<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
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 12, 2000, 10,911,188 shares of the Registrant's Common Stock,
$0.001 par value were outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
HEALTHCARE RECOVERIES, INC.
FORM 10-Q
MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of March 31, 2000 and December
31, 1999............................................... 1
Condensed Statements of Income for the three months ended
March 31, 2000 and 1999................................ 2
Condensed Statements of Cash Flows for the three months
ended March 31, 2000 and 1999.......................... 3
Notes to Condensed Financial Statements................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................... 14
Item 6. Exhibits and Reports on Form 8-K.................... 17
Signatures.................................................. 18
</TABLE>
THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
HEALTHCARE RECOVERIES, INC. OR MEMBERS OF ITS MANAGEMENT TEAM CONTAIN STATEMENTS
WHICH MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.A.
SECTIONS 77Z-2 AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF HEALTHCARE RECOVERIES,
INC. AND MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH
SUCH STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS
CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS ARE SET FORTH IN THE SAFE
HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT
99.1 TO THIS FORM 10-Q, AND ARE HEREBY INCORPORATED BY REFERENCE. HEALTHCARE
RECOVERIES, INC. UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING
STATEMENTS TO REFLECT CHANGED ASSUMPTIONS OR CIRCUMSTANCES, THE OCCURRENCE OF
UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER TIME.
<PAGE> 3
PART I
FINANCIAL INFORMATION
HEALTHCARE RECOVERIES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 226 $ 1,670
Restricted cash........................................... 24,134 26,121
Accounts receivable, less allowance for doubtful accounts
of $435 in 2000 and $380 in 1999........................ 8,673 6,870
Other current assets...................................... 1,395 1,319
-------- --------
Total current assets............................... 34,428 35,980
-------- --------
Property and equipment, at cost:
Buildings and land........................................ 4,001 5,482
Furniture and fixtures.................................... 3,194 3,095
Office equipment.......................................... 1,957 1,946
Computer equipment........................................ 11,991 11,253
Leasehold improvements.................................... 1,102 1,073
-------- --------
22,245 22,849
Accumulated depreciation and amortization................. (10,888) (10,002)
-------- --------
Property and equipment, net........................ 11,357 12,847
-------- --------
Cost in excess of net assets acquired, net................ 28,819 26,296
Identifiable intangibles, net............................. 5,355 5,496
Other assets.............................................. 1,514 1,274
-------- --------
Total assets....................................... $ 81,473 $ 81,893
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 1,571 $ 1,914
Accrued expenses.......................................... 8,579 12,005
Funds due clients......................................... 11,844 13,178
Income taxes payable...................................... 1,710 1,018
-------- --------
Total current liabilities.......................... 23,704 28,115
Other liabilities........................................... 1,868 2,055
Long-term borrowings........................................ 14,000 11,000
-------- --------
Total liabilities.................................. 39,572 41,170
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value per share; 2,000 shares
authorized; no shares issued or outstanding............. -- --
Common stock, $.001 par value per share; 20,000 shares
authorized; 11,225 and 11,209 shares issued and
outstanding as of March 31, 2000 and December 31, 1999,
respectively............................................ 12 12
Capital in excess of par value............................ 22,595 22,541
Other..................................................... (375) (369)
Treasury stock at cost, 305 shares........................ (1,373) (1,373)
Retained earnings......................................... 21,042 19,912
-------- --------
Total stockholders' equity......................... 41,901 40,723
-------- --------
Total liabilities and stockholders' equity......... $ 81,473 $ 81,893
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
1
<PAGE> 4
HEALTHCARE RECOVERIES, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Claims revenues............................................. $16,567 $13,860
Cost of services............................................ 8,466 6,995
------- -------
Gross profit...................................... 8,101 6,865
Support expenses............................................ 4,541 3,600
Depreciation and amortization............................... 1,536 994
------- -------
Operating income.................................. 2,024 2,271
Interest income............................................. 239 260
Interest expense............................................ (242) (140)
Other -- Special Committee expenses......................... 90 --
------- -------
Income before income taxes........................ 1,931 2,391
Provision for income taxes.................................. 801 993
------- -------
Net income........................................ $ 1,130 $ 1,398
======= =======
Earnings per common share (basic and diluted)............... $ 0.10 $ 0.12
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
2
<PAGE> 5
HEALTHCARE RECOVERIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,130 $ 1,398
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 1,536 994
Deferred income taxes.................................. (2) 164
Other.................................................. (3) --
Changes in operating assets and liabilities:
Restricted cash...................................... 1,987 757
Accounts receivable.................................. (1,803) (706)
Other current assets................................. 571 427
Other assets......................................... (357) (291)
Trade accounts payable............................... (973) 651
Accrued expenses..................................... (1,717) (446)
Funds due clients.................................... (1,334) (715)
Income taxes payable................................. 692 (86)
Other liabilities.................................... (188) (439)
------- --------
Net cash (used in) provided by operating
activities....................................... (461) 1,708
------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ (4,545) (43,481)
Disposals of property and equipment....................... 1,388 --
Purchases of property and equipment....................... (877) (984)
------- --------
Net cash used in investing activities............. (4,034) (44,465)
------- --------
Cash flows from financing activities:
Line of credit proceeds................................... 6,600 12,300
Line of credit repayments................................. (3,600) --
Issuance of common stock.................................. 51 136
------- --------
Net cash provided by financing activities......... 3,051 12,436
------- --------
Net decrease in cash and cash equivalents................... (1,444) (30,321)
Cash and cash equivalents, beginning of period.............. 1,670 31,133
------- --------
Cash and cash equivalents, end of period.................... $ 226 $ 812
======= ========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
3
<PAGE> 6
HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Healthcare Recoveries, Inc. (hereinafter referred to as the "Company" or
"HCRI"), a Delaware corporation, was incorporated on June 30, 1988. The Company
provides complete outsourcing of certain medical cost containment services to
the private healthcare payor industry. Its primary service is claims 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
medical cost containment services include hospital bill auditing, contract
compliance review and cost management consulting, coordination of benefits and
overpayments recovery 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. 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.
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, 1999, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed
with the Securities and Exchange Commission on March 14, 2000.
The financial information has been prepared in accordance with the
Company's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such adjustments are
of a normal and recurring nature. Certain financial statement amounts have been
reclassified in the prior year to conform to current period presentation.
2. CONTINGENCIES
The Company is engaged in the business of identifying and recovering
subrogation and related claims of its clients, many of which arise in the
context of personal injury lawsuits. As such, the Company operates in a
litigation-intensive environment. The Company has been, from time to time, 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. CREDIT FACILITY
On February 1, 1998, the Company entered into an agreement providing for a
secured revolving credit agreement (the "Credit Facility"), with borrowings of
up to a maximum of $50 million. An amount of $14 million was outstanding as of
March 31, 2000. Principal amounts outstanding under the Credit Facility bear
interest at a variable rate based on the Prime Rate or Eurodollar Rate, as
applicable, plus a pre-determined
4
<PAGE> 7
HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
3. CREDIT FACILITY -- (CONTINUED)
margin based on the ratio of the Company's total indebtedness to earnings before
interest, taxes, depreciation and amortization. The agreement contains customary
covenants and events of default including maintenance of certain minimum
interest coverage and leverage ratios and a minimum level of net worth. The
agreement also contains a material adverse change clause. The Company does not
expect changes in interest rates to have a material effect on its financial
position, results of operations or cash flows in 2000. 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 Common Stock. The
Company negotiated a third amendment to the Credit Facility, effective May 15,
2000, that extended the maturity date from January 31, 2001 to April 30, 2002,
lowered the maximum borrowing to $40 million, increased the pricing margins for
borrowings and commitment fees and added an additional leverage and financial
ratio.
4. STOCK REPURCHASE PLAN
HCRI's Board approved a stock repurchase plan on March 12, 1999 under which
the Company is authorized to repurchase, from time to time, up to $10 million of
HCRI Common Stock in the open market, at prices per share deemed favorable by
the Company. Shares may be repurchased using cash from operations and borrowed
funds and may 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 1999, HCRI acquired 305,000 shares of its Common
Stock, at an average price per share of $4.50, which is reflected as treasury
stock on the accompanying Condensed Balance Sheets (Unaudited). During May 2000,
HCRI acquired an additional 314,000 shares of its Common Stock, at an average
price of $2.92.
5. EARNINGS PER COMMON SHARE
Reconciliations of the average number of common shares outstanding used in
the calculation of earnings per common share and earnings per common share
assuming dilution are as follows (dollars and shares in thousands, except per
share results):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Weighted average number of common shares outstanding........ 11,225 11,503
Add: Dilutive stock options................................. 11 11
------- -------
Number of common shares outstanding......................... 11,236 11,514
======= =======
Net earnings for earnings per common share (basic and
diluted).................................................. $ 1,130 $ 1,398
======= =======
Earnings per common share:
Basic..................................................... $ 0.10 $ 0.12
======= =======
Diluted................................................... $ 0.10 $ 0.12
======= =======
</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 was calculated using the treasury stock method. Options to purchase
approximately 1,441,000 and 1,189,000 shares for the periods ending March 31,
2000 and 1999, respectively, were not included in the computation of diluted
earnings per common share because the exercise prices of those options were
greater than the average market price of the common shares during the respective
periods.
5
<PAGE> 8
HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
6. 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 limited liability partnership ("ODL"
and, together with SAI, the "Subro Audit Acquisition"), for approximately $24.4
million, using available unrestricted cash. HCRI currently estimates that it may
pay up to $7.0 million through January 2001, pursuant to an earn-out
arrangement. Approximately $8.5 million is held in escrow for the potential
earn-out in connection with the Subro Audit Acquisition and is included in
restricted cash at March 31, 2000 and December 31, 1999. It is anticipated that
approximately $2.8 million of the escrowed amount will be paid in May 2000. SAI
is based in Wisconsin and provides subrogation recovery services to an installed
base of lives, which 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.
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
(the "MedCap Acquisition" and, together with the Subro Audit Acquisition, the
"Acquisitions"). HCRI paid approximately $4.5 million on February 15, 2000
pursuant to an amendment to the original earn-out agreement. Pursuant to the
same amendment, through January 15, 2001, HCRI may pay up to 50% of the fees
collected in relation to certain negotiated contracts, less associated expenses,
as an additional earnout. To date, the amount paid in relation to the fees
collected on those contracts approximates $28,000. 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.
If the Acquisitions had taken place on January 1, 1999, approximate claims
revenues, net income and earnings per share for the three months ended March 31,
1999 would have been $15.4 million, $1.3 million and $0.12 per common share,
respectively. The cost in excess of net tangible and identifiable intangible
assets acquired, allocated and recorded in connection with the Acquisitions was
approximately $30.3 million and is being amortized over a 19 to 20-year period.
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 1999.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW OF COMPANY
HCRI provides insurance subrogation and other medical cost containment
services to the private healthcare payor industry. HCRI's services comprise the
complete outsourcing of 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 rights of HCRI's clients to recover the value of these medical benefits
arise by law or contract, are known generally as the right of subrogation and
are generally paid from the proceeds of liability or workers' compensation
insurance. The Company's other medical cost containment services include
hospital bill auditing, contract compliance review, cost management consulting,
coordination of benefits and overpayment recovery services. HCRI offers its
services on a nationwide basis to health maintenance organizations, indemnity
health insurers, self-funded employee health plans, and companies that provide
claims administration services to self-funded plans (referred to as "third-
party administrators"). The Company had 54.7 million lives under contract from
its clientele at March 31, 2000.
ACQUISITIONS
On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro-Audit (which consisted of SAI and ODL), for approximately $24.4 million,
using available unrestricted cash. HCRI currently estimates that it may pay up
to $7.0 million through January 2001, pursuant to an earn-out arrangement.
Approximately $8.5 million is held in escrow for the potential earn-out in
connection with the Subro Audit Acquisition and is included in restricted cash
at March 31, 2000 and December 31, 1999. It is anticipated that approximately
$2.8 million of the escrowed amount will be paid in May 2000. SAI is based in
Wisconsin and provides subrogation recovery services to an installed base of
lives, which 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.
On February 15, 1999, HCRI acquired the assets and certain liabilities of
MedCap for approximately $10 million, using available unrestricted cash and
borrowed funds. The Company paid approximately $4.5 million on February 15, 2000
pursuant to an amendment to the original earn-out agreement. Pursuant to the
same amendment, through January 15, 2001, HCRI may pay up to 50% of the fees
collected in relation to certain negotiated contracts, less associated expenses,
as an additional earnout. To date, the amount paid in relation to the fees
collected on those contracts approximates $28,000. 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.
OVERVIEW OF OPERATIONS
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 providing service. At this
point, the 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 files and 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 settlements
and rejections. Backlog increases when the Company opens new files of
potentially recoverable claims and decreases when files are recovered and closed
or, after further investigation, determined to be nonrecoverable. Backlog for a
client will range from newly identified potential recoveries to potential
recoveries that are in the late stages of the recovery process. Historically,
recoveries (the amount actually recovered for the Company's clients prior to the
Company's fee) have been produced from backlog in a generally predictable cycle.
Any group of potential recoveries, sufficiently large in number to display
7
<PAGE> 10
OVERVIEW OF OPERATIONS -- (CONTINUED)
statistically significant characteristics and that originates from a defined
time period, tends to produce recovery results that are comparable to other
groups having similar characteristics.
For the most part, the Company is paid contingency fees from the amount of
claims recoveries it makes from backlog or recoveries it identifies through
other cost containment and related recovery services on behalf of its clients.
The Company's revenues are a function of recoveries and effective fee rates.
Effective fee rates vary depending on the mix between 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 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 related 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 personnel 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.
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,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cumulative lives sold, beginning of period.................. 55.6 40.5
Lives from acquisitions................................... -- 18.6(1)
Lives from existing clients............................... (1.2)(2) (1.2)(2)
Lives added from contracts with new clients............... 0.3 1.5
-------- --------
Cumulative lives sold, end of period........................ 54.7 59.4
======== ========
Lives installed............................................. 51.8 53.5(1)
Backlog(3).................................................. $1,150.0 $1,069.6
Claims recoveries........................................... $ 61.7 $ 51.2
Throughput(4)............................................... 5.5% 4.7%
Effective fee rate.......................................... 26.7% 27.1%
Employees
Direct operations......................................... 599 546
Support................................................... 155 146
-------- --------
Total employees................................... 754 692
======== ========
</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.
(2) The March 31, 2000 decrease includes approximately 800,000 lives associated
with a client that was acquired by a health plan that is not a client of the
Company. The March 31, 1999 decrease includes the loss of 900,000 lives from
Blue Shield of California, a former client which terminated its services
with the Company.
(3) 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.
8
<PAGE> 11
RESULTS OF OPERATIONS -- (CONTINUED)
(4) Throughput equals recoveries for the period divided by the average of
backlog at the beginning and end of the period.
STATEMENTS OF INCOME AS A PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------ ------
<S> <C> <C>
Claims revenues............................................. 100.0% 100.0%
Cost of services............................................ 51.1 50.5
Support expenses............................................ 27.4 26.0
Depreciation and amortization............................... 9.3 7.2
Operating income............................................ 12.2 16.4
Income before income taxes.................................. 11.7 17.3
Net income.................................................. 6.8 10.1
</TABLE>
Three months ended March 31, 2000 compared to three months ended March 31,
1999
Claims Revenues. Total revenues for the three-month period ended March 31,
2000 increased 19%, to $16.6 million from $13.9 million in 1999. Claims
recoveries increased from $51.2 million in 1999 to $61.7 million in 2000. Growth
in claims revenues and recoveries occurred primarily because of the
Acquisitions. The effective fee rate decreased to 26.7% from 27.1% primarily due
to hospital bill audit pricing, which does not use a fixed contingent fee but
rather a combination of a fixed fee based on the claims reviewed and a
contingent fee based on savings. In the quarter ended March 31, 2000, the mix of
fixed and contingent fee revenues was such that the overall rate for hospital
bill auditing services declined.
Backlog of $1,150.0 million at March 31, 2000 increased by $80.4 million,
or 8%, compared to March 31, 1999. The Company had a throughput rate of
approximately 5.5% and 4.7%, respectively. The increase in throughput from the
quarter ended March 31, 1999 is largely the effect of partial quarter numbers
from the Acquisitions on the indicators. As used here, "throughput" means
recoveries for the period stated as a percentage of the average backlog for the
period. Lives installed decreased 1.7 million from 53.5 million at March 31,
1999 to 51.8 million at March 31, 2000, because of the previously announced
termination by CIGNA of its contract for prospective subrogation services.
Cost of Services. Cost of services increased 21% for the quarter ended
March 31, 2000 to $8.5 million from $7.0 million in the comparable quarter of
1999. The increase resulted primarily from the inclusion of a full quarter of
costs associated with the operations of the Acquisitions. As a percentage of
claims revenues, cost of services increased to 51.1% in 2000 from 50.5% in 1999,
primarily from an increased level of costs associated with additional
operational employees and a lower growth rate in revenues as compared to the
growth rate in cost of services.
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
expenses associated with lives installed exceeds the revenue growth rate.
Excluding the previously mentioned CIGNA contract termination, lives installed
at March 31, 2000 increased by approximately 1 million from March 31, 1999.
Support Expenses. Support expenses increased 25% to $4.5 million for the
quarter ended March 31, 2000 from $3.6 million for the comparable period in
1999. The increase was due to combining the operations of the acquired companies
and the hiring of additional systems and other staff to support the planned
growth and development of new operations. Support expenses increased as a
percentage of claims revenues from 26% for the three months ended March 31, 1999
to 27% for the comparable period in 2000. The increase in support
9
<PAGE> 12
RESULTS OF OPERATIONS -- (CONTINUED)
expenses as a percentage of claims revenues resulted from a lower growth rate in
revenues than support expenses. Support costs do not vary in proportion to
revenues.
Depreciation and Amortization. Depreciation and amortization expenses
increased 50% to $1.5 million for the three months ended March 31, 2000 from
$1.0 million for the comparable period in 1999. The increase in depreciation
expense was attributable to the purchase of property and equipment related to
the Acquisitions and system upgrades. The increase in amortization expense was
attributable to the addition of intangible assets related to the Acquisitions.
Interest Income. Interest income totaled $239,000 and $260,000 for the
three months ended March 31, 2000 and 1999, respectively. The decrease in
interest income was primarily a result of using available cash to repay borrowed
funds.
Interest Expense. Interest expense totaled $242,000 and $140,000 for the
three months ended March 31, 2000 and 1999, respectively. The increase in
interest expense resulted from a full quarter of interest expense related to the
Acquisitions, an increase in borrowed funds related to the amendment of the
MedCap earnout agreement and higher applicable interest rates for the quarter
ended March 31, 2000.
Other -- Special Committee Expenses. In August 1999, HCRI's Board of
Directors appointed a Special Committee to evaluate strategic alternatives
available to the Company, including its possible sale. During the quarter ended
March 31, 2000, the Company incurred $90,000 of expenses related to the work of
the committee. The Special Committee has ceased seeking a buyer for the Company
and its efforts to enhance shareholder value have been assumed by the full Board
of Directors.
Tax. Provision for income taxes was approximately 41.5% of pre-tax income
for the quarters ended March 31, 2000 and 1999. 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 quarter ended March 31, 2000 decreased $0.3
million, or 21%, to $1.1 million or $0.10 per diluted share, from $1.4 million
or $0.12 per diluted share for the comparable period ended March 31, 1999. The
primary factors offsetting the increase in revenues during the comparable period
and contributing to the decline in the first quarter 2000 earnings, were
support, interest and amortization expenses related to the Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's statements of cash flows for the three months ended March 31,
2000 and 1999 are summarized below (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------- --------
(IN THOUSANDS)
<S> <C> <C>
Net cash (used in) provided by operating activities......... $ (461) $ 1,708
Net cash used in investing activities....................... (4,034) (44,465)
Net cash provided by financing activities................... 3,051 12,436
------- --------
Net decrease in cash and cash equivalents................... $(1,444) $(30,321)
======= ========
</TABLE>
The Company had working capital of $10.7 million at March 31, 2000,
including cash and cash equivalents of $0.2 million, compared with working
capital of $7.9 million at December 31, 1999. The primary reason for the
increase was growth in receivables at MedCap due to new business.
Net cash used in operating activities decreased $2.2 million for the
quarter ended March 31, 2000 compared to the comparable period in 1999,
primarily as a result of the timing of recurring cash receipts and disbursements
related to accounts receivables, accrued expenses and claims recoveries.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
Net cash used in investing activities includes $4.5 million paid under the
amended earnout agreement related to the MedCap Acquisition. Purchases of
property and equipment for the quarter ended March 31, 2000 were approximately
$0.9 million. Disposals of property and equipment of $1.4 million included the
sale of a building owned in Atlanta, Georgia. Throughout 2000, excluding any
future acquisitions, the Company anticipates capital expenditures totaling
approximately $5.0 million.
Net cash provided by financing activities for the quarter ended March 31,
2000 reflects $3.0 million in net cash borrowings from the Company's credit
facility, discussed below.
In February 1998, the Company entered into a $50 million secured revolving
credit agreement 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 bears interest at a variable rate
based on the Prime Rate or Eurodollar Rate, as applicable, plus a pre-determined
margin based on the ratio of the Company's total indebtedness to earnings before
interest, taxes, depreciation and amortization. The agreement contains 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, 2000, the Company was in compliance with the
covenants. 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. The Company negotiated a third
amendment to the Credit Facility, effective May 15, 2000, that extended the
maturity date from January 31, 2001 to April 30, 2002, lowered the maximum
borrowing to $40 million, increased the pricing margins for borrowings and
commitment fees and added an additional leverage and financial ratio.
At March 31, 2000 and December 31, 1999, the Company reported on its
balance sheet, as a current asset, restricted cash of $24.1 million and $26.1
million, respectively. Restricted cash represented claims recoveries effected by
HCRI for its clients and also included an escrowed amount of $8.5 million for a
potential earn-out in connection with the Subro-Audit Acquisition. At March 31,
2000 and December 31, 1999, HCRI reported on its balance sheet, as a current
liability, funds due clients of $11.8 million and $13.2 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 and internal development initiatives.
EXTERNAL FACTORS
The business of recovering subrogation and other 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. Examples of these factors include,
but are not limited to, 1) the non-availability of recovery from such sources as
property and casualty and workers' compensation coverages, 2) law changes that
limit the use of or access to claims and medical records, or 3) the ability of
healthcare payors to recover related claims and audit medical records. Because
the Company's profitability depends in large measure upon obtaining and using
claims data and medical records, the non-availability or decrease in their
availability could have a material adverse effect on the Company.
Moreover, because the Company's revenues are derived 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 its
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.
11
<PAGE> 14
CONCENTRATION OF CLIENTS
The Company provides services to healthcare plans that as of March 31, 2000
covered approximately 54.7 million lives. HCRI's clients are national and
regional healthcare payors, large third-party administrators or self-insured
corporations. For the three months ended March 31, 2000 and 1999, HCRI's largest
client UnitedHealth Group, generated 21% and 24%, respectively, of HCRI's
revenues. The loss of this account could have a material adverse effect on
HCRI's business, results of operations and financial condition. On March 31,
2000, HCRI had backlog of $1,150.0 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 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.
HCRI does not obligate itself to deliver any specific result from the
performance of its services. 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 Company previously recognized the material nature of the business
issues surrounding the computer processing of dates into and beyond the Year
2000 and took corrective action. The Company's efforts included replacing and
testing three basic aspects of its business operations: internal information
technology ("IT") systems, including the internally-written systems that support
subrogation and bill audit recovery; internal non-IT systems, including office
equipment; and material third-party relationships. Management believes that the
Company has completed all of the activities within its control to ensure that
the Company's systems are Year 2000 compliant and the Company has experienced no
interruptions to normal operations due to the start of the Year 2000.
The Company spent approximately $216,000 during 1999 in relation to Year
2000 readiness. These costs were generally not incremental to existing IT
budgets as internal resources were re-deployed and timetables for implementation
of replacement systems were accelerated. The Company has not incurred any
additional costs and does not expect to incur any additional expenses in
connection with Year 2000 issues.
To date, the Company has not experienced any material disruptions of its
internal computer systems or software applications, or with the computer systems
or software applications of its third party vendors, suppliers or service
providers. The Company will continue to monitor these third parties to determine
the impact, if any, on the business of the Company and the actions the Company
must take, if any, in the event of non-compliance by any of these third parties.
Based upon the Company's assessment of compliance by third parties, there
appears to be no material business risk posed by any such noncompliance.
Moreover, the Company generally believes that the vendors that supply products
to the Company for resale are responsible for the products' Year 2000
functionality.
RECENT DEVELOPMENTS
Board-Appointed Special Committee
The Company announced in a press release issued on March 31, 2000 that the
Special Committee formed by the Board of Directors in August 1999 had ceased
seeking a buyer for the Company. Efforts to enhance shareholder value have been
assumed by the full Board of Directors.
Stock Repurchase Plan
HCRI's Board approved a stock repurchase plan on March 12, 1999 under which
the Company is authorized to repurchase, from time to time, up to $10 million of
HCRI Common Stock in the open market, at prices per share deemed favorable by
the Company. During 1999, HCRI acquired 305,000 shares of its Common Stock, at
an average price per share of $4.50, which is reflected as treasury stock on the
12
<PAGE> 15
RECENT DEVELOPMENTS -- (CONTINUED)
accompanying Condensed Balance Sheets (Unaudited). During May 2000, HCRI
acquired an additional 314,000 shares of its Common Stock, at an average price
of $2.92.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
related to its amended Credit Facility, which matures April 30, 2002. The impact
on earnings and value of any debt on the Company's balance sheets are 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, 2000, the Company had
$14.0 million outstanding under its Credit Facility with interest rates ranging
from 7.8% to 9.3%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
13
<PAGE> 16
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 a declaratory judgment 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, 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, and treble damages under RICO,
costs and reasonable attorneys' fees. The court recently ordered that all
dispositive motions in the case be filed by late November 2000. Trial is
scheduled to begin in March 2001.
On October 1, 1999, a First Amended Class Action Complaint ("Amended
Complaint") was filed against HCRI in the United States District Court for the
Southern District of Florida, in a putative class action brought by William
Conte and Aaron Gideon, individually and on behalf of all others similarly
situated. In that action, Conte v. Healthcare Recoveries, Inc., No. 99-10062,
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 Florida Consumer Collection Practices Act. The
Complaint also seeks a declaratory judgment that HCRI, as the subrogation agent
for various healthcare payors, is not entitled to assert and recover upon
subrogation or reimbursement liens it asserts on settlements obtained from third
party tortfeasors when the settlement is in an amount less than the amount
required to fully compensate (or "make whole") the injured party for all
elements of damage caused by the tortfeasor. Plaintiffs purport to represent a
class consisting of all participants or beneficiaries of ERISA plans nationwide
whose net recovery of damages through judgments, settlements or otherwise
against liable third parties has been reduced or potentially reduced by HCRI's
alleged assertion and/or recovery of unlawful subrogation/reimbursement rights
of its clients. Plaintiffs also seek compensatory and statutory damages,
exemplary and punitive damages, injunctive relief, prejudgment interest, costs
and attorneys' fees.
The original complaint in the Conte matter, filed in June 1999, asserted
similar claims on behalf of a putative class of participants or beneficiaries of
one client's health plans located in Florida, Alabama, and Georgia. In response
to HCRI's motion to dismiss that complaint, the plaintiffs filed the Amended
Complaint on behalf of a putative national class. On November 5, 1999, HCRI
filed a motion to dismiss the Amended Complaint. That motion, now fully briefed,
remains pending. The court has not yet addressed the question of whether to
certify the putative class. In early May, the plaintiffs filed a motion seeking
class certification. HCRI is preparing its opposition to the motion.
On October 20, 1999, a class action complaint ("Baker Complaint") was filed
against HCRI and one HCRI client in the Circuit Court of Jefferson County
Alabama, Darrell DeWayne Baker v. Healthcare Recoveries, Inc., United Healthcare
of Alabama, Fictitious Party Defendants A, B, C et al. On December 6, 1999, the
defendants removed the lawsuit to the United States District Court for the
Northern District of Alabama, Southern Division. On January 3, 2000, a First
Amended Complaint was filed, retaining all counts from the original complaint
and seeking an additional declaratory judgment that the health plan and HCRI
have a right to recover through subrogation only the actual benefits paid to
medical providers on behalf of the
14
<PAGE> 17
class. The Baker Complaint, as amended, asserts claims on behalf of two putative
subclasses, both consisting of members nationwide of the client health plan, who
either: (1) allegedly paid inflated subrogation claims due to alleged failure by
the health plan or by HCRI to disclose discounts in the health plan's payments
to medical providers; or (2) allegedly were denied coverage of certain claims by
the health plan. The plaintiffs assert claims against HCRI under a variety of
theories including unjust enrichment, breach of contract, breach of fiduciary
duty and violations of RICO. Plaintiffs demand, on behalf of the putative
classes, compensatory damages, punitive damages, treble damages under RICO, and
reasonable attorneys' fees.
On January 27, 2000, the defendants filed a motion to dismiss the Amended
Complaint, which remains pending. The court has not yet addressed the question
of whether to certify the putative class.
On October 28, 1999, a class action Plaintiff's Original Petition
("Petition") was filed against HCRI and one HCRI client in the District Court
for the 150th Judicial District, Bexar County, Texas, Joseph R. Cajas, on behalf
of himself and all others similarly situated v. Prudential Health Care Plan,
Inc. and Healthcare Recoveries, Inc. The plaintiff asserts that HCRI's
subrogation recovery efforts on behalf of its client Prudential Health Care
Plan, Inc. ("Prudential") violated a number of common law duties, as well as the
Texas Insurance Code and the Texas Business and Commerce Code. The Petition
alleges that HCRI, as the subrogation agent for Prudential, made fraudulent
misrepresentations in the course of unlawfully pursuing subrogation and
reimbursement claims that plaintiffs assert are unenforceable because (1)
prepaid medical service plans may not exercise rights of subrogation and
reimbursement; (2) the subrogation and reimbursement claims asserted by the
Company are not supported by contract documents that provide enforceable
recovery rights and/or do not adequately describe the recovery rights; and (3)
the sums recovered pursuant to such claims unlawfully exceed the amount
Prudential paid for medical goods and services. HCRI was served with the
Petition in early November and has answered, denying all allegations. The court
has not yet addressed the question of whether to certify the putative class.
In late 1999, the Cajas plaintiff's counsel filed two lawsuits in Texas and
South Carolina that raise issues similar to those in the Cajas lawsuit. On
December 7, 1999, a class action complaint ("Complaint") was filed against HCRI
and one HCRI client in the United States District Court for the Western District
of Texas, San Antonio Division, Timothy Patrick Franks, on behalf of himself and
similarly situated persons v. Prudential Health Care Plan, Inc. and Healthcare
Recoveries, Inc. The plaintiff asserts claims on behalf of members of ERISA
governed health plans. The Complaint alleges that HCRI's subrogation recovery
efforts on behalf of its client Prudential violated a number of common law
duties, as well as the terms of certain ERISA plan documents, RICO, the federal
Fair Debt Collection Practices Act, the Texas Insurance Code and the Texas
Business and Commerce Code. The Complaint alleges that HCRI, as the subrogation
agent for Prudential, made fraudulent misrepresentations in the course of
unlawfully pursuing subrogation and reimbursement claims that plaintiffs assert
are unenforceable because (1) prepaid medical service plans may not exercise
rights of subrogation and reimbursement; (2) the subrogation and reimbursement
claims asserted by the Company are not supported by contract documents that
provide enforceable recovery rights and/or do not adequately describe the
recovery rights; and (3) the sums recovered pursuant to such claims unlawfully
exceed the amount Prudential paid for medical goods and services. The Complaint
further alleges that HCRI unlawfully pursued subrogation and reimbursement
claims by (1) failing to pay pro rata attorney's fees to attorneys who
represented class members with respect to tort claims underlying the subrogation
and reimbursement claims; and (2) recovering subrogation and reimbursement
claims from class members who have not been fully compensated for their
injuries. Plaintiffs, on behalf of the class, demand compensatory damages,
punitive damages, and treble damages under RICO, costs and reasonable attorneys'
fees. In April 2000, the court permitted Franks to amend the Complaint (the
"Amended Complaint"), thus rendering moot a motion to dismiss which had been
filed by HCRI and Prudential. On May 2, 2000, HCRI and Prudential filed a motion
to dismiss the Amended Complaint. The motion to dismiss the Amended Complaint is
now pending before the court. The court has not yet addressed the question of
whether to certify the putative class.
On December 22, 1999, a class action Complaint was filed against HCRI and
one HCRI client in the Court of Common Pleas of Richland County, South Carolina,
Estalita Martin et al. vs. Companion Health Care Corp., and Healthcare
Recoveries, Inc. On January 21, 2000, defendant Companion Healthcare Corp.
("CHC") filed an Answer and Counterclaim and plaintiff Martin filed a First
Amended Complaint
15
<PAGE> 18
("Amended Complaint"). The Amended Complaint asserts that HCRI's subrogation
recovery efforts on behalf of its client CHC violated a number of common law
duties, as well as the South Carolina Unfair Trade Practices Act. The Amended
Complaint alleges that HCRI as the subrogation agent for CHC, made fraudulent
misrepresentations in the course of unlawfully pursuing subrogation and
reimbursement claims that plaintiffs assert are unenforceable because (1)
prepaid medical service plans may not exercise rights of subrogation and
reimbursement; (2) the subrogation and reimbursement claims asserted by the
Company are not supported by contract documents that provide enforceable
recovery rights and/or do not adequately describe the recovery rights; and (3)
the sums recovered pursuant to such claims unlawfully exceed the amount CHC was
entitled to collect for such medical goods and services. The Amended Complaint
further alleges that HCRI and CHC unlawfully pursued subrogation and
reimbursement claims by (1) failing to pay pro rata costs and attorney's fees to
attorneys who represented class members with respect to tort claims underlying
the subrogation and reimbursement claims; and (2) failing to include in
subrogation and reimbursement claims all applicable discounts that CHC received
for such medical goods and services. Plaintiffs, on behalf of the class, demand
compensatory damages, punitive damages, and treble damages, disgorgement of
unjust profits, costs, and prejudgment interest and attorneys' fees. HCRI was
served with the original Complaint in late December and is preparing a formal
response. The court has not yet addressed the question of whether to certify the
putative class.
The DeGarmo, Cajas, Franks, Baker and Martin lawsuits, or any one of them,
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. The DeGarmo, Conte, Cajas, Franks, Baker and Martin
lawsuits, or any one or more of them, if successful, could require the Company
to refund, on behalf of its clients, recoveries in a material number of cases.
In addition, an adverse outcome in any of the above referenced lawsuits could
impair materially HCRI's ability to assert subrogation or reimbursement claims
on behalf of its clients in the future.
In terms of the Company's business practices and the allegations underlying
the DeGarmo, Cajas, Franks, Baker and Martin cases, at the end of 1993 HCRI had
ceased the practice of recovering the "reasonable value" of medical treatment
provided by medical providers in circumstances where HCRI has entered into DFS
arrangements with its clients. From that date, the Company's policy has been 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 potentially applicable in these
cases. As a result, and taking into account the underlying facts in each of
these cases, the Company believes it has meritorious grounds to defend these
lawsuits, it intends to defend the cases vigorously, and it believes that the
defense and ultimate resolution of the lawsuits should not have a material
adverse effect upon the business, results of operations or financial condition
of the Company. Nevertheless, if any of these lawsuits or another lawsuit
seeking relief under similar theories were to be successful, it is likely that
such resolution would have a material adverse effect on the Company's business,
results of operations and financial condition.
Management of the Company has observed that, in parallel with
widely-reported legislative concerns with the healthcare payment system, there
also has occurred an increase in litigation, actual and threatened, directed at
healthcare payors and related parties. In addition, certain attorneys who have
gained prominence in representing plaintiffs in recent actions against tobacco
companies have publicly stated their intentions to institute class action
lawsuits against healthcare payors, particularly those in the so-called "managed
care industry", and related parties including, specifically, the Company. As a
result of the foregoing, there can be no assurance that the Company will not be
subject to further class action litigation, that existing and/or future class
action litigation against the Company and its clients will not consume
significant management time and/or attention and that the cost of defending and
resolving such litigation will not be material.
16
<PAGE> 19
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. 0-22585).
2.2 -- Amendment to Asset Purchase Agreement, dated as of December
8, 1999, by and among 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 20, 1999, File No. 0-22585).
2.3 -- Asset Purchase Agreement, dated as of January 3, 1999, by
and among the Registrant, Subro-Audit, Inc., O'Donnell
Leasing Co., LLP, Kevin 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.
0-22585).
2.4 -- Amendment to Asset Purchase Agreement by and among the
Registrant, 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. 0-22585).
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, File No. 0-22585).
27.1 -- Financial Data Schedule (for SEC use only).
99.1 -- Healthcare Recoveries, Inc. Private Securities Litigation
Reform Act of 1995 Safe Harbor Compliance Statement for
Forward-Looking Statements (incorporated by reference to
Exhibit 99.1 of Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, filed March 14,
2000, File No. 0-22585).
</TABLE>
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the quarter
ended March 31, 2000.
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<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHCARE RECOVERIES, INC.
Date: May 12, 2000
/s/ PATRICK B. MCGINNIS
--------------------------------------
Patrick B. McGinnis
Chairman, President and
Chief Executive Officer
Date: May 12, 2000 /s/ DOUGLAS R. SHARPS
--------------------------------------
Douglas R. Sharps
Executive Vice President and Chief
Financial Officer
Principal Financial and Accounting
Officer
18
<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, 2000 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> MAR-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 226
<SECURITIES> 0
<RECEIVABLES> 9,108
<ALLOWANCES> (435)
<INVENTORY> 0
<CURRENT-ASSETS> 34,428
<PP&E> 22,245
<DEPRECIATION> (10,888)
<TOTAL-ASSETS> 81,473
<CURRENT-LIABILITIES> 23,704
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 41,889
<TOTAL-LIABILITY-AND-EQUITY> 81,473
<SALES> 16,567
<TOTAL-REVENUES> 16,567
<CGS> 8,466
<TOTAL-COSTS> 8,466
<OTHER-EXPENSES> 6,167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242
<INCOME-PRETAX> 1,931
<INCOME-TAX> 801
<INCOME-CONTINUING> 1,130
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,130
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
