<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): January 25, 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: 5
------
Total Number of Pages: 33
------
<PAGE> 2
Item 2. Acquisition.
Healthcare Recoveries, Inc., a Delaware corporation ("HRI"), acquired
the assets and certain of the liabilities of Subro-Audit, Inc., a Wisconsin
corporation, ("SAI"), and O'Donnell Leasing Co., LLP, a Wisconsin limited
liability partnership ("ODL") in an asset acquisition (the "Asset Purchase") on
January 25, 1999. The Asset Purchase was consummated in accordance with the
terms of that certain asset purchase agreement (the "Asset Purchase Agreement"),
dated January 3, 1999 among HRI, SAI, ODL, and Kevin M. O'Donnell and Leah
Lampone, individual residents of the State of Wisconsin, and the amendment dated
January 25, 1999 (the "Amendment") by the parties to the Asset Purchase
Agreement.
Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
The following audited Financial Statements of SAI and ODL
(collectively, "Subro"), together with an independent auditors
report thereon and the notes thereto, are included in Exhibit
99.3.
(i) Combined Balanced Sheets as of December 31, 1997 and
1996.
(ii) Combined Statements of Income for the years ended
December 31, 1997 and 1996.
(iii) Combined Statements of Changes in Owners' Equity for
the years ended December 31, 1997 and 1996.
(iv) Combined Statements of Cash Flow for the years ended
December 31, 1997 and 1996.
(v) Notes to Financial Statements.
The following unaudited Financial Statements of Subro,
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 Combined Statements of Income for the nine
month periods ended September 30, 1998 and 1997.
(iii) Condensed Combined Statements of Cash Flows for the
nine month periods ended September 30, 1998 and 1997.
2
<PAGE> 3
(iv) Notes to Condensed Combined Financial Statements.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed balance sheet of HRI and
Subro (collectively the "Combined Entities") as of September
30, 1998, is presented assuming the acquisition 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 acquisition and related
transactions had occurred on January 1, 1997. All material
adjustments required in reflecting the acquisition and related
transactions are set forth in the "Pro Forma Adjustments"
column. The pro forma adjustments are based on preliminary
assumptions of the allocation of the purchase price and are
subject to substantial revision once appraisals, evaluations
and other studies of the fair value of Subro's assets and
liabilities are completed. Actual purchase accounting
adjustments may differ from the pro forma adjustments
presented herein.
The unaudited pro forma condensed financial statements should
be read in conjunction with the historical financial
statements of HRI 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 HRI and Subro merged at January 1, 1997 or September
30, 1998, respectively.
The following unaudited Pro Forma Financial Information of the
Registrant, together with the notes thereto, are included in
Exhibit 99.4.
(i) Unaudited Pro Forma Condensed Balance Sheet of the
Registrant 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.
Exhibit No.
- -----------
2.1* Asset Purchase Agreement by and among Healthcare Recoveries, Inc.,
Subro-Audit, Inc., O'Donnell Leasing Co., LLP, Kevin M. O'Donnell and
Leah Lampone, dated as of January 3, 1999. 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.
2.2* Amendment to Asset Purchase Agreement by and among Healthcare
Recoveries, Inc., Subro-Audit, Inc., O'Donnell Leasing Co., LLP, Kevin
M. O'Donnell and Leah Lampone, dated as of January 25, 1999. The
Exhibits which are referenced in the Amendment to the Asset Purchase
Agreement are hereby incorporated by reference. Such Exhibits have been
omitted for purposes of this filing, but will be furnished
supplementally to the Commission upon request.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1* Text of Press Release of Healthcare Recoveries, Inc., dated January 4,
1999.
99.2* Text of Press Release of Healthcare Recoveries, Inc., dated January 25,
1999.
99.3 Financial Statements of Subro-Audit, Inc. and O'Donnell Leasing Co.,
LLP, as described in Item 7(a) of this 8-K/A.
99.4 Pro Forma Combined Financial Information of Registrant, as described in
Item 7(b) of this 8-K/A.
- ----------------
* Previously filed.
3
<PAGE> 4
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 7, 1999
HEALTHCARE RECOVERIES, INC.
By: /s/ Douglas R. Sharps
-----------------------------------------
Douglas R. Sharps
Executive Vice President -- Finance and
Administration, Chief Financial Officer,
and Secretary
4
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page No.
- ------- --------
<S> <C>
2.1* Asset Purchase Agreement by and among Healthcare Recoveries, Inc.,
Subro-Audit, Inc., O'Donnell Leasing Co., LLP, Kevin M. O'Donnell and
Leah Lampone, dated as of January 3, 1999. 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.
2.2* Amendment to Asset Purchase Agreement by and among Healthcare
Recoveries, Inc., Subro-Audit, Inc., O'Donnell Leasing Co., LLP, Kevin
M. O'Donnell and Leah Lampone, dated as of January 25, 1999. The
Exhibits which are referenced in the Amendment to the Asset Purchase
Agreement are hereby incorporated by reference. Such Exhibits have been
omitted for purposes of this filing, but will be furnished
supplementally to the Commission upon request.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1* Text of Press Release of Healthcare Recoveries, Inc., dated January 4,
1999.
99.2* Text of Press Release of Healthcare Recoveries, Inc., dated January 25,
1999.
99.3 Financial Statements of Subro-Audit, Inc. and O'Donnell Leasing Co.,
LLP, as described in Item 7(a) of this 8-K/A.
99.4 Pro Forma Combined Financial Information of Registrant, as described in
Item 7(b) of this 8-K/A.
</TABLE>
- ----------------
* Previously filed.
5
<PAGE> 1
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 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
included in this current report on Form 8-K filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934.
PricewaterhouseCoopers LLP
April 7, 1999
6
<PAGE> 1
EXHIBIT 99.3
FINANCIAL STATEMENTS
7
<PAGE> 2
SUBRO AUDIT INCORPORATED AND
O'DONNELL LEASING COMPANY
REPORT ON AUDITS OF COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
8
<PAGE> 3
CONTENTS
<TABLE>
<CAPTION>
PAGES
<S> <C>
Report of Independent Accountants 10
Financial Statements:
Combined Balance Sheets as of December 31, 1997 and 1996 11
Combined Statements of Income for the years ended
December 31, 1997 and 1996 12
Combined Statements of Changes in Owners' Equity for the
years ended December 31, 1997 and 1996 13
Combined Statements of Cash Flows for the years ended
December 31, 1997 and 1996 14
Notes to Combined Financial Statements 15-20
</TABLE>
9
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Management
Healthcare Recoveries, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, changes in owners' equity and cash flows present
fairly, in all material respects, the combined financial position of Subro Audit
Incorporated and O'Donnell Leasing Company at December 31, 1997 and 1996, and
the combined results of their operations and their cash flows for each of the
two years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Companies' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits 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
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
February 22, 1999
10
<PAGE> 5
SUBRO AUDIT INCORPORATED AND
O'DONNELL LEASING COMPANY
COMBINED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 817,536 $ 1,090,908
Restricted cash 216,514 282,770
Marketable securities 230,165 150,255
Accounts receivable, less allowance for doubtful accounts
of $27,158 - 1997 and $16,889 - 1996 259,406 530,894
Other current assets 30,973 26,016
----------- -----------
Total current assets 1,554,594 2,080,843
----------- -----------
Property and equipment, at cost:
Land 828,319 846,463
Buildings 3,993,462 3,655,790
Furniture and equipment 2,006,160 1,728,127
----------- -----------
6,827,941 6,230,380
Accumulated depreciation and amortization (1,272,223) (1,103,538)
----------- -----------
Property and equipment, net 5,555,718 5,126,842
----------- -----------
Total assets $ 7,110,312 $ 7,207,685
=========== ===========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accrued compensation $ 257,823 $ 212,978
Accounts payable and other accrued expenses 250,612 228,406
Funds due clients 216,514 282,770
Lease payable due within one year 69,174 39,573
Notes payable due within one year 223,444 468,498
----------- -----------
Total current liabilities 1,017,567 1,232,225
Lease payable 34,185 39,793
Notes payable 3,672,707 3,396,466
Other liabilities 5,858 6,662
----------- -----------
Total liabilities 4,730,317 4,675,146
----------- -----------
Owners' equity:
Combined capital 60,511 60,511
Retained earnings 2,279,401 2,502,490
Net unrealized investment gains (losses) 40,083 (30,462)
----------- -----------
Total owners' equity 2,379,995 2,532,539
----------- -----------
Total liabilities and owners' equity $ 7,110,312 $ 7,207,685
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE> 6
SUBRO AUDIT INCORPORATED AND
O'DONNELL LEASING COMPANY
COMBINED STATEMENTS OF INCOME
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Subrogation revenues $ 6,627,537 $ 6,052,426
Cost of services 3,501,026 2,930,152
----------- -----------
Gross profit 3,126,511 3,122,274
Support expenses 2,261,583 1,718,396
Depreciation and amortization 322,375 220,230
----------- -----------
Operating income 542,553 1,183,648
Interest expense (350,858) (123,538)
Investment income 42,690 38,605
Gain on sale of property and equipment 178,370 3,250
Rental income 74,156 50,293
----------- -----------
Net income $ 486,911 $ 1,152,258
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE> 7
SUBRO AUDIT INCORPORATED AND
O'DONNELL LEASING COMPANY
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
NET
UNREALIZED
COMBINED RETAINED INVESTMENT
CAPITAL EARNINGS GAINS (LOSSES) TOTAL
----------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
Balances, January 1, 1996 $ 60,511 $ 1,575,358 $ (50,290) $1,585,579
Net income 1,152,258 1,152,258
Change in net unrealized investment
gains (losses) 19,828 19,828
Distributions to owner (225,126) (225,126)
----------- ----------- --------- ---------
Balances, December 31, 1996 60,511 2,502,490 (30,462) 2,582,539
Net income 486,911 486,911
Change in net unrealized investment
gains (losses) 70,545 70,545
Distributions to owners (710,000) (710,000)
----------- ----------- --------- ---------
Balances, December 31, 1997 $ 60,511 $ 2,279,401 $ 40,083 $2,379,995
=========== =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE> 8
SUBRO AUDIT INCORPORATED AND
O'DONNELL LEASING COMPANY
COMBINED STATEMENTS OF CASH FLOW
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 486,911 $ 1,152,258
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 322,375 220,230
Gain on sale of property and equipment (178,370) (3,250)
Changes in operating assets and liabilities:
Restricted cash 66,256 50,497
Accounts receivable 271,488 (155,066)
Other current assets (4,957) (10,602)
Accrued compensation 44,845 (90,547)
Accounts payable and other accrued expenses 22,206 152,989
Funds due clients (66,256) (50,497)
Other liabilities (804) 6,662
----------- -----------
Net cash provided by operating activities 963,694 1,272,674
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities (9,365) (80,313)
Purchases of property and equipment (1,197,881) (2,747,789)
Sales of property and equipment 625,000 3,250
----------- -----------
Net cash used in investing activities (582,246) (2,824,852)
----------- -----------
Cash flows from financing activities:
Distributions to owners (710,000) (225,126)
Proceeds from notes payable 1,249,685 2,341,542
Proceeds from lease financing 87,617 102,468
Payments on notes payable (1,218,498) (82,268)
Payments on lease payable (63,624) (23,102)
----------- -----------
Net cash (used in) provided by financing activities (654,820) 2,113,514
----------- -----------
Net (decrease) increase in cash (273,372) 561,336
Cash, beginning of period 1,090,908 529,572
----------- -----------
Cash, end of period $ 817,536 $ 1,090,908
=========== ===========
Supplemental cash flow disclosure:
Interest payments $ 357,042 $ 201,722
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE> 9
NOTES TO COMBINED FINANCIAL STATEMENTS
1. REPORTING ENTITY:
Subro Audit Incorporated (SAI) was incorporated in 1982 as a subchapter
S corporation under the laws of the State of Wisconsin. SAI was
established to provide investigation, processing and professional
negotiation services, generally known as subrogation, to health and
disability insurers, third-party administrators, managed care
organizations, self-funded employee benefit plans and physician hospital
organizations. SAI has offices in Milwaukee, Wisconsin and Atlanta,
Georgia.
O'Donnell Leasing Company (OLC) is a real estate partnership formed
exclusively for the purpose of owning and maintaining the property of
SAI.
Kevin M. O'Donnell, President and Chief Executive Officer, and Leah M.
Lampone, Assistant Secretary, of SAI and OLC (the Companies) each own
50% of SAI and 40% of OLC, respectively. The remaining 20% ownership in
OLC is held by the children of Kevin M. O'Donnell and Leah M. Lampone.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements comprise the accounts of the Companies
and have been prepared to present the financial position and results of
operations of the Companies on a combined basis. All accounts and
transactions between the Companies have been eliminated.
CASH AND RESTRICTED CASH
Restricted cash represents the balance of amounts collected on behalf of
certain clients. The balance will be disbursed to clients in accordance
with the terms of the arrangements between SAI and its clients.
The Companies' cash and restricted cash have been placed with one
financial institution.
MARKETABLE SECURITIES
Marketable securities consist of investments in equity mutual funds
classified in the accompanying combined balance sheets 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
owners' equity.
The cost of marketable securities at December 31, 1997 and 1996 is
$190,082 and $180,717, respectively.
INCOME TAXES
SAI and OLC are pass-through entities for income tax purposes and,
accordingly, income taxes are the responsibility of the owners
individually and are not reflected in the Companies' combined financial
statements.
15
<PAGE> 10
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives
of the respective assets or the term of the lease, if shorter. Estimated
useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Buildings 31 years
Furniture 5 to 7 years
and equipment
</TABLE>
When properties are retired or otherwise disposed, the cost and related
accumulated depreciation are removed from the accounts with any
resulting gain or loss being reflected in results of operations.
Maintenance and repairs are expensed in the year incurred.
COMBINED CAPITAL
Combined capital consists of 4,000 shares of $1 par value common stock
of SAI issued for $4,000 and $56,511 of capital contributed to form OLC.
REVENUE RECOGNITION
Subrogation revenues are generally derived from contingent fee
arrangements based on the recoveries affected by SAI on behalf of its
clients. Revenue is recognized when a fee is earned based on the
recovery of a claim.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of the Companies' combined 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.
3. LEASE COMMITMENTS:
The Companies lease certain computer equipment under long-term leases
accounted for as capital leases. Capitalized cost and related
accumulated amortization of computer equipment under capital leases at
December 31, 1997 and 1996, consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer equipment, at cost $ 190,085 $ 102,468
Less: accumulated amortization (53,213) (14,498)
--------- ---------
$ 136,872 $ 87,970
========= =========
</TABLE>
16
<PAGE> 11
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
3. LEASE COMMITMENTS, CONTINUED:
Future minimum lease payments, by year and in the aggregate, under
capital leases with initial or remaining terms in excess of one year at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 75,493
1999 32,821
2000 2,693
---------
Total 111,007
Less: amount representing interest (7,648)
---------
Net present values 103,359
Less: current portion (69,174)
---------
$ 34,185
=========
</TABLE>
4. NOTES PAYABLE:
Notes payable collateralized by the Companies' property at December 31,
1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Mortgage note payable, due May 1998; interest rate at
December 31, 1997 was 9.25% $ 798,333 $ 862,200
Mortgage note payable, due July 2007; interest rate at
December 31, 1997 was 8.29% 1,939,805 2,524,315
Mortgage note payable, due July 2017; interest rate at
December 31, 1997 was 6.914% 740,316 --
Mortgage note payable, due March 2000; interest rate
at December 31, 1997 was 8.375% 262,600 --
Mortgage note payable, due March September 1999;
interest rate at December 31, 1997 was 8.75% 155,097 174,980
Mortgage note payable, due December 1996; -- 303,469
----------- -----------
3,896,151 3,864,964
Less: current portion (223,444) (468,498)
----------- -----------
$ 3,672,707 $ 3,396,466
=========== ===========
</TABLE>
17
<PAGE> 12
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE, CONTINUED:
The maturities of all notes payable for the five years following
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 223,444
1999 228,688
2000 258,151
2001 275,362
2002 and thereafter 2,910,506
-----------
$ 3,896,151
===========
</TABLE>
Interest capitalized during the years ended December 31, 1997 and 1996
totaled $20,216 and $80,125, respectively.
5. MAJOR CLIENT:
Revenues from one client approximated 28% and 36% of total revenues for
the years ended December 31, 1997 and 1996, respectively. The loss of
this client would have a material adverse effect on the Companies'
combined results of operations, financial position and cash flows.
6. EMPLOYEE BENEFIT PLAN:
SAI's employees participate in a 401(k) defined contribution pension
plan. Annual expense provision is based upon the level of employee
participation as the plan requires SAI to match a certain portion of the
employees' contributions. Total 401(k) plan expense was approximately
$40,000 and $33,000 for the years ended December 31, 1997 and 1996,
respectively.
7. CONTINGENT LIABILITIES:
SAI is engaged in the business of identifying and recovering subrogation
and related claims of its clients, many of which arise in the context of
personal injury lawsuits. As such, SAI operates in a
litigation-intensive environment. SAI has, from time to time, been, and
in the future expects to be, named as a party in litigation incidental
to its business operations. To date, SAI has not been involved in any
litigation which has had a material adverse effect upon SAI, but there
can be no assurance that pending litigation or future litigation will
not have a material adverse effect on SAI's business, results of
operations or financial position.
18
<PAGE> 13
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
8. SUBSEQUENT EVENT:
On January 25, 1999, Healthcare Recoveries, Inc. (HRI) completed the
purchase of the assets and assumption of the liabilities of the
Companies. Pursuant to the definitive agreement, HRI paid approximately
$24.4 million in cash on the date of closing and will pay up to an
additional $8.5 million over two years if certain targets are met
pursuant to an earn-out arrangement.
19
<PAGE> 14
SUBRO AUDIT INCORPORATED AND
O'DONNELL LEASING COMPANY
REPORT ON REVIEWS OF CONDENSED
COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND
FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1997
20
<PAGE> 15
CONTENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Review Report of Independent Accountants 22
Financial Statements:
Condensed Combined Balance Sheets as of September 30, 1998 and
December 31, 1997 23
Condensed Combined Statements of Income for the nine-month
periods ended September 30, 1998 and 1997 24
Condensed Combined Statements of Cash Flows for the nine-month
periods ended September 30, 1998 and 1997 25
Notes to Condensed Combined Financial Statements 26 - 27
</TABLE>
21
<PAGE> 16
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Management
Healthcare Recoveries, Inc.
We have reviewed the accompanying condensed combined financial statements of
Subro Audit Incorporated and O'Donnell Leasing Company (the Companies) as of
September 30, 1998, and for the nine-month periods ended September 30, 1998 and
1997. These condensed combined financial statements are the responsibility of
the Companies' management.
We conducted our reviews 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 than 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 reviews, we are not aware of any material modifications that should
be made to the accompanying condensed combined 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 combined balance sheet as of December 31, 1997 and the related
combined statements of income, changes in owners' equity and cash flows for the
year then ended (not presented herein); and, in our report dated February 22,
1999, we expressed an unqualified opinion on those combined financial
statements. In our opinion, the information set forth in the accompanying
condensed combined balance sheet as of December 31, 1997 is fairly stated, in
all material respects, in relation to the combined balance sheet from which it
has been derived.
PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
February 22, 1999
22
<PAGE> 17
SUBRO AUDIT INCORPORATED AND
O'DONNELL LEASING COMPANY
CONDENSED COMBINED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,178,449 $ 817,536
Restricted cash 205,712 216,514
Marketable securities 228,914 230,165
Accounts receivable, less allowance for doubtful accounts
of $8,147 - 1998 and $27,158 - 1997 77,610 259,406
Other current assets 35,813 30,973
----------- -----------
Total current assets 1,726,497 1,554,594
----------- -----------
Property and equipment, at cost:
Land 828,319 828,319
Buildings 4,013,879 3,993,462
Furniture and equipment 2,023,014 2,006,160
----------- -----------
6,865,212 6,827,941
Accumulated depreciation and amortization (1,542,597) (1,272,223)
----------- -----------
Property and equipment, net 5,322,615 5,555,718
----------- -----------
Total assets $ 7,049,112 $ 7,110,312
=========== ===========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accrued compensation $ 355,789 $ 257,823
Accounts payable and other accrued expenses 225,122 250,612
Funds due clients 205,712 216,514
Lease payable due within one year 39,993 69,174
Notes payable due within one year 235,345 223,444
----------- -----------
Total current liabilities 1,061,961 1,017,567
Lease payable 10,555 34,185
Notes payable 3,499,602 3,672,707
Other liabilities 5,858 5,858
----------- -----------
Total liabilities 4,577,976 4,730,317
----------- -----------
Owners' equity:
Combined capital 60,511 60,511
Retained earnings 2,369,641 2,279,401
Net unrealized investment gains 40,984 40,083
----------- -----------
Total owners' equity 2,471,136 2,379,995
----------- -----------
Total liabilities and owners' equity $ 7,049,112 $ 7,110,312
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed combined financial
statements.
23
<PAGE> 18
SUBRO AUDIT INCORPORATED AND
O'DONNELL LEASING COMPANY
CONDENSED COMBINED STATEMENTS OF INCOME
For the nine-month periods ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Subrogation revenues $ 5,237,615 $ 4,805,377
Cost of services 2,793,782 2,537,488
----------- -----------
Gross profit 2,443,833 2,267,889
Support expenses 1,644,118 1,703,452
Depreciation and amortization 270,374 235,532
----------- -----------
Operating income 529,341 328,905
Interest expense (242,290) (285,712)
Investment income 35,293 26,057
Rental income 55,315 55,914
----------- -----------
Net income $ 377,659 $ 125,164
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed combined financial
statements.
24
<PAGE> 19
SUBRO AUDIT INCORPORATED AND
O'DONNELL LEASING COMPANY
CONDENSED COMBINED 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 $ 377,659 $ 125,164
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 270,374 235,532
Changes in operating assets and liabilities:
Restricted cash 10,802 (77,010)
Accounts receivable 181,796 254,396
Other current assets (3,257) (5,214)
Accrued compensation 97,966 108,540
Accounts payable and other accrued expenses (25,491) 11,478
Funds due clients (10,802) 77,010
Other -- (805)
----------- -----------
Net cash provided by operating activities 899,047 729,091
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities -- (493)
Sales of marketable securities 2,152 --
Purchases of property and equipment (37,271) (1,091,343)
----------- -----------
Net cash used in investing activities (35,119) (1,091,836)
----------- -----------
Cash flows from financing activities:
Distributions to owners (289,000) (590,000)
Proceeds from notes payable -- 1,249,685
Payments on notes payable (161,204) (871,210)
Proceeds from lease payable -- 87,617
Payments on lease payable (52,811) (46,020)
----------- -----------
Net cash used in financing activities (503,015) (169,928)
----------- -----------
Net increase (decrease) in cash 360,913 (532,673)
Cash, beginning of period 817,536 1,090,908
----------- -----------
Cash, end of period $ 1,178,449 $ 558,235
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed combined financial
statements.
25
<PAGE> 20
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. REPORTING ENTITY AND BASIS OF PRESENTATION:
Subro Audit Incorporated (SAI) was incorporated in 1983 as a subchapter
S corporation under the laws of the State of Wisconsin. SAI was
established to provide investigation, processing and professional
negotiation services, generally known as subrogation, to health and
disability insurers, third-party administrators, managed care
organizations, self-funded employee benefit plans and physician hospital
organizations. O'Donnell Leasing Company (OLC) is a real estate
partnership formed exclusively for the purpose of owning and maintaining
the property of SAI.
Kevin M. O'Donnell, President and Chief Executive Officer and Leah M.
Lampone, Assistant Secretary, of SAI and OLC (the Companies) each own
50% of SAI and 40% of OLC, respectively. The remaining 20% ownership in
OLC is held by the children of Kevin M. O'Donnell and Leah M. Lampone.
The accompanying condensed combined financial statements comprise the
accounts of the Companies and have been prepared to present the
financial position and results of operations of the Companies on a
combined basis.
The interim combined 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 Companies' combined annual financial statements.
Accordingly, for further information, the reader of these condensed
combined financial statements may wish to refer to the Companies'
combined financial statements for the year ended December 31, 1997.
The preparation of the Companies' condensed combined 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
Companies' 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:
The Companies adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," on January 1, 1998. SFAS No.
130 establishes standards for the reporting and display of comprehensive
income and its components. Comprehensive income is defined as the change
in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. Comprehensive
income, comprised of net income and unrealized investment gains, totaled
$385,088 and $207,359 for the nine-month periods ended September 30,
1998 and 1997, respectively.
26
<PAGE> 21
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS, CONTINUED
3. CONTINGENT LIABILITIES:
SAI is engaged in the business of identifying and recovering subrogation
and related claims of its clients, many of which arise in the context of
personal injury lawsuits. As such, SAI operates in a
litigation-intensive environment. SAI has, from time to time, been, and
in the future expects to be, named as a party in litigation incidental
to its business operations. To date, SAI has not been involved in any
litigation which has had a material adverse effect upon SAI, but there
can be no assurance that pending litigation or future litigation will
not have a material adverse effect on SAI's business, results of
operations or financial position.
4. SUBSEQUENT EVENT:
On January 25, 1999, Healthcare Recoveries, Inc. (HRI) completed the
purchase of substantially all assets and assumption of substantially all
liabilities of the Companies. Pursuant to the definitive agreement, HRI
paid approximately $24.4 million in cash on the date of closing and will
pay up to an additional $8.5 million over two years if certain targets
are met pursuant to an earn-out arrangement.
27
<PAGE> 1
EXHIBIT 99.4
PRO FORMA COMBINED
FINANCIAL INFORMATION
28
<PAGE> 2
HEALTHCARE RECOVERIES, INC.
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
----------
HEALTHCARE PRO FORMA PRO FORMA
RECOVERIES SUBRO ADJUSTMENTS COMBINED
---------- ----- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $28,003 $ 1,178 $(24,400)(a) $ 4,781
Restricted cash 16,001 206 16,207
Marketable securities -- 229 229
Accounts receivable 3,129 78 3,207
Other current assets 1,065 36 420 (b) 1,521
------- -------- -------- -------
Total current assets 48,198 1,727 (23,980) 25,945
Property and equipment, net 5,857 5,322 500 (c) 11,679
Identifiable intangible assets 3,130 (d) 3,130
Cost in excess of net assets acquired 15,144 (e) 15,144
Other assets 1,753 -- 1,753
------- -------- -------- -------
Total assets $55,808 $ 7,049 $ (5,206) $57,651
------- -------- -------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 5,687 $ 581 $ 1,000 (f) $ 7,268
Funds due clients 12,311 206 12,517
Income taxes payable 1,840 -- 1,840
Lease payable due within one year -- 40 40
Notes payable due within one year -- 235 (235)(g) --
------- -------- -------- -------
Total current liabilities 19,838 1,062 765 21,665
Lease payable 10 10
Notes payable 3,500 (3,500) (g) --
Other liabilities 1,192 6 1,198
------- -------- -------- -------
Total liabilities 21,030 4,578 (2,735) 22,873
------- -------- -------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 11 11
Other 34,767 2,471 (2,471)(h) 34,767
------- -------- -------- -------
Total stockholders' equity 34,778 2,471 (2,471) 34,778
------- -------- -------- -------
Total liabilities and owners' equity $55,808 $ 7,049 $ (5,206) $57,651
======= ======== ======== =======
</TABLE>
See notes to pro forma condensed financial statements
29
<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>
HISTORICAL
-----------------------
HEALTHCARE PRO FORMA PRO FORMA
RECOVERIES SUBRO ADJUSTMENTS COMBINED
---------- ----- ----------- --------
<S> <C> <C> <C> <C>
Subrogation revenues $35,940 $5,238 $41,178
Cost of services 16,538 2,794 19,332
------- ------ -------- -------
Gross profit 19,402 2,444 -- 21,846
Support expenses 7,767 1,644 9,411
Depreciation & amortization 1,701 270 $ 972 (i) 2,943
------- ------ -------- -------
Operating income (loss) 9,934 530 (972) 9,492
Interest expense -- (242) 240 (j) (2)
Investment income 1,243 35 (1,243)(k) 35
Rental income -- 55 55
------- ------ -------- -------
Income (loss) before income taxes 11,177 378 (1,975) 9,580
Provision (benefit) for income taxes 4,636 (550)(l) 4,086
------- ------ -------- -------
Net income (loss) $ 6,541 $ 378 $ (1,425) $ 5,494
======= ====== ======== =======
Earnings per common share - basic and diluted $ 0.57 $ 0.48
======= =======
Shares used in earnings per common share
computation (000s)
Basic 11,479 11,479
Diluted 11,573 11,577
</TABLE>
See notes to pro forma condensed financial statements
30
<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
(a) To record the initial payment of the purchase price at the date
of closing. HRI will pay up to an additional $8,500 over two
years if certain targets are met pursuant to an earn-out
agreement.
(b) To record deferred taxes associated with adjustment (f).
(c) To adjust property and equipment to estimated fair market value.
(d) To record estimated value assigned to identifiable intangibles.
Identifiable intangibles consist of the values assigned to
backlog ($571), customer lists ($2,329) and the non-compete
agreement between HRI and the owners of Subro ($230)
(e) To record the estimated purchase price in excess of net tangible
and identifiable intangible assets acquired:
<TABLE>
<S> <C>
Purchase price $24,400
Estimated acquisition liabilities (adjustment f) 1,000
Equity cancellation (adjustment h) (2,471)
Adjustment to reflect property and equipment
at fair market value (adjustment c) (500)
Deferred tax adjustment (adjustment b) (420)
Repayment of notes payable (adjustment g) (3,735)
Identifiable intangible assets (adjustment d) (3,130)
-------
$15,144
=======
</TABLE>
(f) To record estimated liabilities associated with the acquisition
transaction including severance, lease termination costs and
professional fees.
(g) To record the repayment of notes payable by the owners' of Subro
using proceeds from the transaction.
(h) To eliminate the acquired equity of Subro as of September 30,
1998.
Note 2: Pro forma Adjustments - Condensed Statement of Income for the
nine-month period ended September 30, 1998
(i) 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 a).
(j) To reverse interest expense on notes payable repaid by the owners
of Subro using proceeds from the transaction.
(k) To record foregone investment income on cash and cash equivalents
used to fund the purchase price.
(l) To record pro forma income taxes associated with adjustments (i)
through (k) and pretax income of Subro which is assumed to be
taxable to HRI.
Note 3: A reconciliation of shares used in computing pro forma diluted
earnings per common share follows (000's):
<TABLE>
<S> <C>
Shares used in computing historical diluted earnings per common share 11,573
Impact of options granted to an owner of Subro 4
------
Shares used in computing pro forma diluted earnings per common share 11,577
======
</TABLE>
31
<PAGE> 5
HEALTHCARE RECOVERIES, INC.
PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------
HEALTHCARE PRO FORMA PRO FORMA
RECOVERIES SUBRO ADJUSTMENTS COMBINED
---------- ----- ----------- --------
<S> <C> <C> <C> <C>
Subrogation revenues $39,277 $ 6,628 $45,905
Cost of services 18,523 3,501 22,024
------- -------- -------- -------
Gross profit 20,754 3,127 -- 23,881
Support expenses 8,922 2,262 11,184
Depreciation & amortization 1,181 322 $ 1,073 (m) 2,576
Non-recurring compensation charge (Note 5) 2,848 -- 2,848
------- -------- -------- -------
Operating income (loss) 7,803 543 (1,073) 7,273
Interest expense -- (351) 348 (n) (3)
Investment income 1,158 43 (1,158)(o) 43
Gain on sale of property & equipment -- 178 178
Rental income -- 74 74
------- -------- -------- -------
Income (loss) before income taxes 8,961 487 (1,883) 7,565
Provision (benefit) for income taxes 4,959 (426)(p) 4,533
------- -------- -------- -------
Net income (loss) $ 4,002 $ 487 $ (1,457) $ 3,032
======= ======== ======== =======
Earnings per common share - basic and diluted $ 0.37 $ 0.28
======= =======
Shares used in earnings per common share
computation (000s)
Basic 10,752 10,752
Diluted 10,819 10,822
</TABLE>
See notes to pro forma condensed financial statements
32
<PAGE> 6
HEALTHCARE RECOVERIES, INC.
Notes To Pro Forma Condensed Financial Statements
For the year ended December 31, 1997
(in thousands, except number of shares)
(Unaudited)
Note 4: Pro forma Adjustments - Condensed Statement of Income for the year
ended December 31, 1997
(m) 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.
(n) To reverse interest expense on notes payable repaid by the
owners of Subro using proceeds from the transaction.
(o) To record foregone investment income on cash and cash
equivalents used to fund the purchase price.
(p) To record the pro forma income taxes associated with adjustments
(m) through (o) and pretax income of Subro which is assumed to
be taxable to HRI.
Note 5: During the year ended December 31, 1997, HRI recorded a
non-recurring, non-cash compensation charge of approximately $2.8
million relating to a bonus comprised of 200,000 shares of HRI's common
stock granted by HRI to certain members of HRI's executive management
upon consummation of HRI's public offering.
Note 6: A reconciliation of shares used in computing pro forma diluted
earnings per common share follows (000's):
<TABLE>
<S> <C>
Shares used in computing historical diluted earnings per common share 10,819
Impact of options granted to an owner of Subro 3
------
Shares used in computing pro forma diluted earnings per common share 10,822
======
</TABLE>
Note 7: Prior to the transaction, Subro's owners agreed to pay from the
proceeds of the transaction approximately $221,400, ($128,400, 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 HRI was not considered in the
pro forma statement of income.
33
