<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER 0-22585
HEALTHCARE RECOVERIES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 61-1141758
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1400 WATTERSON TOWER, LOUISVILLE, KENTUCKY 40218
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(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 May 14, 1998, 11,470,000 shares of the registrant's Common Stock,
$0.001 par value (the only class of Common Stock), were outstanding.
================================================================================
<PAGE> 2
HEALTHCARE RECOVERIES, INC.
FORM 10-Q
MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of March 31, 1998 and
December 31, 1997..................................... 2
Condensed Statements of Income for the three months
ended March 31, 1998 and 1997......................... 3
Condensed Statements of Cash Flows for the three months
ended March 31, 1998 and 1997......................... 4
Notes to Condensed Financial Statements................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 11
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................. 11
Signatures.................................................. 12
</TABLE>
THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
HEALTHCARE RECOVERIES, INC. OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.A. SECTIONS 77Z-2 AND
78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF HEALTHCARE RECOVERIES, INC. AND MEMBERS OF ITS
MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-Q, AND ARE
HEREBY INCORPORATED BY REFERENCE HEREIN. HEALTHCARE RECOVERIES, INC. UNDERTAKES
NO OBLIGATION TO UPDATE OR REVIEW FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED
ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE
OPERATING RESULTS OVER TIME.
1
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
HEALTHCARE RECOVERIES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $23,822 $24,674
Restricted cash........................................... 15,184 14,207
Accounts receivable, less allowance for doubtful accounts
of $271 -- March 31, 1998 and $251 -- December 31,
1997................................................... 2,884 2,507
Other current assets...................................... 696 676
------- -------
Total current assets.............................. 42,586 42,064
------- -------
Property and equipment, at cost:
Furniture and fixtures.................................... 2,228 2,177
Office equipment.......................................... 1,524 1,471
Computer equipment........................................ 6,357 5,066
Leasehold improvements.................................... 687 649
------- -------
10,796 9,363
Accumulated depreciation and amortization................. (5,369) (4,920)
------- -------
5,427 4,443
Other assets................................................ 1,817 1,663
------- -------
Total assets...................................... $49,830 $48,170
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 477 $ 986
Accrued expenses.......................................... 4,043 4,770
Funds due clients......................................... 12,207 11,643
Income taxes payable...................................... 2,116 1,754
------- -------
Total current liabilities......................... 18,843 19,153
Other liabilities........................................... 1,029 1,152
------- -------
Total liabilities................................. 19,872 20,305
------- -------
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 shares issued and outstanding... 11 11
Capital in excess of par value............................ 22,001 22,001
Retained earnings......................................... 7,946 5,853
------- -------
Total stockholders' equity........................ 29,958 27,865
------- -------
Total liabilities and stockholders' equity........ $49,830 $48,170
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
HEALTHCARE RECOVERIES, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Revenues.................................................... $11,196 $8,917
Cost of services............................................ 5,259 4,326
------- ------
Gross profit.............................................. 5,937 4,591
Support expenses............................................ 2,240 2,093
Depreciation and amortization............................... 509 245
------- ------
Operating income.......................................... 3,188 2,253
Interest income............................................. 420 114
------- ------
Income before income taxes................................ 3,608 2,367
Provision for income taxes.................................. 1,515 992
------- ------
Net income.................................................. $ 2,093 $1,375
======= ======
Earnings per common share (basic and diluted)............... $ 0.18 $ 0.14
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
HEALTHCARE RECOVERIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operations:
Net income.................................................. $ 2,093 $1,375
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization............................. 509 245
Deferred income taxes..................................... 26 (330)
Changes in operating assets and liabilities:
Restricted cash........................................ (977) 75
Accounts receivable.................................... (377) (454)
Other current assets................................... (20) (249)
Other assets........................................... (240) (657)
Trade accounts payable................................. (509) 33
Accrued expenses....................................... (727) (388)
Funds due clients...................................... 564 427
Income taxes payable................................... 362 --
Other liabilities...................................... (123) 173
------- ------
Net cash provided by operations................... 581 250
------- ------
Cash flows from investing activities:
Purchases of property and equipment....................... (1,433) (53)
------- ------
Net cash used in investing activities............. (1,433) (53)
------- ------
Cash flows from financing activities:
Distributions to Medaphis Corporation..................... -- (125)
------- ------
Net cash used in financing activities............. -- (125)
------- ------
Net (decrease) increase in cash and cash equivalents........ (852) 72
Cash and cash equivalents, beginning of period.............. 24,674 53
------- ------
Cash and cash equivalents, end of period.................... $23,822 $ 125
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
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, arising by law or
contract, are known generally as the right of subrogation 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 (the
"Merger"). Prior to the Merger, the Company's redeemable convertible preferred
stock was converted to common stock. As of the effective time of the Merger,
each share of the then issued and outstanding Company common stock was exchanged
for Medaphis common stock. Employee stock options of the Company outstanding at
the effective time of the Merger were also substituted with similar options of
Medaphis common stock. Subsequent to the Merger, Medaphis recapitalized the
Company effectively canceling all but 100 shares of common stock as collateral
for Medaphis' bank debt, and made the Company a guarantor for Medaphis' bank
debt.
On May 21, 1997, the Company completed its initial public offering (the
"Offering") of 9,800,000 shares of common stock, excluding 200,000 shares
granted by the Company to certain members of the Company's executive management
upon consummation of the Offering. All the shares were sold by Medaphis. As a
result, the Company received no proceeds from the sale of shares in the
Offering. On June 9, 1997, the Company sold 1,470,000 shares of common stock to
the underwriters of the Offering under an over-allotment option, resulting in
proceeds to the Company of approximately $19.2 million.
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, 1997, contained in the Company's
Annual Report on Form 10-K, for the fiscal year ended December 31, 1997.
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 to the
current period presentation.
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.
5
<PAGE> 7
HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
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 requires presentation of both basic and
diluted earnings per share for both interim and annual periods ending after
December 15, 1997. The results for basic and diluted earnings per share amounts
computed under the provisions of SFAS 128 for the year ended December 31, 1998
and 1997, are the same as earnings per common and common equivalent share as
reported in the Company's Annual Report on Form 10-K. Basic and diluted earnings
per share for the three months ended March 31, 1998 and 1997 are $0.18 per share
and $0.14 per share, respectively.
The table below sets forth a reconciliation of the numerators and
denominators of the basic and diluted earnings per common share calculations
(dollars in thousands, except per share results):
<TABLE>
<CAPTION>
NET
INCOME SHARES PER-SHARE RESULTS
---------- ---------- -----------------
<S> <C> <C> <C>
QUARTER ENDED MARCH 31, 1998:
Basic earnings per common share.................. $2,093 11,470,000 $0.18
Effect of dilutive stock options................. -- 156,440 --
Diluted earnings per common share................ $2,093 11,626,440 $0.18
QUARTER ENDED MARCH 31, 1997:
Basic earnings per common share.................. $1,375 9,800,000 $0.14
Effect of dilutive stock options................. -- -- --
Diluted earnings per common share................ $1,375 9,800,000 $0.14
</TABLE>
4. CHANGES IN ACCOUNTING STANDARDS
The Company adopted, SFAS No. 130, "Reporting Comprehensive Income," and
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," on January 1, 1998. Based on the Company's current operations,
these new standards, which are primarily disclosure oriented, did not have a
material impact on the Company's financial condition, results of operations or
cash flows. Comprehensive income of the Company for the three months ended March
31, 1998 and 1997 is the same as net income presented in the accompanying
condensed statements of income.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires capitalization of internal and external costs
incurred to develop or obtain computer software for internal use. The Company
elected adoption of SOP 98-1 as of January 1, 1998.
6
<PAGE> 8
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'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 HRI's clients to
recover the value of these medical benefits arise by law or contract, are known
generally as the right of subrogation, and are generally paid from the proceeds
of liability or workers' compensation insurance.
For a typical new client, it takes three to six 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
contractual services. After installation, HRI receives data from the client from
which it creates an inventory of backlog.
"Backlog" is the total dollar amount of potentially recoverable claims that
the Company is pursuing on behalf of its clients at a given 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. Historically, subrogation
recoveries (the amount actually recovered for its clients prior to the Company's
fee) have been produced from the backlog in a generally predictable cycle,
because any group of potential recoveries that has been sufficiently large in
number to display statistically significant characteristics and that originate
from a defined time period, tended to produce recovery results that have been
comparable to 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. Backlog for a client will range in age from newly identified
potential recoveries (which will be identified each year) to potential
recoveries that are in the late stages of the recovery 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.
The Company is paid a contingency fee from the amount of recoveries it
makes 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 recovery services provided 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 because the client
will have already completed some of the recovery work. Since the Company records
expenses as costs are incurred and records revenues only when a file is settled,
there is a significant lag between recording expense and revenue recognition.
The Company's expenses are determined primarily by the number of employees
directly engaged in recovery activities (cost of services) and by the number of
employees engaged in a variety of support activities (support expenses).
Recovery-related employees must be hired and trained in advance of the
realization of recoveries and revenues and, during times of rapid growth,
installed lives and cost of service will grow more rapidly than revenue. The
number of employees accounted for in support expenses generally grows less
rapidly than revenue due to economies of scale.
7
<PAGE> 9
RESULTS OF OPERATIONS
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Cumulative lives sold, beginning of period.................. 38.5 29.5
Lives from existing client growth......................... (0.5) 0.0
Lives added from contracts with existing clients.......... 0.7 1.3
Lives added from contracts with new clients............... 0.1 0.1
------ ------
Cumulative lives sold, end of period........................ 38.8(1) 30.9
====== ======
Lives installed............................................. 36.6(1) 30.2
Backlog(2).................................................. $692.8 $568.7
Subrogation recoveries...................................... $ 41.1 $ 33.7
Throughput(3)............................................... 6.0% 6.1%
Effective fee rate.......................................... 27.2% 26.4%
Subrogation revenues........................................ $ 11.2 $ 8.9
Employees:
Direct operations......................................... 409 324
Support................................................... 94 79
------ ------
Total employees............................................. 503 403
====== ======
</TABLE>
- ---------------
(1) In April 1998, Oxford Health Plans notified the Company that it intended to
cancel its contract effective June 8, 1998, which will reduce the Company's
cumulative lives sold and lives installed at the end of the second quarter
of 1998 by approximately 2.0 million. Under the Company's contract with this
client, the Company retains the right to work the client's existing backlog
as of June 8, 1998.
(2) Backlog represents the total dollar amount of potentially recoverable claims
that the Company was pursuing on behalf of clients as of March 31, 1997 and
1998.
(3) Throughout equals recoveries for the period divided by the average of
backlog at the beginning and end of the period presented.
The following table presents, for the periods indicated, certain items in
the statements of income as a percentage of subrogation revenue:
STATEMENTS OF INCOME AS A PERCENTAGE OF SUBROGATION REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Subrogation revenues........................................ 100.0% 100.0%
Cost of services............................................ 47.0 48.5
Support expenses............................................ 20.0 23.5
Depreciation and amortization............................... 4.5 2.7
Operating income............................................ 28.5 25.3
Income before income taxes.................................. 32.2 26.5
Net income.................................................. 18.7 15.4
</TABLE>
8
<PAGE> 10
Three months ended March 31, 1998 compared to three months ended March 31,
1997
Revenues. Revenues increased 25.6% to $11.2 million in the three months
ended March 31, 1998 as compared with $8.9 million in the three months ended
March 31, 1997. Growth in subrogation revenues occurred primarily because of the
growth in subrogation recoveries from $33.7 million for the three months ended
March 31, 1997 to $41.1 million for the three months ended March 31, 1998, a
22.0% increase.
The increase in subrogation recoveries was due primarily to growth in
backlog, attributable to a 21.2% increase in the number of lives installed.
Backlog increased 21.8% to $692.8 million at March 31, 1998 from $568.7 million
at March 31, 1997. The Company obtained subrogation recoveries at a throughput
rate of 6.0% of backlog for the three months ended March 31, 1998 and 6.1% for
the same period in 1997.
Cost of Services. Cost of services for the first quarter of 1998 was $5.3
million, an increase of 21.6% from $4.3 million in the three months ended March
31, 1997. The increase in cost of services for the three months ended March 31,
1998 resulted from installing additional lives, which requires increased
processing activities, and correspondingly led to increased staffing and
investigation costs. As a percentage of subrogation revenues, cost of services
for the three months ended March 31, 1998 was 47.0%; a decrease from 48.5% in
the three months ended March 31, 1997. The decline in cost of services as a
percentage of subrogation revenues for the three months ended March 31, 1998 was
a result of productivity improvements.
Support Expenses. Support expenses increased 7.0%, to $2.2 million, for
the three months ended March 31, 1998, from $2.1 million for the comparable
period in 1997, due to hiring of additional support staff. Support expenses
decreased as a percentage of subrogation revenues from 23.5% for the three
months ended March 31, 1997 to 20.0% for the three months ended March 31, 1998.
The decline in support expenses as a percentage of subrogation revenues resulted
from improved economies of scale in the support functions and capitalization of
$169,000 of software development costs associated with the upgrade of the
SubroSystem. These costs were capitalized in the 1998 period in conjunction with
the requirements under SOP 98-1.
Depreciation and Amortization. Depreciation and amortization expenses
increased 107.8%, to $509,000, for the three months ended March 31, 1998 from
$245,000 for the comparable period in 1997, due mainly to the expenditures
related to the upgrade of the SubroSystem.
Interest Income. Interest income totaled $420,000 and $114,000 for the
three months ended March 31, 1998 and 1997, 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 9, 1997 upon the exercise of the underwriters' over-allotment option.
Tax. Provision for income taxes was approximately 42% of pre-tax income
for the three months ended March 31, 1998 and 1997. 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. Net income for the three months ended March 31, 1998 increased
$0.7 million, or 52.2%, to $2.1 million, or $0.18 per share, from $1.4 million,
or $0.14 per share, in the comparable period of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's statements of cash flows for the three months ended March 31,
1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operations............................. $ 581 $ 250
Net cash used in investing activities....................... (1,433) (53)
Net cash used in financing activities....................... -- (125)
------- -----
Net (decrease) increase in cash and cash equivalents........ $ (852) $ 72
======= =====
</TABLE>
The Company had working capital of $23.7 million at March 31, 1998,
including cash and cash equivalents of $23.8 million, compared with working
capital of $22.9 million at December 31, 1997.
9
<PAGE> 11
Net cash provided by operations increased $331,000 for the three months
ended March 31, 1998 compared to the three months ended March 31, 1997,
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 spent $1.4 million in capital expenditures during the three
months ended March 31, 1998 for facility expansion, computer hardware and the
continuing upgrade of the subrogation system. Over the next 15 to 21 months, the
Company anticipates total expenditures for such upgrade of approximately $2.4
million, of which $2.1 million to be spent on hardware and third-party software
will be capitalized.
Net cash provided by financing activities for the three months ended March
31, 1997 reflected the Company's ongoing distributions to Medaphis prior to the
sale of the Company by Medaphis.
In February 1998, the Company entered into a new $50 million senior secured
revolving credit facility (the "Credit Facility") with a group of lenders.
Principal amounts outstanding under the Credit Facility mature on January 31,
2001 and bear interest at the Company's option, at either: (i) the Prime Rate
plus the applicable margin in effect or (ii) the Eurodollar Rate plus the
applicable margin in effect. The applicable margin is determined in accordance
with a Pricing Grid based on the Company's ratio of Consolidated Total
Indebtedness to Consolidated EBITDA. The agreement contains usual and customary
covenants including, but not limited to financial tests for interest coverage,
net worth levels and leverage. The obligations under the Credit Facility are
backed by substantially all of the Company's assets subject to certain permitted
exceptions. As of March 31, 1998, the Company was in compliance with the
covenants and there were no outstanding draws under the Credit Facility.
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 March 31, 1998 and December
31, 1997, the Company reported on its balance sheet, as a current asset,
restricted cash of $15.2 million and $14.2 million respectively, representing
subrogation recoveries effected by HRI for its clients and as a current
liability, funds due clients of $12.2 million and $11.6 million, respectively,
representing recoveries to be distributed to clients, net of the fee earned on
such recoveries.
The Company believes that its available cash resources, together with the
borrowings available under the Credit Facility, will be sufficient to meet its
current operating requirements and internal development initiatives.
IMPACT OF CHANGES IN ACCOUNTING STANDARDS
The Company adopted, SFAS No. 130, "Reporting Comprehensive Income," and
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," on January 1, 1998. Based on the Company's current operations,
these new standards, which are primarily disclosure oriented, did not have a
material impact on the Company's financial condition, results of operations or
cash flows. Comprehensive income of the Company for the quarters ended March 31,
1998 and 1997 is the same as net income presented in the accompanying condensed
statements of income.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires capitalization of internal and external costs
incurred to develop or obtain computer software for internal use. The Company
elected adoption of SOP 98-1 as of January 1, 1998.
EXTERNAL FACTORS
The business of recovering subrogation and related claims for healthcare
payors is subject to a wide variety of external factors. Prominent among these
are factors that would materially change the healthcare
10
<PAGE> 12
payment, fault-based liability or workers' compensation systems. Because the
Company's profitability depends in large measure upon obtaining and using claims
data, and the availability of property and casualty and workers' compensation
coverages as sources of recovery, changes in 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of
Registrant's Amendment No. 2 to Registration Statement on
Form S-1, File No. 333-23287).
3.2 -- Amended and Restated Bylaws of the Registrant (incorporated
by reference to Exhibit 3.2 of Registrant's Amendment No. 2
to Registration Statement on Form S-1, File No. 333-23287).
10.1 -- Credit Agreement, dated as of February 1, 1998, by and among
the Registrant, the lending institutions named therein and
National City Bank of Kentucky (incorporated by reference to
Exhibit 10.12 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1997).
27.1 -- Financial Data Schedule (for SEC use only)
99.1 -- Healthcare Recoveries, Inc. Private Securities Litigation
Reform Act of 1995 Safe Harbor Compliance Statement for
Forward-Looking Statements (incorporated by reference to
Exhibit 99.1 to the Registrant's Annual Report on Form 10-K,
for the fiscal year ended December 31, 1997).
</TABLE>
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the three
months ended March 31, 1998.
11
<PAGE> 13
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.
<TABLE>
<S> <C>
Date: May 15, 1998 /s/ PATRICK B. MCGINNIS
----------------------------------------------
Patrick B. McGinnis
Chairman, President and
Chief Executive Officer
Date: May 15, 1998 /s/ DOUGLAS R. SHARPS
----------------------------------------------
Douglas R. Sharps
Executive Vice President -- Finance and
Administration, and Chief Financial Officer
(Principal Financial and Chief Accounting
Officer)
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 23,822
<SECURITIES> 0
<RECEIVABLES> 3,155
<ALLOWANCES> 271
<INVENTORY> 0
<CURRENT-ASSETS> 42,586
<PP&E> 10,796
<DEPRECIATION> 5,369
<TOTAL-ASSETS> 49,830
<CURRENT-LIABILITIES> 18,843
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 29,947
<TOTAL-LIABILITY-AND-EQUITY> 49,830
<SALES> 11,196
<TOTAL-REVENUES> 11,196
<CGS> 5,259
<TOTAL-COSTS> 5,259
<OTHER-EXPENSES> 2,749
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 3,608
<INCOME-TAX> 1,515
<INCOME-CONTINUING> 2,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,093
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
