SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A (No. 1)
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) January 27, 1999
Health Risk Management, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Minnesota
(State of Other Jurisdiction of Incorporation)
0-18902 41-1407404
(Commission File Number) (I.R.S. Employer Identification No.)
10900 Hampshire Avenue S.
Minneapolis, Minnesota 55438
(Address of Principal Executive Offices) (Zip Code)
(612) 829-3500
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired:
(i) Report of Independent Auditors on Financial
Statements of Oxford Health Plans (PA), Inc.
(ii) Balance Sheets of Oxford Health Plans (PA), Inc. as
of December 31, 1998 and 1997
(iii) Statements of Operations of Oxford Health Plans (PA),
Inc. for the years ended December 31, 1998, 1997 and
1996
(iv) Statements of Changes in Shareholder's Equity
(Deficit) of Oxford Health Plans (PA), Inc. for the
years ended December 31, 1998, 1997 and 1996
(v) Statements of Changes in Cash Flows of Oxford Health
Plans (PA), Inc. for the years ended December 31,
1998, 1997 and 1996
(vi) Notes to Financial Statements
(b) Pro Forma Financial Information:
(i) Pro Forma Combined Balance Sheet of the
Registrant and Oxford Health Plans (PA), Inc. as of
December 31, 1998
(ii) Pro Forma Combined Statement of Operations of the
Registrant and Oxford Health Plans (PA), Inc. for the
year ended June 30, 1998
(iii) Pro Forma Combined Statement of Operations of the
Registrant and Oxford Health Plans (PA), Inc. for the
six month period ended December 31, 1998
<PAGE>
Report of Independent Auditors
Board of Directors
Oxford Health Plans (PA), Inc.
We have audited the accompanying balance sheets of Oxford Health Plans (PA),
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
changes in shareholder's equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Oxford Health Plans (PA), Inc.
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 9, 1999
<PAGE>
OXFORD HEALTH PLANS (PA), INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 124,667 $ --
Premiums receivable 4,460,437 6,520,868
Other receivables 792,200 --
Accrued investment income 135,156 473,693
Receivable from Parent and affiliates 650,816 --
Capital infusion receivable -- 7,500,000
------------ ------------
Total current assets 6,163,276 14,494,561
Fixed maturity investments-at fair value
(amortized cost: $8,380,212 in 1998 and
$23,310,471 in 1997) 8,386,932 23,529,401
Income tax receivable from Parent -- 2,597,000
Furniture and equipment, net of
accumulated depreciation of
$2,517,383 in 1998 and $2,068,134 in 1997 1,007,636 1,972,364
============ ============
Total assets $ 15,557,844 $ 42,593,326
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Medical claims payable $ 7,701,375 $ 34,237,629
Unearned premiums 203 53,711
Accounts payable and accrued expenses 440,092 52,775
Cash overdraft -- 1,422,569
------------ ------------
Total current liabilities 8,141,670 35,766,684
Amount due to Parent and affiliates -- 3,203,863
Deferred tax liability 2,352 76,626
Surplus note payable 5,000,000 5,000,000
------------ ------------
Total liabilities 13,144,022 44,047,173
Shareholder's equity (deficit):
Common stock, $1 par value
Authorized-1,000 shares
Issued and outstanding-1,000 shares 1,000 1,000
Additional paid-in capital 24,184,000 14,324,000
Retained deficit (21,775,546) (15,921,152)
Accumulated other comprehensive income:
Net unrealized gain on fixed
maturity investments 4,368 142,305
------------ ------------
Total shareholder's equity (deficit) 2,413,822 (1,453,847)
------------ ------------
Total liabilities and shareholder's equity (deficit) $ 15,557,844 $ 42,593,326
============ ============
</TABLE>
See accompanying notes.
<PAGE>
OXFORD HEALTH PLANS (PA), INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Medicaid premium $ 133,455,571 $ 111,359,277 $ 101,744,443
Commercial premium 7,387,825 4,675,786 827,780
Net investment income 1,513,986 1,843,328 1,734,384
Other revenues 33,766 -- --
------------- ------------- -------------
Total revenues 142,391,148 117,878,391 104,306,607
Expenses:
Medicaid capitation 90,591,297 -- --
Medical services 47,770,958 114,278,703 84,072,756
Administrative expenses 9,883,287 21,377,358 18,650,956
------------- ------------- -------------
Total expenses 148,245,542 135,656,061 102,723,712
Income (loss) from operations before
federal income taxes (5,854,394) (17,777,670) 1,582,895
Federal tax expense (benefit) -- (2,466,350) 1,069,999
============= ============= =============
Net income (loss) $ (5,854,394) $ (15,311,320) $ 512,896
============= ============= =============
</TABLE>
See accompanying notes.
<PAGE>
OXFORD HEALTH PLANS (PA), INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Comprehensive Retained
Stock Capital Income Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 1,000 $ 6,824,000 $ 2,387 $ (1,122,728) $ 5,704,659
Comprehensive income:
Net income -- -- -- 512,896 512,896
Change in net unrealized gain
(loss) on long-term
investments, net of income
tax expense of $ 21,923 -- -- (54,351) -- (54,351)
Less: Reclassification
adjustment for gains included
in net income, net of income
tax expense of $ 11,020 -- -- (20,467) -- (20,467)
------------
Total comprehensive income 438,078
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 1,000 6,824,000 (72,431) (609,832) 6,142,737
Comprehensive income:
Net loss -- -- -- (15,311,320) (15,311,320)
Change in net unrealized gain
(loss) on long-term
investments, net of income
tax benefit of $ (116,419) -- -- 216,208 -- 216,208
Less: Reclassification
adjustment for gains included
in net loss, net of income
tax expense of $ 792 -- -- (1,472) --
(1,472)
------------
Total comprehensive loss (15,096,584)
Capital contribution -- 7,500,000 -- -- 7,500,000
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 1,000 14,324,000 142,305 (15,921,152) (1,453,847)
Comprehensive income:
Net loss -- -- -- (5,854,394) (5,854,394)
Change in net unrealized gain
(loss) on long-term
investments, net of income
tax benefit of $ (54,744) -- -- 101,668 -- 101,668
Less: Reclassification
adjustment for gains included
in net loss, net of income
tax expense of $ 129,018 -- -- (239,605) -- (239,605)
------------
Total comprehensive loss (5,992,331)
Capital contribution -- 9,860,000 -- -- 9,860,000
============ ============ ============ ============ ============
Balance at December 31, 1998 $ 1,000 $ 24,184,000 $ 4,368 $(21,775,546) $ 2,413,822
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
<PAGE>
OXFORD HEALTH PLANS (PA), INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,854,394) $(15,311,320) $ 512,896
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 1,076,221 1,033,682 807,148
Realized gain on sale of investments (368,623) (2,264) (31,487)
Deferred tax provision -- 130,650 400,999
Changes in assets and liabilities:
Premiums receivable 2,060,431 (6,314,435) (142,035)
Interest receivable 338,537 (123,393) (16,933)
Other receivables (792,200) 75,075 296,312
Receivable from Parent and affiliates (650,816) -- --
Income tax receivable from Parent 2,597,000 (2,597,000) --
Medical claims payable (26,536,254) 15,998,983 3,094,537
Unearned premiums (53,508) (248,316) (6,488,562)
Accounts payable and accrued expenses 387,317 (125,242) (1,060,644)
Income taxes payable -- -- (1,131,171)
------------ ------------ ------------
Net cash used in operating activities (27,796,289) (7,483,580) (3,758,940)
------------ ------------ ------------
Cash flows from investing activities:
Furniture and equipment purchases (111,493) (547,288) (1,802,952)
Proceeds from sales of investments 27,672,105 13,143,159 7,098,780
Purchases of investments (12,373,224) (12,902,567) (12,556,390)
------------ ------------ ------------
Net cash provided (used in) by investing activities 15,187,388 (306,696) (7,260,562)
------------ ------------ ------------
Cash flows from financing activities:
Capital contribution received 17,360,000 -- --
Change in due to Parent and affiliates (3,203,863) (9,756,132) 11,909,089
Proceeds from issuance of surplus note -- 5,000,000 --
Principal payments on capital lease obligations -- -- (175,561)
Cash overdraft (1,422,569) 1,422,569 --
------------ ------------ ------------
Net cash provided by (used in) financing activities 12,733,568 (3,333,563) 11,733,528
------------ ------------ ------------
Net change in cash and cash equivalents 124,667 (11,123,839) 714,026
Cash and cash equivalents at beginning of year -- 11,123,839 10,409,813
------------ ------------ ------------
Cash and cash equivalents at end of year $ 124,667 $ -- $ 11,123,839
============ ============ ============
</TABLE>
See accompanying notes.
<PAGE>
OXFORD HEALTH PLANS (PA), INC.
Notes to Financial Statements
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Oxford Health Plans (PA), Inc. (the Plan) was incorporated in the Commonwealth
of Pennsylvania on July 16, 1992. It is a wholly-owned subsidiary of Oxford
Health Plan, Inc. (Parent). The Certificate of Authority to operate the Health
Maintenance Organization ("HMO") in the Commonwealth of Pennsylvania was
received on May 13, 1993. On July 2, 1993, the Plan began marketing in
Philadelphia, Bucks, and Montgomery counties to enroll members. The first
effective date of enrollment for the Plan was August 1, 1993. Since then, the
Plan applied and received approval to market in Delaware and Chester counties.
On January 27, 1999, the Plan was acquired by Health Risk Management, Inc.
(HRM) (See Note 13).
The Plan has a contract for Medicaid business with the Department of Public
Welfare of the Commonwealth of Pennsylvania (DPW). Approximately 95%, 96% and
99% of the Plan's total premiums in 1998, 1997 and 1996, respectively, were from
DPW contracts. The Plan receives capitation from the DPW based on certain
demographic characteristics of each member. The Plan started marketing
commercial products in the fourth quarter of 1994. The Plan utilizes an
independent professional association ("IPA") model to provide medical services
to its members. The Plan pays capitation or negotiated fees for services
provided by the physicians. The marketing of the commercial products was
discontinued in 1998.
Comprehensive Income
In the year ended December 31, 1998, the Plan adopted Statement of Financial
Accounting Standards No. 130, "Reporting of Comprehensive Income." The adoption
had no impact on the net income (loss) or shareholder's equity (deficit) of the
Plan.
Use 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 financial statements and accompanying notes,
the most significant of which relates to incurred but not reported claims
included in medical claims payable. Actual results could differ from such
estimates.
Revenue Recognition
Premium revenue is generally recognized ratably over the contract periods.
Unearned premiums represent the portion of premiums received for which the Plan
is not obligated to provide services until a future date.
Medical Claims Payable
Medical services expense includes the estimated ultimate net cost of all
reported and unreported claims incurred during a year. The liability for medical
claims payable is estimated primarily by the use of completion factors developed
from historical lag patterns. Pennsylvania HRM, Inc. (PAHRM), a wholly-owned
subsidiary of HRM, is responsible for all claims incurred for the Medicaid
business after April 15, 1998, thus the medical claims payable has decreased
significantly. (See Note 2). Although considerable variability is inherent in
such estimates, management believes that the liability for medical services
payable is adequate. The estimates are continually reviewed and adjusted as
experience develops or new information becomes known. Such adjustments are
included in current operations.
<PAGE>
Medicaid Capitation
Medicaid capitation represents amounts paid to PAHRM for administration of
Medicaid claims and accepting medical risk cost (See Note 2). It is recognized
as an expense when it is due.
Reinsurance
Reinsurance premiums and benefits provided are accounted for on the basis
consistent with that used in accounting for the original policy issued and the
terms of the reinsurance contract.
Cash Equivalents
Short-term investments purchased within three months of their maturities are
considered cash equivalents. The Plan invests in U.S. government securities and
high rated money market funds. The carrying amount reported in the balance
sheets for cash and cash equivalents, which is based on cost, approximates fair
value.
Investments
The Company has determined that its fixed maturity investments might be sold
prior to maturity to support its liquidity requirements. Accordingly, such
investments have been classified as available-for-sale and carried at fair
value, with unrealized gains and losses, net of deferred income taxes, reported
as a separate component of shareholder's equity (deficit). The fair value of
fixed maturity investments is based on quotations obtained from brokers for
those or similar investments. Gains and losses on sales of investments are
recorded as a component of net investment income using the specific
identification method.
Furniture and Equipment
Furniture and equipment is reported at cost. Depreciation is provided over the
estimated useful lives of the assets using straight-line methods. Estimated
useful lives range from three to five years.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between
the financial reporting basis and the tax basis of the Plan's assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Statutory Surplus
Dividends to the Parent are limited to the Plan's surplus as determined in
accordance with accounting practices prescribed or permitted by the Insurance
Department of the Commonwealth of Pennsylvania. Statutory surplus was $2,322,971
and $2,395,714 as of December 31, 1998 and 1997, respectively. The Plan is
required to maintain statutory surplus at an amount that is equal to the greater
of $1,500,000 or 2% of prior year premiums.
2. HEALTH PLAN MANAGEMENT SERVICES AGREEMENT
Effective April 16, 1998, the Plan entered into a five-year contract with PAHRM,
whereby PAHRM provided health plan management services and assumed the medical
risk cost for the Medicaid business. Under the agreement, PAHRM received 95.73%
of the Medicaid premium which is included on the statement of operations as
Medicaid capitation. As an incentive to enter into the agreement and in an
effort to cover the Plan's costs, including the initial transition cost, HRM
paid the Plan $1,640,934, which is reflected as a decrease in administrative
expenses on the statement of operations.
<PAGE>
3. Investments
The amortized cost and fair value of available for sale fixed maturity
investments consists of the following at December 31:
<TABLE>
<CAPTION>
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,346,932 $ 36,279 $ 60,589 $ 5,322,622
Corporate bonds 3,033,280 31,030 -- 3,064,310
----------- ----------- ----------- -----------
$ 8,380,212 $ 67,309 $ 60,589 $ 8,386,932
=========== =========== =========== ===========
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
U.S. Treasury securities $14,589,033 $ 214,441 $ 26,084 $14,777,390
Corporate bonds 4,039,627 8,967 17,799 4,030,795
Municipal tax-
exempt bonds 4,681,810 39,406 -- 4,721,216
----------- ----------- ----------- -----------
$23,310,470 $ 262,814 $ 43,883 $23,529,401
=========== =========== =========== ===========
</TABLE>
All fixed maturity investments are due within five years as of December 31,
1998. Actual maturities may differ from contractual maturities because the
borrowers may have the right to prepay such obligations without prepayment
penalties.
Proceeds from sales of fixed maturity investments during 1998, 1997, and 1996
were $27,736,363, $13,143,159, and $6,171,698, respectively. Gross gains
realized on those sales during 1998, 1997, and 1996 were $393,121, $31,136, and
$77,359, respectively, and gross losses realized on those sales during 1998,
1997, and 1996 were $24,598, $28,872, and $45,872, respectively.
At December 31, 1998 and 1997, bonds with book value of $100,000 were on deposit
with Commonwealth of Pennsylvania Insurance Department to satisfy regulatory
requirements.
The net unrealized gain on fixed maturity investments included in shareholder's
equity (deficit) consists of the following at December 31:
1998 1997
--------- ---------
Gross unrealized gain on fixed
maturity investments $ 6,720 $ 218,931
Adjustments for net deferred
tax liability
(2,352) (76,626)
--------- ---------
Net unrealized gain on fixed
maturity investments $ 4,368 $ 142,305
========= =========
<PAGE>
4. Reinsurance
The Plan has a reinsurance agreement to limit its medical expense exposure.
Under the terms of this agreement (through April 15, 1998 for the Medicaid
business) the Plan was reimbursed for 50% to 90% of the cost of each member's
annual medical services, excluding prescription drugs, in excess of a $150,000
deductible, up to a lifetime limitation of $2,000,000 per member. The Plan
remains obligated for amounts ceded in the event the reinsurer does not meet its
obligations.
Reinsurance premiums charged to medical services in the statement of operations
were $22,350, $5,630, and $311 in 1998, 1997, and 1996, respectively. There were
no reinsurance recoveries in 1998, 1997, or 1996.
Effective with the April 16, 1998 management services agreement with PAHRM, the
medical expense exposure for the Medicaid business was transferred to PAHRM for
claims with dates of service after April 15, 1998.
5. Federal Income Taxes
The Plan files a consolidated federal income tax return with its Parent. The
Plan calculated its federal income tax expense in accordance with the Tax
Sharing Agreement with its parent. At December 31, income tax expense (benefit)
consists of:
1998 1997 1996
---------- ----------- -----------
Current $ -- $(2,597,000) $ 669,000
Deferred -- 130,650 400,999
---------- ----------- -----------
$ -- $(2,466,350) $ 1,069,999
========== =========== ===========
During the year ended December 31, 1998, $2,597,000 was received for the 1997
current income tax benefit from Parent. During the year ended December 31, 1996,
the amount due Parent and affiliates was charged $669,000 for the Plan's 1996
current income tax calculated by Parent. No cash activity occurred in 1997 or
1996 related to income taxes.
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liabilities are as follows at December 31:
1998 1997
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $(6,164,333) $(3,723,200)
Other (81,233) (365,736)
----------- -----------
Total gross deferred tax assets (6,245,565) (4,088,936)
Valuation allowance 6,158,065 4,001,786
----------- -----------
Total deferred tax assets (87,500) (87,150)
Deferred tax liabilities:
Other 89,852 163,776
----------- -----------
Net deferred tax liabilities $ 2,352 $ 76,626
=========== ===========
The Plan has federal net operating loss carry forwards of approximately
$10,600,000 and $6,600,000 which will be available to offset future taxable
income and expire in the years 2012 and 2013, respectively.
The valuation allowances as of December 31, 1998 and 1997 have been recorded in
that the Plan may not be able to realize full benefit of the deferred tax asset.
6. Surplus Note
In 1997, the Plan issued a surplus note to its Parent in return for $5,000,000
in cash. The note is reported as a liability under Generally Accepted Accounting
Principles rather than as surplus for statutory accounting purposes. 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
five years form the date of issuance. No interest has been paid or accrued on
the surplus note as of December 31, 1998.
7. Contingencies
The Plan is involved in legal actions in the normal course of business, some of
which seek monetary damages, including claims for punitive damages which are not
covered by insurance. The Plan believes any ultimate liability associated with
these actions would not have a material adverse effect on the Plan's financial
position or results of operations.
The plan is subject to certain regulatory restrictions on its ability to make
dividend payments, loans or other transfers of cash to its Parent. Such
restrictions, unless amended or waived, limit the use of any cash generated by
the operations of the Plan to pay obligations to the Parent.
8. Parent Company Support
During 1998 the Parent contributed $9,860,000 to the Plan in order for the Plan
to meet its statutory surplus and net worth requirements.
During 1997, the Parent also received a surplus note from the Plan in the
principal sum of $5,000,000 with an interest rate of 8.5% per annum. In
addition, the Parent committed additional cash and investments to the Plan of
$7,500,000, which is classified as capital infusion receivable and additional
paid in capital in the balance sheet at December 31, 1997. On February 6, 1998,
the Plan received the capital infusion receivable from the Parent.
9. Concentrations of Credit Risk
Concentrations of credit risk with respect to premiums receivable are limited
due to the large number of employer groups comprising the Plan's commercial
<PAGE>
product customer base. As of December 31, 1998, the Plan had no significant
concentrations of credit risk. Financial instruments which potentially subject
the Plan to concentrations of such credit risk consist primarily of obligations
of certain state government entities, the United States government and high
grade corporate bonds and notes at December 31, 1998. These obligations are
managed by professional investment managers within the guidelines established by
the Board of Directors, which, as a matter of policy, limit the amounts which
may be invested in any one issuer and prescribe certain minimum invested company
criteria. At December 31, 1998, four bonds represented 70% of total bonds
outstanding.
10. Transactions with Related Parties
In consideration for services provided in 1998, 1997 and 1996, the Plan incurred
management fees from the Parent of approximately $10,600,000, $20,300,000 and
$17,400,000, respectively. Management fees are calculated as a percentage of the
Plan's gross margin, subject to a minimum amount calculated as 17% of the Plan's
premium revenues, and a maximum amount of 25% of the Plan's premium revenues.
The Plan has no employees. Operating expenses allocated through the management
fee arrangement may be greater or less than the expenses that would be incurred
if the Plan was operating on a separate company basis.
Certain members of the Board of Directors of the Plan are also members of the
Boards of Directors of the Parent, Oxford Health Plans (NY), Inc., and its
wholly-owned subsidiary Oxford Health Insurance, Inc., ("Oxford-NY"), Oxford
Health Plans (NJ), Inc. ("Oxford-NJ"), Oxford Health Plans (NH), Inc.
("Oxford-NH"), Oxford Health Plans (CT), Inc. ("Oxford-CT"), Oxford Health Plans
(FL), Inc. ("Oxford-FL"), and Oxford Health Plans (IL), Inc. ("Oxford-IL"),
affiliated entities. The Plan, Oxford-NY, Oxford-NJ, Oxford-NH, Oxford-CT,
Oxford-FL, and Oxford-IL participate in a centralized cash arrangement, in which
all cash receipts and disbursement are coordinated through Oxford.
Monthly transactions between the Parent, the Plan and other affiliates, result
in either a net receivable from parent and affiliates or payable to Parent and
affiliates.
11. Government Programs
The Plan offers health care coverage to Medicaid eligible individuals under a
risk contract with the Commonwealth of Pennsylvania. Under the contract, the
Plan receives fixed monthly premiums per member. Through April 15, 1998, the
Plan bore the risk that the actual costs of health care services may exceed the
per member per month capitation amount received (See Note 2).
12. Subsequent Event
On January 27, 1999, HRM acquired 100% 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 the parent retaining $2,500,000 of the
$5,000,000 surplus note. Effective January 1, 1999, the Tax Sharing Agreement
and all other agreements with the Plan and affiliates were terminated. The net
operating losses incurred prior to the purchase by HRM can be utilized against
future income as permitted by the Internal Revenue Code.
13. Year 2000 (Unaudited)
As discussed in Note 8 above, the Plan is dependent upon its Parent for
operational and financial support. This would include computer systems that
could be affected by the "Year 2000" problem. With the January 1, 1999 purchase
of the Plan by HRM, the Plan's dependency for operational and financial support
will transfer to its new parent, HRM.
The Plan is reliant on technology to deliver its managed healthcare services. If
a computer system or software application used by the Plan or a third party
dealing with the Plan 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 Plan.
<PAGE>
HRM's management has implemented and continues to monitor its Year 2000 Project
to prepare its computer systems, applications, facilities, and external
relationships for the Year 2000. Utilizing a national consulting firm, HRM has
completed a systematic survey of its 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 HRM'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 cost of the Year 2000 Project will be
expensed as incurred.
HRM has targeted its year 2000 efforts to address the critical systems that
support and interface with its clients and vendors. HRM continues to request
information from critical vendors regarding their state of readiness. HRM was
scheduled to have completed Year 2000 testing on its claim system in the Fall of
1998, but this Project component has been extended to the beginning of HRM's
fourth quarter, which commences April 1, 1999. The remediation of HRM's care
management system is scheduled to be completed near the end of HRM's fourth
quarter. These tasks are not expected to be significant.
HRM's Year 2000 Project plans are subject to change are necessarily dependent
upon management business decisions and other factors, both internal and
external, and HRM is making adjustments to its Year 2000 Project as it deems
necessary. The information contained in this statement is based on HRM's
managements' 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 HRM's business
partners, including key vendors, customers, and customers' key vendors; the
availability and cost of personnel trained in this area; the ability to identify
relevant computer codes; and the impact on HRM's external relationships. The
possible consequences of the HRM or its business partners not being fully Year
2000 compliant include temporary disruption of the delivery of services. HRM
will be using contingency plans already in place and will be developing
additional and/or supplemental contingency plans where necessary in an effort to
be prepared should a year 2000 issue arise.
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined balance sheet is based upon the
consolidated financial statements of Health Risk Management, Inc. (HRM) and the
financial statements of Oxford Health Plans (PA), Inc. (Oxford) combined and
adjusted to give effect to the Oxford purchase as of December 31, 1998.
The following unaudited pro forma combined statement of operations for the year
ended June 30, 1998 is based on HRM's audited consolidated statement of
operations for the year ended June 30, 1998 contained in HRM's Form 10-K as
filed with the SEC on September 29, 1998, incorporated by reference, and the
results of operations of Oxford for the periods July 1, 1997 to June 30, 1998 as
prepared from the December 31 year-end statements of operations for Oxford as
included elsewhere in this filing assuming that the acquisition had been
completed as of July 1, 1997.
The following unaudited pro forma combined statement of operations for the six
month period ended December 31, 1998 is based on HRM's unaudited statement of
operations for the six month period then ended contained in HRM's Form 10-Q for
the quarter ended December 31, 1998 as filed with the SEC on February 15, 1999,
incorporated by reference, and the results of operations of Oxford for the six
month period ended December 31, 1998 as prepared from the year ended December
31, 1998 statement of operations for Oxford as included elsewhere in this filing
assuming that the acquisition had been completed as of July 1, 1997.
These unaudited pro forma combined financial statements should be read in
conjunction with HRM's audited consolidated financial statements, including the
notes thereto, which are incorporated by reference in this filing, and in
conjunction with Oxford's audited financial statements , including the notes
thereto which are included elsewhere in this filing. See "Incorporation of
Certain Documents by Reference."
The unaudited pro forma combined financial statements are not necessarily
indicative of the results of operations or financial position of the combined
company that would have occurred had the acquisition of Oxford occurred at the
beginning of each period presented or on the date indicated, nor are the
necessarily indicative of future operating results or financial position.
The unaudited pro forma adjustments are described in the notes to the unaudited
pro forma combined financial statements.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1998
(UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
HRM Oxford PA Adjustments Combined
---------------------------------------------- ------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,736 $ 125 $ 4,000 (1) $ 10,861
Cash and cash equivalents (6,387)(2) (6,387)
Accounts receivable 16,705 5,252 21,957
Deferred income taxes 900 -- 900
Other 1,542 786 (1,067)(2) 1,261
-------------------------------------------- --------
Total current assets 25,883 6,163 (3,454) 28,592
Long term investments available for sale -- 8,286 8,286
Computer software costs, less amortization 26,175 26,175
Property and equipment, less amortization 12,092 1,008 13,100
Investment in subsidiary 7,999 (2) 7,999
Investment in subsidiary (7,999)(3) (7,999)
Deferred income taxes 1,750 (3) 1,750
Goodwill 1,337 (3) 1,337
Other assets 4,994 100 5,094
-------------------------------------------- --------
$ 69,144 $ 15,557 $ (367) $ 84,334
============================================ ========
Current Liabilities:
Accounts payable $ 2,176 2,176
Medical services payable 17,694 7,701 25,395
Accrued expenses 2,337 440 545 (2) 3,322
Unearned revenues 2,250 2,250
Current maturities of notes payable 6,146 1,719 (1) 7,865
Current portion of capitalized equipment leases 378 378
-------------------------------------------- --------
Total current liabilities 30,981 8,141 2,264 41,386
Deferred income taxes 3,035 3,035
Long-term portion of notes payable 1,860 2,281 (1) 4,141
Long-term portion of capitalized equipment leases 631 631
Surplus note payable 5,000 (2,500)(3) 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, 4,583,694 issued and outstanding 46 1 (1)(3) 46
Additional paid-in capital 31,914 24,184 (19,186)(3) 36,912
(4,998)(3) (4,998)
Retained earnings 677 (21,773) 21,773 (2) 677
Unrealized appreciation on investments, net -- 4 4
-------------------------------------------- --------
Total shareholders' equity 32,637 2,416 (2,412) 32,641
-------------------------------------------- --------
$ 69,144 $ 15,557 $ (367) $ 84,334
============================================ ========
</TABLE>
See notes to unaudited pro forma combined balance sheet.
Notes to Unaudited Pro Forma Combined Balance Sheet
(1) To record a draw on the Company's revolving line of credit to partially
fund the acquistion.
(2) To record investment in Oxford PA.
(3) To eliminate the Company's investment in Oxford PA. and recognize related
goodwill and deferred tax assets related to net operating loss
carryforwards.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
(UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
HRM (6) Oxford PA Adjustments Combined
---------------------------------------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Premiums Gross $ 27,457 $ 135,123 $ (26,285) (1) $ 135,123
(1,172) (2)
Management service fees 63,395 - 63,395
Qualityfirst software systems 3,648 3,648
Investment income 337 1,809 (142) (5) 2,004
------------------------------------------ -------------
Total revenues 94,837 136,932 (27,599) 204,170
Operating exenses:
Medical Costs 23,625 109,986 133,611
Medicaid capitation 26,285 (26,285) (1) -
Cost of services including depreciation 56,450 (1,172) (2) 55,278
Selling, marketing and administration 12,077 20,634 134 (3) 32,845
Interest expense 489 330 (4) 819
------------------------------------------ -------------
Total operating expenses 92,641 156,905 (26,993) 222,553
Income before income taxes and cumulative
effect of accounting change 2,196 (19,973) (606) (18,383)
Income taxes (benefit) 868 - (853) (7) 15
------------------------------------------ -------------
Income before cumulative effect of accounting
change 1,328 (19,973) 247 (18,398)
Cumulative effect of accounting change, net of
income tax benefit of $1,342 (2,371) (2,371)
------------------------------------------ -------------
Net income (loss) $ (1,043) $ (19,973) $ 247 $ (20,769)
===================================================================
Basic earnings per share:
Income (loss) before cumulative effect of
accounting change $ 0.29 $ (4.07)
Cumulative effect of accounting change (0.52) (0.52)
---------- ---------
Net income (loss) $ (0.23) $ (4.59)
========== =========
Diluted earnings per share:
Income (loss) before cumulative effect of
accounting change $ 0.28 $ 0.28
Cumulative effect of accounting change $ (0.51) $ (0.51)
---------- ---------
Net income (loss) $ (0.22) $ (0.22)
========== =========
Weighted average number of share outstanding:
Basic 4,524 4,524
========== =========
Diluted 4,663 4,524 (8)
========== =========
</TABLE>
<PAGE>
HEALTH RISK MANAGEMENT, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
HRM (6) Oxford PA Adjustments Combined
------------------------------------------------- ---------------------
Revenues:
<S> <C> <C> <C> <C>
Premiums Gross $ 67,176 $ 71,112 $ (64,308) (1) $ 71,112
(2,868) (2)
Management service fees 24,341 - 24,341
Qualityfirst software systems 2,033 2,033
Investment income 417 651 (71) (5) 997
------------------------------------------------- ----------
Total revenues 93,967 71,763 (67,247) 98,483
Operating exenses:
Medical Costs 58,194 5,454 63,648
Medicaid capitation 64,308 (64,308) (1) -
Cost of services including depreciation 28,710 (2,868) (2) 25,842
Selling, marketing and administration 7,408 1,731 67 (3) 9,206
Interest expense 374 165 (4) 539
Oxford transition costs 1,350 - - 1,350
------------------------------------------------- ----------
Total operating expenses 96,036 71,493 (66,944) 100,585
Income (loss) before income taxes (2,069) 270 (303) (2,102)
Income taxes (benefit) (735) 95 (95) (7) (735)
------------------------------------------------- ----------
Net income (loss) $ (1,334) $ 175 $ (208) $ (1,367)
================================================= ==========
Basic earnings per share $ (0.29) $ (0.30)
================= =========
Diluted earnings per share $ (0.28) $ (0.30)
================= =========
Weighted average number of share outstanding:
Basic 4,599 4,599
================= =========
Diluted 4,682 4,599 (8)
================= =========
</TABLE>
See notes to unaudited pro forma combined statement of operations.
Notes to Unaudited Pro Forma Combined Statements of Operations
(1) To eliminate premiums ceded to HRM by Oxford PA under terms of the April
15, 1998 Management Services Agreement.
(2) To eliminate 4.27% marketing fee paid by HRM to Oxford PA under terms of
the April 15, 1998 Management Services Agreement.
(3) To record pro forma amortization of goodwill over a 10 year period.
(4) To record estimated interest expense related to borrowing on the purchase
of $4,000,000 at an interest rate of 8.25%.
(5) To record estimated investment income forgone related to funding of the
purchase from operations of $3,087,500 at a yield rate of 4.60%.
(6) Certain items in the financial statements for the six months ended December
31, 1998 have been reclassified to reflect the post acquisition reporting
format.
(7) To record tax benefit of Oxford PA losses.
(8) Dilutive securities have been excluded because they are anti-dilutive.
<PAGE>
(c) Exhibits:
See Exhibit Index on page following Signatures.
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 hereunto duly authorized.
HEALTH RISK MANAGEMENT, INC.
Date: April 12, 1999 By /s/ Thomas P. Clark
Thomas P. Clark
Senior Vice President, Finance
and Chief Financial Officer
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
EXHIBIT INDEX
to
FORM 8-K/A (No. 1)
HEALTH RISK MANAGEMENT, INC.
Exhibit Exhibit Description
Number
2.1 Stock Purchase Agreement dated as of October 14, 1998 between Health
Risk Management, Inc. and Oxford Health Plans, Inc. (Previously Filed)
2.2 Closing Agreement dated as of January 27, 1999 between Health Risk
Management, Inc. and Oxford Health Plans, Inc. (Previously Filed)
23 Consent of Independent Auditors
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-38623) pertaining to the Health Risk Management, Inc. Non-Incentive
Stock Option Plan, the Registration Statement (Form S-8 No. 33-38624) pertaining
to the Health Risk Management, Inc. 1990 Stock Option Plan, and the Registration
Statements (Form S-8 No. 33-60390 and Form S-8 No. 333-34497) pertaining to the
Health Risk Management, Inc. 1992 Long-Term Incentive Plan of our report dated
September 23, 1998, with respect to the financial statements of Oxford Health
Plans (PA), Inc. included in this Current Report (Form 8-K) of Health Risk
Management, Inc. dated April 12, 1999, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 12, 1999
