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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 March 31, 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 May 2, 1997.
Common Stock..........................................................14,995,633
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HEALTHPLAN SERVICES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet
March 31, 1997 and December 31, 1996.................... 2
Consolidated Statement of Income
Three Months Ended March 31, 1997 and 1996.............. 3
Consolidated Statement of Changes in
Common Stockholders' Equity March 31, 1997.............. 4
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1997 and 1996.............. 5
Notes to Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................ 17
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 8,016 $ 3,725
Restricted cash.................................................................... 11,117 10,062
Accounts receivable, net of allowance for
doubtful accounts of $119 and $99, respectively................................... 21,899 17,899
Refundable income taxes............................................................ 5,817 6,083
Prepaid commissions................................................................ 141 223
Prepaid expenses and other current assets.......................................... 3,167 4,022
Deferred taxes..................................................................... 3,530 4,481
-------- --------
Total current assets........................................................... 53,687 46,495
Property and equipment, net........................................................ 23,919 21,102
Other assets, net.................................................................. 2,229 2,182
Deferred taxes..................................................................... 7,582 8,327
Note receivable.................................................................... - 6,389
Investments........................................................................ 6,989 3,685
Intangible assets, net............................................................. 155,905 156,521
-------- --------
Total assets................................................................... $250,311 $244,701
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 12,184 $ 18,464
Premiums payable to carriers....................................................... 53,580 29,536
Commissions payable................................................................ 6,143 4,691
Deferred revenue................................................................... 2,239 1,560
Accrued liabilities................................................................ 16,092 14,905
Accrued contract commitments....................................................... 462 1,089
Accrued restructure costs.......................................................... 377 462
Current portion of long-term debt payable.......................................... 276 2,717
-------- --------
Total current liabilities...................................................... 91,353 73,424
Notes payable....................................................................... 43,668 59,581
Other long-term liabilities......................................................... 2,923 2,913
-------- --------
Total liabilities.............................................................. 137,944 135,918
-------- --------
Common stockholders' equity:
Common stock voting, $0.01 par value, 100,000,000 shares
authorized, 14,995,633 and 14,974,126 issued and outstanding
at March 31, 1997 and December 31, 1996, respectively............................ 150 150
Additional paid-in capital......................................................... 106,515 106,153
Retained earnings.................................................................. 5,279 2,480
Valuation allowance on investments................................................. 423 -
-------- --------
Total stockholders' equity..................................................... 112,367 108,783
-------- --------
Total liabilities and stockholders' equity..................................... $250,311 $244,701
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1997 1996
---- ----
<S> <C> <C>
Operating revenues..................................... $72,764 $30,298
Interest income........................................ 829 710
------- -------
Total revenues........................................ 73,593 31,008
------- -------
Expenses:
Agent commissions.................................... 17,793 9,762
Personnel expenses................................... 28,977 8,393
General and administrative........................... 15,223 5,821
Pre-operating and contract start-up costs............ 94 277
Integration.......................................... 1,398 -
Depreciation and amortization........................ 3,870 1,274
------- -------
Total expenses..................................... 67,355 25,527
------- -------
Income before interest expense and income taxes........ 6,238 5,481
Interest expense....................................... 1,200 16
------- -------
Income before income taxes............................. 5,038 5,465
Provision for income taxes............................. 2,239 2,131
------- -------
Net income......................................... $ 2,799 $ 3,334
======= =======
Weighted average net income per share $ 0.19 $ 0.25
======= =======
Weighted average shares outstanding 15,058 13,456
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Voting Additional
Common Paid-in Retained Valuation
Stock Capital Earnings Allowance Total
------ ---------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996...................... $150 $106,153 $2,480 $ - $108,783
Vesting of management stock (unaudited) - 59 - - 59
Issuance of 17,000 shares in connection
with stock option plans (unaudited).............. - 238 - - 238
Issuance of 4,506 shares in connection with
with the employee stock purchase
plan (unaudited)................................. - 65 - - 65
Valuation allowance from investments ............. - - - 423 423
Net income (unaudited)............................ - - 2,799 - 2,799
---- -------- ------ ---- --------
Balance at March 31, 1997 (unaudited)............. $150 $106,515 $5,279 $423 $112,367
==== ======== ====== ==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1997 1996
-------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 2,799 $ 3,334
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ........................................................ 2,101 713
Amortization of intangible assets ................................... 1,667 507
Amortization of other assets ........................................ 102 54
Issuance of common stock to management .............................. 59 79
Deferred taxes ...................................................... 1,697 651
Changes in assets and liabilities net of effect from acquisitions:
Restricted cash ..................................................... (1,055) (7,810)
Accounts receivable ................................................ (4,000) (1,316)
Refundable income taxes ............................................ 267 1,041
Prepaid commissions ................................................ 82 229
Prepaid expenses and other current assets ........................... 855 (323)
Other assets ........................................................ (198) 270
Accounts payable .................................................... (6,280) (1,420)
Premiums payable to carriers ........................................ 24,044 10,521
Commissions payable ................................................. 1,452 176
Deferred revenue .................................................... 679 172
Accrued liabilities ................................................. 186 (1,330)
Accrued contract commitments ........................................ (628) (464)
Accrued restructure ................................................. (85) -
Income taxes payable ................................................ - 461
-------- ----------
Net cash provided by operating activities ........................ 23,744 5,545
-------- ----------
Cash flows from investing activities:
Purchases of property and equipment ................................. (3,318) (1,039)
Sales of short-term investments, net ................................ - 6,425
Payment for purchase of TMG block of business ....................... (1,600) -
Increase in investments, net ........................................ (2,881) (2,055)
Decrease (increase) in note receivable .............................. 6,388 (6,900)
-------- ----------
Net cash used in investing activities ............................ (1,411) (3,569)
-------- ----------
Cash flows from financing activities:
Net payments under line of credit ................................... (15,000) -
Payments on other debt .............................................. (3,345) -
Proceeds from exercise of stock options ............................. 238 -
Proceeds from Common Stock issued ................................... 65 20
-------- ----------
Net cash (used in) provided by financing activities .............. (18,042) 20
-------- ----------
Net increase in cash and cash equivalents ............................ 4,291 1,996
Cash and cash equivalents at beginning of period ..................... 3,725 4,738
-------- ----------
Cash and cash equivalents at end of period ........................... $ 8,016 $ 6,734
======== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest .............................................. $ 1,686 $ -
======== ==========
Cash paid for income taxes .......................................... $ 373 $ 64
======== ==========
Supplemental disclosure of noncash activities:
Issuance of Common Stock to management .............................. $ 59 $ 79
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 over 125,000 small
businesses and large, self-funded organizations, covering approximately 2.6
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.
On May 19, 1995, the Company completed an initial public offering of
4,025,000 shares of its Common Stock, shares of which are presently traded on
the New York Stock Exchange. Concurrent with the initial public offering, the
Company also exchanged Redeemable Preferred Stock of 1,398,000 shares of Common
Stock.
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.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries (i) HealthPlan Services, Inc., together with
its wholly owned subsidiaries ("HPSI"), (ii) Harrington Services Corporation,
together with its direct and indirect wholly owned subsidiaries ("Harrington"),
(iii) Consolidated Group, Inc., together with its affiliate ("Consolidated
Group"), and (iv) Healthcare Informatics Corporation. 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
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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 and diluted earnings per share are not expected to be
significantly different from basic earnings per share for the three months
ended March 31, 1997.
INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired is recorded
as intangible assets, primarily goodwill. Goodwill (net $154.9 million at
March 31, 1997) is amortized over 25 years. Other intangible assets, such as
contract rights (net $1.0 million at March 31, 1997), are amortized over 7
years.
INVESTMENTS
As of January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities". The effect of SFAS 115 is dependent upon
classification of the investment. As the Company's investments are classified
as available for sale, they are measured at fair market value. Any change in
the value of investments is recorded as a valuation allowance in the equity
section of the balance sheet.
INCOME TAXES
The Company recognizes deferred assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. For federal income tax purposes,
the Company files a consolidated tax return with its wholly owned subsidiaries.
PRE-OPERATING AND CONTRACT START-UP COSTS
The Company has elected to expense as incurred, and segregate from other
operating costs, those costs related to the preparation for and implementation
of new products and contracts for services to new customers prior to the
initiation of significant new revenue activity from these new revenue
initiatives.
INTEGRATION EXPENSE
Certain costs amounting to $1.3 million incurred by the Company in the
first quarter of 1997 in relation to the post-acquisition integration of
information systems at Consolidated Group and Harrington are recorded as
integration expense. Other non-information systems costs amounting to $110,000
for items such as travel and consolidation of treasury functions have also been
recorded as integration expense.
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans and employee stock
purchase plan. Accordingly, no compensation cost has been recognized related
to these plans. Had compensation cost for the Company's stock option and
employee stock purchase plans been determined based on the fair value at the
grant dates, as prescribed in Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
net income per share would have been as follows:
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
---------- ----------
<S> <C> <C>
Net income attributable to
common stock (in thousands):
As reported $ 2,799 $ 3,334
Pro forma 2,538 3,233
========== ==========
Net income per share:
As reported $ 0.19 $ 0.25
Pro forma 0.17 0.24
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for grants during the applicable year: dividend yield of 0.0% for both
periods; expected volatility of 30% for each of the three months ended March
31, 1997 and 1996; risk-free interest rates of 6.30% to 6.69% for options
granted during the three months ended March 31, 1997 and 5.51% to 7.05% for
options granted during the three months ended March 31, 1996; and a weighted
average expected option term of four years for both years.
3. NOTE PAYABLE AND CREDIT FACILITY
The Company expanded its credit facility (the "Line of Credit") from $20
million 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 during
1996. The maximum amount available through the Line of Credit as of March 31,
1997 was approximately $109 million. The facility operates on a revolving
basis until May 18, 1998, on which date the outstanding balance shall be paid
over a three year period with the first principal payment due November 30, 1998
and the final payment due April 30, 2001. The Company's borrowing under the
Line of Credit includes interest ranging from LIBOR plus 125 to 175 basis
points to New York prime plus 25 to 75 basis points. The Line of Credit
carries a commitment fee of 0.25% of the unused portion and is secured by the
stock of the Company's subsidiaries. The agreement contains provisions which
include (among other covenants) maintenance of certain minimum financial
ratios, limitations on capital expenditures, limitations on acquisition
activity, and limitations on the payment of dividends. The Company incurred
approximately $900,000 of interest expense and approximately $80,000 of
commitment fee on the Line of Credit for three months ended March 31, 1997.
Subsequent to obtaining the Line of Credit, the Company entered into two
separate interest rate swap agreements as a hedge against interest rate
exposure on the variable rate debt. The agreements, which expire in October
1999 and September 2001, effectively convert $40.0 million of variable debt
under the Line of Credit to fixed rate debt at a weighted average rate of 6.42%
plus a margin ranging from 125 to 175 basis points. For the three months ended
March 31, 1997, the Company recorded approximately $90,000 of interest expense
related to the 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.
The Company incurred additional interest expense of $140,000 in the first
quarter of 1997 relating to notes assumed in the acquisition of the Company
from the Dun and Bradstreet Corporation and notes assumed by the Company in the
acquisitions of Consolidated Group and Harrington.
4. ACQUISITIONS
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 lease a field office located in Brookfield, Wisconsin and pay $1.6
million for certain tangible and intangible assets. In addition, the Company
agreed to employ approximately 220 former TMG employees. The Company has
recorded a liability for certain obligations assumed
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in the Agreement and recorded $1.0 million for the closure of the Brookfield
office, an event which the Company announced during the second quarter to be
executed during the third quarter. TMG provides marketing and administrative
services for medical, dental, and group life benefits to small businesses with
approximately 125,000 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.
CONSOLIDATED GROUP
On July 1, 1996, the Company acquired all the issued and outstanding stock
of Consolidated Group for approximately $61.9 million in cash. Consolidated
Group, headquartered in Framingham, Massachusetts, specializes in providing
medical benefits administration and other related services for health care
plans. Consolidated Group provides these services to over 23,000 small
businesses in a variety of industries covering approximately 250,000 members in
50 states. Consolidated Group employs approximately 420 people.
HARRINGTON SERVICES CORPORATION
On July 1, 1996, the Company also acquired all the issued and outstanding
stock of Harrington for approximately $32.5 million cash and 1,400,110 shares
of the Company's Common Stock valued at $30.1 million. Harrington,
headquartered in Columbus, Ohio, provides administrative services to
self-funded benefit plans. Harrington provides these services to over 3,000
large, self-funded plans for employers in a variety of industries covering
approximately 960,000 members in 47 states. Harrington employs approximately
1,500 employees, with principal offices in Columbus, Ohio; Chicago, Illinois;
and El Monte, California.
UNAUDITED PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
The following unaudited pro forma consolidated results of operations of the
Company give effect to all of the above acquisitions of Consolidated Group
and Harrington, accounted for as purchases, as if they occurred on January 1,
1996 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996
<S> <C>
Revenues 68,827
Net income 2,779
Net income per common share 0.21
</TABLE>
The above pro forma information is not necessarily indicative of the results
of operations that would have occurred had the acquisitions of Consolidated
Group and Harrington been made as of January 1, 1996 or of the results which
may occur in the future.
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 representing a 9% ownership interest and, in addition,
to lend Medirisk up to $10.0 million over four years in the form of debt for
which
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the Company would receive detachable warrants to purchase up to 432,101 shares
of Medirisk's common stock for $0.015 per share, based on the amount of debt
actually acquired.
On March 13, 1996, Medirisk borrowed $6.9 million from the Company bearing
interest of 10% payable quarterly. In accordance with the agreement, warrants
to purchase 298,150 shares of Medirisk's common stock were issued to the
Company. The Company discounted the note receivable by the relative fair value
of the warrants, which was determined to be $573,000.
On January 28, 1997, Medirisk completed an initial public offering and
satisfied the $6.9 million debt balance in accordance with the agreement. The
remaining value of the warrants, approximately $500,000, was accreted to income
in the first quarter of 1997. Upon completion of the public offering,
Medirisk's preferred stock was converted to common stock. The Company has
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. After the 180 day period has lapsed,
the shares will be 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 March 31, 1997,
Medirisk's shares closed at $7.75 per share of common stock. The Company has
recorded its investment in Medirisk at eighty percent of the market value at
March 31, 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 SFAS 115.
On March 5, 1997, the Company and Health Risk Management, Inc. ("HRM")
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 March 31, 1997, HRM's
shares closed at $10.38 per share of common stock. These shares were not
registered and are subject to restrictions on transfer. HRM provides
comprehensive, integrated health care management, information, and health
benefit administration services to employers, insurance companies, unions,
health maintenance organizations ("HMO"), preferred provider organizations
("PPO"), hospitals, and governmental units in the United States and Canada.
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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," "estimate,"
"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 months ended March 31, 1997
and 1996.
The Company provides marketing, administration, and risk management
services and solutions for health and other benefit programs. The Company's
customers include managed care organizations, insurance companies, integrated
health care delivery systems, self-funded benefit plans, and health care
purchasing alliances.
FACTORS AFFECTING PROFITABILITY
The Company's profitability depends on its customers' service
requirements, its ability to meet these requirements efficiently, and the
methods of determining compensation for the Company's services. The factors
affecting service requirements and compensation levels vary depending on the
business unit.
Service Requirements
In both the small group and large group businesses, the Company offers
claims payment services, but such services are typically part of the monthly
fee charged, as opposed to a function of the volume of claims filed. Thus, on
the operating side, profitability is heavily reliant on both the volume of
claims filed and the efficiency with which the Company processes claims. The
same principle applies to the Company's other support functions, such as
enrollment, billing, underwriting, customer service, and reporting. In the
future, the Company's efficiency as an administrator of health care benefits
will be influenced by its ability to increase the use of electronic data
interchange ("EDI") in the claims collection and input function and its ability
to expand the use of auto adjudication in the claims processing and payment
function. Profitability also will be influenced by the Company's ability to
increase operational efficiencies through consolidation of plants and
maximization of economies of scale.
Compensation
In the small group business, the Company is usually compensated by way of
a percentage of premium collected (sometimes referred to as "premium retention
percentage"), and in some instances the Company charges the covered group a
fixed monthly fee. Premium collected is a function of the premium charged by
the payor on each life in the group. Thus, profitability can be a function of
many factors, including the number of groups in force, the number of lives in
force, the number of lives per group, the related premium retention percentage,
and the overall volume of premium collected on a monthly basis. The Company's
ability to increase lives or groups in force is influenced by new business
generated and cases retained. The success of both is heavily influenced by the
competitive nature of the pricing offered by the payor and its desire to
maintain a presence in its geographic regions and the small group market in
general. The Company believes that a higher percentage of future small group
revenue will be derived from HMO versus traditional indemnity business, and
premium retention percentages are typically lower from HMO business. In
addition, it is possible that competitive pressures or regulatory reform could
lower future premium retention percentages on the Company's indemnity products.
The Company's premium retention percentage declined from almost 20% in January
1996 to approximately 17.5% in March 1997. Thus, the Company will have to
increase sales volume in the future to maintain the same operating margins.
In the large group and alliance businesses, the Company is typically
compensated on a capitated or per member, per month ("PMPM") basis. This rate
is usually the result of a competitive bidding process, and pricing is
typically fixed for a period of time. Future profitability will be influenced
by the Company's ability to create value-added services that allow it to
deviate from the commodity pricing inherent in the bidding process.
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Special Risks Associated With The Alliance Business
Starting in 1994, the Company pursued contracts with state-sponsored
health care purchasing alliances, initially in Florida, and in 1995-1996, with
additional contracts in North Carolina, Kentucky, and Washington. The Company
has incurred substantial expenses in connection with the start-up of these
contracts, and, to date, the alliance business has been unprofitable.
The primary material risks associated with alliance contracts are:
1. Private enterprises will not accept the use of a government-sponsored
program and will therefore fail to provide an adequate number of enrollees to
support a revenue base (over which fixed costs may be spread).
2. The number of enrollees per group will be so low that margins are
insufficient to cover the fixed costs of set up for the group.
3. The level of marketing, enrollment, and customer service required will
be materially higher than expected, thereby increasing the variable costs
required under the contract.
4. The independent agents on whom the Company relies to distribute the
product will not be enthusiastic about the alliance program, resulting in lower
than expected enrollment.
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 will be closing its Lexington, Kentucky
office at the end of the contract term. The Company expects to incur
approximately $200,000 in costs associated with this closure.
The Company announced in April 1997 that it had negotiated new contracts
with each of the districts representing the Florida alliance customers. The
new contracts will result in a rate increase to the Company of approximately
67%. The new contracts cover a three year period through June 30, 2000 and may
be canceled with 180 days notice.
There can be no assurance that the Company will be able to recoup its
investment in developing its alliance relationships or that these operations
will ultimately be profitable. Unless the Company can demonstrate that these
operations can be profitable over a sustained period of time, it may elect to
exit the alliance business.
FACTORS AFFECTING GROWTH
The Company's growth is affected greatly by its acquisitions of other
administrators. Growth through acquisition involves substantial risks,
including the risk of improper valuation of the acquired business. In
addition, the value of such an acquired business or block of business could be
impaired if the Company is not successful in integrating the business into its
existing operations. These risks are increased when the Company elects to make
such acquisitions on a leveraged basis.
To understand how the Company books acquisitions of administrators in
purchase transactions, an understanding of the unique nature of the Company's
business is essential. Because administrators can operate with a minimal
amount of capital, acquired companies typically have modest tangible asset
bases. As evidenced by the Company's recent experiences at Harrington and
Consolidated Group, other than the underlying business, there are no intangible
long-lived assets such as work force, customer base, or supplier relationships
to which the Company could assign significant value, as these are relationships
that routinely turn over and are replaced in the ordinary course of business.
Often, no single customer of an acquired business constitutes a significant
part of the business, and customers typically have annual contracts which may
or may not be renewed. Renewal rates can vary significantly on an annual
basis. Accordingly, values cannot be assigned to individual customers or
contracts. Thus, goodwill, which is the excess of purchase price over the fair
value of net assets acquired, is often a significant portion of the purchase
price.
12
<PAGE> 14
There can be no assurance that the Company will successfully and
profitably integrate the businesses of Harrington, Consolidated Group, and the
TMG block of business into its existing operations. In addition, certain costs
will be incurred to successfully integrate these acquired companies. Although
Harrington and Consolidated Group are significantly larger companies with a
broader customer base over which to spread risk, more infrastructure, and
longer histories of servicing customers, and management remains optimistic
about the future, there can be no assurance that adverse renewals will not
occur in the future. The Company will continue to evaluate on a regular basis
whether events and circumstances have occurred that indicate that the carrying
amount of intangible assets may not be recoverable. Although the net
unamortized balance of intangible assets is not considered to be impaired, any
such future determination requiring the write-off of a significant portion of
unamortized intangible assets could have a material adverse effect on the
Company's financial results.
Subsequent to the acquisitions of Harrington and Consolidated Group and
the addition of the TMG block of business, the Company now serves approximately
125,000 businesses, plan holders, and governmental agencies in 50 states,
Washington, D.C., and Puerto Rico, covering approximately 2.6 million members.
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 New England, Celtic
Life Insurance Company, and Ameritas Life Insurance Corporation businesses
accounted for approximately 27.0%, 21.5%, and 8.6%, respectively, of the
Company's consolidated revenue in the first quarter of 1996 and approximately
9.2%, 6.3%, and 3.2%, respectively, of the Company's consolidated revenue in
the first quarter of 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. During the first quarter of 1997, this business
represented approximately 14.4% of the Company's consolidated revenue. The
Company is dependent on United HealthCare's commitment to the small group market
and on the Company's ultimate success in converting the MetraHealth business to
United HealthCare's new products. The Company expects a determination within
the second quarter of 1997 of whether it will be able to transition the business
through United HealthCare or whether it will be necessary to seek to transition
the business through another carrier. Should the Company have to move this
business to another payor, it could experience higher than normal lapse rates
and lower than normal margins. To date, the Company has not been successful in
converting the indemnity/PPO lives to HMO lives.
Revenues from the Company's assumption of the TMG block of business
accounted for 13.7% of consolidated revenues in the first quarter of 1997.
The abandonment of the small group market by either The New England,
Celtic Life Insurance Company, or Ameritas Life Insurance Corporation,
indemnity payors' ability to manage medical losses, the degree to which the
Company is successful in the MetraHealth conversion, as well as the Company's
ability to maintain the TMG block of business could have a material adverse
effect on the Company. With respect to the business serviced by the Company, a
decision by any one of these payors to administer and distribute a significant
portion of its products directly to small businesses also could have a material
adverse effect on the Company.
13
<PAGE> 15
A. RESULTS OF OPERATIONS
The following is a discussion of material changes in the consolidated
results of operations of the Company for the three months ended March 31, 1997
compared to the same period in 1996. The following table sets forth certain
operating data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Operating revenues ........................................ 98.9% 97.7%
Interest income ........................................... 1.1% 2.3%
Total revenues ........................................... 100.0% 100.0%
Expenses:
Agent commissions ........................................ 24.2% 31.4%
Personnel expenses ....................................... 39.4% 27.1%
General and administrative ............................... 20.7% 18.7%
Pre-operating and contract
start-up costs ......................................... 0.1% 0.9%
Integration .............................................. 1.9% 0.0%
Depreciation and amortization ............................ 5.3% 4.1%
Total expenses ......................................... 91.6% 82.2%
Net income before interest expense and
income taxes ........................................... 8.4% 17.8%
Interest expense .......................................... 1.6% 0.1%
Net income before income taxes ............................ 6.8% 17.7%
Provision for income taxes ................................ 3.0% 6.9%
Net income ................................................ 3.8% 10.8%
</TABLE>
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Revenues for the three months ended March 31, 1997 increased $42.6
million, or 137.4%, to $73.6 million from $31.0 million for the same period in
1996. This increase resulted primarily from revenues of $14.6 million, $22.1
million, and $9.9 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 $3.7 million and $1.3 million, respectively, while revenues
from alliance customers increased $0.6 million as 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 core 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 commissions expenses for the three months ended March 31, 1997
increased $8.0 million, or 81.6%, to $17.8 million from $9.8 million for the
same period in 1996. The Company realized an increase in commissions of $10.0
million related to the acquisitions of Consolidated Group, Harrington, and the
TMG block of business. Commissions from HPSI decreased $2.0 million due
primarily to the decrease in its small group revenues. Commissions as a
percentage of operating revenues were 24.5% for the three months ended March
31, 1997 compared to 32.2% for the same period in 1996 as large group revenues
represented a greater percentage of the Company's revenues. Large group
commissions (4.6% of large group revenues) represent a lower percent of
revenues than small group commissions (40.7% of small group revenues).
14
<PAGE> 16
Personnel costs for the three months ended March 31, 1997 increased $20.6
million, or 245.2%, to $29.0 million from $8.4 million for the same period in
1996. Of this increase, $19.2 million is attributable to the Company's
acquisitions of Consolidated Group, Harrington, and the TMG block of business.
Additional costs of $1.4 million resulted from costs associated with the
increased alliance business and increased staffing at the corporate level to
handle accounting, treasury, payroll and other related functions.
General and administrative expenses for the three months ended March 31,
1997 increased $9.4 million, or 162.1%, to $15.2 million from $5.8 million for
the same period in 1996. Of this increase, $8.8 million is attributable to
costs associated with Consolidated Group, Harrington, and the TMG block of
business. Additional costs of $0.4 million were incurred relating to the
consolidation of the Company's combined insurance program for property,
casualty, and other related coverages, and personal property and franchise
taxes related to the consolidation of insurance and tax functions, and
professional services related to HPSI's new business activities in the alliance
business unit.
Depreciation and amortization expenses for the three months ended March
31, 1997 increased $2.6 million, or 200% to $3.9 million from $1.3 million in
1996. Of this increase, $2.3 million relates to depreciation and amortization
on the Company's acquisitions of Consolidated Group and Harrington ($1.2
million of which is the amortization of intangible assets on the acquisitions
being calculated on a straight-line basis over 25 years), and $50,000
relates to amortization recorded on the intangible asset resulting from the
assumption of the TMG block of business, which is being amortized over 7 years.
An additional increase of $0.2 million at HPSI is primarily attributable to the
amortization of internally developed software for the Company's alliance
administration.
Interest expense for the three months ended March 31, 1997 increased to
$1.2 million from $16,000 for the same period in 1996. Of this increase, $1.1
million relates to interest expense and related finance charges incurred on the
Company's Line of Credit.
B. LIQUIDITY AND CAPITAL RESOURCES
On May 19, 1995, the Company completed an initial public offering which
generated net proceeds of approximately $51.0 million. On August 31, 1995, HPS
used approximately $7.5 million of the offering proceeds to acquire all of the
outstanding capital stock of TPCM. On October 12, 1995, HPS used approximately
$5.1 million of the proceeds to acquire substantially all of the assets of the
third party administration business of DGB and the Company placed an additional
$5 million of the proceeds in an escrow account to guarantee the availability
of funds for semi-monthly payments due with respect to the DGB acquisition. On
January 13, 1996, using offering proceeds, the Company acquired $2.0 million of
preferred stock of Medirisk, representing a 9% ownership interest in Medirisk,
and on March 15, 1996, Medirisk exercised its option to issue $6.9 million of
debt with detachable warrants to the Company. To date the Company has not
elected to convert the detachable warrants into common stock of Medirisk. On
January 29, 1997, Medirisk completed an initial public offering of 2.3 million
shares of its common stock at a purchase price of $11.00 per share, and
Medirisk subsequently fully satisfied its debt obligation to the Company (see
"Notes to Consolidated Financial Statements - Investments and Note
Receivable").
On July 1, 1996, the Company utilized substantially all of the remaining
funds originating from the public offering and borrowed against its Line of
Credit under its May 17, 1996 credit facility with First Union National Bank of
North Carolina ("First Union") and other lenders to fund the acquisitions of
Harrington and Consolidated Group.
On September 13, 1996, the Company increased its Line of Credit from $85
million to $175 million. First Union serves as "agency bank" with respect to
this facility. Like the Company's previous credit facility with First Union,
the new facility contains provisions which require the Company to maintain
certain minimum financial ratios, impose limitations on acquisition activity
and capital spending, and which prohibit the Company from declaring or paying
any dividend upon any of its capital stock without the consent of First Union.
During the third quarter of 1996, the Company amended the terms of its credit
facility to allow it to spread the effects of the 1996 restructuring and
integration costs recorded over three years for purposes of calculating funds
availability on its Line of Credit. Similar treatment is in place for
calculating compliance with financial covenants. The outstanding draw against
the Line of Credit was $40.0 million at March 31, 1997.
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 the first quarter of 1997 and allowed the Company to reduce its notes
payable by approximately $16.0 million. The TMG business should continue
to provide
15
<PAGE> 17
cash flows throughout 1997. 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 offset 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 $5.0 million for capital expenditures in
the first quarter of 1997. Of this amount, $1.6 million was related to assets
purchased in the TMG block of business. The remainder was primarily internally
developed software for the Company's large group and alliance business units.
The Company incurred a cash outlay of approximately $1.4 million in the
first quarter of 1997 for non-recurring integration costs related primarily to
systems integration and expects to incur an additional cash outlay of
approximately $0.5 million throughout the remainder of 1997.
The Company expects to spend approximately $1.0 million throughout the
remainder of 1997 to close the Brookfield, Wisconsin office of TMG and move the
administration of the business to its Tampa, Florida and Merrimack, New
Hampshire offices. In addition, the Company expects to incur approximately
$200,000 to close the Kentucky alliance office.
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.
C. SEASONALITY AND INFLATION
The Company has not experienced any pattern of seasonality with respect to
its sales.
The Company does not believe that inflation had a material effect on its
results of operations for the three months ended March 31, 1997 or March 31,
1996. There can be no assurance, however, that the Company's business will not
be affected by inflation in the future.
16
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- -----------------------
<S> <C>
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Report on Form 8-K
On March 11, 1997, the Company filed a Current Report on Form 8-K with
respect to the mutual termination of a previously announced merger agreement
with Health Risk Management, Inc.
17
<PAGE> 19
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: May 14, 1997 /s/ James K. Murray, Jr.
-------------------------------------
President and Chief Executive Officer
Date: May 14, 1997 /s/James K. Murray III
-------------------------------------
Executive Vice President and Chief Financial
Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHPLAN SERVICES, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 19,133
<SECURITIES> 0
<RECEIVABLES> 22,018
<ALLOWANCES> (119)
<INVENTORY> 0
<CURRENT-ASSETS> 53,687
<PP&E> 55,791
<DEPRECIATION> (31,872)
<TOTAL-ASSETS> 250,311
<CURRENT-LIABILITIES> 91,353
<BONDS> 43,668
0
0
<COMMON> 150
<OTHER-SE> 112,217
<TOTAL-LIABILITY-AND-EQUITY> 250,311
<SALES> 0
<TOTAL-REVENUES> 73,593
<CGS> 0
<TOTAL-COSTS> 67,355
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,200
<INCOME-PRETAX> 5,038
<INCOME-TAX> 2,239
<INCOME-CONTINUING> 2,799
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,799
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0
</TABLE>
