UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 12, 1999.
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 13,771,455
<PAGE>
HEALTHPLAN SERVICES CORPORATION
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet
March 31, 1999 and December 31, 1998..................... 2
Consolidated Statement of Operations
Three Months Ended March 31, 1999 and 1998............... 3
Consolidated Statement of Changes in Common
Stockholders' Equity Three Months Ended March 31, 1999... 4
Consolidated Statement of Cash Flows
Three Months Ended March 31, 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 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 6,133 $ 4,582
Restricted cash ......................................... 11,152 11,373
Accounts receivable, net ................................ 23,434 21,834
Prepaid expenses and other current assets ............... 3,506 3,604
Deferred taxes .......................................... 1,448 1,448
--------- ---------
Total current assets ............................ 45,673 42,841
Property and equipment, net ............................... 26,872 27,172
Other assets, net ......................................... 2,580 2,744
Deferred taxes ............................................ 659 1,145
Notes receivable .......................................... 3,291 3,499
Investments ............................................... 6,373 6,647
Intangible assets, net .................................... 190,575 192,757
--------- ---------
Total assets .................................... $ 276,023 $ 276,805
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 13,875 $ 13,917
Premiums payable to carriers ............................ 37,086 38,146
Commissions payable ..................................... 5,579 5,232
Deferred revenue ........................................ 4,148 3,707
Accrued liabilities ..................................... 17,705 16,769
Income taxes payable .................................... 1,195 1,397
Current portion of long-term debt payable ............... 489 486
--------- ---------
Total current liabilities ....................... 80,077 79,654
Notes payable ............................................. 96,689 96,837
Other long-term liabilities ............................... 2,586 2,732
--------- ---------
Total liabilities ............................... 179,352 179,223
--------- ---------
Minority interest ......................................... 6,118 5,930
--------- ---------
Common stockholders' equity:
Common stock voting, $0.01 par value, 100,000,000 shares
authorized, 15,178,255 issued at March 31, 1999 and,
15,174,315 at December 31, 1998 ...................... 152 152
Additional paid-in capital ............................. 109,898 109,887
Treasury stock ......................................... (28,650) (28,088)
Retained earnings ...................................... 9,274 9,736
Unrealized depreciation on investments
available for sale, net of tax ...................... (121) (35)
--------- ---------
Total stockholders' equity ...................... 90,553 91,652
--------- ---------
Total liabilities and stockholders' equity ...... $ 276,023 $ 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)
FOR THE THREE MONTHS
ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
Operating revenues ............................... $ 74,475 $ 68,016
-------- --------
Expenses:
Agent commissions .............................. 16,575 16,085
Personnel ...................................... 29,957 27,433
General and administrative ..................... 18,849 16,009
Integration .................................... 310 259
Other expenses ................................. -- 362
Gain on sale of investments, net ............... -- (2,685)
Depreciation and amortization .................. 4,049 3,579
Interest expense, net .......................... 1,541 886
Equity in loss of joint ventures ............... 155 11,794
-------- --------
Total expenses ......................... 71,436 73,722
-------- --------
Income (loss) before provision for
income taxes and minority interest ........... 3,039 (5,706)
Provision (benefit) for income taxes ........... 1,413 (2,540)
-------- --------
Income (loss) before minority interest ......... 1,626 (3,166)
Minority interest .............................. 189 --
-------- --------
Net income (loss) .............................. $ 1,437 $ (3,166)
======== ========
Basic net income (loss) per share .............. $ 0.10 $ (0.21)
======== ========
Basic weighted average shares outstanding ...... 13,885 14,999
======== ========
Diluted net income per share ................... $ 0.10 $ n/a
======== ========
Diluted weighted average shares outstanding ..... 14,065 n/a
======== ========
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
VOTING ADDITIONAL ON 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 3,940 shares in
connection with the employee
stock purchase plan (unaudited) ...... -- 24 -- -- -- 24
Cash dividends declared (unaudited) ..... -- -- -- (1,899) -- (1,899)
Purchase of 70,100
treasury shares (unaudited) .......... -- -- (562) -- -- (562)
Net income (unaudited) .................. $ 1,437 -- -- -- 1,437 -- 1,437
Unrealized depreciation
on investment available
for sale (unaudited) ................. (86) -- -- -- -- (86) (86)
--------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1999 (unaudited) ... $ 1,351 $ 152 $ 109,898 $ (28,650) $ 9,274 $ (121) $ 90,553
========= ========= ========= ========= ========= ========= =========
</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 THREE MONTHS
ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ 1,437 $ (3,166)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................................. 1,785 1,762
Amortization .................................................. 2,264 1,817
Gain on sale of investments ................................... -- (2,685)
Equity in loss of joint venture ............................... 155 11,794
Minority interest ............................................. 189 --
Issuance of common stock to management ........................ -- 59
Deferred taxes ................................................ 537 (3,944)
Changes in assets and liabilities net of effect from acquisitions:
Restricted cash ............................................... 221 (916)
Accounts receivable ........................................... (1,600) (3,662)
Refundable income taxes ....................................... -- 1,487
Prepaid expenses and other current assets ..................... 98 1
Other assets .................................................. 84 90
Accounts payable .............................................. (42) (1,137)
Premiums payable to carriers .................................. (1,060) (716)
Commissions payable ........................................... 347 1,080
Deferred revenue .............................................. 441 895
Accrued liabilities ........................................... 946 (3,029)
Income taxes payable .......................................... (202) --
-------- --------
Net cash provided by
(used in) operating activities ....................... 5,600 (270)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ........................... (1,485) (2,545)
Cash paid for acquisitions, net of cash acquired .............. -- (4,000)
Purchases of investments ...................................... (19) (11,987)
Proceeds from sale of investments ............................. -- 6,095
Proceeds from notes receivable ................................ 207 --
-------- --------
Net cash used in investing activities .................. (1,297) (12,437)
-------- --------
Cash flows from financing activities:
Net borrowing under line of credit ............................ -- 15,000
Net payments on other debt .................................... (291) (257)
Cash dividends paid ........................................... (1,910) --
Proceeds from exercise of stock options ....................... -- 2,038
Repurchase of Common Stock .................................... (562) (4,264)
Proceeds from Common Stock issued, net ........................ 11 --
-------- --------
Net cash (used in) provided by financing activities .... (2,752) 12,517
-------- --------
Net increase (decrease) in cash and cash equivalents ............. 1,551 (190)
Cash and cash equivalents at beginning of period ................. 4,582 1,545
-------- --------
Cash and cash equivalents at end of period ...................... $ 6,133 $ 1,355
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................ $ 1,706 $ 975
======== ========
Net cash paid (refunds received) for income taxes ............. $ 1,078 $ (80)
======== ========
Supplemental disclosure of cash flow information:
Dividends declared but unpaid ................................. $ 1,899 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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, and claims administration 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. HealthPlan Services has 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.
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.
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
6
<PAGE>
($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. On April 29,
1999, CBS exercised its put right, and HealthPlan Services paid CBS $4.4
million, which represented a payment of $5.5 million for CBS' 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 achieves certain financial
performance objectives. 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 Provident Indemnity Life Insurance Company
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. 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):
THREE MONTHS ENDED
------------------
MARCH 31, 1998
------------------
Revenues $ 80,789
Net loss (3,842)
Net loss per common share (0.26)
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 3.5 through June 30, 1999 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 and New York prime rate
drawings on the Line of Credit at March 31, 1999 were 6.5% and 8.0%,
respectively. 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 $91.0 million at March 31, 1999, and the
maximum amount available was $125.0 million. HealthPlan Services incurred $1.4
million of interest expense on the Line of Credit for the three months ended
March 31, 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
7
<PAGE>
rate of 6.18% plus a margin ranging from 75 to 150 basis points. For the three
months ended March 31, 1999, HealthPlan Services recorded $0.1 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 $6.2 million relating to a
1993 acquisition, the 1998 acquisition of CENTRA, and equipment purchases, of
which $0.5 million is payable within one year.
5. INVESTMENTS
HealthPlan Services owns 109,732 shares of Medirisk, Inc. ("Medirisk"), a
provider of health care information. During the first quarter of 1998,
HealthPlan Services sold 166,000 of shares it previously owned in Medirisk and
recorded a gain on the sale of $2.5 million. On March 31, 1999, Medirisk's
shares closed at $3.75 per share of common stock. This investment is recorded as
available for sale with the unrealized holding loss reported in the equity
section of the balance sheet in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
6. SUBSEQUENT EVENTS
In January 1998, HealthPlan Services began providing policy issuance,
billing, and claims services for the individual indemnity/preferred provider
organization health insurance policies of Provident Indemnity Life Insurance
Company ("PILIC") and Provident American Life and Health Insurance Company
("PALHIC"), which were life insurance subsidiaries of Provident American
Corporation ("PAMCO").
In February 1998, HealthPlan Services acquired 49% of the capital stock
of Montgomery Management from PILIC, together with warrants to purchase an
additional 31% of the company. In October 1998, HealthPlan Services exercised
the warrants.
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 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, PILIC and PAMCO asserted a demand against HealthPlan
Services for claims in excess of $27.0 million, and HealthPlan Services asserted
claims against PILIC and PAMCO. On May 13, 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 PALHIC, 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 $9.0 per share; and will receive a net
cash consideration of $8.3 million. HealthPlan Services has preliminarily
estimated that the above transaction will result in a pre-tax gain of
approximately $2.5 million.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE STATEMENTS CONTAINED IN THIS REPORT OR INCORPORATED BY REFERENCE
HEREIN THAT ARE NOT PURELY HISTORICAL, INCLUDING STATEMENTS REGARDING HEALTHPLAN
SERVICES CORPORATION'S OBJECTIVES, EXPECTATIONS, HOPES, INTENTIONS, BELIEFS, OR
STRATEGIES, ARE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933. IN PARTICULAR, THE WORDS "EXPECT," "ESTIMATE,"
"PLAN," "ANTICIPATE," "PREDICT," "INTEND," "BELIEVE," AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE
THAT ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS, AND UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS. AMONG
THE FACTORS THAT COULD CAUSE SUCH ACTUAL RESULTS TO DIFFER MATERIALLY ARE:
CHANGES IN LEGISLATION; FLUCTUATIONS IN BUSINESS CONDITIONS AND THE ECONOMY;
HEALTHPLAN SERVICES CORPORATION'S ABILITY TO IDENTIFY AND IMPLEMENT
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 months ended March 31, 1999 and
1998.
HealthPlan Services is a leading managed health care services company,
providing distribution, enrollment, billing and collection, and claims
administration 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 months ended March
31, 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:
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
-------- --------
Operating revenues ............................ 100.0 % 100.0 %
------- -------
Expenses:
Agent commissions ........................ 22.3 % 23.7 %
Personnel expenses ....................... 40.2 % 40.3 %
General and administrative ............... 25.3 % 23.5 %
Integration .............................. 0.4 % 0.4 %
Other expenses ........................... 0.0 % 0.5 %
Gain on sale of investments, net ......... 0.0 % (3.9)%
Depreciation and amortization ............ 5.4 % 5.3 %
Interest expense, net .................... 2.1 % 1.3 %
Equity in loss of joint ventures ......... 0.2 % 17.3 %
------- -------
Total expenses ........................... 95.9 % 108.4 %
------- -------
Net income (loss) before provision for
income taxes and minority interest .......... 4.1 % (8.4)%
Provision (benefit) for income taxes .......... 1.9 % (3.7)%
------- -------
Net income (loss) before minority interest..... 2.2 % (4.7)%
Minority interest ............................. 0.3 % 0.0 %
------- -------
Net income (loss) ............................. 1.9 % (4.7)%
======= =======
9
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues for the three months ended March 31, 1999 increased $6.5
million, or 9.6%, to $74.5 million from $68.0 million for the same period in
1998. New revenues of $8.2 million and $4.2 million recognized as a result of
the CENTRA and NPPN acquisitions, respectively, were offset by a decrease in
revenues from fully insured customers ($4.3 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
($1.7 million), primarily related to the loss of seven large customers which
terminated between April and October 1998.
Agent commission expense for the three months ended March 31, 1999
increased $0.5 million, or 3.1%, to $16.6 million from $16.1 million for the
same period in 1998. This increase is consistent with the increase in operating
revenues for the period indicated.
Personnel expense for the three months ended March 31, 1999 increased
$2.6 million, or 9.5%, to $30.0 million from $27.4 million for the same period
in 1998. This increase resulted primarily from $4.3 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 320 employees in
HealthPlan Services' workforce, and reduction in use of overtime and temporary
help.
General and administrative expense for the three months ended March 31,
1999 increased $2.8 million, or 17.5%, to $18.8 million from $16.0 million for
the three months ended March 31, 1998. This increase was primarily attributable
to $5.7 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, travel, and sales
promotions. HealthPlan Services' general and administrative expense as a
percentage of total revenue increased to 25.3% in the first quarter of 1999 from
23.5% for the same period in 1998.
During the first quarter of 1998, the Company sold 166,000 of its shares
of Medirisk stock and all 200,000 of its shares of HRM stock, resulting in gains
of $2.5 million and $0.2 million, respectively.
Depreciation and amortization expense for the three months ended March
31, 1999 increased $0.4 million, or 11.1%, to $4.0 million from $3.6 million for
the three months ended March 31, 1998. This increase related primarily to
amortization of goodwill on HealthPlan Services' CENTRA and NPPN acquisitions.
Net interest expense for the three months ended March 31, 1999 increased
to $1.5 million from $0.9 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 SHPS for the three months ended March 31, 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.
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.
10
<PAGE>
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 three months ended March 31, 1999, HealthPlan
Services spent $8.9 million for Year 2000 compliance system upgrades and expects
to spend $1.5 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 expects that its systems and software will be Year
2000 compliant by the close of the second quarter of 1999. However, there are
risks relating to the external vendors and customers with which HealthPlan
Services exchanges data. Because HealthPlan Services does not control these
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.
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 3.5 through June 30, 1999 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
11
<PAGE>
plus 75 to 150 basis points to New York prime plus 0 to 50 basis points. Current
rates on LIBOR and New York prime rate drawings on the Line of Credit at March
31, 1999 were 6.5% and 8.0%, respectively. 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
$91.0 million at March 31, 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). On March 24, 1999,
HealthPlan Services declared a dividend of $0.1375 per share. This dividend,
totaling $1.9 million, was paid on April 20, 1999.
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. Through May 12, 1999,
HealthPlan Services had acquired 1,406,800 shares under this program at a cost
of approximately $29.1 million.
The Company spent $1.5 million for capital expenditures during the three
months ended March 31, 1999.
On April 29, 1999, HealthPlan Services paid $4.4 million to CBS, which
represented a payment of $5.5 million for CBS' 49.9% interest in CENTRA, offset
by amounts due to HealthPlan Services in connection with the CENTRA acquisition.
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.
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 $97.2 million as of March 31, 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 6.28%) ............... $ 386 $ 398 $ 282 $ 208 $ 4,182 $ 722
Variable Rate (weighted
average interest rate
of 6.58%)...................... 91,000
</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
12
<PAGE>
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.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
27.1 Financial Data Schedule
14
<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: May 14, 1999 /s/ JAMES K. MURRAY, JR
----------------------------------------------------
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
Date: May 14, 1999 /s/ PHILLIP S. DINGLE
----------------------------------------------------
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 17,285
<SECURITIES> 0
<RECEIVABLES> 25,498
<ALLOWANCES> (2,064)
<INVENTORY> 0
<CURRENT-ASSETS> 45,673
<PP&E> 53,481
<DEPRECIATION> (26,609)
<TOTAL-ASSETS> 276,023
<CURRENT-LIABILITIES> 80,077
<BONDS> 96,689
0
0
<COMMON> 152
<OTHER-SE> 90,401
<TOTAL-LIABILITY-AND-EQUITY> 276,023
<SALES> 0
<TOTAL-REVENUES> 74,475
<CGS> 0
<TOTAL-COSTS> 69,740
<OTHER-EXPENSES> 344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,541
<INCOME-PRETAX> 2,850
<INCOME-TAX> 1,413
<INCOME-CONTINUING> 1,437
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,437
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
