; or
b. undergoes a material change in existing senior management
or service contracts relevant to the covered business, as
determined by the Company.
c. Termination of this POLICY shall not terminate the rights
or liabilities of either the Named Insured or the Company
arising during any period when this insurance policy was in
force and effect, provided that nothing herein shall be
construed to extend the Company's liability for reimbursements
under this POLICY for any LOSS incurred by the Named Insured
on or after the date of termination of this POLICY.
<PAGE>
SECTION II
INSURANCE COVERAGE
A. The insurance coverage to be provided under this POLICY shall be
defined as follows:
For aggregate of claims during a POLICY YEAR exceeding 100% of EXPECTED
CLAIMS, the Company agrees to pay 100% of the difference between actual
LOSS covered by this POLICY and EXPECTED CLAIMS.
B. The business covered by this POLICY is limited to HRM's contract with
OXFORD covering its Pennsylvania Medicaid contract.
SECTION III
DEFINITIONS
A. POLICY YEAR shall mean the period beginning on the EFFECTIVE DATE and
ending January 1, 1999, and each year thereafter from January 1st
through January 1st of each year, except that it shall not continue
past the termination date of this POLICY.
B. COVERED CHARGES shall mean the amounts paid by the Named Insured for
COVERED SERVICES, but not to exceed any amount(s) due under contracts
with providers by OXFORD HEALTH PLANS (PA), INC. (OXFORD) or the Named
Insured.
C. EXPECTED CLAIMS is defined as an amount equal to 85% of the total
OXFORD DIRECT WRITTEN PREMIUM received by OXFORD pursuant to its
HealthChoices Physical Health Agreement with the Commonwealth of
Pennsylvania, attached as Exhibit 1, and as amended from time to time.
D. COVERED SERVICES are defined as those health care services for which
the INSURED is obligated to pay under OXFORD'S above-named
HealthChoices Physical Health Agreement.
E. EFFECTIVE DATE shall be April 13, 1998 and January 1st of any
subsequent POLICY YEAR.
F. INSOLVENT or INSOLVENCY shall mean:
1. The entry by a court of competent jurisdiction of an order
approving a petition seeking reorganization, readjustment,
arrangement, composition, or similar relief as to either party
under the applicable bankruptcy laws or any other similar,
applicable law or statute of the United States of America or
any state thereof; or
<PAGE>
2. The appointment by such a court having competent jurisdiction
of a receiver or receivers, or trustee or trustees, or
liquidator or liquidators of either party or of all or any
substantial part of its property upon the application of any
creditor or other party entitled to so apply in any insolvency
or bankruptcy proceeding or other creditor's suit; or
3. The adjudication, not stayed, discharged, rescinded or
reversed, of either party within sixty (60) days of the order
adjudicating either party as bankrupt by a court of competent
jurisdiction.
4. The date of insolvency shall be the date the court enters the
order of such reorganization, readjustment, arrangement
composition, or similar relief.
G. LOSS shall mean only amount(s) that are incurred while this POLICY is
in effect and paid by the Named Insured within the POLICY YEAR or
within eighteen (18) months following the end of the POLICY YEAR in
which they are incurred, for treatment and services afforded under the
HealthChoices Physical Health Agreement covered by this POLICY, net of
any coordination of benefits, savings, or recoveries from a third
party. A LOSS shall be deemed incurred on the date on which the Member
receives the service or treatment. Date of payment is evidenced by the
date of the check issued in payment of such service or treatment.
H. POLICY means this complete insurance document consisting of the policy
forms, declarations page, all endorsements and/or attachments.
I. OXFORD DIRECT WRITTEN PREMIUM means direct written premium received by
OXFORD from the Commonwealth of Pennsylvania under the HealthChoices
Physical Health Agreement for its Pennsylvania Medicaid business for
coverage on and after the EFFECTIVE DATE.
J. GRACE PERIOD shall be that period of time which begins on the fifteenth
(15th) day of each month and extends through the last day of that same
month.
SECTION IV
PREMIUMS AND REMITTANCES
A. The premium for the insurance coverage provided by the Company under
this POLICY shall be:
1. an amount equal to 1.62% of the OXFORD DIRECT WRITTEN PREMIUM,
2. a contingent premium of an amount equal to 100% of LOSSES
between 100% and 106% of EXPECTED CLAIMS, and 10% of LOSSES
above 106% of EXPECTED CLAIMS.
<PAGE>
B. Premiums shall be payable monthly and shall be based on 1) 1.62% of the
capitated premium received in that month which includes reconciliation
of the prior months' premium, 2) 1.62% of an estimate of the maternity
payments for the month, and 3) 1.62% of the difference between the
prior month estimated maternity payments and the actual payments
received in the prior month.
C. Premiums shall be payable to the Company by the fifteenth (15th) day of
the month for which they are due.
D. The Insured shall have the GRACE PERIOD for paying the premium, without
interest, if:
1. Insured fails to pay the premium when due; and
2. Insured has not given written notice to end the POLICY.
If the insured fails to pay the premium by the last day of the GRACE
PERIOD, the POLICY shall terminate at the end of the last day of the
last month for which the premium was paid.
E. If a written request is received by the Company from the Named Insured
in advance of the last day of the GRACE PERIOD, the Company may, at its
sole option, choose to extend the date due.
F. The premium payment by the Named Insured to the Company shall be
accompanied by a statement, signed by an authorized official of the
Named Insured, in which the number of enrolled and eligible Members for
the current month and prior month reconciliations or adjustments is
given.
G. The Company shall have the right to change the premium at the end of
the first POLICY YEAR of this insurance POLICY, or at the beginning of
any POLICY YEAR thereafter, provided that at least ninety days (90)
prior written notice has been given by the Company to the Named
Insured.
H. Upon receiving notice, in compliance with and as defined in SECTION
VII. C., of a material change in the HealthChoices Physical Health
Agreement between OXFORD and the Commonwealth of Pennsylvania, the
Company may elect to exclude the modification of the HealthChoices
Physical Health Agreement between OXFORD and the Commonwealth of
Pennsylvania from insurance coverage or charge an additional premium to
include the modification. The Company shall not be liable for any
modification of coverage of the HealthChoices Physical Health Agreement
between OXFORD and the Commonwealth of Pennsylvania in the event the
Named Insured fails to properly notify the Company pursuant to SECTION
VII. C.
<PAGE>
I. The Company or the Named Insured may offset any balance, whether on
account of premium, commission, claims or losses, adjustment expense,
salvage, or otherwise, due from one party to the other under this
Agreement or under any other agreement heretofore or hereafter entered
into between the Company and the Named Insured.
SECTION V
PROFIT SHARING
A. The Named Insured and the Company shall determine 24 months following
the end of each POLICY YEAR, the profit arising from the covered
business contract during the POLICY YEAR.
B. The Company will receive as profit sharing, 20% of the amount by which
actual claims incurred, including insurance costs, for the POLICY YEAR
reviewed are below 80% of OXFORD DIRECT WRITTEN PREMIUM.
SECTION VI
NOTICE OF CLAIMS
The Named Insured shall notify the Company immediately when actual claims,
including incurred but not reported reserves, exceed the EXPECTED CLAIMS.
SECTION VII
REPORTS, RECORDS AND AUDITS
A. Within thirty (30) days following the end of each calendar month during
the term of the POLICY, the Named Insured shall prepare and forward to
the Company the following reports in a format acceptable to the
Company:
1. These reports shall include:
a. Current month's premium adjusted for any changes to
previous periods;
b. Number of covered members under each member category;
c. Paid Claims during the month.
d. Expenses (itemized and including Manager's fee,
commissions, incentives and the Company's
compensation);
e. Claims and claim adjustment expenses paid (net of
subrogation and cash calls received);
f. Current claims under subrogation
<PAGE>
2. A monthly reporting of claims in excess of $125,000 in a
format acceptable to the Company.
3. The recommended outstanding claims reserves and applicable
incurred but not reported claim reserves as of the end of the
calendar month.
B. Annually, the Named Insured shall furnish the Company such information
as the Company may require to complete its Annual Statement.
C. The Named Insured shall report to the Company within five days (5) of
receipt of notification to the Named Insured any material changes or
modifications in any covered benefits under the HealthChoices Physical
Health Agreement so that the Company can evaluate the need for any
changes in this POLICY. No coverage change shall be made to this POLICY
and/or required until actual notice is received by the Company and
approved by the Company as provided in this POLICY, which approval
shall not be unreasonably withheld.
D. The Named Insured's books and records, to the extent permitted by law,
shall be made available to the Company for inspection and audit at any
time during normal business hours during the time this insurance is in
effect. The Named Insured's books and records shall be maintained and
preserved for a period of six (6) years by the Named Insured.
E. All information disclosed to the Company by the Named Insured, or to
the Named Insured by the Company, either in the course of conducting
negotiations or as the result of complying with the terms and
conditions of this POLICY, shall be considered to be privileged and
confidential information by both the Named Insured and the Company and
shall not be disclosed without written consent of the other and which
consent will not be unreasonably withheld.
F. The submission of this POLICY or other information related thereto to
any Department of Insurance of any state, federal agency, or court
having jurisdiction over the matter and having a legal right to the
information shall not be a violation of this SECTION. The Named Insured
and the Company shall make every effort to advise the other party in
advance of such submission.
G. The Named Insured warrants and represents that to the best of its
knowledge all reports, books, records, and other financial or other
information furnished to the Company are true and correct in all
material respects.
H. In no event, however, shall the Company be liable to the Named Insured
for any claims or losses reinsured hereunder if such claims or losses
are not reported to the Company by the end of the eighteen months (18)
following the end of the POLICY YEAR in which such claims or losses
were incurred.
<PAGE>
SECTION VIII
ARBITRATION
A. Either party may request arbitrator to resolve disputes under this
POLICY. Each party shall choose an arbitrator. Those arbitrators shall
choose a third. If either party refuses or neglects to appoint an
arbitrator within sixty (60) days after the receipt of written notice
from the other party requesting it to do so, the requesting party may
nominate two arbitrators who shall choose the third. Each party shall
submit its case to the arbitrators within sixty (60) days of the
appointment of the arbitrators.
B. The arbitrators shall consider this POLICY a legal obligation, and they
are relieved of all judicial formalities and may abstain from following
the strict rules of law. The decision of a majority of the arbitrators
shall be final and binding on both the Named Insured and the Company.
Each party shall bear the cost of their chosen arbitrator separately,
and the cost associated with the arbitration proceeding itself shall be
borne equally by both parties, unless the arbitrators decide otherwise.
Any such arbitration shall take place in the State of Minnesota, unless
some other location is mutually agreed upon by the Named Insured and
the Company.
C. If any dispute shall arise between the Named Insured and the Company
with reference to the interpretation of this POLICY, the breach
thereof, or their rights with respect to any transaction involved, the
dispute shall be referred in conformance with Section VIII to three (3)
arbitrators, one to be chosen by each party and the third by the two so
chosen. Any disputes relating to SECTION I. C. shall not be subject to
arbitration as described in this section.
SECTION IX
INSOLVENCY
In the event of termination of this POLICY due to the Insolvency of the Named
Insured, the following rule shall apply to each claim or LOSS incurred prior to
the date of termination.
A. The liquidator, receiver, conservator, or statutory successor of the
Named Insured shall give written notice to the Company of the pendency
of each claim or LOSS under the POLICY which may involve the insurance
covered by this POLICY, within a reasonable time after such claim or
LOSS is filed in the conservation or liquidation proceeding or in the
receivership. The Company shall have the right to investigate any such
claim or LOSS during its pendency and to interpose, at the Company's
own expense, in the proceeding where that claim or LOSS is to be
<PAGE>
adjudicated, any defense(s) it may deem available to the Named Insured,
or to the Named Insured's liquidator, receiver, conservator, or
statutory successor. Any such expense incurred by the Company shall be
chargeable, subject to court approval, against the Named Insured as
part of the expense of conservation or liquidation, to the extent of a
pro rata share of the benefit which may accrue to the Named Insured as
a result of the defense undertaken by the Company.
Where two (2) or more companies are involved in the same claim and a
majority in interest elect to interpose defense(s) to that claim, the
expense shall be apportioned in accordance with the terms of the
insurance POLICY as though that expense had been incurred by the Named
Insured.
The provisions of this section shall not preclude the Company from
asserting any excuse or defense to payment of this insurance other than
the excuses or defenses of the insolvency of the Named Insured and the
failure of the Named Insured's liquidator, receiver, conservator, or
statutory successor to pay all or a portion of any claim.
B. Notice of the Named Insured's date of INSOLVENCY, or date of cessation
of operations, shall be communicated to the Company by the Named
Insured at the earliest possible time.
C. The Named Insured shall notify the Company of the pendency of any
action which may lead to INSOLVENCY or any intentions the organization
may have of ceasing operation. Any time after this notification and
prior to the court having named a successor organization, the Company
shall have the first option of entering into an agreement to conserve
the Named Insured. Such agreement may include purchase, sale or
management of the Named Insured.
SECTION X
LIMITATIONS OF INSURANCE
A. The Company's liability to provide reimbursement of claims to the Named
Insured pursuant to this POLICY shall not exceed, in any event, the
limits of coverage stated in SECTION II.
B. The Named Insured is solely responsible for paying for all services
pursuant to the HealthChoices Physical Health Agreement.
C. This POLICY does not provide reimbursement for claim expenses or
salaries paid to employees of the Named Insured.
D. The Company shall not have any responsibility or obligation to provide
any direct services or expenses to the Named Insured.
E. This is a POLICY of insurance solely between the Company and the Named
Insured. Nothing in this POLICY shall create any other right or legal
<PAGE>
contractual relationship between the Company and any Additional Insured
under this POLICY. This POLICY may not be assigned without the written
consent of the Company, which consent will not be unreasonably
withheld.
F. The Company shall not be liable to the Named Insured, and the Named
Insured shall hold harmless and indemnify the Company, for any of the
following:
1. Professional liability or liability for any act or omission,
tortious or otherwise, in connection with any services
rendered to any person or persons by the Named Insured, or any
group, entity, or person employed by or under contract with
the Named Insured;
2. Liability assumed by the Named Insured in excess of the
HealthChoices Physical Health Agreement between OXFORD and the
Commonwealth of Pennsylvania, including liability under any
contract other than the HealthChoices Physical Health
Agreement between OXFORD and the Commonwealth of Pennsylvania;
3. Expenses or LOSSES which the Named Insured has paid as
settlement, whereby the Named Insured is released by any
person or entity from the Named Insured's legal liability
except for COVERED CHARGES under the HealthChoices Physical
Health Agreement;
4. Any liability, claim, or expense caused or contributed to by
war, hostilities (whether war is declared or not), invasion,
or civil war;
5. Any liability, claim or expense caused by any unlawful
participation or actions by the Named Insured in riot or civil
disturbance;
6. Liability as a result of sickness or accidental injury not
specifically covered by the HealthChoices Physical Health
Agreement, unless notice has been provided in accordance with
SECTION II. C. and the Company has specifically agreed in
writing to provide coverage for such LOSS; or
7. Damages, actions, or claims made against the Company and
caused by the Named Insured's acts or omissions.
G. The Company shall not be held liable for the Named Insured's expenses
and LOSSES which are due to any noncompliance with or violation or any
federal or state statue, rule, or regulation.
H. The Company shall not be held liable for any amount paid by the Named
Insured for punitive or exemplary damages, or any other extra
<PAGE>
contractual damages awarded to or against the Named Insured arising out
of the conduct of the Named Insured's investigation, trial, or
settlement of any claim, or failure to pay or delay in payment of any
benefits under its policy(ies), or any statutory penalty imposed upon
the Named Insured on account of any unfair trade practice or any unfair
claim practice.
J. The insurance coverage to be provided by this POLICY does not cover any
LOSS for which the Named Insured is not fully at risk according to the
attached agreement between the Named Insured and OXFORD.
SECTION XI
GENERAL PROVISIONS
A. This POLICY shall not be assignable without the express prior written
consent of the other party which consent shall not be unreasonably
withheld.
B. The Named Insured is solely responsible for the administration of all
COVERED SERVICES and for payment of all COVERED CHARGES. The Company
shall not have any responsibility or obligation to provide any service
or payment directly or indirectly of COVERED CHARGES. The insurance
coverage provided herein is payable solely to the Named Insured, except
as amended by endorsement.
C. If any payment is made by the Company under this POLICY, the Company
shall be subrogated to the Named Insured's legal right to recover such
payment against any person or organization, and the Named Insured shall
execute and deliver instruments and do whatever is necessary to
preserve and secure such legal right. Any recovery made by the Named
Insured shall be reimbursed to the Company to the extent the Named
Insured has included payments to be considered under this POLICY.
D. This POLICY, including endorsements and attachments, if any,
constitutes the entire contract of insurance. No change in this POLICY
shall be valid until approved in writing by an authorized
representative of the Company and unless such written approval is
endorsed hereon or attached hereto.
In witness whereof, the Kentucky Medical Insurance Company has caused this
policy to be signed by its President and Authorized Representative at
Louisville, Kentucky.
/s/ Richard F. Kench /s/ Paul R. Stuhmer
President Authorized Representative
EXHIBIT 10.43
LEASE
This Lease is entered into as of May 5, 1998, between MEPC AMERICAN PROPERTIES
INC., a Delaware corporation ("Lessor") and HEALTH RISK MANAGEMENT, INC., a
Minnesota corporation ("Tenant").
1. Definitions. In this Lease:
(a) "Building" means the office/warehouse building commonly known
as the Hampshire Avenue Technology Center ("Building") to be
located in the City of Bloomington, Minnesota, containing
approximately 142,526 Square Feet of space, as shown in the
drawing attached to this Lease as Exhibit A.
(b) "Premises" means the entire Building, the Land on which the
Building is situated and the driveways, parking areas and
other improvements on the Land. There are no common areas on
the Land or in the Building.
(c) "Term" means the period beginning on the Commencement Date and
ending on the last day of the calendar month in which the date
occurs which is six years after the date on which Lessor no
longer has any obligation for Holdover Rent under Section 2 of
this Lease.
(d) "Commencement Date" means October 1, 1998.
(e) "Lease Year" means a period of 12 consecutive months
commencing on the first day of the first full month of the
Term and each 12-month period thereafter during the Term.
(f) "Monthly Base Rent" means the following amounts:
Lease Year Monthly Base Rent
1 through 6 $115,209.00
7 through 11 $127,680.00
<PAGE>
(g) "Costs" means the estimated monthly Tax Costs for the Premises
plus the estimated monthly Operating Costs for the Premises.
(h) "Monthly Rent" means the Monthly Base Rent plus the Tenant's
Share of the Costs for the Premises.
(i) "Tenant's Share" means 100% with respect to the Premises.
(j) "Operating Costs" means all costs, charges and expenses
incurred by Lessor in connection with ownership, operation,
security, management, maintenance and repair (but not the
initial construction/installation) of the Land, the Building,
other improvements (exclusive of other buildings on the Land),
appurtenances to the Building, parking, roadways, landscaping,
lighting, sidewalks, interior and exterior maintenance,
insurance, heating, cooling, utilities, (except those which
are separately metered and paid for by Tenant), fees or
expenses for management by Lessor or another party (not to
exceed 4% of the sum of the annual Base Rent, plus Tax Costs,
plus Operating Costs other than management fees), costs of
capital improvements made to reduce Operating Costs, or
required under any governmental law or regulation which was
not applicable to the Premises at the time the Building was
constructed, and costs of repairs made to extend the life of
the Building and other improvements (but in each case
amortized over the useful life of the improvements or repairs
of a capital nature). Operating Costs will not include the
items listed on the attached Exhibit E.
(k) "Tax Costs" means all real estate taxes, levies, charges, and
installments of special assessments including interest on
deferred assessments (provided the same are amortized over the
longest period of time available to Lessor and are not solely
and directly attributable to construction of the Premises)
assessed, levied or imposed on, or allocated to, the Premises
and all attorneys' fees, consultants fees, witness fees, court
costs and other expenses of Lessor in connection with any
proceeding to contest these amounts with Lessor's reasonable
expectation that Tax Costs, including such costs of contest,
will be reduced as a result of such contest.
(l) "Square Feet" means the number of square feet calculated from
dimensional architect's drawings by measuring to the outside
surface of exterior walls.
(m) "Lease" means this Lease, all Exhibits attached to this Lease,
and all properly executed amendments, modifications and
supplements to this Lease.
(n) "Section" means a section of this Lease.
(o) "Exhibit" means an Exhibit attached to and thereby made a part
of this Lease.
<PAGE>
(p) "Land" means all of the land described on Exhibit B.
(q) "Taking" means acquisition by a public authority having the
power of eminent domain of all or part of the Land or Building
by condemnation or conveyance in lieu of condemnation.
(r) "Casualty" means a fire, explosion, tornado, or other cause of
damage to or destruction of the Building.
(s) "Tenant Improvements" means improvements to be constructed by
Lessor in the Premises as defined in Section 36.
(t) "Tenant's Work" means all improvements, alterations, fixtures
and equipment other than the Tenant Improvements which are
constructed or installed in addition to Tenant Improvements
for Tenant's use and occupancy of the Premises or desired by
Tenant in addition to the Tenant Improvements to complete the
Premises for occupancy.
2. Premises and Construction.
Lessor leases the Premises to Tenant, and Tenant leases the Premises from
Lessor, for the Term, under the terms and conditions of this Lease.
Lessor shall do everything reasonably within Lessor's control to assure that the
Tenant Improvements are substantially completed not later than September 15,
1998 so that Tenant will be able to commence moving from its existing leased
space on September 15, 1998 and commence doing business from the Premises on or
before October 1, 1998. Lessor agrees that if the Tenant Improvements are not
substantially completed by September 15, 1998, as extended by the length of any
delays caused by Tenant, and if Tenant as a result is not able to commence doing
business from the Premises on or before October 1, 1998, as extended by the
length of any delays caused by Tenant, Lessor shall pay to Tenant with respect
to the period after October 1, 1998, as extended by the length of any delays
caused by Tenant, the actual rent per day (cumulatively, "Holdover Rent") then
being charged to Tenant at its existing facility for each day such substantial
completion is delayed after September 15, 1998, as so extended by Tenant delays.
At such time as Lessor delivers the Premises to Tenant with the Building and the
Tenant Improvements therein substantially completed, Lessor and Tenant shall
jointly inspect the Premises, including the Building to determine if the
Building and Tenant Improvements and the driveways and parking areas on the
Premises are in the condition required by the Lease.
<PAGE>
If the Premises are not in the condition required by the Lease, Tenant may
conditionally accept the Premises using the following procedure: Lessor and
Tenant shall negotiate in good faith and mutually agree upon (i) the items which
Lessor must complete or correct in order to bring the Premises into compliance
with the Lease and (ii) the time period within which each said item is to be
completed (each of which dates shall be referred to as the "Agreed Completion
Date" for that item. Such items shall be enumerated on a list (the "Punchlist")
to be attached to a conditional acceptance letter to be prepared by Tenant and
delivered to Lessor. The Punchlist may be updated by Tenant for a period of 30
days thereafter; provided, however, that cosmetic defects may be added to the
Punchlist only if Tenant is able to demonstrate that such defects existed prior
to the date of creation of the initial Punchlist. If the items on the Punchlist
are not completed according to the provisions of the Punchlist on or prior to
the Agreed Completion Date for each said item, Lessor shall continue to be
obligated to complete each said item in accordance with the terms of the
Punchlist and conditional acceptance letter, but Tenant shall be entitled to
give Lessor written notice of non-compliance, and in the event that Lessor does
not complete the incomplete or improperly completed within 15 days after notice
thereof from Tenant, then Tenant shall have the right to complete that item and
charge Lessor with the out-of-pocket cost thereof. Tenant reserves the right to
object to latent defects in the Building or other improvements on the Premises.
Within 60 days after the Commencement Date, Lessor and Tenant will execute an
agreement supplementing this Lease setting forth the actual Commencement Date
and expiration date of the Term.
3. Rent.
Tenant will pay the Monthly Rent to Lessor at P.O. Box 73547, Chicago, Illinois
60673-7547, or such other place as Lessor may designate, in advance on the first
day of each month during the Term, without demand, deduction or setoff. The
Monthly Rent may change as the Costs are adjusted annually under Sections 4 and
5. Monthly Rent will begin on October 1, 1998.
Monthly Rent or other amounts payable by Tenant to Lessor under this Lease which
are not paid within 10 days after the date due will bear interest from the date
due to the date paid at the rate of 12% per annum or the maximum rate of
interest permitted by law, whichever is less, and the interest will be paid to
Lessor on demand. In addition, Tenant will pay Lessor a $100 service charge for
all Monthly Rent not paid by the 10th day of the month for which it is payable,
which service charge is to partially cover expense involved in handling
delinquent payments.
The interest and service charge provisions of the preceding paragraph shall be
deemed waived as to any one such late payment in any period of 12 consecutive
calendar months.
All amounts to be paid by Tenant to Lessor under this Lease will be deemed to be
additional rent for purposes of payment and collection.
<PAGE>
If any taxes, special assessments, fees or other charges are imposed against
Lessor by any governmental unit or agency with respect to rentals under this
Lease, Tenant will pay these amounts to Lessor when due, except that Tenant will
have no obligation to pay any income tax on rentals unless the tax is imposed in
lieu of real estate taxes.
4. Cost Adjustments.
The initial Monthly Rent will be based in part on the estimated Operating Costs
for the Premises. Prior to the first day of each calendar year after the date of
this Lease, or as soon as reasonably possible after the first day of the year,
Lessor will furnish Tenant with an estimate of the Operating Costs if greater
than the initial Operating Costs, and the Monthly Rent will be increased or
decreased by 1/12th of Tenant's Share of the difference between the initial
estimate of the Operating Costs for the Premises and the then current estimate.
Within 120 days after the end of each calendar year, including the year in which
the Term expires, Lessor will give Tenant a statement of the actual Operating
Costs for that calendar year with respect to the Premises. If the actual
Operating Costs with respect to the Premises exceed the estimated Operating
Costs for that year, Tenant will pay Tenant's Share of the excess to Lessor
within 20 days after receiving the statement. If the actual Operating Costs are
less than the estimated Operating Costs for that year, Lessor will pay Tenant's
Share of the difference to Tenant with the statement. If Tenant does not give
Lessor written notice within one year after receiving Lessor's statement that
Tenant disagrees with the statement and specifying the amounts in dispute,
Tenant will be deemed to have waived the right to contest the statement.
Within 90 days after receiving Lessor's statement of Operating Costs, Tenant may
request the right to review Lessor's records relating to Operating Costs, which
will then be made available to Tenant for review. If the records are made
available to Tenant, Tenant will give Lessor notice of any objections to the
Statement of Operating Costs within the later of (i) one year after receiving
Lessor's statement, and (ii) 180 days after the records are made available to
Tenant, or Tenant may request an audit of the Operating Costs by an independent
certified public accountant chosen by Lessor from a list of not fewer than three
submitted by Tenant in conjunction with the request. If Lessor does not make the
choice within 15 days, Tenant may do so. The auditor will be given access to
those records of Lessor pertaining to Operating Costs for the year in question
as well as an Operating Cost history for the prior three years. The auditor will
report to the parties within 30 days after being chosen. The report of the
auditor will be final and binding on both parties with respect to the year in
question unless Lessor disputes the audit by notice to Tenant within 15 days
after receiving the report. If the report is disputed by Lessor, the parties
will select a mutually acceptable auditor to review the report, and the
determination of the mutually acceptable reviewing auditor will be final and
binding on both parties. If the actual Operating Costs differ from those charged
to Tenant, payments required to make adjustments in rent to conform to the final
report shall be made within 30 days after receipt of the final report. All
expenses of the audit shall be borne by Tenant unless such audit, or the final
determination by the reviewing auditor if Tenant's audit is disputed by Lessor,
<PAGE>
discloses an overstatement of Operating Costs of 5% or more, in which case all
reasonable expenses of Tenant's audit and of the reviewing auditor resolving a
disputed audit will be borne by Lessor.
If Tenant's audit is disputed by Lessor and the reviewing auditor determines
that no adjustment is required, Tenant will pay all costs of its audit and all
costs of the reviewing auditor. If the final resolution of a disputed audit
requires an adjustment in favor of Tenant, but the adjustment is less than 5%,
Tenant will pay the cost of the initial audit, and each party will pay one-half
of the costs of the reviewing auditor. In any case of overpayment or
underpayment, payment of Operating Costs will be adjusted accordingly.
Each year during the Term Tenant shall pay Lessor, as additional rent, the Tax
Costs for the Premises in two equal installments not later than two (2) weeks
prior to the time each installment of real estate taxes is due to the taxing
authority. Presently this would require Tenant to pay the first one-half (1/2)
real estate tax installment on May 1st and the second one-half (1/2) real estate
tax installment on October 1st. The real estate taxes payable for a year during
which the Term was in effect for only a portion of that year shall be pro-rated
on a calendar basis and Tenant shall be responsible only for that portion of the
taxes allocable to the period of the Term. The Land and the improvements
comprise a single tax parcel for real estate tax purposes.
Tenant will file no petition in Tax Court regarding the Tax Costs without
Lessor's prior written consent, which consent shall not be unreasonably
withheld. If Lessor contests Tax Costs payable during the term of this Lease and
receives a refund or incurs additional Tax Costs after adjustments for actual
Tax Costs have been made, the actual Tax Costs will be corrected accordingly and
the appropriate adjustment will be made between Lessor and Tenant regardless of
whether the term of this Lease has expired. The portion of Tax Costs to be paid
by Tenant for the years in which the Term begins and ends will be prorated by
multiplying the actual Tax Costs by a fraction, the numerator of which is the
number of days of that year in the Term and the denominator of which is 365.
5. Cost Computations and Allocations.
The parties acknowledge that Lessor owns and /or manages other commercial
buildings in the Minneapolis metropolitan area and that some of the Operating
Costs attributable to the Premises may be incurred by Lessor as a result of
master contracts with vendors that service the Building and such other buildings
owned or managed by Lessor. Lessor will in its reasonable discretion, determine
from time to time, the method of computing and allocating Operating Costs
between the Premises and other buildings owned or managed by Lessor in the
Minneapolis metropolitan area according to standards and methods customarily
applied in the Minneapolis metropolitan area; provided, however, that if Tenant
objects to the share of such expenses to be allocated to Tenant, Tenant shall
have the right to require Lessor to enter into a separate commercially
reasonable contract for the matter in question.
<PAGE>
6. Fiscal Year.
No more frequently than once every five (5) years, the year used to determine
Costs may be changed to a different 12-month period designated by Lessor. If the
calendar year is changed to a fiscal year, or if a fiscal year is changed to a
different fiscal year, prorations will be made for the estimated Costs and the
actual Costs so that the same time period is used to determine each and so that
Costs are not included in more than one time period.
7. Possession.
Lessor shall make all reasonable efforts to provide Tenant with access to the
Premises not later than September 1, 1998 for purposes of installing Tenant's
furniture and equipment and completing Tenant's Work (as defined in Section 36
of this Lease). During such early access period, Tenant shall not interfere
with, delay or otherwise impede Lessor's completion of the Tenant Improvements
in accordance with Section 36 of this Lease, and any such interference shall be
grounds for extension of the period within which Lessor is to complete the
Tenant Improvements. Lessor will use reasonable efforts to coordinate the work
of the Tenant Improvement contractor and the contractors doing the Tenant Work
for Tenant. This Lease will not be void or voidable and Lessor will not be
liable to Tenant for any loss or damage resulting from any delay in delivering
possession of the Premises to Tenant, except for the Holdover Rent described in
Section 2.
Lessor warrants and represents that Tenant, upon paying the rents and keeping
the agreements of this Lease on Tenant's part to be kept and performed, shall
have peaceful and uninterrupted possession of the Premises during the Term of
this Lease except as otherwise specifically set forth herein.
8. Use.
Tenant will use the Premises for office, warehouse and related purposes and for
no other purpose. Tenant will not commit or permit any act or omission which
results in the violation of any law, governmental regulation, or insurance
policy of Lessor, relating to the Premises, or which will increase Lessor's
insurance rates on the Premises.
9. Care of Premises.
Tenant will, at all times during the Term and any renewals and extensions, at
its sole expense, keep and maintain the interior of the Building (and those
portions of the Premises exterior to the Building which are expressly the
obligation of Tenant) in a clean, safe, sanitary, and good condition and in
compliance with all applicable laws, codes, ordinances, rules, and regulations
as provided in Section 11. Tenant's obligations will include but not be limited
to maintaining a heating, ventilating and air conditioning ("HVAC") contract for
maintenance of the HVAC system, and paying for any repairs not covered by the
HVAC contract. Tenant will also be responsible for all equipment and systems
within the interior of the Building, and for maintaining and repairing (and
replacing if necessary) all lighting and plumbing fixtures, all interior walls,
<PAGE>
partitions, interior doors and interior windows. Tenant will also be responsible
for all broken glass in the Building. When used in this Section, the term
"repairs" shall include replacements and overhauling equipment when necessary,
and all such repairs made by the Tenant shall be equal in quality and class to
the original work, except that if it becomes necessary to replace HVAC
equipment, such replacement will be done at Lessor's initial expense, and Tenant
will pay to Lessor on a monthly basis as additional rent together with the
Monthly Rent the amortized portion of the cost of replacing the HVAC equipment,
with such amortization being over the useful life of the replacement equipment.
Tenant, at its own cost and expense, will enter into a regularly scheduled
preventive maintenance and service contract with a maintenance contractor
approved by Lessor for servicing all hot water, heating and air conditioning
systems and equipment within the Premises. The service contract must include all
services suggested by the equipment manufacturer in its operations and
maintenance manual and must become effective within 30 days of the date Tenant
takes possession of the Premises.
Where the Lease requires Tenant to maintain a service contract on any system or
device serving the Building, Tenant may submit to Lessor any proposed service or
maintenance contract, in which event Lessor shall promptly review the proposed
contract and notify Tenant whether Lessor accepts the proposed service or
maintenance contract as meeting the requirements of this Lease, which acceptance
or non-acceptance shall be in Lessor's sole discretion. If Lessor does not
respond in writing within five business days of the submission of the proposed
contract to Lessor the contract shall be deemed to have been accepted by Lessor
as meeting the requirements of this Lease. If Lessor disapproves a proposed
service or maintenance contract Lessor shall state with reasonable specificity
why the proposed contract was not accepted and what would be required in order
for Lessor to accept the proposed contract. Any service or maintenance contract
accepted by Lessor or deemed accepted by Lessor shall be considered to meet the
requirements of this section, subject to proper performance of the contract.
Tenant will also be responsible for ordinary day-to-day maintenance of all
equipment and systems within the interior of the Building in accordance with
reasonable written instructions therefor provided to Tenant by Lessor.
Tenant shall keep and maintain all portions of the interior of the Building and
the sidewalk and areas adjoining the same in clean and orderly condition, free
of accumulation of dirt, rubbish, snow, and ice except for those portions of the
exterior which are Lessor's responsibility. Lessor shall assign to Tenant all
warranties and guaranties applicable to the portions of the Premises to be
maintained by Tenant. Notwithstanding any provision to the contrary, Lessor
shall remain responsible for all costs directly related to defects in the design
or original construction of the Premises.
If Tenant fails, refuses or neglects to maintain or repair the Premises as
required in this Lease within 10 days after notice has been given to Tenant,
Lessor may make such repairs without liability to Tenant for any loss or damage
<PAGE>
that may accrue to Tenant's merchandise, fixtures or other property or to its
business, and upon completion, upon presentation to Tenant of a bill for the
repairs, Tenant will pay to Lessor all out-of-pocket costs plus 10% for overhead
incurred by Lessor in making such repairs.
Lessor shall maintain the exterior portions of the Premises, including the
driveways and parking areas, in a clean, safe and attractive condition and in
accordance with the standards of similar well managed office/warehouse buildings
in the Minneapolis metropolitan area, and the cost thereof shall be included in
Operating Costs. Lessor will repair, at its expense, the structural portions of
the Building, roof and exterior of the Building (subject to inclusion of such
maintenance and repair costs in Operating Costs pursuant to Section 4 of this
Lease but only to the extent permitted in Section 1(j). Lessor shall be solely
responsible for maintenance, repair and replacement of structural components of
the Building, and such costs shall not be considered Operating Costs; provided,
however, where structural repairs are required to be made by reason of the
intentional wrongful acts of Tenant, the costs will be reimbursed by Tenant and
payable by Tenant to Lessor upon demand.
10. Building Rules.
Rules and Regulations for the Premises and the Building in effect on the date of
this Lease are attached as Exhibit C. Lessor will have the right to adopt
different or additional reasonable rules and regulations, and to rescind or
amend the attached rules and regulations, from time to time. Tenant will abide
by the rules and regulations then in force and will cause Tenant's employees to
observe and comply with them. No such rule may have the effect of amending or
changing a provision of this Lease. No new rule or regulation shall be effective
for 30 days from the date Tenant receives notice of such new rule or regulation.
All such Rules and Regulations shall be enforced by Lessor in a uniform,
non-discriminatory manner.
11. Compliance with Laws.
Subject to the limitations set forth in this Section, Tenant will, at its
expense, promptly comply with all laws, ordinances, rules, orders, regulations
and other requirements of governmental authorities now or subsequently
pertaining to the Premises. Tenant will pay any taxes or other charges by any
governmental authority on Tenant's property or trade fixtures in the Premises or
relating to Tenant's use of the Premises.
The Premises shall not be used in any manner which under any requirement of law
or of any public authority would require Lessor to make any addition or
alteration to or in the Building. After the construction of the Building, the
Tenant Improvements and the other initial improvements by Lessor in the
Premises, Tenant will be responsible for compliance with the Americans with
Disabilities Act of 1990 as it applies to the Premises by reason of any
alterations or additions made by Tenant to the Premises or any use of the
Premises by Tenant. The Premises shall not be used in any manner which will
increase the rates required to be paid for public liability or for all risk
insurance covering the Building. Tenant shall occupy the Premises, conduct its
<PAGE>
business and control its agents, employees and endeavor to control its invitees
and visitors in such a way as is lawful and reputable and will not permit or
create any nuisance, noise, odor, or otherwise interfere with, annoy, or disturb
any other tenant or subtenant leasing space in the Building in its normal
business operations or Lessor in its management of the Building. Outside storage
on the Land of any type of equipment, property, or materials owned or used by
Tenant or its customers and suppliers is not permitted.
Subject to Lessor's right to contest the same, Lessor will comply with all
present and future laws, ordinances, orders, and regulations of federal, state,
county and city governments, and or other governmental authorities having or
claiming jurisdiction over the Land and Building, including but not limited to
ADA, and any applicable federal, state, county or local statutes, laws,
regulations, rules, ordinances, codes, standards, orders, licenses and permits
of any governmental authorities relating to environmental matters, except those
which are related to Tenant's specific use (as opposed to mere occupancy) of the
Premises, property or equipment within the Building, or alterations made or
requested by Tenant after the initial improvements in the Building. Expenses of
such compliance which are not capital expenses under generally accepted
accounting principals will be included in Operating Costs. If compliance by
Lessor with the preceding sentence requires capital improvements to be made by
Lessor, the cost thereof will be amortized over the useful life of the
improvements and amortization of the cost will be included as a part of
Operating Costs.
Tenant shall be under no obligation to make any repairs, alterations,
modifications or improvements to the Premises or to conduct its activities in
any particular manner in order to comply with any law, ordinance, rule,
regulation or order of any governmental body or insurance underwriter if the
latest date on which Tenant may legally effect such compliance is after the
then-current Term of the Lease, provided that Tenant shall otherwise surrender
the Premises in the condition required under the Lease. Subject to the foregoing
and to the provisions of Section 4, above, and Section 1(j) of the Lease, Tenant
shall not be required to pay any of the costs of alterations which are the
obligation of Lessor unless compliance is required as a result of Tenants acts
or specific use of the Premises.
12. Hazardous Substances.
The term "Hazardous Substances", as used in this Lease, means pollutants,
contaminants, toxic or hazardous wastes or any other substances, the removal of
which is required or the use of which is restricted, prohibited or penalized by
an "Environmental Law", which term means any federal, state or local law or
ordinance relating to pollution or the protection of the environment. Tenant
agrees that (a) no activity will be conducted on the Premises that will produce
any Hazardous Substance, except for activities which are part of the ordinary
course of Tenant's business (the "Permitted Activities"), provided the Permitted
Activities are conducted in accordance with all Environmental Laws and have been
approved in advance in writing by Lessor; (b) the Premises will not be used for
storage of any Hazardous Substances, except for temporary storage of materials
used in the Permitted Activities (the "Permitted Materials"), provided the
<PAGE>
Permitted Materials are properly stored in a manner and location meeting all
Environmental Laws and approved in advance in writing by Lessor; (c) no portion
of the Premises or Land will be used by Tenant as a landfill or a dump; (d)
Tenant will not install any underground tanks of any type; (e) Tenant will not
cause any surface or subsurface conditions to exist or come into existence that
constitute, or with the passage of time may constitute, a public or private
nuisance; (f) Tenant will not permit any Hazardous Substances to be brought onto
the Premises, except for Permitted Materials, and if so brought or found, Tenant
will immediately remove them, with proper disposal, and will undertake all
required cleanup procedures under the Environmental Laws. If, at any time during
or after the term of the Lease, the Premises are found to be contaminated or
subject to conditions prohibited in this Lease, Tenant will indemnify and hold
Lessor harmless from all claims, demands, actions, liabilities, costs, expenses,
damages and obligations of any nature arising from or as a result of the use of
the Premises by Tenant. The foregoing indemnification will survive the
termination or expiration of this Lease. Notwithstanding the foregoing, Tenant
shall not be responsible for the remediation of or required to indemnify Lessor
against losses, costs or liability arising in connection with hazardous
substances unless the need for remediation or losses, costs or liability are
attributable to a default by Tenant under this Lease or the wrongful act or
failure to act of Tenant, its agents, employees or contractors, or anyone within
Tenant's control.
13. Signs.
Tenant will not place or permit any signs on the exterior or windows of the
Building, or within the Premises if visible from the exterior of the Building,
except for building standard signage on the brick exterior above the front entry
to Tenant's Premises in the Building unless Tenant shall first obtain Lessor's
approval, which approval shall not be withheld, delayed or conditioned
unreasonably. Upon approval by Lessor (which approval shall not be withheld,
delayed or conditioned unreasonably) and by the City of Bloomington, Tenant
shall, at its sole expense, have the right to construct and maintain a monument
sign on the Land.
14. Alterations.
After completion of the Building, the improvements on the Premises and the
Tenant Improvements, Lessor will have no obligation to do any redecorating or
remodeling of the Building or the Premises. Tenant shall have the right to make
cosmetic or decorative changes within the Building without Lessor's consent so
long as the cost thereof does not exceed $25,000 in any 12-month period and does
not affect the Building structure, systems or exterior appearance. All other
alterations shall require Lessor's prior consent. Lessor shall not unreasonably
withhold such consent if the work does not adversely affect: (i) the value of
the Building, (ii) any system serving the Building, or (iii) the appearance of
the exterior of the Building. With respect to any consent required pursuant to
this Section, Lessor shall respond in writing within 5 business days after
Tenant has submitted reasonably complete plans and/or specifications for the
work to Lessor, or Lessor will be deemed to have consented. If Lessor
disapproves a proposed alteration Lessor shall state with reasonable specificity
the reasons for disapproval and what would be required in order to obtain Lessor
approval.
<PAGE>
Tenant shall have no obligation, at the expiration of the Term, to remove the
initial improvements to the Premises performed by Lessor or Tenant. Tenant shall
not be required to remove any other alterations or improvement at the expiration
of the Lease unless at the time Lessor gave its consent to such alteration
Lessor stated in writing, on the instrument indicating Lessor consent, that
approval was conditioned upon Tenant's agreement to remove the alteration or
improvement at the expiration of the Term. With respect to removal of
alterations required hereunder, Tenant shall not be obligated to replace
affected portions of the Premises but may patch and fill in a manner which will
place the affected area in the same condition as when delivered to Tenant,
reasonable wear and tear excepted (e.g. if carpeting is affected, Tenant's
obligation to restore shall be deemed satisfied if the portion of the carpet
affected by removal of alterations is patched in a reasonable manner.)
Tenant will get Lessor's prior written approval of any contractor or
subcontractor who is to perform work on the Premises at Tenant's request. Such
approval shall not be unreasonably withheld, delayed or conditioned. All
alterations by Tenant will be constructed with new materials, in a good and
workmanlike manner, and in compliance with the plans and specifications approved
by Lessor (except for decorating changes which do not require approved plans and
specifications) and all applicable laws, ordinances, rules, orders, regulations,
or other requirements of governmental authorities. Tenant will pay for any
labor, services, materials, supplies or equipment furnished or alleged to have
been furnished to Tenant in or about the Premises, and will pay and discharge
any mechanic's, materialmen's or other lien against the Premises resulting from
Tenant's failure to make such payment. If any work performed by Tenant results
in the filing of a mechanics lien which Tenant, acting in good faith, wishes to
contest, Tenant shall have the right to contest said lien and the existence of
said lien shall not be deemed to be a default under the Lease so long as (i)
Tenant causes said lien to be satisfied or causes the Premises to be released
from the lien within 30 days after the filing of such lien and (ii) if required
by Lessor Tenant provides Lessor with reasonable security to protect Lessor
interest in the Premises, such as a bond, cash escrow, letter of credit or
guaranty of a person/entity financially capable of satisfying said lien, in an
amount equal to 1.25 times the amount of the lien. If the lien is reduced to
final judgment, Tenant will discharge the judgment and Lessor will return the
cash deposited by Tenant. Lessor may post notices of nonresponsibility on the
Premises as provided by law.
All alterations, additions and improvements to the Premises made at Lessor's or
Tenant's expense, except movable office furniture and Tenant's movable trade and
office fixtures and equipment, including computer equipment and wiring; portable
office partitions; security monitors, wiring and systems, and telecommunications
systems, hardware and wiring, will become the property of Lessor upon
installation and will be surrendered with the Premises upon termination of this
Lease unless Lessor elects otherwise in writing.
<PAGE>
15. Utilities and Services.
Lessor will provide and maintain mains and conduits to supply water, gas,
electricity and sanitary sewer services to the Premises, and will separately
meter the Premises for gas and electrical services. Tenant will directly pay all
charges for sewer usage, garbage disposal, refuse removal, water, electricity,
gas, heating, air conditioning and ventilation costs, telephone, and any other
utility services furnished to the Premises during the Term which are not
included in Operating Costs and which are not payable directly by a future
tenant who shares the Building with Tenant. If any of such services are
furnished by Lessor, the cost of all such services furnished by Lessor will be a
part of the Operating Costs. Lessor will not be liable for any loss or damage
resulting from any temporary interruption of these services due to repairs,
alterations or improvements, or any variation, interruption or failure of these
services due to governmental controls, unavailability of energy, or any other
cause beyond Lessor's control. No such interruption or failure of these services
will be deemed as an eviction of Tenant or will relieve Tenant from any of its
obligations under this Lease.
In the event that an interruption in utilities or essential Building services
occurs, and the interruption is reasonably within the control of Lessor, Lessor
shall use conscientious efforts to avoid doing so in a manner or at a time that
would interfere with the reasonable use of the Premises by Tenant and shall
provide Tenant with at least 24 hours' advance notice. If the interruption
continues for more than three consecutive business days, Monthly Rent shall
abate in proportion to the portion of the Premises which is untenantable until
the service or services which were interrupted are reasonably restored.
16. Entry by Lessor.
Upon at least 24 hours prior notice to an officer of Tenant (except in the case
of an emergency in which no notice shall be required) Lessor and its agents and
contractors and mortgagees will have the right to enter the Premises at
reasonable times for inspecting, cleaning, repairing, or exhibiting the
Premises, but Lessor will have no obligation to make repairs, alterations or
improvements except as expressly provided in this Lease. During the last twelve
(12) months of the Term, Lessor may show the Premises to a prospective tenant
provided that Lessor gives Tenant reasonable advance notice. Lessor acknowledges
that Tenant's business records and communications (including inter-office
communications), may contain highly confidential information. Lessor therefore
agrees that if Tenant deems it to be necessary or appropriate, Lessor shall
permit a representative of Tenant to accompany Lessor while Lessor is within the
Building. Furthermore, Tenant may require that Lessor not enter certain portions
of the Building during a given visit if Tenant deems that to be necessary in
order to avoid disclosure of confidential information. In any such event Lessor
will be permitted to revisit the Building and shall be permitted to view any
areas which were not made available to Lessor to visit as soon as may be
reasonably possible. Lessor will not knowingly disclose Tenant's trade secrets,
and Tenant may require third parties to sign a confidentiality agreement in
connection with access of third parties to the Premises.
<PAGE>
Wherever in the Lease Lessor has a right to enter the Premises to (i) inspect
the Premises, (ii) do work in the Building or on the Land or (iii) show the
Premises to a third party, Lessor shall be required to use reasonable efforts to
(a) provide Tenant with 24 hours advance notice (which shall not be required in
an emergency), and (b) minimize the interference with Tenant's use and occupancy
of the Premises.
17. Subordination.
At the request of any mortgagee or ground lessor, this Lease will be subject and
subordinate to any mortgage or ground lease which may now or hereafter encumber
the Building, and Tenant will execute, acknowledge and deliver to Lessor any
document reasonably requested by Lessor to evidence the subordination so long as
the same is in form and substance customary in the community and does not have
the effect of altering the provisions of this Lease. Such subordination is on
the condition that this Lease and Tenant's right of possession of the Premises
as provided in this Lease are recognized and will not be disturbed by the
mortgagee or ground lessor so long as Tenant is not in default under this Lease
beyond any applicable cure period. If the interest of Lessor is transferred to
any party by reason of foreclosure of a mortgage or cancellation of a ground
lease, or by delivery of a deed in lieu of foreclosure or cancellation, Tenant
will attorn to such party immediately upon receipt of notice. Tenant agrees that
upon notification by Lessor or any mortgagee or ground lessor of the election of
a mortgagee or ground lessor to subordinate its interest in the Premises to this
Lease, this Lease will become prior to the mortgage or ground lease.
18. Estoppel Certificates.
Each party hereby agrees, from time to time, on not less than fifteen (15) days'
prior notice, to execute and deliver to the other party an estoppel certificate
(an "Estoppel Certificate"). An Estoppel Certificate may be relied on by Lessor
or Tenant, as appropriate, and any third party with whom Lessor or Tenant is
dealing, and shall certify the following, as of the date thereof: (i)the
accuracy of this Lease; (ii) the Commencement Date and the date on which the
Term expires; (iii) that this Lease is unmodified and in full force and effect
or in full force and effect as modified, stating the nature of all
modifications; (iv) whether to the executing party's knowledge the other party
is in default or whether the executing party has any claims or demands against
the other party and , if so, specifying such claim or demand; and (v) to other
correct and reasonably ascertainable facts that are covered by the terms of this
Lease.
19. Waiver of Claims and Assumption of Risks.
Lessor and Tenant release each other from any liability for loss or damage by
fire or other casualty that may be insured under a standard form of "all risk"
insurance policy, whether or not the loss or damage resulted from the negligence
of the other, its agents or employees. Each party will use reasonable efforts to
obtain policies of insurance which provide that this release will not adversely
affect the rights of the insureds under the policies. The releases in this
<PAGE>
Section will be effective whether or not the loss was actually covered by
insurance. Tenant assumes all risk of loss or damage of Tenant's property within
the Premises, including any loss or damage caused by sprinkler or other water
leakage, fire, windstorm, explosion, theft, act of any other tenant, or other
cause. Lessor will not be liable to Tenant, or its employees, for loss of or
damage to any property in the Premises.
20. Indemnification.
Tenant will indemnify Lessor and its agents and employees against all claims,
demands and actions, and all related costs and expenses (including reasonable
attorneys' fees) for injury, death, disability or illness of any person, or
damage to property, occurring in the Premises or arising out of Tenant's use of
the Premises, except to the extent caused by the willful misconduct or
negligence of Lessor or someone acting on its behalf.
Lessor will indemnify Tenant and its agents and employees against all claims,
demands and actions, and all costs and expenses relating thereto (including
reasonable attorneys' fees) for injury, death, disability or illness of any
person or persons occurring in, on or about the Land and Building exclusive of
the Premises, except to the extent caused by the willful misconduct or
negligence of Tenant or its officers, employees, agents or contractors or
someone acting on Tenant's behalf.
21. Insurance.
Tenant will keep public liability insurance in force at its expense by an
insurer and policy acceptable to Lessor in its reasonable opinion. The policy
will name Lessor and its mortgagee as additional insureds, for limits of at
least $3,000,000 for bodily injuries or death of one or more persons and at
least $500,000 for property damage. Tenant will carry fire and "all risk"
coverage insurance for Tenant's property and improvements in the Premises,
including coverage for loss or damage by sprinkler leakage or discharge. Prior
to Tenant's occupancy of the Premises, Tenant will deliver to Lessor the
liability and casualty policies or certificates by the insurer showing this
coverage to be in effect with premiums paid. The insurance will provide that
Lessor will be notified in writing 30 days prior to cancellation of, material
change in, or failure to renew, the insurance.
Tenant may, at Tenant's option, self insure its goods, supplies, furniture,
equipment and other items of personal Property that may from time to time be
within any part of the Premises.
With respect to losses, injuries or liability that do not arise from the
negligence or wrongful act of Tenant or Tenant's agents or employees, Lessor's
insurance shall be primary coverage without right of contribution from similar
insurance maintained by Tenant. Lessor shall maintain all-risk full replacement
cost insurance on the Building payable to Lessor, Lessor's mortgagee and Tenant,
as their interests may appear. With respect to alterations or improvements made
<PAGE>
to the Premises by Tenant following the Commencement Date of this Lease, Tenant
shall bear the responsibility for insuring said improvements unless Lessor shall
agree to do so in writing.
22. Assignment and Subletting.
Tenant may assign this Lease or sublet the Premises or any portion thereof, or
transfer any of Tenant's interest herein, at any time during this Term or any
renewals or extensions thereof, without Lessor's prior consent, to any
corporation or entity which controls, is controlled by, or is under common
control with Tenant or acquiring all or substantially all the assets of Tenant,
or to any corporation or entity resulting from a merger or consolidation with
Tenant, or to any corporation or entity in which Tenant maintains a majority
control or interest, if notice thereof is given to Lessor within 30 days
thereafter.
Except as set forth above, Tenant may assign this Lease or sublet all or part of
the Premises only with Lessor's prior written consent. If Tenant receives a bona
fide offer for an assignment of Tenant's interest under this Lease or to
sublease all of the Premises or all of the usable space in the Building and
Tenant requests Lessor's consent, a copy of the offer or a letter of intent
stating the terms of the offer will be furnished to Lessor. In the case of a
proposed assignment or sublease of all of the Premises, Lessor may terminate
this Lease, either conditioned on execution of a new lease between Lessor and
the party making the offer on the same terms as the offer to Tenant or without
that condition. If Lessor fails to give Tenant written notice of its decision to
terminate this Lease within 20 days after receiving a copy of the offer or a
letter of intent stating the terms of the offer to Tenant, Lessor will not
unreasonably withhold, delay or condition its consent to the assignment or
sublease described in the offer, and said consent shall be given or refused
within said 20-day period.
In the case of a proposed sublease for less than all of the Premises, Lessor
shall have no right to lease the portion of the Premises to be subleased or to
exclude the portion of the Premises to be subleased from this Lease, and Lessor
will not unreasonably withhold, delay or condition its consent to the sublease
for less than all of the Premises, and if consent is not given or refused by
Lessor, and, if additional information is not requested by Lessor, within 10
days after Tenant's request, such consent shall be deemed given. If consent is
refused, Lessor's reasons will be given to Tenant.
Lessor's refusal to consent shall not be deemed unreasonable if the proposed
transferee's proposed use is not permitted under the Lease, or fails to comply
with existing municipal official controls, or Lessor determines that occupancy
by the proposed transferee will adversely affect the value of the Premises.
If Lessor consents to one or more subleases, Tenant will still remain liable for
all obligations of the Tenant under this Lease but Lessor agrees that Tenant may
agree with its assignee or sublessee that payments pursuant to the assignment or
sublease shall be made directly to Lessor.
<PAGE>
In the event of any such transfer, Tenant may install such separate meters or
submeters as Tenant deems appropriate. Any options in favor of Tenant shall be
exercisable by any transferee of Tenant as though the same were being exercised
by Tenant itself.
Lessor's interest in this Lease will be freely assignable and the obligations of
the Lessor arising or accruing under this Lease after an assignment will be
enforceable only against the assignee, provided such assignee shall assume
Lessor's obligations hereunder. Lessor shall give Tenant notice of any
assignment by Lessor within 30 days thereafter.
If Tenant, having first obtained Lessor's consent, if required, shall sublet the
Premises, or any part thereof in excess of 32,500 Square Feet, at a rental or
for other monetary consideration in excess of the rent or pro rata portion
thereof due and payable by Tenant under this Lease, then Tenant shall pay to
Lessor, as additional rent: (a) on the first day of each month during the term
of the sublease, the excess of all rent and other consideration due from the
subtenant for such month over the portion of the rent then payable to Lessor
pursuant to the provisions of this lease for said month which is allocable on a
square footage basis to the space sublet; and (b) immediately upon receipt
thereof, any other rent or consideration received by Tenant from such
subletting. In determining the amount of the rent and other consideration due
from the subtenant for the term of the sublease, Tenant shall have the right to
deduct from the stated amount of the rent and other consideration in the
sublease the sum of all out-of-pocket leasing commissions, leasehold
improvements for the subtenant, and demising costs paid by Tenant in connection
with the sublease, or similar out-of-pocket leasing costs, amortized over the
term of the sublease, together with interest at the rate of 12% per annum.
The provisions of this Section will be binding on Tenant and any assignee or
subtenant of Tenant and will apply to all portions of the Premises remaining
subject to this Lease and to each request by Tenant, or its assignee or
subtenant, for Lessor's consent to a further or subsequent assignment or
subletting.
23. Damage or Destruction.
If the Premises or Building is damaged by Casualty, the damage (excluding damage
to improvements paid for by Tenant and trade fixtures, equipment or personal
property of Tenant) will be repaired by Lessor at its expense to a condition as
near as reasonably possible to the condition prior to the Casualty, but if more
than 25% of the total Square Feet of the Building is rendered untenantable,
Lessor may terminate this Lease as of the date of the Casualty by giving written
notice to Tenant within 30 days after the Casualty. If this Lease is not
terminated, Lessor will begin repairs within 90 days after the Casualty and
complete the repairs within a reasonable time, subject to acts of God, strikes
and other matters not within the control of Lessor.
If Lessor fails to begin the repairs as required, or fails to complete such
repairs within 180 days after they are commenced, Tenant may give Lessor notice
to do so. If Lessor has not begun the repairs within 30 days after Tenant's
notice to commence, or completed the repairs within 30 days after Tenant's
<PAGE>
notice to complete, Tenant may terminate this Lease by written notice to Lessor
within 15 days after expiration of the 30-day period.
If this Lease is terminated because of the Casualty, rents and other payments
will be prorated as of the termination and will be proportionately refunded to
Tenant or paid to Lessor, as the case may be. During any period in which the
Premises or any portion of the Premises is made untenantable as a result of the
Casualty, the Monthly Rent will be abated for the period of time untenantable in
proportion to the square foot area untenantable.
24. Eminent Domain.
If there is a permanent Taking of (i) 15% or more of the total Square Feet of
the Building, or (ii) 15% or more of the total number of parking spaces in the
Premises, either party may terminate this Lease as of the date the public
authority takes possession, by written notice to the other party within 30 days
after the Taking provided, however, in the case of a Taking resulting in a loss
of parking spaces, Tenant shall have no right to terminate this Lease if Lessor
provides Tenant with reasonably comparable parking not materially more distant
or less accessible than the parking spaces which were the subject of the Taking.
If this Lease is so terminated, any rents and other payments will be prorated as
of the termination and will be proportionately refunded to Tenant, or paid to
Lessor, as the case may be. All damages, awards and payments for the Taking will
belong to Lessor irrespective of the basis upon which they were made or awarded,
provided that Tenant will be entitled to bring a separate claim and recover any
amounts specifically awarded for Tenant's trade fixtures or equipment or as a
relocation payment or allowance, so long as such award does not reduce Lessor's
award. If this Lease is not terminated as a result of the Taking, Lessor will
restore the remainder of the Premises to a condition as near as reasonably
possible to the condition prior to the Taking, and the rent will be abated for
the period of time the space is untenantable in proportion to the square foot
area untenantable and this Lease will be amended appropriately to reflect the
deletion of the space taken.
25. Defaults.
If: (i) Tenant fails to pay any amount due under this Lease within 10 days after
written notice from Lessor, (ii) Tenant fails to keep or perform any of the
other terms, conditions or covenants of this Lease for more than 30 days after
notice of such failure shall have been given to Tenant (provided that where a
cure is not reasonably possible within that period Tenant shall be entitled to
additional time to effect a cure, so long as Tenant promptly commences acts
reasonably calculated to effect a cure and thereafter diligently prosecutes
those acts to completion), (iii) any proceeding is begun by or against Tenant to
subject the assets of Tenant to any bankruptcy or insolvency law or for an
appointment of a receiver of Tenant or for any of Tenant's assets and is not
discharged or dismissed within 90 days, or (iv) Tenant makes a general
assignment of Tenant's assets for the benefit of creditors, then Lessor may,
with or without terminating this Lease, cure the default and charge Tenant all
reasonable out-of-pocket costs and expenses of doing so, and Lessor also may
reenter the Premises, remove all persons and property, and regain possession of
<PAGE>
the Premises through any and all legal means, without waiver or loss of any of
Lessor's rights under this Lease, including Lessor's right to payment of Monthly
Rent. Lessor also may terminate this Lease as to all future rights of Tenant,
without terminating Lessor's right to payment of Monthly Rent and other charges
due under this Lease.
If this Lease or Tenant's right to possession of the Premises has been
terminated under this Section, Tenant shall have the right to seek and propose
to Lessor prospective tenants to lease the Premises from Lessor or to occupy the
Premises under an assignment of this Lease or a sublease, as the case may be. If
Tenant makes such a proposal and this Lease is then in effect, the provisions of
Section 22 will apply. If this Lease has been terminated by reason of Tenant's
default, and Tenant proposes a new lease by Lessor to a tenant obtained by
Tenant, Lessor will give its good faith consideration to leasing all or a
portion of the Premises to that prospective tenant.
Any amount payable by one party to the other pursuant to the terms of this lease
shall bear interest at the rate of 12% per annum from the date payment to the
other party was due, and shall be paid together with such interest, within the
time period specified in this Lease for such payment (or, if no such time period
is specified, within 30 days).
Tenant shall give Lessor written notice of any default by Lessor under this
Lease. Lessor shall have 30 days after Lessor's receipt of Tenant's default
notice to cure such default' provided, however, that if such a nonmonetary
default cannot reasonably be cured within 30 days, Lessor shall have as much
time to cure such default as is necessary provided Lessor promptly commences and
diligently pursues such cure; and provided further, that if the default relates
to a matter which is of an emergency nature, the Lessor shall have only 48 hours
(or such lesser period as is reasonable under the circumstances) to cure such
default. If Lessor fails to cure any such default within such cure period, then
Tenant may cure the default, in which event Lessor shall reimburse Tenant for
all amounts spent on such cure together with interest as provided in the
preceding paragraph.
No waiver by Lessor or Tenant of performance by the other party shall be
considered a continuing waiver or shall preclude Lessor or Tenant from
exercising its rights in the event of a subsequent default. No acceptance by
Lessor of a partial payment tendered by Tenant shall be deemed to be a waiver of
the balance of the amount due even if the tender states that acceptance will
constitute payment in full. No deposit by Tenant of any partial payments due
hereunder into a lockbox or other bank account for the account of Lessor shall
be deemed to be acceptance or payment by Lessor nor shall it be deemed to be a
waiver by Lessor of any claims Lessor may have against Tenant under this Lease.
If Tenant is in default of a monetary provision of this Lease, any payment that
is not sufficient to cure the subject default shall be deemed to be a partial
payment for purposes of this Section.
Each and every right and remedy contained herein shall be cumulative and in
addition to any other right or remedy given hereunder. In the event that either
<PAGE>
party brings a legal action to enforce the terms of this Lease or to exercise
any right or remedy provided for herein, the prevailing party shall be paid its
reasonable expenses of suit, including reasonable attorneys' fees, by the other
party.
26. Waiver of Lease Provisions.
No waiver of any provision of this Lease will be deemed a waiver of any other
provision or a waiver of that same provision on a subsequent occasion. The
receipt of rent by Lessor with knowledge of a default under this Lease by Tenant
will not be deemed a waiver of the default. Neither party will be deemed to have
waived any provision of this Lease by any action or inaction and no waiver will
be effective unless it is done by expressed written agreement signed by the
party waiving the provision. Any payment by Tenant and acceptance by Lessor of a
lesser amount than the full amount of all Monthly Rent and other charges then
due will be applied to the earliest amounts due. No endorsement or statement on
any check or letter for payment of rent or other amount will be deemed an accord
and satisfaction, and Lessor may accept such check or payment without prejudice
to its right to recover the balance of any rent or other amount or to pursue any
other remedy provided in this Lease. No acceptance of payment of less than the
full amount due to either party will be deemed a waiver of the right to the full
amount due together with any interest and service charges.
27. Return of Possession to Lessor.
On expiration of the Term or sooner termination of this Lease, Tenant will
return possession of the Premises to Lessor, without notice from Lessor, in good
order and condition, except for ordinary wear and damage, destruction or
conditions Tenant is not required to remedy under this Lease. Tenant will give
Lessor all keys for the Premises and will inform Lessor of combinations on any
locks and safes on the Premises. Any property left in the Premises after
expiration or termination of this Lease or after the Premises have been vacated
by Tenant will become the property of Lessor to dispose of as Lessor chooses.
28. Holding Over.
If Tenant remains in possession of the Premises after expiration of the Term
without a new lease, it may do so only with written consent by Lessor, and any
such holding over will be from month-to-month subject to all the same provisions
of this Lease, except that the Monthly Base Rent will be the Monthly Base Rent
stated in Lessor's consent if a new Monthly Base Rent is stated, or 150% of the
Monthly Base Rent under this Lease if no new Monthly Base Rent is stated in
Lessor's consent. Any holding over without Lessor's consent will be at 150% of
the Monthly Rent under this Lease. The month-to-month occupancy may be
terminated by Lessor or Tenant on the last day of any month by at least 30 days'
prior written notice to the other.
<PAGE>
29. Brokers.
Lessor and Tenant represent and warrant one to another that except for Tenant's
representation by Woodbridge Partners Inc., neither of them has employed or
otherwise used any broker or agent in relation to this Lease. Lessor will
indemnify and hold Tenant harmless, and Tenant will indemnify and hold Lessor
harmless, from and against any claims for brokerage or other commissions or fees
arising out of any breach of the foregoing representation and warranty by the
respective indemnitors.
Lessor shall pay Tenant an allowance for payment by Tenant to Woodbridge
Partners, Inc. of a leasing commission in connection with the Lease, payable on
the commencement of the Term in the amount of $427,578.00. In the event Tenant
exercises its option to extend the Term of the Lease, no additional brokerage
commission shall be payable.
30. Notices.
Any notice under this Lease will be in writing, and will be sent by prepaid
certified mail, or by facsimile confirmed by certified mail, or by same day
courier or overnight courier addressed to Tenant prior to the Commencement Date
at 8000 West 78th Street, Minneapolis, Minnesota 55439 (fax number: 946-7516)
Attn: Chief Financial Officer and as of the Commencement Date at the Premises
and to Lessor at 1550 Utica Avenue South, Suite 120, St. Louis Park, Minnesota
55416, or to such other address as is designated in a notice given under this
Section. A notice will be deemed given on the date mailed. Lessor's statements
of Costs and other routine mailings to tenants need not be sent by certified
mail.
31. Governing Law.
This Lease will be construed under and governed by the laws of Minnesota. If any
provision of this Lease is illegal or unenforceable, it will be severable and
all other provisions will remain in force as though the severable provision had
never been included.
32. Entire Agreement.
This Lease contains the entire agreement between Lessor and Tenant regarding the
Premises. Tenant agrees that it has not relied on any statement, representation
or warranty of any person except as set out in this Lease. This Lease may be
modified only by an agreement in writing signed by Lessor and Tenant. No
surrender of the Premises, or of the remainder of the Term, will be valid unless
accepted by Lessor in writing.
33. Successors and Assigns.
All provisions of this Lease will be binding on and for the benefit of the
successors and assigns of Lessor and Tenant, except that no person or entity
holding under or through Tenant in violation of any provision of this Lease will
have any right or interest in this Lease or the Premises.
<PAGE>
34. Intentionally Deleted.
35. Renewal Option.
Lessor grants Tenant the option ("Renewal Option") to extend the term of this
Lease for one additional period of five Lease Years (the "Renewal Period"),
commencing immediately upon the expiration of the Term, subject to the following
conditions:
(a) This Lease is in full force and effect and Lessor has not
declared, in writing, that there exists a default under this
Lease; provided, however, that if Lessor declares such a
default and there is less than 30 days remaining until the
period within which Tenant may exercise its option ends,
Tenant shall have 30 days within which to cure the default and
if so cured, Tenant's exercise of this option shall be
considered effective.
(b) Tenant gives Lessor prior written notice of Tenant's election
to exercise the Renewal Option at least 12 months before the
expiration of the Term. Failure of Tenant to deliver timely
notice of its election to exercise the Renewal Option will
constitute Tenant's waiver of its right to renew the Lease.
(c) The Monthly Base Rent for the Renewal Period will be $127,680.
(d) All of the other terms, covenants and conditions applicable to
the Renewal Period, including Costs, shall be the same as set
forth in this Lease, except that there will be no further
option to extend the Term after the Renewal Period, and no
provisions of this Lease relating to improvements, allowances,
or other incentives or concessions will apply to any Renewal
Period, unless hereafter agreed upon between the parties in
writing.
(e) At the request of either party, Lessor and Tenant will execute
and deliver an appropriate document setting forth all of the
terms, covenants and conditions applicable to the Renewal
Period.
(f) The rights of Tenant under this Section shall not be severed
from this Lease or separately sold, assigned or transferred,
and will expire in accordance with the provisions of this
Section, or upon the expiration or earlier termination of this
Lease.
<PAGE>
36. Construction Improvement Allowance; Punchlist.
Lessor shall construct the Building shell improvements which will include glass
in place of dock doors and eight 4-foot by 8-foot skylights (but not the Tenant
Improvements as hereinafter defined) and the driveways, parking areas, exterior
lighting facilities and devices and related improvements to the Premises of a
similar nature in accordance with the plans and specifications prepared by Pope
Associates, Inc., dated January 28, 1998, as modified by supplemental plans and
specifications prepared by Pope Associates, Inc. dated February 23, 1998, which
Lessor has delivered to Tenant. Lessor shall make no changes to such plans and
specifications, including changes in materials, which will materially adversely
affect Tenant's proposed use of the Premises. The Building shall be constructed
so as to conform to all applicable laws, ordinances and codes. The Building
shall be substantially complete not later than September 1, 1998 subject to
matters reasonably beyond Lessor's control. Tenant shall be entitled to require
changes to the plans and specifications regarding the Building or other
improvements on the Premises, provided that Tenant shall be responsible for all
costs and all delays in completion of construction of the Building caused by
such changes. All such changes in order to be effective must be in the form of a
written change order signed by Tenant which states the amount, if any, by which
the change order increases or decreases the cost of the work as set forth in the
plans and specifications and which states the delay, if any, that the change in
question will cause in substantially completing construction. Lessor has paid
Sewer Access Charges and Water Access Charges in connection with the proposed
improvements on the Premises calculated on the basis that those improvements
would be devoted one-half to office uses and one-half to warehouse uses. All
additional Sewer Access Charges and Water Access Charges shall be Tenant's
responsibility.
Lessor shall cause to be constructed certain leasehold improvements (the "Tenant
Improvements") pursuant to plans and specifications and a contract to be
approved by Lessor and Tenant not later than June 15, 1998. Tenant's approval of
said contract shall not be unreasonably withheld. Tenant shall have the right to
install its own security system. Lessor shall provide construction management
services in connection with the design, construction and commissioning of the
Tenant Improvements, as described and for the fee specified in the attached
Exhibit C. Lessor agrees to be responsible for the cost of the design, sewer and
water charges, permits, signage, construction and construction management of the
Tenant Improvements (the "Tenant Improvement Cost"), in an amount equal to
Twenty Five and 00/100 Dollars ($25.00) per square foot of space in the Building
(the "Tenant Improvement Allowance"). To the extent that the Tenant Improvement
Allowance is insufficient to cover the entire Tenant Improvement Cost, Tenant
shall be responsible for the portion of the Tenant Improvement Cost in excess of
the Tenant Improvement Allowance. The portion of the Tenant Improvement Cost
which is Tenant's responsibility, if any, initially shall be paid by Lessor.
Following completion of the Tenant Improvements (as evidenced by a certificate
of occupancy issued by the responsible governmental authority or a certificate
of final payment and completion certified by Lessor's architect or engineer)
Tenant shall within ten (10) days pay Lessor the portion of the Tenant
Improvement Cost for which Tenant is responsible. To the extent that Tenant
elects to construct Tenant Improvements over time rather than to build-out all
of the space at once, the unused portion of the Tenant Improvement Allowance may
<PAGE>
be used by Tenant at any time during the Term prior to the last year (unless
Tenant exercises its option to extend the Term of the Lease, in which case any
unused portion of the Tenant Improvement Allowance shall remain available for
use by Tenant during all but the last year of the Term, as so extended).
Notwithstanding the foregoing, but provided that Tenant has improved the entire
Premises, at any time following construction in the Building of Tenant
Improvements costing not less than Twenty Two and No/100 Dollars per foot,
Tenant may elect to have the unused portion of the Tenant Improvement Allowance
paid to Tenant at Tenant's direction which amount shall be deemed to be an
allowance to reimburse Tenant for Tenant's costs of design, signage, and
equipment installation, including the cost of computer and telecommunication
equipment and/or facilities wiring, all as shown by copies of appropriate
invoices provided by Tenant to Lessor.
In addition to the foregoing Tenant Improvement Allowance, if Tenant elects to
extend the Term pursuant to the renewal option set out in the Lease, as modified
by Section 26, below, Lessor shall provide Tenant with an additional Tenant
Improvement Allowance in the amount of Six and No/100 Dollars ($6.00) per square
foot to be used for purposes of refurbishing the Premises, including all related
design, sewer, water, permit, signage, administrative and construction costs.
This allowance shall in all respects be treated in the same manner as the
original Tenant Improvement Allowance.
Prior to the Commencement Date Tenant shall have reasonable access to the
Building for purposes of installing cabling and wiring as well as roof-top
reception and/or transmission facilities and equipment related thereto pursuant
to Sections 2 and 37, as well as to move equipment, goods and furnishings into
portions of the Building that has been substantially completed, provided that no
such activity shall unreasonably interfere with Lessor's completion of
construction of the Tenant Improvements.
37. Rooftop Telecommunications Equipment.
Tenant will have the right to use the roof of the Building for the installation
and operation of telecommunications satellite dishes, antennae and related
facilities ("Telecommunications Equipment"), subject to the prior written
approval of Lessor as to the location, nature, design, appearance and size of
the Telecommunications Equipment, which approval shall not be unreasonably
withheld, delayed or conditioned. If Telecommunications Equipment is installed
by Tenant, Tenant will not commit or permit any act or omission which results in
the violation of any law, governmental regulation, or insurance policy of
Lessor, relating to the Building. Tenant will not knowingly permit any conduct
or condition which may unduly disturb or endanger occupants of any other
building.
Any rooftop installation of Tenant's Telecommunications Equipment
("Telecommunications Equipment Work") will be completed by Tenant, at Tenant's
expense, in strict accordance with plans approved in writing by Lessor, which
approval shall not be withheld, delayed or conditioned unreasonably and no
modifications, additions or alterations will be made without Lessor's prior
written consent, which consent will not be unreasonably withheld, delayed or
conditioned. Aesthetic concerns will be deemed valid reasons for withholding
<PAGE>
consent. All working drawings for Telecommunications Equipment Work will be
prepared by Tenant at Tenant's expense and will be submitted to Lessor for
approval. All Telecommunications Equipment Work will be done in a good and
workmanlike manner and as expeditiously as possible. Tenant's installation and
use of the Telecommunications Equipment will be subject to the following (the
"Conditions"):
(a) No Telecommunications Equipment may be installed without Lessor's
prior written approval. Lessor's approval will not be unreasonably withheld,
delayed or conditioned and, subject to the foregoing, shall be given so long as
the work complies with the plans approved by Lessor and Tenant is not in
material default under this Lease and so long as all other conditions set forth
in this Section are met.
(b) Tenant will submit the working drawings for the Telecommunications
Equipment Work and the Telecommunications Equipment to Lessor at least 20 days
before the date the Telecommunications Equipment Work is to commence.
(c) Tenant will provide Lessor with evidence reasonably acceptable to
Lessor that the Telecommunications Equipment and the proposed installation of
the same complies with all applicable laws, ordinances, rules and regulations,
and that Tenant has obtained any licenses, permits or other governmental
consents or approvals required for the installation or use of the
Telecommunications Equipment and the other Telecommunications Equipment Work.
(d) Upon request, Tenant will provide Lessor with evidence acceptable
to Lessor that the Telecommunications Equipment is owned or leased by Tenant and
that the installation of the Telecommunications Equipment will comply with all
provisions of this Lease relating to alterations.
(e) Tenant will promptly pay all costs of the Telecommunications
Equipment Work and the Telecommunications Equipment and any construction,
installation, repair, maintenance, or governmental approval or licensing costs
associated with the Telecommunications Equipment Work and the Telecommunications
Equipment.
(f) Subject to Tenant's right to self insure for loss or damage to its
own property, Tenant will provide Lessor with evidence that the
Telecommunications Equipment, if owned by Tenant, are insured against fire,
theft and other risks normally covered by an "all risk" policy of casualty
insurance, and evidence that the Tenant's liability insurance required under
this Lease applies to all of the Telecommunications Equipment and their
installation, use, maintenance and repair.
(g) Neither the Telecommunications Equipment nor its installation, use,
maintenance or repair shall:
<PAGE>
(i) be disruptive or disturbing by reason of unreasonable
noise, vibration, radio or electromagnetic interference, or similar
cause, or to Lessor's operation or maintenance of the Premises,
(ii) be architecturally or aesthetically inharmonious with the
Land or Building,
(iii) adversely affect the structural or mechanical integrity
of the Building or the operation or maintenance of the systems serving
the Building,
(iv) increase the insurance costs for the Building (except for
costs to be paid solely by Tenant),
(v) endanger the safety or well-being of occupants or visitors
to the Building.
(h) Tenant agrees to comply with and obtain all necessary approvals,
permits, licenses, etc., required by the Federal Communications Commission (the
"FCC") and any other governmental authorities asserting jurisdiction over the
installation or operation of any of Tenant's Telecommunications Equipment.
Tenant warrants, represents and agrees that the installation and operation of
the Telecommunications Equipment shall in no way materially interfere with the
operation of any other Building system or telecommunications equipment system(s)
presently in operation in or on the Building and that in the event such
interference should occur, Tenant, after having received notice of such
interference, will take immediate action to eliminate said interference and
restore the proper operation of such system(s) as required by law or directive
of the FCC. In the event that Tenant fails to eliminate the interference as
required by law or directive of the FCC within a reasonable time, Lessor may, at
its discretion, (i) cure such interference and thereafter add the cost and
expense incurred by Lessor therefor to the next Monthly Rent to become due and
Tenant shall pay said amount as additional Monthly Rent, or (ii) treat such
failure on the part of Tenant to eliminate said interference, as required by the
FCC within the time allotted by the FCC, as a default under this Lease.
Tenant agrees to indemnify and hold Lessor harmless from and against
any claims and expenses Lessor may incur arising from Tenant's failure to comply
with the Conditions or the rules and orders of the FCC with respect to the
installation and operation of any of Tenant's Telecommunications Equipment or
Telecommunications Equipment system(s).
38. Consent Not Unreasonably Withheld.
Wherever in the Lease Lessor's consent is required or a determination is to be
made by Lessor, the decision to consent or not to consent as well as any other
determination shall be made by Lessor in good faith, and no consent shall be
unreasonably withheld, delayed or conditioned, unless different conditions,
standards or provisions are specifically stated in this Lease. Tenant
acknowledges that it shall not be unreasonable for Lessor to refuse to give its
<PAGE>
consent to any request if consenting would be a default by Lessor under any
mortgage, ground lease or contract between Lessor and a third party, or if doing
so would be contrary to applicable law. Wherever in the Lease Tenant's consent
is required, the decision to consent or not to consent shall be made by Tenant
in good faith, and no consent shall be unreasonably withheld, delayed or
conditioned.
39. Tenant's Due Diligence.
Lessor has provided Tenant with a copy of an existing survey of the Premises
together with copies of Lessor's Phase I environmental report and Lessor's title
insurance policy. Tenant acknowledges receipt of such items and accepts the
condition of the Premises, Building and Land as represented therein.
Lessor and Tenant have executed this Lease to be effective as of the date stated
in the first paragraph of this Lease.
LESSOR:
MEPC AMERICAN PROPERTIES INC.
By: /s/ Peter Johnson
Its: Senior Vice President
And
By: /s/ James D. Sant
Its: Vice President
TENANT:
HEALTH RISK MANAGEMENT, INC.
By: /s/ Gary T. McIlroy, M.D.
(Please Print Name)
Its:Chairman and CEO
And
By: /s/ Thomas P. Clark
(Please Print name)
Its:Senior Vice President, Finance and CFO
<PAGE>
The following exhibits to the Lease are not being filed herewith but will be
provided to the Commission upon request:
Exhibit A - Premises
Exhibit B - Land
Exhibit C - Rules and Regulations
Exhibit D - Construction Management Fee
Exhibit E - Expenses Not Considered to be Operating Costs
<PAGE>
AMENDMENT OF LEASE
This Amendment of Lease is entered into as of September 16, 1998 between MEPC O
& I, INC., a Delaware corporation, ("Lessor") and HEALTH RISK MANAGEMENT, INC.,
a Minnesota corporation ("Tenant").
A. Tenant, as tenant, and MEPC American Properties Inc. ("MEPC")
as lessor, entered into a Lease dated May 5, 1998 (the
"Lease"), under which MEPC leased to Tenant the
office/warehouse building commonly known as the Hampshire
Avenue Technology Center ("Building") to be located in the
City of Bloomington, Minnesota, containing approximately
142,526 Square Feet of space, as more fully described in the
Lease.
B. Lessor is now the owner of the Building and has succeeded to
the rights and interests of MEPC as the lessor under the
Lease.
C. Lessor and Tenant want to amend the Lease in certain respects.
In consideration of the above facts and in consideration of the mutual
agreements contained in this Amendment, Lessor and Tenant agree that the Lease
is amended as follows:
1. This Amendment is intended to supplement and amend the
provisions of the Lease. To the extent that any of the
provisions of this Amendment are inconsistent with the
provisions of the Lease, the provisions of this Amendment will
control. Except as otherwise provided in this Amendment, the
terms defined in the Lease will have the same meanings when
used in this Amendment.
2. Section 1 (c) of the Lease is amended to read as follows:
"Term" means the period beginning on the Commencement Date and
ending on the last day of the calendar month in which the date
occurs which is eleven (11) years after the date on which
Lessor no longer has any obligation for Holdover Rent under
Section 2 of this Lease.
3. Section 1 (f) of the Lease is amended to read as follows:
"Monthly Base Rent" means the following amounts:
Lease Year Monthly Base Rent Rate/Square Foot
1 through 6 $122,929.00 $10.35
7 through 11 $133,618.00 $11.25
12 through 16 $133,618.00 $11.25
<PAGE>
4. Section 13 of the Lease is amended to read as follows:
Signs: Tenant will not place or permit any signs on the
exterior or windows of the Building, or within the Premises if
visible from the exterior of the Building, except for building
standard signage on the brick exterior above the front entry
to Tenant's Premises in the Building unless Tenant shall first
obtain Lessor's approval, which approval shall not be
withheld, delayed or conditioned unreasonably. Upon approval
by Lessor (which approval shall not be withheld, delayed or
conditioned unreasonably) and by the City of Bloomington,
Lessor shall at its sole expense, construct a monument sign on
the Land and Tenant, at its sole expense, shall have the right
to construct and maintain signage to the monument.
5. Section 35 (c) is amended to change the Monthly Base Rent for
the Renewal Period from $127,680.00 to $133,618.00.
6. Section 36 paragraph 2 is amended as follows:
(a) to expand the definition of Tenant Improvements to
include Tenant's out-of-pocket moving and relocation
expenses, which shall include, but not be limited to:
space planning; space design; project management;
consultants; and relocating, rewiring and
reprogramming of telecommunications, computer systems
and networks and other furniture, fixtures and
equipment owned or leased by Tenant;
(b) to allow Tenant the right to provide and install, at
its expense, an uninterruptable power supply (UPS)
and a power generator pursuant to plans and
specifications approved in advance by Lessor;
(c) to increase the Tenant Improvement Allowance from
Twenty Five and no/100 Dollars ($25.00) to Thirty two
and no/100 Dollars ($32.00) per Square Foot.
1. Section 36 Paragraph 3, referencing an additional Tenant
Improvement Allowance upon Tenant's election to extend the
Term, is hereby deleted.
2. Except as expressly amended in this Amendment, all of the
terms of the Lease are ratified and affirmed.
Lessor and Tenant have executed this Amendment as of the date written beside
their respective signatures below.
<PAGE>
Lessor:
MEPC AMERICAN PROPERTIES INC.
By: /s/ Peter Johnson
Its: Senior Vice President
And
By: /s/ Richard Weiblen
Its: Vice President
TENANT: HEALTH RISK MANAGEMENT, INC.
By: /s/ Gary T. McIlroy, M.D.
Its: Chairman and CEO
And
By: /s/ Thomas P. Clark
Its: CFO
EXHIBIT 10.44
AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT
Dated as of May 1, 1998
Between
HEALTH RISK MANAGEMENT, INC.
and
U.S. BANK NATIONAL ASSOCIATION
<PAGE>
AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT
THIS AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT
(this "Agreement"), dated as of May 1, 1998, is by and between HEALTH RISK
MANAGEMENT, INC., a Minnesota corporation (the "Borrower"), and U.S. BANK
NATIONAL ASSOCIATION, a national banking association (the "Bank"). This document
amends and restates in its entirety a Revolving Credit and Term Loan Agreement
dated as of June 24, 1994, as thereafter amended (the "Existing Agreement").
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
Section 1.1 Defined Terms. In addition to the terms defined elsewhere
in this Agreement, the following terms shall have the following respective
meanings (and such meanings shall be equally applicable to both the singular and
plural form of the terms defined, as the context may require):
"Advance": The portion of the outstanding Loans bearing interest at an
identical rate for an identical Interest Period, provided that all Reference
Rate Advances shall be deemed a single Advance. An Advance of the Term Loans may
be a "Quoted Rate Advance" or a "Reference Rate Advance" (each, a "type" of
Advance). The Revolving Credit Loans shall be Reference Rate Advances at all
times. Subject to the further agreement of the Bank and the Borrower as
described in Section 2.2(f), the Revolving Credit Loans and Term Loans may be
"CD Rate Advances" and "Eurodollar Advances".
"Adverse Event": The occurrence of any event that could have a material
adverse effect on the business, operations, property, assets or condition
(financial or otherwise) of the Borrower and the Subsidiaries as a consolidated
enterprise or on the ability of the Borrower or any other party obligated
thereunder to perform its obligations under the Loan Documents.
"Agreement": This Amended and Restated Revolving Credit and Term Loan
Agreement, as it may be amended, modified, supplemented, restated or replaced
from time to time.
"Average Maturity Period": The weighted average time to scheduled
maturity of all Term Loan principal prepaid at any one time. Average Maturity
Period shall be computed by multiplying the dollar amount of each installment of
Term Loan principal prepaid by the number of days until the scheduled maturity
of that installment, adding together the resulting products and dividing the
resulting sum by the total dollar amount of the principal being prepaid.
"Business Day": Any day (other than a Saturday, Sunday or legal holiday
in the State of Minnesota) on which national banks are permitted to be open in
Minneapolis, Minnesota and, with respect to Eurodollar Advances, a day on which
dealings in Dollars may be carried on by the Bank in the interbank eurodollar
market.
<PAGE>
"Capital Expenditure": Any amount debited to the fixed asset account on
the consolidated balance sheet of the Borrower in respect of (a) the acquisition
(including, without limitation, acquisition by entry into a Capitalized Lease),
construction, improvement, replacement or betterment of land, buildings,
machinery, equipment or of any other fixed assets or leaseholds, and (b) to the
extent related to and not included in (a) above, materials, contract labor and
direct labor (excluding expenditures properly chargeable to repairs or
maintenance in accordance with GAAP).
"Capitalized Lease": Any lease which is or should be capitalized on the
books of the lessee in accordance with GAAP.
"CD Assessment Rate": The annual assessment rate (rounded upward, if
necessary, to the nearest 1/100th of 1%) actually incurred by the Bank during a
given Interest Period to the Federal Deposit Insurance Corporation (or any
successor) for such Corporation's insuring of time deposits at offices of the
Bank in the United States, as adjusted as hereinafter provided. If the annual
assessment rate for the Federal Deposit Insurance Corporation's (or any
successor's) insuring such time deposits is scheduled to change during such
Interest Period, the CD Assessment Rate for such Interest Period shall be the
weighted average (rounded upward, if necessary, to the nearest 1/100th of 1%) of
the annual assessment rates in effect at the beginning and as of such change.
"CD Rate": The rate of interest determined by the Bank for the relevant
Interest Period to be the average (rounded upward, if necessary, to the nearest
1/100th of 1%) of the rates quoted to the Bank at approximately 8:00 a.m.,
Minneapolis time (or as soon thereafter as practicable), or at the option of the
Bank at approximately the time of the request for a CD Rate Advance if such
request is made later than 8:00 a.m., Minneapolis time, in each case on the
first day of the applicable Interest Period by certificate of deposit dealers
selected by the Bank, in its sole discretion, for the purchase from the Bank, at
face value, of certificates of deposit issued by the Bank in an amount and
maturity comparable to the amount and maturity of the requested CD Rate Advance,
or at the option of the Bank determined for such amount and maturity based on
published composite quotations of certificate of deposit rates.
"CD Rate Advance": An Advance designated as such in a notice of
borrowing under Section 2.2(f)(iii) or a notice of continuation or conversion
under Section 2.2(f)(iv).
"CD Rate (Reserve Adjusted)": A rate per annum (rounded upward, if
necessary, to the nearest 1/100th of 1%) calculated for the Interest Period of a
CD Rate Advance in accordance with the following formula:
CDRA = CD Rate + CDAR
------------
1.00 - CDRR
<PAGE>
In such formula, "CDAR" means "CD Assessment Rate", "CDRA" means "CD Rate
(Reserve Adjusted)" and "CDRR" means "CD Reserve Rate", in each instance
determined by the Bank for the applicable Interest Period. The Bank's
determination of all such rates for any Interest Period shall be conclusive in
the absence of manifest error.
"CD Reserve Rate": A percentage equal to the daily average during such
Interest Period of the aggregate maximum reserve requirements (including all
basic, supplemental, marginal and other reserves), as specified under Regulation
D of the Federal Reserve Board, or any other applicable regulation that
prescribes reserve requirements applicable to non-personal time deposits (as
presently defined in Regulation D) with the Bank or applicable to extensions of
credit by the Bank the rate of interest on which is determined with regard to
rates applicable to non-personal time deposits. Without limiting the generality
of the foregoing, the CD Reserve Requirement shall reflect any reserves required
to be maintained by the Bank against (i) any category of liabilities that
includes deposits by reference to which the CD Rate is to be determined, or (ii)
any category of extensions of credit or other assets that includes CD Advances.
"Code": The Internal Revenue Code of 1986, as amended, or any successor
statute, together with regulations thereunder.
"Commitment": The agreement of the Bank to make Loans to the Borrower
subject to the terms and conditions of this Agreement.
"Consolidated Fixed Charge Coverage Ratio": For any period of
determination, the ratio of:
(a) the remainder of (i) EBITDA for such period, less (ii) 50% of
consolidated Capital Expenditures during such period, and less (iii)
cash taxes paid during such period;
to
(b) the sum of (i) consolidated interest expense during such period,
plus (ii) scheduled payments of principal of interest-bearing
Indebtedness during such period.
"Consolidated Operating Income": For any period of determination, the
consolidated net income of the Borrower and its Subsidiaries as determined in
accordance with GAAP, excluding therefrom (to the extent included): (a)
non-operating gains (including, without limitation, extraordinary or
nonrecurring gains, gains from the discontinuance of operations and gains
arising from the sale of assets other than inventory) during the applicable
period; and (b) similar non-operating losses during such period.
"Consolidated Tangible Net Worth": As of any date of determination, the
sum of the amounts set forth on the consolidated balance sheet of the Borrower
as the sum of the common stocks, preferred stock, additional paid-in capital and
<PAGE>
retained earnings of the Borrower (excluding treasury stock), less the book
value of all assets of the Borrower and its Subsidiaries that would be treated
as intangibles under GAAP, including, without limitation, all such items as
goodwill, trademarks, trade names, service marks, copyrights, patents, licenses,
unamortized debt discount and unamortized deferred charges.
"Default": Any event which, with the giving of notice to the Borrower
or lapse of time, or both, would constitute an Event of Default.
"EBITDA": For any period of determination, the consolidated net income
of the Borrower and its Subsidiaries before provision for income taxes, interest
expense (including, without limitation, implicit interest expense on Capitalized
Leases), depreciation and amortization, all as determined in accordance with
GAAP, excluding therefrom (to the extent included): (a) non-operating gains
(including, without limitation, extraordinary or nonrecurring gains, gains from
the discontinuance of operations and gains arising from the sale of assets other
than inventory) during the applicable period; and (b) similar non-operating
losses during such period.
"ERISA": The Employee Retirement Income Security Act of 1974, as
amended, and any successor statute, together with regulations thereunder.
"ERISA Affiliate": Any trade or business (whether or not incorporated)
that is a member of a group of which the Borrower is a member and which is
treated as a single employer under Section 414 of the Code.
"Eurodollar Advance": An Advance designated as such in a notice of
borrowing under Section 2.2(f)(iii) or a notice of continuation or conversion
under Section 2.2(f)(iv).
"Eurodollar Interbank Rate": The average offered rate for deposits in
United States Dollars (rounded upwards, if necessary, to the nearest 1/16 of 1%)
for delivery of such deposits on the first day of an Interest Period of a
Eurodollar Advance, for the number of days comprised therein, which appears on
the Reuters Screen LIBO Page as of 11:00 a.m., London time (or such other time
as of which such rate appears) on the day that is two Business Days preceding
the first day of the Interest Period or the rate for such deposits determined by
the Bank at such time based on such other published service of general
application as shall be selected by the Bank for such purpose; provided, that in
lieu of determining the rate in the foregoing manner, the Bank may determine the
rate based on rates offered to the Bank for deposits in United States Dollars
(rounded upwards, if necessary, to the nearest 1/16 of 1%) in the interbank
eurodollar market at such time for delivery on the first day of the Interest
Period for the number of days comprised therein. "Reuters Screen LIBO Page"
means the display designated as page "LIBO" on the Reuter Monitor Money Rates
Service (or such other page as may replace the LIBO Page on that service for the
purpose of displaying London interbank offered rates of major banks for United
States Dollar deposits).
<PAGE>
"Eurodollar Rate (Reserve Adjusted)": A rate per annum (rounded upward,
if necessary, to the nearest 1/16th of 1%) calculated for the Interest Period of
a Eurodollar Advance in accordance with the following formula:
ERRA = Eurodollar Interbank Rate
---------------------------
1.00 - ERR
In such formula, "ERR" means "Eurodollar Reserve Rate" and "ERRA" means
"Eurodollar Rate (Reserve Adjusted)", in each instance determined by the Bank
for the applicable Interest Period. The Bank's determination of all such rates
for any Interest Period shall be conclusive in the absence of manifest error.
"Eurodollar Reserve Rate": A percentage equal to the daily average
during such Interest Period of the aggregate maximum reserve requirements
(including all basic, supplemental, marginal and other reserves), as specified
under Regulation D of the Federal Reserve Board, or any other applicable
regulation that prescribes reserve requirements applicable to Eurocurrency
liabilities (as presently defined in Regulation D) or applicable to extensions
of credit by the Bank the rate of interest on which is determined with regard to
rates applicable to Eurocurrency liabilities. Without limiting the generality of
the foregoing, the Eurocurrency Reserve Requirement shall reflect any reserves
required to be maintained by the Bank against (i) any category of liabilities
that includes deposits by reference to which the Eurodollar Interbank Rate is to
be determined, or (ii) any category of extensions of credit or other assets that
includes Eurodollar Advances.
"Event of Default": Any event described in Section 9.1.
"Federal Reserve Board": The Board of Governors of the Federal Reserve
System or any successor thereto.
"GAAP": Generally accepted accounting principles as applied in the
preparation of the audited financial statements of the Borrower referred to in
Section 6.5.
"Government Yield": As of any date of determination, the yield
(converted as necessary to the equivalent semi-annual compound rate) on U.S.
Treasury securities having a maturity date closest to the Average Maturity
Period, as published in The Wall Street Journal (or, if not so published, as
determined by the Bank by using the average of quotes obtained by the Bank from
three primary dealers that market U.S. Treasury securities in the secondary
market). "U.S. Treasury securities" means actively traded U.S. Treasury bonds,
bills and notes and, if more than one issue of U.S. Treasury securities is
scheduled to mature at or about the time of the scheduled maturity of the
applicable Term Note, then to the extent possible the U.S. Treasury security
issued most recently prior to the date of determination will be chosen as the
basis of the Government Yield.
<PAGE>
"Indebtedness": Without duplication, all obligations, contingent or
otherwise, which in accordance with GAAP should be classified upon the obligor's
balance sheet as liabilities, but in any event including the following (whether
or not they should be classified as liabilities upon such balance sheet): (a)
obligations secured by any mortgage, pledge, security interest, lien, charge or
other encumbrance existing on property owned or acquired subject thereto,
whether or not the obligation secured thereby shall have been assumed and
whether or not the obligation secured is the obligation of the owner or another
party; (b) any obligation on account of deposits or advances; (c) any obligation
for the deferred purchase price of any property or services, except trade
accounts payable not due more than 90 days after invoice and not evidenced by a
note, (d) any obligation as lessee under any Capitalized Lease; (e) all
guaranties, endorsements and other contingent obligations in respect to
Indebtedness of others; and (f) undertakings or agreements to reimburse or
indemnify issuers of letters of credit. For all purposes of this Agreement, the
Indebtedness of any Person shall include the Indebtedness of any partnership or
joint venture in which such Person is a general partner or a joint venturer.
"Interest Differential": As of the date of any full or partial
prepayment of a Term Loan, the Note Rate minus the sum of the Government Yield
as of the date of prepayment and the Issuance Spread.
"Interest Period" Either (a) for any Eurodollar Advance, the period
commencing on the borrowing date of such Eurodollar Advance or the date a CD
Rate Advance or a Reference Rate Advance is converted into such Eurodollar
Advance, or the last day of the preceding Interest Period for such Eurodollar
Advance, as the case may be, and ending on the numerically corresponding day
one, two, three or six months thereafter, as selected by the Borrower pursuant
to Section 2.2(f)(iii) or Section 2.2(f)(iv); provided, that:
(i) any Interest Period which would otherwise end on a day which is not
a Business Day shall end on the next succeeding Business Day unless
such next succeeding Business Day falls in another calendar month, in
which case such Interest Period shall end on the next preceding
Business Day;
(ii) any Interest Period which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of the calendar month at the
end of such Interest Period;
(iii) no Interest Period shall extend beyond the Revolving Termination
Date; and
(iv) Interest Periods shall not be chosen for Advances under the Term
Loan that would require payment of any amount of any Advance prior to
the last day of the Interest Period in order to pay an installment of
the Term Loan when due; and
<PAGE>
(b) for any CD Rate Advance, the period commencing on the borrowing date of such
CD Rate Advance or the date a Eurodollar Advance or a Reference Rate Advance is
converted into such CD Rate Advance, or the last day of the preceding Interest
Period for such CD Rate Advance, as the case may be, and ending 30, 60, 90 or
180 days thereafter, as selected by the Borrower pursuant to Section 2.2(f)(iii)
or Section 2.2(f)(iv); provided, that:
(i) any Interest Period which would otherwise end on a day which is not
a Business Day shall end on the next succeeding Business Day;
(ii) no Interest Period shall extend beyond the Revolving Termination
Date; and
(iv) Interest Periods shall not be chosen for Advances under the Term
Loan that would require payment of any amount of any Advance prior to
the last day of the Interest Period in order to pay an installment of
the Term Loan when due.
"Investment": The acquisition, purchase, making or holding of any stock
or other security, any loan, advance, contribution to capital, extension of
credit (except for trade and customer accounts receivable for inventory sold or
services rendered in the ordinary course of business and payable in accordance
with customary trade terms), any acquisitions of real or personal property
(other than real and personal property acquired in the ordinary course of
business) and any purchase or commitment or option to purchase stock or other
debt or equity securities of or any interest in another Person or any integral
part of any business or the assets comprising such business or part thereof.
"Issuance Spread": the percent per annum by which the Bank's cost of
funds exceeds the Government Yield as of the date of the applicable Term Note as
determined by the Bank in its sole discretion.
"Lien": Any security interest, mortgage, pledge, lien, hypothecation,
judgment lien or similar legal process, charge, encumbrance, title retention
agreement or analogous instrument or device (including, without limitation, the
interest of the lessors under Capitalized Leases and the interest of a vendor
under any conditional sale or other title retention agreement).
"Loan Documents": This Agreement, the Notes, the Security Agreement and
each other instrument, document, guaranty, security agreement, mortgage, or
other agreement executed and delivered by the Borrower or any guarantor or party
granting security interests in connection with this Agreement, the Loans or any
collateral for the Loans.
"Loans": The Revolving Loans and the Term Loans.
"Notes": The Revolving Note and the Term Notes.
<PAGE>
"Payment Date": (a) The last day of each month for interest on the
Loans that are Reference Rate Advances or Quoted Rate Advances; (b) the last day
of each Interest Period for each CD Rate Advance and Eurodollar Advance and, if
such Interest Period is in excess of 90 days (in the case of a CD Rate Advance)
or three months (in the case of a Eurodollar Advance), the day 90 days or three
months, as the case may be, after the first day of such Interest Period; and (c)
the last day of each March, June, September and December for Commitment Fees.
"PBGC": The Pension Benefit Guaranty Corporation, established pursuant
to Subtitle A of Title IV of ERISA, and any successor thereto or to the
functions thereof.
"Person": Any natural person, corporation, partnership, joint venture,
firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision or any other entity, whether acting
in an individual, fiduciary or other capacity.
"Plan": An employee benefit plan or other plan, maintained for
employees of the Borrower or of any ERISA Affiliate, and subject to Title IV of
ERISA or Section 412 of the Code.
"Quoted Rate": The fixed rate of interest offered by the Bank and
accepted by the Borrower for a particular Term Loan, as provided in Section 2.2.
The Bank shall, at its discretion, determine the offered rate with reference to
the amount and amortization schedule of the applicable Term Loan, funding rates
available to the Bank, reserve requirements, premiums, insurance costs, profit
margin and other factors deemed relevant by the Bank.
"Quoted Rate Advance": A particular Term Loan agreed by the Borrower
and the Bank to be a Quoted Rate Advance, as described in Section 2.2(e).
"Reference Rate": The rate of interest from time to time publicly
announced by the Bank as its "reference rate." The Bank may lend to its
customers at rates that are at, above or below the Reference Rate. For purposes
of determining any interest rate which is based on the Reference Rate, such
interest rate shall change on the effective date of any change in the Reference
Rate.
"Reference Rate Advance": An Advance described as such in a notice of
borrowing under Section 2.1(d) or Section 2.2(e).
"Related Party": Any Person (other than a Subsidiary): (a) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, the Borrower, (b) which
beneficially owns or holds 5% or more of the equity interest of the Borrower; or
(c) 5% or more of the equity interest of which is beneficially owned or held by
the Borrower or a Subsidiary. The term "control" means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
<PAGE>
"Reportable Event": A reportable event as defined in Section 4043 of
ERISA and the regulations issued under such Section, with respect to a Plan,
excluding, however, such events as to which the PBGC by regulation has waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event, provided that a failure to meet the minimum
funding standard of Section 412 of the Code and Section 302 of ERISA shall be a
reportable event regardless of the issuance of any such waivers in accordance
with Section 412(d) of the Code.
"Revolving Credit Commitment": The maximum unpaid principal amount of
Loans which may from time to time be outstanding hereunder, being initially
$10,000,000, as the same may be reduced from time to time pursuant to Section
2.2(a) and Section 4.3 and, as the context may require, the agreement of the
Bank to make Revolving Loans to the Borrower subject to the terms and conditions
of this Agreement.
"Revolving Loans": The Loans described in Section 2.1(a).
"Revolving Note": The promissory notes of the Borrower described in
Section 2.1(b), substantially in the form of Exhibit A, as such promissory notes
may be amended, modified or supplemented from time to time, and such term shall
include any substitutions for, or renewals of, such promissory notes.
"Revolving Termination Date": The earliest of (a) January 31, 1999; (b)
the date on which the Revolving Loan Commitment is terminated pursuant to
Section 9.2 hereof; (c) the date on which the Revolving Loan Commitment is
reduced to zero pursuant to Section 4.3 hereof; or (d) the date on which any
Revolving Loan or any Term Loan is accelerated.
"Subsidiary": Any Person of which or in which the Borrower and its
other Subsidiaries own directly or indirectly 50% or more of: (a) the combined
voting power of all classes of stock having general voting power under ordinary
circumstances to elect a majority of the board of directors of such Person, if
it is a corporation, (b) the capital interest or profit interest of such Person,
if it is a partnership, joint venture or similar entity, or (c) the beneficial
interest of such Person, if it is a trust, association or other unincorporated
organization.
"Term Loans": The Tranche A Term Loans, Tranche B Term Loan and Tranche
C Term Loan.
"Term Notes": Each promissory note of the Borrower described in Section
2.2(b), substantially in the form of Exhibit B-1, B-2 and B-3, as such
promissory notes may be amended, modified or supplemented from time to time, and
such term shall include any substitutions for, or renewals of, such promissory
notes.
"Tranche A Term Loans": The Loans described in Section 2.2(a)(i).
<PAGE>
"Tranche B Term Loan": The Loan described in Section 2.2(a)(ii).
"Tranche C Term Loan": The Loan described in Section 2.2(a)(iii).
Section 1.2 Accounting Terms and Calculations. Except as may be
expressly provided to the contrary herein, all accounting terms used herein
shall be interpreted and all accounting determinations hereunder (including,
without limitation, determination of compliance with financial ratios and
restrictions in Articles VIII and IX hereof) shall be made in accordance with
GAAP consistently applied. Any reference to "consolidated" financial terms shall
be deemed to refer to those financial terms as applied to the Borrower and its
Subsidiaries in accordance with GAAP.
Section 1.3 Computation of Time Periods. In this Agreement, in the
computation of a period of time from a specified date to a later specified date,
unless otherwise stated the word "from" means "from and including" and the word
"to" or "until" each means "to but excluding."
Section 1.4 Other Definitional Terms. The words "hereof", "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. References to Sections, Exhibits, schedules and like references are
to this Agreement unless otherwise expressly provided.
ARTICLE II TERMS OF LENDING
Subject to the terms and conditions hereof and in reliance upon the
warranties of the Borrower herein, the Bank agrees:
2.1 The Revolving Loans.
(a) Revolving Loans. To make a loan or loans (each, a
"Revolving Loan" and, collectively, the "Revolving Loans") to the
Borrower from time to time from the date hereof until the Revolving
Termination Date, during which period the Borrower may repay and
reborrow in accordance with the provisions hereof, provided, that the
aggregate unpaid principal amount of all outstanding Revolving Loans
shall not exceed the amount of the Revolving Credit Commitment at any
time.
(b) Revolving Note. The Revolving Loans shall be evidenced by
a promissory note of the Borrower (the "Revolving Note"), substantially
in the form of Exhibit A hereto, in the amount of the Revolving
Commitment originally in effect. The Bank shall enter in its records
the amount of the Advance comprising the Revolving Loan, the rate of
interest borne by such Advance and the payments of each Revolving Note,
and such records shall be conclusive evidence of the subject matter
thereof, absent manifest error.
<PAGE>
(c) Advance Options and Increment. The Revolving Loan shall at
all times be Reference Rate Advances, subject to the agreement of the
Bank and the Borrower to permit CD Rate Advances and Eurodollar
Advances, as described in Section 2.2(f). Each Revolving Loan shall be
in a minimum amount of $100,000 and in an integral multiple of $50,000.
(d) Borrowing Procedures for Revolving Loans. Any request by
the Borrower for a Revolving Loan shall be in writing, or by telephone
promptly confirmed in writing, and must be given so as to be received
by the Bank not later than 12:00 noon, Minneapolis time, on the date of
the requested Loan. Unless the Bank determines that any applicable
condition specified in Article VI has not been satisfied, the Bank will
make the amount of the requested Revolving Loan available to the
Borrower at the Bank's principal office in Minneapolis, Minnesota on
the date requested.
Section 2.2. The Term Loans.
(a) Term Loans. To make:
(i) the Tranche A Term Loans to the Borrower from time to time
from the date hereof until the Revolving Termination Date,
which Tranche A Term Loans shall be applied to reduce
outstanding Revolving Loans. The amount of any Tranche A Term
Loan shall permanently reduce the Revolving Credit Commitment.
Each Tranche A Term Loan shall be in a minimum amount of
$250,000 and in an integral multiple thereof. The aggregate
amount of all Tranche A Term Loans made by the Bank shall not
exceed $5,000,000. Up to 3 total Tranche A Term Loans may be
made, and the Bank shall establish separate amortization
schedules for each Tranche A Term Loan, as described in
Section 4.1(b).
(ii) to continue the Term Loan made under the Existing Credit
Agreement, currently in the principal amount of $654,999.85,
as the Tranche B Term Loan hereunder.
(iii) to continue an amount of $2,566,666.66 of the Revolving
Loans made under the Existing Credit Agreement as the Tranche
C Term Loan hereunder.
(b) Term Notes. The Tranche A Term Loans, Tranche B Term Loan and
Tranche C Term Loan shall be evidenced by promissory notes of the
Borrower (the "Term Notes"), substantially in the form of Exhibits B-1,
B-2 and B-3 respectively.
(c) Advance Options. Each Term Loan shall be constituted of either a
Quoted Rate Advance or a Term Reference Rate Advance, Advances, subject
to the agreement of the Bank and the Borrower to permit CD Rate
<PAGE>
Advances and Eurodollar Advances, as described in Section 2.2(f), as
shall be selected by the Borrower, and shall not be convertible into
another type of Advance except as otherwise provided herein.
(d) Borrowing Procedures for Tranche A Term Loans. Any request by the
Borrower for a Tranche A Term Loan shall be in writing, or by telephone
promptly confirmed in writing, and must be given so as to be received
by the Bank not later than 12:00 noon, Minneapolis time, on the date of
the requested Loan. Each request for a Tranche A Term Loan shall
specify (i) the borrowing date (which shall be a Business Day), (ii)
the amount of such Tranche A Term Loan and whether the Borrower
requests the Bank to offer a Quoted Rate for such Tranche A Term Loan.
Unless the Bank determines that any applicable condition specified in
Article VI has not been satisfied, the Bank will apply the amount of
the requested Tranche A Term Loan to the outstanding Revolving Credit
Loans.
(e) Additional Procedures for Quoted Rate Advances. The Borrower may
from time to time request rate quotations from the Bank for a Quoted
Rate to apply to any Term Loan, The Borrower shall have a one-time
option to convert any Term Loan to a Quoted Rate Advance (in its
entirety), based on the Bank's quotation of an applicable Quoted Rate
and the Borrower's acceptance of such Quoted Rate for such Term Loan.
The Bank's records concerning the applicable Quoted Rate, and
concerning whether a Term Loan shall be a Quoted Rate Advance shall be
conclusive. In the absence of mutual agreement to a Quoted Rate to
apply to any Term Loan, such Term Loan shall be a Reference Rate
Advance (except as provided in Section 2.2(f) below).
<PAGE>
(f) Eurodollar and CD Advances.
(i) Upon request of the Borrower, the Bank may agree, at its sole
discretion, to make CD Rate Advances and Eurodollar Advances available
hereunder, and upon written notice by the Bank to the Borrower, the
Borrower may elect to have the Revolving Loans and Term Loans made as
such Advance or converted into such Advances. The definitions and other
provisions pertaining to CD Rate Advances and Eurodollar Advances shall
not be given effect hereunder unless and until the Bank shall provide
such written notice. Notwithstanding this Section 2.2(f), if any Term
Loan is converted into a Quoted Rate Advance as provided in Section
2.2(e), it may not thereafter be converted into a CD Rate Advance or
Eurodollar Advance. Upon agreement to make such Advance available, the
Bank and the Borrower shall also agree upon an interest margin to apply
to the CD Rate Advance and the Eurodollar Advances, and such margin
(the "Applicable Margin") shall be set forth in the written notice by
the Bank contemplated hereby.
(ii) The total of outstanding CD Rate Advances and Eurodollar Advances
shall not exceed 10 at any one time. Each CD Rate Advance or Eurodollar
Advance shall be in a minimum amount of $100,000 or in an integral
multiple of $100,000 above such amount.
(iii) Any request by the Borrower for a CD Rate Advance or Eurodollar
Advance must be given so as to be received by the Bank not later than:
(1) 10:00 a.m., Minneapolis time, on the date of the requested
Loan, if the Revolving Loan shall be comprised of CD Rate
Advances; or
(2) 10:00 a.m., Minneapolis time, two Business days prior to
the date of the requested Revolving Loan, if the Loan shall
be, or shall include, a Eurodollar Advance.
Each such request shall specify (i) the borrowing date (which shall be
a Business Day), (ii) the amount of such Loan and the type or types of
Advances comprising such Loan, and (iii) the initial Interest Periods
for such Advances.
(iv) The Borrower may elect to (i) continue any outstanding CD Rate
Advance or Eurodollar Advance from one Interest Period into a
subsequent Interest Period to begin on the last day of the earlier
Interest Period, or (ii) convert any outstanding Advance into another
type of Advance (on the last day of an Interest Period only, in the
instance of a CD Rate Advance or Eurodollar Advance), by giving the
Bank notice in writing, or by telephone promptly confirmed in writing,
given so as to be received by the Bank not later than:
<PAGE>
(1) 10:00 a.m., Minneapolis time, on the date of the requested
continuation or conversion, if the continuing or converted
Advance shall be a CD Rate Advance; or
(b) 10:00 a.m., Minneapolis time, two Business days prior to
the date of the requested continuation or conversion, if the
continuing or converted Advance shall be a Eurodollar Advance.
Each notice of continuation or conversion of an Advance shall specify
(i) the effective date of the continuation or conversion date (which
shall be a Business Day), (ii) the amount and the type or types of
Advances following such continuation or conversion, and (iii) the
Interest Periods for such Advances. Absent timely notice of
continuation or conversion, each CD Rate Advance and Eurodollar Advance
shall automatically convert into a Reference Rate Advance on the last
day of an applicable Interest Period, unless paid in full on such last
day. No Advance shall be continued as, or converted into, a CD Rate
Advance or a Eurodollar Advance if the shortest Interest Period for
such Advance may not transpire prior to the Revolving Termination Date
(for a Revolving Loan) or the date due (for the Term Loan) or if a
Default or Event of Default shall exist.
Section 2.3 Funding Losses. The Borrower will indemnify the Bank upon
demand against any loss or expense which the Bank may sustain or incur
(including, without limitation, any loss or expense sustained or incurred in
obtaining, liquidating or employing deposits or other funds acquired to effect,
fund, or maintain any Advance) as a consequence of any payment (including,
without limitation, any payment pursuant to Section 4.2 or 9.2) of a Quoted Rate
Advance or any portion thereof on a date other than the date the Quoted Rate
Advance, or such portion, shall be due. For purposes of calculating the funding
loss applicable to any Quoted Rate Advance, if at the time of any prepayment of
a Quoted Rate Advance (whether voluntary or involuntary, and specifically
including but not limited to any payment prior to scheduled maturity following
acceleration of any Term Note), the Interest Differential is greater than zero,
the Borrower shall pay to the Bank a prepayment premium equal to the present
value (determined in accordance with standard financial practice) of the product
of the Interest Differential times the amount prepaid times the Average Maturity
Period. The amount of the prepayment premium shall be calculated as follows: The
amount prepaid shall be multiplied by (a) the Interest Differential, times (b) a
fraction, the numerator of which is the number of days in the Average Maturity
Period and the denominator of which is 360. The resulting product shall then be
divided by the number of whole months (using a thirty-day month) in the Average
Maturity Period, yielding a quotient (the "Quotient"). The amount of the
prepayment premium shall be the present value (determined in accordance with
standard financial practice) on the date of prepayment (using the Government
Yield as of the date of such prepayment as the discount factor) of a stream of
equal monthly payments in number equal to the number of whole months (using a
thirty-day month) in the Average Maturity Period, with the amount of each
hypothetical monthly payment equal to the Quotient and with the first payment
payable thirty days after the date of prepayment. Because there is no readily
available index of rates payable on Quoted Rate Advances, nor any assurance that
<PAGE>
the Bank could replace Quoted Rate Advances with a similar loan, the Borrower
and the Bank agree that changes in the yields on U.S. government securities
provide a reasonable approximation for changes in interest rates generally.
Determinations by the Bank for purposes of this Section 2.3 of the amount
required to indemnify the Bank shall be conclusive in the absence of manifest
error.
Section 2.4 Funding Losses - CD and Eurodollar Advances. The Borrower
will indemnify the Bank upon demand against any loss or expense which the Bank
may sustain or incur (including, without limitation, any loss or expense
sustained or incurred in obtaining, liquidating or employing deposits or other
funds acquired to effect, fund, or maintain any Advance) as a consequence of (i)
any failure of the Borrower to borrow, continue or convert a CD Rate Advance or
Eurodollar Advance on a date specified therefor in a notice thereof, or (iii)
any payment (including, without limitation, any payment pursuant to Section 4.2
or 9.2) of a CD Rate Advance or a Eurodollar Advance or any portion thereof on a
date other than the last day of the Interest Period for such Advance.
Determinations by the Bank for purposes of this Section 2.4 of the amount
required to indemnify the Bank shall be conclusive in the absence of manifest
error.
ARTICLE III INTEREST AND FEES
Section 3.1 Interest.
(a) Quoted Rate Advances. The unpaid principal amount of each Term Loan
that is a Quoted Rate Advance shall bear interest prior to maturity at
the Quoted Rate applicable to such Term Loan.
(b) Revolving Reference Rate Advances. The unpaid principal amount of
each Revolving Loan and each Term Loan that is not a Quoted Rate
Advance shall bear interest prior to maturity at a variable rate per
annum equal to the Reference Rate plus .375% per annum.
(c) CD Rate Advances. The unpaid principal amount of each CD Rate
Advance shall bear interest prior to maturity at a rate per annum equal
to the CD Rate (Reserve Adjusted) in effect for each Interest Period
for such CD Rate Advance plus the Applicable Margin.
(d) Eurodollar Advances. The unpaid principal amount of each Eurodollar
Advance shall bear interest prior to maturity at a rate per annum equal
to the Eurodollar Rate (Reserve Adjusted) in effect for each Interest
Period for such Eurodollar Advance plus the Applicable Margin.
(e) Past Due. Any amount of any Loan not paid when due, whether at the
date scheduled therefor or earlier upon acceleration, shall bear
interest until paid in full at a rate per annum equal to the sum of the
Reference Rate plus 2.375%, but not less than the rate applicable to
the Loan immediately before it became due.
<PAGE>
Section 3.2 Commitment Fees. The Borrower shall pay to the Bank fees
(the "Commitment Fees") in an amount determined by applying a rate of 0.375% per
annum to the average daily unused amount of the Revolving Credit Commitment for
the period from the date hereof to the Revolving Termination Date. The
Commitment Fees shall be payable quarterly in arrears on the last day of each
quarter of the Borrower's fiscal year.
Section 3.3 Computation. Interest and Commitment Fees shall be computed
on the basis of actual days elapsed and a year of 360 days.
Section 3.4 Payment Dates. Accrued interest under Section 3.1 (a), (b),
(c) and (d) and Commitment Fees under Section 3.2 shall be payable on the
Payment Dates. Accrued interest under Section 3.1(e) shall be payable on demand.
Section 3.5 One-Time Fee. The Borrower shall, upon signing this
Agreement, pay to the Bank a one-time fee of $22,313.
ARTICLE IV PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION
OF THE CREDIT AND SETOFF
Section 4.1 Repayment.
(a) Revolving Loans. The Revolving Loans shall be due and payable on
the Revolving Termination Date.
(b) Tranche A Term Loans. Each Tranche A Term Loan shall be payable in
sixty installments of principal, each equal to 1/60th of the initial
principal amount of such Tranche A Term Loan, payable on the last day
of each month of each year, commencing on the first such day after the
making of the relevant Tranche A Term Loan, with the final such payment
equal to all outstanding principal.
(c) Tranche B Term Loan. The Tranche B Term Loan shall be payable in
installments of $43,667.67, payable on the last day of each month of
each year, commencing on the first such day after the date hereof, and
a final payment equal to all outstanding principal on June 30, 1999.
(d) Tranche C Term Loan. The Tranche C Term Loan shall be payable in
installments of $54,166.67, payable on the last day of each month of
each year, commencing on the first such day after the date hereof, and
a final payment equal to all outstanding principal on December 31,
2002.
Section 4.2 Optional Prepayments. The Borrower may, upon written or
telephonic notice received by the Bank, prepay the Loans, in whole or in part,
<PAGE>
at any time subject to the provisions of Section 2.3 and 2.4, without any other
premium or penalty. Any such prepayment must be accompanied by accrued and
unpaid interest on the amount prepaid. Each partial prepayment shall be in a
minimum amount of $100,000. Each prepayment of a Term Loan shall be applied to
the unpaid installments of such Term Loan in the inverse order of its maturity.
Section 4.3 Optional Reduction or Termination of the Commitment. The
Borrower may, at any time, upon no less than 30 Business Days prior written or
telephonic notice received by the Bank, reduce the Revolving Credit Commitment,
with any such reduction in a minimum amount of $100,000 or an integral multiple
thereof. Upon any reduction in the Revolving Credit Commitment pursuant to this
Section, the Borrower shall pay to the Bank the amount, if any, by which the
aggregate unpaid principal amount of outstanding Loans exceeds the Revolving
Credit Commitment as so reduced, together with accrued and unpaid interest
thereon. Amounts so paid cannot be reborrowed. The Borrower may, at any time,
upon not less than 30 Business Days prior written notice to the Bank, terminate
the Revolving Credit Commitment in its entirety. Upon termination of the
Revolving Credit Commitment pursuant to this Section, the Borrower shall pay to
the Bank the full amount of all outstanding Revolving Loans, all accrued and
unpaid interest thereon, all unpaid Commitment Fees accrued to the date of such
termination and all other unpaid obligations of the Borrower to the Bank
hereunder. All payments described in this Section are subject to the provisions
of Section 2.3 and 2.4.
Section 4.4 Payments. Payments and prepayments of principal of, and
interest on, the Notes and all fees, expenses and other obligations under the
Loan Documents shall be made without set-off or counterclaim in immediately
available funds not later than 2:00 p.m., Minneapolis time, on the dates due at
the main office of the Bank in Minneapolis, Minnesota. Funds received on any day
after such time shall be deemed to have been received on the next Business Day.
Subject to the definition of the term "Interest Period", whenever any payment to
be made hereunder or on the Notes shall be stated to be due on a day which is
not a Business Day, such payment shall be made on the next succeeding Business
Day and such extension of time shall be included in the computation of any
interest or fees.
ARTICLE IVA ADDITIONAL PROVISIONS RELATING TO LOANS
Section 4A.1 Increased Costs. If, as a result of any law, rule,
regulation, treaty or directive, or any change therein or in the interpretation
or administration thereof, or compliance by the Bank with any request or
directive (whether or not having the force of law) from any court, central bank,
governmental authority, agency or instrumentality, or comparable agency:
(a) any tax, duty or other charge with respect to any Loan, the Notes
or the Commitment is imposed, modified or deemed applicable, or the
basis of taxation of payments to the Bank of interest or principal of
the Loans or of the Commitment Fees (other than taxes imposed on the
overall net income of the Bank by the jurisdiction in which the Bank
has its principal office) is changed;
<PAGE>
(b) any reserve, special deposit, special assessment or similar
requirement against assets of, deposits with or for the account of, or
credit extended by, the Bank is imposed, modified or deemed applicable;
(c) any increase in the amount of capital required or expected to be
maintained by the Bank or any Person controlling the Bank is imposed,
modified or deemed applicable; or
(d) any other condition affecting this Agreement or the Commitment is
imposed on the Bank or the relevant funding markets;
and the Bank determines that, by reason thereof, the cost to the Bank of making
or maintaining the Loans or the Commitment is increased, or the amount of any
sum receivable by the Bank hereunder or under the Notes in respect of any Loan
is reduced;
then, the Borrower shall pay to the Bank upon demand such additional amount or
amounts as will compensate the Bank (or the controlling Person in the instance
of (c) above) for such additional costs or reduction (provided that the Bank has
not been compensated for such additional cost or reduction in the calculation of
the CD Reserve Rate, the Eurodollar Reserve Rate or the CD Assessment Rate).
Determinations by the Bank for purposes of this Section 4A.1 of the additional
amounts required to compensate the Bank shall be conclusive in the absence of
manifest error. In determining such amounts, the Bank may use any reasonable
averaging, attribution and allocation methods.
Section 4A.2 Deposits Unavailable or Interest Rate Unascertainable or
Inadequate; Impracticability. If the Bank determines (which determination shall
be conclusive and binding on the parties hereto) that:
(a) deposits of the necessary amount for the relevant Interest Period
for any CD Rate Advance or Eurodollar Advance are not available to the
Bank in the relevant markets or that, by reason of circumstances
affecting such market, adequate and reasonable means do not exist for
ascertaining the CD Rate or Eurodollar Interbank Rate, as the case may
be, for such Interest Period;
(b) the CD Rate (Reserve Adjusted) or the Eurodollar Rate (Reserve
Adjusted), as the case may be, will not adequately and fairly reflect
the cost to the Bank of making or funding the CD Rate Advances or
Eurodollar Advances, as the case may be, for a relevant Interest
Period; or
(c) the making or funding of CD Rate Advances or Eurodollar Advances,
as the case may be, has become impracticable as a result of any event
occurring after the date of this Agreement which, in the opinion of the
Bank, materially and adversely affects such Advances or the Bank's
Commitment to make such Advances or the relevant market;
<PAGE>
the Bank shall promptly give notice of such determination to the Borrower, and
(i) any notice of a new CD Rate Advance or Eurodollar Advance, as the case may
be, previously given by the Borrower and not yet borrowed or converted shall be
deemed to be a notice to make an Advance of another type, as selected by the
Borrower, and (ii) the Borrower shall be obligated to either prepay in full any
outstanding CD Rate Advances or Eurodollar Advances, as the case may be, without
premium or penalty on the last day of the current Interest Period with respect
thereto or convert any such Advance to an Advance of another type, as selected
by the Borrower, on such last day.
Section 4A.3 Changes in Law Rendering CD Rate Advances or Eurodollar
Advances Unlawful. If at any time due to the adoption of any law, rule,
regulation, treaty or directive, or any change therein or in the interpretation
or administration thereof by any court, central bank, governmental authority,
agency or instrumentality, or comparable agency charged with the interpretation
or administration thereof, or for any other reason arising subsequent to the
date of this Agreement, it shall become unlawful or impossible for the Bank to
make or fund any CD Rate Advance or Eurodollar Advance, the obligation of the
Bank to provide such Advance shall, upon the happening of such event, forthwith
be suspended for the duration of such illegality or impossibility. If any such
event shall make it unlawful or impossible for the Bank to continue any CD Rate
Advance or Eurodollar Advance previously made by it hereunder, the Bank shall,
upon the happening of such event, notify the Borrower thereof in writing, and
the Borrower shall, at the time notified by the Bank, either convert each such
unlawful Advance to an Advance of another type or repay such Advance in full,
together with accrued interest thereon, subject to the provisions of Section
2.4.
Section 4A.4 Discretion of the Bank as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, the Bank shall
be entitled to fund and maintain its funding of all or any part of the Loans in
any manner it elects; it being understood, however, that for purposes of this
Agreement, all determinations hereunder shall be made as if the Bank had
actually funded and maintained each CD Rate Advance and each Eurodollar Advance
during the Interest Period for such Advance through the purchase of deposits
having a term corresponding to such Interest Period and bearing an interest rate
equal, in the case of CD Rate Advances, to the CD Rate for such Interest Period
or, in the case of Eurodollar Advances, to the Eurodollar Interbank Rate for
such Interest Period (whether or not the Bank shall have granted any
participations in such Advances).
ARTICLE V CONDITIONS PRECEDENT
Section 5.1 Conditions of Initial Loan. The obligation of the Bank to
make the initial Revolving Loan and any Terms Loans hereunder shall be subject
to the satisfaction of the conditions precedent, in addition to the applicable
conditions precedent set forth in Section 5.2 below, that the Bank shall have
received all of the following, in form and substance satisfactory to the Bank,
each duly executed and certified or dated the date of the initial Revolving Loan
and such initial Term Loan or such other date as is satisfactory to the Bank:
<PAGE>
(a) The Revolving Note executed by a duly authorized officer (or
officers) of the Borrower.
(b) The Term Notes executed by a duly authorized officer of the
Borrower.
(c) A copy of the corporate resolution of the Borrower authorizing the
execution, delivery and performance of the Loan Documents, certified by
the Secretary or an Assistant Secretary of the Borrower.
(d) An incumbency certificate showing the names and titles, and bearing
the signatures of, the officers of the Borrower authorized to execute
the Loan Documents and to request Loans hereunder, certified by the
Secretary or an Assistant Secretary of the Borrower, together with
certified copies of the Borrower's Articles of Incorporation and
Bylaws.
(e) A Certificate of Good Standing for the Borrower in the jurisdiction
of its incorporation, certified by the appropriate governmental
official.
(f) An opinion of counsel to the Borrower, addressed to the Bank, in
substantially the form of Exhibit C.
(g) Confirmations of Security Agreements by HRM Claim Management, Inc.,
Institute for Healthcare Quality, Inc. and Health resource Management,
Ltd.
Section 5.2 Conditions Precedent to all Loans. The obligation of the
Bank to make any Loan hereunder (including the initial Loans) shall be subject
to the satisfaction of the following conditions precedent (and the request for a
Loan shall be deemed a representation that the following have been satisfied):
(a) Before and after giving effect to such Loan, the representation and
warranties contained in Article VI shall be true and correct, as though
made on the date of such Loan.
(b) Before and after giving effect to such Loan, no Default or Event of
Default shall have occurred and be continuing.
(c) For any Tranche A Term Loan, the Borrower shall have executed and
delivered a Tranche A Term Note.
<PAGE>
ARTICLE VI REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Agreement, to grant the
Commitment and to make Loans hereunder, the Borrower represents and warrants to
the Bank:
Section 6.1 Organization, Standing, Etc. The Borrower and each of its
corporate Subsidiaries are corporations duly incorporated and validly existing
and in good standing under the laws of the jurisdiction of their respective
incorporation and have all requisite corporate power and authority to carry on
their respective businesses as now conducted, to (in the instance of the
Borrower) enter into the Loan Documents and to perform its obligations under the
Loan Documents. The Borrower and each of its Subsidiaries are duly qualified and
in good standing as a foreign corporation in each jurisdiction in which the
character of the properties owned, leased or operated by it or the business
conducted by it makes such qualification necessary.
Section 6.2 Authorization and Validity. The execution, delivery and
performance by the Borrower of the Loan Documents have been duly authorized by
all necessary corporate action by the Borrower, and the Loan Documents
constitute the legal, valid and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms, subject to
limitations as to enforceability which might result from bankruptcy, insolvency,
moratorium and other similar laws affecting creditors' rights generally and
subject to limitations on the availability of equitable remedies.
Section 6.3 No Conflict; No Default. The execution, delivery and
performance by the Borrower of the Loan Documents will not (a) violate any
provision of any law, statute, rule or regulation or any order, writ, judgment,
injunction, decree, determination or award of any court, governmental agency or
arbitrator presently in effect having applicability to the Borrower, (b) violate
or contravene any provisions of the Articles (or Certificate) of Incorporation
of the Borrower, or (c) result in a breach of or constitute a default under any
indenture, loan or credit agreement or any other agreement, lease or instrument
to which the Borrower is a party or by which it or any of its properties may be
bound or result in the creation of any Lien on any asset of the Borrower or any
Subsidiary. Neither the Borrower nor any Subsidiary is in default under or in
violation of any such law, statute, rule or regulation, order, writ, judgment,
injunction, decree, determination or award or any such indenture, loan or credit
agreement or other agreement, lease or instrument in any case in which the
consequences of such default or violation could constitute an Adverse Event.
Section 6.4 Government Consent. No order, consent, approval, license,
authorization or validation of, or filing, recording or registration with, or
exemption by, any governmental or public body or authority is required on the
part of the Borrower to authorize, or is required in connection with the
execution, delivery and performance of, or the legality, validity, binding
effect or enforceability of, the Loan Documents.
Section 6.5 Financial Statements and Condition. The Borrower's audited
consolidated and consolidating financial statements as at June 30, 1997 and its
unaudited consolidated and consolidating financial statements as at December 31,
1997, as heretofore furnished to the Bank, have been prepared in accordance with
<PAGE>
GAAP on a consistent basis and fairly present the financial condition of the
Borrower and its Subsidiaries as at such dates and the results of their
operations and changes in financial position for the respective periods then
ended. As of the dates of such financial statements, neither the Borrower nor
any Subsidiary had any material obligation, contingent liability, liability for
taxes or long-term lease obligation which is not reflected in such financial
statements or in the notes thereto. Since June 30, 1997, no Adverse Event has
occurred.
Section 6.6 Litigation and Contingent Liabilities. Except as described
in Exhibit D, there are no actions, suits or proceedings pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower or any
Subsidiary or any of their properties before any court or arbitrator, or any
governmental department, board, agency or other instrumentality which, if
determined adversely to the Borrower or such Subsidiary, could constitute an
Adverse Event. Except as described in Exhibit E, neither the Borrower nor any
Subsidiary has any contingent liabilities which are material to the Borrower and
the Subsidiaries as a consolidated enterprise.
Section 6.7 Compliance. The Borrower and its Subsidiaries are in
material compliance with all statutes and governmental rules and regulations
applicable to them.
Section 6.8 Environmental, Health and Safety Laws. There does not exist
any violation by the Borrower or any Subsidiary of any applicable federal, state
or local law, rule or regulation or order of any government, governmental
department, board, agency or other instrumentality relating to environmental,
pollution, health or safety matters which will or threatens to impose a material
liability on the Borrower or a Subsidiary or which would require a material
expenditure by the Borrower or such Subsidiary to cure. Neither the Borrower nor
any Subsidiary has received any notice to the effect that any part of its
operations or properties is not in material compliance with any such law, rule,
regulation or order or notice that it or its property is the subject of any
governmental investigation evaluating whether any remedial action is needed to
respond to any release of any toxic or hazardous waste or substance into the
environment, the consequences of which non-compliance or remedial action could
constitute an Adverse Event.
Section 6.9 ERISA. Each Plan complies with all material applicable
requirements of ERISA and the Code and with all material applicable rulings and
regulations issued under the provisions of ERISA and the Code setting forth
those requirements. No Reportable Event, other than a Reportable Event for which
the reporting requirements have been waived by regulations of the PBGC, has
occurred and is continuing with respect to any Plan. All of the minimum funding
standards applicable to such Plans have been satisfied and there exists no event
or condition which would permit the institution of proceedings to terminate any
Plan under Section 4042 of ERISA. The current value of the Plans' benefits
guaranteed under Title IV or ERISA does not exceed the current value of the
Plans' assets allocable to such benefits.
<PAGE>
Section 6.10 Regulation U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock (as
defined in Regulation U of the Board of Governors of the Federal Reserve System)
and no part of the proceeds of any Loan will be used to purchase or carry margin
stock or for any other purpose which would violate any of the margin
requirements of the Board of Governors of the Federal Reserve System.
Section 6.11 Ownership of Property; Liens. Each of the Borrower and the
Subsidiaries has good and marketable title to its real properties and good and
sufficient title to its other properties, including all properties and assets
referred to as owned by the Borrower and its Subsidiaries in the audited
financial statement of the Borrower referred to in Section 6.5 (other than
property disposed of since the date of such financial statement in the ordinary
course of business). None of the properties, revenues or assets of the Borrower
or any of its Subsidiaries is subject to a Lien, except for (a) Liens listed on
Exhibit F, or (b) Liens allowed under Section 8.11.
Section 6.12 Taxes. Each of the Borrower and the Subsidiaries has filed
all federal, state and local tax returns required to be filed and has paid or
made provision for the payment of all taxes due and payable pursuant to such
returns and pursuant to any assessments made against it or any of its property
and all other taxes, fees and other charges imposed on it or any of its property
by any governmental authority (other than taxes, fees or charges the amount or
validity of which is currently being contested in good faith by appropriate
proceedings and with respect to which reserves in accordance with GAAP have been
provided on the books of the Borrower). No tax Liens have been filed and no
material claims are being asserted with respect to any such taxes, fees or
charges. The charges, accruals and reserves on the books of the Borrower in
respect of taxes and other governmental charges are adequate.
Section 6.13 Trademarks, Patents. Each of the Borrower and the
Subsidiaries possesses or has the right to use all of the patents, trademarks,
trade names, service marks and copyrights, and applications therefor, and all
technology, know-how, processes, methods and designs used in or necessary for
the conduct of its business, without known conflict with the rights of others.
Section 6.14 Investment Company Act. Neither the Borrower nor any
Subsidiary is an "investment company" or a company "controlled" by an investment
company within the meaning of the Investment Company Act of 1940, as amended.
Section 6.15 Public Utility Holding Company Act. Neither the Borrower
nor any Subsidiary is a "holding company" or a "subsidiary company" of a holding
company or an "affiliate" of a holding company or of a subsidiary company of a
holding company within the meaning of the Public Utility Holding Company Act of
1935, as amended.
Section 6.16 Subsidiaries. Exhibit G sets forth as of the date of this
Agreement a list of all Subsidiaries and the number and percentage of the shares
<PAGE>
of each class of capital stock owned beneficially or of record by the Borrower
or any Subsidiary therein, and the jurisdiction of incorporation of each
Subsidiary.
Section 6.17 Partnerships and Joint Ventures. Exhibit H sets forth as
of the date of this Agreement a list of all partnerships or joint ventures in
which the Borrower or any Subsidiary is a partner (limited or general) or joint
venturer.
ARTICLE VII AFFIRMATIVE COVENANTS
From the date of this Agreement and thereafter until the Commitment is
terminated or expires and the Loans and all other liabilities of the Borrower to
the Bank hereunder and under the Notes have been paid in full, unless the Bank
shall otherwise expressly consent in writing, the Borrower will do, and will
cause each Subsidiary (except in the instance of Section 7.1) to do, all of the
following:
Section 7.1 Financial Statements and Reports. Furnish to the Bank:
(a) As soon as available and in any event within 120 days after the end
of each fiscal year of the Borrower, the annual audit report of the
Borrower and its Subsidiaries prepared on a consolidating and
consolidated basis and in conformity with GAAP, consisting of at least
statements of income, cash flow, changes in financial position and
stockholders' equity, and a consolidated balance sheet as at the end of
such year, setting forth in each case in comparative form corresponding
figures from the previous annual audit, certified without qualification
by independent certified public accountants of recognized standing
selected by the Borrower and acceptable to the Bank, together with any
management letters, management reports or other supplementary comments
or reports to the Borrower or its board of directors furnished by such
accountants.
(b) As soon as available and in any event within 45 days after the end
of each of the first three fiscal quarters of each fiscal year, a copy
of the unaudited financial statement of the Borrower and its
subsidiaries prepared in the same manner as the audit report referred
to in Section 7.1(a), signed by the Borrower's chief financial officer,
consisting of at least consolidated statements of income, cash flow,
changes in financial position and stockholders' equity for the Borrower
and the Subsidiaries for such quarter and for the period from the
beginning of such fiscal year to the end of such quarter, and a
consolidated balance sheet of the Borrower as at the end of such
quarter.
(c) Together with the financial statements furnished by the Borrower
under Sections 7.1(a) and 7.1(b), a Compliance Certificate in
substantially the form of Exhibit I, signed by the chief financial
officer of the Borrower demonstrating in reasonable detail compliance
(or noncompliance, as the case may be) with each of the financial
ratios and restrictions contained in Article VIII and stating that as
at the date of each such financial statement, there did not exist any
Default or Event of Default or, if such Default or Event of Default
<PAGE>
existed, specifying the nature and period of existence thereof and what
action the Borrower proposes to take with respect thereto.
(d) Together with the audited financial statements required under
Section 7.1(a) and the unaudited financial statements required under
Section 7.1(b), a projection of the income and expenses of the Borrower
for the following one-year period.
(e) Immediately upon becoming aware of any Default or Event of Default,
a notice describing the nature thereof and what action the Borrower
proposes to take with respect thereto.
(f) Immediately upon becoming aware of the occurrence, with respect to
any Plan, of any Reportable Event (other than a Reportable Event for
which the reporting requirements have been waived by PBGC regulations)
or any "prohibited transaction" (as defined in Section 4975 of the
Code), a notice specifying the nature thereof and what action the
Borrower proposes to take with respect thereto, and, when received,
copies of any notice from PBGC of intention to terminate or have a
trustee appointed for any Plan.
(g) Promptly upon the mailing or filing thereof, copies of all
financial statements, reports and proxy statements mailed to the
Borrower's shareholders, and copies of all registration statements,
periodic reports and other documents filed with the Securities and
Exchange Commission (or any successor thereto) or any national
securities exchange.
(h) Immediately upon becoming aware of the occurrence thereof, notice
of the institution of any litigation, arbitration or governmental
proceeding, or the rendering of a judgment or decision in such
litigation or proceeding, which could constitute an Adverse Event, and
the steps being taken by the Person(s) affected by such proceeding.
(i) Immediately upon becoming aware of the occurrence thereof, notice
of any violation as to any environmental matter by the Borrower or any
Subsidiary and of the commencement of any judicial or administrative
proceeding relating to health, safety or environmental matters (i) in
which an adverse determination or result could result in the revocation
of or have a material adverse effect on any operating permits, air
emission permits, water discharge permits, hazardous waste permits or
other permits held by the Borrower or any Subsidiary which are material
to the operations of the Borrower or such Subsidiary, or (ii) which
will or threatens to impose a material liability on the Borrower or
such Subsidiary to any Person or which will require a material
expenditure by the Borrower or such Subsidiary to cure any alleged
problem or violation.
(j) From time to time, such other information regarding the business,
operation and financial condition of the Borrower and the Subsidiaries
as the Bank may reasonably request.
<PAGE>
Section 7.2 Corporate Existence. Subject to Section 8.1 in the instance
of a Subsidiary, maintain its corporate existence in good standing under the
laws of its jurisdiction of incorporation and its qualification to transact
business in each jurisdiction in which the character of the properties owned,
leased or operated by it or the business conducted by it makes such
qualification necessary.
Section 7.3 Insurance. Maintain with financially sound and reputable
insurance companies such insurance as may be required by law and such other
insurance in such amounts and against such hazards as is customary in the case
of reputable corporations engaged in the same or similar business and similarly
situated.
Section 7.4 Payment of Taxes and Claims. File all tax returns and
reports which are required by law to be filed by it and pay before they become
delinquent all taxes, assessments and governmental charges and levies imposed
upon it or its property and all claims or demands of any kind (including,
without limitation, those of suppliers, mechanics, carriers, warehouses,
landlords and other like Persons) which, if unpaid, might result in the creation
of a Lien upon its property; provided that the foregoing items need not be paid
if they are being contested in good faith by appropriate proceedings, and as
long as the Borrower's or such Subsidiary's title to its property is not
materially adversely affected, its use of such property in the ordinary course
of its business is not materially interfered with and adequate reserves with
respect thereto have been set aside on the Borrower's or such Subsidiary's books
in accordance with GAAP.
Section 7.5 Inspection. Permit any Person designated by the Bank to
visit and inspect any of its properties, corporate books and financial records,
to examine and to make copies of its books of accounts and other financial
records, and to discuss the affairs, finances and accounts of the Borrower and
the Subsidiaries with, and to be advised as to the same by, its officers at such
reasonable times and intervals as the Bank may designate. So long as no Event of
Default exists, the expenses of the Bank for such visits, inspections and
examinations shall be at the expense of the Bank, but any such visits,
inspections, and examinations made while any Event of Default is continuing
shall be at the reasonable expense of the Borrower.
Section 7.6 Maintenance of Properties. Maintain its properties used or
useful in the conduct of its business in good condition, repair and working
order, and supplied with all necessary equipment, and make all necessary
repairs, renewals, replacements, betterments and improvements thereto, all as
may be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times.
Section 7.7 Books and Records. Keep adequate and proper records and
books of account in which full and correct entries will be made of its dealings,
business and affairs.
Section 7.8 Compliance. Comply in all material respect with all laws,
rules, regulations, orders, writs, judgments, injunctions, decrees or awards to
which it may be subject.
<PAGE>
Section 7.9 ERISA. Maintain each Plan in compliance with all material
applicable requirements of ERISA and of the Code and with all material
applicable rulings and regulations issued under the provisions of ERISA and of
the Code.
Section 7.10 Environmental Matters. Observe and comply with all laws,
rules, regulations and orders of any government or government agency relating to
health, safety, pollution, hazardous materials or other environmental matters to
the extent non-compliance could result in a material liability or otherwise
constitute an Adverse Event.
ARTICLE VIII NEGATIVE COVENANTS
From the date of this Agreement and thereafter until the Commitment is
terminated or expires and the Loans and all other liabilities of the Borrower to
the Bank hereunder and under the Notes have been paid in full, unless the Bank
shall otherwise expressly consent in writing, the Borrower will not, and will
not permit any Subsidiary to, do any of the following:
Section 8.1 Merger. Merge or consolidate or enter into any analogous
reorganization or transaction with any Person; provided, however, any
wholly-owned Subsidiary may be merged with or liquidated into the Borrower (if
the Borrower is the surviving corporation) or any other wholly-owned Subsidiary.
Section 8.2 Sale of Assets. Sell, transfer, lease or otherwise convey
all or any substantial part of its assets except for sales and leases of
inventory in the ordinary course of business and except for sales or other
transfers by a wholly-owned Subsidiary to the Borrower or another wholly-owned
Subsidiary.
Section 8.3 Purchase of Assets. Purchase or lease or otherwise acquire
all or substantially all of the assets of any Person (except for purchases or
other transfers by the Borrower or a wholly-owned Subsidiary from a wholly-owned
Subsidiary) in an amount not in excess of $1,000,000 for any such acquisition,
and in an aggregate amount which, together with Investments permitted under
Section 8.9, plus Capital Expenditures permitted under Section 8.16, would not
exceed $12,000,000; provided, that any such acquisition would not cause an
Adverse Event.
Section 8.4 Plans. Permit any condition to exist in connection with any
Plan which might constitute grounds for the PBGC to institute proceedings to
have such Plan terminated or a trustee appointed to administer such Plan, permit
any Plan to terminate under any circumstances which would cause the lien
provided for in Section 4068 of ERISA to attach to any property, revenue or
asset of the Borrower or any Subsidiary or permit the underfunded amount of Plan
benefits guaranteed under Title IV of ERISA to exceed $50,000.
Section 8.5 Change in Nature of Business. Make any material change in
the nature of the business of the Borrower or such Subsidiary, as carried on at
the date hereof.
<PAGE>
Section 8.6 Subsidiaries, Partnerships, Joint Ventures and Ownership of
Stock. Do any of the following: (a) form or acquire any corporation which would
thereby become a Subsidiary; (b) form or enter into any partnership as a limited
or general partner or into any joint venture; (c) permit any Subsidiary to
purchase or otherwise acquire any shares of the stock of the Borrower; or (d)
take any action, or permit any Subsidiary to take any action, which would result
in a decrease in the Borrower's or any Subsidiary's ownership interest in any
Subsidiary (including, without limitation, decrease in the percentage of the
shares of any class of stock owned).
Section 8.7 Other Agreements. Enter into any agreement, bond, note or
other instrument with or for the benefit of any Person other than the Bank which
would: (a) prohibit the Borrower or such Subsidiary from granting, or otherwise
limit the ability of the Borrower or such Subsidiary to grant, to the Bank any
Lien on any assets or properties of the Borrower or such Subsidiary; or (b) be
violated or breached by the Borrower's performance of its obligations under the
Loan Documents.
Section 8.8 Restricted Payments. Either: (a) purchase or redeem or
otherwise acquire for value any shares of the Borrower's or any Subsidiary's
stock, declare or pay any dividends thereon (other than stock dividends and
dividends payable solely to the Borrower), make any distribution on, or payment
on account of the purchase, redemption, defeasance or other acquisition or
retirement for value of, any shares of the Borrower's or any Subsidiary's stock
or set aside any funds for any such purpose (other than payment to, or on
account of or for the benefit of, the Borrower only); or (b) directly or
indirectly make any payment on, or redeem, repurchase, defease, or make any
sinking fund payment on account of, or any other provision for, or otherwise
pay, acquire or retire for value, any Indebtedness of the Borrower or any
Subsidiary that is subordinated in right of payment to the Loans (whether
pursuant to its terms or by operation of law), except for regularly-scheduled
payments of interest and principal (which shall not include payments
contingently required upon occurrence of a change of control or other event)
that are not otherwise prohibited hereunder or under the document or agreement
stating the terms of such subordination.
Section 8.9 Investments. Acquire for value, make, have or hold any
Investments, except:
(a) Investments outstanding on the date hereof and listed on Exhibit J;
(b) Travel advances to officers and employees in the ordinary course of
business;
(c) Investments in readily marketable direct obligations of the United
States of America having maturities of one year or less from the date
of acquisition;
<PAGE>
(d) Certificates of deposit or bankers' acceptances, each maturing
within one year from the date of acquisition, issued by any commercial
bank organized under the laws of the United States or any State thereof
which has (i)(1) combined capital, surplus and undivided profits of at
least $100,000,000, and (2) a credit rating with respect to its
unsecured indebtedness from a nationally recognized rating service that
is satisfactory to the Bank, or (ii) certificate of deposits issued by,
or savings accounts or demand deposit accounts held with, Riverside
Bank, 7760 France Avenue South, Bloomington, Minnesota, 55435, or First
of America Bank - Michigan, N.A., 108 East Michigan Avenue, Kalamazoo,
Michigan 49007, in an amount not in excess of $500,000 in each such
bank, provided, that such banks can meet the credit rating requirement
set forth in clause (i)(2) above;
(e) Commercial paper maturing within 270 days from the date of issuance
and given the highest rating by a nationally recognized rating service;
(f) Repurchase agreements relating to securities issued or guaranteed
as to principal and interest by the United States of America;
(g) extensions of credit in the nature of accounts receivable or notes
receivable arising from the sale of goods and services in the ordinary
course of business;
(h) shares of stock, obligations or other securities received in
settlement of claims arising in the ordinary course of business; and
(i) Investments outstanding on the date hereof in Subsidiaries by the
Borrower and other Subsidiaries; and
(j) Investments (other than Investments allowed in clauses (a) through
(i) above) in an aggregate amount not in excess of $500,000.
Section 8.10 Indebtedness. Incur, create, issue, assume or suffer to
exist any Indebtedness, except:
(a) Indebtedness under this Agreement;
(b) Current liabilities, other than for borrowed money, incurred in the
ordinary course of business;
(c) Indebtedness existing on the date of this Agreement and disclosed
on Exhibit K hereto;
(d) Indebtedness secured by Liens permitted under Section 8.11 hereof;
and
<PAGE>
(e) Indebtedness consisting of endorsements for collection, deposit or
negotiation and warranties of products or services, in each case
incurred in the ordinary course of business.
Section 8.11 Liens. Create, incur, assume or suffer to exist any Lien
with respect to any property, revenues or assets now owned or hereafter arising
or acquired, except:
(a) Liens in connection with the acquisition of property after the date
hereof by way of purchase money mortgage, conditional sale or other
title retention agreement, Capitalized Lease or other deferred payment
contract, and attaching only to the property being acquired if the
Indebtedness secured thereby does not exceed 100% of the fair market
value of such property at the time of acquisition thereof;
(b) Liens existing on the date of this Agreement and disclosed on
Exhibit F hereto;
(c) Deposits or pledges to secure payment of workers' compensation,
unemployment insurance, old age pensions or other social security
obligations, in the ordinary course of business of the Borrower or a
Subsidiary;
(d) Liens for taxes, fees, assessments and governmental charges not
delinquent or to the extent that payments therefor shall not at the
time be required to be made in accordance with the provisions of
Section 8.4;
(e) Liens of carriers, warehousemen, mechanics and materialmen, and
other like Liens arising in the ordinary course of business, for sums
not due or to the extent that payment therefor shall not at the time be
required to be made in accordance with the provisions of Section 8.4;
and
(f) Deposits to secure the performance of bids, trade contracts,
leases, statutory obligations and other obligations of a like nature
incurred in the ordinary course of business.
Section 8.12 Contingent Liabilities. Either: (i) endorse, guarantee,
contingently agree to purchase or to provide funds for the payment of, or
otherwise become contingently liable upon, any obligation of any other Person,
except by the endorsement of negotiable instruments for deposit or collection
(or similar transactions) in the ordinary course of business, or (ii) agree to
maintain the net worth or working capital of, or provide funds to satisfy any
other financial test applicable to, any other Person.
Section 8.13 Unconditional Purchase Obligations. Enter into or be a
party to any contract for the purchase or lease of materials, supplies or other
property or services if such contract requires that payment be made by it
regardless of whether or not delivery is ever made of such materials, supplies
or other property or services.
<PAGE>
Section 8.14 Transactions with Related Parties. Enter into or be a
party to any transaction or arrangement, including, without limitation, the
purchase, sale lease or exchange of property or the rendering of any service,
with any Related Party, except in the ordinary course of and pursuant to the
reasonable requirements of the Borrower's or the applicable Subsidiary's
business and upon fair and reasonable terms no less favorable to the Borrower or
such Subsidiary than would obtain in a comparable arm's-length transaction with
a Person not a Related Party.
Section 8.15 Use of Proceeds. Permit any proceeds of the Loans to be
used, either directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of "purchasing or carrying any margin stock" within the
meaning of Regulation U of the Federal Reserve Board, as amended from time to
time, and furnish to the Bank, upon its request, a statement in conformity with
the requirements of Federal Reserve Form U-1 referred to in Regulation U.
Section 8.16 Capital Expenditures. Make aggregate consolidated Capital
Expenditures in an amount in excess of (a) $10,000,00 during any fiscal year for
software development expenditures, or (b) $12,000,000 during any fiscal year for
all Capital Expenditures (including without limitation software development
expenditures).
Section 8.17 Consolidated Tangible Net Worth. At any time permit
Consolidated Tangible Net Worth to be less than the greater of (a) $9,500,000,
or (b) 0.85 times the actual Consolidated Tangible Net Worth as of the last day
of the most recently-ended fiscal year of the Borrower.
Section 8.18 Consolidated Leverage Ratio. At any time permit the ratio
of consolidated total liabilities (as determined in accordance with GAAP) to
Consolidated Tangible Net Worth to be greater than 2.50 to 1.00.
Section 8.19 Operating Cash Flow Leverage. At any time permit the ratio
of the Borrower's consolidated interest-bearing Indebtedness as of the last day
of any quarter to its Consolidated Operating Income for the period of four
consecutive fiscal quarters then ending to be greater than 3.00 to 1.00.
Section 8.20 Fixed Charge Coverage Ratio. Permit the Consolidated Fixed
Charge Coverage Ratio for any period of four consecutive fiscal quarters to be
less than 1.50 to 1.00.
ARTICLE IX EVENTS OF DEFAULT AND REMEDIES
Section 9.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an Event of Default:
<PAGE>
(a) The Borrower shall fail to make when due, whether by acceleration
or otherwise, any payment of principal of or interest on the Notes or
any fee or other amount required to be made to the Bank pursuant to the
Loan Documents;
(b) The Borrower shall fail to make when due, whether by acceleration
or otherwise, any payment on any other obligations to the Bank or an
affiliate thereof;
(c) Any representation or warranty made or deemed to have been made by
or on behalf of the Borrower or any Subsidiary in the Loan Documents or
on behalf of the Borrower or any Subsidiary in any certificate,
statement, report or other writing furnished by or on behalf of the
Borrower to the Bank or any affiliate of the Bank pursuant to the Loan
Documents or any other instrument, document or agreement shall prove to
have been false or misleading in any material respect on the date as of
which the facts set forth are stated or certified or deemed to have
been stated or certified;
(d) The Borrower shall fail to comply with Section 7.2 hereof or any
Section of Article VIII hereof;
(e) The Borrower shall fail to comply with any agreement, covenant,
condition, provision or term contained in the Loan Documents (and such
failure shall not constitute an Event of Default under any of the other
provisions of this Section 9.1) or in any other instrument, document or
agreement with an affiliate of the Bank, including FBS Business Finance
Corporation.
(f) The Borrower or any Subsidiary shall become insolvent or shall
generally not pay its debts as they mature or shall apply for, shall
consent to, or shall acquiesce in the appointment of a custodian,
trustee or receiver of the Borrower or such Subsidiary or for a
substantial part of the property thereof or, in the absence of such
application, consent or acquiescence, a custodian, trustee or receiver
shall be appointed for the Borrower or a Subsidiary or for a
substantial part of the property thereof and shall not be discharged
within 30 days;
(g) Any bankruptcy, reorganization, debt arrangement or other
proceedings under any bankruptcy or insolvency law shall be instituted
by or against the Borrower or a Subsidiary, and, if instituted against
the Borrower or a Subsidiary, shall have been consented to or
acquiesced in by the Borrower or such Subsidiary, or shall remain
undismissed for 30 days, or an order for relief shall have been entered
against the Borrower or such Subsidiary, or the Borrower or any
Subsidiary shall take any corporate action to approve institution of,
or acquiescence in, such a proceeding;
(h) Any dissolution or liquidation proceeding shall be instituted by or
against the Borrower or a Subsidiary and, if instituted against the
Borrower or such Subsidiary, shall be consented to or acquiesced in by
<PAGE>
the Borrower or such Subsidiary or shall remain for 30 days
undismissed, or the Borrower or any Subsidiary shall take any corporate
action to approve institution of, or acquiescence in, such a
proceeding;
(i) A judgment or judgments for the payment of money in excess of the
sum of $50,000 in the aggregate shall be rendered against the Borrower
or a Subsidiary and the Borrower or such Subsidiary shall not discharge
the same or provide for its discharge in accordance with its terms, or
procure a stay of execution thereof, prior to any execution on such
judgments by such judgment creditor, within 30 days from the date of
entry thereof, and within said period of 30 days, or such longer period
during which execution of such judgment shall be stayed, appeal
therefrom and cause the execution thereof to be stayed during such
appeal;
(j) The institution by the Borrower or any ERISA Affiliate of steps to
terminate any Plan if in order to effectuate such termination, the
Borrower or any ERISA Affiliate would be required to make a
contribution to such Plan, or would incur a liability or obligation to
such Plan, and (ii) immediately after giving effect to the payment of
satisfaction of such contribution, liability or obligation (if made or
undertaken by the Borrower or any Subsidiary) a Default or Event of
Default would exist and be continuing, or the institution by the PBGC
of steps to terminate any Plan;
(k) The maturity of any Indebtedness of the Borrower (other than
Indebtedness covered under Sections 9.1(a) and (b) hereof) or a
Subsidiary shall be accelerated, or the Borrower or a Subsidiary shall
fail to pay any such Indebtedness when due or, in the case of such
Indebtedness payable on demand, when demanded, or any event shall occur
or condition shall exist and shall continue for more than the period of
grace, if any, applicable thereto and shall have the effect of causing,
or permitting (any required notice having been given and grace period
having expired) the holder of any such Indebtedness or any trustee or
other Person acting on behalf of such holder to cause such Indebtedness
to become due prior to its stated maturity or to realize upon any
collateral given as security therefor; or
(l) The Bank shall have determined in good faith (which determination
shall be conclusive) that an Adverse Event has occurred and that the
prospect of payment or performance by the Borrower of any of its
obligations to the Bank, hereunder or under any other instrument,
document or agreement, is materially impaired and the condition giving
rise to such determination continues for 10 days after notice to the
Borrower by the Bank.
Section 9.2 Remedies. If (a) any Event of Default described in Sections
9.1(f), 9.1(g) or 9.1(h) shall occur with respect to the Borrower, the
Commitment shall automatically terminate and the outstanding unpaid principal
balance of the Notes, the accrued interest thereon and all other obligations of
the Borrower to the Bank under the Loan Documents shall automatically become
immediately due and payable; or (b) any other Event of Default shall occur and
<PAGE>
be continuing, then the Bank may take any or all of the following actions: (i)
declare the Commitment terminated, whereupon the Commitment shall terminate,
(ii) declare that the outstanding unpaid principal balance of the Notes, the
accrued and unpaid interest thereon and all other obligations of the Borrower to
the Bank under the Loan Documents to be forthwith due and payable, whereupon the
Notes, all accrued and unpaid interest thereon and all such obligations shall
immediately become due and payable, in each case without demand or notice of any
kind, all of which are hereby expressly waived, anything in this Agreement or in
the Notes to the contrary notwithstanding, (iii) exercise all rights and
remedies under any other instrument, document or agreement between the Borrower
and the Bank, and (iv) enforce all rights and remedies under any applicable law.
Section 9.3 Offset. In addition to the remedies set forth in Section
9.2, upon the occurrence of any Event of Default or at any time thereafter while
such Event of Default continues, the Bank or any other holder of the Notes may
offset any and all balances, credits, deposits (general or special, time or
demand, provisional or final), accounts or monies of the Borrower then or
thereafter with the Bank or such other holder, or any obligations of the Bank or
such other holder of the Notes, against the Indebtedness then owed by the
Borrower to the Bank.
ARTICLE X MISCELLANEOUS
Section 10.1 Waiver and Amendment. No failure on the part of the Bank
or the holder of the Notes to exercise and no delay in exercising any power or
right hereunder or under any other Loan Document shall operate as a waiver
thereof; nor shall any single or partial exercise of any power or right preclude
any other or further exercise thereof or the exercise of any other power or
right. The remedies herein and in any other instrument, document or agreement
delivered or to be delivered to the Bank hereunder or in connection herewith are
cumulative and not exclusive of any remedies provided by law. No notice to or
demand on the Borrower not required hereunder or under the Notes shall in any
event entitle the Borrower to any other or further notice or demand in similar
or other circumstances or constitute a waiver of the right of the Bank or the
holder of the Notes to any other or further action in any circumstances without
notice or demand. No amendment, modification or waiver of any provision of this
Agreement or consent to any departure by the Borrower therefrom shall be
effective unless the same shall be in writing and signed by the Bank, and then
such amendment, modifications, waiver or consent shall be effective only in the
specific instances and for the specific purpose for which given.
Section 10.2 Expenses and Indemnities. Whether or not any Loan is made
hereunder, the Borrower agrees to reimburse the Bank upon demand for all
reasonable expenses paid or incurred by the Bank (including filing and recording
costs and fees and expenses of legal counsel, who may be employees of the Bank)
in connection with the preparation, review, execution, delivery, amendment,
modification, interpretation, collection and enforcement of the Loan Documents.
The Borrower agrees 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 the Loan Documents. The Borrower agrees to indemnify and hold the
<PAGE>
Bank harmless from any loss or expense which may arise or be created by the
acceptance of telephonic or other instructions for making Loans or disbursing
the proceeds thereof. The obligations of the Borrower under this Section 10.2
shall survive any termination of this Agreement.
Section 10.3 Notices. Except when telephonic notice is expressly
authorized by this Agreement, any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery, facsimile transmission, overnight courier or United States mail
(postage prepaid) addressed to such party at the address specified on the
signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. All periods of notice shall be
measured from the date of delivery thereof if manually delivered, from the date
of sending thereof if sent by facsimile transmission, from the first Business
Day after the date of sending if sent by overnight courier, or from four days
after the date of mailing if mailed; provided, however, that any notice to the
Bank under Article II hereof shall be deemed to have been given only when
received by the Bank.
Section 10.4 Successors. This Agreement 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. The Borrower shall not assign its rights or duties hereunder
without the written consent of the Bank.
Section 10.5 Participations and Information. The Bank may sell
participation interests in any or all of the Loans and in all or any portion of
the Commitment to any Person. The Bank may furnish any information concerning
the Borrower in the possession of the Bank from time to time to participants and
prospective participants and may furnish information in response to credit
inquiries consistent with general banking practice.
Section 10.6 Severability. Any provision of the Agreement 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 provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
Section 10.7 Subsidiary References. The provisions of this Agreement
relating to Subsidiaries shall apply only during such times as the Borrower has
one or more Subsidiaries.
Section 10.8 Captions. The captions or headings herein and any table of
contents hereto are for convenience only and in no way define, limit or describe
the scope or intent of any provision of this Agreement.
Section 10.9 Entire Agreement. This Agreement and the Notes embody the
entire agreement and understanding between the Borrower and the Bank with
respect to the subject matter hereof and thereof. This Agreement supersedes all
prior agreements and understandings relating to the subject matter hereof.
<PAGE>
Section 10.10 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 10.11 Existing Security Agreement. The Borrower hereby
reaffirms the Security Agreement, dated as of June 24, 1994 (the "Security
Agreement") and acknowledges and agrees that the Security Agreement secures all
of its obligations to the Bank, including obligations under this Agreement, and
that this Agreement shall be deemed the "Credit Agreement" for purposes of
references thereto in the Security Agreement.
Section 10.12 Waiver. The Borrower has informed the Bank that it was
not in compliance with Section 9.16 ("Capital Expenditures") of this Agreement
as in effect prior to this amendment and restatement for the periods ending
September 30, 1997 through April 30, 1998. The Bank waives the Borrower's
non-compliance with such Section of this Agreement as in effect prior to this
amendment and restatement as applied to such period and waives any Default or
Event of Default arising from such non-compliance. This waiver shall not apply
to any other or subsequent failure to comply with such Section or any other
provision of this Agreement.
Section 10.13 Governing Law. THE VALIDITY, CONSTRUCTION AND
ENFORCEABILITY OF THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY THE INTERNAL
LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS
PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES
APPLICABLE TO NATIONAL BANKS.
Section 10.14 Consent to Jurisdiction. AT THE OPTION OF THE BANK, THIS
AGREEMENT AND THE NOTES MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE
COURT SITTING IN MINNEAPOLIS OR ST. PAUL, MINNESOTA; AND THE BORROWER CONSENTS
TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT
VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER COMMENCES ANY
ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY
ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT,
THE BANK AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF
THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.
Section 10.15 Waiver of Jury Trial. THE BORROWER WAIVES ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a)
UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT
DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR (b)
<PAGE>
ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS
AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A
COURT AND NOT BEFORE A JURY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above.
HEALTH RISK MANAGEMENT, INC.
By: /s/ Thomas P. Clark
Address:
8000 West 78th Street Title: CFO
Minneapolis, Minnesota 55439
Attention: Mr. Thomas P. Clark
Telephone: (612) 829-3525
Fax: (612) 946-7516
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Richard G. Trembley
Address: 601 Second Avenue South
Minneapolis, Minnesota 55402 Title: Vice President
Attention: Mr. Richard G. Trembley
Telephone: (612) 973-0626
Fax: (612) 973-0822
<PAGE>
The following exhibits to the Amended and Restated Revolving Credit and
Term Loan Agreement are not being filed herewith but will be provided to the
Commission upon request:
Exhibit A - Form of Revolving Note
Exhibits B-1, B-2, B-3 - Form of Term Notes
Exhibit C - Form of Legal Opinion
Exhibit D - Litigation
Exhibit E - Contingent Liabilities
Exhibit F - Existing Liens
Exhibit G - Subsidiaries
Exhibit H - Partnerships/Joint Ventures
Exhibit I - Compliance Certificate
Exhibit J - Investments
Exhibit K - Existing Indebtedness
EXHIBIT 18
LETTER REGARDING CHANGE IN ACCOUNTING PRINCIPLE
September 23, 1998
Health Risk Management, Inc.
8000 West 78th Street
Minneapolis, MN 55439
Note 2 of Notes to the Consolidated Financial Statements of Health Risk
Management, Inc. included in its Form 10-K for the year ended June 30, 1998
describes a change in the method of accounting for revenue related to the
Company's health plan management services from a policy of revenue being
generally recognized based on an estimate of the services to be provided over
the service period to a policy under which revenue is recognized ratably over
the contract period. You have advised us that you believe that the change is to
a preferable method in your circumstances because management believes that the
new method will provide for consistent accounting methods for its health plan
management revenue and the Company's new managed care operations revenue, is
more prevalent in the health plan management services industry and will reduce
the administrative burden.
There are no authoritative criteria for determining a "preferable" method for
the recognition of health plan management services revenue based on the
particular circumstances; however, we conclude that the change is to an
acceptable alternative method which, based on your business judgment to make
this change for the reasons cited above, is preferable in your circumstances.
Very truly yours,
/s/ Ernst & Young LLP
EXHIBIT 21
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
Pennsylvania HRM, Inc., a Pennsylvania 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, the Registration Statement (Form S-8 No. 33-38624) pertaining
to the Health Risk Management, Inc. 1990 Stock Option Plan, and 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
September 23, 1998, 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, 1998.
Minneapolis, Minnesota
September 23, 1998
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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0
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<COMMON> 45
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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