<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NUMBER 1 TO
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, 1996
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 December 31, 1996.
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 14,974,126
<PAGE> 2
The registrant is hereby replacing the financial statements as filed in Item 1
on its Form 10-Q for the quarterly period ended September 30, 1996.
HEALTHPLAN SERVICES CORPORATION
TABLE OF CONTENTS
Page No.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Balance Sheet
September 30, 1996 and December 31, 1995 . . . . . . . . . . . 2
Consolidated Statement of Operations Three and
Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . 3
Consolidated Statement of Changes in
Common Stockholders' Equity September 30, 1996 . . . . . . . 4
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1996 and 1995 . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</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,
1996, DECEMBER 31,
AS RESTATED 1995
------------------ ------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 10,458 $ 4,738
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . 9,986 1,005
Short-term investments . . . . . . . . . . . . . . . . . . . . 15 36,723
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 18,274 6,411
Refundable income taxes . . . . . . . . . . . . . . . . . . . - 1,041
Prepaid commissions . . . . . . . . . . . . . . . . . . . . . 272 748
Prepaid expenses and other current assets . . . . . . . . . . . . 4,676 1,485
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . 224 965
---------------- -----------------
Total current assets. . . . . . . . . . . . . . . . . . . 43,905 53,116
Property and equipment, net . . . . . . . . . . . . . . . . . . . 20,587 9,241
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . 2,210 1,463
Deferred taxes . . . . . . . . . .. . . . . . . . . . . . . . . 3,116 -
Note receivable . . . . . . . . . . . . . . . . . . . . . . . . . 6,900 -
Investment in unconsolidated subsidiaries . . . . . . . . . . . . . 2,758 -
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . 171,528 48,847
---------------- -----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . $ 251,009 $ 112,667
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 5,984 $ 3,407
Premiums payable to carriers . . . . . . . . . . . . . . . . . . 29,260 17,209
Commissions payable . . . . . . . . . . . . . . . . . . . . . . 4,721 2,897
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 2,012 947
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 22,879 5,093
Accrued contract commitments . . . . . . . . . . . . . . . . . 1,874 482
Accrued restructure costs . . . . . . . . . . . . . . . . . . . . 745 -
Income taxes payable . . . . . . . . . . . . . . . . . . . . . 1,561 -
Current portion of long-term debt . . . . . . . . . . . . . . . . 2,496 68
---------------- -----------------
Total current liabilities . . . . . . . . . . . . . . . . 71,532 30,103
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . 65,378 1,214
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . - 354
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . 1,338 30
---------------- -----------------
Total liabilities . . . . . . . . . . . . . . . . . . . . 138,248 31,701
---------------- -----------------
Common stockholders' equity:
Common stock voting, $.01 par value, 100,000,000 authorized and
14,908,847 issued and outstanding at September 30, 1996;
25,000,000 authorized and 13,395,357 issued and
outstanding at December 31, 1995 . . . . . . . . . . . . . . 149 134
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 104,598 71,636
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 8,009 9,196
---------------- -----------------
Total stockholders' equity . . . . . . . . . . . . . . . 112,756 80,966
---------------- -----------------
Total liabilities and stockholders' equity . . . . . . . $ 251,004 $ 112,667
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
1996 1995 1996 1995
(AS RESTATED) (AS RESTATED)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues . . . . . . . . . . . . $ 66,555 $ 23,330 $ 128,019 $ 69,476
Interest income . . . . . . . . . . . . . . 451 786 1,857 1,413
------------ ------------ ----------- -----------
Total revenues . . . . . . . . . 67,006 24,116 129,876 70,889
------------ ------------ ----------- -----------
Expenses:
Agents commissions . . . . . . . . . . . 15,025 8,196 34,978 26,442
Personnel expenses . . . . . . . . . . . 27,177 5,711 44,027 17,621
General and administrative . . . . . . . 13,379 4,109 25,053 12,081
Pre-operating and contract start-up costs. 109 545 696 545
Contract commitment expense . . . . . . 2,685 - 2,685 -
Restructure charge . . . . . . . . . . . 1,425 - 1,970 -
Integration expense . . . . . . . . . . . 400 - 400 -
Loss on partial impairment of goodwill . . 13,710 - 13,710 -
Depreciation and amortization . . . . . . 4,184 1,162 6,307 3,156
------------ ------------ ----------- -----------
Total expenses . . . . . . . . . . 78,094 19,723 129,826 59,845
------------ ------------ ----------- -----------
Income (loss) before interest expense
and income taxes . . . . . . . . . . (11,088) 4,393 50 11,044
Interest expense . . . . . . . . . . . . 1,277 16 1,310 48
------------ ------------ ----------- -----------
Income (loss) before income taxes . . . . (12,365) 4,377 (1,260) 10,996
Provision (benefit) for income taxes . . (4,404) 1,753 (73) 4,445
------------ ------------ ----------- -----------
Net income (loss) . . . . . . $ (7,961) $ 2,624 $ (1,187) $ 6,551
============ ============ =========== ===========
Dividends on Redeemable
Preferred Stock . . . . . . . . . . . $ - $ - $ - $ 285
============ ============ =========== ===========
Net income (loss) attributable to
common stock . . . . . . . . . . . . $ (7,961) $ 2,624 $ (1,187) $ 6,266
============ ============ =========== ===========
Pro forma net income (loss) per share . . . N/A $ 0.20 N/A $ 0.49
============ ============ =========== ===========
Pro forma weighted average
shares outstanding . . . . . . . . . . N/A 13,415 N/A 13,407
============ ============ =========== ===========
Historical weighted average net
income (loss) per share . . . . . . . $ (0.53) $ .20 $ (0.09) $ 0.59
============ ============ =========== ===========
Historical weighted average
shares outstanding . . . . . . . . . . 14,966 13,415 13,834 10,635
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Voting Additional
Common Paid-in Retained
Stock Capital Earnings Total
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 . . . . . . $ 134 $ 71,636 $ 9,196 $ 80,966
Vesting of stockholders' interest in
management stock (unaudited) . . . . . - 236 - 236
Issuance of 5,400 shares in connection with
stock option plans (unaudited) . . . . . - 76 - 76
Issuance of 1,347,133 shares in connection
with acquisition of Harrington Services
Corporation (unaudited) . . . . . . . . 13 28,950 - 28,963
Issuance of 160,957 shares in connection with
acquisition of Consolidated Group, Inc.
(unaudited) . . . . . . . . . . . . . . 2 3,700 - 3,702
Net loss, as restated (unaudited) . . . . . - - (1,187) (1,187)
----------- ------------- ------------ ------------
Balance at September 30, 1996, as restated
(unaudited) . . . . . . . . . . . . . . $ 149 $ 104,598 $ 8,009 $ 112,756
=========== ============= ============ ============
</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,
-----------------------------------------
1996,
AS RESTATED 1995
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . $ (1,187) $ 6,551
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 3,854 1,997
Amortization of goodwill . . . . . . . . . . . . . . 2,770 1,005
Amortization of deferred costs . . . . . . . . . . . . 228 154
Contract commitment expense, net . . . . . . . . . . . 1,392 (2,176)
Charge for restructuring business, net. . . . . . . . . 600 -
Loss on impairment of goodwill 13,710 -
Issuance of common stock to management . . . . . . 236 176
Deferred taxes . . . . . . . . . . . . . . . . . . (5,966) (600)
Changes in assets and liabilities net of effect from
acquisitions:
Restricted cash . . . . . . . . . . . . . . . . . . (8,981) (4,521)
Accounts receivable . . . . . . . . . . . . . . . . 1,320 (210)
Refundable income taxes . . . . . . . . . . . . . . 1,041 -
Prepaid commissions . . . . . . . . . . . . . . . 476 (96)
Prepaid expenses and other current assets . . . . . . (1,399) (378)
Other assets . . . . . . . . . . . . . . . . . . . . 87 (97)
Accounts payable . . . . . . . . . . . . . . . . . (3,874) (1,009)
Premiums payable to carriers . . . . . . . . . . . . 12,051 3,936
Commissions payable . . . . . . . . . . . . . . . 1,824 (239)
Deferred revenue . . . . . . . . . . . . . . . . . (38) (1,082)
Accrued liabilities . . . . . . . . . . . . . . . . . (864) (1,482)
Income taxes payable . . . . . . . . . . . . . . . 1,519 (40)
----------------- -----------------
Net cash provided by operating activities . . . 18,799 1,889
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . (3,118) (4,064)
(Purchases) sales of short-term investments, net. . . . 36,708 (43,753)
Payment for purchase of Third Party Claims
Management net of cash acquired . . . . . . . - (7,328)
Cash paid 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) -
Investment in unconsolidated subsidiaries . . . . . . . (2,384) -
Increase in note receivable . . . . . . . . . . . . . . (6,900) -
----------------- -----------------
Net cash used in investing activities . . . . . (64,965) (55,145)
----------------- -----------------
Cash flows from financing activities:
Payments on other debt . . . . . . . . . . . . . . . (11,892) (17)
Net borrowings under line of credit . . . . . . . . . . 60,000 -
Net proceeds from initial public
offering of common stock . . . . . . . . . . . - 50,905
Proceeds from exercise of stock options . . . . . . . . 76 -
Proceeds from common stock issued . . . . . . . . . . 3,702 -
----------------- -----------------
Net cash provided by 51,886 50,888
financing activities ----------------- -----------------
Net increase in cash and cash equivalents . . . . . . . 5,720 (2,368)
Cash and cash equivalents at beginning of period . . . . 4,738 4,303
----------------- -----------------
Cash and cash equivalents at end of period . . . . . . . $ 10,458 $ 1,935
================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . $ 1,258 $ 33
================= =================
Cash paid for income taxes . . . . . . . . . . . . . $ 1,414 $ 4,843
================= =================
Supplemental disclosure of noncash activities:
Exchange of Redeemable Preferred Stock
Series A and Series B for common stock . . . . . $ - $ 19,570
================= =================
Issuance of common stock to management . . . . . . $ 236 $ 176
================= =================
Common stock issued for purchase of Harrington
Services Corporation . . . . . . . . . . . . . . . $ 28,963 $ -
================= =================
Dividends on redeemable preferred stock . . . . . . . $ - $ 285
================= =================
</TABLE>
The accompany notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. RESTATEMENT OF RESULTS OF OPERATIONS
In its previously reported results for the three and nine months ended
September 30, 1996, the Company recorded a charge of $19.2 million for the
impairment of a portion of the goodwill which was recorded in connection with
certain acquisitions made in 1995 (the "1995 acquisitions") and in the third
quarter of 1996 (the "1996 acquisitions") (see note 4). The Company also
recorded in the same period a charge of $14.1 million for the estimated costs
to restructure and integrate the 1996 acquisitions.
The Company has subsequently determined, based on a re-evaluation of the
expected future undiscounted cash flows of the "1995 acquisitions" and the
"1996 acquisitions", that a portion of the related goodwill has not been
impaired. Consequently, the previously recorded impairment charge has been
restated to $13.7 million, which reflects the reduction of previously recorded
impairment charges by $5.3 million due to the re-evaluation.
Further, the Company has also determined that $8.3 million of the
estimated costs to restructure and integrate the 1996 acquisitions, including
consolidation of the Company's data centers and related computer integration
costs, should not have been expensed until incurred. As a substantial portion
of such costs ($6.5 million) are expected to be incurred during the fourth
quarter of 1996, the related charge in the third quarter has been reversed.
Though it is probable additional integration expense will be incurred in 1997,
the amount cannot be determined at this time.
In addition, $3.8 million of the estimated costs of the "1996
acquisitions", including the termination of certain CGI and Harrington
employees ($0.5 million) and the abandonment of certain CGI and Harrington
office space and equipment ($3.3 million), are now being recorded as part of
the purchase price allocations of CGI and Harrington. As such, the related
charge has been reversed and a corresponding amount included in goodwill. The
Company has also reversed $1.2 million of the $3.9 million contract commitment
charge relating to the termination of a royalty contract which CGI initially
reported in results of operations in the third quarter of 1996. Such amount
related to a contract commitment assumed in the Consolidated Group acquisition
which is now being included in goodwill. The net effect of these adjustments
on results of operations, are as follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, 1996 September 30, 1996
--------------------------------------- ---------------------------------------
As previously As previously
reported Adjustments As restated reported Adjustments As restated
------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before interest expense
and income taxes $(29,462) $(11,088) $(18,324) $ 50
Reduction in goodwill impairment charge $ 5,521 $ 5,521
Reversal of integration costs 7,881 7,881
Reversal of contract commitment
to goodwill 1,250 1,250
Reversal of restructure costs
to goodwill 3,814 3,814
Recalculation of goodwill amortization (92) (92)
Net loss $(19,169) $ (7,961) $(12,395) $(1,187)
Aggregate effect of adjustments described above $18,374 $18,374
Related tax effect (7,166) (7,166)
Historical weighted average net loss per share $ (1.28) $ (0.53) $ (0.90) $ (0.09)
</TABLE>
The net reduction in the goodwill impairment charge includes the $5.3
million reversal of the Consolidated Group goodwill impairment charge and other
adjustments related to the purchase accounting liabilities and the future
discounted cash flows of DGB and TPCM.
The $7.9 million reversal of integration costs includes the reversal of
the $8.3 million previously accrued less the $0.4 million of costs actually
incurred in the third quarter.
The related tax effect reflects the adjustment required to arrive to the
expected effective tax rate for the year ending December 31, 1996.
The principal effect of such adjustments on the Company's September 30,
1996 balance sheet is to increase goodwill from $162.1 million to $171.5
million and to increase stockholders' equity from $101.5 million to $112.8
million, which results from a previously reported accumulated deficit of $3.2
million being adjusted to retained earnings of $8.0 million.
2. COMPANY HISTORY
On October 1, 1994, HealthPlan Services Corporation (the "Company"), a
company formed by certain Company officers and Noel Group, Inc., acquired the
outstanding stock and assumed designated liabilities of Plan Services, Inc., a
division of The Dun & Bradstreet Corporation. 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. The
Company provides distribution, enrollment, billing and collection, claims
administration, and information reports and analysis on behalf of health care
payors and providers. Its customers include small businesses, health care
purchasing alliances, health maintenance organizations ("HMOs") and other
managed care organizations, insurance companies, and organizations with
self-funded health care plans.
See Note 4 for a description of acquisitions completed by the Company.
3. 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 1995 Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 29, 1996.
In the opinion of the Company, the interim data includes all 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, HealthPlan Services, Inc. ("HPS"),
HealthCare Informatics Corporation, Harrington, and Consolidated Group, as well
as Third Party Claims Management, Inc. ("TPCM"), the wholly owned subsidiary of
HPS. All intercompany transactions and balances have been eliminated in
consolidation.
Short-Term Investments
As of January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). The effect of SFAS 115 is dependent upon
classification of the investment. As the Company's short-term investments are
classified as available for sale, they are measured at fair market value which
approximates cost.
6
<PAGE> 8
On July 1, 1996, substantially all of the Company's short-term
investments were liquidated in order to meet cash requirements related to the
Company's acquisitions of Harrington and Consolidated Group. At that date, the
cumulative unrealized loss of $42,000 was included in results of operations.
Impairment of Long-lived Assets
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FASB 121"), which became effective for fiscal years beginning after December
15, 1995. In addition to the adoption of FASB 121 on January 1, 1996, the
Company will continue to evaluate, where appropriate and on a regular basis,
whether events and circumstances have occurred that indicate the carrying
amount of goodwill warrants revision or is not recoverable, based on estimated
future undiscounted cash flows from operations, in accordance with Accounting
Principles Board Opinion 17, "Intangible Assets".
FASB 121 established standards for determining when impairment losses on
long-lived assets, including goodwill, have occurred and how impairment losses
should be measured. The Company is required to review long-lived assets and
certain intangibles, to be held and used, for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may
not be recoverable. In performing such a review for recoverability, the
Company is required to compare the expected future cash flows to the carrying
values of the long-lived assets and identifiable intangibles at the lowest
level of identifiable cash flows. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of such assets and
intangibles, the assets are impaired, and the assets must be written down to
their estimated fair value. The Company estimates the discounted future
value of anticipated future cash flows as a measure of the fair value, using a
discount rate of 16%, which approximates Management's estimate of the Company's
estimated weighted average cost of capital.
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 FASB 121, the Company recorded a charge against
earnings of $13.7 million in the third quarter of 1996, representing
approximately 7.6% of the Company's pre-charge goodwill. 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.
The assets of DGB were acquired by the Company's wholly-owned subsidiary, HPS,
on October 12, 1995. DGB, located in Marlborough, Connecticut, is a third
party administrator providing managed health care administrative services to
self-funded employers, typically having between 250 and 2,000 employees in the
New England market. At the time of this acquisition, the Company projected a
10% to 15% growth rate in net cash flows and paid a purchase price which
resulted in $9.8 million excess of purchase price over fair value of
assets acquired. Since this acquisition, the Company has not achieved, and
does not expect to achieve, the revenue and net cash flow projections prepared
at the time of the acquisition due to, among other things, higher than
originally expected attrition rates resulting in ongoing decreases in net
revenues on a quarterly basis (due in part to increased pricing resulting
from a reinsurance carrier's departure from DGB's market), and an inadequate
distribution system, as evidenced by an underperforming sales force and
greater than anticipated operating costs. The Company's efforts to correct
these deficiencies have not enabled it to meets its original projections. The
Company has determined that its revised projected results would not support the
goodwill balance of $8.8 million. Accordingly, the Company has written off
$6.6 million of goodwill associated with the DGB acquisition. Any further
significant declines in the Company's projected net cash flows may result in
additional write-downs of remaining goodwill.
TPCM was acquired by the Company's wholly-owned subsidiary, HPS, on
August 31, 1995. TPCM is a third party administrator providing managed health
care administrative services to hospitals and other health care institutions
which offer self-funded health care benefits. At the time of this acquisition,
the Company projected a 10% to 15% growth rate in net cash flows and paid a
purchase price which resulted in $8.1 million excess of purchase price over
fair market value of assets acquired. Since this acquisition, the Company has
not achieved, and does not expect to achieve, the revenue and net cash flow
projections prepared at the time of the acquisition due to, among other things,
higher than originally expected attrition rates, significantly higher than
expected claims experience (claims filed per enrollee), and greater than
anticipated operating costs due to the limited capability of TPCM's
infrastructure. The Company's efforts to correct these deficiencies have not
enabled it to meet its original projections. Specifically, the Company lost
one customer that represented over $1 million in annualized revenues. The
Company also made a decision to close one of its operating facilities. In
fact, TPCM revenues have decreased from $2.8 million for the 3 months ended
12/31/95 to $1.8 million for the same period in 1996. In addition, lives
covered at TPCM have decreased by 32,000 during the last 12 months. The Company
has determined that its revised projected results would not support the goodwill
balance of $7.5 million. Accordingly, the Company has written off $7.1 million
of goodwill associated with the TPCM acquisition. Any further significant
declines in the Company's projected net cash flows may result in additional
write-downs of remaining goodwill.
The Company will continue to evaluate on a regular basis whether events
and circumstances have occurred that indicate the carrying amount of goodwill
may warrant revision or may not be recoverable. Although the net unamortized
balance of goodwill is not considered to be impaired, any such future
determination requiring the write-off of a significant portion of unamortized
goodwill could materially adversely affect the Company's results.
Earnings per share
Earnings per share was computed based on both the historical and pro
forma weighted average number of shares of Common Stock outstanding during the
period. The pro forma basis gives retroactive effect in 1995 to the exchange of
the Company's Redeemable Series A and Series B Preferred Stock at the time of
the Company's initial public offering. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all stock options and shares of
Common Stock issued have been included as outstanding for the entire period
using the treasury stock method.
7
<PAGE> 9
Income Taxes
The Company's effective tax rate for these periods differed from the
statutory rate, as a result of, among other things, the amortization of
goodwill and state income taxes. Specifically, the Company's effective tax
rate increased because the goodwill amortization for book purposes resulting
from the Harrington acquisition, which was a partially tax-free transaction to
Harrington's shareholders, is not tax deductible by the Company. As a
result, the Company's effective tax rate is expected to vary from the statutory
rate for the remainder of the fiscal year and in future years.
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 revenue activity from these new revenue initiatives.
Contract Commitments
On an ongoing basis, the Company estimates the revenues to be derived
over the life of service contracts as well as the costs to perform the services
connected therewith, in order to identify adverse commitments. This process
includes evaluating actual results during the period and analyzing other
factors, such as anticipated rates, volume and costs. If the revised estimates
indicate that a net loss is expected over the remaining life of the contract,
the Company recognizes the loss immediately.
Starting in 1994, the Company pursued contracts with state-sponsored
health care purchasing alliances, initially in Florida, and in 1995-1996, 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. During the quarter ended December 31,
1994, the Company recorded a pre-tax charge of approximately $3.6 million
related to state-sponsored and private health care purchasing alliances in
Florida. The Company recorded a pre-tax charge related to these contracts in
the amount of $2.6 million in the third quarter of 1996 resulting from
increased costs and lower than anticipated revenues in Florida and North
Carolina. The portion of the loss relating to both the fourth quarter of 1996
and first quarter of 1997 is expected to be approximately $300,000. In
Florida, the Company is negotiating a new contract with the State which is
scheduled to commence in May 1997.
Restructure
In the third quarter of 1996, the Company recorded a charge of
$1,425,000 to reflect the cost of exiting certain excess office space
($650,000) and terminating employees ($775,000).
The Company's restructure plan was for the elimination of approximately
eighty jobs in management, claims administration, and information systems
operations in its Tampa and Memphis offices. Seventy-seven employees were
terminated. The Company expects to incur approximately $75,000 in excess of
the original estimate.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123"), which will be adopted by the Company in 1996.
SFAS 123 establishes a fair value based method of accounting for stock-based
compensation plans. However, it also allows companies to continue to apply the
intrinsic value method prescribed by generally accepted accounting principles
on the condition that pro forma disclosures are made illustrating the effect of
the fair value-based method on the income statement.
The Company has not yet decided if it will apply the effects of SFAS 123
to its income statement upon adoption in 1996 or simply provide pro forma
disclosures.
8
<PAGE> 10
3. CREDIT FACILITY
On September 13, 1996, the Company announced an expansion of its credit
facility (the "Line of Credit") from $85 million to $175 million. First Union
National Bank of North Carolina ("First Union") is the "agency bank," and the
participating banks are Barnett Bank N.A., Fleet Bank N.A., The Fifth Third
Bank of Columbus, NationsBank, N.A. ("NationsBank"), South Trust Bank of
Alabama, and Sun Trust Bank, Tampa Bay. The Company's borrowing under the Line
of Credit will result in interest expense that will range from LIBOR + 125 to
175 basis points or New York prime + 25 to 75 basis points. The Line of Credit
is secured by the stock of the Company's subsidiaries.
On September 13, 1996, the Company entered into an interest rate swap
agreement with NationsBank. According to the terms of the agreement, the
Company is obligated to pay NationsBank on the 17th of each month, commencing
October 17, 1996 and ending September 17, 2001, monthly interest at a fixed per
annum rate of 6.61% on the principal amount of the swap, which is $25 million.
In exchange, NationsBank will reimburse the Company based on the prevailing one
month LIBOR rate, thereby matching the floating rate index as required on the
loan. The Company did not incur any material expense on this swap during the
quarter ended September 30, 1996.
On October 21, 1996, the Company entered into an interest rate swap
agreement with First Union. According to the terms of the agreement, the
Company is obligated to pay First Union on the 22nd of each month, commencing
November 22, 1996 and ending October 22, 1999, monthly interest at a fixed per
annum rate of 6.10% on the principal amount of the swap, which is $15 million.
In exchange, First Union will reimburse the Company based on the prevailing one
month LIBOR rate, thereby matching the floating rate index as required on the
loan.
4. ACQUISITIONS
On August 31, 1995, the Company's wholly owned subsidiary, HealthPlan
Services, Inc. ("HPS"), acquired all of the issued and outstanding shares of
capital stock of Third Party Claims Management, Inc. ("TPCM"), that serves
over 300 mid-to-large sized organizations covering a total of 140,000 members.
In connection with this acquisition, the Company recorded (i) a cash investment
of approximately $7,500,000, subject to a post-closing adjustment based on the
balance sheet of TPCM as of August 31, 1995, (ii) liabilities of approximately
$2,700,000, representing an assumption of liabilities and additional accruals
related to the transaction, and (iii) an additional payment equal to $2.00
multiplied by the number of employees enrolled in TPCM accounts as of the
anniversary date of the contract which was administered by the Company on the
closing date and continues to be a TPCM account administered by the Company on
the anniversary date. This payment was estimated at approximately $210,000 by
the Company at the time of the acquisition and was recorded as a liability and
an increase in goodwill resulting from the acquisition. The Company recorded
final purchase accounting adjustments for TPCM during the third quarter,
resulting in a decrease in the recorded goodwill and accrued liabilities of
$389,000. TPCM is focused on providing services to hospitals and other related
health care institutions that offer self funded health care benefits. The
development of integrated delivery systems by the entities making up this
target market is expected to increase. The services provided by these
customers' systems may include the ability to replace those provided by the
Company and possibly result in competition with the Company.
On October 12, 1995, HPS acquired substantially all of the assets and
assumed certain liabilities of the third party administration business of
Diversified Group Brokerage Corporation ("DGB"), effective as of October 1,
1995. DGB serves approximately 200 medium sized businesses with 45,000
members. The purchase price for DGB consisted of (i) approximately $5,075,000
paid at closing and (ii) for the seven-year period following the closing date,
semi-monthly payments based on the number of enrollees in accounts that were
DGB accounts as of the closing date, to be reduced by any attrition of
enrollees. HPS placed $5,000,000 in escrow as required by the agreement to
fund those payments, and the present value of those estimated payments was
recorded as goodwill. Additionally, HPS assumed approximately $1,000,000 in
liabilities related to this purchase. The Company recorded final purchase
accounting adjustments for DGB during the third quarter, resulting in a
decrease in the recorded goodwill and accrued liabilities of $428,000. The
acquired DGB business consists of the administration of medical benefits for
self-funded health care plans of primarily medium-sized businesses with an
emphasis on the New England geographic market. DGB is heavily dependent on
its ability to maintain and grow market share in the narrowly defined
geographic market.
On January 8, 1996, the Company entered into an agreement with
Medirisk, Inc. ("Medirisk"), a provider of proprietary health care information,
to purchase $2.0 million of Medirisk preferred stock. At September 30, 1996,
this represented an approximately 18.9% ownership interest on a fully diluted
basis, which was recorded under the cost method of accounting. In addition, the
Company agreed to lend up to $10.0 million over four years in the form of debt,
for which the Company would receive detachable warrants to purchase Medirisk
common stock at $0.01 per share. The funds have been used by Medirisk to
finance its expansion through the development of additional products and the
acquisition of additional health care information businesses. Medirisk, which
was founded in 1983 and is headquartered in Atlanta, Georgia, is a provider of
proprietary health care information products and services that track the price
and utilization of medical procedures. As of September 30, 1996, the Company
had purchased $2 million of preferred stock of Medirisk and loaned Medirisk $6.9
million to finance the acquisition of two health care data companies. On
January 29, 1997, Medirisk completed its initial public offering selling
2,300,000 shares of its common stock at $11.00 per share, and Medirisk
subsequently fully satisfied its debt obligation to the Company. In connection
with the offering, the Company's Medirisk preferred stock was converted into
common stock. As of January 29, 1997, the Company beneficially owned 480,442
shares (approximately 9.9%) of Medirisk common stock. Medirisk has granted
underwriters a 30-day option to purchase up to 345,000 additional shares of
common stock solely to cover over-allotments, at a price of $11.00 per share.
On July 1, 1996, the Company acquired all the issued and outstanding
stock of Consolidated Group, Inc. ("CGI") and three affiliated entities
(collectively, "Consolidated Group") for approximately $62 million in cash.
Consolidated Group, headquartered in Framingham, Massachusetts, specializes in
providing medical benefits administration and other related services for
health care plans for over 23,000 small businesses in a variety of industries
covering approximately 215,000 members in 50 states. After the acquisition,
the Company significantly decreased the activity and operations of the three
affiliated entities to concentrate on the core business, which is the
administration of medicial benefits. Revenues for the three affiliated
entities represent less than 3% of total Consolidated Group revenues. In 1995
it had revenues of $74 million. Consolidated Group employs approximately 600
people. The purchase price of Consolidated Group, which totaled $61.9 million
in cash and stock, was allocated to the fair value of the net assets acquired
as follows, subject to post-closing adjustment:
<TABLE>
<S> <C>
Tangible assets acquired $ 17.2 million
Goodwill 63.1 million
Liabilities associated with purchase (18.4) million
--------
$ 61.9 million
</TABLE>
On July 1, 1996, the Company also acquired all reissued and outstanding
stock of Harrington for $32.5 million cash and 1,400,110 of the Company's
common shares. Harrington, headquartered in Columbus, Ohio, provides
administrative services to over 700 large self-funded plans for employers in a
variety of industries covering approximately 1,600,000 members in 47 states.
Its revenues in 1995 were $72 million. Harrington employs approximately 1,500
employees, with principal offices in Columbus, Ohio, Chicago, Illinois, and El
Monte, California. The purchase price of Harrington, which totalled $61.5
million in cash and stock, was allocated to the fair value of the net assets
acquired as follows, subject to post-closing adjustment:
<TABLE>
<S> <C>
Tangible assets acquired $ 16.3 million
Goodwill 76.9 million
Liabilities associated with purchase (31.7) million
--------
$ 61.5 million
</TABLE>
The following unaudited pro forma consolidated results of operations
of the Company give effect to the TPCM, DGB, Consolidated Group, and Harrington
acquisitions, accounted for as purchases, as if they occurred on
January 1, 1995:
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1996 1995
-------- --------
<S> <C> <C>
Revenues $205.5 million $179.3 million
Net income (loss) $ (2.3) million $ 6.5 million
Net income (loss) per
common share $(0.15) $ 0.44
</TABLE>
The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisitions been made
as of January 1, 1995, or of the results which may occur in the future.
On September 13, 1996, the Company announced the execution of a merger
agreement to acquire all of the issued and outstanding capital stock of Health
Risk Management, Inc. ("HRM") for a purchase price consisting
9
<PAGE> 11
of (i) a cash payment, for all outstanding shares of HRM capital stock and
common stock equivalents, of $9.68603 per share and (ii) 0.360208 of a Company
share for each share of HRM capital stock. The Company estimates that total
consideration for the stock of HRM will be approximately $45.7 million in cash
and 1.5 million shares of Company stock. The Company filed an S-4 Registration
Statement relating to this proposed acquisition on November 13, 1996. A
special meeting of HRM shareholders is expected in March, 1997 to vote on
the merger, which will not be effective before March 1, 1997.
HRM is a managed care services company that provides care management and
demand management products and is supported by proprietary clinical decision
support software, QUALITYFIRST(R), which enables payors and providers to more
effectively manage their health care risk. HRM common shares became publicly
traded during 1990. The common shares are traded on the NASDAQ National Market
under the symbol HRMI.
5. SUBSEQUENT EVENTS
Subsequent to September 30, 1996, pursuant to the Plan and Agreement
of Merger dated May 28, 1996, between the Company and Harrington, the Company
and Harrington's shareholders representative agreed on the post closing
adjustment based on the balance sheet of Harrington as of June 30, 1996. This
agreement will result in the issuance, in November 1996, of an additional
52,977 shares of the Company's common stock to the former Harrington
shareholders. The issuance will be accounted for as an adjustment to the
purchase price. The shares will be valued at $21.50 per share, which is the
closing price of the Company's stock on June 26, 1996, resulting in an
increase in goodwill and equity of $1.1 million.
10
<PAGE> 12
The registrant is hereby replacing the Management's Discussion and
Analysis of Financial Condition and Results of Operations as filed in Item 2 on
its Form 10-Q for the quarterly period ended September 30, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS
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, 1996 compared to the same periods in 1995. As further discussed
in Note 1 to the Consolidated Financial Statements, the Company has restated
its previously reported pretax loss for the three and nine months ended
September 30, 1996. This $18.4 million restatement of pretax loss primarily
reflects the capitalization of certain costs related to the CGI acquisition,
which were previously expensed, the exclusion of certain previously recorded
integration costs which are to be recognized when incurred subsequent to
September 30, 1996 and the elimination of certain impairment charges on 1996
acquisitions.
The Company provides distribution, enrollment, billing and collection,
claims administration, and information reports and analysis on behalf of health
care payors and providers. Its customers include small businesses, health care
purchasing alliances, HMOs and other managed care organizations, insurance
companies, and organizations with self-funded health care plans. In the small
group business, the Company is usually compensated by way of a percent of
premium collected (sometimes referred to as "retention percentage") and in some
instances charges a fixed monthly group administration 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 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 renewed on their anniversary
date.
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 retention percentages are typically
lower from HMO business. Thus, the Company will have to increase sales volume
to maintain the same operating margins.
In the ASO and alliance business, 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.
In both the small group and ASO business, 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 (claims experience rate) and the efficiency with which the Company
processes claims. The same can be said for the Company's other support
functions, such as enrollment, billing, underwriting, customer service, and
reporting.
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, therefore increasing the variable
costs required under the contract.
4. The independent agents on whom the Company relies to distribute the
product are not enthusiastic about the alliance program. As a result, program
enrollment fails to meet expectations.
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 will also be influenced by the Company's
ability to increase operational efficiencies through consolidation of plants and
maximization of economies of scale.
The Company's growth is affected greatly by its acquisitions of other
administrators. 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 CGI, 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. No single customer is a
significant part of the business, and customers typically have annual contracts
which may or may not be renewed. In fact, renewal rates can vary
significantly on an annual basis. Accordingly, values cannot and should not be
assigned to individual customers or contracts. Thus, goodwill is often a
significant portion of the purchase price.
Subsequent to the acquisitions of Harrington and Consolidated Group,
the Company now serves approximately 125,000 businesses, plan holders and
governmental agencies in 50 states, Washington, D.C. and Puerto Rico,
representing approximately 3,000,000 members. 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,
----------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues . . . . . . . . . . . . . . 99.3 % 96.7 % 98.6 % 98.0 %
Interest income . . . . . . . . . . . . . . . . 0.7 % 3.3 % 1.4 % 2.0 %
------------------- --------------------
Total revenues . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Expenses:
Agents commissions . . . . . . . . . . . 22.4 % 34.0 % 26.9 % 37.3 %
Personnel expenses . . . . . . . . . . . . 40.6 % 23.7 % 33.9 % 24.8 %
General and administrative . . . . . . . . 20.0 % 17.0 % 19.3 % 17.0 %
Pre-operating and contract start-up costs . . 0.2 % 2.3 % 0.5 % 0.8 %
Contract commitment expense . . . . . . . 4.0 % 0.0 % 2.1 % 0.0 %
Restructure charge . . . . . . . . . . . . . 2.9 % 0.0 % 1.5 % 0.0 %
Integration expense . . . . . . . . . . . . . 0.6 % 0.0 % 0.3 % 0.0 %
Loss on partial impairment of goodwill . . . . 20.5 % 0.0 % 10.6 % 0.0 %
Depreciation and amortization . . . . . . . 5.4 % 4.8 % 4.9 % 4.5 %
------------------- --------------------
Total expenses . . . . . . . . 116.6 % 81.8 % 100.0 % 84.4 %
Income (loss) before interest expense
and income taxes . . . . . . . . . . . . . . . (16.6)% 18.2 % 0.0 % 15.6 %
Interest expense . . . . . . . . . . . . . . . . 1.9 % 0.0 % 1.0 % 0.1 %
------------------- --------------------
Net income (loss) before income taxes . . . . . (18.5)% 18.2 % (1.0)% 15.5 %
Provision for income taxes . . . . . . . . . . (6.6)% 7.3 % 0.1 % 6.3 %
------------------- --------------------
Net income (loss) . . . . . . . . . . . . . . . . (11.9)% 10.9 % (0.9)% 9.2 %
=================== ====================
</TABLE>
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Revenues for the three months ended September 30, 1996 increased $42.9
million, or 178.0%, to $67.0 million from $24.1 million for the same period in
1995. This increase resulted primarily from revenue produced by the Company's
acquisitions and revenue from internal growth (as measured by increased lives
and cases in force), including the new alliance contract in
11
<PAGE> 13
Kentucky, new Administrative Services Only ("ASO") business, and Multiple
Employer Trust ("MET") business, net of lost business attributable to
deterioration of renewal rates at TPCM and DGB.
Agents commissions expenses for the three months ended September 30,
1996 increased $6.8 million, or 82.9%, to $15.0 million from $8.2 million for
the same period in 1995. This increase resulted primarily from commissions
incurred relating to the Company's acquisitions. Agents commissions
represented 22.6% of operating revenues in 1996 (35.1% in 1995). This decrease
in commissions as a percentage of revenue resulted primarily from an increase
in ASO and alliance revenue as a percentage of total revenue. As a percentage
of revenue, MET agents commissions are typically significantly greater than ASO
agents commissions. There are no agents commissions associated with alliance
revenues.
Personnel costs for the three months ended September 30, 1996
increased $21.5 million, or 377.2%, to $27.2 million from $5.7 million for the
same period in 1995. This increase primarily resulted from the additional
costs of $19.4 million associated with the Company's acquisitions and the
influence of a greater concentration of ASO revenue within the Company's
business mix. In addition, the claims experience rate increased resulting in
increased overtime costs. The Company realized additional increases from
costs associated with the alliance contract in Kentucky and new MET and
ASO contracts.
General and administrative expenses for the three months ended
September 30, 1996 increased $9.3 million, or 226.8%, to $13.4 million from
$4.1 million for the same period in 1995. This increase primarily resulted
from expenses of $8.0 million related to the Company's acquisitions.
Additional postage, telephone, and printing costs resulted from the Kentucky
alliance and new MET and ASO contracts.
Contract commitment expense relates to the recognition of losses on
adverse contracts entered into by the Company in previous periods with
state-sponsored and private health care purchasing alliances. These losses are
the result of lower than anticipated growth in lives per case in the Third
Quarter and the resulting excess of cost of service over revenue to be earned
over the balance of the contract period. Discussions have been ongoing with
the related sponsors (Florida and North Carolina) to obtain revisions in
contract terms sufficient to generate additional revenue or reduced costs. As
of September 30, 1996, the Company has been unable to obtain concessions
sufficient to offset the results experienced in the third quarter.
Restructure charges result from the Company's intention to close
excess facilities and terminate certain employees.
The loss on partial impairment of goodwill reflects the write-down of
the carrying value of goodwill originally recorded upon the Company's
acquisition of TPCM and DGB reflecting their expected future discounted cash
flows.
The Company anticipates reductions in revenue from TPCM and DGB
of 11% and 10%, respectively, in the fourth quarter and of approximately 30%
and 17%, respectively, in 1997. Collectively these represent approximately 5%
of the Company's revenue for the quarter ended September 30, 1996. Because of
the narrow focus of the markets served by TPCM and DGB, the Company has been
unable to capitalize on the synergies anticipated at the date of acquisition.
The Company continually evaluates these operations for opportunities to reverse
these revenue losses and adjust operating costs in response to changing
conditions and does not believe these operations will create any further
materially adverse impact on future results of operations.
Depreciation and amortization expenses for the three months ended
September 30, 1996 increased $2.9 million, or 242%, to $4.1 million from $1.2
million in 1995. This increase related primarily to an increase in the
amortization of goodwill related to the Company's acquisitions and abandonment
of computer software.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Revenues for the nine months ended September 30, 1996 increased $59.0
million, or 83.2%, to $129.9 million from $70.9 million for the same period in
1995. This increase resulted primarily from revenue produced by the Company's
acquisitions, from internal growth as measured by increased lives and cases
in force, including the new alliance contract in Kentucky and new ASO and MET
business, net of lost business attributable to deterioration of renewal rates
at TPCM and DGB, and additional interest income from the proceeds of the
Company's initial public offering on May 19, 1995.
Agents commissions expenses for the nine months ended September 30,
1996 increased $8.6 million, or 32.6%, to $35.0 million from $26.4 million for
the same period in 1995. This increase resulted primarily from commissions
incurred relating to the Company's acquisitions. Agents commissions
represented 27.3% of operating revenues in 1996 (38.1% in 1995). This decrease
in commissions as a percentage of revenue resulted primarily from an increase
in ASO and alliance revenue as a percentage of total revenue. As a percentage
of revenue, MET agents commissions are typically greater than ASO agents
commissions. There are no agents commissions associated with alliance revenues.
Personnel costs for the nine months ended September 30, 1996 increased
$26.4 million, or 150.0%, to $44.0 million from $17.6 million for the same
period in 1995. This increase primarily resulted from the additional costs of
$23.1 million associated with the Company's acquisitions and the influence of a
greater concentration of ASO revenue within the Company's business mix. In
addition, a higher than usual claims experience rate resulted in higher
overtime costs as attempts were made to maintain claims backlog levels. The
Company incurred additional increases from costs associated with the alliance
contract in Kentucky and new MET and ASO contracts.
General and administrative expenses for the nine months ended
September 30, 1996 increased $13.0 million, or 107.4%, to $25.1 million from
$12.1 million for the same period in 1995. This increase primarily resulted
from expenses of $10.0 million related to the Company's acquisitions.
Additional postage, telephone, and printing expenses were incurred relating to
the Kentucky alliance and new MET and ASO contracts.
The Company incurred $0.7 million in pre-operating and start-up costs
during the nine months ended September 30, 1996. These costs related primarily
to the contracts with the state-sponsored health care purchasing
12
<PAGE> 14
alliances in North Carolina and Washington, the private alliance in Texas and
the new ASO contracts, and consisted of salaries and wages and temporary help,
printing, and travel expenses.
Depreciation and amortization expenses for the nine months ended
September 30, 1996 increased $3.6 million, or 112.5%, to $6.8 million from $3.2
million in 1995. This increase related primarily to an increase in the
amortization of goodwill related to the Company's acquisitions, the purchase of
data processing equipment, internally-developed software and abandonment of
software.
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 offering proceeds to acquire substantially
all of the assets of the third party administration business of DGB. 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. Medirisk intends to utilize part of the proceeds
from its initial public offering to extinguish the debt owed to the Company
(see "Notes to Consolidated Financial Statements - Acquisitions").
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 to fund the acquisitions of Harrington and Consolidated Group.
The outstanding draw against the Line of Credit was $60 million at September 30,
1996.
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 previous credit facility, the new facility contains
provisions which require the Company to maintain certain minimum financial
ratios, impose limitations on acquisition activity and capital spending, and
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,
the Company amended the terms of its credit facility to allow it to spread
the effects of the restructuring and integration costs recorded (see "Notes to
Consolidated Financial Statements - Restructure and Integration") over 3 years
for purposes of calculating funds availability on its Line of Credit.
Treatment is similar for calculating compliance with financial covenants.
The Company expects that the decline in cash flows which resulted in
the recording of a $13.7 million charge for the impairment of goodwill will not
result in the Company's inability to meet future operating, investing, and
financing requirements for the remainder of 1996 and the near future, especially
given that TPCM and DGB revenues represent less than 5% of total Company
revenue. Cash flow as measured by earnings before interest, taxes, depreciation
and amortization approximated $100,000 for the quarter ended September 30, 1996
and $900,000 for the nine months ended September 30, 1996 for TPCM and
approximately $250,000 and $1,500,000, respectively, for DGB. In addition,
other than the decline in cash flow which led to the impairment of goodwill in
the third quarter of 1996, the Company knows of no other effects or expected
effects on the Company's results of future operations or financial position.
The Company believes that additional revenue will be provided by new products
and sales generated by other initiatives of the Company and will offset the
impact on it's future operations and cash flows.
Although it has been a limited time since the Company's acquisitions
of Harrington and Consolidated Group, management does not immediately foresee
adverse circumstances similar to TPCM and DGB due to the significantly broader
market base over which to spread risk and each company's longer history of
servicing customers. Although management remains optimistic about the future,
there can be no assurance that adverse business conditions will not occur in
the future.
The Company has entered into a merger agreement to acquire the issued
and outstanding capital stock of HRM. This acquisition is not expected to be
completed before March 1, 1997. The Company expects to incur a cash outlay
of approximately $45.7 million in conjunction with the closing of this
acquisition. The acquisition will be primarily funded by proceeds from the
Company's existing Line of Credit.
The Company expects to incur a cash outlay of approximately $6.5
million in the fourth quarter of 1996 for non-recurring integration costs
related primarily to systems integration.
Based on current expectations, the Company believes that all
consolidated operating, investing and financing activities for the remainder of
1996 and the foreseeable future will be met from internally generated cash flow,
available cash, or its existing Line of Credit.
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<PAGE> 15
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 and nine months ended September 30,
1996 or September 30, 1995. There can be no assurance, however, that the
Company's business will not be affected by inflation in the future.
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<PAGE> 16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
10.1 Second Amendment to the Credit Agreement originally dated as of May 17, 1996 by
and among the Company, the Lenders and First Union Bank of North Carolina, as
agent, as amended July, 1996 and September 26, 1996 (previously filed).
10.2 Plan and Agreement of Merger dated September 12, 1996, as amended, among the Company,
HealthPlan Services Alpha Corporation and Health Risk Management, Inc. (included as Exhibit 2.1 to the
Registrant's Registration Statement on Form S-4 filed with the Commission on November 13, 1996,
and incorporated herein by reference).
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
(b) On September 13, 1996, and on February 14, 1997, the Company filed
amended reports on Form 8-K/As, together with required financial statements,
with respect to the Harrington and Consolidated Group acquisitions.
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<PAGE> 17
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: February 14, 1997 /s/ James K. Murray, Jr.
--------------------------------------
President and Chief Executive Officer
Date: February 14, 1997 /s/ James K. Murray III
--------------------------------------
Executive Vice President and Chief Financial Officer
16
