<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-13772
HEALTHPLAN SERVICES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3787901
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3501 Frontage Road, Tampa, Florida 33607
(Address of Principal Executive Offices) (Zip Code)
(813) 289-1000
(Registrant's Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock as of the latest
practicable date.
Total number of shares of Common Stock outstanding as of November 1, 2000.
Common Stock ................................................. 13,685,484
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HEALTHPLAN SERVICES CORPORATION
Table of Contents
<TABLE>
<CAPTION>
Page No.
---------------------
Part I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Balance Sheet
September 30, 2000 and December 31, 1999.......................................................... 2
Consolidated Statement of Operations
Three and Nine Months Ended September 30, 2000 and 1999........................................... 3
Consolidated Statement of Changes in Common
Stockholders' Equity Nine Months Ended September 30, 2000......................................... 4
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2000 and 1999..................................................... 5
Notes to Consolidated Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 16
Part II - OTHER INFORMATION 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHPLAN SERVICES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Restricted cash $ - $ 3
Accounts receivable, net 24,029 22,933
Prepaid expenses and other current assets 4,003 4,135
Refundable income taxes 5,081 666
Deferred taxes 3,144 4,532
-------------------- --------------------
Total current assets 36,257 32,269
Property and equipment, net 27,167 27,804
Other assets, net 2,079 2,537
Investments 2,549 6,513
Intangible assets, net 176,984 191,302
-------------------- --------------------
Total assets $ 245,036 $ 260,425
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 4,866 $ 1,188
Accounts payable 2,724 4,377
Premiums payable to carriers 37,689 33,930
Commissions payable 3,583 4,862
Deferred revenue 1,709 1,762
Accrued liabilities 64,780 26,810
Current portion of long-term debt payable 8,873 3,669
-------------------- --------------------
Total current liabilities 124,224 76,598
Notes payable 68,963 92,168
Deferred taxes 2,762 2,892
Other long-term liabilities 2,432 2,486
-------------------- --------------------
Total liabilities 198,381 174,144
-------------------- --------------------
Commitments and contingencies
Stockholders' equity:
Common Stock, $0.01 par value, 100,000,000 shares
authorized, 15,202,856 issued at September 30, 2000 and,
15,190,458 at December 31, 1999 152 152
Additional paid-in capital 110,406 110,357
Treasury Stock, 1,519,400 shares (30,006) (30,006)
Retained (deficit) earnings (33,374) 4,184
Unrealized (depreciation) appreciation on investments
available for sale, net of tax (523) 1,594
-------------------- --------------------
Total stockholders' equity 46,655 86,281
-------------------- --------------------
Total liabilities and stockholders' equity $ 245,036 $ 260,425
==================== ====================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
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HEALTHPLAN SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share amount)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------- ------ ------- -------
Operating revenues $ 41,767 $ 42,325 $ 127,895 $ 139,089
--------------- --------------- -------------- --------------
Expenses:
Agent commissions 11,812 12,305 38,940 43,118
Personnel expenses 15,842 15,195 47,797 49,053
General and administrative 8,318 13,603 25,630 32,190
Restructure - - 750 920
Other expenses - 298 1,120 367
Gain on sale of investments, net - (974) (332) (4,557)
Depreciation and amortization 2,529 2,533 7,198 7,381
Interest expense 2,427 2,006 7,211 5,367
Interest income (69) (37) (198) (335)
Equity in loss of joint ventures - - - 208
--------------- --------------- -------------- --------------
Total expenses 40,859 44,929 128,116 133,712
--------------- --------------- -------------- --------------
Income (loss) before (benefit) provision for
income taxes, minority interest, discontinued
operations, loss on sale of assets, and 908 (2,604) (221) 5,377
extraordinary item
(Benefit) provision for income taxes (475) (828) (187) 2,328
--------------- --------------- -------------- --------------
Income (loss) before minority interest,
discontinued operations, loss on sale of
assets, and extraordinary item 1,383 (1,776) (34) 3,049
Minority interest - - - 245
--------------- --------------- -------------- --------------
Income (loss) from continuing operations 1,383 (1,776) (34) 2,804
Loss from discontinued operations, net of
taxes 446 1,540 206 1,367
Loss on sale of assets, net of taxes 36,364 - 36,364 -
Extraordinary loss from restructure
of debt, net of taxes - - 954 0
--------------- --------------- -------------- --------------
Net (loss) income $ (35,427) $ (3,316) $ (37,558) $ 1,437
=============== =============== ============== ==============
Basic (loss) earnings per share of Common
Stock:
Earnings (loss) from continuing operations $ 0.10 $ (0.13) $ - $ 0.20
Loss from discontinued operations $ (0.03) $ (0.11) $ (0.02) $ (0.10)
Loss on sale of assets $ (2.66) $ - $ (2.66) $ -
Extraordinary item $ - $ - $ (0.07) $ -
--------------- --------------- -------------- --------------
Net (loss) earnings $ (2.59) $ (0.24) $ (2.75) $ 0.10
=============== =============== ============== ==============
Basic weighted average number
of shares outstanding 13,683 13,663 13,677 13,768
=============== =============== ============== ==============
Diluted (loss) earnings per share of Common
Stock:
Earnings (loss) from continuing
operations $ 0.10 $ (0.13) $ - $ 0.20
Loss from discontinued operations $ (0.03) $ (0.11) $ 0.02 $ (0.10)
Loss on sale of assets $ (2.66) $ - $ (2.66) $ -
Extraordinary item $ - $ - $ (0.07) $ -
--------------- --------------- -------------- --------------
Net (loss) earnings $ (2.59) $ (0.24) $ (2.75) $ 0.10
=============== =============== ============== ==============
Diluted weighted average number of
shares outstanding 13,683 13,663 13,677 13,948
=============== =============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
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HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Unrealized
Appreciation
[DEPRECIATION]
on
Voting Additional Investments
Common Paid-in Treasury Retained Available
Stock Capital Stock Earnings for Sale Total
--------- ----------- --------- --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 152 $ 110,357 $(30,006) $ 4,184 $ 1,594 $ 86,281
Issuance of 1,718 shares in connection
with the directors' compensation
plan (unaudited) - 21 - - - 21
Issuance of 10,680 shares in connection
with the employee stock
purchase plan (unaudited) - 28 - - - 28
Net loss (unaudited) $ - - - (37,558) - (37,558)
Unrealized depreciation on investment
available for sale (unaudited) - - - - (2,117) (2,117)
Comprehensive loss $
--------- ----------- --------- --------- ------------ --------
Balance at September 30, 2000
(unaudited) $ 152 $ 110,406 $(30,006) $(33,374) $ (523) $ 46,655
========= =========== ========= ========= ============ ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
For the Nine Months Ended
September 30,
---------------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ (37,558) $ 1,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation............................................................ 4,267 5,603
Amortization............................................................ 7,403 6,871
Third quarter adverse claims............................................ - 5,658
Gain on sale of investments............................................. (332) (4,556)
Loss on sale of assets.................................................. 36,364 -
Equity in loss of joint venture......................................... - 208
Minority interest....................................................... - 245
Deferred taxes.......................................................... 2,501 21
Changes in assets and liabilities net of effect from acquisitions:
Restricted cash......................................................... 3 4,010
Accounts receivable..................................................... (1,096) 162
Prepaid expenses and other current assets............................... 119 (403)
Other assets............................................................ (158) 64
Cash overdraft.......................................................... 3,678 -
Accounts payable........................................................ (1,655) (3,141)
Premiums payable to carriers............................................ 3,759 (2,861)
Commissions payable..................................................... (1,279) 208
Deferred revenue........................................................ (55) (1,099)
Income taxes payable.................................................... (4,414) (1,667)
Accrued liabilities..................................................... (9,467) 695
-------------------- --------------------
Net cash provided by operating activities...................... 2,080 11,455
-------------------- --------------------
Cash flows from investing activities:
Purchases of property and equipment..................................... (4,560) (6,006)
Cash paid for acquisitions.............................................. (3,054) (8,674)
net of cash acquired
Purchase of investments................................................. - (919)
Proceeds from sale of investments....................................... 936 8,013
Proceeds from sale of assets............................................ 22,623 -
Receivable from sale of investments, net................................ - (290)
Proceeds from note receivable........................................... - 3,498
-------------------- --------------------
Net cash used in investing activities.......................... 15,945 (4,378)
-------------------- --------------------
Cash flows from financing activities:
Net (payments) borrowing................................................ (17,670) 2,000
under line of credit
Net payments on other debt.............................................. (383) (567)
Cash dividends paid..................................................... - (5,688)
Repurchase of Common Stock.............................................. - (1,919)
Proceeds from Common.................................................... 28 45
Stock issued
-------------------- --------------------
Net cash provided by (used in) financing activities............ (18,025) (6,129)
-------------------- --------------------
Net increase in cash and cash equivalents................................ - 948
Cash and cash equivalents at beginning of period......................... - 4,582
-------------------- --------------------
Cash and cash equivalents at end of period............................... $ - $ 5,530
==================== ====================
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 7,442 $ 5,393
==================== ====================
Cash paid for income taxes............................................ $ 282 $ 3,914
==================== ====================
Supplemental disclosure of noncash activities:
Dividends declared and unpaid........................................... $ - $ 1,879
==================== ====================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
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HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
1. Description of Business and Organization
HealthPlan Services Corporation (together with its direct and indirect
wholly owned subsidiaries, "HealthPlan Services") is a leading managed health
care services company, providing marketing, distribution, administration, and
medical cost management services for health care plans and other benefit
programs. HealthPlan Services' customers include insurance companies, health
maintenance organizations ("HMOs") and other managed care organizations, and
organizations with self-funded benefit plans. HealthPlan Services provides
these services to over 100,000 groups covering over 1.5 million members in the
United States. HealthPlan Services functions 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' 1999 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 14, 2000.
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. 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, unless antidilutive.
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. HealthPlan Services has reclassified
losses, net of taxes, on its unemployment compensation, workers' compensation,
Ohio workers' compensation managed care organization, and self-funded business
units as discontinued operations.
Restructure Charges
During the first quarter of 2000, HealthPlan Services recorded a total of
$0.8 million in restructuring costs for the closure of a facility in Merrimack,
New Hampshire and other reductions in our workforce. The costs reflected
employee and lease terminations. HealthPlan Services terminated 75 employees in
management and claims administration. At September 30, 2000, a balance of $0.1
million remained to be paid for severance costs related to the charge in 2000, a
balance of $0.1 million remained to be paid for severance costs
6
<PAGE>
related to the charge in 1999, and a balance of $0.4 million remained to be paid
for a lease termination related to the charge in 1998.
A summary of restructure charges is as follows (in thousands):
<TABLE>
<CAPTION>
Original Charge
2000 1999 1998
-------------- --------------- -----------------
<S> <C> <C> <C>
Severance and related costs $ 618 $ 2,031 $ 1,250
Office closure costs 132 1,725 360
Write-off of property, plant, and equipment, net - 100 442
-------------- --------------- -----------------
Restructure charge 750 3,856 2,052
Amounts paid - 1998 (1,066)
Amounts paid - 1999 (1,153) (586)
Amounts paid - 2000 (611) (2,597) -
-------------- --------------- -----------------
Remaining liability - December 31, 1998 $ 986
Remaining liability - December 31, 1999 $ 2,703 $ 400
--------------- -----------------
Remaining liability - September 30, 2000 $ 139 $ 106 $ 400
============== =============== =================
</TABLE>
Other Expenses
On April 14, 2000, HealthPlan Services agreed to terminate its merger
agreement with UICI. As a result, it expensed $1.1 million of costs including
legal, financial advisory, and other fees, associated with this transaction in
the quarter ended June 30, 2000.
3. Notes Payable and Credit Facility
On June 8, 2000, HealthPlan Services closed on its Second Amended and
Restated Credit Agreement (the "Credit Agreement"). The Credit Agreement
provides for a $73.8 million term loan facility, a $25.0 million revolving
credit facility, and a letter of credit facility of up to $16.0 million
available for current letters of credit. Under the term loan facility, a
payment of $250,000 was required at closing and monthly for a two-month period
commencing June 30, 2000 and repayments of $500,000 each month thereafter with
additional repayments of $15.0 million on January 31 and July 31, 2001, and a
final payment on August 31, 2001. The revolving credit facility has a final
maturity date of August 31, 2001. Interest rates vary from the higher of (a)
the Prime Rate or (b) the Federal Funds rate plus 1/2 of 1%, plus a margin of
1.5% to 3.0%. The Credit Agreement required an initial payment of 1.0% of the
maximum amount of the facility plus certain administrative fees and an annual
commitment fee of .25% for letters of credit and unused commitments. HealthPlan
Services capitalized approximately $1.4 million of bank fees relative to the
Credit Agreement. Under the loan terms, HealthPlan Services must maintain
certain financial covenants for revenue and EBITDA as defined in the Credit
Agreement, is restricted in capital expenditures and issuance of dividends, and
is subject to prepayment with proceeds of certain future activities such as sale
of certain assets, public offerings, and the like. In June 2000, HealthPlan
Services recorded an extraordinary loss on the restructure of the debt of $1.5
million ($1.0 million net of taxes) for fees capitalized under the previous
facility. Subsequent to the closing on the new facility, HealthPlan Services
used the proceeds from the sale of its unemployment compensation, workers'
compensation, Ohio workers' compensation managed care organization, and self-
funded units to reduce its debt by a total of $29.5 million (see Note 6).
HealthPlan Services has paid all of the scheduled payment of $15.0 million due
on January 31, 2001, and $10.5 million on the scheduled payment due on July 31,
2001.
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 2001, effectively convert $40.0 million of
variable debt under the Credit Agreement to fixed rate debt at a weighted
average rate of 6.18%. For the nine months ended September 30, 2000, HealthPlan
Services recognized zero 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.
7
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HealthPlan Services has additional notes of $5.5 million in the aggregate,
of which $0.3 million is due within one year. The notes relate to a 1993
acquisition, the 1998 acquisition of CENTRA, and equipment purchases.
4. Investments
At December 31, 1999, HealthPlan Services owned 109,732 shares of
Caredata.com Inc. ("Caredata.com"), a provider of health care information.
During the first quarter of 2000, HealthPlan Services sold 82,600 of its shares
in Caredata.com and recorded a pretax gain on the sale of $0.3 million.
HealthPlan Services sold its remaining 27,132 shares in Caredata.com in April
2000, and recognized an additional pretax gain of $50,000.
As HealthPlan Services' investment in common shares of HealthAxis Inc. is
classified as available for sale, it is measured at fair market value. Any
increase or decline in the value of investments is recorded as unrealized
appreciation or depreciation in the equity section of the balance sheet.
HealthPlan Services recognizes gains and losses based on average costs.
Investments in common stock and joint ventures in which HealthPlan Services
exercised significant influence but lacked control were accounted for on the
equity basis. Under the equity method, HealthPlan Services recorded its
proportionate share of income and loss of each investment. As of December 31,
1999, all such investments were liquidated.
5. 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 CENTRA 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. In
January 2000, HealthPlan Services paid $0.9 million to CBS in settlement of the
purchase price holdback. On July 13, 2000, HealthPlan Services paid CBS $3.0
million in final contingent consideration.
6. Sale of Assets and Discontinued Operations
On July 5, 2000, HealthPlan Services sold its unemployment compensation and
its workers' compensation units for approximately $19.4 million cash.
HealthPlan Services' unemployment compensation business operated under the name
R.E. Harrington, and its workers' compensation unit conducted business as
Harrington Benefit Services Workers' Compensation Division. Both units were
part of HealthPlan Services' acquisition of Columbus, Ohio-based Harrington
Services Corporation in 1996. HealthPlan Services used the net cash proceeds
from the sale to reduce its bank debt by $18.0 million. As a result of the
transaction, HealthPlan Services recognized a pretax gain of $7.3 million.
On September 15, 2000, HealthPlan Services sold its Ohio workers'
compensation managed care organization unit for approximately $3.7 million cash.
The unit was part of HealthPlan Services' acquisition of Columbus, Ohio-based
Harrington Services Corporation in 1996. HealthPlan Services used the net cash
proceeds from the sale to reduce its bank debt by $2.8 million. As a result of
the transaction, HealthPlan Services recognized a pretax gain of $3.5 million.
8
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On October 26, 2000, HealthPlan Services sold its self-funded business unit
for approximately $13.6 million, consisting of $12.1 million cash and the
assumption of additional current liabilities in the amount of $1.5 million. The
unit was headquartered in Columbus, Ohio and operated primarily under the names
Harrington Benefit Services and CENTRA HealthPlan. HealthPlan Services used the
net cash proceeds from the sale to reduce its bank debt by $8.7 million.
HealthPlan Services recorded an accrual of $47.9 million in the third quarter of
2000 for the pretax loss on the sale.
HealthPlan Services has reclassified losses, net of taxes, on its
unemployment compensation, workers' compensation, Ohio workers' compensation
managed care organization, and self-funded business units as discontinued
operations.
Summarized operating results of the discontinued business units for the
three and nine months ended September 30, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended September Ended September Ended September Ended September
30, 2000 30, 1999 30, 2000 30, 1999
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales....................... $11,763 $23,194 $ 55,458 $71,796
Income (loss) from discontinued
operations before income tax
expense........................ 63 (2,251) 303 (1,422)
Income tax expense.............. (509) 711 (509) 55
---------- ---------- ---------- ----------
Loss from discontinued
operations..................... (446) (1,540) (206) (1,367)
Loss on disposal before
income tax expense............. (37,728) -- (37,728) --
Income tax benefit.............. 1,364 -- 1,364 --
---------- ---------- ---------- ----------
Loss on disposal................ $36,364 $ -- $ 36,364 $ --
---------- ---------- ---------- ----------
</TABLE>
At September 30, 2000 and December 31, 1999, 2000, the assets of
discontinued operations consisted of accounts receivable, property, plant and
equipment and intangible assets, net of liabilities. Net assets are comprised of
$5.9 million of net current assets and $55.2 million of net noncurrent assets at
September 30, 2000 and $4.3 million of net current assets and $7.1 of net
noncurrent assets at December 31, 1999.
7. OTHER COMPREHENSIVE INCOME
In addition to net income, comprehensive income includes certain amounts
recorded directly in equity. The components of comprehensive income, net of
related income tax effects, for the third quarter and year-to-date periods,
were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net (loss) income $ (35,427) $ (3,316) $ (37,558) $ 1,437
Unrealized depreciation
on investment available
for sale (63) (802) (2,117) 530
---------- ---------- ---------- ----------
Comprehensive income $ (35,490) $ (4,118) $ (39,675) $ 1,967
========== ========== ========== ==========
</TABLE>
8. Litigation
In the ordinary course of business, HealthPlan Services may be a party to a
variety of legal actions that affect any business, including employment and
employment discrimination-related suits, employee benefit claims, breach of
contract actions, and tort claims. In addition, because of the nature of its
business, HealthPlan Services could be subject to a variety of legal actions
relating to its business operations, including disputes alleging errors in claim
administration, underwriting, or premium billing. HealthPlan Services currently
has insurance coverage for some of these potential liabilities. Other potential
liabilities may not be covered by insurance, insurers may dispute coverage, or
the amount of insurance may not cover the damages awarded.
In the third quarter of 1999, HealthPlan Services recorded $5.7 million in
pretax expense. This reserve reflected management's best estimate of the
possible ultimate liability to HealthPlan Services as a result of, among other
things, a claim exceeding $7.0 million asserted by a customer, as well as
unquantified claims asserted by two customers and seven insurance brokers, and
the failure of mediation efforts with a customer that had previously asserted a
claim exceeding $2.0 million. The customers alleged breach of contract and
related claims, and the brokers alleged loss of profits due to small group
business declines. The balance in this reserve at September 30, 2000, was $2.8
million. The reserve is reviewed and adjusted quarterly.
In January 1997, HealthPlan Services' subsidiary HealthPlan Services, Inc.
began providing marketing and administrative services for health plans of TMG
Life Insurance Company (now known as Clarica Life Insurance Company), with
Connecticut General Life Insurance Company ("CIGNA Re") acting as the reinsurer.
In January 1999, insureds under this coverage were notified that coverage would
be canceled beginning in July 1999. Substantially all coverage under these
policies is expected to terminate by December 31, 2000. In July 1999, Clarica
asserted a demand against HealthPlan Services, Inc. for claims in excess of $7.0
million for breach of contract and related claims, and HealthPlan Services, Inc.
asserted breach of contract and various other claims against Clarica. A reserve
for these claims was included in the reserve that HealthPlan Services
established in the third quarter of 1999. In April 2000, Clarica and CIGNA Re
jointly submitted a demand for consolidated arbitration in connection with these
claims and claims submitted by CIGNA Re for approximately $6.0 million. The
demand for arbitration was subsequently withdrawn, without prejudice to refile
separate demands. On April 28, 2000, HealthPlan Services, Inc. filed a claim
against CIGNA Re in the Circuit Court for Hillsborough County, Florida. The
claim alleges that CIGNA Re breached its duty of good faith and fair dealing in
connection with the performance of its agreement with HealthPlan Services, Inc.
CIGNA Re removed the proceeding to the United States District Court for the
Middle District of Florida.
On April 17, 2000, Admiral Insurance Company ("Admiral"), HealthPlan
Services' errors and omissions carrier, filed a complaint for declaratory
judgment in the United States District Court for the Middle District of Florida,
naming HealthPlan Services, Inc., Clarica, and CIGNA Re as defendants. The
action seeks a declaration that HealthPlan Services, Inc.'s alleged breaches of
its agreements with CIGNA Re and Clarica are not covered under the terms of
HealthPlan Services' policy with Admiral. On May 1, 2000, HealthPlan Services,
Inc. filed its answer to Admiral's complaint, denying that Admiral is entitled
to relief and asserting various defenses. In July 2000, citing the withdrawal
of the CIGNA Re and Clarica consolidated arbitration demand, Admiral filed a
motion to place the action in administrative suspension, pending the
resubmission of an arbitration demand by CIGNA Re or Clarica. The District
Court granted Admiral's motion on July 26, 2000.
9
<PAGE>
On or around October 23, 2000, HealthPlan Services settled the dispute with
Clarica in consideration for HealthPlan Services' payment of $400,000. Without
admitting any liability, the parties resolved most, but not all, of the dispute.
HealthPlan Services intends to mount a vigorous defense of the CIGNA Re and
Admiral claims, and to continue pursuit of its claims against CIGNA Re. While
the ultimate financial effect of these claims cannot be fully determined at this
time, in the opinion of management, they will not have a material adverse effect
on the accompanying financial statements.
10
<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 our 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; our ability to identify and
implement opportunities to administer new blocks of business; changes in
competition; and our ability to attract and retain key management personnel.
Introduction
The following is a discussion of changes in our consolidated results of
operations for the three and nine months ended September 30, 2000 and 1999.
We are a leading managed health care services company, providing marketing,
distribution, administration, and medical cost management services for health
care payors and providers. We function solely as a service provider generating
fee-based income and do not assume any underwriting risk.
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<PAGE>
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 nine months ended
September 30, 2000 compared to the same period in 1999. The following table
sets forth certain operating data as a percentage of total revenues for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues.............................. 100.0 % 100.0 % 100.0 % 100.0 %
Expenses:
Agent commissions.............................. 28.3 % 29.1 % 30.5 % 31.0 %
Personnel expenses............................. 37.9 % 35.9 % 37.4 % 35.3 %
General and administrative..................... 19.9 % 32.1 % 20.0 % 23.1 %
Restructure charge............................. 0.0 % 0.0 % 0.6 % 0.7 %
Other expense.................................. 0.0 % 0.7 % 0.9 % 0.3 %
Gain on sale of investments.................... 0.0 % (2.3)% (0.3)% (3.3)%
Depreciation and amortization.................. 6.1 % 6.0 % 5.6 % 5.3 %
Interest expense............................... 5.8 % 4.7 % 5.7 % 3.8 %
Interest income................................ (0.2)% (0.1)% (0.2)% (0.2)%
Equity in loss of joint venture................ 0.0 % 0.0 % 0.0 % 0.1 %
Total expenses................................ 97.8 % 106.1 % 100.2 % 96.1 %
Income (loss) before benefit provision for
income taxes, minority interest,
discontinued operations, loss on sale of
assets, and extraordinary item................. 2.2 % (6.1)% (0.2)% 3.9 %
(Benefit) provision for income taxes............ (1.1)% (2.0)% (0.2)% 1.7 %
Income (loss) before minority interest,
discontinued operations, loss on sale of
assets, and extraordinary item................. 3.3 % (4.1)% (0.0)% 2.2 %
Minority interest............................... 0.0 % 0.0 % 0.0 % 0.2 %
Income (loss) from continuing operations........ 3.3 % (4.1)% (0.0)% 2.0 %
(Loss) from discontinued operations,
net of taxes................................... 1.1 % 3.7 % 0.2 % 1.0 %
(Loss) on sale of assets, net of taxes.......... 87.0 % 0.0 % 28.4 % 0.0 %
Extraordinary loss from restructure
of debt, net of taxes.......................... 0.0 % 0.0 % 0.8 % 0.0 %
Net (loss) income............................... (84.8)% (7.8)% (29.4)% 1.0 %
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues for the three months ended September 30, 2000 decreased $0.5
million, or 1.2%, to $41.8 million from $42.3 million in 1999. Revenues from
fully insured customers decreased by $3.0 million, reflecting decreased revenues
of $3.9 million due to certain carrier partners exiting the fully insured market
beginning in 1999 and the termination of our administrative and marketing
agreements with Sunstar Health Plan, Inc. This decrease in fully insured
revenues was partially offset by new revenues from United Benefit Life Insurance
Company. Revenues from Medical Cost Management customers increased by $2.7
million as compared to the same period in 1999, due to the addition of new
customers.
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<PAGE>
Agent commission expense for the three months ended September 30, 2000
decreased $0.5 million, or 4.1%, to $11.8 million from $12.3 million for the
same period in 1999. This decrease is consistent with the decrease in fully
insured revenues for the period indicated, as described above. Fully insured
commissions as a percent of fully insured revenues increased to 48.4% in the
three months ended September 30, 2000, from 45.1% for the same period in 1999.
This increase resulted from higher commissions as a percent of United Benefit
Life Insurance Company revenues than those experienced for the carriers who are
exiting the fully insured market and Sunstar Health Plan, Inc.
Personnel expense for the three months ended September 30, 2000 increased
$0.6 million, or 4.0%, to $15.8 million from $15.2 million in 1999. This
increase was primarily attributable to salaries and benefits added to administer
our Taft Hartley business.
General and administrative expense for the three months ended September 30,
2000 decreased $5.3 million, or 39.0%, to $8.3 million from $13.6 million for
the three months ended September 30, 1999. This decrease was primarily
attributable to $4.7 million expense recorded in the third quarter of 1999
primarily related to claims asserted by four former customers and seven
insurance brokers.
During the second quarter of 1999, HealthPlan Services entered into an
agreement to sell 1,415,000 of its shares of HealthAxis.com stock resulting in a
pretax gain of $3.6 million. During the third quarter of 1999, an additional
gain of $1.0 million was recognized in accordance with terms of the agreement.
Interest expense for the three months ended September 30, 2000 increased to
$2.4 million from $2.0 million in 1999. This increase resulted primarily from
decreased average debt of $11.5 million on our line of credit as well as an
increased average interest rate of 490 basis points on the line of credit due to
the amended terms of the credit facility (see Note 3).
During the third quarter of 2000, we recorded a loss of $36.4 million, net
of taxes, representing a pretax gain of $7.3 million on the sale of our
unemployment compensation and workers' compensation units on July 5, 2000, a
pretax gain of $3.2 million on the sale of our Ohio workers' compensation
managed care organization unit on September 15, 2000, and a pretax loss of $47.9
million on our self-funded unit on October 26, 2000 (see Note 6).
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenues for the nine months ended September 30, 2000 decreased $11.2
million, or 8.1%, to $127.9 million from $139.1 million for the same period in
1999. Revenues from fully insured customers decreased by $17.4 million,
reflecting reduced revenues of $27.2 million due to certain carrier partners
exiting the fully insured market beginning in 1999 and the termination of our
administrative and marketing agreements with Sunstar Health Plan, Inc. This
reduction in fully insured revenues was partially offset by new revenues from
United Benefit Life Insurance Company. Revenues from Medical Cost Management
customers increased by $7.0 million as compared to the same period in 1999, due
to the addition of new customers.
Agent commission expense for the nine months ended September 30, 2000
decreased $4.2 million, or 9.7%, to $38.9 million from $43.1 million for the
same period in 1999. This decrease is consistent with the decrease in fully
insured revenues described above for the period indicated, as described above.
Fully insured commissions as a percent of fully insured revenues increased to
50.8% for the nine months ended September 30, 2000, from 46.0% for the same
period in 1999. This increase resulted from higher commissions as a percent of
United Benefit Life Insurance Company revenues than those experienced for the
carriers who are exiting the fully insured market and Sunstar Health Plan, Inc.
Personnel expense for the nine months ended September 30, 2000 decreased
$1.3 million, or 2.6%, to $47.8 million from $49.1 million for the same period
in 1999. This decrease was primarily attributable to reduced salaries resulting
from a reduction of approximately 180 employees in our workforce related to
office closures and the elimination of positions in fully insured
administration.
General and administrative expense for the nine months ended September 30,
2000 decreased $6.6 million, or 20.5%, to $25.6 million from $32.2 million for
the nine months ended September 30, 1999. This decrease was
13
<PAGE>
primarily attributable to $4.7 million expense recorded in the third quarter of
1999 related to claims asserted by four former customers and seven insurance
brokers. An additional favorable variance resulted from reduced professional
services related to the decrease in care management revenues and the outsourcing
of care management administration to a new vendor.
During the first quarter of 2000, we recorded a total of $0.8 million in
restructuring costs for the closure of a facility in Merrimack, New Hampshire
and other reductions in our workforce. The costs reflected employee and lease
terminations. We terminated 75 employees in management and claims
administration. We recorded $0.9 million in restructuring costs during the nine
months ended September 30, 1999. These costs reflect employee terminations and
computer software associated with reductions in our fully insured customer
workforce in Tampa, Florida. There were 63 employees terminated in management,
claims administration, and information systems.
During the second quarter of 2000, we recorded a total of $1.1 million in
legal, financial advisory, and other fees associated with the termination of our
merger agreement with UICI.
During the six months ended June 30, 2000, we entered into an agreement to
sell all 109,732 shares of our Caredata.com, Inc. stock, resulting in a pretax
gain of $0.3 million. In 1999, HealthPlan Services entered into an agreement to
sell 1,415,000 of its shares of HealthAxis.com stock resulting in a pretax gain
of $4.6 million.
Interest expense for the nine months ended September 30, 2000 increased to
$7.2 million from $5.4 million in 1999. This increase resulted primarily from
increased average debt of $2.1 million on our line of credit as well as an
increased average interest rate of 280 basis points on the line of credit due to
the amended terms of credit facility (see Note 3).
During the third quarter of 2000, we recorded a loss of $36.4 million, net
of taxes, representing a pretax gain of $7.3 million on the sale of our
unemployment compensation and workers' compensation units on July 5, 2000, a
pretax gain of $3.2 million on the sale of our Ohio workers' compensation
managed care organization unit on September 15, 2000, and a pretax loss of $47.9
million on our self-funded unit on October 26, 2000 (see Note 6).
We recorded an extraordinary loss of $1.0 million, net of taxes, related to
our credit facility during the second quarter of 2000 (see Note 3). This loss
represented $1.5 million of pretax non-interest fees and expenses connected with
the prior facility, which were previously subject to amortization over five
years.
B. LIQUIDITY AND CAPITAL RESOURCES
On June 8, 2000, we closed on our Second Amended and Restated Credit
Agreement (the "Credit Agreement"). The Credit Agreement provides for a $73.8
million term loan facility, a $25.0 million revolving credit facility, and a
letter of credit facility of up to $16.0 million available for current letters
of credit. Under the term loan facility, a payment of $250,000 was required at
closing and monthly for a two-month period commencing June 30, 2000 and
repayments of $500,000 each month thereafter with additional repayments of $15.0
million on January 31 and July 31, 2001, and a final payment on August 31, 2001.
The revolving credit facility has a final maturity date of August 31, 2001.
Interest rates vary from the higher of (a) the Prime Rate or (b) the Federal
Funds rate plus 1/2 of 1%, plus a margin of 1.5% to 3.0%. The Credit Agreement
required an initial payment of 1.0% of the maximum amount of the facility plus
certain administrative fees and an annual commitment fee of .25% for letters of
credit and unused commitments. We capitalized approximately $1.4 million of
bank fees relative to the Credit Agreement. Under the loan terms, we must
maintain certain financial covenants for revenue and EBITDA as defined in the
Credit Agreement, is restricted in capital expenditures, and is subject to
prepayment with proceeds of certain future activities such as sale of certain
assets, public offerings, and the like. During the nine months ended September
30, 2000, we paid $6.6 million of interest on our credit agreements.
On July 5, 2000, upon the sale of our unemployment compensation and workers
compensation units, we used the proceeds to reduce its debt by $18.0 million.
On September 15, 2000, we reduced debt by $2.8 million upon the sale of our Ohio
workers' compensation managed care organization unit. Upon the sale of our
self-funded business unit on October 26, 2000, we used the proceeds to reduce
our debt by an additional $8.7 million. As of October 31, 2000, the balance
outstanding under HealthPlan Services' Credit Agreement was $63.2 million, and
14
<PAGE>
HealthPlan Services has paid all of the scheduled payment of $15.0 million due
on January 31, 2001, and $10.5 million on the scheduled payment due on July 31,
2001.
On July 13, 2000, we paid $3.0 million to CENTRA Benefit Services, Inc. in
settlement of the contingent consideration related to our purchase of CENTRA in
1998 (see Note 5).
As of July 6, 2000, we have paid $1.1 million related to our terminated
merger with UICI in legal, financial advisory, and other fees.
On June 1, 2000, we paid $2.2 million, including principal and interest, to
the former owner of National Preferred Provider Network, Inc. ("NPPN") as part
of the additional contingent consideration relating to our acquisition of NPPN
in 1998. A principal balance of $2.0 million remains to be paid on June 1,
2001.
During the nine months ended September 30, 2000, we paid $3.2 million in
connection with the closure of CENTRA's Richardson, Texas office, which was
announced in 1999, and our Merrimack, New Hampshire office, which was announced
in the first quarter of this year.
We spent $4.6 million for capital expenditures during the nine months ended
September 30, 2000.
Based upon current expectations, we believe that all consolidated operating
and financing activities for the next twelve months will be met from internally
generated cash flow from operations, available cash, or our amended Credit
Agreement.
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks inherent in our financial
instruments. These instruments arise from transactions entered into in the
normal course of business and, in some cases, relate to our acquisitions of
related businesses. We are subject to interest rate risk on our existing Credit
Agreement and any future financing requirements. Our fixed rate debt consists
primarily of outstanding balances on our notes issued to C G Insurance Services,
Inc., the former owner of CENTRA, and certain equipment notes, and our variable
rate debt relates to borrowings under our Credit Agreement. See "Liquidity and
Capital Resources."
The following table presents the future principal payment obligations (in
thousands) and weighted-average interest rates associated with our existing
long-term debt instruments, assuming our actual level of long-term indebtedness
of $77.8 million as of September 30, 2000:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter
-------------- -------------- ------------ ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Liabilities
Long-term Debt Fixed Rate
(weighted average interest
rate of 6.06%) $ 88 $ 291 $ 220 $ 4,182 $ 202 $ 523
Variable Rate (weighted
average interest rate
of 12.5%) 8,592 63,738 - - - -
</TABLE>
Our 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 our ability to
obtain adequate financing to fund future acquisitions.
We manage interest rate risk on our variable rate debt by using 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 Credit Agreement to fixed rate debt at a weighted average rate of
6.18%.
While we cannot predict our ability to refinance existing debt or the
impact interest rate movements will have on our existing debt, our management
continues to evaluate our financial position on an ongoing basis.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of business, HealthPlan Services may be a party to a
variety of legal actions that affect any business, including employment and
employment discrimination-related suits, employee benefit claims, breach of
contract actions, and tort claims. In addition, because of the nature of its
business, HealthPlan Services could be subject to a variety of legal actions
relating to its business operations, including disputes alleging errors in claim
administration, underwriting, or premium billing. HealthPlan Services currently
has insurance coverage for some of these potential liabilities. Other potential
liabilities may not be covered by insurance, insurers may dispute coverage, or
the amount of insurance may not cover the damages awarded.
In January 1997, our subsidiary HealthPlan Services, Inc. ("HPS") began
providing marketing and administrative services for health plans of TMG Life
Insurance Company (now known as Clarica Life Insurance Company), with
Connecticut General Life Insurance Company ("CIGNA Re") acting as the reinsurer.
In January 1999, insureds under this coverage were notified that coverage would
be canceled beginning in July 1999. Substantially all coverage under these
policies is expected to terminate by December 31, 2000. In July 1999, Clarica
asserted a demand against HPS for claims in excess of $7.0 million for breach of
contract and related claims, and HPS asserted breach of contract and various
other claims against Clarica. In the third quarter of 1999, we recorded a
reserve for the Clarica claim and other claims. In April 2000, Clarica and
CIGNA Re jointly submitted a demand for consolidated arbitration in connection
with these claims and claims submitted by CIGNA Re for approximately $6.0
million. The demand for arbitration was subsequently withdrawn, without
prejudice to refile separate demands. On April 28, 2000, HPS filed a claim
against CIGNA Re in the Circuit Court for Hillsborough County, Florida. The
claim alleges that CIGNA Re breached its duty of good faith and fair dealing in
connection with the performance of its agreement with HPS. CIGNA Re removed the
proceeding to the United States District Court for the Middle District of
Florida.
On April 17, 2000, Admiral Insurance Company, our errors and omissions
carrier, filed a complaint for declaratory judgment in the United States
District Court for the Middle District of Florida, naming HPS, Clarica, and
CIGNA Re as defendants. The action seeks a declaration that HPS's alleged
breaches of its agreements with CIGNA Re and Clarica are not covered under the
terms of our policy with Admiral. On May 1, 2000, HPS filed its answer to
Admiral's complaint, denying that Admiral is entitled to relief and asserting
various defenses. In July 2000, citing the withdrawal of the CIGNA Re and
Clarica consolidated arbitration demand, Admiral filed a motion to place the
action in administrative suspension, pending the resubmission of an arbitration
demand by CIGNA Re or Clarica. The District Court granted Admiral's motion on
July 26, 2000.
On or around October 23, 2000, we settled the dispute with Clarica in
consideration for our payment of $400,000. Without admitting any liability, we
resolved most, but not all, of the dispute.
We intend to mount a vigorous defense related to the CIGNA Re, and Admiral
claims, and to continue pursuit of our claims against CIGNA Re. While the
ultimate financial effect of these claims cannot be fully determined at this
time, in the opinion of management they will not have a material adverse effect
on the accompanying financial statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description of Exhibit
------ ----------------------
27.1 Financial Data Schedule
17
<PAGE>
HEALTHPLAN SERVICES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHPLAN SERVICES CORPORATION
Date: November 13, 2000 /s/ Phillip S. Dingle
----------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2000 /s/ Gregory C. Fisher
----------------------------------------------
Senior Vice President and Controller
(Principal Accounting Officer)
18
