FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-18902
Health Risk Management, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1407404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 Hampshire Avenue South, Minneapolis, Minnesota 55438
(Address of principal executive offices, Zip Code)
(612) 829-3500
(Registrant's telephone number, including area code)
------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. -
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of Common Stock par value $.01 per share, outstanding on
May 7, 1999 was 4,637,774.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
INDEX
Part I. Financial Information Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- at March 31, 1999 and
June 30, 1998.................................................3
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 and the nine months ended
March 31, 1999 and 1998.......................................4
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1999 and 1998.................................5
Notes to Consolidated Financial Statements......................6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............12-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................16
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders......17
Item 6. Exhibits and Reports on Form 8-K.........................17
Signatures...................................................................18
Exhibit Index................................................................19
<PAGE>
PART I. ITEM 1. FINANCIAL INFORMATION
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
March 31,
1999 June 30
(Unaudited) 1998
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $10,763 $20,624
Accounts receivable, less allowance for doubtful accounts of 15,232 11,019
$310 and $265 at March 31, 1999, and June 30, 1998, respectively
Deferred income taxes 1,730 900
Other 1,619 837
------- -------
Total current assets 29,344 33,380
Fixed maturity investments at fair value 8,626 --
Computer software costs, less accumulated amortization of $20,546 and $17,940 at 26,601 24,284
March 31, 1999 and June 30, 1998, respectively
Property and equipment, less accumulated depreciation of $18,045 and $14,299 at 12,599 8,670
March 31, 1999 and June 30, 1998, respectively
Other assets 5,081 4,180
------- -------
$82,251 $70,514
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,360 $ 2,125
Medical services payable 9,646 15,452
Due to reinsurer 7,203 --
Accrued expenses 4,166 3,596
Unearned revenues 6,313 3,708
Current maturities of notes payable 7,865 4,429
Current portion of capitalized equipment leases 291 596
------- -------
Total current liabilities 38,844 29,906
Deferred income taxes 2,731 3,776
Long-term portion of notes payable 3,670 2,313
Long-term portion of capitalized equipment leases 544 734
Surplus note payable 2,500 --
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, 4,636,774 and
4,583,694 issued and outstanding at March 31, 1999 and June 30, 1998,
respectively
46 46
Additional paid-in capital 32,161 31,728
Retained earnings 1,746 2,011
Accumulated other comprehensive income:
Net unrealized gain on fixed maturity investments
9 --
------- -------
Total shareholders' equity 33,962 33,785
------- -------
$82,251 $70,514
======= =======
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Premiums-gross $ 37,962 $ -- $ 105,137 $ --
Ceded advance premiums earned 1,239 -- 1,239 --
Management service fees 11,903 15,957 36,245 49,035
QualityFIRST revenues 1,059 943 3,092 2,764
Investment income 279 72 696 208
--------- --------- --------- ---------
Total revenues 52,442 16,972 146,409 52,007
Less ceded premiums 18,528 -- 18,528 --
--------- --------- --------- ---------
Net revenues 33,914 16,972 127,881 52,007
Operating expenses:
Medical costs, net 15,644 -- 73,838 --
Cost of services, net 13,144 13,277 41,600 39,383
Selling, marketing and administration, net 3,174 3,514 10,836 9,732
Oxford transition costs -- -- 1,350 --
Interest expense 265 130 639 357
--------- --------- --------- ---------
Total operating expenses 32,227 16,921 128,263 49,472
Income (loss) before income taxes and cumulative
effect of accounting change 1,687 51 (382) 2,535
Income tax expense (benefit) 618 20 (117) 966
--------- --------- --------- ---------
Income (loss) before cumulative effect
of accounting change 1,069 31 (265) 1,569
Cumulative effect
of accounting change, net of
income tax benefit of $1,342 -- -- -- (2,371)
--------- --------- --------- ---------
Net income (loss) $ 1,069 $ 31 $ (265) $ (802)
========= ========= ========= =========
Basic earnings per share:
Income (loss) before cumulative effect
of accounting change $ .23 $ .01 $ (.06) $ .35
Cumulative effect of accounting change -- -- -- (.53)
--------- --------- --------- ---------
Net income (loss) $ .23 $ .01 $ (.06) $ (.18)
========= ========= ========= =========
Diluted earnings per share:
Income (loss) before cumulative effect
of accounting change $ .23 $ .01 $ (.06) $ .34
Cumulative effect of accounting change -- -- -- (.51)
--------- --------- --------- ---------
Net income (loss) $ .23 $ .01 $ (.06) $ (.17)
========= ========= ========= =========
Weighted average number of shares outstanding:
Basic 4,624 4,522 4,607 4,507
========= ========= ========= =========
Diluted 4,665 4,655 4,677 4,628
========= ========= ========= =========
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (265) $ (802)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 2,571 2,354
Amortization 5,111 3,933
Cumulative effect of accounting change -- 2,371
Provision for deferred income taxes (127) 949
Changes in operating assets and liabilities:
Accounts receivable 1,175 (2,155)
Other assets (877) (142)
Accounts payable 1,196 100
Medical services payable (13,507) --
Due to reinsurer 7,203 --
Accrued expenses 781 (340)
Unearned revenues 2,605 (8)
-------- --------
Net cash provided by operating activities 5,866 6,260
Cash flows from investing activities:
Acquisition of net assets, net of cash acquired (7,734)
Property and equipment (5,453) (2,114)
Capitalized software (6,895) (6,244)
Purchase of investments (234) --
-------- --------
Net cash used in investing activities (20,316) (8,358)
Cash flows from financing activities:
Proceeds from notes payable 6,000 1,750
Principal payments on notes payable (1,207) (951)
Principal payments on capital leases (495) (645)
Issuance of common shares 291 681
-------- --------
Net cash provided by financing activities 4,589 835
-------- --------
Decrease in cash and cash equivalents (9,861) (1,263)
Cash and cash equivalents at beginning of period 20,624 5,349
-------- --------
Cash and cash equivalents at end of period $ 10,763 $ 4,086
======== ========
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited interim consolidated financial statements herein have
been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. The accompanying interim
financial statements have been prepared under the presumption that
users of the interim financial information have either read or have
access to the audited financial statements for the latest fiscal year
ended June 30, 1998 and the Form 8-K, as amended, related to the
purchase of Oxford Health Plans (PA), Inc. Accordingly, footnote
disclosures which would substantially duplicate the disclosures
contained in the June 30, 1998 audited financial statements and the
Form 8-K have been omitted from these interim financial statements.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. These interim financial statements should be
read in conjunction with the annual financial statements and the notes
thereto.
2. 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.
3. 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 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 $.53 per share for basic and $.51 per
share for diluted) in the nine months ended March 31, 1998.
<PAGE>
4. Computer software costs
<TABLE>
<CAPTION>
March 31,
1999 June 30,
(Unaudited) 1998
---------- --------
(in thousands)
Computer software costs consist of the following:
<S> <C> <C>
Care Management Software
Cost $19,528 $17,268
Less accumulated amortization 8,088 7,391
------- -------
Net book value 11,440 9,877
Claim Administration Software
Cost 9,471 8,852
Less accumulated amortization 4,061 3,708
------- -------
Net book value 5,410 5,144
Guidelines, Protocols and Medical
Analysis Software
Cost 18,148 16,104
Less accumulated amortization 8,397 6,841
------- -------
Net book value 9,751 9,263
------- -------
Computer software costs $26,601 $24,284
======= =======
</TABLE>
<PAGE>
5. Net Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, and the nine
months ended March 31 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before cumulative effect of
accounting change $ 1,069 $ 31 $ (265) $ 1,569
Cumulative effect of accounting change
-- -- -- (2,371)
------- ------- ------- -------
Net income (loss) $ 1,069 $ 31 $ (265) $ (802)
======= ======= ======= =======
Denominator:
Weighted-average shares-basic
Effect of dilutive stock options 4,624 4,522 4,607 4,507
Weighted-average shares-diluted 41 133 70 121
------- ------- ------- -------
4,665 4,655 4,677 4,628
======= ======= ======= =======
Basic earnings per share:
Income (loss) before cumulative effect of
accounting change $ .23 $ .01 $ (.06) $ .35
Cumulative effect of accounting change -- -- -- (.53)
------- ------- ------- -------
Net income (loss) $ .23 $ .01 $ (.06) $ (.18)
======= ======= ======= =======
Diluted earnings per share:
Income (loss) before cumulative effect of
accounting change $ .23 $ .01 $ (.06) $ .34
Cumulative effect of accounting change -- -- -- (.51)
------- ------- ------- -------
Net income (loss) $ .23 $ .01 $ (.06) $ (.17)
======= ======= ======= =======
</TABLE>
6. HMO Operations and Purchase of Oxford Health Plans (PA), Inc.
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. (the Plan).
The Plan 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 Plan service area. In addition to providing health
plan management services, the Company also assumed the medical cost
risk under the HealthChoices Physical Health Agreement between the
Commonwealth of Pennsylvania and the Plan. The Company receives a fixed
amount per enrolled member per month to assume the medical cost risk.
On January 27, 1999, the Company completed the acquisition of the Plan
for a purchase price of $10,400,000 less an adjustment of $812,500 for
accounts receivable and commercial product allocations. The remaining
net purchase price was settled by cash payments of $7,087,500 and
Oxford Health Plan, Inc. (the Parent of the Plan) retaining a
$2,500,000 surplus note. The note has an interest rate of 8.5% per
annum. Principal and interest on the note is payable only upon the
Plan's receipt of prior approval from the Insurance Commissioner of the
Commonwealth of Pennsylvania. The note is redeemable within the five
years ended 2002. Interest of $37,000 was accrued as of March 31, 1999,
on the surplus note. The acquisition was accounted for by the purchase
method. Goodwill arising from the transaction of $1,337,000 will be
amortized straight line over 10 years.
<PAGE>
Historically, over 95% of the Plan's revenues were the result of the
HealthChoices contract with the Commonwealth of Pennsylvania as
described above. Additionally, the Plan sold commercial HMO products.
The marketing of commercial products was discontinued in 1998.
Immediately prior to the purchase of the Plan, the Company's
reinsurance partner provided a $5,000,000 advance ceded premium in
return for a 50% quota share in the profits of the Plan. Recorded as
unearned revenue, the $5,000,000 is being recognized as ceded advance
premiums earned as the 50% quota share in the profits of the Plan are
realized. Operating results for the three and nine months ended March
31, 1999 also reflect the ceding of 50% of the Plan's Medicaid premiums
and 50% of medical costs and certain administrative costs incurred
subsequent to January 1, 1999.
The results of operations of the Plan for the period January 1, 1999 to
March 31, 1999, are included in the consolidated statements of
operations for the Company for the three and nine month periods ended
March 31, 1999.
Pro forma results of operations assuming the acquisition had been
completed as of July 1, 1997 are as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1999 1998
------------------ ---------- ---------
<S> <C> <C> <C>
Net revenues $ 52,119 $ 132,396 $ 153,387
Income (loss) before cumulative $ (5,097) $ (298) $ (11,552)
effect of accounting change
Net income (loss) $ (5,097) $ (298) $ (13,923)
Basic earnings (loss) per share $ (1.31) $ (.06) $ (3.09)
Diluted earnings (loss) per share $ (1.31) $ (.06) $ (3.09)
</TABLE>
The pro forma results of operations reflect the pro forma amortization
of goodwill over an ten year period, estimated interest expense related
to the borrowing of $4,000,000 at an interest rate of 8.25%, estimated
investment income forgone related to partial funding of the purchase
from operations of $3,087,500 at a yield rate of 4.60% and the
recording of tax benefits on the pro forma adjustments at a 35%
effective tax rate. No impact on the pro forma results has been assumed
for the 50% quota share reinsurance contract entered into effective
January 1, 1999.
The pro forma results of operations are not necessarily indicative of
the results of operations that would have occurred had the acquisition
of the Plan occurred as of July 1, 1997, nor are the results
necessarily indicative of future operating results.
The Company incurred transition costs related to the purchase of the
Plan of approximately $920,000 in the quarter ended December 31, 1998
and $430,000 in the quarter ended September 30, 1998, due to increased
operational costs for HMO related activities without a corresponding
increase in its health plan management service fees.
7. Notes Payable
In conjunction with the purchase of the Plan, the Company modified its
term loan agreement and revolving credit agreement with its bank. The
Company borrowed $4,000,000 under the modified terms of these
agreements to fund the acquisition. Notes payable consist of the
following at:
<PAGE>
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Term loans payable to bank in monthly installments of
$175,000 plus interest at the fixed rate of 7.93%, with
the last payment due January, 2002. Secured by
accounts receivable, equipment, fixtures and general
intangibles $ 5,770 $ 3,742
Note payable to bank under revolving credit agreement
with interest payable monthly at the bank's reference rate
plus 0.375% (7.75% at March 31, 1999), due January 31,
2000. Secured by accounts receivable, equipment,
fixtures and general intangibles $ 5,765 $ 3,000
------- -------
11,535 $ 6,742
Less: Current maturities 7,865 4,429
======= =======
Long-term portion $ 3,670 $ 2,313
======= =======
</TABLE>
8. Comprehensive Income
The comprehensive income for the Company for the three months ended
March 31, and the nine months ended March 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) $1,069 $ 31 $ (265) $ (802)
Change in net unrealized gain on fixed maturity investments 9 -- 9 --
------ ------ ------ ------
Comprehensive income $1,078 $ 31 $ (256) $ (802)
====== ====== ====== ======
</TABLE>
9. Investments
The amortized cost and fair value of available for sale fixed maturity
investments consists of the following at March 31, 1999 (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Treasury securities $5,576 $ 21 $ 115 $5,482
Corporate bonds 3,037 108 1 3,144
------ ------ ------ ------
$8,613 $ 129 $ 116 $8,626
====== ====== ====== ======
All fixed maturity investments are due within five years as of March
31, 1999. Actual maturities may differ from contractual maturities
because the borrowers may have the right to prepay such obligations
without prepayment penalties.
10. Reclassification
Certain items in the financial statements for the three and nine month
periods ended March 31, 1998 have been reclassified to reflect the post
acquisition reporting format.
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
The Company's revenues consist primarily of premiums, net of ceded premiums from
HRM Health Plans (PA), Inc. (a HMO subsidiary acquired January 27, 1999 but
managed under a management services agreement since April 16, 1998) and
management service fees for health plan management.
The Company's operating expenses are comprised of medical costs, net (consisting
primarily of the net costs after the ceded portions of medical services and
reinsurance, net of recoveries), of its cost of services, net (consisting
primarily of the net costs after the ceded portions 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),
and selling, marketing and administration, net (consisting primarily of the net
costs after the ceded portions of sales commissions, advertising, sales account
management personnel, bad debts, administration, professional services,
insurance, compensation and depreciation). The medical costs, cost of services
and selling, marketing and administration expenses are affected to varying
degrees by the 50% quota share agreement related to the Medicaid block of
business effective January 1, 1999.
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of revenues, as indicated, for the three months and the nine months
ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0% 100.0%
===== ===== ====== ======
Operating expenses:
Medical costs, net 80.5(1) -- (1) 85.3(1) -- (1)
Cost of services, net 38.8(2) 78.2(2) 32.5(2) 75.7(2)
Selling, marketing and administration, net 9.4(2) 20.7(2) 8.5(2) 18.7(2)
Oxford transition costs -- (2) -- (2) 1.0(2) -- (2)
Interest expense 0.8(2) 0.8(2) 0.5(2) 0.7(2)
----- ----- ----- -----
Total operating expenses 95.0(2) 99.7(2) 100.3(2) 95.1(2)
----- ----- ----- -----
Income (loss) before income taxes and
cumulative effect of accounting change 5.0 0.3 (0.3) 4.9
Income taxes expense (benefit) 1.8 0.1 (0.1) 1.9
----- ----- ----- -----
Income (loss) before cumulative effect
of accounting change 3.2 0.2 (0.2) 3.0
Cumulative effect of accounting change
net of income tax -- -- -- (4.5)
----- ----- ----- -----
Net income (loss) 3.2% 0.2% (0.2)% (1.5)%
===== ===== ===== =====
</TABLE>
(1) Computed as a % of HMO premiums, net (premiums - gross less ceded premiums).
(2) Computed as a % of net revenues.
Total Revenues: Total revenues increased $35,470,000 (209%) from third quarter
of fiscal 1998 to fiscal 1999 (from $16,972,000 to $52,442,000) and increased
$94,402,000 (182%) from the first nine months of fiscal 1998 to fiscal 1999 from
($52,007,000 to $146,409,000). These increases are primarily attributable to
revenues from HMO operations which began April 16, 1998, sales of additional
products to existing clients and increased sales of the QualityFIRST(R)
software, net of decreases in the number of covered participants enrolled in the
Company's management services related to an HMO that terminated services on
September 30, 1998.
<PAGE>
Following is a breakout of net revenues:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998 Change
---- ---- ------
<S> <C> <C> <C> <C>
Premiums - gross $ 37,962,000 $ -- $ 37,962,000 N/A
Ceded advance premiums earned 1,239,000 -- 1,239,000 N/A
Management service fees 11,903,000 15,957,000 (4,054,000) (25)%
QualityFIRST(R)revenues 1,059,000 943,000 116,000 12%
Investment income 279,000 72,000 207,000 288%
------------- ------------- ------------- -----
Total revenues 52,442,000 16,972,000 35,470,000 209%
-----
Less ceded premiums (18,528,000) -- (18,528,000) N/A
------------- ------------- ------------- -----
Net revenues $ 33,914,000 $ 16,972,000 $ 16,942,000 100%
============= ============= ============= =====
Nine Months Ended
March 31
1999 1998 Change
---- ---- ------
Premiums - gross $ 105,137,000 $ -- $ 105,137,000 N/A
Ceded advance premiums earned 1,239,000 -- 1,239,000 N/A
Management service fees 36,245,000 49,035,000 (12,790,000) (26)%
QualityFIRST(R)revenues 3,092,000 2,764,000 328,000 12%
Investment income 696,000 208,000 488,000 235%
------------- ------------- ------------- -----
Total revenues 146,409,000 52,007,000 94,402,000 182%
-----
Less ceded premiums (18,528,000) -- (18,528,000) N/A
------------- ------------- ------------- -----
Net revenues $ 127,881,000 $ 52,007,000 $ 75,874,000 146%
============= ============= ============= =====
</TABLE>
Revenues from the HMO operations were the result of obtaining in the fourth
quarter of fiscal 1998 a client contract under which the Company is at risk for
the total medical services costs and received a significant portion of the total
premium of the HMO through December 31, 1998. The Company did not have this
business in the first three quarters of fiscal 1998. The Company then acquired
this HMO in January, 1999. The premiums-gross plus ceded advance premiums earned
less ceded premiums resulted in net revenues of $20,673,000 in the third quarter
and $87,848,000 for the nine months ended March 31, 1999.
Revenues for management services decreased 25% or $4,054,000, from third quarter
of fiscal 1998 to fiscal 1999 (decreasing from $15,957,000 to $11,903,000) and
decreased 26% or $12,790,000 from the first nine months of fiscal 1998 to fiscal
1999 (decreasing from $49,035,000 to $36,245,000). This decrease was mainly the
result of the decrease in the number of participants related to an HMO that
terminated services on September 30, 1998 and other clients who terminated
services.
Revenues for QualityFIRST(R) increased 12% or $116,000, from third quarter of
fiscal 1998 to fiscal 1999 (increasing from $943,000 to $1,059,000) and
increased 12% or $328,000 from the first nine months of fiscal 1998 to fiscal
1999 (increasing from $2,764,000 to $3,092,000). This increase was mainly the
result of an increased number of clients or expansion of systems with existing
clients.
Investment income increased 288% or $207,000 from the third quarter of fiscal
1998 to fiscal 1999 (increasing from $72,000 to $279,000) and increased 235%
from the first nine months of fiscal 1998 to fiscal 1999 (increasing from
$208,000 to $696,000). This increase is the result of higher levels of
investments in the third quarter and the first nine months of fiscal 1999.
Medical Costs, Net: The medical costs, net of amounts ceded, for the HMO
increased by $15,644,000 from the third quarter of fiscal 1999 over fiscal 1998
and increased $73,838,000 for the first nine months of fiscal 1999 compared to
fiscal 1998 due to the HMO operations that began in April 1998. As a percentage
of HMO premiums, net, medical costs in the third quarter of fiscal 1999 was 81%
and for the first nine months of fiscal 1999 it was 85%. The decrease in the
third quarter of fiscal 1999 over the first six months of fiscal 1999 was the
result of increased rates verses the cost of medical expenses, net of
reinsurance recoveries in the quarter.
<PAGE>
Cost of Services, Net: Cost of services, net of ceded amounts, decreased
$133,000 (1%) from the third quarter of fiscal 1998 to fiscal 1999 (from
$13,277,000 to $13,144,000) and increased $2,217,000 (6%) for the first nine
months of fiscal 1998 compared to fiscal 1999 (increasing from $39,383,000 to
$41,600,000). The decrease in the third quarter of fiscal 1999 was due to the
quota share portion netted from of cost of services and the increase in the nine
month period was primarily due to increased payroll and expenses related to the
HMO and implementing management services additional covered lives. As a
percentage of the revenues for the HMO operations, management services, and
QualityFIRST(R), the cost of services, net of ceded amounts, was 12%, 85% and
89%, respectively, in the third quarter of fiscal 1999 and compared to 0%, 79%
and 65%, respectively, for the third quarter of fiscal 1998, and was 12%, 82%
and 56% for the first nine months of fiscal 1999 compared to 0%, 77% and 64%,
respectively, for the first nine months of fiscal 1998.
Selling, Marketing and Administration, Net: Selling, marketing and
administration, net of ceded amounts decreased $340,000 (10%) from the third
quarter of fiscal 1998 to fiscal 1999 (from $3,514,000 to $3,174,000) and
increased $1,104,000 (11%) for the first nine months of fiscal 1998 to fiscal
1999 (from $9,732,000 to $10,836,000). The decrease in the third quarter of
fiscal 1999 compared to fiscal 1998 was due to the quota share portion netted
from the selling, marketing and administrative expenses and the increase in the
nine months of fiscal 1999 compared to fiscal 1998 increases were due primarily
to additional staff, travel, commission, bad debts, insurance, training programs
and expenses related to the HMO and implementing management services new
additional covered lives. This expense as a percentage of net revenue was 9% for
the third quarter and the first nine months of fiscal 1999 and was 21% and 19%
for the third quarter and the first nine months of fiscal 1998, respectively.
Oxford Transition Costs: The Company incurred transition costs related to the
purchase of Oxford Health Plans (PA), Inc. of approximately $920,000 in the
quarter ended December 31, 1998 and $430,000 in the quarter ended September 30,
1998, due to increased operational costs for HMO related activities without a
corresponding increase in its health plan management service fees.
Interest Expense: Primarily due to the acquisition, interest expense increased
$135,000 (104%) from the third quarter of fiscal 1998 to fiscal 1999 (from
$130,000 to $265,000 and increased $282,000 (79%) for the first nine months of
fiscal 1998 to fiscal 1999 (from $357,000 to $639,000). Interest expense
remained unchanged at 0.8% of net revenues for the third quarter of fiscal 1998
and fiscal 1999 and decreased as a percentage of net revenues from 0.7% to 0.5%
for the first nine months of fiscal 1998 to fiscal 1999 due to increased
revenues from the HMO operations.
Income Taxes: Income taxes increased in fiscal 1999 from fiscal 1998 because of
higher income before income taxes in the third quarter of fiscal 1999 and
decreased in the first nine month of fiscal 1999 because of lower income before
income taxes. It is expected that the 1999 fiscal year effective tax rate wil1
approximate the 39% rate of fiscal 1998.
Cumulative Effect of Accounting Change: See Note 3 in the Notes to Consolidated
Financial Statements.
Liquidity and Capital Resources
The Company's cash flows provided by operating activities was $5,866,000 and
$6,260,000 for the nine months ended March 31, 1999 and 1998, respectively.
During the nine months ended March 31, 1999 and 1998, cash flows from operating
activities exceeded the net loss primarily due to non-cash charges such as
depreciation and amortization, deferred income taxes, and changes in operating
assets and liabilities.
Cash of $7,734,000, net of cash acquired, was used in the third quarter of
fiscal 1999 to purchase Oxford Health Plans (PA), Inc. on January 27, 1999. Cash
of $6,895,000 and $6,244,000 has been used to invest in software and program
enhancements in fiscal 1999 and fiscal 1998, respectively. Cash of $5,453,000
and $2,114,000 has been invested in property and equipment in the first nine
months of fiscal 1999 and fiscal 1998, respectively and which in fiscal 1999
included approximately $3,000,000 related to the Company's move to new corporate
facilities in the first quarter of fiscal 1999. HRM expects to continue to
acquire property and equipment and enhance software and products, but at lower
rates in the second half of fiscal 1999.
HRM received proceeds from notes payable of $6,000,000 and $1,750,000 in the
first nine months of fiscal 1999 and fiscal 1998, respectively, and also used
approximately $1,702,000 and $1,596,000 in the first nine months of fiscal 1999
and fiscal 1998, respectively, to repay principal on notes payable and capital
leases. The Company received cash proceeds of $291,000 and $681,000 in fiscal
1999 and fiscal 1998, respectively, from stock option exercises for common stock
by current or former employees and directors.
The Company's current ratio was 0.76 at March 31, 1999 and 1.1 at June 30, 1998.
The Company had a working capital deficit of $9,500,000 at March 31, 1999 and
working capital of $3,474,000 at June 30, 1998. The medical services payable and
amounts due to the reinsurer related to the HMO operations decreased working
capital by $16,849,000 and $15,452,000 at March 31, 1999 and June 30, 1998. The
Company has fixed maturity investments available to be used to pay medical
services payables, if the need arises.
<PAGE>
The Company had 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 1999. The Company has an
amended and restated term loan and revolving loan agreement dated January 27,
1999 with its bank and a revolving credit facility expiring January 31, 2000,
under which the Company received an additional term loan of $4,000,000 in
January, 1999 to complete the purchase of Oxford Health Plans (PA), Inc. in
January, 1999. The revolving credit and term loan are secured by liens on the
assets of the Company.
Year 2000
Management has implemented and continues to monitor its Year 2000 Project to
prepare the Company's computer systems, applications, facilities and external
relationships for the Year 2000. A strategy for achieving compliance for each
system component has been identified. The focus of the Year 2000 Project efforts
continues to be on HRM's mission critical systems, which are those that support
and interface with our clients or vendors. Costs of the Company's Year 2000
Project through June 30, 1999 are estimated at approximately $1.4 million of
which approximately $1.1 million has been incurred through March 31, 1999. The
costs associated with the Year 2000 Project will be expensed as incurred.
As of June 30, 1998, the Company's QualityFIRST(R) product is Year 2000 ready in
that it processes four-digit year dates. The Company was scheduled to have
completed Year 2000 testing on its claims system in the Fall of 1998, but this
Project component has been extended to the Company's fourth quarter, which
commences April 1, 1999. The remediation of the Company's care management system
is scheduled to be completed near the end of the Company's fourth quarter. The
Company anticipates ongoing maintenance tasks, which will continue into the Year
2000, although these tasks are not expected to be significant. The Company
continues to request new information from critical vendors and monitors each
critical vendor regarding its state of readiness, and the results of their
responses are being evaluated as part of the program monitoring process
The Company is reliant on technology to deliver its 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.
The Company's Year 2000 Project plans are subject to change and are necessarily
dependent upon management business decisions and other factors, both internal
and external, and the Company is making adjustments to its Year 2000 Project as
it deems necessary. The information contained in this statement is based on
management's best estimates. However, there can be no guarantee that these
estimates will be achieved, and the results could differ materially from those
anticipated based on factors such as: Year 2000 readiness of the Company's
business partners, including its key vendors, its customers, and its customers'
key vendors; the 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 possible consequences of the Company or its business
partners not being fully Year 2000 compliant include temporary disruption of the
delivery of services. The Company will be using contingency plans already in
place related to the backing up of information systems and disaster recovery
procedures. The Company is in the process of developing additional and/or
supplemental contingency plans where necessary in an effort to be prepared in
the event that a Year 2000 issue arises.
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, use of estimates for incurred but not yet reported claims included
in medical services payable, use of estimates of bonus accruals included in
accounts receivable, reconciliations, volume fluctuations, provider relations
and contracting, participant enrollment, fluctuations, changes in member mix or
utilization levels, fixed price contracts, contract disputes, contract
modifications, contract renewals and non-renewals, regulatory issues and
requirements, 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 periodically detailed in
the Company's SEC reports, cannot be predicted exactly, such occurrences can be
expected to have an impact on HRM's anticipated level of revenue growth or
profitability.
<PAGE>
ITEM 3.
Quantitative and Qualitative Disclosure 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 primarily all of these debts have floating interest rates.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Company's shareholders was held on
Wednesday, April 21, 1999. The Meeting was adjourned to and reconvened on
Friday, May 14, 1999.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A Under the Securities and Exchange Act of 1934, there was no
solicitation in opposition to management's nominees as listed in the proxy
statement, and all such nominees were elected.
(c) At the Annual Meeting the following matter were voted upon:
(i) The following persons were elected as Class A Directors
for a three-year term:
Nominee Votes For Votes Withheld
Gary L. Damkoehler 3,186,375 1,087,315
Raymond G. Schultze, M.D. 3,185,975 1,087,715
The terms of office for the following directors continued
after the Meeting: Gary T. McIlroy, M.D., Marlene O. Travis,
Vance Kenneth Travis, Ronald R. Hahn and Robert L. Montgomery.
(ii) By a vote of 3,785,285 shares in favor, 480,455 shares
against, and 7,950 shares abstaining, the shareholders
approved the selection of Ernst & Young, LLP as independent
auditors for the current fiscal year.
(iii) By a vote of 2,126,257 shares in favor, 1,994,840 shares
against, 19,431 shares abstaining and 133,162 shares
represented by broker nonvotes, the shareholders approved the
Health Risk Management, Inc. 1999 Employee Stock Purchase
Plan.
(iv) By a vote of 1,934,777 shares in favor, 2,186,719 shares
against, 33,252 shares abstaining and 118,942 shares
represented by broker nonvotes, shareholders failed to approve
an increase in the number of shares reserved for issuance
under the Health Risk Management, Inc.
Amended and Restated 1992 Long-Term Incentive Plan.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on page following signatures.
(b) During the three months ended March 31, 1999, the Company
filed a report on Form 8-K, dated February 11, 1999 reporting
under Item 2 the acquisition of Oxford Health Plans (PA), Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Health Risk Management, Inc.
Dated: May 17, 1999 By: /s/Gary T. McIlroy
Gary T. McIlroy, M.D.
Chief Executive Officer
Dated: May 17, 1999 By: /s/Thomas P. Clark
Thomas P. Clark
Chief Financial Officer
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX
to
FORM 10-Q
For Quarter Ended March 31, 1999
HEALTH RISK MANAGEMENT, INC.
(SEC File No. 0-18902)
Exhibit
Number Exhibit Description
3.1 Composite Bylaws of the Company as of April 21, 1999.
10.1 First Amendment to Credit Agreement between Health Risk Management,
Inc. and U. S. National Bank Association dated January 27, 1999.
27 Financial Data Schedule (filed in electronic format only)
COMPOSITE BYLAWS
OF
HEALTH RISK MANAGEMENT, INC.
AS OF
APRIL 21, 1999
ARTICLE I.
OFFICES, CORPORATE SEAL
Section 1.01. Registered Office. The registered office of the
corporation in Minnesota shall be that set forth in the Articles of
Incorporation or in the most recent amendment of the Articles of Incorporation
or resolution of the directors filed with the Secretary of State of Minnesota
changing the registered office.
Section 1.02. Other Offices. The corporation may have such other
offices, within or without the State of Minnesota, as the directors shall, from
time to time, determine.
Section 1.03. Corporate Seal. The corporation shall have no seal.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 2.01. Place and time of Meetings. Except as provided otherwise
by Minnesota Statutes Chapter 302A, as now enacted or hereafter amended
(referred to in these Bylaws as "Minnesota Statutes Chapter 302A"), meetings of
the shareholders may be held at any place, within or without the State of
Minnesota, as may from time to time be designated by the directors and, in the
absence of such designation, shall be held at the registered office of the
corporation in the State of Minnesota. The directors shall designate the time of
day for each meeting and, in the absence of such designation, every meeting of
shareholders shall be held at ten o'clock a.m.
Section 2.02. Regular Meetings.
(a) A regular meeting of the shareholders shall be held on such date as
the Board of Directors shall by resolution establish.
(b) At the regular meeting the shareholders, voting as provided in the
Articles of Incorporation and these Bylaws, shall elect qualified successors for
directors to the extent required by Minnesota Statutes Chapter 302A.
(c) At any regular meeting of shareholders, only such business shall be
conducted, and only such proposals shall be acted upon, as properly brought
before the meeting. In order for business to be properly brought before the
meeting, the business must either be (i) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
(ii) otherwise properly brought before the meeting by or at the direction of the
Board, or (iii) otherwise properly brought before the meeting by a shareholder.
In addition to any other applicable requirements, for business to be properly
brought before a regular meeting by a shareholder, the shareholder must have
given timely notice thereof in writing to the Secretary of the corporation. A
shareholder's notice to the Secretary shall set forth as to each matter that the
shareholder proposes to bring before the regular meeting (i) a brief description
of the business desired to be brought before the regular meeting and the reasons
for conducting such business at the regular meeting, (ii) the name and record
address of the shareholder proposing such business, (iii) the class and number
of shares of the corporation which are beneficially owned by the shareholder,
and (iv) any material interest of the shareholder in such business. For purposes
of this Section 2.02 and Section 2.10 of these Bylaws, reference to a
requirement to give timely notice shall mean that such notice addressed to the
Secretary of the corporation must be delivered to or mailed and received at the
principal executive offices of the corporation not less than 80 days and (except
for shareholder proposals subject to Rule 14a-8 under the Securities Exchange
Act of 1934) no more than 100 days prior to the upcoming regular meeting;
provided, however, that in the event the date of the upcoming regular meeting is
advanced by more than 15 days from the first anniversary of the preceding year's
regular meeting, then notice by the shareholder to be timely must be so
delivered not later than the close of business on the earlier of (A) the 80th
day prior to the first anniversary of the preceding year's regular meeting and
(B) the later of (i) the 80th day prior to the upcoming regular meeting and (ii)
the 10th day following the day on which notice of the date of such upcoming
regular meeting is first given to shareholders; further provided, however, that
in the event the date of the upcoming regular meeting is delayed by more than 60
days from the first anniversary of the preceding year's regular meeting, then
notice by the shareholder to be timely must be so delivered not later than the
close of business on the later of (C) the 80th day prior to the upcoming regular
meeting and (D) the 10th day following the day on which notice of the date of
such upcoming regular meeting is first given to shareholders. For purposes of
this Section 2.02 and Section 2.10 of these Bylaws, notice of the date of such
upcoming regular meeting shall be deemed to be first given to shareholders when
disclosure of such date is first made in a press release reported by a national
news service or a report disseminated by any comparable media for the
dissemination of information or any document publicly filed by the corporation
with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d)
of the Securities Exchange Act of 1934.
(d) Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at the regular meeting except in accordance with the
procedures set forth in this Section, provided, however, that nothing in this
Section shall be deemed to preclude discussion by any shareholder of any
business properly brought before the regular meeting.
(e) The chairman of the regular meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section, and if the
chairman should so determine, the chairman shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted. Section 2.03. Special Meetings. Special meetings of the shareholders
may be held at such time and for such purpose and may be called by such persons
under such circumstances as are provided by Minnesota Statutes Chapter 302A.
Section 2.04. Quorum, Adjourned Meetings. The holders of a majority of
the shares entitled to vote shall constitute a quorum for the transaction of
business at any regular or special meeting. In case a quorum shall not be
present at a meeting, those present may adjourn to such day as they shall, by
majority vote, agree upon. If a quorum is present, a meeting may be adjourned
from time to time without notice other than announcement at the meeting. At
adjourned meetings at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally noticed. If a
quorum is present, the shareholders may continue to transact business until
adjournment notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
Section 2.05. Voting. At each meeting of the shareholders every
shareholder having the right to vote shall be entitled to vote either in person
or by proxy. Each shareholder, unless the Articles of Incorporation or statute
provide otherwise, shall have one vote for each share having voting power
registered in such shareholder's name on the books of the corporation. Jointly
owned shares may be voted by any joint owner to the extent provided by Minnesota
Statutes Chapter 302A. Upon the demand of any shareholder, the vote upon any
question before the meeting shall be by ballot. All questions shall be decided
by a majority vote of the number of shares entitled to vote and represented at
the meeting at the time of the vote except if otherwise required by statute, the
Articles of Incorporation, or these Bylaws.
Section 2.06. Record Date. The Board of Directors may fix a time,
subject to any limitations set by Minnesota Statutes Chapter 302A, as a record
date for the determination of the shareholders entitled to notice of, and to
vote at, such meeting, notwithstanding any transfer of shares on the books of
the corporation after any record date so fixed. If the Board of Directors fails
to fix a record date for determination of the shareholders entitled to notice
of, and to vote at, any meeting of shareholders, the record date shall be the
20th day preceding the date of such meeting.
Section 2.07. Notice of Meetings. There shall be mailed to each
shareholder, shown by the books of the corporation to be a holder of record of
voting shares, at his address as shown by the books of the corporation, a notice
to the extent required by Minnesota Statutes Chapter 302A, which notice shall be
mailed at least five days prior thereto except when a longer period of notice is
required by Minnesota Statutes Chapter 302A.
Section 2.08. Waiver of Notice. Notice of any regular or special
meeting may be waived by any shareholder as and to the extent provided by
Minnesota Statutes Chapter 302A.
Section 2.09. Written Action. Any action which might be taken at a
meeting of the shareholders may be taken without a meeting if done in writing
and signed by all of the shareholders entitled to vote on that action.
Section 2.10. Shareholder Nomination of Directors.. Any shareholder who
intends to make a nomination at the regular meeting must have given timely
notice thereof in writing to the Secretary of the corporation setting forth (A)
as to each nominee whom the shareholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of the nominee, (ii) the principal occupation or employment of the
nominee, (iii) the class and number of shares of stock of the corporation which
are beneficially owned by the nominee, and (iv) any other information concerning
the nominee that would be required, under the rules of the Securities and
Exchange Commission, in a proxy statement soliciting proxies for the election of
such nominee; and (B) as to the shareholder giving the notice, (i) the name and
record address of the shareholder, and (ii) the class and number of shares of
stock of the corporation which the shareholder beneficially owns. Such notice
shall include a signed consent to serve as a director of the corporation if
elected of such nominee. The corporation may require any proposed nominee to
furnish such further information as may reasonably be required by the
corporation to determine the eligibility of such proposed nominee to serve as a
director of the corporation. The requirement of this Section 2.10 to give timely
notice shall be governed by the provisions of Section 2.02(c) as noted therein.
ARTICLE III.
DIRECTORS
Section 3.01. General Powers. The business and affairs of the
corporation shall be managed by or under the direction of the Board of
Directors, except as otherwise permitted by Minnesota Statutes Chapter 302A.
Section 3.02. Number, Qualification and Term of Office. The number of
directors of the corporation shall be determined from time to time by resolution
duly adopted by the Board of Directors. Unless otherwise provided by the
Articles of Incorporation, each director shall hold office until the regular
meeting of shareholders next held after such director's election and until such
director's successor shall have been elected and shall qualify, or until the
earlier death, resignation, removal or disqualification of such director.
Section 3.03. Board Meetings. Meetings of the Board of Directors may be
held from time to time at such time and place within or without the State of
Minnesota as may be designated by the Board. In the absence of designation by
the Board of Directors, Board meetings shall be held at the principal executive
office of the corporation, except as may be otherwise unanimously agreed orally,
or in writing, or by attendance. If a meeting schedule is adopted by the Board,
or if the date and time of a Board meeting has been announced at a previous
meeting, no notice is required.
Section 3.04. Calling Meetings; Notice. Meetings of the Board of
Directors may be called by the Chairman of the Board by giving at least
twenty-four hours notice, or by any other director by giving at least five days
notice, of the date, time and place thereof to each director by mail, telephone,
telegram or in person.
Section 3.05. Waiver of Notice. Notice of any meeting of the Board of
Directors may be waived by any director as and to the extent provided by
Minnesota Statutes Chapter 302A.
Section 3.06. Quorum. A majority of the directors holding office
immediately prior to a meeting of the Board of Directors shall constitute a
quorum for the transaction of business at such meeting.
Section 3.07. Absent Directors. A director may give advance written
consent or opposition to a proposal to be acted on at a meeting of the Board of
Directors. If such director is not present at the meeting, consent or opposition
to a proposal does not constitute presence for purposes of determining the
existence of a quorum, but consent or opposition shall be counted as a vote in
favor of or against the proposal and shall be entered in the minutes or other
record of action at the meeting, if the proposal acted on at the meeting is
substantially the same or has substantially the same effect as the proposal to
which the director has consented or objected.
Section 3.08. Conference Communications. Any or all directors may
participate in any meeting of the Board of Directors, or of any duly constituted
committee thereof, by any means of communication as and to the extent authorized
by Minnesota Statutes Chapter 302A.
Section 3.09. Vacancies; Newly Created Directorships. Vacancies in the
Board of Directors of this corporation occurring by reason of death,
resignation, removal or disqualification shall be filled for the unexpired term
by a majority of the then Continuing Directors (as defined in Section 3.10
below) although less than a quorum; newly created directorships resulting from
an increase in the authorized number of directors by action of the Board of
Directors as permitted by Section 3.02 may be filled by a majority vote of the
directors serving at the time of such increase; and each director elected
pursuant to this Section 3.09 shall be a director until such director's
successor is elected by the shareholders at their next regular meeting at which
directors of the same class are scheduled to be elected.
Section 3.10. Removal. Any or all of the directors may be removed from
office at any time only by one of the following two methods: (a) for cause, by
the affirmative vote of the holders of at least 75% of the outstanding shares of
the corporation entitled to vote at an election of directors, considered for
purposes of this section to be voting as a class; or (b) with or without cause,
by the affirmative vote of both (i) a majority of the entire Board of Directors
and (ii) a majority of the then Continuing Directors. For purposes of this
section, a "Continuing Director" at a particular time shall mean a person who is
then a member of the Board and either (i) was a member of the Board on the date
of adoption of this bylaw or (ii) subsequently became a member of the Board if
such person's election to the Board was recommended or approved by a majority of
the then Continuing Directors.
Section 3.11. Committees. The Board of Directors may establish
committees having the authority of the Board in the management of the business
of the corporation as and to the extent provided by Minnesota Statutes Chapter
302A.
A majority of the members of the committee present at a meeting is a
quorum for the transaction of business, unless a larger or smaller proportion or
number is provided in a resolution approved by the affirmative vote of a
majority of the directors present.
Section 3.12. Written Action. Any action which might be taken at a
meeting of the Board of Directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by all of the
directors or committee members, unless the Articles provide otherwise and the
action need not be approved by the shareholders.
Section 3.13. Compensation. Directors who are not salaried officers of
this corporation shall receive such compensation per meeting attended or such
annual or other compensation or both as shall be determined, from time to time,
by resolution of the Board of Directors. The Board of Directors may, by
resolution, provide that all directors shall receive their expenses, if any, of
attendance at meetings of the Board of Directors or any committee thereof.
Nothing herein contained shall be construed to preclude any director from
serving this corporation in any other capacity and receiving proper compensation
therefor.
ARTICLE IV.
OFFICERS
Section 4.01. Number. The officers of the corporation shall consist of
a Chairman of the Board (if one is elected by the Board), a Chief Executive
Officer, a President, a Treasurer, a Secretary (if one is elected by the Board)
and such other officers and agents as may, from time to time, be elected or
appointed by the Board of Directors. Any number of offices may be held by the
same person.
Section 4.02. Election, Term of Office and Qualifications. The Board of
Directors shall elect or appoint, by resolution approved by the affirmative vote
of a majority of the directors present, from within or without their number, the
Chief Executive Officer, the President, Treasurer and such other officers as may
be deemed advisable, each of whom shall have the powers, rights, duties,
responsibilities, and terms in office provided for in these Bylaws or a
resolution of the Board of Directors not inconsistent therewith. The Chief
Executive Officer, the President and all other officers who may be directors
shall continue to hold office until the election and qualification of their
successors, notwithstanding an earlier termination of their directorship.
Section 4.03. Removal and Vacancies. Any officer may be removed from
his office by the Board of Directors at any time, with or without cause. Such
removal, however, shall be without prejudice to the contract rights of the
person so removed. If there be a vacancy among the officers of the corporation
by reason of death, resignation or otherwise, such vacancy shall be filled for
the unexpired term by the Board of Directors.
Section 4.04. Chairman of the Board. The Chairman of the Board, if one
is elected, shall preside at all meetings of the shareholders and directors and
shall have such other duties as may be prescribed, from time to time, by the
Board of Directors.
Section 4.05. President. The President, unless otherwise provided by
the Board of Directors, shall be the Chief Executive Officer and shall have
general active management of the business of the corporation. In the absence of
the Chairman of the Board, he shall preside at all meetings of the shareholders
and directors. He shall see that all orders and resolutions of the Board of
Directors are carried into effect. He shall execute and deliver, in the name of
the corporation, any deeds, mortgages, bonds, contracts or other instruments
pertaining to the business of the corporation unless the authority to execute
and deliver is required by law to be exercised by another person or is expressly
delegated by the Articles or Bylaws or by the Board of Directors to some other
officer or agent of the corporation. He shall maintain records of and, when
necessary, certify all proceedings of the Board of Directors and the
shareholders, and in general, shall perform all duties usually incident to the
office of the President. He shall have such other duties as may, from time to
time, be prescribed by the Board of Directors.
Section 4.06. Vice President. Each Vice President, if one or more are
elected, shall have such powers and shall perform such duties as may be
specified in the Bylaws or prescribed by the Board of Directors or by the
President. In the event of the absence or disability of the President, Vice
Presidents shall succeed to his power and duties in the order designated by the
Board of Directors.
Section 4.07. Secretary. The Secretary, if one is elected, shall give
proper notice of meetings of shareholders and directors. He shall perform such
other duties as may, from time to time, be prescribed by the Board of Directors
or by the President.
Section 4.08. Treasurer. The Treasurer, unless otherwise provided by
the Board of Directors, shall be the chief financial officer and shall keep
accurate financial records for the corporation. He shall deposit all moneys,
drafts and checks in the name of, and to the credit of, the corporation in such
banks and depositaries as the Board of Directors shall, from time to time,
designate. He shall have power to endorse, for deposit, all notes, checks and
drafts received by the corporation. He shall disburse the funds of the
corporation, as ordered by the Board of Directors, making proper vouchers
therefor. He shall render to the President and the directors, whenever
requested, an account of all his transactions as Treasurer and of the financial
condition of the corporation, and shall perform such other duties as may, from
time to time, be prescribed by the Board of Directors or by the President.
Section 4.09. Compensation. The officers of this corporation shall
receive such compensation for their services as may be determined, from time to
time, by resolution of the Board of Directors.
article v.
shares and their transfer
Section 5.01. Certificates for Shares. All shares of the corporation
shall be certificated shares. Every owner of shares of the corporation shall be
entitled to a certificate, to be in such form as shall be prescribed by the
Board of Directors, certifying the number of shares of the corporation owned by
such shareholder. The certificates for such shares shall be numbered in the
order in which they shall be issued and shall be signed, in the name of the
corporation, by the chief executive officer or by such other officer as the
Board of Directors may designate. A signature on a certificate may be a
facsimile. Every certificate surrendered to the corporation for exchange or
transfer shall be cancelled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled, except in cases provided for in Section 5.04.
Section 5.02. Issuance of Shares. The Board of Directors is authorized
to cause to be issued shares of the corporation up to the full amount authorized
by the Articles of Incorporation in such amounts as may be determined by the
Board of Directors and as may be permitted by law. No shares shall be issued
except for such consideration as is permitted by Minnesota Statutes Chapter
302A.
Section 5.03. Transfer of Shares. Transfer of shares on the books of
the corporation may be authorized only by the shareholder named in the
certificate, or the shareholder's legal representative, or the shareholder's
duly authorized attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat as the absolute owner of
shares of the corporation, the person or persons in whose name shares are
registered on the books of the corporation.
Section 5.04. Loss of Certificates. Except as otherwise provided by
Minnesota Statutes Chapter 302A, any shareholder claiming a certificate for
shares to be lost, stolen or destroyed shall make an affidavit or that fact in
such form as the Board of Directors shall require and shall, if the Board of
Directors so requires, give the corporation a bond of indemnity in form, in an
amount, and with one or more sureties satisfactory to the Board of Directors, to
indemnify the corporation against any claim which may be made against it on
account of the reissue of such certificate, whereupon a new certificate may be
issued in the same tenor and for the same number of shares as the one alleged to
have been lost, stolen or destroyed.
article vi.
dividends, record date
Section 6.01. Dividends. Subject to the provisions of the Articles of
Incorporation, of these Bylaws, and of law, the Board of Directors may declare
dividends whenever, and in such amounts as, in its opinion, are deemed
advisable.
Section 6.02. Record Date. Subject to any provisions of the Articles of
Incorporation, the Board of Directors may fix a date not exceeding 120 days
preceding the date fixed for the payment of any dividend as the record date for
the determination of the shareholders entitled to receive payment of the
dividend and, in such case, only shareholders of record on the date so fixed
shall be entitled to receive payment of such dividend notwithstanding any
transfer of shares on the books of the corporation after the record date.
article vii.
books and records
Section 7.01. Share Register. The Board of Directors of the corporation
shall cause to be kept a share register and a record of the dates on which
shares were issued, all as and to the extent required by Minnesota Statutes
Chapter 302A.
Section 7.02. Other Books and Records. The Board of Directors shall
cause to be kept such other documents as and to the extent required by Minnesota
Statutes Chapter 302A.
ARTICLE VIII.
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. The corporation may lend money to, guarantee an
obligation of, become a surety for, or otherwise financially assist a person as
and to the extent provided by Minnesota Statutes Chapter 302A.
ARTICLE IX.
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. The corporation shall indemnify such persons, for such
expenses and liabilities, in such manner, under such circumstances, and to such
extent as permitted by Minnesota Statutes Chapter 302A.
ARTICLE X.
AMENDMENTS
Section 10.01. Unless otherwise provided in the Articles of
Incorporation, these Bylaws may be amended or altered by a vote of the majority
of the whole Board of Directors at any meeting. Unless otherwise provided in the
Articles of Incorporation, such authority in the Board of Directors is subject
to the power of the shareholders to change or repeal such Bylaws by a majority
vote of the shareholders present or represented at any regular or special
meeting of shareholders called for such purpose, as and to the extent provided
by Minnesota Statutes Chapter 302A. Only to the extent limited by Minnesota
Statutes Chapter 302A, the Board of Directors shall not make or alter any Bylaws
fixing a quorum for meetings of shareholders, prescribing procedures for
removing directors of filling vacancies in the Board of Directors, or fixing the
number of directors or their classifications, qualifications, or terms of
office, except that the Board of Directors may adopt or amend any Bylaw to
increase their number.
ARTICLE XI.
SECURITIES OF OTHER CORPORATIONS
Section 11.01. Voting Securities Held by the Corporation. Unless
otherwise ordered by the Board of Directors, either the Chief Executive Officer
or the President shall have full power and authority on behalf of the
corporation (a) to attend any meeting of security holders of other corporations
in which the corporation may hold securities and to vote such securities on
behalf of this corporation; (b) to execute any proxy for such meeting on behalf
of the corporation; or (c) to execute a written action in lieu of a meeting of
such other corporation on behalf of this corporation. At such meeting, either
the Chief Executive Officer or the President shall possess and may exercise any
and all rights and powers incident to the ownership of such securities that the
corporation possesses. The Board of Directors may, from time to time, grant such
power and authority to one or more other persons and may remove such power and
authority from either the Chief Executive Officer or the President upon any
other person or persons.
Section 11.02. Purchase and Sale of Securities. Unless otherwise
ordered by the Board of Directors, either the Chief Executive Officer or the
President shall have full power and authority on behalf of the corporation to
purchase, sell, transfer or encumber any and all securities of any other
corporation owned by the corporation, and may execute and deliver such documents
as may be necessary to effectuate such purchase, sale, transfer or encumbrance.
The Board of Directors may, from time to time, confer like powers upon any other
person or persons.
FIRST AMENDMENT TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), made and
entered into as of January 27, 1999, is by and between Health Risk Management,
Inc., a corporation organized under the laws of the State of Minnesota (the
"Borrower"), and U.S. Bank National Association, a national banking association
(the "Bank").
RECITALS
A. The Bank and the Borrower entered into an Amended and Restated
Revolving Credit and Term Loan Agreement dated as of May 1, 1998 (the "Credit
Agreement").
B. The Borrower desires to amend certain provisions of the Credit
Agreement, and the Bank has agreed to make such amendments, subject to the terms
and conditions set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby covenant
and agree to be bound as follows:
Section 1. Capitalized Terms. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the Credit
Agreement, unless the context shall otherwise require.
Section 2. Amendments. The Credit Agreement is hereby amended as
follows:
2.1 Amended Definitions. The definitions of "Advance," "Consolidated
Fixed Charge Coverage Ratio," "Interest Differential," "Loans," "Notes," "Quoted
Rate," "Quoted Rate Advance," "Revolving Credit Commitment," "Revolving
Termination Date," "Term Loans," and "Term Notes" contained in Section 1.1 of
the Credit Agreement are deleted in their respective entireties and the
following definitions are substituted in lieu thereof in the appropriate
alphabetical order:
"Advance": Any portion of the outstanding Revolving Loans or
Term Loan by the Bank as to which the Borrower has elected one of the
available interest rate options and, if applicable, an Interest Period.
An Advance constituting a Revolving Loan may be a Eurodollar Advance, a
CD Rate Advance or a Reference Rate Advance. An Advance constituting a
Term Loan may be a Eurodollar Advance, a CD Rate Advance or a Reference
Rate Advance, provided however, that, if, pursuant to Section 2.2(e),
the Borrower converts the Term Loan in its entirety to a Quoted Rate
Advance, then no portion of the Term Loan may thereafter be maintained
as or converted into Eurodollar Advances, CD Rate Advances or Reference
Rate Advances.
"Consolidated Fixed Charge Coverage Ratio": For any period of
determination, the ratio of:
(a) the remainder of (i) EBITDA for such period, less (ii)
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.
"Interest Differential": As of the date of any full or partial
prepayment of Term Loan, the Quoted Rate minus the sum of the
Government Yield as of the date of prepayment and the Issuance Spread.
"Loans": The Revolving Loans and the Term Loan.
"Notes": The Revolving Note and the Term Note.
"Quoted Rate": The fixed rate of interest offered by the Bank
and accepted by the Borrower for the 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 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": The Term Loan, provided that the
Borrower and the Bank agree that the Term Loan shall constitute a
Quoted Rate Advance, as described in Section 2.2(e).
"Revolving Credit Commitment": The maximum unpaid principal
amount of Loans which may from time to time be outstanding hereunder,
being initially $6,000,000, 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 Termination Date": The earliest of (a) January 31,
2000; (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.
"Term Loan": As defined in Section 2.2.
"Term Note": The promissory note of the Borrower described in
Section 2.2, substantially in the form of Exhibit B, as such promissory
note may be amended, modified or supplemented from time to time, and
such term shall include any substitutions for, or renewals of, such
promissory note.
2.2 Deleted Definitions. Section 1.1 of the Credit Agreement is further
amended by deleting the definitions of "Tranche A Term Loans," "Tranche B Term
Loan," and "Tranche C Term Loan" in their entireties.
2.3 New Definitions. Section 1.1 of the Credit Agreement is further
amended by adding the definitions of "Acquisition", "Acquisition Documents",
"Administrative Services Agreement," "Annual Statement," "Applicable Insurance
Code," "Applicable Margin," "Consolidated Leverage Ratio," "Healthchoices
Contract," "HRMPA," "Insurance Regulatory Authority," "Licenses," "Net Medical
Claims Payable," "Purchase Agreement," "Reinsurance Agreements," "SAP,"
"Security Agreement," "Software Capital Expenditures," "Statutory Net Worth,"
and "Surplus Reinsurance Agreements" thereto in correct alphabetical order:
"Acquisition": The purchase by the Borrower of all of the
outstanding stock of Oxford Health Plans (PA), Inc. pursuant to the
Purchase Agreement.
"Acquisition Documents": The Purchase Agreement and all other
agreements, instruments, certificates and other documents executed and
delivered pursuant to or in connection therewith, as the same may be
supplemented, amended or otherwise modified.
"Administrative Services Agreement": That certain
Administrative Services Agreement to be dated as of January 1, 1999
between the Borrower and HRMPA.
"Applicable Insurance Code": As to HRMPA, the insurance code
of any state where such company is domiciled or doing business and any
successor statute of similar import, together with the regulations
thereunder, as amended or otherwise modified and in effect from time to
time. References to sections of the Applicable Insurance Code shall be
construed to also refer to successor sections.
"Applicable Margin": With respect to:
(a) Reference Rate Advances -- 0%.
(b) CD Rate Advances -- 2.75%.
(c) Eurodollar Advances -- 2.75%.
"Consolidated Leverage Ratio": For any period of determination
the ratio of (a) consolidated total liabilities of the Borrower and the
Subsidiaries less Net Medical Services Claims Payable, to (b)
Consolidated Tangible Net Worth.
"Healthchoices Contract": shall mean that certain
Healthchoices Physical Health Agreement to be dated as of January 1,
1999 between the Commonwealth of Pennsylvania and HRMPA, as amended,
restated or otherwise modified from time to time.
"HRMPA": prior to the effectiveness of its name change in
manner contemplated by Section 7.12, Oxford Health Plans (PA), Inc., a
Pennsylvania corporation and, thereafter, HRM Health Plans (PA), Inc.
"Insurance Regulatory Authority": With respect to HRMPA, each
governmental or regulatory agency with which such company is required
to file its Annual Statement or which exercises regulatory authority
over the primary businesses being conducted by such company.
"Licenses": As defined in Section 6.18.
"Net Medical Services Claims Payable" shall mean, as of any
date of determination, the aggregate claims payable (reported and
unreported) stated by HRMPA in Part B of HRMPA's Statutory Financial
Statement for the applicable fiscal period minus the aggregate cash and
investments stated by HRMPA in Part A of HRMPA's Statutory Financial
Statement for the applicable fiscal period.
"Purchase Agreement": That certain Stock Purchase Agreement
dated as of October 14, 1998 between the Borrower, as purchaser, Oxford
Health Plans, Inc., as seller, as in effect on the date hereof and as
the same may be supplemented, amended or otherwise modified after the
date hereof with the prior written consent of the Bank.
"Reinsurance Agreements: Any agreement, contract, treaty,
certificate or other arrangement (other than a Surplus Reinsurance
Agreement) by which the Borrower or any Subsidiary agrees to transfer
or cede to another insurer all or part of the liability assumed or
assets held by the Borrower or any Subsidiary under a policy or
policies of insurance or under a reinsurance agreement assumed by the
Borrower or any Subsidiary. Reinsurance Agreements shall include, but
not be limited to, any agreement, contract, treaty or certificate or
other arrangement (other than a Surplus Reinsurance Agreement) which is
treated as such by the applicable Insurance Regulatory Authority.
"SAP": As to HRMPA, the statutory accounting practices
prescribed by the Insurance Regulatory Authority.
"Security Agreement": As defined in Section 10.11.
"Software Capital Expenditures": For any period of
determination, the aggregate amount of Capital Expenditures properly
attributable (according to GAAP) to research and development conducted
by Borrower or any Subsidiary, including without limitation,
development of computer software and databases.
"Statutory Financial Statements": As to HRMPA, the annual and
quarterly financial statements of such company as required to be filed
with the applicable Insurance Regulatory Authority, together with all
exhibits and schedules filed therewith, prepared in accordance with
SAP.
"Statutory Net Worth": As to HRMPA, as of any date of
determination, the total amount shown as its Total Net Worth in Part B
of HRMPA's Statutory Financial Statement for the applicable fiscal
period.
"Surplus Reinsurance Agreements" Any agreement whereby the
Borrower or any Subsidiary assumes or cedes business under a
reinsurance agreement that would be considered a "financing type"
reinsurance agreement as determined in accordance with the Statement of
Financial Accounting Standards 113 or any successor thereto.
2.4 Revolving Loans. Section 2.1(c) of the Credit Agreement is deleted
in its entirety and the following is substituted in lieu thereof:
(c) Advance Options and Increment. Revolving Loans may be
maintained, at the election of the Borrower, but subject to the
limitations hereof, as Reference Rate Advances, CD Rate Advances or
Eurodollar Advances. Each Revolving Loan shall be in a minimum amount
of $100,000 and in an integral multiple of $50,000.
2.5 Term Loan. Sections 2.2 (a), (b), (c), (d), (e) and (f)(i) of the
Credit Agreement are deleted in their entireties and the following is
substituted in lieu thereof:
(a) Term Loan. To make a single term loan (the "Term Loan")
available to Borrower in a single advance in the principal amount of
$6,294,916 made upon the consummation of the First Amendment hereto.
Payments or prepayments upon the Term Loan may not be reborrowed.
(b) Term Note. The Term Loan shall be further evidenced by the
Term Note.
(c) Advance Options. The Term Loan may be maintained, at the
election of the Borrower, but subject to the limitations hereof, as
Reference Rate Advances, Eurodollar Advances or CD Rate Advances,
provided, however, that, subject to the limitations hereof, pursuant to
Section 2.2(e), the Borrower may elect to convert the entire Term Loan
to a Quoted Rate Advance.
(d) Term Loan Procedures. Not later than 11:30 a.m.
(Minneapolis time) on January 27, 1999, the Borrower shall orally
notify the Bank of its intention to borrow the Term Loan on that date.
Such notice of borrowing shall be irrevocable and shall be deemed a
representation by the Borrower that on such date and after giving
effect to Term Loan the applicable conditions specified by the Banks
shall be satisfied. The Term Loan shall initially be made as Reference
Rate Advances. Unless the Bank determines that any applicable condition
specified by the Bank has not been satisfied, the Bank will make the
proceeds of the Term Loan available to the Borrower on the requested
date by disbursing $4,000,000 of the proceeds of such Term Loan to the
seller under the Acquisition Documents and using the remaining proceeds
of the Term Loan to refinance the Borrower's existing term loan
obligations to the Bank.
(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 the Term Loan. The Borrower shall have a
one-time option to convert the 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 the Term
Loan. The Bank's records concerning the applicable Quoted Rate, and
concerning whether the 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, the Term Loan may be maintained, continued or
converted as Reference Rate Advances, Eurodollar Advances or CD Rate
Advances, in the manner set forth in Section 2.2(f).
(f) Eurodollar and CD Advances.
(i) On the terms and subject to the limitations hereof, the
Borrower shall have the option at any time and from time to
time to convert all or any portion of the Advances other than
Quoted Rate Advances into Reference Rate Advances, Eurodollar
Advances or CD Rate Advances, or to continue Eurodollar
Advances or a CD Rate Advances as such; provided, however that
a Eurodollar Rate Advance or a CD Rate Advance may be
converted or continued only on the last day of the Interest
Period applicable thereto and no Advance may be converted or
continued as a Eurodollar Rate Advance or a CD Rate Advance if
a Default or Event of Default has occurred and is continuing
on the proposed date of continuation or conversion.
Notwithstanding this Section 2.2(f), if the Term Loan is
converted into a Quoted Rate Advance as provided in Section
2.2(e), it may not thereafter be converted into Reference Rate
Advances, CD Rate Advances or Eurodollar Advances.
2.6 Use of Proceeds. The following is added as new Section 2.5 of the
Credit Agreement:
Section 2.5 Use of Loan Proceeds. The proceeds of the Term
Loan shall be used to refinance $2,294,916 of the Borrower's existing
term loan obligations to the Bank and to fund not greater than
$4,000,000 of the purchase price in connection with the Acquisition.
The proceeds of the initial Revolving Loans shall be used to refinance
the Borrower's existing revolving obligations to the Bank and $807,500
of the Borrower's existing term loan obligations to the Bank. All other
Revolving Loans shall be used for the general business purposes of the
Borrower, in a manner not in conflict with any of the covenants in this
Agreement.
2.7 Interest. Sections 3.1(a) and (b) of the Credit Agreement are
deleted in their entireties and the following is substituted in lieu thereof:
(a) Quoted Rate Advances. Upon conversion of the Term Loan in
its entirety to a Quoted Rate Advance, the unpaid principal amount of
the Term Loan shall bear interest prior to maturity at the Quoted Rate
applicable to the Term Loan.
(b) Reference Rate Advances. The unpaid principal amount of
each Reference Rate Advance shall bear interest prior to maturity at a
rate per annum equal to the Reference Rate plus the Applicable Margin.
2.8 Commitment Fees. Section 3.2 of the Credit Agreement is deleted in
its entirety and the following is substituted in lieu thereof:
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 sum of (a) the Revolving Commitment in
effect as of the due date of such payment plus (b) the aggregate unpaid
principal amount upon the Term Note as of the due date of such payment
for the period from the date hereof to the scheduled maturity date of
the Term Note. The Commitment Fees shall be payable quarterly in
arrears on the last day of each quarter of the Borrower's fiscal year.
2.9 Repayment. Section 4.1 of the Credit Agreement is deleted in its
entirety and the following is substituted in lieu thereof:
Section 4.1 Repayment.
(a) Revolving Loans. The outstanding principal upon the
Revolving Loans shall be due and payable on the Revolving
Termination Date.
(b) Term Loan. The Term Loan shall be payable in installments
of $175,000, payable on that last day of each month of each
year, commencing on January 31, 1999, and a final payment
equal to all outstanding principal on January 31, 2002.
2.10 New Representations and Warranties. The following is added as new
Sections 6.18, 6.19 and 6.20 of the Credit Agreement:
Section 6.18 Insurance Licenses. Exhibit I lists all of the
jurisdictions in which the Borrower or any Subsidiary holds licenses
(including, without limitation, licenses or certificates of authority
from applicable insurance departments), permits or authorizations to
transact insurance and reinsurance business (collectively, the
"Licenses"). Except as set forth on Exhibit I, to the Borrower's
knowledge, no License is the subject of a proceeding for suspension or
revocation or any similar proceedings, there is no sustainable basis
for such a suspension or revocation, and no such suspension or
revocation is threatened by any Insurance Regulatory Authority. Neither
the Borrower nor any Subsidiary transacts any insurance business,
reinsurance business or health maintenance organization business,
directly or indirectly, in any state or jurisdiction other than those
enumerated on Exhibit I hereto, where such business requires any
license, permit, governmental approval, consent or other authorization.
Section 6.19 Reinsurance. Exhibit J lists all Reinsurance
Agreements and Surplus Reinsurance Agreements of the Borrower or any
Subsidiary in effect on the date of consummation of the First Amendment
hereto. All persons with whom the Borrower or any Subsidiary have ceded
any obligations with respect to any Reinsurance Agreement or Surplus
Reinsurance Agreements have a rating a "A" or better by A.M. Best &
Company.
Section 6.20 Year 2000. The Borrower has reviewed and assessed
its, and each Subsidiary's, business operations and computer systems
and applications to address the "year 2000 problem" (that is, that
computer applications and equipment used by the Borrower or any
Subsidiary, directly or indirectly through third parties, may be unable
to properly perform date-sensitive functions before, during and after
January 1, 2000). The Borrower reasonably believes that the year 2000
problem will not result in a material adverse change in the Borrower's
or any Subsidiary's business condition (financial or otherwise),
operations, properties or prospects or ability to repay the Bank. The
Borrower is in the process of implementing a plan to remediate year
2000 problems and will complete implementation of such plan with
respect to any material year 2000 problems, and testing thereof, by
September 30, 1999. The Borrower agrees that this representation will
be true and correct on and shall be deemed made by the Borrower on each
date the Borrower requests any Advance under this Agreement or delivers
any information to the Bank. The Borrower will promptly deliver to the
Bank such information relating to this representation and covenant as
the Bank requests from time to time.
2.11 Additional Financial and Business Information. Section 7.1(j) of
the Credit Agreement is deleted in its entirety and the following is substituted
in lieu thereof:
(j) As soon as possible, but in any event within sixty (60) days after
the end of each fiscal year of HRMPA, a copy of the Statutory Financial
Statement of HRMPA, for such fiscal year prepared in accordance with
SAP and accompanied by the certification of the responsible officer of
HRMPA that such financial statements presents fairly, in accordance
with SAP, the financial position of HRMPA for the period then ended.
(k) As soon as possible, but in any event within sixty (60) days after
the end of each of the first three fiscal quarters of each fiscal year
of HRMPA, a copy of the Statutory Financial Statement of HRMPA for such
fiscal quarter, all prepared in accordance with SAP and accompanied by
the certification of the responsible officer of such company that all
such financial statements present fairly in accordance with SAP the
financial position of such company for the periods then ended (subject
to normal year-end and audit adjustments).
(l) Within fifteen (15) days after being delivered to HRMPA any draft
or final examination report issued from time to time by the applicable
Insurance Regulatory Authority.
(m) Copies of all material Insurance Holding Company System Act filings
with any governmental or regulatory authority by the Borrower or any
Subsidiary not later than ten (10) Business Days after such filings are
made, including, without limitation, filings which seek approval of any
governmental or regulatory authority with respect to transactions
between the Borrower and any Subsidiaries.
(n) Within five (5) Business Days of such notice, notice of actual
suspension, termination or revocation of any License or material
restriction thereon by any Insurance Regulatory Authority or of receipt
of notice from any Insurance Regulatory Authority notifying the
Borrower or any Subsidiary of a hearing (which is not withdrawn within
ten (10) days) relating to such a suspension, termination, revocation
or restriction, including any request by an Insurance Regulatory
Authority which commits the Borrower or any Subsidiary to take, or
refrain from taking, any action or which otherwise materially and
adversely affects the authority of the Borrower or any Subsidiary to
conduct their businesses.
(o) Within three (3) Business Days of such notice, notice of any
pending or threatened investigation or regulatory proceeding (other
than routine periodic investigations or reviews) by any Insurance
Regulatory Authority concerning the business, practices or operations
of the Borrower or any Subsidiary, including any agent or managing
general agent thereof.
(p) Promptly, upon knowledge of the Borrower or any Subsidiary, notice
of any actual or proposed changes in any Applicable Insurance Code, if
such changes could reasonably be expected to materially affect the
business of the Borrower or any Subsidiary.
(q) Promptly, notice of any written notice received by the Borrower or
any Subsidiary of any material denial of coverage, litigation or
arbitration arising out of any Surplus Reinsurance Agreement or any
material Reinsurance Agreement.
(r) From time to time, such other information regarding the business,
operation and financial condition of the Borrower or the Subsidiaries
as the Bank may reasonably request.
2.12 Acquisition Documents; Name Change. The following is added as new
Sections 7.11, 712 and 7.13 of the Credit Agreement:
Section 7.11 Acquisition Documents. Promptly deliver to the
Bank from time to time upon request by the Bank copies of any
Acquisition Documents specified in such request. The Borrower will
perform and comply in all material respects with all of its obligations
under all Acquisition Documents, and exercise promptly and diligently
their rights thereunder.
Section 7.12 Change of Name For HRMPA. On or before the
earlier of (a) the termination of any license to use any trade name of
the seller under the Acquisition Documents or (b) 180 days from the
date of consummation of the First Amendment hereto, Borrower shall file
all documents and instruments and take all other actions necessary to
duly and properly change the name of Oxford Health Plans (PA), Inc. to
HRM Health Plans (PA), Inc. The Borrower shall promptly furnish the
Bank with copies of all documents effecting the corporate name change
contemplated by the forgoing sentence.
Section 7.13 Supplemental Schedules and Secretary's
Certificate. As soon as available, but in no event greater than 30 days
after the date of consummation of the First Amendment hereto, the
Borrower will furnish the Bank with the following:
(a) Copies of the final executed versions of the
Administrative Services Agreement and Healthchoices Contract,
each in form and substance reasonably acceptable to the Bank.
(b) Reinsurance Agreements granting to HRMPA stop loss
coverage and insolvency coverage of a type and in an amount
sufficient to comply with the Healthchoices Contract and any
Applicable Insurance Code, each in form and substance
reasonably acceptable to the Bank, together with a form of a
supplemental Exhibit J hereto covering such new Reinsurance
Agreements.
(c) A Certificate of the Borrower's Chief Financial Officer
certifying that the agreements contemplated by the clauses (a)
and (b) are in full force and effect, without modification or
amendment.
2.13 Purchase of Assets. Section 8.3 of the Credit Agreement is deleted
in its entirety and the following is substituted in lieu thereof:
Section 8.3 Purchase of Assets. Except for the transactions
contemplated by the Acquisition Documents, 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;
provided, that any such acquisition would not cause an Adverse Event.
2.14 Subsidiaries, Etc. Section 8.6 of the Credit Agreement is deleted
in its entirety and the following is substituted in lieu thereof:
Section 8.6 Subsidiaries. Partnerships. Joint Ventures and
Ownership of Stock. Do any of the following: (a) except for the
acquisitions contemplated by the Acquisition Documents, 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).
2.15 Amended Financial Covenants. Sections 8.16, 8.17, 8.18, 8.19 and
8.20 of the Credit Agreement are deleted in their respective entireties and the
following sections are substituted in lieu thereof:
Section 8.16 Capital Expenditures. Make consolidated Capital
Expenditures in an amount in excess of (a) $14,500,000 at any time
during its fiscal year ending on or about June 30, 1999, (b)
$10,000,000 at any time during its fiscal year ending on or about June
30, 2000 and (b) $8,000,000 at any time during its fiscal year ending
on or about June 30, 2001 or during any fiscal year ending thereafter.
Section 8.17 Consolidated Tangible Net Worth. At any time
permit Consolidated Tangible Net Worth to be less than (a) at any time
during the period from and including January 1, 1999 to the date of
consummation of First Amendment hereto to but excluding June 30, 1999,
$8,750,000, (b) as at June 30, 1999, $11,500,000 and (c) from and after
June 30, 1999, the greater of (i) $11,500,000 or (b) 0.95 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 Consolidated Leverage Ratio to be greater than (a) 4.00 to 1.00 at
any time during the period from the date of consummation of the First
Amendment hereto to and including June 29, 1999, (b) 3.00 to 1.00 at
any time during the period from June 30, 1999 to and including June 29,
2000 and (c) 2.00 to 1.00 at any time from and after June 30, 2000.
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 to be greater than
(a) 5.00 to 1.00 as of January 1, 1999 and March 31, 1999 and (b) 2.00
to 1.00 as of June 30, 1999 and the last day of each fiscal quarter
occurring thereafter. With respect to months that end on or before
January 31, 1999, the relevant components of the forgoing ratio shall
be calculated on a pro forma basis.
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 (a) 1.20 to 1.00 for the
four fiscal quarters ended on June 30, 1999 and (b) 1.50 to 1.00 for
the four fiscal quarters ended on the last day of any fiscal quarter
occurring from and after June 30, 1999. With respect to months that end
on or before January 31, 1999, the relevant components of the forgoing
ratio shall be calculated on a pro forma basis.
2.16 New Negative Covenants. The following is added as new Sections
8.21, 8.22, 8.23, 8.24 and 8.25 of the Credit Agreement:
Section 8.21 Software Capital Expenditures. Make aggregate
consolidated Software Capital Expenditures in an amount in excess of
(a) $9,500,000 at any time during its fiscal year ending on or about
June 30, 1999, (b) $8,000,000 at any time during its fiscal year ending
on or about June 30, 2000 and (c) $6,000,000 at any time during its
fiscal year ending on or about June 30, 2001 or during any fiscal year
ending thereafter.
Section 8.22 Minimum Statutory Net Worth. At any time permit
HRMPA to maintain Statutory Net Worth which is less than the minimum
net worth prescribed by any Insurance Regulatory Authority or any
Applicable Insurance Code.
Section 8.23 Reinsurance and Other Contracts.
(a) At any time enter into, nor permit any of its Subsidiaries
to enter into, Surplus Reinsurance Agreements except those
treaties existing on the date of this Agreement (which
treaties shall not be materially amended without the written
consent of the Bank).
(b) At any time permit, nor permit any of its Subsidiaries to,
materially default under or make any material change or
modification to the Healthchoices Contract, the Administrative
Services Agreement, any Surplus Reinsurance Agreement or any
Reinsurance Agreement.
Section 8.24 Acquisition Documents. Default under any of the
Acquisition Documents, nor agree to any amendment, modification,
cancellation, or termination of any Acquisition Document.
Section 8.25 Commercial Membership Requirements. At any time
fail to maintain, or cause any Subsidiary to fail to maintain, a valid
and enforceable waiver of the commercial membership requirements set
forth in the regulations of the Health Care Financing Administration,
if such waiver is required by such regulations.
2.17 Exhibit of Licenses. Exhibit I to the Credit Agreement is hereby
added to read as set forth on Exhibit A attached to this Amendment.
2.18 Exhibit of Reinsurance Agreements. Exhibit J to the Credit
Agreement is hereby added to read as set forth on Exhibit B attached to this
Amendment
2.19 New Revolving Note. Exhibit A to the Credit Agreement is hereby
amended to read as set forth on Exhibit C attached to this Amendment.
2.20 New Term Note. Exhibit B to the Credit Agreement is hereby added
to read as set forth on Exhibit D attached to this Amendment which Exhibit
amends and restates Exhibits B-1, 2 and 3 of the Credit Agreement.
Section 3. Effectiveness of Amendments. The amendments contained in
this Amendment shall become effective upon delivery by the Borrower of, and
compliance by the Borrower with, the following:
3.1 This Amendment, the Revolving Note and Term Note, each
duly executed by the Borrower.
3.2 A copy of the resolutions of the Board of Directors of the
Borrower authorizing the execution, delivery and performance of this
Amendment, the Revolving Note and the Term Note certified as true and
accurate by its Secretary or Assistant Secretary, along with a
certification by such Secretary or Assistant Secretary (i) certifying
that there has been no amendment to the Articles of Incorporation or
Bylaws of the Borrower since true and accurate copies of the same were
previously delivered to the Bank, and (ii) identifying each officer of
the Borrower authorized to execute this Amendment, the Revolving Note
and the Term Note and any other instrument or agreement executed by the
Borrower in connection with this Amendment (collectively, the
"Amendment Documents"), and certifying as to specimens of such
officer's signature and such officer's incumbency in such offices as
such officer holds.
3.3 Certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if
any) with respect to this Amendment, including without limitation,
copies of the Certificate of Good Standing and all Licenses for HRMPA
from the appropriate Insurance Regulatory Authority.
3.4 Reaffirmations of Security Agreement in the forms of
Exhibits E-1, E-2 and E-3, duly executed by the corporations indicated
therein.
3.5 An opinion of Buchanan Ingersoll, special Pennsylvania
regulatory counsel to the Borrower in form and substance acceptable to
the Bank, duly executed by said counsel.
3.6 An opinion of the Borrower's and Subsidiaries' in-house
General Counsel in form and substance acceptable to the Bank, duly
executed by such counsel.
3.7 Good standing certificates for the Borrower and
corporations executing Exhibits E-1, E-2 and E-3 from the State
Minnesota issued not more than 10 days prior to the date of this
Amendment.
3.8 UCC searches for the Borrower and the corporations
executing Exhibits E-1, E-2 and E-3 from the State of Minnesota issued
not more than 10 days prior to the date of this Amendment.
3.9 The Bank shall have received a non-refundable amendment
fee in the amount of $107,581.
3.10 Copies of the Acquisition Documents, including all
amendments thereof and supplements thereto, all of which shall be in
form and substance satisfactory to the Bank.
3.11 A Solvency Certificate of the Borrower in the form of
Exhibit F hereto, duly executed by the Secretary of the Borrower,
together with copies of the Projections and Closing Date Balance Sheet
referred to therein.
3.12 A certificate of the chief financial officer of the
Borrower certifying that:
(i) The Purchase Agreement, in the form delivered to
the Bank, remains in full force and effect, without
modification or amendment and embodies the entire Agreement
and understanding between the parties thereto with respect to
the matters therein;
(ii) All conditions to the closing of the Acquisition
and the Purchase Agreement shall be satisfied and the
Acquisition Agreement has not been terminated and remains in
full force and effect;
(iii) True and accurate copies of all outstanding
Reinsurance Agreements and Surplus Reinsurance Agreements have
been attached to such Certificate and previously supplied to
the Bank and remain in full force and effect.
3.13 HRMPA shall have received the net proceeds from an
advance ceding allowance by reinsurance companies to HRMPA in amounts
and containing terms and conditions in all respects satisfactory to the
Bank.
3.14 The Borrower shall have paid in cash $2,087,500 of the
purchase price in connection with the Acquisition from funds of the
Borrower other than the proceeds of any Loan.
3.15 The Borrower shall have satisfied such other conditions
as specified by the Bank, including payment of all unpaid legal fees
and expenses incurred by the Bank through the date of this Amendment in
connection with the Credit Agreement and the Amendment Documents.
Section 4 Defaults and Waivers.
4.1 Events of Default and Unmatured Events of Default.
(a) Consolidated Tangible Net Worth. The Borrower
defaulted under Section 8.17 of the Credit Agreement by
permitting its Consolidated Tangible Net Worth to be less than
the amounts set forth therein for the period ended December
31, 1998.
(b) Consolidated Leverage Ratio. The Borrower
defaulted under Section 8.18 of the Credit Agreement by
permitting the ratio of the Borrower's consolidated total
liabilities (as determined in accordance with GAAP) to
Consolidated Tangible Net Worth to be greater than 2.50 to
1.00 as at December 31, 1998.
(c) Consolidated Cash Flow Leverage. The Borrower
defaulted under Section 8.19 of the Credit Agreement by
permitting the ratio of the Borrower's consolidated
interest-bearing Indebtedness as of December 31, 1998 to its
Consolidated Operating Income for the period of four
consecutive fiscal quarters ending on that date to be greater
than 3.00 to 1.00.
(d) Fixed Charge Coverage Ratio. The Borrower
defaulted under Section 8.20 of the Credit Agreement by
permitting the Consolidated Fixed Charge Coverage Ratio for
the period of four consecutive fiscal quarters ended on
December 31, 1998 to be less than 1.50 to 1.00.
4.2 Waiver. Upon the date on which this Amendment becomes
effective, the Bank hereby waives the Borrower's Defaults and Events of
Default described in the preceding Sections 4.1(a) through 4.1(d) (the
"Existing Defaults"). The waiver of the Existing Defaults set forth
above is limited to the express terms thereof, and nothing herein shall
be deemed a waiver by the Bank of any other term, condition,
representation or covenant applicable to the Borrower under the Credit
Agreement (including but not limited to any future occurrence similar
to the Existing Defaults) or any of the other agreements, documents or
instruments executed and delivered in connection therewith, or of the
covenants described therein. The waivers set forth herein shall not
constitute a waiver by the Bank of any other Default or Event of
Default, if any, under the Credit Agreement, and shall not be, and
shall not be deemed to be, a course of action with respect thereto upon
which the Borrower may rely in the future, and the Borrower hereby
expressly waives any claim to such effect.
Section 5. Representations, Warranties, Authority, No Adverse Claim.
5.1 Reassertion of Representations and Warranties, No Default. The
Borrower hereby represents that on and as of the date hereof and after giving
effect to this Amendment (a) all of the representations and warranties contained
in the Credit Agreement are true, correct and complete in all respects as of the
date hereof as though made on and as of such date, except for changes permitted
by the terms of the Credit Agreement, and (b) there will exist no Default or
Event of Default under the Credit Agreement as amended by this Amendment on such
date which has not been waived by the Bank.
5.2 Authority, No Conflict, No Consent Required. The Borrower
represents and warrants that the Borrower has the power and legal right and
authority to enter into the Amendment Documents and has duly authorized as
appropriate the execution and delivery of the Amendment Documents and other
agreements and documents executed and delivered by the Borrower in connection
herewith or therewith by proper corporate, and none of the Amendment Documents
nor the agreements contained herein or therein contravene or constitute a
default under any agreement, instrument or indenture to which the Borrower is a
party or a signatory or a provision of the Borrower's Articles of Incorporation,
Bylaws or any other agreement or requirement of law, or result in the imposition
of any lien on any of its property under any agreement binding on or applicable
to the Borrower or any of its property except, if any, in favor of the Bank. The
Borrower represents and warrants that no consent, approval or authorization of
or registration or declaration with any person, including but not limited to any
governmental authority, is required in connection with the execution and
delivery by the Borrower of the Amendment Documents or other agreements and
documents executed and delivered by the Borrower in connection therewith or the
performance of obligations of the Borrower therein described, except for those
which the Borrower has obtained or provided and as to which the Borrower has
delivered certified copies of documents evidencing each such action to the Bank.
5.3 No Adverse Claim. The Borrower warrants, acknowledges and agrees
that no events have been taken place and no circumstances exist at the date
hereof which would give the Borrower a basis to assert a defense, offset or
counterclaim to any claim of the Bank with respect to the Borrower's obligations
under the Credit Agreement as amended by this Amendment.
Section 6. Affirmation of Credit Agreement, Further References,
Affirmation of Security Interest. The Bank and the Borrower each acknowledge and
affirm that the Credit Agreement, as hereby amended, is hereby ratified and
confirmed in all respects and all terms, conditions and provisions of the Credit
Agreement, except as amended by this Amendment, shall remain unmodified and in
full force and effect. All references in any document or instrument to the
Credit Agreement are hereby amended and shall refer to the Credit Agreement as
amended by this Amendment. The Borrower confirms to the Bank that the Borrower's
obligations under the Credit Agreement, as amended by this Amendment are and
continue to be secured by the security interest granted by the Borrower in favor
of the Bank under the Security Agreement, and all of the terms, conditions,
provisions, agreements, requirements, promises, obligations, duties, covenants
and representations of the Borrower under such documents and any and all other
documents and agreements entered into with respect to the obligations under the
Credit Agreement are incorporated herein by reference and are hereby ratified
and affirmed in all respects by the Borrower.
Section 7. Merger and Integration, Superseding Effect. This Amendment,
from and after the date hereof, embodies the entire agreement and understanding
between the parties hereto and supersedes and has merged into this Amendment all
prior oral and written agreements on the same subjects by and between the
parties hereto with the effect that this Amendment, shall control with respect
to the specific subjects hereof and thereof.
Section 8. Severability. Whenever possible, each provision of this
Amendment and the other Amendment Documents and any other statement, instrument
or transaction contemplated hereby or thereby or relating hereto or thereto
shall be interpreted in such manner as to be effective, valid and enforceable
under the applicable law of any jurisdiction, but, if any provision of this
Amendment, the other Amendment Documents or any other statement, instrument or
transaction contemplated hereby or thereby or relating hereto or thereto shall
be held to be prohibited, invalid or unenforceable under the applicable law,
such provision shall be ineffective in such jurisdiction only to the extent of
such prohibition, invalidity or unenforceability, without invalidating or
rendering unenforceable the remainder of such provision or the remaining
provisions of this Amendment, the other Amendment Documents or any other
statement, instrument or transaction contemplated hereby or thereby or relating
hereto or thereto in such jurisdiction, or affecting the effectiveness, validity
or enforceability of such provision in any other jurisdiction.
Section 9. Successors. The Amendment Documents 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.
Section 10. Legal Expenses. As provided in Section 10.2 of the Credit
Agreement, the Borrower agrees to reimburse the Bank, upon execution of this
Amendment, for all reasonable out-of-pocket expenses (including attorneys' fees
and legal expenses of Dorsey & Whitney LLP, counsel for the Bank) incurred in
connection with the Credit Agreement, including in connection with the
negotiation, preparation and execution of the Amendment Documents and all other
documents negotiated, prepared and executed in connection with the Amendment
Documents, and in enforcing the obligations of the Borrower under the Amendment
Documents, and to pay and save the Bank harmless from all liability for, any
stamp or other taxes which may be payable with respect to the execution or
delivery of the Amendment Documents, which obligations of the Borrower shall
survive any termination of the Credit Agreement.
Section 11. Headings. The headings of various sections of this
Amendment have been inserted for reference only and shall not be deemed to be a
part of this Amendment.
Section 12. Counterparts. The Amendment Documents may be executed in
several counterparts as deemed necessary or convenient, each of which, when so
executed, shall be deemed an original, provided that all such counterparts shall
be regarded as one and the same document, and either party to the Amendment
Documents may execute any such agreement by executing a counterpart of such
agreement.
Section 13. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY
THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT
OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO
NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES.
[The remainder of this page has been intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date and year first above written.
BORROWER:
HEALTH RISK MANAGEMENT, INC.
By:
Title:
BANK:
U.S. BANK NATIONAL ASSOCIATION
By:
Title:
<PAGE>
EXHIBIT A TO FIRST AMENDMENT
TO CREDIT AGREEMENT
EXHIBIT I
INSURANCE LICENSES
Oxford Health Plans (PA), Inc. f/k/a Oak Tree Health Plan of Pennsylvania, Inc.
Certificate of Authority to Operate a Health Maintenance Organization dated,
September 22, 1993.
<PAGE>
EXHIBIT B TO FIRST AMENDMENT
TO CREDIT AGREEMENT
EXHIBIT J
REINSURANCE
Oxford Health Plans (PA), Inc.
1. Treaty Summary for Fully Insured MEDICAID Program effective January 1, 1999
between Oxford Health Plans (PA), Inc. and Reassurance Company of Hannover
signed January 19, 1999
1. Stop Loss and Insolvency Insurance to be provided upon finalization effective
January 1, 1999. Pennsylvania HRM, Inc./Health Risk Management, Inc.
1. HealthCare Excess Risk Insurance Policy - Schedule of Insurance - Aggregate
Policy #hc1001 between Pennsylvania HRM, Inc. (Health Risk Management, Inc.
and Kentucky Medical Insurance Company effective 4/13/98 and expiration
date January 1, 1999.
<PAGE>
EXHIBIT C TO FIRST AMENDMENT
TO CREDIT AGREEMENT
AMENDED AND RESTATED REVOLVING NOTE
$6,000,000 Minneapolis, Minnesota: January 27, 1999
FOR VALUE RECEIVED, the undersigned HEALTH RISK MANAGEMENT, INC., a Minnesota
corporation (the "Borrower"), promises to pay to the order of U.S. BANK NATIONAL
ASSOCIATION, a national banking association (the "Bank"), on the Revolving
Termination Date, or other due date or dates determined under the Credit
Agreement hereinafter referred to, the principal sum of SIX MILLION DOLLARS
($6,000,000), or if less, the then aggregate unpaid principal amount of the
Revolving Loans (as such terms are defined in the Credit Agreement) as may be
borrowed by the Borrower under the Credit Agreement. All Loans and all payments
of principal shall be recorded by the holder in its records which records shall
be conclusive evidence of the subject matter thereof, absent manifest error.
The Borrower further promises to pay to the order of the Bank interest on the
aggregate unpaid principal amount hereof from time to time outstanding from the
date hereof until paid in full at the rates per annum which shall be determined
in accordance with the provisions of the Credit Agreement. Accrued interest
shall be payable on the dates specified in the Credit Agreement.
All payments of principal and interest under this Note shall be made in lawful
money of the United States of America in immediately available funds at the
Bank's office at 601 2nd Ave. S., Minneapolis, Minnesota 55402-4302, or at such
other place as may be designated by the Bank to the Borrower in writing.
This Note (a) is the Revolving Note referred to in, and evidences indebtedness
incurred under, an Amended and Restated Revolving Credit and Term Loan Agreement
dated as of May 1, 1998 (herein, as it may be amended, modified or supplemented
from time to time, called the "Credit Agreement") between the Borrower and the
Bank, to which Credit Agreement reference is made for a statement of the terms
and provisions thereof, including those under which the Borrower is permitted
and required to make prepayments and repayments of principal of such
indebtedness and under which such indebtedness may be declared to be immediately
due and payable and (b) amends and restates, but does not constitute payment
upon or a novation of, (i) that certain Revolving Note dated May 1, 1998 from
the Borrower to the Bank in the amount of $10,000,000 and (ii) that certain
Revolving Note dated December 30, 1996 from the Borrower to the Bank in the
original principal amount of $1,275,000. All parties hereto, whether as makers,
endorsers or otherwise, severally waive presentment, demand, protest and notice
of dishonor in connection with this Note.
This Note is made under and governed by the internal laws of the State of
Minnesota.
HEALTH RISK MANAGEMENT, INC.
By:
Title:
<PAGE>
EXHIBIT D TO FIRST AMENDMENT
TO CREDIT AGREEMENT
CONSOLIDATED AMENDED AND RESTATED TERM NOTE
$6,294,916 Minneapolis, Minnesota: January 27, 1999
FOR VALUE RECEIVED, the undersigned HEALTH RISK MANAGEMENT, INC., a Minnesota
corporation (the "Borrower"), promises to pay to the order of U.S. BANK NATIONAL
ASSOCIATION, a national banking association (the "Bank"), the principal sum of
SIX MILLION TWO HUNDRED NINETY FOUR THOUSAND NINE HUNDRED SIXTEEN AND NO/100
DOLLARS ($6,294,916), payable in consecutive installments of $175,000.00 each,
payable on the last day of each month of each year, commencing with the first
such date to occur after the date hereof, with the final such payment, equal to
all principal outstanding hereunder, payable on January 31, 2002.
The Borrower further promises to pay to the order of the Bank interest on the
aggregate unpaid principal amount hereof from time to time outstanding from the
date hereof until paid in full at the rates per annum which shall be determined
in accordance with the provisions of the Credit Agreement (as hereinafter
defined). Accrued interest shall be payable on the dates specified in the Credit
Agreement.
All payments of principal and interest under this Note shall be made in lawful
money of the United States of America in immediately available funds at the
Bank's office at 601 2nd Ave. S., Minneapolis, Minnesota 55402-4302, or at such
other place as may be designated by the Bank to the Borrower in writing.
This Note (a) is the Term Note referred to in, and evidences indebtedness
incurred under, an Amended and Restated Credit and Term Loan Agreement dated as
of May 1, 1998 (herein, as it may be amended, modified or supplemented from time
to time, called the "Credit Agreement") between the Borrower and the Bank, to
which Credit Agreement reference is made for a statement of the terms and
provisions thereof, including those under which the Borrower is permitted and
required to make prepayments and repayments of principal of such indebtedness
and under which such indebtedness may be declared to be immediately due and
payable and (b) consolidates, amends and restates, but does not constitute
payment upon or a novation of (i) that certain Term Note (Tranche B Term Loans)
dated May 1, 1998 from the Borrower to the Bank in the amount of $654,999.85 and
(ii) that certain Term Note (Tranche C Term Loans) dated May 1, 1998 in the
amount of $2,566,666.66.
All parties hereto, whether as makers, endorsers or otherwise, severally waive
presentment, demand, protest and notice of dishonor in connection with this
Note.
This Note is made under and governed by the internal laws of the State of
Minnesota.
HEALTH RISK MANAGEMENT, INC.
By:
Title:
<PAGE>
EXHIBIT E-1 TO FIRST AMENDMENT
TO CREDIT AGREEMENT
REAFFIRMATION OF SECURITY AGREEMENT
January 27, 1999
U.S. Bank National Association
U.S. Bank Place - MPFP0907
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Re: Security Agreement Executed by the Undersigned dated June 24, 1994,
(the "Security Agreement") Regarding the Liabilities (as defined in the
Security Agreement) of Health Risk Management, Inc. (the "Borrower") to
U.S. Bank National Association (the "Bank")
This will confirm (a) that the undersigned hereby consents to the terms of that
First Amendment to Credit Agreement dated concurrently herewith by and between
the Borrower and the Bank (the "Amendment") and to the execution and delivery of
the Amendment by the Borrower and (b) that the obligations of the Borrower to
the Bank under the Amended and Restated Revolving Credit and Term Loan Agreement
dated as of May 1, 1998, as amended by the Amendment, constitute "Liabilities"
of the Borrower to the Bank within the meaning of the above-referenced Security
Agreement. This will further confirm that as modified by clause (b) of the
immediately preceding sentence, all of the terms, covenants and conditions of
the Security Agreement remain in full force and effect.
INSTITUTE FOR HEALTHCARE QUALITY,
INC., a Minnesota corporation
By:
Its:
<PAGE>
EXHIBIT E-2 TO FIRST AMENDMENT
TO CREDIT AGREEMENT
REAFFIRMATION OF SECURITY AGREEMENT
January 27, 1999
U.S. Bank National Association
U.S. Bank Place - MPFP0907
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Re: Security Agreement Executed by the Undersigned dated June 24, 1994,
(the "Security Agreement") Regarding the Liabilities (as defined in the
Security Agreement) of Health Risk Management, Inc. (the "Borrower") to
U.S. Bank National Association (the "Bank")
This will confirm (a) that the undersigned hereby consents to the terms of that
First Amendment to Credit Agreement dated concurrently herewith by and between
the Borrower and the Bank (the "Amendment") and to the execution and delivery of
the Amendment by the Borrower and (b) that the obligations of the Borrower to
the Bank under the Amended and Restated Revolving Credit and Term Loan Agreement
dated as of May 1, 1998, as amended by the Amendment, constitute "Liabilities"
of the Borrower to the Bank within the meaning of the above-referenced Security
Agreement. This will further confirm that as modified by clause (b) of the
immediately preceding sentence, all of the terms, covenants and conditions of
the Security Agreement remain in full force and effect.
HEALTH RESOURCE MANAGEMENT, LTD,
an Alberta, Canada corporation
By:
Its:
<PAGE>
EXHIBIT E-3 TO FIRST AMENDMENT
TO CREDIT AGREEMENT
REAFFIRMATION OF SECURITY AGREEMENT
January 27, 1999
U.S. Bank National Association
U.S. Bank Place - MPFP0907
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Re: Security Agreement Executed by the Undersigned dated June 24, 1994,
(the "Security Agreement") Regarding the Liabilities (as defined in the
Security Agreement) of Health Risk Management, Inc. (the "Borrower") to
U.S. Bank National Association (the "Bank")
This will confirm (a) that the undersigned hereby consents to the terms of that
First Amendment to Credit Agreement dated concurrently herewith by and between
the Borrower and the Bank (the "Amendment") and to the execution and delivery of
the Amendment by the Borrower and (b) that the obligations of the Borrower to
the Bank under the Amended and Restated Revolving Credit and Term Loan Agreement
dated as of May 1, 1998, as amended by the Amendment, constitute "Liabilities"
of the Borrower to the Bank within the meaning of the above-referenced Security
Agreement. This will further confirm that as modified by clause (b) of the
immediately preceding sentence, all of the terms, covenants and conditions of
the Security Agreement remain in full force and effect.
HRM CLAIM MANAGEMENT, INC., a
Minnesota corporation
By:
Its:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FROM THE REGISTRANT'S FORM 10-Q FOR THE QUARTER
ENDED 3/31/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 10,763
<SECURITIES> 0
<RECEIVABLES> 15,232
<ALLOWANCES> 310
<INVENTORY> 0
<CURRENT-ASSETS> 29,344
<PP&E> 39,200
<DEPRECIATION> 38,591
<TOTAL-ASSETS> 82,251
<CURRENT-LIABILITIES> 38,844
<BONDS> 6,714
0
0
<COMMON> 46
<OTHER-SE> 33,916
<TOTAL-LIABILITY-AND-EQUITY> 82,251
<SALES> 127,185
<TOTAL-REVENUES> 127,881
<CGS> 0
<TOTAL-COSTS> 115,438
<OTHER-EXPENSES> 12,186
<LOSS-PROVISION> 86
<INTEREST-EXPENSE> 639
<INCOME-PRETAX> (382)
<INCOME-TAX> (117)
<INCOME-CONTINUING> (265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (265)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
