FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-18902
Health Risk Management, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1407404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 Hampshire Avenue South, Minneapolis, Minnesota 55438
(Address of principal executive offices, Zip Code)
(612) 829-3500
(Registrant's telephone number, including area code)
------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of Common Stock par value $.01 per share, outstanding on
May 12, 2000 was 4,661,801.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
INDEX
Part I. Financial Information Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- at March 31, 2000 and
December 31, 1999.............................................3
Consolidated Statements of Net Income for the three months
ended March 31, 2000 and 1999.................................4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999.................................5
Notes to Consolidated Financial Statements......................6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............11-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.........................16
Signatures...................................................................17
Exhibit Index................................................................18
<PAGE>
PART I. ITEM 1. FINANCIAL INFORMATION
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited (Note 1)
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,186 $ 10,577
Accounts receivable-net of allowance for doubtful accounts of $282
and $255 at March 31, 2000 and December 31, 1999, respectively 21,785 19,627
Deferred income taxes 700 700
Other 1,641 1,448
-------- --------
Total current assets 31,312 32,352
Fixed maturity investments at fair value 6,665 6,675
Computer software costs, less accumulated amortization of $25,521 and $23,612 at
March 31, 2000 and December 31, 1999, respectively 25,694 26,180
Property and equipment, less accumulated depreciation of $17,409 and $16,631 at
March 31, 2000 and December 31, 1999, respectively 13,153 11,078
Other assets 7,818 4,552
-------- --------
$ 84,642 $ 80,837
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,533 $ 3,084
Medical services payable 22,911 22,506
Due to reinsurer -- 138
Accrued expenses 6,127 4,226
Unearned revenues 1,607 2,774
Current maturities of notes payable 8,995 6,825
Current portion of capitalized equipment leases 575 380
-------- --------
Total current liabilities 45,748 39,933
Deferred income taxes 1,574 1,479
Long-term portion of notes payable -- 3,295
Long-term portion of capitalized equipment leases 1,504 529
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, 4,661,801 and
4,639,496 issued and outstanding at March 31, 2000 and December 31,
1999, respectively 46 46
Additional paid-in capital 32,313 32,192
Retained earnings 1,266 1,162
Accumulated other comprehensive loss:
Net unrealized loss on fixed maturity investments (309) (299)
-------- --------
Total shareholders' equity 33,316 33,101
-------- --------
$ 84,642 $ 80,837
======== ========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
------- -------
Revenues:
<S> <C> <C>
Premiums-gross $44,790 $37,962
Ceding allowance -- 1,239
Management service fees 10,490 11,903
QualityFIRST revenues 1,174 1,059
Investment income 287 279
------- -------
Total revenues 56,741 52,442
Less ceded premiums -- 18,528
------- -------
Net revenues 56,741 33,914
Operating expenses:
Medical costs, net 36,783 15,644
Cost of services, net 15,437 13,144
Selling, marketing and administration, net 3,985 3,174
Interest expense 332 265
------- -------
Total operating expenses 56,537 32,227
------- -------
Income before income taxes 204 1,687
Income tax expense 100 618
------- -------
Net income $ 104 $ 1,069
======= =======
Net income per share:
Basic $ .02 $ .23
======= =======
Diluted $ .02 $ .23
======= =======
Weighted average number of shares outstanding:
Basic 4,653 4,624
======= =======
Diluted 4,654 4,665
======= =======
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 104 $ 1,069
Adjustments to reconcile net income to net cash
used in operating activities:
Loss on disposal of equipment 14 --
Depreciation 834 941
Amortization 2,157 1,800
Provision for deferred income taxes 95 614
Changes in operating assets and liabilities:
Accounts receivable (690) 6,861
Other assets (170) 980
Accounts payable 2,442 1,339
Medical services payable (6,302) (15,749)
Due to reinsurer (138) 7,203
Accrued expenses 699 2,040
Unearned revenues (1,167) 4,063
-------- --------
Net cash (used in) provided by operating activities (2,122) 11,161
Cash flows from investing activities:
Acquisition of net liabilities (assets), net of cash acquired 1,593 (7,734)
Computer software costs capitalized (1,423) (2,031)
Property and equipment purchased (231) (595)
Purchase of investments -- (234)
-------- --------
Net cash used in investing activities (61) (10,594)
Cash flows from financing activities:
Proceeds from notes payable -- 4,000
Principal payments on notes payable (1,125) (471)
Principal payments on capital leases (88) (174)
Issuance of common shares 5 105
-------- --------
Net cash (used in) provided by financing activities (1,208) 3,460
-------- --------
(Decrease) increase in cash and cash equivalents (3,391) 4,027
Cash and cash equivalents at beginning of period 10,577 6,736
-------- --------
Cash and cash equivalents at end of period $ 7,186 $ 10,763
======== ========
Supplemental disclosure:
Equipment and computer software acquired under capital leases $ 1,258 $ --
======== ========
</TABLE>
See accompanying notes.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the three month period ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Registrant Company and
Subsidiaries' transition report on Form 10-K of the six month
transition period ended December 31, 1999.
2. Uses 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.
3. Computer software costs
March 31,
2000 December 30,
(Unaudited) 1999
----------- ------------
(in thousands)
Computer software costs consist of the following:
Care Management Software
Cost $20,685 $20,201
Less accumulated amortization 10,020 9,161
----------- ------------
Net book value 10,665 11,040
Claim Administration Software
Cost 10,111 9,987
Less accumulated amortization 5,058 4,803
----------- ------------
Net book value 5,053 5,184
QualityFIRST(R)Software
Cost 20,419 19,604
Less accumulated amortization 10,443 9,648
----------- ------------
Net book value 9,976 9,956
----------- ------------
Computer software costs $25,694 $26,180
=========== ============
The Company capitalizes its internal-use software related to its Care
Management software and Claim Administration software in accordance
<PAGE>
with 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).
Effective October 1, 1999, the estimated remaining useful life of the
AutoPILOT Care Management software was reduced from seven years to
three years and no additional internal costs have been capitalized
since that date.
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.
4. Net Income Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, (in thousands,
except per share data):
2000 1999
------ ------
Numerator:
Net income $ 104 $1,069
====== ======
Denominator:
Weighted-average shares-basic 4,653 4,624
Effect of dilutive stock options 1 41
------ ------
Weighted-average shares-diluted 4,654 4,665
====== ======
Net income per share:
Basic $ .02 $ .23
====== ======
Diluted $ .02 $ .23
====== ======
5. Comprehensive Income
The comprehensive income for the Company for the three months ended
March 31, were as follows (in thousands):
2000 1999
------ ------
Net income $ 104 $1,069
Change in net unrealized loss on fixed
maturity investments (10) 9
------ ------
Comprehensive income $ 94 $1,078
====== ======
6. Investments
The amortized cost and fair value of available for sale fixed maturity
investments consisted of the following (in thousands):
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000
--------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ------- ------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 4,941 $ -- $ 270 $4,671
Corporate bonds 2,033 -- 39 1,994
----------- ---------- ------ ------
$ 6,974 $ -- $ 309 $6,665
=========== ========== ====== ======
<CAPTION>
December 31, 1999
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ------ ------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 4,941 $ -- $ 264 $4,677
Corporate bonds 2,033 -- 35 1,998
----------- ---------- ------ ------
$ 6,974 $ -- $ 299 $6,675
=========== ========== ====== ======
</TABLE>
All fixed maturity investments are due within five years as of March 31, 2000.
Actual maturities may differ from contractual maturities because the borrowers
may have the right to prepay such obligations without prepayment penalties.
There were no sales of fixed maturity investments during the three months ended
March 31, 2000 and March 31, 1999.
At March 31, 2000 U.S. Treasury Securities with a book value of $100,000 were on
deposit with the Commonwealth of Pennsylvania Insurance Department to satisfy
regulatory requirements.
The net unrealized loss on fixed maturity investments included in shareholder's
equity consisted of the following (in thousands):
March 31, 2000 December 31, 1999
----- -----
Gross unrealized loss on fixed
maturity investments $(309) $(299)
Adjustment for net deferred
tax benefit, net of valuation allowance -- --
----- -----
Net unrealized loss on fixed
maturity investments $(309) $(299)
===== =====
7. Acquisitions/Reinsurance Agreement
On January 27, 1999, the Company completed the acquisition of Oxford Health
Plans (PA), Inc., now named HRM Health Plans (PA), Inc. (the Plan or HRMPA), 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% per annum. The note is classified as
long-term due to the fact that the principal and interest on the note are
payable only upon the Plan's receipt of prior approval from the Insurance
Commissioner of the Commonwealth of Pennsylvania. Interest of $249,939 and
$197,104 was accrued as of March 31, 2000 and December 31, 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 during the three months ended March 31,
2000 and March 31, 1999.
<PAGE>
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. Substantially all of the
commercial block has 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.
Amounts recoverable under terms of this reinsurance contract as of March 31,
2000 and December 31, 1999 were $6,910,000 and are included in accounts
receivable on the consolidated balance sheet.
Effective January 1, 1999, the Company entered into a 50% quota share
reinsurance agreement under which the reinsurer has assumed 50% of the Medicaid
medical cost risk and certain non-medical expenses in exchange for 50% of the
related Medicaid premium. Under this agreement, the Company received a
$5,000,000 ceding allowance from the reinsurer. The ceding allowance is being
realized in relation to profits ceded to the reinsurer. The Company realized
$1,239,000 in the three month period ended March 31, 1999 of the ceding
allowance. On February 21, 2000, the Company elected to recapture the business
ceded effective January 1, 2000 and paid a recapture fee of $300,000. There were
no amounts recoverable under terms of this reinsurance contract as of March 31,
2000. Amounts ceded under the contract premiums, medical costs and expenses for
the three month period ended March 31, 1999 were $18,528,000, $15,210,000 and
$1,935,000, respectively.
In January 2000, the Company, through its subsidiary 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 $3,400,000. The
$3,400,000 has been recorded as Goodwill and will be amortized on a straight
line basis over 10 years. It is included in other assets on the consolidated
balance sheet. The revenue from HealthMATE is expected to exceed $32,000,000
annually.
8. Notes Payable
The net income of $104,000 for the quarter ended March 31, 2000 resulted in the
Company not meeting bank covenants under bank loan agreements. As a result,
$1,870,000 of the long-term portion of the notes payable has been reclassified
as current maturities of notes payable in the consolidated balance sheet as of
March 31, 2000.
9. Reclassification
Certain items in the financial statements for the three months ended March 31,
1999 have been reclassified to conform to the 2000 presentations.
<PAGE>
10. Segment Reporting
Reportable segment information is as follows (in thousands):
<TABLE>
<CAPTION>
Risk
Three months ended March 31, 2000: Management QualityFIRST (HMO)
Services Unit Unit Unit Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external clients $ 10,490 $ 1,174 $ 44,790 $ 56,454
Intersegment revenues(1) 6,154 285 -- 6,439
Investment income(2) 41 -- 246 287
Interest expense(3) 225 54 53 332
Depreciation expense 748 33 53 834
Amortization expense 1,259 842 56 2,157
Segment pretax profit(4) (1,051) (391) 1,646 204
Segment assets(4) 42,205 10,656 31,781 84,642
Purchases of property and equipment
and computer software(5)
3,310 815 227 4,352
<CAPTION>
Risk
Three months ended March 31, 1999: Management QualityFIRST (HMO)
Services Unit Unit Unit Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external clients $ 11,903 $ 1,059 $ 20,673 $ 33,635
Intersegment revenues(1) 5,503 308 -- 5,811
Investment income(2) 23 -- 256 279
Interest expense(3) 184 44 37 265
Depreciation expense 849 41 50 940
Amortization expense 1,099 701 -- 1,800
Segment pretax profit(4) 939 (363) 1,111 1,687
Segment assets(4) 41,133 10,531 30,587 82,251
Purchases of property and equipment
and computer software 2,471 766 -- 3,237
</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 ($73,000 and $91,000 for
the three months ended March 31, 2000 and 1999, respectively) and the Risk
(HMO) unit ($212,000 and $217,000 for the three months ended March 31, 2000
and 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.
(5) Included in the Management Services Unit are equipment and computer
software acquired under capital leases of $1,258,000 and acquisition of
property and equipment of $1,200,000. The Risk (HMO) Unit purchases relate
to the acquisition of HealthMATE as described in Note 7.
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company's revenues consist primarily of Medicaid premiums for providing
administrative services while assuming all the medical cost risk, management
service fees for health plan management and QualityFIRST revenues for software
licenses and subscription fees.
The Company's operating expenses are comprised of medical costs, net (consisting
primarily of the net medical costs after the ceded portion of medical services
and reinsurance, net of recoveries), its cost of services, net (consisting
primarily of net costs after ceded portions of compensation of personnel,
including nurses and physicians, telephone expenses, depreciation and
amortization, rent, costs related to the Company's computer operations, costs
related to customer service, and costs related to development of new services),
and selling, marketing and administration expenses, net (consisting primarily of
the net costs after ceded portions of sales commissions, advertising, sales
account management personnel, bad debts, administration, professional services,
insurance, compensation and depreciation). The medical costs, cost of services
and selling, marketing and administration expenses are affected to varying
degrees by the 50% quota share agreement related to the Medicaid block of
business which was effective January 1, 1999 through December 31, 1999 (for
further discussion of the 50% quota share agreement, see Note 8 of the audited
financial statements for the six months ended December 31, 1999).
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 a more conservative best estimate
after considering the February 2000 claim payment information together with
additional actuarial analysis. In the three months ended March 31, 2000, the
Company added approximately $350,000 to the medical services payable for 1999
and prior to set additional conservative estimates of the liability.
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. During the quarter ended March 31, 2000, the Company's
HMO recaptured the business ceded effective January 2000 for a recapture fee of
$300,000.
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, March 31, 2000 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.
<PAGE>
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of revenues for the three months ended March 31, 2000 and March 31,
1999.
<TABLE>
<CAPTION>
Three Months
Ended
March 31
2000 1999
<S> <C> <C>
Total revenues 100% 100%
==== ====
Operating expenses:
Medical costs, net 82%(1) 81%(1)
Cost of services, net 27(2) 39(2)
Selling, marketing and administration, 7(2) 9(2)
net
Interest expense 1(2) 1(2)
---- ----
Total operating expenses 100(2) 95(2)
---- ----
Income before income taxes * 5
Income tax expense * 2
---- ----
Net income * 3%
==== ====
</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
$4,299,000 (8%) for the first quarter ended March 31, 2000 compared to the same
period in 1999 (from $52,442,000 to $56,741,000) This increase is primarily
attributable to revenues from HMO operations offset by lower revenue 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.
Following is a breakout of net revenues:
Three Months Ended
March 31,
-----------------------------------
2000 1999
---- ----
Premiums - gross $44,790,000 $37,962,000
Ceding allowance -- 1,239,000
Management service fees 10,490,000 11,903,000
QualityFIRST revenues 1,174,000 1,059,000
Investment income 287,000 279,000
----------- -----------
Total revenues 56,741,000 52,442,000
Less ceded premiums (18,528,000)
----------- -----------
--
Net revenues $56,741,000 $33,914,000
=========== ===========
Premiums - gross are from HMO operations. The premiums-gross increased 18% or
$6,828,000, for the first quarter ended March 31, 2000 compared to the same
period in 1999 (increasing from $37,962,000 to $44,790,000). The increase was
the result of two months of premium in the quarter ended March 31, 2000 from the
HealthMATE Plan acquisition, membership category changes and rate adjustments
effective January 2000. Total revenues include the ceding allowance and net
revenues reflect the premiums that were ceded under the reinsurance agreement
for the quarter ended March 31, 1999.
<PAGE>
The management services revenue decreased 12% or $1,413,000, for the first
quarter ended March 31, 2000 compared to the same period in 1999 (decreasing
from $11,903,000 to $10,490,000) which was the result of the loss of two clients
(an insurance company and a bankrupt health plan), and other decreases in total
covered members in the the quarter ended March 31, 2000.
Revenues from QualityFIRST(R) increased 11% or $115,000 for the first quarter
ended March 31, 2000 compared to the same period in 1999 (increasing from
$1,059,000 to $1,174,000). The increases were the result of an increased number
of clients and expansion of systems with existing clients.
Investment income increased 3% or $8,000 for the first quarter ended March 31,
2000 compared to the same period in 1999 (increasing from $279,000 to $287,000).
This increase is the result of 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 increased
135% or $21,139,000 for the first quarter ended March 31, 2000 compared to the
same period in 1999 due mainly to the ceding arrangement in 1999. As a
percentage of net HMO premiums, net medical costs was 82.1% for the first
quarter ended March 31, 2000 compared to 80.5% for the same period in 1999.
Cost of Services, Net: Cost of services, net of amounts ceded, increased 17% or
$2,293,000 for the first quarter ending March 31, 2000 compared to the same
period in 1999 (increasing from $13,144,000 to $15,437,000). The increase was
primarily due to increased payroll and other 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 27% in the first
quarter ending March 31, 2000 and 39% for the same period in 1999. The increase
from 1999 to 2000 resulted mainly from the ceding arrangement in 1999 that ceded
a portion of premiums and expenses that was not in place during the quarter
ended March 31, 2000.
Selling, Marketing and Administration, Net: Selling, marketing and
administration, net of amounts ceded, increased 26% or $811,000 for the first
quarter ended March 31, 2000 compared to the same period in 1999 (increasing
from $3,174,000 to $3,985,000). The increase was 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 was 7% and 9%
for the first quarter ended March 31, 2000 and the same period in 1999. The
increase from 1999 to 2000 resulted mainly from the ceding arrangement in 1999
that ceded a portion of premiums and expenses that was not in place during the
quarter ended March 31, 2000.
Interest Expense: Interest expense increased 25% or $67,000 for the quarter
ended March 31, 2000 compared to the same period in 1999 (increasing from
$265,000 to $332,000) and decreased as a percentage of net revenue from 0.8% to
0.6%. In fiscal 1999, additional loans were obtained to acquire the HMO. The
increase from 1999 to 2000 resulted mainly from the ceding arrangement in 1999
that ceded a portion of premiums and expenses that was not in place during the
quarter ended March 31, 2000.
Income Taxes: Income tax expense decreased in the first quarter ended March 31,
2000 from the same period a year ago by $518,000, or 84% (from $618,000 to
$100,000) primarily due to fluctuations in levels of income before income taxes.
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 for the six months ended December 31, 1999.
Liquidity and Capital Resources
The Company's cash flow used in operations was $2,122,000 and provided from
operations was $11,161,000 for the first quarter ended March 31, 2000 and 1999,
respectively. In 2000, cash flow from operations did not exceed net income
primarily due to changes in operating assets and liabilities, including the
medical services payable, being in excess of non-cash charges such as
depreciation and amortization and deferred income taxes. In 1999, cash flow from
operations exceeded net income primarily due to non-cash charges such as
depreciation and amortization, deferred income taxes, and net changes in
operating assets and liabilities including the medical services payable.
<PAGE>
Acquisitions in the first quarter ended March 31, 2000 resulted in net
liabilities acquired of $1,593,000. Acquisitions in the first quarter ended
March 31, 1999 resulted in net assets acquired of $7,734,000. Cash has been used
to invest in software and program enhancements ($1,423,000 and $2,031,000 for
the first quarter ended March 31, 2000 and 1999, respectively). The Company also
used cash to acquire property and equipment ($231,000 and $595,000 for the first
quarter ended March 31, 2000 and 1999, respectively). Cash of $234,000 was used
in the first quarter ended March 31, 1999 for 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 $1,213,000 and $645,000 for the first quarter ended
March 31, 2000 and 1999, respectively to repay principal on notes payable and
capital leases. The Company borrowed $4,000,000 in the first quarter of calendar
1999. The Company received cash proceeds of $5,000 and $105,000 for the first
quarter of calendar years 2000 and 1999, respectively, from stock options
exercised for common stock by current or former employees and directors.
The Company had a working capital deficit of $14,436,000 and $7,581,000 at March
31, 2000 and December 31, 1999, respectively. The medical services payables
reduced working capital by $22,911,000 and $22,506,000 at March 31, 2000 and
December 31, 1999, respectively. The Company has fixed maturity investments of
$6,665,000 and $6,675,000 available at March 31, 2000 and 1999, respectively, to
be used to pay medical services payables, if the need arises.
The Company had 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.
For the quarter ended March 31, 2000, the Company did not meet the $500,000 net
income bank covenant under the bank loan agreements. The Company has included in
the financial statements all debt to the bank as a current liability. The
Company is working with the bank and expects to be able to resolve the bank
covenant default. With such resolution, 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, but that by mid-year additional financing of
the two new businesses will need to be obtained. The two new web-based business
plans will require on-going support from the Company until external financing is
obtained. The quarter ended March 31, 2000, included approximately $500,000 of
internal start up expenses related to these business plans and at least 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 $6,070,000
and $2,925,000, respectively, as of March 31, 2000) with its bank and a
revolving credit facility expiring January 30, 2001, under which the Company has
$75,000 additional available at March 31, 2000. The revolving credit and term
loan are secured by liens on the assets of the Company.
During the quarter ended March 31, 2000, the Company acquired approximately
$32,000,000 of annual premium in its risk business unit by assuming
approximately $3,400,000 of liabilities in excess of cash and other assets.
These excess liabilities will reduce the net worth of our HMO entity by
approximately $3,400,000, 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 continue to meet state statutory net worth requirements. The
acquisition has been immediately profitable to the Company, because the Company
has been able to leverage its equipment, systems and employees in the Medicaid
business in the same state.
<PAGE>
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.
ITEM 3.
Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in the Company's interest rate market risk
disclosures since December 31, 1999. For further information, refer to Item 7A
in the Company's Transition Report on Form 10-K for the six months ended
December 31, 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 -- Financial Data Schedule (filed in electronic
format only)
(b) On February 14, 2000, the Company filed a report on Form 8-K
reporting under Item 5, its acquisition of the outstanding
stock of Pennsylvania HealthMATE, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Health Risk Management, Inc.
Dated: May 15, 2000 By: /s/Gary T. McIlroy
Gary T. McIlroy, M.D.
Chief Executive Officer
Dated: May 15, 2000 By: /s/Thomas P. Clark
Thomas P. Clark
Chief Financial Officer
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX
to
FORM 10-Q
For Quarter Ended March 31, 2000
HEALTH RISK MANAGEMENT, INC.
(SEC File No. 0-18902)
Exhibit
Number Exhibit Description
27 Financial Data Schedule (filed in electronic format only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
financial statements from the Registrant's Form 10-Q for the quarter
ended March 31, 2000
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 7,186
<SECURITIES> 0
<RECEIVABLES> 21,785
<ALLOWANCES> 282
<INVENTORY> 0
<CURRENT-ASSETS> 31,312
<PP&E> 38,847
<DEPRECIATION> 42,930
<TOTAL-ASSETS> 84,642
<CURRENT-LIABILITIES> 45,748
<BONDS> 4,004
0
0
<COMMON> 46
<OTHER-SE> 33,270
<TOTAL-LIABILITY-AND-EQUITY> 84,642
<SALES> 56,741
<TOTAL-REVENUES> 56,741
<CGS> 0
<TOTAL-COSTS> 52,220
<OTHER-EXPENSES> 3,985
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 332
<INCOME-PRETAX> 204
<INCOME-TAX> 100
<INCOME-CONTINUING> 104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
