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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, 2002
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
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PLANVISTA 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.)
4010 Boy Scout Boulevard, Suite 200
Tampa, Florida 33607
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (813) 353-2300
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock $.01 par value OTCBB
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the registrant's Common Stock, $.01 par
value, held by non-affiliates of the registrant, computed by reference to the
last reported price at which the stock was sold on June 28, 2002, was
$36,870,406.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 24, 2003 was 16,790,256.86.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 22, 2003...........................Part III
PART I
FORWARD-LOOKING STATEMENTS
The statements contained in this report or incorporated by reference
herein that are not purely historical, including statements regarding our
objectives, expectations, hopes, intentions, beliefs, or strategies, are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic, and competitive
uncertainties and contingencies, many of which, with respect to future business
decisions, are subject to change. These uncertainties and contingencies can
affect actual results and could cause actual results to differ materially from
those expressed in any forward-looking statements made by us, or on our behalf.
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. Stockholders and prospective
investors should exercise caution since these statements involve known and
unknown risks, uncertainties, and other factors, which are, in some cases,
beyond our control and could adversely affect our actual results, performance,
or achievements. Numerous factors could cause such actual results to differ
materially from those in the forward-looking statements, including our ability
to expand our client base; the success of our new products and services; our
ability to maintain our current preferred provider organization network
arrangements; our ability to manage costs; our failure to comply with the
financial covenants of our restructured debt agreements; changes in law; risk of
material adverse outcome in litigation; fluctuations in business conditions and
the economy; our ability to attract and retain key management personnel; changes
in accounting and reporting practices; and our ability to obtain additional debt
or equity financing on terms favorable to us to facilitate our long-term growth.
The factors above should not be construed as exhaustive. Except as
required to comply with applicable law, we undertake no obligation to release
publicly the results of any future revisions we may make to forward-looking
statements to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
GENERAL
Through PlanVista Solutions, Inc., our operating subsidiary, we provide
medical cost containment and business process outsourcing solutions for the
medical insurance and managed care industries. Our customers include healthcare
payers such as insurance carriers, self-insured employers, third party
administrators, health maintenance organizations (sometimes referred to as
HMOs), and other entities that pay claims on behalf of health plans. We also
provide services for health care providers, including individual providers,
preferred provider organizations (sometimes referred to as PPOs), and other
provider groups.
We provide healthcare payers with access to our preferred provider
network, known as the National Preferred Provider Network (sometimes referred to
as our NPPN network), which offers payers discounts on participating provider
medical services. Our NPPN network is a "network of networks," comprised of more
than 30 local PPO networks and independent physician associations with which we
contract, as well as directly contracted independent physicians in some cases.
Our NPPN network includes approximately 400,000 physicians, 4,000 acute care
hospitals, and 55,000 ancillary care providers. In addition to offering payers
in-network discounts, we have added medical bill review and negotiation and
advance funding options through key strategic alliances. Our cost containment
customers also benefit from our advanced claims repricing and network and data
management services.
We have leveraged our leading edge technology and management expertise
to offer our clients network and data management outsourcing services that are
independent of our NPPN network access business. In late 2001, we launched our
PayerServ business, which helps payers manage all of their network
relationships, whether or not the payers also access our NPPN network. PlanServ,
the other business initiative we implemented in late 2001, provides
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claims repricing and network and data management services that help PPOs support
all of their payer relationships, not simply payer relationships that they
maintain through NPPN.
Prior to 2002, our NPPN network access business accounted for all of our
operating revenue. Our new business process outsourcing products, PayerServ and
PlanServ, secured their first customers in November 2001 and February 2002,
respectively, and, together with our other new business initiatives,
collectively generated over 5.0% of our operating revenue for 2002.
BUSINESS STRATEGY
We plan to grow operating revenue and profits by increasing the market
share of our medical cost containment business, building our existing network
and data management business process outsourcing businesses, and introducing new
medical cost management solutions for our customers. Our strategy is to market
our established NPPN network brand as a leading national preferred provider
network and to provide a broad array of technology-based business process
outsourcing services to existing and new customers. This strategy is designed to
help our customers maximize their total savings on medical claims and
administration through our advanced network and administrative capabilities.
FOCUSED PENETRATION OF PAYER MARKET
We plan to increase the operating revenue from, and the profitability
of, our NPPN network access business by increasing our payer customer base. We
believe that we can increase our market share by marketing our claims repricing
technology, our ability to capture discounts on a large percentage of claims due
to the size of our NPPN network, and the attractiveness to payer customers of
our percentage of savings revenue model, as discussed in more detail below. We
also plan to cross-sell our PayerServ products to our existing NPPN network
access customers. Additionally, because our NPPN network is a network comprised
in part of a number of regional PPOs, we believe that we will have the ability
to market our PlanServ products to these PPOs. We believe that our ability to
market our products to PPOs is enhanced because, in operating our NPPN network,
we have gained experience in managing the back office, automation, and
technology challenges that most PPOs face.
EMPHASIS ON SUPERIOR TECHNOLOGY
We intend to continue differentiating ourselves as a technology leader
by using our electronic claims repricing technology to increase our customer
base. In addition, we plan to update and introduce new technology-enabled
services and to improve the speed and accuracy of our existing technology. The
latest version of our Internet claims repricing system, ClaimPassXL(R) v. 3.5,
allows us to shift claims repricing submissions from paper or fax to the
Internet, which reduces our claims processing costs from between $0.75 and $0.80
per claim to $0.15 per claim, and reduces our turnaround times from 72 hours to
real-time for most claims. We believe that faster turnaround of claims repricing
will become more important to payers as state insurance regulators increase
their scrutiny of claims payment turnaround times. Since the March 2001 release
of ClaimPassXL(R) v. 3.0, the predecessor to ClaimPassXL(R) v. 3.5, our volume
of internet repriced claims has increased steadily. We processed approximately
138,279 internet claims in the fourth quarter of 2002, up from 84,081 in the
fourth quarter of 2001, a growth rate of over 60.0%. During 2002, approximately
250 customers used our ClaimPassXL(R) system, resulting in more than 528,000
claims processed and more than $10.4 million in operating revenue for the year.
RECENT DEVELOPMENTS
In June 2000, we initiated a strategic turnaround program designed to
(1) divest our third party administration businesses, (2) reduce our senior
debt, (3) focus our efforts on enhancing our medical cost containment business,
and (4) restructure our balance sheet. We disposed of all of our third party
administration and managing general underwriter businesses in a series of
transactions during 2001 and 2000.
Upon completion of the disposition of our former business units, we were
left with a capital and debt structure that our remaining medical cost
containment core business was not able to service, and we were unable to pay our
senior secured debt in the principal amount of approximately $69.0 million when
it matured in August 2001. We entered into a forbearance agreement with our
senior lenders under which we operated until we completed a new
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credit facility and closed on a debt restructuring transaction in April 2002.
Pursuant to this restructuring, we obtained a revised term loan for $40.0
million, which is collateralized by all of our assets, and exchanged $29.0
million of senior secured debt for 29,000 shares of our newly authorized Series
C convertible preferred stock and an additional note for $184,872, which has a
maturity date of July 1, 2003.
On March 13, 2003, PVC Funding Partners LLC, an affiliate of
Commonwealth Associates, LP and Comvest Venture Partners, filed a form 13D with
the Securities and Exchange Commission in which they indicated that on March 7,
2003, they acquired 29,851, or 96.0%, of our outstanding Series C convertible
preferred stock from our senior lenders. These Series C convertible preferred
shares were purchased from the senior lenders on a prorata basis at a price of
$33.50 per share. The selling lenders continue to hold the remaining 4.0% of the
Series C convertible preferred stock. In connection with the transaction, PVC
Funding Partners also acquired $20.5 million in principal amount of our
outstanding bank debt from our senior lenders.
On March 31, 2003, we renegotiated approximately $4.3 million in
convertible notes that were originally issued to Centra Benefit Services, Inc.
(sometimes referred to as Centra). Pursuant to the renegotiated terms, we have
extended the maturity date of the notes from December 1, 2004 to April 1, 2006,
reduced the interest rate from 12.0% per annum to 6.0% per annum, and fixed the
conversion price at $1.00, subject to adjustment in accordance with
anti-dilution protections. The previous conversion price was based on the
trading price of our common stock. Immediately upon completion of this
restructuring, PVC Funding Partners acquired slightly more than 50% of the face
value of the notes from Centra. The remaining interest is held by Centra.
The terms of the restructured credit arrangements, the Series C
convertible preferred stock, the PVC Funding Partners transaction, and the
Centra convertible notes are discussed in more detail below in "Business - Our
History" and in "Management's Discussion and Analysis of Financial Conditions
and Results of Operations - Liquidity and Capital Resources."
OUR SERVICES
MEDICAL COST CONTAINMENT SERVICES
Network Access
Our NPPN network is comprised of PPOs, independent physician
associations, and individually contracted physicians that offer discounts on
medical services. These providers and provider groups participate in our NPPN
network to increase patient flow and benefit from our NPPN network's prompt,
efficient claims repricing services. Healthcare payers access our NPPN network
to benefit from the discounts offered by our participating providers. The size
of our NPPN network and the level of our NPPN network discounts provide our
payer customers with significant reductions in medical claims costs.
Our NPPN network access agreements generally require our customers to
pay us a percentage of the cost savings generated by our NPPN network discounts.
In our industry, this payment arrangement is called a "percentage of savings"
revenue model. A typical percentage of savings customer maintains arrangements
with more than one PPO network. Most of these payer customers utilize our NPPN
network as an additional network to contain costs when a covered person obtains
medical services from a provider outside of the payer's primary PPO network.
When a provider bills a payer for medical services that are covered by our NPPN
network discount arrangements, we electronically review the bill and reprice it
to conform to the negotiated discounted rate, which is typically lower than the
invoiced amount. We charge payers an average of 18.0% of the savings that the
payer realizes from the discount. For 2002, our NPPN network access operating
revenue was $31.3 million, including $27.8 million of operating revenue from
percentage of savings contracts. We derive the balance of our NPPN network
operating revenue from payer customers that pay us a flat fee per month based on
the number of enrolled members. These customers generally access our NPPN
network as their primary PPO network.
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As of December 31, 2002, we had approximately 750 network access
customers located throughout the country, with approximately 2.0 million
estimated members. Our network access customer agreements are generally
terminable upon 90 days notice. During 2002, three network access clients and
their affiliates accounted for an aggregate of 19.6% of our net operating
revenues. The loss of any of these client groups could have a material adverse
effect on our financial results.
Contracts with our PPO participants and other participating providers
generally have renewable terms ranging from one to two years, but in most cases
are terminable by either party without cause on 90 days' notice. The termination
of any PPO contracts would render us unable to provide our customers with access
to the PPO's provider discounts, and therefore would eliminate our ability to
reprice claims and derive operating revenue accordingly. More than 80.0% of our
participating providers have been part of the NPPN network for more than three
years, with some relationships spanning nine years, since the beginning of the
NPPN network's inception in 1994. Since the majority of our provider
arrangements are through other networks, we depend on our contracted networks to
maintain provider relationships and ensure provider compliance with the terms of
the network arrangements.
Electronic Claims Repricing
In connection with our NPPN network access business, we provide
electronic claims repricing services that benefit both our payer clients and our
participating providers. A participating provider submits a claim at the full,
undiscounted provider rate. The provider sends the claim directly to us or to
the payer, which then forwards the bill to us. Because there are a wide variety
of provider systems for submitting claims, we accept claims by traditional
methods such as mail and fax, as well as through the Internet and by electronic
data interchange. We convert paper and faxed claims to an electronic format, and
then electronically reprice the claims by calculating the reduced price based on
our NPPN network's negotiated discount. We return the repriced claims file to
the payer electronically, in most cases within a 72-hour period.
Our ClaimPassXL(R) internet and electronic data interchange services
speed the claims repricing process for our customers. By logging onto our
ClaimPassXL(R) internet site, a payer can input claims information directly into
our claims system. We electronically reprice the claim and deliver the repriced
claim information to the payer customer through the Internet. Our electronic
data interchange (sometimes referred to as EDI) system further simplifies the
process for our customers. EDI customers do not have to key claims information
into our internet site. Instead, our EDI system interfaces directly with the
payer's claims file configuration, which allows the payer to send us its claims
file in its existing electronic format. After we electronically reprice the
claims, we send the customer an electronic file of claims information that the
payer can incorporate into its claims database automatically.
Although we do not charge our network access customers a separate fee
for claims repricing, we believe that our advanced repricing system provides
significant benefits that make our network access services more attractive to
payers. It is time-consuming and expensive for a payer to load PPO rates and
demographic information into its claims system and to create a system that
accepts the various forms in which claims information is submitted. We offer a
turnkey solution that requires only a limited number of payer personnel. We can
reduce claims turnaround times and provide efficient claims transmission
options. Our system also can reduce lost claims, reduce the number of
undiscounted claims, support high claim volume customers, and improve accuracy
over manually processed claims. Our customers also are relieved of some of the
burden of complying with the Health Insurance Portability and Accountability Act
(sometimes referred to as HIPAA), which imposes privacy and data configuration
requirements that apply to claims repricing. We believe that our claims
processing procedures are in compliance with current HIPAA requirements and will
be compliant with future requirements. Providers also benefit from our
streamlined claims system, which helps increase the speed with which they get
paid and the accuracy of the claim payments.
Network and Data Management
We use our information system capabilities to provide network and data
management services for the payers that access our NPPN network. We prepare
detailed reports regarding repricing turnaround times and the savings that each
payer realizes, itemized by the total number of claims incurred, the number of
claims discounted, and the average discount. Payers can use this information to
help design health plans that effectively control costs,
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enhance member benefits, and yield a more favorable loss ratio, which is the
ratio of paid medical claims compared to collected premiums. As a provider of
data management services, we maintain provider demographics and fee schedules
and update provider directories. We integrate several components of certain
licensed reporting software to provide both our payer clients and our
participating PPOs with quick access to claims data, allowing them to produce a
variety of analytical reports. We generally do not charge our NPPN network
access customers any additional fee for our standard network and data management
services.
Bill Review and Negotiation
In April 2002, we began offering optional medical bill review and
negotiation services to our payer clients. Many of our percentage of savings
clients send us all claims that fall outside their primary PPO network
arrangements. Traditionally, we identified and repriced the claims that were
subject to our NPPN discount arrangements and returned the non-NPPN claims to
the payer without applying any discount. We now offer our payer customers the
opportunity to realize cost savings on these out-of-network claims through our
affiliation with a bill review and negotiation company. We can electronically
transmit our non-NPPN network claims to the company's experienced professionals,
who use proprietary medical software to analyze each claim to detect any
incorrect charges or billing irregularities. Once that phase of the analysis is
completed, the detailed charges are compared to a proprietary database to
determine the competitiveness of the charges in the provider's geographic area.
The bill negotiator then contacts the provider to discuss our findings, and in
many cases is able to reduce the claim amount. The reviewer obtains signed
agreements from each provider to prevent the provider from later contesting the
reduction or billing the patient for the balance. The company then returns the
electronic file to us, and we forward it to the payer along with the payer's
other repriced claims. Payers pay us a percentage of the savings that are
generated by the bill review and negotiation service. Our 2002 operating revenue
for this service was approximately $335,000.
Advance Funding
In 2002, we launched a program to provide advance funding services for
payers and providers. Through our arrangement with established advance funding
companies, we offer participating providers the opportunity to receive claim
payments in advance of the due date. In exchange, the providers agree to accept
a discount of the original billed amount. This service provides both a reduction
in claim costs for payers and rapid payment for providers. The payer pays us a
percentage of the discount agreed to by the provider.
BUSINESS PROCESS OUTSOURCING
We traditionally provided claims repricing and network management
services only with respect to claims that our NPPN participating providers
submitted to one of our network access payer customers. Through our network and
data management business process outsourcing business, we have expanded our
scope to offer payers and providers services that are independent of our network
access business.
PayerServ
Healthcare payers typically contract with more than one PPO network.
While historically most payers' information systems and applications could
handle simple percentage discount repricing calculations for a single network,
we believe that most are not well suited for current PPO contract terms
requiring detailed, often complex, repricing calculations. Each of the networks
with which a payer contracts may have different discount methodologies and
rates, greatly adding to a payer's administrative burden and increasing the
complexities of processing and repricing claims.
Through PayerServ, we use our existing technology and management
expertise to help payers manage all of their network relationships, whether or
not they also access our NPPN network. A payer can outsource its network and
data management obligations to us, and we will assume the responsibility for
moving, tracking, and repricing healthcare claims among all of the PPO networks
with which it has contracts. By maintaining provider fee schedule and
demographic information for all of the providers in a payer's provider
configuration, we eliminate bottlenecks in the payer's claim work flow, expedite
claims repricing, and improve accuracy.
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Our PayerServ services may include acting as the payer's mailroom for
receipt of all provider claims, converting paper and fax claims to an electronic
format, identifying the correct network fee schedule applicable to each claim,
and electronically repricing the claim accordingly. We also can provide
reporting and other network management services with respect to all of the
payer's networks. We can prepare customized reports for payers that capture
information regarding repricing turnaround time, cost management, demographics,
case management, provider services, diagnoses, and procedures. We believe that
our PayerServ customers benefit from reduced operating expenses, streamlined
network management, HIPAA-compliant procedures, and electronic repricing with
rapid turnaround times. We do not require customers to pay upfront network
loading fees and monthly maintenance fees, which are features of many of our
competitors' systems.
Our PayerServ customers typically pay us for claims repricing and claims
and network and data management services on a per-claim basis. For each
PayerServ customer, we analyze the customer's service requirements, including
claims work flow, claims volume and types, and PPO network configurations. Then,
based on our proprietary pricing model, we determine the pricing for each claim
transaction.
PlanServ
PlanServ uses the same technology and management expertise that supports
our PayerServ business to offer claims repricing and network and data management
services to PPOs. Our PPO participants generally maintain relationships with
payers that are independent from the PPOs' affiliation with our NPPN network.
Many of these PPOs are seeking cost-efficient ways to develop their own
automated claims handling and repricing systems and to manage the provider data
necessary to update their provider directories efficiently and otherwise support
network access. By outsourcing repricing functions to PlanServ, a PPO can
achieve advanced electronic capabilities for its payer clients without incurring
the high cost of systems development. We can serve as a mailroom for PlanServ
clients, receiving paper and fax claims and converting them to an electronic
form for repricing, so that the PPO never touches the claims. PPOs that take
advantage of our PlanServ offerings do not have to distribute their rates to
their payers, manually reprice claims, or be concerned with HIPAA requirements
related to claims repricing. The PPO's payer clients benefit from reduced
turnaround times on repriced claims and escape the burden of loading the PPO's
rates. PlanServ products also include web hosting capabilities, featuring
customized, private label web access that enables a participating PPO's
customers to reprice claims electronically through the Internet. Each PPO's
website includes the PPO's logo and other material chosen by the PPO.
PlanServ also offers our PPO customers management reporting products
that capture important claims data, including repricing turnaround times, claim
volume, and savings amounts. Our PPO customers can use this information to
negotiate better physician and facility discounts. We believe that obtaining and
analyzing information is increasingly important to PPOs because this information
is necessary for them to properly establish their discount levels. We also
provide PlanServ customers with database administration, including provider
directory updates and maintenance of provider demographics and fee schedules.
Like PayerServ, PlanServ generally charges customers a per-claim fee,
which is calculated based on the extent of the customer's service requirements,
including claims work flow and number of payers.
OUR INTELLECTUAL PROPERTY AND TECHNOLOGY
Our proprietary technology offers customers the benefits of an open
architecture, which means that it is compatible with other operating systems and
applications. Using a combination of electronic data interchange and internet
systems, customers can interface with our claims repricing system without
incurring significant incremental capital expenditures for hardware or software
or having to adopt a specific claims format. The open architecture of our system
also improves reliability and facilitates the cross-selling of other
technology-based services to our customers, in part because of the following
characteristics:
Scalability
Our systems are designed to be highly scalable or adaptable to levels of
use. Using TCP/IP in a Unix and Windows NT environment with a 10/100/1000 Mhz
backbone, we have designed our systems to accommodate additional servers and
disk space as needed with little or no interruption in processing. Using Oracle,
our database
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technology gives us the flexibility to design web-enabled customer applications
that do not require the installation of proprietary software. We also are able
to design new internal systems using the languages of our choice, which are
currently Visual Basic and Visual FoxPro.
Modularity
Our systems have been developed with discrete or specific functionality
that we can replicate and utilize with additional hardware so that we can
reorganize the discrete functions and adapt the system to service different
situations. We believe that this modularity enables us to optimize application
and hardware performance, and take immediate advantage of improvements in
hardware and software.
Redundancy
All of our production servers are designed with a redundant array of
inexpensive disks, which provides protection in the event a disk fails. Our
hardware is replicated to provide redundancy in the event of a total system
failure. We document and review our disaster recovery plans quarterly in order
to reduce the risk of business interruption.
Industry Standards
Through the adoption and active use of standard formats for healthcare
electronic data interchange processing, we can support payer and provider
processing requirements and provide standard interfaces to other electronic data
interchange processing organizations.
Ease of Use
Our products utilize a 32 bit graphical user interface. Our web-based
products are written in Java and function in any operating system capable of
using a web browser, thereby enhancing ease of use by our customers.
Remote Connectivity Offerings
We were an early adopter of the emerging internet technology that
enables us to provide quick connectivity through file transfer protocol,
web-enabled applications, and virtual private networking. We believe that these
features allow us to provide improved service levels and lower pricing. We have
established relationships with multiple telecommunications vendors to ensure
reliable and redundant connectivity over T1 and frame relay circuits.
We do not have patent protection for our proprietary technology, which
includes primarily software and software applications. Until we obtain this
protection, we must rely on trade secret and copyright protection provided under
common law. We also have implemented certain security measures to protect our
systems from access by unauthorized parties that might want to copy or otherwise
use our technologies. These security measures include firewall protection,
corporate antivirus programs, and email and facility security. We rely on
technology licensed from third parties to perform key functions, and may be
required to license additional technology in the future. We have obtained
federal trademark protection for the marks PlanVista Solutions(R) and
ClaimPassXL(R).
COMPETITION
PREFERRED PROVIDER NETWORK ACCESS
The PPO industry is highly fragmented. According to the American
Association of Preferred Provider Organizations, as of March 2003 there were
more than 1,000 PPOs in the United States. A few companies, such as First Health
Group Corporation, BCE Emergis/eHealth Solutions Group, Concentra, Inc., Beech
Street Corporation, Coalition America, Inc., and Multiplan, Inc., offer provider
networks and claim volumes of meaningful size. The remainder of the competitive
landscape is diverse, with major insurance companies and managed care
organizations such as Blue Cross Blue Shield, Aetna US Healthcare, WellPoint
Health Networks, Inc., United Health Group,
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Humana Health Care Plans, Private Healthcare Systems (PHCS), and Cigna
Healthcare also offering proprietary preferred provider networks and services.
In addition, the number of independent PPOs has decreased as managed care
organizations and large hospital chains have acquired PPOs to administer their
managed care business and increase enrollment. We expect consolidation to
continue as the participants in the industry seek to acquire additional volume
and access to PPO contracts in key geographic markets. This consolidation may
give our customers greater bargaining power and lead to more intense price
compensation.
ELECTRONIC CLAIMS REPRICING
The claims repricing service market is also fragmented. Our repricing
competitors provide some or all of the services we currently provide. Our
competitors can be categorized as follows:
. Large managed care organizations and third party administrators
with in-house claim processing and repricing systems, such as
Blue Cross Blue Shield, UnitedHealth Group, and Wellpoint Health
Networks, Inc.;
. Healthcare information technology companies providing
enterprise-wide systems to the payer market, such as
McKesson/HBOC (NYSE: MCK), Eclipsys Corp (NASDAQ: ECLP), and
Perot Systems Corporation (NYSE: PER); and
. Healthcare information software vendors selling claim processing
products to the provider market, such as The TriZetto Group
(NASDAQ: TZIX), HealthAxis (NASDAQ: HAXS), Avidyn/ppoOne
(NASDAQ: ADYN), and several private companies.
The market for claims repricing services is competitive, rapidly evolving, and
subject to rapid technological change. We believe that competitive conditions in
the healthcare information industry in general will lead to continued
consolidation as larger, more diversified organizations are able to reduce costs
and offer an integrated package of services to payers and providers.
We compete on the basis of the strength of our electronic claims
repricing technology, the size of our network and the level of our network
discounts, our percentage of savings pricing model, and the diversity of
services we offer through our business processing outsourcing products and other
new initiatives. Many of our current and potential competitors have greater
financial and marketing resources than we have. Furthermore, we believe that the
increasing acceptance of managed care in the marketplace, the adoption of more
sophisticated technology, legislative reform, and the consolidation of the
industry will result in increased competition. There can be no assurance that we
will continue to maintain our existing customer base, or that we will be
successful with any new products that we have introduced or will introduce.
OUR HISTORY
We were incorporated in Delaware in 1994 and completed our initial
public offering in May 1995 under the name HealthPlan Services Corporation. We
changed our name to PlanVista Corporation in April 2001. Our original core
business, which we purchased from Dun & Bradstreet Corporation in 1994, provided
third party administration of healthcare claims for large and small group
employers. After our 1995 initial public offering, we initiated a series of
acquisitions designed to grow our business. We spent more than $170.0 million in
cash to acquire seven businesses between 1995 and 1998, including the purchase
of a managing general underwriter business and the May 1998 purchase of our NPPN
network business for $31.6 million. We used funds from our senior credit
facility to help finance these acquisitions. By 1999, a number of our
businesses, other than our NPPN network business that is part of our core
business today, had become unprofitable. We were burdened with more than $100.0
million of senior debt, more than $10.0 million of subordinated debt, and
approximately $25.0 million of working capital deficit.
Divestiture
In June 2000, we initiated a strategic turnaround program designed to
(1) divest our third party administration businesses, (2) reduce our senior
debt, (3) focus our efforts on enhancing our medical cost containment business,
and (4) restructure our balance sheet. We disposed of all of our third party
administration and managing
9
general underwriter businesses in a series of transactions during 2001 and 2000.
In the 2000 transactions, we received a total of $35.1 million and, in one of
the transactions, the buyer assumed $1.5 million of additional current
liabilities. Of the cash proceeds, we used $29.5 million to reduce our
outstanding indebtedness to our senior lenders.
We completed the disposition of our former business units in June 2001
with the sale of our subsidiary, HealthPlan Services, Inc., which contained our
remaining third party administration business and our managing general
underwriter business. In connection with this non-cash transaction, the buyer,
HealthPlan Holdings, Inc., assumed approximately $40.0 million in working
capital deficit of the acquired businesses, and acquired assets having a fair
market value of approximately $30.0 million. At the closing of this transaction,
we issued 709,757 shares of our common stock to offset $5.0 million of the
assumed deficit. We offset the remaining $5.0 million of this deficit with a
long-term convertible subordinated note, which automatically converted into
813,273 shares of our common stock on April 12, 2002 in connection with the
restructuring of our credit facility, as described below. During 2001 and 2002,
in connection with the HealthPlan Holdings transaction, we issued a total of
343,521 additional shares of our common stock in settlement of certain
post-closing disputes and to meet certain obligations under the terms of the
subordinated note and a registration rights agreement we entered into at
closing. See "Management's Discussion and Analysis of Operations - Liquidity and
Capital Resources" for a more detailed discussion of the HealthPlan Holdings
transactions.
Our current business consists of our core medical cost containment
business, which includes our NPPN network, as well as our new network and data
management business process outsourcing businesses, which we introduced in 2001
and which began earning operating revenue in the first quarter of 2002.
Debt Restructure
Upon completion of the disposition of our former business units, we were
left with a capital and debt structure that our remaining medical cost
containment core business was not able to service, and we were unable to pay our
senior secured debt in the principal amount of approximately $69.0 million when
it matured in August 2001. We entered into a forbearance agreement with our
senior lenders under which we operated until we completed a new credit facility
and closed on a debt restructuring transaction in April 2002. Pursuant to this
restructuring, we obtained a revised term loan for $40.0 million, which is
secured by all of our assets, and exchanged $29.0 million of senior secured debt
for 29,000 shares of our newly authorized Series C convertible preferred stock
and an additional note for $184,872 with a maturity date of July 1, 2003.
Series C Convertible Preferred Stock
The Series C convertible preferred stock issued to our senior lenders in
connection with our restructured credit facility accrues dividends at 10.0% per
annum during the first twelve months from issuance and at 12.0% per annum
thereafter. Dividends are payable quarterly in additional shares of Series C
convertible preferred stock or, at our option, in cash. We have chosen to pay
dividends in the form of additional shares, and to date we have issued to the
Series C shareholders an aggregate of 2,092 additional shares of Series C
convertible preferred stock. In addition, while at least 12,000 shares of Series
C convertible preferred stock are outstanding, the Series C convertible
preferred stockholders are entitled to elect three out of seven members of our
board of directors. Upon the occurrence of a Board Shift Event, as defined
below, the board composition would change so as to allow the holders of Series C
convertible preferred stock to elect four out of seven directors, thereby
shifting control of the board to the directors elected by the holders of Series
C convertible preferred stock. A "Board Shift Event" is defined as (1) our
failure to achieve certain specified net operating cash flow requirements, (2)
any default in connection with the payment of principal or interest under our
restructured credit facility, after the lapse of any applicable grace periods,
or (3) our failure to redeem all of the Series C convertible preferred stock by
October 12, 2003. We may redeem the Series C convertible preferred stock at any
time at our option at a redemption price of $1,000 per share plus accrued
dividends. Until the March 2003 closing of the PVC Funding Partners transaction,
as described below, the senior lenders under our restructured credit facility
were the sole holders of the Series C convertible preferred stock.
In addition to their voting rights with respect to directors, the
holders of the Series C convertible preferred stock will have the right in
certain circumstances to vote as a single class with the common stockholders on
all matters other than the election of directors on an "as-converted" basis,
with each share of Series C convertible
10
preferred stock having a number of votes equal to the number of shares of common
stock into which it would be converted. The "as-converted" rights take effect
upon the earliest to occur of (1) any default in connection with the payment of
principal or interest under our restructured credit facility, after the lapse of
any applicable grace period, (2) our failure to redeem all of the Series C
convertible preferred stock by October 12, 2003, or (3) the date on which fewer
than 12,000 shares of Series C convertible preferred stock are outstanding.
There are 31,092 shares of Series C convertible preferred stock outstanding. In
connection with the issuance of the Series C convertible preferred stock, the
senior lenders entered into a stockholders agreement with us, which provides,
among other things, for registration rights in connection with the sale of any
shares of common stock that are issuable upon conversion of the Series C
convertible preferred stock. The registration rights include shelf and
piggy-back registration rights.
At any time after October 12, 2003, the Series C convertible preferred
stock may be converted into shares of our common stock at the rate of 703.37
shares of common stock for each preferred share, or a total of 20,996,398 shares
(or 55.6%) of our common stock upon full conversion, subject to adjustment. The
Series C convertible preferred stock has weighted-average anti-dilution
protection and a provision that in no event will the Series C convertible
preferred stock convert into less than 51.0% of our outstanding shares of common
stock.
Offering
On July 19, 2002, we filed an Amended Registration Statement with the
Securities and Exchange Commission, wherein we offered for sale an aggregate of
5,174,979 shares of our common stock (the "Offering"). During the fourth quarter
of 2002, we decided to postpone the Offering indefinitely. We subsequently filed
an application to withdraw the Registration Statement.
PVC Funding Partners Transaction
On March 13, 2003, PVC Funding Partners LLC, an affiliate of
Commonwealth Associates, LP and Comvest Venture Partners, filed a form 13D with
the Securities and Exchange Commission in which it indicated that on March 7,
2003, it acquired 29,851, or 96.0%, of our outstanding Series C convertible
preferred stock from our senior lenders. These preferred shares were purchased
from the lenders on a prorata basis at a price of $33.50 per share. The selling
lenders continue to hold the remaining 4.0% of the Series C convertible
preferred stock. In connection with the transaction, PVC Funding Partners also
acquired $20.5 million in principal amount of our outstanding bank debt from our
senior lenders. In connection with the closing of the transaction, the three
members of our board of directors theretofore designated by the holders of the
Series C convertible preferred stockholders voluntarily relinquished their board
positions, and were replaced by three directors selected by PVC Funding
Partners.
There is an intercreditor agreement between PVC Funding Partners and
Wachovia Bank, National Association, dated March 7, 2003. The intercreditor
agreement provides that, until the occurrence of a Board Shift Event, PVC
Funding Partners has all of the rights of the original lenders under the
restructured credit agreements, except that (1) PVC Funding Partners' rights to
mandatory prepayments and other principal payments prior to the maturity date
are subordinated to the original lenders' rights to those payments, and (2) PVC
Funding Partners' notes will be voted consistently with and on the same
percentage basis as the original lenders with respect to all matters required to
be submitted to a vote or consent of the lenders, except for matters related
to certain fundamental changes in the loan terms. Upon the first occurrence of a
Board Shift Event, which would allow PVC Funding Partners to appoint an
additional board member and thus obtain control of our board of directors, PVC
Funding Partners has the option of not exercising their right to obtain such
control. If, within fifteen days of a first Board Shift Event, PVC Funding
Partners notifies the original lenders that they will not exercise their right
to control our board, then the original lenders will have the option to
repurchase 14,304 of the Series C convertible preferred stock, at a price of
$33.50 per share. If PVC Funding Partners exercises their right to obtain
control of our board, or fails to timely notify the original lenders that they
will not exercise this right, then the debt held by PVC Funding Partners will
automatically be subordinated to the debt held by the original lenders.
11
Restructured Centra Notes
On March 31, 2003, we renegotiated approximately $4.3 million in
convertible notes that were originally issued to Centra Benefit Services, Inc.
(sometimes referred to as Centra). Pursuant to the renegotiated terms, we have
extended the maturity date of the notes from December 1, 2004 to April 1, 2006,
reduced the interest rate from 12% per annum to 6% per annum, and fixed the
conversion price at $1.00, subject to adjustment in accordance with
anti-dilution protections. The previous conversion price was based on the
trading price of our common stock. Immediately upon completion of this
restructuring, PVC Funding Partners acquired slightly more than 50% of the face
value of the notes from Centra. The remaining interest is held by Centra.
See "Management's Discussion and Analysis of Financial Condition and
Reports of Operations - Liquidity and Capital Resources."
GOVERNMENT REGULATION
Regulation in the healthcare industry is constantly evolving. Federal,
state, and local governments continue their efforts to reduce the rate of
increases in healthcare expenditures and to regulate the adjudication of
healthcare claims for the protection of patients as well as providers. Many of
these policy initiatives have contributed to the complex and time-consuming
nature of obtaining healthcare reimbursement for medical services. The impact of
regulatory developments in the healthcare industry is complex and difficult to
predict, and our business could be adversely affected by new healthcare
regulatory requirements or new interpretations of existing requirements. We
believe, however, that the increasing complexity of healthcare transactions and
the resulting additional information management requirements placed on providers
and payers should increase the demand for our services. At the same time, these
requirements may dramatically increase our cost of providing services.
PRIVACY REGULATION
As participants in the healthcare industry, we and our payer and
provider customers are subject to laws and regulations relating to the
confidential treatment and secure transmission of patient medical records and
other healthcare information. The Health Insurance Portability and
Accountability Act of 1996, as amended (sometimes referred to as HIPAA), has
had, and will continue to have, a significant effect on developers and users of
healthcare information systems. On December 28, 2000, the Department of Health
and Human Services (sometimes referred to as HHS) issued final regulations, in
the form of a Privacy Rule, relating to patient information privacy and
electronic healthcare transactions. On August 14, 2002, HHS adopted
modifications to the Privacy Rule. The Privacy Rule affects certain health
plans, healthcare clearinghouses, and health care providers. These "covered
entities" must implement standards to protect and guard against the misuse of
individually identifiable health information. In many instances, we are merely
deemed to be a business associate of our health plan and provider customers. We
are deemed to be a clearinghouse when we convert nonstandard data content, or
data in a nonstandard format, into standard data elements or a standard
transaction, or vice versa. Among other things, the Rule requires us to adopt
written privacy procedures and provide employee training with respect to
compliance. We must be in compliance with these regulations by April 14, 2003.
We expect to be compliant with the regulations on or before that date.
In October 2003, we will become subject to HIPAA regulations related to
electronic transactions. These regulations require us to use standard data
content and formats for the submission of electronic claims and other
administrative and healthcare transactions. Additionally, HHS has adopted
regulations relating to security of individual health information and a national
employer identifier. We expect to be in compliance with these regulations on or
before their effective dates.
Many healthcare payers and providers have sought assistance from outside
vendors to facilitate implementation and/or to provide clearinghouse translation
capabilities as a method to reduce those costs and meet the required mandatory
implementation dates. While HIPAA could continue to have an adverse effect on
the operations of providers and payers and consequently reduce our revenue, we
believe we possess technical and managerial knowledge and skills that could
benefit healthcare organizations seeking to establish compliance with
12
HIPAA requirements. We have analyzed the extent to which we may need to alter
our systems to comply with current and proposed HIPAA regulations and do not
believe that there will be significant additional costs to us in complying with
such regulations. Because some HIPAA regulations have yet to be issued and
because even final HIPAA regulations may be subject to additional modification
or amendment, our products may require modification in the future. If we fail to
offer solutions that permit compliance with applicable laws and regulations, our
business could suffer.
Many of our customers will also be subject to state laws implementing
the federal Gramm-Leach-Bliley Act, relating to certain disclosures of nonpublic
personal health information and nonpublic personal financial information by
insurers and health plans. We also may be subject to state privacy laws, which
may be more stringent than HIPAA in some cases.
PROVIDER CONTRACTING AND CLAIMS REGULATION
Some state legislatures have enacted statutes that govern the terms of
provider network discount arrangements or restrict unauthorized disclosure of
such arrangements. Legislatures in other states are considering adoption of
similar laws. Although we believe that we operate in a manner consistent with
applicable provider contracting laws, there can be no assurance that we will be
in compliance with laws or regulations to be promulgated in the future, or with
new interpretations of existing laws.
Our customers perform services that are governed by numerous other
federal and state civil and criminal laws, and in recent years have been subject
to heightened scrutiny of claims practices, including fraudulent billing and
paying practices. Many states also have enacted regulations requiring prompt
claims payment. To the extent that our customers' reliance on any of the
services we provide contribute to any alledged violation of these laws or
regulations, then we could be subject to indemnification claims from our
customers or be included as part of an investigation of our customers'
practices. Federal and state consumer laws and regulations may apply to us when
we provide claims services and a violation of any of these laws could subject us
to fines or penalties.
LICENSING REGULATION
While we are currently not subject to licensing requirements for the
services we provide, some states require us, as a non-risk-bearing PPO, to
formally register and file an annual or one-time accounting of networks and
providers with which we contract. Given the rapid evolution of healthcare
regulation, it is possible that we will be subject to future licensing
requirements in any of the states where we currently perform services, or that
one or more states may deem our activities to be analogous to those engaged in
by other participants in the healthcare industry that are now subject to
licensing and other requirements, such as third party administrator or
insurance regulations. Moreover, laws governing participants in the healthcare
industry are not uniform among states. As a result, we may have to undertake the
expense and difficulty of obtaining any required licenses, and there is a risk
that we would not be able to meet the licensing requirements imposed by a
particular state. It also means that we may have to tailor our products on a
state-by-state basis in order for our customers to be in compliance with
applicable state and local laws and regulations.
INTERNET REGULATION
We offer a number of internet-related products. The Internet and its
associated technologies are subject to increasing government regulation. A
number of legislative and regulatory proposals are under consideration by
federal, state, local, and foreign governments and agencies. We cannot be
assured that we will be able to comply with requirements that may be adopted in
the future.
PATIENT PROTECTION INITIATIVES
State and federal legislators and regulators have proposed initiatives
to protect consumers covered by managed care plans and other health coverage.
These initiatives may result in the adoption of laws related to timely claims
payment and review of claims determinations. These laws may impact the manner in
which we perform services for our clients.
13
While we believe our operations are in material compliance with
applicable laws as currently interpreted, the regulatory environment in which we
operate may change significantly in the future, which could restrict our
existing operations, expansion, financial condition, or opportunities for
success.
EMPLOYEES
On March 24, 2003, we employed 155 persons. Our employees are not
represented by a labor union or a collective bargaining agreement. We regard our
relationship with our employees as good.
AVAILABLE INFORMATION
We are headquartered in Tampa, Florida and have an operations and
technology center in Middletown, New York. Our Tampa headquarters' mailing
address is 4010 Boy Scout Boulevard, Suite 200, Tampa, Florida 33607, and our
principal telephone number at that location is 813-353-2300. Our website address
is www.planvista.com. Our annual reports on Form 10-K, our quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports are
available free of charge through our website at "About Us/Investor
Information/SEC Filings." We make this information available via a hyperlink to
a third party Securities and Exchange Commission (sometimes referred to as SEC)
filings website. We do not maintain or provide information directly to this
site. Although the third party that maintains the website has endeavored to make
our SEC filings available as soon as reasonably practicable after we file them
electronically with the SEC, we make no representations or warranties with
respect to the timeliness or content of any postings on the website.
ITEM 2. PROPERTIES
We conduct our operations from our headquarters in Tampa, Florida and
our data processing facility in Middletown, New York. We lease both of these
facilities. We believe that our facilities are adequate for our present and
foreseeable business requirements.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may be a party to a variety of
legal actions that affect many businesses, including employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, and tort claims. In addition, we have a number of indemnification
obligations related to certain of the businesses we sold during 2000 and 2001,
and we could be subject to a variety of legal and other actions as a result of
such indemnification obligations. We currently have insurance coverage for some
of these potential liabilities. Other potential liabilities may not be covered
by insurance, insurers may dispute coverage, or the amount of insurance may not
cover the damages awarded. We cannot fully determine the ultimate financial
effect of these claims and indemnification obligations at this time.
In November 2001, we filed a complaint for breach of contract and unjust
enrichment in the Circuit Court of the Thirteenth Judicial Circuit, Hillsborough
County, Florida, against Trewit, Inc. and Harrington Benefit Services, Inc., our
former subsidiary. The complaint, which we amended in February 2002, sought in
excess of $3.5 million in damages arising primarily out of a settlement entered
into in connection with a dispute that arose after Trewit's acquisition of
Harrington Benefit Services from us in 2000. In April 2002, we again amended the
complaint to include claims of fraudulent misrepresentation, negligent
misrepresentation, and promissory estoppel, seeking additional damages for these
causes of action in excess of $1.4 million. On June 28, 2002, Trewit filed a
complaint against us in the Circuit Court of the Thirteenth Judicial Circuit,
Hillsborough County, Florida, alleging breach of contract and fraud in
connection with their acquisition of Harrington Benefit Services. The complaint
sought damages in excess of $2.0 million. In February 2003, we resolved our
litigation with Trewit, Inc. and Harrington Benefit Services, Inc. without
payment by us, and the parties signed mutual releases.
In November 2001, Paid Prescriptions, LLC initiated a breach of contract
action in the United States District Court for the District of New Jersey
against HealthPlan Services, our former subsidiary that we sold to HealthPlan
Holdings. Paid Prescriptions seeks $1.6 million to $2.0 million in compensation
arising from HealthPlan Services' alleged failure to meet certain performance
goals under a contract requiring HealthPlan Services to enroll
14
a certain number of customers for Paid Prescriptions' services. The events
giving rise to this claim allegedly occurred prior to our sale of the HealthPlan
Services business to HealthPlan Holdings. Accordingly, we are vigorously
defending the action on behalf of HealthPlan Services, in accordance with our
indemnification obligations to HealthPlan Holdings.
We are currently in discussions with HealthPlan Holdings to finalize any
purchase price adjustments associated with the HealthPlan Services transaction.
These adjustments relate primarily to the amount of accrued liabilities and
trade accounts receivable reserves, and the classification of investments at the
transaction date. HealthPlan Holdings believes it is due approximately $1.7
million from us related to the transaction, while we believe we have claims
against HealthPlan Holdings amounting to approximately $4.5 million (which would
be partially offset against other post-closing payments that we have agreed to
pay, subject to certain limitations as provided in the transaction documents).
In the event that we are unable to resolve these matters directly with
HealthPlan Holdings, we will seek to resolve them through binding arbitration as
provided for in the purchase agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since October 4, 2002, our common stock has been traded on the
Over-The-Counter Bulletin Board under the symbol PVST. Prior to that time, our
stock was traded on the New York Stock Exchange. Our New York Stock Exchange
symbol was HPS From May 1995 until April 2001, when we changed our symbol to PVC
in connection with the change of our name from HealthPlan Services Corporation
to PlanVista Corporation. The following table sets forth the high and low sales
prices of our common stock for each quarter during 2001 and 2002, as reported by
the New York Stock Exchange or the Over-The-Counter Bulletin Board, as
applicable.
2002 HIGH LOW
---- ---------- ----------
Fourth quarter ........................... $ 2.50 $ 0.73
Third quarter ............................ $ 3.50 $ 1.06
Second quarter ........................... $ 6.30 $ 3.40
First quarter ............................ $ 6.40 $ 4.25
2001 HIGH LOW
---- ---------- ----------
Fourth quarter............................ $ 5.83 $ 4.14
Third quarter............................. $ 7.97 $ 4.20
Second quarter............................ $ 8.35 $ 6.60
First quarter............................. $ 9.44 $ 6.20
There were 152 holders of record of our common stock as of March 24,
2003. We believe that there are a greater number of beneficial owners that hold
our common stock in street name. We have not paid dividends since October 1999,
and our current credit agreement prohibits the payment of dividends. We have no
present plans to pay any dividends on our common stock because we currently
intend to retain all earnings, if any, in order to expand our operations and pay
down debt. In the future, depending upon our financial condition, earnings,
capital requirements, results of operations, contractual limitations and any
other factors deemed relevant by our board of directors, our board of directors
may at any time consider the payment of dividends.
15
The following table sets forth our equity compensation plan information
as of December 31, 2002.
NUMBER OF SECURITIES
NUMBER OF REMAINING AVAILABLE
SECURITIES WEIGHTED- FOR
TO BE ISSUED AVERAGE FUTURE ISSUANCE UNDER
UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION
OUTSTANDING OUTSTANDING PLANS
OPTIONS, OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND WARRANTS AND REFLECTED IN COLUMN
PLAN CATEGORY RIGHTS RIGHTS (a))
- ---------------------------------------- ---------------- ----------------- ---------------------
(a) (b) (c)
Equity compensation plans approved
by security holders (1)................ 1,810,137 $ 6.72 558,913(2)
Equity compensation plans not
approved by security holders .......... -- -- --
---------------- ----------------- ---------------------
Total .......................... 1,810,137 $ 6.72 558,913
================ ================= =====================
- ----------
(1) These plans consist of the 1995 Directors Stock Option Plan, the 1995
Incentive Equity Plan, the 1995 Consultants Stock Option Plan, the Amended
and Restated 1996 Employee Stock Option Plan, the Amended and Restated 1997
Directors Equity Plan, and the 1996 Employee Stock Purchase Plan.
(2) This number includes 19,781 shares available for issuance under the Amended
and Restated 1997 Directors Equity Plan and 23,569 shares available for
issuance under the 1996 Employee Stock Purchase Plan. This number does not
include 3.0 million shares issuable under the 2002 Employee Stock Option
Plan, which was approved by our stockholders at our 2002 Annual Meeting of
Stockholders, subject to completion of a proposed public offering of our
stock. During the fourth quarter of 2002, we decided to postpone the
offering indefinitely. At our 2003 annual meeting, we expect to request
stockholder approval for issuance of options to purchase an aggregate of
3.5 million shares of our common stock, without any condition related to
the conclusion of an offering.
16
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
We have derived the following selected historical consolidated financial
data from our audited consolidated financial statements at December 31, 2002 and
2001 and for the years ended December 31, 2002, 2001, 2000, 1999, and 1998,
which are included in this Form 10-K. The report of PricewaterhouseCoopers LLP,
our independent accountants, on our consolidated financial statements at
December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and
2000 appears elsewhere in this Form 10-K. Our selected consolidated financial
data should be read in conjunction with the related consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001(1) 2000(1) 1999(1) 1998(1)
--------- ----------- ----------- ---------- ---------
STATEMENT OF OPERATIONS DATA:
(In thousands, except per share amounts)
Operating revenue .............................. $ 33,141 $ 32,918 $ 26,964 $ 18,691 $ 10,024
--------- ----------- ----------- ---------- ---------
Cost of operating revenue:
Marketing allowances ........................ 559 308 295 110 30
Personnel expense ........................... 8,474 9,137 8,301 8,189 4,937
Network access fees ......................... 5,122 5,343 3,896 2,521 1,894
Other ....................................... 5,267 6,213 3,993 3,903 4,028
Depreciation ................................ 528 467 303 723 247
--------- ----------- ----------- ---------- ---------
Total cost of operating revenue .......... 19,950 21,468 16,788 15,446 11,136
Bad debt expense ............................... 3,356 3,348 649 624 -
Offering costs ................................. 1,213 - - - -
Amortization of goodwill ....................... - 1,378 1,380 1,388 967
Loss on impairment of intangible assets ........ - - 5,513 - -
Loss (gain) on sale of investments, net ........ - 2,503 (332) (4,630) (33,240)
Interest expense ............................... 5,628 12,098 10,489 7,737 5,540
Other (income) expense ........................ - (175) 868 (373) 11,921
Equity in loss of joint venture ................ - - - 208 -
--------- ----------- ----------- ---------- ---------
Income (loss) before (benefit) provision for
income taxes, minority interest, discontinued
operations, loss on sale of discontinued
operations, extraordinary loss, and cumulative
effect of change in accounting principle ...... 2,994 (7,702) (8,391) (1,709) 13,700
Net income (loss) .............................. 4,185 (45,221) (104,477) 104 9,698
Basic and diluted net income (loss) per
share from continuing operations before
minority interest, discontinued operations,
loss on sale of assets, extraordinary item,
and cumulative effect of change in
accounting principle .......................... $ 0.25 $ (2.37) $ 0.37 $ (0.08) $ 0.55
Basic and diluted net income (loss)
per share ..................................... $ 0.25 $ (3.11) $ (7.64) $ 0.01 $ 0.67
Dividends declared per share
of common stock ............................... - - - $ 0.4125 -
Average common shares outstanding
Basic ....................................... 16,427 14,558 13,679 13,742 14,353
Diluted ..................................... 16,523 14,558 13,679 13,922 14,584
BALANCE SHEET DATA: As of December 31,
--------------------------------------------------------------
Working capital (deficit) ...................... $ 1,178 $ (7,901) $ (104,859) $ (44,329) $ (93,903)
Total assets ................................... 42,585 40,125 104,668 236,683 217,002
Total debt ..................................... 45,544 76,086 66,038 95,762 97,322
Stockholders' equity (deficit) ................. (18,389) (53,290) (20,340) 86,281 91,652
- ----------
(1) We have reclassified the business units sold in 2001 and 2000 as
discontinued operations in the Consolidated Statements of Operations. During
2000, we sold our unemployment compensation, workers' compensation, workers'
compensation managed care organization, and self-funded businesses. In 2001, we
sold our third party administration and managing general underwriter business
units.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read together with our consolidated
financial statements and related notes, which appear elsewhere in this Form
10-K. To the extent that this discussion is more limited than the information in
the consolidated financial statements, you should rely on the consolidated
financial statements. We caution you that, while forward-looking statements
reflect our good faith beliefs, these statements are not guarantees of future
performance. In addition, except as required by law, we disclaim any obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events, or otherwise. See Forward-Looking Statements.
INTRODUCTION
The following is a discussion of changes in the consolidated results of
our operations for the years ended December 31, 2002, 2001, and 2000.
We provide medical cost containment and business process outsourcing
solutions for the medical insurance and managed care industries. We provide
national PPO network access, electronic claims repricing, and claims and data
management services to health care payers such as insurance carriers, HMOs,
self-insured employers, third party administrators, and other entities that pay
claims on behalf of health plans. We also provide services for health care
providers, including individual providers, PPOs, and other provider groups.
We earn most of our operating revenue in the form of fees generated from
the discounts we provide for the payers that access our NPPN network. We
generally enter into agreements with our healthcare payer customers under which
they pay to us a percentage of the cost savings generated from our NPPN network
discounts with PPOs and providers. We recognize this operating revenue when
claims processing and administrative services have been performed. Operating
revenue from customers with certain contingent contractual rights is not
recognized until the corresponding cash is collected. A portion of our operating
revenue is generated from customers that pay us a monthly fee based on eligible
employees enrolled in a benefit plan covered by our health benefits payer
customers. We recognize our monthly fee operating revenue at the time the
services are provided. Operating revenue related to our business process
outsourcing services is earned on a per claim basis at the time the associated
services are provided.
Our expenses generally consist of fees incurred to provide access to
participating PPO networks for our customers, compensation and benefits costs
for our employees, occupancy and related costs, general and administrative
expenses associated with operating our business, taxes, and debt service
obligations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that certain items of income and expense bear to our operating
revenue for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
Operating revenue .......................................... 100% 100.0% 100.0%
Cost of operating revenue:
Marketing allowances .................................... 1.7% 1.0% 1.0%
Personnel expense ....................................... 25.6% 27.8% 30.8%
Network access fees ..................................... 15.5% 16.2% 14.4%
Other ................................................... 15.8% 18.9% 14.8%
Depreciation ............................................ 1.6% 1.3% 1.3%
------- ------- -------
Total cost of operating revenue .................... 60.2% 65.2% 62.3%
Offering costs ............................................. 3.7% - -
Bad debt expense ........................................... 10.1% 10.1% 2.4%
Amortization of goodwill ................................... - 4.2% 5.1%
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Loss on impairment of intangible assets .................... - - 20.4%
(Gain) loss on sale of investments, net .................... - 7.6% (1.2)%
Other income (expense) ..................................... - (0.1)% 3.2%
Interest expense ........................................... 16.9% 36.3% 38.9%
------- ------- -------
Income (loss) before (benefit) provision for income
taxes, discontinued operations, and cumulative
effect of change in accounting principle .................. 9.1% (23.3)% (31.1)%
(Benefit) provision for income taxes ....................... (3.6)% 81.4% (12.1)%
------- ------- -------
Income (loss) before minority interest, discontinued,
operations loss on sale of assets, extraordinary item,
and cumulative effect of change in accounting
principle ................................................. 12.7% (104.7)% (19.0)%
======= ======= =======
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Operating Revenue
Operating revenue for the year ended December 31, 2002 increased $0.2
million, or 1.0%, to $33.1 million from $32.9 million in 2001. During 2002, we
added over 45 new accounts and generated operating revenue from those customers
totaling $4.5 million. The increase in operating revenue from this new business
was partially offset by a decrease in operating revenue from customers that no
longer use our services or that have significantly reduced their utilization.
Claims volume increased 0.7 million, or 24.1%, to 3.6 million claims repriced in
2002 compared to 2.9 million claims repriced in 2001. The percentage increase in
operating revenue in 2002 was less than the percentage increase in claims volume
because we repriced a higher percentage of generally lower dollar value
physician claims in 2002 compared to 2001, resulting in a decrease in average
operating revenue per claim.
Personnel Expense
Personnel expense for the year ended December 31, 2002 decreased $0.6
million, or 6.6%, to $8.5 million from $9.1 million in 2001. Personnel expense
as a percentage of revenues decreased to 25.6% in 2002 compared to 27.8% in
2001. During 2002, we reduced our total employee count from 152 at January 1,
2002 to 144 at December 21, 2002. We continued to benefit from efficiencies in
our claim repricing operations through increased use of our technology, which
allowed us to increase the number of claims processed per person in 2002
compared to the same period in 2001.
Network Access Fees and Other Cost of Operating Revenue
Network access fees and other cost of operating revenue for the year
ended December 31, 2002 decreased $1.2 million, or 10.3%, to $10.4 million from
$11.6 million in 2001. Network access fees and other cost of operating revenue
as a percentage of operating revenue were 31.3% in 2002 compared to 35.1% in
2001. This decrease was attributable to decreases in network access fees of $0.2
million, due to contracts with certain of our newer networks that are on more
favorable terms and the migration of certain networks to a flat fee contract
basis. Additionally, our electronic imaging costs decreased by approximately
$0.2 million as more of our repricing is done through either EDI or internet
connections.
Depreciation and Amortization of Goodwill
Depreciation for the year ended December 31, 2002 increased an
immaterial amount compared to 2001. This small increase in depreciation was due
to purchases of fixed assets in the latter part of 2001 and during 2002.
Amortization of intangibles was $1.4 million for the year ended December 31,
2001. No amortization of goodwill was recorded in 2002 due to the adoption of
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and
Intangible Assets," under which goodwill is no longer amortized but instead is
subject to impairment tests at least annually. No impairment of goodwill was
determined to have occurred during 2002.
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Bad Debt Expense
Bad debt expense for the year ended December 31, 2002 increased an
immaterial amount from the same period in 2001. Bad debt expense is recorded
based on our estimate of uncollectible accounts receivable.
Offering Costs
During 2002, we pursued a secondary offering of our common stock (the
"Offering"), and in connection therewith incurred legal, accounting, and
printing fees. However, due to market conditions, the Offering was indefinitely
postponed and, accordingly, in the fourth quarter, we expensed approximately
$1.2 million associated with the Offering.
Interest Expense
Interest expense for the year ended December 31, 2002 decreased to $5.6
million from $12.1 million during the same period in 2001. During 2001, we
incurred higher interest rates on our credit facility that increased from prime
plus 1.0% (10.50%) on January 1, 2001, to prime plus 6.0% (10.75%) through April
12, 2002, the date we restructured our credit facility. As a result of this
restructuring, we reduced the debt balance owed to our Senior Lenders from $64.8
million at December 31, 2001 to $40.0 million at December 31, 2002. Our senior
lenders currently charge interest at a rate of prime plus 1.0% (5.25% at
December 31, 2002). The decrease resulting from the lower average principal
balance and lower interest rates was partially offset by the bank charges and
other financing costs incurred to restructure the credit facility, which are
included in interest expense for the year ended December 31, 2002.
Loss (gain) on Sale of Investments, Net
Loss on sale of investments for the year ended December 31, 2002
decreased $2.5 million, to $0.0 from $2.5 million for the same period in 2001.
The loss on sale of investments in 2001 was due to our sale of our investment in
HealthAxis, Inc.
Income Taxes
The benefit for income taxes for the year ended December 31, 2002 was
$1.2 million compared to a provision for income taxes of $26.8 million during
the same period in 2001. Effective January 1, 2002, a new federal law was
enacted allowing corporations to increase the period for which they may obtain
refunds on past income taxes paid due to net operating losses. The prior law
allowed companies to use their net operating losses for the preceding three
fiscal years while the new law allows companies to use their net operating
losses for the preceding five fiscal years.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Operating Revenue
Operating revenue for the year ended December 31, 2001 increased $6.0
million, or 22.3%, to $32.9 million from $26.9 million in 2000. During 2001, we
added more than 177 new accounts and generated revenue from those customers
totaling $6.2 million. Operating revenue from existing customers was flat in
2001 compared to 2000. Claims volume increased 0.8 million, or 38.1%, to 2.9
million claims repriced in 2001 compared to 2.1 million claims repriced in 2000.
The percentage increase in operating revenue in 2001 was less than the
percentage increase in claims volume because we repriced a higher percentage of
generally lower dollar value physician claims in 2001 compared to 2000,
resulting in a decrease in average operating revenue per claim.
Personnel Expense
Personnel expense for the year ended December 31, 2001 increased $0.8
million, or 9.6%, to $9.1 million from $8.3 million in 2000. Personnel expense
increased as salaries and wages increased to meet increased volume
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of claims received and commissions earned from the increase in operating
revenue. Personnel expense as a percentage of operating revenue decreased to
27.8% in 2001 compared to 30.8% in 2000, primarily because we were able to
increase efficiencies in our claims repricing operations through increased use
of our technology, which allowed us to increase the number of claims processed
per person in 2001.
Network Access Fees and Other Costs of Operating Revenue
Network access fees and other costs of operating revenue for the year
ended December 31, 2001 increased $3.7 million, or 46.8%, to $11.6 million from
$7.9 million in 2000. This increase was primarily attributable to increases in
network access fees, electronic imaging, postage, computer software and
maintenance cost, and printing cost supporting our increased operating revenue.
Network access fees and other costs of operating revenue as a percentage of
operating revenue were 35.1% in 2001 compared to 29.4% in 2000. Additionally, we
incurred increased legal and other costs associated with our divestitures and
credit facility restructuring activities during 2001 totaling $0.7 million.
During 2000, we received proceeds from a key-man life insurance policy totaling
$0.5 million, which reduced overall cost of operating revenue during such
period.
Depreciation and Amortization of Goodwill
Depreciation for the year ended December 31, 2001 increased $0.2
million, or 66.7%, to $0.5 million from $0.3 million in 2000. Amortization of
intangibles was $1.4 million for each of the years ended December 31, 2001 and
2000. The increase in depreciation was primarily attributable to the
amortization of internally developed software costs that were capitalized in
2001 and the depreciation of new property and equipment acquired in 2001.
Bad Debt Expense
Bad debt expense for the year ended December 31, 2001 increased $2.7
million, or 450.0%, to $3.3 million from $0.6 million in 2000 due to the related
increase in operating revenue, an overall increase in the estimated allowance
for doubtful accounts based on historical collection rates, and a $1.2 million
additional reserve against certain accounts resulting from customer
negotiations.
Loss on Sale of Investments, Net
Loss on sale of investments, net for the year ended December 31, 2001
was $2.5 million compared to gain on sale of investments of $0.3 million in
2000. During the second quarter of 2001, we sold all of our shares of
HealthAxis, Inc. stock and realized a net pretax loss on the sale of
approximately $2.5 million. During the second quarter of 2000, we sold all
109,732 of our shares of Caredata.com, Inc. stock and realized a net pretax gain
on the sale of $0.3 million.
Interest Expense
Interest expense for the year ended December 31, 2001 increased $1.6
million, or 15.2%, to $12.1 million from $10.5 million in 2000. This increase
resulted from increased interest rates on our credit facility from prime plus
1.0%, or 10.5%, at January 1, 2001 to prime plus 6.0%, or 10.75%, at December
31, 2001. In addition, we incurred significant bank charges that were included
in interest expense associated with amendments to our credit facility during
2001.
Other Income and Expense
Other income for the year ended December 31, 2001 was immaterial. Other
expense for the year ended December 31, 2000 was $0.9 million. During the second
quarter of 2000, we expensed legal, financial advisory, and other fees
associated with the termination of our merger agreement with UICI, a Texas-based
financial services firm. We entered into a contract to be acquired by them in
October 1999. The transaction was mutually terminated in April 2000.
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Income Taxes
Provision for income taxes for the year ended December 31, 2001 was
$26.8 million compared to a benefit for income taxes of $3.3 million in 2000.
During 2001, we were required to establish a $36.5 million valuation allowance
on our net deferred tax assets as a result of cumulative losses in recent years,
as required by SFAS No. 109, "Income Taxes."
Discontinued Operations
Loss from discontinued operations, net of taxes for the year ended
December 31, 2001 decreased $58.2 million, or 99.0%, to $0.6 million from $58.8
million in 2000. Loss on sale of discontinued operations, net of taxes for the
year ended December 31, 2001 decreased $29.2 million, or 74.3%, to $10.1 million
from $39.3 million in 2000. During 2000, these operations were adversely
affected by the write-off of $80.3 million of goodwill and contract rights
related to the business units sold determined by the selling price of the
unemployment compensation and workers' compensation, Ohio workers' compensation
managed care organization and self-funded business units sold in 2000, and the
definitive agreement signed in April 2001 to sell our third party administration
and managing general underwriter business units. The additional losses in 2001
were incurred based on actual results of operations and the terms of the final
sale, which occurred in June 2001.
Extraordinary Loss
During the second quarter of 2000, we recorded an extraordinary loss of
$1.0 million, net of taxes, related to our credit facility. This loss
represented $1.5 million of pretax non-interest fees and expenses connected with
the prior facility, which were previously subject to amortization over five
years. No such gains or losses were recognized during 2001.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is our ability to generate adequate amounts of cash to meet
our financial commitments. Our primary sources of cash are fees generated from
the healthcare provider discounts that we make available to our network access
customers. Our uses of cash consist of payments to PPOs to provide access to
their networks for our customers, payments for compensation and benefits for our
employees, occupancy and related costs, general and administrative expenses
associated with operating our business, debt service obligations, and taxes. We
had cash and cash equivalents totaling $1.2 million at December 31, 2002. Net
cash flow provided by (used in) operating activities was $1.4 million, $(9.5)
million, and $3.2 million during the years ended December 31, 2002, 2001, and
2000, respectively. During 2001, cash flow provided by operating activities was
affected by negative cash flows from our discontinued operations.
HealthPlan Holdings Transaction
On June 18, 2001, we completed the disposition of our third party
administration and managing general underwriter business units with the sale of
our subsidiary, HealthPlan Services, Inc. In connection with this non-cash
transaction, the buyer, HealthPlan Holdings, Inc., assumed approximately $40.0
million in working capital deficit of the acquired businesses and acquired
assets having a fair market value of approximately $30.0 million. At the closing
of this transaction, we issued 709,757 shares of our common stock to offset $5.0
million of the assumed deficit. We offset the remaining $5.0 million of this
deficit with a long-term convertible subordinated note, which automatically
converted into 813,273 shares of common stock on April 12, 2002 in connection
with the restructuring of our credit facilities. The note accrued interest prior
to its conversion, which we elected to pay through the issuance of 41,552 shares
of our common stock. Our agreement with HealthPlan Holdings states that if
HealthPlan Holdings does not receive gross proceeds of at least $5.0 million
upon the sale of the conversion shares, then we must issue and distribute to
them additional shares of our common stock, based on a ten-day trading average
price, to compensate HealthPlan Holdings for the difference, if any, between
$5.0 million and the amount of proceeds they realize from the sale of the
conversion shares. Our agreement with HealthPlan Holdings also requires that we
register the conversion shares upon demand. To date, HealthPlan Holdings has
made no demand for registration of these conversion shares.
We entered into a registration rights agreement in favor of HealthPlan
Holdings with respect to the 709,757 shares we issued to them at closing. This
Registration Rights Agreement required that we file a registration
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statement covering the issued shares as soon as practicable after the closing of
their purchase of such shares. The Agreement also contained provisions requiring
redemption of such shares or the issuance of certain additional penalty shares
(in the event that our lenders prohibited redemption), if such registration
statement did not become effective by certain specified time periods. Because
the registration statement we filed with the Securities and Exchange Commission
covering such shares was not declared effective within the required time
periods, we issued to HealthPlan Holdings the maximum number of penalty shares
specified by the registration rights agreement, which was 200,000 shares of our
common stock. As of this date, we still have not registered the 709,757
purchased shares.
Following the sale of HealthPlan Services, we reimbursed HealthPlan
Services approximately $4.3 million for pre-closing liabilities that HealthPlan
Services settled on our behalf and issued to HealthPlan Holdings 101,969 shares
of our common stock as penalty shares relating to certain post closing disputes
with respect to those pre-closing liabilities. The primary source of the funds
for the reimbursement to HealthPlan Services was the proceeds of July 2001
private placements of our common stock to certain investment accounts managed by
DePrince, Race & Zollo, an investment firm. John Race, who was our director at
the time, is one of the principals of DePrince, Race & Zollo. In connection
with the private placements, which were ratified by our stockholders at our
annual meeting in July 2002, we issued an aggregate of 553,500 shares of our
common stock in exchange for $3.8 million, which represented a 15.0% discount
from the ten-day trading average of our common stock prior to the dates of
issuance.
We are currently in discussions with HealthPlan Holdings to finalize any
purchase price adjustments associated with the HealthPlan Services transaction.
These adjustments relate primarily to the amount of accrued liabilities and
trade accounts receivable reserves, and the classification of investments at the
transaction date. HealthPlan Holdings believes it is due approximately $1.7
million from us related to the transaction, while we believe we have claims
against HealthPlan Holdings amounting to approximately $4.5 million (which would
be partially offset against other post-closing payments that we have agreed to
pay, subject to certain limitations as provided in the transaction documents).
In the event that we are unable to resolve these matters directly with
HealthPlan Holdings, we will seek to resolve them through binding arbitration as
provided for in the purchase agreement.
Restructured Credit Facility
On April 12, 2002, we closed a transaction to restructure and refinance
our bank debt, which was $69.0 million prior to the closing. Under the terms of
the restructured agreement, we entered into a $40.0 million term loan that
accrues interest at a variable rate, generally prime plus 1.0%, with interest
payments due monthly beginning on April 30, 2002. Quarterly principal payments
of $50,000 became due beginning September 30, 2002, and the term loan is payable
in full on May 31, 2004. The term loan is collateralized by all of our assets.
The restructured credit facility does not include a line of credit or the
ability to borrow any additional funds. In exchange for retirement of the
remaining amounts due to the lenders, we issued 29,000 shares of our newly
authorized Series C convertible preferred stock and an additional note in the
amount of $184,872. The Series C convertible preferred stock accrues dividends
at 10.0% per annum during the first twelve months from issuance and at 12.0% per
annum thereafter. Dividends are payable quarterly in additional shares of Series
C convertible preferred stock or, at our option, in cash. We have chosen to pay
dividends in the form of additional shares, and to date we have issued to the
Series C shareholders an aggregate of 2,092 additional shares of Series C
convertible preferred stock. In connection with the restructuring, we issued an
additional note to Wachovia Bank, National Association (referred to as
Wachovia), the administrative agent for our lending group, in the amount of
$64,000 for administrative agent fees. The restructured credit agreement
contains certain financial covenants, including minimum monthly EBITDA levels
(defined as earnings before interest, taxes, depreciation, and amortization and
adjusted for non-cash items deducted in calculating net income and severance, if
any, paid to certain of our officers), maximum quarterly and annual capital
expenditures, a minimum quarterly fixed charge ratio that is based primarily on
our operating cash flows, and maximum quarterly and annual extraordinary
expenses (excluding certain pending and threatened litigation, indemnification
agreements, and certain other matters as defined in the restructured agreement).
The required monthly minimum EBITDA levels for the third quarter of 2002
averaged approximately $808,000. The required monthly minimum EBITDA level was
$1.0 million from October 2002 through January 2003, and decreased to $700,000
in February 2003. For March 2003 through July 2003, the monthly minimum EBITDA
will be $800,000, and it will increase to $1.0 million per month thereafter.
From April 12, 2002 through November 30, 2002, we were in compliance with these
financial covenants for each reporting period required under the terms of the
restructured agreement. During December 2002, we were not in compliance with our
EBITDA covenant and we subsequently obtained a waiver from our senior lenders
for this non-compliance.
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The accounting treatment for the restructured credit facility complies
with the requirements of SFAS No.15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," which requires that a comparison be made between
the future cash outflows associated with the restructured facility (including
principal, interest and related costs), and the carrying value related to the
previous credit facility. The carrying value of the restructured credit facility
would be the same as the carrying value of the previous obligations, less the
fair value of the preferred stock issued. We obtained an appraisal to determine
the fair value of the stock and warrants issued, which indicated the fair value
was approximately $29.0 million. No gain or loss was recognized for accounting
purposes in connection with the debt restructuring. We recorded a charge during
the second quarter of 2002 of $0.4 million upon closing of our debt
restructuring for various investment advisory and legal fees incurred in
connection with the arrangement of the restructured credit facility.
In connection with our new credit facility and debt restructuring, we
were required to adopt the accounting principles prescribed by Emerging Issues
Task Force ("EITF") 00-27. In accordance with the accounting requirements of
EITF 00-27, we have reflected approximately $46.7 million as an increase to the
carrying value of our Series C convertible preferred stock with a comparable
reduction to additional paid-in capital. The amount accreted to the Series C
convertible preferred stock is calculated based on (a) the difference between
the closing price of our common stock on April 12, 2002 and the conversion price
per share available to the holders of our Series C convertible preferred stock,
multiplied by (b) our estimate of the number of shares of common stock that will
be issued if the shares of our Series C convertible preferred stock are ever
converted. Such shares are not convertible until October 12, 2003. This amount
is accreted over the contractual life of the Series C convertible preferred
stock. This non-cash entry did not affect our net income but did impact the net
income deemed available to our common stockholders for reporting purposes during
2002. Net income per share applicable to common stockholders during 2002 was
further reduced by preferred stock dividends totaling $2.1 million, paid in
2,092 shares of our Series C convertible preferred stock to the holders of our
Series C convertible preferred stock.
In connection with the closing of the transactions contemplated by the
restructured credit agreement, we entered into a letter agreement, as amended,
with the lenders and Wachovia, as administrative agent for the lenders and for
the holders of the Series C convertible preferred stock. Pursuant to the letter
agreement, the lenders, in their capacity as such and as holders of the Series C
convertible preferred stock, granted to us an option to consider the entire
indebtedness under the credit facility paid in full and to redeem the Series C
convertible preferred stock in exchange for payment of $40.0 million plus
accrued and unpaid interest under the credit facility and other specified terms.
The option expired on September 9, 2002.
Offering
On July 19, 2002, we filed an Amended Registration Statement with the
Securities and Exchange Commission wherein we offered for sale an aggregate of
5,174,979 shares of our common stock (sometimes referred to as the Offering).
During the fourth quarter of 2002, we decided to postpone the Offering
indefinitely. Accordingly, during the fourth quarter of 2002 we expensed $1.2
million of costs associated with the Offering. We subsequently filed an
application to withdraw the Registration Statement.
PVC Funding Partners Transaction
On March 13, 2003, PVC Funding Partners LLC, an affiliate of
Commonwealth Associates, LP and Comvest Venture Partners, filed a form 13D with
the Securities and Exchange Commission in which they indicated that on March 7,
2003, they acquired from our senior lenders 29,651, or 96.0%, of our outstanding
Series C convertible preferred stock. This Series C convertible preferred stock
was purchased from the lenders on a prorata basis at a price of $33.50 per
share. The original lenders continue to hold the remaining 4.0% of the Series C
convertible preferred stock. In connection with the transaction, PVC Funding
Partners also acquired $20.5 million in principal amount of our outstanding bank
debt from the original lenders.
There is an intercreditor agreement between PVC Funding Partners and
Wachovia Bank, National Association, dated March 7, 2003. The intercreditor
agreement provides that, until the occurrence of a Board Shift Event, PVC
Funding Partners has all of the rights of the original lenders under the
restructured credit agreements, except that (1) PVC Funding Partners' rights to
mandatory prepayments and other principal payments prior to the maturity date
are subordinated to the original lenders' rights to those payments, and (2) PVC
Funding Partners' notes
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will be voted consistently with and on the same percentage basis as the original
lenders with respect to all matters required to be submitted to a vote or
consent of the lenders, except for matters related to certain fundamental
changes in the loan terms. Upon the first occurrence of a Board Shift Event,
which would allow PVC Funding Partners to appoint an additional board member and
thus obtain control of our board of directors, PVC Funding Partners has the
option of not exercising their right to obtain such control. If, within fifteen
days of a first Board Shift Event, PVC Funding Partners notifies the original
lenders that they will not exercise their right to control our board, then the
original lenders will have the option to repurchase 14,304 of the Series C
convertible preferred stock, at a price of $33.50 per share. If PVC Funding
Partners exercises their right to obtain control of our board, or fails to
timely notify the original lenders that they will not exercise this right, then
the debt held by PVC Funding Partners will automatically be subordinated to the
debt held by the original lenders.
Centra Convertible Notes
As of December 31, 2001, we were in payment default with respect to
interest payments due under notes aggregating $4.0 million payable to CENTRA
Benefits, Inc. (sometimes referred to as Centra). We originally issued these
notes in connection with our 1998 acquisition of a third party administration
business from Centra. On April 12, 2002, we restructured these notes in
connection with the closing of our restructured credit facility, which required
that the maturity date of the notes be extended beyond the maturity date of the
restructured facility. Under the restructured terms, we retired the original
notes and issued new notes totaling $4.3 million, with a maturity date of
December 1, 2004. The restructure notes accrued interest monthly at a compound
rate of 12.0% per annum. Interest was payable quarterly in shares of our common
stock, as calculated based on the average trading price over the last ten
trading days of the quarter, unless Centra elected to receive any quarterly
payment in cash on a deferred basis. Centra elected a deferred cash payment,
which required us to make the cash interest payment either (1) within 90 days
after the end of the fiscal year, to the extent that payment can be paid from
available excess cash flow, as permitted by the terms of our restructured credit
facility, or (2) on December 1, 2004, the date on which the convertible notes
matured. At any time, Centra had the right to convert some or all of the notes
to shares of our common stock, based on the lesser of (1) $6.40, (2) the average
trading price of our common stock for the ten-day period immediately preceding
notice of conversion, or (3) if any shares of the Series C convertible preferred
stock have been converted into common stock, then the price at which such shares
were converted. These notes were subordinated to the term loan with our senior
lenders. In connection with the restructuring of the Centra notes, we issued to
Centra warrants for the purchase of an aggregate of 200,000 shares of our common
stock at an exercise price of $6.398 per share, subject to adjustment in
accordance with the terms of the warrants.
On March 31, 2003, we renegotiated the terms of the Centra notes.
Pursuant to the renegotiated terms, we have extended the maturity date of the
notes from December 1, 2004 to April 1, 2006, reduced the interest rate from
12.0% per annum to 6.0% per annum, and fixed the conversion price at $1.00,
subject to adjustment in accordance with anti-dilution protections. The previous
conversion price was based on the trading price of our common stock. Immediately
upon completion of this restructuring, PVC Funding Partners acquired slightly
more than 50% of the face value of the notes from Centra. The remaining interest
is held by Centra.
Other Obligations
In connection with a 1993 acquisition by our former subsidiary,
HealthPlan Services, Inc., we assumed a note payable to Cal Group, Inc. As of
December 31, 2002, the outstanding balance of the note was approximately
$751,000.
As of March 27, 2002, we retired a subordinated note payable to New
England Financial, including accrued interest, totaling approximately $2.5
million, by issuing 274,369 shares of our common stock, based on the closing
price of our common stock one day immediately prior to the retirement date of
the note, and by issuing a credit for $950,000 payable with in-kind claims
repricing services. New England Financial subsequently assigned the 274,369
shares to New England Financial Distributors. We have agreed to register these
shares.
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On April 12, 2002, in connection with the restructuring of our credit
facility, the maturity date of notes totaling $500,000 was extended to December
1, 2004. The notes are due to William Bennett, a member of our board of
directors, and John Race, who was a member of the board at the time that the
notes were issued and at the time of the April restructuring. These notes bear
interest at prime plus 4.0% per annum, but payment of interest is subordinated
and deferred until all senior obligations are paid.
In 1994, we obtained a letter of credit in connection with a third party
administration contract entered into by HealthPlan Services, our former
subsidiary. The letter of credit remained outstanding due to multi-party
litigation related to the business administered. In July 2002, we entered into a
settlement agreement with respect to the litigation. The letter of credit, which
was then in the amount of $4.6 million, was subsequently returned to our senior
lenders and canceled. In January 2003, in compliance with the indemnification
obligations arising out of our sale of the HealthPlan Services business, we paid
$250,000 in connection with the final settlement of the multi-party litigation.
Capital Expenditures
We spent $0.3 million and $0.5 million on capital expenditures during
the twelve months ended December 31, 2002 and 2001, respectively.
Liquidity
We believe that all consolidated operating and financing obligations
for the next twelve months will be met from internally generated cash flow from
operations, and available cash. Although there can be no assurances, management
believes based on available information, it will be able to maintain compliance
with the terms of its restructured credit facility, including the financial
covenants, for the foreseeable future. Our ability to fund our operations, make
scheduled payments of interest and principal on our indebtedness, and maintain
compliance with the terms of our restructured credit facility, including our
financial covenants, depends on our future performance, which is subject to
economic, financial, competitive, and other factors beyond our control. If we
are unable to generate sufficient cash flows from operations to meet our
financial obligations and achieve the restrictive debt covenants as required
under the restructured credit facility, there may be a material adverse effect
on our business, financial condition, and results of operations. Management is
continuing to explore alternatives to reduce our obligations, recapitalize our
company, and provide additional liquidity. There can be no assurances that we
will be successful in these endeavors.
INFLATION
We do not believe that inflation had a material effect on our results of
operations for the twelve months ended December 31, 2002 and 2001. There can be
no assurance, however, that our business will not be affected by inflation in
the future.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements requires that
we adopt and follow certain accounting policies. Certain amounts presented in
our condensed consolidated financial statements have been determined in
accordance with such policies, based upon estimates and assumptions. Although we
believe that our estimates and assumptions are reasonable, actual results may
differ.
We have included below a discussion of the accounting policies that we
believe are affected by the more significant judgments and estimates used in the
preparation of our condensed consolidated financial statements, how we apply
such policies, and how results differing from our estimates and assumptions
would affect the amounts presented in our condensed consolidated financial
statements. Other accounting policies also have a significant effect on our
condensed consolidated financial statements, and some of these policies also
require the use of estimates and assumptions.
REVENUE RECOGNITION
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We earn operating revenues in the form of fees generated from the
repricing of medical claims. We generally enter into agreements with our health
benefit payer clients that require them to pay a percentage of the cost savings
generated from our network discounts with participating providers. These
agreements are generally terminable upon 90 days notice. Operating revenues from
percentage of savings contracts are generally recognized when claims processing
and administrative services have been performed. Operating revenues from
customers with certain contingent contractual rights are generally not
recognized until the corresponding cash is collected. The remainder of our
operating revenues is generated from customers that pay us a monthly fee based
on eligible employees enrolled in a benefit plan covered by our health benefits
payers clients. Operating revenues under such agreements are recognized when the
network access services are provided.
ACCOUNTS RECEIVABLE
We generate our operating revenue and related accounts receivable from
services provided to healthcare payers, such as self-insured employers, medical
insurance carriers, third party administrators, HMOs, and other entities that
pay claims on behalf of health plans. We also generate operating revenue from
services that we provide to participating health care services providers, such
as individual providers and provider networks.
We evaluate the collectibility of our accounts receivable based on a
combination of factors. In circumstances where we are aware of a specific
customer's inability to meet its financial obligations to us, we record a
specific reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount we reasonably believe will be collected. For all other
customers, we recognize reserves for bad debts based on past write-off history,
average percentage of receivables written off historically, and the length of
time the receivables are past due. To the extent historical credit experience is
not indicative of future performance or other assumptions used by management do
not prevail, loss experience could differ significantly, resulting in either
higher or lower future provision for losses.
IMPAIRMENT OF INTANGIBLE AND LONG-LIVED ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS"), SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against these new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill. SFAS No. 142 requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Und