<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
HEALTHCARE RECOVERIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
(Healthcare Recoveries Logo)
April 2, 1999
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Healthcare Recoveries, Inc. to be held on May 3, 1999 at 1400 Watterson Tower,
Louisville, Kentucky 40218. The meeting will begin promptly at 10:00 a.m., local
time.
The items of business are listed in the following Notice of Annual Meeting
and are more fully addressed in the Proxy Statement provided herewith.
Please date, sign and return your proxy card in the enclosed envelope at
your convenience to assure that your shares will be represented and voted at the
Annual Meeting even if you cannot attend. If you attend the Annual Meeting, you
may vote your shares in person even though you have previously signed and
returned your proxy.
On behalf of your Board of Directors, thank you for your continued support
and interest in Healthcare Recoveries, Inc.
Sincerely,
/s/ Patrick B. McGinnis
Patrick B. McGinnis
Chairman of the Board and
Chief Executive Officer
(Healthcare Recoveries Address)
<PAGE> 3
(HRI Logo)
HEALTHCARE RECOVERIES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 3, 1999
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (the "Annual
Meeting") of Healthcare Recoveries, Inc. (the "Company") will be held at 1400
Watterson Tower, Louisville, Kentucky 40218, on Monday, May 3, 1999, at 10:00
a.m., local time, for the following purposes:
(i) To elect two (2) Class B directors to three-year terms expiring at
the 2002 annual meeting of stockholders;
(ii) To approve and adopt an amendment to the Company's 1997 Stock
Option Plan for Eligible Participants (the "Stock Option Plan") to increase
the number of shares of Common Stock reserved for issuance under such Stock
Option Plan from 860,000 to 1,760,000;
(iii) To ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company to serve for 1999; and
(iv) To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on March 17, 1999 as
the record date for determination of stockholders entitled to receive notice of,
and to vote at, the meeting and any adjournment thereof. A list of stockholders
as of the close of business on March 17, 1999 will be available at the Company's
offices for examination during normal business hours by any stockholder during
the period from April 19, 1999 through the Annual Meeting.
Your attention is directed to the Proxy Statement provided with this
Notice.
By Order of the Board of Directors,
/s/ Douglas R. Sharps
Douglas R. Sharps
Executive Vice President --
Finance and Administration,
Chief Financial Officer and Secretary
Louisville, Kentucky
April 2, 1999
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF
YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
<PAGE> 4
HEALTHCARE RECOVERIES, INC.
1400 WATTERSON TOWER
LOUISVILLE, KENTUCKY 40218
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 3, 1999
APRIL 2, 1999
The enclosed form of proxy is solicited by the Board of Directors of
Healthcare Recoveries, Inc. (the "Company") for use at the annual meeting of
stockholders to be held on May 3, 1999 (the "Annual Meeting"), and any
adjournment thereof. When such proxy is properly executed and returned, the
shares it represents will be voted as directed at the meeting and any
adjournment thereof or, if no direction is indicated, such shares will be voted
in favor of the proposals set forth in the notice attached hereto. Any
stockholder giving a proxy has the power to revoke it at any time before it is
voted. Revocation of a proxy is effective upon receipt by the Secretary of the
Company of either (i) an instrument revoking such proxy or (ii) a duly executed
proxy bearing a later date. Furthermore, if a stockholder attends the meeting
and elects to vote in person, any previously executed proxy is thereby revoked.
Only stockholders of record as of the close of business on March 17, 1999
will be entitled to vote at the Annual Meeting. As of that date, the Company had
outstanding 11,502,987 shares of common stock, $0.001 par value (the "Common
Stock"). Each share of Common Stock is entitled to one vote. No cumulative
voting rights are authorized and appraisal rights for dissenting stockholders
are not applicable to the matters being proposed. It is anticipated that this
Proxy Statement and the accompanying proxy will first be mailed to stockholders
of record on or about April 2, 1999.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the inspector of elections appointed for the meeting who will also determine
whether a quorum is present for the transaction of business. The presence in
person or by proxy of holders of a majority of the shares of Common Stock
outstanding on the record date will constitute a quorum for the transaction of
business at the Annual Meeting or any adjournment thereof. Abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining whether a quorum is present. Shares held by nominees for beneficial
owners will be counted for purposes of determining whether a quorum is present
if the nominee has the discretion to vote on at least one of the matters
presented even if the nominee may not exercise discretionary voting power with
respect to other matters and voting instructions have not been received from the
beneficial owner (a "broker non-vote").
The affirmative vote of a plurality of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors is required to elect the directors. The affirmative vote of a majority
of the shares present in person or by proxy and entitled to vote is required
with respect to the approval and adoption of an amendment to the Stock Option
Plan to increase the number of shares of Common Stock reserved for issuance
under such Stock Option Plan and with respect to the ratification of the
appointment of PricewaterhouseCoopers LLP as the Company's independent
accountants. With respect to any other matter that may properly come before the
meeting for stockholder consideration, abstentions will be counted in
determining the minimum number of affirmative votes required for approval of any
matter presented for stockholder consideration and accordingly, will have the
effect of a vote against any such matter. Broker non-votes will not be counted
as votes for or against matters presented for stockholder consideration.
ELECTION OF DIRECTORS
The Company's Board of Directors (the "Board") is divided into three
classes designated as Class A, Class B and Class C, serving staggered,
three-year terms. Of the current six directors, two will continue to serve for
terms expiring in 2000 and two will continue to serve for terms expiring in 2001
(the "Continuing Directors"). Management of the Company and the Board recommend
the election of William C. Ballard, Jr. and Elaine J. Robinson for the office of
Class B director to hold office for a three-year term and until their successors
are duly elected and qualified.
The Board has no reason to believe that either of the nominees for the
office of director will be unavailable for election as a director. However, if
at the time of the Annual Meeting either of the nominees should be unable or
decline to serve, the persons named in the proxy will vote for such substitute
nominees,
<PAGE> 5
vote to allow the vacancy created thereby to remain open until filled by the
Board, or vote to reduce the number of directors for the ensuing year, as the
Board recommends. In no event, however, can the proxy be voted to elect more
than two directors. The affirmative vote of a plurality of the shares present in
person or represented by proxy at the meeting and entitled to vote on the
election of directors is required to elect the directors.
MANAGEMENT OF THE COMPANY
DIRECTORS
Set forth below are the Continuing Directors and the nominees for election
to the Board. Also set forth below as to each Continuing Director and nominee is
his or her age, the year in which he or she was first elected a director, a
brief description of his or her principal occupation and business experience
during the past five years, directorships of certain companies presently held by
him or her, and certain other information, which information has been furnished
by the respective individuals.
NOMINEES
CLASS B DIRECTORS -- TERM EXPIRING 2002
MR. WILLIAM C. BALLARD, JR.
Age 58
Director Since 1997
Mr. Ballard is of counsel to the law firm Greenebaum Doll & McDonald in
Louisville, Kentucky. He retired in 1992 after 22 years as the Chief Financial
Officer and a director of Humana Inc. Mr. Ballard serves on the boards of
directors of American Safety Razor Co., Health Care REIT, Inc., LG&E Energy
Corp., Mid-America Bancorp, UnitedHealth Group, and Jordan Telecommunications
Products, Inc.
MS. ELAINE J. ROBINSON
Age 50
Director Since 1997
Ms. Robinson is Executive-In-Residence at the University of Louisville. She
served as Vice President and Treasurer of Providian Corporation from December
1991 until November 1, 1997 when she retired after more than ten years service
for the company. Providian Corporation was acquired by AEGON N.V. in June 1997.
CONTINUING DIRECTORS
CLASS A DIRECTORS -- TERM EXPIRING 2001
MR. JOHN H. NEWMAN
Age 54
Director Since 1997
Mr. Newman, based in New York City, has been a partner in the international
law firm of Brown & Wood LLP since 1980.
MR. CHRIS B. VAN ARSDEL
Age 55
Director Since 1997
Mr. Van Arsdel currently serves as Divisional Vice President of Technical
Infrastructure at EDS Corporation ("EDS"). From November 1970 to the present,
Mr. Van Arsdel has held various positions at EDS, including Divisional Vice
President of the Resellers Division, Director of Corporate Quality and Director
of Operations.
CLASS C DIRECTORS -- TERM EXPIRING 2000
MS. JILL L. FORCE
Age 46
Director Since 1997
Ms. Force serves as Senior Vice President, General Counsel and Corporate
Secretary of Vencor, Inc. Ms. Force has been General Counsel of Vencor, Inc.
since 1989.
2
<PAGE> 6
MR. PATRICK B. MCGINNIS
Age 51
Director Since 1997
In 1988, Mr. McGinnis left Humana Inc., where he served as Vice
President -- Finance & Planning, to co-found the Company. He served as the
Company's Chief Executive Officer until August 1996, when he left the Company to
become President of the Medaphis Healthcare Information Technology Company,
which provides a variety of sophisticated software solutions to healthcare
enterprises throughout the United States. He rejoined the Company in January
1997 as its Chairman and Chief Executive Officer. Mr. McGinnis serves on the
board of directors of CareTenders Health Corp.
OPERATION OF THE BOARD OF DIRECTORS
The Company has an Audit Committee of the Board which is composed of John
H. Newman, Chairman, Jill L. Force, and Chris B. Van Arsdel. The Audit Committee
is responsible for, among other things, recommending to the Board of Directors
the accounting firm that will serve as independent auditors for the Company and
reviewing the Company's internal accounting controls. The Audit Committee may
exercise such additional authority as may be prescribed from time to time by
resolution of the Board.
The Company has a Compensation Committee of the Board which is composed of
William C. Ballard, Jr., Chairman, Jill L. Force, and Elaine J. Robinson. The
Compensation Committee shall, among other things, approve base salaries of
executive officers, approve the terms of annual incentive or bonus plans in
which executive officers participate and review and make recommendations to the
Board concerning approval and adoption of and amendments to stock-based
compensation plans. The Compensation Committee may exercise such additional
authority as may be prescribed from time to time by resolution of the Board.
The Company does not have a nominating committee.
During 1998, the Board met six times, the Audit Committee met four times
and the Compensation Committee met one time. All of the directors attended 75%
or more of the aggregate number of meetings of the Board and all committees on
which they served during 1998.
DIRECTORS' COMPENSATION
The Company pays its non-employee directors an annual retainer in the
amount of $15,000 plus $1,500 for attendance (in person or by telephone) at each
regular meeting of the Board. In 1998, the Company adopted the 1998 Deferred
Compensation Plan for Directors (the "Deferred Plan"). The Deferred Plan
provides a mechanism under which a director can elect to defer the payment of
the foregoing fees until after the earlier of his or her death, resignation,
removal or retirement as a director. To date, there have been no deferrals under
the Deferred Plan. In addition, the Company provides for the grant of options to
purchase Common Stock to each non-employee director of the Company under the
Company's Amended and Restated Directors' Stock Option Plan (the "Directors'
Plan"). In 1997, each non-employee director was awarded options to purchase
10,000 shares of Common Stock at an exercise price equal to the initial public
offering price per share upon consummation of the Company's initial public
offering in May 1997. The Directors' Plan provides that beginning on the date of
the annual meeting of stockholders in May 1998 and on the date of each
subsequent annual meeting for so long as shares are available under the
Directors' Plan, each eligible director will receive options to purchase 2,000
shares of Common Stock. The Directors' Plan currently provides that one-third of
the shares of Common Stock covered by an option grant will vest on the first
anniversary of the date of the grant and on each succeeding anniversary until
fully vested, provided that the optionee must be a non-employee director of the
Company on each such anniversary in order for options to vest on such date.
Subject to adjustment in accordance with the provisions of the Directors' Plan,
the total amount of Common Stock for which options may be granted to directors
under the Directors' Plan shall not exceed in the aggregate 150,000 shares. As
of December 31, 1998, options to purchase 60,000 shares had been granted under
the Directors' Plan. The Directors' Plan, with respect to the granting of
options, shall terminate at midnight on March 31, 2002.
3
<PAGE> 7
MANAGEMENT COMMON STOCK OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of March 17, 1999 by (i) each of the
Company's directors, (ii) the Company's named executive officers (as hereinafter
defined) and (iii) such directors and all executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY
NAME OWNED(1) PERCENT OF CLASS(2)
- ---- ------------ -------------------
<S> <C> <C>
Patrick B. McGinnis........................................ 193,334(3) 1.7
Robert G. Bader, Jr. ...................................... 14,439(4) *
Mark J. Bates.............................................. 434(5) *
Debra M. Murphy............................................ 44,034(6) *
Douglas R. Sharps.......................................... 51,250(7) *
Bobby T. Tokuuke........................................... 39,879(8) *
William C. Ballard, Jr..................................... 19,001(9) *
Jill L. Force.............................................. 6,501(10) *
John H. Newman............................................. 14,001(11) *
Elaine J. Robinson......................................... 4,501(12) *
Chris B. Van Arsdel........................................ 4,501(13) *
All executive officers and directors as a group (11
persons)................................................. 391,875 3.4
</TABLE>
- ---------------
* Beneficial ownership represents less than 1% of the Company's outstanding
common stock.
(1) Under the rules of the Securities and Exchange Commission, a person is
deemed to be a "beneficial owner" of a security if that person has or
shares "voting power", which includes the power to vote or to direct the
voting of such security, or "investment power", which includes the power to
dispose of or to direct the disposition of such security. A person also is
deemed to be a beneficial owner of any securities which that person has the
right to acquire within sixty (60) days. Under these rules, more than one
person may be deemed to be a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as of which he
or she has no economic or pecuniary interest. Except as set forth in the
footnotes below, the persons named below have sole voting and investment
power with respect to all shares of Common Stock shown as being
beneficially owned by them. Shares have been rounded to avoid listing
fractional shares issued in connection with the Company's Employee Stock
Purchase Plan (the "Stock Purchase Plan").
(2) Based on an aggregate of 11,502,987 shares of Common Stock issued and
outstanding as of December 31, 1998.
(3) Includes 5,000 shares held by Mr. McGinnis' spouse. Also includes 83,334
shares that are not currently outstanding, but that may be acquired within
sixty (60) days upon the exercise of stock options granted under the
Healthcare Recoveries, Inc. Non-Qualified Stock Option Plan for Eligible
Employees (the "Option Plan").
(4) Includes 300 shares Mr. Bader holds jointly with his spouse. Includes 805
shares acquired under the Stock Purchase Plan. Also includes 13,334 shares
that are not currently outstanding, but that may be acquired within sixty
(60) days upon the exercise of stock options granted under the Option Plan.
(5) Represents 434 shares acquired under the Stock Purchase Plan.
(6) Includes 700 shares which are held by Ms. Murphy as trustee for a minor
child. Also includes 28,334 shares that are not currently outstanding, but
that may be acquired within sixty (60) days upon the exercise of stock
options granted under the Option Plan.
(7) Includes 31,250 shares that are not currently outstanding, but that may be
acquired within sixty (60) days upon the exercise of stock options granted
under the Option Plan.
(8) Includes 21,667 shares that are not currently outstanding, but that may be
acquired within sixty (60) days upon the exercise of stock options granted
under the Option Plan. Also includes 1,212 shares acquired under the Stock
Purchase Plan.
4
<PAGE> 8
(9) Represents 2,500 shares held by Mr. Ballard in a charitable remainder trust
for the benefit of his son, 2,500 shares held by Mr. Ballard in a
charitable remainder trust for the benefit of his daughter and 10,000
shares held by Mr. Ballard in a charitable remainder trust for the benefit
of his spouse. Mr. Ballard has sole voting power over the shares. Also,
includes 4,001 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options under the Directors' Plan.
(10) Includes 4,001 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options under the Directors' Plan.
(11) Represents 10,000 shares owned by Mr. Newman's spouse. Also includes 4,001
shares that are not currently outstanding, but that may be acquired upon
the exercise of stock options under the Directors' Plan.
(12) Includes 4,001 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options under the Directors' Plan.
(13) Includes 4,001 shares that are not currently outstanding, but that may be
acquired upon the exercise of stock options under the Directors' Plan.
EMPLOYMENT AGREEMENTS
In May 1997, the Company entered into an employment agreement pursuant to
which Mr. McGinnis serves as Chairman and Chief Executive Officer of the
Company. The employment agreement is for a term of three years, with automatic
two year renewals, unless a notice of termination is delivered by either party
within not less than sixty (60) days prior to the end of a term or a renewal
term. Under the terms of the agreement, Mr. McGinnis received a salary at an
initial annual rate of $200,000. The Company may terminate the employment
agreement and all of its obligations thereunder if Mr. McGinnis (i) materially
breaches any term of the employment agreement, (ii) commits any other act in bad
faith materially detrimental to the business or reputation of the Company, (iii)
engages in illegal activities or is convicted of any crime involving fraud,
deceit, or moral turpitude, or (iv) dies or becomes mentally or physically
incapacitated or disabled and is materially unable to perform his obligation
under the employment agreement. The Company's obligations under the employment
agreement to pay salary, to provide for the continued vesting of stock option
awards and to provide for health insurance benefits shall continue for the
greater of the remainder of the term (or the renewal term) or two years if the
Company terminates the employment agreement for any reason other then (i)-(iv)
above, or if Mr. McGinnis terminates the agreement for one of the following
reasons (i) the Company materially breaches any term of the employment
agreement, (ii) the Company assigns Mr. McGinnis duties, or significantly
reduces his assigned duties, in a manner inconsistent with his position with the
Company (without his consent), (iii) the Company requires Mr. McGinnis's
relocation outside of the metropolitan Louisville, Kentucky area (without his
consent), (iv) the Company fails to obtain the assumption of the employment
agreement by any successors to the Company, or (v) a Change in Control Event (as
defined in the employment agreement) occurs, and Mr. McGinnis's employment is
terminated by Mr. McGinnis within 120 days thereafter (in this latter event, Mr.
McGinnis may also be entitled to receive a certain Gross-Up Payment (as defined
in the employment agreement)). The employment agreement contains certain
confidentiality and noncompete provisions in favor of the Company.
On February 12, 1999, the Company's Board and Compensation Committee
approved an amendment to Mr. McGinnis' employment agreement to provide that his
base salary would be subject to annual increases given in the normal course of
business. The Board and the Compensation Committee thereafter approved a cost of
living adjustment to Mr. McGinnis' annual salary, increasing such salary by the
Company's standard rate of 2.3% and making such salary increase retroactive to
February 15, 1998.
In May 1997, the Company entered into employment agreements with Messrs.
Sharps and Tokuuke, and Ms. Murphy, each with a term of three years. Under the
terms of the agreements, Mr. Sharps received a salary at an annual rate of
$125,000, and Mr. Tokuuke and Ms. Murphy each received a salary at an initial
annual rate of $110,000. In May 1998, the Board appointed Ms. Murphy to the
position of Executive Vice President -- Operations, HRI Division effective June
1, 1998. In connection with her new position, Ms. Murphy's annual salary was
increased to $125,000 (subject to the Company's standard annual cost of living
adjustment), and she received 20,000 stock options. The Company may terminate
the employment
5
<PAGE> 9
agreements with Messrs. Sharps and Tokuuke, and Ms. Murphy for cause in the
following circumstances: (i) material breach of any term of the employment
agreement, (ii) commission of any other act materially detrimental to the
business or reputation of the Company, (iii) intentional engagement in illegal
or dishonest activities or commitment or conviction of any crime involving
fraud, deceit, or moral turpitude or (iv) death or mental or physical
incapacitation or disability resulting in an inability to perform one's
obligations under the employment agreement. Each employment agreement contains
certain confidentiality and noncompete provisions in favor of the Company. The
other named executive officers of the Company do not have employment agreements.
Mr. Tokuuke entered into an agreement with the Company on June 23, 1998 to
amend his employment agreement and his stock option agreement (the "Tokuuke
Agreement"). The Tokuuke Agreement, among other things, modified his incentive
compensation arrangements, canceled unvested stock options covering 48,333
shares and granted new stock options covering 20,000 shares. One of the effects
of Mr. Tokuuke's agreement was to change his status as an executive officer in
the Company's management group to a key manager of the Company. As such, Mr.
Tokuuke ceased to be a reporting person.
PRINCIPAL STOCKHOLDERS
The table below sets forth certain information as of December 31, 1998
concerning persons known to the Board to be a "beneficial owner," as such term
is defined by the rules of the Securities and Exchange Commission, of more than
5% of the outstanding shares of the Common Stock.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY PERCENT OF
NAME AND ADDRESS OWNED(1) CLASS
- ---------------- ------------------ ----------
<S> <C> <C>
The Kaufmann Fund, Inc...................................... 1,622,500(2) 14.1%
140 E. 45th Street
43rd Floor
New York, New York 10017
FMR Corp.................................................... 1,129,200(3) 9.82%
82 Devonshire Street
Boston, Massachusetts 02109
Putnam Investments, Inc..................................... 876,900(4) 7.6%
One Post Office Square
Boston, Massachusetts 02109
Artisan Partners Limited Partnership........................ 811,300(5) 7.06%
1000 North Water Street #1770
Milwaukee, Wisconsin 53202
AMVESCAP, PLC............................................... 704,100(6) 6.12%
11 Devonshire Square
London EC2M4YR
England
1315 Peachtree St., N.E
Atlanta, Georgia 30309
The TCW Group, Inc.......................................... 613,500(5) 5.3%
865 South Figueroa Street
Los Angeles, California 90017
</TABLE>
- ---------------
(1) See Note (1) under "Management Common Stock Ownership" elsewhere herein.
(2) The information regarding The Kaufmann Fund, Inc. ("Kaufmann") is given in
reliance upon a Schedule 13G filed by such stockholder on or about February
18, 1998 with the Securities and Exchange Commission (the "Commission"). The
Schedule 13G indicated that Kaufmann has sole voting power and sole
dispositive power over 1,622,500 shares.
(3) The information regarding FMR Corp. ("FMR") is given in reliance upon a
Schedule 13G filed on or about February 12, 1999 by such stockholder, Edward
C. Johnson III ("Johnson") and Abigail P. Johnson (who through their
ownership of common stock of FMR and the execution of a shareholders' voting
agreement may be deemed to form a controlling group with respect to FMR),
Fidelity Management & Research Company ("Fidelity"), a wholly owned
subsidiary of FMR and a registered
6
<PAGE> 10
investment advisor and Fidelity Low-Priced Stock Fund ("Fidelity Fund"), an
investment company. The Schedule 13G indicated that Fidelity is the
beneficial owner of 1,114,500 shares and that Johnson and FMR, through its
control of Fidelity, each has the sole power to dispose of the 1,114,500
shares. The Schedule 13G also indicated that neither FMR nor Johnson has the
sole power to vote or direct the voting of the shares owned directly or by
the Fidelity funds. The Schedule 13G also indicated that Fidelity Fund had
an interest in 737,500 shares. The Schedule 13G also stated that Fidelity
Management Trust Company, ("Fidelity Management"), a wholly owned subsidiary
of FMR, is beneficial owner of 14,700 shares and that Johnson and FMR each
has sole dispositive power over the 14,700 shares and sole power to vote or
to direct the voting of the 14,700 shares.
(4) The information regarding Putnam Investments, Inc. ("PI") is given in
reliance upon a Schedule 13G filed by such stockholder, its parent
corporation, Marsh & McLennan Companies, Inc. ("MMC"), two wholly owned
registered investment advisors of PI, Putnam Investment Management, Inc.
("PIM") and The Putnam Advisory Company, Inc. ("PAC") on or about January
21, 1998 with the Commission. The Schedule 13G stated that neither MMC or PI
have any power to vote or dispose of, or direct the voting or disposition
of, any of the securities covered by the Schedule 13G. The Schedule 13G
indicated that PIM had shared dispositive power over 452,400 shares; and
that PAC had shared voting power over 401,900 shares and shared dispositive
power over 424,500 shares.
(5) The information regarding Artisan Partners Limited Partnership ("Artisan
Partners") is given in reliance upon a Schedule 13G filed on or about
February 11, 1999 by such stockholder, Artisan Investment Corporation, the
general partner of Artisan Partners ("Artisan Corp."), and the principal
stockholders of Artisan Corp., Andrew A. Ziegler and Carlene Murphy Ziegler.
The Schedule 13G indicated that Artisan Partners, Artisan Corp., Andrew A.
Ziegler and Carlene Murphy Ziegler have shared voting and shared dispositive
power over 811,300 shares.
(6) The information regarding AMVESCAP PLC ("AMVESCAP") is given in reliance
upon a Schedule 13G filed on or about February 11, 1999 by such stockholder,
AVZ, Inc., AIM Management Group Inc., AMVESCAP Group Services, Inc.,
INVESCO, Inc., INVESCO North American Holdings, Inc., INVESCO Capital
Management, Inc., INVESCO Funds Group, Inc., INVESCO Management & Research,
Inc., INVESCO Realty Advisors, Inc., and INVESCO (NY) Asset Management,
Inc., all of which have shared voting and shared dispositive power over
704,100 shares.
(7) The information regarding The TCW Group, Inc. ("TCW Group") is given in
reliance upon a Schedule 13G filed by such stockholder and Robert Day
("Day"), an individual who may be deemed to control the TCW Group on or
about February 12, 1999. The Schedule 13G indicated that the TCW Group and
Robert Day have shared voting and shared dispositive power over 613,500
shares. The Schedule 13G states that the TCW Group holds 0 shares directly,
and Day holds 0 shares directly or indirectly, other than the indirect
holding of the TCW Group. The Schedule 13G indicated that the following
subsidiaries of the TCW Group acquired the 613,500 shares: Trust Company of
the West, TCW Asset Management Company and TCW Funds Management, Inc.
7
<PAGE> 11
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and the five other most highly compensated executive
officers of the Company (referred to herein as the "named executive officers")
for the year ended December 31, 1998. On August 28, 1995, the Company became a
wholly-owned subsidiary of Medaphis Corporation ("Medaphis"). Medaphis sold its
interest in the Company to the public on May 21, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- AWARDS
OTHER ------------
ANNUAL SECURITIES
NAME AND COMPENSATION UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) $(1) OPTIONS (#) COMPENSATION ($)
- ------------------------------ ---- ---------- --------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Patrick B. McGinnis........... 1998 $200,000 $103,416 $ -- 50,000 $13,561(2)
Chairman, Chief Executive 1997 163,132 137,061 1,120,000 200,000 49,944(3)
Officer, Director 1996 110,996 80,664 -- -- 89,301(4)
Debra M. Murphy............... 1998 118,654 53,135 -- 40,000 9,655(5)
Executive Vice 1997 106,802 74,324 210,000 65,000 5,566(5)
President--Operations, HRI 1996 83,071 45,960 -- -- 3,080(6)
Division
Douglas R. Sharps............. 1998 127,432 55,759 -- 15,000 7,465(7)
Executive Vice 1997 121,689 74,401 280,000 78,750 1,018(7)
President--Finance and 1996 107,152 95,176 -- -- 265(8)
Administration, Chief
Financial Officer and
Secretary
Robert G. Bader, Jr........... 1998 110,654 50,964 -- 40,000 9,779(9)
Senior Vice President -- 1997
Business 1996
Development
Mark J. Bates................. 1998 $ 62,019(10) $ 57,274 -- 50,000 $ 4,659(11)
Senior Vice President-- 1997
Systems 1996
Bobby T. Tokuuke (12)......... 1998 112,141 21,411 -- 25,000(13) 9,614(14)
Vice President-- 1997 107,491 50,513 210,000 65,000(15) 5,903(14)
Information Systems 1996 92,424 50,714 -- -- 3,460(16)
</TABLE>
- ---------------
(1) This column reflects the dollar value of a stock bonus representing 186,000
shares of the Company's Common Stock that was awarded in connection with
the Company's initial public offering on May 21, 1997, as calculated based
upon $14.00, the initial public offering price of the Company's Common
Stock. The aggregate stock holdings as of December 31, 1998 for Messrs.
McGinnis, Sharps, Tokuuke and Ms. Murphy were 110,000, 20,000, 17,000, and
15,700 respectively, having a value of $1,870,000, $340,000, $289,000, and
$266,900 respectively, based upon the closing price of the Common Stock on
The Nasdaq National Market on December 31, 1998.
(2) All other compensation for 1998 includes amounts paid by the Company on
behalf of Mr. McGinnis for matching 401(k) plan contributions and insurance
premiums.
(3) Includes $36,923 paid to Mr. McGinnis for his services as President of
Medaphis Healthcare Information Technology Company, a subsidiary of
Medaphis ("HIT") and $8,285 of matching contributions to the Medaphis
Deferred Compensation Plan (the "Medaphis Deferred Plan"). All other
compensation for 1997 includes amounts paid by the Company on behalf of Mr.
McGinnis for matching 401(k) plan contributions and insurance premiums.
(4) Includes $83,301 paid to Mr. McGinnis for his services as President of HIT,
$4,500 of matching contributions to the Medaphis Plan (the "Medaphis
Savings Plan") and $1,500 of matching contributions to the Medaphis
Deferred Plan.
8
<PAGE> 12
(5) All other compensation for 1998 and 1997 includes amounts paid by the
Company on behalf of Ms. Murphy for matching 401(k) contributions and
insurance premiums.
(6) Includes $1,785 of matching contributions to the Medaphis Savings Plan. All
other compensation for 1997 includes amounts paid by the Company on behalf
of Ms. Murphy for matching 401(k) contributions and insurance premiums.
(7) All other compensation for 1998 and 1997 includes amounts paid by the
Company on behalf of Mr. Sharps for matching 401(k) plan contributions and
insurance premiums.
(8) Includes amounts paid by the Company on behalf of Mr. Sharps for insurance
premiums.
(9) All other compensation for 1998 includes amounts paid by the Company on
behalf of Mr. Bader for matching 401(k) plan contributions and insurance
premiums.
(10) This amount represents the compensation Mr. Bates has received since June
23, 1998, the date he joined the Company. His annual salary is $125,000.
(11) All other compensation for 1998 includes amounts paid by the Company on
behalf of Mr. Bates for matching 401(k) plan contributions and insurance
premiums.
(12) Mr. Tokuuke entered into the Tokuuke Agreement in June 1998 pursuant to
which he ceased to be an executive officer, but remained an employee of the
Company.
(13) Includes 5,000 options that were canceled pursuant to the Tokuuke Agreement
in June 1998.
(14) All other compensation for 1998 and 1997 includes amounts paid by the
Company on behalf of Mr. Tokuuke for matching 401(k) plan contributions and
insurance premiums.
(15) Includes 43,333 options that were canceled pursuant to the Tokuuke
Agreement in June 1998.
(16) Includes $2,151 of matching contributions to the Medaphis Savings Plan and
$1,076 of matching contributions to the Medaphis Deferred Plan.
9
<PAGE> 13
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
EXECUTIVE OFFICER
NAME AGE POSITION SINCE
- ---- --- -------- -----------------
<S> <C> <C> <C>
Patrick B. McGinnis................. 51 Chairman of the Board, Chief 1996
Executive Officer & Director
Robert G. Bader, Jr................. 42 Senior Vice President -- Business 1998
Development
Mark J. Bates....................... 39 Senior Vice President -- Systems 1998
Marcia Deutsch...................... 47 Senior Vice President -- Corporate; 1999
President, MedCap Division
Debra M. Murphy..................... 43 Executive Vice 1997
President -- Operations; HRI
Division
Kevin M. O'Donnell.................. 52 Executive Vice 1999
President -- Corporate; President,
SAI Sales Division
Douglas R. Sharps................... 45 Executive Vice President -- Finance 1997
and Administration, Chief Financial
Officer & Secretary
Brian K. Taylor..................... 50 Senior Vice President -- Sales and 1998
Marketing
</TABLE>
PATRICK B. MCGINNIS serves as Chairman, Chief Executive Officer and a
director of the Company. In 1988, Mr. McGinnis left Humana Inc., where he served
as Vice President -- Finance & Planning, to co-found the Company. He served as
the Company's Chief Executive Officer until August 1996, when he left to become
President of Medaphis Healthcare Information Technology Company. He rejoined the
Company and assumed his current responsibilities in January 1997.
ROBERT G. BADER, JR. serves as Senior Vice President -- Business
Development of the Company. He assumed his current responsibilities in January
1998. From 1992 until 1994 Mr. Bader served as Vice President of Strategic
Planning of Blue Cross Blue Shield of Kentucky. In 1994, he assumed the
positions of Chief Operating and Chief Financial Officer of Acordia of
Louisville, one of the operating companies of Acordia, Inc., which was a
publicly traded insurance brokerage and health administrative services company
until wholly acquired by Anthem, Inc. in 1997.
MARK J. BATES serves as Senior Vice President -- Systems at the Company.
Before joining HRI in June 1998, Mr. Bates was Director of Application
Development at Humana Inc. In his 14 years at Humana Inc. he held a variety of
systems management responsibilities including Director of Technical Services,
Director of Customer Service, and Director of Development Support. Mr. Bates is
a 1981 graduate of Rose-Hulman Institute of Technology with a B.S. in Computer
Science. He is a founding member of the Computer Information Systems Corporate
Partner Program at the University of Louisville School of Business.
MARCIA DEUTSCH serves as Senior Vice President -- Corporate; President,
MedCap Division. Ms. Deutsch joined the Company in February 1999. Before joining
the Company, Ms. Deutsch was President and CEO of MedCap Medical Cost
Management, Inc. ("MedCap") since September 1989.
DEBRA M. MURPHY serves as Executive Vice President -- Operations; HRI
Division. Ms. Murphy joined the Company in 1991 as Sales and Marketing Manager.
She was promoted to Director of Sales in October 1994, to Vice
President -- Sales in February 1996 and to Senior Vice President in November
1996. She assumed her current responsibilities in June 1997.
KEVIN M. O'DONNELL serves as Executive Vice President -- Corporate;
President, SAI Sales Division. Mr. O'Donnell joined the Company in January 1999
after serving as President of Subro Audit, Inc. since February 1984. Mr.
O'Donnell has been an attorney since 1972.
10
<PAGE> 14
DOUGLAS R. SHARPS serves as Executive Vice President -- Finance and
Administration, Chief Financial Officer and Secretary. Mr. Sharps joined the
Company in January 1990 as Vice President and General Counsel and became Chief
Financial Officer in October 1994. He is also the principal of Sharps &
Associates, PSC, a law firm that provides support to the Company and handles
litigated recoveries in California, Illinois, Kentucky and Texas. He assumed his
current responsibilities in January 1997.
BRIAN K. TAYLOR serves as Senior Vice President -- Sales and Marketing.
Before assuming his current responsibilities in June 1998, Mr. Taylor was
employed by Aon Risk Services of Kentucky where he served as Vice President from
May 1989 to March 1996 and Senior Vice President from March 1996 to June 1998.
STOCK OPTION GRANTS
The following table sets forth information with respect to options granted
under the Stock Option Plan and the Option Plan to each of the named executive
officers during 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AND ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING TOTAL GRANTED TO TERM
OPTIONS GRANTED EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------------
NAME IN 1998 1998 PER SHARE DATE 5% 10%
- ---- ---------------- ------------ -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Patrick B.
McGinnis........... 50,000 9.5 $20.25 2/22/08 $636,750 $1,613,664
Robert G. Bader,
Jr................. 40,000 7.6 22.25 1/02/08 559,716 1,418,431
Mark J. Bates........ 50,000 9.5 16.88 6/22/08 530,786 1,345,119
Debra M. Murphy...... 20,000 3.8 20.25 2/22/08 254,700 645,466
20,000 3.8 18.25 5/28/08 229,547 581,716
Douglas R. Sharps.... 15,000 2.9 20.25 2/22/08 191,025 484,099
Bobby T. Tokuuke..... 5,000(1) .9 20.25 2/22/08 63,675 161,366
20,000(1) 3.8 16.88 6/22/08 212,314 538,047
</TABLE>
- ---------------
(1) The 5,000 options were canceled and the 20,000 options were granted pursuant
to the Tokuuke Agreement. The Company entered into the Tokuuke Agreement in
order to facilitate Mr. Tokuuke's change in status from a member of the
management group to a key manager.
STOCK OPTION EXERCISES
The table below shows the number of shares of Common Stock covered by both
exercisable and unexercisable stock options held by the named executive officers
as of December 31, 1998. The table also reflects the value for in-the-money
options based on the positive spread between the exercise price of such options
and the last reported sale price of the Common Stock on December 31, 1998, the
last trading date in 1998 for the Common Stock.
AGGREGATED OPTION EXERCISES IN 1998
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN
OPTIONS AT THE MONEY OPTIONS
DECEMBER 31, 1998 AT DECEMBER 31, 1998
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Patrick B. McGinnis.............................. 66,667 183,333 $200,001 $399,999
Robert G. Bader, Jr.............................. 0 40,000 0 0
Mark J. Bates.................................... 0 50,000 0 6,000
Debra M. Murphy.................................. 21,667 83,333 65,001 129,999
Douglas R. Sharps................................ 26,250 67,500 78,750 157,500
Bobby T. Tokuuke................................. 21,667 20,000 65,001 60,000
</TABLE>
11
<PAGE> 15
STOCK PRICE PERFORMANCE GRAPH
The graph below reflects the cumulative stockholder return (assuming
reinvestment of dividends) on the Common Stock compared to the return of the
Center for Research in Security Price Total Return Index for The Nasdaq Stock
Market, U.S. Companies (the "Nasdaq Composite, U.S.") and the Company's peer
group index for the periods indicated. This graph reflects the investment of
$100.00 on May 22, 1997 (the date the Company's initial public offering was
completed by Medaphis) in the Common Stock, the Nasdaq Composite, U.S., the
Company's 1997 peer group and the Company's 1998 peer group. The Company's 1998
peer group consists of the following companies: ABR Information Services, CCC
Information Services Group, Concentra Managed Care, Inc., HCIA, Health
Management Systems, Inc., Hooper Holmes, Inc., Medaphis, MedQuist, Inc., Profit
Recovery Group International, QuadraMed and Transcend Services, Inc. In order to
obtain a more representative sample, the Company increased the number of
companies in the 1998 peer group from the number of companies in the 1997 peer
group. One company in the 1997 peer group, Access Health, Inc., is no longer a
publicly traded company and accordingly is not represented in the 1998 peer
group.
<TABLE>
<CAPTION>
1997 Peer 1998 Peer
HCRI Group Group NASDAQ
Measurement Period Annual Annual Annual Annual
(Fiscal Year Covered) Values Values Values Values
<S> <C> <C> <C> <C>
5/22/97 100 100 100 100
5/30/97 103 99 103 102
6/30/97 131 105 116 105
7/31/97 124 104 109 116
8/29/97 120 118 115 116
9/30/97 153 125 111 123
10/31/97 125 110 108 116
11/28/97 137 109 111 117
12/31/97 151 110 113 114
1/30/98 145 112 113 118
2/27/98 144 131 137 129
3/31/98 158 129 143 134
4/30/98 162 124 146 136
5/29/98 123 102 129 130
6/30/98 134 105 122 138
7/31/98 111 90 108 136
8/31/98 66 58 81 109
9/30/98 68 51 94 123
10/30/98 69 52 94 129
11/30/98 113 54 100 142
12/31/98 115 54 114 160
</TABLE>
The stock price performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933, as amended, or under
the Securities Exchange Act of 1934, as amended (together, the "Acts"), except
to the extent that the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
In 1998, the Compensation Committee consisted of the three disinterested
members of the Board (the "Compensation Committee") whose names appear below.
The Compensation Committee receives input regarding compensation for the
executive officers from the Chief Executive Officer. Currently, the Chief
Executive Officer and the named executive officers (other than Messrs. Bader and
Bates) are parties to
12
<PAGE> 16
employment agreements that set forth each individual's base salary and
contemplate the participation by each employee (other than Mr. Tokuuke) in the
Management Group Incentive Compensation Plan.
Compensation Components. The components of the Company's executive
compensation program consist of base salaries, cash bonuses and stock options.
The Company's compensation program is designed to provide competitive base
salaries for the Company's executive officers, and incentive compensation and
long-term incentives that retain the executive officers and motivate them to
achieve the Company's business objectives over the long-term.
Base Salary. The Chief Executive Officer and each named executive officer
(other than Messrs. Bader and Bates) is a party to a three-year employment
agreement with the Company that sets forth each officer's base salary. See
"Employment Agreements."
Management Group Incentive Compensation Plan. The Company has adopted an
annual performance-based bonus plan in which the named executive officers (other
than Mr. Tokuuke) participate. The plan is divided into a nondiscretionary bonus
pool and a discretionary bonus pool that provides for cash bonuses to its
participants based on certain performance-based thresholds set forth in the
plan. The Company estimates that the maximum bonus for the named executive
officers will be between 95% and 120% of their respective annual base salaries.
Based on its evaluation of the Chief Executive Officer's performance in
attaining the Company's financial results, the Compensation Committee will grant
Mr. McGinnis an annual bonus from the discretionary bonus pool. Mr. McGinnis
will recommend to the Compensation Committee, the discretionary annual bonus for
the executive officers based on each executive officer's performance in
attaining the Company's financial results.
Stock Option Plans. The Company maintains stock option plans designed to
align executives' and stockholders' interests in the enhancement of stockholder
value. Stock options are granted under these plans to certain officers, key
employees and consultants of the Company by the Compensation Committee. Stock
options are generally granted annually if available and if supported by the
Company's growth and profitability. To foster long-term commitments, executives'
options typically vest over a three-year period and remain outstanding for ten
years. In accordance with United States Treasury Department regulations, in the
event the value realized upon the exercise of options by any "covered" employee
(the difference between the per share exercise price and the market price on the
date of exercise multiplied by the number of options exercised) when combined
with such employee's other "covered" compensation in the year of exercise
exceeds $1.0 million, the Company will be unable to deduct the amount of such
excess compensation.
Supplemental Retirement Savings Plan. The Company has adopted a
non-qualified deferred compensation plan under which certain key employees of
the Company may defer up to 16% of their compensation (reduced by the amount
they could have deferred under the Company's 401(k) Plan). The Company will
match employee contributions equal to the contributions that would have been
made under the Company's 401(k) Plan but for certain tax restrictions.
Participants will be entitled to receive distributions upon termination of
employment. The Company may fund all or part of its obligations under this plan
in a trust reachable by the Company's general creditors.
Deductibility of Certain Compensation. Section 162(m) of the Internal
Revenue Code of 1986, as amended, generally disallows a tax deduction to
publicly held corporations for compensation in excess of $1 million per employee
in any taxable year that is paid to the corporation's chief executive officer or
to its four other most highly compensated executive officers. No executive
officer received more than $1 million in compensation in 1998 that will be
subject to the Section 162(m) limitation on deductibility.
Chief Executive Officer Compensation. As discussed earlier in this Proxy
Statement, the Company entered into an employment agreement with the Chief
Executive Officer in May 1997. The employment agreement is for an initial term
of three years and contains certain confidentiality and noncompete provisions
(the "Employment Agreement"). Pursuant to the Employment Agreement, Mr. McGinnis
received an initial base salary of $200,000, and is eligible to participate in
the Management Group Incentive Compensation Plan. On February 12, 1999, the
Company's Board and Compensation Committee approved an amendment to the
Employment Agreement to provide for annual adjustments to Mr. McGinnis' base
salary given in the normal
13
<PAGE> 17
course of business. See "Employment Agreements." The Compensation Committee
determines the amount of discretionary bonuses that Mr. McGinnis receives under
the Management Group Incentive Compensation Plan, based on his performance with
respect to achieving financial results.
In addition, to augment Mr. McGinnis' long-term incentive for continued
employment with the Company, Mr. McGinnis was granted options to acquire 200,000
and 50,000 shares of the Common Stock under the Company's Option Plan in 1997
and 1998 respectively. Additionally, in February 1999 Mr. McGinnis received a
loan from the Company, as described elsewhere in this Proxy Statement.
COMPENSATION COMMITTEE
William C. Ballard, Jr., Chairman
Jill L. Force
Elaine J. Robinson
April 2, 1999
The foregoing report should not be deemed incorporated by reference by any
general statement incorporating by reference this Proxy Statement into any
filing under the Acts, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As described earlier in this Proxy Statement, the Company has a
Compensation Committee of the Board composed of William C. Ballard, Jr.,
Chairman, Jill L. Force and Elaine J. Robinson. Mr. Ballard is also of counsel
to the law firm Greenebaum Doll & McDonald in Louisville, Kentucky (the
"Greenebaum Firm"). From time to time the Company retains the Greenebaum Firm to
handle certain legal matters. The fees incurred by the Company in connection
with such representation have been immaterial.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MCGINNIS DEMAND NOTE. On February 12, 1999, the Board authorized a loan in
the amount of $350,000 to Patrick B. McGinnis, Chairman, Chief Executive Officer
and director of the Company, in exchange for a full recourse promissory note in
the same amount from Mr. McGinnis. The full recourse promissory note bears
interest at a rate equal to either: (1) the Company's cost of borrowing under
its Credit Agreement, dated February 1, 1998 with National City Bank of Kentucky
and the lenders named therein (the "Credit Agreement"), or (2) if no loan amount
is outstanding under the Credit Agreement, the federal short-term rate.
SHARPS & ASSOCIATES. As part of its obligations under client contracts,
the Company generally pays for the legal representation of clients, as required
in the recovery process. A portion of those payments is made in the form of a
retainer to Sharps & Associates PSC, a law firm solely owned by Douglas R.
Sharps, the Company's Executive Vice President -- Finance and Administration,
Chief Financial Officer and Secretary. This law firm employs sixteen attorneys
and six paralegals at its offices in Louisville, Kentucky; Oakland, California;
Chicago, Illinois; and Dallas, Texas. The Company paid $1,320,000 to such
related party during the period ended December 31, 1998 for legal services.
However, Mr. Sharps receives no personal benefit from his ownership of the firm.
MEDCAP MEDICAL COST MANAGEMENT, INC. ASSET PURCHASE. On February 15, 1999,
the Company acquired substantially all of the assets and properties of MedCap
Medical Cost Management, Inc., a California corporation ("MedCap") pursuant to
an Asset Purchase Agreement by and among the Company, MedCap and Marcia Deutsch,
the sole shareholder of MedCap. The Company paid approximately $10 million to
MedCap and may pay up to fifty percent of the gross profits of the MedCap
business for each of the twelve month periods ending December 31, 1999 and 2000,
pursuant to an earn-out arrangement.
14
<PAGE> 18
In conjunction with the acquisition, Ms. Deutsch entered into an Employment
Agreement under which she will serve as Senior Vice President -- Corporate;
President, MedCap Division for a term of two years. Ms. Deutsch will receive an
annual base salary of $150,000 per year and will be entitled to participate in
the Company's incentive compensation plan as described in the Compensation
Committee Report on Executive Compensation contained elsewhere in this Proxy
Statement. Pursuant to her Employment Agreement and a Stock Option Agreement,
Ms. Deutsch also received options to purchase forty thousand (40,000) shares of
the Company's Common Stock under the Stock Option Plan. The Employment Agreement
also contains certain non-competition, non-interference and non-solicitation
covenants.
The total consideration paid for the assets of MedCap was determined
through arm's length negotiations between representatives of the Company, MedCap
and Marcia Deutsch. None of the Company or, to the knowledge of the Company, any
director or officer or any associate of any such director or officer of the
Company had any material relationship with MedCap or Marcia Deutsch prior to the
acquisition.
SUBRO-AUDIT, INC. AND O'DONNELL LEASING CO., LLP ASSET PURCHASE. On
January 25, 1999, the Company acquired substantially all of the assets of
Subro-Audit, Inc., a Wisconsin corporation and O'Donnell Leasing Co., LLP, a
Wisconsin limited liability partnership (together, "SAI"), pursuant to an Asset
Purchase Agreement by and among the Company, SAI, Kevin O'Donnell and Leah
Lampone. Kevin O'Donnell and Leah Lampone owned all of the outstanding capital
stock of Subro-Audit, Inc. and were the sole general partners of O'Donnell
Leasing Co., LLP. The Company paid approximately $24.4 million to SAI and may
pay up to $8.5 million over the next two years pursuant to an earn-out
arrangement.
In conjunction with the acquisition, Kevin M. O'Donnell entered into an
Employment Agreement under which he will serve as Executive Vice
President -- Corporate; President, SAI Sales Division for a term of two years.
The Employment Agreement contains certain non-competition, non-interference and
non-solicitation provisions. Mr. O'Donnell may receive a $1.00 per life sales
commission based on the number of new lives in excess of 2,000,000 lives.
Pursuant to his Employment Agreement and Stock Option Agreement, Mr. O'Donnell
also received options to purchase fifty thousand (50,000) shares of common stock
under the Stock Option Plan.
The total consideration paid for the assets was determined through arm's
length negotiations between representatives of the Company, SAI, Kevin O'Donnell
and Leah Lampone. None of the Company and to the knowledge of the Company, any
director or officer or any associate of any such director or officer of the
Company had any material relationship with SAI, Kevin O'Donnell or Leah Lampone
prior to the acquisition.
OTHER TRANSACTION. William C. Ballard, Jr., a director of the Company, is
of counsel to the Greenebaum Firm. From time to time the Company retains the
Greenebaum Firm to handle certain small legal matters. The fees incurred by the
Company in connection with such representation have been immaterial.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers, directors and persons who own
more than ten percent (10%) of the Common Stock to file certain reports with
respect to each such person's beneficial ownership of the Common Stock,
including statements of changes in beneficial ownership on Form 4. In addition,
Item 405 of Regulation S-K requires the Company to identify in its Proxy
Statement each reporting person that failed to file on a timely basis reports
required by Section 16(a) of the Exchange Act during the most recent fiscal year
or prior fiscal years. The Form 4s for Mr. Robert G. Bader, Jr. and Mr. Mark J.
Bates, executive officers of the Company, relating to 805 shares and 434 shares,
respectively, owned by virtue of purchases made under the Stock Purchase Plan
were not filed on a timely basis during 1998. The Form 5 for Mr. Bobby T.
Tokuuke, who ceased being an executive officer of the Company as of June 23,
1998, relating to 20,000 options granted as of June 22, 1998 under the Company's
Option Plan, was not filed on a timely basis during 1998.
15
<PAGE> 19
PROPOSED AMENDMENT TO THE STOCK OPTION PLAN
The Board has approved and recommends to the stockholders that they approve
a proposal to amend certain provisions of the Company's Stock Option Plan to
increase the number of shares of Common Stock authorized for grant under such
plan from 860,000 to 1,760,000, an increase of 900,000 shares of Common Stock.
The text of the proposed amendment to the Stock Option Plan is set forth in
Exhibit A to this Proxy Statement.
The proposed amendment to the Stock Option Plan will be adopted upon
receiving the affirmative vote of holders of a majority of the shares present or
represented by proxy and entitled to vote at the meeting. Proxies will be voted
in accordance with the specifications marked thereon, and if no specification is
made on a proxy that is properly executed and returned, will be voted "FOR"
adoption of the proposed amendment to the Stock Option Plan.
The Board has determined that the amendment to the Stock Option Plan is in
the best interests of the Company and its stockholders. The proposed amendment
would provide additional shares for grant to employees of the Company. The Board
believes the stock option grants are an effective method to attract and retain
employees and that the availability of shares for future grants under the Stock
Option Plan is important to the Company's business prospects and operations.
Except for the amendment described above, the Stock Option Plan will remain
unchanged. The following is a summary of the Stock Option Plan. This summary is
qualified in its entirety by reference to such plan.
Summary Description of the Stock Option Plan. The Company's stockholders
approved the Stock Option Plan on December 8, 1997. The Stock Option Plan
provides for the grant of options to purchase the Company's Common Stock to
eligible participants, which may include any consultant, officer, or other
employee of the Company or of an entity that is acquired by the Company. Only
eligible participants who are also employees of the Company or a parent or
subsidiary of the Company are eligible for the grant of incentive stock options
under the Stock Option Plan. As of December 31, 1998, the closing price of the
Common Stock on the Nasdaq Stock Market was $17.00 per share. A total of 860,000
shares of Common Stock are currently reserved under the Stock Option Plan. The
maximum number of shares of Common Stock with respect to which options may be
granted under the Stock Option Plan in any calendar year to any one eligible
participant is 100,000 shares. Under the Stock Option Plan, options may not be
granted after ten (10) years from the effective date of the Stock Option Plan.
As of March 17, 1999, there were 306,050 options available for grant under the
Stock Option Plan. Currently, approximately 180 persons are eligible
participants under the Stock Option Plan.
The Stock Option Plan is administered by the Compensation Committee which
consists of three non-employee outside directors of the Company. Subject to the
terms of the Stock Option Plan, the Compensation Committee has the authority to
determine the eligible participants to whom options may be granted and to
determine certain other provisions with respect to each option. The Compensation
Committee may also delegate to the chief executive officer of the Company the
authority to determine the non-executive employees and consultants to whom
options may be granted and the terms and conditions of such options.
Options granted under this Stock Option Plan are generally nontransferable
by the optionee and, unless otherwise determined by the Compensation Committee,
must be exercised by the optionee during his or her period of employment or
service with the Company, a parent or subsidiary of the Company, or, in the case
of options other than incentive stock options, during the period of employment
or service with a company acquired by the Company, or within a specified period
following termination of employment or service. The options shall vest according
to the terms that the Compensation Committee determines in its sole discretion.
In the event of a Change of Control (as defined by the Stock Option Plan), the
unexercised portion of all outstanding options under the Stock Option Plan will
automatically become fully vested and immediately exercisable and will remain
exercisable until the first anniversary of such event, after which time all
outstanding options will immediately terminate as to any portion thereof not
exercised. The exercise period for stock options granted under the Stock Option
Plan shall end ten (10) years from the date on which such options are granted,
or, in the case of incentive stock options granted to an eligible participant
who owns more
16
<PAGE> 20
than ten percent of the total combined voting power of the stock of the Company,
a subsidiary or parent, five years from the date on which such options are
granted.
Under the terms of the Stock Option Plan, the exercise price for the
issuance of Common Stock pursuant to incentive stock options shall be no less
than the fair market value of the Company's Common Stock on the date that such
options are granted or, if such incentive stock options are granted to a person
who owns more than ten percent of the total combined voting power of all classes
of stock of either the Company or a subsidiary or parent of the Company, then
the exercise price shall be no less than one hundred ten percent (110%) of the
fair market value of the Company's Common Stock on the date such options are
granted. The aggregate fair market value of the Company's Common Stock subject
to incentive stock options granted to an eligible participant under the Stock
Option Plan and any other stock option plan that first become exercisable in any
calendar year shall not exceed $100,000.
The number of shares of Common Stock with respect to which options may be
granted under the Stock Option Plan shall be adjusted by the Compensation
Committee to reflect any change in the capitalization of the Company.
Estimate of Benefits. The number of options that will be awarded to the
Chief Executive Officer and the other executive officers of the Company at
future dates is not currently determinable. Information regarding awards to the
Chief Executive Officer and the other named executive officers in 1998 is
provided elsewhere in this Proxy Statement. See "Stock Option Grants." In
addition, in 1998, 235,000 options under the Stock Option Plan were granted to
all current executive officers as a group and 223,950 options were granted to
122 employees, including all current officers who are not executive officers.
Pursuant to the Stock Option Plan, the Company had outstanding, as of
December 31, 1998, options to purchase a total of 553,950 shares of Common Stock
with exercise prices ranging from $8.56 to $22.25 per share.
Federal Income Tax Consequences. A description of the federal income tax
consequences under present law of participation in the Stock Option Plan is set
forth below. Individual circumstances may vary these results. The description is
only a general summary based on current federal income tax laws, regulations,
and judicial and administrative interpretations thereof. The federal income tax
laws and regulations are frequently amended, and such amendments may or may not
be retroactive with respect to transactions described in this Proxy Statement.
Furthermore, eligible participants participating in the Stock Option Plan may be
subject to taxes other than federal income taxes, such as state and local income
taxes and estate or inheritance taxes. Accordingly, prior to purchasing, selling
or otherwise disposing of Common Stock under the Stock Option Plan, each
eligible participant should consult his or her own tax advisor.
Non-Incentive Stock Options ("Non-ISO")
An eligible participant is not subject to federal income tax upon the grant
of a Non-ISO pursuant to the Stock Option Plan, nor will the grant of the option
result in a federal income tax deduction for the Company. As a result of the
exercise of a Non-ISO, the eligible participant generally will recognize
ordinary income in an amount equal to the excess, if any, of the fair market
value of the shares transferred to the eligible participant upon exercise over
the option price. Such fair market value generally will be determined on the
date the shares of Common Stock are transferred pursuant to the exercise.
However, if the eligible participant is subject to Section 16(b) of the Exchange
Act, the date on which the fair market value of the shares transferred will be
determined is delayed for up to six months if the eligible participant cannot
sell the Common Stock without being subject to liability under Section 16(b) of
the Exchange Act. Alternatively, if the eligible participant is subject to
Section 16(b) of the Exchange Act and makes a timely election under sec. 83(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), such fair market
value will be determined on the date the shares are transferred pursuant to the
exercise without regard to the effect of Section 16(b) of the Exchange Act. The
eligible participant will recognize ordinary income in the year in which the
fair market value of the shares transferred is determined. The Company generally
will be entitled to a federal income tax deduction equal to the amount of
ordinary income recognized by the eligible participant when such ordinary income
is recognized by the eligible participant, provided the Company satisfies
applicable
17
<PAGE> 21
federal income tax reporting requirements. The Company's deduction, however, is
subject to a $1,000,000 limitation on the deduction of certain employee
remuneration under sec. 162(m) of the Code, unless an exception for
performance-based compensation under such section applies under the
circumstances.
Depending on the period the shares of Common Stock are held after exercise,
the sale or other taxable disposition of shares acquired through the exercise of
a Non-ISO generally will result in a short-term or a long-term capital gain or
loss equal to the difference between the amount realized on such disposition and
the fair market value of the shares transferred to the eligible participant when
the Non-ISO was exercised or when any restrictions on the Common Stock lapsed.
Special rules apply to an eligible participant who exercises a Non-ISO by
paying the option price, in whole or in part, by the transfer of shares of
Common Stock to the Company.
Incentive Stock Options ("ISO")
An eligible participant is not subject to federal income tax upon the grant
of an ISO pursuant to the Stock Option Plan, nor does the grant of an ISO result
in a federal income tax deduction for the Company. Further, an eligible
participant will not recognize income for federal income tax purposes and the
Company normally will not be entitled to any federal income tax deduction as a
result of the exercise of an ISO and the related transfer of shares of Common
Stock to the eligible participant. However, the excess of the fair market value
of the shares transferred upon the exercise of the ISO over the option price for
such shares generally will constitute an adjustment to income for purposes of
calculating the alternative minimum tax for the year in which the option is
exercised. Thus, certain eligible participants may increase their federal income
tax liability as a result of the exercise of an ISO under the alternative
minimum tax rules of the Code.
If the shares of Common Stock transferred pursuant to the exercise of an
ISO are disposed of within two years from the date the option is granted or
within one year from the date the option is exercised (the "holding periods"),
the eligible participant generally will recognize ordinary income equal to the
lesser of (i) the gain realized (i.e., the excess of the amount realized on the
disposition over the option price) or (ii) the excess of the fair market value
of the shares transferred upon exercise over the option price for such shares.
If the eligible participant is subject to Section 16(b) of the Exchange Act, the
date on which the fair market value of the shares transferred upon exercise will
be determined may be delayed for up to six months (as explained above with
respect to Non-ISOs) unless the eligible participant makes a timely election
under sec. 83(b) of the Code. The balance, if any, of the eligible participant's
gain over the amount treated as ordinary income on disposition generally will be
treated as short-term or long-term capital gain depending upon whether the
holding period applicable to long-term capital assets is satisfied. The Company
generally will be entitled to a federal income tax deduction equal to any
ordinary income recognized by the eligible participant, provided the Company
satisfies applicable federal income tax reporting requirements (and subject
potentially to limitation under sec. 162(m) of the Code).
If the shares of Common Stock transferred upon the exercise of an ISO are
disposed of after the holding periods have been satisfied, such disposition
generally will result in long-term capital gain or loss treatment with respect
to the difference between the amount realized on the disposition and the option
price. The Company will not be entitled to a federal income tax deduction as a
result of a disposition of such shares after the holding periods have been
satisfied.
Special rules apply to an eligible participant who exercises an ISO by
paying the option price, in whole or in part, by the transfer of shares of
Common Stock to the Company.
SELECTION OF INDEPENDENT ACCOUNTANTS
The Board has selected the firm of PricewaterhouseCoopers LLP to serve as
independent accountants of the Company for 1999. PricewaterhouseCoopers LLP has
served as independent accountants of the Company since 1997. One or more
representatives of PricewaterhouseCoopers LLP will be present at the meeting,
will have an opportunity to make a statement if he or she so desires and will be
available to respond to appropriate questions.
18
<PAGE> 22
ANNUAL REPORT TO STOCKHOLDERS
The annual report of the Company for the year ended December 31, 1998
accompanies this Proxy Statement.
ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K, including the financial
statements and financial statement schedules, as filed with the Securities and
Exchange Commission, except exhibits thereto accompanies this Proxy Statement.
The Company will provide copies of the exhibits, should they be requested by
eligible stockholders, and the Company may impose a reasonable fee for providing
such exhibits. Requests for copies of the Company's Annual Report on Form 10-K
should be mailed to:
Healthcare Recoveries, Inc.
1400 Watterson Tower
Louisville, Kentucky 40218
Attention: Douglas R. Sharps
Executive Vice President --
Finance and Administration,
Chief Financial Officer and
Secretary
STOCKHOLDER PROPOSALS
Any stockholder proposals intended to be presented at the Company's 2000
annual meeting of stockholders must be received by the Company no later than
December 4, 1999 in order to be considered for inclusion in the Proxy Statement
and form of proxy to be distributed by the Board of Directors in connection with
such meeting.
Any stockholder proposal to be considered at next year's annual meeting but
not included in the proxy statement must be delivered to or mailed and received
at the principal executive offices of the Company between February 3, 2000 and
March 4, 2000 or the persons appointed as proxies may exercise their
discretionary voting authority if the proposal is considered at the meeting;
provided, however, that if notice or public disclosure of the date of the
meeting is given or made to stockholders after February 23, 2000, to be timely,
notice by the stockholder must be received not later than the close of business
on the tenth day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made.
OTHER MATTERS
The Board knows of no other matters to be brought before the meeting.
However, if any other matters should come before the meeting, the person named
in the proxy will vote such proxy in accordance with their judgment.
EXPENSES OF SOLICITATION
The cost of solicitation of proxies will be borne by the Company. In an
effort to have as large a representation at the meeting as possible, special
solicitation of proxies may, in certain instances, be made personally or by
telephone, facsimile or mail by one or more employees of the Company. The
Company also will reimburse brokers, banks, nominees and other fiduciaries for
postage and reasonable clerical expenses of forwarding the proxy material to
their principals who are beneficial owners of the Company's Common Stock. In
addition, the Company has retained Corporate Investor Communications, Inc.
("CIC") to assist in the solicitation of proxies with respect to shares of the
Company's Common Stock held of record by brokers, nominees and institutions and,
in certain cases, by other holders. Such solicitation may be made through the
19
<PAGE> 23
use of mail, by telephone or by personal calls. The anticipated cost of the
services of CIC is a fee of $4,000 plus expenses.
By Order of the Board of Directors,
Douglas R. Sharps
Executive Vice President --
Finance and Administration,
Chief Financial Officer
and Secretary
Louisville,
Kentucky April 2, 1999
20
<PAGE> 24
EXHIBIT A
PROPOSED AMENDMENT TO HEALTHCARE RECOVERIES, INC. 1997
STOCK OPTION PLAN FOR ELIGIBLE PARTICIPANTS
RESOLVED, that Section 3 of the 1997 Stock Option Plan for Eligible
Participants is hereby amended retroactive to the Effective Date of such Plan to
make an additional 900,000 shares available by deleting Section 3 of such Plan
in its entirety, and replacing it with the following:
"sec.3. SHARES RESERVED UNDER THE PLAN. There shall be 1,760,000 shares
of Stock reserved for issuance under this Plan, and such shares of Stock
shall be reserved to the extent that the Company deems appropriate from
authorized but unissued shares of Stock and from shares of Stock which
have been repurchased by the Company. Furthermore, any shares of Stock
subject to an Option that remain unissued after the cancellation or
expiration of such Option thereafter shall again become available for
use under this Plan. The maximum number of shares of Stock with respect
to which an Option or Options may be granted under this Plan in any
calendar year to any one Eligible Participant shall be 100,000 shares,
and any Option granted before stockholder approval of this Plan
automatically shall be granted subject to such approval."
<PAGE> 25
PROXY HEALTHCARE RECOVERIES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS ON MAY 3, 1999
The undersigned hereby appoints PATRICK B. McGINNIS and DOUGLAS R. SHARPS,
and each of them, proxies, with full power of substitution and resubstitution,
for and in the name of the undersigned, to vote all shares of stock of
Healthcare Recoveries, Inc., which the undersigned would be entitled to vote if
personally present at the Annual Meeting of Stockholders to be held on Monday,
May 3, 1999 at 10:00 a.m., local time, at 1400 Watterson Tower, Louisville,
Kentucky 40218, and at any adjournment thereof, upon the matters described in
the accompanying Notice of Annual Meeting of Stockholders and Proxy Statement,
receipt of which is hereby acknowledged, and upon any other business that may
properly come before the meeting or any adjournment thereof. Said proxies are
directed to vote on the matters described in the Notice of Annual Meeting and
Proxy Statement as follows, and otherwise in their discretion upon such other
business as may properly come before the meeting or any adjournment thereof.
(1) To elect two (2) Class B directors to three-year terms expiring at the 2002
annual meeting of stockholders:
<TABLE>
<S> <C>
[ ] FOR all nominees listed (except as marked [ ] WITHHOLD AUTHORITY to vote for
below to the contrary) all nominees listed
</TABLE>
William C. Ballard, Jr.
Elaine J. Robinson
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH THE
NOMINEE'S NAME IN THE LIST ABOVE.)
(2) To approve and adopt an amendment to the Company's 1997 Stock Option Plan
for Eligible Participants (the "Stock Option Plan") to increase the number
of shares of Common Stock reserved for issuance under such Stock Option Plan
from 860,000 to 1,760,000:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company to serve for 1999:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued, and to be signed, on the other side)
(Continued from other side)
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THE
PROXY WILL BE VOTED FOR THE PROPOSALS LISTED ON THE OTHER SIDE OF THIS PROXY.
Date , 1999
-----------------------------
-----------------------------
-----------------------------
Please sign exactly as
your name or names appear
hereon. Where more than
one owner is shown above,
each should sign. When
signing in a fiduciary or
representative capacity,
please give full title. If
this proxy is submitted by
a corporation, it should
be executed in the full
corporate name by a duly
authorized officer. If a
partnership, please sign
in partnership name by
authorized person.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. IF YOU ATTEND
THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY.
<PAGE> 26
APPENDIX A
HEALTHCARE RECOVERIES, INC.
1997 STOCK OPTION PLAN
FOR ELIGIBLE PARTICIPANTS
<PAGE> 27
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
sec. 1. PURPOSE............................................................ A-3
sec. 2. DEFINITIONS........................................................ A-3
2.1. Acquisition................................................. A-3
2.2. Board....................................................... A-3
2.3. Code........................................................ A-3
2.4. Committee................................................... A-3
2.5. Company..................................................... A-3
2.6. Effective Date.............................................. A-3
2.7. Eligible Participant........................................ A-3
2.8. Exchange Act................................................ A-3
2.9. Fair Market Value........................................... A-3
2.10. ISO......................................................... A-4
2.11. Non-ISO..................................................... A-4
2.12. Option...................................................... A-4
2.13. Option Agreement............................................ A-4
2.14. Option Price................................................ A-4
2.15. Parent...................................................... A-4
2.16. Plan........................................................ A-4
2.17. Securities Act.............................................. A-4
2.18. Stock....................................................... A-4
2.19. Subsidiary.................................................. A-4
2.20. Ten Percent Shareholder..................................... A-4
sec. 3. SHARES RESERVED UNDER THE PLAN..................................... A-4
sec. 4. ADMINISTRATION..................................................... A-4
sec. 5. ELIGIBILITY........................................................ A-5
sec. 6. GRANT OF OPTIONS................................................... A-5
sec. 7. OPTION PRICE....................................................... A-6
sec. 8. EXERCISE PERIOD.................................................... A-6
sec. 9. NONTRANSFERABILITY................................................. A-6
sec. 10. SECURITIES REGISTRATION........................................... A-6
sec. 11. LIFE OF PLAN...................................................... A-7
sec. 12. ADJUSTMENT........................................................ A-7
sec. 13. CHANGE OF CONTROL AND CERTAIN OTHER EVENTS........................ A-7
13.1. Change of Control Events..................................... A-7
13.2. The Company.................................................. A-8
13.3. Notice....................................................... A-8
13.4. Disposition of Stock Following Change of Control of
Company..................................................... A-8
13.5. Fractional Shares............................................ A-8
sec. 14. AMENDMENT OR TERMINATION.......................................... A-8
sec. 15. MISCELLANEOUS..................................................... A-8
15.1. No Stockholder Rights........................................ A-8
15.2. No Contract of Employment.................................... A-8
15.3. Other Conditions............................................. A-9
15.4. Taxes........................................................ A-9
15.5. Construction................................................. A-9
15.6. References................................................... A-9
</TABLE>
A-2
<PAGE> 28
HEALTHCARE RECOVERIES, INC.
1997 STOCK OPTION PLAN
FOR ELIGIBLE PARTICIPANTS
sec. 1.
PURPOSE
The purpose of this Plan is to provide options to purchase stock to
Eligible Participants in order for such Eligible Participants to acquire or
increase their proprietary interest in the Company, and for such Eligible
Participants to share in the success of the Company and to encourage them to
remain in the employ of the Company.
sec. 2.
DEFINITIONS
Each capitalized term set forth in this sec. 2 shall have the meaning set
forth opposite such capitalized term for purposes of this Plan and, for purposes
of such definitions, the singular shall include the plural and the plural shall
include the singular.
2.1. Acquisition -- means the acquisition by the Company or any of its
subsidiaries of all or part of the assets or outstanding capital stock or
ownership interests (whether by purchase, merger or other business combination)
of any corporation, partnership, joint stock company, limited liability company,
joint venture or other business entity or division or other operating unit
thereof.
2.2. Board -- means the Board of Directors of the Company.
2.3. Code -- means the Internal Revenue Code of 1986, as amended.
2.4. Committee -- means the committee appointed by the Board to administer
this Plan and at all times shall consist of two or more members of the Board who
constitute "Non-Employee Directors" as such term is defined in Rule 16b-3 under
the Exchange Act and "Outside Directors" as such term is defined in Treasury
Regulation sec. 1.162-27(e)(3).
2.5. Company -- means Healthcare Recoveries, Inc., a Delaware corporation,
and any successor.
2.6. Effective Date -- means the effective date of this Plan, which shall
be the date this Plan is adopted by the Board in 1997, provided the Company's
stockholders (acting at a duly called meeting of such stockholders) approve this
Plan within twelve months after the date the Board adopts this Plan.
2.7. Eligible Participant -- means any consultant, officer or other
employee of the Company, a Parent or a Subsidiary, or any consultant, officer or
other employee of an entity that is the subject of an Acquisition, who the
Committee, acting in its absolute discretion, has determined to be eligible for
the grant of an Option under this plan.
2.8. Exchange Act -- means the Securities Exchange Act of 1934.
2.9. Fair Market Value -- means for any date (i) the closing price on such
date for a share of Stock as reported by The Wall Street Journal under the
quotation system then used and reported on by any national securities exchange
(as defined under the Exchange Act) on which the stock is listed or, (ii) if the
Stock is not traded on a national securities exchange, the closing price for
such date as reported for such date by The Wall Street Journal under the Nasdaq
National Market quotation system or under the quotation system under which such
closing price is reported or, (iii) if The Wall Street Journal does not report
such closing price, such closing price as reported for such date by a newspaper
or trade journal selected by the Committee or, (iv) if no such closing price is
available for such date, such closing price as so reported or so quoted in
accordance with sec. 2.9(i), (ii) or (iii) for the immediately preceding
business day, or, (v) if no newspaper or trade journal reports such closing
price or if no such price quotation is available, the price that the Committee
acting in
A-3
<PAGE> 29
good faith determines through any reasonable valuation method that a share of
Stock might change hands between a willing buyer and a willing seller, neither
being under any compulsion to buy or to sell and both having reasonable
knowledge of the relevant facts.
2.10. ISO -- means an option granted under this Plan to purchase Stock that
is intended to satisfy the requirements of sec. 422 of the Code.
2.11. Non-ISO -- means an option granted under this Plan to purchase Stock
that by its terms provides that it will not be treated as an incentive stock
option under sec. 422 of the Code or that fails to satisfy the requirements of
sec. 422 of the Code.
2.12. Option -- means an option granted under this Plan to purchase Stock.
2.13. Option Agreement -- means the written agreement that sets forth the
terms of an Option granted to an Eligible Participant under this Plan.
2.14. Option Price -- means the price that shall be paid to purchase one
share of Stock upon the exercise of an Option granted under this Plan.
2.15. Parent -- means any corporation that is a parent corporation (within
the meaning of sec. 424(e) of the Code) of the Company.
2.16. Plan -- means this Healthcare Recoveries, Inc. 1997 Stock Option Plan
for Eligible Participants, as amended from time to time.
2.17. Securities Act -- means the Securities Act of 1933.
2.18. Stock -- means the common stock of the Company, par value $.001 per
share.
2.19. Subsidiary -- means any corporation that is a subsidiary corporation
(within the meaning of sec. 424(f) of the Code) of the Company.
2.20. Ten Percent Shareholder -- means a person who owns (after taking into
account the attribution rules of sec. 424(d) of the Code) more than ten percent
of the total combined voting power of all classes of stock of either the
Company, a Subsidiary or a Parent.
sec. 3.
SHARES RESERVED UNDER THE PLAN
There shall be 860,000 shares of Stock reserved for issuance under this
Plan, and such shares of Stock shall be reserved to the extent that the Company
deems appropriate from authorized but unissued shares of Stock and from shares
of Stock which have been repurchased by the Company. Furthermore, any shares of
Stock subject to an Option that remain unissued after the cancellation or
expiration of such Option thereafter shall again become available for use under
this Plan. The maximum number of shares of Stock with respect to which an Option
or Options may be granted under this Plan in any calendar year to any one
Eligible Participant shall be 100,000 shares, and any Option granted before
stockholder approval of this Plan automatically shall be granted subject to such
approval.
sec. 4.
ADMINISTRATION
This Plan shall be administered by the Committee. The Board may from time
to time remove members from, or add members to, the Committee. Vacancies on the
Committee shall be filled by the Board and the Board shall designate the
Chairman of the Committee. The Committee shall hold meetings at such times and
places as it may determine. The Committee acting in its absolute discretion
shall exercise such powers and take such action as expressly called for under
this Plan and, further, the Committee shall have the power to
A-4
<PAGE> 30
interpret this Plan and to take such other action (except to the extent the
right to take such action is expressly and exclusively reserved for the Board)
in the administration and operation of this Plan as the Committee deems
equitable under the circumstances, which action shall be binding on the Company,
on each affected Eligible Participant and on each other person directly or
indirectly affected by such action. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with respect
to this Plan or any Option granted under this Plan.
sec. 5.
ELIGIBILITY
Only Eligible Participants shall be eligible for the grant of Options under
this Plan. Only Eligible Participants who are employees of the Company, a Parent
or a Subsidiary shall be eligible for the grant of ISOs under this Plan.
sec. 6.
GRANT OF OPTIONS
The Committee, acting in its absolute discretion, shall have the right to
grant Options to Eligible Participants under this Plan, and the Committee may
delegate to the chief executive officer of the Company the authority to grant
Options to any Eligible Participant, subject to any review, approval or
notification required by the Committee, except that the chief executive officer
shall not be delegated the authority to grant Options to Eligible Participants
who are subject to the reporting requirements of Section 16(a) of the Exchange
Act. Each grant of an Option shall be evidenced by an Option Agreement, which
shall specify whether the Option is an ISO or Non-ISO and which shall
incorporate such other terms and conditions as the Committee, acting in its
absolute discretion, or the chief executive officer deems consistent with the
terms of this Plan; provided that (unless the Committee or the chief executive
officer decides otherwise with respect to any Option grant or grants) each
Option Agreement shall provide the vesting provisions of the Option and shall
provide that, if the Eligible Participant ceases to be an employee of the
Company, any Parent or Subsidiary, or, in the case of a Non-ISO, an employee of
any entity that is the subject of an Acquisition, except as a result of a
transaction contemplated by sec. 13, before the Option is fully vested, any
portion of the Option which is not fully vested on the date of such termination
of employment shall be automatically forfeited as of such employment termination
date, and the vested portion of the Option which is unexercised shall expire,
terminate and become unexercisable no later than the earlier to occur of: (i)
the expiration of three months from the date on which the Eligible Participant
ceases to be an employee of the Company, any Parent or Subsidiary, or, in the
case of a Non-ISO, an employee of any entity that is the subject of an
Acquisition, by any reason other than death or permanent and total disability
(within the meaning of Code sec. 22(e)(3)), or (ii) the expiration of six months
from the date the Eligible Participant ceases to be employed by the Company, any
Parent or Subsidiary, or, in the case of a Non-ISO, an employee of any entity
that is the subject of an Acquisition, by reason of death or permanent and total
disability (within the meaning of Code Section 22(e)(3)).
The aggregate Fair Market Value of the shares of Stock subject to ISOs and
other incentive stock options (that satisfy the requirements under sec. 422 of
the Code) granted to an Eligible Participant under this Plan and under any other
stock option plan adopted by the Company, a Subsidiary or a Parent that first
become exercisable in any calendar year shall not exceed $100,000. Such Fair
Market Value figure shall be determined by the Committee on the date the ISO or
other incentive stock option is granted. The Committee shall interpret and
administer the limitation set forth in this paragraph in accordance with
sec. 422(d) of the Code, and the Committee shall treat this limitation as in
effect only for those periods for which sec. 422(d) of the Code is in effect.
A-5
<PAGE> 31
sec. 7.
OPTION PRICE
The Option Price for each share of Stock subject to an ISO shall be no less
than the Fair Market Value of a share of Stock on the date such Option is
granted or, if the ISO is granted to an Eligible Participant who is a Ten
Percent Shareholder, the Option Price for each share of Stock subject to such
Option shall be no less than one hundred ten percent (110%) of the Fair Market
Value of a share of Stock on the date such Option is granted. The Option Price
for each share of Stock subject to a Non-ISO may (in the absolute discretion of
the Committee or chief executive officer) be more than or equal to the Fair
Market Value of a share of Stock on the date such Option is granted; provided
that the Option Price for each Non-ISO that is granted to replace a stock option
of any entity that is the subject of an Acquisition shall reflect the conversion
ratio, if any, applicable to such Acquisition and may (in the absolute
discretion of the Committee) be more or less than or equal to the Fair Market
Value of a share of Stock on the date such Option is granted; provided further,
however, that in no event shall the Option Price be less than adequate
consideration as determined by the Committee.
sec. 8.
EXERCISE PERIOD
Each Option granted under this Plan shall be exercisable in whole or in
part if and when it is vested and at such time or times as set forth in the
related Option Agreement, but no Option Agreement shall make an Option
exercisable on or after the earlier of
(a) the date such option is exercised in full or forfeited,
(b) the date which is the fifth anniversary of the date such Option is
granted, if such Option is an ISO and the Eligible Participant is a Ten
Percent Shareholder on the date such Option is granted, or
(c) the date which is the tenth anniversary of the date such Option is
granted, if such Option is a Non-ISO or if such Option is an ISO and is
granted to an Eligible Participant who is not a Ten Percent Shareholder on
the date such Option is granted.
sec. 9.
NONTRANSFERABILITY
No Option granted under this Plan shall be transferable by an Eligible
Participant other than by will or by the laws of descent and distribution at his
or her death, and an Option shall be exercisable during an Eligible
Participant's lifetime only by the Eligible Participant or, if the Eligible
Participant is determined under applicable law to be incompetent to act on his
or her own behalf, by the person authorized under such applicable law to act on
the Eligible Participant's behalf. The Company shall treat any person to whom an
Option is transferred by will or by the laws of descent and distribution the
same as an Eligible Participant for purposes of exercising such Option.
sec. 10.
SECURITIES REGISTRATION
Each Option Agreement shall provide that, upon the receipt of shares of
Stock as a result of the exercise of an Option, the Eligible Participant shall,
if so requested by the Company, hold such shares of Stock for investment and not
with a view to resale or distribution to the public and, if so requested by the
Company, shall deliver to the Company a written statement satisfactory to the
Company to that effect. Each Option Agreement also shall provide that, if so
requested by the Company, the Eligible Participant shall make a written
representation to the Company that he or she will not sell or offer to sell any
of such Stock unless a registration statement shall be in effect with respect to
such stock under the Securities Act and any applicable
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state securities law or unless he or she shall have furnished to the Company an
opinion, in form and substance satisfactory to the Company, of legal counsel
acceptable to the Company, that such registration is not required. Certificates
representing the Stock transferred upon the exercise of an Option granted under
this Plan may at the discretion of the Company bear a legend to the effect that
such Stock has not been registered under the Securities Act or any applicable
state securities law and that such Stock may not be sold or offered for sale in
the absence of an effective registration statement as to such Stock under the
Securities Act and any applicable state securities law or an opinion, in form
and substance satisfactory to the Company, of counsel acceptable to the Company,
that such registration is not required.
sec. 11.
LIFE OF PLAN
No Option shall be granted under this Plan on or after the earlier of
(a) the tenth anniversary of the Effective Date, in which event this
Plan thereafter shall continue in effect until all outstanding Options have
been exercised in full or no longer are exercisable, or
(b) the date on which all of the Stock reserved under sec. 3 has (as a
result of the exercise of Options granted under this Plan) been issued or
no longer is available for use under this Plan, in which event this Plan
also shall terminate on such date.
sec. 12.
ADJUSTMENT
The number of shares of Stock reserved under sec. 3, the number of shares
of Stock subject to Options granted under this Plan, and the Option Price of
such Options shall be adjusted by the Committee in a equitable manner to reflect
any change in the capitalization of the Company, including, but not limited to,
such changes as stock dividends or stock splits, a subdivision or combination of
the Stock, a reclassification of the Stock, a merger or consolidation of the
Company or any like changes in the Stock or in the value of a share of Stock.
The Committee as part of any corporate transaction described in sec. 424(a) of
the Code shall have the right to adjust (in any manner which the Committee in
its discretion deems consistent with sec. 424(a) of the Code) the number, kind
or class (or any combination thereof) of shares subject to ISOs previously
granted under this Plan and the related Option Price for each such Option, and,
further, shall have the right (in any manner which the Committee in its
discretion deems consistent with sec. 424(a) of the Code) to grant Options to
effect the assumption of, or the substitution for, options previously granted by
any other corporation to the extent that such corporate transaction calls for
such substitution or assumption of such options. If any adjustment under this
sec. 12 would create a fractional share of Stock or a right to acquire a
fractional share of Stock, such fractional share shall be disregarded and the
number of shares of Stock reserved under this Plan and the number subject to any
Options granted under this Plan shall be the next lower number of shares of
Stock, rounding all fractions downward. Any adjustment made under this sec. 12
by the Committee shall be conclusive and binding on affected persons.
sec. 13.
CHANGE OF CONTROL AND CERTAIN OTHER EVENTS
13.1. Change of Control Events. The following events shall constitute
"Change of Control" events for purposes of this Plan: (1) The adoption of a plan
of merger or consolidation of the Company with any other corporation as a result
of which the holders of the outstanding voting stock of the Company as a group
would receive less than fifty percent of the voting stock of the surviving or
resulting corporation; (2) The adoption of a plan of liquidation or the approval
of the dissolution of the Company; or (3) The sale or transfer of substantially
all of the assets of the Company.
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13.2. The Company. In the event of a Change of Control event described in
sec. 13.1(1), the unexercised portion of all outstanding Options under this Plan
will automatically become fully vested and immediately exercisable and will
remain exercisable (subject to adjustment pursuant to sec. 12) until 12 months
after the occurrence of such Change of Control event, after which time all
outstanding Options will immediately terminate as to any portion thereof not
exercised; provided, the Compensation Committee may approve vesting and exercise
periods differing from those provided in this sec. 13.2.
13.3. Notice. Subject to compliance with applicable federal and state
securities laws, the Committee will undertake to provide applicable Eligible
Participants with reasonable notice of any Change of Control event described in
sec. 13.1 prior to the occurrence of such Change of Control event.
13.4. Disposition of Stock Following Change of Control of Company. In the
event of a Change of Control event described in sec. 13.1(1), each Eligible
Participant electing to exercise any outstanding Option will have the right in
connection with the closing of such Change of Control event either to (1) sell
to the Company or the surviving or resulting corporation, the shares of Stock
which the Eligible Participant received upon exercise of such Option at a cash
price per share equivalent of the Fair Market Value of the Stock as of the date
of such Change of Control event, or (2) receive the number and class of shares
of stock or other securities or any other property which the terms of the
agreement of merger, consolidation, or other reorganization would entitle the
Eligible Participant to receive as the holder of record of the number of shares
of Stock which the Eligible Participant received upon exercise of such Option;
provided, however, that in the event a Change of Control event contemplated by
this sec. 13.4 involves a merger to be accounted for under the "pooling of
interests" accounting method, then the Committee shall have the authority
hereunder to modify the rights of an Eligible Participant under this sec. 13.4
to the extent necessary in order to preserve the "pooling of interests"
accounting treatment for such merger.
13.5. Fractional Shares. No Change of Control event contemplated by this
sec. 13 shall create a right to acquire a fractional share of Stock, and any
such fractional share shall be forfeited by the Eligible Participant.
sec. 14.
AMENDMENT OR TERMINATION
This Plan may be amended by the Board from time to time to the extent that
the Board deems necessary or appropriate, except that the Board shall not amend
this Plan absent the approval of the stockholders of the Company (a) if
stockholder approval of the amendment is required under Code sec. 422, to
increase the number of shares of Stock reserved under sec. 3 or to change the
class of employees eligible for Options under sec. 5, or (b) if stockholder
approval of the amendment is required by a national securities exchange on which
the stock is listed, is required in order to comply with Rule 16b-3 under the
Exchange Act, or is required to enable Options granted under the Plan to be
treated as "qualified performance based compensation" under Treasury Regulation
sec. 1.162-27(e); provided that any amendment that specifically applies to
Non-ISOs shall not require stockholder approval unless such approval is required
under sec. 14(b). The Board also may suspend the granting of Options under this
Plan at any time and may terminate this Plan at any time; provided, however, the
Board shall not have the right unilaterally to modify, amend or cancel any
Option granted before such modification, amendment or cancellation unless the
Eligible Participant consents in writing to such modification, amendment or
cancellation.
sec. 15.
MISCELLANEOUS
15.1. No Stockholder Rights. No Eligible Participant shall have any rights
as a stockholder of the Company as a result of the grant of an Option to him or
to her under this Plan or his or her exercise of such Option pending the actual
delivery of Stock subject to such Option to such Eligible Participant.
15.2. No Contract of Employment. The grant of an Option to an Eligible
Participant under this Plan shall not constitute a contract of employment and
shall not confer on an Eligible Participant any rights upon
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his or her termination of employment in addition to those rights, if any,
expressly set forth in the Option Agreement which evidences his or her Option.
15.3. Other Conditions. Each Option may require that an Eligible
Participant (as a condition to the exercise of an Option) enter into any
agreement or make such representations requested by the Company, including any
agreement which restricts the transfer of Stock acquired pursuant to the
exercise of such Option and provides for the repurchase of such Stock by the
Company under certain circumstances.
15.4. Taxes. The Company may make such provisions and take such steps as
it may deem necessary or appropriate for the withholding of all federal, state,
local and other taxes required by law to be withheld with respect to Options
under the Plan, including, but not limited to, (i) deducting the amount required
to be withheld from salary or any other amount then or thereafter payable to an
Eligible Participant, beneficiary or legal representative or (ii) requiring an
Eligible Participant, beneficiary or legal representative to pay to the Company
the amount required to be withheld as a condition of releasing the Stock.
15.5. Construction. This Plan shall be construed under the laws of the
State of Delaware.
15.6. References. Any reference in this Plan to a section (sec.) shall be
to a section (sec.) of this Plan unless otherwise specified in such reference.
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