SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from July 1, 1999 to December 31, 1999
Commission file number 0-18902
Health Risk Management, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1407404
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
10900 Hampshire Avenue South, Minneapolis, MN
55438 (Address of principal executive offices, the
zip codes)
Registrant's telephone number, including area code: 612/829-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Preferred Stock Purchase Rights
Indicate by check mark, whether the Registrant (1) has filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 22, 2000 was approximately $28,000,000 based upon the
closing sale price of the Registrant's Common Stock on such date.
Shares of $.01 par value Common Stock outstanding at March 22, 2000:
4,661,801 shares.
Documents Incorporated by Reference
NONE
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business.
Unless the context otherwise requires, references in this Transition Report
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
to "HRM" and the "Company" refer to Health Risk Management, Inc., and its
wholly owned domestic subsidiaries, HRM Claim Management, Inc., Institute
for Healthcare Quality, Inc., Health Benefit Reinsurance, Inc.,
Pennsylvania HRM, Inc., HRM Health Plans (PA), Inc. and its wholly owned
subsidiary, Pennsylvania HealthMATE, Inc., and HRM's Canadian subsidiary,
Health Resource Management LTD. HRM was incorporated in Minnesota in 1977.
The Company changed its fiscal year end from June 30 to December 31,
effective December 31, 1999. This report is HRM's Transition Report on Form
10-K for the period July 1, 1999, through December 31, 1999.
HRM delivers a variety of evidence-based medical information products and
health plan management services to the managed care and indemnity markets.
Service and contracting options range from a single product/service sold on
a subscription, fee or per member per month basis, to total management of
the financial risk of a health plan to outright ownership of a health plan.
Our principal health plan management services and products include care
management (formerly known as utilization review), provider network
management, claim administration, partial and total risk management and
computer-based medical information software and related management
services.
During the fiscal ended June 30, 1999, we realigned these products and
services into three market-focused business units, which focus on the
specific needs of our three major businesses. This was also done so we can
manage more efficiently the specific segments within each market that have
the highest profit potential. During this six month transition period ended
December 31, 1999, we continued to realign our products and services into
three market-focused business units. One of the goals of this realignment
is to facilitate efficient management of the specific segments within each
market that have the highest profit potential. This report highlights the
products, services, programs and financials of the three business units.
The three business units are the Risk Business Unit, the Service Business
Unit and the QualityFIRST Business Unit.
Subsequent to the six month transition period ended December 31, 1999, our
Board of Directors authorized management in each business unit to initiate
new Internet-based businesses that will take full advantage of cost saving,
access and other benefits as well as the profit potential of Internet-based
products and services. These initiatives will be briefly addressed below.
This was the next step in the fulfillment of the business strategy we
announced in the fiscal year ended June 30, 1999, Annual Report on Form
10-K.
1. Risk Business Unit. This unit produces larger revenues than any of the
other units because the revenue reflects the full risk of the benefits
provided by the health plan, including the cost of services,
administrative costs and profits. This unit accounted for 0%, 29%, and
73% of the Company's total revenue for fiscal years 1997, 1998 and
1999, respectively. This unit accounted for 76% of the Company's total
revenue for the six month transition period ended December 31, 1999.
Its revenue is derived primarily from monthly payments received from
state agencies. Operating expenses from this unit are listed as
Medical costs, net, the cost of service, and administrative expense
related to the health plan. Medical costs, net of ceded amounts, refer
to the cost of providing medical services to health plan members. This
unit's market is managed care organizations that are underperforming;
that is, they are operating at a loss, or they are not able to manage
their medical loss ratio, but provide a premium rate that supports the
medical costs, cost of service expense, administrative expense and
profit potential.
We use our 20 years' experience in health plan management to apply
virtually all of our services and products to the goal of turning
around failing health plans. To accomplish this, we assume management
of all operational functions of the health plan, and we assume either
a portion or all of the plan's financial risk, or we acquire the plan.
With each increase in level of risk assumed, HRM increases its access
to the health plan's premium dollars and assets and increases its
assumption of financial risk, which may be reinsured via various
reinsurance vehicles.
<PAGE>
In February 1998, we signed, through our wholly-owned subsidiary,
Pennsylvania HRM, Inc., our first full-risk, total health plan
management contract with Oxford Health Plans (PA), Inc., Philadelphia,
(Oxford) an approximately 60,000-member Medicaid HMO. Under the terms
of the agreement, beginning April 16, 1998, we provided health plan
management services and assumption of the medical cost risk under the
HealthChoices Physical Health Agreement between the Commonwealth of
Pennsylvania and Oxford. On January 27, 1999, we purchased the health
plan, which today operates under the name OakTreeHealth Plan(TM). See
Note 8 to the Consolidated Financial Statements and Current Report on
Form 8-K filed February 11, 1999, for further information concerning
our purchase of the health plan.
During the six month transition period ended December 31, 1999, the
risk business unit concentrated its marketing efforts on health
maintenance organizations (HMOs), especially Medicaid HMOs. In
December, efforts were initiated by HRM Health Plans (PA), Inc. to
investigate the acquisition of Pennsylvania HealthMATE, an
approximately 18,000-voluntary member Integrated Delivery System
serving the Medicaid population in central Pennsylvania. In January
2000, HRM Health Plans (PA) finalized the acquisition of Pennsylvania
HealthMATE.
2. Service Business Unit. This unit, known under the brand name HRM(R)
CarePASS(R) USA, is HRM's second highest revenue generating business
unit, accounting for 94%, 67% and 24% of the Company's total revenue
for fiscal years 1997, 1998 and 1999, respectively. The unit accounted
for 21% of the Company's total revenue for the six month transition
period ended December 31, 1999. This unit's revenue, in the form of
management service fees, is usually based on either the number of
members covered by the particular benefit plan or on a fee per
transaction basis. Operating expenses for this unit are included in
cost of services.
Basic services in this unit include acute care management (review)
services, coordinated care management for catastrophic or long-term
illnesses, provider network management, and health care claim and
related administrative services. This business unit's markets are
mainly employer self-funded health benefit plans and fully insured
benefit plans operated by insurance companies. This unit provides
effective comprehensive health plan management to help clients ensure
their employees or health plan members have: The right care, At the
right time, In the right setting, From the right professional, At the
right price, For the optimal outcomeSM.
The sales objective is to sell all or as many services to a client as
possible with the aim of providing total health plan management. When
we meet this objective, clients can maximize the effectiveness and
efficiency of their health plan, and HRM is in a position to maximize
the returns for both the client and itself.
A brief discussion of recent business developments, including those
related to the Internet, can be found in the narrative description of
the business sections below.
3. QualityFIRST Business Unit. This unit's revenue is included in
QualityFIRST revenues, and accounted for 6%, 4% and 2% of the
Company's revenues for fiscal years 1997, 1998 and 1999, respectively.
This unit's revenue accounted for 2% of the Company's revenues for the
six month transition period ended December 31, 1999. Revenues are
primarily in the form of software license, subscription and related
fees. During the six month transition period ended December 31, 1999,
we continued efforts to re-focus what had been mainly a health care
practice guideline software product into an enterprise-wide financial,
liability and clinical management system to be used by managed care
organizations in managing their medical loss ratio. We also
intensified efforts to re-brand the product series as QualityFIRST(R)
Evidence-based Solutions for Effective Medical ManagamentSM. . We also
added separate medical information, continuing medical education and
medical education core curriculum components. The primary focus during
the transition period was the Internet. We devoted significant efforts
to developing comprehensive additional strategies and prototypes for
Internet applications.
<PAGE>
Among other services, QualityFIRST(R) delivers scientific,
evidence-based medical and financial risk management solutions to help
health plans and providers deliver quality care for members, maintain
control over medical loss ratios and minimize exposure to liability
risk.
A brief discussion of recent business developments, including those
related to the Internet, can be found in the narrative description of
business section below.
(b) Financial Information about Industry Segments.
The Company is engaged at the present time in three industry segments,
namely health insurance and medical service plans (Risk Business Unit),
health care management services (Service Business Unit) and medical
information software systems and services (QualityFIRST Business Unit).
Financial information concerning the Company's business units is included
in Items 6,7,8 and 14.
(c) Narrative Description of Business.
(1) Products.
HRM's products and services are developed, packaged, managed, sold and
operated by one of our three main business units, which allows us to
focus our attention on the high revenue components and the specific
needs of each of our three primary markets: the at-risk health plan
market; the self-insured/indemnity service market; and the
QualityFIRST provider market. Products and services are assigned to a
business unit based on the specific needs of the market being served.
Risk Business Unit Marketplace: Health Plans At Risk
Health plans at risk - primarily HMOs - represent the market for the
Risk Business Unit. This business unit is described in (a) above. It
makes use of all of the Company's services and products as it assumes
partial or full financial risk for a health plan. When accepting
contracted financial risk, we may obtain reinsurance against losses
above specific levels. In cases when we share risk, contracts also may
include the awarding of specified bonus to us or payment by us of a
penalty for the achievement or non achievement of specified
performance targets.
In January 1999, the unit undertook the ownership and management of an
approximately 60,000- member Medicaid HMO in Philadelphia (formerly
known as Oxford Health Plans (PA), Inc.) and that today is known as
OakTree Health Plan(TM) (the Plan). HRM had been managing the Plan
since April 1998. In January 2000, HRM Health Plans (PA) completed its
acquisition of Pennsylvania HealthMATE, an approximately 18,000-member
Medicaid Integrated Delivery System in central Pennsylvania. Our
objective with these two plans - and others the Company expects to
manage and/or acquire in the future -- is to improve the delivery of
medical care services for members and to reduce the plans' medical
loss ratio through improved operational efficiency and effectiveness.
To accomplish this, we employ virtually all of HRM's health care
management, provider contracting and claim administration products and
services together with management expertise gained during 23years of
hands on administration. This business unit plans to expand its
management and/or ownership of similar HMO organizations with various
financial or reinsurance arrangements.
In addition, as the other business units establish services and
products on the Internet, the Risk Business Unit will take full
advantage of these developments and enjoy significant cost savings and
enhanced access to a wide array of services and products.
Service Business Unit Marketplace: Self Insured/Indemnity
Although the self-insured/indemnity marketplace is the focus of the
Service Business Unit, the unit also provides care management, claim
administration and other management services to managed care
organizations on a selected basis. During the year, the Service
Business Unit focused sales efforts toward only large employers (more
than 1,000 employees) and insurance plans, which represented a shift
in marketing strategy away from smaller organizations. Because this
<PAGE>
market had been the exclusive focus of HRM for most of its history,
most of our client base falls within this business unit. The client
base is nationwide, with clients' employees or members located in
nearly every state.
During the six month transition period ended December 31, 1999, this
unit also continued the process of repackaging and bundling its many
separate services into essentially one total health plan management
product. This product includes everything a self-insured employer or
an insurance company with a health insurance plan needs if it is to
offer a health plan to employees/members. This product is sold on a
fixed monthly fee per covered employee based on expected transaction
volume or on a per transaction or case basis. Components of this
product include care management for acute and chronic medical,
surgical and behavioral health cases; complete claim administration
services, including reinsurance products when requested and pharmacy
management (provided through subcontractors); and provider network
management (usually through an affiliated preferred provider network).
Also during this six month transition period ended December 31, 1999,
the unit adopted a long-term strategy to enhance patient empowerment
in matters pertaining to their own health care by increasing their
access to accredited, evidence-based health care education resources.
Tied to this strategy are significant efforts to increase customer
loyalty through the use of long-term pricing incentives and
risk-sharing incentives. A key development that will facilitate these
incentives are the large operational cost savings the unit is
beginning to accrue through the addition of processing technology.
This technology, a combination of Internet-based data and
sophisticated phone services, plus the internal integration of service
expertise, will reduce the number of points of contact for patients
and providers so that eventually there will be a single point of
contact for all callers, which will result in improved service at
lower cost. New call center technology already is using skills-based
routing for incoming phone calls. This system is aimed at improving
employee productivity, reducing training costs and serving the
customer better and more economically.
On the claim administration side, new scanning and optical character
recognition technology for entering paper claims into our electronic
claim adjudication system will contribute significant savings to our
claim processing service and greatly increase claim accuracy and claim
turnaround time. All data entry already has been centralized to the
Minneapolis unit, and we expect to eliminate all external vendors who
key-in paper claims.
A significant accomplishment during the six month transition period
has been the centralization of provider file management into one
location. Provider data from all of our satellite offices are now
housed centrally. This greatly simplifies provider data management,
which is improving service for our customers and reducing data access
costs.
During the six month transition period ended December 31, 1999, the
business unit began developing plans to create a new web-based
application service provider (ASP) to enhance business to business
services, provide significant savings and improve the overall business
practice of health plans and providers alike. Eventually the Service
and Risk Business Units could carry out all of its operations
processes through the ASP. Also, the QualityFIRST Business Unit's
institutional license clients, such as HMOs, could perform their
utilization management, claim administration and other business
management operations through the ASP. Initial services could possibly
include: Provider Programs such as eligibility verification, benefit
plan coverages, medical decision support, utilization management
tools, network management, case specific ancillary services, claim
adjudication; case tracking, practice profiling, provision of
patient-requested patient education materials on a request and push
basis; Patient Programs such as web-access to health care information,
information about ancillary services, chat lines, patient questions
for their physician, differential diagnoses, provider evaluations,
appointment scheduling; Health Plan Sponsor Programs such as
sponsor-specific web page; single point of contact for all patient
information management; web-based reporting tools including financial,
operational, case mix trends (plan vs. industry, etc.); pricing
incentives and risk-sharing opportunities; web-based enrollment,
eligibility, provider directories, claim status.
Typical Service Business Unit Case Example
In a typical case managed by this business unit as of December
31, 1999, a plan participant or the participant's physician must
call a toll-free telephone number prior to commencement of
<PAGE>
elective medical or surgical treatment, or whenever possible,
prior to an emergency admission. This toll-free call can be
placed by the plan participant or the participant's physician 24
hours per day, seven days per week, 365 days per year. (The plan
participant's physician, other medical provider, hospital,
outpatient center, etc. already will have been determined by
HRM's Provider Network Services in conjunction with the
participant's employer or insurer.) From these calls, our nurses
gather information on the participant's medical condition and the
attending physician's proposed treatment plan, and then compare
these with our QualityFIRST(R) guidelines to determine the
validity of the proposed diagnosis and appropriateness of the
proposed treatment. In the event of any discrepancies between the
proposed diagnosis and treatment and our QualityFIRST(R)
guidelines, or at the request of the attending physician (and in
all cases involving certain complicated illnesses), these
determinations are reviewed by one of our consulting physicians
who is available 24 hours a day, seven days per week, 365 days
per year, and, in certain instances, by an independent physician
(second opinion). A second opinion provides the patient with
additional information to enable him or her to make an informed
decision before proceeding with a certain treatment. The
determination of whether the diagnosis, plan of treatment, and
setting for care are medically necessary and appropriate is
entered into our computer system to determine health plan
reimbursement, to begin the claim administration process, and to
communicate the determination to the client's health plan
administrator and the patient. Under no circumstances does HRM
prohibit the provision of any clinical services. If we do not
authorize the payment of the physician's or hospital's fee, the
health plan administrator may nonetheless choose to pay such fee.
Even if the health plan administrator chooses not to pay such
fee, the patient remains free to engage any physician, hospital,
or outpatient facility to perform any treatment based upon any
diagnosis, at the patient's expense. The participant receives the
appropriate treatment from the appropriate practitioner, in the
appropriate setting and our claim administration division
processes the appropriate claims and pays the appropriate charges
for the services that are covered according to the employer's
health plan or the participant's health insurance policy. Also,
any plan participant is encouraged to use our HRM(R) CareCALL(R)
24-hour health information, assessment, triage and referral phone
line, which provides personal health management and promotes
illness and injury prevention by educating and empowering the
caller to make appropriate decisions about their health, their
health care, and the health care resources they use.
QualityFIRST Business Unit Marketplace: General Public/Managed Care
Organizations/Insurance Companies/Provider Organizations
Managed care organizations, insurance companies, and various provider
organizations represent the market for the QualityFIRST Business Unit.
This unit is described in (a) above. As noted, during the six month
transition period ended December 31, 1999, this unit re-focused its
marketing efforts toward offering an integrated, enterprise-wide
product aimed at improving not only overall health care consistency
and quality, but also the customer's overall bottom line results. This
was in contrast to previous marketing efforts aimed at selling the
product as a tool to assist in clinical decision-making.
During the six month transition period ended December 31, 1999, the
unit concentrated on development of plans and prototypes to make this
product, including its medical content, suitable and attractive for
Internet applications aimed at the general public, employees of
clients, health plan members of client provider organizations, medical
students and physicians. The proposed e-health business could give
consumers, physicians and health plan administrators access to
reliable, evidence-based, health care information on the Internet to
facilitate consistent decision making. Consumers, for example, will
learn more about treatment options for their specific conditions. And
they likely would be better prepared to discuss their options and
choices with their physicians. Users are expected to have access to a
patented, logic-based Q&A format that will lead them to quality
decisions that are based on medical best practice research. All other
aspects of the product, as discussed below, could also be available on
the Internet.
QualityFIRST(R) products currently are offered on a license and
subscription fee basis, which allows, for example, HMOs and other
managed care organizations, insurance companies, and provider
organizations to use our software in their health plan management
system. We also have signed numerous joint venture/partnership
agreements whereby companies that license operating systems to
providers and provider organizations will include our decision support
QualityFIRST(R) guidelines on their systems or, as an option, on their
systems for a fee.
<PAGE>
The products of this Business Unit are bundled under a single brand
name:
QualityFIRST(R) Evidence-based Solutions for Effective Medical
ManagementSM.
These services and products, which include computer-based clinical
decision support systems based on current clinical research findings
and published clinical practice evidence, provide solutions for the
medical risk management challenges being faced by HMOs, various
managed care organizations, physicians and health plan members
interested in selecting the right care from the right provider at the
right time. This series includes the following components:
QualityFIRST(R) Medical Risk Management System(TM). This system,
which is used on an enterprise-wide basis, delivers medical and
financial risk management strategies to help health plans,
providers and others deliver quality care, maintain maximum
control over medical loss ratios and minimize liability.
This integrated system is based on QualityFIRST(R) guidelines,
which may also be sold as a stand alone product. The Medical Risk
Management System is a clinical decision support software system
that uses evidence-based guidelines to evaluate and confirm
proposed diagnoses, suggest treatment selection options, identify
resource options, and capture decisions for profiling,
accountability reporting and outcomes measurement. This
information is especially valuable for financial risk and
outcomes management, identification of educational needs and for
management of the medical loss ratio. The Medical Risk Management
System integrates medical and financial management to create a
portfolio of risk management solutions.
The key component of the Medical Risk Management System is the
scientific evidence-based QualityFIRST(R) clinical guidelines
that provide clinical decision support for evaluating diagnosis,
treatment selection and resource use for each episode of care. In
addition, the guidelines provide consistent criteria and practice
standards against which care quality and related costs can be
measured. Physicians working with health plans, health plan
medical directors, health care professionals working with
physicians, and other providers use these diagnosis-driven
guidelines to promote consistency in decision making, to
influence quality of care; to promote clinically appropriate
decisions concurrently; to promote optimal outcomes; and to allow
the practitioner flexibility in care decisions on the basis of
individual patient factors.
The clinical evidence-based guideline content is supported by
full academic research and clinical outcome analysis and
addresses the clinical value of a particular intervention both on
an individual basis and on an aggregate long-term basis. On-line
access to clinical documentation of guideline recommendations,
research abstracts and full bibliographic references to the
clinical literature contribute to the product's high acceptance.
The interactive operating platform promotes quality care through
its ability to facilitate and document acute care clinical
decisions. The patented, directed questioning format mirrors the
sequential "decision tree" process of clinical decision making,
promotes clinical consistency and is user friendly. The product's
capability to document clinical decisions, including variances to
guideline recommendations, provides a consistent baseline for
measurement, assessment, education and continuous quality
improvement.
QualityFIRST(R) offers Medical/Surgical, Workers'
Compensation/Disability, Behavioral Health, and Specialist
Referral guidelines as well as Alternative Setting indicators.
These modules comprise 500 guidelines and more than 3,630
treatments/procedures covering approximately 80% of significant
clinical events. The Workers' Compensation/Disability package
includes on-line-return-to-work parameters to identify the
expected length of disability and to expedite return to work as
well as on-line access to individual state workers' compensation
treatment guidelines to facilitate compliance with local workers'
compensation regulations. Alternative Setting indicators are
designed to help streamline the transfer of care from an acute
setting to the next appropriate care level based on medical,
physical, economic and psychosocial issues particular to each
patient. Specialist Referral guidelines are used to facilitate
the referral decision process from the primary care physician to
the specialist. These guidelines are designed to help ensure
<PAGE>
appropriate referrals and appropriate timing of referrals, to
support first line treatment by the primary care physician and to
document referral decisions so the result is optimal,
cost-effective care. Each of the guidelines is reviewed at least
yearly and is updated as necessary to reflect the latest clinical
advances.
QualityFIRST(R) software is made available to clients on a
software license basis. Licensees include hospitals, insurance
companies, HMOs, and others. Fees are based on a license fee at
inception with a monthly subscription fee during the term of the
license agreement based on number of plan members or number of
workstations using the guidelines.
QualityFIRST Triple WinSM Program. This program was launched
during the fiscal year ended June 30, 1999, and is a breakthrough
in offering health plans a method of aligning the interests and
incentives of all stakeholders in health care: members, providers
and health plans. It achieves its goals by using a unique
combination of medical management tools and strategies,
consulting and education. Success can be measured objectively
using QualityFIRST(R) Medical Risk Management System(TM) data.
The Triple WinSM Program provides the health plan CEO with a
method to assess issues related to managing medical risk,
including evaluation of current clinical practices and corrective
plan development, implementation and measurement.
QualityFIRST Triple WinSM Program components include:
- Clinical decision support using the QualityFIRST(R) Medical
Risk Management System(TM)
- Alignment of physician compensation and incentive strategies
- Evidence-based clinical benchmarking using providers'
clinical practice results as measured using QualityFIRST(R)
data. Comparisons of practice profiles generated using
QualityFIRST(R) data help health plan medical directors
manage health plan quality and consistency and identify
continuing medical education needs.
- Physician education. HRM, and its subsidiary, the Institute
for Healthcare Quality, in conjunction with major medical
schools across the U.S. has been co-sponsoring an
evidence-based curriculum to introduce the next generation
of physicians to evidence-based QualityFIRST(R)interactive,
clinical decision support software. Evidence-based medicine
is an approach that promotes the application of scientific
evidence and research to clinical decision-making at the
point of care. A key objective is to provide physicians with
the opportunity for hands-on experience with an advanced
tool such as QualityFIRST(R). This program re-enforces the
value of guideline use. QualityFIRST is installed in 50
medical school programs to provide instruction to medical
students and residents on the use of computerized clinical
decision support and the use of evidence-based guidelines in
medical practice. When used as a component of residency
programs, such as the six residencies co-sponsored by HRM
and the Minnesota Academy of Family Medicine, and clerkship
programs, our guideline curriculum elements prepare students
for the use of guidelines when they begin practice. We
anticipate that their exposure to our guidelines in school
could lead them to select and purchase our guidelines as
their system of choice in practice for effective medical
management. Currently, we do not directly generate revenue
from our CME program, but health plan executives and
potential customers recognize the value of this approach,
seeing it as a value-added aspect unique to our products and
services.
Internet Strategy Will Change Mode of Product and Service Delivery
As we noted in summary above, we have announced a significant new
business strategy for our products and services that is based on
various Internet applications. As previously announced, we have
started the process of transforming HRM from a service company
centered on information to an information company doing some service
functions.
<PAGE>
Internet technology will radically change the overall dynamics of
today's medical care system for payers, providers and patients. To
expand and prosper, we must take full advantage of these
opportunities, which are summarized below:
1. The Internet has expanded in a quantum leap the member's,
provider's and payer's access to information, in many ways
placing all three parties on a nearly equal knowledge basis.
This will ultimately restructure the health care industry.
2. The increasing health care co-pay fees being born by members
will give members the right to demand more control of their
health care.
3. The burdensome administrative processes in the health care
industry can be significantly reduced with much cheaper and
more efficient Internet technology.
4. The Internet will affect HRM's current processes, products
and services as follows:
(a) Health care benefit plans will instantly be available
in their complete form and open to members, payers and
providers equally.
(b) Eligibility files can be maintained in real time and
updated daily, which will greatly reduce the
administrative burden and costs and result in more
accurate files.
(c) Provider network management can be done in real time
with significant administrative savings and greater
accuracy.
(d) Utilization Management can make use of two-way
communication on the Internet and many other features
for instant access for all involved parties and data
bases at any time.
(e) Claim Adjudication is a process with many Internet
applications that will greatly simplify the process,
make it more efficient and member friendly and save
money.
(f) Member Services will combine state of the art computer
telephony and the Internet to streamline access to
information and lead to enhanced member satisfaction.
(2) Status of products in development.
HRM continually expands its medical and cost databases and medical
expertise for self-funded benefit plans, fully insured benefit plans,
HMOs, providers, plan members, medical students, workers' compensation
and disability insurance programs; refines its QualityFIRST(R) System
to address an ever enlarging number of provider organizations and
medical conditions; and will continue expanding its software package
containing HRM's proprietary QualityFIRST(R) System for license to
third parties. HRM also expects to continue to develop programs for
management of health care services, medical education programs and
costs associated with particular illnesses or conditions. HRM
anticipates that, as computer hardware, computer software and
telecommunications equipment become more technologically
sophisticated, and as Internet applications become feasible, the
Company will create new or enhanced software and health care
information products using the Company's medical expertise, database
systems and technology. HRM will also respond to changes required by
health care reform in the nation.
(3) Source and Availability of Raw Materials.
Not applicable.
(4) Patents, trademarks, licenses, franchises and concessions.
The Company has filed patent applications covering its "Health Care
Management System" which is an automated, real-time, interactive
health care management data processing system for use by hospitals,
<PAGE>
physicians, insurance companies, health maintenance organizations
(HMOs) and others in the health care field to serve as a diagnostic,
evaluation and utilization tool for health care providers to
individuals. The system is implemented on computer hardware and
software and is used by the Company in providing health care
management services. Two U. S. patent has been issued on a component
of the health care management system. Three other applications remain
pending.
HRM claims copyrights to software developed by the Company. In
addition HRM has obtained perpetual licenses to use certain software
developed by other companies which HRM uses in providing services to
its clients. HRM has various safeguards in place, including
authorization codes and encryption, to limit access to the Company's
databases and operating systems. HRM markets its services and products
under a number of trade names and trademarks. The following are
principal trademarks or registered trademarks of HRM or its
subsidiaries: AutoPILOTTM HRM(R) Evidence-based SolutionsSM, HRM(R)
CarePASS(R) USA, HRM(R) CarePASS(R) USA-Your Passport to HealthSM,
HRM(R) CareCALLSM, HRM(R)DisabilityCARESM, HRM(R) MEDIATM,
HRM(R)QualityBIRTH(R), ReviewPLUS(R), HRM(R) Coordinated Care
ManagementSM, HRM(R) Rainbow Plan(R), QualityFIRST(R), QualityFIRST
Health Decision ScienceSM, QualityFIRST(R) Medical Risk Management
SystemSM, QualityFIRST(R) The Gold Standard for Evidence-based
BenchmarkingTM, QualityFIRST(R) Evidence-based Solutions for Effective
Medical ManagementSM, QualityFIRST Index: A Benchmark for Measuring
Healthcare QualityTM, QualityFIRST Triple WinSM Program, QualityFIRST
Quick Reference ManualTM, QualityFIRST Clinical Evidence SummaryTM,
QualityFIRST(R) Clinician Reference GuidelinesTM, CarePLUSSM,
ReviewPlus(R), Together We Can Make a Healthy Difference(R), Institute
for Healthcare Quality(R), IHQ(R)and OakTree Health PlanTM. HRM relies
to varying degrees upon its common law rights of trademark ownership,
copyrights and registration of its trademarks.
(5) Seasonality.
HRM's revenues have, in recent history, not been seasonal. The
acquisitions of Oxford Health Plans (PA), Inc., now named HRM Health
Plans (PA), Inc., in January 1999 and Pennsylvania HealthMATE, Inc. in
January 2000 have not and are not expected to introduce seasonality
into the Company's revenues.
(6) Working Capital.
HRM's working capital requirements are not generally subject to
significant fluctuations. In the fiscal year ended June 30, 1999, the
use of working capital was required for the purchase of Oxford Health
Plans (PA), Inc., now named HRM Health Plans (PA), Inc. The
consolidated statements of cash flows indicate the cash flows used in
and provided by operations, investing activities and financing
activities.
(7) Major Customers.
The Company services a small number of large clients that have
accounted for a significant portion of the Company's revenues in prior
years. HRM Health Plans (PA), Inc. (f/k/a Oxford Health Plan (PA)
Inc.), became a new client in fiscal 1998 and accounted for
approximately 29% of total revenues in fiscal 1998 and was acquired in
January, 1999 and accounted for 73% of total revenue in fiscal year
ended June 30, 1999 and 76% of revenues in the six month transition
period ended December 31, 1999 with the majority of the revenue from a
contract for Medicaid members with the Commonwealth of Pennsylvania.
Keystone Mercy Health Plan (KMHP) accounted for approximately 16% and
17% of total revenues in fiscal 1998 and 1997, respectively. The
contract with KMHP terminated September 30, 1998. Columbia/HCA
Healthcare Corporation accounted for 16% of total revenues in fiscal
1997.
(8) Backlog.
The Company's revenues are principally derived through the provision
of services as and when needed by the contracting client and no
backlog amounts are maintained.
(9) Government contracts.
A material portion of the Company's business is subject to negotiation
on an annual basis or termination of contract for convenience with one
hundred twenty days (120) notice or for cause with forty-five days
notice at the election of a government entity. HRM's subsidiary HMO
<PAGE>
holds a contract with the Commonwealth of Pennsylvania for
approximately 60,000 Medicaid members under the Healthy Choices
Program in a five (5) County Philadelphia area.
(10) Competition.
The health care management industry historically has been highly
fragmented and competitive. HRM's principal competitive strengths are
its medical and cost databases, QualityFIRST(R) health care practice
guidelines and the proprietary software systems. The Company is able
to provide clients with a full range of integrated health care
management services, focusing not only on improving its quality, but
also on reducing the cost of health care.
The Risk Business Unit competes with other HMOs or health plans in the
geographic region where HRM has management risk contracts or ownership
in a health plan. This unit competes with HMOs, provider organizations
and insurance companies who are significantly larger and possess
greater financial resources than the Company.
The Service Business Unit competes directly with approximately 100
independent utilization review firms as well as approximately 120
insurance carriers, approximately 200 third-party administrators that
have established their own utilization review procedures, and a
limited number of software vendors. In addition, the Company's care
management services compete indirectly with HMOs and several hundred
PPOs. Some of the Company's competitors are substantially larger and
possess greater financial resources than the Company. The Company,
however, believes that the trend toward consolidation of services will
continue as employers and insurance companies recognize the
convenience of dealing with a single health care management
organization.
The QualityFIRST Business Unit competes with a number of other
software companies, but believes that the Company offers the most
comprehensive evidence-based medical guidelines content available in
the marketplace today.
(11) Research and development.
HRM continually enhances its databases and proprietary software
systems. Costs capitalized for these enhancements, excluding acquired
software, by the Company were $3,146,000 for the six month transition
period ended December 31, 1999, $8,696,000 in the fiscal year ended
June 30, 1999, $9,057,000 in fiscal 1998 and $7,396,000 in fiscal
1997.
(12) Effect of environmental regulation.
To the extent that the Company's management can determine, there are
no federal, state or local provisions regulating the discharge of
materials into the environment or otherwise relating to the protection
of the environment, with which compliance by the Company has had or is
expected to have a material effect upon the capital expenditures,
earnings, or competitive position of the Company.
(13) Employees.
As of March 2000, the Company employed approximately 900 persons,
including approximately 250 physicians, nurses, and other health
professionals. The Company uses approximately 150 independent
consulting physicians. None of the Company's employees are covered by
a collective bargaining agreement.
(d) Foreign Operations and Export Sales.
In Canada, health care prices and payments are set and administered by the
provincial governments. HRM has marketed all of its managed health care
services and software, other than price control services, to employers,
insurance companies, hospitals and governmental agencies in Canada through
HRM's wholly owned Canadian subsidiary. There was no revenue derived from
Canada in the six month transition period ended December 31, 1999, U.S.
$46,000 in the fiscal year ended June 30, 1999, U. S. $195,000 in fiscal
1998 and U.S. $325,000 in fiscal 1997. The Company closed its office in
Alberta in fiscal 1999.
<PAGE>
Item 2. Properties.
HRM's principal corporate offices consist currently of approximately 142,500
square feet in a building in Minneapolis, MN with a lease expiring in or by
2009, 31,000 square feet in Kalamazoo, MI with a lease expiring in or by 2001,
28,000 square feet in Philadelphia, PA with a lease expiring in or by 2004 and
4,000 square feet in Sacramento, CA with a lease expiring in or by 2000. All of
the Company's facilities are used exclusively by the Company for office space or
computer operations and are anticipated to be adequate, but will be expanded as
business needs require.
Item 3. Legal Proceedings.
The Company is not a party to any material pending legal proceedings. Care
Management Services provided by the Company are advisory in nature, and
determinations as to payment or nonpayment of benefits are made by the plan
sponsor or its administrator, which can be the Company as a health plan third
party administrator. All determinations as to the medical care rendered to the
patient are made by the patient or the attending physician. Nevertheless
patients or others might assert claims against the Company for damages due to
adverse medical consequences. New or existing legal theories by which patients
or attending physicians may seek to assert liability against the Company or
other companies in the health care industry are evolving and are expected to
continue to evolve. Although the Company believes that its procedures for making
care management and claims benefit recommendations and decisions result in
reasonable and accurate recommendations, there can be no assurance that the
Company's procedures for limiting liability are effective or that the Company
will not be subject to liability from litigation which might adversely affect
the Company's business. The Company maintains professional liability insurance
and such other coverages as the Company believes are reasonable in light of the
Company's experience to date.
In April 1999, four parties (Banco Panamericano, Inc., Chiplease, Inc., Leon
Greenblatt III and Leslie Jabine) claiming to be shareholders of the Company
brought suit against the Company in the United States District Court for the
Northern District of Illinois. The essence of their complaint is that the four
plaintiffs, as alleged shareholders of the Company, had properly demanded that
the Company call a special meeting of shareholders under Minnesota corporate
law, yet the Company had failed to call one. The complaint seeks an order from
the court declaring that the plaintiffs may call such a meeting directly and
that the Company would be responsible for paying the costs of calling and
conducting the meeting. At the meeting, the plaintiffs want the shareholders to
discuss and vote upon six resolutions that would, inter alia, change the make-up
of the Company's board of directors and terminate the Company's April 4, 1997
Rights Agreement, the Company's shareholder rights plan. The Company does not
believe the plaintiffs are entitled to require the holding of a special meeting
or to take shareholder action on all of the resolutions proposed. The Company
intends to defend this matter vigorously. In response to the lawsuit, the
Company has brought a motion to transfer the case to the United States District
Court for the District of Minnesota and both sides have brought motions for
summary judgment.
In an order dated December 21, 1999, the trial court certified three questions
to the Minnesota Supreme Court on the grounds that the answers to the questions
are dispositive of the case, the relevant statutes are unclear, and there are no
controlling appellate decisions pertaining to the questions. In an Order dated
January 20, 2000, the Minnesota Supreme Court accepted the questions from the
trial court. The parties have submitted briefs to the Minnesota Supreme Court in
support of their respective positions, and oral argument before the Court has
been scheduled for May 9, 2000.
A dispute over amounts which HRM Health Plans (PA), Inc. (the Plan) allegedly
owes a previous provider arose during 1999. The provider, Omnia, Inc., alleges
that the Plan failed to perform, and interfered with the provider's contractual
obligations. The provider demands $4.7 million in damages, plus interest, and it
commenced arbitration proceedings in September, 1999 in Pennsylvania to pursue
its claim. The Company believes that the allegations are without merit and in
November 1999 filed a counterclaim in the arbitration for amounts in excess of
$4.4 million for the provider's failure to perform under terms of the contract.
The contract between the Plan and the provider requires that the dispute be
settled in arbitration for which a hearing is scheduled in May 2000. The outcome
of the arbitration and the impact on the Company's operations is not
determinable. The Company intends to defend its position vigorously in this
matter.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
a) Health Risk Management, Inc. Common Shares are traded on the Nasdaq
National Market under the symbol HRMI. The following table shows the
quarterly range of high and low sale prices of the Common Shares on the
National Market during the fiscal periods indicated.
High Low
Fiscal year ended June 30, 1998
First Quarter 14.125 11.000
Second Quarter 16.000 9.625
Third Quarter 16.125 8.375
Fourth Quarter 16.375 13.125
Fiscal year ended June 30, 1999
First Quarter 16.500 8.500
Second Quarter 11.875 5.250
Third Quarter 13.250 6.938
Fourth Quarter 11.250 7.375
Six month transition period ended December 31, 1999
First Quarter 11.500 6.250
Second Quarter 8.500 5.813
Fiscal year ending December 31, 2000
First Quarter 8.875 6.000
Through March 22, 2000
b) Holders
As of March 23, 2000, there were approximately 72 holders of record of the
Company's Common Stock.
c) Dividends
The Company has never paid cash dividends on its Common Shares and has no
present intention to pay cash dividends in the foreseeable future. Under
the Company's Revolving Credit and Term Loan Agreement with its bank, the
Company is prohibited from paying cash dividends on its stock without the
bank's consent.
<PAGE>
Item 6. Selected Financial Data.
Health Risk Management, Inc.
SELECTED CONSOLIDATED FINANCIAL DATA
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year Ended June 30, December 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999 1998 1999
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share data) (unaudited)
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Premiums- gross $ -- $ -- $ -- $27,457 $144,639 $67,175 $78,659
Ceding allowance -- -- -- -- 2,457 -- 1,423
Management services fees 47,873 51,454 59,076 63,395 48,731 24,342 22,622
QualityFIRST revenues 1,429 3,053 3,647 3,648 4,064 2,033 2,062
Investment income 128 158 187 337 969 417 478
----------- --------- --------- --------- --------- --------- ---------
Total revenues 49,430 54,665 62,910 94,837 200,860 93,967 105,244
Less ceded premiums -- -- -- -- (37,821) -- (38,065)
----------- --------- --------- --------- --------- --------- ---------
Net revenues 49,430 54,665 62,910 94,837 163,039 93,967 67,179
Operating expenses:
Medical costs, net -- -- -- 23,625 90,572 58,194 34,443
Cost of services, net 35,834 38,106 44,640 55,141 55,441 28,456 27,997
Selling, marketing and
administration, net 11,458 12,602 14,081 13,386 14,049 7,662 5,931
Oxford transition costs -- -- -- -- 1,350 1,350 --
Interest expense 759 708 535 489 974 374 611
-------- -------- -------- -------- ---------- --------- ---------
Total operating expenses 48,051 51,416 59,256 92,641 162,386 96,036 68,982
-------- -------- -------- -------- ---------- --------- ---------
Income (loss)before income taxes and
cumulative effect of accounting change 1,379 3,249 3,654 2,196 653 (2,069) (1,803)
Income tax expense (benefit) 535 1,253 1,413 868 282 (735) (583)
-------- -------- -------- -------- ---------- --------- ---------
Income (loss) before cumulative effect
of accounting change 844 1,996 2,241 1,328 371 (1,334) (1,220)
Cumulative effect
of accounting change, net of
income tax benefit of $1,342(1) -- -- -- (2,371) -- -- --
-------- -------- -------- -------- ---------- --------- ---------
Net income (loss) $ 844 $ 1,996 $ 2,241 $ (1,043) $ 371 $ (1,334) $ (1,220)
======== ======== ======== ======== ========== ========= =========
Basic earnings per share(2):
Income (loss) before cumulative effect
of accounting change $ .21 $ .49 $ .52 $ .29 $ .08 $ (.29) $ (.26)
Cumulative effect of accounting change(1) -- -- -- (.52) -- -- --
-------- -------- -------- -------- ---------- --------- ---------
Net income (loss) $ .21 $ .49 $ .52 $ (.23) $ .08 $ (.29) $ (.26)
======== ======== ======== ======== ========== ========= =========
Diluted earnings per share(2):
Income (loss) before cumulative effect
of accounting change $ .21 $ .47 $ .50 $ .29 $ .08 $ (.29) $ (.26)
Cumulative effect of accounting change(1) -- -- -- (.51) -- -- --
-------- -------- -------- -------- ---------- --------- ---------
$ .21 $ .47 $ .50 $ (.22) $ .08 $ (.29) $ (.26)
======== ======== ======== ======== ========== ========= =========
Net income (loss)
Weighted average number of shares outstanding:
Basic 3,947 4,081 4,291 4,524 4,615 4,599 4,640
Diluted 3,982 4,219 4,458 4,663 4,675 4,599 4,640
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------------------------------------
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit) $3,763 $5,246 $8,578 $3,474 $(8,511) $(7,581)
Total assets 39,962 44,822 51,723 70,514 88,569 80,837
Current portion of notes payable and capitalized
equipment Leases 1,946 2,427 1,988 5,025 8,117 7,205
Long-term portion of notes payable and capitalized
Equipment leases 5,155 4,550 3,487 3,047 3,628 3,824
Surplus note payable -- -- -- -- 2,500 2,500
Shareholders' equity 25,101 28,474 34,044 33,785 34,396 33,101
</TABLE>
(1) As discussed in Note 3 of the consolidated financial statements, the
Company changed its method of accounting for management service revenue. On
a pro-forma basis, this change would have decreased 1997 net income by
$1,382,000, increased 1996 net income by $494,000, and decreased 1995 net
income by $79,000.
(2) Earnings per share amounts prior to 1998 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share." For further discussion of earnings per share, see the notes to
the consolidated financial statements.
(3) Certain items in the 1995, 1996, 1997 and 1998 selected consolidated
financial data have been reclassified to conform to the December 31,1999
presentation.
<PAGE>
Item 7. 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 (for further discussion of the
50% quota share agreement, see Note 8 of the audited financial statements).
A significant portion of the Company's revenue is from the Risk Business Unit
which owns an HMO serving a Medicaid membership. This business is subject to
regulatory risks such as rate setting, reporting, net worth requirements,
government agendas and the general health of the membership served. Service
utilization for contracted charges payable to providers of care, pharmacies,
vendors, etc. are highly variable and as such estimates are used to estimate
charges incurred but not yet received. The medical loss for the plan continues
to be highly subjective. In the six month transition period ended December 31,
1999, management and the board recorded an additional $2,000,000 medical
services payable because it desired to set more conservative best estimate after
considering the February 2000 claim payment information together with additional
actuarial analysis.
The HMO has estimated receivables from insurance policies for aggregate coverage
of excessive medical costs that may result in adjustments in the future. The
Company's HMO had a 50% quota share agreement whereby 50% of premiums,
investments, medical costs and certain administrative cost are ceded to an
insurance company until a certain policy period has passed or a recapture is
allowed under the policy. Subsequent to year end, the Company's HMO recaptured
the business ceded effective January 2000 for a recapture fee of $300,000 which
was accrued at year end.
Accounts receivable at times, may include performance bonus accruals which when
billed, may result in amounts greater than the accrual or less than the accrual
because considerable time may pass between the accrual of the revenue and the
actual billing of the performance bonus. The affected parties then require time
to prove up the final calculations.
The Company adopted SOP 98-I on July 1, 1999 which resulted in lowering the
amount capitalized for internally developed computer software related to its
Care Management (AutoPILOT) and Claim Administration systems by approximately
$500,000 per quarter based on the year ended June 30, 1999 analysis. This
resulted in additional expense in the periods subsequent to June 30, 1999. Also,
with the decision that the Company's Care Management system will be web-based
versus web-enabled, the Company shortened the estimated useful life on AutoPILOT
from 7 years to 3 years and this resulted in approximately $250,000 additional
expenses in the quarter ended December 31, 1999 and each quarter thereafter for
these years unless it is impaired or replaced before that time. In addition, no
additional software costs will be capitalized related to AutoPILOT.
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of total revenues for each of the three years in the periods ended
June 30, 1997, 1998 and 1999 and for the six month transition period ended
December 31, 1998, and 1999 and compares the percentage change in the dollar
amounts of these items for the period indicated.
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
December 31,
Year Ended June 30, Period to Period Increase (Decrease)
June 30, June 30, December
1997 vs 1998 vs 31, 1998
1997 1998 1999 1998 1999 1998 1999 vs 1999
---- ---- ---- ---- ---- ---- ---- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues 100% 100% 100% 100% 100% 51% 112% 12%
=== === ==== ==== ====
Operating expenses:
Medical costs, net 0% 86%(1) 85%(1) 87%(1) 85%(1) --% 283% (41%)
Cost of services, net 71(2) 58(2) 34(2) 30(2) 42(2) 24 1 (2)
Selling, marketing and administration, net 22(2) 14(2) 9(2) 8(2) 9(2) (5) 5 (23)
Oxford transition costs 0 0 1(2) 1(2) 0 -- -- (100)
Interest expense 1(2) 0 1(2) * 1(2) (9) 99 63
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses 94(2) 98(2) 100(2) 102(2) 103(2) 56 75 (28)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes and
cumulative effect of accounting change 6 2 * (2) (3) (40) (70) 13
Income tax expense (benefit) 2 1 * (1) (1) (39) (68) 21
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before cumulative effect
of accounting change 4 1 * (1) (2) (41) (72) 9
Cumulative effect of accounting change,
net of income tax 0 (2) 0 0 0 -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) 4% (1%) *% (1%) (2)% (147%) 135% 9%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(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
Revenues: Total revenues prior to the reduction for ceded premiums increased
$11,277,000 (12%) for the six month period ended December 31, 1999 compared to
the same period in 1998 (from $93,967,000 to $105,244,000), increased
$106,023,000 (112%) from fiscal 1998 to fiscal 1999 (from $94,837,000 to
$200,860,000) and increased $31,927,000 (51%) from fiscal 1997 to fiscal 1998
(from $62,910,000 to $94,837,000). These increases are primarily attributable to
revenues from HMO operations which began April 16, 1998 (see Note 8 of the
audited financial statements) offset by lower revenues from management service
fees. Management service fees were impacted by a net 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. During the six months ended
December 31, 1999, the Service Business Unit's profit was reduced by
approximately $1,000,000 due to reduced covered lives mainly attributable to a
client that was centralizing its own care management department after acquiring
significantly more covered lives. The Company replaced a significant portion of
these lives going forward by extending and expanding its contract with Columbia
HCA, a client of many years, in January 2000.
Following is a breakout of net revenues:
<TABLE>
<CAPTION>
Year Ended June 30, Six Months Ended December 31,
---------------------------------------------- -----------------------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Premiums - gross $ -- $ 27,457,000 $ 144,639,000 $ 67,175,000 $ 78,659,000
Ceding allowance -- -- 2,457,000 -- 1,423,000
Management service fees 59,076,000 63,395,000 48,731,000 24,342,000 22,622,000
QualityFIRST revenues 3,647,000 3,648,000 4,064,000 2,033,000 2,062,000
Investment income 187,000 337,000 969,000 417,000 478,000
------------- ------------- ------------- ------------- -------------
Total revenues 62,910,000 94,837,000 200,860,000 93,967,000 105,244,000
Less ceded premiums -- -- (37,821,000) -- (38,065,000)
------------- ------------- ------------- ------------- -------------
Net revenues $ 62,910,000 $ 94,837,000 $ 163,039,000 $ 93,967,000 $ 67,179,000
============= ============= ============= ============= =============
</TABLE>
<PAGE>
Premiums - gross are from HMO operations which were the result of obtaining in
the fourth quarter of fiscal 1998 the revenue from a client contract under which
the Company was at risk for the total medical services costs. The Company
received a significant portion of the total premium from this HMO from April
1998 through December 1998 and the Company then acquired this HMO in January
1999. The Company did not have this business in the first three quarters of
fiscal 1998. The premiums-gross increased 17% or $11,484,000, for the six month
period ended December 31, 1999 compared to the same period in 1998 (increasing
from $67,175,000 to $78,659,000) and increased 427% or $117,182,000, from fiscal
1998 to fiscal 1999 (increasing from $27,457,000 to $144,639,000). The increase
was the result of two and one-half months of premium in fiscal 1998 compared to
twelve months of premiums in fiscal 1999, 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 January 1999.
The management services revenue decreased 7% or $1,720,000, for the six month
period ended December 31, 1999 compared to the same period in 1998 (decreasing
from $24,342,000 to $22,622,000) which was the result of the loss of an
insurance company and bankruptcy of a health plan in the second quarter.
Revenues from management services decreased 23% or $14,664,000, from fiscal 1998
to fiscal 1999 (decreasing from $63,395,000 to $48,731,000) 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. The management services revenue
increased 7% or $4,319,000, from fiscal 1997 to fiscal 1998 (increasing from
$59,076,000 to $63,395,000) which was the result of the growth of existing
business and new contracts entered into by the Company.
Revenues from QualityFIRST(R) increased 1% or $29,000 for the six month period
ended December 31, 1999 compared to the same period in 1998 (increasing from
$2,033,000 to $2,062,000), increased 11% or $416,000, from fiscal 1998 to fiscal
1999 (increasing from $3,648,000 to $4,064,000) and was largely unchanged
between fiscal 1997 and fiscal 1998. The increases were the result of an
increased number of clients or expansion of systems with existing clients, but
does not include sales announced in the quarter, but implemented in subsequent
quarters.
Investment income increased 15% or $61,000 for the six month period ended
December 31, 1999 compared to the same period in 1998 (increasing from $417,000
to $478,000), increased 188% or $632,000 from fiscal 1998 to fiscal 1999
(increasing from $337,000 to $969,000), and increased 80% or $150,000 from
fiscal 1997 to fiscal 1998 (increasing from $187,000 to $337,000). This increase
is the result of higher levels of short-term investments in the periods
including any increases in interest rates earned.
Medical Costs, Net: Medical costs, net of amounts ceded, for the HMO decreased
41% or $23,754,000 for the six month period ended December 31, 1999 compared to
the same period in 1998 (decreasing from $58,194,000 to $34,443,000) due mainly
because the ceding arrangement began in 1999. Medical costs, net of amounts
ceded, increased 283% or $66,947,000 from fiscal 1998 to fiscal 1999 (from
$23,625,000 to $90,572,000) due to the HMO operations that began in the fourth
quarter of fiscal 1998. As a percentage of net HMO premiums, net medical costs
was 86.6% for the six month period ended December 31, 1998 compared to 84.8% for
the same period in 1999 and 86.0% in fiscal 1998 compared to 84.8% in fiscal
1999. This percentage is the result of higher premium rates for the years versus
the cost of medical expenses, net of insurance recoveries.
Cost of Services, Net: Cost of services, net of amounts ceded, decreased 2% or
$459,0000 for the six month period ending December 31, 1999 compared to the same
period in 1998 (decreasing from $28,456,000 to $27,997,000), increased 1% or
$300,000 from fiscal 1998 to fiscal 1999 (from $55,141,000 to $55,441,000), and
increased 24% or $10,501,000 from fiscal 1997 to fiscal 1998 (from $44,640,000
to $55,141,000). The increases were primarily due to increased payroll and
expenses related to the HMO and implementing management services for additional
covered lives. As a percentage of net revenues, the cost of service, net of
amounts ceded, was 71% in fiscal 1997, 58% in fiscal 1998 and 34% in fiscal 1999
and was 30% for the six months ended December 31, 1998 and 42% for the same
period in 1999. These decreasing percentages were the result of higher premium
revenue in fiscal 1998 and still higher premium revenue in fiscal 1999. The six
month period change from 1998 to 1999 resulted mainly from the reinsurance
agreement entered into in January 1999 and the ceding of a portion of premium
and expense to the insurance company.
Selling, Marketing and Administration, Net: Selling, marketing and
administration, net of amounts ceded, decreased 23% or $1,731,000 for the six
month period ended December 31, 1999 compared to the same period in 1998
(decreasing from $7,662,000 to $5,931,000), increased 5% or $663,000, from
fiscal 1998 to fiscal 1999 (from $13,386,000 to $14,049,000), and decreased 5%
or $695,000 from fiscal 1997 to fiscal 1998 (from $14,081,000 to $13,386,000).
The increases or decreases were due primarily to additions or decreases to
staff, travel, commission, bad debts, insurance, training programs and other
expenses. This expense as a percentage of net revenues (22%, 14%, and 9%) for
<PAGE>
fiscal 1997, fiscal 1998 and fiscal 1999, respectively, decreased because of the
higher premium revenue in fiscal 1998 and still higher premium revenue in fiscal
1999. This expense was 8% for the six months ended December 31, 1998 and 9% for
the same period in 1999. The six month period change from 1998 to 1999 resulted
mainly from the reinsurance agreement entered into in January 1999 and the
ceding of a portion of premium and expense to the insurance company.
Oxford Transition Costs : The Company incurred transition costs related to the
purchase of Oxford Health Plans (PA), Inc., now named HRM 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 the
management service fees.
Interest Expense: Interest expense increased 63% or $237,000 for the six month
period ended December 31, 1999 compared to the same period in 1998 (increasing
from $374,000 to $611,000) and increased as a percentage of net revenue from
0.4% to 0.9%. Interest expense increased 99% or $485,000 from fiscal 1998 to
fiscal 1999 (from $489,000 to $974,000), and increased as a percentage of net
revenue from 0.5% to 0.6%. Interest expense decreased 9% or $46,000 from fiscal
1997 to fiscal 1998 (from $535,000 to $489,000) and decreased as a percentage of
net revenue from 0.9% to 0.5%. Interest expense was impacted in fiscal 1998 by
lower interest rates and lower average principal balances outstanding. In fiscal
1999, additional loans were obtained to acquire the HMO.
Income Taxes: Income tax benefit decreased 21% or $152,000 for the six month
period ended December 31, 1999 compared to the same period in 1998 (from an
income tax benefit of $735,000 to $583,000). Income tax expense decreased in
fiscal 1999 from fiscal 1998 by $586,000, or 68% (from $868,000 to $282,000),
and decreased in fiscal 1998 from fiscal 1997 by $545,000, or 39% (from
$1,413,000 to $868,000) primarily due to fluctuations in levels of income (loss)
before income taxes and cumulative effect of accounting change. Net income has
been reported as fully taxed in the periods at the federal tax rate of 34% with
the effective tax rate varying due to state income taxes, expired NOL's and
nondeductible expenses. See Note 10 in the Notes to Consolidated Financial
Statements.
Cumulative effect of accounting change: See Note 3 in the Notes to Consolidated
Financial Statements.
Liquidity and Capital Resources
The Company's cash flow from operations was $4,510,000 and used in operations
was $5,295,000 for the six months ended December 31, 1999 and 1998,
respectively. The Company's cash flow from operations was $6,892,000 and
$23,685,000 for fiscal 1999 and 1998, respectively. Cash flow from operations
have exceeded net income (loss) primarily due to non-cash charges such as
depreciation and amortization, deferred income taxes, cumulative effect of the
accounting change and changes in operating assets and liabilities, particularly
the medical services payable. For the six month period ended December 31, 1998,
cash flow used in operations exceeded the net loss due to an increase in
accounts receivables.
Cash of $7,734,000, net of cash acquired, was used in the third quarter of
fiscal 1999 to purchase Oxford Health Plans (PA), Inc., now named HRM Health
Plans (PA), Inc., on January 27, 1999. Cash has been used to invest in software
and program enhancements ($3,146,000 and $4,864,000 for the six months ended
December 31, 1999 and 1998, respectively and $8,696,000 and $9,057,000 in fiscal
1999 and fiscal 1998, respectively). The Company also used cash to acquire
property and equipment ($603,000 and $4,858,000 for the six months ended
December 31, 1999 and 1998, respectively and $5,602,000 and $2,734,000 for
fiscal 1999 and fiscal 1998, respectively). Approximately $3,000,000 of the
fiscal 1999 property and equipment purchases were related to the corporate
office move in the first quarter of fiscal 1999. Cash of $1,641,000 was
generated in the six month transition period ended December 31, 1999 from the
sale of fixed maturity investments and $234,000 was used in fiscal 1999 from the
purchase of fixed maturity investments. The Company expects to continue to
acquire property and equipment and enhance software and products.
HRM also used approximately $2,070,000 and $1,057,000 for the six months ended
December 31, 1999 and 1998, respectively and $2,327,000 and $2,153,000 in fiscal
1999 and fiscal 1998, respectively, to repay principal on notes payable and
capital leases. The Company borrowed $1,000,000 and $2,000,000 for the six
months ended December 31, 1999 and 1998, respectively and $6,000,000 and
$4,750,000 in fiscal 1999 and fiscal 1998, respectively. The Company received
cash proceeds of $16,000 and $186,000 for the six months ended December 31, 1999
and 1998, respectively and $306,000 and $784,000 in fiscal 1999 and fiscal 1998,
respectively, from stock option exercises for common stock by current or former
employees and directors.
<PAGE>
The Company had a working capital deficit of $7,581,000 and $8,511,000 at
December 31, 1999 and June 30, 1999, respectively and working capital of
$3,474,000 at June 30, 1998. The medical services payables reduced working
capital by $22,506,000, $21,215,000 and $15,452,000 at December 31, 1999, June
30, 1999 and 1998, respectively. The Company has fixed maturity investments of
$6,675,000 and $8,406,000 available at December 31, 1999 and June 30, 1999,
respectively, to be used to pay medical services payables, if the need arises.
The Company has a net operating loss carryforward of approximately $30,000,000
for income tax purposes at December 31, 1999, which can be used to reduce
taxable income and cash flow necessary to pay taxes. The Company changed its tax
accounting treatment to one of capitalizing computer software costs versus
expensing them when incurred. This change should protect carry forward net
operating loss (NOLs) for tax purposes going forward.
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 calendar year 2000. The loss in
the quarter ended December 31, 1999 resulted in the Company not meeting bank
covenants under the bank loan agreements. Subsequent to December 31, 1999, the
Company and the bank amended the loan agreement which will amend the covenants
going forward and waived defaults that existed at December 31, 1999. The two new
web-based business plans will require on-going support from the Company until
external financing is obtained. The quarter ended December 31, 1999 included
approximately $250,000 of expenses related to these business plans and more than
double that amount will be required going forward until they are financed,
estimated by mid-year, and it is expected that they will then create positive
cash flow back to the Company.
The Company has a term loan and revolving loan (principal balance of $7,195,000
and $2,925,000, respectively, as of December 31, 1999.) with its bank and a
revolving credit facility expiring January 30, 2001, under which the Company has
$75,000 and $235,000 additional available under the facility at December 31,
1999 and June 30, 1999, respectively. The revolving credit and term loan are
secured by liens on the assets of the Company.
Subsequent to December 31, 1999, the Company acquired approximately $32,000,000
of annual premium in its risk business unit by assuming approximately $2,500,000
of liabilities in excess of cash and other assets. These excess liabilities will
impact the net worth of our HMO entity, but it is believed that the HMO's net
worth, the earnings of the HMO and a planned quota share insurance arrangement,
will allow the HMO to meet state statutory net worth requirements. The
acquisition should be immediately profitable to the Company, because the Company
can leverage its equipment, systems and employees in the Medicaid business in
the same state.
<PAGE>
YEAR 2000 DISCLOSURE
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. There were 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 primary focus of the Year 2000 Project effort was 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 currently in
Phase 5, maintenance of year 2000 integrity of all of our mission critical
components.
The Company completed all year 2000 readiness work according to our Project
plans and experienced no significant problems as a result of the transition to
the year 2000. The Company continues to monitor its systems for any year 2000
issues. Because of the unique nature of the year 2000 issue, including the
existence of critical dates in the year 2000, ongoing maintenance activities
will necessarily 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 $.4 million was incurred in the six
month transition period ended December 31, 1999. Costs to be incurred after
December 31, 1999 are not expected to be significant. The costs associated with
the Year 2000 Project have been and will be expensed as incurred.
Year 2000 Contingency Plans
As of October 31, 1999, contingency plans had been completed for the Company's
significant business processes. While at this point we do not anticipate
experiencing any problems which would require the implementation of the
Company's contingency plans, the contingency plans can and will be implemented
if necessary.
Year 2000 Risks
The Company is reliant on technology and outside vendors to deliver its
services. 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 on a go forward basis. Possible consequences of such a failure
include temporary disruption of the Company's ability to deliver services to its
clients.
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. The Company will continue to monitor systems and activities
relating to its Year 2000 Project.
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 Company's anticipated level of revenue growth
or profitability.
<PAGE>
Item 7A Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the Company is exposed to market risk from
changes in interest rates. The Company does not enter into any derivative
transactions. The Company's note payable and term loan obligations are subject
to interest rate risk. A 100 basis point increase in interest rates related to
the note payable to bank under revolving credit agreement, assuming the amount
borrowed remains constant, would result in an annual increase in the Company's
then current interest expense of approximately $29,000. A 100 basis point
increase in interest rates related to the Company's term loans payable would
result in an annual increase in the Company's then current interest expense of
approximately $72,000.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company and its subsidiaries are
included in a separate section of this report. See Part IV, Item 14.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
The following table provides certain information with respect to all directors
of the Company.
<TABLE>
<CAPTION>
Name of Director Current Position(s) Principal Occupation(s) Director
(Class) Age with Company During Past Five Years Since
<S> <C> <C> <C> <C>
Gary T. McIlroy, M.D. 59 Chairman of the Board, Chairman and Chief Executive Officer of 1977
(Class C) Chief Executive Officer the Company since 1977. Dr. McIlroy is
and Director married to Marlene O. Travis.
Marlene O. Travis 60 President, Chief President of the Company since 1987 and 1977
(Class B) Operating Officer, Chief Operating Officer of the Company
Secretary and Director from 1987 to 1992 and since June 1993;
and Chief Administrative Officer from
1992 to June 1993. Ms. Travis is married
to Gary T. McIlroy, M.D.
Gary L. Damkoehler 60 Director Chairman, Chief Executive Officer and 1996
(Class A) President since 1988 of JSA Healthcare
Corporation of St. Petersburg, Florida, a
direct provider of healthcare services.
Raymond G. Schultze, 66 Director Chief Executive Officer and Medical 1996
M.D. (Class A) Director since 1997 of Toiyabe Dialysis
Unit. Consultant regarding healthcare
management consulting (self-employed)
since 1997.
Prior to this he was Professor of
Medicine at the UCLA School of Medicine
from 1980 to 1995; and Administrative
Vice Chancellor for UCLA from 1986 to
1992. Dr. Schultze currently is providing
consulting services to the County of Los
Angeles for the re-engineering of their
healthcare system.
Vance Kenneth Travis 73 Director Chairman of the Board of Triad 1984
(Class B) International, Inc., a plant engineering
and project management operation for
petro-chemical and refinery process
plants located in Calgary, Alberta,
Canada. Mr. Travis is Marlene Travis'
uncle.
Robert L. Montgomery 63 Director Consultant regarding Health System 1993
(Class C) Management to Sutter Health since 1999.
Prior to this he was President-Western
Division of Sutter Health from 1996
to 1999. Prior to this, he was
President and Chief Executive
Officer of Alta Bates Health
System of Emeryville,
California, a vertically
integrated full service healthcare
system, from 1989 to 1996, and from
1979 to 1983.
</TABLE>
The Company's Articles of Incorporation provide for the election of three
classes of directors with terms staggered so as to require the election of only
one class of directors each year. The term of the Class B directors expires at
the 2000 annual meeting, the term of the Class C directors expires at the 2001
annual meeting, and the term of the Class A Directors expires at the 2002 annual
meeting.
<PAGE>
Executive Officers
The following sets forth the names and ages of current executive officers of the
Company, in addition to information regarding their positions with the Company,
their periods of service in such positions, and their business experience for at
least the past five years.
Name Age Position
Gary T. McIlroy, M. D. 59 Chairman of the Board, Chief Executive
Officer and Director
Marlene O. Travis 60 President, Chief Operating Officer,
Secretary and Director
Thomas P. Clark 52 Senior Vice President, Finance and Chief
Financial Officer
Adele M. Kimpell 53 Executive Vice President, Operational
Effectiveness
Russell A. Peterson 58 Chief Information Officer
Pamela N. Hursh 37 President, Indemnity Business Unit
Dianne L. Kuss 52 Vice President, Corporate Marketing
Michael T. McKim 55 Vice President and General Counsel
Luis A. Rosa 46 President, Risk Business Unit
Gary T. Mcllroy, M.D., a co-founder of the Company, has been an officer of the
Company since 1977 and Chairman of the Board, Chief Executive Officer, and a
director of the Company since 1984. Dr. McIIroy has owned and operated three
medically-related businesses. Dr. McIIroy was co-founder, President, and Chief
Executive Officer of Midwest Laboratory Associates, a medical testing laboratory
from 1977 until its sale in 1980. From 1973 to 1978, he was President and Chief
Executive Officer of Upper Mississippi Pathologists, P.A., serving several
hospitals in central Minnesota. Dr. McIIroy holds an M.D. degree from the
University of California-Los Angeles, and is Board Certified in Anatomical and
Clinical Pathology following four years of specialty training at the Mayo Clinic
in Rochester, Minnesota. He is also a member of the American College of
Utilization Review Physicians.
Dr. McIIroy is married to Marlene O. Travis.
Marlene O. Travis, a co-founder of the Company, has been the Secretary, a
director and an officer of the Company since 1977, and currently serves as
President and Chief Operating Officer. Ms. Travis has served as Chief Operating
Officer since June 1993 and also held the position from January 1987 through
December 1991. Ms. Travis has been President since 1987, and Chief
Administrative Officer from January 1992 to June 1993, and Executive Vice
President prior to 1987. Ms. Travis is Chairman and Chief Executive Officer of
the Company's subsidiaries, Health Resource Management Ltd. and Institute for
Healthcare Quality, Inc. Ms. Travis was co-founder, Vice President and Director
of Operations of Midwest Laboratory Associates from 1977 to 1980. She was
Business Manager of Upper Mississippi Pathologists, P. A. from 1973 to 1978. Ms.
Travis is married to Dr. Gary T. McIIroy.
Thomas P. Clark, joined the Company as Controller in 1985, and has been Senior
Vice President, Finance and Chief Financial Officer of the Company since 1986.
From 1976 to 1985, Mr. Clark maintained his own public accounting practice.
Prior to such time Mr. Clark was an accountant with the accounting firms of KPMG
Peat Marwick and Breitman, Orenstein & Schweitzer.
Adele M. Kimpell, R. N., became Executive Vice President, Operational
Effectiveness in September 1999, and had previously served as Executive Vice
President, Health Plan Operations since March 1996. Ms. Kimpell also served as
Senior Vice President, Health Plan Operations since August 1993, and Senior Vice
President, Care Management Services since August 1993. Ms. Kimpell joined the
Company as a Clinical Reviewer in March 1985. Ms. Kimpell has served in various
capacities within HRM since January 1990, including Vice President, Strategic
Business Implementation, Vice President, Special Projects, Vice President,
Claims Administration and Assistant Vice President, Sales Operations. Ms.
Kimpell has a B.S. degree in nursing and had 15 years experience in intensive
care and emergency room units prior to joining HRM.
<PAGE>
Russell A. Peterson, became Chief Information Officer in April 1998. Mr.
Peterson joined the Company as Vice President, Applications Software in March
1993. Prior to joining the Company, Mr. Peterson was a director for Medtronic,
Inc. in Fridley Minnesota from 1989 to 1992. Mr. Peterson received his B.A.
degree from Macalester College in 1963 and his MBA from the University of St.
Thomas in 1979.
Pamela N. Hursh R.N., became President, Indemnity Business Unit in December
1999, and had previously served as Acting President, Indemnity Business Unit
since July 1999. Ms. Hursh also served as Vice President, Operational
Effectiveness. Ms. Hursh joined the Company as an Account Manager in March 1991.
Ms. Hursh has served in various capacities within HRM since June 1992, including
Senior Account Manager, National Account Executive, Director of Account
Management and Client Services and VP, Strategic Business Improvement. Ms. Hursh
received her B.S. degree from Northern Illinois University in 1987.
Dianne L. Kuss, became Vice President, Corporate Marketing in June 1999. Ms.
Kuss joined the Company as a Marketing Manager in November 1997. Ms. Kuss has
served since April 1998 as Director of Indemnity Marketing and Vice President,
Marketing. Prior to joining the Company, Ms. Kuss served as a Consultant for
Integrated Healthcare Advisory Group, Inc. in Richmond, VA from 1994 to 1997.
Ms. Kuss received her B.A.S. degree from the University of Minnesota and her
M.S. from Kennedy-Western University in Agoura Hills, CA.
Michael T. McKim, Esq., joined the Company as Vice President and General Counsel
in December 1992. Prior to joining the Company, Mr. McKim was a partner in the
Minneapolis law firm of Larkin, Hoffman, Daly & Lindgren, Ltd. from 1986 to
1992. Mr. McKim received his B. A. degree from the University of Notre Dame and
his J. D. degree from Creighton University School of Law in Omaha. He is a
member of the Ramsey County, Minnesota State and Nebraska State Bar
associations, where he serves on various standing and ad hoc committees.
Luis A. Rosa, joined the company as President, Risk Business Unit in January
2000. Prior to joining the Company, Mr. Rosa was Chief Executive Officer for
Network Management Services, subsidiary of Columbia HCA in Brentwood, TN from
1995 to 2000. He served as General Manager for Potomac Medical Services in TN
from 1993 to 1995. Prior to that, he served in various positions at Aetna Health
Plans and MedCenters, Inc. Mr. Rosa received his B.A.
degree from Purdue University in Hammond, Indiana in 1977.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more that ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Such forms include: Form 3, due within ten days after becoming an
officer, director or greater than ten-percent holder; Form 4, due within ten
days after any calendar month during which a reportable transaction occurred;
and Form 5 due within 45 days after the end of the fiscal year. Officers,
directors and greater than ten-percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based on its review of the copies of such forms received by it, or written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that, during the period from July 1, 1999
through December 31, 1999, all Section 16(a) filing requirements applicable to
its current and former officers and directors were complied with.
<PAGE>
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth the cash and noncash compensation for the six
month transition period ended December 31, 1999, and for each of the previous
three fiscal years, paid to the Company's Chief Executive Officer and the four
other highest paid executive officers of the Company whose salary and bonus for
fiscal year ended June 30, 1999 exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
------------------------------------------- ---------------------
Other
Annual Securities
Compen- Stock Underlying LTIP All Other
Name and Position Year Salary Bonus sation(1) Awards Options Payouts Compensation
- ----------------- ---- ------ ----- --------- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary T. McIlroy, M.D. 1999* $139,000 $ 0 $4,930(10) 0 0 $0 $10,332(6)
Chairman & CEO 1999 278,000 0 9,859(10) 0 10,000(4) 0 23,986(6)
1998 278,000 0(2) 9,837(10) 0 40,000(2) 0 23,484(6)
1997 278,000 0(2) 9,395(10) 0 15,000(2) 0 23,150(6)
40,000(4)
Marlene Travis 1999* $125,000 $ 0 $4,930(10) 0 0 $0 $9,211(7)
President & COO 1999 250,000 0 9,859(10) 0 10,000(4) 0 21,009(7)
1998 250,000 0(2) 9,837(10) 0 30,000(2) 0 20,336(7)
1997 250,000 0(2) 9,395(10) 0 12,500(2) 0 20,150(7)
33,333(4)
Thomas P. Clark 1999* $100,000 $ 0 $5,451(10) 0 0 $5,186(8)
CFO 1999 200,000 0 10,902(10) 15,000(11) 0 $0 35,752(8)
1998 200,000 0(2) 10,902(10) 0 30,000(2) 0 9,555(8)
1997 200,000 0(2) 10,460(10) 0 10,000(2) 0 9,150(8)
26,667(4)
Adele M. Kimpell 1999* $85,000 $25,000(3) 0 0 0 $0 $2,782(5)
Executive V.P. 1999 171,600 0 0 0 0 0 4,290(5)
1998 156,420 0(2) 0 0 3,600(2) 0 3,361(5)
1997 153,542 0(2) 0 0 4,000(2) 0 2,663(5)
9,000(4)
William M. Smith 1999* $103,129 0 0 0 0 $0 $11,481(9)
Former Vice President 1999 237,506 0 0 0 1,500(4) 0 61,086(9)
Managed Care Sales 1998 128,181 $15,000(12) 0 0 6,000(4) 0 11,074(9)
</TABLE>
* Six month transition period ended December 31, 1999.
(1) Does not include the payment of professional and monthly club dues, term
group life insurance and other personal benefits, the aggregate amount of
which was less than 10% of the individual's listed compensation.
(2) Stock options were issued under the Amended and Restated 1992 Long-Term
Incentive Plan or the 1990 Stock Option Plan in lieu of cash bonus under
the annual Executive Incentive Plan and are fully exercisable.
(3) Additional compensation in connection with off-site services provided for
an extended period of time.
(4) Stock options were issued under the Amended and Restated 1992 Long-Term
Incentive Plan and become exercisable in annual increments of one-third per
year.
(5) The Company matching contribution under its 401(k) Salary Savings Plan.
(6) The amount reflected includes $3,150, $3,484, $3,986 and $332 as Company
matching contributions under its 401(k) Salary Savings Plan or other
retirement payments for fiscal 1997, 1998, 1999 and the six month period
ended December 31, 1999, respectively, and $20,000 per year ($10,000 per
half year) for the total premiums paid by the Company on the life insurance
policy covered by the Split-Dollar Agreement referred to below in
"Employment Agreements" for fiscal 1997, 1998, 1999 and the six months
ended December 31, 1999, respectively.
<PAGE>
(7) The amount reflected includes $3,150, $3,336, $4,009 and $711 as Company
matching contributions under its 401(k) Salary Savings Plan or other
retirement payments for fiscal 1997, 1998, 1999 and the six months ended
December 31, 1999, respectively, and $17,000 per year ($8,500 per half
year) for a total premiums paid by the Company on the life insurance policy
covered by the Split-Dollar Agreement referred to below in "Employment
Agreements" for fiscal 1997, 1998, 1999 and the six months ended December
31, 1999, respectively.
(8) The amount reflected includes $3,150, $3,555, $4,435 and $2,186 as Company
matching contributions under its 401(k) Salary Savings Plan or other
retirement payments for fiscal 1997, 1998, 1999 and the six month
transition period ended December 31, 1999, respectively, and $6,000 per
year ($3,000 per half year) for the total premiums paid by the Company on
the life insurance policy covered by the Split-Dollar Agreement referred to
below in "Employment Agreements" for fiscal 1997, 1998, 1999 and the six
months ended December 31, 1999, respectively.
(9) The amount reflected includes $2,492, $4,800 and $1,801 for fiscal 1998,
1999 and the six months ended December 31, 1999 as Company matching
contributions under its 401(k) Salary Savings Plan and a moving allowance
of $8,582, $56,286, and $9,680 for fiscal 1998, 1999 and the six months
ended December 31, 1999.
(10) Includes auto allowance and medical coverage.
(11) Issuance of 15,000 common shares as a bonus in connection with certain
business acquisition activities.
(12) Special bonus related to acceptance of employment.
The following two stock option tables summarize option grants and exercises
during fiscal 1999 for the Chief Executive Officer and other named executive
officers, and the values of options granted during fiscal 1999 and held by such
persons at June 30, 1999. No options were granted or exercised during the six
month transition period ended December 31, 1999.
Stock Option Grants in Fiscal 1999
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed Annual
Rates of Stock Price Appreciation for Option Term
---------------------------------------------
Individual Grants 5%(2) 10%(2)
-------------------------------------------------- --------------------- --------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise or Expiration Stock Stock
Name Granted Fiscal Year Base Price Date(1) Price Gain Price Gain
---- ------- ----------- ---------- ------- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary McIlroy, M.D. 10,000(1) 12.9% $10.00 06/30/03 $12.76 $ 27,600 $16.11 $61,100
Marlene Travis 10,000(1) 12.9% $10.00 06/30/03 $12.76 $ 27,600 $16.11 $61,100
Thomas P. Clark 0 0.0% $ 0.00 -- $ 0.00 $ 0 $ 0.00 $ 0
Adele M. Kimpell 0 0.0% $ 0.00 -- $ 0.00 $ 0 $ 0.00 $ 0
William M. Smith 1,500(1) 1.9% $10.00 06/30/03 $12.76 $ 4,140 $16.11 $ 9,165
</TABLE>
(1) One-third of the stock options granted as a long-term incentive to the
individuals become exercisable on February 17, 1999, the date of grant, and
the next two anniversaries of the date of grant. Under the terms of the
Plan, the Board may provide for the protection of all optionees to whom
options have been granted in the event of a merger, liquidation,
reorganization or similar transaction.
(2) The stock price is calculated using a 5% and 10% rate of appreciation
(solely for illustrative purposes) for the term of the option, compounded
annually. The gain is the difference between the resulting illustrative
compounded stock price and the exercise price times the number of options
granted.
<PAGE>
Aggregated Option Exercises in Fiscal 1999 and December 31, 1999 Option Value
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Acquired Options at December In-the-Money Options
on Exercise Value 31, 1999 Exercisable/ at December 31, 1999(1)
Realized Unexercisable Exercisable/Unexercisable
--------------- -------- ----------------------- -------------------------
<S> <C> <C> <C> <C>
Gary T. McIlroy, M.D. 0 -- 91,473/96,665 $0/$0
Marlene Travis 0 -- 71,354/73,277 $0/$0
Thomas P. Clark 15,000 $142,035 51,537/32,889 $0/$0
Adele M. Kimpell 2,000 $ 11,626 15,200/5,400 $0/$0
William M. Smith -- -- 6,500/1,000 $0/$0
</TABLE>
(1) Market value of underlying securities at December 31, 1999 ($6.125), the
closing price of the Common Stock, minus the exercise price. No options
were exercised during the six months ended December 31, 1999.
Director Fees and Options
Annual Retainer and Meeting Fees. All directors of the Company are reimbursed
for expenses incurred by them in connection with attending meetings of the Board
and performing duties as a director. Each nonemployee director receives an
annual retainer of $12,500 and meeting fees as follows: $750 for each Board
meeting attended; $500 ($650 for committee chairs) for each committee meeting
attended unless the committee meeting is held in conjunction with a Board
meeting; $500 for each meeting of the board of directors of a subsidiary of the
Company that is attended; $500 for each Board meeting in which the nonemployee
director participates by telephone; and $250 for each committee meeting in which
the nonemployee director participates by telephone. A director of the Company
may elect to receive the payment of his or her annual retainer, meeting fees and
committee fees on a monthly basis or in one lump sum at the end of the fiscal
year.
Deferred Compensation Plan for Directors. The Board of Directors of the Company
adopted the Deferred Compensation Plan for Directors, effective for fiscal 1994,
and for all fiscal years thereafter until the Plan is terminated. Under the
Deferred Compensation Plan, members of the Company's Board of Directors and
members of the Board of any subsidiary may elect, prior to the beginning of any
fiscal year, to defer the receipt of all or any portion of any annual retainer
and meeting fees that may be payable to the director during the fiscal year for
which the election is effective. The Deferred Compensation Plan is administered
by the Compensation Committee. All amounts deferred by the director are credited
to an account established for the director for accounting purposes only, and the
amounts credited to such account generally accrue interest, compounded
quarterly, at a rate equal to two percentage points above the Prime Rate. The
Deferred Compensation Plan is and will remain unfunded, and the director will
stand in the position of a general unsecured creditor of the Company with
respect to all payments made pursuant to the Deferred Compensation Plan.
Director Options. Under the Amended and Restated 1992 Long-Term Incentive Plan,
directors who are not employees of the Company are eligible for nonqualified
stock options. As specified in the Plan, an option for 3,800 shares of the
Company's Common Stock was granted to each nonemployee director who was serving
on the Board on September 14, 1992, the date the Board originally adopted the
Plan, and is granted to each new nonemployee director on the date that such new
director is first elected to the Board. All nonemployee directors will also
receive an option for 1,900 shares of the Company's Common Stock at the end of
each fiscal year during which such director continues to serve on the Board. The
Board may, in its discretion, grant additional nonqualified stock options to
nonemployee directors, subject to such terms and conditions as the Board may
deem appropriate.
In addition, a nonemployee director may elect in writing to receive a
nonqualified stock option in lieu of all or any portion of the annual retainer
and meeting fees to which such director may be entitled and which would
otherwise be payable to such director during the fiscal year for which the
election has been made. The number of shares subject to such option is
determined by dividing the total dollar amount specified in the election by 25%
of the fair market value of the Company's Common Stock as of the date the option
is granted, which shall be the last day of the fiscal year for which the
election has been made. Any election by the nonemployee director to receive a
nonqualified stock option in lieu of annual retainer and meeting fees must be
made prior to the date the option is granted.
Except for options granted in lieu of retainer or meeting fees, the option price
per share for all nonqualified stock options granted to nonemployee directors is
generally the fair market value of a share of the Company's Common Stock as of
the date such option is granted. The exercise price per share for all
nonqualified stock options granted to nonemployee directors in lieu of retainer
<PAGE>
or meeting fees pursuant to the election described above equals 75% of the fair
market value of a share of the Company's Common Stock as of the date such option
is granted. All nonqualified stock options granted to the nonemployee directors
ordinarily expire five years after the date they are granted, and become
exercisable as to one-third of the shares subject to the option on each of the
succeeding three anniversaries of the option grant.
Employment Agreements
The Company has an Employment Agreement, dated June 20, 1996, with Gary T.
McIlroy, M.D. whereby Dr. McIlroy will continue to serve as Chief Executive
Officer with the term continuing indefinitely unless terminated under the terms
of the Agreement. Dr. McIlroy received a base salary for fiscal 1999 and for the
six months ended December 31, 1999 of $278,000 per year (subject to increase
upon annual review by the Compensation Committee of the Board) and is eligible
to receive an annual incentive bonus under the Executive Incentive Plan. The
Employment Agreement is terminable by the Company for cause, in which case the
Company is obligated to pay only Dr. McIlroy's accrued base salary and a portion
of annual incentive bonus for the fiscal year in which his termination occurs.
The Agreement is also terminable by the Company upon thirty (30) days written
notice, without cause, in which case the Company is obligated to (i) pay the
then-current annualized base salary and provide health, dental, life and other
benefits for a twenty-four month period; (ii) pay out-placement services; (iii)
pay a portion of any annual incentive bonus for the fiscal year in which his
termination occurs; and (iv) transfer to Dr. McIlroy all cash value and life
insurance policies owned by the Company. In the event Dr. McIlroy resigns for
"good reason" or within twelve (12) months after a "change of control" of the
Company, the Company is obligated to make all of the payments and provide all of
the benefits described in the preceding sentence, and shall accelerate the
vesting of all stock options which shall then remain exercisable until the
options expire. The Agreement also addresses the benefits payable and the
treatment of the life insurance policies owned by the Company upon termination
for death or disability and, in the event of disability, provides for
supplemental disability payments and health, dental and life benefits for a
twelve (12) month period.
The Company also has a Split Dollar Agreement, dated June 5, 1991, which
requires the Company to pay the premiums on a life insurance policy owned by Dr.
McIlroy (or his assignee) and which requires repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater, upon Dr. McIlroy's death or termination of employment. Under the
Employment Agreement, if Dr. McIlroy's employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company, or if Dr.
McIlroy resigns for "good reason," the repayment obligations under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.
The Company has an Employment Agreement, dated June 21, 1996, with Marlene
Travis whereby Ms. Travis will continue to serve as President and Chief
Operating Officer with the term continuing indefinitely unless and until
terminated under the terms of the Agreement. Ms. Travis received a base salary
for fiscal 1999 and for the six months ended December 31, 1999 of $250,000 per
year (subject to increase upon annual review by the Chief Executive Officer) and
is eligible to receive an annual incentive bonus under the Executive Incentive
Plan. The Employment Agreement is terminable by the Company for cause, in which
case the Company is obligated to pay only Ms. Travis' accrued base salary and a
portion of any annual incentive bonus for the fiscal year in which her
termination occurs. The Agreement is also terminable by the Company upon thirty
(30) days written notice, without cause, in which case the Company is obligated
to (i) pay the then-current annualized base salary and provide health, dental,
life and other benefits for a twenty-four (24) month period; (ii) pay
out-placement services; (iii) pay a portion of any annual incentive bonus for
the fiscal year in which her termination occurs; and (iv) transfer to Ms. Travis
all cash value and life insurance policies owned by the Company. In the event
Ms. Travis resigns for "good reason" or within twelve (12) months after a
"change of control" of the Company, the Company is obligated to make all of the
payments and provide all of the benefits described in the preceding sentence and
shall accelerate the vesting of all stock options which shall then remain
exercisable until the options expire. The Agreement also addresses the benefits
payable and the treatment of the life insurance policies owned by the Company
upon termination for death or disability and, in the event of disability,
provides for supplemental disability payments and health, dental and life
benefits for a twelve (12) month period.
The Company also has a Split Dollar Agreement, dated June 5, 1991, which
requires the Company to pay the premiums on a life insurance policy owned by Ms.
Travis (or her assignee) and which requires repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater, upon Ms. Travis' death or termination of employment. Under the
Employment Agreement, if Ms. Travis' employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company, or if Ms.
Travis resigns for "good reason," the repayment obligations under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.
The Company has an Employment Agreement dated June 21, 1996, with Thomas P.
Clark whereby Mr. Clark will continue to serve as Chief Financial Officer, with
the term continuing indefinitely unless and until terminated under the terms of
the Agreement. As announced, Mr. Clark will be assuming the position of
Executive Vice President, Acquisitions and Business Development and a new Chief
Financial Officer will be hired. Mr. Clark's responsibilities under his
<PAGE>
Employment Agreement will be adjusted accordingly. Mr. Clark received an annual
base salary for fiscal 1999 and for the six months ended December 31, 1999 of
$200,000 per year (subject to increase upon annual review by the Chief Executive
Officer) and is eligible to receive an annual incentive bonus under the
Executive Incentive Plan. The Employment Agreement is terminable by the Company
for cause, in which case the Company is obligated to pay only Mr. Clark's
accrued base salary and a portion of any annual incentive bonus for the fiscal
year in which his termination occurs. The Agreement is also terminable by the
Company upon thirty (30) days written notice, without cause, in which case the
Company is obligated to (i) pay the then-current annualized base salary and
provide health, dental, life and other benefits for a twenty-four (24) month
period; (ii) pay out-placement services; (iii) pay a portion of any annual
incentive bonus for the fiscal year in which his termination occurs; and (iv)
transfer to Mr. Clark all cash value and life insurance policies paid by the
Company. In the event Mr. Clark resigns for "good reason" or within twelve (12)
months after a "change of control" of the Company, the Company is obligated to
make all of the payments and provide all of the benefits described in the
preceding sentence and shall accelerate the vesting of all stock options which
shall then remain exercisable until the options expire. The Agreement also
addresses the benefits payable and the treatment of the life insurance policies
owned by the Company upon termination for death or disability and, in the event
of disability, provides for supplemental disability payments and health, dental
and life benefits for a twelve (12) month period.
The Company also has a Split Dollar Agreement, dated September 19, 1991, which
requires the Company to pay the premiums on a life insurance policy owned by Mr.
Clark (or his assignee) and which requires repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater, upon Mr. Clark's death or termination of employment. Under the
Employment Agreement, if Mr. Clark's employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company, or if Mr.
Clark resigns for "good reason," the repayment obligations under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.
<PAGE>
Performance Graph
Set forth below are line graphs comparing the Company's cumulative total
shareholder return on the Company's Common Stock, from June 30, 1994 through
December 31, 1999 with the cumulative total return of The Nasdaq Market Index
(U.S. Companies) and of the selected peer group (the "SIC Peer Group Index").
The SIC Peer Group Index includes all Nasdaq companies which are in the same
three-digit SIC ("Standard Industrial Classification") labeled 632-Accident and
Health Insurance and Medical Service Plans.
[Graph Omitted]
<TABLE>
<CAPTION>
06/30/94 06/30/95 06/28/96 06/30/97 06/30/98 06/30/99 12/31/99
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HRM 100.00 161.54 161.54 207.69 234.62 151.92 94.23
SIC Code Index 100.00 101.41 131.50 171.23 180.82 175.19 141.21
Nasdaq Market 100.00 117.28 147.64 177.85 235.75 330.37 495.88
</TABLE>
The Nasdaq Market Index and SIC Peer Group Index is provided by Media General
Financial Services. The Peer Group includes the following companies: Aetna, Inc;
AFLAC Inc.; American Medical SEC Inc.; AON Corp.; Citizens Financial Corp.;
Conseco, Inc.; Everest Re Group Ltd.; Foundation Health System; Healthaxis,
Inc.; Humana, Inc.; Lifepoint Hospitals; Maxicare Health Plans; Medical Control,
Inc.; Mid-Atlantic Medical Services; MIIX Group, Inc.; Morrison Management
Specialists; Oxford Health Plans, Inc.; Pacificare Health System B New; Penncorp
Financial Group; Righchoice Managed Care; Sierra Health Services; Torchmark
Corp.; Triad Hospitals, Inc.; Trigon Healthcare Inc.; United Healthcare Corp.;
United Wisconsin Services; Unum Provident Corp.; Wellpoint Health Network.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned by each person known to the Company to beneficially own
more than 5% of the Company's Common Stock, by each of the Company's current
directors, by each executive officer named in the Summary Compensation Table (on
page 25), and by all of the Company's current directors and current executive
officers as a group, as of March 22, 2000.
Name of Director, Executive Officer Number of Shares Percent of
or Identity of Group Beneficially Owned(1) Class
Chiplease, Inc. 675,500(2) 14.49%
640 N. LaSalle Street, Suite 300
Chicago, IL 60610
Summit Capital Management, LLC 397,250(3) 8.52%
601 Union Street Suite 3900
Seattle, WA 98101
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor 288,800( 4) 6.20%
Santa Monica, CA 90401
Gary T. McIlroy, M.D. 382,245( 5) 8.01%
10900 Hampshire Avenue South
Minneapolis, MN 55438
Marlene Travis 380,665( 6) 8.02%
10900 Hampshire Avenue South
Minneapolis, MN 55438
Thomas P. Clark 124,275(7) 2.63%
Adele M. Kimpell 17,400( 8) *
W. Michael Smith 10,275(9) *
Vance Kenneth Travis 11,009(10) *
Robert L. Montgomery 20,380(11) *
Gary L. Damkoehler 16,701(12) *
Raymond G. Schultze, M.D 6,701(13) *
All Current Executive Officers and
Current Directors as a
Group (13 persons) 979,679(14) 19.67%
- -----------
* Less than one percent.
(1) Except as otherwise noted, each person or group named in the table has
sole voting and investment power with respect to all shares of Common
Stock listed opposite the name of such person or group. Shares not
outstanding but deemed beneficially owned by virtue of the right of a
person to acquire them as of March 22, 2000, or within 60 days of such
date are treated as outstanding only when determining the amount and
percent owned by such person or group named in the table.
(2) Includes 399,100 (8.56%) shares which Chiplease, Inc. represents are
owned by it and 276,400 (5.93%) shares which Chiplease, Inc. represents
<PAGE>
are owned by the secretary of Chiplease, Inc. and for which the
secretary has sole voting power and which was owned on August 28, 1998,
the date of the most recent Schedule 13D/A received by the Company from
such shareholder.
(3) In its most recent Schedule 13G filing with the Securities and Exchange
Commission on February 14, 2000, Summit Capital Management, LLC
represents it has shared voting and investment power over all such
shares.
(4) In its most recent Schedule 13G filing with the Securities and Exchange
Commission on February 11, 2000, Dimensional Fund Advisors, Inc. (DFI),
represents it has sole voting power and investment power over such
shares. DFI disclaims beneficial ownership of the shares.
(5) The number of shares set forth in the above table (i) includes 270,106
shares held by Gary T. McIlroy Revocable Trust, for which Dr. McIlroy
is grantor and trustee, (ii) includes 108,139 shares which Dr. McIlroy
has the right to acquire upon exercise of options, (iii) includes 4,000
shares held by a foundation controlled by Dr. McIlroy (iv) excludes 75
shares beneficially owned by Dr. McIlroy's and Ms. Travis' adult
children and (v) excludes the shares beneficially owned by Ms. Travis.
Dr. McIlroy disclaims beneficial ownership of such excluded shares.
(6) The number of shares set forth in the above table (i) includes 291,978
shares held by the Marlene O. Travis Revocable Trust, for which Ms.
Travis is grantor and trustee, (ii) includes 84,687 shares which Ms.
Travis has the right to acquire upon exercise of options, (iii)
includes 4,000 shares held by a foundation controlled by Ms. Travis,
(iv) excludes 75 shares beneficially owned by Ms. Travis' and Dr.
McIlroy's adult children and (v) excludes the shares beneficially owned
by Dr. McIlroy. Ms. Travis disclaims beneficial ownership of such
excluded shares.
(7) Includes 62,738 shares held by Mr. Clark and 61,537 shares which Mr.
Clark has the right to acquire upon exercise of options.
(8) Includes 1,000 shares held by Ms. Kimpell and 16,400 shares which Ms.
Kimpell has the right to acquire upon exercise of options.
(9) Includes 3,275 shares held by Mr. Smith and 7,000 shares which Mr.
Smith has the right to acquire upon exercise of options.
(10) Includes 5,308 shares held by Mr. Travis and 5,701 shares which Mr.
Travis has the right to acquire upon exercise of options.
(11) Includes 9,462 shares held by Mr. Montgomery and 10,918 shares which
Mr. Montgomery has the right to acquire upon exercise of options.
(12) Includes 11,000 shares held by Mr. Damkoehler and 5,701 shares which
Mr. Damkoehler has the right to acquire upon exercise of options.
(13) Includes 1,000 shares held by Dr. Schultze and 5,701 shares which Dr.
Schultze has the right to acquire upon exercise of options.
(14) Includes 661,961 shares held by the current officers and directors, and
317,718 shares that current executive officers and directors as a group
have the right to acquire as of March 31, 2000, or within 60 days of
such date, upon exercise of options.
Item 13. Certain Relationships and Related Transactions.
None.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this report.
(1) Financial Statements. The financial statements listed below are
included in this Transition Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934 on the pages indicated.
Page in this
Form 10-K
Report of Independent Auditors............................... 38
Consolidated Balance Sheets as of December 31, 1999,
June 30, 1999 and June 30, 1998.............................. 39
Consolidated Statements of Operations for the six
months ended December 31, 1999 and 1998, and for the years
ended June 30, 1999, 1998 and 1997........................... 40
Consolidated Statements of Shareholders' Equity for the
six months ended December 31, 1999 and 1998 and for the
years ended June 30, 1999, 1998 and 1997..................... 41
Consolidated Statements of Cash Flows for the six
months ended December 31, 1999 and 1998 and for the years
ended June 30, 1999, 1998 and 1997........................... 42
Notes to Consolidated Financial Statements................... 43
(2) Financial Statement Schedules. The following schedule is included
in this Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 on the pages indicated.
Page in this
Report
II. Valuation and Qualifying Accounts....................... 60
Schedules I, III, IV, and V are omitted for the reason that they
are not applicable, not required or the information is presented
in the consolidated financial statements or related notes.
<PAGE>
(b) Exhibits.
2.1 Stock Purchase Agreement dated as of October 14, 1998 between Health
Risk Management, Inc. and Oxford Health Plans, Inc. - incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K filed February 11,
1999 (SEC File No. 0-18902).
2.2 Closing Agreement dated as of January 27, 1999 between Health Risk
Management, Inc. and Oxford Health Plans, Inc. - incorporated by
reference to Exhibit 2.2 to the Company's Form 8-K filed February 11,
1999 (SEC File No. 0-18902).
3.1 Amended and Restated Articles of Incorporation, as amended to date --
incorporated by reference to Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997 (SEC File No.
0-18902).
3.2 Composite Bylaws of the Company, as of April 21, 1999--incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 (SEC File No. 0-18902)
4.1 Specimen form of the Company's Common Share Certificate -- incorporated
by reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (SEC File No. 33-37595).
4.2 Amended and Restated Articles of Incorporation, as amended to date (see
Exhibit 3.1).
4.3 Composite Bylaws of the Company, as of April 21, 1999 (see Exhibit
3.2).
4.4 Rights Agreement dated as of April 4, 1997 between health Risk
Management, Inc. and Norwest Bank Minnesota, N.A. as Rights Agent,
together with the following exhibits thereto:
(a) Certificate of Designations of Series A Preferred Stock,
(b) Summary of Rights to Purchase Shares of Series A Preferred Stock,
(c) Form of Rights Certificate
-- incorporated by reference to Exhibit 1 to the Company's
Form 8-A Registration Statement filed April 10, 1997 (SEC File
No. 0-18902).
10.1* Employment Agreement dated as of June 20, 1996 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy -- incorporated by reference
to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
10.2* Split Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy and the Amendment to Split
Dollar Agreement dated July 28, 1992 between Health Risk Management,
Inc. and Gary T. McIlroy -- incorporated by reference to Exhibit 10.4
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18902).
10.3* Employment Agreement dated as of June 21, 1996 between Health Risk
Management, Inc. and Marlene O. Travis -- incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (SEC File No. 0-18902).
10.4* Split Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Marlene O. Travis and the Amendment to Split
Dollar Agreement dated July 28, 1992 between Health Risk Management,
Inc. and Marlene O. Travis -- incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18902).
10.5* Employment Agreement dated June 21, 1996 between Health Risk
Management, Inc. and Thomas P. Clark -- incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (SEC File No. 0-18902).
<PAGE>
10.6* Split Dollar Agreement dated as of September 1, 1991 between Health
Risk Management, Inc. and Thomas P. Clark -- incorporated by reference
to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
10.7* Health Risk Management, Inc. 1990 Stock Option Plan -- incorporated by
reference to Exhibit 10.16 to the Company's Registration Statement on
Form S-1 (SEC File No. 33-37595).
10.8* Form of Stock Option Agreement to be used pursuant to 1990 Stock Option
Plan -- incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1991 (SEC
File No. 0-18902).
10.9* Amended and Restated 1992 Long-Term Incentive Plan--incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.10* Form of Non-Employee Director Initial/Annual Option Agreement under the
1992 Long-Term Incentive Plan -incorporated by reference to Exhibit
10.30 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992 (SEC File No. 0-18902).
10.11* Form of Non-Employee Director Elective Option Agreement under the 1992
Long-Term Incentive Plan -incorporated by reference to Exhibit 10.31 to
the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1992 (SEC File No. 0-18902).
10.12* Form of Incentive Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.13* Form of Non-Qualified Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.14* Form of Performance Unit Award under the 1992 Long-Term Incentive Plan
-- incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1992 (SEC File
No. 0-18902).
10.15* Deferred Compensation Plan for Directors -- incorporated by reference
to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992 (SEC File No. 0-18902).
10.16* Executive Incentive Plan -- incorporated by reference to the
description of such Plan as set forth under "Compensation Pursuant to
Plans - Executive Incentive Plan" in the Company's Proxy Statement for
its 1992 Annual Meeting of Shareholders (SEC File No. 0-18902).
10.17 Lease Agreement dated January 11, 1993 between Thomas L. Koster, Inc.,
d/b/a/ Realvesco Properties and Health Risk Management, Inc., as
amended by First Amendment to Lease Agreement dated January 29, 1993,
related to the Company's offices at 5250 Lovers Lane, Portage, Michigan
-- incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1993 (SEC File
No. 0-18902).
10.18 Second Amendment to Lease dated July 22, 1997 for the Lease Agreement
dated January 11, 1993 between Thomas L. Koster, Inc., d/b/a/ Realvesco
Properties and Health Risk Management, Inc., related to the Company's
offices at 5250 Lovers Lane, Portage, Michigan--incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.19 Security Agreement dated June 24, 1994 relating to Revolving Credit and
Term Loan Agreement of same date -- incorporated by reference to
Exhibit 10.31 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994 (SEC File No. 0-18902).
<PAGE>
10.20 Management Services Agreement dated February 24, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Oxford Health Plans (PA), Inc. - incorporated by
reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 (SEC File No. 0-18902).
10.21 Health Care Excess Risk Insurance Policy dated April 13, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Kentucky Medical Insurance Company -- incorporated
by reference to Exhibit 10.42 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 (SEC File No. 0-18902).
10.22 Lease agreement dated May 5, 1998, between MEPC O &I, Inc. and Health
Risk Management, Inc. related to the Company's offices at 10900
Hampshire Avenue South, Minneapolis, Minnesota and Amendment of Lease
dated September 16, 1998 -- incorporated by reference to Exhibit 10.43
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998 (SEC File No. 0-18902).
10.23 Amended and Restated Revolving Credit and Term Loan Agreement between
Health Risk Management, Inc. and U.S. Bank National Association dated
May 1, 1998 - incorporated by reference to Exhibit 10.44 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1998 (SEC File No. 0-18902).
10.24 First Amendment to the Credit Agreement between Health Risk Management,
Inc. and U.S. National Bank Association dated January 27, 1999 --
incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 (SEC File No.
0-18902).
10.25 Second Amendment to the Credit Agreement between Health Risk
Management, Inc. and U.S. National Bank Association dated June 30, 1999
- incorporated by reference to Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1999 (SEC File
No. 0-18902).
10.26 Sublease Agreement dated February 10, 1999 between Day & Zimmermann,
Inc. and Health Risk Management, Inc. as amended by First Amendment to
Sublease dated April 6, 1999, related to the Company's offices at 1818
Market Street, Philadelphia, Pennsylvania -- incorporated by reference
to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999 (SEC File No. 0-18902).
10.27 Amended and Restated HealthChoices Southeast Agreement between the
Commonwealth of Pennsylvania (Department of Public Welfare) and Oxford
Health Plans (PA), Inc. dated January 1, 1999 -- incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999 (SEC File No. 0-18902).
10.28 Third Amendment to the Credit Agreement between Health Risk Management,
Inc. and U.S. National Bank dated December 21, 1999.
21. List of subsidiaries.
23. Consent of Independent Auditors.
27.1 Financial Data Schedule for the six month transition period ended
December 31, 1999 (filed in electronic format only).
- --------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
(c) Reports on Form 8-K.
During the quarter ended December 31, 1999, the Company filed a report
on Form 8-K dated November 4, 1999 reporting under Item 8 its change in
fiscal year end from June 30 to December 31.
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
of Health Risk Management, Inc.
We have audited the accompanying consolidated balance sheets of Health Risk
Management, Inc. as of December 31, 1999, June 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the six months ended December 31, 1999 and for each of the three years
in the period ended June 30, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Health
Risk Management, Inc. at December 31, 1999, June 30, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the six month
period ended December 31, 1999 and for each of the three years in the period
ended June 30, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As described in Notes 3 and 1 of the consolidated financial statements, the
Company changed its method of accounting for management service fees during the
year ended June 30, 1998 and its method of accounting for computer software for
internal use effective July 1, 1999, respectively.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 1, 2000
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
---------- --------------------
1999 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 10,577 $ 9,229 $ 20,624
Accounts receivable-net of allowance for doubtful accounts of $255, $324 and
$265 at December 31, 1999, June 30, 1999 and 1998, respectively 19,627 23,774 11,019
Deferred income taxes 700 1,440 900
Other 1,448 2,263 837
-------- -------- --------
Total current assets 32,352 36,706 33,380
Fixed maturity investments at fair value 6,675 8,406 --
Computer software costs, less accumulated amortization of $23,612, $19,910 and
$17,940 at December 31, 1999, June 30, 1999 and 1998, respectively 26,180 26,736 24,284
Property and equipment, less accumulated depreciation of $16,631, $15,001 and
$14,299 at December 31, 1999, June 30, 1999 and 1998, respectively 11,078 11,825 8,670
Other assets 4,552 4,896 4,180
-------- -------- --------
$ 80,837 $ 88,569 $ 70,514
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,084 $ 3,954 $ 2,125
Medical services payable 22,506 21,215 15,452
Due to reinsurer 138 553 --
Accrued expenses 4,226 6,144 3,596
Unearned revenues 2,774 5,234 3,708
Current maturities of notes payable 6,825 7,865 4,429
Current portion of capitalized equipment leases 380 252 596
-------- -------- --------
Total current liabilities 39,933 45,217 29,906
Deferred income taxes 1,479 2,828 3,776
Long-term portion of notes payable 3,295 3,145 2,313
Long-term portion of capitalized equipment leases 529 483 734
Surplus note payable 2,500 2,500 --
Commitments and contingencies
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, 4,641,996
4,639,496 and 4,583,694 issued and outstanding December 31, 1999,
June 30, 1999 and 1998, respectively 46 46 46
Additional paid-in capital 32,192 32,176 31,728
Retained earnings 1,162 2,382 2,011
Accumulated other comprehensive deficit (299) (208) --
-------- -------- --------
Total shareholders' equity 33,101 34,396 33,785
-------- -------- --------
$ 80,837 $ 88,569 $ 70,514
======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended Year Ended June 30,
---------------------- ----------------------------------
1999 1998 1999 1998 1997
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums-gross $ 78,659 $ 67,175 $ 144,639 $ 27,457 $ --
Ceding allowance 1,423 -- 2,457 -- --
Management service fees 22,622 24,342 48,731 63,395 59,076
QualityFIRST revenues 2,062 2,033 4,064 3,648 3,647
Investment income 478 417 969 337 187
--------- --------- --------- --------- ---------
Total revenues 105,244 93,967 200,860 94,837 62,910
Less ceded premiums 38,065 -- 37,821 -- --
--------- --------- --------- --------- ---------
Net revenues 67,179 93,967 163,039 94,837 62,910
Operating expenses:
Medical costs, net 34,443 58,194 90,572 23,625 --
Cost of services, net 27,997 28,456 55,441 55,141 44,640
Selling, marketing and administration, net 5,931 7,662 14,049 13,386 14,081
Oxford transition costs -- 1,350 1,350 -- --
Interest expense 611 374 974 489 535
--------- --------- --------- --------- ---------
Total operating expenses 68,982 96,036 162,386 92,641 59,256
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change (1,803) (2,069) 653 2,196 3,654
Income tax expense (benefit) (583) (735) 282 868 1,413
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect
of accounting change (1,220) (1,334) 371 1,328 2,241
Cumulative effect
of accounting change, net of
income tax benefit of $1,342 -- -- -- (2,371) --
--------- --------- --------- --------- ---------
Net income (loss) $ (1,220) $ (1,334) $ 371 $ (1,043) $ 2,241
========= ========= ========= ========= =========
Basic earnings per share:
Income (loss) before cumulative effect
of accounting change $ (.26) $ (.29) $ .08 $ .29 $ .52
Cumulative effect of accounting change -- -- -- (.52) --
========= ========= ========= ========= =========
Net income (loss) $ (.26) $ (.29) $ .08 $ (.23) $ .52
========= ========= ========= ========= =========
Diluted earnings per share:
Income (loss) before cumulative effect
of accounting change $ (.26) $ (.29) $ .08 $ .29 $ .50
Cumulative effect of accounting change -- -- -- (.51) --
========= ========= ========= ========= =========
Net income (loss) $ (.26) $ (.29) $ .08 $ (.22) $ .50
========= ========= ========= ========= =========
Proforma net income and per share amounts
assuming the new revenue recognition
accounting policy is applied retroactively:
Net income -- -- -- $ 1,328 $ 859
Basic earnings per share -- -- -- $ .29 $ .20
Diluted earnings per share -- -- -- $ .29 $ .19
Weighted average number of shares outstanding:
Basic 4,640 4,599 4,615 4,524 4,291
========= ========= ========= ========= =========
Diluted 4,640 4,599 4,675 4,663 4,458
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Shares
Outstanding Accumulated
----------------------- Additional Other
Number of Paid-In Comprehensive Retained
Total Shares Amount Capital Deficit Earnings
---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 28,474 4,180,476 $ 42 $ 27,619 $ -- $ 813
Common shares issued 2,464 200,000 2 2,462 -- --
Options exercised, including
tax benefit of $120 865 97,769 1 864 -- --
Net income 2,241 -- -- -- -- 2,241
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 34,044 4,478,245 45 30,945 -- 3,054
Options exercised 784 105,449 1 783 -- --
Net loss (1,043) -- -- -- -- (1,043)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998 33,785 4,583,694 46 31,728 -- 2,011
Options exercised 306 40,745 -- 306 -- --
Common shares issued 142 15,057 -- 142 -- --
Comprehensive income:
Net income 371 -- -- -- -- 371
Change in net unrealized
loss on fixed maturity
investments (208) -- -- -- (208) --
----------
Total comprehensive income 163 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1999 34,396 4,639,496 46 32,176 (208) 2,382
Common shares issued 16 2,500 -- 16
Comprehensive loss:
Net loss (1,220) (1,220)
Change in net unrealized
loss on fixed maturity
investments (91) (91)
----------
Total comprehensive loss (1,311)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 $ 33,101 4,641,996 $ 46 $ 32,192 $ (299) $ 1,162
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31, Year Ended June 30,
-------------------- --------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,220) $ (1,334) $ 371 $ (1,043) $ 2,241
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Realized gain on investments (1) -- -- -- --
Depreciation 1,642 1,630 3,480 3,199 2,816
Amortization 4,086 3,311 6,971 5,558 4,830
Cumulative effect of accounting
change -- -- -- 2,371 --
Provision for deferred income taxes (609) (741) 262 (489) 1,398
Changes in operating assets and liabilities:
Accounts receivable 4,147 (5,686) (7,366) (1,023) (2,557)
Other assets 775 (1,857) (1,530) (1,360) 7
Accounts payable (808) (143) 1,804 560 (238)
Medical services payable 1,291 2,242 (1,938) 15,452 --
Due to reinsurer (415) -- 553 -- --
Accrued expenses (1,918) (1,259) 2,759 578 382
Unearned revenues (2,460) (1,458) 1,526 (118) 1,248
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities 4,510 (5,295) 6,892 23,685 10,127
Cash flows from investing activities:
Acquisition of net assets, net of cash acquired -- -- (7,734) -- (139)
Sale of investments 1,641 -- -- -- --
Purchase of investments -- -- (234) -- --
Computer software costs capitalized (3,146) (4,864) (8,696) (9,057) (7,396)
Property and equipment purchased (603) (4,858) (5,602) (2,734) (2,827)
-------- -------- -------- -------- --------
Net cash used in investing activities (2,108) (9,722) (22,266) (11,791) (10,362)
Cash flows from financing activities:
Proceeds from notes payable 1,000 2,000 6,000 4,750 1,275
Principal payments on notes payable (1,890) (736) (1,732) (1,308) (1,278)
Principal payments on capital leases (180) (321) (595) (845) (999)
Issuance of common shares 16 186 306 784 3,239
-------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities (1,054) 1,129 3,979 3,381 2,237
-------- -------- -------- -------- --------
Increase (decrease) in cash 1,348 (13,888) (11,395) 15,275 2,002
Cash and cash equivalents at beginning of
period 9,229 20,624 20,624 5,349 3,347
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period
$ 10,577 $ 6,736 $ 9,229 $ 20,624 $ 5,349
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of Health
Risk Management, Inc. and its wholly owned subsidiaries (the Company).
All significant intercompany transactions have been eliminated.
B. Nature of Operations
The Company provides management services, which include administrative
services and products for integrated health plan management; generates
QualityFIRST revenues from the sale of evidence-based clinical decision
support software; and operates a wholly-owned health maintenance
organization (HMO).
Each of the three is treated as a business segment.
The Company provides its management services, including care
management, price control and claim administration, to self-insured
employers, unions, government entities, insurance companies, HMO's
preferred provider organizations and hospitals throughout the United
States.
QualityFIRST revenues are principally derived from software license and
subscription fees for the evidence based clinical decision support
software.
On April 16, 1998, the Company's wholly-owned subsidiary, Pennsylvania
HRM, Inc., entered into a five-year contract with Oxford Health Plans
(PA), Inc., now named HRM Health Plans (PA), Inc. (the Plan). The Plan
is a HMO licensed by the Commonwealth of Pennsylvania to offer certain
insurance products to covered members as defined in the HealthChoices
Physical Health Agreement (HealthChoices agreement) between the
Commonwealth of Pennsylvania and the Plan. The Company received a fixed
amount per enrolled member per month and certain per case fees to
provide administrative services and assumed all the medical cost risk
through the date of acquisition of the Plan. On January 27, 1999, the
Company acquired the Plan (See Note 8). Premium revenues result from
the Plan's operations from April 16, 1998. The Company continues to
assume the medical cost risk through the Plan.
Plan revenues were seventy-six (76%) of total revenues in the six
months ended December 31, 1999 and seventy-three percent (73%) and
twenty-nine percent (29%) of total revenues in the years ended June 30,
1999 and 1998, respectively. In the year ended June 30, 1998, revenues
from a management services client was sixteen percent (16%) of total
revenues. In the year ended June 30, 1997, revenues from two management
services clients were seventeen percent (17%) and sixteen percent (16%)
of total revenues.
The markets serviced by the Company are principally domestic.
C. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. The most
significant items include incurred but not yet reported claims included
in medical services payable, performance bonus accruals included in
accounts receivable and the deferred tax asset valuation allowance.
Such estimates and assumptions could change in the future as more
information becomes known, which could impact the amounts reported and
disclosed herein.
<PAGE>
D. Revenue Recognition
Premiums and management service fees are generally recognized ratably
over the contract period. Included in management service fees are
estimated amounts for performance bonuses and contract adjustments.
These estimates are recognized when reasonably determinable.
Adjustments to these estimates are recorded in current operations.
Contractual relationships with management service clients subject the
Company to revenue fluctuations resulting from changes in client
employment levels or covered lives, restructuring of benefit plans and
price adjustments based on contractual experience and performance
bonuses. Included in accounts receivable is a significant accrued
performance bonus that was recognized as revenue in the fiscal years
ended June 30, 1997 and 1998 that was billed subsequent to December 31,
1999.
E. Unearned Revenues
Unearned revenues represent amounts billed to clients for contract
services yet to be performed, QualityFIRST revenues yet to be earned
and ceding allowance yet to be earned.
F. Computer Software Costs
The Company capitalizes QualityFIRST(R) computer software costs in
accordance with Statement of Financial Accounting Standards (SFAS) No.
86, Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed. The capitalized costs are amortized based on the
greater of the amount computed using (a) the ratio of current gross
revenues for the product to the total of current and anticipated future
gross revenues or (b) a straight-line basis over their estimated useful
lives, ranging from three to ten years.
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 prospectively revised its previous
capitalization policy for such software to be in conformance with the
SOP and, as a result, capitalized fewer costs, which increased the net
loss for the six months ended December 31, 1999 by approximately
$677,000 ($.15 per share diluted).
G. Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the assets using straight-line
methods for financial reporting purposes and accelerated methods for
tax purposes. Estimated useful lives range from three to ten years.
Equipment under capital leases is amortized over the term of the
respective lease or over the service lives of the assets for those
leases which substantially transfer ownership.
H. Goodwill
Goodwill is generally being amortized on a straight line basis over 10
years.
I. Income Taxes
Deferred tax assets and liabilities are determined based on differences
between the financial reporting basis and the tax basis of the
Company'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.
<PAGE>
J. Medical Costs
Medical costs principally include the estimated ultimate net cost of
all reported and unreported claims incurred during the year. The
liability for medical services payable is estimated by management
primarily by the use of cost per contract data and completion factors
developed from historical lag patterns. Subsequent to the Company's
purchase of the Plan, several issues with respect to claims processing
were identified that limited the usefulness of historical claims data
to estimate future claim payments. These issues included large claims
backlogs, overpayments, and duplicate payments. Through December 31,
1999, the claim processing issues identified by management continue to
affect their ability to estimate the ultimate cost of settling medical
claims.
Management believes that the liability for medical services is adequate
and that it has identified the operational changes that will improve
its ability to estimate the liability for medical claims. However, the
assumptions made about improvements in historical trends, the related
operational changes and the collection of claim overpayments of
$1,321,000 during the year ending December 31, 2000 may not be realized
which will adversely affect the ultimate cost of medical claims. The
estimates for settled claims and incurred but not reported or paid
claims are made and adjusted in future periods as required. The
estimates are continually reviewed and adjusted as experience develops
or new information becomes known. Such adjustments are included in
current operations. The six months ended December 31, 1999 included an
additional $2,925,000 of medical claim expense in excess of the medical
claims liability at June 30, 1999, net of reinsurance.
K. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Six Months Ended December 31, Year Ended June 30,
1999 1998 1999 1998 1997
--------- --------- ------ --------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Income (loss) before cumulative effect
of accounting change $ (1,220) $ (1,334) $ 371 $ 1,328 $2,241
Cumulative effect of accounting change -- -- -- (2,371) --
--------- --------- ------ --------- ------
Net income (loss) $ (1,220) $ (1,334) $ 371 $ (1,043) $2,241
========= ========= ====== ========= ======
Denominator:
Weighted-average shares-basic 4,640 4,599 4,615 4,524 4,291
Effect of dilutive stock options -- -- 60 139 167
--------- --------- ------ --------- ------
Weighted-average shares-diluted 4,640 4,599 4,675 4,663 4,458
========= ========= ====== ========= ======
Basic earnings per share:
Income (loss) before cumulative effect
of accounting change $ (.26) $ (.29) $ .08 $ .29 $ .52
Cumulative effect of accounting change -- -- -- (.52) --
--------- --------- ------ --------- ------
Net income (loss) $ (.26) $ (.29) $ .08 $ (.23) $ .52
========= ========= ====== ========= ======
Diluted earnings per share:
Income (loss) before cumulative effect
of accounting change $ (.26) $ (.29) $ .08 $ .29 $ .50
Cumulative effect of accounting change -- -- -- (.51) --
--------- --------- ------ --------- ------
Net income (loss) $ (.26) $ (.29 )$ .08 $ (.22) $ .50
========= ========= ====== ========= ======
</TABLE>
The effect of stock options were not included in the calculation of
diluted earnings per share for six month transition period ended
December 31, 1999 and 1998 because they are antidilutive.
<PAGE>
L. Shareholder Rights Plan
On April 4, 1997, the Company's Board of Directors established a
shareholder rights plan which provides for a dividend distribution of
one preferred stock purchase right (a "Right") to be attached to each
share of common stock then outstanding or thereafter issued. The Rights
are currently not exercisable or transferable apart from the common
stock. Each Right entitles the holder to purchase one one-hundredth of
a share of Series A Preferred Stock at a price of $50.00 per one
one-hundredth of a preferred share, subject to adjustment. The Rights
become exercisable if a person or group acquires 15% or more of common
stock or announces a tender offer for 15% or more of common stock,
subject to certain exceptions. After the Rights become exercisable,
each Right entitles the holder (other than the 15% holder) to purchase
the Company's common stock having a market value of two times the
Right's exercise price. Also, if after a person acquires 15% without
Board approval, the Company is acquired in a merger or similar
transaction, each right thereafter would entitle a holder (other than
the 15% holder) to acquire shares of the acquiring company or an
affiliate having a market value of two times the Right's exercise
price, subject to certain exceptions. Each Right is redeemable at $.001
at any time up to ten days after a person acquires 15% of the Company's
common stock. The Rights expire on April 4, 2007 unless earlier
redeemed by the Company.
M. Cash and Cash Equivalents
Short-term investments purchased within three months of their
maturities are considered cash equivalents. The Company invests in U.S.
government securities and high rated money market funds. The carrying
amount reported in the consolidated balance sheets for cash and cash
equivalents approximates its fair value.
N. Investments
The Company has determined that its fixed maturity investments might be
sold prior to maturity to support its liquidity needs. Accordingly,
such investments have been classified as available-for-sale and carried
at fair value, with net unrealized losses reported as a component of
accumulated other comprehensive loss in shareholders' equity. 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 investment income
using the specific identification method.
O. Reinsurance
Reinsurance premiums and benefits are accounted for on the basis
consistent with that used in accounting for the reinsured policy and
the terms of the reinsurance contract.
P. Risks and Uncertainties
Management is considering and is in the process of developing a
business plan for an internet-based business model for the Management
Services Unit. The development of a business plan began in 1999 in
recognition of the significant impact that the internet is having and
will continue to have on business to business services to health
insurance plans and health providers. As a result of this consideration
and planning effort, the Company is evaluating and will continue to
evaluate the impact that internet technology will have on its existing
technology and software and the remaining estimated lives of its
software assets. As described in Note 5, management reduced the
estimated life of its care management software from seven years to
three years. The Company's other software systems, claims
administration and QualityFIRST, are also being evaluated for the
impact that technology may have on their estimated useful lives;
however, management does not believe that a change in their estimated
useful life is warranted at this time. As the internet-based business
plan evolves and as internet technology emerges, the Company may
further reduce the estimated useful lives of the existing software or
<PAGE>
abandon those assets. Management believes that it is reasonably
possible that a decision to move to a internet-based business model
could occur during the next 12 months.
The Company has accrued $6,910,000 as a reinsurance recoverable from a
single reinsurer relating to medical claims incurred during the period
of April 16, 1998 through December 31, 1998. While the reinsurer is
currently conducting a claims audit to assess the appropriateness of
the Company's assertion, management believes that the entire receivable
is collectible either from the reinsurer or the health care providers
during the year ending December 31, 2000.
Q. Merger Termination
On March 10, 1997, the Company and HealthPlan Services Corporation
(HPS) announced that the merger agreement dated September 12, 1996 had
been terminated by mutual arrangement and that HPS had purchased
200,000 unregistered shares of common stock from the Company at a price
of $2.5 million ($12.50 per share). The consolidated net income for the
year ended June 30, 1997 includes a one-time charge of $390,000 in
selling, marketing and administration expense ($0.05 per share diluted,
net of tax benefit) for the write-off of costs related to the
terminated merger agreement with HPS.
2. CHANGE IN FISCAL YEAR
On November 4, 1999, the Company's Board of Directors decided to change the
Company's fiscal year end from June 30 to December 31 in order to
facilitate activities of the Plan and the Company.
3. ACCOUNTING CHANGE
Effective July 1, 1997, the Company changed its method of accounting for
management service fees 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 between its management
services and the full risk health plan premiums, is more prevalent in the
health management industry, and will reduce the administrative burden.
The cumulative effect of the change in accounting principles as July 1,
1997 resulted in a pre-tax, non-cash charge of $3,713,000 ($2,371,000 after
tax benefit of $.52 per share for basic and $.51 per share for diluted).
Income before cumulative effect of accounting change and basic and diluted
earnings per share for the year ended June 30, 1998 would have been
$1,826,000, $.40 and $.39, respectively, without the accounting change
compared to $1,328,000, $.29 and $.29, respectively, with the accounting
change.
4. INVESTMENTS
The amortized cost and fair value of available-for-sale fixed maturity
investments consists of the following (in thousands):
December 31, 1999
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------ ------- ------ ------
U.S. Treasury securities $4,941 $ -- $ 264 $4,677
Corporate bonds 2,033 -- 35 1,998
------ ------- ------ ------
$6,974 $ -- $ 299 $6,675
====== ======= ====== ======
<PAGE>
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
====== ====== ====== ======
The Company held no investments at June 30, 1998.
All fixed maturity investments are due within five years as of December 31,
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
six months ended December 31, 1999 and are included in investment income. There
were no sales of fixed maturity investments during the year ended June 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 at December 31, 1999 and June 30, 1999.
The net unrealized loss on fixed maturity investments included in shareholder's
equity consists of the following (in thousands):
December 31, June 30,
1999 1999
----- -----
Gross unrealized loss on fixed
maturity investments $(299) $(208)
Adjustment for net deferred
tax benefit, net of valuation allowance -- --
----- -----
Net unrealized loss on fixed
maturity investments $(299) $(208)
===== =====
<PAGE>
5. COMPUTER SOFTWARE COSTS
Computer software costs consist of the following (in thousands):
December 31, June 30,
------------ ---------------------
1999 1999 1998
Care Management Software
Cost $20,201 $18,936 $17,268
Less accumulated amortization 9,161 7,483 7,391
------- ------- -------
Net book value 11,040 11,453 9,877
Claim Administration Software
Cost 9,987 9,709 8,852
Less accumulated amortization 4,803 4,302 3,708
------- ------- -------
Net book value 5,184 5,407 5,144
QualityFIRST(R) Software
Cost 19,604 18,001 16,104
Less accumulated amortization 9,648 8,125 6,841
------- ------- -------
Net book value 9,956 9,876 9,263
------- ------- -------
Computer Software Costs $26,180 $26,736 $24,284
======= ======= =======
Amortization of these costs was as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
------------------ ------------------------------
1999 1998 1999 1998 1997
(unaudited)
<S> <C> <C> <C> <C> <C>
Care Management Software $1,678 $1,249 $2,603 $2,214 $1,791
Claim Administration Software 501 445 919 795 735
QualityFIRST Software 1,523 1,279 2,722 2,149 1,617
------ ------ ------ ------ ------
Amortization Expense $3,702 $2,973 $6,244 $5,158 $4,143
====== ====== ====== ====== ======
</TABLE>
Fully amortized software of $4,274,000 was written off in the year ended
June 30, 1999.
Effective October 1, 1999, the estimated remaining useful life of the care
management software was reduced from seven years to three years. The
reduction resulted in an additional amortization expense of approximately
$250,000 during the six months ended December 31, 1999 and increased the
net loss by approximately $167,000 ($.04 per share diluted).
<PAGE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
----------------- -------------------------------
1999 1999 1998
----------------- ------------- -------------
Owned
<S> <C> <C> <C>
Office equipment, furniture and fixtures $ 7,796 $ 7,811 $ 5,788
Leasehold improvements 2,270 2,248 1,719
Data processing equipment 15,623 15,101 10,348
----------------- ------------- -------------
25,689 25,160 17,855
Less accumulated depreciation 15,250 13,763 10,676
----------------- ------------- -------------
Net property and equipment owned 10,439 11,397 7,179
----------------- ------------- -------------
Capitalized leases
Office equipment and furniture -- -- 1,271
Data processing equipment 2,020 1,666 3,843
----------------- ------------- -------------
2,020 1,666 5,114
Less accumulated depreciation 1,381 1,238 3,623
----------------- ------------- -------------
Net capitalized leases 639 428 1,491
----------------- ------------- -------------
Property and equipment $ 11,078 $ 11,825 $ 8,670
================= ============= =============
</TABLE>
7. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
------- --------------------
1999 1999 1998
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Term loans payable to bank in monthly installments of $325,000 plus interest
at the bank's reference rate (8.50% at December 31, 1999), with the last
payment equal to all remaining principal due
January, 2002 $ 7,195 $ 5,245 $ 3,742
Note payable to bank under revolving credit agreement with interest payable
monthly at the bank's reference rate (8.50% at
December 31, 1999), due January 30, 2001 2,925 5,765 3,000
------- ------- -------
10,120 11,010 6,742
Less: Current maturities 6,825 7,865 4,429
------- ------- -------
Long-term portion $ 3,295 $ 3,145 $ 2,313
======= ======= =======
</TABLE>
The above notes payable are collateralized by accounts receivable,
equipment, fixtures, and general intangibles. The notes payable are subject
to debt covenants that are to be met on a quarterly basis. The Company's
revolving credit agreement includes a $3,000,000 revolving credit facility.
The revolving credit agreement terminates on January 30, 2001. The Company
had available $75,000 under the revolving credit facility at December 31,
1999.
<PAGE>
The carrying amounts of the Company's borrowings under its term loan and
notes payable approximate their fair value.
Under terms of the revolving credit and term loan agreements, the Company
is prohibited from paying dividends on its stock without the bank's
consent.
Scheduled payments by fiscal year under terms of the notes payable will be
$6,825,000 in 2000 and $3,295,000 in 2001.
Total interest paid on notes payable was $468,000 for the six months ended
December 31, 1999 and $797,000, $335,000 and $299,000 for the years ended
June 30, 1999, 1998 and 1997, respectively.
8. ACQUISITION/REINSURANCE AGREEMENT
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.
As a result of the acquisition, the Company retained a $2,500,000 surplus
note, which has an interest rate of 8.5% annum. The note is classified as
long-term due to the fact that the principle 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. Interest of $197,104 and
$89,980 was accrued as of December 31, 1999 and June 30, 1999,
respectively. The Plan is also restricted from paying dividends in excess
of prior year net income or 10% of net worth without prior approval from
the Insurance Commissioner. No dividends were paid in 1999.
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
December 31, 1999, substantially all of the commercial block had
discontinued their insurance coverage with the Plan.
For the period April 16, 1998 to December 31, 1998 the Company maintained a
reinsurance contract to control exposure to potential medical losses
arising from large risks. To the extent that the reinsurer does not meet
its obligations assumed under the reinsurance contract, the Company remains
primarily liable. Reinsurance premiums under terms of this reinsurance
contract were $1,088,000 and $445,000 in the years ended June 30, 1999 and
1998, respectively, and are included in medical costs, net. Amounts
recoverable under terms of this reinsurance contract as of December 31,
1999 and June 30, 1999 were $6,910,000 and $3,990,000, respectively, and
are included in accounts receivable on the consolidated balance sheet.
There were no amounts recoverable under terms of the reinsurance contract
as of June 30, 1998.
Effective January 1, 1999, the Company entered in to 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 $1,423,000 in the six month period ended December 31,
1999 and $2,457,000 in the year ended June 30, 1999, of the ceding
allowance as a component of net revenue. Amounts ceded under the contract
for premiums, medical costs and expenses for the six month period ended
December 31, 1999 were $38,065,000, $32,998,000 and $3,153,000,
respectively. The amounts ceded for the year ended June 30, 1999 were
$37,821,000, $31,464,000 and $3,569,000, respectively.
Under terms of the agreement, the Company could recapture the business
ceded, subject to provisions of the agreement. On February 21, 2000, the
Company elected to recapture the business ceded and accrued the recapture
fee of $300,000 at December 31, 1999. There were no amounts recoverable
under terms of this reinsurance contract as of December 31, 1999.
<PAGE>
9. OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
At December 31, 1999, the Company's 1992 Long-Term Incentive Plan and the
1990 Stock Option Plan ("the Option Plans") permitted the granting of
1,200,000 options to officers, directors and employees. These can be either
incentive stock options or non-qualified stock options. Options are
generally granted at not less than market value at the date of grant and
generally for a five-year period. The options have been granted at prices
ranging from $5.250 to $15.50. A total of 73,390 common shares are
available for future issuance under the Option Plans at December 31, 1999.
Transactions related to outstanding options are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Total Exercisable Exercise Price
-------- -------- -------------
<S> <C> <C> <C>
Balance at June 30, 1996 533,814 364,865 $ 8.72
Granted 260,550 -- 12.32
Became exercisable -- 99,324 7.41
Exercised (97,769) (97,769) 9.06
Expired (24,536) (24,536) 8.85
-------- --------
Balance at June 30, 1997 672,059 341,884 10.06
Granted 237,600 -- 12.61
Became exercisable -- 161,523 10.36
Exercised (105,449) (105,449) 8.89
Expired (77,341) (71,041) 11.23
-------- --------
Balance at June 30, 1998 726,869 326,917 10.72
Granted 77,250 -- 9.92
Became exercisable -- 184,606 11.57
Exercised (40,745) (40,745) 7.80
Expired (54,228) (31,895) 11.34
-------- --------
Balance at June 30, 1999 709,146 438,883 10.63
Granted 15,000 -- 8.47
Became exercisable -- 61,317 12.10
Expired (20,450) (13,600) 12.39
-------- --------
Balance at December 31, 1999 703,696 486,600 10.66
======== ========
</TABLE>
The following table summarizes information about the stock options at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Exercise Contractual Average Average
Prices Number Life in Years Exercise Price Number Exercise Price
<S> <C> <C> <C> <C> <C>
$5.250 - $7.875 111,368 0.24 $7.03 110,035 $7.04
$8.00 74,695 0.91 8.00 74,695 8.00
$9.125 - $9.875 24,500 4.38 9.23 6,000 8.88
$10.00 59,000 3.50 10.00 23,997 10.00
$10.125 53,200 2.50 10.13 44,150 10.13
$10.375 - $11.00 64,533 2.24 10.90 60,702 10.90
$11.25 - $11.75 21,850 1.49 11.45 21,350 11.45
$12.625 162,600 2.50 12.63 56,534 12.63
$12.875 -$15.50 131,950 2.58 13.33 89,137 13.27
------- -------
$5.250 - $15.50 703,696 2.08 10.66 486,600 10.10
======= =======
</TABLE>
<PAGE>
The number of options scheduled to expire by year are 185,702 in 2000,
33,244 in 2001, 386,250 in 2002, 74,000 in 2003 and 24,500 in 2004. As
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to follow Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees," to measure compensation
cost for employee stock options. Under APB No. 25, if the exercise price of
the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
------------------- --------------------------------------------------------
1999 1999 1998 1997
------------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Risk Free Interest Rate Change 5.54% to 6.36% 3.95 to 5.93% 5.25 to 5.625% 5.85 to 6.73%
Dividend Yield 0% 0% 0% 0%
Volatility factor of the expected
market price of the Company's
common stock .626 .622 .577 .513
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restriction and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the option's vesting period. Had the compensation
cost been determined consistent with SFAS No. 123, the pro-forma impact
would be as follows (in thousands):
<TABLE>
<CAPTION>
Six Months
Ended December 31, Year Ended June 30,
---------------- --------------------------------------------------------
1999 1999 1998 1997
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Reported net income (loss) $ (1,220) $ 371 $ (1,043) $ 2,241
SFAS No. 123 Compensation Cost (366) (540) (282) (324)
---------------- --------------- ---------------- ----------------
Proforma net income (loss) $ (1,586) $ (169) $ (1,325) $ 1,917
---------------- --------------- ---------------- ----------------
Proforma net income (loss) per share:
Basic $ (.34) $ (.04) $ (.29) $ .45
Diluted $ (.34) $ (.04) $ (.29) $ .43
</TABLE>
On May 14, 1999, the shareholders approved the Company's 1999 Employee
Stock Purchase Plan. The Plan permits employees to purchase stock of the
Company at a lower of 85% of the closing price of the Company's common
stock as of the commencement date of a plan year or 85% of the closing
price of the Company's common stock as of the last date of a plan year. The
first plan year began November 1, 1999 and $49,389 had been contributed at
December 31, 1999. Initially, 60,000 shares of the Company's common stock
have been reserved for issuance. Beginning November 1, 2000, and each year
thereafter, the shares available for issuance will be increased so that up
to 60,000 shares will be available for each plan year. The Plan will
terminate on October 31, 2009, unless the Board of Directors extends the
term of the plan.
<PAGE>
10. INCOME TAXES
The components of income tax expense (benefit) were as follows (in
thousands):
<TABLE>
<CAPTION>
Six Months
Ended December 31, Year Ended June 30,
---------------- --------------------------------------------------------
1999 1999 1998 1997
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Current:
Federal $ -- $ -- $ -- $ 5
State 26 20 15 10
Deferred (609) 262 853 1,398
---------------- --------------- ---------------- ----------------
$ (583) $ 282 $ 868 $ 1,413
================ =============== ================ ================
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
Six Months
Ended December 31, Year Ended June 30,
---------------- --------------------------------------------------------
1999 1999 1998 1997
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Statutory rate (34.0%) 34.0% 34.0% 34.0%
State income taxes (2.5) 3.6 2.8 2.7
Non-deductible meals
and entertainment expenses .6 4.0 1.4 .8%
NOL expiration 5.0 -- -- --
Other (1.4) (1.6) 1.6 1.2
================ =============== ================ ================
(32.3%) 43.2% 39.5% 38.7%
================ =============== ================ ================
</TABLE>
The components of the deferred income tax liabilities and assets were as
follows (in thousands):
<TABLE>
<CAPTION>
Six Months
Ended
December 31, Year Ended June 30,
-------- -----------------------
1999 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Deferred tax liabilities
Prepaid expenses $ 27 $ 72 $ 58
Other assets 255 330 172
Computer software costs 8,004 9,483 8,519
Tax over book depreciation 1,182 1,188 1,016
-------- -------- --------
Total deferred tax liabilities 9,468 11,073 9,765
Deferred tax assets
Receivables 88 135 1,747
Accrued expenses 605 558 428
Ceding allowance 388 890 --
Net operating loss carryforwards 10,463 12,704 5,487
-------- -------- --------
Total deferred tax assets 11,544 14,287 7,662
Less valuation allowance (2,855) (4,675) (773)
-------- -------- --------
Total net deferred tax assets 8,689 9,685 6,889
-------- -------- --------
Net deferred tax liabilities $ 779 $ 1,388 $ 2,876
======== ======== ========
</TABLE>
At December 31, 1999, the Company had net operating loss (NOL)
carryforwards of $30,000,000 for income tax purposes that expire in years
2001 through 2018. Included in this NOL is $6,000,000 and $2,270,000
related to the estimated net operating carryforward of the Plan and stock
options, respectively, and each has a full valuation allowance. The amount
of NOL that will expire by year for which a deferred tax asset has been
recognized is $3,801,000 in 2000, $1,664,000 in 2001, $299,000 in 2002,
<PAGE>
$1,334,000 in 2003, $66,000 in 2004 and $14,797,000 thereafter. The amount
of the net operating loss carryforward related to the Plan is subject to
the filing of the 2000 consolidated tax return of the former Parent of the
Plan and the application of the consolidated tax return rules. The amount
of the Plan's NOL that the Company will have available each year is further
limited by Section 382 of the Internal Revenue Code and is estimated to be
$333,000 per year. The Plan's NOL will expire in the years 2011 through
2016. The stock options when realized for financial statement purposes will
be recorded as additional paid-in capital and not as a reduction of income
tax expense. In addition, any Plan NOLs eventually realized would first be
used to reduce net goodwill of $1,218,000 at December 31, 1999, and then to
reduce income tax expense.
Total income tax paid for the six months ended December 31, 1999 and for
the years ended June 30, 1999, 1998 and 1997 was $38,000, $23,000, $14,786
and $15,090, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and various equipment under
operating and capital leases. Rental expense was approximately $2,467,000,
$4,507,000, $4,276,000 and $3,564,000 for the six months ended December 31,
1999 and for the years ended June 30, 1999, 1998 and 1997, respectively.
The following is a schedule of future minimum rental payments required
under operating leases (in thousands):
Year ending December 31:
2000 $ 3,562
2001 3,156
2002 2,416
2003 2,184
2004 1,904
Thereafter 8,368
-------
Total minimum rental payments $21,590
=======
In addition to the above amounts, additional rental payments are due under
the office facility leases based on the lessor's operating costs.
The following is a schedule of future minimum lease payments under capital
leases (in thousands):
Year ending December 31:
2000 $ 463
2001 410
2002 143
-------
Total minimum lease payments 1,016
Less amount representing interest 107
-------
Net minimum lease payments 909
Less current maturities 380
-------
Long-term portion $ 529
=======
The Company entered into capital lease agreements totaling $354,000 for
data processing equipment and software for the six months ended December
31, 1999. The Company entered into no capital leases in the years ended
June 30, 1999 and 1998.
A dispute over amounts the Plan allegedly owes a previous provider arose
during 1999. The provider alleges that the Plan failed to perform, and
interfered with the provider's contractual obligations. The provider
demands $4.7 million in damages, plus interest. The Company believes that
the allegations are without merit and has filed a counterclaim for amounts
in excess of $4.4 million for the provider's failure to perform under terms
of the contract. The contract between the Plan and the provider requires
that the dispute be settled in arbitration for which a hearing is scheduled
in May 2000. The outcome of arbitration and the impact on the Company's
operations is not determinable. The Company intends to defend its position
vigorously in this matter.
At times the Company is or may be involved in legal actions concerning
benefit plan coverage, decisions by the Company or alleged medical
malpractice by participating providers. If found liable in such actions,
the Company may bear financial responsibility. Also, the Company is or may
be involved in certain other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the claims and
legal actions will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
<PAGE>
As a risk contractor for Medicaid programs, the Company is subject to
regulations covering operating procedures. The laws and regulations
governing risk contractors are complex and subject to interpretation. The
state of Pennsylvania and various regulatory bodies within the state,
monitor the Company's operations to ensure compliance with the applicable
laws and regulations. There can be no assurance that administrative or
systems issues or the Company's current or future provider arrangements
will not result in adverse action by regulatory authorities.
12. SAVINGS PLAN
The Company has a tax deferred savings plan in accordance with the
provisions of Section 401(k) of the Internal Revenue Code covering
substantially all employees. Under the plan, the Company matches a minimum
of 10% of eligible employees' contributions up to 6% of the employee's
salary. Employee and employer matching contributions to the plan are
remitted to a trustee on a biweekly basis. Company contribution expenses
were $271,000, $567,000, $442,000, and $350,000 for the six months ended
December 31, 1999 and for the years ended June 30, 1999, 1998, and 1997,
respectively.
13. SUBSEQUENT EVENT
In January 2000, the Company through its subsidiary, HRM Health Plans (PA),
Inc. (HRMPA) acquired from Hamilton HealthCenter, Inc. all of the
outstanding stock of Pennsylvania HealthMATE, Inc., an 18,000 voluntary
member health plan serving the Medicaid population in a six (6) county
area. HRMPA assumed ownership of HealthMATE by assuming liabilities in
excess of assets of approximately $2,500,000. The revenue from HealthMATE
is expected to exceed $32,000,000 annually.
<PAGE>
14. SEGMENT REPORTING
Reportable segment information is as follows (in thousands):
<TABLE>
<CAPTION>
Risk
Management QualityFIRST (HMO)
Six months ended December 31,1999: Services Unit Unit Unit Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues from external clients $ 22,622 $ 2,062 $ 42,017 $ 66,701
Intersegment revenues(1) 11,443 547 -- 11,990
Investment income(2) 53 -- 425 478
Interest expense(3) 407 97 107 611
Depreciation expense 1,480 67 95 1,642
Amortization expense 2,554 1,532 -- 4,086
Segment pretax profit (loss)(4) 1,009 (667) (2,145) (1,803)
Segment assets 39,002 10,716 31,119 80,837
Purchases of property and equipment and
computer software 2,131 1,630 -- 3,761
<CAPTION>
Risk
Management QualityFIRST (HMO)
Year ended June 30, 1999: Services Unit Unit Unit Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues from external customers $ 48,731 $ 4,064 $ 109,275 $ 162,070
Intersegment revenues(1) 20,787 1,330 -- 22,117
Investment income(2) 196 -- 773 969
Interest expense(3) 714 170 90 974
Depreciation expense 3,230 149 101 3,480
Amortization expense 4,230 2,741 -- 6,971
Segment pretax profit (loss)(4) 1,608 (1,515) 560 653
Segment assets 46,291 11,033 31,245 88,569
Purchases of property and equipment and
computer software 10,793 3,586 -- 14,379
</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 QualityFIRST Unit revenues represents amounts charged by the
QualityFIRST Unit to the Management Services Unit ($188,000 and $456,000
for the six month period ended December 31, 1999 and the year ended June
30, 1999, respectively) and the Risk (HMO) unit $359,000 and $874,000 for
the six month period ended December 31, 1999 and the year ended June 30,
1999, 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 $1,350,000
have been charged to the Risk (HMO) unit for the year ended June 30, 1999.
<PAGE>
15. QUARTERLY FINANCIAL DATA (Unaudited)
The following table presents certain unaudited quarterly results for the six
months ended December 31, 1999 and for the years ended June 30, 1999 and 1998
(in thousands, except per share data).
<TABLE>
<CAPTION>
Six Month Period Ended December 31, 1999
----------------------------------------
First Second Six
Quarter Quarter Months
---------- --------- -----------
<S> <C> <C> <C>
Net revenues $ 35,703 $ 31,476 $ 67,179
========== ========= ===========
Net income (loss) $ 913 $ (2,133) $ (1,220)
========== ========= ===========
Earnings (loss) per share:
Basic $ .20 $ (.46) $ (.26)
========== ========= ===========
Diluted $ .20 $ (.46) $ (.26)
========== ========= ===========
<CAPTION>
Year Ended June 30, 1999
----------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 48,949 $ 45,018 $ 33,914 $ 35,158 $ 163,039
========== ========= ========== ========== ===========
Net income (loss) $ (23) $ (1,311) $ 1,069 $ 636 $ 371
========== ========= ========== ========== ===========
Earnings (loss) per share:
Basic $ (.01) $ (.28) $ .23 $ .14 $ .08
========== ========= ========== ========== ===========
Diluted $ (.01) $ (.28) $ .23 $ .14 $ .08
========== ========= ========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, 1998
----------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 17,046 $ 17,989 $ 16,972 $ 42,830 $ 94,837
========== ========== ========== ========== ==========
Income (loss) before cumulative
effect of accounting change $ 751 $ 787 $ 31 $ (241) $ 1,328
Cumulative effect of
accounting change (2,371) -- -- -- (2,371)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (1,620) $ 787 $ 31 $ (241) $ (1,043)
========== ========== ========== ========== ==========
Basic earnings per share:
Income (loss) before cumulative
effect of accounting change $ .17 $ .18 $ .01 $ (.05) $ .29
Cumulative effect of
accounting change (.53) -- -- -- (.52)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (.36) $ .18 $ .01 $ (.05) $ (.23)
========== ========== ========== ========== ==========
Diluted earnings per share:
Income (loss) before cumulative
effect of accounting change $ .16 $ .17 $ .01 $ (.05) $ .29
Cumulative effect of
accounting change (.51) -- -- -- (.51)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (.35) $ .17 $ .01 $ (.05) $ (.22)
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Schedule II
HEALTH RISK MANAGEMENT, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
Six month transition period ended December 31, 1999:
Allowance for uncollectible accounts $323,500 $6,332 -- $74,832(1) $255,000
Year ended June 30, 1999:
Allowance for uncollectible accounts $265,000 $113,159 -- $54,659(1) $323,500
Year ended June 30, 1998:
Allowance for uncollectible accounts $260,000 $113,339 -- $108,339(1) $265,000
Year ended June 30, 1997:
Allowance for uncollectible accounts $200,000 $127,014 -- $67,014(1) $260,000
</TABLE>
- ----------------
(1) Uncollectible accounts written off.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
HEALTH RISK MANAGEMENT, INC.
April 13, 2000 By: /s/ Gary McIlroy
Gary T. McIlroy, M.D.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
April 13, 2000 By: /s/ Gary McIlroy
Gary T. McIlroy, M.D.
Chairman of the Board, Chief Executive Officer
and Director (principal executive officer)
April 13, 2000 By: /s/ Marlene Travis
Marlene Travis
President, Secretary, Chief Operating Officer
and Director
April 13, 2000 By: /s/ Thomas P. Clark
Thomas P. Clark
Senior Vice President, Finance and Chief
Financial Officer (principal financial
officer and principal accounting officer)
April 13, 2000 By: /s/ Vance Kenneth Travis
Vance Kenneth Travis, Director
April 13, 2000 By: /s/ Gary L. Damkoehler
Gary L. Damkoehler, Director
April 13, 2000 By: /s/ Raymond G. Schultze, M.D.
Raymond G. Schultze, M.D., Director
April 13, 2000 By: /s/ Robert L. Montgomery
Robert L. Montgomery, Director
<PAGE>
EXHIBIT INDEX
No. Description
2.1 Stock Purchase Agreement dated as of October 14, 1998 between Health
Risk Management, Inc. and Oxford Health Plans, Inc. - incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K filed February 11,
1999 (SEC File No. 0-18902).
2.2 Closing Agreement dated as of January 27, 1999 between Health Risk
Management, Inc. and Oxford Health Plans, Inc. - incorporated by
reference to Exhibit 2.2 to the Company's Form 8-K filed February 11,
1999 (SEC File No. 0-18902).
3.1 Amended and Restated Articles of Incorporation, as amended to date --
incorporated by reference to Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997 (SEC File No.
0-18902).
3.2 Composite Bylaws of the Company, as of April 21, 1999--incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 (SEC File No. 0-18902)
4.1 Specimen form of the Company's Common Share Certificate -- incorporated
by reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (SEC File No. 33-37595).
4.2 Amended and Restated Articles of Incorporation, as amended to date (see
Exhibit 3.1).
4.3 Composite Bylaws of the Company, as of April 21, 1999 (see Exhibit
3.2).
4.4 Rights Agreement dated as of April 4, 1997 between health Risk
Management, Inc. and Norwest Bank Minnesota, N.A. as Rights Agent,
together with the following exhibits thereto:
(a) Certificate of Designations of Series A Preferred Stock,
(b) Summary of Rights to Purchase Shares of Series A Preferred Stock,
(c) Form of Rights Certificate
-- incorporated by reference to Exhibit 1 to the Company's Form
8-A Registration Statement filed April 10, 1997 (SEC File No.
0-18902).
10.1* Employment Agreement dated as of June 20, 1996 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy -- incorporated by reference
to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
10.2* Split Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Dr. Gary T. McIlroy and the Amendment to Split
Dollar Agreement dated July 28, 1992 between Health Risk Management,
Inc. and Gary T. McIlroy -- incorporated by reference to Exhibit 10.4
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18902).
10.3* Employment Agreement dated as of June 21, 1996 between Health Risk
Management, Inc. and Marlene O. Travis -- incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (SEC File No. 0-18902).
10.4* Split Dollar Agreement dated as of June 5, 1991 between Health Risk
Management, Inc. and Marlene O. Travis and the Amendment to Split
Dollar Agreement dated July 28, 1992 between Health Risk Management,
Inc. and Marlene O. Travis -- incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (SEC File No. 0-18902).
<PAGE>
10.5* Employment Agreement dated June 21, 1996 between Health Risk
Management, Inc. and Thomas P. Clark -- incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (SEC File No. 0-18902).
10.6* Split Dollar Agreement dated as of September 1, 1991 between Health
Risk Management, Inc. and Thomas P. Clark -- incorporated by reference
to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (SEC File No. 0-18902).
10.7* Health Risk Management, Inc. 1990 Stock Option Plan -- incorporated by
reference to Exhibit 10.16 to the Company's Registration Statement on
Form S-1 (SEC File No. 33-37595).
10.8* Form of Stock Option Agreement to be used pursuant to 1990 Stock Option
Plan -- incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1991 (SEC
File No. 0-18902).
10.9* Amended and Restated 1992 Long-Term Incentive Plan--incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.10* Form of Non-Employee Director Initial/Annual Option Agreement under the
1992 Long-Term Incentive Plan -incorporated by reference to Exhibit
10.30 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992 (SEC File No. 0-18902).
10.11* Form of Non-Employee Director Elective Option Agreement under the 1992
Long-Term Incentive Plan -incorporated by reference to Exhibit 10.31 to
the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1992 (SEC File No. 0-18902).
10.12* Form of Incentive Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.13* Form of Non-Qualified Stock Option Agreement under the 1992 Long-Term
Incentive Plan -- incorporated by reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1992 (SEC File No. 0-18902).
10.14* Form of Performance Unit Award under the 1992 Long-Term Incentive Plan
-- incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1992 (SEC File
No. 0-18902).
10.15* Deferred Compensation Plan for Directors -- incorporated by reference
to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992 (SEC File No. 0-18902).
10.16* Executive Incentive Plan -- incorporated by reference to the
description of such Plan as set forth under "Compensation Pursuant to
Plans - Executive Incentive Plan" in the Company's Proxy Statement for
its 1992 Annual Meeting of Shareholders (SEC File No. 0-18902).
10.17 Lease Agreement dated January 11, 1993 between Thomas L. Koster, Inc.,
d/b/a/ Realvesco Properties and Health Risk Management, Inc., as
amended by First Amendment to Lease Agreement dated January 29, 1993,
related to the Company's offices at 5250 Lovers Lane, Portage, Michigan
-- incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1993 (SEC File
No. 0-18902).
10.18 Second Amendment to Lease dated July 22, 1997 for the Lease Agreement
dated January 11, 1993 between Thomas L. Koster, Inc., d/b/a/ Realvesco
Properties and Health Risk Management, Inc., related to the Company's
offices at 5250 Lovers Lane, Portage, Michigan--incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (SEC File No. 0-18902).
10.19 Security Agreement dated June 24, 1994 relating to Revolving Credit and
Term Loan Agreement of same date -- incorporated by reference to
Exhibit 10.31 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994 (SEC File No. 0-18902).
<PAGE>
10.20 Management Services Agreement dated February 24, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Oxford Health Plans (PA), Inc. - incorporated by
reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 (SEC File No. 0-18902).
10.21 Health Care Excess Risk Insurance Policy dated April 13, 1998, between
Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
Management, Inc) and Kentucky Medical Insurance Company -- incorporated
by reference to Exhibit 10.42 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 (SEC File No. 0-18902).
10.22 Lease agreement dated May 5, 1998, between MEPC O &I, Inc. and Health
Risk Management, Inc. related to the Company's offices at 10900
Hampshire Avenue South, Minneapolis, Minnesota and Amendment of Lease
dated September 16, 1998 -- incorporated by reference to Exhibit 10.43
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998 (SEC File No. 0-18902).
10.23 Amended and Restated Revolving Credit and Term Loan Agreement between
Health Risk Management, Inc. and U.S. Bank National Association dated
May 1, 1998 - incorporated by reference to Exhibit 10.44 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1998 (SEC File No. 0-18902).
10.24 First Amendment to the Credit Agreement between Health Risk Management,
Inc. and U.S. National Bank Association dated January 27, 1999 --
incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 (SEC File No.
0-18902).
10.25 Second Amendment to the Credit Agreement between Health Risk
Management, Inc. and U.S. National Bank Association dated June 30, 1999
-- incorporated by reference to Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1999 (SEC File
No. 0-18902).
10.26 Sublease Agreement dated February 10, 1999 between Day & Zimmermann,
Inc. and Health Risk Management, Inc. as amended by First Amendment to
Sublease dated April 6, 1999, related to the Company's offices at 1818
Market Street, Philadelphia, Pennsylvania -- incorporated by reference
to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999 (SEC File No. 0-18902).
10.27 Amended and Restated HealthChoices Southeast Agreement between the
Commonwealth of Pennsylvania (Department of Public Welfare) and Oxford
Health Plans (PA), Inc. dated January 1, 1999 -- incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999 (SEC File No. 0-18902).
10.28 Third Amendment to the Credit Agreement between Health Risk Management.
Inc. and U.S. National Bank dated December 21, 1999.
21. List of subsidiaries.
23. Consent of Independent Auditors.
27.1 Financial Data Schedule for the six month transition period ended
December 31, 1999 (filed in electronic format only).
- --------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
THIRD AMENDMENT TO CREDIT AGREEMENT
This THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), made and
entered into as of December 21, 1999, is by and between Health Risk Management,
Inc., a corporation organized under the laws of the State of Minnesota (the
"Borrower"), and U.S. Bank National Association, a national banking association
(the "Bank").
RECITALS
A. The Bank and the Borrower entered into an Amended and Restated
Revolving Credit and Term Loan Agreement dated as of May 1, 1998, as amended by
a First Amendment to Credit Agreement dated as of January 27,1999 and as amended
by a Second Amendment to Credit Agreement dated as of June 30, 1999 (as amended,
the "Credit Agreement").
B. The Borrower desires to amend certain provisions of the Credit
Agreement, and the Bank has agreed to make such amendments, subject to the terms
and conditions set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby covenant
and agree to be bound as follows:
Section 1. Capitalized Terms. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the Credit
Agreement, unless the context shall otherwise require.
Section 2. Amendments. The Credit Agreement is hereby amended as
follows:
2.1 Amended Definitions. The definitions of "Revolving Credit
Commitment" and "Revolving Termination Date" contained in Section 1.1 of the
Credit Agreement are deleted in their respective entireties and the following
definitions are substituted in lieu thereof in the appropriate alphabetical
order:
"Revolving Credit Commitment": The maximum unpaid principal
amount of Revolving Loans which may from time to time be outstanding
hereunder, being initially $3,000,000, as the same may be reduced from
time to time pursuant to Section 4.3 and, as the context may require,
the agreement of the Bank to make Revolving Loans to the Borrower
subject to the terms and conditions of this Agreement.
<PAGE>
"Revolving Termination Date": The earliest of (a) January 30,
2001; (b) the date on which the Revolving Loan Commitment is terminated
pursuant to Section 9.2 hereof; (c) the date on which the Revolving
Loan Commitment is reduced to zero pursuant to Section 4.3 hereof; or
(d) the date on which any Revolving Loan or the Term Loan is
accelerated.
2.2 Term Loan. Sections 2.2 (a) and (d) of the Credit Agreement are
deleted in their entireties and the following is substituted in lieu thereof:
(a) Term Loan. To make a single term loan (the "Term Loan")
available to Borrower in a single advance in the principal amount of
$7,369,916 made upon the consummation of the Third Amendment hereto.
Payments or prepayments upon the Term Loan may not be reborrowed.
(d) Term Loan Procedures. Not later than 11:30 a.m.
(Minneapolis time) upon the date of consummation of the Third Amendment
hereto, the Borrower shall orally notify the Bank of its intention to
borrow the Term Loan on that date. Such notice of borrowing shall be
irrevocable and shall be deemed a representation by the Borrower that
on such date and after giving effect to Term Loan the applicable
conditions specified by the Bank shall be satisfied. The Term Loan
shall initially be made as Reference Rate Advances. Unless the Bank
determines that any applicable condition specified by the Bank has not
been satisfied, the Bank will make the proceeds of the Term Loan
available to the Borrower, which proceeds shall be used (a) to
refinance the Borrower's existing term loan obligations to the Bank and
(b) to refinance $3,000,000 of the Borrower's existing revolving loan
obligations to the Bank.
2.3 Use of Proceeds. Section 2.5 of the Credit Agreement is deleted in
its entirety and the following is substituted in lieu thereof:
Section 2.5 Use of Loan Proceeds. The proceeds of the Term
Loan shall be used (a) to refinance the Borrower's existing term loan
obligations to the Bank and (b) to refinance $3,000,000 of the
Borrower's existing revolving loan obligations to the Bank. The
proceeds of the initial Revolving Loans shall be used for the general
business purposes of the Borrower, in a manner not in conflict with any
of the covenants in this Agreement.
2.4 Repayment. Section 4.1(b) of the Credit Agreement is deleted in its
entirety and the following is substituted in lieu thereof:
<PAGE>
(b) Term Loan. The Term Loan shall be payable in installments of
$325,000, payable on that last day of each month of each year,
commencing on December 31, 1999, and a final payment equal to all
outstanding principal on January 31, 2002.
2.6 Unused Revolving Commitment. Section 8.21 of the Credit Agreement
is deleted in its entirety and the following is substituted in lieu thereof.
Section 8.21 [Reserved]
2.7 New Revolving Note. Exhibit A to the Credit Agreement is hereby
amended to read as set forth on Exhibit A attached to this Amendment.
2.8 New Term Note. Exhibit B to the Credit Agreement is hereby amended
to read as set forth on Exhibit B attached to this Amendment.
Section 3. Effectiveness of Amendments. The amendments contained in
this Amendment shall become effective upon delivery by the Borrower of, and
compliance by the Borrower with, the following:
3.1 This Amendment, the new Revolving Note and the new Term
Note, in the forms attached hereto as Exhibit A and B, respectively,
each duly executed by the Borrower.
3.2 A copy of the resolutions of the Board of Directors of the
Borrower authorizing the execution, delivery and performance of this
Amendment, the new Revolving Note and the new Term Note certified as
true and accurate by its Secretary or Assistant Secretary, along with a
certification by such Secretary or Assistant Secretary (i) certifying
that there has been no amendment to the Articles of Incorporation or
Bylaws of the Borrower since true and accurate copies of the same were
previously delivered to the Bank, and (ii) identifying each officer of
the Borrower authorized to execute this Amendment, the new Revolving
Note and the new Term Note and any other instrument or agreement
executed by the Borrower in connection with this Amendment
(collectively, the "Amendment Documents"), and certifying as to
specimens of such officer's signature and such officer's incumbency in
such offices as such officer holds.
3.3 Certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if
any) with respect to this Amendment.
<PAGE>
3.4 Reaffirmations of Security Agreement in the forms of
Exhibits C-1, C-2 and C-3, duly executed by the corporations indicated
therein.
3.5 A good standing certificate for the Borrower issued as of
a date acceptable to the Bank.
3.6 The Borrower shall have satisfied such other conditions as
specified by the Bank, including payment of all unpaid legal fees and
expenses incurred by the Bank through the date of this Amendment in
connection with the Credit Agreement and the Amendment Documents.
Section 4 [Reserved]
Section 5. Representations, Warranties, Authority, No Adverse Claim.
5.1 Reassertion of Representations and Warranties, No Default. The
Borrower hereby represents that on and as of the date hereof and after giving
effect to this Amendment (a) all of the representations and warranties contained
in the Credit Agreement are true, correct and complete in all respects as of the
date hereof as though made on and as of such date, except for changes permitted
by the terms of the Credit Agreement, and (b) there will exist no Default or
Event of Default under the Credit Agreement as amended by this Amendment.
5.2 Authority, No Conflict, No Consent Required. The Borrower
represents and warrants that the Borrower has the power and legal right and
authority to enter into the Amendment Documents and has duly authorized as
appropriate the execution and delivery of the Amendment Documents and other
agreements and documents executed and delivered by the Borrower in connection
herewith or therewith by proper corporate, and none of the Amendment Documents
nor the agreements contained herein or therein contravene or constitute a
default under any agreement, instrument or indenture to which the Borrower is a
party or a signatory or a provision of the Borrower's Articles of Incorporation,
Bylaws or any other agreement or requirement of law, or result in the imposition
of any lien on any of its property under any agreement binding on or applicable
to the Borrower or any of its property except, if any, in favor of the Bank. The
Borrower represents and warrants that no consent, approval or authorization of
or registration or declaration with any person, including but not limited to any
governmental authority, is required in connection with the execution and
delivery by the Borrower of the Amendment Documents or other agreements and
documents executed and delivered by the Borrower in connection therewith or the
performance of obligations of the Borrower therein described, except for those
which the Borrower has obtained or provided and as to which the Borrower has
delivered certified copies of documents evidencing each such action to the Bank.
<PAGE>
5.3 No Adverse Claim. The Borrower warrants, acknowledges and agrees
that no events have been taken place and no circumstances exist at the date
hereof which would give the Borrower a basis to assert a defense, offset or
counterclaim to any claim of the Bank with respect to the Borrower's obligations
under the Credit Agreement as amended by this Amendment.
Section 6. Affirmation of Credit Agreement, Further References,
Affirmation of Security Interest. The Bank and the Borrower each acknowledge and
affirm that the Credit Agreement, as hereby amended, is hereby ratified and
confirmed in all respects and all terms, conditions and provisions of the Credit
Agreement, except as amended by this Amendment, shall remain unmodified and in
full force and effect. All references in any document or instrument to the
Credit Agreement are hereby amended and shall refer to the Credit Agreement as
amended by this Amendment. The Borrower confirms to the Bank that the Borrower's
obligations under the Credit Agreement, as amended by this Amendment are and
continue to be secured by the security interest granted by the Borrower in favor
of the Bank under the Security Agreement, and all of the terms, conditions,
provisions, agreements, requirements, promises, obligations, duties, covenants
and representations of the Borrower under such documents and any and all other
documents and agreements entered into with respect to the obligations under the
Credit Agreement are incorporated herein by reference and are hereby ratified
and affirmed in all respects by the Borrower.
Section 7. Merger and Integration, Superseding Effect. This Amendment,
from and after the date hereof, embodies the entire agreement and understanding
between the parties hereto and supersedes and has merged into this Amendment all
prior oral and written agreements on the same subjects by and between the
parties hereto with the effect that this Amendment, shall control with respect
to the specific subjects hereof and thereof.
Section 8. Severability. Whenever possible, each provision of this
Amendment and the other Amendment Documents and any other statement, instrument
or transaction contemplated hereby or thereby or relating hereto or thereto
shall be interpreted in such manner as to be effective, valid and enforceable
under the applicable law of any jurisdiction, but, if any provision of this
Amendment, the other Amendment Documents or any other statement, instrument or
transaction contemplated hereby or thereby or relating hereto or thereto shall
be held to be prohibited, invalid or unenforceable under the applicable law,
such provision shall be ineffective in such jurisdiction only to the extent of
such prohibition, invalidity or unenforceability, without invalidating or
rendering unenforceable the remainder of such provision or the remaining
provisions of this Amendment, the other Amendment Documents or any other
statement, instrument or transaction contemplated hereby or thereby or relating
hereto or thereto in such jurisdiction, or affecting the effectiveness, validity
or enforceability of such provision in any other jurisdiction.
<PAGE>
Section 9. Successors. The Amendment Documents shall be binding upon
the Borrower and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Bank and the successors and assigns
of the Bank.
Section 10. Legal Expenses. As provided in Section 10.2 of the Credit
Agreement, the Borrower agrees to reimburse the Bank, upon execution of this
Amendment, for all reasonable out-of-pocket expenses (including attorneys' fees
and legal expenses of Dorsey & Whitney LLP, counsel for the Bank) incurred in
connection with the Credit Agreement, including in connection with the
negotiation, preparation and execution of the Amendment Documents and all other
documents negotiated, prepared and executed in connection with the Amendment
Documents, and in enforcing the obligations of the Borrower under the Amendment
Documents, and to pay and save the Bank harmless from all liability for, any
stamp or other taxes which may be payable with respect to the execution or
delivery of the Amendment Documents, which obligations of the Borrower shall
survive any termination of the Credit Agreement.
Section 11. Headings. The headings of various sections of this
Amendment have been inserted for reference only and shall not be deemed to be a
part of this Amendment.
Section 12. Counterparts. The Amendment Documents may be executed in
several counterparts as deemed necessary or convenient, each of which, when so
executed, shall be deemed an original, provided that all such counterparts shall
be regarded as one and the same document, and either party to the Amendment
Documents may execute any such agreement by executing a counterpart of such
agreement.
Section 13. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY
THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT
OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO
NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES.
[The remainder of this page has been intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date and year first above written.
BORROWER:
HEALTH RISK MANAGEMENT, INC.
By:
Title:
BANK:
U.S. BANK NATIONAL ASSOCIATION
By:
Title:
EXHIBIT 21
LIST OF SUBSIDIARIES
OF
HEALTH RISK MANAGEMENT, INC.
Health Resource Management Ltd., an Alberta corporation
HRM Claim Management, Inc., a Minnesota corporation
Institute for Healthcare Quality, Inc., a Minnesota corporation
Health Benefit Reinsurance, Inc., a Michigan corporation
Pennsylvania HRM, Inc., a Pennsylvania corporation
HRM Health Plans (PA), Inc., a Pennsylvania corporation
Pennsylvania HealthMATE, Inc., a Pennsylvania corporation
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-38623) pertaining to the Health Risk Management, Inc. Non-Incentive
Stock Option Plan, the Registration Statement (Form S-8 No. 33-38624) pertaining
to the Health Risk Management, Inc. 1990 Stock Option Plan, and in 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 March 31, 2000 with respect to the consolidated financial
statements and schedule of Health Risk Management, Inc. included in this
Transition Report (Form 10-K) for the six months ended December 31, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
financial statements from the Registrant's Form 10-K Transition Report
for the period July 1, 1999 to December 31, 1999
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 10,577
<SECURITIES> 0
<RECEIVABLES> 19,627
<ALLOWANCES> 255
<INVENTORY> 0
<CURRENT-ASSETS> 32,352
<PP&E> 37,258
<DEPRECIATION> 40,243
<TOTAL-ASSETS> 80,837
<CURRENT-LIABILITIES> 39,933
<BONDS> 6,324
0
0
<COMMON> 46
<OTHER-SE> 33,055
<TOTAL-LIABILITY-AND-EQUITY> 80,837
<SALES> 67,179
<TOTAL-REVENUES> 67,179
<CGS> 0
<TOTAL-COSTS> 62,440
<OTHER-EXPENSES> 5,931
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 611
<INCOME-PRETAX> (1,803)
<INCOME-TAX> (583)
<INCOME-CONTINUING> (1,220)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,220)
<EPS-BASIC> (.26)
<EPS-DILUTED> (.26)
</TABLE>
