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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)
Registrant's telephone number, including area code (813) 289-1000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF NAME OF EXCHANGE
EACH CLASS ON WHICH REGISTERED
---------- -------------------
Common Stock $.01 par value........................NYSE
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Securities registered pursuant to Section 12(g) of the Act: None
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 ninety (90) days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock, $0.1 par
value, held by non-affiliates of the registrant, computed by reference to the
last reported price at which the stock was sold on February 16, 2000, was
$47,964,537.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 16, 2000 was 13,672,776.
PART I
THE STATEMENTS CONTAINED IN THIS REPORT OR INCORPORATED BY REFERENCE HEREIN THAT
ARE NOT PURELY HISTORICAL, INCLUDING STATEMENTS REGARDING HEALTHPLAN SERVICES'
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.
ITEM 1. BUSINESS
GENERAL
We are a leading managed health care services company, providing
marketing, distribution, administration, and medical cost management services
for health care plans and other benefit programs. Our customers include
insurance companies, health maintenance organizations ("HMOs") and other managed
care organizations, and organizations with self-funded benefit plans. We provide
services to over 100,000 groups covering over 3 million members in the
United States. We function solely as a service provider generating fee-based
income and do not assume any underwriting risk.
STRATEGY
Our strategy is to improve revenue and operating profits through the
addition of new payors, the addition of new products, and the expansion of our
medical cost management business. We also plan to develop new information
technology services and upgrade operating systems to increase labor efficiency.
OUR SERVICES
We provide marketing, distribution, administration, and medical cost
management services for health plans and other benefit programs. We have
strengthened our service capabilities through our interactive electronic
Internet site, which is accessible through our home page (www.healthplan.com).
1
MARKETING AND DISTRIBUTION SERVICES.
We help insurance companies and other health care organizations market
and distribute health plans that target individuals and small businesses. We
provide advice on managed care product design based on our experience in the
small business market as well as market research, actuarial analysis of claims
adjudicated, and interaction with payor organizations. The products we help
design often include features that address the particular needs of the small
business employer, including specialized medical, dental, life, and disability
coverage. On behalf of our payors, we help educate insurance agents about the
benefits offered under payor product offerings.
We provide sales support for insurance agents through a sales force
that includes telephone sales representatives. We maintain a database of over
100,000 insurance agents, including general agents, independent brokers, and
career agency groups. A career agency is often affiliated with a life or
property and casualty parent company that does not underwrite health products.
We provide career agencies with opportunities to distribute health products that
compliment their existing product offerings. Our relationships with independent
and career agents provide us with a significant distribution conduit to the
small business market in the United States. In 1999, we paid commissions to over
22,000 agents.
We have invested in information technology to support our sales and
marketing function. Through our electronic Internet site, agents can obtain
electronic forms, check the underwriting status of pending cases, get
information on active business, and access quotations for certain products for
individuals. Agents can also access automatic premium quotations for individual
products through our interactive voice response system. Using our automated
proposal delivery system, our sales representatives can deliver finished
proposals to agents immediately by fax server or electronic mail.
PLAN ADMINISTRATION SERVICES.
We provide enrollment, premium billing and collection, claims
administration, and customer support services for all types of benefit plans. As
a provider of enrollment services, we perform underwriting support services,
issue enrollment cards, and administer case renewals. Our billing and collection
services on behalf of payors include sending monthly bills to plan members,
receiving premium payments, and paying agent commissions. We also implement
premium adjustments due to rate changes, employee hiring or termination, and
other group changes. As a provider of claims administration services, we verify
eligibility, calculate copayments, reprice and adjudicate claims, prepare
explanation of benefits forms, and issue checks from payor accounts to claimants
and to health care providers. Our customer support representatives respond to
plan member questions regarding claims and other plan benefits.
Through our claims adjudication software and other technology, we
streamline plan administration for our customers. We provide automated billing
and collection services through electronic funds transfer. Plan members can
access billing information, obtain forms, and request customer service through
our Internet site. Our site compliments our established customer service
capabilities, which include over 450 toll-free telephone lines and a customized
call distribution system for routing and tracking calls. We also provide an
interactive voice response system that allows plan members to check on the
status of premium payment and claims matters automatically by telephone. Our
employees can receive claims electronically and image and digitize
non-electronic claims. In June 1999, we became one of the first companies to use
Time Warner's new Road Runner Internet connection. Road Runner provides Internet
access for contract workers who provide claims processing services for us from
their homes. By using a cable modem, Road Runner eliminates the need for a
separate telephone line for Internet connection. The Road Runner service is also
faster and less expensive than other Internet connection options. To ensure
customer privacy, we created a Virtual Private Network using an early release
version of Novell's Border Manager. The directory-based software allows home
workers to send and receive confidential data securely over the Internet.
In addition to enrollment, claims administration, and customer support
services, we offer specialized administrative services tailored for our
self-funded customers. We provide workers compensation claims administrative
services for both public and private employers. Our workers compensation
services include medical case management and bill adjudication services for Ohio
employers that participate in the Ohio Health Partnership program. We serve over
5,400 employers through this program. We also provide claims and tax consulting
services to help employers control their state unemployment insurance liability.
Our claims staff is authorized to provide state employment security agencies
with information required to process unemployment claims filed by former
employees.
2
In February 1999, HealthPlan Services, Inc. ("HPS"), our wholly owned
subsidiary, signed an agreement to acquire a 19% interest in Florida 1st Health
Plans, Inc. Florida 1st, based in Winter Haven, Florida, provides third party
administration services and offers HMO products. HPS terminated the Florida 1st
acquisition agreement in September 1999.
MEDICAL COST MANAGEMENT SERVICES
Our medical cost management services help health plans reduce costs and
enhance plan benefits. We provide our clients with access to discounts on the
services of health care providers, including hospitals, physicians, pharmacies,
and laboratories. We also provide reporting and analytical services that can
help payors design more cost-effective and comprehensive benefit plans.
Through our subsidiary National Preferred Provider Network, Inc.
("NPPN"), our clients have access to regional and national preferred provider
organization ("PPO") networks that offer discounts on provider services. NPPN
affiliate networks include over 450,000 physician offices, 4,000 hospitals, and
50,000 ancillary care provider locations in all 50 states and the District of
Columbia. NPPN's clients include all types of payors, including insurance
carriers, third party administrators, and self-funded benefit plans.
Our subsidiary Montgomery Management Corporation is a managing general
underwriter that serves self-funded benefit plans. Montgomery Management offers
stop-loss coverage that provides self-funded plans with insurance for plan
expenses that exceed specified thresholds. Montgomery Management has the
authority to bind stop-loss insurance coverage for self-funded plans on behalf
of the insurance companies it represents.
We have enhanced our medical cost management services with value-added
product offerings. In January 1999, an affiliate of Merck-Medco Managed Care
L.L.C., which manages prescription drugs, began providing pharmacy benefits for
our fully insured and self-funded benefit plan customers. In the second quarter
of 1999, we offered our customers access to the Lab Card(R) laboratory testing
program offered by LabONE, Inc. In September 1999, we entered into an agreement
with HealthCare Recoveries, Inc., a provider of subrogation and recovery
services, to make HealthCare Recoveries' services available to our customers.
Our Analytics Information Management ("AIM") team specializes in
leading edge reporting tools for all types of health benefit plans, including
fully insured and self-funded plans. Our AIM professionals prepare reports for
health plans that capture information regarding the plans' health care cost
management, demographics, case management, provider services, diagnoses, and
procedures. We also provide data analysis services, benefit plan modeling, and
cost benefit analysis services. Payors can use this information to help design
plans that control costs and enhance benefits.
OUR CUSTOMERS
We provide services for a wide range of health care benefit plans and
employee benefit programs, including self-funded benefit plans for employers,
associations, and Taft-Hartley trusts, and fully insured health plans offered by
managed care organizations, insurance companies, and other health care
organizations.
SELF-FUNDED HEALTH PLANS AND EMPLOYEE BENEFIT PROGRAMS (LARGE GROUP
CUSTOMERS).
We provide administration and medical cost management services for
self-funded health benefit plans, workers compensation programs, and
unemployment compensation programs. In 1999, we provided these services for
approximately 3,000 customers, including large corporations, government sector
employers, associations, and Taft-Hartley benefit plans, which are employee
benefit plans managed jointly by union and management representatives. Our
self-funded customers include the Oklahoma State and Education Employees Group
Insurance Board, the American Veterinary Medical Association Group Health and
Life Insurance Trust, the Hotel Employees and Restaurant Employees International
Union Welfare Fund, the State of South Carolina Dental Program, and Darden
Restaurants.
3
In June 1998, we acquired a 50.1% interest in CENTRA HealthPlan LLC
("CENTRA"), and we acquired the remaining 49.9% interest in April 1999. CENTRA
is an administrator of self-funded health plans for over 90 groups, including
the State of Washington Health Care Authority and Inland Steel Corporation.
FULLY INSURED BENEFIT PLANS (SMALL GROUP CUSTOMERS).
We provide marketing, distribution, administration, and medical cost
management services for insurance companies and other organizations that offer
health benefit plans for individuals and small businesses. Our clients include
New England Financial Life Insurance Company, which accounted for 9.85% of our
1999 revenues, and affiliates of Ceres Group, Inc., which accounted for 10.6% of
our 1999 revenues.
In January 1998, we began providing services for the individual
indemnity/preferred provider organization health insurance policies of Provident
Indemnity Life Insurance Company ("Provident Indemnity") and Provident American
Life and Health Insurance Company ("Provident American"). In 1999, this business
accounted for approximately 8.15% of our revenues. Effective January 1, 1999,
Central Reserve Life Insurance Company, the predecessor of Ceres Group, Inc.,
acquired Provident American. In February 1999, Provident Indemnity and its
parent company, Provident American Corporation (now known as HealthAxis, Inc.),
asserted a demand against us for claims in excess of $27 million. Effective in
March 1999, we settled this matter, as well as several claims that we had
asserted against Provident Indemnity and Provident American Corporation. The
impact of this settlement is reflected in our 1999 Financial Statements.
In September 1999, we began providing marketing and administrative
services for United Benefit Life Insurance Company, a Ceres Group affiliate. In
October 1999, we entered into agreements to provide marketing and administrative
services for another Ceres Group affiliate, Continental General Insurance
Company.
During 1998 and 1999, four of our carrier partners elected to exit the
small group market and cancel coverage. None of the canceled coverage was
transitioned as a block to another carrier. In aggregate, the canceled coverage
accounted for 6.9% of our 1999 revenues. Substantially all coverage under the
canceled policies is expected to terminate by December 31, 2000.
Effective June 30, 1999, we terminated our administrative services
agreement with SunStar Health Plan, Inc. and our SunStar marketing agreement was
also canceled. This business accounted for approximately 7.0% of our revenue for
the first six months of 1999.
We continue to experience higher lapses than new sales in the business
written with our fully insured payors. Several factors have contributed to this
trend. Escalating medical costs have resulted in less competitive pricing for
managed indemnity products. In recent years there has been a nationwide increase
in the frequency with which employer groups change benefit plans, due in part to
rapid changes in benefit designs offered, higher first-year commissions for
agents, and guaranteed issue legislation and other new laws that make it easier
for employer groups to switch plans without penalty. As a result of these and
other factors, carriers and managed care payors are less committed to the small
group market, and the industry has consolidated. We are not certain when, if
ever, these trends will be reversed.
Although we continue to work with our fully insured payors to introduce
additional cost control mechanisms, we cannot predict whether these payors will
be able to manage their medical loss ratios successfully and thus offer
competitive pricing for their products. We also cannot predict whether we will
be able to form new alliances with health care payors that are committed to the
small group market for the long term. The results of our initiatives in these
areas may affect our ability to maintain and grow fully insured business in the
future.
Typically, our fully insured payors sign contracts with us that are
cancelable by either party without penalty upon advance written notice of
between 90 days and one year. The loss of one or more of our key fully insured
blocks of business could have a material adverse effect on us.
4
OUR HISTORY
Our principal operating subsidiary, HealthPlan Services, Inc., was
founded in 1970 by James K. Murray, Jr., our current Chairman of the Board,
President, and Chief Executive Officer, Charles H. Guy, Jr., and Trevor G.
Smith. The Dun & Bradstreet Corporation purchased the business in 1978 and
operated it as a division. In 1994, the three founders and other investors
incorporated HealthPlan Services Corporation in Delaware and purchased the
business from Dun & Bradstreet. On May 19, 1995, we completed an initial public
offering of 4,025,000 shares of Common Stock.
INTEGRATION
In 1998, we began integration of our newly acquired CENTRA HealthPlan
LLC and NPPN businesses, including integration of technology platforms
associated with the CENTRA acquisition, and closure of the Irving, Texas and
Houston, Texas CENTRA offices. We completed the NPPN system integration in the
first quarter of 1999 and substantially completed integration of the CENTRA
system in the third quarter of 1999. We continue to explore opportunities to
increase efficiency through consolidation of operations. In the fourth quarter
of 1999, we commenced the closing of our San Bernardino, California and
Richardson, Texas offices and implemented a reduction in force at our Duncan,
Oklahoma and St. Louis, Missouri locations.
INFORMATION TECHNOLOGY
Our primary data processing facilities are located in Tampa, Florida,
Columbus, Ohio, and El Monte, California. We operate in a three-tiered
architectural environment. A large IBM mainframe supports substantially all of
the transactions processed by us. In 1999, we completed our initiative to
consolidate our operations into a common technology platform and eliminate
redundant computer facilities as part of our ongoing integration of acquired
businesses.
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," for a discussion of our Year 2000
Compliance Plan.
GOVERNMENT REGULATION
We are subject to regulation under the health care, insurance laws, and
other laws of all 50 states, the District of Columbia, and Puerto Rico. Many
states require us or our employees to receive regulatory approval or licensure
to provide claims administration services. Provider networks also are regulated
in many states. We are dependent upon our continued good standing under
applicable licensing laws and regulations. These laws and regulations are
intended to protect plan members rather than stockholders and differ in content,
interpretation, and enforcement practices from state to state. Moreover, with
respect to many issues affecting us, there is a lack of guiding judicial or
administrative precedent. State regulators have relatively broad discretion to
interpret these laws when granting, renewing, or revoking licenses or approvals.
Regulators could construe some of these laws to prohibit or restrict practices
that have been significant factors in our operating procedure for many years. We
could risk major erosion and even "rebate" exposure if state regulators
determine that our practices are impermissible.
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), governs the relationships between certain health benefit plans and
the fiduciaries of those plans. In general, ERISA is designed to protect the
ultimate beneficiaries of the plans from wrongdoing by the fiduciaries. ERISA
provides that a person is a fiduciary of a plan to the extent that such person
has discretionary authority in the administration of the plan or with respect to
the plan's assets. Each employer is a fiduciary of the plan it sponsors, but
there also can be other fiduciaries of a plan. ERISA imposes various express
obligations on fiduciaries. For example, a fiduciary must prevent its plan from
engaging in certain prohibited transactions with parties in interest or from
acting under an impermissible conflict of interest with a plan. Generally, a
party in interest with respect to a plan includes a fiduciary of the plan and
persons that provide services to the plan. The application of ERISA to our
operations is an evolving area of law and is subject to ongoing regulatory and
judicial interpretations of ERISA. Although we strive to minimize the
applicability of ERISA to our business and to ensure that our practices are not
inconsistent with ERISA, there can be no assurance that courts or the United
States Department of Labor will not in the future take positions contrary to our
current or future practices. Any such contrary positions could require changes
to our business practices (as well as industry practices generally) or
5
result in liabilities of the type referred to above. Similarly, there can be no
assurance that future statutory changes to ERISA will not significantly affect
us and our industry.
COMPETITION
We face competition and potential competition from traditional
indemnity insurance carriers, Blue Cross/Blue Shield organizations, managed care
organizations, third party administrators, PPOs, transaction processing
companies, and health care information companies. We compete principally on the
basis of the price and quality of services. Many large insurers and managed care
companies offer individual small group products through captive agents and do
not outsource any administrative services in connection with such products. We
compete for large group clients with several hundred local and regional third
party administrators. In addition, many large insurers have actively sought the
claims administration business of self-funded programs and have begun to offer
services similar to the services we offer. Many of our competitors and potential
competitors are considerably larger and have significantly greater resources
than we do.
EXECUTIVE OFFICERS OF HEALTHPLAN SERVICES
Set forth below is information regarding our executive officers.
Executive officers are appointed by the Board and serve at the pleasure of the
Board.
NAME AND AGE OCCUPATION/BACKGROUND
------------ ---------------------
James K. Murray, Jr. - 64 Chairman of the Board and Chief Executive Officer of HealthPlan Services
since January 1998, President since January 2000, and a director since
October 1994. Mr. Murray was President and Chief Executive Officer of
HealthPlan Services from December 1994 to December 1997. Mr. Murray
held the position of Corporate Senior Vice President of The Dun &
Bradstreet Corporation from March 1990 until his retirement from Dun &
Bradstreet in December 1993. Mr. Murray also served as Chairman of the
Board of the Reuben H. Donnelly Corp., a publisher of telephone yellow
pages, from August 1991 to December 1993. Mr. Murray co-founded the
predecessor to HealthPlan Services in 1970.
Jeffery W. Bak - 34 Executive Vice President - Small Group Sales and Operations of
HealthPlan Services since June 1999. Mr. Bak joined HealthPlan
Services in January 1995 and served as Vice President - Sales from
January 1995 to December 1996, Senior Vice President - Sales from
January 1997 to December 1998, and Executive Vice President - Sales,
Marketing, and Business Development from January 1999 to May 1999.
From November 1992 to December 1994, Mr. Bak was a reinsurance
broker with Peglar & Associates in Stamford, Connecticut.
Phillip S. Dingle - 38 Executive Vice President and Chief Financial Officer of HealthPlan
Services since January 1999. From August 1996 to December 1998,
Mr. Dingle was Senior Vice President and Chief Counsel of HealthPlan
Services. Prior to August 1996, Mr. Dingle was a partner with the
law firm of Hill, Ward & Henderson in Tampa, Florida, having joined
the firm in May 1990, specializing in commercial trial law and
general business matters.
George E. Lucco - 52 Executive Vice President - Large Group Operations of HealthPlan
Services since October 1994. Mr. Lucco joined HealthPlan Services
in 1982 and has served as an Executive Vice President with various
operational and management responsibilities since 1989.
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NAME AND AGE OCCUPATION/BACKGROUND
------------ ---------------------
Jeffrey L. Markle - 51 Executive Vice President - Medical Cost Management of HealthPlan
Services since July 1999. From June 1998 to June 1999, Mr. Markle
was Senior Vice President - Medical Loss Management of HealthPlan
Services. From 1996 to 1998, Mr. Markle was Vice President of the US
Group Operations for Swiss Re Life & Health, a reinsurance company
in Toronto. From 1994 to 1996, he was Vice President and General
Manager of the Canadian Operations of Olsten Kimberly Quality Care,
a home healthcare company. From 1991 to 1993, he was Chief
Operating Officer of Medisys Health Group, Inc., a preventive health
care company in Canada, and from 1989 to 1991 he was President and
Chief Executive Officer of Laurentian Health Services.
EMPLOYEES
We had approximately 2,920 employees on March 31, 2000. Except for some
of the employees of American Benefit Plan Administrators, Inc., a subsidiary
that administers Taft-Hartley plans, our labor force is not unionized. We
believe that our relationship with our employees is good.
TRADEMARKS
We utilize various service marks, trademarks, and trade names in
connection with our products and services, most of which are the property of our
customers. Although we consider our service marks, trademarks, and trade names
important in the operation of our business, our business is not dependent on any
individual service mark, trademark, or trade name.
UICI TRANSACTION
As of October 5, 1999, we entered into a merger agreement with UICI, a
diversified financial services company. On December 9, 1999, UICI announced a
significant loss in its credit card operations, and the merger was delayed. On
February 18, 2000, we entered into an amended merger agreement for UICI to
acquire HealthPlan Services in exchange for convertible preferred securities. On
April 13, 2000, we terminated the transaction by mutual agreement with UICI, as
a result of the failure to obtain required lender consents. In connection with
this termination, we have entered into an agreement with our lenders to amend
the terms of our credit facility. See "Liqudity and Capital Resources" in
Item 7.
ITEM 2. PROPERTIES
We conduct our operations from our headquarters in Tampa, Florida. Our
central data processing facilities are located in Tampa, Florida, Columbus,
Ohio, and El Monte, California. We lease these facilities, as well as all of our
other facilities. We believe that our facilities are adequate for our present
and anticipated business requirements.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we 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, we could be subject to a variety of legal
actions due to the nature of our business, including disputes alleging errors in
claims administration, underwriting, or premium billing. We currently have
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 opinion of
management, although the outcome of current claims against us is uncertain, in
the aggregate they are not likely to have a material adverse effect on our
business, financial condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the New York Stock Exchange under the
symbol HPS. The following table sets forth the high and low sales prices of our
Common Stock for each quarter during 1998 and 1999, as reported by the New York
Stock Exchange for the periods indicated.
1999 HIGH LOW
---- ---- ---
Fourth quarter.................$ 7.750 $3.00
Third quarter..................$ 7.875 $5.6875
Second quarter.................$10.1875 $6.1875
First quarter..................$11.500 $6.8125
1998 HIGH LOW
---- ---- ---
Fourth quarter.................$11.50 $ 8.1875
Third quarter..................$18.875 $ 8.00
Second quarter.................$26.750 $17.375
First quarter..................$26.625 $20.250
There were 407 holders of record of our Common Stock as of February 9,
2000. We believe that there is a greater number of beneficial owners that hold
our Common Stock in a street name. We paid quarterly dividends on our Common
Stock of 12.5 cents per share (or 50 cents per share on an annualized basis) for
the first quarter of 1998, and 13.75 cents per share (or 55 cents per share on
an annualized basis) for the second, third, and fourth quarters of 1998 and the
first, second, and third quarters of 1999. Pursuant to our May 1998 Credit
Agreement with our lenders, as amended, we have agreed to refrain from future
dividend payments.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
We have derived the following selected historical financial data from
our audited consolidated financial statements at December 31, 1999 and 1998 and
for the years ended December 31, 1999, 1998, and 1997, which are included in
this Form 10-K, and from our audited financial statements at December 31, 1997,
1996, and 1995 and for the years ended December 31, 1996 and 1995, which are not
included herein. The report of PricewaterhouseCoopers LLP, our independent
accountants, on our consolidated financial statements at December 31, 1999 and
1998 and for the years ended December 31, 1999, 1998, and 1997 appears elsewhere
in this Form 10-K. Our selected historical financial data should be read in
conjunction with the related financial statements and notes thereto appearing
elsewhere in this Form 10-K.
Year Ended December 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENT OF INCOME DATA:
Revenues . . . . . . . . . . . . . . . $277,424 $289,247 $281,644 $191,493 $ 98,187
Expenses:
Agent commissions . . . . . . . . . . . 55,923 68,449 65,674 48,507 36,100
Other operating expenses . . . . . . . . 202,220 200,710 170,556 114,078 40,406
Restructure charge . . . . . . . . . . . 3,856 2,052 1,374 1,425 -
Integration expense . . . . . . . . . . . 310 4,171 4,885 7,804 -
Other expense . . . . . . . . . . . . . 298 1,811 316 17,207 1,664
Gain on sale of investments, net . . . . . . (4,630) (33,240) - - -
Equity in loss of joint ventures . . . . . . 208 11,849 2,850 - -
Depreciation and amortization . . . . . . . 16,747 15,800 15,917 10,548 4,386
------ ------ ------ ------ -----
Income (loss) from operations . . . . . . 2,492 17,645 20,072 (8,076) 15,631
Net income (loss) . . . . . . . . . . . . $ 104 $9,698 $ 10,796 $(6,716) $ 9,535
Dividends on redeemable
preferred stock . . . . . . . . . . . . . - - - - 285
------ ------ ------ ------ -----
Net income (loss) attributable
to Common Stock . . . . . . . . . . . $ 104 $9,698 $ 10,796 $(6,716) $ 9,250
------ ------ ------ ------ -----
Basic net income (loss) per share . . . . . . $ 0.01 $ 0.68 $ 0.72 $ (0.47) $ 0.82
Pro forma net income per share (1) . . . . $ 0.71
Diluted net income per share . . . . . . . $ 0.01 $ 0.67 $ 0.71 n/a $ 0.84
Dividends declared per share
of common stock . . . . . . . . . . . $ 0.41 $ 0.54 $ 0.38 - -
Average common shares outstanding
Basic . . . . . . . . . . . . . . . . 13,742 14,353 15,004 14,181 11,316
Pro forma (1) . . . . . . . . . . . . . 13,414
Diluted . . . . . . . . . . . . . . . . 13,922 14,584 15,164 n/a 11,380
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Working capital (deficit) . . . . . . . . $ (44,329) $ (36,813) $ (29,842) $ (26,929) $ 23,013
Total assets . . . . . . . . . . . . . . 260,425 276,805 243,324 244,701 112,667
Total debt . . . . . . . . . . . . . . . 95,837 97,323 43,694 62,298 1,282
Common stockholders' equity . . . . . . . 86,281 91,652 116,566 108,783 80,966
(1) Gives effect to the recapitalization of all 19,000,000 shares of
Preferred Stock (plus the right to receive dividends accrued thereon),
which were exchanged for 1,397,857 shares of our Common Stock
contemporaneously with the consummation of our initial public offering
on May 19, 1995, for all periods presented.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following is a discussion of changes in the consolidated results of
our operations for the years ended December 31, 1999, 1998, and 1997.
We are a leading managed health care services company, providing
marketing, distribution, administration, and medical cost management services
for health care plans and other benefit programs. We function solely as a
service provider generating fee-based income and do not assume any underwriting
risk.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages which certain items of income and expense bear to our revenue for
such periods.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
---------------- ---------------- -----------------
Total revenues . . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 %
------- ------- -------
Expenses:
Agent commissions . . . . . . . . . . . . . . 20.2 % 23.7 % 23.3 %
Personnel . . . . . . . . . . . . . . . . . . . 41.4 % 42.6 % 40.2 %
General and administrative . . . . . . . . . . . 28.9 % 24.8 % 19.5 %
Restructure charge . . . . . . . . . . . . . . . 1.4 % 0.7 % 0.5 %
Integration . . . . . . . . . . . . . . . . . . . 0.1 % 1.4 % 1.7 %
Other expenses . . . . . . . . . . . . . . . . . 0.1 % 0.6 % 0.1 %
Gain on sale of investments, net . . . . . . . . (1.7)% (11.5)% -
Depreciation and amortization . . . . . . . . . 6.0 % 5.5 % 5.7 %
Interest expense . . . . . . . . . . . . . . . . . 2.8 % 2.4 % 1.5 %
Interest income . . . . . . . . . . . . . . . . . (0.2)% (0.4)% (0.6)%
Equity in loss of joint ventures . . . . . . . . . 0.1 % 4.1 % 1.0 %
------- ------- -------
Total expenses . . . . . . . . . . . . . 99.1 % 93.9 % 92.9 %
------- ------- -------
Income before provision for income
taxes and minority interest . . . . . . . . . 0.9 % 6.1 % 7.1 %
Provision for income taxes . . . . . . . . . . . . 0.8 % 3.0 % 3.3 %
------- ------- -------
Income before minority interest . . . . . . . . . . 0.1 % 3.1 % 3.8 %
Minority interest . . . . . . . . . . . . . . . . . 0.1 % (0.3)% -
------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . 0.0 % 3.4 % 3.8 %
======= ======= =======
10
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues for the year ended December 31, 1999 decreased $11.8 million,
or 4.1%, to $277.4 million from $289.2 million in 1998. New revenues of $13.2
million and $5.9 million recognized as a result of the CENTRA and NPPN
acquisitions, respectively, were offset by a decrease of $29.5 million in
revenues from fully insured customers, 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 of $4.1 million were realized from self-funded customers,
primarily related to the loss of twelve customers. We recognized an increase in
NPPN revenues of $2.8 million for the period of June through December 1999, as
compared to the same seven-month period in 1998.
Agent commission expense for the year ended December 31, 1999 decreased
$12.5 million, or 18.3%, to $55.9 million from $68.4 million for the same period
in 1998. This decrease is consistent with the decrease in fully insured revenues
for the period indicated, as described above.
Personnel expense for the year ended December 31, 1999 decreased $8.6
million, or 7.0%, to $114.7 million from $123.3 million in 1998. We incurred
$6.6 million of personnel expense associated with the consolidation of CENTRA
and NPPN. These consolidation expenses were offset by reduced salaries resulting
from a reduction of 485 employees in our workforce and reduction in the use of
overtime and temporary help, and the outsourcing of our care management services
for CENTRA to Sykes HealthPlan Services, Inc. ("SHPS"). These services are now
included as professional services within general and administrative expense.
General and administrative expense for the year ended December 31, 1999
increased $8.5 million, or 11.8%, to $80.3 million from $71.8 million for the
year ended December 31, 1998. This increase was primarily attributable to $8.9
million of general and administrative expense associated with the consolidation
of CENTRA's and NPPN's financial results, an increase of $1.9 million in CENTRA
professional services due to the outsourcing of its care management services to
SHPS beginning in the fourth quarter of 1998, and a charge of $5.7 million in
pretax expense primarily related to claims asserted by four former customers and
seven insurance brokers (see Note 10 to the financial statements appearing
elsewhere in this Form 10-K). This increase was partially offset by reductions
in rent due to office closings and reductions in telephone, postage, printing,
and charges to the reserve for doubtful accounts.
During 1999, we recorded a total of $3.8 million in restructuring costs
for office closure and employee terminations. In the second quarter of 1999, we
incurred $0.9 million of restructuring costs reflecting employee terminations
associated with reductions in our fully insured workforce in Tampa, Florida. We
terminated 63 employees in management, claims administration, and information
systems. In December 1999, we recorded a restructure charge of $2.9 million
relating to the closing of our self-funded offices in Richardson, Texas and San
Bernardino, California, and additional reductions in the self-funded workforces
in Duncan, Oklahoma and St. Louis, Missouri. We terminated a total of 133
employees in management, claims administration, and information systems.
We recorded $2.1 million in restructuring costs during the year ended
December 31, 1998. These costs reflected employee terminations, lease
terminations, and the abandonment of property and equipment associated with
closing our Framingham, Massachusetts, Chicago, Illinois, and Atlanta, Georgia
offices.
Other expense of $1.8 million for the year ended December 31, 1998
reflects costs of $1.4 million associated with the write-off of customer
balances due to a billing system conversion and uncollectability of accounts
among our self-funded customers, and costs of $0.4 million related to the
start-up of new carrier business.
During 1999, we entered into an agreement to sell certain shares of
HealthAxis.com, Inc. stock, resulting in a pretax gain of $4.6 million. During
the year ended December 31, 1998, we sold 370,711 of our shares of Caredata.com,
Inc. stock and all 200,000 of our shares of Health Risk Management, Inc. stock,
resulting in pretax gains of $5.2 million and $0.2 million, respectively. On
September 11, 1998, we sold our 50% interest in SHPS to Sykes Enterprises,
Incorporated for $30.6 million and recognized a pretax gain on the sale of SHPS
of $27.9 million.
11
Depreciation and amortization expense for the year ended December 31,
1999 increased $0.9 million, or 5.7%, to $16.7 million from $15.8 million for
the year ended December 31, 1998. This increase related primarily to
amortization of goodwill on our CENTRA and NPPN acquisitions.
Interest expense for the year ended December 31, 1999 increased to $7.8
million from $6.9 million in 1998. This increase resulted primarily from
increased debt borrowed in 1998 to fund our acquisitions of CENTRA and NPPN, and
to fund repurchases of our Common Stock in 1998 and 1999. During 1998 and 1999,
we purchased 1,276,700 and 242,700 shares, respectively, of our stock for a
collective purchase price of $30.0 million, all of which was borrowed pursuant
to our credit facility.
We recorded our 50% share of the $23.6 million loss incurred by SHPS
for the six months ended June 30, 1998. The loss was principally the result of a
charge for the write-off of purchased research and development associated with
acquisitions by SHPS. We sold our interest in SHPS in September 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues for the year ended December 31, 1998 increased $7.6 million,
or 2.7%, to $289.2 million from $281.6 million in 1997. New revenues of $20.3
million and $10.0 million recognized as a result of the CENTRA and NPPN
acquisitions, respectively, were offset by a decrease in revenues from fully
insured customers ($3.2 million), primarily related to the transition of the
United HealthCare and Travelers block of indemnity/preferred provider
organization business to Seaboard Life Insurance Company products. This
reduction in fully insured revenues was partially offset by $26.1 million in
revenues from the Provident Indemnity and Provident American block of business.
Other revenue decreases were realized from self-funded customers ($16.7
million), primarily related to the sale of the contracts of Diversified Group
Brokerage, Inc., in 1997, along with the loss of three large customers in 1998,
and from alliance customers ($3.5 million), primarily related to us exiting the
Kentucky alliance in 1997.
Agent commission expense for the year ended December 31, 1998 increased
$2.7 million, or 4.1%, to $68.4 million from $65.7 million in 1997. This
increase is consistent with the increase in operating revenues for the period
indicated.
Personnel expense for the year ended December 31, 1998 increased $10.2
million, or 9.0%, to $123.3 million from $113.1 million in 1997. This increase
resulted primarily from $16.0 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 435 employees in our workforce and
the outsourcing of care management services to SHPS. These services are now
included as general and administrative expense. Our personnel expense as a
percentage of total revenues was 42.6% for the year ended December 31, 1998
compared to 40.2% in 1997.
General and administrative expense for the year ended December 31, 1998
increased $16.9 million, or 30.8%, to $71.8 million from $54.9 million in 1997.
This increase was primarily attributable to $12.5 million of general and
administrative expense associated with the consolidation of CENTRA's and NPPN's
financial results along with $6.7 million of costs associated with the
outsourcing of our care management services to SHPS. Our general and
administrative expense as a percentage of total revenue increased to 24.8% for
the year ended December 31, 1998 from 19.5% in 1997 primarily due to the
outsourcing of our care management services to SHPS.
We recorded $2.1 million in restructuring costs during the year ended
December 31, 1998. These costs reflect employee terminations, lease
terminations, and the abandonment of property and equipment associated with
closing our Framingham, Massachusetts, Chicago, Illinois, and Atlanta, Georgia
offices. There were 47, 43, and 48 employees terminated in the Framingham,
Chicago, and Atlanta offices, respectively. These employees worked in
management, claims administration, and information systems. In 1997, we recorded
a charge of $1.4 million to reflect the cost of exiting our Framingham,
Massachusetts office. This charge reflected the cost of terminating employees
and abandoning property and equipment. Our restructure plan included the
elimination of approximately 150 jobs in management, administration, and
information systems. The administration and claims services historically
performed in Framingham were assumed in our Tampa, Florida and Merrimack, New
Hampshire offices.
12
Integration expense during the year ended December 31, 1998 was $4.2
million. These costs included $2.1 million in converting the data center and
three claims platforms for CENTRA and $1.9 million in converting the information
systems from our Framingham, Massachusetts office to the Tampa office.
Integration expense for the year ended December 31, 1997 was $4.9 million. Of
this expense, $3.2 million related to the integration of information systems
used by the TMG block of business, Consolidated Group, Inc. and an affiliated
company, and Harrington Services Corporation, while $1.7 million represented
other costs associated with transferring functions from certain offices, the
consolidation of treasury functions, and employee relocations.
Other expense of $1.8 million for the year ended December 31, 1998
reflects costs of $1.4 million associated with the write-off of customer
balances due to a billing system conversion and uncollectability of accounts
among our self-funded customers, and costs of $0.4 million related to the
start-up of the Provident Indemnity and Provident American block of business.
During the year ended December 31, 1998, we sold 370,711 of our shares
of Caredata.com Inc.'s stock and all 200,000 of our shares of Health Risk
Management stock, resulting in gains of $5.2 million and $0.2 million,
respectively. On September 11, 1998, we sold our 50% interest in SHPS to Sykes
Enterprises for $30.6 million and recognized a gain on the sale of SHPS of $27.9
million.
Depreciation and amortization expense for the year ended December 31,
1998 decreased $0.1 million, or 0.6%, to $15.8 million from $15.9 million in
1997. Some of our furniture and fixtures became fully amortized in 1997.
Additionally, we wrote off internally developed software related to our exiting
the Kentucky alliance in 1997. These reductions were partially offset by
amortization of goodwill on our CENTRA and NPPN acquisitions.
Net interest expense for the year ended December 31, 1998 increased to
$5.6 million from $2.5 million in 1997. This increase resulted primarily from
our acquisitions of CENTRA and NPPN, along with our share repurchase program.
During 1998, we purchased 1,276,700 shares of our stock for a collective
purchase price of $28.1 million, all of which was borrowed pursuant to our
credit facility.
We recorded our 50% share of the loss incurred by SHPS through the date
of its disposition, which was $11.8 million on a pre-tax basis. This loss
principally resulted from a charge for the write-off of purchased research and
development associated with acquisitions by SHPS.
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.
We implemented our Year 2000 ("Y2K") compliance project to prepare our business
for the Year 2000. We define Y2K "compliance" to mean that the computer code
will process all defined future dates properly and give accurate results.
PLAN TO ADDRESS YEAR 2000 COMPLIANCE
We conducted a review of our computer systems and capabilities and
created a three-pronged program for addressing issues related to the Y2K. This
program includes the purchase and implementation of software packages from
vendors, an upgrade of vendor packages to Y2K compliant versions, and the
internal development and implementation of new software applications to increase
the capabilities of our systems for the future.
We began implementing this plan in 1996 with an upgrade of the
mainframe operating system. We purchased and replaced our accounting and
financial system and workers compensation system and wrote and implemented a new
system for the unemployment compensation business. We received from the vendor
and implemented, for all current
13
accounts, the latest version of its claims processing software, which is Y2K
compliant. We also upgraded our billing and administrative system to be Y2K
compliant.
We requested Y2K compliance information from our 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, we asked each vendor and customer for information
regarding (a) the status of the vendor's or customer's Y2K readiness initiative,
and (b) information regarding any expected changes in the vendor's or customer's
data interface with us.
A team of our information system professionals coordinated our Y2K
compliance efforts and tested any new interfaces with vendors and customers. To
date, we have not experienced disruptions in any of our computer systems. Our
team of information system professionals will continue to monitor our computer
systems until we have completed data exchanges with vendors and customers.
Although we do not expect that any disruptions that might occur from such data
exchanges would materially disrupt our computer systems, we cannot guarantee
that they would have no material effect.
COST OF PROJECT
Between January 1, 1996 and December 31, 1999, we spent $11.6 million
for Y2K compliance systems and upgrades. These costs include the expense of
replacing any existing systems with Y2K compliant systems, even in cases where
the system would have been replaced or upgraded regardless of Y2K requirements.
We expect to spend less than $0.5 million during the first quarter of 2000 in
both capital and modification costs to complete our Y2K program.
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 (with certain
adjustments called for in the credit agreement). This multiple is set at 3.25
through June 30, 2001, 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. Our borrowing under the
Line of Credit includes interest ranging from LIBOR plus 250 basis points to New
York prime plus 150 basis points. Current rates on LIBOR drawings on the Line of
Credit at December 31, 1999 were 8.0%. 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 our subsidiaries. The outstanding draw was $90.0 million at December
31, 1999, and the maximum amount available was $90.0 million.
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 had not been 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
14
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
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 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 million on January 31 and July 31, 2001, with
a final payment in 2001. The agreement also provides for a $25 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% 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, EBITDA, 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.
Pursuant to our Line of Credit and prior to the fourth quarter of 1999,
we were permitted to pay a quarterly dividend of up to $0.1375 per share of our
capital stock (up to $0.55 per share on an annualized basis). During 1999, we
declared dividends totaling $5.7 million. These dividends were paid on April 20,
July 20, and October 19, 1999.
Effective in March 1999, we acquired the remaining 20% of the capital
stock of Montgomery Management Corporation from Provident Indemnity for $1.5
million.
During the second quarter of 1997, our Board of Directors authorized us
to use up to $20.0 million to support a share repurchase program. We 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. During the second quarter of 1999, we completed this
share repurchase program. During 1999, we acquired an additional 242,700 shares
under this program at a cost of $1.9 million.
On May 28, 1999, we agreed to pay NPPN's former owner net consideration
of approximately $6.6 million in settlement of the additional contingent
consideration relating to our 1998 acquisition of NPPN. Of this net
consideration, we paid approximately $2.6 million in 1999, with the remaining
$4.0 million plus interest to be paid evenly on the first and second
anniversaries of the settlement.
On April 29, 1999, we paid CENTRA Benefit Services $4.4 million, which
represented a payment of $5.5 million for CENTRA Benefit Services' remaining
49.9% interest in CENTRA, offset by amounts due to us in connection with the
CENTRA acquisition.
We spent $8.0 million for capital expenditures during the year ended
December 31, 1999.
During 1999, we sold 1,415,000 of our shares of HealthAxis.com common
stock, resulting in a pretax gain of $4.6 million.
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.
INFLATION
We do not believe that inflation had a material effect on our results
of operations for the year ended December 31, 1999 or 1998. There can be no
assurance, however, that our business will not be affected by inflation in the
future.
ITEM 7A. 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."
15
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 $95.8 million as of December 31, 1999:
2000 2001 2002 2003 2004 THEREAFTER
------------ ------------ ---------- -------- --------- -------------
Liabilities
Long-term Debt Fixed Rate
(weighted average interest
rate of 6.19%) . . . . . . $ 419 $ 291 $ 220 $ 4,182 $ 202 $ 523
Variable Rate (weighted
average interest rate
of 6.94%) . . . . . . . . . 3,250,000 86,750,000 - - - -
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%.
A 1% increase in interest rates due to increased rates nationwide would
result in additional interest of approximately $0.5 million net of interest
saved on our interest rate swap agreements.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are listed in Item
14(a)(1) and are submitted at the end of this Annual Report on Form 10-K. We are
not required to file any supplementary data under this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION ABOUT DIRECTORS
Set forth below is information about our directors. Directors are
elected at each annual stockholders meeting. Each director holds office until
the next annual meeting, unless prior to that time he or she resigns or is
removed from the Board. See Item 1 for information about our executive officers.
16
NAME AND AGE OCCUPATION/BACKGROUND
- ------------ ---------------------
James K. Murray, Jr. - 64 Chairman of the Board and Chief Executive Officer of HealthPlan Services
since January 1998, President since January 2000, and a director since
October 1994. Mr. Murray was President and Chief Executive Officer of
HealthPlan Services from December 1994 to December 1997. Mr. Murray held
the position of Corporate Senior Vice President of The Dun & Bradstreet
Corporation from March 1990 until his retirement from Dun & Bradstreet in
December 1993. Mr. Murray also served as Chairman of the Board of the
Reuben H. Donnelly Corp., a publisher of telephone yellow pages, from
August 1991 to December 1993. Mr. Murray co-founded the predecessor to
HealthPlan Services in 1970.
William L. Bennett - 50 Director of HealthPlan Services since August 1994, Vice Chairman of the
Board since January 1998, and Chairman of the Board from December 1994 to
December 1997. Until March 1995, Mr. Bennett served as Chairman and Chief
Executive Officer of Noel Group, Inc., a publicly traded company that held
controlling interests in small-to-medium size operating companies.
Mr. Bennett is a director of Allegheny Energy, Inc., an electric utility
holding company; and Sylvan, Inc., a company that produces mushroom spawn
and fresh mushrooms.
Joseph A. Califano, Jr. - 68 Director of HealthPlan Services since January 1995. Since 1992,
Mr. Califano has been Chairman and President of The National Center on
Addiction and Substance Abuse at Columbia University. He is a director of
Automatic Data Processing, Inc.; Kmart Corporation; True North
Communications Inc.; and Warnaco, Inc. Mr. Califano is a governor of the
New York Presbyterian Hospital and a trustee of The Century Foundation,
The Urban Institute, and The American Ditchley Foundation. Mr. Califano
is Founding Chairman of the Institute for Social and Economic Policy in
the Middle East at the Kennedy School of Government at Harvard
University. He is an Adjunct Professor of Public Health (Health Policy
and Management) at Columbia University's Medical School (Department of
Psychiatry) and School of Public Health and a member of the Institute of
Medicine of the National Academy of Sciences. Mr. Califano served as
Secretary of the United States Department of Health, Education, and
Welfare from 1977 to 1979. He is a member of the Advisory Council of the
American Foundation for AIDS Research. He is the author of nine books and
numerous articles.
Joseph S. DiMartino - 56 Director of HealthPlan Services since March 1995. Since January 1995,
Mr. DiMartino has been Chairman of the Board of approximately 168 funds
in the Dreyfus Family of Mutual Funds. From 1982 to December 1994, he
was President, a director, and until August 1994 Chief Operating Officer,
of The Dreyfus Corporation, an investment advisor and manager of the
Dreyfus Group of Mutual Funds. He also was Chairman of the Board of
Directors of Noel Group, Inc. from February 1995 to November 1997. He is
a director of The Muscular Dystrophy Association, Carlyle Industries,
Inc., and Century Business Services, Inc.
17
NAME AND AGE OCCUPATION/BACKGROUND
- ------------ ---------------------
Vincent D. Farrell, Jr. - 53 Director of HealthPlan Services since July 1997. Since 1982, Mr. Farrell
has been Managing Director and Chief Investment Officer for Spears,
Benzak, Salomon & Farrell, a money management firm based in New York with
$5 billion in assets under management. Mr. Farrell also is a director of
Swiss Army Brands Company, Inc., a consumer products company best known
for its Swiss Army knives and watches. Mr. Farrell is a frequent guest
lecturer throughout the country for a number of large securities firms.
John R. Gunn - 57 Director of HealthPlan Services since November 1994. Since 1982, Mr. Gunn
has served in various capacities for the Memorial Sloan-Kettering Cancer
Center, a medical center and research institute, and is currently its
Executive Vice President and Chief Operating Officer and a member of its
Board of Managers. Mr. Gunn is a director of the following not-for-profit
entities: Empire Blue Cross and Blue Shield, The Greater New York
Hospital Association, the Devereaux Foundation, and the Hospital
Association of New York State.
Nancy M. Kane, D.B.A. - 50 Director of HealthPlan Services since November 1994. Dr. Kane is an
author, lecturer, and recognized expert in managed health care. Since
1980, she has been a member of the Harvard School of Public Health
faculty, where she has served in the Department of Health Policy and
Management. Dr. Kane is a director of the Urban Medical Group, a
not-for-profit medical group practice organization.
David Nierenberg - 46 Director of HealthPlan Services since November 1994. Since April 1995,
Mr. Nierenberg has been President of Nierenberg Investment Management Co.,
Inc., an investment management company. Between 1986 and 1995,
Mr. Nierenberg was a general partner of Trinity Ventures, Ltd., a venture
capital company. Mr. Nierenberg is a director of Southwest Washington
Medical Center, a private not-for-profit hospital.
James G. Niven - 54 Director of HealthPlan Services since November 1994. Since 1996,
Mr. Niven has been a Senior Vice President at Sotheby's, an international
auction house. Since 1982, he has been a general partner of Pioneer
Associates, a venture capital investment company. He also is a director
of The Lynton Group, Inc., a company engaged in aircraft charter and
maintenance; and Tatham Offshore, Inc., an independent energy company
engaged in the development, exploration, and production of offshore oil
and gas reserves. Mr. Niven also is a member of the Board of Managers of
Memorial Sloan-Kettering Cancer Center, a trustee and a director of the
Neil A. McConnell Foundation, and a trustee of The Blenheim Foundation,
the Museum of Modern Art, and the National Center for Learning
Disabilities.
18
NAME AND AGE OCCUPATION/BACKGROUND
- ------------ ---------------------
Robert R. Parker - 67 Director of HealthPlan Services since July 1998. Mr. Parker served as
President and Chief Operating Officer of HealthPlan Services from January
1998 to January 2000, and as Executive Vice President and Chief Operating
Officer - Large Group Business from July 1996 to December 1997. Mr.
Parker was Chairman and Chief Executive Officer of Harrington Services
Corporation from 1986 to December 1997. Harrington became a wholly owned
subsidiary of HealthPlan Services in July 1996.
Marc I. Perkins - 54 Director of HealthPlan Services since October 1997. Since April 1999,
Mr. Perkins has been President of Gunther International, a manufacturer
of high speed inserting equipment. Between October 1998 and March 1999,
Mr. Perkins served as Vice Chairman and Chief Executive Officer of
Gunther International. From 1992 to December 1998, Mr. Perkins was
President and Chief Executive Officer of Perkins Capital Advisers, Inc.
and General Partner of Perkins Partners I, Ltd. He has been a principal
in PMK Securities and Research, Inc., a securities broker dealer, since
February 1995. He has appeared on CNBC and is a frequent lecturer at
numerous organizations and universities.
Arthur F. Weinbach - 56 Director of HealthPlan Services since February 1997. Since 1998,
Mr. Weinbach has been Chairman and Chief Executive Officer of Automatic
Data Processing, Inc. ("ADP"). From 1996 to 1998, Mr. Weinbach was
President and Chief Executive Officer of ADP. Previously, he served as
President and Chief Operating Officer of ADP from 1994 to 1996. Mr.
Weinbach serves on the Board of Directors of ADP and of Schering-Plough
Corporation, a company engaged in the discovery, development,
manufacturing, and marketing of pharmaceutical and health care products.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, each executive officer, director, and beneficial owner of more than ten
percent of our outstanding Common Stock must file reports with the Securities
and Exchange Commission reporting beneficial ownership of our Common Stock (i)
at the time of becoming subject to Section 16's reporting requirements, and (ii)
at the time of any changes in beneficial ownership occurring thereafter. On
January 1, 1999, Jeffery W. Bak became a "Reporting Person" for purposes of
Section 16(a). A Form 3 was filed with respect to this status on March 8, 1999,
after the Form 3 filing deadline. On July 1, 1999, Jeffrey L. Markle became a
"Reporting Person" for purposes of Section 16(a). A Form 3 was filed with
respect to this status on October 21, 1999, after the Form 3 filing deadline.
Based upon review of reports submitted to us and written representations of
persons that we know to be subject to these reporting requirements, we believe
that all other reports due for 1999 were filed on a timely basis.
19
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding
compensation paid or accrued by us for the fiscal year ended December 31, 1999
to: (i) our Chief Executive Officer; and (ii) each of our four other most highly
compensated executive officers whose salary and bonus exceeded $100,000 during
1999 and who was serving as an executive officer at the end of 1999
(collectively, the "Named Officers"). The table also sets forth information
regarding paid or accrued compensation to each Named Officer for the two
preceding fiscal years.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES ALL
NAME AND UNDERLYING OTHER
PRINCIPAL POSITION (1) YEAR SALARY($) BONUS($) OPTIONS (#)(2) COMPENSATION($)(3)
---------------------- ---- --------- -------- -------------- ------------------
James K. Murray, Jr. 1999 $ 378,056 $ 99,375 35,000 $ 3,333
Chairman of the Board, 1998 364,000 82,810 -- 1,580
President, and Chief 1997 350,000 -- 35,000 2,297
Executive Officer
Robert R. Parker 1999 238,887 57,408 35,000 3,333
Former President and 1998 230,100 55,200 -- 1,129
Chief Operating 1997 202,963 -- 35,000 2,297
Officer
William L. Bennett 1999 216,032 38,938 35,000 3,333
Vice Chairman 1998 208,000 49,920 -- 1,342
of the Board 1997 198,387 -- 35,000 2,000
Jeffery W. Bak 1999 173,618 78,400 25,000 3,297
Executive Vice 1998 135,379 53,250 -- 1,650
President 1997 114,192 14,660 20,000 2,221
Phillip S. Dingle 1999 174,385 65,000 25,000 3,333
Executive Vice 1998 149,558 53,250 -- 1,398
President and Chief 1997 134,731 -- 20,000 831
Financial Officer
- ---------------
(1) Indicates each Named Officer's current position with HealthPlan
Services. See "Executive Officers of HealthPlan Services" in Item 1 for
a description of previous positions held by each Named Officer.
(2) Refers to incentive stock options granted during the stated fiscal year
under either the HealthPlan Services Corporation 1995 Incentive Equity
Plan or the Amended and Restated HealthPlan Services Corporation 1996
Employee Stock Option Plan. The Incentive Plan and the Employee Option
Plan provide for grants of stock options to our employees, as
determined by the Compensation Committee of the Board of Directors. The
Compensation Committee may grant these options as incentive options,
which qualify for certain favorable tax treatment, or as non-qualified
options. The Compensation Committee has the authority to set the
exercise price for options at the time of grant, except that the
exercise price of an incentive option may not be less than the fair
market value of the Common Stock on the grant date. Each option grant
reflected in the table vests over a four-year period from the date of
the grant, with 20% of the options becoming vested on the grant date
and 20% becoming vested on each successive anniversary of the grant
date, until the options become fully
20
vested on the fourth anniversary of the grant date. In the event of any
merger or other transaction in which HealthPlan Services does not
survive, the Compensation Committee at its option may accelerate the
vesting of all outstanding Incentive Plan and Employee Option Plan
options, subject to applicable law.
(3) Consists of Company contributions to each Named Officer's account under
the HealthPlan Services, Inc. Profit Participation 401(k) Plan. Does
not include the amount of life insurance premium payments allocable to
any Named Officer. HealthPlan Services provides all employees with life
insurance benefits that are generally equal to two years base salary,
subject to certain adjustments.
OPTION GRANTS IN 1999
INDIVIDUAL GRANTS(1)
--------------------------------------
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE APPRECIATION
FOR OPTION TERM (10 YEARS)(2)
--------------------------------------------
5% 10%
--------------------- -------------------
NUMBER OF % OF TOTAL EXERCISE OR EXPIRATION PER AGGREGATE PER AGGREGATE
NAME SECURITIES OPTIONS BASE PRICE DATE SHARE VALUE SHARE VALUE
UNDERLYING GRANTED TO ($/SHARE) VALUE VALUE
OPTIONS EMPLOYEES IN
GRANTED (#) FISCAL YEAR
----------------- ---------------- ------------- -------------- -------- -------------- -------- -----------
James K. Murray, Jr. 35,000 .07 $11.00 1/7/09 $6.92 $242,200 $17.52 $613,200
Robert R. Parker 35,000 .07 11.00 1/7/09 6.92 242,200 17.52 613,200
William L. Bennett 35,000 .07 11.00 1/7/09 6.92 242,200 17.52 613,200
Jeffery W. Bak 25,000 .05 11.00 1/7/09 6.92 173,000 17.52 438,000
Phillip S. Dingle 25,000 .05 11.00 1/7/09 6.92 173,000 17.52 438,000
- -------------------
(1) Consists of option grants under the Employee Option Plan. Each option
grant vests over a four-year period from the grant date, January 7,
1999, with 20% of the options becoming vested on the grant date and 20%
becoming vested on each successive anniversary of the grant date, until
the options become fully vested on the fourth anniversary of the grant
date.
(2) The dollar gains under these columns result from calculations assuming
5% and 10% growth rates, as set by the Securities and Exchange
Commission, and are not intended to forecast future price appreciation
of our Common Stock. The gains reflect a future value based upon growth
at the prescribed rates. We are not aware of any formula which will
determine with reasonable accuracy a present value based on future
unknown or volatile factors. Options have value to the Named Officers
and to all option recipients only if the price of our Common Stock
advances beyond the applicable option exercise price during the
effective option period.
21
AGGREGATED OPTION EXERCISES DURING 1999 AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to stock options
exercised by each Named Officer during 1999 and the number of unexercised stock
options held by each Named Officer at year-end. There are no outstanding stock
appreciation rights.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT
FISCAL YEAR-END (#)
-------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ----------- -------------
James K. Murray, Jr. -0- -0- 158,000 62,000
Robert R. Parker -0- -0- 88,000 57,000
William L. Bennett -0- -0- 158,000 62,000
Jeffery W. Bak -0- -0- 31,200 33,000
Phillip S. Dingle -0- -0- 40,000 35,500
- ---------------
PARKER EMPLOYMENT AGREEMENT
HealthPlan Services was a party to an Employment and Noncompetition
Agreement with Robert R. Parker. The agreement, which had a three-year term
ending June 30, 1999, required Mr. Parker to perform duties assigned to him by
the Board of Directors at an annual base salary of not less than $200,000. Mr.
Parker resigned his position as President and Chief Operating Officer of
HealthPlan Services in January 2000. Mr. Parker remains a director of HealthPlan
Services.
DIRECTOR COMPENSATION
We reimburse all directors for out-of-pocket expenses, including travel
expenses, related to attendance at Board and committee meetings. Directors who
are also HealthPlan Services employees receive no additional compensation for
their service on the Board of Directors and Board committees. Each director who
is not an employee is entitled to a quarterly retainer fee of $1,250 and an
additional fee of $500 for each Board meeting and committee meeting attended.
Pursuant to the HealthPlan Services Corporation 1997 Directors Equity
Plan, each non-employee director may receive Common Stock rather than a cash
retainer fee as compensation for each quarter in which the director serves on
the Board. The shares issued for each quarter have a value equal to $2,500,
which is calculated based on the fair market value of our Common Stock at the
end of the quarter. An eligible director may make an irrevocable election not to
participate in the Directors Equity Plan in any year and instead receive
quarterly cash retainers. The aggregate number of shares of Common Stock
available for awards under the Directors Equity Plan is 100,000, subject to
specified adjustments in the event of changes in the outstanding shares of
Common Stock.
Each director who is not an employee of HealthPlan Services also
participates in the 1995 HealthPlan Services Corporation Directors Stock Option
Plan. Pursuant to the Directors Option Plan, each participating director
automatically receives an option to purchase 12,000 shares of Common Stock,
effective as of the later of (i) May 18, 1995 (the business day immediately
preceding the day that our securities were first offered to the public in an
underwritten initial public offering), or (ii) the date that the director
becomes eligible to participate. Each participating director is also granted an
additional option to purchase 12,000 shares of Common Stock if he or she is
reelected to the Board of Directors at the annual meeting of stockholders that
follows the director's fourth complete year of service on the Board. All options
vest over a four-year period from the date of grant, with 20% of the options
becoming exercisable on the grant date and 20% becoming exercisable on each of
the next four anniversaries of the grant date. In the event of any merger,
consolidation, or sale of substantially all of our assets, we may accelerate
22
vesting of the outstanding Directors Option Plan options, subject to applicable
law. The exercise price of each option is the fair market value of our Common
Stock as of the grant date. The aggregate number of shares of Common Stock
available for awards under the Directors Option Plan is 240,000, subject to
specified adjustments in the event of changes in the outstanding shares of
Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board is composed of four directors:
Joseph A. Califano, Jr., Vincent D. Farrell, Jr., James G. Niven, and Arthur F.
Weinbach, none of whom is or was an officer or employee of HealthPlan Services.
Mr. Weinbach is Chairman and Chief Executive Officer of ADP. As required by a
December 1996 agreement under which ADP purchased approximately 9% of our Common
Stock, Mr. Weinbach was elected to our Board of Directors in February 1997. ADP
has provided payroll and shareholder distribution services for us since 1995.
During 1999, we paid ADP approximately $240,000 for these services.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the best of our knowledge, based on information filed with the
Securities and Exchange Commission and information provided directly to us by
the persons and entities named below, the following table sets forth the
beneficial ownership of our Common Stock as of February 9, 2000, by: (i) each
beneficial owner of more than five percent of our Common Stock; (ii) each
director; (iii) each officer who is a Named Officer in the Summary Compensation
Table set forth above in Item 11; and (iv) our directors and executive officers
as a group. Except as otherwise indicated, each stockholder named below has sole
investment and voting power with respect to shares beneficially owned by the
stockholder. We do not know of any arrangement that may result in a change of
control of HealthPlan Services.
SHARES BENEFICIALLY
NAME AND ADDRESS POSITION WITH HEALTHPLAN OWNED AS OF PERCENT
OF BENEFICIAL OWNER SERVICES FEBRUARY 9, 2000 OF CLASS
- ------------------- ------------------------ ---------------- --------
James K. Murray, Jr. Chairman, President, and 928,641 (1) 6.7%
3501 Frontage Road Chief Executive Officer
Tampa, Florida 33607
William L. Bennett Vice Chairman of the Board 409,865 (2) 3.0%
149 Common Street
Dedham, Massachusetts 02026
Joseph A. Califano, Jr. Director 25,932 (3) 0.2%
152 W. 57th Street
12th Floor
New York, New York 10019
Joseph S. DiMartino Director 73,069 (3) 0.5%
22 E. 67th Street
New York, New York 10021
Vincent D. Farrell, Jr. Director 227,996 (4) 1.7%
45 Rockefeller Plaza
33rd Floor
New York, New York 10111
John R. Gunn Director 25,932 (3) 0.2%
1275 York Avenue
New York, New York 10021
23
SHARES BENEFICIALLY
NAME AND ADDRESS POSITION WITH HEALTHPLAN OWNED AS OF PERCENT
OF BENEFICIAL OWNER SERVICES FEBRUARY 9, 2000 OF CLASS
- ------------------- ------------------------- ---------------- --------
Nancy M. Kane, D.B.A. Director 25,482 (5) 0.2%
677 Huntington Avenue
Boston, Massachusetts 02115
David Nierenberg Director 58,417 (6) 0.4%
19605 N. E. 8th Street
Camas, Washington 98607
James G. Niven Director 30,462 (3) 0.2%
1334 York Avenue
New York, New York 10021
Robert R. Parker Director 366,697 (7) 2.7%
300 Eddy Street
Quanah, TX 79252
Marc I. Perkins Director 7,320 (8) 0.1%
One Winnenden Road
Norwich, Connecticut 06360
Arthur F. Weinbach Director 9,882 (9) 0.1%
One ADP Boulevard
Roseland, New Jersey 07068
Jeffery W. Bak Executive Vice President 38,960 (10) 0.3%
3501 Frontage Road
Tampa, Florida 33607
Phillip S. Dingle Executive Vice President and 48,964 (11) 0.4%
3501 Frontage Road Chief Financial Officer
Tampa, Florida 33607
Automatic Data Processing, Inc. -- 1,320,000 9.7%
One ADP Boulevard
Roseland, New Jersey 07068
DePrince, Race & Zollo, Inc. -- 3,012,200 (12) 22.0%
201 S. Orange Avenue, Suite 850
Orlando, Florida 32801
Dimensional Fund Advisors Inc. -- 1,112,205 (13) 8.1%
1299 Ocean Avenue
11th Floor
Santa Monica, California 90401
All Directors and Executive Officers as -- 2,386,119 (14) 16.6%
a group (includes 16 persons)
- ------------------------------------------
(1) Does not include 160,000 shares held by a private entity in which Mr.
Murray owns securities; Mr. Murray is not a controlling shareholder of
such entity and he does not have or share investment control over the
entity's portfolio. Includes 13,156 shares held by a private company
with respect to which Mr. Murray shares investment and voting power;
Mr. Murray disclaims beneficial ownership in such shares except to the
extent
24
of his interest in such private company. Also includes: 150,000 shares
held by Mr. Murray's wife, as to which shares Mr. Murray disclaims
beneficial ownership; 593,803 shares held by a family limited
partnership with respect to which Mr. Murray shares investment and
voting power; and 165,000 shares issuable upon exercise of options that
are exercisable within 60 days of February 9, 2000.
(2) Includes 167,400 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000. Also includes 3,609
shares held by Mr. Bennett's children, as to which Mr. Bennett
disclaims beneficial ownership.
(3) Includes 14,400 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000.
(4) Includes 7,200 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000. Also includes 219,097
shares beneficially owned by Spears, Benzak, Salomon & Farrell, Inc., a
division of Key Asset Management, Inc., with respect to which shares
Mr. Farrell disclaims beneficial ownership. Mr. Farrell is Managing
Director and Chief Investment Officer of Spears Benzak.
(5) Includes 14,400 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000. Also includes 450
shares held by Dr. Kane as custodian for her minor child.
(6) Includes 14,400 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000. Also includes 43,735
shares held by the Nierenberg Family 1993 Living Trust, with respect to
which Mr. Nierenberg has investment and voting power as trustee.
(7) Includes 97,400 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000.
(8) Includes 7,200 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000.
(9) Includes 9,600 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000. Does not include the
proportionate share ownership of the Company represented by 443,383
shares of Automatic Data Processing, Inc. ("ADP") common stock that are
beneficially owned by Mr. Weinbach or 554,000 shares of ADP common
stock issuable to Mr. Weinbach upon exercise of options that are
exercisable within 60 days of February 9, 2000. Also does not include
1,320,000 shares held by ADP. Mr. Weinbach is the Chairman and Chief
Executive Officer of ADP, and therefore may be deemed to share
investment and voting power with respect to the shares owned by ADP.
(10) Includes 36,200 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000.
(11) Includes 45,000 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000.
(12) The information set forth in the table and this footnote regarding
shares beneficially owned by DePrince, Race & Zollo, Inc. as of
February 9, 2000 is based on information provided to us by DePrince
Race.
(13) The information set forth in the table and this footnote regarding
shares beneficially owned by Dimensional Fund Advisors, Inc. as of
February 9, 2000 is based on information provided to us by Dimensional.
Dimensional, an investment advisor registered under Section 203 of the
Investment Advisors Act of 1940, furnishes investment advice to four
investment companies registered under the Investment Company Act of
1940, and serves as investment manager to certain other investment
vehicles, including commingled group trusts. (These investment
companies and investment vehicles are the "Portfolios"). In its role as
investment advisor and investment manager, Dimensional possesses both
voting and investment power over 1,112,205 shares of our Common Stock
as of February 9, 2000. The Portfolios own all securities reported in
this statement, and Dimensional disclaims beneficial ownership of such
securities.
25
(14) Includes 692,400 shares issuable upon exercise of options that are
exercisable within 60 days of February 9, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1996, we entered into an agreement with Noel Group, Inc.
and ADP pursuant to which Noel agreed to sell 1,320,000 shares of our Common
Stock to ADP at a purchase price of $20 per share. Upon completion of this
transaction on February 7, 1997, ADP owned approximately 9% of our Common Stock.
As required by the ADP Agreement, Arthur F. Weinbach, Chairman and Chief
Executive Officer of ADP, was elected to our Board of Directors in February
1997. ADP has provided payroll and shareholder distribution services for us
since 1995. During 1999, we paid ADP approximately $240,000 for these services.
During 1999, James F. Carlin, who was a HealthPlan Services director
until February 1999, was a limited partner in Consolidated Group Service Company
Limited Partnership, and was a shareholder and a director of the Consolidated
Partnership's general partner. The Consolidated Partnership owns our former
Framingham, Massachusetts facility and leased this property to Consolidated
Group beginning in 1987. In November 1998, in connection with the closing of our
Framingham operations, we entered into an agreement with the Consolidated
Partnership to terminate the lease, which had a term expiring in May 2003. Under
the termination agreement, we committed to pay up to approximately $2.2 million
to the Consolidated Partnership over a three-year period to cover certain rent
differential, tenant improvement, and other costs related to the termination and
to leasing the facility to a new tenant. During 1999, we paid the Consolidated
Partnership approximately $325,000 under this arrangement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of HealthPlan
Services and its subsidiaries are filed as part of this Form
10-K starting at page F-1:
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations - Years ended December
31, 1999, 1998, and 1997
Consolidated Statement of Changes in Stockholders' Equity -
Years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows - Years ended December
31, 1999, 1998, and 1997 Notes to Consolidated Financial
Statements
(2) Report of Independent Accountants on Supplemental Schedule
Schedule II - Schedule of Valuation and Qualifying Accounts
for each of the Years Ended December 31, 1999, 1998, and 1997
(3) Exhibits included or incorporated herein:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
2.1 Amended and Restated Acquisition Agreement, dated August 31,
1995, by and among HealthPlan Services, Inc., Millennium
HealthCare, Inc., and Third Party Claims Management, Inc.
(incorporated by reference to HealthPlan Services ("the
Company's") Form 8-K Current Report filed on September 15,
1995).
26
2.2 Asset Purchase Agreement, dated October 1, 1995, by and
between HealthPlan Services, Inc. and Diversified Group
Brokerage Corporation, and Amendment to the Asset Purchase
Agreement, dated October 11, 1995, by and between HealthPlan
Services, Inc. and Diversified Group Brokerage Corporation
(incorporated by reference to the Company's Form 8-K Current
Report filed on October 27, 1995).
2.3 Securities Purchase Agreement, dated January 8, 1996 between
Medirisk, Inc. and HealthPlan Services Corporation
(incorporated by reference to Exhibit 10.18 to the Company's
1995 Annual Report on Form 10-K filed on March 29, 1996).
2.4 Acquisition Agreement dated May 17, 1996 between HealthPlan
Services Corporation, Consolidated Group, Inc., Consolidated
Group Claims, Inc., Consolidated Health Coalition, Inc., and
Group Benefit Administrators Insurance Agency, Inc., the named
Shareholders, and Holyoke L. Whitney as Shareholders'
Representative (incorporated by reference to Exhibit 2 to the
Company's Form 8-K Current Report filed on July 15, 1996).
2.5 Plan and Agreement of Merger dated May 28, 1996 between
HealthPlan Services Corporation, HealthPlan Services Alpha
Corporation, Harrington Services Corporation, and Robert
Chefitz as Shareholders' Representative (incorporated by
reference to the Company's Form 8-K Current Report filed on
July 15, 1996).
2.6 Stock Purchase Agreement dated December 18, 1996 by and among
Noel Group, Inc., Automatic Data Processing, Inc., and the
Company (incorporated by reference to the Noel Group, Inc.'s
Current Report on Form 8-K dated February 7, 1997).
2.7 Shareholder Agreement by and among Sykes Enterprises,
Incorporated and the Company dated December 18, 1997, and
Amendment to Shareholder Agreement dated February 28, 1998
(incorporated by reference to Exhibit 2.7 to the Company's
1997 Annual Report on Form 10-K filed on March 30, 1998).
2.8 Amended and Restated Acquisition Agreement dated May 15, 1998
by and among HealthPlan Services Corporation, National
Preferred Provider Network, Inc., and other parties named
therein (incorporated by reference to Exhibit 2.8 to the
Company's Annual Report on Form 10-K filed on March 30, 1999).
2.9 Subscription and Asset Contribution Agreement dated June 16,
1998 by and between CENTRA HealthPlan LLC, and its prospective
members: HealthPlan Services, Inc., and CENTRA Benefit
Services, Inc. (incorporated by reference to Exhibit 2.8 to
the Company's 1998 Annual Report and Form 10-K filed on March
30, 1999).
2.10 Stock Purchase Agreement dated September 1, 1998 among Sykes
Enterprises, Incorporated, HealthPlan Services Corporation,
and Sykes HealthPlan Services, Inc. (incorporated by reference
to Exhibit 2.8 to the Company's 1998 Annual Report and Form
10-K filed on March 30, 1999).
2.11 (a) Agreement and Plan of Merger dated October 5, 1999 by and
among UICI and HealthPlan Services Corporation (incorporated
by reference to Exhibit 99.2 to the HealthPlan Services
Current Report on Form 8-K filed on October 7, 1999); Amended
and Restated Agreement and Plan of Merger between UICI, UICI
Acquisition Co., UICI Capital Trust I, and HealthPlan Services
Corporation dated February 18, 2000 (incorporated by reference
to Exhibit 99.2 to the Company's Form 8-K filed on February
23, 2000);
(b) Amendment to Amended and Restated Agreement and Plan of Merger
dated March 23, 2000 by and among UICI and HealthPlan
Services.
(c) Termination Agreement, dated April 13, 2000, by and among UICI
and HealthPlan Services.
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 4.1 to the Company's Form S-8
Registration Statement #333-07631 filed with respect to the
HealthPlan Services Corporation 1996 Employee Stock Option
Plan on July 3, 1996).
27
3.2 By-laws, as amended (incorporated by reference to Exhibit 3.2
to the Company's 1996 Annual Report on Form 10-K, filed on
March 31, 1997).
4.1 Excerpts from the Certificate of Incorporation, as amended
(included in Exhibit 3.1).
4.2 Excerpts from the By-laws, as amended (included in Exhibit
3.2).
4.3 Specimen stock certificate (incorporated by reference to
Exhibit 4.3 to the Company's Form S-1 Registration Statement
#33-90472, filed on May 18, 1995).
10.1 Agreement between New England Mutual Life Insurance Company of
Boston and the Company effective as of June 1, 1987, as
amended by Memorandum dated January 17, 1992 and Memorandum
dated February 4, 1994 (incorporated by reference to Exhibit
10.3 to the Company's Form S-1 Registration Statement
#33-90472, filed on May 18, 1995).
10.2 Agreements relating to MetraHealth business (originally
written with The Travelers Insurance Company) (incorporated by
reference to Exhibit 10.4 to the Company's 1996 Annual Report
on Form 10-K, filed on March 31, 1997):
(a) Administrative Services Agreement dated November 1,
1989 between The Travelers Insurance Company and
Consolidated Group, Inc.
(b) Claims Administration Agreement dated November 1,
1989 between The Travelers Insurance Company and
Consolidated Group Claims, Inc.
10.3 HealthPlan Services Corporation 1996 Employee Stock Option
Plan (compensatory plan) (incorporated by reference to Exhibit
10.6 to the Company's 1996 Annual Report on Form 10-K, filed
on March 31, 1997).
10.4 Amended and Restated HealthPlan Services Corporation 1996
Employee Stock Option Plan (compensatory plan) (incorporated
by reference to Exhibit 4.3 to the Company's Form S-8
Registration Statement #333-31913, filed on July 23, 1997).
10.5 HealthPlan Services Corporation 1995 Incentive Equity Plan
(compensatory plan) (incorporated by reference to Exhibit 10.7
to the Company's Form S-1 Registration Statement #33-90472,
filed on May 18, 1995).
10.6 1995 HealthPlan Services Corporation Directors Stock Option
Plan (compensatory plan) (incorporated by reference to Exhibit
10.10 to the Company's Form S-1 Registration Statement
#33-90472, filed on May 18, 1995).
10.7 Restricted Stock Agreements between the Company and Claudia N.
Griffiths (incorporated by reference to Exhibit 10.10 to the
Company's Form S-1 Registration Statement #33-90472, filed on
May 18, 1995). The same agreement was executed with Steven V.
Hulslander, Gary L. Raeckers, Craig H. Cassady, Richard M.
Bresee, Nola H. Moon, and George E. Lucco.
10.8 Subscription Agreement dated as of September 30, 1994 among
the Company, James K. Murray, Jr., Trevor G. Smith, and
Charles H. Guy, Jr. (incorporated by reference to Exhibit
10.11 to the Company's Form S-1 Registration Statement
#33-90472, filed on May 18, 1995).
10.9 Stock Purchase Agreement dated as of October 5, 1994 among the
Company, Noel Group, Inc., Trinity Side-by-Side Fund I, L.P.,
Trinity Ventures II, L.P., and Trinity Ventures III, L.P.
(incorporated by reference to Exhibit 10.12 to the Company's
Form S-1 Registration Statement #33-90472, filed on May 18,
1995).
28
10.10 Form of Stock Purchase Agreement dated as of December 15, 1994
among the Company, Noel Group, Inc., and each of the
signatories listed on the signature pages thereto
(incorporated by reference to Exhibit 10.13 to the Company's
Form S-1 Registration Statement #33-90472, filed on May 18,
1995).
10.11 (a) Lease Agreement between the Company and Paragon
Group, Inc. (as agent for Airport Southeast
Associates, Ltd.), dated January 26, 1982, as amended
on June 18, 1987 by agreement between the Company and
Concourse Associates Venture (successor in interest
to Airport Southeast Associates) (Concourse Center I,
Tampa, Florida) (incorporated by reference to Exhibit
10.14(a) to the Company's Form S-1 Registration
Statement #33-90472, filed on May 18, 1995).
(b) Lease Agreement between the Company and Paragon
Group, Inc. (as agent for Airport Southeast
Associates, Ltd.), dated January 26, 1982, as amended
on October 13, 1983, April 3, 1984 by a Supplement to
Amendment of Lease, and as further amended on June
18, 1987 by agreement between the Company and
Concourse Associates Venture (successor in interest
to Airport Southeast Associates) (Concourse Center
II, Tampa, Florida) (incorporated by reference to
Exhibit 10.14(b) to the Company's Form S-1
Registration Statement #33-90472, filed on May 18,
1995).
(c) Second Amendment to Leases dated April 30, 1995
between Concourse Center Associates Limited
Partnership and the Company (Concourse Centers I and
II, Tampa, Florida) (incorporated by reference to
Exhibit 10.13(g) to the Company's Annual Report on
Form 10-K, filed on March 29, 1996).
(d) Amended, Consolidated and Restated Lease dated
January 1, 1987 between Consolidated Group, Inc. and
Consolidated Group Service Company Limited
Partnership, as amended by First Amendment dated May
23, 1990, and by Second Amendment dated March 27,
1996 (incorporated by reference to Exhibit 10.14(d)
to the Company's 1996 Annual Report on Form 10-K,
filed on March 31, 1997).
10.12 (a) Amended and Restated Credit Agreement dated as of May
1, 1998 by and among HealthPlan Services Corporation,
First Union National Bank, and other lenders named
therein, as amended by: the First Amendment thereto
dated June 23, 1998; and Second Amendment and Waiver
dated December 15, 1998 (incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form
10-K, filed March 30, 1999).
(b) Third Amendment and Waiver dated November 15, 1999;
and the Nonwaiver and Standstill Agreements dated
February 11, 2000; waiver and consent dated March 1,
2000.
(c) Second Extension of Nonwaiver and Standstill
Agreement, dated April 13, 2000.*
10.13 Employment and Noncompetition Agreement, dated June 25, 1996
by and between R.E. Harrington, Inc. and Robert R. Parker
(management contract) (incorporated by reference to Exhibit
10.19 to the Company's 1996 Annual Report on Form 10-K filed
on March 31, 1997).
10.14 Deferred Compensation Agreement between R.E. Harrington, Inc.
and Robert R. Parker dated May 15, 1987 (compensatory plan)
(incorporated by reference to Exhibit 10.17 to the Company's
1997 Annual Report on Form 10-K filed on March 30, 1998).
10.15 Employment and Noncompetition Agreement, dated July 1, 1996 by
and between Consolidated Group, Inc. and Timothy T. Clifford
(management contract) (incorporated by reference to Exhibit
10.20 to the Company's 1996 Annual Report on Form 10-K filed
on March 31, 1997).
10.16 Amended and Restated HealthPlan Services Corporation 1997
Directors Equity Plan (compensatory plan) (incorporated by
reference to Exhibit 4.3 to the Company's Form S-8
Registration Statement #333-31915, filed on July 23, 1997).
29
10.17 HealthPlan Services Corporation 1998 Officer Bonus Plan
Summary (compensatory plan).
10.18 Administrative Services and Business Transfer Agreement
between the Company and TMG Life Insurance Company, dated
December 4, 1996 (incorporated by reference to Exhibit 10.21
to the Company's 1997 Annual Report on Form 10-K filed on
March 30, 1998).
10.19 Deferred Compensation Plan of R.E. Harrington, Inc. dated
January 1, 1998 (compensatory plan) (incorporated by reference
to Exhibit 10.19 to the Company's 1998 Annual Report and Form
10-K filed on March 30, 1999).
10.20 Management Agreement dated February 28, 1998 among Midwestern
United Life Insurance Company, HealthPlan Services, Inc., and
Connecticut General Life Insurance Company (incorporated by
reference to Exhibit 10.20 to the Company's 1998 Annual Report
and Form 10-K filed on March 30, 1999).
10.21 Administration Services Agreement dated July 1, 1997 between
Seaboard Life Insurance Company and HealthPlan Services, Inc.
(incorporated by reference to Exhibit 10.21 to the Company's
1998 Annual Report and Form 10-K filed on March 30, 1999).
10.22 Services Agreement effective February 1, 1998 by and among
Provident Indemnity Life Insurance Company, and Provident
American Life and Health Insurance Company, HealthPlan
Services Corporation, and HealthPlan Services, Inc.
(incorporated by reference to Exhibit 10.22 to the Company's
1998 Annual Report and Form 10-K filed on March 30, 1999).
11.1 Statement regarding computation of per share earnings: not
required because the relevant computations can be clearly
determined from the material contained in the financial
statements included herein.
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
* To be filed by amendment.
(b) We filed the following Current Report on Form 8-K during the three months
ended December 31, 1999:
Form 8-K Current Report, filed on October 7, 1999, regarding the UICI
Agreement and Plan of Merger (without financial statements or pro forma
financial information).
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, HealthPlan Services has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tampa, State of Florida, on the 14th day of April,
2000.
HEALTHPLAN SERVICES CORPORATION
By: /s/ James K. Murray, Jr.
--------------------------
James K. Murray, Jr.
President, Chief Executive Officer, and
Chairman of the Board (Principal Executive Officer)
By: /s/ Phillip S. Dingle
---------------------
Phillip S. Dingle
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William L. Bennett, James K. Murray, Jr.,
and Joseph S. DiMartino his or her true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
or her in his or her name, place, and stead, in any and all capacities, to sign
any or all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, and hereby
ratifies and confirms all that said attorneys-in-fact and agents, each acting
alone, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ James K. Murray, Jr. President, Chief Executive April 14, 2000
- ------------------------ Officer, and Chairman of the
James K. Murray, Jr. Board (Principal Executive
Officer)
/s/ William L. Bennett Vice Chairman of the Board April 14, 2000
- ----------------------
William L. Bennett
Director
- ---------------------------
Joseph A. Califano, Jr.
/s/ Joseph S. DiMartino Director April 14, 2000
- ---------------------------
Joseph S. DiMartino
Director
- ---------------------------
Vincent D. Farrell, Jr.
Director
- ----------------
John R. Gunn
31
SIGNATURE TITLE DATE
- --------- ----- ----
Director
- -----------------
Nancy M. Kane
/s/ David Nierenberg Director April 14, 2000
- --------------------
David Nierenberg
/s/ James G. Niven Director April 14, 2000
- ------------------
James G. Niven
/s/ Robert R. Parker Director April 14, 2000
- --------------------
Robert R. Parker
/s/Marc I. Perkins Director April 14, 2000
- ------------------
Marc I. Perkins
/s/ Arthur F. Weinbach Director April 14, 2000
- ----------------------
Arthur F. Weinbach
32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
AND STOCKHOLDERS OF
HEALTHPLAN SERVICES CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and
comprehensive income and of cash flows present fairly, in all material respects,
the financial position of HealthPlan Services Corporation and its subsidiaries
(HealthPlan Services) at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of
HealthPlan Services' management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
April 14, 2000
Tampa, Florida
F-1
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ - $ 4,582
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . 3 11,373
Accounts receivable, net of allowance for doubtful
accounts of $3,211 and $1,689, respectively . . . . . . . . . 22,933 21,834
Prepaid expenses and other current assets . . . . . . . . . . . 4,135 3,604
Refundable income taxes . . . . . . . . . . . . . . . . . . . 666 -
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . 4,532 1,448
----------------- -----------------
Total current assets . . . . . . . . . . . . . . . . . . 32,269 42,841
Property and equipment, net . . . . . . . . . . . . . . . . . . 27,804 27,172
Other assets, net of accumulated amortization of
$1,295 and $963, respectively . . . . . . . . . . . . . . . . 2,537 2,744
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . - 1,145
Note receivable . . . . . . . . . . . . . . . . . . . . . . . . - 3,499
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,513 6,647
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . 191,302 192,757
----------------- -----------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 260,425 $ 276,805
================= =================
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . $ 1,188 $ -
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 4,377 13,917
Premiums payable to carriers . . . . . . . . . . . . . . . . . . 33,930 38,146
Commissions payable . . . . . . . . . . . . . . . . . . . . . . 4,862 5,232
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 1,762 3,707
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 26,810 16,769
Income taxes payable . . . . . . . . . . . . . . . . . . . . . - 1,397
Current portion of long-term debt payable . . . . . . . . . . . . 3,669 486
----------------- -----------------
Total current liabilities. . . . . . . . . . . . . . . . . . 76,598 79,654
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . 92,168 96,837
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . 2,892 -
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . 2,486 2,732
----------------- -----------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 174,144 179,223
----------------- -----------------
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . - 5,930
----------------- -----------------
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 authorized, 15,190,458 issued at
December 31, 1999 and,
15,174,315 at December 31, 1998 . . . . . . . . . . . . . . 152 152
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 110,357 109,887
Treasury stock, 1,519,400 at December 31, 1999 and
1,276,700 shares at December 31, 1998 . . . . . . . . . . . . (30,006) (28,088)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 4,184 9,736
Unrealized appreciation (depreciation) on investments
available for sale, net of tax . . . . . . . . . . . . . . . . . 1,594 (35)
----------------- -----------------
Total stockholders' equity . . . . . . . . . . . . . . . . 86,281 91,652
----------------- -----------------
Total liabilities and stockholders' equity . . . . . . . . . $ 260,425 $ 276,805
================= =================
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997
--------------- ------------- --------------
Operating revenues . . . . . . . . . . . . . . . . . $ 277,424 $ 289,247 $ 281,644
--------------- ------------- --------------
Expenses:
Agent commissions . . . . . . . . . . . . . . . . 55,923 68,449 65,674
Personnel . . . . . . . . . . . . . . . . . . . . 114,685 123,290 113,141
General and administrative . . . . . . . . . . . . . . 80,323 71,777 54,947
Restructure charge . . . . . . . . . . . . . . . . . 3,856 2,052 1,374
Integration . . . . . . . . . . . . . . . . . . . . 310 4,171 4,885
Other expenses . . . . . . . . . . . . . . . . . . . 298 1,811 316
Gain on sale of investments, net . . . . . . . . . . . (4,630) (33,240) -
Depreciation and amortization . . . . . . . . . . . . 16,747 15,800 15,917
Interest expense . . . . . . . . . . . . . . . . . . . 7,815 6,874 4,173
Interest income . . . . . . . . . . . . . . . . . . (603) (1,231) (1,705)
Equity in loss of joint ventures . . . . . . . . . . . . 208 11,849 2,850
--------------- ------------- --------------
Total expenses . . . . . . . . . . . . . . . . . 274,932 271,602 261,572
--------------- ------------- --------------
Income before provision for income taxes
and minority interest . . . . . . . . . . . . . . . 2,492 17,645 20,072
Provision for income taxes . . . . . . . . . . . . . 2,143 8,683 9,276
--------------- ------------- --------------
Income before minority interest . . . . . . . . . . . 349 8,962 10,796
Minority interest . . . . . . . . . . . . . . . . . . 245 (736) -
--------------- ------------- --------------
Net income . . . . . . . . . . . . . . . . . . . . . $ 104 $ 9,698 $ 10,796
=============== ============= ==============
Basic net income per share . . . . . . . . . . . . . . $ 0.01 $ 0.68 $ 0.72
Basic weighted average
shares outstanding . . . . . . . . . . . . . . . . 13,742 14,353 15,004
Diluted net income per share . . . . . . . . . . . . . $ 0.01 $ 0.67 $ 0.71
Diluted weighted average
shares outstanding . . . . . . . . . . . . . . . . 13,922 14,584 15,164
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
UNREALIZED
APPRECIATION
ON
VOTING ADDITIONAL INVESTMENTS
COMPREHENSIVE COMMON PAID-IN TREASURY RETAINED AVAILABLE
INCOME STOCK CAPITAL STOCK EARNINGS FOR SALE TOTAL
------------- --------- ---------- --------- -------- ------------ ---------
Balance at December 31, 1996 .......... $ 150 $ 106,153 $ - $ 2,480 $ - $ 108,783
Vesting of management stock ........... - 235 - - - 235
Issuance of 46,800 shares in
connection with stock option plans - 655 - - - 655
Issuance of 14,569 shares in
connection with the employee
stock purchase plan ................ - 237 - - - 237
Issuance of 2,538 shares in
connection with the directors
compensation plan .................. - 45 - - - 45
Cash dividends declared ............... - - - (5,605) - (5,605)
Net income ............................ $ 10,796 - - - 10,796 - 10,796
Unrealized appreciation on
investment available for sale ...... 1,420 - - - - 1,420 1,420
-------------
Comprehensive income .................. $ 12,216
============= --------- ----------- --------- -------- ------------ ---------
Balance at December 31, 1997 .......... $ 150 $107,325 $ - $ 7,671 $ 1,420 $ 116,566
Vesting of management stock ........... - 179 - - - 179
Issuance of 123,500 shares in
connection with stock option plans 2 2,218 - - - 2,220
Issuance of 12,662 shares in
connection with the employee
stock purchase plan ................ - 162 - - - 162
Issuance of 120 shares in
connection with the directors
compensation plan .................. - 3 - - - 3
Cash dividends declared ............... - - - (7,633) - (7,633)
Purchase of 1,276,700
treasury shares .................... - - (28,088) - - (28,088)
Net income ............................ $ 9,698 - - - 9,698 - 9,698
Unrealized depreciation on
investment available for sale ...... (1,455) - - - - (1,455) (1,455)
-------------
Comprehensive income .................. $ 8,243
============= --------- ----------- --------- -------- ------------ ----------
Balance at December 31, 1998 .......... $ 152 $109,887 $(28,088) $ 9,736 $ (35) $ 91,652
Refund of overpayment in connection
with stock option plan ............. (13) (13)
Issuance of 16,143 shares in
connection with the employee
stock purchase plan ................ 81 81
Cash dividends declared ............... (5,656) (5,656)
Purchase of 242,700
treasury shares .................... (1,918) (1,918)
Tax benefit on exercise of shares in
connection with stock option plans - 402 - - - 402
Net income ............................ 104 104 104
Unrealized appreciation on investment
available for sale ................. 1,629 1,629 1,629
-------------
Comprehensive income .................. $ 1,733
============= --------- ---------- --------- -------- ------------ ---------
Balance at December 31, 1999 .......... $ 152 $110,357 $(30,006) $ 4,184 $ 1,594 $ 86,281
========= ========== ========= ======== ============ =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997
------------ --------------- ---------------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . $ 104 $ 9,698 $ 10,796
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 7,512 7,607 9,061
Amortization . . . . . . . . . . . . . . . . . 9,235 8,193 6,856
Gain on sale of investments . . . . . . . . . . . (4,630) (33,240) -
Equity in loss of joint ventures. . . . . . . . . 208 11,849 2,850
Minority interest . . . . . . . . . . . . . . . . 245 (736) -
Issuance of Common Stock to management. . . . . . - 179 235
Deferred taxes . . . . . . . . . . . . . . . . . (3) 4,776 6,697
.
Changes in assets and liabilities, net of effect from acquisitions
and dispositions:
Restricted cash . . . . . . . . . . . . . . . . . 11,369 (117) (1,194)
Accounts receivable . . . . . . . . . . . . . . . (2,025) 14,019 (10,919)
Prepaid expenses and other current assets . . . . (531) 458 960
Cash overdraft . . . . . . . . . . . . . . . . . 1,188 - -
Other assets . . . . . . . . . . . . . . . . . (79) 111 (1,138)
Accounts payable . . . . . . . . . . . . . . . . (9,540) (3,300) (7,316)
Premiums payable to carriers. . . . . . . . . . . (4,216) (2,522) 20,583
Commissions payable . . . . . . . . . . . . . . (370) (347) 604
Deferred revenue . . . . . . . . . . . . . . . . (1,944) 926 455
Accrued liabilities . . . . . . . . . . . . . . . 7,925 (9,119) (8,894)
Income taxes payable . . . . . . . . . . . . . . (1,429) 3,691 4,240
------------- --------------- ----------------
Net cash provided by operating activities. 13,019 12,126 33,876
------------ --------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . (7,996) (9,146) (9,837)
Cash paid for acquisitions, net of cash acquired. (8,674) (40,847) -
Payment for purchase of
The Mutual Group block of business. . . . . . - - (1,623)
Payment for HealthAxis Inc. contract rights . . . - - (707)
Proceeds from sale of assets . . . . . . . . . . - 1,466 2,780
Proceeds from sale of investments . . . . . . . . 8,013 40,152 -
Purchases of investments . . . . . . . . . . . . (919) (18,081) (5,341)
Receivable from sale of investment, net . . . . . (375) - -
Proceeds from notes receivable. . . . . . . . . . 3,498 794 6,388
Purchases of notes receivable . . . . . . . . . . - - (6,334)
------------- --------------- ----------------
Net cash used in investing activities. . . (6,453) (25,662) (14,674)
------------- --------------- ----------------
Cash flows from financing activities:
Net (payments) borrowings under line of credit. . (1,000) 51,000 (15,000)
Net payments on other debt . . . . . . . . . . . (732) (1,075) (3,593)
Cash dividends paid . . . . . . . . . . . . . . . (7,566) (7,590) (3,726)
Distribution of minority interest . . . . . . . . - (46) -
Proceeds from exercise of stock options . . . . . - 2,220 655
Repurchase of Common Stock . . . . . . . . . . . (1,918) (28,088) -
Proceeds from Common Stock issued . . . . . . . 68 152 282
------------- --------------- ----------------
Net cash (used in) provided by financing activities (11,148) 16,573 (21,382)
------------- --------------- ----------------
Net (decrease) increase in cash and cash equivalents. (4,582) 3,037 (2,180)
Cash and cash equivalents at beginning of year. . . . 4,582 1,545 3,725
------------- --------------- ----------------
Cash and cash equivalents at end of year . . . . . . $ - $ 4,582 $ 1,545
============= =============== ================
Supplemental disclosure of cash flow information:
Cash paid for interest. . . . . . . . . . . . . . $ 7,140 $ 6,333 $ 4,900
============= =============== ================
Net cash paid (refunds received) for income taxes $ 3,575 $ 214 $ (838)
============= =============== ================
Supplemental disclosure of noncash activities:
Dividends declared but unpaid . . . . . . . . . . $ - $ 1,910 $ 1,879
============= =============== ================
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 plans. HealthPlan Services provides these services to
over 100,000 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
HealthPlan Services prepares its financial statements in conformity
with generally accepted accounting principles. These principles require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of
HealthPlan Services Corporation and its subsidiaries. As of December 31, 1998,
HealthPlan Services had 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. As of December 31, 1999, HealthPlan
Services had acquired the remaining minority shares of both CENTRA and
Montgomery Management (see Note 3). All intercompany transactions and balances
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as highly liquid investments that
have original maturities of three months or less.
RESTRICTED CASH
HealthPlan Services established a bank account for the sole purpose of
administering the contracts with the Florida Community Health Purchasing
Alliances ("CHPA"). This cash was withdrawn only to meet current obligations
connected with servicing these contracts. As of November 30, 1999, HealthPlan
Services' contract with CHPA was terminated.
F-6
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Costs of the assets acquired
have been recorded at their respective fair values at the date of acquisition.
Expenditures for maintenance and repairs and research and development costs are
expensed as incurred. Major improvements that increase the estimated useful life
of an asset are capitalized. Depreciation is computed using the straight-line
method over the following estimated useful lives of the related assets:
YEARS
---------------------
Furniture and fixtures 3-10
Computers and equipment 2-5
Computer software 3 or expected life
Leasehold improvements Lease term
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist primarily of prepaid
commissions (paid to certain agents at the initiation of a policy), rent,
insurance, postage, and repair and maintenance contracts.
INVESTMENTS
As HealthPlan Services' investments in Caredata.com, Inc. ("Caredata.com")
formerly Medirisk, Inc., and HealthAxis Inc. (formerly Provident American
Corporation) (see Note 7) are classified as available for sale, they are
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.
INTANGIBLES AND IMPAIRMENT OF LONG-LIVED ASSETS
The excess of cost over the fair value of net assets acquired is
recorded as goodwill and amortized on a straight-line basis over 25 years. Other
intangibles, such as contract rights, are amortized over either the term or
expected life of the contracts, generally 5-7 years.
HealthPlan Services reviews long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. HealthPlan Services
compares the expected future undiscounted cash flows to the carrying values of
the long-lived assets at the lowest level of identifiable cash flows. When the
expected future undiscounted cash flows are less than the carrying amount, the
asset is written down to its estimated fair value.
OTHER ASSETS
Other assets include loan origination fees which are amortized over
the terms of the respective agreements.
F-7
PREMIUMS PAYABLE
HealthPlan Services collects insurance premiums on behalf of its
insurance carrier and managed care customers and remits such amounts to the
customers when due.
REVENUE RECOGNITION
Revenues are recognized ratably over contractual periods or as claims
processing and administrative services are being performed. Revenue collected in
advance is recorded as deferred revenue until the related services are
performed.
AGENT COMMISSIONS
Agent commissions are recognized as expense in the same period that
corresponding revenues are recognized. These commissions are paid upon
collection of cash.
INTEGRATION EXPENSE
Certain costs amounting to $2.1 million incurred by HealthPlan Services
in 1998 relative to the conversion of the data center and three claims platforms
for CENTRA as well as $1.9 million of costs incurred in converting the
information systems from HealthPlan Services' Framingham, Massachusetts office
to the Tampa office were recorded as integration expense.
Certain costs amounting to $3.2 million incurred by HealthPlan Services
in 1997 relative to the post-acquisition integration of information systems at
Consolidated Group, Inc. and an affiliated company (collectively, "Consolidated
Group") and Harrington Services Corporation, together with its direct and
indirect wholly owned subsidiaries ("Harrington"), as well as the
post-assumption integration of information systems for the group operations of
TMG Life Insurance Company's Employee Benefits division ("TMG"), were recorded
as integration expense. Other non-information systems costs amounting to $1.7
million for items such as the closing of certain of HealthPlan Services'
offices, consolidation of treasury functions, and employee relocations have also
been recorded as integration expense.
RESTRUCTURE CHARGES
In the second quarter of 1999, HealthPlan Services incurred $0.9
million of restructuring costs reflecting employee terminations associated with
reductions in HealthPlan Services' workforce in Tampa, Florida. There were 63
employees terminated in management, claims administration, and information
systems. This restructure was completed in 1999, and there was a balance of $0.1
million in severance remaining to be paid in the first quarter of 2000. In
December of 1999, HealthPlan Services recorded a restructure charge of $2.9
million relating to the closing of HealthPlan Services' offices in Richardson,
Texas and San Bernardino, California, and additional reductions in the
workforces in Duncan, Oklahoma and St. Louis, Missouri. A total of 133 employees
were terminated in management, claims administration, and information systems.
At December 31, 1999, a balance of $2.6 million remained to be paid for lease
terminations and severance costs.
In 1998, HealthPlan Services recorded a charge of $2.1 million to
reflect the cost of employee terminations, and the abandonment of property and
equipment associated with closing HealthPlan Services' Framingham,
Massachusetts, Chicago, Illinois, and Atlanta, Georgia offices. There were 47,
43, and 48 employees terminated in the Framingham, Chicago, and Atlanta offices,
respectively. These employees worked in management, claims administration, and
information systems. An accrual balance of $0.4 million remained at December 31,
1999, related to a lease termination payment due in December 2000.
In 1997, HealthPlan Services recorded a charge of $1.4 million to
reflect the cost of exiting its Framingham, Massachusetts office. This charge
reflected the cost of terminating employees and abandoning property and
equipment. HealthPlan Services' restructure plan included the elimination of
approximately 150 jobs in management, administration, and information systems.
The administration and claims services historically
F-8
performed in Framingham were assumed in HealthPlan Services' Tampa, Florida and
Merrimack, New Hampshire offices.
HealthPlan Services recognizes a liability for restructuring charges
and a corresponding charge to results of operations when the following
conditions exist: management approves and commits HealthPlan Services to a plan
of termination of employees, or an exit plan, and establishes the benefits that
current employees will receive upon termination; the benefit arrangement is
communicated to employees; the plan of termination identifies the number and
type of employees; and the exit plan or plan of termination will begin as soon
as possible, and significant changes are not likely. Restructure charges
consists of the following (in thousands):
ORIGINAL CHARGE
1999 1998
------------------- ------------------
Severance and related costs $ 2,031 $ 1,250
Office closure costs 1,725 360
Write-off of property, plant, and equipment, net 100 442
------------------- ------------------
Restructure charge 3,856 2,052
Amounts paid - 1998 (1,066)
Amounts paid - 1999 (1,153) (586)
------------------
Remaining liability - December 31, 1998 $ 986
------------------- ==================
Remaining liability - December 31, 1999 $ 2,703 $ 400
=================== ==================
INCOME TAXES
HealthPlan Services recognizes deferred assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. For federal income tax
purposes, HealthPlan Services files a consolidated tax return with its wholly
owned subsidiaries.
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.
STOCK-BASED COMPENSATION
HealthPlan Services applies the intrinsic value method currently
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25") and
discloses the pro forma effects of the fair value based method, as prescribed by
Statement of Financial Accounting Standards No. 123 ("SFAS 123").
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments including interest rate swaps are used
by HealthPlan Services principally in the management of its interest rate
exposures. Amounts to be paid or received under interest rate swap agreements
are accrued as interest rates change and are recognized over the life of the
swap agreements as an adjustment to interest expense. The fair values of the
swap agreements are not recognized in the consolidated financial statements
since they are accounted for as hedges.
F-9
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments," requires the disclosure of the fair value
of financial instruments, including assets and liabilities recognized and not
recognized in the consolidated statements of financial condition.
HealthPlan Services' investments, which are readily marketable, are
carried at market value. Management estimates that the aggregate net fair value
of other financial instruments recognized on the consolidated statements of
financial condition (including cash and cash equivalents, receivables and
payables, and short-term borrowings) approximates their carrying value, as such
financial instruments are short-term in nature, bear interest at current market
rates or are subject to repricing.
HealthPlan Services' only financial instruments not reflected at
estimated market value are its two interest rate swaps (see Note 9). The
unrecorded fair value of these swaps as of December 31, 1999 was approximately
$0.3 million.
3. ACQUISITIONS
CENTRA HEALTHPLAN LLC
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. CENTRA is a major administrator of self-funded health plans for large
corporations. As part of its restructuring charge in the fourth quarter of 1999,
HealthPlan Services announced that it will close CENTRA's headquarters in
Richardson, Texas in the first half of 2000. CENTRA also has processing
facilities in Houston, Texas, Duncan, Oklahoma, Lynnwood, Washington, and
Charleston, West Virginia. The purchase price of CENTRA was allocated to the
fair value of the net assets acquired as follows (in thousands):
Tangible assets acquired $ 8,164
Goodwill 20,001
Liabilities assumed (9,990)
-------------------
$ 18,175
===================
NATIONAL PREFERRED PROVIDER NETWORK, INC.
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 achieved certain financial
performance objectives. On May 28, 1999, HealthPlan Services agreed to pay
NPPN's former owner net consideration of approximately $6.6 million in
settlement of the additional contingent consideration. Headquartered in
Middletown, New York, NPPN is a preferred provider organization ("PPO") network
which consists of over 450,000 physician offices, 4,000 hospitals, and 50,000
ancillary care providers covering all 50 states and the District of Columbia.
The purchase price of NPPN was allocated to the fair value of the net assets
acquired as follows (in thousands):
F-10
Tangible assets acquired $ 4,746
Goodwill 34,021
Liabilities assumed (10,199)
-------------------
$ 28,568
===================
MONTGOMERY MANAGEMENT CORPORATION
On February 27, 1998, HealthPlan Services acquired 49% of the capital stock of
Montgomery Management from Provident Indemnity Life Insurance Company
("Provident Indemnity") 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 at a cost of $8,060. Effective in March 1999, in connection with
HealthPlan Services' agreement with Provident Indemnity and HealthAxis Inc. (see
Note 7), HealthPlan Services acquired the remaining 20% interest in Montgomery
Management. 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. The purchase price
of Montgomery Management was allocated to the fair value of the net assets
acquired as follows (in thousands):
Tangible assets acquired $ 990
Goodwill 5,008
Liabilities assumed (990)
-------------------
$ 5,008
===================
DIVERSIFIED GROUP BROKERAGE
On October 12, 1995, HealthPlan Services, Inc. ("HPSI"), a wholly owned
subsidiary of HealthPlan Services, acquired substantially all of the assets and
assumed certain liabilities of the third party administration business of
Diversified Group Brokerage Corporation ("DGB"), effective as of October 1,
1995. The purchase price for the DGB business consisted of (i) approximately
$5.1 million paid at closing, and (ii) for the seven-year period following the
closing date, semi-monthly payments based on the number of enrollees in accounts
that were DGB accounts as of the closing date, to be reduced by any attrition of
enrollees. HPSI placed $5.0 million in escrow, as required by the agreement to
fund those payments, and the present value of those estimated payments was
recorded as goodwill. Additionally, HPSI assumed approximately $1.0 million in
liabilities related to this purchase. In December 1997, HealthPlan Services sold
the contracts and certain other assets to DGB for cash totaling $4.3 million.
The cash consideration, net of the sale of certain property and equipment ($0.1
million), the write-off of interest receivable on the escrow account ($0.4
million), and the write-off of goodwill associated with the DGB acquisition
($2.3 million), resulted in a net recovery of $1.5 million.
UNAUDITED PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
The following unaudited pro forma consolidated results of operations of
HealthPlan Services give effect to acquisitions, accounted for as purchases, as
if they occurred on January 1, 1997 (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997
-------------------- -------------------
Revenues $ 308,725 $ 332,736
Net income 7,538 8,091
Net income per common share 0.52 0.53
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, 1997 or of the results which may occur in the future.
F-11
4. CONCENTRATION OF CUSTOMERS
HealthPlan Services is party to a variety of contracts with insurance
companies, PPOs, HMOs, integrated delivery systems, and self-funded customers
located throughout the United States to provide third party marketing,
administration, and risk management services. For the years ended December 31,
1999, 1998, and 1997, HealthPlan Services' two largest payors accounted for
approximately 10.6% and 9.9%, 9.0% and 8.5%, and 13.1% and 12.6%, respectively,
of total revenues.
HealthPlan Services grants credit, without collateral, to some of its
self-funded clients under certain contracts.
5. INTANGIBLE ASSETS
Intangible assets resulting from the excess of cost over the fair value
of the respective net assets acquired was as follows (in thousands):
DECEMBER 31,
----------------------------------------
1999 1998
------------------ ----------------
HealthPlan Services goodwill $ 32,841 $ 32,841
NPPN goodwill 34,021 25,240
CENTRA goodwill 20,001 22,334
Montgomery Management goodwill 5,008 4,008
Consolidated Group goodwill 59,734 59,734
Harrington goodwill 66,705 66,705
Third Party Claims Management goodwill 490 490
Contract rights 1,481 1,481
------------------ ----------------
220,281 212,833
Less: Accumulated amortization (28,979) (20,076)
------------------ ----------------
$ 191,302 $ 192,757
================== ================
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
---------------------------------------
1999 1998
----------------- ---------------
Furniture and fixtures $ 10,290 $ 10,076
Computers and equipment 17,887 17,801
Computer software 26,371 20,893
Leasehold improvements 3,921 3,107
----------------- ---------------
58,469 51,877
Less: Accumulated depreciation (30,665) (24,705)
----------------- ---------------
$ 27,804 $ 27,172
================= ===============
HealthPlan Services capitalizes purchased software which is ready for
service and software development costs incurred from the time technological
feasibility of the software is established until the software is ready for use.
Costs associated with the Year 2000 compliance (not associated with other
software modifications), and other computer software maintenance costs related
to software development were expensed as incurred. Software development costs
and costs of purchased software are amortized using the straight-line method
over a maximum of three years or the expected life of the product.
The carrying value of capitalized software assets is regularly reviewed
by HealthPlan Services, and a loss is recognized when the net realizable value
falls below the unamortized cost.
F-12
7. INVESTMENTS
Investments consist of the following (in thousands):
DECEMBER 31,
-----------------------------------------
1999 1998
------------------ -----------------
Investments available for sale,
at market (cost of $3,984 and $6,460) $ 6,513 $ 6,405
Equity method investments - 242
------------------ -----------------
$ 6,513 $ 6,647
================== =================
In December 1997, HealthPlan Services and Sykes Enterprises,
Incorporated ("Sykes") formed Sykes HealthPlan Services, Inc. ("SHPS"). The new
company was owned fifty percent (50%) by each of the founding companies and
provides care management services, technology solutions, certain customer
support services, and other outsourcing capabilities to the health care and
insurance industries. HealthPlan Services invested $17.0 million in SHPS and
guaranteed a line of credit of up to $37.5 million to fund the activities of
SHPS. On September 11, 1998, HealthPlan Services sold its 50% interest in SHPS
to Sykes for $30.6 million and recognized a gain on the sale of SHPS of $27.9
million. Additionally, HealthPlan Services was relieved of its obligations
associated with SHPS' credit facility.
HealthPlan Services accounted for its investment in SHPS under the
equity method of accounting. HealthPlan Services recorded its 50% share in the
loss incurred by SHPS, which was $11.8 million in 1998 and $2.9 million in 1997
on a pre-tax basis. This loss was principally the result of a charge for the
write-off of purchased research and development associated with SHPS'
acquisitions.
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 HealthAxis Inc. and received warrants to purchase 100,000 shares
of HealthAxis Inc. 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, Provident Indemnity and HealthAxis Inc. asserted a demand
against HealthPlan Services, and HealthPlan Services asserted claims against
Provident Indemnity and HealthAxis Inc. Effective in March 1999, the parties
agreed to resolve all claims connected with the demand and exchange mutual
releases. In connection with the resolution, HealthPlan Services: agreed to
continue providing administrative services to Provident Indemnity and Provident
American Life and Health Insurance Company ("Provident American"), the latter of
which is now owned by Ceres Group, Inc.: acquired the remaining 20% interest in
Montgomery Management; agreed to sell 1,415,000 shares of HealthAxis.com stock;
exercised its warrants to purchase 100,000 shares of HealthAxis Inc. stock at
$9.00 per share; and received a net cash consideration of $9.3. The agreement
resulted in a pretax gain of $4.6 million. On December 31, 1999, HealthAxis
Inc.'s shares closed at $35.19 per share of common stock. The remaining
investment is recorded as available for sale with the unrealized holding gain
reported in the equity section of the balance sheet in acordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115").
On March 5, 1997, HealthPlan Services and Health Risk Management, Inc.
("HRM") mutually agreed to terminate a merger agreement previously entered into
on September 12, 1996. In connection with the termination, HealthPlan Services
purchased 200,000 shares of HRM common stock, representing approximately 4.5% of
HRM shares outstanding, at a price of $12.50 per share. During the first quarter
of 1998, HealthPlan Services sold all of its shares in HRM and recorded a
pre-tax gain on the sale of $0.2 million.
On January 8, 1996, HealthPlan Services entered into an agreement with
Caredata.com, a provider of health care information, to purchase $2.0 million of
Caredata.com preferred stock representing a 9% ownership interest and, in
addition, to lend Caredata.com up to $10.0 million over four years in the form
of debt for which HealthPlan Services would receive detachable warrants to
purchase up to 432,101 shares of Caredata.com's common stock for $0.015 per
share, based on the amount of debt actually acquired. On January 28, 1997,
Caredata.com completed an initial public offering and satisfied the $6.9 million
debt balance in accordance with the
F-13
agreement. The remaining value of the warrants of approximately $0.5 million was
accreted to income in the first quarter of 1997. Upon completion of the public
offering, Caredata.com's preferred stock was converted to common stock.
HealthPlan Services exercised its warrants in February of 1998 resulting in an
ownership of 480,442 shares of common stock, which represented an approximate
11% ownership interest. The average cost was $5.48 per share. During 1998,
HealthPlan Services sold 370,711 of its shares in Caredata.com and recorded a
pre-tax gain on the sale of $5.2 million. On December 31, 1999, Caredata.com's
shares closed at $6.63 per share of common stock. This investment is recorded as
available for sale with the unrealized holding gain reported in the equity
section of the balance sheet in accordance with SFAS 115.
8. NOTE RECEIVABLE
In October 1997, in conjunction with HealthPlan Services' agreement to assume
all of the policy issuance, billing, and claims services of Provident Indemnity
and Provident American, HealthPlan Services advanced HealthAxis Inc. $5.0
million. HealthPlan Services recorded the present value of these payments at
HealthPlan Services' incremental borrowing rate of 7%, $4.3 million, as a note
receivable and recorded the remaining $0.7 million as contract rights included
in intangible assets. Effective in March 1999, in connection with HealthPlan
Services' agreement with Provident Indemnity and HealthAxis Inc., the note was
repaid.
9. NOTES PAYABLE AND CREDIT FACILITIES
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 (with certain adjustments called for in the credit
agreement). This multiple is set at 3.25 through June 30, 2001 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 250 basis points to New York prime
plus 150 basis points. The current rate on LIBOR drawings on the Line of Credit
at December 31, 1999 was 8.0%. 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 $90.0 million at
December 31, 1999, and the maximum amount available was $90.0 million.
HealthPlan Services incurred $6.2 million of interest expense on the Line of
Credit for the year ended December 31, 1999.
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 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 observe 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 Service had not been 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) 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
F-14
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 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 million on January 31 and July 31,
2001, with a final payment in 2001. The agreement also provides for a $25
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% 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, EBITDA, 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 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 rate of 6.18%. For the year ended December 31, 1999,
HealthPlan Services recorded $0.4 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.
In conjunction with the acquisition of HealthPlan Services in 1994 by
certain HealthPlan Services' officers and Noel Group, Inc., HealthPlan Services
assumed a note payable to CAL/GROUP (the "CAL/GROUP Note") of $1.3 million,
which bears interest at 5% per annum. The note payable requires semi-annual
principal payments in May and November of $64,000 to $80,000 through November
2008. Interest expense relating to the note payable was approximately $53,000
and $57,000 for the years ended December 31, 1999 and 1998, respectively.
On July 1, 1996, HealthPlan Services assumed certain equipment notes as
a result of a prior agreement that had been executed by Harrington ("Harrington
Equipment Notes"). The notes, which are secured primarily by telephone
equipment, have interest rates ranging from 7.1% to 10.7%, with the final
payment due in February 2005. The monthly payment on these notes is $30,000.
On May 18, 1998, HealthPlan Services assumed certain equipment notes as
a result of prior agreements that had been executed by NPPN ("NPPN Equipment
Notes"). The notes, which are secured primarily by furniture and telephone
equipment, have interest rates ranging from 11.0% to 11.6%, with the final
payment due in June 2002. The monthly payment on these notes is $13,000.
In conjunction with the acquisition of CENTRA on June 16, 1998,
HealthPlan Services issued $4.0 million in five year 5.75% notes convertible
into approximately 180,000 shares of HealthPlan Services' stock. The notes
require semi-annual payments of accrued interest which commenced in January 1999
and continue until the outstanding principal is paid in full. Unless earlier
converted pursuant to the terms of the acquisition agreement, the outstanding
principal shall be paid in June 2003. Interest expense relating to the note
payable was $0.2 million and $0.1 million for the years ended December 31, 1999
and 1998, respectively.
The balances outstanding on the above debt instruments are as follows
(in thousands):
DECEMBER 31,
-----------------------------------------
1999 1998
------------------ ------------------
Line of Credit $ 90,000 $ 91,000
CAL/GROUP Note 1,022 1,096
Harrington Equipment Notes 496 797
NPPN Equipment Notes 319 430
CENTRA Note 4,000 4,000
------------------ ------------------
95,837 97,323
Less: Amounts due within one year (3,669) (486)
------------------ ------------------
Long-term debt $ 92,168 $ 96,837
================== ==================
F-15
Future minimum principal payments for all notes as of December 31, 1999
are as follows (in thousands):
2000 3,669
2001 87,041
2002 220
2003 4,182
2004 202
Thereafter 523
---------------
$ 95,837
===============
10. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
DECEMBER 31,
-------------------------------------
1999 1998
--------------- ---------------
Adverse lease commitments $ - $ 478
Salaries and wages 7,531 7,430
Office closure costs 1,933 1,446
Interest 564 446
Accrued legal and regulatory 193 429
State and local taxes 121 504
Severance 1,463 -
Dividends declared - 1,910
Adverse claims (see Note 12) 4,577 -
NPPN settlement 4,000 -
Sales conferences 41 19
Care management outsource contract 3,014 1,201
Other 3,373 2,906
--------------- ---------------
$ 26,810 $ 16,769
=============== ===============
Adverse lease commitments relate to office leases assumed by HealthPlan
Services upon its acquisitions of Harrington and CENTRA and its assumption of
the TMG block of business at prices in excess of market rates or for property
that will not be utilized for the full term of the lease. Severance and office
closure costs refer to costs connected with HealthPlan Services' acquisitions of
Consolidated Group, Harrington, and CENTRA.
A director of HealthPlan Services also serves as Chairman and Chief
Executive Officer of Automatic Data Processing, Inc. ("ADP"). ADP has provided
payroll and shareholder distribution services for HealthPlan Services since
1995. During the years ended December 31, 1999, 1998, and 1997, HealthPlan
Services compensated ADP for these services in the amounts of approximately
$240,000, $195,000, and $110,000, respectively.
11. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
HealthPlan Services has a defined contribution employee benefit plan
established pursuant to Section 401(k) of the Internal Revenue Code covering
substantially all employees. HealthPlan Services matches one-third of employee
contributions limited to 6% of the employee's salary. Under the provisions of
the plan, participants' rights to employer contributions vest 40% after
completion of three years of qualified service and increase by 20% for each
additional year of qualified service completed thereafter. HealthPlan Services
converted employees of CENTRA and NPPN to HealthPlan Services' plan on January
1, 1999. During 1998, HealthPlan Services retained CENTRA's and NPPN's plans.
Expense in connection with these plans for the years ended December 31, 1999,
1998, and 1997 was approximately $0.7 million, $0.7 million, and $1.0 million,
respectively.
F-16
POST-RETIREMENT BENEFIT PLAN
HealthPlan Services provides medical and term life insurance benefits
to certain retired employees. HealthPlan Services funds the benefit costs on a
current basis because there are no plan assets. HealthPlan Services incurred
post-retirement benefit cost of $28,000, $36,000, and $37,000 for the years
ended December 31, 1999, 1998, and 1997, respectively. At December 31, 1999 and
1998, accrued post-retirement liabilities of $1.3 million and $1.4 million,
respectively, were included in the balance in other long-term liabilities.
Actuarial assumptions used in calculating the obligation include a discount rate
of 7.5% and a health care cost trend rate of 5% in 2000 and thereafter. A 1%
increase in the health care cost trend rate would result in an additional
obligation of $65,000 and additional service cost and interest cost of $10,000.
DEFERRED COMPENSATION PLAN
HealthPlan Services has a deferred compensation plan with an officer
and former officer. The deferred compensation, which together with accumulated
interest is accrued but unfunded, is distributable in cash after retirement or
termination of employment, and at December 31, 1999 and 1998, amounted to
approximately $0.9 and $1.0 million, respectively. Both participants began
receiving such deferred amounts, together with interest at 12% annually, at age
65.
MANAGEMENT STOCK
From the period 1994 through January 1995, certain members of
management received 473,000 shares of Common Stock, which carried limitations on
vesting over a four-year period and restrictions regarding the sale of stock in
a public market. HealthPlan Services recognized compensation expense based on
the vesting period of the shares. The shares became fully vested in January
1999.
12. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
HealthPlan Services rents office space and equipment under
non-cancelable operating leases. Rental expense under the leases approximated
$14.3 million (net of $1.0 million charged to adverse lease accruals), $15.2
million (net of $1.6 million charged to adverse lease accruals), and $11.2
million (net of $1.5 million charged to adverse lease accruals) for the years
ended December 31, 1999, 1998, and 1997, respectively. Future minimum rental
payments under these leases are as follows (in thousands):
2000 $10,799
2001 8,491
2002 7,253
2003 6,398
2004 5,355
Thereafter 4,812
----------
$43,108
===========
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.
F-17
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 former customer that had previously asserted a claim
exceeding $2 million. The customers alleged breach of contract and related
claims, and the brokers alleged loss of profits due to small group business
declines (see Note 16).
While HealthPlan Services intends to mount a vigorous defense related
to these claims, the ultimate financial effect of these claims cannot be fully
determined at this time. In the opinion of HealthPlan Services' management,
although the outcome of current claims against HealthPlan Services is uncertain,
in the aggregate they are not likely to have a material adverse effect on
HealthPlan Services' business, financial condition, or results of operations.
REGULATORY COMPLIANCE
HealthPlan Services' activities are highly regulated by state and
federal regulatory agencies under requirements that are subject to broad
interpretations. HealthPlan Services cannot predict the position that may be
taken by these third parties that could require changes to the manner in which
HealthPlan Services operates.
13. INCOME TAXES
The provision for income taxes is as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997
---------------------- ------------------- --------------------
Current
Federal $ 1,871 $ 3,681 $ 2,986
State 276 650 427
---------------------- ------------------- --------------------
2,147 4,331 3,413
---------------------- ------------------- --------------------
Deferred
Federal (3) 3,669 5,130
State (1) 683 733
---------------------- ------------------- --------------------
(4) 4,352 5,863
---------------------- ------------------- --------------------
Provision for income taxes
$ 2,143 $ 8,683 $ 9,276
====================== =================== ====================
The components of deferred taxes recognized in the accompanying
financial statements are as follows (in thousands):
DECEMBER 31,
---------------------------------------------
1999 1998
------------------- --------------------
Deferred tax asset - current
Accrued expenses not currently deductible $ 4,532 $ 1,448
=================== ====================
Deferred tax asset (liability) - non-current
Deferred compensation $ 480 $ 467
Post-retirement benefits 489 523
Depreciation (5,471) (4,300)
Intangibles 2,639 4,248
Equity in loss of joint venture (93) 186
Unrealized (gain) loss on investments available for sale (936) 21
------------------- --------------------
$ (2,892) $ 1,145
=================== ====================
F-18
The deferred tax asset resulting from intangibles relates to certain
intangible assets acquired by HealthPlan Services that are amortizable for tax
purposes.
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. No valuation
allowance is considered necessary at December 31, 1999 and 1998, based on
HealthPlan Services' expectations of future taxable income.
The provision for income taxes varies from the federal statutory income
tax rates due to the following:
1999 1998 1997
-------------- -------------- -------------
Federal statutory rate applied to pre-tax income 34.0% 34.0% 34.0%
State income taxes net of federal tax benefit 5.0% 5.0% 5.0%
Non-deductible goodwill amortization 43.5% 6.8% 5.3%
Other non-deductible items 3.5% 3.4% 1.9%
-------------- -------------- -------------
Effective tax rate 86.0% 49.2% 46.2%
============== ============== =============
14. EARNINGS PER COMMON SHARE
Earnings per share are calculated in accordance with the provisions of
the Statement on Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," effective for 1997. SFAS 128 requires HealthPlan Services to report
both basic earnings per share, which is based on the weighted-average number of
common shares outstanding, and all dilutive potential common shares outstanding.
All prior years' earnings per share data have been restated in accordance with
SFAS 128.
NET INCOME
ATTRIBUTABLE TO PER SHARE
COMMON STOCK SHARES AMOUNT
----------------- --------------- --------------
1999
Earnings per share of common stock-basic $ 104 13,742 $ 0.01
Effect of dilutive securities:
CENTRA convertible notes - 180 -
----------------- --------------- --------------
Earnings per share of common stock--
assuming dilution $ 104 13,922 $ 0.01
================= =============== ==============
1998
Earnings per share of common stock-basic $ 9,698 14,353 $ 0.68
Effect of dilutive securities:
Stock options 51 -
CENTRA convertible notes 180 (0.01)
----------------- --------------- --------------
Earnings per share of common stock--
assuming dilution $ 9,698 14,584 $ 0.67
================= =============== ==============
1997
Earnings per share of common stock-basic $ 10,796 15,004 $ 0.72
================= =============== ==============
15. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN
STOCK OPTION PLANS
HealthPlan Services' stock option plans authorize the granting of both
incentive and non-incentive stock options for a total of 2,590,000 shares of
Common Stock to key executives, management, consultants, and, with respect to
240,000 shares, to directors. Under the plans, all options have been granted at
prices not less than market value on the date of grant. Certain non-qualified
incentive stock options may be granted at less than market value.
F-19
Options generally vest over a four-year period from the date of grant, with 20%
of the options becoming exercisable on the date of the grant and 20% becoming
exercisable on each of the next four anniversaries of the date of the grant.
A summary of option transactions during each of the three years ended
December 31, 1999 is shown below:
NUMBER WEIGHTED
OF AVERAGE
SHARES OPTION PRICE
------------------- ------------------
Under option, December 31, 1996
(278,200 exercisable) 1,443,500 $ 18.54
Granted 613,000 20.37
Exercised (46,800) 14.00
Canceled (41,600) 20.32
-------------------
Under option, December 31, 1997
(711,200 exercisable) 1,968,100 19.17
Granted 203,000 11.84
Exercised (123,500) 17.87
Canceled (287,100) 20.31
-------------------
Under option, December 31, 1998
(922,800 exercisable) 1,760,500 18.23
Granted 551,000 10.45
Exercised - -
Canceled (346,050) 15.75
-------------------
Under option, December 31, 1999 1,965,450
There were 624,550 and 829,500 shares available for the granting of
options at December 31, 1999 and 1998, respectively.
The following table summarizes the stock options outstanding at
December 31, 1999:
RANGE NUMBER WEIGHTED AVERAGE WEIGHTED
OF OUTSTANDING AT REMAINING AVERAGE
EXERCISE PRICES DECEMBER 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE
------------------------- ------------------------ ----------------------- ---------------------
$ 7.19 - $16.44 789,250 8 years $11.35
16.57 - 26.00 1,176,200 7 years 19.93
F-20
MEASUREMENT OF FAIR VALUE
HealthPlan Services applies APB 25 and related interpretations in
accounting for its stock option plans and employee stock purchase plan.
Accordingly, no compensation cost has been recognized related to these plans.
Had compensation cost for HealthPlan Services' stock option and employee stock
purchase plans been determined based on the fair value at the grant dates, as
prescribed in SFAS 123, HealthPlan Services' net income and net income per share
would have been as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
Net income (loss) attributable to
common stock (in thousands):
As reported $ 104 $ 9,698 $ 10,796
Pro forma (223) 8,528 9,363
=============== =============== ==============
Net income (loss) per share:
Basic as reported $ 0.01 $ 0.68 $ 0.72
Basic pro forma (0.02) 0.59 0.62
Diluted as reported $ 0.01 $ 0.67 $ 0.71
Diluted pro forma n/a 0.59 0.62
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants during the applicable year: dividend yield of 0.00%, 4.78%, and 2.38%
for the years ended December 31, 1999, 1998, and 1997, respectively; expected
volatility of 30% for each of the years ended December 31, 1999, 1998, and 1997;
risk-free interest rates of 6.47% to 6.53% for options granted during the year
ended December 31, 1999, 4.15% to 5.62% for options granted during the year
ended December 31, 1998, and 5.49% to 6.54% for options granted during the year
ended December 31, 1997; and a weighted average expected option term of four
years for all three years.
EMPLOYEE STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan ("Employee Plan"),
HealthPlan Services is authorized to issue up to 250,000 shares of Common Stock
to its employees who have completed one year of service. The Employee Plan is
intended to provide a method whereby employees have an opportunity to acquire
shares of Common Stock of HealthPlan Services.
Under the terms of the Employee Plan, an employee may authorize a
payroll deduction of a specified dollar amount per pay period. The proceeds of
that deduction are used to acquire shares of HealthPlan Services' Common Stock
on the offering date. The number of shares acquired is determined based on 85%
of the closing price of HealthPlan Services' Common Stock on the New York Stock
Exchange on the offering date.
HealthPlan Services sold 16,143 shares in 1999, 12,662 shares in 1998,
and 14,569 shares in 1997 to employees under the Employee Plan.
16. SUBSEQUENT EVENTS
As of October 5, 1999, HealthPlan Services and UICI, a diversified
financial services company, entered into a merger agreement. On December 9,
1999, UICI announced a significant loss in its credit card operations, and the
merger was delayed. On February 18, 2000, HealthPlan Services and UICI agreed
upon an amended merger agreement for UICI to acquire HealthPlan Services for
convertible preferred securities. On April 13, 2000, HealthPlan Services
terminated the transaction by mutual agreement with UICI, as a result of the
failure to obtain required lender consents.
F-21
In January 1997, HealthPlan Services 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 for claims in excess of $7.0 million for
breach of contract and related claims, and HealthPlan Services asserted breach
of contract and various other claims against Clarica. In the third quarter of
1999, HealthPlan Services recorded a reserve for the Clarica claim and other
claims. In April 2000, Clarica and CIGNA Rejointly submitted a demand for
arbitration in connection with these claims and claims submitted by CIGNA Re for
approximately $6.0 million. HealthPlan Services intends to mount a vigorous
defense of the Clarica and CIGNA Re claims, and to continue pursuit of its
claims against Clarica and CIGNA Re. While the effect, if any, cannot be
determined at this time, in the opinion of management, it will not have a
material adverse effect on the accompanying financial statements.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED; IN THOUSANDS EXCEPT PER
SHARE DATA)
FOURTH THIRD SECOND FIRST
QUARTER (1) QUARTER (2) QUARTER QUARTER
Year ended December 31, 1999
Revenues $66,538 $65,479 $70,932 $74,475
Net (loss) income (1,332) (3,316) 3,316 1,437
Basic (loss) net income per common share $ (0.10) $(0.24) $ 0.24 $ 0.10
Diluted net income per common share n/a n/a $ 0.24 $ 0.10
FOURTH THIRD SECOND FIRST
QUARTER (3) QUARTER (4) QUARTER QUARTER
Year ended December 31, 1998
Revenues $74,965 $74,526 $71,740 $68,016
Net income (loss) 385 12,256 223 (3,166)
Basic net income (loss) per common share $ 0.03 $ 0.88 $ 0.02 $(0.21)
Diluted net income per common share $ 0.03 $ 0.88 $ 0.02 n/a
(1) Net loss fluctuation due to $2.9 million pretax restructure charge.
(2) Net loss fluctuation due to $5.7 million pretax adverse claim charge.
(3) Net income fluctuation due to $1.5 million pretax integration costs
associated with conversion of systems and data centers of acquired
companies.
(4) Net income fluctuation due to $27.9 million pretax gain on the sale of the
investment in SHPS.
F-22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders
of HealthPlan Services Corporation
Our audits of the consolidated financial statements referred to in our report
dated April 14, 2000 appearing on page F-1 of this Form 10-K of HealthPlan
Services Corporation also included an audit of the Financial Statement Schedule
listed in Item 14 of this Form 10-K. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Tampa, Florida
April 14, 2000
HEALTHPLAN SERVICES CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
-------------------------------
Beginning Bad Debt Revenue Ending
Description Balance Expense Reversals Deductions (1) Balance
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
December 31, 1999
1,689 2,146 1,081 1,705 3,211
Allowance for Doubtful Accounts
December 31, 1998
150 2,429 809 1,699 1,689
Allowance for Doubtful Accounts
December 31, 1997 99 454 0 403
150
(1) Reflects direct write-off of accounts.
Exhibit Index
2.11(b) Amendment to Amended and Restated Agreement and Plan of Merger dated
March 23, 2000 by and among UICI and HealthPlan Services.
10.12(b) Third Amendment and Waiver dated November 15, 1999; and the Nonwaiver
and Standstill Agreements dated February 11, 2000.
10.17 HealthPlan Services Corporation 1998 Officer Bonus Plan Summary
(compensatory plan).
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.