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 June 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
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(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
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(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 August 12, 1998.
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . .14,013,147
<PAGE>
HEALTHPLAN SERVICES CORPORATION
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet
June 30, 1998 and December 31, 1997 .......................... 2
Consolidated Statement of Operations
Three and Six Months Ended June 30, 1998 and 1997 ............ 3
Consolidated Statement of Changes in Common
Stockholders' Equity Six Months Ended June 30, 1998 .......... 4
Consolidated Statement of Cash Flows
Six Months Ended June 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 15
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................ $ 7,576 $ 1,545
Restricted cash ...................................................... 11,269 11,256
Accounts receivable, net of allowance for
doubtful accounts of $1,990 and $150, respectively ................ 34,012 28,900
Refundable income taxes .............................................. 1,586 1,843
Prepaid expenses and other current assets ............................ 5,646 3,071
Deferred taxes ....................................................... 1,943 3,085
--------- ---------
Total current assets ......................................... 62,032 49,700
Property and equipment, net ............................................ 26,976 23,235
Other assets, net of accumulated amortization
of $832 and $689, respectively .................................... 3,239 2,908
Deferred taxes ......................................................... 8,215 4,008
Notes receivable ....................................................... 3,942 6,334
Investments ............................................................ 9,672 7,595
Intangible assets, net ................................................. 186,834 149,544
--------- ---------
Total assets ................................................. $ 300,910 $ 243,324
========= =========
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 14,301 $ 13,502
Premiums payable to carriers ......................................... 43,554 39,601
Commissions payable .................................................. 8,898 5,484
Deferred revenue ..................................................... 2,166 2,015
Accrued liabilities .................................................. 26,299 18,555
Current portion of long-term debt payable ............................ 468 385
--------- ---------
Total current liabilities .................................... 95,686 79,542
Notes payable .......................................................... 115,240 43,309
Deferred taxes ......................................................... 1,195 982
Other long-term liabilities ............................................ 2,779 2,925
--------- ---------
Total liabilities ............................................ 214,900 126,758
--------- ---------
Minority interest ...................................................... 971 --
--------- ---------
Common stockholders' equity:
Common stock voting, $0.01 par value, 100,000,000 shares authorized,
15,166,347 issued at June 30, 1998 and,
15,038,033 at December 31, 1997 .................................. 152 150
Additional paid-in capital .......................................... 109,750 107,325
Treasury stock, 1,153,200 shares .................................... (26,801) --
Retained earnings ................................................... 919 7,671
Unrealized appreciation on investments available for sale ........... 1,019 1,420
--------- ---------
Total stockholders' equity ................................... 85,039 116,566
--------- ---------
Total liabilities, minority interest, and stockholders' equity $ 300,910 $ 243,324
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------- -------------------------------
1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Operating revenues ...................... $ 71,740 $ 71,780 $ 139,756 $ 144,543
--------- --------- --------- ---------
Expenses:
Agent commissions ...................... 17,992 16,692 34,077 34,485
Personnel expenses .................... 31,183 29,144 58,616 58,121
General and administrative ............. 18,690 14,017 34,699 29,239
Pre-operating and contract
start-up costs ..................... -- 69 362 163
Restructure charge ..................... -- 1,374 -- 1,374
Integration ............................ -- 780 259 2,178
Gain on sale of investments ............ (2,680) -- (5,365) --
Depreciation and amortization .......... 3,870 4,342 7,449 8,212
Interest expense, net .................. 1,414 713 2,300 1,084
Equity in (income) loss of joint venture (43) -- 11,751 --
--------- --------- --------- ---------
Total expenses ................ 70,426 67,131 144,148 134,856
--------- --------- --------- ---------
Income (loss) before provision for income
taxes and minority interest ............ 1,314 4,649 (4,392) 9,687
Provision (benefit) for income taxes ... 1,329 2,241 (1,211) 4,480
--------- --------- --------- ---------
(Loss) income before minority interest ... (15) 2,408 (3,181) 5,207
Minority interest ........................ (238) -- (238) --
--------- --------- --------- ---------
Net income (loss) ................ $ 223 $ 2,408 $ (2,943) $ 5,207
========= ========= ========= =========
Basic net income (loss) per share ........ $ 0.02 $ 0.16 $ (0.20) $ 0.35
Basic weighted average number of
shares outstanding .................... 14,505 14,996 14,750 14,990
Diluted net income per share ............. $ 0.02 $ 0.16 $ n/a $ 0.34
Diluted weighted average number of
shares outstanding .................... 14,804 15,041 n/a 15,111
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
UNREALIZED
APPRECIATION
ON
VOTING ADDITIONAL 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) ........ -- 118 -- -- -- 118
Issuance of 123,500 shares in connection
with stock option plans (unaudited) ......... 2 2,218 -- -- -- 2,220
Issuance of 4,694 shares in connection with the
employee stock purchase plan (unaudited) .... -- 86 -- -- -- 86
Issuance of 120 shares in connection with the
directors compensation plan (unaudited) ..... -- 3 -- -- -- 3
Change in unrealized appreciation
on investments available
for sale (unaudited) ........................ -- -- -- -- (401) (401)
Cash dividends declared (unaudited) ........... -- -- -- (3,809) -- (3,809)
Purchase of treasury shares (unaudited) ........ -- -- (26,801) -- -- (26,801)
Net loss (unaudited) ........................... -- -- -- (2,943) -- (2,943)
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1998 (unaudited) ........... $ 152 $ 109,750 $ (26,801) $ 919 $ 1,019 $ 85,039
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ............................................. $ (2,943) $ 5,207
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................................. 3,623 4,400
Amortization .................................................. 3,826 3,395
Equity in loss of joint venture ............................... 11,751 --
Minority interest ............................................. (238) --
Disposal of computer software ................................. -- 417
Issuance of Common Stock to management ........................ 118 118
Deferred taxes ................................................ (2,616) 3,526
Changes in assets and liabilities net of effect from acquisitions:
Restricted cash ............................................... (13) (1,251)
Accounts receivable ........................................... 2,312 (7,857)
Refundable income taxes ....................................... 258 5,993
Prepaid expenses and other current assets ..................... (1,358) (317)
Other assets .................................................. (257) (220)
Accounts payable .............................................. (1,728) (11,523)
Premiums payable to carriers .................................. 3,883 19,707
Commissions payable ........................................... 3,283 1,123
Deferred revenue .............................................. 151 729
Accrued liabilities ........................................... 50 2,167
-------- --------
Net cash provided by operating activities .............. 20,102 25,614
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ........................... (3,513) (5,041)
Payment for purchase of CENTRA HealthPlan LLC,
net of cash acquired ................................... (10,759) --
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)
Increase in investments, net ................................. (14,464) (1,816)
Decrease in note receivable .................................. 2,392 6,388
-------- --------
Net cash used in investing activities ............... (55,068) (2,069)
-------- --------
Cash flows from financing activities:
Net borrowing (payments) under line of credit ................. 69,000 (15,000)
Payments on other debt ........................................ (1,621) (3,387)
Cash dividends paid ........................................... (1,889) --
Proceeds from exercise of stock options ...................... 2,220 238
Purchase of Treasury Stock .................................... (26,801) --
Proceeds from Common Stock issued ............................. 88 125
-------- --------
Net cash provided by (used in) financing activities .... 40,997 (18,024)
-------- --------
Net increase in cash and cash equivalents ....................... 6,031 5,521
Cash and cash equivalents at beginning of period ................ 1,545 3,725
-------- --------
Cash and cash equivalents at end of period ...................... $ 7,576 $ 9,246
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................ $ 2,283 $ 2,588
======== ========
Cash paid for income taxes .................................... $ 1,230 $ 1,528
======== ========
Supplemental disclosure of noncash activities:
Dividends declared and unpaid ................................. $ 1,921 $ 1,861
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 120,000 small businesses, plan holders, and self-funded
organizations, covering approximately 3.4 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's 50% owned
joint venture investment is accounted for using the equity method. 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.
The diluted loss per share is not shown for the six months ended June
30, 1998, as it is anti-dilutive.
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):
SIX MONTHS ENDED JUNE 30,
------------------------
1998 1997
------ ------
Unrealized appreciation on
investment available for sale .............. $1,019 $ 668
Tax at 39% statutory rate ...................... 397 261
------ ------
Comprehensive income ........................... $ 622 $ 407
====== ======
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. NPPN is one of the country's largest networks of health
care providers and is headquartered in Middletown, New York.
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. 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 gives effect to acquisitions, accounted for as purchases, as if they
occurred on January 1, 1997 (in thousands):
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
-------- --------
Revenues .................................... 159,232 169,315
Expenses .................................... 168,656 165,210
(Loss) income before taxes and
minority interest ....................... (9,424) 4,105
Net (loss) income ........................... (6,443) 1,293
Net income per common share ................. n/a 0.09
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.
5. NOTES PAYABLE AND CREDIT FACILITY
On June 23, 1998, the Company amended and restated its $175 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 June 30, 1998 was
approximately $159 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 under the Line of Credit at June 30, 1998 was $109.0
million. The Company incurred approximately $2.1 million of interest expense and
approximately $144,000 in commitment fees on the current and previous Lines of
Credit for the six months ended June 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 six months ended June 30, 1998, the Company recorded
approximately $143,000 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.
8
<PAGE>
6. INVESTMENTS AND NOTE RECEIVABLE
In December 1997, the Company and Sykes Enterprises, Incorporated
("Sykes") formed Sykes HealthPlan Services, Inc. ("SHPS"). The new company is
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 has 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 April 24, 1998, SHPS filed a
preliminary registration statement with the Securities and Exchange Commission
for an initial public offering of shares of its common stock. On July 23, 1998,
the Company and Sykes announced the postponement of SHPS' initial public
offering due to unfavorable market conditions for initial public offerings.
The Company accounts for its investment in SHPS under the equity method
of accounting. The Company recorded its 50% share in the $23.5 million loss
incurred by SHPS for the six months ended June 30, 1998, which was principally
the result of a charge of $23.7 million for the write-off of purchased research
and development associated with SHPS' acquisitions of Health International, Inc.
("HI") and Prudential Service Bureau, Inc. ("PSBI").
Summary financial information for SHPS for the six months ended June
30, 1998 is as follows (unaudited) (in thousands):
Condensed Income Statement Information
Revenues $ 20,456
Loss from operations (23,343)
Net loss $ (23,503)
Condensed Balance Sheet Information
Current assets $ 27,555
Non-current assets 50,950
Current liabilities 20,930
Non-current liabilities 52,925
Net worth $ 4,650
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.
9
<PAGE>
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 six months ended June 30, 1998, the Company sold 370,711 of its
shares in Medirisk and recorded a gain on the sale of $5.2 million. On June 30,
1998, Medirisk's shares closed at $20.25 per share of common stock. This
investment is recorded as available for sale with the unrealized holding gain
reported in the equity section of the balance sheet in accordance with SFAS 115.
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 six months ended June 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 six months ended June 30,
1998 compared to the same period 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues ................... 100.0 % 100.0 % 100.0 % 100.0 %
Expenses:
Agent commissions .............. 25.1 % 23.3 % 24.4 % 23.9 %
Personnel expenses ............. 43.4 % 40.6 % 41.9 % 40.2 %
General and administrative ..... 26.1 % 19.5 % 24.8 % 20.2 %
Pre-operating and contract
start-up costs ............... 0.0 % 0.1 % 0.3 % 0.1 %
Restructure charge ............. 0.0 % 1.9 % 0.0 % 1.0 %
Integration .................... 0.0 % 1.1 % 0.2 % 1.5 %
Gain on sale of investments .... (3.7)% 0.0 % (3.8)% 0.0 %
Depreciation and amortization .. 5.4 % 6.0 % 5.3 % 5.7 %
Interest expense, net .......... 2.0 % 1.0 % 1.6 % 0.7 %
Equity in (income) loss of joint
venture ...................... (0.1)% 0.0 % 8.5 % 0.0 %
Total expenses ............... 98.2 % 93.5 % 103.2 % 93.3 %
Income (loss) before provision for
income taxes and
minority interest .............. 1.8 % 6.5 % (3.2)% 6.7 %
Provision (benefit) for
income taxes .................... 1.8 % 3.1 % (0.9)% 3.1 %
Income (loss) before
minority interest ............... 0.0 % 3.4 % (2.3)% 3.6 %
Minority interest .................... (0.3)% 0.0 % (0.2)% 0.0 %
Net income (loss) .................... 0.3 % 3.4 % (2.1)% 3.6 %
</TABLE>
11
<PAGE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues for the three months ended June 30, 1998 decreased $0.1
million, or 0.1%, to $71.7 million from $71.8 million for the same period in
1997. This decrease resulted from a reduction in revenues from self-funded
customers ($4.3 million) primarily related to the sale of the DGB contracts in
1997, and from alliance customers ($1.6 million) primarily related to the
Company's exiting the Kentucky alliance in 1997. This was offset by an increase
in revenues from fully-insured customers ($0.6 million) primarily related to
$7.9 million in revenues from the Provident block of business offsetting a
reduction in revenues related to the transition of the United HealthCare and
Travelers block of indemnity/preferred provider organization block of business
to Seaboard Life Insurance Company products. Additionally, the Company
recognized $3.0 million and $2.3 million in revenues from CENTRA and NPPN,
respectively.
Agent commission expense for the three months ended June 30, 1998
increased $1.3 million, or 7.8%, to $18.0 million from $16.7 million for the
same period in 1997. This increase resulted primarily from commissions
associated with the Provident block of business, which represent a higher
percentage of revenue than the Company's other fully-insured business. The
Company's commissions as a percentage of operating revenues increased from 23.3%
in the three months ended June 30, 1997 to 25.1% in the same period 1998, as
fully-insured customer revenues from the Provident block of business represented
a greater percentage of the Company's total revenues.
Personnel expense for the three months ended June 30, 1998 increased
$2.1 million, or 7.2%, to $31.2 million from $29.1 million for the same period
in 1997. This increase resulted primarily from overtime and temporary services
incurred as a result of a backlog of claims the Company received from the
Provident transition along with $3.4 million of personnel expense associated
with the consolidation of CENTRA's and NPPN's financial results. These increases
were partially offset by reduced salaries resulting from a reduction of
approximately 190 employees in the Company's workforce. The Company's personnel
expense as a percentage of total revenues increased to 43.4% for the three
months ended June 30, 1998 from 40.6% for the three months ended June 30, 1997.
General and administrative expense for the three months ended June 30,
1998 increased $4.7 million, or 33.6%, to $18.7 million from $14.0 million for
the three months ended June 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. The
Company's general and administrative expense as a percentage of total revenue
increased to 26.1% in the second quarter of 1998 from 19.5% for the same period
in 1997.
During the second quarter of 1998, the Company sold 204,711 of its
shares of Medirisk resulting in a gain of $2.7 million.
Depreciation and amortization expense for the three months ended June
30, 1998 decreased $0.4 million, or 9.3%, to $3.9 million from $4.3 million for
the three months ended June 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 tax provision of 101% of pre-tax income results from the effect of
non-deductible goodwill included in the Company's annualized estimated effective
tax rate. The Company's annualized effective tax rate is calculated based on the
Company's annual earnings projections. Due to lower than projected earnings in
the second quarter of 1998, the Company adjusted its earnings projections for
the remainder of 1998 resulting in an increase in its effective tax rate.
12
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues for the six months ended June 30, 1998 decreased $4.7 million,
or 3.3%, to $139.8 million from $144.5 million for the same period in 1997. This
decrease resulted from a reduction in revenues from fully-insured customers
($1.5 million) primarily related to the transition of the United HealthCare and
Travelers block of indemnity/preferred provider organization block of business
to Seaboard Life Insurance Company products offsetting $12.6 million in revenues
from the Provident block of business, from self-funded customers ($6.1 million)
primarily related to the sale of the DGB contracts in 1997, and from alliance
customers ($2.7 million) primarily related to the Company's exiting the Kentucky
alliance in 1997. New revenues of $3.0 million and $2.3 million were recognized
as a result of the CENTRA and NPPN acquisitions, respectively.
Agent commission expense for the six months ended June 30, 1998
decreased $0.4 million, or 1.2%, to $34.1 million from $34.5 million for the
same period in 1997. This decrease resulted primarily from the decrease in
revenues from fully-insured customers. The Company's commissions as a percentage
of operating revenues increased from 23.9% in the six months ended June 30, 1997
to 24.4% in the same period 1998, due to commissions associated with the
Provident block of business, which has a higher commission percentage than the
Company's other fully-insured business.
Personnel expense for the six months ended June 30, 1998 increased $0.5
million, or 0.9%, to $58.6 million from $58.1 million for the same period in
1997. This increase resulted primarily from overtime and temporary services
incurred as a result of a backlog of claims the Company received from the
Provident transition along with $3.4 million of personnel expense associated
with the consolidation of CENTRA's and NPPN's financial results. These increases
were partially offset by a reduction in the Company's workforce of approximately
190 employees. The Company's personnel expense as a percentage of total revenues
increased to 41.9% for the six months ended June 30, 1998 from 40.2% for the six
months ended June 30, 1997.
General and administrative expense for the six months ended June 30,
1998 increased $5.5 million, or 18.8%, to $34.7 million from $29.2 million for
the six months ended June 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 $2.4 million. On January 1, 1998, the
Company began paying fees to SHPS for performing care management services. The
Company's general and administrative expense as a percentage of total revenue
increased to 24.8% for the six months ended June 30, 1998 from 20.2% for the
same period in 1997.
During the six months ended June 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.
Depreciation and amortization expense for the six months ended June 30,
1998 decreased $0.8 million, or 9.8%, to $7.4 million from $8.2 million for the
six months ended June 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 $23.5 million loss incurred by
SHPS for the six months ended June 30, 1998, which was principally the result of
a charge of $23.7 million for the write-off of purchased research and
development associated with the acquisitions of HI and PSBI by SHPS.
13
<PAGE>
B. LIQUIDITY AND CAPITAL RESOURCES
On June 23, 1998, the Company amended and restated its $175 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 financial ratios,
limitations on merger and acquisition activity, and limitations on investment
activity. The outstanding draw was $109.0 million at June 30, 1998.
In the second quarter of 1997, the Company entered into an amendment of
the terms of its Line of Credit to enable it to pay a quarterly dividend of up
to $0.125 per share of the Company's capital stock (up to $0.50 per share on an
annualized basis). The amended and restated credit facility permits continued
dividend payments, but limits such payments to no more than $0.55 per share of
the Company's capital stock 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 $3.8 million. These dividends were paid
on April 21 and July 21.
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. On May 12,
1998, the Board increased to $30.0 million its authorization to repurchase
shares under this program. The Company began implementing this share repurchase
program in the first quarter of 1998. Through August 12, 1998, the Company had
acquired 1,153,200 shares under this program at a cost of approximately $26.8
million.
In December 1997, the Company and Sykes formed SHPS. SHPS is owned 50
percent 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 has funded
the entire amount of $17.0 million it agreed to invest in the equity of SHPS. In
addition, the Company has agreed to guarantee up to $37.5 million of SHPS' $75.0
million credit line.
The Company spent $3.5 million for capital expenditures during the six
months ended June 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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On June 16, 1998, in connection with the CENTRA transaction, the Company
issued to CBS $4.0 million in 5.75% convertible notes. During the period
beginning on June 17, 1999 and ending on June 15, 2003, which is the maturity
date of the notes, CBS will have the right to convert the notes into shares of
the Company's common stock at a rate per share equal to $22.00 of the
outstanding principal amount of the notes. The notes are subject to certain
set-off rights of the Company under certain circumstances. The issuance of the
notes was exempt from registration under Section 4(2) of the Securities Act of
1933, based upon the fact that CBS was a sophisticated investor that took the
notes in a negotiated transaction for investment and not with a view to
distribution. A description of the terms of the CENTRA transaction is set forth
at Note 3 to the Company's consolidated financial statements in Part I, Item 1
of this Form 10-Q. Such description is incorporated by reference into this Part
II, Item 2.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual Meeting of Stockholders, held on May 12, 1998,
the stockholders of the Company elected thirteen directors to serve for the
ensuing year or until their respective successors have been elected and
qualified or their earlier resignation or removal. The results of these votes
were: one director 13,188,000 votes for and 18,526 votes withheld, four
directors 13,172,081 votes for and 34,445 votes withheld, three directors
13,172,061 votes for and 34,465 votes withheld, one director 13,171,471 votes
for and 35,055 votes withheld, one director 13,169,654 votes for and 36,872
votes withheld, one director 12,721,106 votes for and 485,020 votes withheld,
one director 12,720,725 votes for and 485,801 votes withheld, and one director
12,720,428 votes for and 486,098 votes withheld.
ITEM 5. OTHER INFORMATION.
On July 16, 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
15
<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: August 13, 1998 /s/ JAMES K. MURRAY, JR.
-------------------------------
Chief Executive Officer and Chairman of the
Board
(Principal Executive Officer)
Date: August 13, 1998 /s/ DONALD W. GOULD, JR.
------------------------
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer and Principal
Accounting Officer)
16
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,845
<SECURITIES> 0
<RECEIVABLES> 36,002
<ALLOWANCES> (1,990)
<INVENTORY> 0
<CURRENT-ASSETS> 61,668
<PP&E> 71,769
<DEPRECIATION> (44,793)
<TOTAL-ASSETS> 300,910
<CURRENT-LIABILITIES> 95,686
<BONDS> 115,240
0
0
<COMMON> 152
<OTHER-SE> 84,887
<TOTAL-LIABILITY-AND-EQUITY> 300,910
<SALES> 0
<TOTAL-REVENUES> 139,756
<CGS> 0
<TOTAL-COSTS> 130,097
<OTHER-EXPENSES> 11,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,300
<INCOME-PRETAX> (4,154)
<INCOME-TAX> (1,211)
<INCOME-CONTINUING> (2,943)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,943)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> 0
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