UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NO. 1-13772
HEALTHPLAN SERVICES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3787901
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3501 FRONTAGE ROAD, TAMPA, FLORIDA 33607
(Address of Principal Executive Offices) (Zip Code)
(813) 289-1000
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock as of the latest
practicable date.
Total number of shares of Common Stock outstanding as of November 6, 1998.
Common Stock .................................................. 13,922,366
<PAGE>
HEALTHPLAN SERVICES CORPORATION
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet
September 30, 1998 and December 31, 1997.................... 2
Consolidated Statement of Income
Three and Nine Months Ended September 30, 1998 and 1997..... 3
Consolidated Statement of Changes in Common
Stockholders' Equity Nine Months Ended September 30, 1998... 4
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1998 and 1997............... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 10
PART II - OTHER INFORMATION 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 6,138 $ 1,545
Restricted cash ...................................................... 11,805 11,256
Accounts receivable, net ............................................. 27,539 28,900
Refundable income taxes .............................................. -- 1,843
Prepaid expenses and other current assets ............................ 5,068 3,071
Deferred taxes ....................................................... 1,943 3,085
--------- ---------
Total current assets ......................................... 52,493 49,700
Property and equipment, net ............................................ 27,437 23,235
Other assets, net ...................................................... 3,265 2,908
Deferred taxes ......................................................... 2,666 4,008
Notes receivable ....................................................... 3,725 6,334
Investments ............................................................ 6,182 7,595
Intangible assets, net ................................................. 184,716 149,544
--------- ---------
Total assets ................................................. $ 280,484 $ 243,324
========= =========
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 15,016 $ 13,502
Premiums payable to carriers ......................................... 38,311 39,601
Commissions payable .................................................. 5,331 5,484
Deferred revenue ..................................................... 2,109 2,015
Accrued liabilities .................................................. 24,731 18,555
Income taxes payable ................................................. 2,848 --
Current portion of long-term debt payable ............................ 472 385
--------- ---------
Total current liabilities .................................... 88,818 79,542
Notes payable .......................................................... 94,225 43,309
Deferred taxes ......................................................... 474 982
Other long-term liabilities ............................................ 2,799 2,925
--------- ---------
Total liabilities ............................................ 186,316 126,758
--------- ---------
Minority interest ...................................................... 526 --
--------- ---------
Common stockholders' equity:
Common stock voting, $0.01 par value, 100,000,000 shares authorized,
15,170,966 issued at September 30, 1998 and,
15,038,033 at December 31, 1997 ................................... 152 150
Additional paid-in capital .......................................... 109,852 107,325
Treasury stock, 1,204,800 shares .................................... (27,415) --
Retained earnings ................................................... 11,261 7,671
Unrealized (depreciation) appreciation
on investments available for sale ................................. (208) 1,420
--------- ---------
Total stockholders' equity ................................... 93,642 116,566
--------- ---------
Total liabilities, minority interest, and stockholders' equity $ 280,484 $ 243,324
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues ............... $ 74,526 $ 68,846 $ 214,282 $ 213,389
--------- --------- --------- ---------
Expenses:
Agent commissions .............. 17,359 16,039 51,436 50,524
Personnel expenses ............. 33,324 27,301 91,939 85,422
General and administrative ..... 18,892 13,372 53,591 42,610
Restructure charge ............. 2,052 -- 2,052 1,374
Integration .................... 2,349 1,121 2,608 3,300
Other expense .................. 1,436 79 1,798 242
Gain on sale of investments .... (27,875) -- (33,240) --
Depreciation and amortization .. 4,209 3,843 11,658 12,055
Interest expense, net .......... 1,784 726 4,084 1,809
Equity in loss of joint venture -- -- 11,752 --
--------- --------- --------- ---------
Total expenses ............ 53,530 62,481 197,678 197,336
--------- --------- --------- ---------
Income before provision for income
taxes and minority interest .... 20,996 6,365 16,604 16,053
Provision for income taxes ....... 9,173 2,777 7,962 7,258
--------- --------- --------- ---------
Income before minority interest .. 11,823 3,588 8,642 8,795
Minority interest ................ (433) -- (671) --
--------- --------- --------- ---------
Net income ................ $ 12,256 $ 3,588 $ 9,313 $ 8,795
========= ========= ========= =========
Basic net income per share ....... $ 0.88 $ 0.24 $ 0.64 $ 0.59
Basic weighted average number
of shares outstanding .......... 13,993 15,010 14,497 14,997
Diluted net income per share ..... $ 0.88 $ 0.24 $ 0.64 $ 0.58
Diluted weighted average number of
shares outstanding ............. 13,993 15,214 14,651 15,144
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
(DEPRECIATION)
APPRECIATION
VOTING ADDITIONAL ON INVESTMENTS
COMMON PAID-IN TREASURY RETAINED AVAILABLE
STOCK CAPITAL STOCK EARNINGS FOR SALE TOTAL
---------- ---------- --------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .................. $ 150 $ 107,325 $ -- $ 7,671 $ 1,420 $ 116,566
Vesting of management stock (unaudited) ....... -- 177 -- -- -- 177
Issuance of 123,500 shares in connection
with stock option plans (unaudited) ........ 2 2,218 -- -- -- 2,220
Issuance of 9,313 shares in connection with the
employee stock purchase plan (unaudited) ... -- 129 -- -- -- 129
Issuance of 120 shares in connection with the
directors compensation plan (unaudited) .... -- 3 -- -- -- 3
Change in unrealized (depreciation)
appreciation on investments available
for sale (unaudited) ....................... -- -- -- -- (1,628) (1,628)
Cash dividends declared (unaudited) ........... -- -- -- (5,723) -- (5,723)
Purchase of treasury shares (unaudited) ....... -- -- (27,415) -- -- (27,415)
Net income (unaudited) ........................ -- -- -- 9,313 -- 9,313
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1998 (unaudited) ..... $ 152 $ 109,852 $ (27,415) $ 11,261 $ (208) $ 93,642
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 9,313 $ 8,795
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................................. 5,648 6,541
Amortization .................................................. 6,010 5,097
Gain on sale of investments ................................... (33,240) --
Equity in loss of joint venture ............................... 11,751 --
Minority interest ............................................. (671) --
Disposal of computer software ................................. -- 417
Issuance of Common Stock to management ........................ 177 176
Deferred taxes ................................................ 2,932 2,478
Changes in assets and liabilities net of effect from acquisitions:
Restricted cash ............................................... (549) (1,316)
Accounts receivable ........................................... 8,785 (2,611)
Income taxes payable .......................................... 4,691 9,305
Prepaid expenses and other current assets ..................... (780) 959
Other assets .................................................. (349) (164)
Accounts payable .............................................. (1,013) (14,386)
Premiums payable to carriers .................................. (1,360) 11,560
Commissions payable ........................................... (284) 1,325
Deferred revenue .............................................. 94 239
Accrued liabilities ........................................... (1,517) (1,612)
-------- --------
Net cash provided by operating activities .............. 9,638 26,803
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ........................... (5,999) (7,333)
Payment for purchase of CENTRA HealthPlan LLC,
net of cash acquired ................................... (8,784) --
Payment for purchase of National Preferred Provider Network
net of cash acquired ................................... (24,724) --
Payment for purchase of Montgomery Management ................. (4,000) --
Payment for purchase of TMG block of business ................. -- (1,600)
Proceeds from sale of investments ............................. 40,152 --
Increase in investments ....................................... (19,835) (1,821)
Decrease in note receivable ................................... 2,609 6,388
-------- --------
Net cash used in investing activities .................. (20,581) (4,366)
-------- --------
Cash flows from financing activities:
Net borrowing (payments) under line of credit ................. 48,000 (15,000)
Net payments on other debt .................................... (3,587) (3,458)
Cash dividends paid ........................................... (3,801) (1,863)
Proceeds from exercise of stock options ....................... 2,220 445
Repurchase of Common Stock .................................... (27,415) --
Proceeds from Common Stock issued ............................. 119 182
-------- --------
Net cash provided by (used in) financing activities .... 15,536 (19,694)
-------- --------
Net increase in cash and cash equivalents ........................ 4,593 2,743
Cash and cash equivalents at beginning of period ................. 1,545 3,725
-------- --------
Cash and cash equivalents at end of period ....................... $ 6,138 $ 6,468
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................ $ 4,494 $ 3,538
======== ========
Cash paid for income taxes .................................... $ 416 $ 1,746
======== ========
Supplemental disclosure of noncash activities:
Dividends declared and unpaid ................................. $ 1,910 $ 1,865
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
HealthPlan Services Corporation (together with its direct and indirect
subsidiaries, the "Company") is an outsourcing company that administers health
and other benefit plans for large, self-funded companies and for payors
(insurance companies, health maintenance organizations ("HMOs"), and other
risk-takers) that have elected to outsource sales support, distribution, and
"back-office" administrative services. The Company provides these services to
approximately 150,000 small businesses, plan holders, and self-funded
organizations, covering over 3 million members in the United States. The Company
functions solely as a service provider generating fee-based income and does not
assume any underwriting risk.
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 1997 Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 30, 1998.
In the opinion of Management, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for fair presentation
of financial position and results of operations for the interim periods
presented. Interim results are not necessarily indicative of results for a full
year.
The consolidated financial statements include the accounts of HealthPlan
Services Corporation and its wholly owned subsidiaries. The Company has
consolidated its investment in CENTRA HealthPlan LLC ("CENTRA") and recorded the
minority shareholder's interest on the balance sheet and statement of
operations. All intercompany transactions and balances have been eliminated in
consolidation.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the income available
to common stockholders by the weighted average number of common shares
outstanding for the period, without consideration for common stock equivalents.
The calculation of diluted earnings per share reflects the effect of outstanding
options using the treasury stock method.
6
<PAGE>
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." The following table sets
forth comprehensive income (net of taxes) for the periods indicated, which
reflects the inclusion of unrecognized appreciation on investments held for sale
(see Note 6). Comprehensive income would result in an adjustment to net income
as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
------- -------
Net income .............................. $ 9,313 $ 8,795
Unrealized (depreciation) appreciation on
investment available for sale ....... (1,628) 1,420
Tax at 39% statutory rate ............... 635 (554)
------- -------
Comprehensive income .................... $ 8,320 $ 9,661
======= =======
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year's presentation. These amounts do not have a material impact on the
financial statements taken as a whole.
3. ACQUISITIONS
On June 16, 1998, the Company acquired a 50.1% interest in CENTRA. CENTRA
was formed by an agreement between the Company and CENTRA Benefit Services, Inc.
("CBS") in which substantially all the assets in CBS's third party
administration business, which administers self-insured employee benefit plans,
were transferred to CENTRA. The Company paid $0.2 million for a 1% interest in
CENTRA and acquired an additional 49.9% interest from CBS in exchange for the
payment of $7.4 million ($9.3 million purchase price net of the payoff of a CBS
note), the issuance of $4.0 million in five year 5.75% notes convertible into
approximately 180,000 shares of the Company's stock, and additional contingent
consideration. With respect to such additional consideration, CBS has the right
to put its remaining interest in CENTRA at a contractual price not to exceed
$7.2 million within two years of the acquisition date if it meets certain
financial performance criteria. If CBS has not put its remaining interest to the
Company within two years, CBS will sell its remaining interest in CENTRA to the
Company at an appraised value not to exceed $7.2 million. CENTRA is a major
administrator of self-funded health plans for large corporations and is
headquartered in Richardson, Texas. CENTRA also has processing facilities in
Houston, Texas, Duncan, Oklahoma, Lynnwood, Washington, and Charleston, West
Virginia.
On May 18, 1998, the Company acquired National Preferred Provider
Network, Inc. ("NPPN") for $25.0 million cash and additional contingent
consideration of up to $25.0 million if NPPN achieves certain financial
performance objectives. Headquartered in Middletown, New York, NPPN is one of
the country's largest networks of health care (PPO) providers which consists of
approximately 330,000 physicians, more than 3,300 hospitals, and 24,000
ancillary care providers covering all 50 states.
On February 27, 1998, the Company acquired 49% of the capital stock of
Montgomery Management Corporation ("Montgomery Management") from Provident
American Corporation ("Provident") for $4.0 million. In connection with the
purchase, the Company obtained warrants to purchase an additional 31% of
Montgomery Management for nominal consideration. On October 26, 1998, the
Company exercised these warrants for an additional 31% of Montgomery
Management's capital stock for a cost of $8,060. Montgomery Management is a full
service managing general underwriter that has the authority to bind health
insurance coverage (on behalf of the insurance companies it represents) to
self-funded customers.
7
<PAGE>
The following unaudited pro forma consolidated results of operations of
the Company give effect to the CENTRA, NPPN, and Montgomery Management
acquisitions, accounted for as purchases, as if they occurred on January 1, 1997
(in thousands):
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
------- -------
Revenues .................. $233,679 $250,448
Expenses .................. 221,388 240,302
Income before taxes and
minority interest ..... 12,291 10,146
Net income ................ 6,356 4,644
Net income per common share $ 0.43 $ 0.31
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, 1997 or of the results which may occur in the future.
4. BLOCKS OF BUSINESS
In October 1997, the Company and Provident entered into an agreement
under which the Company assumed all of the policy issuance, billing, and claims
services for the individual health insurance policies of Provident's life
insurance subsidiaries. The Company began providing these services in January
1998.
On October 1, 1998, the Company and The Prudential Insurance Company of
America announced that they had signed a letter of intent to enter into a
long-term outsourcing agreement. According to the arrangement, the Company will
provide the case-level administrative services for Prudential HealthCare's Small
Business Division, such as medical and dental policy issuance, billing, and
underwriting, for current and future small group and individual clients holding
either medical or dental policies. The definitive contract is expected to be
signed within thirty (30) days with a transition beginning during the first six
(6) months of 1999. The agreement will apply to all of Prudential HealthCare
Small Business clients except those based in California.
5. NOTES PAYABLE AND CREDIT FACILITY
On June 23, 1998, the Company amended and restated its $175.0 million
credit facility (the "Line of Credit"), with availability limited by formula to
a multiple of trailing earnings before interest expense, income taxes, and
depreciation and amortization expense (with certain adjustments called for in
the credit agreement). This multiple is set at 3.5 through June 30, 1999 and
steps down thereafter to 2.75 during the final four quarters of the facility.
The maximum amount available through the Line of Credit as of September 30, 1998
was approximately $125.0 million, including all debt, letters of credit, and
guarantees made by the Company. The facility operates on a revolving basis over
a five year term with the final maturity date on May 3, 2003, at which time the
entire outstanding balance must be paid. The Company's borrowing under the Line
of Credit includes interest ranging from LIBOR plus 75 to 125 basis points to
prime plus 0 to 50 basis points. The Line of Credit carries a commitment fee
ranging from 0.175% to 0.25% of the unused portion and is secured by the stock
of the Company's subsidiaries. The credit agreement contains provisions that
include (among other covenants) a requirement that the Company maintain certain
minimum financial ratios, limitations on merger and acquisition activity,
limitations on investment activity, and limitations on the payment of dividends.
The outstanding balance
8
<PAGE>
under the Line of Credit at September 30, 1998 was $88.0 million. The Company
incurred approximately $4.0 million of interest expense and approximately
$184,000 in commitment fees on the current and previous Lines of Credit for the
nine months ended September 30, 1998.
The Company has 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 75 to 125 basis
points. For the nine months ended September 30, 1998, the Company recorded
approximately $222,000 of interest expense related to its interest rate swap
agreements.
The Company has additional notes payable of $6.7 million relating to the
CENTRA acquisition, a 1994 acquisition, and equipment purchases, of which $0.5
million is payable within one year.
6. INVESTMENTS AND NOTE RECEIVABLE
In December 1997, the Company and Sykes Enterprises, Incorporated
("Sykes") formed Sykes HealthPlan Services, Inc. ("SHPS"). The new company was
owned fifty percent (50%) by each of the founding companies and provides care
management services, technology solutions, certain customer support services,
and other outsourcing capabilities to the health care and insurance industries.
The Company invested $17.0 million in SHPS and guaranteed a line of credit of up
to $37.5 million to fund the activities of SHPS. On September 11, 1998, the
Company sold its 50% interest in SHPS to Sykes for $30.6 million and recognized
a gain on the sale of SHPS of $27.9 million. Additionally, the Company was
relieved of its obligations associated with SHPS' credit facility.
The Company accounted for its investment in SHPS under the equity method
of accounting. The Company recorded its 50% share in the loss incurred by SHPS
which was $11.8 million on a pre-tax basis. This loss was principally the result
of a charge for the write-off of purchased research and development associated
with SHPS' acquisitions of Health International, Inc. ("HI") and Prudential
Service Bureau, Inc. ("PSBI").
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. During the first quarter of
1998, the Company sold all of its shares in HRM and recorded a gain on the sale
of $0.2 million.
On January 8, 1996, the Company entered into an agreement with Medirisk,
Inc. ("Medirisk"), 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 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 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 of
approximately $0.5 million 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 exercised its warrants in February of 1998
resulting in an ownership of 480,442 shares of common stock, which represented
an approximate 11% ownership interest. The average cost was $5.48 per share.
During the nine months ended September 30, 1998, the Company sold 370,711 of its
shares in Medirisk and recorded a gain on the sale of $5.2 million. On September
30, 1998, Medirisk's shares closed at $2.50 per share of common stock. This
investment is recorded as available for sale with the unrealized holding loss
reported in the equity section of the balance sheet in accordance with SFAS 115.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE STATEMENTS CONTAINED IN THIS REPORT OR INCORPORATED BY REFERENCE
HEREIN THAT ARE NOT PURELY HISTORICAL, INCLUDING STATEMENTS REGARDING HEALTHPLAN
SERVICES CORPORATION'S OBJECTIVES, EXPECTATIONS, HOPES, INTENTIONS, BELIEFS, OR
STRATEGIES, ARE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933. IN PARTICULAR, THE WORDS "EXPECT," "ESTIMATE,"
"PLAN," "ANTICIPATE," "PREDICT," "INTEND," "BELIEVE," AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE
THAT ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS, AND UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS. AMONG
THE FACTORS THAT COULD CAUSE SUCH ACTUAL RESULTS TO DIFFER MATERIALLY ARE:
CHANGES IN LEGISLATION; FLUCTUATIONS IN BUSINESS CONDITIONS AND THE ECONOMY;
HEALTHPLAN SERVICES CORPORATION'S ABILITY TO IDENTIFY AND IMPLEMENT STRATEGIC
ACQUISITIONS; CHANGES IN COMPETITION; AND HEALTHPLAN SERVICES CORPORATION'S
ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT PERSONNEL.
INTRODUCTION
The following is a discussion of changes in the consolidated results of
operations of the Company for the three and nine months ended September 30, 1998
compared to the same periods in 1997.
The Company is an outsourcing company that administers health and other
benefit plans for large, self-funded companies and for payors (insurance
companies, HMOs, and other risk-takers) that have elected to outsource sales
support, distribution, and "back-office" administrative services.
10
<PAGE>
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, 1998 compared to the same periods in 1997. 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,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues ...................... 100.0 % 100.0 % 100.0 % 100.0 %
Expenses:
Agent commissions .................. 23.3 % 23.3 % 24.0 % 23.8 %
Personnel expenses ................. 44.7 % 39.7 % 42.9 % 40.0 %
General and administrative ......... 25.3 % 19.4 % 25.0 % 20.0 %
Restructure charge ................. 2.8 % 0.0 % 1.0 % 0.6 %
Integration ........................ 3.2 % 1.6 % 1.2 % 1.5 %
Other expense ...................... 1.9 % 0.1 % 0.8 % 0.1 %
Gain on sale of investments ........ (37.4)% 0.0 % (15.5)% 0.0 %
Depreciation and amortization ...... 5.6 % 5.6 % 5.5 % 5.6 %
Interest expense, net .............. 2.4 % 1.1 % 1.9 % 0.9 %
Equity in loss of joint venture .... 0.0 % 0.0 % 5.5 % 0.0 %
Total expenses ................... 71.8 % 90.8 % 92.3 % 92.5 %
Income (loss) before provision for income
taxes and minority interest ........ 28.2 % 9.2 % 7.7 % 7.5 %
Provision (benefit) for
income taxes ....................... 12.3 % 4.0 % 3.7 % 3.4 %
Income (loss) before
minority interest .................. 15.9 % 5.2 % 4.0 % 4.1 %
Minority interest ....................... (0.5)% 0.0 % (0.3)% 0.0 %
Net income (loss) ....................... 16.4 % 5.2 % 4.3 % 4.1 %
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenues for the three months ended September 30, 1998 increased $5.7
million, or 8.3%, to $74.5 million from $68.8 million for the same period in
1997. This increase resulted from revenues of $8.7 million and $3.6 million from
CENTRA and NPPN, respectively, offset by a reduction in revenues from
self-funded customers ($5.5 million) primarily related to the sale of the DGB
contracts in 1997 as well as the loss of three large customers in 1998, and from
fully-insured customers ($0.9 million) primarily related to the transition of
the United HealthCare Corporation ("United HealthCare") and the Travelers
Insurance Company ("Travelers") block of indemnity/preferred provider
organization business to Seaboard Life Insurance Company products. This revenue
loss from fully-insured customers was partially offset by $6.9 million in
revenues from the Provident block of business.
Agent commission expense for the three months ended September 30, 1998
increased $1.4 million, or 8.8%, to $17.4 million from $16.0 million for the
same period in 1997. This increase is consistent with the increase in operating
revenues for the period indicated.
11
<PAGE>
Personnel expense for the three months ended September 30, 1998 increased
$6.0 million, or 22.0%, to $33.3 million from $27.3 million for the same period
in 1997. This increase resulted primarily from personnel expense associated with
the consolidation of CENTRA's and NPPN's financial results. This increase was
offset by reduced salaries resulting from a reduction of approximately 300
employees in the Company's workforce undertaken primarily in September, with
third quarter effective dates, and the outsourcing of care management services
to SHPS. These services are now included as professional services within general
and administrative expense. The Company's personnel expense as a percentage of
total revenues increased to 44.7% for the three months ended September 30, 1998
from 39.7% for the three months ended September 30, 1997.
General and administrative expense for the three months ended September
30, 1998 increased $5.5 million, or 41.0%, to $18.9 million from $13.4 million
for the three months ended September 30, 1997. This increase was primarily
attributable to the Company's acquisitions of CENTRA and NPPN and the
outsourcing of its care management services to SHPS at a cost of $1.1 million.
On January 1, 1998, the Company began paying fees to SHPS for performing care
management services. These services, which formerly appeared as personnel costs,
are now included as professional services within general and administrative
expense. The Company's general and administrative expense as a percentage of
total revenue increased to 25.3% in the third quarter of 1998 from 19.4% for the
same period in 1997.
The Company incurred $2.1 million in restructuring costs during the three
months ended September 30, 1998. These costs reflect employee terminations,
lease terminations, and the abandonment of property and equipment associated
with closing the Company's Framingham, Massachusetts, Chicago, Illinois, and
Atlanta, Georgia offices. There were 47, 43, and 48 employees terminated in
management, claims administration, and information systems in the Framingham,
Chicago, and Atlanta offices, respectively.
Integration expense of $2.3 million for the three months ended September
30, 1998 reflects costs of $1.7 million in converting the data center and three
claims platforms for CENTRA and $0.6 million in converting the information
systems from the Company's Framingham, Massachusetts office to the Tampa office.
Integration expense of $1.1 million for the three months ended September 30,
1997 included $0.3 million related to the integration of information systems at
Consolidated Group and Harrington and $0.8 million representing other
non-restructuring costs related to the closing of the Company's Brookfield,
Wisconsin and Framingham, Massachusetts offices, the consolidation of treasury
functions, and employee relocations.
Other expense of $1.4 million for the three months ended September 30,
1998 reflects costs associated with the write-off of customer balances due to a
billing system conversion and uncollectability of accounts among the Company's
self-funded business customers.
During the three months ended September 30, 1998, the Company sold its
50% interest in SHPS to Sykes for $30.6 million and recognized a gain on the
sale of SHPS of $27.9 million.
Depreciation and amortization expense for the three months ended
September 30, 1998 increased $0.4 million, or 10.5%, to $4.2 million from $3.8
million for the three months ended September 30, 1997. This increase resulted
primarily from amortization of goodwill on the Company's CENTRA and NPPN
acquisitions.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues for the nine months ended September 30, 1998 increased $0.9
million, or 0.4%, to $214.3 million from $213.4 million for the same period in
1997. New revenues of $11.7 million and $6.0 million recognized as a result of
the CENTRA and NPPN acquisitions, respectively, were offset by a decrease in
revenues from fully-insured customers ($2.4 million) primarily related to the
transition of the United HealthCare and Travelers block of indemnity/preferred
provider organization business to Seaboard Life Insurance Company products. This
reduction in fully-insured revenues was partially offset by $19.9 million in
revenues from the Provident block of business. Other revenue decreases were
realized from self-funded customers ($11.3 million) primarily related to the
sale of the DGB contracts in 1997 along with the loss of three large customers
in 1998 and from alliance customers ($3.1 million) primarily related to the
Company's exiting the Kentucky alliance in 1997.
Agent commission expense for the nine months ended September 30, 1998
increased $0.9 million, or 1.8%, to $51.4 million from $50.5 million for the
same period in 1997. This increase is consistent with the increase in operating
revenues for the period indicated.
Personnel expense for the nine months ended September 30, 1998 increased
$6.5 million, or 7.6%, to $91.9 million from $85.4 million for the same period
in 1997. This increase resulted primarily from $10.0 million of personnel
expense associated with the consolidation of CENTRA's and NPPN's financial
results. This increase was offset by reduced salaries resulting from a reduction
of approximately 300 employees in the Company's workforce undertaken primarily
in September, with third quarter effective dates and the outsourcing of care
management services to SHPS. These services are now included as professional
services within general and administrative expense. The Company's personnel
expense as a percentage of total revenues increased to 42.9% for the nine months
ended September 30, 1998 from 40.0% for the nine months ended September 30,
1997.
General and administrative expense for the nine months ended September
30, 1998 increased $11.0 million, or 25.8%, to $53.6 million from $42.6 million
for the nine months ended September 30, 1997. This increase was primarily
attributable to the Company's acquisitions of CENTRA and NPPN and the
outsourcing of its care management services to SHPS at a cost of $3.5 million.
On January 1, 1998, the Company began paying fees to SHPS for performing care
management services. These services, which formerly appeared as personnel costs,
are now included as professional services within general and administrative
expense. The Company's general and administrative expense as a percentage of
total revenue increased to 25.0% for the nine months ended September 30, 1998
from 20.0% for the same period in 1997.
The Company recorded $2.1 million in restructuring costs during the nine
months ended September 30, 1998. These costs reflect employee terminations,
lease terminations, and the abandonment of property and equipment associated
with closing the Company's Framingham, Massachusetts, Chicago, Illinois, and
Atlanta, Georgia offices. There were 47, 43, and 48 employees terminated in
management, claims administration, and information systems in the Framingham,
Chicago, and Atlanta offices, respectively.
Integration expense of $2.6 million for the nine months ended September
30, 1998 included costs of $1.7 million in converting the data center and three
claims platforms for CENTRA and $0.7 million in converting the information
systems from the Company's Framingham, Massachusetts office to the Tampa office.
Integration expense of $3.3 million for the nine months ended September 30, 1997
included $2.0 million related to the integration of information systems at
Consolidated Group and Harrington, while $1.3 million represented other costs
related to the closing of the Company's Brookfield, Wisconsin and Framingham,
Massachusetts offices, the consolidation of treasury functions, and employee
relocations.
13
<PAGE>
Other expense of $1.8 million for the nine months ended September 30,
1998 reflects costs of $1.4 million associated with the write-off of customer
balances due to a billing system conversion and uncollectability of accounts
among the Company's self-funded customers, and costs of $0.4 million related to
the start-up of the Provident block of business.
During the nine months ended September 30, 1998, the Company sold 370,711
of its shares of Medirisk stock and all 200,000 of its shares of HRM stock
resulting in gains of $5.2 million and $0.2 million, respectively. On September
11, 1998, the Company sold its 50% interest in SHPS to Sykes for $30.6 million
and recognized a gain on the sale of SHPS of $27.9 million.
Depreciation and amortization expense for the nine months ended September
30, 1998 decreased $0.4 million, or 3.3%, to $11.7 million from $12.1 million
for the nine months ended September 30, 1997. Some of the Company's furniture
and fixtures became fully amortized in the fourth quarter of 1997. Additionally,
the Company recognized a reduction in the amortization of internally developed
software related to the Company's exiting the Kentucky alliance in 1997. These
reductions were partially offset by amortization of goodwill on the Company's
CENTRA and NPPN acquisitions.
The Company recorded its 50% share of the loss incurred by SHPS for the
nine months ended September 30, 1998, which was $11.8 million on a pre-tax
basis. This loss was principally the result of a charge for the write-off of
purchased research and development associated with the acquisitions of HI and
PSBI by SHPS.
B. YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems/capabilities
and has created a three-pronged program for addressing issues related to the
Year 2000. This program includes the purchase and implementation of software
packages from vendors, an upgrade of vendor packages to the Year 2000 compliant
versions, and the internal development and implementation of new software
applications to increase the capabilities of the Company's systems for the
future.
The implementation of this plan commenced in 1996 with the upgrade of the
mainframe operating system. The Company has since purchased and replaced its
accounting and financial system and workers compensation system and written and
implemented a new system for the unemployment compensation business. The Company
has received the latest version of its claim processing software from the vendor
and is currently implementing this version for all current accounts. The Company
is also pursuing system enhancements to its billing and administration system.
The Company expects that these enhancements, together with the Company's other
Year 2000 efforts, will bring its software and systems into compliance no later
than the second quarter of 1999. The Company anticipates spending $3.2 million
in both capital and modification costs to complete its Year 2000 program.
There are risks associated with the Company's Year 2000 efforts relating
to some external vendors with which the Company exchanges data. Because the
Company does not control these vendors or their resources, the Company can
provide no assurance that such vendors will complete their respective Year 2000
solutions in time for the Company to fully test system interfaces with them. The
Company is coordinating its efforts with vendors to minimize this impact and,
subject to the described risks, does not anticipate any material impact on its
operations.
C. LIQUIDITY AND CAPITAL RESOURCES
On June 23, 1998, the Company amended and restated its $175.0 million
credit facility ("Line of Credit") with availability equal to a multiple of
trailing earnings before interest expense, income taxes, and depreciation and
amortization expense (with certain adjustments called for in the credit
agreement). This multiple is set at 3.5 through June 30, 1999 and steps down
thereafter to 2.75 during the final four quarters of the facility. First Union
National Bank of North Carolina serves as "agency bank," and NationsBank, N.A.
serves as co-agent with respect to this facility. The credit facility contains
provisions which include the maintenance of certain minimum
14
<PAGE>
financial ratios, limitations on merger and acquisition activity, and
limitations on investment activity. The outstanding draw was $88.0 million at
September 30, 1998, and the maximum amount available was approximately $125.0
million.
The Company's amended and restated Line of Credit enables it to pay a
quarterly dividend of up to $0.1375 per share of the Company's capital stock (up
to $0.55 per share on an annualized basis). In the second quarter of 1998, the
Company increased its dividend to $0.1375 per share. During 1998, the Company
has declared dividends totaling $5.7 million. These dividends were paid on April
21, July 21, and October 20.
During the second quarter of 1997, the Board of Directors authorized the
Company to use up to $20.0 million to support a share repurchase. The Company
began implementing this share repurchase program in the first quarter of 1998.
On May 12, 1998, the Board increased to $30.0 million its authorization to
repurchase shares under this program. Through November 6, 1998, the Company had
acquired 1,248,600 shares under this program at a cost of approximately $27.8
million.
In December 1997, the Company and Sykes formed SHPS. SHPS was owned 50%
by each of the founding companies and provides care management services,
technology solutions, certain customer support services, and other outsourcing
capabilities to the health care and insurance industries. The Company invested
$17.0 million in SHPS and guaranteed a line of credit of up to $37.5 million to
fund the activities of SHPS. On September 11, 1998, the Company sold its 50%
interest in SHPS to Sykes for $30.6 million and recognized a gain on the sale of
SHPS of $27.9 million. Additionally, the Company was relieved of its obligation
associated with SHPS' credit facility.
The Company spent $6.0 million for capital expenditures during the nine
months ended September 30, 1998.
During 1998, the Company sold 370,711 of its shares of Medirisk stock and
all 200,000 of its shares of HRM common stock, resulting in gains of $5.2
million and $0.2 million, respectively.
Based upon 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.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On July 14, 1998, Robert R. Parker was elected as a director of the
Company. Mr. Parker is currently President and Chief Operating Officer of the
Company and was formerly the Chief Executive Officer of Harrington Services
Corporation, which the Company acquired in 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
27.1 Financial Data Schedule
(b) Form 8-K.
On September 28, 1998, the Company filed a report on Form 8-K, together
with required financial statements, with respect to the sale of its 50% interest
in SHPS.
16
<PAGE>
HEALTHPLAN SERVICES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHPLAN SERVICES CORPORATION
Date: November 16, 1998 /S/ JAMES K. MURRAY, JR.
------------------------
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
Date: November 16, 1998 /S/ DONALD W. GOULD, JR.
------------------------
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 17,943
<SECURITIES> 0
<RECEIVABLES> 29,863
<ALLOWANCES> (2,324)
<INVENTORY> 0
<CURRENT-ASSETS> 52,493
<PP&E> 74,241
<DEPRECIATION> (46,804)
<TOTAL-ASSETS> 280,484
<CURRENT-LIABILITIES> 88,818
<BONDS> 94,225
0
0
<COMMON> 152
<OTHER-SE> 93,490
<TOTAL-LIABILITY-AND-EQUITY> 280,484
<SALES> 0
<TOTAL-REVENUES> 214,282
<CGS> 0
<TOTAL-COSTS> 181,842
<OTHER-EXPENSES> 11,081
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,084
<INCOME-PRETAX> 17,275
<INCOME-TAX> 7,962
<INCOME-CONTINUING> 9,313
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,313
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
</TABLE>
