UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 9, 2000.
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,676,066
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<PAGE>
HEALTHPLAN SERVICES CORPORATION
TABLE OF CONTENTS
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 ...................... 2
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999 ................ 3
Condensed Consolidated Statement of Changes in Common
Stockholders' Equity Three Months Ended March 31, 2000 .... 4
Condensed Consolidated Statement of Cash Flows
Three Months Ended March 31, 2000 and 1999 ................ 5
Notes to Condensed Consolidated Financial Statements ...... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............. 10
PART II - OTHER INFORMATION 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHPLAN SERVICES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 6,252 $ -
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . 22,956 22,933
Prepaid expenses and other current assets . . . . . . . . . . . . . . 4,160 4,135
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . 1,196 666
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,837 4,532
-------------- ----------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 39,404 32,269
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 28,082 27,804
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,783 2,537
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,912 6,513
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,020 191,302
-------------- ----------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 262,201 $ 260,425
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 1,188
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,062 4,377
Premiums payable to carriers . . . . . . . . . . . . . . . . . . . . . . . 35,959 33,930
Commissions payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,408 4,862
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,137 1,762
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,447 26,810
Current portion of long-term debt payable . . . . . . . . . . . . . . . . 20,107 3,669
-------------- ----------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 91,120 76,598
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,621 92,168
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,247 2,892
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . 2,470 2,486
-------------- ----------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 177,458 174,144
-------------- ----------------
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares
authorized, 15,192,176 issued at March 31, 2000 and,
15,190,458 at December 31, 2000 . . . . . . . . . . . . . . . . . . . . 152 152
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 110,378 110,357
Treasury stock, 1,519,400 shares . . . . . . . . . . . . . . . . . . . . (30,006) (30,006)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,979 4,184
Unrealized appreciation on investments
available for sale, net of tax. . . . . . . . . . . . . . . . . . . . . 240 1,594
-------------- ----------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 84,743 86,281
-------------- ----------------
Total liabilities and stockholders' equity . . . . . . . . . . . . $ 262,201 $ 260,425
============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------
2000 1999
---- ----
<S> <C> <C>
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,398 $ 74,475
--------------- ---------------
Expenses:
Agent commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,331 16,575
Personnel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,552 29,957
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . 17,461 18,849
Restructure charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 -
Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 310
Gain on sale of investments, net . . . . . . . . . . . . . . . . . . . . . (285) -
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 3,889 4,049
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,294 1,764
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (199) (223)
Equity in loss of joint venture . . . . . . . . . . . . . . . . . . . . . - 155
---------------- ---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 65,793 71,436
---------------- ---------------
(Loss) income before benefit provision for
income taxes and minority interest . . . . . . . . . . . . . . . . . . . (395) 3,039
(Benefit) provision for income taxes . . . . . . . . . . . . . . . . . . (190) 1,413
---------------- ---------------
(Loss) income before minority interest . . . . . . . . . . . . . . . . . . (205) 1,626
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 189
---------------- ---------------
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (205) $ 1,437
================ ===============
Basic net (loss) income per share . . . . . . . . . . . . . . . . . . . . $ (0.01) $ 0.10
================ ===============
Basic weighted average shares outstanding . . . . . . . . . . . . . . . . 13,673 13,885
================ ===============
Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . $ n/a $ 0.10
================ ===============
Diluted weighted average shares outstanding . . . . . . . . . . . . . . . n/a 14,065
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Unrealized
Appreciation
Voting Additional on
Comprehensive Common Paid-in Treasury Retained Investments
Income Stock Capital Stock Earnings Available Total
for Sale
------------- -------- ----------- --------- -------- ------------ ---------
<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
Net loss (unaudited) ............... $ (205) - - - (205) - (205)
Unrealized depreciation on
investment available for sale
(unaudited)........................ (1,354) - - - - (1,354) (1,354)
-------------
Comprehensive income ............... $ (1,559)
============= -------- ----------- --------- --------- ------------ ---------
Balance at March 31, 2000
(unaudited) ...................... $ 152 $ 110,378 $(30,006) $ 3,979 $ 240 $ 84,743
======== =========== ========= ========= ============ =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . $ (205) $ 1,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 1,510 1,785
Amortization . . . . . . . . . . . . . . . . . . . . . . . . 2,379 2,264
Gain on sale of investments . . . . . . . . . . . . . . . . . (285) -
Equity in loss of joint venture . . . . . . . . . . . . . . . - 155
Minority interest . . . . . . . . . . . . . . . . . . . . . . - 189
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . 845 537
Changes in assets and liabilities net of effect
from acquisitions:
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . - 221
Accounts receivable . . . . . . . . . . . . . . . . . . . . . (23) (1,600)
Prepaid expenses and other current assets . . . . . . . . . . (25) 98
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 656 84
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . (1,188) -
Accounts payable . . . . . . . . . . . . . . . . . . . . . . (316) (42)
Premiums payable to carriers . . . . . . . . . . . . . . . . 2,029 (1,060)
Commissions payable . . . . . . . . . . . . . . . . . . . . . (454) 347
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 375 441
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . (2,342) 946
Income taxes payable . . . . . . . . . . . . . . . . . . . . (529) (202)
--------------- ---------------
Net cash provided by (used in) operating activities . . . . 2,427 (270)
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . . (1,788) (1,485)
Purchases of investments . . . . . . . . . . . . . . . . . . - (19)
Proceeds from sale of investments . . . . . . . . . . . . . . 738 -
Proceeds from notes receivable . . . . . . . . . . . . . . . - 207
--------------- ---------------
Net cash used in investing activities . . . . . . . . . . . (1,050) (1,297)
--------------- ---------------
Cash flows from financing activities:
Net borrowing under line of credit . . . . . . . . . . . . . 5,000 -
Net payments on other debt . . . . . . . . . . . . . . . . . (125) (291)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . - (1,910)
Repurchase of Common Stock . . . . . . . . . . . . . . . . . - (562)
Proceeds from Common Stock issued, net . . . . . . . . . . . - 11
--------------- ---------------
Net cash provided by (used in) by financing activities . . 4,875 (2,752)
--------------- ---------------
Net increase in cash and cash equivalents . . . . . . . . . . . 6,252 1,551
Cash and cash equivalents at beginning of period . . . . . . . . - 4,582
--------------- ---------------
Cash and cash equivalents at end of period . . . . . . . . . . $ 6,252 $ 6,133
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . $ 2,069 $ 1,706
=============== ===============
Net (refunds received) cash paid for income taxes . . . . . $ (862) $ 1,078
=============== ===============
Supplemental disclosure of cash flow information:
Dividends declared but unpaid . . . . . . . . . . . . . . . $ - $ 1,899
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. We terminated 75 employees in
management and claims administration. At March 31, 2000, a balance of $0.6
million remained to be paid for severance costs.
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 (182) (376) -
------------- ------------- --------------
Remaining liability - December 31, 1998 $ 986
--------------
Remaining liability - December 31, 1999 $ 2,703 $ 400
------------- --------------
Remaining liability - March 31, 2000 $ 568 $ 2,327 $ 400
============= ============= ==============
</TABLE>
3. NOTES PAYABLE AND CREDIT FACILITY AND SUBSEQUENT EVENT
Under HealthPlan Services' May 1, 1998 Amended and Restated Credit
Agreement, as amended, HealthPlan Services maintains a line of credit of $115.0
million (the "Line of Credit") with availability equal to a multiple of trailing
earnings before interest expense, income taxes, and depreciation and
amortization expense ("EBITDA") (with certain adjustments called for in the
credit agreement).
HealthPlan Services did not meet certain financial performance
requirements under the credit facility for the third and fourth quarters of
1999. The lenders under the credit facility and Healthplan Services entered into
an amendment and waiver (the "Waiver Agreement") under which the lenders waived
default with respect to these requirements, provided that: (i) HealthPlan
Services met certain minimum performance objectives; (ii) the proposed
acquisition of HealthPlan Services by UICI, a diversified financial services
company, was consummated on or prior to February 10, 2000; (iii) the Agreement
and Plan of Merger between HealthPlan Services and UICI ("the Merger Agreement")
did not otherwise terminate prior to closing of the transaction contemplated
thereby; and (iv) HealthPlan Services refrained from issuing dividends and
observed certain limits on its investments and capital expenditures. The
amendment and waiver also reduced the amount available under the Line of Credit
from $175.0 million to $115.0 million. The proposed acquisition of HealthPlan
Services was not completed by February 10, 2000, and on February 10, 2000, the
lenders under the credit facility and HealthPlan Services entered into a
nonwaiver and standstill agreement (the "Standstill Agreement") with the lenders
under the credit facility. Pursuant to the Standstill Agreement, the lenders
agreed to defer their rights or remedies related to the failure of HealthPlan
Services to meet certain financial performance requirements under the credit
facility for a period of thirty days from the execution of the amended merger
agreement (February 18, 2000) between HealthPlan Services and UICI.
Additionally, in accordance with the Standstill Agreement: (i) HealthPlan
Services executed and delivered to the agency bank a supplement to the pledge
agreement pledging 100% of the capital stock of HealthAxis.com owned by
HealthPlan Services; (ii) HealthPlan Services agreed upon a change in the
applicable margins to 250 and 150 basis points on borrowings on LIBOR and New
York prime drawings, respectively; and (iii) HealthPlan Services may not exceed
its borrowings on the date of the Standstill Agreement plus the amount available
under its swingline credit agreement of $5.0 million with the agency bank. On
March 17, 2000, the Standstill Agreement was extended to April 15, 2000.
On April 14, 2000, after agreeing to terminate the UICI transaction,
HealthPlan Services entered into an extension of the Standstill Agreement
pursuant to which HealthPlan Services and the lenders agreed to amend certain
terms of the May 1, 1998 credit agreement, with documentation to be formalized
by May 31, 2000. The agreement provides for a $90.0 million term loan including
up to $73.7 million maximum borrowings and remaining amounts available for
letters of credit. The agreement requires repayment of $250,000 of principal per
month for a three-month period commencing May 31, 2000 and $500,000 each month
thereafter with additional repayments of $15.0 million on January 31 and July
31, 2001, with a final payment on August 31, 2001. The agreement also provides
for a $25.0 million revolving credit facility and an August 31, 2001 final
maturity. Interest rates vary from base rate plus 1.5% to base rate plus 3.0%.
7
<PAGE>
The agreement requires initial payment of a fee of 1.0% of the maximum
amount of the facility plus certain administrative fees and annual commitment
fee of .25% for letters of credit and unused commitments.
Under the agreed loan terms, HealthPlan Services must maintain certain
financial covenants for revenue and EBITDA as defined in the 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,
etc.
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 Line of Credit to fixed rate debt at a weighted average
rate of 6.18%. For the quarter ended March 31, 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 $5.7 million relating to a
1993 acquisition, the 1998 acquisition of CENTRA, and equipment purchases, of
which $0.4 million is due within one year.
4. INVESTMENTS
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 gain of $50,000 which will be included in the second quarter.
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 pretax expense. This reserve reflected management's best estimate of the
possible ultimate liability to HealthPlan Services as a result of 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.
In January 1997, our 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.
8
<PAGE>
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 arbitration in
connection with these claims and claims submitted by CIGNA Re for approximately
$6.0 million. 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.
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 barred from coverage 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.
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.
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 months ended March 31, 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.
A. RESULTS OF OPERATIONS
The following is a discussion of material changes in our consolidated
results of operations for the three months ended March 31, 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>
Three Months Ended
March 31,
------------------
2000 1999
------ ------
<S> <C> <C>
Operating revenues ........................... 100.0 % 100.0 %
------- -------
Expenses:
Agent commissions ....................... 20.4 % 22.3 %
Personnel expenses ...................... 43.6 % 40.2 %
General and administrative .............. 26.7 % 25.3 %
Restructure charge ...................... 1.1 % 0.0 %
Integration ............................. 0.0 % 0.4 %
Gain on sale of investments, net ........ (0.4)% 0.0 %
Depreciation and amortization ........... 6.0 % 5.4 %
Interest expense ........................ 3.5 % 2.4 %
Interest income ......................... (0.3)% (0.3)%
Equity in loss of joint ventures ........ 0.0 % 0.2 %
------- --------
Total expenses .......................... 100.6 % 95.9 %
------- --------
Net (loss) income before benefit provision for
income taxes and minority interest ......... (0.6)% 4.1 %
(Benefit) provision for income taxes ......... (0.3)% 1.9 %
------- --------
Net (loss) income before minority interest ... (0.3)% 2.2 %
Minority interest ............................ 0.0 % 0.3 %
------- -------
Net (loss) income ............................ (0.3)% 1.9 %
======= =======
</TABLE>
10
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenues for the three months ended March 31, 2000 decreased $9.1
million, or 12.2%, to $65.4 million from $74.5 million in 1999. Revenues from
fully insured customers decreased by $8.6 million, reflecting reduced revenues
of $12.1 million due to four 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 $2.8 million, due
primarily to the reduction of revenues from care management services and the
termination of eight customers. Revenues from Medical Cost Management customers
increased by $2.3 million as compared to the same period in 1999, due to the
addition of new customers.
Agent commission expense for the three months ended March 31, 2000
decreased $3.3 million, or 19.9%, to $13.3 million from $16.6 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.
Personnel expense for the three months ended March 31, 2000 decreased
$1.4 million, or 4.7%, to $28.6 million from $30.0 million in 1999. This
decrease was primarily attributable to reduced salaries resulting from a
reduction of approximately 310 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 March 31,
2000 decreased $1.3 million, or 7.4%, to $17.5 million from $18.8 million for
the three months ended March 31, 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 an increase in the
allowance for doubtful accounts.
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.
During the first quarter of 2000, we entered into an agreement to sell
82,600 shares of Caredata.com, Inc. stock, resulting in a pretax gain of $0.3
million.
Interest expense for the three months ended March 31, 2000 increased to
$2.3 million from $1.8 million in 1999. This increase resulted primarily from
increased debt of $4.0 million on our line of credit as well as an increased
average interest rate of 200 basis points on the line of credit due to the
amended terms of the credit facility (see Note 3).
B. YEAR 2000 COMPLIANCE
During the quarter ended March 31, 2000, we spent an additional $695,000
for a total cost of $12.3 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. 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 and
customers would have no material effect.
C. LIQUIDITY AND CAPITAL RESOURCES
Under our May 1, 1998 Amended and Restated Credit Agreement, as amended,
we maintain a line of credit of $115.0 million (the "Line of Credit") with
availability equal to a multiple of trailing earnings before interest expense,
income taxes, and depreciation and amortization expense ("EBITDA") (with certain
adjustments called for in the credit agreement).
11
<PAGE>
We did not meet certain financial performance requirements under the
credit facility for the third and fourth quarters of 1999. We entered into an
amendment and waiver (the "Waiver Agreement") with the lenders under the credit
facility under which the lenders waived default with respect to these
requirements, provided that: (a) we met certain minimum performance objectives;
(b) the proposed acquisition of us by UICI was consummated on or prior to
February 10, 2000; (c) the Agreement and Plan of Merger between us and UICI
("the Merger Agreement") did not otherwise terminate prior to closing of the
proposed acquisition; and (d) we refrained from issuing dividends and observed
certain limits on our investments and capital expenditures. The amendment and
waiver also reduced the amount available under the Line of Credit from $175.0
million to $115.0 million. Our proposed acquisition was not completed by
February 10, 2000, and on February 10, 2000, we entered into a nonwaiver and
standstill agreement (the "Standstill Agreement") with the lenders under the
credit facility. Pursuant to the Standstill Agreement, the lenders agreed to
defer their rights or remedies related to our failure to meet certain financial
performance requirements under the credit facility for a period of thirty days
from the execution of the amended merger agreement (February 18, 2000) between
us and UICI. Additionally, in accordance with the Standstill Agreement: (a) we
executed and delivered to the agency bank a supplement to the pledge agreement
pledging 100% of the capital stock of HealthAxis.com; (b) we agreed to a change
in the applicable margins on borrowings on LIBOR and New York prime drawings, to
250 and 150 basis points, respectively; and (c) we may not exceed our borrowings
on the date of the Standstill Agreement plus the amount available under our
swingline credit agreement of $5.0 million with the agency bank. On March 17,
2000, the Standstill Agreement was extended to April 15, 2000.
On April 14, 2000, after agreeing to terminate the UICI transaction, we
entered into an extension of the Standstill Agreement pursuant to which we and
the lenders agreed to amend certain terms of the May 1, 1998 credit agreement,
with documentation to be formalized by May 31, 2000. The agreement provides for
a $90.0 million term loan including up to $73.7 million maximum borrowings and
remaining amounts available for letters of credit. The agreement requires
repayment of $250,000 of principal per month for a three-month period commencing
May 31, 2000, and $500,000 each month thereafter with additional repayments of
$15.0 million on January 31 and July 31, 2001, with a final payment in 2001. The
agreement also provides for a $25.0 million revolving credit facility and an
August 31, 2001 final maturity. Interest rates vary from base rate plus 1.5% to
base rate plus 3.0%.
The agreement requires initial payment of a fee of 1.0% of the maximum
amount of the facility plus certain administrative fees and annual commitment
fee of .25% for letters of credit and unused commitments.
Under the agreed loan terms, we must maintain certain financial
covenants for revenue and EBITDA, are restricted in capital expenditures, and
are subject to prepayment with proceeds of certain future activities such as
sale of certain assets, public offerings, etc.
We spent $1.8 million for capital expenditures during the three months
ended March 31, 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 revised
Line of Credit.
HealthPlan Services has retained financial advisers to assist in the
examination of its strategic banking alternatives.
12
<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 Line of
Credit 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 Line of Credit. See "Liquidity and
Capital Resources."
The following table presents the future principal payment obligations
(in thousands) and weighted-average interest rates associated with our existing
long-term debt instruments, assuming our actual level of long-term indebtedness
of $100.7 million as of March 31, 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 6.15%) . . . . . . . . . . . . . $ 310 $ 291 $ 220 $ 4,182 $ 202 $ 523
Variable Rate (weighted average
interest rate of 8.64%). . . . . . . . . 3,250 91,750 - - - -
</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 Line of Credit 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.
13
<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 arbitration in connection with these claims
and claims submitted by CIGNA Re for approximately $6.0 million. 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.
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 barred from coverage
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.
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.
<TABLE>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
On February 23, 2000, we filed a report on Form 8-K with respect to the
Amended Agreement and Plan of Merger with UICI.
14
<PAGE>
HEALTHPLAN SERVICES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHPLAN SERVICES CORPORATION
Date: May 15, 2000 /s/ James K. Murray, Jr
---------------------------------------------------
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
Date: May 15, 2000 /s/ Phillip S. Dingle
---------------------------------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
15
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 6,252
<SECURITIES> 0
<RECEIVABLES> 26,441
<ALLOWANCES> (3,485)
<INVENTORY> 0
<CURRENT-ASSETS> 39,404
<PP&E> 60,217
<DEPRECIATION> (32,135)
<TOTAL-ASSETS> 262,201
<CURRENT-LIABILITIES> 91,120
<BONDS> 80,621
0
0
<COMMON> 152
<OTHER-SE> 84,591
<TOTAL-LIABILITY-AND-EQUITY> 262,201
<SALES> 0
<TOTAL-REVENUES> 65,398
<CGS> 0
<TOTAL-COSTS> 63,499
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<INCOME-PRETAX> (395)
<INCOME-TAX> (190)
<INCOME-CONTINUING> (205)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (205)
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
