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, 1999
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 August 6, 1999.
Common Stock .................................................. 13,662,319
<PAGE>
HEALTHPLAN SERVICES CORPORATION
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet
June 30, 1999 and December 31, 1998 ....................... 2
Consolidated Statement of Operations
Three and Six Months Ended June 30, 1999 and 1998 ......... 3
Consolidated Statement of Changes in Common
Stockholders' Equity Six Months Ended June 30, 1999 ....... 4
Consolidated Statement of Cash Flows
Six Months Ended June 30, 1999 and 1998 ................... 5
Notes to Consolidated Financial Statements ................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............. 9
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>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ -- $ 4,582
Restricted cash .......................................................... 8,906 11,373
Accounts receivable, net ................................................. 22,501 21,834
Receivable from sale of investments ...................................... 6,955 --
Prepaid expenses and other current assets ................................ 3,740 3,604
Deferred taxes ........................................................... 1,448 1,448
--------- ---------
Total current assets ............................................. 43,550 42,841
Property and equipment, net ................................................ 26,551 27,172
Other assets, net .......................................................... 2,579 2,744
Deferred taxes ............................................................. -- 1,145
Notes receivable ........................................................... -- 3,499
Investments ................................................................ 6,096 6,647
Intangible assets, net ..................................................... 195,604 192,757
--------- ---------
Total assets ..................................................... $ 274,380 $ 276,805
========= =========
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft ........................................................... $ 2,528 $ --
Accounts payable ......................................................... 11,396 13,917
Premiums payable to carriers ............................................. 38,051 38,146
Commissions payable ...................................................... 4,466 5,232
Deferred revenue ......................................................... 2,910 3,707
Accrued liabilities ...................................................... 21,512 16,769
Income taxes payable ..................................................... 2,256 1,397
Current portion of long-term debt payable ................................ 505 486
--------- ---------
Total current liabilities ........................................ 83,624 79,654
Notes payable .............................................................. 95,579 96,837
Deferred taxes ............................................................. 578 --
Other long-term liabilities ................................................ 2,527 2,732
--------- ---------
Total liabilities ................................................ 182,308 179,223
--------- ---------
Minority interest .......................................................... -- 5,930
--------- ---------
Common stockholders' equity:
Common stock voting, $0.01 par value, 100,000,000 shares authorized,
15,181,719 issued at June 30, 1999 and,
15,174,315 at December 31, 1998 ....................................... 152 152
Additional paid-in capital .............................................. 109,918 109,887
Treasury stock .......................................................... (30,006) (28,088)
Retained earnings ....................................................... 10,711 9,736
Unrealized appreciation on investments
available for sale, net of tax ....................................... 1,297 (35)
--------- ---------
Total stockholders' equity ....................................... 92,072 91,652
--------- ---------
Total liabilities, minority interest, and stockholders' equity ... $ 274,380 $ 276,805
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues ................................... $ 70,932 $ 71,740 $ 145,407 $ 139,756
--------- --------- --------- ---------
Expenses:
Agent commissions .................................. 14,241 17,992 30,816 34,077
Personnel .......................................... 28,389 31,183 58,346 58,616
General and administrative ......................... 19,248 18,690 38,097 34,699
Restructure charge ................................. 920 -- 920 --
Integration ........................................ -- -- 310 259
Other expenses ..................................... -- -- -- 362
Gain on sale of investments, net ................... (3,583) (2,680) (3,583) (5,365)
Depreciation and amortization ...................... 4,160 3,870 8,209 7,449
Interest expense, net .............................. 1,734 1,414 3,275 2,300
Equity in loss (income) of joint venture ........... 53 (43) 208 11,751
--------- --------- --------- ---------
Total expenses ................................ 65,162 70,426 136,598 144,148
--------- --------- --------- ---------
Income (loss) before provision for income
taxes and minority interest ........................ 5,770 1,314 8,809 (4,392)
Provision (benefit) for income taxes ................. 2,398 1,329 3,811 (1,211)
--------- --------- --------- ---------
Income (loss) before minority interest ............... 3,372 (15) 4,998 (3,181)
Minority interest .................................... 56 (238) 245 (238)
--------- --------- --------- ---------
Net income (loss) ............................. $ 3,316 $ 223 $ 4,753 $ (2,943)
========= ========= ========= =========
Basic net income (loss) per share .................... $ 0.24 $ 0.02 $ 0.34 $ (0.20)
Basic weighted average number of
shares outstanding ................................ 13,759 14,505 13,820 14,750
Diluted net income per share ......................... $ 0.24 $ 0.02 $ 0.34 n/a
Diluted weighted average number of
shares outstanding ................................ 13,944 14,804 14,003 n/a
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
ON
VOTING ADDITIONAL INVESTMENTS
COMPREHENSIVE COMMON PAID-IN TREASURY RETAINED AVAILABLE
INCOME STOCK CAPITAL STOCK EARNINGS FOR SALE TOTAL
------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 .......... $ 152 $ 109,887 $ (28,088) $ 9,736 $ (35) $ 91,652
Refund of overpayment in connection
with stock option plans (unaudited) .. (13) (13)
Issuance of 7,404 shares in
connection with the employee
stock purchase plan (unaudited) ...... 44 44
Cash dividends declared (unaudited) ..... (3,778) (3,778)
Purchase of 242,700
treasury shares (unaudited) ......... (1,918) (1,918)
Net income (unaudited) .................. $ 4,753 4,753 4,753
Unrealized appreciation on investment
available for sale (unaudited) ....... 1,332 1,332 1,332
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1999 (unaudited) .... $ 6,085 $ 152 $ 109,918 $ (30,006) $ 10,711 $ 1,297 $ 92,072
========= ========= ========= ========= ========= ========= =========
</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 SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ................................................. $ 4,753 $ (2,943)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ...................................................... 3,670 3,623
Amortization ...................................................... 4,539 3,826
Gain on sale of investments ....................................... (3,583) (5,365)
Equity in loss of joint venture ................................... 208 11,751
Minority interest ................................................. 245 (238)
Issuance of Common Stock to management ............................ -- 118
Deferred taxes .................................................... 941 (2,616)
Changes in assets and liabilities net of effect from acquisitions:
Restricted cash ................................................... 2,466 (13)
Accounts receivable ............................................... (667) 2,312
Refundable income taxes ........................................... -- 258
Prepaid expenses and other current assets ......................... (136) (1,358)
Other assets ...................................................... (79) (257)
Cash overdraft .................................................... 2,528 --
Accounts payable .................................................. (2,526) (1,728)
Premiums payable to carriers ...................................... (95) 3,883
Commissions payable ............................................... (766) 3,283
Deferred revenue .................................................. (796) 151
Accrued liabilities ............................................... 55 50
Income taxes payable .............................................. 860 --
-------- --------
Net cash provided by operating activities .................. 11,617 14,737
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ............................... (3,050) (3,513)
Cash paid for acquisitions, net of cash acquired .................. (8,674) (39,483)
Purchase of investments ........................................... (919) (16,955)
Proceeds from sale of investments ................................. 7,040 9,897
Receivable from sale of investments, net .......................... (6,955) --
Decrease in note receivable ....................................... 3,499 351
-------- --------
Net cash used in investing activities ...................... (9,059) (49,703)
-------- --------
Cash flows from financing activities:
Net (payments) borrowing under line of credit ..................... (1,000) 69,000
Payments on other debt ............................................ (443) (1,621)
Cash dividends paid ............................................... (3,809) (1,889)
Proceeds from exercise of stock options ........................... -- 2,220
Purchase of Treasury Stock ........................................ (1,919) (26,801)
Proceeds from Common Stock issued ................................. 31 88
-------- --------
Net cash provided by (used in) finanding activities ........ (7,140) 40,997
-------- --------
Net increase in cash and cash equivalents ............................ (4,582) 6,031
Cash and cash equivalents at beginning of period ..................... 4,582 1,545
-------- --------
Cash and cash equivalents at end of period ........................... $ -- $ 7,576
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................... $ 3,491 $ 2,283
======== ========
Cash paid for income taxes ........................................ $ 2,013 $ 1,230
======== ========
Supplemental disclosure of noncash activities:
Dividends declared and unpaid ..................................... $ 1,879 $ 1,921
======== ========
</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, 1999
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
HealthPlan Services Corporation (together with its direct and indirect
wholly owned subsidiaries, "HealthPlan Services" or the "Company") is a leading
managed health care services outsourcing company, providing distribution,
enrollment, billing and collection, claims administration, and risk management
services for health care payors and providers. HealthPlan Services provides
these services to approximately 140,000 groups covering over 3 million members
in the United States. HealthPlan Services 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 HealthPlan Services' 1998 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 30, 1999.
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 subsidiaries. As of December 31, 1998, HealthPlan
Services had consolidated its investment in CENTRA HealthPlan LLC ("CENTRA") and
Montgomery Management Corporation ("Montgomery Management") and recorded the
interest of the minority shareholders of those entities on the balance sheet and
statement of operations. As of June 30, 1999, HealthPlan Services had acquired
the remaining minority shares of both CENTRA and Montgomery Management (see Note
3). 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 shares outstanding for
the period, without consideration for common stock equivalents. The calculation
of diluted earnings per share reflects the effect of outstanding options and
warrants using the treasury stock method.
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.
6
<PAGE>
GAIN ON SALE OF INVESTMENTS
In May, 1998, HealthPlan Services invested $5.8 million in a convertible
note of HealthAxis.com, Inc. ("HealthAxis.com"), which was a wholly owned
subsidiary of Provident American Corporation ("PAMCO"), and received warrants to
purchase 100,000 shares of PAMCO stock. In October 1998, the note and accrued
interest on the note were converted into 2,365,365 shares of HealthAxis.com.
In February 1999, Provident Indemnity Life Insurance Company ("PILIC")
and PAMCO asserted a demand against HealthPlan Services, and HealthPlan Services
asserted claims against PILIC and PAMCO. In May 1999, the parties agreed to
resolve all claims connected with the demand and exchange mutual releases. In
connection with the resolution, HealthPlan Services: will continue providing
administrative services to PILIC and Provident American Life and Health
Insurance Company, the latter of which is now owned by Ceres Group, Inc.;
acquired the remaining 20% interest in Montgomery Management; agreed to sell up
to 1,415,000 shares of HealthAxis.com stock; exercised its warrants to purchase
100,000 shares of PAMCO stock at $9.00 per share; and will receive a net cash
consideration of $8.3 million, $1.3 million of which was received during the
second quarter. The agreement resulted in a pre-tax gain of $3.6 million.
3. ACQUISITIONS
On June 16, 1998, HealthPlan Services acquired a 50.1% interest in
CENTRA. CENTRA was formed by an agreement between HealthPlan Services 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. HealthPlan Services paid $0.2 million
for a 1% interest in CENTRA and acquired an additional 49.1% 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 HealthPlan Services' stock, a
purchase price holdback of up to $1.2 million, and additional contingent
consideration. In addition to such contingent consideration, CBS was given the
right to put its remaining interest in CENTRA at a contractual price not to
exceed $6.0 million within two years of the acquisition date if it met certain
financial performance criteria. CBS exercised its put right and on April 29,
1999, HealthPlan Services paid CBS $4.4 million, which represented a payment of
$5.5 million for CBS's 49.9% interest in CENTRA, offset by amounts due to
HealthPlan Services in connection with the CENTRA acquisition. 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, HealthPlan Services acquired National Preferred
Provider Network, Inc. ("NPPN") for $25.0 million cash and additional contingent
consideration of up to $25.0 million if NPPN achieved certain financial
performance objectives. On May 28, 1999, HealthPlan Services agreed to pay
NPPN's former owner net consideration of approximately $6.6 million in
settlement of the additional contingent consideration. Headquartered in
Middletown, New York, NPPN is a preferred provider organization network which
consists of over 450,000 physician offices, more than 4,000 hospitals, and
50,000 ancillary care providers covering all 50 states and the District of
Columbia.
On February 27, 1998, HealthPlan Services acquired 49% of the capital
stock of Montgomery Management from PILIC for $4.0 million. In connection with
the purchase, HealthPlan Services obtained a warrant to purchase an additional
31% of Montgomery Management for nominal consideration. On October 26, 1998,
HealthPlan Services exercised this warrant for an additional 31% of Montgomery
Management's capital stock for a cost of $8,060. In May 1999, in connection with
HealthPlan Services' agreement with PILIC and PAMCO (see Note 2, "Gain on Sale
of Investments"),
7
<PAGE>
HealthPlan Services acquired the remaining 20% interest in Montgomery
Management. 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.
UNAUDITED PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
The following unaudited pro forma consolidated results of operations of
HealthPlan Services give effect to acquisitions in 1998, accounted for as
purchases, as if they occurred on January 1, 1998 (in thousands):
Six Months Ended
----------------
June 30,1998
----------------
Revenues ........................................ $ 159,420
Net loss ........................................ (4,051)
Net loss per common share ....................... (0.27)
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, 1998 or of the results which may occur in the future.
4. NOTES PAYABLE AND CREDIT FACILITY
Under HealthPlan Services' May 1, 1998 Amended and Restated Credit
Agreement, as amended, the Company maintains a line of credit of $175.0 million
(the "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 3.25 through June 30, 2001 and steps down
thereafter to 2.75 during the remaining term 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, limitations on capital
expenditures, limitations on dividends and distributions, and limitations on
investment activity. HealthPlan Services' borrowing under the Line of Credit
includes interest ranging from LIBOR plus 75 to 150 basis points to New York
prime plus 0 to 50 basis points. Current rates on LIBOR drawings on the Line of
Credit at June 30, 1999 were 6.7%. 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 HealthPlan Services' subsidiaries. The outstanding draw was $90.0 million at
June 30, 1999, and the maximum amount available was $125.0 million. HealthPlan
Services incurred $2.9 million of interest expense on the Line of Credit for the
six months ended June 30, 1999.
HealthPlan Services has also 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 September and December 2001, effectively
convert $40.0 million of variable debt under the Line of Credit to fixed rate
debt at a weighted average rate of 6.18% plus a margin ranging from 75 to 150
basis points. For the six months ended June 30, 1999, HealthPlan Services
recorded $0.2 million of interest expense related to the swap agreements.
HealthPlan Services considers the fixed rate and variable rate financial
instruments to be representative of current market interest rates and,
accordingly, the recorded amounts approximate their present fair market value.
HealthPlan Services has additional notes of $6.1 million relating to a
1993 acquisition, the 1998 acquisition of CENTRA, and equipment purchases, of
which $0.5 million is payable within one year.
8
<PAGE>
5. INVESTMENTS
HealthPlan Services owns 109,732 shares of Caredata.com Inc.
("Caredata.com"), formerly known as Medirisk, Inc., a provider of health care
information. During the six months ended June 30, 1998, HealthPlan Services sold
370,711 of shares it previously owned in Caredata.com and recorded a gain on the
sale of $5.2 million. On June 30, 1999, Caredata.com's shares closed at $9.00
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 Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities."
In May 1998, HealthPlan Services invested $5.8 million in a convertible
note of HealthAxis.com, which was a wholly owned subsidiary of PAMCO, and
received warrants to purchase 100,000 shares of PAMCO stock. In May 1999 in
connection with HealthPlan Services' agreement with PILIC and PAMCO (see Note 2,
"Gain on Sale of Investments"), HealthPlan Services exercised its warrants to
purchase 100,000 shares of PAMCO stock at $9.00 per share resulting in an
average price per share of $11.12. On June 30, 1999, PAMCO's shares closed at
$27.88 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.
In October 1998, the $5.8 million note and accrued interest on the note
were converted into 2,365,365 shares of HealthAxis.com stock. In connection with
HealthPlan Services' agreement with PILIC and PAMCO (see Note 2, "Gain on Sale
of Investments"), HealthPlan Services also agreed to sell up to 1,415,000 shares
of HealthAxis.com stock, which resulted in a pre-tax gain of $3.6 million. The
average cost of the HealthAxis.com shares was $2.39 per share.
6. SUBSEQUENT EVENTS
Effective January 1, 1997, HealthPlan Services assumed marketing and
administrative services for TMG Life Insurance Company's ("TMG") medical,
dental, and group life benefits business. In July 1997, the parties agreed to a
transition of a majority of this business to Midwestern United Life Insurance
Company ("Midwestern United"), with HealthPlan Services remaining as the
administrator. In January 1999, Midwestern United notified its insureds that it
will cancel their policies beginning on July 31, 1999.
In July 1999, TMG asserted a demand against HealthPlan Services for
claims in excess of $7.0 million, and HealthPlan Services asserted claims
against TMG. HealthPlan Services intends to defend its interests in this matter
vigorously. The financial effect, if any, of this matter cannot be determined at
this time.
In 1997, HealthPlan Services began providing services for the "Access"
products issued by Seaboard Life Insurance Company (USA). In July 1999, Seaboard
Life notified its insureds that it will cancel all Seaboard Life coverage
beginning February 1, 2000. For the six months ended June 30, 1999, the Access
products accounted for 2.7% of HealthPlan Services' revenues.
In 1997, HealthPlan Services entered into an agreement to provide
administrative services for the insurance products of SunStar Health Plan, Inc.
HealthPlan Services terminated this agreement effective July 1, 1999. For the
six months ended June 30, 1999, the SunStar business accounted for 7% of
HealthPlan Services' revenues.
In July 1999, HealthPlan Services entered into an agreement with United
Benefit Life Insurance Company ("UBL"), which is a wholly owned subsidiary of
Ceres Group, Inc., through its insurance subsidiary Central Reserve Life
Insurance Company, to provide administrative services for UBL products.
HealthPlan Services will begin providing these services in September 1999. In
August 1999, UBL made an initial payment to HealthPlan Services of $800,000 in
connection with this agreement.
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
9
<PAGE>
OPPORTUNITIES TO ADMINISTER NEW BLOCKS OF BUSINESS; 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 HealthPlan Services for the three and six months ended June 30,
1999 and 1998.
HealthPlan Services is a leading managed health care services company,
providing distribution, enrollment, billing and collection, claims
administration, and risk management services for health care payors and
providers. HealthPlan Services functions solely as a service provider generating
fee-based income and does not assume any underwriting risk.
A. RESULTS OF OPERATIONS
The following is a discussion of material changes in the consolidated
results of operations of HealthPlan Services for the three and six months ended
June 30, 1999 compared to the same period in 1998. 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,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues .................. 100.0 % 100.0 % 100.0 % 100.0 %
Expenses:
Agent commissions .............. 20.1 % 25.1 % 21.2 % 24.4 %
Personnel expenses ............. 40.0 % 43.4 % 40.1 % 41.9 %
General and administrative ..... 27.1 % 26.1 % 26.2 % 24.8 %
Restructure charge ............. 1.3 % 0.0 % 0.6 % 0.0 %
Integration .................... 0.0 % 0.0 % 0.2 % 0.2 %
Other expense .................. 0.0 % 0.0 % 0.0 % 0.3 %
Gain on sale of investments .... (5.1)% (3.7)% (2.5)% (3.8)%
Depreciation and amortization .. 5.9 % 5.4 % 5.7 % 5.3 %
Interest expense, net .......... 2.4 % 2.0 % 2.3 % 1.6 %
Equity in loss (income) of joint
venture ...................... 0.1 % (0.1)% 0.1 % 8.5 %
Total expenses ............... 91.8 % 98.2 % 93.9 % 103.2 %
Income (loss) before provision for
income taxes and
minority interest .............. 8.2 % 1.8 % 6.1 % (3.2)%
Provision (benefit) for
income taxes ................... 3.4 % 1.8 % 2.6 % (0.9)%
Income (loss) before
minority interest .............. 4.8 % 0.0 % 3.5 % (2.3)%
Minority interest ................... 0.1 % (0.3)% 0.2 % (0.2)%
Net income (loss) ................... 4.7 % 0.3 % 3.3 % (2.1)%
</TABLE>
10
<PAGE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues for the three months ended June 30, 1999 decreased $0.8 million,
or 1.1%, to $70.9 million from $71.7 million for the same period in 1998. New
revenues of $5.1 million and $1.6 million recognized as a result of the CENTRA
and NPPN acquisitions, respectively, were offset by a decrease in revenues from
fully insured customers ($7.4 million), primarily related to the transition of a
block of indemnity/preferred provider organization business from The Travelers
Insurance Company and United HealthCare Corporation to Seaboard Life Insurance
Company (USA) products, a decrease in revenues from the block of business
assumed from TMG Life Insurance Company in 1997, and a decrease in revenues from
PILIC. This reduction in fully insured revenues was partially offset by revenues
from new carrier relationships.
Agent commission expense for the three months ended June 30, 1999
decreased $3.8 million, or 21.1%, to $14.2 million from $18.0 million for the
same period in 1998. This decrease is consistent with the decrease in fully
insured revenues described above for the period indicated.
Personnel expense for the three months ended June 30, 1999 decreased $2.8
million, or 9.0%, to $28.4 million from $31.2 million for the same period in
1998. HealthPlan Services incurred $2.5 million of personnel expense associated
with the consolidation of CENTRA and NPPN. This increase was offset by reduced
salaries resulting from a reduction of approximately 815 employees in HealthPlan
Services' workforce and reduction in use of overtime and temporary help.
General and administrative expense for the three months ended June 30,
1999 increased $0.5 million, or 2.7%, to $19.2 million from $18.7 million for
the three months ended June 30, 1998. This increase was primarily attributable
to $3.3 million of general and administrative expense associated with the
consolidation of CENTRA's and NPPN's financial results. This increase was offset
by reductions in rent due to office closings, printing, telephone, and supplies.
HealthPlan Services recorded $0.9 million in restructuring costs during
the three months ended June 30, 1999. These costs reflect employee terminations
and computer software associated with reductions in HealthPlan Services' fully
insured customer workforce in Tampa, Florida. There were 63 employees terminated
in management, claims administration, and information systems.
During the second quarter of 1999, HealthPlan Services entered into an
agreement to sell up to 1,415,000 of its shares of HealthAxis.com stock
resulting in a pre-tax gain of $3.6 million. During the second quarter of 1998,
the Company sold 204,711 of its shares of Medirisk stock resulting in a gain of
$2.7 million.
Depreciation and amortization expense for the three months ended June 30,
1999 increased $0.3 million, or 7.7%, to $4.2 million from $3.9 million for the
three months ended June 30, 1998. This increase related primarily to
amortization of goodwill on HealthPlan Services' CENTRA and NPPN acquisitions.
Net interest expense for the three months ended June 30, 1999 increased
to $1.7 million from $1.4 million in 1998. This increase resulted primarily from
HealthPlan Services' acquisitions of CENTRA and NPPN, along with the HealthPlan
Services' shares repurchased in 1998.
11
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues for the six months ended June 30, 1999 increased $5.6 million,
or 4.0%, to $145.4 million from $139.8 million for the same period in 1998. New
revenues of $13.2 million and $5.9 million recognized as a result of the CENTRA
and NPPN acquisitions, respectively, were offset by a decrease in revenues from
fully insured customers ($11.7 million), primarily related to the transition of
a block of indemnity/preferred provider organization business from The Travelers
Insurance Company and United HealthCare Corporation to Seaboard Life Insurance
Company (USA) products and a decrease in revenues from the block of business
assumed from TMG Life Insurance Company in 1997. This reduction in fully insured
revenues was partially offset by revenues from new carrier relationships. Other
revenue decreases were realized from self-funded customers ($2.3 million),
primarily related to the loss of nine large customers which terminated between
April and October 1998.
Agent commission expense for the six months ended June 30, 1999 decreased
$3.3 million, or 9.7%, to $30.8 million from $34.1 million for the same period
in 1998. This decrease is consistent with the decrease in fully insured revenues
described above for the period indicated.
Personnel expense for the six months ended June 30, 1999 decreased $0.3
million, or 1.0%, to $58.3 million from $58.6 million for the same period in
1998. HealthPlan Services incurred $6.6 million of personnel expense associated
with the consolidation of CENTRA and NPPN. These consolidation expenses were
offset by reduced salaries resulting from a reduction of approximately 815
employees in HealthPlan Services' workforce and reduction in use of overtime and
temporary help.
General and administrative expense for the six months ended June 30, 1999
increased $3.4 million, or 9.8%, to $38.1 million from $34.7 million for the six
months ended June 30, 1998. This increase was primarily attributable to $8.9
million of general and administrative expense associated with the consolidation
of CENTRA's and NPPN's financial results. This increase was offset by reductions
in rent due to office closings, telephone, postage, printing, travel, and sales
promotions.
HealthPlan Services recorded $0.9 million in restructuring costs during
the six months ended June 30, 1999. These costs reflect employee terminations
and computer software associated with reductions in HealthPlan Services' fully
insured customer workforce in Tampa, Florida. There were 63 employees terminated
in management, claims administration, and information systems.
During the second quarter of 1999, HealthPlan Services entered into an
agreement to sell up to 1,415,000 of its shares of HealthAxis.com stock
resulting in a pre-tax gain of $3.6 million. 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 pre-tax gains of $5.2 million
and $0.2 million, respectively.
Depreciation and amortization expense for the six months ended June 30,
1999 increased $0.8 million, or 10.8%, to $8.2 million from $7.4 million for the
six months ended June 30, 1998. This increase related primarily to amortization
of goodwill on HealthPlan Services' CENTRA and NPPN acquisitions.
Net interest expense for the six months ended June 30, 1999 increased to
$3.3 million from $2.3 million in 1998. This increase resulted primarily from
HealthPlan Services' acquisitions of CENTRA and NPPN, along with the shares
repurchased in 1998.
HealthPlan Services recorded its 50% share of the $23.6 million loss
incurred by Sykes HealthPlan Services ("SHPS"), a company formed in December
1997 by HealthPlan Services and Sykes Enterprises, Incorporated, for the six
months ended June 30, 1998, which was principally the result of a charge for the
write-off of purchased research and development associated with acquisitions by
SHPS. HealthPlan Services sold its interest in SHPS in September 1998.
12
<PAGE>
B. YEAR 2000 COMPLIANCE
INTRODUCTION
The "Year 2000 Problem" arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of the familiar
"19." If not corrected, many computer applications could fail or create
erroneous results. The problems created by using abbreviated dates appear in
hardware (such as microchips), operating systems, and other software programs.
HealthPlan Services' Year 2000 ("Y2K") compliance project is intended to prepare
HealthPlan Services' business for the Year 2000. HealthPlan Services defines Y2K
"compliance" to mean that the computer code will process all defined future
dates properly and give accurate results.
PLAN TO ADDRESS YEAR 2000 COMPLIANCE
HealthPlan Services has conducted a review of its computer systems and
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 Year 2000
compliant versions, and the internal development and implementation of new
software applications to increase the capabilities of HealthPlan Services'
systems for the future.
The implementation of this plan commenced in 1996 with the upgrade of the
mainframe operating system. HealthPlan Services 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.
HealthPlan Services has received from the vendor the latest version of its claim
processing software, which is Year 2000 compliant, and is currently implementing
this version for all current accounts. HealthPlan Services also is undertaking
system enhancements to its billing and administration system.
HealthPlan Services has requested Year 2000 compliance information from
its significant customers and vendors, including landlords and other third
parties that are responsible for non-information technology systems such as
security and environmental controls. In particular, HealthPlan Services has
asked each vendor and customer for information regarding (a) the status of the
vendor's or customer's Year 2000 readiness initiative, and (b) information
regarding any expected changes in the vendor's or customer's data interface with
HealthPlan Services. A team of HealthPlan Services information system
professionals is coordinating its Year 2000 compliance efforts and is testing
any new interfaces with vendors and customers.
COST OF PROJECT
Between 1996 and the six months ended June 30, 1999, HealthPlan Services
spent $9.6 million for Year 2000 compliance system upgrades and expects to spend
$0.8 million in both capital and modification costs to complete its Year 2000
program. These costs include the expense of replacing any existing systems with
Year 2000 compliant systems, even in cases where the system would have been
replaced or upgraded regardless of Year 2000 requirements.
STATE OF READINESS, RISKS, AND CONTINGENCY PLANS
HealthPlan Services completed its primary systems and software upgrades
for Year 2000 compliance and continues to validate the changes and complete the
required migrations of data. HealthPlan Services' best efforts will be made to
validate all material systems in an off-site systems test scheduled for the
third quarter. However, there are risks relating to the external vendors and
customers with which HealthPlan Services exchanges data. Because HealthPlan
Services does not control these
13
<PAGE>
vendors and customers or their resources, HealthPlan Services can provide no
assurance that such vendors and customers will complete their respective Year
2000 solutions in time for HealthPlan Services to fully test system interfaces
with them. Although HealthPlan Services does not have a formal Year 2000
contingency plan, its Year 2000 compliance team will be responding to any
disruption in service resulting from a Year 2000 compliance problem in
HealthPlan Services' systems and software or in a vendor's or customer's system.
Specific contingency plans will be created if necessary, following HealthPlan
Services' off-site systems test in the third quarter. There is no assurance,
however, that HealthPlan Services will be able to remedy any disruption in
service, in particular any disruption from a vendor's or customer's failure to
be Year 2000 compliant or to inform HealthPlan Services of a change in its data
interface. HealthPlan Services cannot estimate the cost that would be associated
with a disruption in service resulting from its own or a vendor's or customer's
Year 2000 compliance failure.
C. LIQUIDITY AND CAPITAL RESOURCES
Under HealthPlan Services' May 1, 1998 Amended and Restated Credit
Agreement, as amended, the Company maintains a line of credit of $175.0 million
(the "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 3.25 through June 30, 2001 and steps down
thereafter to 2.75 during the remaining term 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, limitations on capital
expenditures, limitations on dividends and distributions, and limitations on
investment activity. HealthPlan Services' borrowing under the Line of Credit
includes interest ranging from LIBOR plus 75 to 150 basis points to New York
prime plus 0 to 50 basis points. Current rates on LIBOR drawings on the Line of
Credit at June 30, 1999 were 6.7%. 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 HealthPlan Services' subsidiaries. The outstanding draw was $90.0 million at
June 30, 1999, and the maximum amount available was $125.0 million.
Pursuant to the HealthPlan Services' Line of Credit, the Company may pay
a quarterly dividend of up to $0.1375 per share of HealthPlan Services' capital
stock (up to $0.55 per share on an annualized basis). During 1999 HealthPlan
Services has declared dividends totaling $3.8 million. These dividends were paid
on April 20 and July 20.
During the second quarter of 1997, the Board of Directors authorized
HealthPlan Services to use up to $20.0 million to support a share repurchase
program. HealthPlan Services 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. During the second
quarter of 1999, HealthPlan Services completed this share repurchase program.
During 1998 and the first six months of 1999, a total of 1,519,400 shares were
repurchased.
The Company spent $3.0 million for capital expenditures during the six
months ended June 30, 1999.
In May 1999, HealthPlan Services and PILIC and PAMCO agreed to resolve
all claims and exchange mutual releases in connection with demands asserted by
PILIC and PAMCO against HealthPlan Services and HealthPlan Services against
PILIC and PAMCO. HealthPlan Services expects to receive the remaining $7.0
million of net cash consideration due from this agreement by November 1, 1999.
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>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HealthPlan Services is exposed to certain market risks inherent in
HealthPlan Services' financial instruments. These instruments arise from
transactions entered into in the normal course of business and, in some cases,
relate to HealthPlan Services' acquisitions of related businesses. HealthPlan
Services is subject to interest rate risk on its existing Line of Credit and any
future financing requirements. HealthPlan Services' fixed rate debt consists
primarily of outstanding balances on its notes issued to C G Insurance Services,
Inc. and the former owner of CENTRA and certain equipment notes, and its
variable rate debt relates to borrowings under its Line of Credit. See
"Liquidity and Capital Resources."
The following table presents the future principal payment obligations (in
thousands) and weighted-average interest rates associated with HealthPlan
Services' existing long-term debt instruments, assuming HealthPlan Services'
actual level of indebtedness of $96.1 million as of June 30, 1999:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Liabilities
Long-term Debt Fixed Rate
(weighted average interest
rate of 6.27%) .......... $ 248 $ 419 $ 291 $ 220 $ 4,182 $ 724
Variable Rate (weighted
average interest rate
of 6.56%) ................ 90,000
</TABLE>
HealthPlan Services' primary market risk exposure relates to (i) the
interest rate risk on long-term and short-term borrowings, (ii) the impact of
interest rate movements on its ability to meet interest expense requirements and
exceed financial covenants, and (iii) the impact of interest rate movements on
HealthPlan Services' ability to obtain adequate financing to fund future
acquisitions.
HealthPlan Services manages interest rate risk on its variable rate debt
through its use of two separate interest rate swap agreements. The agreements,
which expire in September and December 2001, effectively convert $40.0 million
of variable rate debt under the Line of Credit to fixed rate debt at a weighted
average rate of 6.18%.
While HealthPlan Services cannot predict its ability to refinance
existing debt or the impact interest rate movements will have on its existing
debt, management continues to evaluate its financial position on an ongoing
basis.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At HealthPlan Services' Annual Meeting of Stockholders, held on May 11,
1999, the stockholders of HealthPlan Services elected twelve 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 12,626,979 votes for and 59,817 votes withheld, one director
12,627,106 votes for and 59,690 votes withheld, one director 12,621,193 votes
for and 65,603 votes withheld, one director 12,626,333 votes for and 60,463
votes withheld, one director 12,619,080 votes for and 67,716 votes withheld, one
director 12,627,186 votes for and 59,610 votes withheld, one director 12,626,624
votes for and 60,172 votes withheld, one director 12,490,821 votes for and
195,975 votes withheld, one director 12,576,317 votes for and 110,479 votes
withheld, one director 12,627,009 votes for and 59,787 votes withheld, one
director 12,621,081 votes for and 65,715 votes withheld, and one director
12,486,943 votes for and 199,853 votes withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
27.1 Financial Data Schedule
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: August 6, 1999 /s/ JAMES K. MURRAY, JR
------------------------------------
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: August 6, 1999 /s/ PHILLIP S. DINGLE
------------------------------------
Executive 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,906
<SECURITIES> 0
<RECEIVABLES> 25,206
<ALLOWANCES> (2,705)
<INVENTORY> 0
<CURRENT-ASSETS> 43,550
<PP&E> 54,989
<DEPRECIATION> (28,438)
<TOTAL-ASSETS> 274,380
<CURRENT-LIABILITIES> 83,624
<BONDS> 95,579
0
0
<COMMON> 152
<OTHER-SE> 91,920
<TOTAL-LIABILITY-AND-EQUITY> 274,380
<SALES> 0
<TOTAL-REVENUES> 145,407
<CGS> 0
<TOTAL-COSTS> 133,115
<OTHER-EXPENSES> 453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,275
<INCOME-PRETAX> 8,564
<INCOME-TAX> 3,811
<INCOME-CONTINUING> 4,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,753
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.34
</TABLE>
