<PAGE> 1
UNITED STATES
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 September 30, 1997
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 NO. 1-13772
HEALTHPLAN SERVICES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3787901
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3501 FRONTAGE ROAD, TAMPA, FLORIDA 33607
(Address of Principal Executive Offices) (Zip Code)
(813) 289-1000
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock as of the latest
practicable date.
Total number of shares of Common Stock outstanding as of November 7, 1997.
Common Stock ........................................................ 15,017,543
<PAGE> 2
HEALTHPLAN SERVICES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet
September 30, 1997 and December 31, 1996 .............. 2
Consolidated Statement of Income
Three and Nine Months Ended September 30, 1997 and 1996 3
Consolidated Statement of Changes in
Stockholders' Equity September 30, 1997 ............... 4
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1997 and 1996 ......... 5
Notes to Consolidated Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......... 8
PART II - OTHER INFORMATION 14
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 6,468 $ 3,725
Restricted cash ..................................................... 11,378 10,062
Accounts receivable, net of allowance for
doubtful accounts of $185 and $99, respectively .................. 20,510 17,899
Refundable income taxes ............................................. -- 6,083
Prepaid expenses and other current assets ........................... 3,286 4,245
Deferred taxes ...................................................... 3,216 4,481
-------- --------
Total current assets ........................................ 44,858 46,495
Property and equipment, net ........................................... 23,038 21,102
Other assets, net ..................................................... 2,216 2,182
Deferred taxes ........................................................ 7,115 8,327
Note receivable ....................................................... -- 6,389
Investments ........................................................... 6,981 3,685
Intangible assets, net ................................................ 152,554 156,521
-------- --------
Total assets ................................................ $236,762 $244,701
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 5,940 $ 18,464
Premiums payable to carriers ........................................ 41,095 29,536
Commissions payable ................................................. 6,016 4,691
Deferred revenue .................................................... 1,799 1,560
Accrued liabilities ................................................. 15,846 16,456
Income taxes payable ................................................ 3,221 --
Current portion of long-term debt ................................... 343 2,717
-------- --------
Total current liabilities ................................... 74,260 73,424
Notes payable ......................................................... 43,471 59,581
Other long-term liabilities ........................................... 2,901 2,913
-------- --------
Total liabilities ........................................... 120,632 135,918
-------- --------
Stockholders' equity:
Common stock voting, $0.01 par value, 100,000,000 shares authorized,
15,017,543 and 14,974,126 issued and outstanding
at September 30, 1997 and December 31, 1996, respectively ........ 150 150
Additional paid-in capital ......................................... 106,959 106,153
Retained earnings .................................................. 7,547 2,480
Unrealized appreciation ............................................ 1,474 --
-------- --------
Total stockholders' equity .................................. 116,130 108,783
-------- --------
Total liabilities and stockholders' equity .................. $236,762 $244,701
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues ........................ $ 68,846 $ 66,555 $ 213,389 $ 128,019
Interest income ........................... 267 451 1,379 1,857
--------- --------- --------- ---------
Total revenues ..................... 69,113 67,006 214,768 129,876
--------- --------- --------- ---------
Expenses:
Agent commissions ....................... 16,039 15,025 50,524 34,978
Personnel expenses ...................... 27,301 27,177 85,422 44,027
General and administrative .............. 13,372 13,379 42,610 25,053
Pre-operating and contract start-up costs 79 109 242 696
Contract commitment ..................... -- 2,685 -- 2,685
Restructuring ........................... -- 1,425 1,374 1,425
Integration ............................. 1,121 400 3,300 400
Loss on partial impairment of goodwill .. -- 13,710 -- 13,710
Depreciation and amortization ........... 3,843 4,184 12,055 6,852
--------- --------- --------- ---------
Total expenses ..................... 61,755 78,094 195,527 129,826
--------- --------- --------- ---------
Income (loss) before interest expense
and income taxes ....................... 7,358 (11,088) 19,241 50
Interest expense .......................... 993 1,277 3,188 1,310
--------- --------- --------- ---------
Income (loss) before income taxes ......... 6,365 (12,365) 16,053 (1,260)
Income tax provision (benefit) ............ 2,777 (4,404) 7,258 (73)
--------- --------- --------- ---------
Net income (loss) .................. $ 3,588 $ (7,961) $ 8,795 $ (1,187)
========= ========= ========= =========
Primary weighted average
net income (loss) per share ............ $ 0.24 $ (0.53) $ 0.58 $ (0.09)
========= ========= ========= =========
Primary weighted average
shares outstanding ..................... 15,103 14,966 15,065 13,834
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Voting Additional
Common Paid-in Retained Unrealized
Stock Capital Earnings Appreciation Total
--------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .......... $ 150 $ 106,153 $ 2,480 $ -- $ 108,783
Vesting of management stock ........... -- 176 -- -- 176
(unaudited)
Issuance of 31,800 shares in connection
with stock option plans ........... -- 445 -- -- 445
(unaudited)
Issuance of 11,617 shares in connection
with the employee stock purchase
plan (unaudited) .................. -- 185 -- -- 185
Unrealized appreciation on
investments (unaudited) ........... -- -- -- 1,474 1,474
Declaration of cash
dividend (unaudited) .............. -- -- (3,728) -- (3,728)
Net income (unaudited) ................ -- -- 8,795 -- 8,795
--------- --------- --------- --------- ---------
Balance at
September 30, 1997 (unaudited) ........ $ 150 $ 106,959 $ 7,547 $ 1,474 $ 116,130
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 8,795 $ (1,187)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................................. 6,541 3,854
Amortization of intangible assets ........................................ 4,967 2,770
Amortization of other assets ............................................. 130 228
Disposal of computer software ............................................ 417 --
Contract commitment expense, net ......................................... -- 1,392
Charge for restructuring, net ............................................ -- 600
Loss on impairment of goodwill ........................................... -- 13,710
Vesting of management stock .............................................. 176 236
Deferred taxes ........................................................... 2,478 (5,966)
Changes in assets and liabilities net of effect from acquisitions:
Restricted cash .......................................................... (1,316) (8,981)
Accounts receivable ...................................................... (2,611) 1,320
Refundable income taxes .................................................. 6,084 1,041
Prepaid expenses and other current assets ................................ 959 (923)
Other assets ............................................................. (164) 87
Accounts payable ......................................................... (16,249) (3,874)
Premiums payable to carriers ............................................. 11,560 12,051
Commissions payable ...................................................... 1,325 1,824
Deferred revenue ......................................................... 239 (38)
Accrued liabilities ...................................................... (1,612) (864)
Income taxes payable ..................................................... 3,221 1,519
-------- --------
Net cash provided by operating activities ......................... 24,940 18,799
-------- --------
Cash flows from investing activities:
Purchases of property and equipment .................................. (7,333) (3,118)
Sales of short-term investments, net ................................. -- 36,708
Payment for purchase of TMG block of business ........................ (1,600) --
Payment for purchase of Harrington Services
Corporation net of cash acquired .................................. -- (29,274)
Payment for purchase of Consolidated Group, Inc. .....................
net of cash acquired .............................................. -- (59,997)
Increase in investments (net) ........................................ (1,821) (2,384)
Decrease (increase) in note receivable ............................... 6,388 (6,900)
-------- --------
Net cash used in investing activities ............................. (4,366) (64,965)
-------- --------
Cash flows from financing activities:
Net payments under line of credit ........................................ (15,000) 60,000
Payments on other debt ................................................... (3,458) (11,892)
Proceeds from exercise of stock options .................................. 445 76
Proceeds from Common Stock issued ........................................ 182 3,702
-------- --------
Net cash (used in) provided by financing activities ............... (17,831) 51,886
-------- --------
Net increase in cash and cash equivalents ................................... 2,743 5,720
Cash and cash equivalents at beginning of period ............................ 3,725 4,738
-------- --------
Cash and cash equivalents at end of period .................................. $ 6,468 $ 10,458
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................... $ 3,538 $ 1,258
======== ========
Cash paid for income taxes ............................................... $ 1,746 $ 1,414
======== ========
Supplemental disclosure of noncash activities:
Vesting of management stock .............................................. $ 176 $ 236
======== ========
Dividends declared and unpaid ............................................ $ 1,865 $ --
======== ========
Common Stock issued for purchase of
Harrington Services Corporation ................................... $ -- $ 28,963
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
HealthPlan Services Corporation (together with its direct and indirect
wholly owned subsidiaries, the "Company") provides marketing, administration,
and risk management services and solutions for health and other benefit
programs. The Company provides these services for approximately 125,000 small
businesses and large, self-funded organizations, covering approximately 2.9
million members in the United States. The Company's customers include managed
care organizations, insurance companies, integrated health care delivery
systems, self-funded benefit plans, and health care purchasing alliances.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim financial data is unaudited and should be read in conjunction
with the audited Consolidated Financial Statements and notes thereto included in
the Company's 1996 Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 31, 1997.
In the opinion of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for fair presentation
of financial position and results of operations for the interim periods
presented. Interim results are not necessarily indicative of results for a full
year.
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries, all of which are wholly owned. All
intercompany transactions and balances have been eliminated in consolidation.
EARNINGS PER SHARE
Earnings per share have been computed based on the historical weighted
average number of shares of Common Stock outstanding during the period. Stock
options have been included as outstanding for the entire period using the
treasury stock method.
During the first quarter of 1997, Statement on Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share," was issued. SFAS 128 will
be effective for the year ending December 31, 1997 and will require a
restatement of previously reported earnings per share. Under SFAS 128, "basic"
earnings per share will replace the reporting of "primary" earnings per share.
Basic earnings per share is calculated by dividing the income available to
common stockholders by the weighted average number of common shares outstanding
for the period, without consideration for common stock equivalents. "Fully
diluted" earnings per share will be replaced by "diluted" earnings per share
under SFAS 128. The calculation of diluted earnings per share is similar to that
of fully diluted earnings per share under existing accounting pronouncements.
Primary earnings per share would not be materially different from basic
earnings per share for the nine months ended September 30, 1997.
6
<PAGE> 8
INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired is recorded
as intangible assets, primarily goodwill. Goodwill (net $151.7 million at
September 30, 1997) is amortized over 25 years. Other intangible assets, such as
contract rights (net $0.9 million at September 30, 1997), are amortized over 7
years.
RESTRUCTURING EXPENSE
In the second quarter of 1997, the Company recorded a charge of $1.4
million to reflect the cost of exiting its Framingham, Massachusetts office.
This charge reflected the cost of terminating employees and abandoning property
and equipment. The Company's restructure plan calls for the elimination of
approximately 220 jobs in management, administration, and information systems.
The administration and claims services historically performed in Framingham will
be assumed in the Company's Tampa, Florida and Merrimack, New Hampshire offices.
INTEGRATION EXPENSE
Certain costs amounting to $2.0 million incurred by the Company for the
nine months ended September 30, 1997 relative to the post-acquisition
integration of information systems at Consolidated Group, Inc., together with
its affiliate ("Consolidated Group"), and Harrington Services Corporation,
together with its direct and indirect wholly owned subsidiaries ("Harrington"),
are recorded as integration expense. Other non-information systems costs
amounting to $1.3 million for items such as the closing of the Company's
Brookfield, Wisconsin and Framingham, Massachusetts offices, consolidation of
treasury functions, and employee relocations have also been recorded as
integration expense.
3. NOTE PAYABLE AND CREDIT FACILITY
The Company's credit facility (the "Line of Credit") is equal to the
lesser of (i) three times earnings before interest expense, income taxes, and
depreciation and amortization expense (with certain adjustments called for in
the credit agreement) or (ii) $175 million, and the maximum amount available as
of September 30, 1997 was approximately $88.4 million. As of June 13, 1997, the
Line of Credit was amended to, among other things, permit the establishment of a
swingline facility of up to $10 million (with a corresponding reduction in the
$175 million available within the Line of Credit) and enable the Company to pay
a quarterly dividend of up to $0.125 per share of the Company's capital stock
(or up to $0.50 per share on an annualized basis) for 1997, which amount may be
increased on an annualized basis by up to $0.05 per share for each calendar year
after 1997. The Company incurred approximately $2.4 million of interest expense
and approximately $250,000 in commitment fees on the Line of Credit for the nine
months ended September 30, 1997.
The Company has entered into two separate interest rate swap agreements
as a hedge against interest rate exposure on its variable rate debt. For the
nine months ended September 30, 1997, the Company recorded approximately
$245,000 of interest expense related to its interest rate swap agreements. The
Company considers the fixed rate and variable rate financial instruments to be
representative of current market interest rates and, accordingly, the recorded
amounts approximate their present fair market value.
4. SIGNIFICANT TRANSACTIONS
THE MUTUAL GROUP INC.'S EMPLOYEE BENEFITS BUSINESS
Effective January 1, 1997, HPSI assumed the administrative
responsibilities for the group operations of The Mutual Group (U.S.) Inc.'s
Employee Benefits division ("TMG block of business"). As part of the
administration and business transfer agreement (the "Agreement"), the Company
agreed to assume a lease related to a field office located in Brookfield,
Wisconsin and pay $1.6 million for certain tangible and
7
<PAGE> 9
intangible assets. In addition, the Company agreed to employ approximately 220
former TMG employees. The Company has recorded a liability for certain
obligations assumed in the Agreement, including the closure of the Brookfield
office, an event which the Company announced during the second quarter and
executed during the third quarter of 1997. TMG provides marketing and
administrative services for medical, dental, and group life benefits to small
businesses with approximately 210,000 members and over $100 million in annual
premiums. Connecticut General Life Insurance Company has assumed financial
responsibility for the business as the reinsurer of new and existing policies.
Consistent with the Company's historical policy of accounting for the assumption
of blocks of business (as opposed to the acquisition of companies), the
intangible asset, called "contract rights," is being amortized over 7 years.
5. INVESTMENTS AND NOTES RECEIVABLE
On January 8, 1996, the Company entered into an agreement with
Medirisk, Inc., a provider of health care information, to purchase $2.0 million
of Medirisk preferred stock and to lend Medirisk up to $10.0 million over four
years in the form of debt. On January 28, 1997, Medirisk completed an initial
public offering and satisfied its outstanding debt balance with the Company.
Upon completion of the public offering, Medirisk's preferred stock was
converted to common stock. The Company agreed not to sell its shares of
Medirisk in the public market for 180 days after the effective date of the
initial public offering without the prior consent of the offering's
underwriters. On July 27, 1997, after the 180 day period lapsed, the shares
became eligible for sale in the public market, subject to the conditions and
restrictions of Rule 144 under the Securities Act of 1933. Assuming full
conversion of the warrants issued to the Company, its ownership amounts to
480,442 shares of common stock after the public offering, which represents an
approximate 11% ownership interest. On September 30, 1997, Medirisk's shares
closed at $10.88 per share of common stock. The Company has recorded its
investment in Medirisk at eighty percent of the market value at September 30,
1997 to reflect the estimated value of the restricted investment. The
investment has been adjusted to this value with the unrealized holding gain
reported in the equity section of the balance sheet in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), Accounting
for Certain Investments in Debt and Equity Securities.
On March 5, 1997, the Company and Health Risk Management, Inc. ("HRM"), a
provider of integrated health care management services, mutually agreed to
terminate a merger agreement previously entered into on September 12, 1996. In
connection with the termination, the Company purchased 200,000 shares of HRM
common stock, representing approximately 4.5% of HRM shares outstanding, at a
price of $12.50 per share. On September 30, 1997, HRM's shares closed at $12.13
per share of common stock. The investment has been adjusted to market value at
September 30, 1997, with the unrealized holding loss reported in the equity
section of the balance sheet in accordance with SFAS 115. These shares are not
registered and are subject to restrictions on transfer.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains certain forward-looking statements regarding
future financial condition and results of operations. The words "expect,"
"anticipate," "predict," "believe," and similar expressions are intended to
identify forward-looking statements. Such statements involve risks,
uncertainties, and assumptions, including industry and economic conditions,
customer actions, and other factors discussed herein and in the Company's other
filings with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
INTRODUCTION
The following is a discussion of material changes in the consolidated
results of operations of the Company for the three and nine months ended
September 30, 1997 and 1996.
8
<PAGE> 10
ALLIANCE BUSINESS
In February 1997, the Kentucky alliance announced that at the expiration
of the current term of the Company's contract on June 30, 1997, the alliance
would break out various services currently being performed under the contract
and seek separate bids for those services. The Company chose not to submit a
formal bid to provide such services and closed its Lexington, Kentucky office at
the end of the contract term. Revenues from this contract during 1997 were $2.7
million. During the quarter ended June 30, 1997, the Company recorded $200,000
in estimated costs and approximately $415,000 in abandoned software associated
with this closure. The Company has also notified the State of Washington that it
does not intend to renew its current contract, the term of which expires on
December 31, 1997. Alliance revenues represented 1.5% and 2.5%, respectively,
of the Company's total revenues for the three and nine months ended September
30, 1997.
RELIANCE ON PAYORS
Typically, the Company's insurance and managed care payors sign contracts
with the Company that are cancelable by either party without penalty upon
advance written notice of between 90 days and one year and are also cancelable
upon a significant change of ownership of the Company. The Company's five
primary payors accounted for approximately 50.1% of the Company's consolidated
revenue for the nine months ended September 30, 1996 and approximately 46.2% of
the Company's consolidated revenue for the nine months ended September 30, 1997.
Although this decline is due primarily to the Company's expansion through
acquisition, which has diluted its concentration of revenues from these sources,
it should be noted that the Company continues to experience higher lapses than
originations in the business written with these payors, and it is not certain
when, if ever, this trend will be reversed. In the third quarter of 1996,
Metropolitan Life Insurance Company completed a merger with The New England. The
Company is unable to predict what effect, if any, such merger will ultimately
have on the Company's relationship with The New England.
Historically, the majority of Consolidated Group's business was written
with The Travelers Insurance Company, which recently combined with the health
insurance business of Metropolitan Life Insurance Company to form MetraHealth.
Subsequently, MetraHealth was acquired by United HealthCare, one of the nation's
leading HMO companies. For the nine months ended September 30, 1997, this
business represented approximately 13.2% of the Company's consolidated revenue.
The Company has not been successful in converting the MetraHealth indemnity/PPO
business to United HealthCare's new HMO products. On July 28, 1997, the Company
announced that it had formed an alliance with Seaboard Life Insurance Company
(USA) to develop and administer health benefit plans for small businesses.
During the next 12 months, the Company will seek to transition the majority of
the MetraHealth business to Seaboard Life. As the transition occurs, the
business could experience higher than normal lapse rates and lower than normal
margins.
9
<PAGE> 11
A. RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues ............... 99.6 % 99.3 % 99.4 % 98.6 %
Interest income .................. 0.4 % 0.7 % 0.6 % 1.4 %
Total revenues ................... 100.0 % 100.0 % 100.0 % 100.0 %
Expenses:
Agent commissions ........... 23.2 % 22.4 % 23.5 % 26.9 %
Personnel expenses .......... 39.5 % 40.5 % 39.8 % 33.9 %
General and administrative .. 19.4 % 20.0 % 19.9 % 19.3 %
Pre-operating and contract
start-up costs ............ 0.1 % 0.2 % 0.1 % 0.5 %
Contract commitment ......... 0.0 % 4.0 % 0.0 % 2.1 %
Restructuring ............... 0.0 % 2.1 % 0.6 % 1.1 %
Integration ................. 1.6 % 0.6 % 1.5 % 0.3 %
Loss on partial impairment
of goodwill................ 0.0 % 20.5 % 0.0 % 10.6 %
Depreciation and amortization 5.6 % 6.2 % 5.6 % 5.3 %
Total expenses ............ 89.4 % 116.5 % 91.0 % 100.0 %
Net income (loss) before interest
expense and income taxes .... 10.6 % (16.5)% 9.0 % 0.0 %
Interest expense ................. 1.4 % 1.9 % 1.5 % 1.0 %
Net income before income taxes ... 9.2 % (18.4)% 7.5 % (1.0)%
Provision for income taxes ....... 4.0 % (6.5)% 3.4 % (0.1)%
Net income ....................... 5.2 % (11.9)% 4.1 % (0.9)%
</TABLE>
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Revenues for the three months ended September 30, 1997 increased $2.1
million, or 3.1%, to $69.1 million from $67.0 million for the same period in
1996. This increase resulted primarily from increases in revenues of $1.9
million and $1.0 million from the Company's small and large group customers,
respectively, partially offset by a decrease in revenues of $0.7 million from
alliance customers. The decrease in alliance revenues is primarily related to
the Company's exit from the Kentucky alliance business.
Agent commission expenses for the three months ended September 30, 1997
increased $1.0 million, or 6.7%, to $16.0 million from $15.0 million for the
same period in 1996. Commissions as a percentage of operating revenues were
23.3% for the three months ended September 30, 1997 compared to 22.6% for the
same period in 1996 as small group revenues represented a greater percentage of
the Company's revenues due to the acquisition of the TMG block of business.
Small group commissions generally represent a significantly higher percent of
revenues than large group commissions.
Integration expense for the three months ended September 30, 1997 was
$1.1 million. Of this expense, $0.3 million related to the integration of
information systems at Consolidated Group and
10
<PAGE> 12
Harrington, while $0.8 million represented other non-restructuring costs related
to the closing of the Company's Brookfield, Wisconsin and Framingham,
Massachusetts offices, the consolidation of treasury functions, and employee
relocations.
After performing a review for impairment of long-lived assets related to
each of the Company's acquired businesses and applying the principles of
measurement contained in the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121 ("FASB 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
the Company recorded a charge against earnings of $13.7 million in the third
quarter of 1996. This charge was attributable to impairment of goodwill recorded
on the acquisitions of Diversified Group Brokerage Corporation (acquired in
October 1995) of $6.6 million and of Third Party Claims Management, Inc.
(acquired in August 1995) of $7.1 million.
Depreciation and amortization expenses for the three months ended
September 30, 1997 decreased $0.4 million, or 9.5%, to $3.8 million from $4.2
million in 1996. This decrease is primarily due to the 1996 disposal of $0.5
million of internally developed software used in the administration of the small
group business of the Company's subsidiary, HealthPlan Services, Inc.("HPSI").
Interest expense for the three months ended September 30, 1997 decreased
to $1.0 million from $1.3 million for the same period in 1996. This decrease
relates to the Company's reduction in its Line of Credit in 1997 of $15.0
million.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Revenues for the nine months ended September 30, 1997 increased $84.9
million, or 65.4%, to $214.8 million from $129.9 million for the same period in
1996. This increase resulted primarily from revenues of $28.5 million, $45.4
million, and $28.2 million from the Company's acquisitions of Consolidated Group
(effective 7/1/96), Harrington (effective 7/1/96), and the TMG block of business
(effective 1/1/97), respectively. Revenues from HPSI's small and large group
customers decreased by $17.3 million compared to the same period in 1996. The
decline in HPSI's small group business is a result of lower premium retention
rates and net lapses experienced in HPSI's traditional blocks of indemnity
business. The reduction in large group revenue is primarily a result of lower
revenues produced by Third Party Claims Management, Inc. and Diversified Group
Brokerage, which were acquired by the Company in 1995.
Agent commission expenses for the nine months ended September 30, 1997
increased $15.5 million, or 44.3%, to $50.5 million from $35.0 million for the
same period in 1996. The Company realized an increase in commissions of $24.0
million related to the acquisitions of Consolidated Group, Harrington, and the
TMG block of business. Commissions from HPSI decreased $8.5 million due
primarily to the decrease in its small group revenues. Commissions as a
percentage of operating revenues were 23.7% for the nine months ended September
30, 1997 compared to 27.3% for the same period in 1996 as large group revenues
represented a greater percentage of the Company's revenues. Large group
commissions generally represent a lower percent of revenues than small group
commissions.
Personnel costs for the nine months ended September 30, 1997 increased
$41.4 million, or 94.1%, to $85.4 million from $44.0 million for the same period
in 1996. The majority of this increase is attributable to the Company's
acquisitions of Consolidated Group, Harrington, and the TMG block of business.
General and administrative expenses for the nine months ended September
30, 1997 increased $17.5 million, or 69.7%, to $42.6 million from $25.1 million
for the same period in 1996. The majority of this increase is attributable to
costs associated with Consolidated Group, Harrington, and the TMG block of
business.
In the third quarter of 1996, the Company recorded a pre-tax charge of
$2.7 million related to the state-sponsored health care purchasing alliances.
This charge resulted from increased costs and lower than anticipated revenues in
Florida and North Carolina.
11
<PAGE> 13
The Company incurred $1.4 million in restructuring costs during the nine
months ended September 30, 1997. These costs reflect employee terminations and
the abandonment of property and equipment associated with closing the Company's
Framingham, Massachusetts office. In the third quarter of 1996, the Company
recorded a charge of $1.4 million to reflect the cost of exiting certain excess
office space and terminating employees related to the elimination of
approximately eighty jobs in management, claims administration, and information
systems operations in its Tampa and Memphis offices.
Integration expense for the nine months ended September 30, 1997 was $3.3
million. Of this expense, $2.0 million related to the integration of information
systems at Consolidated Group and Harrington, while $1.3 million represented
other costs related to the closing of the Company's Brookfield, Wisconsin and
Framingham, Massachusetts offices, the consolidation of treasury functions, and
employee relocations.
After performing a review for impairment of long-lived assets related to
each of the Company's acquired businesses and applying the principles of
measurement contained in the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121 ("FASB 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
the Company recorded a charge against earnings of $13.7 million in the third
quarter of 1996. This charge was attributable to impairment of goodwill recorded
on the acquisitions of Diversified Group Brokerage Corporation (acquired in
October 1995) of $6.6 million and of TPCM (acquired in August 1995) of $7.1
million.
Depreciation and amortization expenses for the nine months ended
September 30, 1997 increased $5.2 million, or 75.4%, to $12.1 million from $6.9
million in 1996. This increase relates to depreciation and amortization on the
Company's acquisitions of Consolidated Group and Harrington and from the
assumption of the TMG block of business.
Interest expense for the nine months ended September 30, 1997 increased
to $3.2 million from $1.3 million for the same period in 1996. This increase
relates to interest expense and related finance charges incurred on the
Company's Line of Credit.
B. LIQUIDITY AND CAPITAL RESOURCES
The Company has a Line of Credit of $175 million. First Union National
Bank of North Carolina serves as "agency bank" with respect to this facility.
The facility contains provisions which require the Company to maintain certain
minimum financial ratios and impose limitations on acquisition activity and
capital spending. The outstanding draw against the Line of Credit was $40.0
million at September 30, 1997.
In the second quarter of 1997, the Company amended the terms of its Line
of Credit to enable it to pay a quarterly dividend of up to $0.125 per share of
the Company's capital stock (or up to $0.50 per share on an annualized basis)
for 1997, which amount may be increased on an annualized basis by up to $0.05
per share for each calendar year after 1997. During 1997, the Company has
declared dividends totaling $3.7 million. These dividends were paid on July 14
and October 15. The Company expects to continue making quarterly dividend
payments for the foreseeable future.
Operating income generated and premium collected by the Company from the
new TMG block of business and existing business increased the Company's cash
flows in 1997 and allowed the Company to reduce its notes payable by
approximately $16.0 million. The TMG business should continue to provide cash
flows throughout 1997. Additionally, the Company believes that additional
revenue will be provided by new products and sales generated by other
initiatives of the Company and the expansion of its current customer base, which
will enhance the impact on its future operations and cash flows. This statement
is forward looking in nature, however, and actual results may differ if the
Company's initiatives are unsuccessful.
The Company spent approximately $8.9 million for capital expenditures
during the nine months ended September 30, 1997.
12
<PAGE> 14
The Company incurred a cash outlay of approximately $3.3 million during
the nine months ended September 30, 1997 for integration costs related primarily
to systems integration. An additional cash outlay of $1.0 million is expected
during the remainder of 1997 for the closing of the Company's Brookfield,
Wisconsin and Framingham, Massachusetts offices as well as other integration
projects.
During the second quarter of 1997, the Company announced that it had
authorized the use of up to $20.0 million to support a share repurchase program,
subject to the terms and conditions of a previously announced agreement with
Automatic Data Processing, Inc. Although limited share repurchases may occur in
1997 to support employee stock plans, the Company recognizes that any
significant repurchases might taint pooling of interests accounting treatment
for future acquisitions. Further, if the Company elects to pursue a future
transaction in accordance with the pooling of interests method of accounting, it
may rescind its share repurchase program. No shares have been repurchased as of
September 30, 1997.
On October 16, 1997, the Company and Provident American Corporation
announced that they have entered into a long-term agreement under which
Provident will outsource to the Company all of its current health insurance
policy issuance, billing, and claims for its life insurance subsidiaries,
effective January 1, 1998. The Company incurred a cash outlay in the amount of
$5 million as a business transfer cost for transitioning the block and for other
various services and guarantees. These costs will be capitalized as an
intangible asset and amortized over the life of the contract.
On October 20, 1997, the Company and Sykes Enterprises, Incorporated
jointly announced that they have signed a letter of intent to form a new entity
named Sykes HealthPlan Services. The new company will be owned 50 percent by
each of the founding companies and will provide care management services,
technology solutions, certain customer support services, and other outsourcing
capabilities to the health care and insurance industries. The Company and Sykes
anticipate initially investing $25 million in capitalization and subordinated
debt to fund the activities of the new venture. The Company anticipates
utilizing its existing Line of Credit to fund its obligation in the joint
venture.
Based on current expectations, the Company believes that all consolidated
operating and financing activities for the foreseeable future will be met from
internally generated cash flow from operations, available cash, or its existing
Line of Credit.
13
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
During the fourth quarter of 1997, Charles H. Guy, Jr. resigned as a
director of the Company and Marc I. Perkins was elected to fill the vacancy for
the unexpired portion of the term of office.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description of Exhibit
------- ----------------------
27.1 Financial Data Schedule
14
<PAGE> 16
HEALTHPLAN SERVICES CORPORATION
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.
HEALTHPLAN SERVICES CORPORATION
Date: November 12, 1997 /s/ James K. Murray, Jr.
-------------------------------------
President and Chief Executive Officer
Date: November 12, 1997 /s/ James K. Murray III
-------------------------------------
Executive Vice President and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHPLAN SERVICES INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 17,846
<SECURITIES> 0
<RECEIVABLES> 20,695
<ALLOWANCES> (185)
<INVENTORY> 0
<CURRENT-ASSETS> 44,858
<PP&E> 59,207
<DEPRECIATION> (36,169)
<TOTAL-ASSETS> 236,762
<CURRENT-LIABILITIES> 74,260
<BONDS> 43,471
0
0
<COMMON> 150
<OTHER-SE> 115,980
<TOTAL-LIABILITY-AND-EQUITY> 236,762
<SALES> 0
<TOTAL-REVENUES> 214,768
<CGS> 0
<TOTAL-COSTS> 195,527
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,188
<INCOME-PRETAX> 16,053
<INCOME-TAX> 7,258
<INCOME-CONTINUING> 8,795
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,795
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0
</TABLE>
