<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER 0-22585
HEALTHCARE RECOVERIES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 61-1141758
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1400 WATTERSON TOWER LOUISVILLE, KENTUCKY 40218
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(502) 454-1340
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of May 17, 1999, 11,197,987 shares of the Registrant's Common Stock,
$0.001 par value were outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
HEALTHCARE RECOVERIES, INC.
FORM 10-Q
MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998.................................. 1
Condensed Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998................... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998............. 3
Notes to Condensed Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
Item 3. Quantitative and Qualitative Market Risk
Disclosures............................................... 15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................... 16
Item 6. Exhibits and Reports on Form 8-K.................... 16
Signatures.................................................. 19
</TABLE>
THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
HEALTHCARE RECOVERIES, INC. OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.A. SECTIONS 77Z-2 AND 78U-5
(SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF
OR CURRENT EXPECTATIONS OF HEALTHCARE RECOVERIES, INC. AND MEMBERS OF ITS
MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-Q, AND ARE
HEREBY INCORPORATED BY REFERENCE HEREIN. HEALTHCARE RECOVERIES, INC. UNDERTAKES
NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED
ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE
OPERATING RESULTS OVER TIME.
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
HEALTHCARE RECOVERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 812 $31,133
Restricted cash........................................... 25,982 16,927
Accounts receivable, less allowance for doubtful accounts
of $347 in 1999 and $307 in 1998....................... 5,423 3,607
Other current assets...................................... 875 1,583
------- -------
Total current assets.............................. 33,092 53,250
------- -------
Property and equipment, at cost:
Buildings and land........................................ 5,024 --
Furniture and fixtures.................................... 2,727 2,527
Office equipment.......................................... 1,917 1,783
Computer equipment........................................ 8,915 7,991
Leasehold improvements.................................... 933 845
------- -------
19,516 13,146
Accumulated depreciation and amortization................. (7,616) (6,962)
------- -------
Property and equipment, net....................... 11,900 6,184
Cost in excess of net assets acquired....................... 23,629 --
Identifiable intangibles.................................... 5,917 --
Other assets................................................ 1,328 1,569
------- -------
Total assets...................................... $75,866 $61,003
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 2,148 $ 1,234
Accrued expenses.......................................... 5,679 5,516
Funds due clients......................................... 13,315 13,118
Income taxes payable...................................... 2,398 2,484
------- -------
Total current liabilities......................... 23,540 22,352
Other liabilities........................................... 1,300 1,458
Long term borrowings........................................ 12,300 --
------- -------
Total liabilities................................. 37,140 23,810
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 2,000 shares authorized;
no shares issued or outstanding........................ -- --
Common stock, $.001 par value; 20,000 shares authorized;
11,503 shares issued and outstanding for 1999 and
1998................................................... 12 12
Capital in excess of par value............................ 22,563 22,428
Retained earnings......................................... 16,151 14,753
------- -------
Total stockholders' equity........................ 38,726 37,193
------- -------
Total liabilities and stockholders' equity........ $75,866 $61,003
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE> 4
HEALTHCARE RECOVERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Revenues.................................................... $13,860 $11,196
Cost of services............................................ 6,995 5,259
------- -------
Gross profit...................................... 6,865 5,937
Support expenses............................................ 3,600 2,240
Depreciation and amortization............................... 994 509
------- -------
Operating income.................................. 2,271 3,188
Interest income, net........................................ 120 420
------- -------
Income before income taxes........................ 2,391 3,608
Provision for income taxes.................................. 993 1,515
------- -------
Net income.................................................. $ 1,398 $ 2,093
======= =======
Earnings per common share (basic and diluted)............... $ 0.12 $ 0.18
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 5
HEALTHCARE RECOVERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,398 $ 2,093
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 994 509
Deferred income taxes.................................. 164 26
Changes in operating assets and liabilities:
Restricted cash...................................... 757 (977)
Accounts receivable.................................. (706) (377)
Other current assets................................. 427 (20)
Other assets......................................... (291) (240)
Trade accounts payable............................... 651 (509)
Accrued expenses..................................... (446) (727)
Funds due clients.................................... (715) 564
Income taxes payable................................. (86) 362
Other liabilities.................................... (439) (123)
-------- -------
Net cash provided by operating activities......... 1,708 581
-------- -------
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ (43,481) --
Purchases of property and equipment....................... (984) (1,433)
-------- -------
Net cash used in investing activities............. (44,465) (1,433)
-------- -------
Cash flows from financing activities:
Line of credit proceeds, net.............................. 12,300 --
Other..................................................... 136 --
-------- -------
Net cash provided by financing activities......... 12,436 --
-------- -------
Net decrease in cash and cash equivalents................... (30,321) (852)
Cash and cash equivalents, beginning of period.............. 31,133 24,674
-------- -------
Cash and cash equivalents, end of period.................... $ 812 $23,822
======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 6
HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Healthcare Recoveries, Inc. (hereinafter referred to as "HCRI" or the
"Company") was incorporated on June 30, 1988 under the laws of the State of
Delaware. The Company provides complete outsourcing of certain medical cost
containment services to the private healthcare payor industry. Its primary
service is subrogation recovery, which entails the identification, investigation
and recovery of accident-related medical benefits incurred by its clients on
behalf of their insureds, but for which other persons or entities have primary
responsibility. The Company's clients' rights to recover the value of these
medical benefits, arising by law or contract, are generally known as the right
of subrogation and paid from the proceeds of liability or workers' compensation
insurance. The Company's other cost containment services include hospital bill
auditing, contract compliance review and cost management consulting services.
The Company operated as an independent entity until August 28, 1995, when
it was merged with and into a subsidiary of Medaphis Corporation ("Medaphis"),
in a transaction accounted for as a pooling of interests (the "Merger"). Prior
to the Merger, the Company's then issued and outstanding redeemable convertible
preferred stock was converted to common stock of the Company ("Common Stock").
As of the effective time of the Merger, each share of the then issued and
outstanding Common Stock was exchanged for Medaphis common stock. Employee stock
options of the Company outstanding at the effective time of the Merger were also
substituted with similar options on Medaphis common stock. Subsequent to the
Merger, Medaphis recapitalized the Company effectively canceling all but 100
shares of Common Stock used as collateral for Medaphis' bank debt, and made the
Company a guarantor for Medaphis' bank debt.
On May 21, 1997, the Company completed its initial public offering (the
"Offering") of 9,800,000 shares of Common Stock, excluding 200,000 shares issued
in connection with a non-recurring compensation charge. Medaphis sold all the
shares. As a result, the Company received no proceeds from the sale of shares in
the Offering. On June 9, 1997, the Company sold 1,470,000 shares of Common Stock
to the underwriters of the Offering in satisfaction of the exercise of an
over-allotment option, resulting in proceeds to the Company of approximately
$19.2 million.
In connection with the Offering, certain revisions to allocations and
estimates were made by management to the financial statements for the periods
during which the Company was a subsidiary of Medaphis to present the financial
position, results of operations and cash flows of the Company as an independent
entity. Costs previously incurred by Medaphis on behalf of the Company include
executive salaries, employee benefits, insurance, telecommunications, payroll
processing and other general and administrative expenses. The allocation of
these costs was based principally on specific identification, the ratio of the
number of Company employees to total Medaphis employees or the ratio of total
Company assets to total Medaphis assets, as appropriate. Management believes
that, in the aggregate, costs of this nature reflect the fair value of services
rendered by Medaphis and that it would have incurred similar costs as an
independent entity.
The accompanying financial statements are presented in a condensed format
and consequently do not include all of the disclosures normally required by
generally accepted accounting principles or those normally made in the Company's
annual financial statements. Accordingly, for further information, the reader of
this Form 10-Q may wish to refer to the Company's audited financial statements
as of and for the year ended December 31, 1998, contained in the Company's
Annual Report on Form 10-K, for the fiscal year ended December 31, 1998.
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.
4
<PAGE> 7
HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CONTINGENCIES
The Company engages in the identification and recovery of subrogation and
related claims of its clients, many of which arise in the context of personal
injury lawsuits. As such, the Company operates in a litigation-intensive
environment. The Company, from time to time, has been, and in the future expects
to be, named as a party in litigation incidental to its business operations. To
date, the Company has not been involved in any litigation which has had a
material adverse effect upon the Company, but there can be no assurance that
pending litigation or future litigation will not have a material adverse effect
on the Company's business, results of operations or financial condition.
3. EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," specifies the computation, presentation, and disclosure requirements for
earnings per share and requires presentation of both basic and fully diluted
earnings per share for both interim and annual periods. The results for basic
and diluted earnings per share amounts computed under the provisions of SFAS 128
for the year ended December 31, 1998 and 1997, are the same as earnings per
common and common equivalent share as reported in the Company's Annual Report on
Form 10-K. Basic and diluted earnings per share for the three months ended March
31, 1999 and 1998 are $0.12 and $0.18 per share, respectively. A reconciliation
of the numerators and denominators of the basic and diluted earnings per common
share calculations follows (dollars and shares in thousands, except per share
results):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
1999 1998
-------- --------
<S> <C> <C>
Weighted average number of common shares outstanding........ 11,503 11,470
Add: Dilutive stock options................................. 11 156
------- -------
Number of common shares outstanding......................... 11,514 11,626
======= =======
Net earnings for earnings per common share (basic and
diluted).................................................. $ 1,398 $ 2,093
======= =======
Earnings per common share:
Basic..................................................... $ 0.12 $ 0.18
======= =======
Diluted................................................... $ 0.12 $ 0.18
======= =======
</TABLE>
Basic earnings per common share were computed based on the weighted-average
number of shares outstanding during the period. The dilutive effect of stock
options is calculated using the treasury stock method. Options to purchase
1,189,000 shares for the period ending March 31, 1999 and 47,000 shares for the
comparable period in 1998, were not included in the computation of diluted
earnings per common share as the options' exercise prices exceeded the average
market price of the common shares during the respective periods.
4. ACQUISITIONS
On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro-Audit, Inc., a Wisconsin corporation ("SAI"), and a related entity,
O'Donnell Leasing Co., LLP, a Wisconsin general partnership ("ODL" and together
with SAI, "Subro-Audit"), for approximately $24.4 million, using available
unrestricted cash, and may pay up to $7.0 million over the next two years
pursuant to an earn-out arrangement (the "Subro-Audit Acquisition"). SAI is
based in Wisconsin and provides subrogation recovery services to an installed
base of lives, who are covered by insurers, HMOs and employer-funded plans,
throughout the United States. The Subro-Audit Acquisition was accounted for
using the purchase method of accounting and is operated as a division of HCRI.
5
<PAGE> 8
HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS -- (CONTINUED)
On February 15, 1999, HCRI acquired the assets and certain liabilities of
MedCap Medical Cost Management, Inc., a California corporation ("MedCap"), for
approximately $10 million, using available unrestricted cash and borrowed funds,
and may pay up to 50% 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 (the "MedCap Acquisition," and, together with the
Subro-Audit Acquisition, the "Acquisitions"). MedCap provides a variety of
medical cost management services to health insurers and HMOs primarily in
California. These services include hospital bill auditing, contract compliance
review, identification of certain other payments, and cost management consulting
services. The MedCap Acquisition was accounted for using the purchase method of
accounting and is operated as a division of HCRI.
If the Acquisitions had taken place on January 1, 1999, revenues, net
income and earnings per share for the quarter ended March 31, 1999, would have
been $15.3 million, $1.1 million and $0.09 per share, respectively. If the
Acquisitions had taken place on January 1, 1998, revenues, net income and
earnings per share for the quarter ended March 31, 1998, would have been $13.9
million, $1.6 million and $0.14 per share, respectively. Based on preliminary
allocations, the cost in excess of net assets acquired recorded in connection
with the Acquisitions was $23.8 million. These results may not necessarily
reflect future results of operations or what the results of operations would
have been had the Acquisitions actually been consummated at the beginning of the
periods presented.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Healthcare Recoveries, Inc. (hereinafter referred to as "HCRI" or the
"Company") provides complete outsourcing of certain medical cost containment
services to the private healthcare payor industry. Its primary service is
subrogation recovery, which entails the identification, investigation and
recovery of accident-related medical benefits incurred by its clients on behalf
of their insureds, but for which other persons or entities have primary
responsibility. The Company's clients' rights to recover the value of these
medical benefits, arising by law or contract, are generally known as the right
of subrogation and paid from the proceeds of liability or workers' compensation
insurance. The Company's other cost containment services include the provision
of hospital bill auditing, contract compliance review and cost management
consulting services.
On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro-Audit, Inc., a Wisconsin corporation ("SAI"), and a related entity,
O'Donnell Leasing Co., LLP, a Wisconsin general partnership ("ODL" and, together
with SAI, "Subro-Audit"), for approximately $24.4 million, using available
unrestricted cash, and may pay up to $7.0 million over the next two years
pursuant to an earn-out arrangement (the "Subro-Audit Acquisition"). SAI is
based in Wisconsin and provides subrogation recovery services to an installed
base of lives, who are covered by insurers, HMOs and employer-funded plans,
throughout the United States. The Subro-Audit Acquisition was accounted for
using the purchase method of accounting and is operated as a division of HCRI.
On February 15, 1999, HCRI acquired the assets and certain liabilities of
MedCap Medical Cost Management, Inc., a California corporation ("MedCap"), for
approximately $10 million, using available unrestricted cash and borrowed funds,
and may pay up to 50% 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 (the "MedCap Acquisition" and, together with the
Subro-Audit Acquisition, the "Acquisitions"). MedCap provides a variety of
medical cost management services to health insurers and HMOs primarily in
California. These services include hospital bill auditing, contract compliance
review, identification of certain other payments, and cost management consulting
services. The MedCap Acquisition was accounted for using the purchase method of
accounting and is operated as a division of HCRI.
For a typical new client, it takes up to six months from the contract
signing (when the lives are "sold") to complete the construction of electronic
data interfaces necessary for the Company to begin service. At this point, the
new client is considered "installed." During the installation period, the
Company must also hire and train quality staff necessary to provide contractual
services. After installation, HCRI receives data from the client from which it
creates an inventory of backlog.
"Backlog" is the total dollar amount of potentially recoverable claims that
the Company is pursuing or auditing on behalf of its clients at a given point in
time. These claims are gross figures, prior to estimates of claim settlement and
rejection. Backlog increases when the Company opens new files of potentially
recoverable claims and decreases when files of claims are recovered, completed
or, after further investigation, determined to be nonrecoverable.
Historically, claims recoveries (the amount actually recovered for its
clients prior to the Company's fee) have been produced from the backlog in a
generally predictable cycle. This is because any group of potential recoveries
that has been sufficiently large in number to display statistically significant
characteristics and that originates from a defined time period, tended to
produce recovery results that have been comparable to other groups having
similar characteristics. Backlog for a client will range from newly identified
potential recoveries (which will be identified each year) to potential
recoveries that are in the late stages of the recovery process.
During the first quarter of 1999, HCRI encountered operating difficulties
that involved a lower than historical level of yield from the backlog of
subrogation claims. As used here, yield, referred to as "throughput," means
recoveries for the period stated as a percentage of the average backlog for the
period. The deterioration in throughput of subrogation claims was the
consequence of a shortfall in first quarter recoveries, which appears to have
resulted from certain changes that HCRI made in its operations during the second
half of 1998 and the first quarter of 1999. The changes in operations entailed a
series of modifications to work processes and systems improvements, the purpose
of which was to enable the Company to significantly
7
<PAGE> 10
OVERVIEW -- (CONTINUED)
increase the number of files assigned to each examiner, with anticipated
corresponding increases in average recoveries per examiner. Contrary to
management's expectations, increasing the average number of files assigned to
each examiner resulted in the unforeseen decrease in throughput.
Because the decline in throughput appears to be the result of the increased
number of subrogation files per examiner, the Company has instituted a plan to
hire 50 new examiners (25 net new examiners, after attrition and terminations).
Management believes that this additional headcount will allow the Company to
resume historic levels of throughput in subrogation by the end of 1999.
Also during the quarter, the Company's backlog, excluding the Acquisitions,
declined approximately $12 million from the end of the prior quarter. Management
believes that this decline in backlog is related to, among other things, a
slower rate of installation of new lives and a decrease in the average size of
the files of which backlog is composed. About half of the decrease in average
file size is, management believes, attributable to the run-off (i.e., the
closing, with or without recovery) of "retrospective files" and "pending files"
that are larger on average than the other files in backlog. When these
larger-than-average (measured by dollar amount) files are replaced by smaller
ones, the average size of files in backlog declines. "Retrospective files" are
those identified by HCRI, as part of an ancillary service that the Company sells
from time to time, in a client's past claims history data. "Pending files" are
those taken over by the Company from a client in connection with the signing of
the service contract.
For the most part, the Company is paid a contingency fee from the amount of
claims recoveries it makes from backlog on behalf of its subrogation clients.
For its hospital bill auditing clients, the contingency fee may be based on the
dollar amount of claims audited. The Company's revenues are a function of claims
recoveries and effective fee rates. Effective fee rates vary depending on the
mix between recovery services provided and client fee schedules. The fee
schedules for each client are separately negotiated and reflect the Company's
standard fee rates, the services to be provided and anticipated volume of
services. The Company grants volume discounts and, for its subrogation recovery
services, negotiates a lower fee when it assumes backlog from a client because
the client will have already completed some of the recovery work. Because the
Company records expenses as costs are incurred and records revenues only when a
file is settled, there is a lag between the recording of expenses and revenue
recognition.
The Company's expenses are determined primarily by the number of employees
directly engaged in recovery activities ("cost of services") and by the number
of employees engaged in a variety of support activities ("support expenses").
Recovery-related employees must be hired and trained in advance of the
realization of recoveries and revenues. The number of employees accounted for in
support expenses generally grows less rapidly than revenue due to economies of
scale.
8
<PAGE> 11
RESULTS OF OPERATIONS
The following tables present certain key operating indicators and results
of operations data for the Company for the periods indicated:
KEY OPERATING INDICATORS
(IN MILLIONS, EXCEPT FOR PERCENTAGES AND EMPLOYEES)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- ------
<S> <C> <C>
Cumulative lives sold, beginning of period.................. 40.5 38.5
Lives from acquisitions................................... 18.6(1) --
Lives from existing client growth (loss).................. (1.2)(2) (0.5)
Lives added from contracts with existing clients.......... -- 0.7
Lives added from contracts with new clients............... 1.5 0.1
-------- ------
Cumulative lives sold, end of period........................ 59.4 38.8
======== ======
Lives installed............................................. 53.5(1) 36.6
Backlog(3).................................................. $1,069.6 $692.8
Claims recoveries........................................... $ 51.2 $ 41.1
Throughput(4)............................................... 4.7% 6.0%
Effective fee rate.......................................... 27.1% 27.2%
Employees(5)
Direct operations......................................... 561 409
Support................................................... 131 94
-------- ------
Total employees................................... 692 503
======== ======
</TABLE>
- ---------------
(1) Includes approximately 8.1 million lives sold and 8.0 million lives
installed from the Subro-Audit Acquisition and 10.5 million lives sold and
8.0 million lives installed from the MedCap Acquisition. Subsequent to the
end of the quarter, the Company received notice that CIGNA HealthCare
("CIGNA") intended to terminate its agreement with SAI, effective July 31,
1999. The CIGNA contract covers approximately 2.8 million installed lives.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Recent Developments."
(2) Incorporates the loss of 900,000 lives from Blue Shield of California, a
terminated client.
(3) Backlog is the total dollar amount of potentially recoverable claims that
the Company is pursuing or auditing on behalf of clients at any point in
time. Backlog at March 31, 1999 incorporates approximately $130 million of
backlog from the Subro-Audit Acquisition and approximately $181 million of
backlog from the MedCap Acquisition. Excluding the Acquisitions, backlog
would have been $758.5 million.
(4) Throughput equals recoveries for the period divided by the average of
backlog at the beginning and end of the period. The variation from historic
throughput levels in the current quarter (e.g., from that for the three
months ended March 31, 1998) is in part an effect of the timing of the
Acquisitions on the amount of backlog in the calculation of throughput and
certain operational changes in the second half of 1998 and the first quarter
of 1999. Excluding the Acquisitions, throughput for first quarter of 1999
would have been approximately 5.6%.
(5) Includes the addition from SAI of 106 direct operations employees and 23
support staff employees, and from MedCap of 53 direct operations employees
and 13 support staff employees.
9
<PAGE> 12
RESULTS OF OPERATIONS -- (CONTINUED)
The following table presents, for the periods indicated, certain items in
the statements of income as a percentage of revenue:
STATEMENTS OF INCOME AS A PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1999 1998
----- -----
<S> <C> <C>
Claims revenues............................................. 100.0% 100.0%
Cost of services............................................ 50.5 47.0
Support expenses............................................ 26.0 20.0
Depreciation and amortization............................... 7.2 4.5
Operating income............................................ 16.4 28.5
Income before income taxes.................................. 17.3 32.2
Net income.................................................. 10.1 18.7
</TABLE>
Three months ended March 31, 1999 compared to three months ended March 31,
1998
Revenues. Total revenues for the three-month period ended March 31, 1999
increased 24%, to $13.9 million from $11.2 million in 1998. Claims recoveries
increased from $41.1 million in 1998 to $51.2 million in 1999. The effective fee
rate decreased slightly to 27.1% from 27.2%. Growth in claims revenues and
recoveries occurred primarily because of the inclusion of the Acquisitions.
Claims revenues and recoveries for the three month period ended March 31, 1999
include revenues from medical cost management and subrogation services
attributable to the Acquisitions. Before taking into effect the Acquisitions,
HCRI claims revenues were $11.9 million and recoveries were $43.3 million.
Revenues for the three month period ended March 31, 1999 were adversely impacted
by the operational changes implemented in the second half of 1998 and the first
quarter of 1999 which were designed to enhance operating productivity but had
the effect of decreasing throughput for the period.
Backlog for the three month period ended March 31, 1999 increased by $376.8
million, or 54%, compared to the three month period ended March 31, 1998.
Backlog for the three month period ended March 31, 1999 increased by $298
million, or 39%, over the three month period ended December 31, 1998. This net
growth in backlog was the result of the installation of new lives, the
processing of lives already installed, the addition of $130 million from the
Subro-Audit Acquisition and the addition of $181 million from the MedCap
Acquisition. The Company obtained claims recoveries at a rate of approximately
4.7% of average backlog. Lives installed grew 46.2% during the first quarter of
1999 to 53.5 million, primarily because of the Acquisitions.
Cost of Services. Cost of services for the first quarter of 1999 was $7.0
million, an increase of 33% from $5.3 million in the three months ended March
31, 1998. The increase resulted from costs associated with the operations of the
Acquisitions and from installing additional lives. Excluding the Acquisitions,
HCRI's cost of services was $5.9 million, an increase of 12.8% over the
comparable period in 1998. As a percentage of claims revenues, cost of services
increased to 50.5% in 1999 from 47.0% in 1998. The increase is a result of lower
recoveries in 1999 and an increase in their associated costs in 1999 relative to
the growth in revenue.
As a result of the nature of the Company's contingent fee arrangements with
its clients, the Company incurs significant current expense in an effort to
generate revenue, a significant portion of which will be recorded in future
periods. Because relatively little revenue is earned during the first year
following the installation of new lives, unless the Company assumes
responsibility for the new client's existing backlog, the growth rate for lives
installed exceeds the revenue growth rate.
Support Expenses. Support expenses increased 60.7%, to $3.6 million for
the three months ended March 31, 1999 from $2.2 million for the comparable
period in 1998, due to combining the operations of the Acquisitions and the
hiring of additional support staff for the upgrade of HCRI's information
management
10
<PAGE> 13
RESULTS OF OPERATIONS -- (CONTINUED)
system (the"SubroSystem"). Support expenses increased as a percentage of claims
revenues from 20.0% for the three months ended March 31, 1998 to 26.0% for the
comparable period in 1999. The increase in support expenses as a percentage of
claims revenues resulted from the Acquisitions and a lower growth rate in
revenues than support expenses.
Depreciation and Amortization. Depreciation and amortization expenses
increased 95.3%, to $1.0 million for the three months ended March 31, 1999 from
$0.5 million for the comparable period in 1998. The increase in depreciation
expense was mainly attributable to capital expenditures for continuing operating
and system upgrades. The increase in amortization expense is attributable to the
addition of intangible assets, resulting from the Acquisitions.
Interest Income. Interest income, net totaled $0.1 million and $0.4
million for the three months ended March 31, 1999 and 1998, respectively. The
decrease in interest income was a result of using available cash for the
Acquisitions and an increase in borrowed funds, which increased interest
expense.
Tax. Provision for income taxes was approximately 41.5% of pre-tax income
for the three months ended March 31, 1999 and 42% for the comparable period in
1998. The effective tax rate exceeded the Federal statutory tax rate as a
consequence of state and local taxes and non-deductible expenses.
Net Income. Net income for the three months ended March 31, 1999 decreased
$0.7 million, or 33%, to $1.4 million or $0.12 per diluted common share, from
$2.1 million or $0.18 per diluted common share for the comparable period ended
March 31, 1998. Management believes that the deterioration in first quarter
operating results resulted primarily from changes made in HCRI's operations in
the second half of 1998 and first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's statements of cash flows for the three months ended March 31,
1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operations............................. $ 1,708 $ 581
Net cash used in investing activities....................... (44,465) (1,433)
Net cash provided by financing activities................... 12,436 --
-------- -------
Net decrease in cash and cash equivalents................... $(30,321) $ (852)
======== =======
</TABLE>
The Company had working capital of $9.6 million at March 31, 1999,
including cash and cash equivalents of $0.8 million, compared with working
capital of $30.9 million at March 31, 1998. The decrease is attributable to
using available cash for the Acquisitions in January and February 1999.
Net cash provided by operations increased $1.1 million for the three month
period ended March 31, 1999 compared to the comparable period in 1998, primarily
as a result of the timing of recurring cash receipts and disbursements related
to accrued expenses and claims recoveries.
Net cash used in investing activities primarily reflects the Company's cost
of the Acquisitions of $34.4 million, $8.5 million escrowed for earn-out
potential and additional funds for purchased net working capital plus ongoing
capital expenditures for facility expansion and system enhancements. Capital
expenditures for the quarter ended March 31, 1999 were approximately $1.0
million. Throughout 1999, excluding acquisitions, the Company anticipates
capital expenditures totaling approximately $4.0 million.
Net cash provided by financing activities for the quarter ended March 31,
1999 reflects $12.3 million in net cash borrowings from the Company's credit
facility, discussed below.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
In February 1998, the Company entered into a $50 million senior secured
revolving credit facility (the "Credit Facility") with National City Bank of
Kentucky and the lenders named therein, replacing the Company's $10 million line
of credit. The principal amount outstanding under the Credit Facility will
mature on January 31, 2001 and bears interest at the Company's option, at
either: (i) the Prime Rate plus the applicable margin in effect or (ii) the
Eurodollar Rate plus the applicable margin in effect. The applicable margin is
determined in accordance with a Pricing Grid based on the Company's ratio of
consolidated total indebtedness to consolidated earnings before interest, taxes,
depreciation and amortization. The agreement contains usual and customary
covenants including, but not limited to, financial tests for interest coverage,
net worth levels and leverage that may limit the Company's ability to pay
dividends. The Company's obligations under the Credit Facility are secured by
substantially all of the Company's assets, subject to certain permitted
exceptions. As of March 31, 1999, the Company was in compliance with the
covenants and a total of $12.3 million was drawn under the Credit Facility and
used for the Acquisitions. The Credit Facility was amended in May 1998 and March
1999 to enable the Company to acquire entities that do not maintain audited
financial statements and to use proceeds from the Credit Facility to repurchase
up to $10 million of outstanding stock, respectively.
At March 31, 1999 and 1998, the Company reported on its balance sheet, as a
current asset, restricted cash of $26.0 million and $16.9 million, respectively.
Restricted cash represented claims recoveries effected by HCRI for its clients
and the March 31, 1999 amount also included an escrowed amount of $8.5 million
for a potential earn-out in connection with the Subro-Audit Acquisition. At
March 31, 1999 and 1998, HCRI reported on its balance sheet, as a current
liability, funds due clients of $13.3 million and $13.1 million, respectively,
representing claims recoveries to be distributed to clients, net of the fee
earned on such recoveries.
The Company believes that its available cash resources, together with the
borrowings available under the Credit Facility, will be sufficient to meet its
current operating requirements, acquisitions and internal development
initiatives.
EXTERNAL FACTORS
The business of recovering subrogation and related claims for healthcare
payors is subject to a wide variety of external factors. Prominent among these
are factors that would materially change the healthcare payment, fault-based
liability or workers' compensation systems. Because the Company's profitability
depends in large measure upon obtaining and using claims data and medical
records, the availability of property and casualty and workers' compensation
coverages as sources of recovery, changes in laws that would limit or bar either
the access to or use of claims data and medical records, or the ability of
healthcare payors to recover subrogation and related claims or to audit medical
records represent an ongoing risk to the Company.
Moreover, because the Company's revenues derive from the recovery of the
costs of medical treatment, material changes in such costs will tend to affect
the Company's backlog or its rate of backlog growth, as well as revenue or its
rate of revenue growth. The healthcare industry, and particularly the business
of healthcare payors, is subject to various external factors that may have the
effect of significantly altering the costs of healthcare and the environment for
the sale or delivery of recovery and cost containment services. The Company is
unable to predict which of these factors, if any, could have a potentially
material impact on healthcare payors and through them, the healthcare recovery
and cost containment industry.
CONCENTRATION OF CLIENTS
The Company provides services to healthcare plans that as of March 31, 1999
covered approximately 59.4 million lives. HCRI's clients are national and
regional healthcare payors, large third-party administrators or self-insured
corporations. The loss of one or more of these accounts could have a material
adverse effect on HCRI's business, results of operations and financial
condition. On March 31, 1999, HCRI had backlog of $1,069.6 million. HCRI's
revenues are earned under written contracts with its clients that generally
provide for contingency fees from recoveries under a variety of pricing regimes.
The pricing arrangements offered by
12
<PAGE> 15
CONCENTRATION OF CLIENTS -- (CONTINUED)
HCRI to its clients include a fixed fee percentage, a fee percentage that
declines as the number of lives covered by the client and subject to HCRI's
service increases and a fee percentage that varies with HCRI's recovery
performance.
For the three months ended March 31, 1999 and 1998, respectively, the
Company's largest client, UnitedHealth Group, contributed 24.4% and 29.8%,
respectively, of the Company's total revenues. The Company's second and third
largest clients respectively represented 7.5% and 6.8% of the Company's revenues
during the first quarter ended March 31, 1999 and 9.2% and 7.6% of the Company's
revenues for the comparable period in 1998. The loss of one or more of the
Company's large clients could have a material adverse effect on the Company's
results of operations, financial position and cash flows.
HCRI performs its services on a reasonable efforts basis and does not
obligate itself to deliver any specific result. Contracts with its customers are
generally terminable on 60 to 180 days' notice by either party, although in a
few cases the contracts extend over a period of years. Pursuant to the terms of
its client contracts, HCRI is generally entitled to continue to make recoveries
for the client and earn a fee on the backlog existing at the time of
termination.
YEAR 2000 ISSUES
The year 2000 presents a problem for computer systems (software and
hardware) that were not designed to handle any dates beyond the year 1999. The
problem is pervasive and complex because virtually every computer operation will
be affected in some way by the rollover of the last two digits of the year "00."
In consequence, any such software and hardware will need to be modified some
time prior to December 31, 1999 in order to remain functional. Computer systems
that do not properly handle this rollover could generate erroneous data or fail
to function.
The Company has initiated a company-wide program to identify and address
the modifications to or replacements of computer code (including data received
from clients), hardware and office equipment, as well as the testing and
implementation procedures necessary to achieve year 2000 readiness ("Y2K
Readiness" or descriptively, "Y2K Ready"). As a result of this program, all
functions within the Company have been surveyed in order to first, identify
software and hardware that are not presently Y2K Ready, and second, to establish
a schedule for remediation or replacement of the items of software and hardware
that are not Y2K Ready.
The Company has completed its identification of the elements of its
software and hardware that are not Y2K Ready. Included among these elements are
certain fields contained in the SubroSystem, the Company's on-line subrogation
system. The first date of potential failure for all of these items of software
and hardware, including the SubroSystem, is January 1, 2000. The completion date
for replacement or remediation of all elements of Company software, including
the SubroSystem, and hardware which are not already Y2K Ready, is September 30,
1999. Although the Company had previously estimated a June 30, 1999 completion
date, the Company directed certain resources during the fourth quarter of 1998
to facilitate the Acquisitions and certain other matters, which caused the
delay. To date, the costs of the Company's efforts to achieve Y2K Readiness have
not exceeded $75,000, and are not expected to exceed $150,000 in total.
Management believes that the greatest risk posed to the Company's Y2K
Readiness lies in the possible failure of its clients and other members of the
healthcare payor industry to achieve Y2K Readiness. The Company relies on its
clients to provide electronic claims data, through electronic data interfaces,
as the source of information from which the Company identifies potentially
recoverable claims. If clients are unable to provide such data because they are
not Y2K Ready, the Company could suffer a slow-down in its recovery efforts,
impairing its ability to make the recoveries from which it derives its revenue.
Moreover, to the extent that payors, which are potential clients, fail to
achieve Y2K Readiness, HCRI's ability to sell to and to install such payors may
also be impaired. With respect to current clients, HCRI has undertaken a survey
of each client's state of Y2K Readiness. The Company has received notifications
from 70% of its client base, representing more than 70% of its installed lives.
All notifications indicated that clients have Y2K efforts
13
<PAGE> 16
YEAR 2000 ISSUES -- (CONTINUED)
underway. The Company is attempting to obtain surveys from its remaining client
base. However, as the Company is relying upon representations of client Y2K
Readiness in response to the surveys, the Company is closely monitoring progress
through available means, and preparing for contingencies, as necessary.
The Company's contingency planning calls for, among other things, early
identification of alternative means of obtaining electronic claims data should
the existing electronic data interfaces with clients fail. Contingency plans are
being developed on an as-needed, client-specific basis, as warranted.
RECENT DEVELOPMENTS
Loss of Client
The Company recently received notice from CIGNA indicating that CIGNA
intended to terminate effective July 31, 1999 its subrogation services agreement
with SAI and that CIGNA had selected another vendor to be its sole provider of
subrogation services. Under the terms of its agreement with CIGNA, SAI retains
the right to provide recovery services with respect to backlog on hand as of the
termination date. The Company believes that the CIGNA termination covers
approximately 2.8 million installed lives and that SAI received revenues of
approximately $2.4 million and $2.1 million from the CIGNA contract in 1998 and
1997, respectively. The Company acquired Subro-Audit on January 25, 1999 for
approximately $24.4 million, plus earn-out payments over two years. As a result
of the CIGNA termination, the Company now estimates that the maximum earn-out
payment on the Subro-Audit Acquisition has been reduced from $8.5 million to
$7.0 million. Management believes the termination of the CIGNA contract will
have a minimal effect on anticipated 1999 revenues for the Company.
Stock Repurchase Plan
HCRI's Board authorized a stock repurchase plan under which the Company may
repurchase up to $10 million of HCRI Common Stock in the open market, from time
to time, at prices per share deemed favorable by the Company. Shares will be
repurchased using borrowed funds and will continue until such time as the
Company has repurchased $10 million of HCRI Common Stock or until it otherwise
determines to terminate the stock repurchase plan. During the period from April
7, 1999 to April 13, 1999, the Company repurchased 305,000 shares of its stock
at an average price of $4.50 per share.
Adoption of a Rights Plan
On February 12, 1999, the Board of Directors adopted a Stockholder Rights
Plan and declared a dividend of one preferred stock purchase right (a "Right")
for each outstanding share of Common Stock of the Company. The dividend was
payable to stockholders of record on March 1, 1999. The Rights, which will
initially trade with the Common Stock, separate and become exercisable only upon
the earlier to occur of (i) 10 days after the date (the "Stock Acquisition
Date") of a public announcement that a person or group of affiliated persons has
acquired 20% or more of the Common Stock (such person or group being hereinafter
referred to as an "Acquiring Person") or (ii) 10 days (or such later date as the
Board of Directors shall determine) after the commencement of, or announcement
of an intention to make, a tender offer or exchange offer that could result in
such person or group owning 20% or more of the Common Stock (the earlier of such
dates being called the "Distribution Date"). When exercisable, each Right
initially entitles the registered holder to purchase from the Company one
one-hundredth of a share of a newly created class of preferred stock of the
Company at a purchase price of $65 (the "Purchase Price"). The Rights are
redeemable for $0.001 per Right at the option of the Board of Directors. The
Rights expire on March 1, 2009.
If any person becomes an Acquiring Person, each holder of a Right will
thereafter have the right (the "Flip-In Right") to receive, in lieu of shares of
preferred stock and upon payment of the Purchase Price, shares of Common Stock
having a value equal to two times the Purchase Price of the Right. Also, if at
any
14
<PAGE> 17
RECENT DEVELOPMENTS -- (CONTINUED)
time on or after the Stock Acquisition Date, (i) the Company is acquired in a
transaction in which the holders of all the outstanding shares of Common Stock
immediately prior to the consummation of the transaction are not the holders of
all of the surviving corporation's voting power, or (ii) more than 50% of the
Company's assets, cash flow or earning power is sold or transferred other than
in the ordinary course of business, then each holder of a Right shall thereafter
have the right (the "Flip-Over Right") to receive, in lieu of shares of
preferred stock and upon exercise and payment of the Purchase Price, common
shares of the acquiring company having a value equal to two times the Purchase
Price. If a transaction would otherwise result in a holder having a Flip-In as
well as a Flip-Over Right, then only the Flip-Over Right will be exercisable. If
a transaction results in a holder having a Flip-Over Right subsequent to a
transaction resulting in the holder having a Flip-In Right, a holder will have a
Flip-Over Right only to the extent such holder's Flip-In Rights have not been
exercised.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
The Company is exposed to market risk from changes in interest rates
related to its Credit Facility. The impact on earnings and value of any debt
under its Credit Facility is subject to change as a result of movements in
market rates and prices. The Credit Facility is subject to variable interest
rates. As of March 31, 1999, the Company had $12.3 million outstanding under its
Credit Facility with interest rates ranging from 6.69% to 6.75%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
15
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 15, 1994, a class action complaint ("Complaint") was filed against
HCRI in the United States District Court for the Northern District of West
Virginia, Michael L. DeGarmo, et al. v. Healthcare Recoveries, Inc. The
plaintiffs assert that HCRI's subrogation recovery efforts on behalf of its
clients violate a number of state and federal laws, including the Fair Debt
Collection Practices Act and the Racketeering Influenced and Corrupt
Organizations Act ("RICO"). The Complaint also seeks judgment, under the federal
Declaratory Judgment Act, that HCRI as the subrogation agent for various
healthcare payors be limited, in recovering from persons who caused accidents or
from the healthcare payors' injured insureds, to the actual costs of the medical
treatment provided to such injured insureds by such healthcare payors,
notwithstanding provisions in the applicable healthcare policies or agreements,
which generally allow recovery by the healthcare payors of the "reasonable
value" of such treatments. The Complaint alleges that HCRI made fraudulent
representations to recover sums in excess of those actually expended by the
applicable healthcare payor to pay for medical treatment. On March 30, 1999, the
Court entered an order certifying a class of all members of one HCRI client
health plan located in Wheeling, West Virginia (The Health Plan of the Upper
Ohio Valley) who have been subject to subrogation and/or reimbursement
collection practices by HCRI. Plaintiffs, on behalf of the class as certified,
demand compensatory damages, punitive damages, treble damages under RICO, costs
and reasonable attorneys' fees. The DeGarmo case remains in discovery.
This lawsuit, if successful, could prevent the Company from recovering the
"reasonable value" of medical treatment under discounted fee for service
("DFS"), capitation and other payment arrangements. By the end of 1993, at the
direction of certain clients, HCRI had ceased the practice of recovering on
their behalf the "reasonable value" of medical treatment provided by medical
providers under DFS arrangements with those clients. It is the Company's current
policy not to recover the "reasonable value" of medical treatment in DFS
arrangements. However, HCRI historically and currently recovers the "reasonable
value" of medical treatment provided under capitation arrangements and other
payment arrangements with medical providers on behalf of those clients that
compensate medical providers under these payment mechanisms, to the extent that
these benefits are related to treatment of the injuries as to which clients have
recovery rights. The Company believes that its clients' contracts, including the
contracts that provide for recovery under DFS, capitation and other payment
arrangements are enforceable under the laws of the states potentially applicable
in this case and that, as a result, this litigation will not have a material
adverse effect upon its business, results of operation or financial condition.
Nevertheless, if this lawsuit or another lawsuit seeking relief under similar
theories were to be successful, it could have a material adverse effect on the
Company's business, results of operations and financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following list of Exhibits includes both exhibits submitted with this
Form 10-Q as filed with the Commission and those incorporated by reference to
other filings:
<TABLE>
<C> <C> <S>
2.1 -- Asset Purchase Agreement, dated as of December 4, 1998, by
and among the Registrant, MedCap Medical Cost Management,
Inc. and Marcia Deutsch (incorporated by reference to
Exhibit 2.1 of Registrant's Current Report on Form 8-K,
filed December 11, 1998, File No. 000-22585.)
2.2 -- Asset Purchase Agreement, dated as of January 3, 1999, by
and among the Registrant, Subro-Audit, Inc., O'Donnell
Leasing Co., LLP, Kevin M. O'Donnell and Leah Lampone
(incorporated by reference to Exhibit 2.1 of Registrant's
Current Report on Form 8-K, filed January 11, 1999, File No.
000-22585).
</TABLE>
16
<PAGE> 19
<TABLE>
<C> <C> <S>
2.3 -- Amendment to Asset Purchase Agreement by and among
Healthcare Recoveries, Inc., Subro-Audit, Inc., O'Donnell
Leasing Co., LLP, Kevin O'Donnell and Leah Lampone, dated as
of January 25, 1999 (incorporated by reference to Exhibit
2.2 of Registrant's Current Report on Form 8-K, filed
February 3, 1999, File No. 000-22585).
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of
Registrant's Amendment No. 2 to Registration Statement on
Form S-1, File No. 333-23287).
3.2 -- Amended and Restated Bylaws of the Registrant (incorporated
by reference to Exhibit 3.2 of Registrant's Amendment No. 2
to Registration Statement on Form S-1, File No. 333-23287).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of Registrant's Amendment No. 1 to
Registration Statement on Form S-1, File No. 333-23287).
4.2 -- Rights Agreement, dated February 12, 1999, between the
Registrant and National City Bank, as Rights Agent, which
includes as Exhibit A the Form of Certificate of
Designations of the Preferred Stock, as Exhibit B the Form
of Right Certificate and as Exhibit C the Summary of Rights
to Purchase Preferred Stock (incorporated by reference to
Exhibit 4.1 of Registrant's Form 8-A, filed February 16,
1999).
10.1 -- Amendment No. 1 to Employment Agreement between the
Registrant and Patrick B. McGinnis, dated February 12, 1999,
(incorporated by reference to Exhibit 10.6 of Registrant's
Annual Report on Form 10-K, filed March 26, 1999).
10.2 -- Employment Agreement between the Registrant and Kevin M.
O'Donnell, dated January 25, 1999 (incorporated by reference
to Exhibit 10.9 of Registrant's Annual Report on Form 10-K,
filed March 26, 1999).
10.3 -- Amendment No. 2 to the Credit Agreement, dated as of March
19, 1999 by and among the Registrant, the Lending
Institutions Named Therein and National City Bank of
Kentucky (incorporated by reference to Exhibit 10.17 of
Registrant's Annual report on Form 10-K, filed March 26,
1999).
10.4 -- Healthcare Recoveries, Inc. 1998 Deferred Compensation Plan
for Directors.
27.1 -- Financial Data Schedule. (for SEC use only).
99.1 -- Healthcare Recoveries, Inc. Private Securities Litigation
Reform Act of 1995 Safe Harbor Compliance Statement for
Forward-Looking Statement (incorporated by reference to
Exhibit 99.1 of Registrant's Annual Report on Form 10-K,
filed March 26, 1999).
</TABLE>
(b) Reports on Form 8-K
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILE DATE
- ------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Asset Purchase Agreement for Subro-Audit No January 3, 1999 January 11, 1999
Acquisition of Subro-Audit No January 25, 1999 February 3, 1999
Adoption of Rights Plan No February 12, 1999 February 16, 1999
Acquisition of MedCap No February 15, 1999 February 26, 1999
Stock Repurchase Program, announcement No March 15, 1999 March 26, 1999
regarding client contract and estimated first
quarter revenues
Consolidated Supplemental Financial Statements Yes(1) January 25, 1999 April 7, 1999(3)
to give effect for the Subro-Audit
Acquisition
Consolidated Supplemental Financial Statements Yes(2) February 15, 1999 April 29, 1999(4)
to give effect for the MedCap Acquisition
</TABLE>
- ---------------
1. Financial Statements of SAI and ODL (collectively, "Subro-Audit").
(a) Financial Statements of Subro-Audit:
(i) Combined Balance Sheets as of December 31, 1997 and 1996.
(ii) Combined Statements of Income for the years ended December 31, 1997
and 1996.
17
<PAGE> 20
(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 Combined Financial Statements.
(b) Unaudited Financial Statements of Subro-Audit, together with an
independent auditors review report:
(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.
(iv) Notes to Condensed Combined Financial Statements.
(c) Unaudited Pro Forma Financial Information and Notes:
(i) Unaudited Pro Forma Condensed Balance Sheet of HCRI at September
30, 1998.
(ii) Unaudited Pro Form 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.
2. Financial Statements of MedCap Medical Cost Management, Inc. ("MedCap").
(a) Financial Statements of MedCap:
(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.
(b) Unaudited Financial Statements of MedCap, together with an independent
auditors review report:
(i) Condensed 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.
(c) Unaudited Pro Forma Financial Information and Notes:
(i) Unaudited Pro Forma Condensed Balance Sheet of HCRI at September
30, 1998.
(ii) Unaudited Pro Form 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.
3. Form 8-K/A amending Form 8-K filed February 3, 1999.
4. Form 8-K/A amending Form 8-K filed February 26, 1999.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHCARE RECOVERIES, INC.
Date: May 17, 1999 /s/ PATRICK B. MCGINNIS
--------------------------------------
Patrick B. McGinnis
Chairman, President and
Chief Executive Officer
Date: May 17, 1999 /s/ DOUGLAS R. SHARPS
--------------------------------------
Douglas R. Sharps
Executive Vice President and Chief
Financial Officer
Principal Financial and Accounting
Officer
19
<PAGE> 1
EXHIBIT 10.4
HEALTHCARE RECOVERIES, INC.
1998 DEFERRED COMPENSATION PLAN
FOR DIRECTORS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ss. 1. PURPOSE..................................................................................... 1
ss. 2. DEFINITIONS................................................................................. 1
2.1. Account..................................................................... 1
2.2. Beneficiary................................................................. 1
2.3. Board....................................................................... 1
2.4. Compensation Committee...................................................... 1
2.5. Director ................................................................... 1
2.6. Fees........................................................................ 1
2.7. HRI......................................................................... 1
2.8. Interest Credit Rate........................................................ 2
2.9. NCB......................................................................... 2
2.10. Plan........................................................................ 2
ss. 3. DEFERRAL ELECTIONS.......................................................................... 2
3.1. First Term Director Deferral Elections...................................... 2
3.2. Annual Deferral Elections................................................... 3
3.3. Automatic Election Extension................................................ 3
3.4. Account Credits............................................................. 3
ss. 4. INTEREST CREDITS............................................................................ 4
ss. 5. DISTRIBUTIONS............................................................................... 4
5.1. General..................................................................... 4
5.2. Elections................................................................... 4
5.3. Distribution Forms.......................................................... 5
(a) Standard Lump Sum.................................................. 5
(b) Five Annual Installments........................................... 5
(c) Ten Annual Installments............................................ 5
5.4. Beneficiary................................................................. 6
(a) Designation........................................................ 6
(b) Distribution....................................................... 6
5.5. Hardship.................................................................... 7
5.6. General Assets.............................................................. 7
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
ss.6. MISCELLANEOUS................................................................................ 7
6.1. Making and Revoking Elections............................................... 7
6.2. No Liability................................................................ 8
6.3. No Assignment; Binding Effect............................................... 8
6.4. Administration.............................................................. 8
6.5. Construction................................................................ 8
6.6. Term of Office.............................................................. 8
6.7. Amendment and Termination................................................... 9
</TABLE>
-ii-
<PAGE> 4
SS. 1.
PURPOSE
The purpose of this Plan is to provide a mechanism under
which a Director can elect to defer the payment of his or her Fees that are
otherwise payable to him until after the earlier of his or her death,
resignation, removal or retirement as a Director.
SS. 2.
DEFINITIONS
2.1. Account -- means the bookkeeping account maintained by
HRI as part of HRI's books and records in accordance with ss. 3, ss. 4 and ss.
5 to show as of any date the interest of each Director in this Plan.
2.2. Beneficiary -- means the person or persons designated
as such in accordance with ss. 5.4.
2.3. Board -- means the Board of Directors of HRI.
2.4. Compensation Committee -- means the compensation
committee of the Board comprising 3 members elected by the Board.
2.5. Director -- means any person (other than a person who
is an employee of HRI) who has been elected a member of the Board and any
former member of the Board for whom an Account is maintained under this Plan.
2.6. Fees -- means any meeting fees and retainer fees which
are payable to a Director for services as a member of the Board.
2.7. HRI -- means Healthcare Recoveries, Inc. and any
successor to Healthcare Recoveries, Inc.
<PAGE> 5
2.8. Interest Credit Rate -- means the prime rate of
interest in effect on the last day of each calendar quarter at NCB.
2.9. NCB -- means National City Bank of Kentucky,
Louisville, Kentucky or any successor to such bank.
2.10. Plan -- means this Healthcare Recoveries, Inc. 1998
Deferred Compensation Plan for Directors.
SS. 3.
DEFERRAL ELECTIONS
3.1. First Term Director Deferral Elections. A person who
is elected a Director or who is nominated for election as a Director (other
than a person who was a Director immediately before such election or
nomination) shall have the right at any time before the end of the 30-day
period immediately following the effective date of his or her election to elect
on the form provided for this purpose to defer the payment of all or any part
of his or her Fees which are otherwise payable after the end of such 30-day
period and before the end of the calendar year which includes the last day in
such 30-day period; provided, however, if a person makes such election before
the effective date of his or her election to the Board, such election shall
apply to all of such Fees which he or she so elects to defer and which are
payable during the first calendar year he or she serves as a Director. Any
election which is made and not revoked before the effective date of a
Director's election shall become irrevocable on such date and an election once
irrevocable shall remain irrevocable through the end of the calendar year which
includes such effective date. Any election which is made after such effective
date and not revoked before the end
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<PAGE> 6
of the 30-day period immediately following such effective date shall become
irrevocable immediately after the last day in such 30-day period, and an
election once irrevocable shall remain irrevocable through the end of the
calendar year which includes the last day in such 30-day period.
3.2. Annual Deferral Elections. A person who is a Director
before the beginning of any calendar year shall have the right to elect on the
form provided for this purpose to defer all or any part of his or her Fees
which are otherwise payable during such calendar year. Any election which is
made and which is not revoked before the beginning of such calendar year shall
become irrevocable on the first day of such calendar year and shall remain
irrevocable through the end of such calendar year.
3.3. Automatic Election Extension. If a Director has made a
deferral election under either ss. 3.1 or ss. 3.2 for any calendar year and has
not revoked such election before the beginning of any subsequent calendar year,
such election shall remain in effect for each such subsequent calendar year and
shall be irrevocable through the end of each such subsequent calendar year.
3.4. Account Credits. The Fees which a Director elects to
defer under this ss. 3 shall be credited to his or to her Account as of the
date HRI determines that such Fees otherwise would have been payable directly
to the Director if no election had been made under this ss. 3.
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<PAGE> 7
SS. 4.
INTEREST CREDITS
Interest credits shall be made by HRI at the Interest Credit
Rate to each Account as of the first day in each calendar quarter based on the
prime interest rate in effect on the last day of the immediately preceding
calendar quarter at NCB. Such credits shall be made until each Account is
distributed in full in accordance with ss. 5.
SS. 5.
DISTRIBUTIONS
5.1. General. The balance credited to a Director's Account
shall (subject to ss. 5.4(b)) first become distributable to him or to her on
the first day of the calendar year which immediately follows the calendar year
which includes his or her date of death or the effective date of his or her
resignation, removal or retirement as a Director, whichever comes first, and
the distribution shall be made or begin to be made, as the case may be, as soon
as practicable after the beginning of such calendar year. All distributions
under this Plan shall be made in cash.
5.2. Elections. A Director shall have the right to elect
that his or her Account be distributed in one of the distribution forms
described in ss. 5.3, and any such election shall be effective only if such
election is made at least one full year before his or her Account first becomes
distributable. If a Director elects to revoke a prior election, such revocation
shall be effective only if such revocation is made at least one full year
before his or her Account first becomes distributable. If no election is made
under this ss. 5 or if an election has not become effective when an Account
first becomes distributable, the
-4-
<PAGE> 8
Director shall be deemed to have made an election under this Plan for a
standard lump sum distribution under ss. 5.3(a).
5.3. Distribution Forms.
(a) Standard Lump Sum. A Director shall have the right to
elect that his or her Account be distributed in a standard lump sum, and a
standard lump sum distribution shall be made as soon as practicable after his
or her Account first becomes distributable under ss. 5.1.
(b) Five Annual Installments. A Director shall have the
right to elect that his or her Account be distributed in five annual
installments. If a Director's Account is distributed under this distribution
form, the first annual installment shall be made as soon as practicable after
his or her Account first becomes distributable under ss. 5.1. The amount
distributable each calendar year shall be determined by multiplying the
Director's Account by a fraction, the numerator of which shall be one and the
denominator of which shall be the number of installments remaining after such
installment has been paid plus one. The second annual installment through the
fifth annual installment shall be distributed on or about the anniversary of
the distribution of the first annual installment.
(c) Ten Annual Installments. A Director shall have the
right to elect that his or her Account be distributed in ten annual
installments. If a Director's Account is distributed under this distribution
form, the first annual installment shall be made as soon as practicable after
his or her Account first becomes distributable under ss. 5.1, and the amount
distributable each calendar year shall be determined by multiplying the
Director's Account by a fraction, the numerator of which shall be one and the
denominator of which
-5-
<PAGE> 9
shall be the number of installments remaining after such installment has been
paid plus one. The second annual installment through the tenth annual
installment shall be distributed on or about the anniversary of the
distribution of the first annual installment.
5.4. Beneficiary.
(a) Designation. A Director shall have the right to
designate a person, or more than one person, as his Beneficiary to receive the
balance credited to his or her Account in the event of his or her death. Any
such designation shall be made on a form provided for this purpose and shall be
effective when such form is properly completed and delivered (in accordance
with the instructions on such form) by the Director to HRI before his or her
death. A Director may change his or her Beneficiary designation from time to
time and, if a Director changes his or her Beneficiary at any time, his or her
Beneficiary shall be the person or persons designated on the last form which is
effective on his or her date of death. If no Beneficiary designation is in
effect on the date a Director dies or if no designated Beneficiary survives the
Director, the Director's estate automatically shall be treated as his or her
Beneficiary under this Plan.
(b) Distribution. If a Director's Beneficiary is a natural
person, the Director's Account shall be distributed, or shall continue to be
distributed to such person, in accordance with the distribution election in
effect for the Director on the date of his or her death. If a Director's
beneficiary is a person other than a natural person, the balance credited to
the Director's Account shall be distributed to such person in a lump sum as
-6-
<PAGE> 10
soon as practicable after the Director's Account first becomes distributable to
such person under the terms of this Plan without regard to the distribution
form which the Director had elected.
5.5. Hardship. A Director shall have the right to request
that HRI distribute all, or a part of, his or her Account to him or to her in
the event that he or she experiences a severe and unanticipated financial
hardship. If a Director makes such a request, the Compensation Committee shall
review such request and direct HRI to make such distributions, if any, from the
Director's Account as the Compensation Committee deems appropriate in light of
the nature and magnitude of the Director's financial hardship and the other
assets available to the Director to address such hardship. If a Director dies
and his or her Beneficiary is a natural person, such Beneficiary shall be
treated as the Director under this ss. 5.5 if the Beneficiary makes a request
for a distribution under this ss. 5.5.
5.6. General Assets. All distributions to, or on behalf of,
a Director under this Plan shall be made from the general assets of HRI, and
any claim by a Director or by his or her Beneficiary against HRI for any
distribution under this Plan from such assets shall be treated the same as a
claim of any general and unsecured creditor of HRI.
SS. 6.
MISCELLANEOUS
6.1. Making and Revoking Elections. An election shall be
treated as made or revoked under this Plan only when the form provided for
making such election or revocation is properly completed and delivered to HRI
in accordance with the instructions on such form.
-7-
<PAGE> 11
6.2. No Liability. No Director and no Beneficiary of a
Director shall have the right to look to, or have any claim whatsoever against,
any officer, director, employee or agent of HRI in his or her individual
capacity for the distribution of any Account.
6.3. No Assignment; Binding Effect. No Director or
Beneficiary shall have the right to alienate, assign, commute or otherwise
encumber an Account for any purpose whatsoever, and any attempt to do so shall
be disregarded as completely null and void. The provisions of this Plan shall
be binding on each Director and Beneficiary and on HRI.
6.4. Administration. This Plan shall be administered at any
time by the person or persons assigned to do so by the Board and such person by
virtue of such assignment shall have the right and the power and the
responsibility to take such equitable and other action as he or she deems
proper or appropriate under the circumstances to properly administer this Plan.
6.5. Construction. This Plan shall be construed in
accordance with the laws of the State of Kentucky. Headings and subheadings
have been added only for convenience of reference and shall have no substantive
effect whatsoever. All references to sections shall be to sections to this
Plan. All references to the singular shall include the plural and all
references to the plural shall include the singular.
6.6. Term of Office. A Director's participation in this
Plan shall not constitute a contract for a Director to serve as a member of the
Board for any particular term or for any particular rate of compensation, and
participation in this Plan shall have no bearing whatsoever on such terms or
compensation or on any other conditions for membership on the Board.
-8-
<PAGE> 12
6.7. Amendment and Termination. The Board shall have the
right to amend this Plan from time to time and to terminate this Plan at any
time; provided, however, that the balance credited to each Account immediately
after any such amendment or termination shall be no less than the balance
credited to such Account immediately before such amendment or termination and
no amendment or termination shall adversely affect a Director's right to the
distribution of his or her Account or his or her Beneficiary's right to the
distribution of such Account.
HEALTHCARE RECOVERIES, INC.
By:
------------------------------------
Title
----------------------------------
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHCARE RECOVERIES, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 812
<SECURITIES> 0
<RECEIVABLES> 5,770
<ALLOWANCES> 347
<INVENTORY> 0
<CURRENT-ASSETS> 33,092
<PP&E> 19,516
<DEPRECIATION> 7,616
<TOTAL-ASSETS> 75,866
<CURRENT-LIABILITIES> 23,540
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 38,714
<TOTAL-LIABILITY-AND-EQUITY> 75,866
<SALES> 13,860
<TOTAL-REVENUES> 13,860
<CGS> 6,995
<TOTAL-COSTS> 6,995
<OTHER-EXPENSES> 4,594
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140
<INCOME-PRETAX> 2,391
<INCOME-TAX> 993
<INCOME-CONTINUING> 1,398
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,398
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
