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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
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
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Common Stock $.01 par value..................NYSE
-----------------------
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 March 15, 1999, was
$76,702,641.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 15, 1999 was 13,867,822.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this Form 10-K is incorporated
by reference to the definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders of HealthPlan Services Corporation, which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1998.
PART I
THE STATEMENTS CONTAINED IN THIS REPORT OR INCORPORATED BY REFERENCE HEREIN THAT
ARE NOT PURELY HISTORICAL, INCLUDING STATEMENTS REGARDING HEALTHPLAN SERVICES
CORPORATION'S OBJECTIVES, EXPECTATIONS, HOPES, INTENTIONS, BELIEFS, OR
STRATEGIES, ARE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933. IN PARTICULAR, THE WORDS "EXPECT," "ESTIMATE,"
"PLAN," "ANTICIPATE," "PREDICT," "INTEND," "BELIEVE," AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE
THAT ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS, AND UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS. AMONG
THE FACTORS THAT COULD CAUSE SUCH ACTUAL RESULTS TO DIFFER MATERIALLY ARE:
CHANGES IN LEGISLATION; FLUCTUATIONS IN BUSINESS CONDITIONS AND THE ECONOMY;
HEALTHPLAN SERVICES CORPORATION'S ABILITY TO IDENTIFY AND IMPLEMENT
OPPORTUNITIES TO ADMINISTER NEW BLOCKS OF BUSINESS; CHANGES IN COMPETITION; AND
HEALTHPLAN SERVICES CORPORATION'S ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT
PERSONNEL.
ITEM 1. BUSINESS
GENERAL
HealthPlan Services Corporation (together with its direct and indirect
wholly owned subsidiaries, "HealthPlan Services" or the "Company") is a leading
managed health care services company, providing distribution, enrollment,
billing and collection, and claims administration services for health care
payors and providers. HealthPlan Services' customers include insurance
companies, health maintenance organizations ("HMOs") and other managed care
organizations, and organizations with self-funded health care plans. HealthPlan
Services provides these services to approximately 140,000 groups covering over 3
million members in the United States. HealthPlan Services functions solely as a
service provider generating fee-based income and does not assume any
underwriting risk. In May 1998, HealthPlan Services acquired National Preferred
Provider Network, Inc. ("NPPN"), a preferred provider organization network
consisting of over 450,000 physician offices, 4,000 hospitals, and 50,000
ancillary care provider locations in all 50 states and the District of Columbia.
Except for its NPPN subsidiary, the revenue of which is not significant for
reporting purposes, HealthPlan Services operates in one business segment.
STRATEGY
HealthPlan Services' strategy is to improve revenue and operating
profits through the addition of new payors, such as HMOs, integrated health care
delivery systems, managed care providers, and self-funded organizations, and the
development of new electronic commerce and other information technology
services. HealthPlan Services plans to upgrade operating systems and increase
labor efficiency. HealthPlan Services also intends to pursue opportunities to
enhance its product offerings through NPPN; Montgomery Management Corporation, a
managing general underwriter in which HealthPlan Services holds an 80% interest;
and other entities with which HealthPlan Services maintains outsourcing
arrangements.
COMPANY SERVICES
HealthPlan Services provides marketing, distribution, administration,
and transaction processing services and solutions for self-funded employee
benefit plans, managed care organizations, insurance companies, and other
organizations. In December 1998, HealthPlan Services introduced an interactive
electronic Internet site through which certain plan transactions can be
performed electronically. The site, which is accessible through HealthPlan
Services' home page (www.healthplan.com), enhances HealthPlan Services'
capabilities in all aspects of its services.
MARKETING
HealthPlan Services provides managed care companies, insurance
companies, and other health care organizations with marketing services that
target individuals and small businesses. HealthPlan Services helps design
managed care products based on market research, historical experience in the
small business market, actuarial analysis of claims adjudicated, and interaction
with payor organizations. These products often include features that address the
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particular needs of the small business employer, including specialized medical,
dental, life, and disability coverage. On behalf of its payors, HealthPlan
Services prepares and implements communications programs that are aimed at
educating insurance agents about the benefits offered under payor product
offerings.
HealthPlan Services' marketing activity includes sales support for
insurance agents through a field sales force and telephone sales
representatives. HealthPlan Services maintains a database of over 100,000
insurance agents, including master brokers, independent brokers, and career
agency groups. In 1998, HealthPlan Services paid commissions to over 25,000 of
these agents. In the case of a career agency relationship, HealthPlan Services
offers the agent group, which generally is affiliated with a life or property
and casualty parent company, opportunities to distribute products that are not
currently underwritten by its parent company and that compliment its existing
product offerings. These relationships with independent and career agents
provide HealthPlan Services with a significant distribution conduit to the small
business market in the United States.
HealthPlan Services has invested in information technology to support
its sales and marketing function. HealthPlan Services' new electronic Internet
site provides agents with underwriting status on pending cases as well as
information on active business. In addition, agents can access electronic forms
through the site and initiate support requests that are delivered automatically
to the appropriate Company department. HealthPlan Services also has invested in
client-server technology that utilizes personal computer workstations in a
local-area and wide-area network to deliver information and images to the
desktop. Using HealthPlan Services' automated proposal delivery system, a
HealthPlan Services sales representative can deliver a finished proposal from
the computer desktop to an agent immediately by fax server or electronic mail.
HealthPlan Services also maintains an interactive voice response system to
provide agents with automatic premium quotations for individual health products.
HealthPlan Services continues to seek new marketing channels for indemnity
and managed care products. In May 1998, HealthPlan Services entered into an
agreement to perform services for HealthAxis.com, Inc. ("HealthAxis.com"), a
company that provides sales and distribution services for health insurance
products offered through the Internet. HealthPlan Services began providing
administrative services in connection with products offered through
HealthAxis.com in November 1998. In connection with this arrangement, in 1998
HealthPlan Services acquired a minority equity interest in HealthAxis.com for
$5.8 million. In May 1998, HealthPlan Services formed a strategic alliance with
Healtheon Corporation ("Healtheon") to pursue opportunities to market health
insurance products to small businesses through the Internet. Healtheon develops
and manages virtual health care networks to facilitate information exchange
among health care payors, providers, and plan members. In June 1998, HealthPlan
Services entered into an arrangement with The National Federation of Independent
Businesses ("NFIB"), pursuant to which NFIB agreed to endorse products of
selected HealthPlan Services payors to NFIB members. In June 1998, HealthPlan
Services and NationsBanc Insurance Services, Inc. entered into a letter of
intent to market health insurance products to small businesses. To date,
HealthPlan Services has not generated any significant revenue from any of its
new marketing initiatives, and it is not clear when, if ever, significant
revenue will materialize from these ventures.
PLAN ADMINISTRATION SERVICES
HealthPlan Services provides enrollment, premium billing and
collection, claims administration, and customer support services for all types
of health plans. As a provider of enrollment services, HealthPlan Services
performs underwriting support services, issues enrollment cards, and administers
case renewals. HealthPlan Services' billing and collection services on behalf of
payors include sending monthly bills to insured parties, receiving premium
payments from insureds, and paying agent commissions. HealthPlan Services also
implements premium adjustments due to rate changes, employee hiring or
termination, and other group changes. As a provider of claims administration
services, HealthPlan Services verifies eligibility, calculates copayments,
reprices and adjudicates claims, prepares explanation of benefits forms, and
issues checks from payor accounts to claimants and to health care providers.
HealthPlan Services' customer support representatives respond to plan member
questions regarding claims and other plan benefits.
Through its claims adjudication software and other technology
solutions, HealthPlan Services streamlines plan administration for its
customers. HealthPlan Services provides automated billing and collection
services through electronic funds transfer. Through HealthPlan Services' new
electronic Internet site, plan members can access billing information, obtain
forms, and request customer service. HealthPlan Services' new electronic site
compliments its
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established customer service capabilities, which include over 450 toll-free
telephone lines and a comprehensive customized call distribution system for
rating and tracking of calls. HealthPlan Services also provides an interactive
voice response (IVR) system that allows insureds to check on the status of
premium payment and claims matters automatically by telephone. HealthPlan
Services' information technology systems allow Company employees to receive
claims electronically and to image and digitize non-electronic claims.
In addition to enrollment, claims administration, and customer support
services, HealthPlan Services offers specialized plan administration services
tailored for its self-funded customers. HealthPlan Services' systems are
organized to administer a broad array of employee benefit plan components as an
integrated one-stop source. Due to the size of its customer base, HealthPlan
Services can offer its self-funded customers access to national service
providers to control and reduce plan costs. HealthPlan Services also offers
these customers administrative services for workers compensation and
unemployment compensation programs. During 1998, HealthPlan Services acquired
80% of the capital stock of Montgomery Management Corporation ("Montgomery
Management") from Provident Indemnity Life Insurance Company. Montgomery
Management is a full service managing general underwriter that has the authority
to bind stop-loss insurance coverage (on behalf of the insurance companies it
represents) to self-funded group health benefit plans.
HealthPlan Services seeks to enhance its services with value-added
product offerings. Through NPPN, its preferred provider network subsidiary,
HealthPlan Services offers its clients access to regional and national preferred
provider networks in all 50 states and the District of Columbia. In January
1999, HealthPlan Services entered into an agreement with Merck-Medco Managed
Care L.L.C., which manages prescription drugs, to provide pharmacy benefits for
HealthPlan Services' small business and large self-insured customers.
In December 1997, HealthPlan Services and Sykes Enterprises,
Incorporated ("Sykes") formed Sykes HealthPlan Services, Inc. ("SHPS"), a
provider of care management services, technology solutions, certain customer
support services, and other outsourcing capabilities to employers and the health
care and insurance industries. The shareholders agreement relating to this
transaction contained noncompete provisions generally preventing HealthPlan
Services and Sykes from competing with each other or with SHPS. HealthPlan
Services began outsourcing its care management and utilization review services
to SHPS in the first quarter of 1998. In September 1998, HealthPlan Services
sold its interest in SHPS to Sykes. HealthPlan Services' outsourcing
relationship with SHPS, as well as the noncompete restrictions in the
shareholders agreement, have continued after the transfer of HealthPlan
Services' interest in SHPS.
In February 1999, HealthPlan Services, Inc. ("HPS"), HealthPlan
Services' wholly owned subsidiary, signed a definitive agreement to acquire a
19% interest in Florida 1st Health Plans, Inc. ("Florida 1st"), subject to
receipt of regulatory approvals and other required documentation. In connection
with this acquisition, HPS will receive an option to purchase an additional
31.1% interest in Florida 1st. Florida 1st, based in Winter Haven, Florida,
provides third party administration services to self-funded health plans
covering over 110,000 members and offers HMO products covering over 12,000
members.
INFORMATION SERVICES
HealthPlan Services has broad reporting and analytic capabilities
relating to all of its core services. HealthPlan Services' information services
include preparation of reports regarding agent production, enrollment, and
frequency and types of claims. HealthPlan Services provides a comprehensive data
resource of financial, utilization, and benefit plan design information for its
clients. HealthPlan Services also provides regulatory compliance services to its
clients, helping payors structure their employee benefit plans to comply with
applicable state and federal law. HealthPlan Services intends to continue to
enhance its data analysis and statistical reporting capabilities using its
database of administered claims as well as publicly available data.
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HEALTHPLAN SERVICES CUSTOMERS
HealthPlan Services provides 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)
HealthPlan Services provides administrative and information services
for self-funded health benefit plans, workers compensation programs, and
unemployment compensation programs. In 1998, HealthPlan Services 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. HealthPlan Services' self-funded customers include the health
care programs for the Oklahoma State and Education Employees Group Insurance
Board, the State of South Carolina, the American Veterinary Medical Association
Group Health and Life Insurance Trust, the Hotel Employees and Restaurant
Employees International Union Welfare Fund, and Darden Restaurants.
In June 1998, HealthPlan Services acquired a 50.1% interest in CENTRA
HealthPlan LLC ("CENTRA"). CENTRA is an administrator of self-funded health
plans for approximately 100 large groups, including the State of Washington and
Inland Steel Corporation. CENTRA is headquartered in Richardson, Texas. CENTRA
Benefit Services ("CBS"), the holder of the remaining 49.9% interest in CENTRA,
has the right to put this interest to HealthPlan Services at a contractual price
not to exceed $6.0 million if CENTRA meets certain financial performance
criteria. In February 1999, CBS notified HealthPlan Services that it intends to
exercise its put option. HealthPlan Services is evaluating whether or not CENTRA
has met the necessary financial performance criteria for CBS to exercise this
option.
FULLY INSURED BENEFIT PLANS (SMALL GROUP CUSTOMERS)
For over 25 years, HealthPlan Services has provided services to
insurance companies and other organizations that offer fully insured health
benefit plans for individuals and small businesses. Traditionally, HealthPlan
Services' primary market was indemnity (fee-for-service) benefit plans, but in
recent years HealthPlan Services has shifted its focus to "managed indemnity"
plans and other managed care plans that include mechanisms for controlling
health care costs. HealthPlan Services now provides marketing and administrative
services for several managed care products, including products offered by New
England Life Insurance Company, Kaiser Permanente Insurance Company, and Aetna
U.S. HealthCare, Inc.
Effective January 1, 1997, HealthPlan Services assumed marketing and
administrative services for TMG Life Insurance Company's ("TMG's") medical,
dental, and group life benefits business, with Connecticut General Life
Insurance Company, a CIGNA company ("CIGNA Re"), acting as the reinsurer. In
July 1997, the parties agreed to a transition of a majority of this business to
Midwestern United Life Insurance Company ("Midwestern United"), with HealthPlan
Services remaining as administrator and CIGNA Re remaining as the reinsurer. TMG
canceled coverage of the portion of the business that was not identified for
transition to Midwestern United. During the transition, which is expected to be
complete in the second quarter of 1999, the business is experiencing higher than
normal lapse rates and lower than normal margins. This business accounted for
approximately 8% of HealthPlan Services' revenues in 1998. In January 1999,
Midwestern United notified its insureds that it will cancel their policies
beginning on July 31, 1999. HealthPlan Services is working with its current
distribution system to direct Midwestern United insureds to suitable replacement
coverage.
In 1997, approximately 12.6% of HealthPlan Services' revenues were
derived from a block of indemnity/preferred provider organization ("PPO")
business insured by United HealthCare Corporation ("United HealthCare") and The
Travelers Insurance Company ("Travelers"). In July 1997, United HealthCare and
Travelers agreed to the transition of a majority of this business to the
"Access" products, which are fully insured, triple-option health benefit
products. The Access products are issued by Seaboard Life Insurance Company
(USA) ("Seaboard Life") and administered by HealthPlan Services. Beginning in
October 1997, Seaboard Life began offering coverage under the Access products to
holders of the United HealthCare and Travelers policies. The business
experienced higher than normal lapse rates and lower than
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normal margins during this transition, which was substantially completed in
1998. In 1998, this business accounted for approximately 6.1% of HealthPlan
Services' consolidated revenue. Effective as of December 31, 1998, the Centris
Group, Inc. ("Centris") acquired Seaboard Life. Centris has informed HealthPlan
Services that it does not wish Seaboard Life to continue as the carrier for the
Access program. HealthPlan Services is engaged in discussions with insurance
carriers that may be interested in replacing Seaboard Life as the insurer for
the program.
In January 1998, HealthPlan Services began providing policy issuance,
billing, and claims services for the individual indemnity/preferred provider
organization health insurance policies of Provident Indemnity Life Insurance
Company ("PILIC") and Provident American Life and Health Insurance Company
("PALHIC"). In 1998, this business accounted for approximately 9% of HealthPlan
Services' revenues. Effective January 1, 1999, Central Reserve Life Insurance
Company, the predecessor of Ceres Group, Inc., acquired PALHIC. HealthPlan
Services is unable to predict whether this merger will have any material effect
on HealthPlan Services' relationship with PALHIC. In February 1999, PILIC and
its parent company, Provident American Corporation ("PAMCO"), asserted a demand
against HealthPlan Services for claims in excess of $27 million. In the event
PAMCO and PILIC elect to pursue such claims, HealthPlan Services will mount a
vigorous defense. The financial effect, if any, of this matter cannot be
determined at this time.
HealthPlan Services continues to experience higher lapses than new
sales in the business written with its 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. These and other factors have resulted in a weakening of HealthPlan
Services' carrier and managed care payors' commitment to the small group market
and consolidation of the industry. HealthPlan Services is not certain when, if
ever, these trends will be reversed. In addition to Seaboard Life and Midwestern
United, the insurers of two of HealthPlan Services' smaller blocks of business,
which together constituted approximately 4.5% of HealthPlan Services' revenues
for 1998, have elected to exit the small business market.
Although HealthPlan Services continues to work with its managed
indemnity payors to introduce additional care management and other cost control
mechanisms for their benefit plans, HealthPlan Services cannot predict whether
these managed indemnity payors will be able to manage their medical loss ratios
successfully and thus offer competitive pricing for their products. HealthPlan
Services also cannot predict whether it will be able to form alliances with
health care payors that are committed to the small group market for the long
term. The results of Company initiatives in these areas may affect HealthPlan
Services' ability to maintain and grow managed indemnity business in the future.
Typically, HealthPlan Services' indemnity and managed care payors sign
contracts with HealthPlan Services 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 HealthPlan Services' key insurance carrier or managed care blocks
of business could have a material adverse effect on HealthPlan Services. There
can be no assurance that HealthPlan Services will successfully transition the
Midwestern United or Seaboard Life blocks of business to new carriers or managed
care entities.
On September 30, 1998, HealthPlan Services and the Prudential Insurance
Company of America signed a letter of intent to enter into a long-term
outsourcing arrangement. On January 11, 1999, HealthPlan Services announced that
it did not expect to enter into a contract with Prudential in the near future
because Prudential is continuing to evaluate its situation in the context of the
proposed Aetna U.S. HealthCare acquisition of Prudential.
COMPANY HISTORY
HealthPlan Services' principal operating subsidiary, HealthPlan
Services, Inc. ("HPS"), was founded in 1970 by James K. Murray, Jr., HealthPlan
Services' current Chairman of the Board and Chief Executive Officer, Charles H.
Guy, Jr., and Trevor G. Smith (the "Founders"). The Dun & Bradstreet Corporation
("D&B") purchased the business in 1978 and operated it as a division. In 1994,
the Founders and other investors formed the Company and purchased the HPS
business (the "Predecessor Company") from D&B. On May 19, 1995, HealthPlan
Services completed an initial public offering of 4,025,000 shares of its Common
Stock. HealthPlan Services is a Delaware corporation.
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INTEGRATION
In 1998, HealthPlan Services completed integration of the operations of
two businesses it acquired in July 1996: Consolidated Group, Inc. ("Consolidated
Group"), a provider of administrative services for fully insured health care
plans; and Harrington Services Corporation ("Harrington"), a provider of
administrative services for large, self-funded benefit plans. This integration
included consolidation of personnel and administrative services to its Tampa,
Florida and Merrimack, New Hampshire facilities from the former Consolidated
Group facility in Framingham, Massachusetts. In connection with this
integration, in 1998 HealthPlan Services also consolidated the operations of
former Harrington offices in Atlanta, Georgia and Chicago, Illinois to other
Company facilities. HealthPlan Services also transferred operations to Tampa
from the Brookfield, Wisconsin facility, the lease for which HealthPlan Services
had assumed in connection with the TMG block of business.
In 1998, HealthPlan Services began integration of its newly acquired
CENTRA and NPPN businesses, including integration of technology platforms
associated with the CENTRA acquisition, and closure of the Irving, Texas and
Houston, Texas CENTRA offices. HealthPlan Services expects that it will complete
integration of the CENTRA and NPPN businesses during the first quarter of 1999.
INFORMATION TECHNOLOGY
HealthPlan Services' primary data processing facilities are located in
Tampa, Florida, Columbus, Ohio, and El Monte, California. HealthPlan Services
operates in a three-tiered architectural environment. A large IBM mainframe
supports substantially all of the transactions processed by HealthPlan Services.
In 1998, HealthPlan Services continued the consolidation of its operations into
a common technology platform and the elimination of redundant computer
facilities as part of its ongoing integration of acquired businesses. HealthPlan
Services expects that this integration will be completed in 1999.
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," for a discussion of HealthPlan Services'
Year 2000 Compliance Plan.
GOVERNMENT REGULATION
HealthPlan Services is subject to regulation under the health care and
insurance laws and other statutes and regulations of all 50 states, the District
of Columbia, and Puerto Rico. Many states in which HealthPlan Services provides
claims administration services require HealthPlan Services or its employees to
receive regulatory approval or licensure to conduct such business. Provider
networks also are regulated in many states. HealthPlan Services' operations are
dependent upon its continued good standing under applicable licensing laws and
regulations. Such laws and regulations are subject to amendment or
interpretation by regulatory authorities in each jurisdiction. Generally, such
authorities have relatively broad discretion when granting, renewing, or
revoking licenses or granting approvals. These laws and regulations are intended
to protect insured parties rather than stockholders and differ in content,
interpretation, and enforcement practices from state to state. Moreover, with
respect to many issues affecting HealthPlan Services, there is a lack of guiding
judicial or administrative precedent. Certain of these laws could be construed
by state regulators to prohibit or restrict practices that have been significant
factors in HealthPlan Services' operating procedure for many years. HealthPlan
Services could risk major erosion and even "rebate" exposure in these states if
state regulators deem HealthPlan Services' practices to be 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. These obligations include barring a fiduciary from
permitting a plan to engage 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
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the plan and persons that provide services to the plan. The application of ERISA
to the operations of HealthPlan Services and its customers is an evolving area
of law and is subject to ongoing regulatory and judicial interpretations of
ERISA. Although HealthPlan Services strives to minimize the applicability of
ERISA to its business and to ensure that HealthPlan Services' practices are not
inconsistent with ERISA, there can be no assurance that courts or the United
States Department of Labor (the "DOL") will not in the future take positions
contrary to the current or future practices of HealthPlan Services. Any such
contrary positions could require changes to HealthPlan Services' business
practices (as well as industry practices generally) or 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 HealthPlan Services and
its industry.
During 1996 and 1997, HealthPlan Services' Consolidated Group
subsidiary underwent an audit by the DOL in which the DOL raised various
questions about the application of ERISA to the way that Consolidated Group did
business. HealthPlan Services has responded to all outstanding concerns raised
by the DOL in that audit. Although the DOL has not objected to HealthPlan
Services' responses, there can be no assurance that the DOL will not in the
future take positions that could require changes to the way HealthPlan Services
operates or result in the imposition of administrative fines and penalties.
COMPETITION
HealthPlan Services faces 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. HealthPlan Services
competes 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. HealthPlan Services competes 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 offered by HealthPlan Services. Many of HealthPlan Services'
competitors and potential competitors are considerably larger and have
significantly greater resources than HealthPlan Services.
EMPLOYEES
HealthPlan Services had approximately 3,300 employees on February 28,
1999. Except for some of the employees of American Benefit Plan Administrators,
Inc., a Company subsidiary that administers Taft-Hartley plans, HealthPlan
Services' labor force is not unionized. HealthPlan Services believes that its
relationship with its employees is good.
TRADEMARKS
HealthPlan Services utilizes various service marks, trademarks, and
trade names in connection with its products and services, most of which are the
property of HealthPlan Services' payors. Although HealthPlan Services considers
its service marks, trademarks, and trade names important in the operation of its
business, the business of HealthPlan Services is not dependent on any individual
service mark, trademark, or trade name.
ITEM 2. PROPERTIES
HealthPlan Services conducts its operations from its headquarters in
Tampa, Florida. HealthPlan Services' central data processing facilities are
located in Tampa, Florida, Columbus, Ohio, and El Monte, California. HealthPlan
Services leases these facilities, as well as substantially all of its other
locations. HealthPlan Services believes that its facilities are adequate for its
present and anticipated business requirements.
ITEM 3. LEGAL PROCEEDINGS
During 1996 and 1997, HealthPlan Services' Consolidated Group
subsidiary underwent a DOL audit in which the DOL raised various questions about
the application of ERISA to the way that Consolidated Group did business.
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HealthPlan Services has responded to all outstanding concerns raised by the DOL
in that audit. Although the DOL has not objected to HealthPlan Services'
responses, there can be no assurance that the DOL will not in the future take
positions that could require changes to the way HealthPlan Services operates or
result in the imposition of administrative fines and penalties.
In the ordinary course of business, HealthPlan Services may be a party
to a variety of legal actions that affect any business, including employment and
employment discrimination-related suits, employee benefit claims, breach of
contract actions, and tort claims. In addition, because of the nature of its
business, HealthPlan Services could be subject to a variety of legal actions
relating to its business operations, including disputes alleging errors in claim
administration, underwriting, or premium billing. HealthPlan Services currently
has insurance coverage for some of these potential liabilities. Other potential
liabilities may not be covered by insurance, insurers may dispute coverage, or
the amount of insurance may not cover the damages awarded. In the 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of HealthPlan Services' security
holders during the fourth quarter of 1998.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HealthPlan Services' 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 for each quarter during 1997 and 1998, as reported by the New York
Stock Exchange for the periods indicated.
1998 HIGH LOW
---- ---- ---
Fourth quarter.................... $11.500 $10.375
Third quarter..................... $10.875 $ 9.500
Second quarter.................... $17.6875 $17.375
First quarter $26.625 $26.125
1997 HIGH LOW
---- ---- ---
Fourth quarter.................... $22.1875 $18.9375
Third quarter..................... $22.125 $18.375
Second quarter.................... $19.250 $13.625
First quarter..................... $23.625 $15.375
HealthPlan Services paid quarterly dividends on its Common Stock of
12.5 cents per share (or 50 cents per share on an annualized basis) for the
second, third, and fourth quarters of 1997 and the first quarter of 1998.
HealthPlan Services paid 13.75 cents per share (or 55 cents per share on an
annualized basis) for the second, third, and fourth quarters of 1998. HealthPlan
Services expects to continue to pay cash dividends in the future. Pursuant to
HealthPlan Services' May 1, 1998 credit agreement with its lenders, as amended,
in each year beginning in 1999 HealthPlan Services may increase the amount of
dividend payments by up to five cents per share on an annualized basis, subject
in certain circumstances to lender consent. There were 393 holders of record of
HealthPlan Services' Common Stock as of March 15, 1999. HealthPlan Services
believes that there is a greater number of beneficial owners that hold
HealthPlan Services' Common Stock in a street name.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data set forth below have been
derived from the audited consolidated financial statements of HealthPlan
Services at December 31, 1998 and 1997 and for the years ended December 31,
1998, 1997, and 1996, and have been derived from the audited financial
statements of HealthPlan Services at December 31, 1996, 1995, and 1994 and for
the years ended December 31, 1996 and 1995 and the three months ended December
31, 1994 and the Predecessor Company at September 30, 1994 and for the nine
months ended September 30, 1994 not included herein. The report of
PricewaterhouseCoopers LLP, independent accountants of HealthPlan Services, on
the consolidated financial statements of HealthPlan Services at December 31,
1998 and 1997 and for the years ended December 31, 1998, 1997, and 1996 appears
elsewhere in this Form 10-K. Selected historical financial data of HealthPlan
Services should be read in conjunction with the related financial statements and
notes thereto appearing elsewhere in this Form 10-K. The pro forma selected
financial data are not necessarily indicative of actual results of financial
position that would have been achieved had the acquisition of the Predecessor
Company from D&B ("the Acquisition") been completed as of January 1, 1994, nor
are the statements necessarily indicative of HealthPlan Services' future results
of operations or financial position.
9
PREDECESSOR
HEALTHPLAN SERVICES COMPANY (1)
------------------------------------------------------------------------------ -----------
PRO FORMA THREE NINE
YEAR MONTHS MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED ENDED
--------------------------------------------------- DEC. 31, DEC. 31, SEPT. 30,
1998 1997 1996 1995 1994(3) 1994 1994
---- ---- ---- ---- ------- ---- ----
STATEMENT OF INCOME DATA:
Revenues .......................... $ 289,247 $281,644 $191,493 $ 98,187 $107,077 $25,132 $81,945
Expenses:
Agent commissions.................. 68,449 65,674 48,507 36,100 43,260 10,047 33,213
Other operating expenses........... 200,710 170,556 114,078 40,406 45,633 10,202 42,138
Contract commitments............... - - 2,685 - 3,623 3,623 -
Restructure charge................. 2,052 1,374 1,425 - - - -
Integration expense................ 4,171 4,885 7,804 - - - -
Other expense...................... 1,811 316 812 1,664 - - -
Gain on sale of investments........ (33,240) - - - - - -
Loss on impairment of goodwill..... - - 13,710 - - - -
Equity in loss of joint
venture.......................... 11,849 2,850 - - - - -
Depreciation and amortization...... 15,800 15,917 10,548 4,386 3,517 870 3,347
--------- -------- -------- -------- -------- ------- -------
Income (loss)
from operation................... 17,645 20,072 (8,076) 15,631 11,044 390 3,247
Net income (loss).................. $9,698 $ 10,796 $ (6,716) $ 9,535 $ 6,467 $ 231 $ 1,747
-------
Dividends on redeemable
preferred stock.................. -- -- -- 285 -- 285
--------- -------- -------- -------- -------- -------
Net income (loss) attributable
to Common Stock ................. $ 9,698 $ 10,796 $ (6,716) $ 9,250 $ 6,467 $ (54)
--------- -------- -------- -------- -------- -------
Basic net income (loss)
per share........................ $ 0.68 $ 0.72 $ (0.47) $ 0.82
Pro forma net income
per share (2).................... $ 0.71 $ 0.69 $ 0.03
Diluted net income per share....... $ 0.67 $ 0.71 n/a $ 0.84
Dividends declared per share
of common stock.................. $ 0.54 $ 0.38 -- --
Average common shares
outstanding
Basic........................... 14,353 15,004 14,181 11,316
Pro forma (2)................... 13,414 9,339 9,339
Diluted......................... 14,584 15,164 n/a 11,380
DECEMBER 31 PRO FORMA
--------------------------------------------------- DEC. 31, DEC. 31, SEPT. 30,
1998 1997 1996 1995 1994(3) 1994 1994
---- ---- ---- ---- ------- ---- ----
Working capital (deficit).......... $ (36,813) $ (29,842) $(26,929) $ 23,013 $ (16,050) $(16,050) $ (17,742)
Total assets....................... 276,805 243,324 244,701 112,667 53,189 53,189 27,884
Total debt......................... 97,323 43,694 62,298 1,282 1,300 1,300 1,254
Redeemable preferred stock
(Series A & B), including
accrued dividends................ -- -- -- -- -- 19,285 --
Common stockholders'
equity (divisional equity)....... 91,652 116,566 108,783 80,966 20,292 1,007 2,170
(1) Represents the historical results of operations of the Predecessor
Company. HealthPlan Services' historical financial statements reflect
certain expenses, including expenses attributable to employee benefit
programs, retirement and health plans, treasury, and insurance, which
were incurred by the Predecessor Company and allocated to HealthPlan
Services on a pro rata basis.
10
(2) 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 Common Stock of HealthPlan
Services contemporaneously with the consummation of the initial public
offering on May 19, 1995 ("the Recapitalization"), for all periods
presented.
(3) Gives effect to the Acquisition and the Recapitalization as if such
transactions had occurred on January 1, 1994.
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
operations of HealthPlan Services for the years ended December 31, 1998, 1997,
and 1996.
HealthPlan Services is a leading managed health care services company,
providing distribution, enrollment, billing and collection, and claims
administration services for health care payors and providers. HealthPlan
Services functions solely as a service provider generating fee-based income and
does not assume any underwriting risk.
11
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages which certain items of income and expense bear to HealthPlan
Services' revenue for such periods.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
------- ------- -------
Total revenues ........................ 100.0 % 100.0 % 100.0 %
------- ------- -------
Expenses:
Agent commissions ................... 23.7 % 23.3 % 25.3 %
Personnel ........................... 42.6 % 40.2 % 37.7 %
General and administrative .......... 24.8 % 19.5 % 21.7 %
Contract commitments ................ -- -- 1.4 %
Restructure charge .................. 0.7 % 0.5 % 0.8 %
Integration ......................... 1.4 % 1.7 % 4.1 %
Loss on impairment of goodwill ...... -- -- 7.2 %
Other expense ....................... 0.6 % 0.1 % 0.4 %
Gain on sale of investments, net .... (11.5)% -- --
Depreciation and amortization ....... 5.5 % 5.7 % 5.5 %
Interest expense, net ............... 2.0 % 0.9 % 0.1 %
Equity in loss of joint venture ..... 4.1 % 1.0 % --
------- ------- -------
Total expenses ............... 93.9 % 92.9 % 104.2 %
------- ------- -------
Income (loss) before provision for
income taxes and minority interest 6.1 % 7.1 % (4.2)%
Provision (benefit) for income taxes .. 3.0 % 3.3 % (0.7)%
------- ------- -------
Income (loss) before minority interest 3.1 % 3.8 % (3.5)%
Minority interest ..................... (0.3)% -- --
------- ------- -------
Net income (loss) ..................... 3.4 % 3.8 % (3.5)%
======= ======= =======
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 PILIC/PALHIC 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. ("DGB"), in 1997,
along with the loss of three large customers in 1998, and from alliance
customers ($3.5 million) primarily related to HealthPlan Services' 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.
12
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 HealthPlan
Services' workforce and the outsourcing of care management services to SHPS.
These services are now included as general and administrative expense.
HealthPlan Services' 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 HealthPlan
Services' outsourcing of its care management services to SHPS. HealthPlan
Services' 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 HealthPlan Services' care management
services to SHPS.
HealthPlan Services 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 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. 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 performed in Framingham were assumed in HealthPlan
Services' Tampa, Florida and Merrimack, New Hampshire offices.
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 HealthPlan Services' 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, Consolidated Group, and Harrington businesses, while
$1.7 million represented other costs associated with transferring functions from
certain of HealthPlan Services' 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 HealthPlan Services' self-funded customers, and costs of $0.4 million
related to the start-up of the PILIC/PALHIC block of business.
During the year ended December 31, 1998, HealthPlan Services sold
370,711 of its shares of Medirisk, Inc. stock and all 200,000 of its shares of
Health Risk Management, Inc. stock, resulting in gains of $5.2 million and $0.2
million, respectively. 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.
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 HealthPlan Services' furniture and fixtures became fully amortized
in 1997. Additionally, HealthPlan Services wrote off internally developed
software related to HealthPlan Services' exiting the Kentucky alliance in 1997.
These reductions were partially offset by amortization of goodwill on HealthPlan
Services' 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
HealthPlan Services' acquisitions of CENTRA and NPPN, along with its share
repurchase program, which began in 1998.
13
HealthPlan Services recorded its 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 ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for the year ended December 31, 1997 increased $90.1 million,
or 47.0%, to $281.6 million from $191.5 million in 1996. This increase resulted
primarily from the inclusion of an additional six months of revenues, $71.6
million, from HealthPlan Services' acquisition of Consolidated Group and
Harrington (effective July 1, 1996). Revenues from HealthPlan Services' base
business (revenues exclusive of above acquisitions) increased by $17.9 million
compared to the same period in 1996. This increase was primarily a result of
HealthPlan Services' assumption of the TMG block of business.
Agent commission expense for the year ended December 31, 1997 increased
$17.2 million, or 35.4%, to $65.7 million from $48.5 million in 1996. This
increase resulted primarily from the inclusion of an additional six months of
commissions of $7.1 million related to HealthPlan Services' 1996 acquisitions.
HealthPlan Services' commissions as a percentage of operating revenues declined
from 25.3% in 1996 to 23.3% in 1997, as self-funded customer revenues
represented a greater percentage of HealthPlan Services' total revenues.
Traditionally, self-funded customer commissions represent a lower percent of
revenues than fully insured customer commissions.
Personnel expense for the year ended December 31, 1997 increased $40.9
million to $113.1 million, or 56.7%, from $72.2 million in 1996. Of this
increase, $34.5 million was attributable to a full year of personnel expenses
from HealthPlan Services' 1996 acquisitions. HealthPlan Services' personnel
expense as a percentage of total revenues increased to 40.2% in 1997 from 37.7%
in 1996. This was primarily due to the full-year impact of the Harrington
acquisition and the more labor-intensive nature of the self-funded customers.
General and administrative expense for the year ended December 31, 1997
increased $13.4 million, or 32.2%, to $55.0 million from $41.6 million in 1996.
Of this increase, $14.3 million is attributable to a full year of expenses from
HealthPlan Services' 1996 acquisitions being included in HealthPlan Services'
1997 general and administrative expenses. HealthPlan Services' general and
administrative expense as a percentage of total revenue decreased to 19.5% in
1997 from 21.7% in 1996. This decline is primarily attributable to savings
realized in postage, communications, professional services, and printing costs
and the net recovery of $1.5 million from DGB in 1997.
In 1997, HealthPlan Services renegotiated its contracts with the
Florida Community Health Purchasing Alliances and exited the Kentucky alliance
and Washington alliance businesses. HealthPlan Services closed its Lexington,
Kentucky office at the end of the contract term. As a result of the Kentucky
office closure, HealthPlan Services recognized a one-time, non-recurring charge
to general and administrative expense of $0.2 million. No contract commitment
expense for the alliance business was recognized by HealthPlan Services in 1997.
HealthPlan Services incurred $1.4 million in restructuring costs for
the year ended December 31, 1997. These costs reflect employee terminations and
the abandonment of property and equipment associated with transferring functions
from HealthPlan Services' Framingham, Massachusetts 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, Consolidated Group, and Harrington businesses, while
$1.7 million represented other costs associated with transferring functions from
certain of HealthPlan Services' offices, the consolidation of treasury
functions, and employee relocations.
Depreciation and amortization expense for the year ended December 31,
1997 increased $5.4 million, or 51.4%, to $15.9 million from $10.5 million in
1996. Of this increase, $4.5 million related to a full year of depreciation and
amortization from HealthPlan Services' acquisition of Consolidated Group and
Harrington. Additionally, HealthPlan Services recognized a $0.4 million
acceleration of amortization for internally developed software related to
HealthPlan Services' exiting the Kentucky alliance in 1997.
14
Interest expense for the year ended December 31, 1997 increased to $2.5
million from $0.3 million in 1996. This increase reflects the fact that
HealthPlan Services' credit facility balance was outstanding for a full year in
1997, as opposed to six months in 1996.
HealthPlan Services recorded its 50% share of the $2.9 million loss
incurred by SHPS for the period from inception to December 31, 1997, which was
principally the result of a charge of $2.8 million for the write-off of
purchased research and development associated with an acquisition 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.
HealthPlan Services' Year 2000 ("Y2K") compliance project is intended to prepare
HealthPlan Services' business for the Year 2000. HealthPlan Services defines Y2K
"compliance" to mean that the computer code will process all defined future
dates properly and give accurate results.
PLAN TO ADDRESS YEAR 2000 COMPLIANCE
HealthPlan Services has conducted a review of its computer systems and
capabilities and has created a three-pronged program for addressing issues
related to the Year 2000. This program includes the purchase and implementation
of software packages from vendors, an upgrade of vendor packages to Year 2000
compliant versions, and the internal development and implementation of new
software applications to increase the capabilities of HealthPlan Services'
systems for the future.
The implementation of this plan commenced in 1996 with the upgrade of
the mainframe operating system. HealthPlan Services has since purchased and
replaced its accounting and financial system and workers compensation system and
written and implemented a new system for the unemployment compensation business.
HealthPlan Services has received from the vendor the latest version of its claim
processing software, which is Year 2000 compliant, and is currently implementing
this version for all current accounts. HealthPlan Services also is undertaking
system enhancements to its billing and administration system.
HealthPlan Services has requested Year 2000 compliance information from
its significant customers and vendors, including landlords and other third
parties that are responsible for non-information technology systems such as
security and environmental controls. In particular, HealthPlan Services has
asked each vendor and customer for information regarding (a) the status of the
vendor's or customer's Year 2000 readiness initiative, and (b) information
regarding any expected changes in the vendor's or customer's data interface with
HealthPlan Services. A team of HealthPlan Services information system
professionals is coordinating its Year 2000 compliance efforts and is testing
any new interfaces with vendors and customers.
COST OF PROJECT
Between 1996 and 1998, HealthPlan Services spent $7.9 million for Year
2000 compliance system upgrades and expects to spend $2.4 million in both
capital and modification costs to complete its Year 2000 program. These costs
include the expense of replacing any existing systems with Year 2000 compliant
systems, even in cases where the system would have been replaced or upgraded
regardless of Year 2000 requirements.
STATE OF READINESS, RISKS, AND CONTINGENCY PLANS
HealthPlan Services expects that its systems and software will be Year
2000 compliant by the close of the second quarter of 1999. However, there are
risks relating to the external vendors and customers with which HealthPlan
Services exchanges data. Because HealthPlan Services does not control these
vendors and customers or their resources,
15
HealthPlan Services can provide no assurance that such vendors and customers
will complete their respective Year 2000 solutions in time for HealthPlan
Services to fully test system interfaces with them. Although HealthPlan Services
does not have a formal Year 2000 contingency plan, its Year 2000 compliance team
will be responding to any disruption in service resulting from a Year 2000
compliance problem in HealthPlan Services systems and software or in a vendor's
or customer's system. There is no assurance, however, that HealthPlan Services
will be able to remedy any disruption in service, in particular any disruption
from a vendor's or customer's failure to be Year 2000 compliant or to inform
HealthPlan Services of a change in its data interface. HealthPlan Services
cannot estimate the cost that would be associated with a disruption in service
resulting from its own or a vendor's or customer's Year 2000 compliance failure.
LIQUIDITY AND CAPITAL RESOURCES
Under HealthPlan Services' May 1, 1998 Amended and Restated Credit
Agreement, as amended, the Company maintains a line of credit of $175.0 million
(the "Line of Credit") with availability equal to a multiple of trailing
earnings before interest expense, income taxes, and depreciation and
amortization expense (with certain adjustments called for in the credit
agreement). This multiple is set at 3.5 through June 30, 1999 and steps down
thereafter to 2.75 during the remaining term of the facility. First Union
National Bank of North Carolina serves as "agency bank," and NationsBank, N.A.
serves as co-agent, with respect to this facility. The credit facility contains
provisions which include the maintenance of certain minimum financial ratios,
limitations on merger and acquisition activity, limitations on capital
expenditures, limitations on dividends and distributions, and limitations on
investment activity. HealthPlan Services' borrowing under the Line of Credit
includes interest ranging from LIBOR plus 75 to 150 basis points to New York
prime plus 0 to 50 basis points. Current rates on LIBOR and New York prime rate
drawings on the Line of Credit at December 31, 1998 were 7.1875% and 7.75%,
respectively. The Line of Credit carries a commitment fee ranging from 0.175% to
0.25% of the unused portion and is secured by the stock of HealthPlan Services'
subsidiaries. The outstanding draw was $91.0 million at December 31, 1998, and
the maximum amount available was $125.0 million.
HealthPlan Services' Line of Credit enables it to pay a quarterly
dividend of up to $0.1375 per share of HealthPlan Services' capital stock (up to
$0.55 per share on an annualized basis). In the second quarter of 1998,
HealthPlan Services increased its dividend to $0.1375 per share. For 1998,
HealthPlan Services declared dividends totaling $7.6 million. These dividends
were paid on April 21, 1998, July 21, 1998, October 20, 1998, and January 19,
1999.
On February 27, 1998, HealthPlan Services acquired 49% of the capital
stock of Montgomery Management Corporation ("Montgomery Management") from
Provident Indemnity Life Insurance Company ("PILIC") for $4.0 million. In
connection with the purchase, HealthPlan Services obtained a warrant from PILIC
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.
During the second quarter of 1997, the Board of Directors authorized
HealthPlan Services to use up to $20.0 million to support a share repurchase
program. HealthPlan Services began implementing this share repurchase program in
the first quarter of 1998. On May 12, 1998, the Board increased to $30.0 million
its authorization to repurchase shares under this program. Through March 15,
1999, HealthPlan Services had acquired 1,306,800 shares under this program at a
cost of approximately $28.3 million.
On May 18, 1998, HealthPlan Services acquired National Preferred
Provider Network, Inc. ("NPPN") for $25.0 million cash and additional contingent
consideration of up to $25.0 million if NPPN achieves certain financial
performance objectives.
On June 16, 1998 HealthPlan Services paid $0.2 million for a 1%
interest in CENTRA and acquired an additional 49.1% interest from CENTRA Benefit
Services ("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' Common Stock, a purchase price holdback of up to $1.2
million, and additional contingent consideration. In additon to such contingent
consideration, CBS has the right to put its remaining 49.9% interest in
16
CENTRA at a contractual price not to exceed $6.0 million within two years of the
acquisition date if CENTRA meets certain financial performance criteria. If CBS
has not put its remaining interest to HealthPlan Services within two years, CBS
will sell its remaining interest in CENTRA to HealthPlan Services at an
appraised value not to exceed $6.0 million. In February 1999, CBS notified
HealthPlan Services that it intends to exercise its put option. HealthPlan
Services is evaluating whether or not CENTRA has met the necessary financial
performance criteria for CBS to exercise this option.
In December 1997, HealthPlan Services and Sykes formed SHPS. SHPS was
owned 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 obligation associated with SHPS' credit facility.
HealthPlan Services spent $9.1 million for capital expenditures during
the year ended December 31, 1998. Additionally, HealthPlan Services incurred a
cash outlay of $4.2 million for integration costs related to the conversion of
the data center and three claims platforms for CENTRA and the conversion of the
information systems from HealthPlan Services' Framingham, Massachusetts office
to the Tampa office. HealthPlan Services does not expect to incur any material
integration costs in 1999.
During 1998, HealthPlan Services sold 370,711 of its shares of Medirisk
common stock and all 200,000 of its shares of HRM common stock, resulting in
gains of $5.2 million and $0.2 million, respectively.
Based upon current expectations, HealthPlan Services believes that all
consolidated operating and financing activities for the foreseeable future will
be met from internally generated cash flow from operations, available cash, or
its existing Line of Credit.
INFLATION
HealthPlan Services does not believe that inflation had a material
effect on its results of operations for the year ended December 31, 1998 or
1997. There can be no assurance, however, that HealthPlan Services' business
will not be affected by inflation in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HealthPlan Services is exposed to certain market risks inherent in
HealthPlan Services' financial instruments. These instruments arise from
transactions entered into in the normal course of business and, in some cases,
relate to HealthPlan Services' acquisitions of related businesses. HealthPlan
Services is subject to interest rate risk on its existing Line of Credit and any
future financing requirements. HealthPlan Services' fixed rate debt consists
primarily of outstanding balances on its notes issued to C G Insurance Services,
Inc. (CAL/GROUP) and former owner of CENTRA and certain equipment notes, and its
variable rate debt relates to borrowings under its Line of Credit.
See "Liquidity and Capital Resources."
The following table presents the future principal payment obligations
(in thousands) and weighted-average interest rates associated with HealthPlan
Services' existing long-term debt instruments, assuming HealthPlan Services'
actual level of long-term indebtedness of $97.3 million as of December 31, 1998:
1999 2000 2001 2002 2003 THEREAFTER
---------- ---------- ---------- -------- -------- ----------
Liabilities
Long-term Debt Fixed Rate
(weighted average interest
rate of 6.34%)................... $ 486 $ 419 $ 291 $ 220 $ 4,182 $ 724
Variable Rate (weighted
average interest rate
of 7.16%)......................... -- -- -- -- 91,000 --
HealthPlan Services' primary market risk exposure relates to (i) the
interest rate risk on long-term and short-term borrowings, (ii) the impact of
interest rate movements on its ability to meet interest expense requirements and
17
exceed financial covenants, and (iii) the impact of interest rate movements on
HealthPlan Services' ability to obtain adequate financing to fund future
acquisitions.
HealthPlan Services manages interest rate risk on its variable rate
debt through its use of two separate interest rate swap agreements. The
agreements, which expire in September and December 2001, effectively convert
$40.0 million of variable rate debt under the Line of Credit to fixed rate debt
at a weighted average rate of 6.18%.
While HealthPlan Services cannot predict its ability to refinance
existing debt or the impact interest rate movements will have on its existing
debt, management continues to evaluate its financial position on an ongoing
basis.
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.
HealthPlan Services is 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
The response to this item is included in HealthPlan Services'
definitive Proxy Statement for the Annual Meeting of Stockholders to be held May
11, 1999, under "Proposal 1: Election of Directors," "Additional Information
Concerning Directors," "Executive Officers," and "Section 16(a) Beneficial
Ownership Reporting Compliance," and is herein incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is included in HealthPlan Services'
definitive Proxy Statement for the Annual Meeting of Stockholders to be held May
11, 1999, under "Compensation of Executive Officers" and "Additional Information
Concerning Directors," and is herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is included in HealthPlan Services'
definitive Proxy Statement for the Annual Meeting of Stockholders to be held May
11, 1999, under "Security Ownership of Certain Beneficial Owners and
Management," and is herein incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is included in HealthPlan Services'
definitive Proxy Statement for the Annual Meeting of Stockholders to be held May
11, 1999, under "Compensation Committee Interlocks and Insider Participation"
and "Certain Relationships and Related Transactions," and is herein incorporated
by reference.
18
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, 1998 and 1997
Consolidated Statements of Operations - Years ended
December 31, 1998, 1997, and 1996
Consolidated Statement of Changes in Stockholders' Equity -
Years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows - Years ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
(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 the Company's Form 8-K Current
Report filed on September 15, 1995).
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).
19
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.
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.
2.10 Stock Purchase Agreement dated September 1, 1998 among Sykes
Enterprises, Incorporated, HealthPlan Services Corporation,
and Sykes HealthPlan Services, Inc.
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).
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).
20
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).
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
21
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 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 the
Second Amendment and Waiver dated December 15, 1998.
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).
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).
10.20 Management Agreement dated February 28, 1998 among Midwestern
United Life Insurance Company, HealthPlan Services, Inc., and
Connecticut General Life Insurance Company.
22
10.21 Administration Services Agreement dated July 1, 1997 between
Seaboard Life Insurance Company and HealthPlan Services, Inc.
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.
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.
(b) The Company did not file any Current Reports on Form 8-K
during the three months ended December 31, 1998.
23
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 30th day of March,
1999.
HEALTHPLAN SERVICES CORPORATION
By: /s/ JAMES K. MURRAY, JR.
----------------------------------------------
James K. Murray, Jr.,
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. Chief Executive Officer March 30, 1999
- ---------------------------- and Chairman of the Board
James K. Murray, Jr. (Principal Executive Officer)
/s/ WILLIAM L. BENNETT Vice Chairman of the Board March 30, 1999
- ----------------------------
William L. Bennett
/s/ JOSEPH A. CALIFANO, JR. Director March 30, 1999
- ---------------------------
Joseph A. Califano, Jr.
/s/ JOSEPH S. DIMARTINO Director March 30, 1999
- ---------------------------
Joseph S. DiMartino
/s/ VINCENT D. FARRELL, JR. Director March 30, 1999
- ---------------------------
Vincent D. Farrell, Jr.
24
/s/ JOHN R. GUNN Director March 30, 1999
- ---------------------------
John R. Gunn
/s/ NANCY M. KANE Director March 30, 1999
- ---------------------------
Nancy M. Kane
/s/ DAVID NIERENBERG Director March 30, 1999
- ---------------------------
David Nierenberg
/s/ JAMES G. NIVEN Director March 30, 1999
- ---------------------------
James G. Niven
/s/ ROBERT R. PARKER Director March 30, 1999
- ---------------------------
Robert R. Parker
/s/ MARC I. PERKINS Director March 30, 1999
- ---------------------------
Marc I. Perkins
/s/ TREVOR G. SMITH Director March 30, 1999
- ---------------------------
Trevor G. Smith
/s/ ARTHUR F. WEINBACH Director March 30, 1999
- ---------------------------
Arthur F. Weinbach
25
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 of
cash flows present fairly, in all material respects, the financial position of
HealthPlan Services Corporation and its subsidiaries (the "Company") at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurancce 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.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Tampa, Florida
March 19, 1999
F-1
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------------
1998 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 4,582 $ 1,545
Restricted cash .................................................. 11,373 11,256
Accounts receivable, net of allowance for doubtful
accounts of $1,689 and $150, respectively .................... 21,834 28,900
Refundable income taxes .......................................... -- 1,843
Prepaid expenses and other current assets ........................ 3,604 3,071
Deferred taxes ................................................... 1,448 3,085
--------- ---------
Total current assets ..................................... 42,841 49,700
Property and equipment, net ........................................ 27,172 23,235
Other assets, net of accumulated amortization of
$963 and $689, respectively .................................. 2,744 2,908
Deferred taxes ..................................................... 1,145 4,008
Note receivable .................................................... 3,499 6,334
Investments ........................................................ 6,647 7,595
Intangible assets, net ............................................. 192,757 149,544
--------- ---------
Total assets ............................................. $ 276,805 $ 243,324
========= =========
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 13,917 $ 13,502
Premiums payable to carriers ..................................... 38,146 39,601
Commissions payable .............................................. 5,232 5,484
Deferred revenue ................................................. 3,707 2,015
Accrued liabilities .............................................. 16,769 18,555
Income taxes payable ............................................. 1,397 --
Current portion of long-term debt payable ........................ 486 385
--------- ---------
Total current liabilities ................................ 79,654 79,542
Notes payable ...................................................... 96,837 43,309
Deferred taxes ..................................................... -- 982
Other long-term liabilities ........................................ 2,732 2,925
--------- ---------
Total liabilities ........................................ 179,223 126,758
--------- ---------
Minority interest .................................................. 5,930 --
--------- ---------
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 authorized,
15,174,315 issued at December 31, 1998 and,
15,038,033 at December 31, 1997 ............................... 152 150
Additional paid-in capital ...................................... 109,887 107,325
Treasury stock, 1,276,700 shares ................................ (28,088) --
Retained earnings ............................................... 9,736 7,671
Unrealized appreciation on investments
available for sale, net of tax ............................... (35) 1,420
--------- ---------
Total stockholders' equity ............................... 91,652 116,566
--------- ---------
Total liabilities and stockholders' equity ............... $ 276,805 $ 243,324
========= =========
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,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
Operating revenues ........................................ $ 289,247 $ 281,644 $ 191,493
--------- --------- ---------
Expenses:
Agent commissions ...................................... 68,449 65,674 48,507
Personnel .............................................. 123,290 113,141 72,209
General and administrative ............................. 71,777 54,947 41,614
Contract commitments ................................... -- -- 2,685
Restructure charge ..................................... 2,052 1,374 1,425
Integration ............................................ 4,171 4,885 7,804
Loss on impairment of goodwill ......................... -- -- 13,710
Other expenses.......................................... 1,811 316 812
Gain on sale of investments, net ....................... (33,240) -- --
Depreciation and amortization .......................... 15,800 15,917 10,548
Interest expense, net .................................. 5,643 2,468 255
Equity in loss of joint ventures ....................... 11,849 2,850 --
--------- --------- ---------
Total expenses .................................... 271,602 261,572 199,569
--------- --------- ---------
Income (loss) before provision for income taxes
and minority interest ............................. 17,645 20,072 (8,076)
Provision (benefit) for income taxes ................... 8,683 9,276 (1,360)
--------- --------- ---------
Income (loss) before minority interest ................. 8,962 10,796 (6,716)
Minority interest ...................................... (736) -- --
--------- --------- ---------
Net income (loss) ...................................... $ 9,698 $ 10,796 $ (6,716)
========= ========= =========
Basic net income (loss) per share ...................... $ 0.68 $ 0.72 $ (0.47)
Basic weighted average
shares outstanding ................................ 14,353 15,004 14,181
Diluted income (loss) per share ........................ $ 0.67 $ 0.71 n/a
Diluted weighted average
shares outstanding ................................ 14,584 15,164 n/a
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(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, 1995 ........ $ 134 $ 71,636 $ -- $ 9,196 $ -- $ 80,966
Vesting of management stock ......... -- 456 -- -- -- 456
Issuance of 11,400 shares in
connection with stock option plans -- 160 -- -- -- 160
Issuance of 1,400,110 shares in
connection with acquisition of
Harrington Services Corporation .. 14 30,088 -- -- -- 30,102
Issuance of 160,957 shares to
former affiliates of Consolidated
Group, Inc. ...................... 2 3,700 -- -- -- 3,702
Issuance of 6,302 shares in
connection with the employee
stock purchase plan .............. -- 113 -- -- -- 113
Net loss ............................ -- -- -- (6,716) -- (6,716)
--------- --------- --------- --------- --------- ---------
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
========= ========= ========= ========= ========= =========
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,
-------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) .................................. $ 9,698 $ 10,796 $ (6,716)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation ....................................... 7,607 9,061 5,729
Amortization ....................................... 8,193 6,856 4,819
Gain on sale of investments ........................ (33,240) -- --
Equity in loss of joint venture .................... 11,849 2,850 --
Minority interest .................................. (736) -- --
Loss on impairment of goodwill ..................... -- -- 13,710
Issuance of Common Stock to management ............. 179 235 456
Deferred taxes ..................................... 4,776 6,697 (804)
Changes in assets and liabilities, net of effect from
acquisitions and dispositions:
Restricted cash .................................... (117) (1,194) (9,057)
Accounts receivable ................................ 14,019 (10,919) 1,415
Refundable income taxes ............................ -- 4,240 (5,043)
Prepaid expenses and other current assets .......... 458 960 (286)
Other assets ....................................... 111 (1,138) 565
Accounts payable ................................... (3,300) (7,316) 13,049
Premiums payable to carriers ....................... (2,522) 20,583 1,809
Commissions payable ................................ (347) 604 338
Deferred revenue ................................... 926 455 (490)
Accrued liabilities ................................ (9,119) (8,894) 1,229
Income taxes payable ............................... 3,691 -- (54)
-------- -------- --------
Net cash provided by operating activities ... 12,126 33,876 20,669
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ................ (9,146) (9,837) (5,731)
Sales (purchases) of short-term investments, net ... -- -- 36,723
Cash paid for acquisitions, net of cash acquired ... (40,847) -- (89,484)
Payment for purchase of
The Mutual Group block of business ............. -- (1,623) --
Payment for Provident American contract rights ..... -- (707) --
Proceeds from sale of assets ....................... 1,466 2,780 --
Proceeds from sale of investments .................. 40,152 -- --
Purchases of investments ........................... (18,081) (5,341) (3,311)
Proceeds from notes receivable ..................... 794 6,388 --
Purchases of notes receivable ...................... -- (6,334) (6,388)
-------- -------- --------
Net cash used in investing activities ....... (25,662) (14,674) (68,191)
-------- -------- --------
Cash flows from financing activities:
Net (payments) borrowings under line of credit ..... 51,000 (15,000) 55,000
Net (payments) borrowing on other debt ............. (1,075) (3,593) (12,466)
Cash dividends paid ................................ (7,590) (3,726) --
Distribution of minority interest .................. (46) -- --
Proceeds from exercise of stock options ............ 2,220 655 160
Repurchase of Common Stock ......................... (28,088) -- --
Proceeds from Common Stock issued .................. 152 282 3,815
-------- -------- --------
Net cash (used in) provided by financing
activities ............................... 16,573 (21,382) 46,509
-------- -------- --------
Net (decrease) increase in cash and cash equivalents .. 3,037 (2,180) (1,013)
Cash and cash equivalents at beginning of period ...... 1,545 3,725 4,738
-------- -------- --------
Cash and cash equivalents at end of period ............ $ 4,582 $ 1,545 $ 3,725
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ............................. $ 6,333 $ 4,900 $ 1,573
======== ======== ========
Net cash paid (refunds received) for income taxes .. $ 214 $ (838) $ 4,968
======== ======== ========
Supplemental disclosure of noncash activities:
Dividends declared but unpaid ...................... $ 1,910 $ 1,879 $ --
======== ======== ========
Common Stock issued for purchase of
Harrington Services Corporation .................... $ -- $ -- $ 30,102
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
HealthPlan Services Corporation (together with its direct and indirect
wholly owned subsidiaries, the "Company") is a leading managed health care
services outsourcing company, providing distribution, enrollment, billing and
collection, and claims administration services for health care payors and
providers. The Company provides these services to approximately 140,000 groups
covering over 3 million members in the United States. The Company functions
solely as a service provider generating fee-based income and does not assume any
underwriting risk.
On May 19, 1995, the Company completed an initial public offering of
4,025,000 shares of its Common Stock, shares of which are presently traded on
the New York Stock Exchange. Concurrent with the initial public offering, the
Company also exchanged Redeemable Preferred Stock for 1,398,000 shares of Common
Stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The Company 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. The Company has
consolidated its investment in CENTRA HealthPlan LLC ("CENTRA") and Montgomery
Management Corporation ("Montgomery Management") and recorded the minority
shareholder's interest on the balance sheet and statement of operations. 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
The Company established a bank account for the sole purpose of
administering the contracts with the Florida Community Health Purchasing
Alliances. This cash may be withdrawn only to meet current obligations connected
with servicing these contracts.
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 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 the Company's investment in Medirisk, Inc. ("Medirisk") (see Note 8)
is classified as available for sale, it is measured at fair market value. Any
increase or decline in the value of investments is recorded as unrealized
appreciation or depreciation in the equity section of the balance sheet. The
Company recognizes gains based on average costs.
Investments in common stock and joint ventures in which the Company
exercises significant influence but lacks control are accounted for on the
equity basis. Under the equity method, the Company records its proportionate
share of income and loss of each investment.
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. The
Company 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. The Company 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. The Company calculates estimated fair value as the
discounted future value of anticipated cash flows (see Note 6).
Other intangibles, such as contract rights, are amortized over either
the term or expected life of the contracts, generally 5-7 years.
OTHER ASSETS
Other assets includes loan origination fees which are amortized over
the terms of the respective agreements.
PREMIUMS PAYABLE
The Company collects insurance premiums on behalf of its insurance
carrier and managed care customers and remits such amounts to the customers when
due.
F-7
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.
ADVERSE CONTRACT COMMITMENTS
On an ongoing basis, the Company estimates the revenues to be derived
over the life of service contracts, as well as the costs to perform the services
connected therewith, in order to identify adverse commitments. This process
includes evaluating actual results during the period and analyzing other
factors, such as anticipated rates, volume, and costs. If the revised estimates
indicate that a net loss is expected over the remaining life of the contract,
the Company recognizes the loss immediately.
INTEGRATION EXPENSE
Certain costs amounting to $2.1 million incurred by the Company 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 the Company's Framingham, Massachusetts office to the Tampa office
were recorded as integration expense.
Certain costs amounting to $3.2 million incurred by the Company 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 the Company's offices,
consolidation of treasury functions, and employee relocations have also been
recorded as integration expense.
Certain costs amounting to $6.9 million incurred by the Company in 1996
in relation to the post-acquisition integration of information systems at
Consolidated Group and Harrington are recorded as integration expense. Other
non-information systems costs amounting to $0.9 million for items such as
travel, recruiting, and moving have also been recorded as integration expense.
RESTRUCTURE CHARGES
In 1998, the Company recorded a charge of $2.1 million to reflect the
cost of employee terminations, and the abandonment of property and equipment
associated with closing the Company's 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, the Company 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. The
Company's 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 the
Company's Tampa, Florida and Merrimack, New Hampshire offices.
In 1996, the Company recorded a restructure charge of $1.4 million to
reflect the cost of exiting certain excess office space ($0.7 million) and
terminating employees ($0.7 million). The Company's restructure plan was for the
elimination of 77 jobs in management, claims administration, and information
systems operations in its Tampa and Memphis offices.
The Company recognizes a liability for restructuring charges and a
corresponding charge to results of operations when the following conditions
exist: management approves and commits the Company to a plan of termination of
employees, or an exit plan, and establishes the benefits that current employees
will receive upon
F-8
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.
AGENT COMMISSIONS
The Company recognizes agent commissions expense in the same period
that the related revenues are recognized.
INCOME TAXES
The Company 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,
the Company 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 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
The Company 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 the Company 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.
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.
The Company's 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.
F-9
The Company's only financial instruments not reflected at estimated
market value are its two interest rate swaps (see Note 10). The unrecorded fair
value of these swaps as of December 31, 1998 was approximately ($1.1 million).
3. ACQUISITIONS
CENTRA HEALTHPLAN LLC
On June 16, 1998, the Company acquired a 50.1% interest in CENTRA.
CENTRA was formed by an agreement between the Company 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. The Company 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 the Company's stock, a purchase
price holdback of up to $1.2 million, and additional contingent consideration.
In addition to such contingent consideration, CBS has the right to put its
remaining interest in CENTRA at a contractual price not to exceed $6.0 million
within two years of the acquisition date if it meets certain financial
performance criteria. If CBS has not put its remaining interest to the Company
within two years, CBS will sell its remaining interest in CENTRA to the Company
at an appraised value not to exceed $6.0 million. CENTRA is a major
administrator of self-funded health plans for large corporations and is
headquartered in Richardson, Texas. CENTRA also has processing facilities in
Houston, Texas, Duncan, Oklahoma, Lynnwood, Washington, and Charleston, West
Virginia. The purchase price of CENTRA was allocated to the fair value of the
net assets acquired as follows (in thousands):
Tangible assets acquired $ 8,447
Goodwill 22,334
Liabilities assumed (17,330)
-----------
$ 13,451
===========
NATIONAL PREFERRED PROVIDER NETWORK, INC.
On May 18, 1998, the Company acquired National Preferred Provider
Network, Inc. ("NPPN") for $25.0 million cash and additional contingent
consideration of up to $25.0 million if NPPN achieves certain financial
performance objectives. Headquartered in Middletown, New York, NPPN is a
preferred provider organization network which consists of over 450,000 physician
offices, more than 4,000 hospitals, and 50,000 ancillary care providers covering
all 50 states and the District of Columbia. The purchase price of NPPN was
allocated to the fair value of the net assets acquired as follows (in
thousands):
Tangible assets acquired $ 4,609
Goodwill 25,240
Liabilities assumed (4,849)
-----------
$ 25,000
===========
F-10
MONTGOMERY MANAGEMENT CORPORATION
On February 27, 1998, the Company acquired 49% of the capital stock of
Montgomery Management from Provident Indemnity Life Insurance Company for $4.0
million. In connection with the purchase, the Company obtained a warrant to
purchase an additional 31% of Montgomery Management for nominal consideration.
On October 26, 1998, the Company exercised this warrant for an additional 31% of
Montgomery Management's capital stock for a cost of $8,060. Montgomery
Management is a full service managing general underwriter that has the authority
to bind health insurance coverage (on behalf of the insurance companies it
represents) to self-funded customers. 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 4,008
Liabilities assumed (990)
-----------
$ 4,008
===========
DIVERSIFIED GROUP BROKERAGE
On October 12, 1995, HealthPlan Services, Inc. ("HPSI"), a wholly owned
subsidiary of the Company, 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, the Company 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
the Company give effect to acquisitions, accounted for as purchases, as if they
occurred on January 1, 1996 (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues $ 308,725 $ 332,736 $ 318,713
Net income (loss) 7,538 8,091 (10,544)
Net income (loss) per common share 0.52 0.53 (0.74)
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, 1996 or of the results which may occur in the future.
4. BLOCKS OF BUSINESS
PROVIDENT AMERICAN CORPORATION
In January 1998, HealthPlan Services began providing policy issuance,
billing, and claims services for the individual indemnity/preferred provider
orgainzation health insurance policies of Provident Indemnity Life Insurance
Company ("PILIC") and Provident American Life and Health Insurance Company
("PALHIC"). In conjunction with this arrangement, the Company recorded contract
rights (see Notes 6 and 9) of $0.7 million.
F-11
TMG LIFE INSURANCE COMPANY'S EMPLOYEE BENEFITS BUSINESS
Effective January 1, 1997, the Company assumed marketing and
administrative services for TMG's medical, dental, and group life benefits
business, with Connecticut General Life Insurance Company, a CIGNA company,
acting as the reinsurer. In conjunction with this agreement, the Company
recorded contract rights (see Note 6) of $0.8 million. In July 1997, the parties
agreed to a transition of a majority of this business to Midwestern United Life
Insurance Company ("Midwestern United"), with the Company remaining as
administrator. TMG canceled coverage of the portion of the business that was not
identified for transition to Midwestern United. During the transition, which is
expected to be complete in the second quarter of 1999, the business is
experiencing higher than normal lapse rates and lower than normal margins. This
business accounted for approximately 8% of the Company's consolidated revenue in
1998. In January 1999, Midwestern United notified its insureds that it will
cancel their policies beginning on July 31, 1999. The Company is working with
its current distribution system to direct Midwestern United insureds to suitable
replacement coverage.
5. CONCENTRATION OF CUSTOMERS
The Company is party to a variety of contracts with insurance
companies, preferred provider organizations, health maintenance organizations,
integrated delivery systems, health care alliances, 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,
1998 and 1997, the Company's two largest payors accounted for approximately 9.0%
and 8.5% and 13.1% and 12.6%, respectively, of total revenues.
The Company grants credit, without collateral, to some of its
self-funded clients under certain contracts.
6. 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,
--------------------------
1998 1997
---------- -----------
HealthPlan Services goodwill $ 32,841 $ 32,841
NPPN goodwill 25,240 -
CENTRA goodwill 22,334 -
Montgomery Management goodwill 4,008 -
Consolidated Group goodwill 59,734 59,734
Harrington goodwill 66,705 66,705
Third Party Claims Management goodwill 490 490
TMG contract rights 774 1,224
Provident contract rights 707 707
---------- -----------
212,833 161,701
Less: Accumulated amortization (20,076) (12,157)
---------- -----------
$ 192,757 $ 149,544
========== ===========
F-12
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
Land $ - $ 438
Building - 1,133
Furniture and fixtures 10,076 8,126
Computers and equipment 17,801 13,952
Computer software 20,893 14,100
Leasehold improvements 3,107 3,214
------------ ------------
51,877 40,963
Less: Accumulated depreciation (24,705) (17,728)
------------ ------------
$ 27,172 $ 23,235
============ ============
The Company 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 to provide
processing services to customers. Research and development costs, costs
associated with the Year 2000 compliance (not associated with other software
modifications), and other computer software maintenance costs related to
software development are 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 a software and development asset is regularly
reviewed by the Company, and a loss is recognized when the net realizable value
falls below the unamortized cost.
8. INVESTMENTS
Investments consist of the following (in thousands):
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
Investments available for sale,
at market (cost of $6,460 and $5,131) $ 6,405 $ 7,385
Equity method investments 242 210
------------ ------------
$ 6,647 $ 7,595
============ ============
In December 1997, the Company 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.
The Company 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, the
Company 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, the Company was
relieved of its obligations associated with SHPS' credit facility.
The Company accounted for its investment in SHPS under the equity method
of accounting. The Company 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, the Company invested $5.8 million in a convertible note of
HealthAxis.com, Inc. ("HealthAxis.com") bearing interest at the rate of 5 1/2%.
In October 1998, the note and the accrued interest on the note were converted
into 2,365,365
F-13
shares of HealthAxis.com representing a 14.6% ownership. HealthAxis.com provides
sales and distribution services for health insurance products offered through
the Internet. The Company began providing administrative services in connection
with products offered through HealthAxis.com in November 1998.
On March 5, 1997, the Company 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, the Company 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, the Company sold all of its shares in HRM and recorded a pre-tax gain on
the sale of $0.2 million.
On January 8, 1996, the Company entered into an agreement with
Medirisk, Inc. ("Medirisk"), a provider of health care information, to purchase
$2.0 million of Medirisk preferred stock representing a 9% ownership interest
and, in addition, to lend Medirisk up to $10.0 million over four years in the
form of debt for which the Company would receive detachable warrants to purchase
up to 432,101 shares of Medirisk's common stock for $0.015 per share, based on
the amount of debt actually acquired. On January 28, 1997, Medirisk completed an
initial public offering and satisfied the $6.9 million debt balance in
accordance with the 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, Medirisk's preferred stock was converted
to common stock. The Company 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, the Company sold 370,711 of its shares in Medirisk and recorded a
pre-tax gain on the sale of $5.2 million. On December 31, 1998, Medirisk's
shares closed at $5.00 per share of common stock. This investment is recorded as
available for sale with the unrealized holding loss reported in the equity
section of the balance sheet in accordance with Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
9. NOTE RECEIVABLE
In October 1997, in conjunction with HealthPlan Services' agreement to
assume all of the policy issuance, billing, and claims services of PILIC and
PALHIC, which are life insurance subsidiaries of Provident American Corporation
("PAMCO"), the Company advanced PAMCO $5.0 million. The Company will retain
$85,000 per month during the first 60 months of the agreement in addition to
the regular service fees collected. The Company recorded the present value of
these payments at the Company's 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. The outstanding balance on this note at December
31, 1998 was $3.5 million.
10. NOTES PAYABLE AND CREDIT FACILITIES
Under HealthPlan Services' May 1, 1998 Amended and Restated Credit
Agreement, as amended, the Company maintains a line of credit of $175.0 million
(the "Line of Credit"), with availability equal to a multiple of trailing
earnings before interest expense, income taxes, and depreciation and
amortization expense (with certain adjustments called for in the credit
agreement). This multiple is set at 3.5 through June 30, 1999 and steps down
thereafter to 2.75 during the remaining term of the facility. First Union
National Bank of North Carolina serves as "agency bank," and NationsBank, N.A.
serves as co-agent with respect to this facility. The credit facility contains
provisions which include the maintenance of certain minimum financial ratios,
limitations on merger and acquisition activity, limitations on capital
expenditures, limitations on dividends and distributions, and limitations on
investment activity. The Company's borrowing under the Line of Credit includes
interest ranging from LIBOR plus 75 to 150 basis points to New York prime plus 0
to 50 basis points. Current rates on LIBOR and New York prime rate drawings on
the Line of Credit at December 31, 1998 were 7.1875% and 7.75%, respectively.
The Line of Credit carries a commitment fee ranging from 0.175% to 0.25% of the
unused portion and is secured by the stock of the Company's subsidiaries. The
outstanding draw was $91.0 million at December 31, 1998, and the maximum amount
available was $125.0 million. The Company incurred $5.6 million of interest
expense on the Line of Credit for the year ended December 31, 1998.
F-14
The Company 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% plus a margin ranging from 75 to 150 basis
points. For the year ended December 31, 1998, the Company recorded $0.3 million
of interest expense related to the swap agreements. The Company 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 the Company in 1994 by certain
Company officers and Noel Group, Inc., the Company assumed a note payable to
the 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 $57,000 and $60,000 for the years ended
December 31, 1998 and 1997, respectively.
On July 1, 1996, the Company assumed a mortgage outstanding from
Consolidated Group secured by a building with a fixed interest rate of 8.75%.
The building was sold and the mortgage paid off in April 1998.
On July 1, 1996, the Company 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, the Company 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, the
Company issued $4.0 million in five year 5.75% notes convertible into
approximately 180,000 shares of the Company's stock. The notes require
semi-annual payments of accrued interest commencing in January 1999 and
continuing 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.
The balances outstanding on the above debt instruments are as follows
(in thousands):
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
Line of Credit $ 91,000 $ 40,000
CAL/GROUP Note 1,096 1,160
Consolidated Group Mortgage -- 1,450
Harrington Equipment Notes 797 1,084
NPPN Equipment Notes 430 --
CENTRA Note 4,000 --
------------ ------------
97,323 43,694
Less: Amounts due within one year (486) (385)
------------ ------------
Long-term debt $ 96,837 $ 43,309
============ ============
F-15
Future minimum principal payments for all notes as of December 31, 1998
are as follows (in thousands):
1999 $ 486
2000 419
2001 291
2002 221
2003 95,182
Thereafter 724
-------------
$ 97,323
=============
11. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
Adverse lease commitments $ 478 $ 4,351
Salaries and wages 7,430 5,308
Office closure costs 1,446 820
Interest 446 178
Accrued legal and regulatory 429 300
State and local taxes 504 500
Severance - 192
Dividends declared 1,910 1,879
Sales conferences 19 596
Care management outsource contract 1,201 -
Other 2,906 4,431
------------ ------------
$ 16,769 $ 18,555
============ ============
Adverse lease commitments relate to office leases assumed by the
Company 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 the Company's acquisitions of
Consolidated Group, Harrington, and CENTRA.
In the first quarter of 1998, the Company began outsourcing its care
management and utilization review services to SHPS (see Note 8). During its 50%
ownership of SHPS until September 11, 1998, the Company incurred $3.4 million of
outsourcing costs. These costs were included as general and administrative
expense.
A director of the Company also serves as Chairman and Chief Executive
Officer of Automatic Data Processing, Inc. ("ADP"). ADP has provided payroll and
shareholder distribution services for the Company since 1995. During the years
ended December 31, 1998 and 1997, the Company compensated ADP for these services
in the amounts of approximately $195,000 and $110,000, respectively.
12. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
The Company has a defined contribution employee benefit plan
established pursuant to Section 401(k) of the Internal Revenue Code covering
substantially all employees. Through December 31, 1996, the Company matched up
to 50% of the employee contribution limited to 6% of the employee's salary for
its HPSI and Harrington employees, and it matched 50% of the employee
contribution limited to 4% of the employee's salary for its Consolidated Group
employees. Effective January 1, 1997, the Company began to match one-third of
such employee contributions limited to 6% of the employee's salary. Under the
provisions of the plan, participants'
F-16
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. The Company converted employees of CENTRA and NPPN
to the Company's plan on January 1, 1999. During 1998, the Company retained
CENTRA's and NPPN's plans. CENTRA's plan included a discretionary match at the
end of each calendar year with immediate vesting, and NPPN's plan included no
match. Expense in connection with these plans for the years ended December 31,
1998, 1997, and 1996 was approximately $0.7 million, $1.0 million, and $0.9
million, respectively.
POST-RETIREMENT BENEFIT PLAN
Harrington, the Company's wholly owned subsidiary acquired on July 1,
1996, provides medical and term life insurance benefits to certain retired
employees of two of its subsidiaries. The Company funds the benefit costs on a
current basis because there are no plan assets. The Company incurred
post-retirement benefit cost of $36,000, $37,000, and $38,000 for the years
ended December 31, 1998, 1997, and 1996, respectively. At December 31, 1998 and
1997, an accrued post-retirement liability of $1.4 million is 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 1999 and thereafter. A 1% increase in the health care
cost trend rate would result in an additional obligation of $101,000 and
additional service cost and interest cost of $13,000.
DEFERRED COMPENSATION PLAN
The Company 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, 1998 and 1997, amounted to approximately $1.0
and $0.9 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. The Company recognized compensation expense based on the
vesting period of the shares. The shares became fully vested in January 1999.
13. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company rents office space and equipment under non-cancelable
operating leases. Rental expense under the leases approximated $15.2 million
(net of $1.6 million charged to adverse lease accruals), $11.2 million (net of
$1.5 million charged to adverse lease accruals), and $7.7 million (net of $0.4
million charged to adverse lease accruals) for the years ended December 31,
1998, 1997, and 1996, respectively. Future minimum rental payments under these
leases are as follows (in thousands):
1999 $ 10,446
2000 7,864
2001 6,630
2002 6,130
2003 5,276
Thereafter 6,183
------------
$ 42,529
============
LITIGATION
In the ordinary course of business, the Company 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
F-17
of contract actions, and tort claims. In addition, because of the nature of its
business, the Company 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. The Company currently has
insurance coverage for some of these potential liabilities. Other potential
liabilities may not be covered by insurance, insurers may dispute coverage, or
the amount of insurance may not cover the damages awarded. In the opinion of the
Company's management, although the outcome of current claims against the Company
is uncertain, in the aggregate they are not likely to have a material adverse
effect on the Company's business, financial condition, or results of operations.
In February 1999, Provident Indemnity Life Insurance Company ("PILIC")
and its parent company, PAMCO, asserted a demand against the Company for claims
in excess of $27.0 million. The Company provides administrative services for
individual indemnity/PPO health insurance policies of PILIC. In the event PAMCO
and PILIC elect to pursue such claims, the Company will mount a vigorous
defense. The financial effect, if any, of this matter cannot be determined at
this time.
REGULATORY COMPLIANCE
The Company's activities are highly regulated by state and federal
regulatory agencies under requirements that are subject to broad
interpretations. The Company cannot predict the position that may be taken by
these third parties that could require changes to the manner in which the
Company operates.
14. INCOME TAXES
The provision (benefit) for income taxes is as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
-------- -------- --------
Current
Federal ............... $ 3,681 $ 2,986 $ 429
State ................. 650 427 61
------- ------- -------
4,331 3,413 490
------- ------- -------
Deferred
Federal ............... 3,669 5,130 (1,619)
State ................. 683 733 (231)
------- ------- -------
4,352 5,863 (1,850)
------- ------- -------
Provision (benefit) for
income taxes .............. $ 8,683 $ 9,276 $(1,360)
======= ======= =======
The components of deferred taxes recognized in the accompanying
financial statements are as follows (in thousands):
DECEMBER 31,
------------------------
1998 1997
--------- ----------
Deferred tax asset - current
Accrued expenses not currently deductible $ 1,448 $ 3,085
========= ==========
Deferred tax asset (liability) - non-current
Deferred compensation $ 467 $ 549
Post-retirement benefits 523 573
Depreciation (4,300) (4,040)
Intangibles 4,248 5,737
Equity in loss of joint venture 186 1,041
Unrealized gain on investments available
for sale 21 (834)
--------- ----------
$ 1,145 $ 3,026
========= ==========
F-18
The deferred tax asset resulting from intangibles relates to certain
intangible assets acquired by the Company that are amortizable for tax purposes
and to the tax treatment of the goodwill impairment charge.
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, 1998 and 1997, based on the
Company's expectations of future taxable income.
The provision for income taxes varies from the federal statutory income
tax rates due to the following:
1998 1997 1996
-------- -------- --------
Federal statutory rate applied to pre-tax income (loss) 34.0% 34.0% (35.0)%
State income taxes net of federal tax benefit 5.0% 5.0% (5.0)%
Goodwill amortization 6.8% 5.3% 20.1 %
Tax exempt interest income -- -- (2.6)%
Non-deductible items 3.4% 1.9% 5.7 %
-------- ------- ------
Effective tax rate 49.2% 46.2% (16.8)%
======== ======= ========
15. 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 the Company 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
--------------- -------- -----------
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
Effect of dilutive securities:
Stock options ..................... 160 (0.01)
Earnings per share of common stock-- ... -------- -------- -----------
assuming dilution .................... $ 10,796 15,164 $ 0.71
======== ======== ===========
1996
Loss per share of common stock-basic $ (6,716) 14,181 $ (0.47)
======== ======== ===========
F-19
16. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN
STOCK OPTION PLANS
The Company's 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. 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, 1998 is shown below:
NUMBER WEIGHTED
OF AVERAGE
SHARES OPTION PRICE
------------ ------------
Under option, December 31, 1995
(112,000 exercisable) 545,000 $18.11
Granted 922,500 18.75
Exercised (11,400) 14.00
Canceled (12,600) 19.35
------------
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
------------
There were 829,500 and 621,900 shares available for the granting of
options at December 31, 1998 and 1997, respectively.
The following table summarizes the stock options outstanding at
December 31, 1998:
RANGE NUMBER WEIGHTED AVERAGE WEIGHTED
OF OUTSTANDING AT REMAINING AVERAGE
EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE
------------------------- ------------------------ ----------------------- ---------------------
$ 8.69 - $18.13 920,700 8 years $14.80
18.25 - 26.00 839,800 8 years 21.98
F-20
MEASUREMENT OF FAIR VALUE
The Company 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 the Company's stock option and employee stock purchase plans been
determined based on the fair value at the grant dates, as prescribed in SFAS
123, the Company's net income and net income per share would have been as
follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- -------- --------
Net income (loss) attributable to
common stock (in thousands):
As reported $ 9,698 $ 10,796 $ (6,716)
Pro forma 8,528 9,363 (8,596)
======== ======== ========
Net income (loss) per share:
Basic as reported $ 0.68 $ 0.72 $ (0.47)
Basic pro forma 0.59 0.62 (0.61)
Diluted as reported $ 0.67 $ 0.71 $ n/a
Diluted pro forma 0.59 0.62 n/a
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 4.78%, 2.38%, and 0.0%
for the years ended December 31, 1998, 1997, and 1996, respectively; expected
volatility of 30% for each of the years ended December 31, 1998, 1997, and 1996;
risk-free interest rates of 4.15% to 5.62% for options granted during the year
ended December 31, 1998, 5.49% to 6.54% for options granted during the year
ended December 31, 1997, and 6.30% to 6.69% for options granted during the year
ended December 31, 1996; 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"), the
Company 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 the Company. The Employee Plan has been implemented by
consecutive quarterly offerings of the Company's Common Stock commencing on July
1, 1996.
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 the Company's Common Stock on the
offering date. The number of shares acquired is determined based on 85% of the
closing price of the Company's Common Stock on the New York Stock Exchange on
the offering date.
The Company sold 12,662 shares in 1998, 14,569 shares in 1997, and
6,302 shares in 1996 to employees under the Employee Plan.
F-21
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED; IN THOUSANDS EXCEPT PER
SHARE DATA)
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Year ended December 31, 1998
Revenues $74,965 $74,526 $71,740 $68,016
Net income 385 12,256 223 (3,166)
Basic net income 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
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Year ended December 31, 1997
Revenues $68,254 $68,846 $71,780 $72,764
Net income 2,001 3,588 2,408 2,799
Basic net income per common share $ 0.13 $ 0.24 $ 0.16 $ 0.19
Diluted net income per common share $ 0.13 $ 0.24 $ 0.16 $ 0.18
F-22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
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.
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.
2.10 Stock Purchase Agreement dated September 1,1998 among Sykes
Enterprises, Incorporated, HealthPlan Services Corporation,
and Sykes HealthPlan Services, Inc.
10.12 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 the
Second Amendment and Waiver dated December 15, 1998.
10.17 HealthPlan Services Corporation 1998 Officer Bonus Plan
Summary (compensatory plan).
10.19 Deferred Compensation Plan of R.E. Harrington, dated January
1, 1998 (compensatory plan).
10.20 Management Agreement dated February 28, 1998 among Midwestern
United Life Insurance Company, HealthPlan Services, Inc. and
Connecticut General Life Insurance Company.
10.21 Administration Services Agreement dated July 1, 1997 between
Seaboard Life Insurance Company and HealthPlan Services, Inc.
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.
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.