FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
October 22, 1999 was 4,639,496.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
INDEX
Part I. Financial Information Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- at September 30, 1999 and
June 30, 1999..................................................3
Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998..............................4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1999 and 1998..............................5
Notes to Consolidated Financial Statements........................6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............10-13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk..........................................................13
Part II. Other Information
Item 1. Legal Proceedings.........................................14
Item 4. Submission of Matters to a Vote of Security Holders.......14
Item 6. Exhibits and Reports on Form 8-K..........................14
Signatures....................................................................15
Exhibit Index.................................................................16
<PAGE>
PART I. ITEM 1. FINANCIAL INFORMATION
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
September 30,
1999 June 30,
(Unaudited) 1999
---------------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,214 $ 9,229
Accounts receivable-net of allowance for doubtful accounts of $312
and $324 at September 30, 1999 and June 30, 1999, respectively 22,261 23,774
Deferred income taxes 1,145 1,440
Other 2,030 2,263
-------- --------
Total current assets 33,650 36,706
Fixed maturity investments at fair value 6,743 8,406
Computer software costs, less accumulated amortization of $21,571 and $19,910 at
September 30, 1999 and June 30, 1999, respectively 26,391 26,736
Property and equipment, less accumulated depreciation of $15,804 and $15,001 at
September 30, 1999 and June 30, 1999, respectively 11,486 11,825
Other assets 4,719 4,896
-------- --------
$ 82,989 $ 88,569
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,714 $ 3,954
Medical services payable 18,263 21,215
Due to reinsurer 787 553
Accrued expenses 4,495 6,144
Unearned revenues 3,710 5,234
Current maturities of notes payable 7,725 7,865
Current portion of capitalized equipment leases 261 252
-------- --------
Total current liabilities 38,955 45,217
Deferred income taxes 3,105 2,828
Long-term portion of notes payable 2,620 3,145
Long-term portion of capitalized equipment leases 523 483
Surplus note payable 2,500 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 authorized, 4,639,496
issued and outstanding at September 30, 1999 and June 30, 1999 46 46
Additional paid-in capital 32,176 32,176
Retained earnings 3,295 2,382
Accumulated other comprehensive loss:
Net unrealized loss on fixed maturity investments (231) (208)
-------- --------
Total shareholders' equity 35,286 34,396
-------- --------
$ 82,989 $ 88,569
======== ========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Premiums-gross $ 40,074 $ 33,711
Ceding allowance 1,161 --
Management service fees 12,215 13,901
QualityFIRST revenues 1,029 1,088
Investment income 231 249
-------- --------
Total revenues 54,710 48,949
Less ceded premiums 19,007 --
-------- --------
Net revenues 35,703 48,949
Operating expenses:
Medical costs, net 16,605 28,828
Cost of services, net 14,212 15,549
Selling, marketing and administration, net 3,089 3,957
Oxford transition costs -- 430
Interest expense 307 183
-------- --------
Total operating expenses 34,213 48,947
-------- --------
Income before income taxes 1,490 2
Income taxes expense 577 25
-------- --------
Net income (loss) $ 913 $ (23)
======== ========
Net income (loss) per share:
Basic $ .20 $ (.01)
======== ========
Diluted $ .20 $ (.01)
======== ========
Weighted average number of shares outstanding:
Basic 4,639 4,594
======== ========
Diluted 4,666 4,722
======== ========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 913 $ (23)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Realized gain on investments 1 --
Depreciation 803 823
Amortization 1,854 1,642
Provision for deferred income taxes 572 20
Changes in operating assets and liabilities:
Accounts receivable 1,513 (3,725)
Other assets 218 (850)
Accounts payable (402) 359
Medical services payable (2,952) 2,702
Due to reinsurer 234 --
Accrued expenses (1,649) (628)
Unearned revenues (1,524) (1,164)
-------- --------
Net cash used in operating activities (419) (844)
Cash flows from investing activities:
Sale of investments 1,639 --
Computer software costs (1,317) (2,411)
Property and equipment, net (160) (1,105)
-------- --------
Net cash provided by (used in) investing activities 162 (3,516)
Cash flows from financing activities:
Principal payments on notes payable (665) (379)
Principal payments on capital leases (93) (179)
Issuance of common shares -- 174
-------- --------
Net cash used in financing activities (758) (384)
-------- --------
Decrease in cash and cash equivalents (1,015) (4,744)
Cash and cash equivalents at beginning of period 9,229 20,624
-------- --------
Cash and cash equivalents at end of period $ 8,214 $ 15,880
======== ========
</TABLE>
See accompanying notes.
<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, 1999. Accordingly, footnote disclosures which would
substantially duplicate the disclosures contained in the June 30, 1999
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, performance bonus accruals included in
accounts receivable, and the tax valuation allowance. Actual results
could differ from such estimates.
3. Computer software costs
September 30,
1999 June 30,
(Unaudited) 1999
------- -------
(in thousands)
Computer software costs consist of the following:
Care Management Software
Cost $19,359 $18,936
Less accumulated amortization 8,161 7,483
------- -------
Net book value 11,198 11,453
Claim Administration Software
Cost 9,873 9,709
Less accumulated amortization 4,548 4,302
------- -------
Net book value 5,325 5,407
QualityFIRST(R)Software
Cost 18,731 18,001
Less accumulated amortization 8,863 8,125
------- -------
Net book value 9,868 9,876
------- -------
Computer software costs $26,391 $26,736
======= =======
Effective July 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1
"Accounting for Computer Software Developed For or Obtained For
Internal Use" (the SOP) for its internal-use software related to its
Care Management software and Claim Administration software. The SOP
requires the capitalization of certain costs incurred in connection
with developing or obtaining software for internal use. In connection
with such adoption, the Company revised its previous capitalization
policy for such software to be in conformance with the SOP and, as a
result, capitalized less costs.
<PAGE>
4. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended September 30, (in
thousands, except per share data):
1999 1998
------- -------
Numerator:
Net income (loss) $ 913 $ (23)
======= =======
Denominator:
Weighted-average shares-basic 4,639 4,594
Effect of dilutive stock options 27 128
------- -------
Weighted-average shares-diluted 4,666 4,722
======= =======
Net income (loss) per share:
Basic $ .20 $ (.01)
======= =======
Diluted $ .20 $ (.01)
======= =======
5. Comprehensive Income (Loss)
The comprehensive income (loss) for the Company for the three months
ended September 30, were as follows (in thousands):
1999 1998
----- -----
Net income (loss) $ 913 $ (23)
Change in net unrealized loss on fixed
maturity investments (23) --
----- -----
Comprehensive income (loss) $ 890 $ (23)
===== =====
6. Investments
The amortized cost and fair value of available for sale fixed maturity
investments consisted of the following (in thousands):
September 30, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Treasury securities $4,941 $ -- $ 210 $4,731
Corporate bonds 2,033 -- 21 2,012
------ ------ ------ ------
$6,875 $ -- $ 231 $6,743
====== ====== ====== ======
June 30, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Treasury securities $5,581 $ 11 $ 198 $5,394
Corporate bonds 3,033 -- 21 3,012
------ ------ ------ ------
$8,614 $ 11 $ 219 $8,406
====== ====== ====== ======
<PAGE>
All fixed maturity investments are due within five years as of
September 30, 1999. Actual maturities may differ from contractual
maturities because the borrowers may have the right to prepay such
obligations without prepayment penalties.
Gross realized gains of $8,356 and gross realized losses of $6,829 were
recognized on the sale of available-for-sale fixed maturity securities
in the three months ended September 30, 1999 and are included in
investment income. There were no sales of fixed maturity investments
during the three months ended September 30, 1998.
At September 30, 1999 U.S. Treasury Securities with a book value of
$100,000 were on deposit with the Commonwealth of Pennsylvania
Insurance Department to satisfy regulatory requirements.
The net unrealized loss on fixed maturity investments included in
shareholder's equity consisted of the following (in thousands):
September 30, June 30,
1999 1999
----- -----
Gross unrealized loss on fixed
maturity investments $(231) $(208)
Adjustment for net deferred
tax benefit, net of valuation allowance -- --
----- -----
Net unrealized loss on fixed
maturity investments $(231) $(208)
===== =====
7. Acquisition/Reinsurance
On January 27, 1999, the Company completed the acquisition of Oxford Health
Plans (PA), Inc. (the Plan), a wholly-owned subsidiary of Oxford Health Plans,
Inc. In the nine months prior to the acquisition, the Company managed the
medical assistance component of the Plan under terms of a contract with Oxford
Health Plans, Inc. The Company provided health plan management services and
assumed the medical cost risk of the medical assistance recipients in and around
Philadelphia, Pennsylvania.
After the acquisition, the Company continued to assume the medical cost risk
through the Plan for these Medical Assistance recipients. The acquisition also
included a small block of commercial HMO products. As of September 30, 1999,
substantially all of the commercial block had discontinued their insurance
coverage with the Plan.
Effective January 1, 1999, the Company entered into a 50% quota-share
reinsurance agreement under which the reinsurer has assumed 50% of the Medicaid
medical cost risk and certain non-medical expenses in exchange for 50% of the
related Medicaid premium. Under this agreement, the Company received a
$5,000,000 ceding allowance from the reinsurer. The ceding allowance is being
realized in relation to profits ceded to the reinsurer. The Company realized
$1,161,000 of the ceding allowance as a component of net revenue in the three
months ended September 30, 1999. Since the inception of the agreement,
$3,618,000 of the $5,000,000 ceding allowance had been realized as of September
30, 1999. Amounts ceded under the contract for premiums, medical costs and
expenses for the three months ended September 30, 1999 were $19,007,000,
$15,986,000 and $1,739,000, respectively.
During the first three years of the agreement, the Company may recapture the
business ceded, subject to provisions of the agreement. There were no amounts
recoverable under terms of this reinsurance contract as of September 30, 1999.
<PAGE>
8. Segment Reporting
For the three months ended September 30, reportable segment information
is as follows (in thousands):
<TABLE>
<CAPTION>
Risk
Management QualityFIRST (HMO)
1999: Services Unit Unit Unit Total
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external customers $ 12,215 $ 1,029 $ 22,228 $ 35,472
Intersegment revenues(1) 6,481 282 -- 6,763
Investment income(2) 18 -- 213 231
Interest expense(3) 204 49 54 307
Depreciation expense 720 33 50 803
Amortization expense 1,111 743 -- 1,854
Income (loss) before taxes(4) 937 (324) 877 1,490
Assets(4) 44,966 10,963 27,060 82,989
Purchases of property and equipment
and computer software 1,094 753 -- 1,847
<CAPTION>
Risk
Management QualityFIRST (HMO)
1998: Services Unit Unit Unit Total
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external customers $ 13,901 $ 1,088 $ 33,711 $ 48,700
Intersegment revenues(1) 3,726 392 -- 4,118
Investment income(2) 80 -- 169 249
Interest expense(3) 148 35 -- 183
Depreciation expense 789 34 -- 823
Amortization expense 1,019 623 -- 1,642
Income (loss) before taxes(4) 586 (275) (309) 2
Assets(4) 45,706 10,818 17,206 73,730
Purchases of property and equipment
and computer software 4,552 990 -- 5,542
</TABLE>
(1) Intersegment Management Services Unit revenues represent the amounts
charged to the Risk (HMO) Unit under terms of an administrative services
agreement. The revenue is eliminated in consolidation.
Intersegment OualityFIRST Unit revenues represents amounts charged by the
QualityFIRST Unit to the Management Services Unit ($101,000 and $168,000
for the three months ended September 30, 1999 and 1998, respectively) and
the Risk (HMO) unit ($181,000 and $224,000 for the three months ended
September 30, 1999 and 1998 respectively) for use of the QualityFIRST(R)
software. The revenue is based upon covered members or employees and is
eliminated in consolidation.
(2) Investment income earned on fixed maturity investments is recorded in the
Risk (HMO) Unit. All other investment income is recorded in the Management
Services Unit.
(3) Interest expense on the surplus note payable is recorded in the Risk (HMO)
Unit. The remaining interest expense has been allocated between the
Management Services Unit and the QualityFIRST unit based upon segment
assets.
(4) Corporate amounts have been allocated back to the respective business units
based upon estimated resource usage. Oxford transition costs of $430,000
have been charged to the Risk (HMO) unit for the three months ended
September 30, 1998.
<PAGE>
9. Reclassification
Certain items in the financial statements for the three months ended September
30, 1998 have been reclassified to conform to the 1999 presentations.
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
The Company's revenues consist primarily of Medicaid premiums for providing
administrative services while assuming all the medical cost risk, management
service fees for health plan management and QualityFIRST revenues for software
licenses and subscription fees.
The Company's operating expenses are comprised of medical costs, net (consisting
primarily of the net medical costs after the ceded portion of medical services
and reinsurance, net of recoveries), its cost of services, net (consisting
primarily of net costs after 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 expenses, net (consisting primarily of
the net costs after 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 which became effective January 1, 1999.
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of total revenues for the three months ended September 30, 1998 and
1999 and for the fiscal year ended June 30, 1999.
Three Months Year
Ended Ended
September 30, June 30,
1998 1999 1999
Total revenues 100% 100% 100%
==== ==== ====
Operating expenses:
Medical costs, net 86(1) 79(1) 85(1)
Cost of services, net 32(2) 40(2) 34(2)
Selling, marketing and administration, net 8(2) 9(2) 9(2)
Oxford transition costs 1(2) -- 1(2)
Interest expense * 1(2) 1(2)
---- ---- ----
Total operating expenses 100(2) 96(2) 100(2)
---- ---- ----
Income before income taxes and cumulative
effect of accounting change * 4 *
Income taxes * 2 *
---- ---- ----
Net income (loss) (*) 3 *
==== ==== ====
(1) Computed as a % of HMO premiums, net (gross premiums less ceded premiums).
(2) Computed as a % of net revenues.
* Less than 1% on a rounded basis
Total Revenues: Total revenues increased $5,761,000 (12%) from first quarter
1999 to fiscal 2000 (from $48,949,000 to $54,710,000). The increase in revenues
is primarily attributable to increased revenues from the HMO operations and
realization of $1,161,000 of the ceding allowance (see Note 7 of the unaudited
financial statements) offset by lower revenues from management service fees.
Management service fees were impacted by a net of decreases in the number of
covered participants enrolled in the Company's management services as a result
of an HMO that terminated services on September 30, 1998.
<PAGE>
Following is a breakout of revenue:
Three Months Ended
September 30,
1998 1999
Premiums - gross $ 33,711,000 $ 40,074,000
Ceding allowance 0 1,161,000
Management service fees 13,901,000 12,215,000
QualityFIRST revenues 1,088,000 1,029,000
Investment income 249,000 231,000
------------ ------------
Total revenues 48,949,000 54,710,000
Less ceded premiums 0 (19,007,000)
------------ ------------
Net revenues $ 48,949,000 $ 35,703,000
============ ============
The premiums-gross increased 19% or $6,363,000, from the first quarter of fiscal
1999 to fiscal 2000 (increasing from $33,711,000 to $40,074,000). Revenues from
the HMO operations increased as a result of membership category changes and rate
adjustments effective January 1999. Total revenues include the ceding allowance
and net revenues reflect the premiums that are ceded under the reinsurance
agreement that was entered into in January 1999 (see Note 7 of the unaudited
financial statements).
Revenues from management services decreased 12% or $1,686,000, from the first
quarter of fiscal 1999 to fiscal 2000 (decreasing from $13,901,000 to
$12,215,000) mainly the result of the decrease in the number of covered
participants enrolled in the Company's management services related to an HMO
that terminated services on September 30, 1998 and other clients who terminated
services.
Revenues from QualityFIRST(R) decreased 5% or $59,000, from the first quarter of
fiscal 1999 to fiscal 2000 (decreasing from $1,088,000 to $1,029,000). The
decrease was the result of fewer implementations of the QualityFIRST(R)
computer-based clinical decision support systems during the quarter and does not
include sales announced in the quarter, but implemented in a subsequent quarter.
Investment income decreased 7% or $18,000 from the first quarter of fiscal 1999
to fiscal 2000 (decreasing from $249,000 to $231,000). This decrease is the
result of a slightly lower level of invested assets in fiscal 2000 as compared
to fiscal 1999.
Medical Costs, Net: Medical costs, net of amounts ceded, for the HMO decreased
42% or $12,223,000 from the first quarter of fiscal 1999 to fiscal 2000 (from
$28,828,000 to $16,605,000) mainly due to the 50% quota-share reinsurance
agreement that began January 1, 1999. As a percentage of HMO premiums, net
medical costs were 85.5% in the first quarter of fiscal 1999 and 78.8% in the
first quarter of fiscal 2000. Excluding the impact of the discontinued
commercial line of business, the Medicaid net medical costs were 85.5% in the
first quarter of fiscal 1999 and 86.5% in the first quarter of fiscal 2000. The
increase in fiscal 2000 was the result of the estimated medical costs increasing
slightly faster than increases in the Medicaid premiums, specifically as related
to pharmacy and inpatient costs.
Cost of Services, Net: Cost of services, net of amounts ceded, decreased 9% or
$1,337,000 from the first quarter of fiscal 1999 to fiscal 2000 (from
$15,549,000 to $14,212,000). The decrease was primarily due to decreased payroll
and expenses related to the delivery of service to the HMO that terminated
services on September 30, 1998. As a percentage of net revenues, the cost of
service, net of amounts ceded, was 32% in the first quarter of fiscal 1999 and
40% in first quarter of fiscal 2000. This percentage was the result of lower net
revenues in the first quarter of fiscal 2000 as a result of the premiums ceded
under the reinsurance agreement that was entered into January 1999.
Selling, Marketing and Administration, Net: Selling, marketing and
administration, net of amounts ceded, decreased 22% or $868,000, from the first
quarter of fiscal 1999 to fiscal 2000 (from $3,957,000 to $3,089,000). The
decreases were due primarily to HMO administration expenses ceded under the
reinsurance agreement that was entered into in January 1999. As a percentage of
net revenues, selling, marketing and administration, net was 8% in the first
quarter of fiscal 1999 and 9% in first quarter of fiscal 2000. This percentage
was the result of lower net revenues in the first quarter of fiscal 2000 as a
result of the premiums ceded under the reinsurance agreement that was entered
into in January 1999.
<PAGE>
Oxford Transition Costs : The Company incurred transition costs related to the
purchase of Oxford Health Plans (PA), Inc. of approximately $430,000 in the
quarter ended September 30, 1998 , due to increased operational costs for HMO
related activities without a corresponding increase in the management service
fees.
Interest Expense: Interest expense increased 68% or $124,000 from the first
quarter of fiscal 1999 to fiscal 2000 (from $183,000 to $307,000), and increased
as a percentage of net revenue from 0.4% to 0.9%. Interest expense was impacted
in fiscal 2000 by the additional loans which were obtained in fiscal 1999 to
acquire the HMO.
Income Taxes: Income taxes increased in the first quarter of fiscal 2000 from
fiscal 1999 by $552,000, or 2,208% (from $25,000 to $577,000), mainly due to the
increase in the level of income before income taxes. It is expected that the
2000 fiscal year effective tax rate will approximate the 39% rate of fiscal
1999.
Liquidity and Capital Resources
The Company's cash used in operations was $419,000 and $844,000 for the first
quarter of fiscal 2000 and 1999, respectively. Cash flow used in operations
exceeded net income in the first quarter of fiscal 2000 due to increased
payments of medical services payable, payments of accrued expenses and the
recognition of the ceding allowance. Cash flow used in operations exceeded the
net loss in the first quarter of fiscal 1999 due to an increase in accounts
receivable.
Cash has been used to invest in software and program enhancements ($1,317,000
and $2,411,000 in the first quarter of fiscal 2000 and fiscal 1999,
respectively). The Company also acquired property and equipment of $160,000 and
$1,105,000 in the first quarter of fiscal 2000 and fiscal 1999, respectively.
Cash of $1,639,000 was generated in the first quarter of fiscal 2000 through the
sale of a fixed maturity investment. This cash was made available to process
medical services payable. HRM expects to continue to acquire property and
equipment and enhance software and products at this quarter's level in fiscal
year 2000.
HRM also used approximately $758,000 and $558,000 in the first quarter of fiscal
2000 and fiscal 1999, respectively, to repay principal on notes payable and
capital leases. The Company received cash proceeds of $174,000 in the first
quarter of fiscal 1999 from stock option exercises for common stock by current
or former employees and directors.
The Company had a working capital deficit of $5,305,000 at September 30, 1999
compared to a working capital deficit of $8,511,000 at June 30, 1999. The
medical services payables reduces working capital by $18,263,000 and $21,215,000
at September 30, 1999 and June 30, 1999, respectively. The Company has fixed
maturity investments of $6,743,000 available at September 30, 1999 to be used to
pay medical services payables, if the need arises.
The Company has a net operating loss carryforward of approximately $35,000,000
for income tax purposes at June 30, 1999, which can be used to reduce taxable
income and cash flow necessary to pay taxes.
The Company believes that its cash and expected 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 2000.
The Company has a term loan and revolving loan (principal balance of $4,725,000
and $5,625,000, respectively, as of September 30, 1999) with its bank and a
revolving credit facility expiring January 31, 2000, under which the Company has
$375,000 available under the facility. Subsequent to September 30, 1999, the
Company received a commitment from its bank to convert $3,000,000 of the
$6,000,000 revolving loan to a term loan, to reduce the revolving credit
facility to $3,000,000 and to extend the term of the revolving credit facility
to January 30, 2001. The revolving credit and term loan are secured by liens on
the assets of the Company.
<PAGE>
Year 2000
State of Year 2000 Readiness
The Company began work on its Year 2000 Project in 1997 and established a Year
2000 Project Office and Year 2000 Project Team in early 1998. The Company's Year
2000 Project Office is comprised of the Company's senior Information Services
("I.S.") management team, which provides business support and resources for the
overall project. The Company's Year 2000 Project Team, under the leadership of
the CIO, consists of the Company's I.S. employees, independent consultants, and
business representatives on an as-needed basis.
There are five phases to the Company's Year 2000 Project: Phase 1: Identify and
Analyze; Phase 2: Plan and Schedule; Phase 3: Execute the Plan (Remediate;
Upgrade; Replace; or Eliminate); Phase 4: Test and Integrate; and Phase 5:
Maintain Year 2000 Integrity. The goal of the Company's Year 2000 Project is to
prepare the Company's computer systems, applications, facilities (including
non-information technology systems, such as security systems) and external
relationships for the Year 2000. The primary focus of the Year 2000 Project
effort has been, and continues to be, on the Company's mission critical systems,
which are those that support and interface with our clients or vendors. The
Company's Year 2000 Project is comprised of many different platforms and
components and the Company is at varying Project phases with respect to the
different components.
In Phase 1 of the Year 2000 Project, the Company completed a general inventory
of its work environment. The inventory included system hardware, system
software, utilities (phone, electric, etc.), as well as additional facility
components. The Project Team has completed its inventory of mission critical
components.
During Phase 2 of the Company's Year 2000 Project, the Year 2000 Project Team
provided initial size estimates for the scope of each mission critical system
component that was identified, and developed a strategy for achieving compliance
for each of these components. In addition, the Year 2000 Project Team developed
a communication plan for internal and external communications regarding the year
2000.
All mission critical components of Phases 3 and 4 have been completed. As of
June 30, 1999, the Company had completed the majority of the remediation of its
mission critical applications. Remediation of the Claims System, implementation
of the remediated Claims System, and future-date testing on Claims System were
completed as of July 1999. The remediation of the critical elements of the Care
Management System was completed in July 1999. The future-date testing on this
system was completed in October 1999.
The Company's Year 2000 Project Team is currently in Phase 5, maintenance of
Year 2000 integrity of all of the Company's mission critical components,
including the Company's QualityFIRST(R) product. The Company's QualityFIRST(R)
product is Year 2000 ready in that it processes four-digit year dates, in
accordance with the Software Release Note delivered to customers.
The Company continues to review year 2000 information of critical vendors,
including phone service and utilities, to determine the impact of their year
2000 readiness on the Company's business and to request additional year 2000
information. The majority of the Company's Year 2000 Project activities,
including contingency planning, have been completed as of October 31, 1999.
Nevertheless, because of the unique nature of the year 2000 issue, there will be
some contingency planning and ongoing maintenance activities that will continue
into the year 2000.
Year 2000 Project Costs
Costs of the Company's Year 2000 Project through June 30, 1999 were
approximately $1.1 million. An additional $.2 million was incurred in the
quarter ended September 30, 1999. An additional $.3 million is expected to be
incurred during fiscal year 2000. The costs associated with the Year 2000
Project have been and will be expensed as incurred.
<PAGE>
Year 2000 Risks
The Company is reliant on technology and outside vendors to deliver its
services. While the Company may have more than one vendor to provide a specific
service to the Company, for those services for which the Company does not have
more than one vendor, the Company does not intend to hire backup vendors. There
could be a material adverse effect on the Company if there is a failure by the
Company, or a third party dealing with the Company, to be year 2000 ready with
respect to such things as: (1) a mission critical computer system or software
application; (2) facilities and equipment; or (3) the ability to provide
necessary services or products. Possible consequences of such a failure include
temporary disruption of the Company's ability to deliver services to its
clients. The scope and length of time of such a disruption will depend upon the
particular circumstances.
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. There can be no guarantee that these estimates will
be achieved, or that third parties on which the Company relies, or that the
Company itself, will be year 2000 ready. The results of the Year 2000 Project
could differ materially from those anticipated based on factors such as: the
impact of the Company's external relationships including the 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; and the ability to identify relevant computer codes.
Year 2000 Contingency Plans
In June 1999, the Company began to focus on contingency planning efforts. The
Company will be using contingency plans already in place relating to back-up of
information systems, as well as some business operations. The Company has
developed additional and/or supplemental contingency plans where necessary. As
of October 31, 1999, contingency plans have been developed for the Company's
significant business processes. Ongoing contingency planning activities will
continue into the year 2000.
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
marketplace including, but not limited to clients and vendors commonly
experiencing mergers or acquisitions, use of estimates for incurred but not yet
reported claims including medical services payable, use of estimates of bonus
accruals including 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 the HRM's anticipated level of revenue growth or
profitability.
ITEM 3.
Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in the Company's interest rate market risk
disclosures since June 30, 1999. For further information, refer to Item 7A in
the Company's Annual Report on Form 10-K for the year ended June 30, 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 5. Other Information
None
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 September 30, 1999, 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: November __, 1999 By: /s/Gary T. McIlroy
Gary T. McIlroy, M.D.
Chief Executive Officer
Dated: November __, 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 September 39, 1999
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 Form 10-Q for the quarter ended September 30,
1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 8,214
<SECURITIES> 0
<RECEIVABLES> 22,261
<ALLOWANCES> 312
<INVENTORY> 0
<CURRENT-ASSETS> 33,650
<PP&E> 37,877
<DEPRECIATION> 37,375
<TOTAL-ASSETS> 82,989
<CURRENT-LIABILITIES> 38,955
<BONDS> 5,643
0
0
<COMMON> 46
<OTHER-SE> 35,240
<TOTAL-LIABILITY-AND-EQUITY> 82,989
<SALES> 35,703
<TOTAL-REVENUES> 35,703
<CGS> 0
<TOTAL-COSTS> 30,817
<OTHER-EXPENSES> 3,089
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 307
<INCOME-PRETAX> 1,490
<INCOME-TAX> 577
<INCOME-CONTINUING> 913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 913
<EPS-BASIC> .20
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</TABLE>
