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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
[ ] 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 0-22585
HEALTHCARE RECOVERIES, INC.,
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
Delaware 61-1141758
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
1400 Watterson Tower, Louisville, Kentucky 40218
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(502) 454-1340
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Indicate by check 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 ( )
As of November 12, 1997, 11,470,000 shares of the registrant's Common Stock,
$0.001 par value (the only class of Common Stock), were outstanding.
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HEALTHCARE RECOVERIES, INC.
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
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Page
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of September 30, 1997 and
December 31, 1996 ............................................ 3
Condensed Statements of Income for the three months and
nine months ended September 30, 1997 and 1996 ................ 4
Condensed Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 ............................ 5
Notes to Condensed Financial Statements ........................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 8
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .............................. 19
Signatures ..................................................................... 20
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
HEALTHCARE RECOVERIES, INC.
CONDENSED BALANCE SHEETS (Unaudited)
(In thousands)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 22,485 $ 53
Restricted cash ....................................................... 13,861 18,755
Accounts receivable, less allowance for doubtful accounts of
$134 - September 30, 1997 and $100 - December 31, 1996 ........... 2,586 1,926
Other current assets .................................................. 1,619 275
-------- --------
Total current assets ............................................. 40,551 21,009
-------- --------
Property and equipment, at cost:
Furniture and fixtures ................................................ 1,944 1,713
Office equipment ...................................................... 1,120 975
Computer equipment .................................................... 4,092 3,076
Leasehold improvements ................................................ 648 598
-------- --------
7,804 6,362
Accumulated depreciation and amortization ............................. (4,664) (3,865)
-------- --------
3,140 2,497
Other assets ............................................................. 1,608 463
-------- --------
Total assets ..................................................... $ 45,299 $ 23,969
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ................................................ $ 483 $ 586
Accrued expenses ...................................................... 7,077 3,740
Funds due clients ..................................................... 11,415 14,953
-------- --------
Total current liabilities ........................................ 18,975 19,279
Other liabilities ........................................................ 471 580
-------- --------
Total liabilities ................................................ 19,446 19,859
-------- --------
Contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized
no shares issued or outstanding .................................. - -
Common stock, $.001 par value, 20,000,000 shares authorized, 11,470,000
and 9,800,000 shares issued and outstanding, respectively ........ 11 10
Contributed capital in excess of par value of common stock ............ 22,042 -
Equity funding from Medaphis Corporation .............................. - 182
Retained earnings ..................................................... 3,800 3,918
-------- --------
Total stockholders' equity ....................................... 25,853 4,110
-------- --------
Total liabilities and stockholders' equity ....................... $ 45,299 $ 23,969
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
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HEALTHCARE RECOVERIES, INC.
CONDENSED STATEMENTS OF INCOME (Unaudited)
For the three months and nine months ended September 30, 1997 and 1996
(In thousands, except per share amounts)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
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Revenues:
Subrogation ..................................... $10,180 $7,718 $28,421 $22,074
Other revenues .................................. - 72 - 1,042
------- ------ ------- -------
Total revenues ............................... 10,180 7,790 28,421 23,116
Cost of services ................................... 4,762 3,869 13,447 10,926
------- ------ ------- -------
Gross profit .................................... 5,418 3,921 14,974 12,190
Support expenses ................................... 2,332 1,807 6,638 5,418
Depreciation and amortization ...................... 317 237 799 642
Non-recurring compensation charge .................. - - 2,848 -
------- ------ ------- -------
Operating income ................................ 2,769 1,877 4,689 6,130
Interest income .................................... 411 123 740 347
------- ------ ------- -------
Income before income taxes ...................... 3,180 2,000 5,429 6,477
Provision for income taxes ......................... 1,341 838 3,479 2,716
------- ------ ------- -------
Net income ......................................... $ 1,839 $1,162 $ 1,950 $ 3,761
======= ====== ======= =======
Earnings per common and common
equivalent share ................................ $ 0.16 $ 0.12 $ 0.18 $ 0.38
======= ====== ======= =======
Shares used in computing earnings per common and
common equivalent share ......................... 11,646 9,800 10,583 9,800
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
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HEALTHCARE RECOVERIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
For the nine months ended September 30, 1997 and 1996
(In thousands)
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NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
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Cash flows from operations:
Net income .................................................... $ 1,950 $ 3,761
Adjustment to reconcile net income to net cash provided by
(used in) operations:
Non-recurring compensation charge .......................... 2,848 -
Depreciation and amortization .............................. 799 642
Deferred income taxes ...................................... (891) 214
Changes in operating assets and liabilities:
Decrease in restricted cash ............................. 4,894 985
Increase in accounts receivable ......................... (660) (684)
Increase in other current assets ........................ (654) (1,049)
(Increase) decrease in other assets ..................... (944) 3
Increase (decrease) in trade accounts payable ........... (103) 76
Increase in accrued expenses ............................ 3,337 89
Increase (decrease) in funds due clients ................ (3,538) 1,269
Increase (decrease) in other liabilities ................ (109) 333
-------- -------
Net cash provided by operations ...................... 6,929 5,639
-------- -------
Cash flows from investing activities:
Purchases of property and equipment ........................ (1,442) (1,166)
-------- -------
Net cash used in investing activities ................ (1,442) (1,166)
-------- -------
Cash flows from financing activities:
Issuance of common stock ................................... 19,194 -
Distributions to Medaphis Corporation ...................... (2,249) (1,894)
-------- -------
Net cash provided by (used in) financing activities .. 16,945 (1,894)
-------- -------
Net increase in cash and cash equivalents ..................... 22,432 2,579
Cash and cash equivalents, beginning of period ................ 53 -
-------- -------
Cash and cash equivalents, end of period ...................... $ 22,485 $ 2,579
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
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HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Healthcare Recoveries, Inc. (the "Company") was incorporated on June
30, 1988 under the laws of the State of Delaware. The Company's services
comprise the complete outsourcing of the identification, investigation and
recovery of accident-related medical benefits incurred by its clients for which
other persons or entities have primary responsibility. The rights of the
Company's clients to recover the value of these medical benefits, known
generally as subrogation, arise by law or contract and are generally paid from
the proceeds of liability or workers' compensation insurance.
The Company operated as an independent entity until August 28, 1995
when the Company was merged with and into a subsidiary of Medaphis Corporation
("Medaphis") in a transaction accounted for as a pooling of interests. On May
16, 1997, the Company amended its Certificate of Incorporation to authorize
2,000,000 shares of $.001 par value Preferred Stock and 20,000,000 shares of
$.001 par value Common Stock, of which 9,800,000 shares of Common Stock were
issued and outstanding after a 98,000-for-1 Common Stock split which the Company
declared to be effective immediately prior the public offering (the "Offering")
of the Company's Common Stock by Medaphis on May 21, 1997. In addition to the
shares sold by Medaphis, the Company issued 200,000 shares of Common Stock to
certain members of the Company's management as a divestiture bonus (the
"Divestiture Bonus") and sold 1,470,000 shares of Common Stock to the
underwriters of the Offering in connection with their exercise of an
over-allotment option.
The accompanying financial statements are presented in a condensed
format and consequently do not include all of the disclosures normally required
by generally accepted accounting principles or those normally made in the
Company's annual financial statements. Accordingly, for further information, the
reader of this Form 10-Q may wish to refer to the Company's audited financial
statements as of and for the year ended December 31, 1996, contained in the
Company's Registration Statement on Form S-1, declared effective on May 21, 1997
(file no. 333-23287).
The financial information has been prepared in accordance with the
Company's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such adjustments are
of a normal and recurring nature.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
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HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
2. CONTINGENCIES
The Company is engaged in the business of identifying and recovering
subrogation and related claims of its clients, many of which arise in the
context of personal injury lawsuits. As such, the Company operates in a
litigation-intensive environment. The Company has from time to time been, and
in the future expects to be, named as a party in litigation incidental to its
business operations. To date, the Company has not been involved in any
litigation which has had a material adverse effect upon the Company, but there
can be no assurance that pending litigation or future litigation will not have a
material adverse effect on the Company's business, results of operations or
financial condition.
3. NON-RECURRING COMPENSATION CHARGE
The accompanying condensed statement of income for the nine months
ended September 30, 1997 includes a non-recurring, non-cash compensation charge
(not deductible for income tax purposes) of approximately $2.8 million ($.28 per
share) related to the Divestiture Bonus.
4. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share were computed based on
the weighted-average number of common and common equivalent shares outstanding
during the periods presented after giving retroactive effect to the 98,000-for-1
common stock split effective immediately prior to the Offering. Earnings per
common and common equivalent share do not give retroactive effect to the
Divestiture Bonus or stock options to purchase 550,000 shares of Common Stock
granted to members of the Company's management and to non-employee directors at
the time of the Offering.
5. FUTURE CHANGES IN ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share and will require presentation of both basic
and fully diluted earnings per share for both interim and annual periods ending
after December 15, 1997. The results for basic and fully diluted earnings per
share amounts computed under the provisions of SFAS 128 for the quarters ended
September 30, 1997 and 1996, and for the nine months ended September 30, 1996
are the same as earnings per common and common equivalent share as reported in
the accompanying statements of income. Basic and fully diluted earnings per
share for the nine months ended September 30, 1997 are $0.19 per share and $0.18
per share, respectively.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The provisions of SFAS No. 130 will be effective for
fiscal years beginning after December 15, 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Healthcare Recoveries, Inc. (hereinafter referred to as "HRI" or the
"Company") provides insurance subrogation and related recovery services to the
private healthcare payor industry. HRI services comprise the complete
outsourcing of the identification, investigation and recovery of
accident-related medical benefits incurred by its clients for which other
persons or entities have primary responsibility. The rights of HRI's clients to
recover the value of these medical benefits, known generally as subrogation,
arise by law or contract and are generally paid from the proceeds of liability
or workers' compensation insurance.
For a typical new client, it takes three to nine months from the
contract signing (when the "lives" are "sold") to complete the construction of
electronic data interfaces necessary for the Company to begin service. At this
point, the new client is considered "installed." During the installation period,
the Company must also hire and train qualified staff necessary to provide
contracted services. After installation, the client transmits data to HRI from
which HRI creates an inventory of backlog (i.e., gross recoveries in process.)
Backlog is the total dollar amount of potentially recoverable claims
that the Company is pursuing on behalf of its clients at any point in time.
These claims are gross figures, prior to estimates of claim settlement and
rejection. Backlog increases when the Company opens new files of potentially
recoverable claims and decreases when files of claims are recovered or, after
further investigation, determined to be non-recoverable. Recoveries have
historically been produced from the backlog in a generally predictable cycle,
because any group of potential recoveries that was sufficiently large in number
to display statistically significant characteristics and that originated from a
defined time period, tended to produce recovery results comparable to those of
other groups having similar characteristics. Although some recoveries will be
made during the first year of service, the average time to make a recovery is 18
to 24 months, with substantially all recoveries made by the sixth year after
installation. Backlog for a client will range in age from newly identified
potential recoveries to potential recoveries that are in the late stages of the
recovery
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<PAGE> 9
process. As a result of this cycle, approximately six years from the date of
installation, the client's annual amounts of subrogation recoveries as a percent
of the client's backlog will be generally constant, except for variations due to
the number of installed lives for the client and changes in the costs of medical
services.
Because backlog is based on the judgment of Company personnel,
historical performance may not be indicative of future results and the actual
amount of future subrogation revenues to be derived from backlog could differ
significantly from historical experience. Further, the recovery characteristics
of backlog in future years may be different from historical experience for a
variety of reasons.
The Company is paid a contingency fee from the amount of recoveries
obtained from backlog on behalf of its clients. The Company's revenues are a
function of subrogation recoveries and effective fee rates. Effective fee rates
vary depending on the mix between recoveries and client fee schedules. The fee
schedules for each client are separately negotiated and are based on the
Company's standard fee rates, the services to be provided and anticipated volume
of services. The Company grants volume discounts and negotiates a lower fee when
it assumes backlog from a client when some of the recovery work has already been
completed by the client.
HRI was incorporated on June 30, 1988 under the laws of Delaware and
operated as an independent entity until August 28, 1995, when the Company was
acquired by Medaphis Corporation ("Medaphis") in a transaction valued at
approximately $79.1 million. Medaphis sold HRI in May 1997 as part of its
restructuring plan to divest non-core businesses. In anticipation of the sale of
HRI by Medaphis, certain revisions were made by management in the accompanying
financial statements for the periods during which the Company was a subsidiary
of Medaphis to present the financial position, results of operations and cash
flows of the Company as an independent entity. The Company paid certain
previously allocated costs directly during 1997. The allocation of these costs
prior to 1997 was based principally on specific identification, the ratio of the
number of Company employees to total Medaphis employees or the ratio of total
Company assets to total Medaphis assets, as appropriate. These costs include
executive salaries, employee benefits, insurance, payroll processing and other
general and administrative expenses.
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Management believes that, in the aggregate, these costs reflect the fair value
of services rendered by Medaphis and that it would have incurred similar costs
as an independent company.
Management does not expect a significant change in the costs incurred
by the Company as a result of operating on a stand-alone basis, except for the
non-recurring, non-cash compensation charge incurred as a result of the
Divestiture Bonus, consisting of 200,000 shares of the Company's common stock
granted to members of executive management and certain other employees of the
Company upon the sale of HRI by Medaphis.
The following tables present certain key operating indicators for the
Company for the periods indicated:
KEY OPERATING INDICATORS
(IN MILLIONS, EXCEPT FOR PERCENTAGES AND EMPLOYEES)
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<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1997 1996 1997 1996
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Cumulative lives sold, beginning of period ......... 34.3 27.5 29.5 24.2
Lives from existing client growth .............. 0.4 0.5 1.3 0.7
Lives added from contracts with existing clients 3.1 0.5 5.4 2.0
Lives added from contracts with new clients ... 0.0 0.1 1.6 1.7
------ ------ ------ ------
Cumulative lives sold, end of period ............... 37.8 28.6 37.8 28.6
====== ====== ====== ======
Lives installed .................................... 34.3 27.1 34.3 27.1
Backlog (1) ........................................ $642.2 $526.5 $642.2 $526.5
Subrogation recoveries (2) ......................... $ 37.3 $ 29.4 $105.1 $ 81.5
Throughput (3) ..................................... 6.0% 5.7% 17.9% 18.3%
Effective fee rate ................................. 27.3% 26.3% 27.0% 27.1%
Subrogation revenues (2) ........................... $ 10.2 $ 7.7 $ 28.4 $ 22.1
Employees:
Direct operations ............................ 362 298 362 298
Support ...................................... 82 67 82 67
------ ------ ------ ------
Total employees ......................... 444 365 444 365
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(1) Backlog (i.e., gross recoveries in process) represents the total dollar
amount of potentially recoverable claims that the Company is pursuing on
behalf of clients at any point in time.
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(2) Subrogation recoveries for the three and nine months ended September 30,
1996 exclude approximately $500,000 and $6.8 million, respectively, of
recoveries from the silicone breast implant settlement. Subrogation
revenues for the three and nine months ended September 30, 1996 exclude
$72,000 and $1,042,000, respectively, of other (i.e., non-recurring)
revenue in connection with the implant settlement in 1996.
(3) Throughput equals recoveries for the period divided by the average of
backlog at the beginning and end of the period.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items
in the statements of operation as a percentage of subrogation revenue:
STATEMENTS OF INCOME AS A PERCENTAGE OF SUBROGATION REVENUES
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1997 1996(1) 1997(2) 1996(1)
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Subrogation revenues ............................... 100.0% 100.0% 100.0% 100.0%
Cost of services ................................... 46.8 50.1 47.3 49.5
Support expenses ................................... 22.9 23.4 23.4 24.5
Depreciation and amortization ...................... 3.1 3.1 2.8 2.9
Operating income ................................... 27.2 23.4 26.5 17.9
Income before income taxes ......................... 31.2 25.0 29.1 24.6
Net income ......................................... 18.1 14.5 16.9 14.3
</TABLE>
(1) Statements of Income for the three and nine months ended
September 30, 1996 exclude $72,000 ($42,000 after tax) and
$1,042,000 ($605,000 after tax), respectively, of other
(i.e. non-recurring) revenue from the silicone breast implant
settlement.
(2) Statement of Income for the nine months ended September 30, 1997
exclude the $2.8 million non-cash, non-recurring compensation
charge (not deductible for income tax purposes) related to
Medaphis' divestiture of HRI.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996
Revenues. Total revenues increased 30.7% to $10.2 million in the three
months ended September 30, 1997 as compared with $ 7.8 million in the three
months ended September 30, 1996,
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and increased 22.9% to $28.4 million in the nine months ended September 30,
1997 as compared with $23.1 million in the comparable period in 1996. In the
three and nine months ended September 30, 1996, total revenues include $72,000
and $1,042,000, respectively, of other (i.e. non-recurring) revenue derived from
recoveries in the silicone breast implant settlement. Growth in subrogation
revenues occurred primarily because of the growth in subrogation recoveries from
$29.4 million for the three months ended September 30, 1996 to $37.3 million for
the three months ended September 30, 1997, a 26.9% increase, and from $81.5
million for the nine months ended September 30, 1996 to $105.1 million for the
comparable period in 1997, a 29.0% increase.
The increases in total subrogation recoveries was due primarily to growth
in backlog (i.e., gross recoveries in process), attributable to an increase in
the number of lives installed. Backlog increased 22.0% to $642.2 million at
September 30, 1997 from $526.5 million at September 30, 1996. The Company
obtained subrogation recoveries at a throughput rate of 6.0% of backlog for the
three months ended September 30, 1997 and 5.7% for the same period in 1996.
Cost of Services. Cost of services for the third quarter of 1997 was $4.8
million, an increase of 23.1% from $3.9 million in the three months ended
September 30, 1996, and was $13.4 million for the nine months ended September
30, 1997, an increase of 22.9% from $10.9 million for the comparable period in
1996. The increase in cost of services for the three and nine months ended
September 30, 1997 resulted from installing additional lives, which require
increased processing activities, and correspondingly led to increased staffing
and investigation cost. As a percentage of subrogation revenues (i.e. exclude
$72,000 and $1,042,000, respectively, of other (i.e. non-recurring) revenue from
the silicone breast implant settlement), cost of services for the three months
ended September 30, 1997 was 46.8%, a decrease from 50.1% in the three months
ended September 30, 1996, and for the nine months ended September 30, 1997 was
47.3%, a decrease from 49.5% for the comparable period in 1996. The decline in
cost of services as a percentage of subrogation revenues for the three and nine
months ended September 30, 1997 was a result of productivity improvements.
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Support Expenses. Support expenses increased 29.1%, to $2.3 million, for
the three months ended September 30, 1997, from $1.8 million for the comparable
period in 1996, and 22.5%, to $6.6 million, for the nine months ended September
30, 1997 from $5.4 million in 1996, due to hiring of additional support staff.
Support expenses decreased as a percentage of subrogation revenues (i.e.
subrogation revenues for the three and nine months ended September 30, 1996
exclude $72,000 and $1,042,000, respectively, of non-recurring revenue from the
silicone breast implant settlement) from 23.4% for the three months ended
September 30, 1996 to 22.9% for the three months ended September 30, 1997, and
from 24.5% for the nine months ended September 30, 1996 to 23.4% for the
comparable period in 1997. The decline in support expenses as a percentage of
subrogation revenues resulted from improved economies of scale in the support
functions.
Depreciation and Amortization. Depreciation and amortization expenses
from prior periods have been reclassified to conform with the current period
presentation. Depreciation and amortization expenses increased 33.8%, to
$317,000 for the three months ended September 30, 1997 from $237,000 for the
comparable period in 1996 and increased 24.5% to $799,000 for the nine months
ended September 30, 1997 from $642,000 in the comparable period in 1996.
Compensation Charge. In connection with the divestiture of the Company by
Medaphis in May 1997, the Company incurred a one-time $2.8 million non-cash
compensation charge (not deductible for income tax purposes) from the issuance
by the Company of 200,000 shares of common stock to the Company's management as
a bonus for the successful completion of the sale of the Company by Medaphis.
These shares represent 2% of the 10,000,000 shares of common stock outstanding
after the initial public offering that closed on May 28, 1997 and 1.7% of the
11,470,000 shares of common stock outstanding after the sale of 1,470,000 shares
issued upon exercise of the underwriters' over-allotment option.
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Interest Income. Interest income totaled $411,000 and $123,000 for the
three months ended September 30, 1997 and 1996, respectively, and $740,000 and
$347,000 for the nine months ended September 30, 1997 and 1996, respectively.
The increase in interest income was a result of interest income earned on $19.2
million of proceeds from the issuance by the Company of 1,470,000 shares of
common stock as of June 11, 1997 upon the exercise of the underwriters'
over-allotment option.
Tax. Provision for income taxes were approximately 42% of pre-tax income,
excluding the non-cash non-recurring compensation charge, for the three and nine
months ended September 30, 1997 and 1996. The effective tax rates exceeded the
U.S. statutory tax rate as a consequence of state and local taxes and
non-deductible expenses.
Net Income. Recurring (i.e. adjusted) net income for the three months
ended September 30, 1997 increased $0.7 million, or 64.2%, to $1.8 million, or
$0.16 per share, from $1.1 million, or $0.11 per share, in the comparable period
of 1996 and for the nine months ended September 30, 1997 increased $1.6 million,
or 52.0%, to $4.8 million, or $0.45 per share, from $3.2 million, or $0.32 per
share, in the comparable period in 1996, excluding non-recurring items. These
non-recurring items were the $2.8 million ($.28 per share) non-cash,
non-recurring compensation charge in the second quarter of 1997 and $605,000
($.06 per share, net of tax) of net income from the implant settlement in the
second ($563,000) and third ($42,000) quarters of 1996. Net income as reported
for the three months ended September 30, 1997 was $1.8 million, or $0.16 per
share, compared to net income of $1.2 million, or $0.12 per share, for the same
period in 1996. Net Income as reported for the nine months ended September 30,
1997 was $2.0 million, or $0.18 per share, compared to $3.8 million, or $0.38
per share, for the nine months ended September 30, 1996.
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<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company's statements of cash flows for the nine months ended
September 30,1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operations ................................. $ 6,929 $ 5,639
Net cash used in investing activities ........................... (1,442) (1,166)
Net cash provided by (used in) financing activities ............. 16,945 (1,894)
-------- -------
Net increase in cash and cash equivalents ....................... $ 22,432 $ 2,579
======== =======
</TABLE>
The Company had working capital of $21.6 million at September 30, 1997,
including cash and cash equivalents of $22.5 million, compared with working
capital of $1.7 million at December 31, 1996 when the Company was a wholly-owned
subsidiary of Medaphis. The increase is primarily attributable to the $19.2
million of proceeds received in connection with the exercise of the
underwriters' over-allotment option.
Net cash provided by operations increased $1.3 million for the nine
months ended September 30, 1997 compared to the nine months ended September 30,
1996, primarily as a result of timing of recurring cash receipts, disbursements
related to accrued expenses and subrogation recoveries.
Net cash used in investing activities primarily reflects the Company's
capital expenditures for ongoing facility expansion and system enhancements,
including computer hardware, to meet the requirements of the Company's growing
revenue base.
The Company anticipates that capital expenditures for the year ending
December 31, 1997 will be approximately $3.5 million for facility expansion,
computer hardware and the planned upgrade of the subrogation system. Over the
next 18 to 24 months, the Company anticipates total expenditures for such
upgrade of approximately $3.3 million, of which $3.0 million to be spent on
hardware and third-party software will be capitalized.
-15-
<PAGE> 16
Net cash provided by financing activities for the nine months ended
September 30, 1997 reflects $19.2 million in cash proceeds received in
connection with the exercise of the underwriters' over-allotment option. Net
cash used in financing activities for the nine months ended September 30, 1997
and September 30, 1996 reflected the Company's ongoing distributions to Medaphis
prior to the sale of the Company by Medaphis.
In May 1997, the Company executed a $10.0 million unsecured revolving
Line of Credit ("Line of Credit") for working capital purposes with National
City Bank of Kentucky (the "Bank"). The interest rate on outstanding
indebtedness, at the Company's option, will be either (i) the greater of the
Bank's prime rate or the effective Federal Funds rate plus 0.5% or (ii) LIBOR
plus 2.25%. The maturity date for all outstanding indebtedness under the Line of
Credit will be May 22, 1999. The agreement contains customary covenants,
including covenants to maintain certain minimum interest coverage and leverage
ratios and a minimum level of net worth. As of September 30, 1997, the Company
was in compliance with the covenants and there were no outstanding draws on the
Line of Credit.
By contract, with respect to its standard recovery services, the
Company disburses recoveries to its clients on or before the 15th day of the
month following the month in which recoveries are made. At September 30, 1997
and December 31, 1996, the Company reported on its balance sheet, as a current
asset, restricted cash of $13.9 million and $18.8 million respectively,
representing subrogation recoveries effected by HRI for its clients, except that
restricted cash at December 31, 1996 also included $6.4 million in recoveries
from the silicone breast implant settlement received in November and December
1996. At September 30, 1997 and December 31, 1996, HRI reported on its balance
sheet, as a current liability, funds due clients of $11.4 million and $15.0
million, respectively, representing recoveries to be distributed to clients, net
of the fee earned on such recoveries.
-16-
<PAGE> 17
The Company believes that its available cash resources, together with
the borrowings available under the Line of Credit, will be sufficient to meet
its current operating requirements and internal development initiatives.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share and will require presentation of both basic
and fully diluted earnings per share for both interim and annual periods ending
after December 15, 1997. The results for basic and fully diluted earnings per
share amounts computed under the provisions of SFAS 128 for the quarters ended
September 30, 1997 and 1996 and for the nine months ended September 30, 1996
are the same as earnings per common and common equivalent share as reported in
the accompanying statements of income. Basic and fully diluted earnings per
share for the nine months ended September 30, 1997 are $0.19 per share and $0.18
per share, respectively
In September 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The provisions of SFAS No. 130 will be
effective for fiscal years beginning after December 15, 1997.
EXTERNAL FACTORS
The business of recovering subrogation and related claims for
healthcare payors is subject to a wide variety of external factors, including
factors that would materially change the healthcare payment, fault-based
liability, or workers' compensation systems. Because the Company's profitability
depends to a large extent upon obtaining and using client claims data, and the
availability of property and casualty and workers' compensation coverage as
sources of recovery, changes in
-17-
<PAGE> 18
laws that would limit or bar either the access to or use of claims data or the
ability of healthcare payors to recover subrogation and related claims represent
an ongoing risk to the Company.
Moreover, because the Company's revenues derive from the recovery of
the costs of medical treatment of accidents, material changes in such costs will
tend to affect the Company's revenue or its rate of revenue growth. The
healthcare industry, and particularly the business of healthcare payors, is
subject to various external factors that may have the effect of significantly
altering the costs of healthcare. The Company is unable to predict which of
these factors, if any, could have a potentially material impact on healthcare
payors and through them, the healthcare subrogation recovery industry.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors regarding forward-looking statements. Statements in this document
that look forward in time involve risks and uncertainties including: (1) the
ability of HRI to successfully implement its operating strategy and acquisition
strategy, (2) HRI's ability to manage growth, (3) changes in laws and government
regulations applicable to HRI, (4) adverse developments in cases that challenge
the business practices of HRI or its clients, and (5) changes in the historical
relationships among such key operating indicators as lives sold, lives
installed, backlog and throughput and in the predictive value of these
indicators with respect to certain aspects of HRI's financial results.
-18-
<PAGE> 19
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K
during the quarter ended September 30, 1997.
-19-
<PAGE> 20
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.
Healthcare Recoveries, Inc.
Date: November 13, 1997 /s/ Patrick B. McGinnis
-----------------------------------------
Patrick B. McGinnis
Chairman, President and
Chief Executive Officer
Date: November 13, 1997 /s/ Douglas R. Sharps
-----------------------------------------
Douglas R. Sharps
Executive Vice President-Finance and
Administration, and
(Principal Financial and Chief Accounting
Officer)
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHCARE RECOVERIES FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 22,485
<SECURITIES> 0
<RECEIVABLES> 2,720
<ALLOWANCES> 134
<INVENTORY> 0
<CURRENT-ASSETS> 40,551
<PP&E> 7,804
<DEPRECIATION> 4,664
<TOTAL-ASSETS> 45,299
<CURRENT-LIABILITIES> 18,975
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 25,842
<TOTAL-LIABILITY-AND-EQUITY> 45,299
<SALES> 28,421
<TOTAL-REVENUES> 28,421
<CGS> 13,447
<TOTAL-COSTS> 13,447
<OTHER-EXPENSES> 10,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,429
<INCOME-TAX> 3,479
<INCOME-CONTINUING> 1,950
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<NET-INCOME> 1,950
<EPS-PRIMARY> .18
<EPS-DILUTED> .19
</TABLE>
