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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 2001
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001
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)
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)
(Registrant's Telephone Number, Including Area Code) (502) 454-1340
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 15, 2001, 9,789,596 shares of the Registrant's Common Stock,
$0.001 par value, were outstanding.
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HEALTHCARE RECOVERIES, INC.
FORM 10-Q
MARCH 31, 2001
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of March 31, 2001 and December 1
31, 2000....................................................
Condensed Statements of Income for the three months ended 2
March 31, 2001 and 2000.....................................
Condensed Statements of Cash Flows for the three months 3
ended March 31, 2001 and 2000...............................
Notes to Condensed Financial Statements..................... 4
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosures About Market 15
Risk........................................................
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 20
Signatures ............................................................ 21
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 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 THE HEALTHCARE RECOVERIES, INC. ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2000, AND ARE HEREBY INCORPORATED HEREIN 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.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
HEALTHCARE RECOVERIES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,872 $ 1,297
Restricted cash........................................... 22,357 21,647
Accounts receivable, less allowance for doubtful accounts
of $445 in 2001 and $434 in 2000........................ 8,506 7,660
Other current assets...................................... 2,214 2,153
-------- --------
Total current assets............................... 34,949 32,757
-------- --------
Property and equipment, at cost:
Buildings and land........................................ 4,001 4,001
Furniture and fixtures.................................... 3,237 3,230
Office equipment.......................................... 1,997 1,992
Computer equipment........................................ 14,581 13,883
Leasehold improvements.................................... 1,323 1,308
-------- --------
25,139 24,414
Accumulated depreciation and amortization................. (14,720) (13,781)
-------- --------
Property and equipment, net........................ 10,419 10,633
-------- --------
Cost in excess of net assets acquired, net.................. 28,738 29,143
Identifiable intangibles, net............................... 4,794 4,934
Other assets................................................ 1,952 1,978
-------- --------
Total assets....................................... $ 80,852 $ 79,445
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 1,441 $ 1,231
Accrued expenses.......................................... 8,577 9,906
Funds due clients......................................... 12,734 12,437
Income taxes payable...................................... 2,258 1,385
-------- --------
Total current liabilities.......................... 25,010 24,959
Other liabilities........................................... 2,271 2,324
Long-term borrowings........................................ 14,000 14,000
-------- --------
Total liabilities.................................. 41,281 41,283
-------- --------
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; 9,789 and 9,771 shares issued and
outstanding as of March 31, 2001 and December 31, 2000,
respectively............................................ 12 12
Capital in excess of par value............................ 22,686 22,637
Other..................................................... (927) (912)
Treasury stock at cost; 1,773 shares as of March 31, 2001
and December 31, 2000................................... (7,037) (7,037)
Retained earnings......................................... 24,837 23,462
-------- --------
Total stockholders' equity......................... 39,571 38,162
-------- --------
Total liabilities and stockholders' equity......... $ 80,852 $ 79,445
======== ========
The accompanying notes are an integral part of the condensed financial
statements.
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HEALTHCARE RECOVERIES, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
Claims revenues............................................. $16,255 $16,567
Cost of services............................................ 7,738 8,466
------- -------
Gross profit...................................... 8,517 8,101
Support expenses............................................ 4,496 4,541
Depreciation and amortization............................... 1,585 1,536
Research and development.................................... 134 --
------- -------
Operating income.................................. 2,302 2,024
Interest income............................................. 350 239
Interest expense............................................ 303 242
Other -- Special Committee expenses......................... -- 90
------- -------
Income before income taxes........................ 2,349 1,931
Provision for income taxes.................................. 974 801
------- -------
Net income........................................ $ 1,375 $ 1,130
======= =======
Earnings per common share (basic and diluted)............... $ 0.14 $ 0.10
======= =======
The accompanying notes are an integral part of the condensed financial
statements.
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HEALTHCARE RECOVERIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31
------------------
2001 2000
------- -------
Cash flows from operating activities:
Net income................................................ $ 1,375 $ 1,130
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 1,585 1,536
Deferred income taxes.................................. -- (2)
Other.................................................. 3 (3)
Changes in operating assets and liabilities:
Restricted cash...................................... (710) 1,987
Accounts receivable.................................. (846) (1,803)
Other current assets................................. (65) 571
Other assets......................................... (46) (357)
Trade accounts payable............................... 210 (973)
Accrued expenses..................................... (1,354) (1,717)
Funds due clients.................................... 297 (1,334)
Income taxes payable................................. 873 692
Other liabilities.................................... (53) (188)
------- -------
Net cash provided by (used in) operating
activities....................................... 1,269 (461)
------- -------
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ -- (4,545)
Disposals of property and equipment....................... -- 1,388
Purchases of property and equipment....................... (725) (877)
------- -------
Net cash used in investing activities............. (725) (4,034)
------- -------
Cash flows from financing activities:
Line of credit proceeds................................... -- 6,600
Line of credit repayments................................. -- (3,600)
Issuance of common stock.................................. 46 51
Other..................................................... (15) --
------- -------
Net cash provided by financing activities......... 31 3,051
------- -------
Net increase (decrease) in cash and cash equivalents........ 575 (1,444)
Cash and cash equivalents, beginning of period.............. 1,297 1,670
------- -------
Cash and cash equivalents, end of period.................... $ 1,872 $ 226
======= =======
The accompanying notes are an integral part of the condensed financial
statements.
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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
is a leading independent provider of outsourcing of insurance subrogation and
certain other medical claims recovery and cost containment services to the
private healthcare payor industry. Its primary business is medical claims
recovery, and its primary product is subrogation recovery, which generally
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 are generally
paid from the proceeds of liability or workers' compensation insurance. The
Company's other medical claims recovery services include provider bill auditing,
contract compliance review and cost management consulting, coordination of
benefits and overpayments recovery services.
The accompanying financial statements are presented in a condensed format
and consequently do not include all of the disclosures normally required by
accounting principles generally accepted in the United States of America 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,
2000, contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, filed with the Securities and Exchange Commission on
March 27, 2001.
The financial information has been prepared in accordance with the
Company's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such adjustments are
of a normal and recurring nature.
2. 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 May 15, 2000, the Company entered into a third amendment (the
"Amendment") to its February 1, 1998 revolving credit facility with National
City Bank of Kentucky and the lenders named therein (the "Credit Facility"). The
Company's obligations under the Credit Facility are secured by substantially all
of the Company's assets, subject to certain permitted exceptions. Under the
Amendment, the maturity date was extended to April 30, 2002 from January 31,
2001, the maximum borrowing capacity decreased to $40 million from $50 million,
and certain other financial terms and covenants were amended. Principal amounts
outstanding under the Credit Facility bear interest at a variable rate based on
the Prime Rate or Eurodollar Rate, as applicable, plus the pre-determined fixed
margin. At March 31, 2001, the interest rate was 7.01%. The Credit Facility
contains customary covenants and events of default 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. It also contains a material
adverse change clause. The Credit Facility was amended in June 2000, to increase
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HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
the amount of other debt that the Company is permitted to maintain outstanding
under another of the Credit Facility's financial covenants. As of March 31,
2001, $14.0 million was outstanding under the Credit Facility.
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. HCRI did not repurchase any shares of its own stock
during the three months ended March 31, 2001. During 2000, HCRI repurchased
1,467,765 shares of its Common Stock at an average price of $3.86 per share.
From inception of the program through March 31, 2001, the total number of shares
repurchased was 1,772,765 at a cost of $7.0 million, or an average cost of $3.97
per share. All of the reacquired shares of Common Stock through March 31, 2001
are reflected as treasury stock on the accompanying Condensed Balance Sheets
(Unaudited).
5. RELATED PARTY TRANSACTION
On February 12, 1999, the Board of Directors approved a loan in the amount
of $350,000 to Patrick B. McGinnis, the Chairman and Chief Executive Officer of
the Company, in exchange for a full recourse promissory note in the same amount
from Mr. McGinnis. On June 30, 2000, at the direction of the Board of Directors
and in accordance with terms authorized by it, the Company loaned Mr. McGinnis
an additional $500,000. Under these terms, the $500,000 loan to Mr. McGinnis was
combined with his existing debt to the Company of $350,000 of principal and
$36,520 of accrued interest. Mr. McGinnis delivered to the Company his full
recourse promissory note in the amount of $886,520, bearing interest at a fixed
rate of 6.62% per annum, compounded annually (the "Amended Promissory Note"),
and the Company cancelled the old promissory note evidencing the prior debt. The
Amended Promissory Note provides for mandatory prepayments from certain of the
proceeds received by Mr. McGinnis from his sale of the Company's securities and
any related transactions. At March 31, 2001, the promissory note of $886,520 and
accrued interest of $40,692 were outstanding. The proceeds of these loans were
to enable Mr. McGinnis to repay debts originally incurred by him to pay income
taxes related to the ordinary income deemed to have been received by him on
account of Common Stock granted to him in connection with the initial public
offering of the Company's stock in May 1997, as well as to enable him to
purchase additional stock in the initial public offering.
On June 30, 2000, pursuant to Board authorization and in accordance with
the terms of the Amended Promissory Note, the Company and Mr. McGinnis entered
into a deferred compensation agreement (the "Agreement"). Under the Agreement,
50% of the amount otherwise payable to Mr. McGinnis under the Company's
Management Group Incentive Compensation Plan shall be deferred until the Amended
Promissory Note is paid in full, with such deferred compensation then being paid
in full to Mr. McGinnis within 30 days thereafter. The Company has full right of
set-off against any deferred compensation under the Agreement should Mr.
McGinnis default under the Amended Promissory Note. At the election of Mr.
McGinnis, the payment of the deferred compensation, upon payment of the Amended
Promissory Note, may be extended for a period of not more than ten years. At
March 31, 2001, the amount of deferred compensation was $52,648 with accrued
interest of $153.
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HEALTHCARE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
6. 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):
THREE MONTHS
ENDED
MARCH 31,
----------------
2001 2000
------ -------
Weighted average number of common shares outstanding........ 9,789 11,225
Add: Dilutive stock options................................. 100 11
------ -------
Number of common shares outstanding (diluted)............... 9,889 11,236
====== =======
Net earnings for earnings per common share (basic and
diluted).................................................. $1,375 $ 1,130
====== =======
Earnings per common share:
Basic..................................................... $ 0.14 $ 0.10
====== =======
Diluted................................................... $ 0.14 $ 0.10
====== =======
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 1,446,024 and 1,441,384 shares for the three month periods ended
March 31, 2001 and 2000, respectively, were not included in the computation of
diluted earnings per common share because the exercise prices of these options
were greater than the average market price of the common shares during the
respective periods.
7. 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, "Subro Audit"), for approximately $24.4 million (the
"Subro Audit Acquisition"), using available unrestricted cash. HCRI currently
estimates that it may pay up to $5.4 million pursuant to an earn-out
arrangement, of which $2.8 million was paid on May 18, 2000 with the remainder
to be paid in 2001. Approximately $4.7 million was held in escrow for the
potential earn-out and was included in restricted cash at March 31, 2001 and
December 31, 2000. SAI is based in Wisconsin and provides subrogation recovery
services with respect to an installed base of lives, which are covered by
insurers, HMOs and employer-funded plans, throughout the United States of
America. 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, the Company was obligated to pay up to
50% of the fees collected in relation to certain negotiated contracts, less
associated expenses, as an additional amount. The final amount, which was paid
in 2000 in relation to the fees collected on those contracts, was approximately
$292,000. MedCap provides a variety of medical cost management services to
health insurers and HMOs, primarily in California. These services include
provider 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW OF COMPANY
HCRI is a leading independent provider of outsourcing of insurance
subrogation and certain other medical claims recovery and cost containment
services to the private healthcare payor industry. Its primary business is
medical claims recovery and its primary product is subrogation recovery, which
generally 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 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 claims recovery services include provider
bill auditing 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 50.8 million lives under contract from its
clientele at March 31, 2001.
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 $5.4 million pursuant to an earn-out arrangement, of which $2.8 million was
paid on May 18, 2000, with the remainder to be paid in 2001. Approximately $4.7
million was held in escrow for the potential earn-out and was included in
restricted cash at March 31, 2001 and December 31, 2000. SAI is based in
Wisconsin and provides subrogation recovery services with respect to an
installed base of lives, which are covered by insurers, HMOs and employer-funded
plans, throughout the United States of America. 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, the Company was obligated to pay up to
50% of the fees collected in relation to certain negotiated contracts, less
associated expenses, as an additional earn-out. The final amount, which was paid
in 2000 in relation to the fees collected on those contracts, was approximately
$292,000. MedCap provides a variety of medical cost management services to
health insurers and HMOs, primarily in California. These services include
provider 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
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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. Historically, support expenses have not grown in direct
proportion to revenues.
RESULTS OF OPERATIONS
The following tables present certain key operating indicators and results
of operations data for the Company for the periods indicated:
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KEY OPERATING INDICATORS
(IN MILLIONS, EXCEPT FOR PERCENTAGES AND EMPLOYEES)
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
Cumulative lives sold, beginning of period.................. 52.5 55.6
Lives from existing client loss, net........................ (2.8)(1) (1.7)(1)
Lives added from new contracts with existing clients........ 0.4 0.5
Lives added from contracts with new clients................. 0.7 0.3
-------- --------
Cumulative lives sold, end of period........................ 50.8 54.7
======== ========
Lives installed............................................. 47.8 51.8
Backlog(2).................................................. $1,207.3 $1,150.0
Claims recoveries........................................... $ 60.5 $ 61.7
Throughput(3)............................................... 5.1% 5.5%
Effective fee rate.......................................... 26.8% 26.7%
Claims revenues............................................. $ 16.3 $ 16.6
Employees:
Direct operations......................................... 544 599
Support................................................... 137 155
-------- --------
Total employees................................... 681 754
======== ========
---------------
(1) The March 31, 2001 and March 31, 2000 decreases included approximately 1.2
million and 0.8 million lives, respectively, associated with a client that
was acquired by a health plan that is not a client of the Company.
(2) 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.
(3) Throughput equals claims 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 CLAIMS REVENUES
THREE MONTHS
ENDED
MARCH 31,
--------------
2001 2000
----- -----
Claims revenues............................................. 100.0% 100.0%
Cost of services............................................ 47.6 51.1
Support expenses............................................ 27.7 27.4
Depreciation and amortization............................... 9.8 9.3
Research and development.................................... 0.8 --
Operating income............................................ 14.2 12.2
Other -- Special Committee expenses......................... -- 0.5
Income before income taxes.................................. 14.5 11.7
Net income.................................................. 8.5 6.8
Three months ended March 31, 2001 compared to three months ended March 31,
2000
Claims Revenues. Claims revenues for the three month period ended March
31, 2001 decreased 2% to $16.3 million from $16.6 million for the same quarter
of 2000. Claims recoveries also decreased 2% from $61.7 million in 2000 to $60.5
million in 2001. This decrease in recoveries and revenues from the comparable
prior year quarter was primarily due to the decrease in throughput described
below. The effective fee rate for the quarter ended March 31, 2001 increased
slightly to 26.8% from 26.7% in the same quarter of 2000. The
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effective fee rate in the quarter grew because of the recovery mix in the
quarter, with relatively more recoveries coming from subrogation clients which
have higher effective fee rates than provider bill audit and overpayments
clients.
Backlog increased from March 31, 2000 by $57.3 million, or 5%, to $1,207.3
million at March 31, 2001, despite a decrease in lives installed from 51.8
million as of March 31, 2000 to 47.8 million at March 31, 2001, primarily due to
growth in the provider bill audit services backlog. Subrogation backlog
decreased slightly compared to the prior year period, however, the percentage
decrease in backlog is significantly less than the percentage decrease in lives
installed. The Company typically continues to make recoveries on the backlog of
terminated clients that exists as of the contract termination date, until that
backlog is exhausted (i.e., usually 5 to 6 years), but removes terminated
clients from the category of "lives installed" as of the contract termination
date.
Throughput for the quarter ended March 31, 2001 decreased to 5.1% from 5.5%
for the comparable quarter of 2000. The decrease in throughput compared to the
prior year quarter was primarily caused by a decrease in provider bill audit
recoveries, which are significantly more volatile as a percentage of backlog
than subrogation recoveries.
Cost of Services. Cost of services decreased 9% for the quarter ended
March 31, 2001 to $7.7 million, from $8.5 million for the comparable period in
2000. As a percentage of claims revenues, cost of services decreased to 47.6%
for the quarter ended March 31, 2001 compared to 51.1% for the prior year
quarter. The decrease in cost of services as a percentage of claims revenues for
the comparable quarters resulted from certain productivity enhancements
instituted during 2000 and management of labor costs through delays in hiring
and attrition.
Support Expenses. Support expenses decreased 1%, or $45,000, for the
quarter ended March 31, 2001 compared to the same quarter in 2000. The decrease
was due to expense control measures undertaken in 2000. Support expenses
increased as a percentage of claims revenues to 27.7% for the three month period
ended March 31, 2001 from 27.4% for the same period in 2000. The increase in
support expenses as a percentage of claims revenues resulted from the decrease
in revenues described above. Support expenses typically do not vary in
proportion to revenues.
Depreciation and Amortization. Depreciation and amortization expense
increased 3% to $1.6 million for the quarter ended March 31, 2001 from $1.5
million for the same period in 2000. The increase in depreciation expense was
attributable to the purchased property and equipment related to system upgrades.
The increase in amortization expense was attributable to the addition of
intangible assets acquired in the Acquisitions.
Interest Income. Interest income increased $111,000, or 46%, for the
quarter ended March 31, 2001 compared to the same quarter in 2000. The increase
in interest income was primarily due to the timing of cash receipts which
increased the average cash and cash equivalents balance as well as the average
restricted cash balance throughout the 2001 quarter as compared to the same
period in 2000.
Interest Expense. Interest expense totaled $303,000 and $242,000 for the
quarters ended March 31, 2001 and 2000, respectively. The increase in interest
expense for the 2001 quarter as compared with the respective period in 2000 is
due to an increase in the average funds borrowed relating to the stock
repurchase program, and due to higher effective interest rates during the 2001
period.
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 first quarter
of 2000, the Company incurred $90,000 of expenses related to the work of the
committee. In March 2000, the Special Committee ceased seeking a buyer for the
Company and its efforts to enhance shareholder value were assumed by the full
Board of Directors.
Tax. Provision for income taxes was approximately 41.5% of pre-tax income
for the three months ended March 31, 2001 and 2000. The effective tax rate
exceeded the Federal statutory tax rate as a consequence of state and local
taxes and non-deductible expenses.
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Net Income. Net income for the quarter ended March 31, 2001 increased to
$1.4 million or $0.14 per diluted share from $1.1 million or $0.10 per diluted
share for the comparable period in 2000. The primary factor offsetting the
decrease in claims revenues between the comparable three month periods, and
contributing to the growth in net income for the three months ended March 31,
2001, was the reduction in cost of services. The net income for the three months
ended March 31, 2001 increased 22% over the comparable quarter of 2000 while the
diluted earnings per share for the three months ended March 31, 2001 increased
40% over the same period of 2000 as a result of the stock repurchase plan. (See
Note 4 -- Stock Repurchase Program.)
LIQUIDITY AND CAPITAL RESOURCES
The Company's statements of cash flows for the three months ended March 31,
2001 and 2000 are summarized below:
THREE MONTHS
ENDED
MARCH 31,
----------------
2001 2000
------ -------
(IN THOUSANDS)
Net cash provided by (used in) operating activities......... $1,269 $ (461)
Net cash used in investing activities....................... (725) (4,034)
Net cash provided by financing activities................... 31 3,051
------ -------
Net increase (decrease) in cash and cash equivalents........ $ 575 $(1,444)
====== =======
The Company had working capital of $9.9 million at March 31, 2001,
including cash and cash equivalents of $1.9 million, compared with working
capital of $7.8 million at December 31, 2000. The primary reason for the
increase was the increase in accounts receivable and timing of payments of
accrued expenses.
Net cash provided by operating activities was $1.3 million, an increase of
$1.7 million for the three months ended March 31, 2001, compared to the same
period in 2000, primarily as a result of the timing of recurring cash receipts
and disbursements related to accounts receivable and accrued expenses as well as
an increase in net income of $0.2 million.
Net cash used in investing activities includes $0.7 million in capital
expenditures for the three months ended March 31, 2001. Excluding any future
acquisitions, the Company anticipates capital expenditures for the year to be
approximately $3.5 million.
Net cash provided by financing activities for the three months ended March
31, 2001 reflects no change in net cash borrowings from the Company's credit
facility, as discussed below.
On May 15, 2000, the Company entered into a third amendment (the
"Amendment") to its February 1, 1998 revolving credit facility with National
City Bank of Kentucky and the lenders named therein (the "Credit Facility"). The
Company's obligations under the Credit Facility are secured by substantially all
of the Company's assets, subject to certain permitted exceptions. Under the
Amendment, the maturity date was extended to April 30, 2002 from January 31,
2001, the maximum borrowing capacity decreased to $40 million from $50 million,
and certain other financial terms and covenants were amended. Principal amounts
outstanding under the Credit Facility bear interest at a variable rate based on
the Prime Rate or Eurodollar Rate, as applicable, plus the pre-determined fixed
margin. The Credit Facility contains customary covenants and events of default
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. It
also contains a material adverse change clause. The Credit Facility was amended
in June 2000, to increase the amount of other debt that the Company is permitted
to maintain outstanding under another of the Credit Facility's financial
covenants. As of March 31, 2001, $14.0 million was outstanding under the Credit
Facility.
At March 31, 2001 and December 31, 2000, the Company reported on its
balance sheets, as a current asset, restricted cash of $22.4 million and $21.6
million, respectively. Restricted cash at March 31, 2001 and December 31, 2000
represented claims recoveries effected by HCRI for its clients and also included
an escrowed amount of $4.7 million for a potential earn-out in connection with
the Subro-Audit Acquisition. At March 31, 2001 and December 31, 2000, HCRI
reported on its balance sheets, as a current liability, funds due
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clients of $12.7 million and $12.4 million, respectively, representing claims
recoveries to be distributed to clients, net of the fee earned on such
recoveries.
In light of its acquisition strategy, the Company is currently assessing
its opportunities for capital formation. The Company believes that its available
cash resources, together with the borrowings available under the Credit Facility
and other potential sources of funding, will be sufficient to meet its current
operating requirements and acquisition and internal development activities.
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 medical claims 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, 2001
covered approximately 50.8 million lives. HCRI's clients are national and
regional healthcare payors, large third-party administrators or self-insured
corporations. HCRI's largest client is UnitedHealth Group. For the three month
periods ended March 31, 2001 and 2000, UnitedHealth Group generated 27% and 21%
of HCRI's revenues, respectively. The loss of this account could have a material
adverse effect on HCRI's business, results of operations and financial
condition.
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 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. HCRI's contracts
generally provide that in the event of termination, HCRI is entitled to complete
the recovery process on the existing backlog or to receive a cash payment
designed to approximate the gross margin that would otherwise have been earned
from the recovery on the backlog of the terminating client. On March 31, 2001,
HCRI has backlog of $1,207.3 million.
RECENT DEVELOPMENTS
Appointment of a Director
Effective October 31, 2000, Elaine J. Robinson resigned as a director of
the Company. Under the Company's Certificate of Incorporation and Bylaws, a
vacancy on the Board of Directors created by a
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resignation may be filled by a majority vote of the remaining directors. A
director so chosen to fill the vacancy would hold office until the next
succeeding Annual Meeting. The Board of Directors, through its Nominating
Committee, nominated Herbert A. Denton to fill the vacant position. Mr. Denton's
nomination was approved by a majority vote of the remaining directors on May 11,
2001.
Services to the Property and Casualty Insurance Industry:
On February 14, 2001, the Company disclosed, among other things, its entry
into the subrogation outsourcing market that serves property and casualty
("P&C") insurers. The Company is offering its services to the P&C market under
the brand name "TransPaC Solutions". The Company currently provides subrogation
outsourcing services to two P&C clients, aggregating $60 million of net premiums
earned ("NPE") to date. The Company is in the process of establishing a
full-time direct sales force of three individuals experienced in P&C sales and
marketing. The Company's target market for its P&C subrogation services is P&C
insurers that have a minimum of $50 million of NPE and that have reported below
average subrogation recovery results. Based on available information, the
Company believes that there are currently more than 50 P&C insurers that fit
this description.
The Company believes that the market for P&C subrogation outsourcing in the
United States is substantial and that the potential savings from subrogation
recoveries will vary depending upon the P&C line of business. The Company
believes that total potential subrogation recoveries in the automobile insurance
market exceed $6 billion per year. Based on its research and early experience
with two customers, the Company believes that there is an opportunity to
increase total subrogation recoveries across a wide spectrum of automobile
insurers. The Company's initial marketing strategy is to offer its services to
smaller, regionally oriented automobile insurers which generally lack the
resources to maximize subrogation recoveries.
The Company believes that it has an opportunity to leverage its healthcare
subrogation expertise and resources to provide service to the P&C markets. The
primary difference between the two markets is in the acquisition of claims data
for investigation of subrogation potential. The P&C industry does not have
standard data definitions regarding claims as does the health insurance
industry. Nevertheless, the Company used its healthcare subrogation expertise to
build data interfaces with its first two P&C customers, and it has created
proprietary business processes to acquire paper-based and/or imaged claims data
from its customers' claims adjusting offices and archives.
The Company has assessed the competitive environment for P&C subrogation
outsourcing, and believes that the competition is fragmented and characterized
by claims adjusting companies that operate on a local or regional basis and law
firms that specialize in low volume, but legally complex, subrogation claims.
The Company has identified only one competitor that attempts to serve a national
market. It believes that this competitor has enjoyed limited success because it
is owned and controlled by a P&C insurer.
As previously disclosed, the Company estimates that it will incur losses
from TransPaC Solutions in 2001 of $0.04 to $0.05 per diluted share for the full
year 2001, but also expects to be operating at break-even by the end of the
year. The Company estimates that it will earn gross margins comparable to its
healthcare recovery services in providing P & C subrogation recovery services.
The Company cautions that the foregoing forecasts and estimates are not
guarantees of future performance and that actual results of TransPaC Solutions
will be dependent upon, among other things, future facts and circumstances, many
of which are outside the control of management of the Company. See "Safe Harbor
Compliance Statement on Forward Looking Statements" included as Exhibit 99.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000 and hereby incorporated herein by reference.
Technology Development:
During the three months ended March 31, 2001, the Company incurred expenses
of approximately $134,000 for research and development costs to develop new
products for the insurance industry. The Company expects to incur additional
expenses of between $1.9 million and $2.4 million for research and development
with respect to these products. In addition, in 2001, the Company expects to
capitalize
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approximately $800,000 of costs in accordance with generally accepted accounting
principles for the development of software for sale to unrelated parties.
Many participants in the health insurance market do not outsource
subrogation services. The Company currently estimates that 40% to 50% of the
private health insurance and health benefits markets do not outsource
subrogation recoveries. Public sector markets, such as Medicaid and Medicare,
have virtually no outsourcing of subrogation recoveries. These programs
typically rely on their claims administration contractors to provide subrogation
services as part of a bundled service contract. Like the health insurance
market, the Company believes that certain participants in the P&C insurance
market are less likely to outsource subrogation services. The Company believes
mutual insurers have organizational and cultural biases against outsourcing and
larger P&C insurers have sufficient resources to develop relatively
sophisticated internal departments.
In light of these market conditions, the Company began the internal
development of a web-enabled subrogation software application. The Company will
sell these products as an application service provider ("ASP"), under the trade
name "Troveris", both to the health insurance and benefits market and to the P&C
market. The Company expects to complete and offer for sale a commercially
available health insurance application during the second quarter of 2001 and a
commercially available P&C application during the third quarter of 2001.
The Troveris marketing strategy combines the opportunity for an internal
subrogation department to gain operating efficiency through the functionality of
state-of-the-art desktop software and to leverage its ability to produce
recoveries through the purchase of unbundled components of the Company's
traditional subrogation outsourcing services. The Troveris software application
allows the Company to administer these customized relationships using the same
proprietary processes as it uses for those customers who purchase turnkey
subrogation outsourcing services. An additional benefit of the Troveris software
application is that the Company believes that it will substantially reduce
future expenses for maintaining software applications that it uses to provide
turnkey outsourcing services.
The Company anticipates that during the fourth quarter of 2001, it will
begin migrating its own subrogation operations to the Troveris application. It
expects that this transition will be completed in the second quarter of 2002. At
that time, the Company expects to abandon its legacy subrogation system, thereby
reducing its technology expense, net of the expense of maintaining the Troveris
application, by at least $600,000 per year. The Troveris application will also
enable the Company to expand its ability to manage its knowledge workers via
telecommuting arrangements. While the Company believes it can achieve the
foregoing transition and corresponding reduction of expenses in the outlined
timeframe, future facts and circumstances could change these estimates. See
"Safe Harbor Compliance Statement for Forward-Looking Statements" included as
Exhibit 99.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 and hereby incorporated herein by reference.
The Company is not aware of any competition in subrogation software in an
ASP model for the health insurance industry, and it can only identify a single
competitor in the P&C insurance industry. This competitor is partially owned and
controlled by a major P&C insurer, and the Company believes that this
relationship will reduce the ability of the competitor to sell its services to
other P&C insurers.
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. HCRI did not repurchase any shares of its own stock
during the three months ended March 31, 2001. During 2000, HCRI repurchased
1,467,765 shares of its Common Stock at an average price of $3.86 per share.
From inception of the program through March 31, 2001, the total number of
repurchased shares is 1,467,765 at a cost of $7.0
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million, or an average price of $3.97 per share. All of the reacquired shares of
Common Stock through March 31, 2001 are reflected as treasury stock in the
accompanying Condensed Balance Sheets (Unaudited).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
An element of market risk exists for the Company 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 as the
Credit Facility is subject to variable interest rates. However, 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 2001. As of March 31, 2001, the
Company had $14.0 million outstanding under its Credit Facility, with an
interest rate of 7.01%. See Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
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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 alleges that HCRI engaged in
fraudulent or negligent practices on behalf of its clients by attempting to
recover, via subrogation, amounts in excess of the actual amounts paid for those
services and that HCRI pursued subrogation recoveries from individuals whose
health insurance plans did not specifically provide for subrogation. HCRI
responded to these allegations by maintaining that the subrogation rights of its
clients provide for recovery of medical treatment at the "prevailing rates" or
"reasonable value" of those services and that instances in which recoveries were
made or sought against individuals without specific plan language occurred due
to either mistaken referrals from clients or reliance on equitable or common law
subrogation rights. 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.
On February 5, 2001, the Company announced that the parties to the DeGarmo
lawsuit had agreed in principal to settle for $3 million and certain
non-monetary terms primarily affecting subrogation recovery activities of one
HCRI client in West Virginia. On April 4, 2001, the parties jointly filed a
motion to approve the proposed settlement and on April 5, 2001 the court entered
an order preliminarily approving the settlement. A fairness hearing to determine
if the court will give final approval is scheduled for June 11, 2001. The
Company will fund the settlement with cash flow from operations and/or
borrowings under its existing credit facility. The Company believes that the
settlement agreement will not have an adverse effect on its subrogation recovery
activities. The Company's primary reason for settling the DeGarmo litigation is
its unusual facts, which are, to the Company's best knowledge, peculiar to this
case. The Company does not believe that this proposed settlement will have an
effect on its defense of any other lawsuits or on its current level of
determination to defend vigorously those lawsuits.
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
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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. In May 2000, plaintiffs moved to certify the putative class and HCRI
thereafter filed opposition papers. That motion has now also been fully briefed
and remains pending.
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 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 1999, 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 Complaint asserted claims on behalf of members of ERISA
governed health plans and alleged 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 alleged 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
alleged that HCRI unlawfully pursued subrogation and reimbursement claims by (1)
failing to pay pro rata attorney's fees to attorneys who represented purported
class members with respect to tort claims underlying the subrogation and
reimburse-
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ment claims; and (2) recovering subrogation and reimbursement claims from
purported class members who have not been fully compensated for their injuries.
Plaintiffs, on behalf of the purported class, demanded compensatory damages,
punitive damages, and treble damages under RICO, costs and reasonable attorneys'
fees. On January 18, 2000, the defendants filed a motion to dismiss the
Complaint.
In response to the defendants' motion, on February 28, 2001, the court
rendered its opinion and entered an order dismissing all of the plaintiff's
claims with the exception of the plaintiff's claim for attorney fees, which
remains pending before the court for disposition. On March 14, 2001, HCRI filed
an answer to the Complaint denying all of the plaintiff's allegations. Also on
March 14, 2001, the plaintiff filed a motion to alter or amend the court's
ruling on the motion to dismiss. The court has not yet addressed that motion,
nor has the court addressed the issue of class certification.
On December 22, 1999, a class action complaint ("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 ("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 purported 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 purported 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 1999 and has answered denying all allegations. HCRI filed a motion
to dismiss on August 31, 2000. HCRI filed a Memorandum in Support of that Motion
to Dismiss on December 22, 2000. The Court held a hearing on that motion on
December 29, 2000. The Court has not yet ruled on the motion. The court has not
yet addressed the question of whether to certify the putative class.
The 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 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 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 under DFS arrangements with HCRI's 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,
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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 one or more other lawsuits 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.
On March 12, 2001, a Complaint ("Complaint") was filed against HCRI in the
United States District Court for the Eastern District of Louisiana, in a
putative class action brought by Kyle M. Hamilton. In that action, Hamilton v.
Healthcare Recoveries, Inc., No. 01-650, plaintiff asserts that HCRI's
subrogation recovery efforts on behalf of its clients violate certain Louisiana
state laws, the federal Fair Debt Collection Practices Act and the Louisiana
Unfair Trade Practices Act. The Complaint alleges that HCRI intentionally and
negligently interfered with the plaintiff's and the putative class members'
rights to settle certain personal injury claims. The Complaint further alleges
that HCRI unlawfully pursued subrogation and reimbursement claims that plaintiff
asserts are unenforceable because the clauses in HCRI's clients' coverage
documents that create such recovery rights are rendered null and void by
Louisiana statutes that generally prohibit coordination of benefits with
individually underwritten insurance coverages. Plaintiff purports to represent a
class consisting of all persons covered under group health policies that were
issued or delivered in the State of Louisiana and who received any communication
from HCRI attempting to enforce any clauses that allegedly were rendered null
and void by Louisiana law. Plaintiff seeks on behalf of the purported class
compensatory and statutory damages, interest, costs, attorneys' fees and such
additional damages and relief as may be allowed by any applicable law. HCRI was
served with the Complaint in mid-March 2001. On April 11, 2001, HCRI filed a
motion to dismiss which remains pending before the court.
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, including
class actions brought by nationally prominent attorneys, directed at healthcare
payors and related parties. 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.
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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:
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 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 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 Annual Report on
Form 10-K for the fiscal year ended December 31, 2000).
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).
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, 2000).
(b) Reports on Form 8-K
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILE DATE
------------- ---------- ---------------- ----------------
Item 5 -- Announcement regarding Proposed No February 2, 2001 February 7, 2001
Settlement of DeGarmo Litigation...............
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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 15, 2001 /s/ PATRICK B. MCGINNIS
--------------------------------------------------------
Patrick B. McGinnis
Chairman, President and
Chief Executive Officer
Date: May 15, 2001 /s/ DOUGLAS R. SHARPS
--------------------------------------------------------
Douglas R. Sharps
Executive Vice President and
Chief Executive Officer
Principal Financial and
Accounting Officer
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