UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 1, 2000.
Common Stock ...................................................13,683,456
<PAGE>
HEALTHPLAN SERVICES CORPORATION
Table of Contents
Page No.
---------------
Part I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 .........................2
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2000 and 1999 ...........3
Consolidated Statements of Changes in
Stockholders' Equity Six Months Ended June 30, 2000 .........4
Consolidated Statements of Cash Flows
Six Months Ended June 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 ..............10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ..........................................15
Part II - OTHER INFORMATION 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHPLAN SERVICES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................$ 2,008 $ -
Restricted cash ............................................................ - 3
Accounts receivable, net ................................................... 21,636 22,933
Prepaid expenses and other current assets .................................. 4,576 4,135
Refundable income taxes .................................................... 3,272 666
Deferred taxes ............................................................. 3,591 4,532
-------------- ----------------
Total current assets ............................................... 35,083 32,269
Property and equipment, net .................................................. 28,425 27,804
Other assets, net ............................................................ 2,267 2,537
Investments .................................................................. 2,649 6,513
Intangible assets, net ....................................................... 186,737 191,302
-------------- ----------------
Total assets .......................................................$ 255,161 $ 260,425
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft .............................................................$ - $ 1,188
Accounts payable ........................................................... 4,712 4,377
Premiums payable to carriers ............................................... 36,913 33,930
Commissions payable ........................................................ 5,405 4,862
Deferred revenue ........................................................... 2,214 1,762
Accrued liabilities ........................................................ 17,999 26,810
Current portion of long-term debt payable .................................. 21,058 3,669
-------------- ----------------
Total current liabilities .......................................... 88,301 76,598
Notes payable ................................................................ 78,962 92,168
Deferred taxes ............................................................... 3,311 2,892
Other long-term liabilities .................................................. 2,457 2,486
-------------- ----------------
Total liabilities .................................................. 173,031 174,144
-------------- ----------------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common Stock, $0.01 par value, 100,000,000 shares
authorized, 15,195,466 issued at June 30, 2000 and,
15,190,458 at December 31, 2000 ......................................... 152 152
Additional paid-in capital ................................................ 110,391 110,357
Treasury Stock, 1,519,400 shares .......................................... (30,006) (30,006)
Retained earnings ......................................................... 2,053 4,184
Unrealized (depreciation) appreciation on investments
available for sale, net of tax .......................................... (460) 1,594
-------------- ----------------
Total stockholders' equity ......................................... 82,130 86,281
-------------- ----------------
Total liabilities and stockholders' equity .........................$ 255,161 $ 260,425
============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues .......................................$ 64,425 $ 70,932 $ 129,823 $ 145,407
-------------- --------------- -------------- -------------
Expenses:
Agent commissions ...................................... 13,797 14,241 27,128 30,816
Personnel expenses ..................................... 26,854 28,389 55,406 58,346
General and administrative ............................. 16,787 19,248 34,248 38,097
Restructure charge ..................................... - 920 750 920
Integration ............................................ - - - 310
Other expenses ......................................... 1,120 - 1,120 -
Gain on sale of investments, net ....................... (47) (3,583) (332) (3,583)
Depreciation and amortization .......................... 3,945 4,160 7,834 8,209
Interest expense ....................................... 2,665 1,840 4,959 3,603
Interest income ........................................ (224) (106) (423) (328)
Equity in loss of joint ventures ....................... - 53 - 208
-------------- --------------- -------------- -------------
Total expenses ........................................... 64,897 65,162 130,690 136,598
-------------- --------------- -------------- -------------
(Loss) income before provision for income
taxes, minority interest, and
extraordinary item ..................................... (472) 5,770 (867) 8,809
Provision for income taxes ............................... 500 2,398 310 3,811
-------------- --------------- -------------- -------------
(Loss) income before minority interest
and extraordinary item ................................. (972) 3,372 (1,177) 4,998
Minority interest ........................................ - 56 - 245
-------------- --------------- -------------- -------------
(Loss) income before extraordinary item .................. (972) 3,316 (1,177) 4,753
Extraordinary loss from restructure
of debt, net of taxes .................................. 954 - 954 -
-------------- --------------- -------------- -------------
Net (loss) income ........................................$ (1,926) $ 3,316 $ (2,131) $ 4,753
============== =============== ============== =============
Basic (loss) earnings per share of Common Stock:
(Loss) earnings before extraordinary item ..............$ (0.07) $ 0.24 $ (0.09) $ 0.34
Extraordinary item ..................................... (0.07) - (0.07) -
-------------- --------------- -------------- -------------
Net (loss) earnings ....................................$ (0.14) $ 0.24 $ (0.16) $ 0.34
============== =============== ============== =============
Basic weighted average number of
shares outstanding .................................... 13,676 13,759 13,674 13,820
============== =============== ============== =============
Diluted (loss) earnings per share of Common Stock:
(Loss) earnings before extraordinary item ..............$ (0.07) $ 0.24 $ (0.09) $ 0.34
Extraordinary item ..................................... (0.07) - (0.07) -
-------------- --------------- -------------- -------------
Net (loss) earnings ....................................$ (0.14) $ 0.24 $ (0.16) 0.34
============== =============== ============== =============
Diluted weighted average number of
shares outstanding .................................... 13,676 13,944 13,674 14,003
============== =============== ============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
3
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Unrealized
Depreciation
on
Voting Additional Investments
Comprehensive Common Paid-in Treasury Retained Available
Income Stock Capital Stock Earnings for Sale Total
------------- --------- ----------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 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 3,290 shares in
connection with the employee
stock purchase plan (unaudited) .. - 13 - - - 13
Net loss (unaudited) ................. $ (2,131) - - - (2,131) - (2,131)
Unrealized depreciation on investment
available for sale (unaudited) ... (2,054) - - - - (2,054) (2,054)
-------------
Comprehensive loss ................... $ (4,185)
============= --------- ----------- --------- --------- ------------ ---------
Balance at June 30, 2000
(unaudited) ...................... $ 152 $ 110,391 $(30,006) $ 2,053 $ (460) $ 82,130
========= =========== ========= ========= ============ =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ................................................$ (2,131) $ 4,753
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ..................................................... 2,998 3,670
Amortization ..................................................... 6,400 4,539
Gain on sale of investments ...................................... (332) (3,583)
Equity in loss of joint venture .................................. - 208
Minority interest ................................................ - 245
Deferred taxes ................................................... 2,566 941
Changes in assets and liabilities net of effect from acquisitions:
Restricted cash .................................................. 3 2,466
Accounts receivable .............................................. 1,298 (667)
Prepaid expenses and other current assets ........................ (441) (136)
Other assets ..................................................... (1,564) (79)
Cash overdraft ................................................... (1,188) 2,528
Accounts payable ................................................. 334 (2,526)
Premiums payable to carriers ..................................... 2,983 (95)
Commissions payable .............................................. 542 (766)
Deferred revenue ................................................. 451 (796)
Accrued liabilities .............................................. (8,791) 55
Income taxes payable ............................................. (2,605) 860
----------------- -----------------
Net cash provided by operating activities ................. 523 11,617
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment .............................. (3,619) (3,050)
Cash paid for acquisitions, net of cash acquired ................. - (8,674)
Purchase of investments .......................................... - (919)
Proceeds from sale of investments ................................ 936 7,040
Receivable from sale of investments, net ......................... - (6,955)
Decrease in note receivable ...................................... - 3,499
----------------- -----------------
Net cash used in investing activities ..................... (2,683) (9,059)
----------------- -----------------
Cash flows from financing activities:
Net borrowing (payments) under line of credit .................... 4,435 (1,000)
Payments on other debt ........................................... (280) (443)
Cash dividends paid .............................................. - (3,809)
Purchase of Treasury Stock ....................................... - (1,919)
Proceeds from Common Stock issued ................................ 13 31
----------------- -----------------
Net cash provided by (used in) financing activities ....... 4,168 (7,140)
----------------- -----------------
Net increase in cash and cash equivalents ........................... 2,008 (4,582)
Cash and cash equivalents at beginning of period .................... - 4,582
----------------- -----------------
Cash and cash equivalents at end of period ..........................$ 2,008 $ -
================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest ...........................................$ 4,833 $ 3,491
================= =================
Net (refunds received) paid for income taxes .....................$ (616) $ 2,013
================= =================
Supplemental disclosure of noncash activities:
Dividends declared and unpaid ....................................$ - $ 1,879
================= =================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 3 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.
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 June 30, 2000, a balance
of $0.2 million remained to be paid for severance costs related to the charge in
2000, a balance of $0.3 million remained to be paid for severance costs 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.
6
<PAGE>
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 (580) (2,441) -
------------- -------------
--------------
Remaining liability - December 31, 1998 $ 986
--------------
Remaining liability - December 31, 1999 $ 2,703 $ 400
------------- --------------
Remaining liability - June 30, 2000 $ 170 $ 262 $ 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. On
July 5, 2000, upon the sale of HealthPlan Services' unemployment compensation
and workers compensation units, HealthPlan Services used the proceeds to reduce
its debt by $18.0 million (see Note 6). Of this amount, $6.7 million represents
projected income taxes which may be re-borrowed upon their due date in September
2000. As of July 5, 2000, the balance outstanding under HealthPlan Services'
Credit Agreement was $76.4 million.
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 six months ended June 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.
HealthPlan Services has additional notes of $5.6 million in the
aggregate. The notes relate to a 1993 acquisition, the 1998 acquisition of
CENTRA, and equipment purchases, of which $0.3 million is due within one year.
7
<PAGE>
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 pre-tax 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 pre-tax 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. 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 pre-tax 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 June 30, 2000, was $3.2
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
judgement 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
8
<PAGE>
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.
HealthPlan Services intends to mount a vigorous defense of the Clarica,
CIGNA Re, and Admiral claims, and to continue pursuit of its claims against
Clarica and 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.
6. Subsequent Events
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, including $6.7 million of
projected income taxes on the transaction which may be re-borrowed upon their
due date in September 2000. As a result of the transaction, HealthPlan Services
expects to recognize a pre-tax gain in the third quarter of $7-8 million.
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
contingent consideration.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE STATEMENTS CONTAINED IN THIS REPORT OR INCORPORATED BY REFERENCE
HEREIN THAT ARE NOT PURELY HISTORICAL, INCLUDING STATEMENTS REGARDING 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 six months ended June 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.
10
<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 six months ended
June 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 Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues ........................ 100.0 % 100.0 % 100.0 % 100.0 %
Expenses:
Agent commissions ....................... 21.4 % 20.1 % 20.9 % 21.2 %
Personnel expenses ...................... 41.6 % 40.0 % 42.7 % 40.1 %
General and administrative .............. 26.1 % 27.1 % 26.4 % 26.2 %
Restructure charge ...................... 0.0 % 1.3 % 0.6 % 0.6 %
Integration ............................. 0.0 % 0.0 % 0.0 % 0.2 %
Other expense ........................... 1.7 % 0.0 % 0.9 % 0.0 %
Gain on sale of investments ............. (0.0)% (5.1)% (0.3)% (2.5)%
Depreciation and amortization ........... 6.1 % 5.9 % 6.0 % 5.7 %
Interest expense ........................ 4.1 % 2.6 % 3.8 % 2.5 %
Interest income ......................... (0.3)% (0.2)% (0.3)% (0.2)%
Equity in loss of joint venture ......... 0.0 % 0.1 % 0.0 % 0.1 %
Total expenses ....................... 100.7 % 91.8 % 100.7 % 93.9 %
(Loss) income before provision for
income taxes, minority interest,
and extraordinary item .................. (0.7)% 8.2 % (0.7)% 6.1 %
Provision for income taxes ............... 0.8 % 3.4 % 0.2 % 2.6 %
(Loss) income before
minority interest, and
extraordinary item ...................... (1.5)% 4.8 % (0.9)% 3.5 %
Minority interest ......................... 0.0 % 0.1 % 0.0 % 0.2 %
Net (loss) income before
extraordinary item ...................... (1.5)% 4.7 % (0.9)% 3.3 %
Extraordinary loss from restructure
of debt, net of taxes ................... (1.5)% 0.0 % (0.7)% 0.0 %
Net (loss) income ......................... (3.0)% 4.7 % (1.6)% 3.3 %
</TABLE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues for the three months ended June 30, 2000 decreased $6.5
million, or 9.2%, to $64.4 million from $70.9 million in 1999. Revenues from
fully insured customers decreased by $5.8 million, reflecting reduced revenues
of $10.9 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 self-insured customers decreased by $2.7 million, due
primarily to the decrease of revenues from care management services and
terminated customers. Revenues from Medical Cost Management customers increased
by $2.1 million as compared to the same period in 1999, due to the addition of
new customers.
11
<PAGE>
Agent commission expense for the three months ended June 30, 2000
decreased $0.4 million, or 2.8%, to $13.8 million from $14.2 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 52.7% in the
three months ended June 30, 2000, from 44.6% 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 HealthPlan, Inc.
Personnel expense for the three months ended June 30, 2000 decreased
$1.5 million, or 5.3%, to $26.9 million from $28.4 million in 1999. This
decrease was primarily attributable to reduced salaries resulting from a
reduction of approximately 315 employees in our workforce related to office
closures and the elimination of positions in fully insured and self-insured
administration.
General and administrative expense for the three months ended June 30,
2000 decreased $2.4 million, or 12.5%, to $16.8 million from $19.2 million for
the three months ended June 30, 1999. This decrease was primarily attributable
to reduced professional services related to the decrease in care management
revenues and the outsourcing of care management administration to a new vendor
and a reduction in bad debt expense. The decrease in professional services was
partially offset by increased costs associated with electronic imaging of our
records and network fees paid on the increased Medical Cost Management revenues.
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 second quarter of 2000, we entered into an agreement to sell
the remaining 27,132 shares of Caredata.com, Inc. stock, resulting in a pre-tax
gain of $50,000.
Interest expense for the three months ended June 30, 2000 increased to
$2.7 million from $1.8 million in 1999. This increase resulted primarily from
increased debt of $5.0 million on our line of credit as well as an increased
average interest rate of 330 basis points on the line of credit due to the
amended terms of the credit facility (see Note 3).
We recorded an extraordinary loss of $1.0 million net of taxes on our
credit facility during the three months ended June 30, 2000 (see Note 3). This
loss represented $1.5 million of pre-tax non-interest fees and expenses
connected with the prior facility, which were previously subject to amortization
over five years.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues for the six months ended June 30, 2000 decreased $15.6
million, or 10.7%, to $129.8 million from $145.4 million for the same period in
1999. Revenues from fully insured customers decreased by $14.4 million,
reflecting reduced revenues of $23.3 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 self-insured customers
decreased by $5.5 million, due primarily to the reduction of revenues from care
management services and terminated customers. Revenues from Medical Cost
Management customers increased by $4.3 million as compared to the same period in
1999, due to the addition of new customers.
Agent commission expense for the six months ended June 30, 2000 decreased
$3.7 million, or 12.0%, to $27.1 million from $30.8 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 51.9% for the
six months ended June 30, 2000, from 46.3% 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 HealthPlan, Inc.
Personnel expense for the six months ended June 30, 2000 decreased $2.9
million, or 5.0%, to $55.4 million from $58.3 million for the same period in
1999. This decrease was primarily attributable to reduced salaries
12
<PAGE>
resulting from a reduction of approximately 315 employees in our workforce
related to office closures and the elimination of positions in fully insured and
self-insured administration.
General and administrative expense for the six months ended June 30, 2000
decreased $3.9 million, or 10.2%, to $34.2 million from $38.1 million for the
six months ended June 30, 1999. This decrease was primarily attributable to
reduced professional services related to the decrease in care management
revenues and the outsourcing of care management administration to a new vendor.
This decrease in professional services was partially offset by increased costs
associated with electronic imaging of our records and network fees paid on the
increased Medical Cost Management revenues.
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 six
months ended June 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
pre-tax gain of $0.3 million. 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 pre-tax gain of $3.6 million.
Interest expense for the six months ended June 30, 2000 increased to $5.0
million from $3.6 million in 1999. This increase resulted primarily from
increased debt of $5.0 million on our line of credit as well as an increased
average interest rate of 260 basis points on the line of credit due to the
amended terms of credit facility (see Note 3).
We recorded an extraordinary loss of $1.0 million net of taxes related to
our credit facility during the three months ended June 30, 2000 (see Note 3).
This loss represented $1.5 million of pre-tax non-interest fees and expenses
connected with the prior facility, which were previously subject to amortization
over five years.
B. YEAR 2000 COMPLIANCE
During the six months ended June 30, 2000, we spent an additional $1.2
million for a total cost of $12.8 million to complete our Year 2000 compliance
project, a project that began in 1996 to address the issue of computer programs
which would not properly recognize a year beginning with "20" instead of the
familiar "19." To date, we have not experienced disruptions in any of our
computer systems related to Year 2000 compliance. Although we have not
experienced any disruptions at this time and do not anticipate any further
significant expenditures, we cannot guarantee that any disruptions that might
occur from any data exchange with vendors or that customers would not experience
material adverse effects if any disruption did occur.
C. 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
13
<PAGE>
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 six months ended June 30, 2000, we
paid $4.5 million of interest on our credit agreements.
On July 5, upon the sale of our unemployment compensation and workers
compensation units, we used the proceeds to reduce its debt by $18.0 million. Of
this amount, $6.7 million represents projected income taxes which may be
re-borrowed upon their due date in September 2000.
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 6).
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.
During 2000, we have paid $1.0 million in adverse claim settlements
against a reserve established in the third quarter of 1999, which relates to
various claims asserted against us.
During the six months ended June 30, 2000, we paid $3.0 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 $3.6 million for capital expenditures during the six months
ended June 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.
HealthPlan Services has retained financial advisers to assist in the
examination of its strategic banking alternatives.
14
<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 $100.0 million as of June 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 6.11%) .................. $ 167 $ 291 $ 220 $ 4,182 $ 202 $ 523
Variable Rate (weighted
average interest rate
of 8.64%) ........................ 20,750 73,685 - - - -
</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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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 judgement 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.
We intend to mount a vigorous defense related to the Clarica, CIGNA Re,
and Admiral claims, and to continue pursuit of our claims against Clarica and
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
16
<PAGE>
HEALTHPLAN SERVICES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHPLAN SERVICES CORPORATION
Date: August 8, 2000 /s/ Phillip S. Dingle
-----------------------------------------
President and Chief Operating Officer
(Principal Executive Officer)
Date: August 8, 2000 /s/ Gregory C. Fisher
-----------------------------------------
Senior Vice President and Controller
(Principal Accounting Officer)
17
