-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G6BvlCrbbjF68SXQJJ5cCVu2xAxTqx+Dgm2o5zF3Szj9vkY9+mzcm2JdbbR5rIAb nk/WMKoVshPyC+408WXkQA== 0001016843-99-000560.txt : 19990517 0001016843-99-000560.hdr.sgml : 19990517 ACCESSION NUMBER: 0001016843-99-000560 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHPLAN SERVICES CORP CENTRAL INDEX KEY: 0000942319 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 133787901 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13772 FILM NUMBER: 99622071 BUSINESS ADDRESS: STREET 1: 3501 FRONTAGE RD CITY: TAMPA STATE: FL ZIP: 33607 BUSINESS PHONE: 8132891000 MAIL ADDRESS: STREET 1: 3501 FRONTAGE RD CITY: TAMPA STATE: FL ZIP: 33607 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NO. 1-13772 HEALTHPLAN SERVICES CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 13-3787901 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3501 FRONTAGE ROAD, TAMPA, FLORIDA 33607 (Address of Principal Executive Offices) (Zip Code) (813) 289-1000 (Registrant's Telephone Number, Including Area Code) NOT APPLICABLE (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Total number of shares of Common Stock outstanding as of May 12, 1999. Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 13,771,455 HEALTHPLAN SERVICES CORPORATION TABLE OF CONTENTS PAGE NO. -------- PART I - FINANCIAL INFORMATION Item 1. Consolidated Balance Sheet March 31, 1999 and December 31, 1998..................... 2 Consolidated Statement of Operations Three Months Ended March 31, 1999 and 1998............... 3 Consolidated Statement of Changes in Common Stockholders' Equity Three Months Ended March 31, 1999... 4 Consolidated Statement of Cash Flows Three Months Ended March 31, 1999 and 1998............... 5 Notes to Consolidated Financial Statements............... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 9 PART II - OTHER INFORMATION 14 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HEALTHPLAN SERVICES CORPORATION CONSOLIDATED BALANCE SHEET (IN THOUSANDS EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ............................... $ 6,133 $ 4,582 Restricted cash ......................................... 11,152 11,373 Accounts receivable, net ................................ 23,434 21,834 Prepaid expenses and other current assets ............... 3,506 3,604 Deferred taxes .......................................... 1,448 1,448 --------- --------- Total current assets ............................ 45,673 42,841 Property and equipment, net ............................... 26,872 27,172 Other assets, net ......................................... 2,580 2,744 Deferred taxes ............................................ 659 1,145 Notes receivable .......................................... 3,291 3,499 Investments ............................................... 6,373 6,647 Intangible assets, net .................................... 190,575 192,757 --------- --------- Total assets .................................... $ 276,023 $ 276,805 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................ $ 13,875 $ 13,917 Premiums payable to carriers ............................ 37,086 38,146 Commissions payable ..................................... 5,579 5,232 Deferred revenue ........................................ 4,148 3,707 Accrued liabilities ..................................... 17,705 16,769 Income taxes payable .................................... 1,195 1,397 Current portion of long-term debt payable ............... 489 486 --------- --------- Total current liabilities ....................... 80,077 79,654 Notes payable ............................................. 96,689 96,837 Other long-term liabilities ............................... 2,586 2,732 --------- --------- Total liabilities ............................... 179,352 179,223 --------- --------- Minority interest ......................................... 6,118 5,930 --------- --------- Common stockholders' equity: Common stock voting, $0.01 par value, 100,000,000 shares authorized, 15,178,255 issued at March 31, 1999 and, 15,174,315 at December 31, 1998 ...................... 152 152 Additional paid-in capital ............................. 109,898 109,887 Treasury stock ......................................... (28,650) (28,088) Retained earnings ...................................... 9,274 9,736 Unrealized depreciation on investments available for sale, net of tax ...................... (121) (35) --------- --------- Total stockholders' equity ...................... 90,553 91,652 --------- --------- Total liabilities and stockholders' equity ...... $ 276,023 $ 276,805 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 2 HEALTHPLAN SERVICES CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA) FOR THE THREE MONTHS ENDED MARCH 31, ----------------------- 1999 1998 -------- -------- Operating revenues ............................... $ 74,475 $ 68,016 -------- -------- Expenses: Agent commissions .............................. 16,575 16,085 Personnel ...................................... 29,957 27,433 General and administrative ..................... 18,849 16,009 Integration .................................... 310 259 Other expenses ................................. -- 362 Gain on sale of investments, net ............... -- (2,685) Depreciation and amortization .................. 4,049 3,579 Interest expense, net .......................... 1,541 886 Equity in loss of joint ventures ............... 155 11,794 -------- -------- Total expenses ......................... 71,436 73,722 -------- -------- Income (loss) before provision for income taxes and minority interest ........... 3,039 (5,706) Provision (benefit) for income taxes ........... 1,413 (2,540) -------- -------- Income (loss) before minority interest ......... 1,626 (3,166) Minority interest .............................. 189 -- -------- -------- Net income (loss) .............................. $ 1,437 $ (3,166) ======== ======== Basic net income (loss) per share .............. $ 0.10 $ (0.21) ======== ======== Basic weighted average shares outstanding ...... 13,885 14,999 ======== ======== Diluted net income per share ................... $ 0.10 $ n/a ======== ======== Diluted weighted average shares outstanding ..... 14,065 n/a ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 3 HEALTHPLAN SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE AMOUNTS)
UNREALIZED APPRECIATION VOTING ADDITIONAL ON INVESTMENTS COMPREHENSIVE COMMON PAID-IN TREASURY RETAINED AVAILABLE INCOME STOCK CAPITAL STOCK EARNINGS FOR SALE TOTAL ------------- --------- ---------- --------- ---------- -------------- --------- Balance at December 31, 1998 .......... $ 152 $ 109,887 $ (28,088) $ 9,736 $ (35) $ 91,652 Refund of overpayment in connection with stock option plans (unaudited) .. -- (13) -- -- -- (13) Issuance of 3,940 shares in connection with the employee stock purchase plan (unaudited) ...... -- 24 -- -- -- 24 Cash dividends declared (unaudited) ..... -- -- -- (1,899) -- (1,899) Purchase of 70,100 treasury shares (unaudited) .......... -- -- (562) -- -- (562) Net income (unaudited) .................. $ 1,437 -- -- -- 1,437 -- 1,437 Unrealized depreciation on investment available for sale (unaudited) ................. (86) -- -- -- -- (86) (86) --------- --------- --------- --------- --------- --------- --------- Balance at March 31, 1999 (unaudited) ... $ 1,351 $ 152 $ 109,898 $ (28,650) $ 9,274 $ (121) $ 90,553 ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4 HEALTHPLAN SERVICES CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, ----------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net income (loss) ............................................. $ 1,437 $ (3,166) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .................................................. 1,785 1,762 Amortization .................................................. 2,264 1,817 Gain on sale of investments ................................... -- (2,685) Equity in loss of joint venture ............................... 155 11,794 Minority interest ............................................. 189 -- Issuance of common stock to management ........................ -- 59 Deferred taxes ................................................ 537 (3,944) Changes in assets and liabilities net of effect from acquisitions: Restricted cash ............................................... 221 (916) Accounts receivable ........................................... (1,600) (3,662) Refundable income taxes ....................................... -- 1,487 Prepaid expenses and other current assets ..................... 98 1 Other assets .................................................. 84 90 Accounts payable .............................................. (42) (1,137) Premiums payable to carriers .................................. (1,060) (716) Commissions payable ........................................... 347 1,080 Deferred revenue .............................................. 441 895 Accrued liabilities ........................................... 946 (3,029) Income taxes payable .......................................... (202) -- -------- -------- Net cash provided by (used in) operating activities ....................... 5,600 (270) -------- -------- Cash flows from investing activities: Purchases of property and equipment ........................... (1,485) (2,545) Cash paid for acquisitions, net of cash acquired .............. -- (4,000) Purchases of investments ...................................... (19) (11,987) Proceeds from sale of investments ............................. -- 6,095 Proceeds from notes receivable ................................ 207 -- -------- -------- Net cash used in investing activities .................. (1,297) (12,437) -------- -------- Cash flows from financing activities: Net borrowing under line of credit ............................ -- 15,000 Net payments on other debt .................................... (291) (257) Cash dividends paid ........................................... (1,910) -- Proceeds from exercise of stock options ....................... -- 2,038 Repurchase of Common Stock .................................... (562) (4,264) Proceeds from Common Stock issued, net ........................ 11 -- -------- -------- Net cash (used in) provided by financing activities .... (2,752) 12,517 -------- -------- Net increase (decrease) in cash and cash equivalents ............. 1,551 (190) Cash and cash equivalents at beginning of period ................. 4,582 1,545 -------- -------- Cash and cash equivalents at end of period ...................... $ 6,133 $ 1,355 ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest ........................................ $ 1,706 $ 975 ======== ======== Net cash paid (refunds received) for income taxes ............. $ 1,078 $ (80) ======== ======== Supplemental disclosure of cash flow information: Dividends declared but unpaid ................................. $ 1,899 $ -- ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 HEALTHPLAN SERVICES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 1. DESCRIPTION OF BUSINESS AND ORGANIZATION HealthPlan Services Corporation (together with its direct and indirect wholly owned subsidiaries, "HealthPlan Services" or the "Company") is a leading managed health care services outsourcing company, providing distribution, enrollment, billing and collection, and claims administration services for health care payors and providers. HealthPlan Services provides these services to approximately 140,000 groups covering over 3 million members in the United States. HealthPlan Services functions solely as a service provider generating fee-based income and does not assume any underwriting risk. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The interim financial data is unaudited and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the HealthPlan Services' 1998 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 1999. In the opinion of Management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation of financial position and results of operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements include the accounts of HealthPlan Services Corporation and its subsidiaries. HealthPlan Services has consolidated its investment in CENTRA HealthPlan LLC ("CENTRA") and Montgomery Management Corporation ("Montgomery Management") and recorded the interest of the minority shareholders of those entities on the balance sheet and statement of operations. All intercompany transactions and balances have been eliminated in consolidation. EARNINGS PER SHARE Basic earnings per share is calculated by dividing the income available to common stockholders by the weighted average number of shares outstanding for the period, without consideration for common stock equivalents. The calculation of diluted earnings per share reflects the effect of outstanding options and warrants using the treasury stock method. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year's presentation. These amounts do not have a material impact on the financial statements taken as a whole. 3. ACQUISITIONS On June 16, 1998, HealthPlan Services acquired a 50.1% interest in CENTRA. CENTRA was formed by an agreement between HealthPlan Services and CENTRA Benefit Services, Inc. ("CBS") in which substantially all the assets in CBS's third party administration business, which administers self-insured employee benefit plans, were transferred to CENTRA. HealthPlan Services paid $0.2 million for a 1% interest in CENTRA and acquired an additional 49.1% interest from CBS in exchange for the payment of $7.4 million 6 ($9.3 million purchase price net of the payoff of a CBS note), the issuance of $4.0 million in five year 5.75% notes convertible into approximately 180,000 shares of HealthPlan Services' stock, a purchase price holdback of up to $1.2 million, and additional contingent consideration. In addition to such contingent consideration, CBS was given the right to put its remaining interest in CENTRA at a contractual price not to exceed $6.0 million within two years of the acquisition date if it met certain financial performance criteria. On April 29, 1999, CBS exercised its put right, and HealthPlan Services paid CBS $4.4 million, which represented a payment of $5.5 million for CBS' 49.9% interest in CENTRA, offset by amounts due to HealthPlan Services in connection with the CENTRA acquisition. CENTRA is a major administrator of self-funded health plans for large corporations and is headquartered in Richardson, Texas. CENTRA also has processing facilities in Houston, Texas, Duncan, Oklahoma, Lynnwood, Washington, and Charleston, West Virginia. On May 18, 1998, HealthPlan Services acquired National Preferred Provider Network, Inc. ("NPPN") for $25.0 million cash and additional contingent consideration of up to $25.0 million if NPPN achieves certain financial performance objectives. Headquartered in Middletown, New York, NPPN is a preferred provider organization network which consists of over 450,000 physician offices, more than 4,000 hospitals, and 50,000 ancillary care providers covering all 50 states and the District of Columbia. On February 27, 1998, HealthPlan Services acquired 49% of the capital stock of Montgomery Management from Provident Indemnity Life Insurance Company for $4.0 million. In connection with the purchase, HealthPlan Services obtained a warrant to purchase an additional 31% of Montgomery Management for nominal consideration. On October 26, 1998, HealthPlan Services exercised this warrant for an additional 31% of Montgomery Management's capital stock for a cost of $8,060. Montgomery Management is a full service managing general underwriter that has the authority to bind health insurance coverage (on behalf of the insurance companies it represents) to self-funded customers. UNAUDITED PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS The following unaudited pro forma consolidated results of operations of HealthPlan Services give effect to acquisitions in 1998, accounted for as purchases, as if they occurred on January 1, 1998 (in thousands): THREE MONTHS ENDED ------------------ MARCH 31, 1998 ------------------ Revenues $ 80,789 Net loss (3,842) Net loss per common share (0.26) The above pro forma information is not necessarily indicative of the results of operations that would have occurred had the acquisitions been made as of January 1, 1998 or of the results which may occur in the future. 4. NOTES PAYABLE AND CREDIT FACILITY Under HealthPlan Services' May 1, 1998 Amended and Restated Credit Agreement, as amended, the Company maintains a line of credit of $175.0 million (the "Line of Credit"), with availability equal to a multiple of trailing earnings before interest expense, income taxes, and depreciation and amortization expense (with certain adjustments called for in the credit agreement). This multiple is set at 3.5 through June 30, 1999 and steps down thereafter to 2.75 during the remaining term of the facility. First Union National Bank of North Carolina serves as "agency bank," and NationsBank, N.A. serves as co-agent with respect to this facility. The credit facility contains provisions which include the maintenance of certain minimum financial ratios, limitations on merger and acquisition activity, limitations on capital expenditures, limitations on dividends and distributions, and limitations on investment activity. HealthPlan Services' borrowing under the Line of Credit includes interest ranging from LIBOR plus 75 to 150 basis points to New York prime plus 0 to 50 basis points. Current rates on LIBOR and New York prime rate drawings on the Line of Credit at March 31, 1999 were 6.5% and 8.0%, respectively. The Line of Credit carries a commitment fee ranging from 0.175% to 0.25% of the unused portion and is secured by the stock of HealthPlan Services' subsidiaries. The outstanding draw was $91.0 million at March 31, 1999, and the maximum amount available was $125.0 million. HealthPlan Services incurred $1.4 million of interest expense on the Line of Credit for the three months ended March 31, 1999. HealthPlan Services has also entered into two separate interest rate swap agreements as a hedge against interest rate exposure on the variable rate debt. The agreements, which expire in September and December 2001, effectively convert $40.0 million of variable debt under the Line of Credit to fixed rate debt at a weighted average 7 rate of 6.18% plus a margin ranging from 75 to 150 basis points. For the three months ended March 31, 1999, HealthPlan Services recorded $0.1 million of interest expense related to the swap agreements. HealthPlan Services considers the fixed rate and variable rate financial instruments to be representative of current market interest rates and, accordingly, the recorded amounts approximate their present fair market value. HealthPlan Services has additional notes of $6.2 million relating to a 1993 acquisition, the 1998 acquisition of CENTRA, and equipment purchases, of which $0.5 million is payable within one year. 5. INVESTMENTS HealthPlan Services owns 109,732 shares of Medirisk, Inc. ("Medirisk"), a provider of health care information. During the first quarter of 1998, HealthPlan Services sold 166,000 of shares it previously owned in Medirisk and recorded a gain on the sale of $2.5 million. On March 31, 1999, Medirisk's shares closed at $3.75 per share of common stock. This investment is recorded as available for sale with the unrealized holding loss reported in the equity section of the balance sheet in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 6. SUBSEQUENT EVENTS In January 1998, HealthPlan Services began providing policy issuance, billing, and claims services for the individual indemnity/preferred provider organization health insurance policies of Provident Indemnity Life Insurance Company ("PILIC") and Provident American Life and Health Insurance Company ("PALHIC"), which were life insurance subsidiaries of Provident American Corporation ("PAMCO"). In February 1998, HealthPlan Services acquired 49% of the capital stock of Montgomery Management from PILIC, together with warrants to purchase an additional 31% of the company. In October 1998, HealthPlan Services exercised the warrants. In May 1998, HealthPlan Services invested $5.8 million in a convertible note of HealthAxis.com, Inc. ("HealthAxis.com"), which was a wholly owned subsidiary of PAMCO, and received warrants to purchase 100,000 shares of PAMCO stock. In October 1998, the note and accrued interest on the note were converted into 2,365,365 shares of HealthAxis.com. In February 1999, PILIC and PAMCO asserted a demand against HealthPlan Services for claims in excess of $27.0 million, and HealthPlan Services asserted claims against PILIC and PAMCO. On May 13, 1999, the parties agreed to resolve all claims connected with the demand and exchange mutual releases. In connection with the resolution, HealthPlan Services: will continue providing administrative services to PILIC and PALHIC, the latter of which is now owned by Ceres Group, Inc.; acquired the remaining 20% interest in Montgomery Management; agreed to sell up to 1,415,000 shares of HealthAxis.com stock; exercised its warrants to purchase 100,000 shares of PAMCO stock at $9.0 per share; and will receive a net cash consideration of $8.3 million. HealthPlan Services has preliminarily estimated that the above transaction will result in a pre-tax gain of approximately $2.5 million. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE STATEMENTS CONTAINED IN THIS REPORT OR INCORPORATED BY REFERENCE HEREIN THAT ARE NOT PURELY HISTORICAL, INCLUDING STATEMENTS REGARDING HEALTHPLAN SERVICES CORPORATION'S OBJECTIVES, EXPECTATIONS, HOPES, INTENTIONS, BELIEFS, OR STRATEGIES, ARE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933. IN PARTICULAR, THE WORDS "EXPECT," "ESTIMATE," "PLAN," "ANTICIPATE," "PREDICT," "INTEND," "BELIEVE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE THAT ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS, AND UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE SUCH ACTUAL RESULTS TO DIFFER MATERIALLY ARE: CHANGES IN LEGISLATION; FLUCTUATIONS IN BUSINESS CONDITIONS AND THE ECONOMY; HEALTHPLAN SERVICES CORPORATION'S ABILITY TO IDENTIFY AND IMPLEMENT OPPORTUNITIES TO ADMINISTER NEW BLOCKS OF BUSINESS; CHANGES IN COMPETITION; AND HEALTHPLAN SERVICES CORPORATION'S ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT PERSONNEL. INTRODUCTION The following is a discussion of changes in the consolidated results of operations of HealthPlan Services for the three months ended March 31, 1999 and 1998. HealthPlan Services is a leading managed health care services company, providing distribution, enrollment, billing and collection, and claims administration services for health care payors and providers. HealthPlan Services functions solely as a service provider generating fee-based income and does not assume any underwriting risk. A. RESULTS OF OPERATIONS The following is a discussion of material changes in the consolidated results of operations of HealthPlan Services for the three months ended March 31, 1999 compared to the same period in 1998. The following table sets forth certain operating data as a percentage of total revenues for the periods indicated: THREE MONTHS ENDED MARCH 31, --------------------- 1999 1998 -------- -------- Operating revenues ............................ 100.0 % 100.0 % ------- ------- Expenses: Agent commissions ........................ 22.3 % 23.7 % Personnel expenses ....................... 40.2 % 40.3 % General and administrative ............... 25.3 % 23.5 % Integration .............................. 0.4 % 0.4 % Other expenses ........................... 0.0 % 0.5 % Gain on sale of investments, net ......... 0.0 % (3.9)% Depreciation and amortization ............ 5.4 % 5.3 % Interest expense, net .................... 2.1 % 1.3 % Equity in loss of joint ventures ......... 0.2 % 17.3 % ------- ------- Total expenses ........................... 95.9 % 108.4 % ------- ------- Net income (loss) before provision for income taxes and minority interest .......... 4.1 % (8.4)% Provision (benefit) for income taxes .......... 1.9 % (3.7)% ------- ------- Net income (loss) before minority interest..... 2.2 % (4.7)% Minority interest ............................. 0.3 % 0.0 % ------- ------- Net income (loss) ............................. 1.9 % (4.7)% ======= ======= 9 THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Revenues for the three months ended March 31, 1999 increased $6.5 million, or 9.6%, to $74.5 million from $68.0 million for the same period in 1998. New revenues of $8.2 million and $4.2 million recognized as a result of the CENTRA and NPPN acquisitions, respectively, were offset by a decrease in revenues from fully insured customers ($4.3 million), primarily related to the transition of a block of indemnity/preferred provider organization business from The Travelers Insurance Company and United HealthCare Corporation to Seaboard Life Insurance Company (USA) products and a decrease in revenues from the block of business assumed from TMG Life Insurance Company in 1997. This reduction in fully insured revenues was partially offset by revenues from new carrier relationships. Other revenue decreases were realized from self-funded customers ($1.7 million), primarily related to the loss of seven large customers which terminated between April and October 1998. Agent commission expense for the three months ended March 31, 1999 increased $0.5 million, or 3.1%, to $16.6 million from $16.1 million for the same period in 1998. This increase is consistent with the increase in operating revenues for the period indicated. Personnel expense for the three months ended March 31, 1999 increased $2.6 million, or 9.5%, to $30.0 million from $27.4 million for the same period in 1998. This increase resulted primarily from $4.3 million of personnel expense associated with the consolidation of CENTRA and NPPN. This increase was offset by reduced salaries resulting from a reduction of approximately 320 employees in HealthPlan Services' workforce, and reduction in use of overtime and temporary help. General and administrative expense for the three months ended March 31, 1999 increased $2.8 million, or 17.5%, to $18.8 million from $16.0 million for the three months ended March 31, 1998. This increase was primarily attributable to $5.7 million of general and administrative expense associated with the consolidation of CENTRA's and NPPN's financial results. This increase was offset by reductions in rent due to office closings, printing, travel, and sales promotions. HealthPlan Services' general and administrative expense as a percentage of total revenue increased to 25.3% in the first quarter of 1999 from 23.5% for the same period in 1998. During the first quarter of 1998, the Company sold 166,000 of its shares of Medirisk stock and all 200,000 of its shares of HRM stock, resulting in gains of $2.5 million and $0.2 million, respectively. Depreciation and amortization expense for the three months ended March 31, 1999 increased $0.4 million, or 11.1%, to $4.0 million from $3.6 million for the three months ended March 31, 1998. This increase related primarily to amortization of goodwill on HealthPlan Services' CENTRA and NPPN acquisitions. Net interest expense for the three months ended March 31, 1999 increased to $1.5 million from $0.9 million in 1998. This increase resulted primarily from HealthPlan Services' acquisitions of CENTRA and NPPN, along with the shares repurchased in 1998. HealthPlan Services recorded its 50% share of the $23.6 million loss incurred by SHPS for the three months ended March 31, 1998, which was principally the result of a charge for the write-off of purchased research and development associated with acquisitions by SHPS. HealthPlan Services sold its interest in SHPS in September 1998. B. YEAR 2000 COMPLIANCE INTRODUCTION The "Year 2000 Problem" arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. The problems created by using abbreviated dates appear in hardware (such as microchips), operating systems, and other software programs. HealthPlan Services' Year 2000 ("Y2K") compliance project is intended to prepare HealthPlan Services' business for the Year 2000. HealthPlan Services defines Y2K "compliance" to mean that the computer code will process all defined future dates properly and give accurate results. 10 PLAN TO ADDRESS YEAR 2000 COMPLIANCE HealthPlan Services has conducted a review of its computer systems and capabilities and has created a three-pronged program for addressing issues related to the Year 2000. This program includes the purchase and implementation of software packages from vendors, an upgrade of vendor packages to Year 2000 compliant versions, and the internal development and implementation of new software applications to increase the capabilities of HealthPlan Services' systems for the future. The implementation of this plan commenced in 1996 with the upgrade of the mainframe operating system. HealthPlan Services has since purchased and replaced its accounting and financial system and workers compensation system and written and implemented a new system for the unemployment compensation business. HealthPlan Services has received from the vendor the latest version of its claim processing software, which is Year 2000 compliant, and is currently implementing this version for all current accounts. HealthPlan Services also is undertaking system enhancements to its billing and administration system. HealthPlan Services has requested Year 2000 compliance information from its significant customers and vendors, including landlords and other third parties that are responsible for non-information technology systems such as security and environmental controls. In particular, HealthPlan Services has asked each vendor and customer for information regarding (a) the status of the vendor's or customer's Year 2000 readiness initiative, and (b) information regarding any expected changes in the vendor's or customer's data interface with HealthPlan Services. A team of HealthPlan Services information system professionals is coordinating its Year 2000 compliance efforts and is testing any new interfaces with vendors and customers. COST OF PROJECT Between 1996 and the three months ended March 31, 1999, HealthPlan Services spent $8.9 million for Year 2000 compliance system upgrades and expects to spend $1.5 million in both capital and modification costs to complete its Year 2000 program. These costs include the expense of replacing any existing systems with Year 2000 compliant systems, even in cases where the system would have been replaced or upgraded regardless of Year 2000 requirements. STATE OF READINESS, RISKS, AND CONTINGENCY PLANS HealthPlan Services expects that its systems and software will be Year 2000 compliant by the close of the second quarter of 1999. However, there are risks relating to the external vendors and customers with which HealthPlan Services exchanges data. Because HealthPlan Services does not control these vendors and customers or their resources, HealthPlan Services can provide no assurance that such vendors and customers will complete their respective Year 2000 solutions in time for HealthPlan Services to fully test system interfaces with them. Although HealthPlan Services does not have a formal Year 2000 contingency plan, its Year 2000 compliance team will be responding to any disruption in service resulting from a Year 2000 compliance problem in HealthPlan Services' systems and software or in a vendor's or customer's system. There is no assurance, however, that HealthPlan Services will be able to remedy any disruption in service, in particular any disruption from a vendor's or customer's failure to be Year 2000 compliant or to inform HealthPlan Services of a change in its data interface. HealthPlan Services cannot estimate the cost that would be associated with a disruption in service resulting from its own or a vendor's or customer's Year 2000 compliance failure. C. LIQUIDITY AND CAPITAL RESOURCES Under HealthPlan Services' May 1, 1998 Amended and Restated Credit Agreement, as amended, the Company maintains a line of credit of $175.0 million (the "Line of Credit") with availability equal to a multiple of trailing earnings before interest expense, income taxes, and depreciation and amortization expense (with certain adjustments called for in the credit agreement). This multiple is set at 3.5 through June 30, 1999 and steps down thereafter to 2.75 during the remaining term of the facility. First Union National Bank of North Carolina serves as "agency bank," and NationsBank, N.A. serves as co-agent, with respect to this facility. The credit facility contains provisions which include the maintenance of certain minimum financial ratios, limitations on merger and acquisition activity, limitations on capital expenditures, limitations on dividends and distributions, and limitations on investment activity. HealthPlan Services' borrowing under the Line of Credit includes interest ranging from LIBOR 11 plus 75 to 150 basis points to New York prime plus 0 to 50 basis points. Current rates on LIBOR and New York prime rate drawings on the Line of Credit at March 31, 1999 were 6.5% and 8.0%, respectively. The Line of Credit carries a commitment fee ranging from 0.175% to 0.25% of the unused portion and is secured by the stock of HealthPlan Services' subsidiaries. The outstanding draw was $91.0 million at March 31, 1999, and the maximum amount available was $125.0 million. Pursuant to the HealthPlan Services' Line of Credit, the Company may pay a quarterly dividend of up to $0.1375 per share of HealthPlan Services' capital stock (up to $0.55 per share on an annualized basis). On March 24, 1999, HealthPlan Services declared a dividend of $0.1375 per share. This dividend, totaling $1.9 million, was paid on April 20, 1999. During the second quarter of 1997, the Board of Directors authorized HealthPlan Services to use up to $20.0 million to support a share repurchase program. HealthPlan Services began implementing this share repurchase program in the first quarter of 1998. On May 12, 1998, the Board increased to $30.0 million its authorization to repurchase shares under this program. Through May 12, 1999, HealthPlan Services had acquired 1,406,800 shares under this program at a cost of approximately $29.1 million. The Company spent $1.5 million for capital expenditures during the three months ended March 31, 1999. On April 29, 1999, HealthPlan Services paid $4.4 million to CBS, which represented a payment of $5.5 million for CBS' 49.9% interest in CENTRA, offset by amounts due to HealthPlan Services in connection with the CENTRA acquisition. Based upon current expectations, the Company believes that all consolidated operating and financing activities for the foreseeable future will be met from internally generated cash flow from operations, available cash, or its existing Line of Credit. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK HealthPlan Services is exposed to certain market risks inherent in HealthPlan Services' financial instruments. These instruments arise from transactions entered into in the normal course of business and, in some cases, relate to HealthPlan Services' acquisitions of related businesses. HealthPlan Services is subject to interest rate risk on its existing Line of Credit and any future financing requirements. HealthPlan Services' fixed rate debt consists primarily of outstanding balances on its notes issued to C G Insurance Services, Inc. and the former owner of CENTRA and certain equipment notes, and its variable rate debt relates to borrowings under its Line of Credit. See "Liquidity and Capital Resources." The following table presents the future principal payment obligations (in thousands) and weighted-average interest rates associated with HealthPlan Services' existing long-term debt instruments, assuming HealthPlan Services' actual level of indebtedness of $97.2 million as of March 31, 1999:
1999 2000 2001 2002 2003 THEREAFTER -------- -------- -------- -------- ---------- ---------- Liabilities Long-term Debt Fixed Rate (weighted average interest rate of 6.28%) ............... $ 386 $ 398 $ 282 $ 208 $ 4,182 $ 722 Variable Rate (weighted average interest rate of 6.58%)...................... 91,000
HealthPlan Services' primary market risk exposure relates to (i) the interest rate risk on long-term and short-term borrowings, (ii) the impact of interest rate movements on its ability to meet interest expense requirements and exceed financial covenants, and (iii) the impact of interest rate movements on HealthPlan Services' ability to obtain adequate financing to fund future acquisitions. HealthPlan Services manages interest rate risk on its variable rate debt through its use of two separate interest rate swap agreements. The agreements, which expire in September and December 2001, effectively 12 convert $40.0 million of variable rate debt under the Line of Credit to fixed rate debt at a weighted average rate of 6.18%. While HealthPlan Services cannot predict its ability to refinance existing debt or the impact interest rate movements will have on its existing debt, management continues to evaluate its financial position on an ongoing basis. 13 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 27.1 Financial Data Schedule 14 HEALTHPLAN SERVICES CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTHPLAN SERVICES CORPORATION Date: May 14, 1999 /s/ JAMES K. MURRAY, JR ---------------------------------------------------- Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: May 14, 1999 /s/ PHILLIP S. DINGLE ---------------------------------------------------- Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 15 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27 Financial Data Schedule EX-27 2
5 1,000 U.S. DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 17,285 0 25,498 (2,064) 0 45,673 53,481 (26,609) 276,023 80,077 96,689 0 0 152 90,401 276,023 0 74,475 0 69,740 344 0 1,541 2,850 1,413 1,437 0 0 0 1,437 0.10 0.10
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