<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 15, 1999
Healthcare Recoveries, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
----------------------------------------------
(State or other jurisdiction of incorporation)
0-22585
------------------------
(Commission File Number)
61-1141758
------------------------------------
(IRS Employer Identification Number)
1400 Watterson Tower, Louisville, Kentucky 40218
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (502) 454-1340
--------------
Not applicable
-------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Exhibit Index Located on Page: 6
Total Number of Pages: 31
<PAGE> 2
Item 2. Acquisition
Healthcare Recoveries, Inc., a Delaware corporation ("HCRI"), acquired
the assets and certain of the liabilities of MedCap Medical Cost Management,
Inc., a California corporation ("MedCap"), in an asset acquisition (the "Asset
Purchase") on February 15, 1999. The Asset Purchase was consummated in
accordance with the terms of that certain asset purchase agreement (the "Asset
Purchase Agreement"), dated December 4, 1998 among HCRI, MedCap and Marcia
Deutsch, an individual resident of the State of California.
Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
The following audited Financial Statements of MedCap, together
with an independent auditors report thereon and the notes
thereto, are included in Exhibit 99.3.
(i) Balance Sheet as of December 31, 1997.
(ii) Statement of Income for the year ended December 31,
1997.
(iii) Statement of Changes in Shareholder's Equity for the
year ended December 31, 1997.
(iv) Statement of Cash Flows for the year ended December
31, 1997.
(v) Notes to Financial Statements.
The following unaudited Financial Statements of MedCap,
together with an independent auditors review report thereon
and the notes thereto, are included in Exhibit 99.3.
(i) Condensed Combined Balance Sheets as of September 30,
1998 and December 31, 1997.
(ii) Condensed Statements of Income for the nine-month
periods ended September 30, 1998 and 1997.
(iii) Condensed Statements of Cash Flows for the nine-month
periods ended September 30, 1998 and 1997.
(iv) Notes to Condensed Financial Statements.
<PAGE> 3
(b) Pro Forma Financial Information.
The unaudited pro forma condensed financial statements have
been prepared giving effect to the acquisition of the net
assets of MedCap Medical Cost Management, Inc. ("MedCap") and
the acquisition of the net assets of Subro Audit Incorporated
and O'Donnell Leasing Co., LLP (Subro Audit Incorporated and
O'Donnell Leasing Co., LLP collectively referred to as
"Subro"). On January 25, 1999, HCRI also completed the
purchase of substantially all the assets and assumption of
substantially all the liabilities of Subro in a transaction
accounted for as a purchase. Pursuant to the definitive
agreement between HCRI and the owners of Subro, HCRI paid
approximately $24.4 million in cash on the date of closing and
will pay up to an additional $8.5 million to the owners of
Subro if certain targets are met pursuant to an earn-out
arrangement.
The unaudited pro forma condensed balance sheet of HCRI,
MedCap and Subro (HCRI, MedCap and Subro collectively referred
to as the "Combined Entities") as of September 30, 1998, is
presented assuming the acquisitions had occurred on September
30, 1998. The unaudited pro forma condensed statements of
income of the Combined Entities for the nine-month period
ended September 30, 1998 and for the year ended December 31,
1997, present the results of operations of the Combined
Entities assuming the acquisitions and related transactions
had occurred on January 1, 1997. All material adjustments
required in reflecting the acquisitions and related
transactions are set forth in the "Pro Forma Adjustments"
column. The pro forma adjustments are based on preliminary
assumptions of the allocations of the respective purchase
prices and are subject to substantial revision once
appraisals, evaluations and other studies of the fair value of
MedCap's and Subro's assets and liabilities are completed.
Actual purchase accounting adjustments may differ from the
proforma adjustments presented herein.
The combined financial statements of Subro as of and for the
years ended December 31, 1997 and 1996 and the condensed
combined financial statements of Subro as of September 30,
1998 and for the nine-month periods ended September 30, 1998
and 1997, are incorporated herein by reference to HCRI's
current report on Form 8-K/A (File No. 0-22585) dated April 7,
1999.
The unaudited pro forma condensed financial statements should
be read in conjunction with the historical financial
statements of HCRI, MedCap and Subro. The pro forma data is
for informational purposes only and may not necessarily
reflect future results of operations and financial position or
what the results of operations or financial position would
have been had HCRI acquired the net assets of MedCap and Subro
on January 1, 1997 or September 30, 1998, respectively.
The following audited Pro Forma Financial Information of HCRI,
together with the notes thereto, are included in Exhibit 99.4.
<PAGE> 4
(i) Unaudited Pro Forma Condensed Balance Sheet of HCRI
at September 30, 1998.
(ii) Unaudited Pro Forma Condensed Statement of Income for
the nine-month period ended September 30, 1998.
(iii) Unaudited Pro Forma Condensed Statement of Income for
the year ended December 31, 1997.
(iv) Notes to Unaudited Pro Forma Condensed Financial
Statements.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. <S> <C>
2.1* Asset Purchase Agreement by and among HCRI, MedCap Medical Cost
Management, Inc. and Marcia Deutsch, dated as of December 4, 1998. The
Exhibits and Disclosure Letters which are referenced in the table of
contents and elsewhere in the Asset Purchase Agreement are hereby
incorporated by reference. Such Exhibits and Disclosure Letters have
been omitted for purposes of this filing, but will be furnished
supplementally to the Commission upon request (incorporated herein by
reference to Exhibit 2.1 of HCRI's Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 11, 1998).
23.1 Consent of PricewaterhouseCoopers LLP.
99.1* Text of Press Release of HCRI, dated December 7, 1998 (incorporated
herein by reference to Exhibit 99.1 of HCRI's Current Report on Form
8-K filed with the Securities and Exchange Commission on December 11,
1998).
99.2* Text of Press Release of HCRI, dated February 16, 1999. (incorporated
herein by reference to Exhibit 99.2 of HCRI's Current Report on Form
8-K filed with the Securities and Exchange Commission on February 26,
1999).
99.3 Financial Statements of MedCap Medical Cost Management, Inc. as
described in Item 7(a) of this 8-K/A.
99.4 Pro Forma Combined Financial Information of HCRI, as described in Item
7(b) of this 8- K/A.
99.5* The combined financial statements of Subro as of and for the years
ended December 31, 1997 and 1996 and the condensed combined financial
statements of Subro as of September 30, 1998 and for the nine-month
periods ended September 30, 1998 and 1997 (incorporated herein by
reference to Exhibit 99.3 of HCRI's Current Report on Form 8-K/A filed
with the Securities and Exchange Commission on April 7, 1999).
</TABLE>
- ----------------
* Previously filed.
<PAGE> 5
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: April 29, 1999
HEALTHCARE RECOVERIES, INC.
/s/ Douglas R. Sharps
By: -----------------------------------------
Douglas R. Sharps
Executive Vice President -- Finance and
Administration, Chief Financial Officer,
and Secretary
<PAGE> 6
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page No.
- ------- --------
<S> <C> <C>
2.1* Asset Purchase Agreement by and among HCRI, MedCap
Medical Cost Management, Inc. and Marcia Deutsch,
dated as of December 4, 1998. The Exhibits and
Disclosure Letters which are referenced in the
table of contents and elsewhere in the Asset
Purchase Agreement are hereby incorporated by
reference. Such Exhibits and Disclosure Letters
have been omitted for purposes of this filing, but
will be furnished supplementally to the Commission
upon request (incorporated herein by reference to
Exhibit 2.1 of HCRI's Current Report on Form 8-K
filed with the Securities and Exchange Commission
on December 11, 1998).
23.1 Consent of PricewaterhouseCoopers LLP.
99.1* Text of Press Release of HCRI, dated December 7,
1998 (incorporated herein by reference to Exhibit
99.1 of HCRI's Current Report on Form 8-K filed
with the Securities and Exchange Commission on
December 11, 1998).
99.2* Text of Press Release of HCRI, dated February 16,
1999. (incorporated herein by reference to Exhibit
99.2 of HCRI's Current Report on Form 8-K filed
with the Securities and Exchange Commission on
February 26, 1999).
99.3 Financial Statements of MedCap Medical Cost
Management, Inc. as described in Item 7(a) of
this 8-K/A.
99.4 Pro Forma Combined Financial Information of HCRI,
as described in Item 7(b) of this 8-K/A.
99.5* The combined financial statements of Subro as of
and for the years ended December 31, 1997 and 1996
and the condensed combined financial statements of
Subro as of September 30, 1998 and for the
nine-month periods ended September 30, 1998 and
1997 (incorporated herein by reference to Exhibit
99.3 of HCRI's Current Report on Form 8-K/A filed
with the Securities and Exchange Commission on
April 7, 1999).
</TABLE>
- --------------
* Previously filed.
<PAGE> 1
ITEM 7
EXHIBIT 23.1
CONSENT OF PRICEWATERHOUSECOOPERS LLP
<PAGE> 2
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Healthcare Recoveries, Inc. (the "Company") on Form S-8 (File Nos. 333-41557,
333-41559, and 333-41561) of our report dated March 12, 1999, on our audit of
the financial statements of MedCap Medical Cost Management, Inc. ("MedCap") as
of and for the year ended December 31, 1997 and our report dated March 12, 1999,
on our review of the condensed financial statements of MedCap as of September
30, 1998 and for the nine-month periods ended September 30, 1998 and 1997, which
reports are included in this current report on Form 8-K/A. We also consent to
the incorporation by reference of our report dated February 22, 1999, on our
audit of the combined financial statements of Subro Audit Incorporated and
O'Donnell Leasing Company ("Subro") as of and for the years ended December 31,
1997 and 1996 and our report dated February 22, 1999, on our review of the
condensed combined financial statements of Subro as of September 30, 1998 and
for the nine-month periods ended September 30, 1998 and 1997, which reports are
incorporated by reference in this current report on Form 8-K/A to the Company's
current report on Form 8-K/A (File No. 0-22585) filed with the Securities and
Exchange Commission on April 7, 1999.
PricewaterhouseCoopers LLP
Louisville, Kentucky
April 29, 1999
<PAGE> 1
ITEM 7
EXHIBIT 99.3
MEDCAP MEDICAL COST MANAGEMENT, INC.
REPORT ON AUDIT OF FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
<PAGE> 2
C O N T E N T S
<TABLE>
<CAPTION>
PAGES
<S> <C>
Report of Independent Accountants 1
Financial Statements:
Balance Sheet as of December 31, 1997 2
Statement of Income for the year ended December 31, 1997 3
Statement of Changes in Shareholder's Equity for the year ended December 31, 1997 4
Statement of Cash Flows for the year ended December 31, 1997 5
Notes to Financial Statements 6-7
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Healthcare Recoveries, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, shareholder's equity, and cash flows present fairly, in all material
respects, the financial position of MedCap Medical Cost Management, Inc. at
December 31, 1997 and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
March 12, 1999
1
<PAGE> 4
MEDCAP MEDICAL COST MANAGEMENT, INC.
BALANCE SHEET
December 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 86,900
Short-term investments 443,994
Accounts receivable 1,197,819
Other current assets 21,232
-----------
Total current assets 1,749,945
-----------
Property and equipment, at cost:
Office and computer equipment 163,978
Furniture and fixtures 39,083
Leasehold improvements 1,575
-----------
204,636
Accumulated depreciation (150,989)
-----------
Property and equipment, net 53,647
-----------
Other assets 6,443
-----------
Total assets $ 1,810,035
===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accrued payroll $ 205,040
401(k) pension plan payable 122,560
Accrued expenses 27,207
Accrued compensation 28,626
-----------
Total current liabilities 383,433
-----------
Shareholder's equity:
Common stock; $1 par value; 1,000,000 shares authorized;
7,800 shares issued and outstanding 7,800
Contributed capital in excess of par value 2,999
Retained earnings 1,302,334
Net unrealized gain on investments 113,469
-----------
Total shareholder's equity 1,426,602
-----------
Total liabilities and shareholder's equity $ 1,810,035
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 5
MEDCAP MEDICAL COST MANAGEMENT, INC.
STATEMENT OF INCOME
for the year ended December 31, 1997
<TABLE>
<S> <C>
Revenues:
Audit services $ 4,604,909
Other revenues 91,270
-----------
Total revenues 4,696,179
Cost of services 1,995,629
-----------
Gross profit 2,700,550
Support expenses 2,281,754
Depreciation expense 41,464
-----------
Operating income 377,332
Interest expense 6,792
-----------
Net income $ 370,540
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 6
MEDCAP MEDICAL COST MANAGEMENT, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
for the year ended December 31, 1997
<TABLE>
<CAPTION>
CONTRIBUTED NET
CAPITAL IN UNREALIZED
COMMON EXCESS OF RETAINED GAIN ON
STOCK PAR VALUE EARNINGS INVESTMENTS TOTAL
-------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997 $7,800 $2,999 $ 931,794 $ 56,279 $ 998,872
Net income 370,540 370,540
Change in net unrealized
investment gains 57,190 57,190
------ ------ ---------- -------- ----------
Balances, December 31, 1997 $7,800 $2,999 $1,302,334 $113,469 $1,426,602
====== ====== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 7
MEDCAP MEDICAL COST MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
for the year ended December 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 370,540
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense 41,464
Changes in operating assets and liabilities:
Accounts receivable (151,530)
Other assets 9,695
Accrued payroll 26,853
401(k) pension plan payable 72,560
Accrued expenses 19,717
Accrued compensation 8,299
---------
Net cash provided by operating activities 397,598
---------
Cash flows from investing activities:
Payments for property and equipment (49,981)
Payments for short-term investments (29,927)
---------
Net cash used in investing activities (79,908)
---------
Cash flows from financing activities:
Proceeds from short-term borrowings 431,009
Payments on short-term borrowings (759,548)
---------
Net cash used in financing activities (328,539)
---------
Net decrease in cash (10,849)
Cash, beginning of year 97,749
---------
Cash, end of year $ 86,900
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
MedCap Medical Cost Management, Inc. (the Company) was incorporated on
September 5, 1990 as Subchapter S corporation under the laws of the
State of California. The Company provides medical cost management and
information services to third party payers within the health care
industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
SHORT-TERM INVESTMENTS: Marketable securities consist of investments
in equity mutual funds classified in the accompanying balance sheet as
current based on management's intent to use the securities to fund
current operations. Marketable securities have been categorized as
available for sale and, as a result, are stated at fair value based on
quoted market prices. Unrealized holding gains and losses are included
as a component of shareholder's equity.
The cost of marketable securities at December 31, 1997 is $275,000.
PROPERTY AND EQUIPMENT: Property and equipment is recorded at cost.
Depreciation is provided using the double-declining-balance method
over the estimated useful lives of the respective assets. Estimated
useful lives of property and equipment range from 5 to 7 years.
When properties are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts with
any resulting gain or loss being reflected in results of operations.
REVENUE RECOGNITION: Audit services and other revenue are generally
derived from contingent fee arrangements based on the recoveries
affected by the Company on behalf of its clients. Revenue is
recognized when services have been completed and billed to the client.
INCOME TAXES: The Company is a pass-through entity for income tax
purposes and, accordingly, income taxes are the responsibility of the
owner and are not reflected in the Company's financial statements.
USE OF ESTIMATES AND ASSUMPTIONS: The preparation of the Company's
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect (a) the reported amounts of assets and liabilities, (b)
disclosure of contingent assets and liabilities at the date of the
financial statements and (c) reported amounts of revenues and
expenditures during the reporting period. Actual results could differ
from those estimates.
6
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. LINE OF CREDIT:
The Company has entered into an agreement which provides an unsecured
revolving line of credit (the "Line of Credit") for borrowings up to a
maximum of $750,000.
4. MAJOR CLIENTS:
Three clients comprised 10% or more of total revenues for the year
ended December 31, 1997. Total revenues from these clients
approximated 38%, 27% and 22% of the Company's total revenues. The
loss of one of the clients would have a material adverse effect on the
Company's results of operations, financial position and cash flows.
5. EMPLOYEE BENEFIT PLAN:
The Company's employees participate in a 401(k) defined contribution
pension plan. Annual expense provisions are based upon the level of
employee participation as the plan requires the Company to match a
certain portion of the employees' contributions.
Total retirement plan expense was approximately $123,000 for the year
ended December 31, 1997.
6. SUBSEQUENT EVENT:
On February 15, 1999, Healthcare Recoveries, Inc. (HCRI) completed the
purchase of the assets and assumption of the liabilities of the
Company for approximately $10 million using existing cash and
short-term borrowed funds. Pursuant to the purchase agreement HRI may
pay additional amounts over two years if certain targets are met
pursuant to an earn-out arrangement.
7
<PAGE> 10
ITEM 7
EXHIBIT 99.3
MEDCAP MEDICAL COST MANAGEMENT, INC.
REPORT ON REVIEW OF
CONDENSED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND
FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1997
<PAGE> 11
C O N T E N T S
<TABLE>
<CAPTION>
PAGES
<S> <C>
Report on Review of Independent Accountants 1
Financial Statements:
Condensed Balance Sheets as of September 30, 1998 2
and December 31, 1997
Condensed Statements of Income for the nine-month periods 3
ended September 30, 1998 and 1997
Condensed Statements of Cash Flows for the nine-month 4
periods ended September 30, 1998 and 1997
Notes to Condensed Financial Statements 5
</TABLE>
<PAGE> 12
REPORT ON REVIEW OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Management
Healthcare Recoveries, Inc.
We have reviewed the accompanying condensed financial statements of MedCap
Medical Cost Management, Inc. as of September 30, 1998 and for the nine-month
periods ended September 30, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope that an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of December 31, 1997 and the related statements
of income and retained earnings and cash flows for the year then ended (not
presented herein); and, in our report dated March 12, 1999, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of
December 31, 1997 is fairly stated, in all material respects, in relation to
the balance sheet from which it has been derived.
PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
March 12, 1999
1
<PAGE> 13
MEDCAP MEDICAL COST MANAGEMENT, INC.
CONDENSED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash in bank $ 759,091 $ 86,900
Short-term investments 460,836 443,994
Accounts receivable 725,584 1,197,819
Other current assets 29,482 21,232
----------- -----------
Total current assets 1,974,993 1,749,945
----------- -----------
Property and equipment, at cost:
Furniture and fixtures 39,083 39,083
Office and computer equipment 198,275 163,978
Leasehold improvements 1,575 1,575
----------- -----------
238,933 204,636
Accumulated depreciation (173,489) (150,989)
----------- -----------
Property and equipment, net 65,444 53,647
----------- -----------
Other assets 6,443 6,443
----------- -----------
Total assets $ 2,046,880 $ 1,810,035
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 205,201 $ 205,040
401(k) pension plan payable 108,000 122,560
Accounts payable and accrued expenses 138,383 27,207
Accrued compensation 29,016 28,626
----------- -----------
Total current liabilities 480,600 383,433
----------- -----------
Shareholders' equity:
Common stock 7,800 7,800
Contributed capital in excess of par value 2,999 2,999
Retained earnings 1,429,612 1,302,334
Net unrealized investment gains 125,869 113,469
----------- -----------
Total shareholders' equity 1,566,280 1,426,602
----------- -----------
Total liabilities and shareholders' equity $ 2,046,880 $ 1,810,035
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
2
<PAGE> 14
MEDCAP MEDICAL COST MANAGEMENT, INC.
CONDENSED STATEMENTS OF INCOME
for the nine-month periods ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Revenues:
Audit services $3,083,271 $ 3,406,753
Other revenues 461,428 1,756
---------- -----------
Total revenues 3,544,699 3,408,509
Cost of services 1,523,305 1,446,077
---------- -----------
Gross profit 2,021,394 1,962,432
Support expenses 1,620,728 1,663,032
Depreciation expense 22,500 24,798
---------- -----------
Operating income 378,166 274,602
Interest expense -- (6,792)
Other income, net 15,112 13,154
---------- -----------
Net income $ 393,278 $ 280,964
========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
3
<PAGE> 15
MEDCAP MEDICAL COST MANAGEMENT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
for the nine-month periods ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 393,278 $ 280,964
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation expense 22,500 24,798
Changes in operating assets and liabilities:
Accounts receivable 472,235 225,607
Other current assets (8,250) 215
Accrued compensation 161 (6,904)
401(k) pension plan payable (14,560) (5,000)
Accounts payable and accrued expenses 111,176 219,939
Accrued compensation 390 6,224
--------- ---------
Net cash provided by operating activities 976,930 745,843
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (4,442) (5,133)
Purchases of property and equipment (34,297) (49,980)
--------- ---------
Net cash (used in) provided by investing activities (38,739) (55,113)
--------- ---------
Cash flows from financing activities:
Distributions to owner (266,000) --
Proceeds from short-term borrowings -- 431,009
Payments on short-term borrowings -- (759,548)
--------- ---------
Net cash used in financing activities (266,000) (328,539)
--------- ---------
Net increase in cash 672,191 362,191
Cash, beginning of period 86,900 97,749
--------- ---------
Cash, end of period $ 759,091 $ 459,940
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
4
<PAGE> 16
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. REPORTING ENTITY AND BASIS OF PRESENTATION:
MedCap Medical Cost Management, Inc. (the Company) was incorporated on
September 5, 1990 as a Subchapter S Corporation under the laws of the
State of California. The Company provides medical cost management and
information services to third party payers within the healthcare
industry.
The interim financial statements are presented in a condensed format
and consequently do not include all of the disclosures normally
required by generally accepted accounting principles or those normally
made in the Company's annual financial statements. Accordingly, for
further information, the reader of these financial statements may wish
to refer to the Company's financial statements for the year ended
December 31, 1997.
The preparation of the Company's condensed financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect (a) the
reported amounts of assets and liabilities, (b) disclosure of
contingent assets and liabilities at the date of the financial
statements and (c) reported amounts of revenues and expenditures
during the reporting period. Actual results could differ from those
estimates.
The financial information has been prepared in accordance with the
Company's customary accounting practices and has not been audited. In
the opinion of management, the information presented reflects all
adjustments necessary for a fair presentation of interim results. All
such adjustments are of a normal and recurring nature.
2. COMPREHENSIVE INCOME:
Comprehensive income, comprised of net income and unrealized
investment gains, totaled $406,068 and $331,794 for the nine-month
periods ended September 30, 1998 and 1997, respectively.
3. SUBSEQUENT EVENT:
On February 15, 1999, Healthcare Recoveries, Inc. (HCRI) completed the
purchase of the assets and assumption of the liabilities of the
Company for a total initial consideration of approximately $10 million
using existing cash and short-term borrowed funds. Pursuant to the
purchase agreement HCRI may pay additional amounts over two years if
certain targets are met pursuant to an earn-out arrangement.
5
<PAGE> 1
ITEM 7
EXHIBIT 99.4
PRO FORMA COMBINED FINANCIAL
INFORMATION OF HCRI
<PAGE> 2
EXHIBIT 99.4
HEALTHCARE RECOVERIES, INC.
Pro forma Condensed Balance Sheet
September 30, 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
HRI AND
HISTORICAL MEDCAP MEDCAP SUBRO
------------- PRO FORMA PRO FORMA SUBRO PRO FORMA PRO FORMA
HRI MEDCAP ADJUSTMENTS COMBINED HISTORICAL ADJUSTMENTS COMBINED
--- ------ ----------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $28,003 $ 759 $ (500) (a) $28,262 $1,178 $(24,400) (h) $ 5,040
Restricted cash 16,001 -- 16,001 206 16,207
Marketable securities -- 461 461 229 690
Accounts receivable 3,129 726 3,855 78 3,933
Other current assets 1,065 29 210 (b) 1,304 36 420 (i) 1,760
Total current assets 48,198 1,975 (290) 49,883 1,727 (23,980) 27,630
------- ------ -------- ------- ------ -------- -------
Property and equipment, net 5,857 66 5,923 5,322 500 (j) 11,745
Identifiable intangible assets -- -- 2,900 (c) 2,900 -- 3,130 (k) 6,030
Cost in excess of net assets acquired -- -- 5,824 (d) 5,824 -- 15,144 (l) 20,968
Other assets 1,753 6 1,759 -- 1,759
------- ------ -------- ------- ------ -------- -------
Total assets $55,808 $2,047 $ 8,434 $66,289 $7,049 $ (5,206) $68,132
======= ====== ======== ======= ====== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 5,687 $ 481 $ 500 (e) $ 6,668 $ 581 $ 1,000 (m) $ 8,249
Funds due clients 12,311 -- 12,311 206 12,517
Income taxes payable 1,840 -- 1,840 -- 1,840
Borrowings under credit facility -- -- 9,500 (f) 9,500 -- 9,500
Lease payable due within one year -- -- -- 40 40
Notes payable due within one year -- -- -- 235 (235) (n) --
------- ------ -------- ------- ------ -------- -------
Total current liabilities 19,838 481 10,000 30,319 1,062 765 32,146
Lease payable -- -- -- 10 10
Notes payable -- -- -- 3,500 (3,500) (n) --
Other liabilities 1,192 -- 1,192 6 1,198
------- ------ -------- ------- ------ -------- -------
Total liabilities 21,030 481 10,000 31,511 4,578 (2,735) 33,354
------- ------ -------- ------- ------ -------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock -- -- --
Common stock 11 8 (8) (g) 11 11
Other 34,767 1,558 (1,558) (g) 34,767 2,471 (2,471) (o) 34,767
------- ------ -------- ------- ------ -------- -------
Total stockholders' equity 34,778 1,566 (1,566) 34,778 2,471 (2,471) 34,778
------- ------ -------- ------- ------ -------- -------
Total liabilities and owners' equity $55,808 $2,047 $ 8,434 $66,289 $7,049 $ (5,206) $68,132
======= ====== ======== ======= ====== ======== =======
</TABLE>
See notes to pro forma condensed financial statements
<PAGE> 3
HEALTHCARE RECOVERIES, INC.
Pro forma Condensed Statement of Income
For the nine-month period ended September 30, 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
HRI AND
HISTORICAL MEDCAP
--------------- PRO FORMA PRO FORMA SUBRO PRO FORMA PRO FORMA
HRI MEDCAP ADJUSTMENTS COMBINED HISTORICAL ADJUSTMENTS COMBINED
------- ------ ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Subrogation $35,940 $ 35,940 $ 5,238 $ 41,178
Other revenues -- $3,544 3,544 3,544
------- ------ ------ -------- ------- ------- --------
Total revenues 35,940 3,544 -- 39,484 5,238 -- 44,722
Cost of services 16,538 1,523 18,061 2,794 20,855
------- ------ ------ -------- ------- ------- --------
Gross profit 19,402 2,021 -- 21,423 2,444 -- 23,867
Support expenses 7,767 1,621 9,388 1,644 11,032
Depreciation & amortization 1,701 22 $ 458 (p) 2,181 270 $ 972 (s) 3,423
------- ------ ------ -------- ------- ------- --------
Operating income (loss) 9,934 378 (458) 9,854 530 (972) 9,412
Interest expense -- -- (499) (q) (499) (242) 240 (t) (501)
Investment income 1,243 -- 1,243 35 (1,243) (u) 35
Other income, net -- 15 15 55 70
------- ------ ------ -------- ------- ------- --------
Income (loss) before income taxes 11,177 393 (957) 10,613 378 (1,975) 9,016
Provision (benefit) for income taxes 4,636 -- (224) (r) 4,412 -- (550) (v) 3,862
------- ------ ------ -------- ------- ------- --------
Net income (loss) $ 6,541 $ 393 $ (733) $ 6,201 $ 378 $(1,426) $ 5,154
======= ====== ====== ======== ======= ======= ========
Earnings per common share - basic and diluted $ 0.57 $ 0.54 $ 0.44
======= ======== ========
Shares used in earnings per common share
computation (000s)
Basic 11,479 11,479 11,479
Diluted 11,579 11,579 11,583
</TABLE>
See notes to pro forma condensed financial statements
<PAGE> 4
HEALTHCARE RECOVERIES, INC.
Notes To Pro Forma Condensed Financial Statements
As of and for the nine-month period ended September 30, 1998
(in thousands)
(Unaudited)
Note 1: Pro forma Adjustments - Condensed Balance Sheet as of September 30,
1998
MEDCAP:
(a) To record cash used to fund the initial payment of the
purchase price for the acquisition of MedCap. HCRI will also
pay the owner of MedCap an earn-out payment based on 50% of
gross profit generated from MedCap's business over a two-year
period.
(b) To record deferred taxes associated with adjustment (f).
(c) To record estimated value assigned to identifiable intangibles
of MedCap. Identifiable intangibles of MedCap consist of the
value assigned to customer lists ($2,600) and the value
assigned to the non-compete agreement between HCRI and the
owner of MedCap ($300)
(d) To record the estimated purchase price in excess of net
tangible and identifiable intangible assets acquired:
<TABLE>
<S> <C>
Original purchase price consisting of $500 cash and $9,500 of
borrowings under HCRI's credit facility $10,000
Estimated acquisition liabilities (adjustment e) 500
Equity cancellation (adjustment g) (1,566)
Deferred tax adjustment (adjustment b) (210)
Identifiable intangible assets (adjustment c) (2,900)
-------
$ 5,824
=======
</TABLE>
(e) To record estimated liabilities associated with the
acquisition of MedCap including severance, lease obligations
and professional and other acquisition fees.
(f) To record short-term borrowings under HCRI's credit facility
to fund the acquisition of MedCap.
(g) To eliminate the acquired equity of MedCap as of September 30,
1998.
SUBRO:
(h) To record the initial payment of the purchase price of Subro
at the date of closing. HCRI will pay up to an additional
$8,500 over two years if certain targets are met pursuant to
an earn-out agreement.
(i) To record deferred taxes associated with adjustment (m).
(j) To adjust property and equipment of Subro to estimated fair
market value.
(k) To record estimated value assigned to identifiable intangibles
of Subro. Identifiable intangibles consist of the values
assigned to backlog ($571), customer lists ($2,329) and the
non-compete agreement between HCRI and the owners of Subro
($230)
(l) To record the estimated purchase price in excess of net
tangible and identifiable intangible assets acquired:
<TABLE>
<S> <C>
Purchase price consisting of cash $24,400
Estimated acquisition liabilities (adjustment m) 1,000
Equity cancellation (adjustment o) (2,471)
Adjustment to reflect property and equipment
at fair market value (adjustment j) (500)
Deferred tax adjustment (adjustment i) (420)
Repayment of notes payable (adjustment n) (3,735)
Identifiable intangible assets (adjustment k) (3,130)
-------
$15,144
=======
</TABLE>
(m) To record estimated liabilities associated with the
acquisition of Subro including severance, lease termination
costs and professional fees.
(n) To record the repayment of notes payable by the owners' of
Subro using proceeds from the Subro transaction.
(o) To eliminate the acquired equity of Subro as of September 30,
1998.
<PAGE> 5
HEALTHCARE RECOVERIES, INC.
Notes To Pro Forma Condensed Financial Statements - Continued
As of and for the nine-month period ended September 30, 1998
(in thousands)
(Unaudited)
Note 2: Pro forma Adjustments - Condensed Statement of Income for the
nine-month period ended September 30, 1998
MEDCAP:
(p) To record amortization related to identifiable intangibles and
the excess of purchase price over net tangible and intangibles
assets acquired for MedCap. The excess of purchase price over
net tangible and identifiable intangible assets acquired will
be amortized on a straight-line basis over 20 years. The
values assigned to customer lists and the non- compete
agreement will be amortized on a straight-line basis over 15
years and 4 years, respectively.
Amortization for the period also includes amortization
associated with additional goodwill to be recorded in
connection with the earn-out payment at the end of the first
year (see note a).
(q) To record interest expense on amounts outstanding under the
credit facility (see note f) at the interest rate of 7
percent.
(r) To record the pro forma income taxes associated with
adjustments (p) and (q) and pretax income of MedCap which is
assumed to be taxable to HCRI.
SUBRO:
(s) To record amortization related to identifiable intangibles and
the excess of purchase price over net tangible and intangibles
assets acquired. The excess of purchase price over net
tangible and identifiable intangible assets acquired will be
amortized on a straight-line basis over 20 years.
The values assigned to backlog, customer lists and the
non-compete agreement will be amortized on a straight-line
basis over 5 years, 15 years and 5 years, respectively.
Amortization for the period also includes amortization
associated with additional goodwill to be recorded in
connection with the earn-out payment at the end of the first
year (see note h).
(t) To reverse interest expense on notes payable repaid by the
owners of Subro using proceeds from the Subro transaction.
(u) To record foregone investment income on cash and cash
equivalents used to fund the purchase price of Subro.
(v) To record pro forma income taxes associated with adjustments
(s) through (u) and pretax income of Subro which is assumed to
be taxable to HCRI.
Note 3: A reconciliation of shares used in computing pro forma diluted
earnings per common share follows (000s):
<TABLE>
<S> <C>
Shares used in computing historical diluted earnings per common share 11,573
Impact of options granted to the owner of MedCap 6
------
Shares used in computing HRI and MedCap pro forma combined diluted
earnings per common share 11,579
------
Impact of options granted to an owner of Subro 4
------
Shares used in computing pro forma combined diluted earnings per
common share 11,583
======
</TABLE>
<PAGE> 6
HEALTHCARE RECOVERIES, INC.
Pro forma Condensed Statement of Income
For the year ended December 31, 1997
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
HRI AND
HISTORICAL MEDCAP
----------------- PRO FORMA PRO FORMA SUBRO PRO FORMA PRO FORMA
HRI MEDCAP ADJUSTMENTS COMBINED HISTORICAL ADJUSTMENTS COMBINED
--- ------ ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Subrogation $39,277 $39,277 $ 6,628 $ 45,905
Other revenues - $ 4,696 4,696 4,696
------- ------- ------- ------- ------- ------- --------
Total revenues 39,277 4,696 - 43,973 6,628 - 50,601
Cost of services 18,523 1,996 20,519 3,501 24,020
------- ------- ------- ------- ------- ------- --------
Gross profit 20,754 2,700 - 23,454 3,127 - 26,581
Support expenses 8,922 2,282 11,204 2,262 13,466
Depreciation & amortization 1,181 41 $ 540 (w) 1,762 322 $ 1,073 (z) 3,156
Non-recurring compensation charge
(Note 4) 2,848 - 2,848 - 2,848
------- ------- ------- ------- ------- ------- --------
Operating income (loss) 7,803 377 (540) 7,640 543 (1,073) 7,110
Interest expense - (7) (665)(x) (672) (351) 348 (aa) (675)
Investment income 1,158 - 1,158 43 (1,158)(bb) 43
Gain on sale of property & equipment - - - 178 178
Other income, net - - - 74 74
------- ------- ------- ------- ------- ------- --------
Income (loss) before income taxes 8,961 370 (1,205) 8,126 487 (1,883) 6,730
Provision (benefit) for income taxes 4,959 - (327)(y) 4,632 - (426)(cc) 4,206
------- ------- ------- ------- ------- ------- --------
Net income (loss) $ 4,002 $ 370 $ (878) $ 3,495 $ 487 $(1,457) $ 2,524
======= ======= ======= ======= ======= ======= ========
Earnings per common share - basic
and diluted $ 0.37 $ 0.32 $ 0.23
======= ======= ========
Shares used in earnings per common
share computation (000s)
Basic 10,752 10,752 10,752
Diluted 10,819 10,826 10,829
</TABLE>
See notes to pro forma condensed financial statements
<PAGE> 7
HEALTHCARE RECOVERIES, INC.
Notes To Pro Forma Condensed Financial Statements
For the year ended December 31, 1997
(Unaudited)
Note 4: Pro forma Adjustments - Condensed Statement of Income for the year
ended December 31, 1997
MEDCAP:
(w) To record amortization related to identifiable intangibles and
the excess of purchase price over net tangible and intangibles
assets acquired. See adjustments (c) and (p).
(x) To record interest expense on amounts outstanding on credit
facility (see note f) at the interest rate of 7 percent.
(y) To record the pro forma income taxes associated with
adjustments (w) and (x) and pretax income of MedCap which is
assumed to be taxable to HCRI.
SUBRO:
(z) To record amortization related to identifiable intangibles and
the excess of purchase price over net tangible and intangibles
assets acquired. See adjustments (k) and (s).
(aa) To reverse interest expense on notes payable repaid by the
owners of Subro using proceeds from the Subro transaction.
(bb) To record foregone investment income on cash and cash
equivalents used to fund the purchase price of Subro
(cc) To record the pro forma income taxes associated with
adjustments (z) through (bb) and pretax income of Subro which
is assumed to be taxable to HCRI.
Note 5: During the year ended December 31, 1997, HCRI recorded a
non-recurring, non-cash compensation charge of approximately $2.8
million relating to a bonus comprised of 200,000 shares of HCRI's
common stock granted by HCRI to certain members of HCRI's executive
management upon consummation of HCRI's public offering.
Note 6: A reconciliation of shares used in computing pro forma diluted
earnings per common share follows (000s):
<TABLE>
<S> <C>
Shares used in computing historical diluted earnings per common share 10,819
Impact of options granted to the owner of MedCap 7
------
Shares used in computing HCRI and MedCap pro forma combined diluted
earnings per common share 10,826
Impact of options granted to an owner of Subro 3
------
Shares used in computing pro forma combined diluted earnings per
common share 10,829
======
</TABLE>
Note 7: Prior to the Subro transaction, Subro management agreed to pay from
the proceeds of the transaction up to approximately $205,700 ($119,300,
net of tax) to the employees of Subro in the form of a bonus if certain
minimum employment requirements are met. The related charge to be
included in the results of operations of HCRI was not considered in the
pro forma statement of income.
