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 December 31, 1998
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
February 9, 1999 was 4,609,051.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
INDEX
Part I. Financial Information Page
Number
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- at December 31, 1998 and
June 30, 1998................................................3
Consolidated Statements of Operations for the three months
ended December 31, 1998 and 1997 and the six months ended
December 31, 1998 and 1997...................................4
Consolidated Statements of Cash Flows for the six months
ended December 31, 1998 and 1997.............................5
Notes to Consolidated Financial Statements......................6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............10-13
Part II. Other Information
Item 1. Legal Proceedings.......................................14
Item 5. Other Information.......................................14
Item 6. Exhibits and Reports on Form 8-K........................14
Signatures..................................................................15
Exhibit Index...............................................................16
<PAGE>
PART I. FINANCIAL INFORMATION
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
December 31,
1998 June 30
(Unaudited) 1998
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,736 $ 20,624
Accounts receivable, less allowance for doubtful accounts of 16,705 11,019
$290 and $265 at December 31, 1998, and June 30, 1998, respectively
Deferred income taxes 900 900
Other 1,542 837
---------------- ----------------
Total current assets 25,883 33,380
Computer software costs, less accumulated amortization of $18,941 and $17,940 at 26,175 24,284
December 31, 1998, and June 30, 1998 respectively
Property and equipment, less accumulated depreciation of $14,587 and $14,299 at
December 31, 1998, and June 30, 1998 respectively 12,092 8,670
Other assets 4,994 4,180
---------------- ----------------
$ 69,144 $ 70,514
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,176 $ 2,125
Medical services payable 17,694 15,452
Accrued expenses 2,337 3,596
Unearned revenues 2,250 3,708
Current maturities of notes payable 6,146 4,429
Current portion of capitalized equipment leases 378 596
---------------- ----------------
Total current liabilities 30,981 29,906
Deferred income taxes 3,035 3,776
Long-Term portion of notes payable 1,860 2,313
Long-Term portion of capitalized equipment leases 631 734
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, 4,605,685
and 4,583,694 issued and outstanding at December 31, 1998 and
June 30, 1998, respectively 46 46
Additional paid-in capital 31,914 31,728
Retained earnings 677 2,011
---------------- ----------------
Total shareholders' equity 32,637 33,785
---------------- ----------------
$ 69,144 $ 70,514
================ ================
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Health plan management services $ 15,262 $ 17,916 $ 34,173 $ 34,899
Managed care operations 29,588 -- 59,377 --
Investment income 168 73 417 136
-------- -------- -------- --------
Total revenues 45,018 17,989 93,967 35,035
Operating expenses:
Cost of health plan management services 11,478 13,385 25,588 26,106
Cost of managed care operations 29,366 -- 58,194 --
Selling, marketing and administration 5,134 3,227 10,530 6,218
Oxford transition costs 920 -- 1,350 --
Interest expense 191 106 374 227
-------- -------- -------- --------
Total operating expenses 47,089 16,718 96,036 32,551
Income (loss) before income taxes and cumulative
effect of accounting change (2,071) 1,271 (2,069) 2,484
Income tax expense (benefit) (760) 484 (735) 946
-------- -------- -------- --------
Income (loss) before cumulative effect
of accounting change (1,311) 787 (1,334) 1,538
Cumulative effect of accounting change, net of
income tax benefit of $1,342 -- -- -- (2,371)
-------- -------- -------- --------
Net income (loss) $ (1,311) $ 787 $ (1,334) $ (833)
======== ======== ======== ========
Basic earnings per share:
Income (loss) before cumulative effect
of accounting change $ (.28) $ .18 $ (.29) $ .34
Cumulative effect of accounting change
-- -- -- (.53)
-------- -------- -------- --------
Net income (loss) $ (.28) $ .18 $ (.29) $ (.19)
======== ======== ======== ========
Diluted earnings per share:
Income (loss) before cumulative effect
of accounting change $ (.28) $ .17 $ (.28) $ .33
Cumulative effect of accounting change
-- -- -- (.51)
-------- -------- -------- --------
Net income (loss) $ (.28) $ .17 $ (.28) $ (.18)
======== ======== ======== ========
Weighted average number of shares outstanding:
Basic 4,605 4,502 4,599 4,499
======== ======== ======== ========
Diluted 4,643 4,639 4,682 4,638
======== ======== ======== ========
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,334) $ (833)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 1,630 1,537
Amortization 3,311 2,548
Cumulative effect of accounting change -- 2,371
Provision for deferred income taxes (741) 743
Changes in operating assets and liabilities:
Accounts receivable (5,686) (2,139)
Other assets (1,857) (52)
Accounts payable (143) (271)
Medical services payable 2,242 --
Accrued expenses (1,259) 236
Unearned revenues (1,458) 23
-------- --------
Net cash provided by (used in) operating activities (5,295) 4,163
Cash flows from investing activities:
Property and equipment (4,858) (933)
Capitalized software (4,864) (4,070)
-------- --------
Net cash used in investing activities (9,722) (5,003)
Cash flows from financing activities:
Proceeds from notes payable 2,000 1,750
Principal payments on notes payable (736) (594)
Principal payments on capital leases (321) (438)
Issuance of common shares 186 190
-------- --------
Net cash provided by financing activities 1,129 908
-------- --------
Increase (decrease) in cash (13,888) 68
Cash and cash equivalents at beginning of period 20,624 5,349
-------- --------
Cash and cash equivalents at end of period $ 6,736 $ 5,417
======== ========
</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. Accordingly, footnote disclosures which would
substantially duplicate the disclosures contained in the June 30, 1998
audited financial statements have been omitted from these interim
financial statements. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These interim financial
statements should be read in conjunction with the annual financial
statements and the notes thereto.
2. 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 six months ended December 31, 1997.
<PAGE>
4. Computer software costs
<TABLE>
<CAPTION>
December 31,
1998 June 30,
(Unaudited) 1998
------- -------
(in thousands)
Computer software costs consist of the following:
<S> <C> <C>
Care Management Software
Cost $18,590 $17,268
Less accumulated amortization 7,412 7,391
------- -------
Net book value 11,178 9,877
Claim Administration Software
Cost 9,144 8,852
Less accumulated amortization 3,828 3,708
------- -------
Net book value 5,316 5,144
Guidelines, Protocols and Medical
Analysis Software
Cost 17,382 16,104
Less accumulated amortization 7,701 6,841
------- -------
Net book value 9,681 9,263
------- -------
Computer software costs $26,175 $24,284
======= =======
</TABLE>
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 December 31, and the six
months ended December 31 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before cumulative effect of
accounting change $ (1,311) $ 787 $ (1,334) $ 1,538
Cumulative effect of accounting change
-- -- -- (2,371)
----------- ----------- ----------- ------------
Net income (loss) $ (1,311) $ 787 $ (1,334) $ (833)
=========== =========== =========== ============
Denominator:
Weighted-average shares-basic
Effect of dilutive stock options 4,605 4,502 4,599 4,499
Weighted-average shares-diluted 38 137 83 139
----------- ----------- ----------- ------------
4,643 4,639 4,682 4,638
=========== =========== =========== ============
Basic earnings per share:
Income (loss) before cumulative effect of
accounting change $ $ $ $
(.28) .18 (.29) .34
Cumulative effect of accounting change
-- -- -- (.53)
----------- ----------- ----------- ------------
Net income (loss) $ (.28) $ .18 $ (.29) $ (.19)
=========== =========== =========== ============
Diluted earnings per share:
Income (loss) before cumulative effect of
accounting change $ (.28) $ .17 $ (.28) $ .33
Cumulative effect of accounting change
-- -- -- (.51)
----------- ----------- ----------- ------------
Net income (loss) $ (.28) $ .17 $ (.28) $ (.18)
=========== =========== =========== ============
</TABLE>
6. Purchase of Oxford Health Plans (PA)
On January 27, 1999, the Company finalized the purchase of Oxford
Health Plans (PA), Inc. (OXPA), a wholly-owned subsidiary of Oxford
Health Plans, Inc., for $7.1 million in cash and the assumption of a
surplus note from OXPA for $2.5 million.
In conjunction with the purchase, the Company amended its revolving
credit facility and term loan agreement with the bank. As of January
27, 1999, the Company has term loans outstanding of $6,295,000 with an
interest rate of 7.93% and payable at $175,000 per month. The Company
also has $5,765,000 outstanding under the terms of its $6,000,000
revolving credit facility expiring January 31, 2000 with an interest
rate based upon the bank's reference rate.
The Company incurred transition costs related to the purchase of OXPA
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. Reclassification
Certain items in the financial statements for the three and six month
periods ended December 31, 1997 have been reclassified to conform to
the 1998 presentations.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Overview
A majority of the Company's revenues consist of fees for health plan management
and managed care operations.
The Company's expenses are comprised of its cost of health plan management
services (consisting primarily of compensation of personnel, including nurses
and physicians, telephone expenses, depreciation and amortization, rent, costs
related to the Company's computer operations, costs related to customer service,
and costs related to development of new services), cost of managed care
operations (consisting primarily of the cost of medical services and
reinsurance, net of recoveries), selling, marketing and administration expenses
(including sales commissions, advertising, sales account management personnel,
bad debts, compensation and depreciation).
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of total revenues, as indicated, for the three months and the six
months ended December 31, 1998 and 1997 and the fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Year
December 31, December 31, Ended
June 30,
1998 1997 1998 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Operating expenses:
Cost of health plan management services 75.2(1) 74.7(1) 74.9(1) 74.8(1) 76.8(1)
Cost of managed care operations 99.2(2) -- 98.0(2) -- 97.6(2)
Selling, marketing and administration 11.4(3) 17.9(3) 11.2(3) 17.7(3) 15.4(3)
Oxford transition costs 2.0(3) -- 1.4(3) -- --
Interest expense 0.4(3) 0.6(3) 0.4(3) 0.6(3) 0.5(3)
----- ----- ----- ----- -----
Total operating expenses 104.6(3) 92.9(3) 102.2(3) 92.9(3) 97.7(3)
----- ----- ----- ----- -----
Income (loss) before income taxes and
cumulative effect of accounting change (4.6) 7.1 (2.2) 7.1 2.3
Income taxes expense (benefit) (1.7) 2.7 (0.8) 2.7 0.9
----- ----- ----- ----- -----
Income (loss) before cumulative effect
of accounting change (2.9) 4.4 (1.4) 4.4 1.4
Cumulative effect of accounting change
net of income tax -- -- -- (6.8) (2.5)
----- ----- ----- ----- -----
Net income (loss) (2.9)% 4.4% (1.4)% (2.4)% (1.1)%
===== ===== ===== ===== =====
</TABLE>
(1) Computed as a % of health plan management revenues.
(2) Computed as a % of managed care operations revenues.
(3) Computed as a % of total revenues.
Total Revenues: Total revenues increased $27,029,000 (150%) from second quarter
of fiscal 1998 to fiscal 1999 (from $17,989,000 to $45,018,000) and increased
$58,932,000 (168%) from the first six months of fiscal 1998 to fiscal 1999 from
($35,035,000 to $93,967,000). These increases are primarily attributable to
revenues from managed care operations which began April 16, 1998, and net of
decreases in the number of covered participants enrolled in the Company's health
plan management services related to an HMO that terminated services on September
30, 1998 and sales of additional products to existing clients and increased
sales of the QualityFIRST(R) Medical Risk Management System.
<PAGE>
Following is a breakout of revenue:
<TABLE>
<CAPTION>
Three Months Ended
December 31
1998 1997 Change
----------- ----------- ------------
<S> <C> <C> <C> <C>
Health plan management services $15,262,000 $17,916,000 $ (2,654,000) (15)%
Managed care operations 29,588,000 0 29,588,000 N/A
Investment income 168,000 73,000 95,000 130%
----------- ----------- ----------- ----
Total revenues $45,018,000 $17,989,000 $27,029,000 150%
=========== =========== =========== ====
Six Months Ended
December 31
1998 1997 Change
----------- ----------- -----------
Health plan management services $34,173,000 $34,899,000 $ (726,000) (2)%
Managed care operations 59,377,000 0 59,377,000 N/A
Investment income 417,000 136,000 281,000 207%
----------- ----------- ----------- ----
Total revenues $93,967,000 $35,035,000 $58,932,000 168%
=========== =========== =========== ====
</TABLE>
Revenues for health plan management services decreased 15% or $2,654,000, from
second quarter of fiscal 1998 to fiscal 1999 (decreasing from $17,916,000 to
$15,262,000) and decreased 2% or $726,000 from the first six months of fiscal
1998 to fiscal 1999 (decreasing from $34,899,000 to $34,173,000). 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.
Revenues from the managed care operations were the result of obtaining in the
fourth quarter of fiscal 1998 the revenue from a client contract under which the
Company is at risk for the total medical services costs and receives a
significant portion of the total premium of an HMO. The Company did not have
this business in the first three quarters of fiscal 1998. The Company acquired
this HMO in January 1999.
Investment income increased 130% or $95,000 from the second quarter of fiscal
1998 to fiscal 1999 (increasing from $73,000 to $168,000)and increased 207% from
the first six months of fiscal 1998 to fiscal 1999 (increasing from $136,000 to
$417,000). This increase is the result of higher levels of investments in the
first quarter and the first six months of fiscal 1999.
Cost of Health Plan Management Services: Cost of services decreased $1,907,000
(14%) from the second quarter of fiscal 1998 to fiscal 1999 (from $13,385,000 to
$11,478,000) and decreased $518,000 (2%) for the first six months of fiscal 1998
compared to fiscal 1999 (decreasing from $26,106,000 to $25,588,000). As a
percentage of health plan management revenues, cost of services remained
essentially unchanged at 75% in the second quarter of fiscal 1998 and fiscal
1999, respectively, and for the first six months of fiscal 1998 compared to
fiscal 1999. The decrease in fiscal 1999 of cost of services as a percentage of
revenues was primarily due to reduced payroll and expenses related to the HMO
which terminated on September 30, 1998.
Cost of Managed Care Operations: The cost of managed care operations increased
by $29,366,000 from the second quarter of fiscal 1999 over fiscal 1998 and
increased $58,194,000 for the first six months of fiscal 1999 compared to fiscal
1998 due to the managed care operations beginning in April 1998. As a percentage
of managed care revenues, this cost in the second quarter of fiscal 1999 was 99%
and for the first six months of fiscal 1999 it was 98%. The increase in the
second quarter of fiscal 1999 over the first quarter of fiscal 1999 was the
result of increased cost of medical expenses in the quarter.
Selling, Marketing and Administration: Selling, marketing and administration
expenses increased $1,907,000 (59%) from the second quarter of fiscal 1998 to
fiscal 1999 (from $3,227,000 to $5,134,000) and increased $4,312,000 (69%) for
the first six months of fiscal 1998 to fiscal 1999 (from $6,218,000 to
$10,530,000). This expense as a percentage of total revenue was 18% and 11% for
the second quarter and the first six months of fiscal 1998 and fiscal 1999,
respectively. The dollar increases were due primarily to additional staff,
travel, commission, bad debts, insurance, training programs and amounts
allocated to the major client that started in April, 1998.
<PAGE>
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: Interest expense increased $85,000 (80%) from the second
quarter of fiscal 1998 to fiscal 1999 (from $106,000 to $191,000 and increased
$147,000 (65%) for the first six months of fiscal 1998 to fiscal 1999 (from
$227,000 to $374,000), and decreased as a percentage of revenue from 0.6% to
0.4% for the second quarter and the first six months of fiscal 1998 to fiscal
1999, respectively.
Income Taxes: Income taxes decreased in fiscal 1999 from fiscal 1998 because of
lower income before income taxes. It is expected that the 1999 fiscal year
effective tax rate wil 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 used in operations was $5,295,000 for the six months
ended December 31, 1998 compared to cash flows provided by operations of
$4,163,000 for the six months ended December 31, 1998. As of December 31, 1998,
accounts receivable of approximately $6,000,000 impacted cash flows from
operations and should be collected in the third quarter. During the six months
ended December 31, 1997, cash flows from operations exceeded net income
primarily due to non-cash charges such as depreciation and amortization,
deferred income taxes, cumulative effect of the accounting change and changes in
operating assets and liabilities.
Cash of $9,722,000 and $5,003,000 has been used to invest in software and
program enhancements and property and equipment in the first six months of
fiscal 1999 and fiscal 1998, respectively, which in fiscal 1999 included
approximately $3,000,000 of property and equipment 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 $2,000,000 and $1,750,000 in the
first six months of fiscal 1999 and fiscal 1998, respectively, and also used
approximately $1,057,000 and $1,032,000 in the first six months of fiscal 1999
and fiscal 1998, respectively, to repay principal on notes payable and capital
leases. The Company received cash proceeds of $186,000 and $190,000 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 0.83 at December 31, 1998 and 1.1 at June 30,
1998. The Company had a working capital deficit of $5,098,000 at December 31,
1998 and working capital of $3,474,000 at June 30, 1998. The medical services
payable related to the managed care operations decreased working capital by
$17,694,000 and $15,452,000 at December 31, 1998 and June 30, 1998.
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. In light of the changes in the Company's accounting
policy and the Company's core business, the Company and its bank have agreed to
new loan covenants that the Company expects to meet each quarter ongoing.
<PAGE>
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. Utilizing a national consulting firm, the
Company has completed a systematic survey of all hardware, software and
facilities. A strategy for achieving compliance for each system component has
been identified and initial size estimates for the scope of each system
component has been prepared. Costs of the Company's Year 2000 Project through
June 30, 1999, are estimated at approximately $1.4 million of which
approximately $.9 million has been incurred through December 31, 1998. The costs
associated with the Year 2000 Project will be expensed as incurred.
The Company has targeted its Year 2000 compliance efforts to address the
critical systems that support and interface with the Company's clients and
vendors. The Company continues to request information from critical vendors
regarding their state of readiness, and the results of their responses are being
evaluated as part of the program monitoring process. 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 beginning of 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. There
are expected to be ongoing maintenance tasks which will continue into the Year
2000, although these tasks are not expected to be significant.
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 will be 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, reconciliations, volume fluctuations, participant enrollment
fluctuations, fixed price contracts, contract disputes, contract modifications,
contract renewals and non-renewals, various business reasons for delaying
contract closings, and the operational challenges of matching case volume with
optimum staffing, having fully trained staff, having computer and telephonic
supported operations and managing turnover of key employees and outsourced
services to performance standards. While occurrences of these risks, and others
detailed in this report and the Company's other SEC reports, cannot be predicted
exactly, such occurrences can be expected to have an impact on the Company's
anticipated level of revenue growth or profitability.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 25, 1998, Keystone Mercy Health Plan filed a complaint, seeking
injunctive relief and unspecified damages, in U.S. District Court for the
Eastern District of Pennsylvania against the Company alleging the Company had
failed to perform services under a September 12, 1998 settlement agreement.
Keystone subsequently voluntarily dismissed its complaint and the parties
executed a Stipulation to Dismiss Without Prejudice that was approved by the
Court on October 30, 1998.
Item 5. Other Information
The Company's board of directors has set April 21, 1999 as the date for the 1999
annual shareholders meeting. A proposal submitted by a shareholder and intended
to be presented at the 1999 annual meeting had to be received by the Company by
February 4, 1999, to be includable in the Company's proxy statement for the 1999
annual meeting. Shareholder proposals received by the Company after January 31,
1999 can be voted on by the discretionary authority of management named in the
proxies without prior mention of such matter in the proxy statement. As provided
in the Company's Bylaws, no shareholder proposals received by the Company after
March 2, 1999 can be considered at the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 -- Financial Data Schedule (filed in electronic
format only)
(b) During the three months ended December 31, 1998, there was no
report filed on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Health Risk Management, Inc.
Dated: February 16, 1999 By: /s/Gary T. McIlroy
Gary T. McIlroy, M.D.
Chief Executive Officer
Dated: February 16, 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 December 31, 1998
HEALTH RISK MANAGEMENT, INC.
(SEC File No. 0-18902)
Exhibit
Number Exhibit Description
27 Financial Data Schedule (filed in electronic format only)
<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 DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,736
<SECURITIES> 0
<RECEIVABLES> 16,705
<ALLOWANCES> 290
<INVENTORY> 0
<CURRENT-ASSETS> 25,883
<PP&E> 38,267
<DEPRECIATION> 33,528
<TOTAL-ASSETS> 69,144
<CURRENT-LIABILITIES> 30,981
<BONDS> 2,491
0
0
<COMMON> 46
<OTHER-SE> 32,591
<TOTAL-LIABILITY-AND-EQUITY> 69,144
<SALES> 93,550
<TOTAL-REVENUES> 93,967
<CGS> 0
<TOTAL-COSTS> 83,752
<OTHER-EXPENSES> 11,880
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 374
<INCOME-PRETAX> (2,069)
<INCOME-TAX> (735)
<INCOME-CONTINUING> (1,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,334)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.28)
</TABLE>
