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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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 1-13772
HEALTHPLAN SERVICES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-378901
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3501 FRONTAGE ROAD, TAMPA, FLORIDA 33607
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (813) 289-1000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF NAME OF EXCHANGE
EACH CLASS ON WHICH REGISTERED
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Common Stock $.01 par value......................NYSE
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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 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 during which the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the last reported price at which the
stock was sold on March 10, 1997 was $114,264,785.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 10, 1997 was 14,991,126.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this Form 10-K is incorporated by
reference to the definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders of HealthPlan Services Corporation, which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1996.
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PART I
This document contains certain forward-looking statements regarding future
financial condition and results of operations. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions are intended to
identify forward-looking statements. Such statements involve risks,
uncertainties, and assumptions, including industry and economic conditions,
customer actions, and other factors discussed herein and in the Company's other
filings with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
ITEM 1. BUSINESS
GENERAL
HealthPlan Services Corporation (together with its direct and indirect
wholly owned subsidiaries, the "Company"), including its newly acquired
operating units, Consolidated Group, Inc. ("Consolidated Group") and Harrington
Services Corporation ("Harrington"), is a provider of marketing, administration,
and risk management services and solutions for health and other benefit
programs. The Company provides these services for over 125,000 small businesses,
plan holders, and large, self-funded organizations, covering approximately 2.6
million members in the United States. The Company's clients include managed care
organizations, insurance companies, integrated health care delivery systems,
self-funded benefit plans, and health care purchasing alliances. The Company and
its operating units function solely as service providers generating fee-based
income and do not assume any underwriting risk.
STRATEGY
The Company's strategy is to grow revenue and increase earnings through new
product development, broader distribution of existing managed care products, and
the addition of new payors, such as health maintenance organizations ("HMOs"),
integrated health care delivery systems, and other managed care providers. The
Company desires to build economies of scale by adding administrative services
contracts with larger groups and by opportunistic expansion of its small group
business. The Company also intends to further support the development of
information-based products for its payors and other customers.
RECENT TRANSACTIONS AND COMPANY REORGANIZATION
Health Risk Management, Inc.
On September 12, 1996, the Company entered into a Plan and Agreement of
Merger (the "Merger Agreement") with HealthPlan Services Alpha Corporation, a
Delaware corporation and wholly owned subsidiary of the Company, and Health Risk
Management, Inc., a Minnesota corporation ("HRM"), which provided for the
acquisition of HRM by the Company in a merger transaction (the "HRM Merger"). In
March 1997, the Company and HRM mutually agreed to terminate the Merger
Agreement due to unexpected delays and the parties' unwillingness to consummate
a transaction that might be of less value and dilutive to their respective
shareholders in the near term. In connection with the termination, the Company
purchased 200,000 shares of HRM common stock, representing approximately 4.5% of
HRM shares outstanding, at a price of $12.50 per share. These shares are not
registered under the federal or state securities laws and are subject to
restrictions on transfer. The Company and HRM also have committed to continue
joint marketing of their respective products and services under the terms of a
marketing agreement established in September 1996. HRM provides comprehensive,
integrated health care management, information, and health benefit
administration services to employers, insurance companies, unions, HMOs,
preferred provider organizations ("PPOs"), physician hospital organizations
("PHOs"), hospitals, and governmental units in the United States and Canada.
Consolidated Group, Inc. and Harrington Services Corporation Acquisitions;
Company Reorganization
On July 1, 1996, the Company acquired all of the issued and outstanding
stock of Consolidated Group and three affiliated entities for approximately
$61.9 million in cash. Consolidated Group, headquartered in Framingham,
Massachusetts, specializes in providing medical benefits administration and
other related services for health care plans. As of December 31, 1996,
Consolidated Group provided these services for over 23,000 small businesses
covering approximately 250,000 members. Consolidated Group was founded in 1971
and was a principal competitor of the Company in the small employer market prior
to the acquisition. Upon consummation of this transaction, James F. Carlin, Jr.
and Holyoke L. Whitney, the founders of Consolidated Group, were elected to the
Company's Board of Directors. Between July 1, 1996 and December 31, 1996,
Consolidated Group generated revenues of $32.1 million.
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On July 1, 1996, the Company acquired all of the issued and outstanding
stock of Harrington for $32.5 million cash and 1,400,110 shares of the Company's
Common Stock valued at $30.1 million. Harrington, headquartered in Columbus,
Ohio, provides administrative services to large, self-funded benefit plans
covering approximately 960,000 members as of December 31, 1996. Its revenues
between July 1, 1996 and December 31, 1996 were $42 million.
In the third quarter of 1996, after the consummation of the Consolidated
Group and Harrington acquisitions, the Company implemented a reorganization of
its management structure. In connection with this reorganization, the Company
appointed a chief operating officer for each of its four business units: Small
Group Business, Large Group Business, Health Care Alliances, and The New
England. Timothy T. Clifford, the President and Chief Executive Officer of
Consolidated Group, became Chief Operating Officer - Small Group Business, and
Robert R. Parker, the Chairman and Chief Executive Officer of Harrington, became
Chief Operating Officer - Large Group Business. Richard M. Bresee became Chief
Operating Officer - Health Care Alliances, and Gary L. Raeckers became Chief
Operating Officer - The New England.
Medirisk, Inc. Transaction
On January 8, 1996, the Company entered into an agreement with Medirisk,
Inc. ("Medirisk"), a provider of proprietary information products that track the
price and utilization of medical procedures, to purchase $2.0 million of
Medirisk preferred stock. The Company also agreed to purchase up to $10.0
million over four years in the form of senior subordinated notes, for which the
Company would receive detachable warrants to purchase Medirisk common stock at
$0.015 per share. As of December 31, 1996, the Company (i) had purchased $2.0
million of preferred stock of Medirisk, (ii) had loaned Medirisk $6.9 million,
and (iii) had received detachable warrants to purchase 298,150 shares of
Medirisk common stock. Medirisk has used these funds to finance its expansion
through the development of additional products and the acquisition of two health
care information businesses. On January 29, 1997, Medirisk completed an initial
public offering of 2.3 million shares of its common stock at a purchase price of
$11.00 per share, and Medirisk subsequently fully satisfied its debt obligation
to the Company. In connection with the offering, the Company's Medirisk
preferred stock was converted into Medirisk common stock. The Company has not
yet exercised its warrants to purchase Medirisk common stock. As of January 29,
1997, the Company beneficially owned 480,442 shares (representing approximately
11%) of Medirisk common stock on a fully diluted basis, assuming exercise of all
outstanding warrants.
Third Party Claims Management, Inc. and Diversified Group Brokerage
Corporation Acquisitions
During 1995, the Company acquired all of the stock of a small, self-funded
benefits administrator known as Third Party Claims Management, Inc. ("TPCM") and
substantially all of the assets of another administrator known as Diversified
Group Brokerage Corporation ("DGB"). Both TPCM and DGB have experienced
declining revenue due to customer attrition. After performing a review for
impairment of goodwill related to TPCM and DGB, in the third quarter of 1996 the
Company recorded a charge against earnings of $7.1 million relating to the TPCM
transaction and $6.6 million relating to the DGB transaction. The Company has
worked to consolidate the operations of TPCM and DGB, resulting in the
termination of substantially all of the operations at the Memphis, Tennessee and
Irving, Texas offices of TPCM in 1996 and 1997.
THE COMPANY'S PRODUCTS AND SERVICES
The Company provides marketing, administration, and risk management
outsourcing services and solutions for managed care organizations, insurance
companies, integrated health care delivery systems, self-funded benefit plans,
and health care purchasing alliances.
Marketing
Through its Small Group Operating Unit, the Company provides managed
care companies, insurance companies, and integrated health care delivery systems
with marketing services targeting the individual and small business market. The
Company's marketing activity includes sales support for insurance agents through
a direct field sales force, telephone sales representatives, and master brokers.
The Company maintains relationships with over
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100,000 insurance agents, including independent brokers and captive insurance
agents who work exclusively for underwriters that have contracted with the
Company to provide individual and small group health plans through their agent
force. This agent relationship provides the Company with a significant
distribution conduit to the small business market in the United States. The
Company also helps design managed care products based on market research,
actuarial analysis of claims adjudicated, and interaction with payor
organizations. These products often include features that address the particular
needs of the small business employer, including specialized dental and
disability coverage. On behalf of its payors, the Company designs and implements
communications programs that are aimed at educating insurance agents about the
relative merits of particular product offerings. In addition, the Company
develops consumer awareness programs, including advertising and media planning,
for state-sponsored health care purchasing alliances.
Administration
The Company provides enrollment, premium billing and collection, and claims
administration services for all types of benefit plans. The Company's enrollment
services include underwriting, issuance of enrollment cards, and case renewal.
As a provider of billing and collection services, the Company sends monthly
bills on behalf of payors to insured parties, receives premium payments from the
insureds, and pays service fees to agents. The Company also implements premium
changes due to rate changes, employee hiring or termination, and other group
changes. The Company's claims administration services include eligibility
verification, copayment calculation, repricing, claims adjudication, and
preparation of explanation of benefits forms. The Company also processes claims
on behalf of self-funded companies and other payors by issuing checks to health
care providers on payor accounts.
Risk Management
The Company's risk management products include traditional utilization
review services as well as information and analysis services. The Company
provides utilization review through its Care Management units. These units are
staffed by qualified nurses and other qualified medical personnel to provide
precertification approval (a review mechanism for screening costs in advance of
medical care); medical case management (to contain the costs of prolonged and
catastrophic cases); and special claims review services. The Company has broad
reporting and analytic capabilities relating to all aspects of its services. The
Company's information services include preparation of reports regarding agent
production, enrollment, and frequency and type of claims. The Company intends to
continue to enhance its information-based products. In particular, the Company
plans to pursue opportunities with its strategic partner, Medirisk, to develop
information-based products from the Company's database of administered claims.
The Company also hopes to enhance its risk management business unit through its
relationship with HRM.
THE COMPANY'S CUSTOMERS
The Company provides services on behalf of a wide range of health care
payors, including managed care organizations, insurance companies, integrated
health care delivery systems, self-funded benefit plans, and health care
purchasing alliances.
Small Group Customers
Through its Small Group Operating Unit, the Company has over 25 years of
experience in helping insurance companies and other payors access the small
employer market. Since October 1994, the Company has expanded its customer base
from traditional indemnity carriers to include HMOs, PPOs, and other managed
care entities, and has worked with its traditional indemnity carriers to develop
managed care products. The Company provides marketing and administrative
services for several major managed care products through relationships with The
New England Mutual Life Insurance Company and New England Life Insurance Company
(together, "The New England"), United HealthCare Corporation ("United
HealthCare"), Kaiser Permanente Insurance Company, and U.S. Healthcare, Inc.
Effective January 1, 1997, the Company assumed marketing and administrative
services for TMG Life Insurance Company's ("TMG's") medical, dental, and group
life benefit business. Based on TMG's 1996 revenues, the Company expects that
TMG's employee benefits business will generate over $20 million in revenue in
1997. This amount is a forward-looking estimate, however, and is not necessarily
indicative of actual results, which could be different upon the occurrence of
any one of several factors, including greater-than-expected attrition.
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The Company continues to pursue relationships with several new managed care
clients. In July 1995, the Company began providing services in Florida for an
affiliate of Physicians Corporation of America ("PCA"). In the first quarter of
1996, the Company expanded its services to include PCA's Alabama affiliate. In
the fourth quarter of 1996, PCA transferred its Alabama operations to Health
Partners of Alabama, Inc. The Company and Health Partners of Alabama, Inc. are
currently negotiating a continuation of the Alabama relationship. In April 1996,
the Company and an affiliate of Foundation Health Corporation, a national
managed care company, entered into an agreement whereby the Company will be
Foundation's exclusive marketer and administrator in the State of Florida for
individual and small group products (for groups with 15 or fewer employees). In
addition, the Company will market and administer Foundation's individual program
and will offer a dual option PPO/HMO for small groups with between 15 and 50
employees. In July 1996, the Company entered into an agreement with Provident
Indemnity Life Insurance Company to market and administer its managed indemnity
product to individuals in several states.
The Company also has established relationships with integrated delivery
systems. In May 1996, the Company entered into an agreement to provide
administrative services for an affiliate of the Florida Independent Physicians
Association ("FIPA"), a network of independent physicians associations
representing physicians in the State of Florida.
In 1996, the Company explored new distribution channels for its indemnity
and managed care products. In the third quarter of 1996, the Company established
a computer "home page" on the Internet (www.healthplan.com). In addition to
providing information about the Company, the home page offers price quotations
for a Celtic Life Insurance Company product marketed through the Company.
To date, the Company has not generated any significant revenue from any of
its new managed care, integrated delivery system, or distribution relationships,
and it is unclear when, if ever, significant revenue will materialize from these
ventures.
In the first quarter of 1996, the Company and Employers Life Insurance
Company of Wausau ("ELOW") entered into an agreement to offer health care
products to small businesses in several states. In the fourth quarter of 1996,
the Company and ELOW agreed to discontinue this product offering due to
unexpected market conditions. In 1995, the Company entered into a memorandum of
understanding with Coastal Healthcare Group, Inc. ("Coastal") regarding possible
marketing and administrative services arrangements. The Company has not entered
into a definitive agreement with Coastal regarding such arrangements and is not
currently engaged in negotiations with Coastal. In 1995, the Company and Mutual
of Omaha agreed to expand their existing marketing relationship to include
Mutual of Omaha's HMOs. The pricing and other terms of this relationship have
not been negotiated, and the Company is not currently providing services for
Mutual of Omaha's HMO product.
Typically, the Company's insurance and managed care payors sign contracts
with the Company that are cancelable by either party without penalty upon
advance written notice of between 90 days and one year and are also cancelable
upon a significant change of ownership of the Company. The New England, Celtic
Life Insurance Company, and Ameritas Life Insurance Corporation businesses
accounted for approximately 31.0%, 23.0%, and 10.7%, respectively, of the
Company's consolidated revenue in 1995 and approximately 16.2%, 12.5%, and 6.5%,
respectively, of the Company's consolidated revenue for the year ended December
31, 1996. Although this decline is due primarily to the Company's expansion
through acquisition, which has diluted its concentration of revenues from these
sources, it should be noted that the Company continues to experience higher
lapses than originations in the business written with these payors, and it is
not certain when, if ever, this trend will be reversed.
The difficulty experienced by the Company in originating business for the
Company's indemnity payors during the 1990s is representative of the problems
facing the industry in general. Escalating medical costs have rendered
fee-for-service products less competitive, as evidenced by the explosive growth
during this decade of HMO products, which utilize a higher degree of demand and
disease management applications. The Company cannot predict the success with
which indemnity payors will be able to manage their medical loss ratios in the
future, which ability affects the competitive nature of the pricing they can
offer with respect to their products. Such pricing could have a direct effect
on the Company's ability to originate, maintain, and grow indemnity business in
the future.
In the third quarter of 1996, Metropolitan Life Insurance Company
completed a merger with The New England. The Company is unable to predict what
effect, if any, this merger will ultimately have on the Company's relationship
with The New England.
Historically, the majority of Consolidated Group's business was written
with The Travelers Insurance Company, which recently combined with the health
insurance business of Metropolitan Life Insurance Company to form MetraHealth.
Subsequently, MetraHealth was acquired by United HealthCare, one of the nation's
leading HMO companies. Between July 1, 1996 and December 31, 1996, this business
represented approximately 75% of Consolidated Group's revenue, or approximately
13% of the Company's consolidated revenue. The Company is dependent on United
HealthCare's commitment to the small group market and on the Company's ultimate
success in converting the MetraHealth business to United HealthCare's new
products. Should the Company have to move this business to another payor, it
could experience higher than normal lapse rates and lower than normal margins.
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The abandonment of the small group market by either The New England, Celtic
Life Insurance Company, or Ameritas Life Insurance Corporation, indemnity
payors' ability to manage medical costs, and the degree to which the Company is
successful in the MetraHealth conversion, could have a material
adverse effect on the Company. With respect to the business serviced by the
Company, a decision by any one of these payors to administer and distribute a
significant portion of its products directly to small businesses also could have
a material adverse effect on the Company.
Large Group Customers
The Company has been in the administrative services only ("ASO") business
since 1987, when the Company assumed administrative responsibility for the
employee health insurance plan of The Dun & Bradstreet Corporation ("D&B").
Harrington, the Company's newly acquired subsidiary, was founded in 1953 and is
an administrator of self-funded health care plans for large corporations,
government sector employers, Taft-Hartley plans, and associations. In addition
to providing claims administration services, the Large Group Operating Unit also
offers its clients workers' compensation and unemployment cost control programs.
As a result of the TPCM, DGB, and Harrington acquisitions, the Company added
multiple operating facilities throughout the country for its ASO business.
Through these acquisitions, as well as new business sales and case acquisition,
as of December 31, 1996 this business unit provided administrative services to
approximately 3,500 clients with over 850,000 employees, representing
approximately 1.6 million members.
Health Care Purchasing Alliances
During the 1990s, many small businesses were unable to obtain health care
coverage at affordable prices. In response, some states have formed
state-sponsored health care purchasing alliances. Several privately funded
groups also have formed health care purchasing alliances, in some cases with
state support. The Company is the administrator for four state-sponsored health
care purchasing alliances (in Florida, Kentucky, North Carolina, and Washington)
and three private alliances.
In 1996, the alliance unit was still not profitable. The Company's 1996
alliance revenues were $6.5 million, or approximately 3% of the Company's
consolidated revenues. Management continues to review operating procedures to
improve profitability and has entered into discussions with its Florida alliance
customers to renegotiate the existing contracts, which are scheduled to expire
in 1997. Unless the Company is successful in renegotiating its alliance
contracts, it may elect to exit the alliance business.
The Company is currently the administrator for each of the regional
Florida Community Health Purchasing Alliances ("CHPAs") established by the State
of Florida. In the fourth quarter of 1994, and in the third quarter of 1996, the
Company recorded significant charges to reflect the estimated loss the Company
would incur over the life of the Florida CHPA contracts. In February 1995, the
Company was selected as the statewide administrator for North Carolina's State
Health Plan Purchasing Alliance program, which was launched in the fourth
quarter of 1995. Insurance carriers in North Carolina have not yet shown
significant support for this alliance. In the third quarter of 1996, the Company
recorded a charge to reflect the estimated loss the Company would incur over the
life of the North Carolina contract. In April 1995, the Company was selected as
the statewide administrator for Kentucky's health care purchasing alliance
program, which commenced in July 1995. In the third quarter of 1995, the Company
opened an office in Lexington, Kentucky to administer the Kentucky program. The
Kentucky plan is fully operational and was profitable in 1996, with
approximately 270,000 covered members as of December 31, 1996. In February
1997, the Kentucky alliance announced that at the expiration of the current term
of the Company's contract on June 30, 1997, the alliance would break out various
services currently being performed under the contract and seek separate bids for
those services. The Company chose not to submit a formal bid to provide such
services. In December 1995, the Company was selected to develop and implement
statewide marketing and selected administrative services for the "Basic Health
Plan," the State of Washington's health care purchasing alliance program,
beginning in the second quarter of 1996. The Washington contract is still in the
developmental stage, and its ultimate success and acceptance by the residents of
the State of Washington cannot be predicted at this time.
The Company has incurred substantial expenses in connection with the
start-up of its Florida, Kentucky, North Carolina, and Washington alliance
administration contracts and will incur similar start-up expenses in connection
with
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other state health care purchasing alliance business obtained by the Company in
the future. The Company does not anticipate recovering all of its start-up
expenses incurred in connection with the alliance administration contracts
during their initial terms, and there can be no assurance that the health care
purchasing alliance contracts will be profitable for the Company. In addition,
each of the health care purchasing alliance contracts currently held by the
Company contains a broad cancellation provision that enables the alliance to
cancel the contract on relatively short notice without penalty. The Company has
developed marketing expertise and proprietary software to handle the enrollment,
billing, disbursement, and reporting services required under the Alliance
contracts, including client-server technology. The Company believes that its
marketing expertise and proprietary software may provide it with a competitive
advantage in pursuing alliance contracts.
Since 1985, Consolidated Group has worked with Associated Industries of
Massachusetts ("A.I.M.") to offer specially designed health care plans to A.I.M.
member companies. In September 1995, Small Business United of Texas ("SBUT"), a
non-profit business association, selected the Company to provide administrative
services for its affiliated health care purchasing alliance. The Company has not
entered into a definitive agreement with the SBUT alliance. In November 1995,
the Company began administering health care benefits for the South Broward
Hospital District self-funded benefits plans. In January 1996, the Company began
providing claims administration services for some of the member employers of
Healthcare Sarasota, Inc., a coalition of employers in Sarasota, Florida.
INFORMATION TECHNOLOGY
The Company's central data processing facilities are located in Tampa,
Florida; Framingham, Massachusetts; Columbus, Ohio; and El Monte, California.
The Company operates in a three-tiered architectural environment. A large IBM
mainframe and a DEC platform support the large volume of data and transactions
processed by the Company on an annual basis. Since 1990, the Company has
invested in client-server technology to support the front-end sales and
marketing function. The Company utilizes personal computer workstations in a
local-area and wide-area network to deliver information and images to the
desktop. The Company also utilizes a variety of other technologies to meet
specific business needs, including interactive voice response for sales and
services, point-of-service devices for claims processing, and optical character
recognition for entry of data from forms.
The Company completed four acquisitions during 1995 and 1996 and intends to
create a common technology platform for all of its business operations. In
addition, the Company expects to eliminate redundant facilities and personnel as
part of its ongoing integration of acquired businesses. These efforts could take
several years and the costs, which are expected to be significant, cannot be
determined at this time.
GOVERNMENT REGULATION
The Company is subject to regulation under the health care and insurance
laws and other statutes and regulations of all 50 states, the District of
Columbia, and Puerto Rico. Many states in which the Company provides claims
administration services require the Company or its employees to receive
regulatory approval or licensure to conduct such business. Provider networks are
also regulated in many states, and certain states require the licensure of
companies, such as the Company, which provide utilization review services. The
Company's operations are dependent upon its continued good standing under
applicable licensing laws and regulations. Such laws and regulations are subject
to amendment or interpretation by regulatory authorities in each jurisdiction.
Generally, such authorities have relatively broad discretion when granting,
renewing, or revoking licenses or granting approvals. These laws and regulations
are intended to protect insured parties rather than stockholders and differ in
content, interpretation, and enforcement practices from state to state.
Moreover, with respect to many issues affecting the Company, there is a lack of
guiding judicial or administrative precedent. Certain of these laws could be
construed by state regulators to prohibit or restrict practices that have been
significant factors in the Company's operating procedure for many years. The
Company could risk major erosion and even "rebate" exposure in these states if
state regulators were to deem the Company's practices to be impermissible.
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
governs the relationships between certain health benefit plans and the
fiduciaries of those plans. In general, ERISA is designed to protect the
ultimate beneficiaries of the plans from wrongdoing by the fiduciaries. ERISA
provides that a person is a fiduciary of a
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plan to the extent that such person has discretionary authority in the
administration of the plan or with respect to the plan's assets. Each employer
is a fiduciary of the plan it sponsors, but there can also be other fiduciaries
of a plan. ERISA imposes various express obligations on fiduciaries. These
obligations include barring a fiduciary from permitting a plan to engage in
certain prohibited transactions with parties in interest or from acting under an
impermissible conflict of interest with a plan. Generally, a party in interest
with respect to a plan includes a fiduciary of the plan and persons that provide
services to the plan. The application of ERISA to the operations of the Company
and its customers is an evolving area of law and is subject to ongoing
regulatory and judicial interpretations of ERISA. Although the Company strives
to minimize the applicability of ERISA to its business and to ensure that the
Company's practices are not inconsistent with ERISA, there can be no assurance
that courts or the United States Department of Labor will not in the future take
positions contrary to the current or future practices of the Company. Any such
contrary positions could require changes to the Company's business practices (as
well as industry practices generally) or result in liabilities of the type
referred to above. Similarly, there can be no assurance that future statutory
changes to ERISA will not significantly affect the Company and its industry.
The Company's Consolidated Group subsidiary is undergoing an audit by the
United States Department of Labor (the "DOL") in which the DOL has raised
various questions about the application of ERISA to the way that subsidiary does
business. This audit is ongoing, and there can be no assurance that the DOL will
not take positions that could require changes to the way this subsidiary
operates, or result in the imposition of administrative fines and penalties.
COMPANY HISTORY
The Company's initial principal operating subsidiary, HealthPlan Services,
Inc. ("HPSI"), was founded in 1970 by James K. Murray, Jr., the Company's
current President and Chief Executive Officer, Charles H. Guy, Jr., and Trevor
G. Smith (the "Founders"), each of whom currently serves as a director of the
Company. D&B purchased the business in 1978 and operated it as a division. Mr.
Murray continued to play an active role in the business until 1987, when he left
to assume roles of increasing responsibility within D&B, which included serving
as president of two of its largest operating divisions. In August 1994, the
Founders, Noel Group, Inc., a publicly-traded company based in New York
("Noel"), and three funds in which Trinity Ventures, Ltd., a privately-held
venture capital company, is the general partner (the "Initial Investors"),
formed the Company to purchase the HealthPlan Services business (the
"Predecessor Company") from D&B, which purchase was consummated on September 30,
1994. HealthPlan Services Corporation is a Delaware corporation.
STOCKHOLDERS
In December 1996, Noel, Automatic Data Processing, Inc. ("ADP"), and the
Company entered into an agreement (the "ADP Agreement") pursuant to which Noel
agreed to sell 1,320,000 shares of the Company's Common Stock to ADP at a
purchase price of $20 per share. This transaction was completed on February 7,
1997. Upon completion of the transaction, Noel and ADP owned approximately 29%
and 9%, respectively, of the Company's Common Stock. The ADP Agreement generally
provides that: (i) ADP may not agree to acquire additional shares of the
Company's Common Stock prior to December 31, 1997, unless such acquisition is
approved by the Company's Board of Directors, or unless the Company entertains
alternative offers; (ii) Noel may not dispose of its remaining shares of the
Company's Common Stock prior to September 30, 1997 other than through a direct
distribution to Noel's shareholders, subject to specified conditions; and (iii)
the Company may not take any action prior to December 31, 1997 that could
interfere with "pooling-of-interests" accounting. The Company also agreed: (i)
to give ADP the opportunity to maintain its percentage ownership interest in the
Company in the event that prior to December 31, 1996 the Company intends to sell
any interest in its Common Stock; (ii) to grant ADP certain piggyback
registration rights; and (iii) to file a shelf registration statement with
respect to ADP's shares within 15 days after the effective date of the ADP
Agreement. The Company expects to file the shelf registration statement shortly
after the filing of this Annual Report on Form 10-K. As required by the ADP
Agreement, Arthur F. Weinbach, President and Chief Executive Officer of ADP, was
elected to the Board of Directors of the Company in February 1997. In May 1996,
Noel's Board of Directors adopted a plan of liquidation and dissolution, which
was approved by Noel's shareholders on March 19, 1997. In connection with Noel's
liquidation, the Company expects to file a Form S-3 Registration Statement with
the Securities and Exchange Commission to register the shares of the Company's
Common Stock held by Noel.
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COMPETITION
The Company faces competition and potential competition from traditional
indemnity insurance carriers, Blue Cross/Blue Shield organizations, managed care
organizations, third party administrators, utilization review companies, risk
management companies, and health care informatics companies. The Company
competes principally on the basis of the price and quality of services. Many
large insurers have actively sought the claims administration business of
self-funded programs and have begun to offer utilization review and other
managed health care services similar to the services offered by the Company.
Many of the Company's competitors and potential competitors are considerably
larger and have significantly greater resources than the Company.
EMPLOYEES
With the acquisitions of the Consolidated Group and Harrington and the
assumption of the employee benefits business of TMG, the Company employed
approximately 3,400 employees as of March 20, 1997. Except for Harrington's
subsidiary, American Benefit Plan Administrators, Inc., which administers
Taft-Hartley plans, the Company's labor force is not unionized. The Company
believes its relationship with its employees is good.
TRADEMARKS
The Company utilizes various service marks, trademarks, and trade names in
connection with its products and services, most of which are the property of the
Company's payors. Although the Company considers its service marks, trademarks,
and trade names important in the operation of its business, the business of the
Company is not dependent on any individual service mark, trademark, or trade
name.
ITEM 2. PROPERTIES
The Company conducts its operations from its headquarters in Tampa,
Florida; its principal operating units, Small Group and Large Group, are
headquartered in Framingham, Massachusetts and Columbus, Ohio, respectively. The
Company's central data processing facilities are located in its Tampa, Florida,
Framingham, Massachusetts, and Columbus, Ohio headquarters, and in El Monte,
California. The Company leases these facilities, as well as substantially all of
its other locations. The Company believes that its facilities are adequate for
its present and anticipated business requirements. In connection with the
integration of its newly acquired businesses, the Company has begun
consolidating redundant facilities, including data centers, and expects to
continue this consolidation in 1997.
ITEM 3. LEGAL PROCEEDINGS
In 1995, Self Funded Strategies, L.L.C., a former provider of
marketing services for the Company, filed a complaint against the Company
claiming wrongful termination of an exclusive marketing agreement and breach of
contract. The parties to the dispute agreed to binding arbitration, and the
arbitration proceedings occurred during the week of October 29, 1996. The
arbitration panel's decision, rendered in December 1996, is not expected to
materially alter the amount or timing of future payments that the Company is
contractually obligated to make to the plaintiff under the marketing agreement,
and thus is not expected to materially affect the cash flows of the Company's
business.
Pursuant to the Harrington acquisition agreement (the "Harrington
Agreement"), the Company agreed to use its best efforts to file a registration
statement sufficient to permit the public offering and sale of the shares of the
Company's Common Stock issued to the Harrington stockholders in the acquisition,
with such registration statement to become effective on or before October 31,
1996. On October 30, 1996, the Company received a letter from a representative
of Harrington's shareholders stating that the Company was in violation of the
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10
Harrington Agreement and reserving all rights under such Agreement. As of the
date hereof, it is not possible for the Company to evaluate what, if any,
damages might result from such notice. In November 1996, the Company filed a
Form S-3 registration statement with the Securities and Exchange Commission
registering the restricted shares of the Company's Common Stock held by the
former Harrington and Consolidated Group shareholders. This registration
statement became effective on February 14, 1997.
The Company's Consolidated Group subsidiary is undergoing a DOL audit in
which the DOL has raised various questions about the application of ERISA to the
way that subsidiary does business. This audit is ongoing, and there can be no
assurance that the DOL will not take positions that could require changes to the
way this subsidiary operates, or result in the imposition of administrative
fines and penalties.
The Company is involved in various claims arising in the normal course of
business. In the opinion of the Company's management, although the outcomes of
these claims are uncertain, in the aggregate they are not likely to have a
material adverse effect on the Company's business, financial condition, or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol HPS. The following table sets forth the high and low sales prices
since the date of its initial public offering, as reported by the New York Stock
Exchange for the periods indicated.
1996 HIGH LOW
---- ---- ---
Fourth quarter .................................. $ 24.50 $16.375
Third quarter ................................... $26.875 $ 18.00
Second quarter .................................. $ 29.25 $ 20.25
First quarter ................................... $28.375 $22.625
1995 HIGH LOW
---- ---- ---
Fourth quarter ................................... $ 27.00 $17.375
Third quarter .................................... $ 22.00 $15.125
From May 19, 1995 until end of Second Quarter .... $ 18.00 $ 14.25
The Company has not paid any cash dividends on its capital stock and does
not anticipate paying cash dividends in the foreseeable future. It is the
present intention of the Company's Board of Directors to retain all earnings in
the Company in order to support the future growth of the Company's business.
Pursuant to the Company's May 17, 1996 credit agreement with its lenders, the
Company may not declare or pay any dividends upon any of its capital stock
without the consent of the agent for its lenders. There were approximately 382
holders of record of the Company's Common Stock as of March 10, 1997. The
Company believes that there is a significantly greater number of beneficial
owners that hold the Company's Common Stock in street name.
As of July 1, 1996, the Company paid $32.5 million in cash and issued
1,400,110 shares of its Common Stock, par value $.01 per share, to Harrington
stockholders in exchange for all of the issued and outstanding stock of
Harrington. The value assigned to the shares issued in the Harrington
transaction was $30.1 million, or $21.50 per share. As of July 1, 1996, in
connection with the Consolidated Group transaction, certain former stockholders
of Consolidated Group purchased an aggregate of 160,957 shares of the Company's
Common Stock, par value $.01 per share, for a purchase price of $23 per share,
or an aggregate of $3.7 million. The shares issued in connection with the
Harrington and
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Consolidated Group transactions were exempt from registration
under Section 4 and Regulation D of the Securities Act of 1933, based on the
value of the shares issued and the nature of the distributions. The Company
did not register such shares at the time of issuance, and in connection with
such issuance filed a Form D with the Securities and Exchange Commission
stating that the shares were exempt from registration under Rule 506 of
Regulation D. Pursuant to registration rights agreements entered into in
connection with the Harrington and Consolidated Group transactions, the Company
filed a Form S-3 Registration Statement with respect to these shares, which
statement became effective on February 14, 1997.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data set forth below have been derived
from the audited consolidated financial statements of the Company at December
31, 1996 and 1995 and for the years ended December 31, 1996 and 1995 and the
three months ended December 31, 1994 and the audited financial statements of the
Predecessor Company at September 30, 1994 and for the nine months ended
September 30, 1994, which appear elsewhere in this Annual Report on Form 10-K
("Form 10-K"), and have been derived from the audited financial statements of
the Company at December 31, 1994 and the Predecessor Company at December 31,
1993 and the year ended December 31, 1993 and the unaudited financial statements
of the Predecessor Company at December 31, 1992 and the year then ended not
included herein. The report of Price Waterhouse LLP, independent accountants of
the Company, on the consolidated financial statements of the Company at December
31, 1996 and 1995 and for the years ended December 31, 1996 and 1995 and the
three months ended December 31, 1994 appears elsewhere in this Form 10-K. The
report of Coopers & Lybrand L.L.P., independent accountants of the Predecessor
Company, on the financial statements of the Predecessor Company at September 30,
1994 and the nine months ended September 30, 1994 appears elsewhere in this Form
10-K. Selected historical financial data of the Company and the Predecessor
Company should be read in conjunction with the related financial statements and
notes thereto appearing elsewhere in this Form 10-K. The pro forma selected
financial data are not necessarily indicative of actual results of financial
position that would have been achieved had the acquisition of HPSI ("the
Acquisition") been completed as of January 1, 1994, nor are the statements
necessarily indicative of the Company's future results of operations or
financial position.
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THE COMPANY PREDECESSOR COMPANY (1)
----------- -----------------------
Pro Forma Three Nine
Year Year Year Months Months Year Year
Ended Ended Ended Ended Ended Ended Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Sept. 30, Dec. 31, Dec. 31,
1996 1995 1994(4) 1994 1994 1993 1992
---- ---- ------- ---- ---- ---- ----
STATEMENT OF INCOME
DATA:
Revenues ........... $ 193,839 $100,250 $ 107,178 $ 25,233 $ 81,945 $ 113,863 $ 124,165
Expenses:
Agent commissions... 48,507 36,100 43,260 10,047 33,213 48,380 55,680
Other operating
expenses .......... 117,236 44,133 45,734 10,303 42,138 49,270 45,172
Contract commitments 2,685 - 3,623 3,623 - - -
Restructure charge . 1,425 - - - - - -
Integration expense 7,804 - - - - - -
Loss on impairment
of goodwill ........ 13,710 - - - - - -
Depreciation and
amortization ....... 10,548 4,386 3,517 870 3,347 4,053 3,734
(Loss) income from
operations ......... (8,076) 15,631 11,044 390 3,247 12,160 19,579
Net (loss) income .. $ (6,716) $ 9,535 $ 6,467 $ 231 $ 1,747 $ 6,960 $ 11,559
--------- -------- --------- -------- -------- --------- ---------
Dividends on
redeemable preferred
stock .............. - 285 - 285
Net (loss) income
attributable to
Common Stock ....... $ (6,716) $ 9,250 $ 6,467 $ (54)
--------- -------- --------- --------
Pro forma net income
per share (2) ...... $ 0.71 $ 0.69 $ 0.03
Pro forma weighted
average shares
outstanding (2) .... 13,414 9,339 9,339
Historical weighted
average net (loss)
income per share ... $ (0.47) $ 0.82
Historical weighted
average shares
outstanding ........ 14,266 11,336
Pro Forma
Dec.31, Dec.31, Dec.31, Dec.31, Sept.30, Dec.31, Dec.31,
1996 1995 1994(4) 1994 1994 1993 1992
---- ---- ------- ---- ---- ---- ----
Working capital
(deficit) (3) ...... $ (26,929) $ 23,013 $ (16,050) $(16,050) $(17,742) $ (21,993) $ (22,933)
Total assets ....... 244,701 112,667 53,189 53,189 27,884 31,851 19,853
Total debt ......... 62,298 1,282 1,300 1,300 1,254 1,450 -
Redeemable
preferred stock
(Series A & B),
including accrued
dividends .......... - - - 19,285 - - -
Common
stockholders' equity
(divisional equity
(deficit)) ......... 108,783 80,966 20,292 1,007 2,170 634 (1,897)
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(Notes from previous page)
(1) Represents the historical results of operations of the Predecessor
Company. The Company's historical financial statements reflect certain
expenses, including expenses attributable to employee benefit programs,
retirement and health plans, treasury, and insurance, which were
incurred by the Predecessor Company and allocated to the Company on a
pro rata basis.
(2) Gives effect to the recapitalization of all 19,000,000 shares of
Preferred Stock (plus the right to receive dividends accrued thereon),
which were exchanged for 1,397,857 shares of Common Stock of the
Company contemporaneously with the consummation of the initial public
offering on May 19, 1995 ("the Recapitalization"), for all periods
presented.
(3) The working capital deficit of the Predecessor Company reflects its
participation in D&B's cash management system, which centrally pooled
all D&B entities' cash balances and resulted in negative working
capital for the Predecessor Company. The working capital deficit of the
Company reflects its assumption in the Acquisition of a $17.0 million
working capital deficit of the Predecessor Company.
(4) Gives effect to the Acquisition and the Recapitalization as if such
transactions had occurred on January 1, 1994.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma statement of operations presents the pro
forma statement of income of the Company for the year ended December 31, 1994
giving effect to: (i) the Acquisition; (ii) the Recapitalization; and (iii) the
Company's initial public offering of common stock on May 19, 1995. The unaudited
pro forma statements of income for the year ended December 31, 1994 assume that
the foregoing transactions had been completed on January 1, 1994. The unaudited
pro forma financial statements give effect only to the adjustments set forth in
the accompanying notes thereto. These unaudited pro forma financial statements
are provided only for comparison and are not necessarily indicative of actual
results of operations.
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HEALTHPLAN SERVICES CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Predecessor Pro
Company Company Forma
Nine Months Three Months Year
Ended Ended Ended
Sept. 30, Dec. 31, Pro Forma Dec. 31,
1994 1994 Adjustments 1994
---- ---- ----------- ----
Revenues $81,945 $ 25,233 $ - $107,178
------- -------- ------- --------
Expenses:
Agent commissions 33,213 10,047 - 43,260
Personnel expenses 24,476 5,972 (3,086)(b) 27,362
General and administrative 12,991 4,331 - 17,322
Contract commitments - 3,623 - 3,623
Staff reductions and office
closings 4,671 - (3,621)(c) 1,050
Depreciation and amortization 3,347 870 (700)(d) 3,517
------- -------- ------- --------
Total expenses 78,698 24,843 (7,407) 96,134
------- -------- ------- --------
Income before income taxes 3,247 390 7,407 11,044
Provision for income taxes 1,500 159 2,918(e) 4,577
------- -------- ------- --------
Net income 1,747 231 4,489 6,467
Dividends on redeemable
preferred stock - 285 (285)(a) -
------- -------- ------- --------
Net income (loss) attributable
to common stock $ 1,747 $ (54) $ 4,774 $ 6,467
======= ======== ======= ========
Pro forma net income
attributable to common
stock per share $ 0.69
========
Pro forma weighted average
shares outstanding--fully diluted $ 9,339
========
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HEALTHPLAN SERVICES CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA FINANCIAL STATEMENT ADJUSTMENTS
The unaudited pro forma financial information reflects the following
unaudited pro forma adjustments (in thousands):
(a) To give effect to the Recapitalization.
(b) To reflect the elimination of actual salaries and benefits for
employees terminated at September 30, 1994 of $1,073 as a
condition of the Acquisition (net of new executives' salaries
and benefits of $602) and the elimination of D&B employee
benefit and incentive compensation programs of $5,556 (net of
newly implemented Company employee benefits programs of
$2,941).
(c) To reflect the elimination of Predecessor Company one-time
severance expenses related to staff reductions, as reflected
on the audited statement of income for the nine months ended
September 30, 1994, of $3,621.
(d) To adjust depreciation and amortization expense to reflect the
allocation of the purchase price for the Acquisition and asset
revaluation of $12 and ($560), respectively, and the
elimination of Predecessor Company amortization on
acquisitions of carrier blocks of $1,248, which had been
calculated on an accelerated basis over periods of up to seven
years.
(e) To reflect the Pro Forma Statement of Income federal and state
tax provision after giving effect to pro forma adjustments
(b), (c), and (d) described above.
2. UNAUDITED PRO FORMA NET INCOME PER COMMON SHARE AND WEIGHTED AVERAGE SHARES
OUTSTANDING
Unaudited pro forma net income per common share amounts and weighted
average shares outstanding in the accompanying Pro Forma Statements of Income
for the year ended December 31, 1994 are based on the weighted average number of
shares during the year assuming that the following events occurred on January 1,
1994: (i) the three-for-two stock split with respect to the Common Stock of the
Company, which was effected in the form of a stock dividend declared by the
Board of Directors on March 8, 1995; and (ii) the Recapitalization.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following is a discussion of material changes in the consolidated
results of operations of the Company for the years ended December 31, 1996 and
1995 and Pro Forma Statements for the year ended December 31, 1994 (see
Item 6, "Unaudited Pro Forma Financial Statements" and "Notes to Unaudited Pro
Forma Financial Statements").
The Company provides marketing, administration, and risk management
services and solutions for benefit programs. The Company's customers include
managed care organizations, insurance companies, integrated health care delivery
systems, self-funded benefit plans, and health care purchasing alliances.
FACTORS AFFECTING PROFITABILITY
The Company's profitability depends on its customers' service requirements,
its ability to meet these requirements efficiently, and the methods of
determining compensation for the Company's services. The factors affecting
service requirements and compensation levels vary depending on the business
unit.
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Service Requirements
In both the small group and large group businesses, the Company offers
claims payment services, but such services are typically part of the monthly fee
charged, as opposed to a function of the volume of claims filed. Thus, on the
operating side, profitability is heavily reliant on both the volume of claims
filed and the efficiency with which the Company processes claims. The same
principle applies to the Company's other support functions, such as enrollment,
billing, underwriting, customer service, and reporting. In the future, the
Company's efficiency as an administrator of health care benefits will be
influenced by its ability to increase the use of electronic data interchange
("EDI") in the claims collection and input function and its ability to expand
the use of auto adjudication in the claims processing and payment function.
Profitability also will be influenced by the Company's ability to increase
operational efficiencies through consolidation of plants and maximization of
economies of scale.
Compensation
In the small group business, the Company is usually compensated by way of a
percentage of premium collected (sometimes referred to as "premium retention
percentage"), and in some instances the Company charges the covered group a
fixed monthly fee. Premium collected is a function of the premium charged by the
payor on each life in the group. Thus, profitability can be a function of many
factors, including the number of groups in force, the number of lives in force,
the number of lives per group, the related premium retention percentage, and the
overall volume of premium collected on a monthly basis. The Company's ability to
increase lives or groups in force is influenced by new business generated and
cases retained. The success of both is heavily influenced by the competitive
nature of the pricing offered by the payor and its desire to maintain a presence
in its geographic regions and the small group market in general. The Company
believes that a higher percentage of future small group revenue will be derived
from HMO versus traditional indemnity business, and premium retention
percentages are typically lower from HMO business. In addition, it is possible
that competitive pressures or regulatory reform could lower future premium
retention percentages on the Company's indemnity products. The Company's premium
retention percentage declined from almost 20% in January 1996 to approximately
17% in February 1997. Thus, the Company will have to increase sales volume in
the future to maintain the same operating margins.
In the large group and alliance businesses, the Company is typically
compensated on a capitated or per member, per month ("PMPM") basis. This rate is
usually the result of a competitive bidding process, and pricing is typically
fixed for a period of time. Future profitability will be influenced by the
Company's ability to create value-added services that allow it to deviate from
the commodity pricing inherent in the bidding process.
Special Risks Associated With The Alliance Business
Starting in 1994, the Company pursued contracts with state-sponsored health
care purchasing alliances, initially in Florida, and in 1995-1996, with
additional contracts in North Carolina, Kentucky, and Washington. The Company
has incurred substantial expenses in connection with the start up of these
contracts, and, to date, the alliance business has been unprofitable.
The primary material risks associated with alliance contracts are:
1. Private enterprises will not accept the use of a government-sponsored
program and will therefore fail to provide an adequate number of enrollees to
support a revenue base (over which fixed costs may be spread).
2. The number of enrollees per group will be so low that margins are
insufficient to cover the fixed costs of set up for the group.
3. The level of marketing, enrollment, and customer service required will
be materially higher than expected, thereby increasing the variable costs
required under the contract.
4. The independent agents on whom the Company relies to distribute the
product will not be enthusiastic about the alliance program, resulting in lower
than expected enrollment.
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There can be no assurance that the Company will be able to recoup its
investment in developing its alliance relationships or that these operations
will ultimately be profitable.
FACTORS AFFECTING GROWTH
The Company's growth is affected greatly by its acquisitions of other
administrators. Growth through acquisition involves substantial risks, including
the risk of improper valuation of the acquired business. In addition, the value
of such an acquired business or block of business could be impaired if the
Company is not successful in integrating the business into its existing
operations. These risks are increased when the Company elects to make such
acquisitions on a leveraged basis.
To understand how the Company books acquisitions of administrators in
purchase transactions, an understanding of the unique nature of the business is
essential. Because administrators can operate with a minimal amount of capital,
acquired companies typically have modest tangible asset bases. As evidenced by
the Company's recent experiences at Harrington and Consolidated Group, other
than the underlying business, there are no intangible long-lived assets such as
work force, customer base, or supplier relationships to which the Company could
assign significant value, as these are relationships that routinely turn over
and are replaced in the ordinary course of business. Often, no single customer
of an acquired business constitutes a significant part of the business, and
customers typically have annual contracts which may or may not be renewed.
Renewal rates can vary significantly on an annual basis. Accordingly, values
cannot be assigned to individual customers or contracts. Thus, goodwill, which
is the excess of purchase price over the fair value of net assets acquired, is
often a significant portion of the purchase price.
After performing a review for impairment of goodwill related to each of the
Company's acquired businesses and applying the principles of measurement
contained in FASB 121, the Company recorded a pre-tax charge against earnings of
$13.7 million in the third quarter of 1996, representing approximately 7.6% of
the Company's pre-charge goodwill. The pre-tax charge is attributable to
impairment of goodwill recorded on the following acquisitions: DGB, $6.6
million; and TPCM, $7.1 million.
At the time of the DGB acquisition, the Company projected a 10% to 15%
growth rate in net cash flows at DGB and paid a purchase price which resulted in
$9.8 million of goodwill. Since this acquisition, the DGB business has not
achieved, and does not expect to achieve, the revenue and net cash flow
projections prepared at the time of the acquisition due to, among other things,
higher than originally expected attrition rates resulting in ongoing decreases
in net revenues (due in part to increased pricing resulting from a reinsurance
carrier's departure from DGB's market) and an inadequate distribution system, as
evidenced by an underperforming sales force and greater than anticipated
operating costs. The Company's efforts to correct these deficiencies have not
enabled it to meet its original projections. The Company has determined that its
revised projected cash flows will not fully provide for the recovery of the
goodwill balance of $8.8 million. Accordingly, the Company has written off $6.6
million of goodwill associated with the DGB acquisition. Any further significant
declines in DGB's projected net cash flows may result in additional write-downs
of remaining goodwill.
At the time of the TPCM acquisition, the Company projected a 10% to 15%
growth rate in net cash flows at TPCM and paid a purchase price which resulted
in $8.1 million of goodwill. Since this acquisition, TPCM has not achieved, and
does not expect to achieve, the revenue and net cash flow projections prepared
at the time of the acquisition due to, among other things, higher than
originally expected attrition rates, significantly higher than expected claims
experience (claims filed per enrollee), and greater than anticipated operating
costs due to the inability to obtain economies of scale through integration. The
Company's efforts to correct these deficiencies have not enabled it to meet its
original projections. Lives covered at TPCM decreased by 32,000 during 1996. The
Company has determined that its revised projected cash flows will not fully
provide for the recovery of the goodwill balance of $7.5 million. Accordingly,
the Company has written off $7.1 million of goodwill associated with the TPCM
acquisition. Any further significant declines in TPCM's projected net cash flows
may result in additional write-downs of remaining goodwill.
The Company anticipates reductions in revenue at TPCM and DGB of
approximately 30% and 17%, respectively, in 1997. TPCM and DGB represented
approximately 5% of the Company's consolidated revenue in the fourth quarter of
1996. The Company continually evaluates these operations for opportunities to
reverse these revenue losses and adjust operating
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costs in response to changing conditions and does not believe these operations
will create any further materially adverse impact on future results of
operations.
There can be no assurance that the Company will successfully and profitably
integrate the businesses of Harrington and Consolidated Group into its existing
operations. In addition, certain costs will be incurred to successfully
integrate these acquired companies. Although Harrington and Consolidated Group
are significantly larger companies with a broader customer base over which to
spread risk, more infrastructure, and longer histories of servicing customers,
and management remains optimistic about the future, there can be no assurance
that adverse renewals will not occur in the future. The Company will continue to
evaluate on a regular basis whether events and circumstances have occurred that
indicate that the carrying amount of goodwill may not be recoverable.
Although the net unamortized balance of goodwill is not considered to be
impaired, any such future determination requiring the write-off of a significant
portion of unamortized goodwill could have a material adverse effect on the
Company's financial results.
Subsequent to the acquisitions of Harrington and Consolidated Group, the
Company now serves approximately 125,000 businesses, plan holders, and
governmental agencies in 50 states, Washington, D.C., and Puerto Rico, covering
approximately 2.6 million members.
RELIANCE ON PAYORS
Typically, the Company's insurance and managed care payors sign contracts
with the Company that are cancelable by either party without penalty upon
advance written notice of between 90 days and one year and are also cancelable
upon a significant change of ownership of the Company. The New England, Celtic
Life Insurance Company, and Ameritas Life Insurance Corporation businesses
accounted for approximately 31.0%, 23.0%, and 10.7%, respectively, of the
Company's consolidated revenue in 1995 and approximately 16.2%, 12.5%, and 6.5%,
respectively, of the Company's consolidated revenue for the year ended December
31, 1996. Although this decline is due primarily to the Company's expansion
through acquisition, which has diluted its concentration of revenues from these
sources, it should be noted that the Company continues to experience higher
lapses than originations in the business written with these payors, and it is
not certain when, if ever, this trend will be reversed. In the third quarter of
1996, Metropolitan Life Insurance Company completed a merger with The New
England. The Company is unable to predict what effect, if any, such merger will
ultimately have on the Company's relationship with The New England.
Historically, the majority of Consolidated Group's business was written
with The Travelers Insurance Company, which recently combined with the health
insurance business of Metropolitan Life Insurance Company to form MetraHealth.
Subsequently, MetraHealth was acquired by United HealthCare, one of the nation's
leading HMO companies. Between July 1, 1996 and December 31, 1996, this business
represented approximately 75% of Consolidated Group's revenue, or approximately
13% of the Company's consolidated revenue. The Company is dependent on United
HealthCare's commitment to the small group market and on the Company's ultimate
success in converting the MetraHealth business to United HealthCare's new
products. Should the Company have to move this business to another payor, it
could experience higher than normal lapse rates and lower than normal margins.
The abandonment of the small group market by either The New England, Celtic
Life Insurance Company, or Ameritas Life Insurance Corporation, indemnity
payors' ability to manage medical losses, and the degree to which the Company is
successful in the MetraHealth conversion, could have a material adverse effect
on the Company. With respect to the business serviced by the Company, a decision
by any one of these payors to administer and distribute a significant portion of
its products directly to small businesses also could have a material adverse
effect on the Company.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
which certain items of income and expense bear to the Company's revenues for
such periods.
Company Company Pro Forma
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994 (1)
----------------- ----------------- ---------------------
Revenues 100.0 % 100.0 % 100.0 %
------- ------- -------
Expenses:
Agent commissions 25.0 % 36.0 % 40.4 %
Personnel expenses 37.3 % 25.4 % 25.5 %
General & administrative
expenses 21.5 % 16.8 % 16.1 %
Pre-operating and contract
start-up costs 0.4 % 1.7 % -
Contract commitments 1.4 % - 3.4 %
Restructure charge 0.7 % - -
Integration expense 4.0 % - -
Loss on impairment of
goodwill 7.1 % - -
Staff reductions and office
closings - - 1.0 %
Depreciation
& amortization 5.4 % 4.4 % 3.2 %
----- ----- -----
Total expenses 102.8 % 84.3 % 89.6 %
------- ------ ------
Net (loss) income before
interest expense (2.8)% 15.7 % 10.4 %
Interest expense 1.4 % 0.1 % 0.1 %
----- ----- -----
(Loss) income before income (4.2)% 15.6 % 10.3 %
taxes
(Benefit) provision for
income taxes (0.7)% 6.1 % 4.3 %
------ ----- -----
Net (loss) income (3.5)% 9.5 % 6.0 %
====== ===== =====
(1) See Unaudited Pro Forma Financial Statements and Notes to Unaudited Pro
Forma Financial Statements.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 increased $93.5 million, or
93.2%, to $193.8 million from $100.3 million in 1995. This increase resulted
primarily from additional revenues of $5.9 million, $6.7 million, $32.1 million,
and $42.0 million from the Company's acquisitions of TPCM (effective 9/1/95),
DGB (effective 10/1/95), Consolidated Group (effective 7/1/96), and Harrington
(effective 7/1/96), respectively. Revenues from HealthPlan Services, Inc.
("HPSI") large group and alliance customers increased $2.1 million and $5.7
million, respectively, over 1995.
19
21
Agent commissions expense for the year ended December 31, 1996 increased
$12.4 million, or 34.3%, to $48.5 million from $36.1 million in 1995. This
increase resulted primarily from $12.6 million of additional commissions related
to the Company's acquisitions of TPCM, DGB, Consolidated Group, and Harrington.
HPSI's commissions as a percentage of operating revenues declined from 36.8% in
1995 to 34.2% in 1996, as large group revenues represented a greater percentage
of total HPSI revenues. Large group commissions (11.9% of 1996 HPSI revenues)
represent a lower percentage of revenues than small group commissions (44.9% of
1996 HPSI revenues). If large group revenues continue to represent an
increasingly greater percentage of overall consolidated revenues, agent
commissions as a percentage of revenues are expected to continue to decline.
Personnel expenses for the year ended December 31, 1996 increased $46.8
million to $72.2 million, or 184.3%, from $25.4 million in 1996. Of this
increase, $41.3 million is attributable to the Company's acquisitions of TPCM,
DGB, Consolidated Group, and Harrington. Personnel expenses for HPSI increased
$5.5 million and are primarily related to additional salaries and wages,
overtime, and temporary services related to new activity in HPSI's alliance and
large group business units, which are more labor-intensive than the small group
business unit. Assuming the mix of activity in the Company's business units is
consistent with that of 1996, ongoing personnel expenses as a percentage of
revenues are not expected to change significantly.
General and administrative expenses for the year ended December 31, 1996
increased $24.6 million, or 144.7%, to $41.6 million from $17.0 million in 1995.
Of this increase, $17.1 million is attributable to costs associated with the
Company's acquisitions of TPCM, DGB, Consolidated Group, and Harrington. Costs
for HPSI increased by $7.6 million and are primarily attributable to telephone,
postage, printing, and professional services related to HPSI's new business
activities in the alliance and large group business units.
Contract commitment expenses relate to the recognition of losses on adverse
contracts entered into by the Company in previous periods with state-sponsored
health care purchasing alliances in Florida and North Carolina. These losses are
the result of lower than anticipated growth in lives per case and the resulting
excess of cost of service over revenue to be earned over the balance of the
applicable contract periods. Discussions have been ongoing with the related
sponsors (Florida and North Carolina) to obtain revisions in contract terms
sufficient to generate additional revenue or reduced costs. During 1996, the
Company was unable to obtain concessions sufficient to offset the adverse
results expected on the Florida and North Carolina contracts, resulting in the
recognition of a loss of $2.7 million.
Restructure charges result primarily from the Company's closure of its
Memphis facility and downsizing of its corporate offices subsequent to the
acquisitions of Consolidated Group and Harrington.
The loss on partial impairment of goodwill reflects the write-down of the
carrying value of goodwill originally recorded upon the Company's acquisition of
TPCM and DGB, which reflects their expected future discounted cash flows (see
Item 1, "Business - Recent Transactions and Company Reorganization" for related
discussion).
Depreciation and amortization expense for the year ended December 31, 1996
increased $6.2 million, or 140.9%, to $10.6 million from $4.4 million in 1995.
Of this increase, $5.2 million relates to depreciation and amortization on the
Company's acquisitions of TPCM, DGB, Consolidated Group, and Harrington ($3.2
million of which is the amortization of goodwill on the acquisitions being
calculated on a straight-line basis over 25 years). An additional increase of
$0.9 million at HPSI is primarily attributable to the amortization of internally
developed software for the Company's alliance administration.
Year Ended December 31, 1995 Compared to Pro Forma Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 decreased $6.9 million, or
6.4%, to $100.3 million from $107.2 million in 1994. This decrease resulted
primarily from a decline of $14.2 million in revenues generated from services
provided through the small group business unit. Declines in revenue from two of
the Company's payors accounted for $8.3 million of this decrease, as such payors
deemphasized their small group indemnity products and developed managed care
products. Additionally, the loss of one payor relationship, the Centennial Life
Insurance Company relationship (which terminated effective January 31, 1995),
resulted in a reduction in revenue of $5.2 million. The decline in small group
revenue was partially offset by an increase in large group revenue of $6.1
million resulting from the Company's 1995
20
22
acquisitions and an increase in interest income of $2 million primarily from
earnings on the proceeds from the Company's May 19, 1995 initial public
offering.
Agent commissions expense for the year ended December 31, 1995 decreased
$7.2 million, or 16.6%, to $36.1 million from $43.3 million in 1994. This
decrease resulted principally from the decline in revenues for the period.
Agent commissions expense represented approximately 36.8% of operating revenues
for the year ended December 31, 1995 (40.4% in 1994). As a percentage of
revenues, small group agent commissions are significantly greater than large
group agent commissions. Small group agent commissions represented
approximately 45.6% of related customer revenues in 1995 (46.7% in 1994), and
large group agent commissions represented approximately 10.8% of related
customer revenues in 1995 (8.1% in 1994).
Personnel expenses for the year ended December 31, 1995 decreased $2.0
million, or 7.3%, to $25.4 million from $27.4 million in 1994. This decrease was
primarily related to the termination of 125 employees of the Predecessor Company
on September 30, 1994, offset by $2.4 million of additional personnel costs
related to the Company's 1995 acquisitions.
Other operating expenses for the year ended December 31, 1995 decreased
$0.2 million, or 1.2%, to $17.0 million from $17.2 million in 1994. The Company
realized savings in telephone, rent, leased equipment, and consulting fees in
1995, which were offset by $1.4 million of additional expenses related to the
Company's 1995 acquisitions.
The Company incurred $1.7 million in pre-operating and start-up costs
during the year ended December 31, 1995. These costs related primarily to the
state-sponsored health care purchasing alliances in Kentucky and North Carolina
and consisted of salaries and wages and temporary help, printing, and travel
expenses.
Contract commitment expense of $3.6 million for the year ended December 31,
1994 represented the excess of expected future costs over future revenues for
the CHPA contract term expiring in April 1997.
Depreciation and amortization expense for the year ended December 31, 1995
increased $0.9 million, or 25.7%, to $4.4 million from $3.5 million in 1994.
This increase resulted principally from an increase in depreciation related to
the purchase of new telephone and computer hardware equipment and an increase in
the amortization of goodwill related to the Company's 1995 acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
On May 19, 1995, the Company completed an initial public offering which
generated net proceeds of approximately $51.0 million. On August 31, 1995, HPS
used approximately $7.5 million of the offering proceeds to acquire all of the
outstanding capital stock of TPCM. On October 12, 1995, HPS used approximately
$5.1 million of the offering proceeds to acquire substantially all of the assets
of the third party administration business of DGB. The Company placed an
additional $5.0 million of the proceeds in an escrow account to guarantee the
availability of funds for semi-monthly payments due with respect to the DGB
acquisition. On January 13, 1996, using offering proceeds, the Company acquired
$2.0 million of preferred stock of Medirisk, representing a 9% ownership
interest in Medirisk, and on March 15, 1996, Medirisk exercised its option to
issue $6.9 million of debt with detachable warrants to the Company. To date, the
Company has not elected to convert the detachable warrants into common stock of
Medirisk. On January 29, 1997, Medirisk completed an initial public offering of
2.3 million shares of its common stock at a purchase price of $11.00 per share,
and Medirisk subsequently fully satisfied its debt obligation to the Company
(see "Notes to Consolidated Financial Statements Investments").
On July 1, 1996, the Company utilized substantially all of the remaining
funds originating from the public offering and borrowed against its line of
credit under its May 17, 1996 credit facility with First Union National Bank of
North Carolina ("First Union") and other lenders ("Line of Credit") to fund the
acquisitions of Harrington and Consolidated Group.
On September 13, 1996, the Company increased its Line of Credit from $85
million to $175 million. First Union serves as "agency bank" with respect to
this facility. Like the Company's previous credit facility with First Union, the
new facility contains provisions which require the Company to maintain certain
minimum financial ratios, impose limitations on acquisition activity and capital
spending, and which prohibit the Company from declaring or paying any dividend
upon any of its capital
21
23
stock without the consent of First Union. During the third quarter of 1996, the
Company amended the terms of its credit facility to allow it to spread the
effects of the restructuring and integration costs recorded (see "Notes to
Consolidated Financial Statements - Restructure and Integration") over three
years for purposes of calculating funds availability on its Line of Credit.
Similar treatment is in place for calculating compliance with financial
covenants. The outstanding draw against the Line of Credit was $55.0 million at
December 31, 1996.
The Company expects that the decline in cash flows which resulted in the
recording of a $13.7 million charge for the impairment of goodwill will not
result in the Company's inability to meet future operating, investing, and
financing requirements for the near future, especially given that TPCM and DGB
revenues represent approximately 5% of total Company revenue in the fourth
quarter of 1996. Cash flow, as measured by earnings before interest, taxes,
depreciation, and amortization, approximated $225,000 and $1.7 million for the
year ended December 31, 1996 for TPCM and DGB, respectively. In addition, other
than the decline in cash flow that led to the impairment of goodwill in the
third quarter of 1996, the Company knows of no other effects or expected effects
on the Company's results of future operations or financial position. The Company
believes that additional revenue will be provided by new products and sales
generated by other initiatives of the Company, which will offset the impact on
its future operations and cash flows. This statement is forward-looking in
nature, however, and actual results may differ if the Company's initiatives are
unsuccessful.
Although only nine months have passed since the Company's acquisitions of
Harrington and Consolidated Group, management does not foresee any immediate
adverse circumstances similar to TPCM and DGB due to the significantly broader
market base over which to spread risk and Consolidated Group's and Harrington's
longer history of servicing customers. Although management remains optimistic
about the future, there can be no assurance that adverse business conditions
will not occur in the future.
The Company incurred a cash outlay of approximately $7.8 million in 1996
for non-recurring integration costs related primarily to systems integration and
expects to incur an additional cash outlay of approximately $1.5 million in
1997.
Based on current expectations, the Company believes that all consolidated
operating, investing, and financing activities for the foreseeable future will
be met from internally generated cash flow from operations, available cash, or
its existing Line of Credit.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are listed in Item 14(a)(1)
and are submitted at the end of this Annual Report on Form 10-K. The
Company is not required to file any supplementary financial data under this
Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is included in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 6, 1997, under
"Proposal 1: Election of Directors," "Additional Information Concerning
Directors," "Executive Officers," and "Section 16(a) Beneficial Ownership
Reporting Compliance," and is herein incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is included in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 6, 1997, under
"Compensation of Executive Officers," and is herein incorporated by reference.
22
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is included in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 6, 1997, under
"Security Ownership of Certain Beneficial Owners and Management," "Compensation
Committee Interlocks and Insider Participation," and "Certain Relationships and
Related Transactions," and is herein incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is included in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 6, 1997, under
"Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions," and is herein incorporated by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of the Company and
its subsidiaries are filed as part of this Form 10-K starting at page
F-1:
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 1996 and 1995 and September
30, 1994
Consolidated Statements of Operations - Year ended December 31, 1996
and 1995, three months ended December 31, 1994, and nine months ended
September 30, 1994
Consolidated Statements of Changes in Stockholders' Equity - Year
ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows - Year ended December 31, 1996
and 1995, and nine months ended September 30, 1994
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
(3) Exhibits included or incorporated herein:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
2.1 Amended and Restated Acquisition Agreement, dated August 31, 1995, by
and among HealthPlan Services, Inc., Millennium HealthCare, Inc., and
Third Party Claims Management, Inc. (incorporated by reference to the
Company's Form 8-K Current Report filed on September 15, 1995).
2.2 Asset Purchase Agreement, dated October 1, 1995, by and between
HealthPlan Services, Inc. and Diversified Group Brokerage Corporation,
and Amendment to the Asset Purchase Agreement, dated October 11, 1995,
by and between HealthPlan Services, Inc. and Diversified Group
Brokerage Corporation (incorporated by reference to the Company's Form
8-K Current Report filed on October 27, 1995).
23
25
2.3 Securities Purchase Agreement, dated January 8, 1996 between Medirisk,
Inc. and HealthPlan Services Corporation (incorporated by reference to
Exhibit 10.18 to the Company's 1995 Annual Report on Form 10-K filed
on March 29,1996).
2.4 Acquisition Agreement dated May 17, 1996 between HealthPlan Services
Corporation, Consolidated Group, Inc., Consolidated Group Claims,
Inc., Consolidated Health Coalition, Inc., and Group Benefit
Administrators Insurance Agency, Inc., the named Shareholders, and
Holyoke L. Whitney as Shareholders' Representative (incorporated by
reference to Exhibit 2 to the Company's Form 8-K Current Report filed
on July 15, 1996).
2.5 Plan and Agreement of Merger dated May 28, 1996 between HealthPlan
Services Corporation, HealthPlan Services Alpha Corporation,
Harrington Services Corporation, and Robert Chefitz as Shareholders'
Representative (incorporated by reference to the Company's Form 8-K
Current Report filed on July 15, 1996).
2.6 Stock Purchase Agreement dated December 18, 1996 by and among Noel
Group, Inc., Automatic Data Processing, Inc. (incorporated by
reference to the Noel Group, Inc.'s Current Report on Form 8-K dated
February 7, 1997).
3.1 Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 4.1 to the Company's Form S-8 Registration Statement
#333-07631 filed with respect to the HealthPlan Services Corporation
1996 Employee Stock Option Plan on July 3, 1996).
3.2 By-laws, as amended.
4.1 Excerpts from the Certificate of Incorporation, as amended (included
in Exhibit 3.1).
4.2 Excerpts from the By-laws, as amended (included in Exhibit 3.2).
4.3 Specimen stock certificate (incorporated by reference to Exhibit 4.3
to the Company's Form S-1 Registration Statement #33-90472, filed on
May 18, 1995).
10.1 Agreement between Celtic Life Insurance Company and the Company dated
April 1, 1981, as amended pursuant to Letter Agreement dated July 9,
1990, Letter Agreement dated December 17, 1990, Letter Agreement dated
December 28, 1991, and Letter Agreement dated May 11, 1994
(incorporated by reference to Exhibit 10.2 to the Company's Form S-1
Registration Statement #33-90472, filed on May 18, 1995).
10.2 Agreement between New England Mutual Life Insurance Company of Boston
and the Company effective as of June 1, 1987, as amended by Memorandum
dated January 17, 1992 and Memorandum dated February 4, 1994
(incorporated by reference to Exhibit 10.3 to the Company's Form S-1
Registration Statement #33-90472, filed on May 18, 1995).
10.3 The Agreement between Ameritas (formerly known as Bankers Life
Insurance Company of Nebraska) and the Company effective November 1,
1981, with Administrator's Agreements Addenda A (Arizona), Addenda B
(California), Addenda C (Indiana), Addenda D (Kansas), Addenda E
(Montana), Addenda F (Nevada), Addenda G (Tennessee) (incorporated by
reference to Exhibit 10.4 to the Company's Form S-1 Registration
Statement #33-90472, filed on May 18, 1995).
10.4 Agreements relating to MetraHealth business (originally written with
The Travelers Insurance Company):
(a) Administrative Services Agreement dated November 1, 1989 between
The Travelers Insurance Company and Consolidated Group, Inc.
24
26
[S] [C]
(b) Claims Administration Agreement dated November 1, 1989 between
The Travelers Insurance Company and Consolidated Group Claims,
Inc.
10.5 Administrative Services Agreement between the Company and Community
Health Purchasing Alliance District Two (incorporated by reference to
Exhibit 10.6 to the Company's Form S-1 Registration Statement
#33-90472, filed on May 18, 1995). The same contract was executed with
Districts One, Three, Four, Five, Six, Seven, Eight, Nine, Ten and
Eleven.
10.6 HealthPlan Services Corporation 1996 Employee Stock Option Plan.
10.7 HealthPlan Services Corporation 1995 Incentive Equity Plan
(incorporated by reference to Exhibit 10.7 to the Company's Form S-1
Registration Statement #33-90472, filed on May 18, 1995).
10.8 1995 HealthPlan Services Corporation Directors Stock Option Plan
(incorporated by reference to Exhibit 10.10 to the Company's Form S-1
Registration Statement #33-90472, filed on May 18, 1995).
10.9 Consulting Agreement between the Company and Reveley Resources, Inc.,
dated March 28, 1996 (incorporated by reference to Exhibit 10.19 to
the Company's 1995 Annual Report on Form 10-K, filed on March 29,
1996).
10.10 Restricted Stock Agreements between the Company and Claudia N.
Griffiths (incorporated by reference to Exhibit 10.10 to the Company's
Form S-1 Registration Statement #33-90472, filed on May 18, 1995). The
same agreement was executed with Steven V. Hulslander, Gary L.
Raeckers, Craig H. Cassady, Richard M. Bresee, Nola H. Moon, and
George E. Lucco.
10.11 Subscription Agreement dated as of September 30, 1994 among the
Company, James K. Murray, Jr., Trevor G. Smith and Charles H. Guy, Jr.
(incorporated by reference to Exhibit 10.11 to the Company's Form S-1
Registration Statement #33-90472, filed on May 18, 1995).
10.12 Stock Purchase Agreement dated as of October 5, 1994 among the
Company, Noel Group, Inc., Trinity Side-by-Side Fund I, L.P., Trinity
Ventures II, L.P., and Trinity Ventures III, L.P. (incorporated by
reference to Exhibit 10.12 to the Company's Form S-1 Registration
Statement #33-90472, filed on May 18, 1995).
10.13 Form of Stock Purchase Agreement dated as of December 15, 1994 among
the Company, Noel Group, Inc. and each of the signatories listed on
the signature pages thereto (incorporated by reference to Exhibit
10.13 to the Company's Form S-1 Registration Statement #33-90472,
filed on May 18, 1995).
10.14 (a) Lease Agreement between the Company and Paragon Group, Inc. (as
agent for Airport Southeast Associates, Ltd.), dated January 26, 1982,
as amended on June 18, 1987 by agreement between the Company and
Concourse Associates Venture (successor in interest to Airport
Southeast Associates) (Concourse Center I, Tampa, Florida)
(incorporated by reference to Exhibit 10.14(a) to the Company's Form
S-1 Registration Statement #33-90472, filed on May 18, 1995).
25
27
(b) Lease Agreement between the Company and Paragon Group, Inc. (as
agent for Airport Southeast Associates, Ltd.), dated January 26, 1982,
as amended on October 13, 1983, April 3, 1984 by a Supplement to
Amendment of Lease, and as further amended on June 18, 1987 by
agreement between the Company and Concourse Associates Venture
(successor in interest to Airport Southeast Associates) (Concourse
Center II, Tampa, Florida) (incorporated by reference to Exhibit
10.14(b) to the Company's Form S-1 Registration Statement #33-90472,
filed on May 18, 1995).
(c) Second Amendment to Leases dated April 30, 1995 between Concourse
Center Associates Limited Partnership and the Company (Concourse
Centers I and II, Tampa, Florida)(incorporated by reference to Exhibit
10.13(g) to the Company's Annual Report on Form 10-K filed on March
29, 1996).
(d) Amended, Consolidated and Restated Lease dated January 1, 1987
between Consolidated Group, Inc. and Consolidated Group Service
Company Limited Partnership, as amended by First Amendment dated May
23, 1990, and by Second Amendment dated March 27, 1996.
10.15 Credit Agreement dated as of May 17, 1996 by and between the Company,
First Union National Bank of North Carolina, and other lenders named
therein, as amended by the First Amendment thereto dated July 1,
1996, and the Second Amendment thereto dated September 26, 1996.
10.16 Administrative Services Agreement between the Company and the Kentucky
Health Purchasing Alliance dated July 1, 1995 (incorporated by
reference to Exhibit 10.15 to the Company's 1995 Annual Report on Form
10-K filed on March 29, 1996).
10.17 Third Party Administrator Contract between the Company and SCNC
Health Alliance, Inc. dated June 26, 1995. Each of Southeastern North
Carolina Health Alliance, Inc., WNC Health Alliance, Inc., and Eastern
North Carolina Health Plan Purchasing Alliance, Inc. is a party to a
contract with the Company in substantially the same form (incorporated
by reference to Exhibit 10.16 to the Company's 1995 Annual Report on
Form 10-K filed on March 29, 1996).
10.18 Administrative Services Agreement between the Company and the State of
Washington's Health Care Authority dated February 7, 1996
(incorporated by reference to Exhibit 10.7 to the Company's 1995
Annual Report on Form 10-K filed on March 26, 1996).
10.19 Employment and Noncompetition Agreement dated June 25, 1996 by and
between R.E. Harrington, Inc. and Robert R. Parker.
10.20 Employment and Noncompetition Agreement dated July 1, 1996 by and
between Consolidated Group, Inc. and Timothy T. Clifford.
11.1 Statement regarding computation of per share earnings: not required
because the relevant computations can be clearly determined from the
material contained in the financial statements included herein.
21.1 Subsidiaries of the registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule.
(b) The Company did not file any Current Reports on Form 8-K during
the three months ended December 31, 1996.
26
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Tampa, State of Florida, on the 31st day of March, 1997.
HEALTHPLAN SERVICES CORPORATION
By: /s/ James K. Murray, Jr.
------------------------------------------
James K. Murray, Jr., President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ James K. Murray III
------------------------------------------
James K. Murray III, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William L. Bennett, James K. Murray, Jr. and
Joseph S. DiMartino his or her true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
or her in his or her name, place and stead, in any and all capacities, to sign
any or all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, and hereby
ratifies and confirms all that said attorneys-in-fact and agents, each acting
alone, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ William L. Bennett Chairman of the Board; March 31, 1997
- ---------------------- Director
William L. Bennett
/s/ James K. Murray, Jr. President and Chief March 31, 1997
- ------------------------ Executive Officer; Director
James K. Murray, Jr. (Principal Executive Officer)
/s/ Joseph A. Califano, Jr. Director March 31, 1997
- ---------------------------
Joseph A. Califano, Jr.
27
29
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Joseph S. DiMartino Director March 31, 1997
- -----------------------
Joseph S. DiMartino
/s/ John R. Gunn Director March 31, 1997
- ----------------
John R. Gunn
/s/ Charles H. Guy, Jr. Director March 31, 1997
- -----------------------
Charles H. Guy, Jr.
/s/ Nancy M. Kane Director March 31, 1997
- -----------------
Nancy M. Kane
/s/ David Nierenberg Director March 31, 1997
- --------------------
David Nierenberg
/s/ James G. Niven Director March 31, 1997
- ------------------
James G. Niven
/s/ Trevor G. Smith Director March 31, 1997
- -------------------
Trevor G. Smith
/s/ Samuel F. Pryor, IV Director March 31, 1997
- -----------------------
Samuel F. Pryor, IV
/s/ James F. Carlin, Jr. Director March 31, 1997
- ------------------------
James F. Carlin, Jr.
/s/ Arthur F. Weinbach Director March 31, 1997
- ----------------------
Arthur F. Weinbach
/s/ Holyoke L. Whitney Director March 31, 1997
- ----------------------
Holyoke L. Whitney
28
30
INDEX TO EXHIBITS
Exhibit Number Exhibit Description
- -------------- -------------------
2.1 Amended and Restated Acquisition Agreement, dated August 31,
1995, by and among HealthPlan Services, Inc., Millennium
HealthCare, Inc., and Third Party Claims Management, Inc.
(incorporated by reference to the Company's Form 8-K Current
Report filed on September 15, 1995).
2.2 Asset Purchase Agreement, dated October 1, 1995, by and
between HealthPlan Services, Inc. and Diversified Group
Brokerage Corporation, and Amendment to the Asset Purchase
Agreement, dated October 11, 1995, by and between HealthPlan
Services, Inc. and Diversified Group Brokerage Corporation
(incorporated by reference to the Company's Form 8-K Current
Report filed on October 27, 1995).
2.3 Securities Purchase Agreement, dated January 8, 1996 between
Medirisk, Inc. and HealthPlan Services Corporation
(incorporated by reference to Exhibit 10.18 to the Company's
1995 Annual Report on Form 10-K filed on March 29,1996).
2.4 Acquisition Agreement dated May 17, 1996 between HealthPlan
Services Corporation, Consolidated Group, Inc., Consolidated
Group Claims, Inc., Consolidated Health Coalition, Inc., and
Group Benefit Administrators Insurance Agency, Inc., the named
Shareholders, and Holyoke L. Whitney as Shareholders'
Representative (incorporated by reference to Exhibit 2 to the
Company's Form 8-K Current Report filed on July 15, 1996).
2.5 Plan and Agreement of Merger dated May 28, 1996 between
HealthPlan Services Corporation, HealthPlan Services Alpha
Corporation, Harrington Services Corporation, and Robert
Chefitz as Shareholders' Representative (incorporated by
reference to the Company's Form 8-K Current Report filed on
July 15, 1996).
2.6 Stock Purchase Agreement dated December 18, 1996 by and among
Noel Group, Inc., Automatic Data Processing, Inc.
(incorporated by reference to the Noel Group, Inc.'s Current
Report on Form 8-K dated February 7, 1997).
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 4.1 to the Company's Form S-8
Registration Statement #333-07631 filed with respect to the
HealthPlan Services Corporation 1996 Employee Stock Option
Plan on July 3, 1996).
3.2 By-laws, as amended.
4.1 Excerpts from the Certificate of Incorporation, as amended
(included in Exhibit 3.1).
4.2 Excerpts from the By-laws, as amended (included in Exhibit
3.2).
4.3 Specimen stock certificate (incorporated by reference to
Exhibit 4.3 to the Company's Form S-1 Registration Statement
#33-90472, filed on May 18, 1995).
10.1 Agreement between Celtic Life Insurance Company and the
Company dated April 1, 1981, as amended pursuant to Letter
Agreement dated July 9, 1990, Letter Agreement dated December
17, 1990, Letter Agreement dated December 28, 1991, and Letter
Agreement dated May 11, 1994 (incorporated by reference to
Exhibit 10.2 to the Company's Form S-1 Registration Statement
#33-90472, filed on May 18, 1995).
29
31
10.2 Agreement between New England Mutual Life Insurance Company of
Boston and the Company effective as of June 1, 1987, as
amended by Memorandum dated January 17, 1992 and Memorandum
dated February 4, 1994 (incorporated by reference to Exhibit
10.3 to the Company's Form S-1 Registration Statement
#33-90472, filed on May 18, 1995).
10.3 The Agreement between Ameritas (formerly known as Bankers Life
Insurance Company of Nebraska) and the Company effective
November 1, 1981, with Administrator's Agreements Addenda A
(Arizona), Addenda B (California), Addenda C (Indiana),
Addenda D (Kansas), Addenda E (Montana), Addenda F (Nevada),
Addenda G (Tennessee) (incorporated by reference to Exhibit
10.4 to the Company's Form S-1 Registration Statement
#33-90472, filed on May 18, 1995).
10.4 Agreements relating to MetraHealth business (originally
written with The Travelers Insurance Company):
(a) Administrative Services Agreement dated November 1,
1989 between The Travelers Insurance Company and
Consolidated Group, Inc.
(b) Claims Administration Agreement dated November 1,
1989 between The Travelers Insurance Company and
Consolidated Group Claims, Inc.
10.5 Administrative Services Agreement between the Company and
Community Health Purchasing Alliance District Two
(incorporated by reference to Exhibit 10.6 to the Company's
Form S-1 Registration Statement #33-90472, filed on May 18,
1995). The same contract was executed with Districts One,
Three, Four, Five, Six, Seven, Eight, Nine, Ten and Eleven.
10.6 HealthPlan Services Corporation 1996 Employee Stock Option
Plan.
10.7 HealthPlan Services Corporation 1995 Incentive Equity Plan
(incorporated by reference to Exhibit 10.7 to the Company's
Form S-1 Registration Statement #33-90472, filed on May 18,
1995).
10.8 1995 HealthPlan Services Corporation Directors Stock Option
Plan (incorporated by reference to Exhibit 10.10 to the
Company's Form S-1 Registration Statement #33-90472, filed on
May 18, 1995).
10.9 Consulting Agreement between the Company and Reveley
Resources, Inc., dated March 28, 1996 (incorporated by
reference to Exhibit 10.19 to the Company's 1995 Annual Report
on Form 10-K, filed on March 29, 1996).
10.10 Restricted Stock Agreements between the Company and Claudia N.
Griffiths (incorporated by reference to Exhibit 10.10 to the
Company's Form S-1 Registration Statement #33-90472, filed on
May 18, 1995). The same agreement was executed with Steven V.
Hulslander, Gary L. Raeckers, Craig H. Cassady, Richard M.
Bresee, Nola H. Moon, and George E. Lucco.
10.11 Subscription Agreement dated as of September 30, 1994 among
the Company, James K. Murray, Jr., Trevor G. Smith and Charles
H. Guy, Jr. (incorporated by reference to Exhibit 10.11 to the
Company's Form S-1 Registration Statement #33-90472, filed on
May 18, 1995).
10.12 Stock Purchase Agreement dated as of October 5, 1994 among the
Company, Noel Group, Inc., Trinity Side-by-Side Fund I, L.P.,
Trinity Ventures II, L.P., and Trinity Ventures III, L.P.
(incorporated by reference to Exhibit 10.12 to the Company's
Form S-1 Registration Statement #33-90472, filed on May 18,
1995).
30
32
10.13 Form of Stock Purchase Agreement dated as of December 15, 1994
among the Company, Noel Group, Inc. and each of the
signatories listed on the signature pages thereto
(incorporated by reference to Exhibit 10.13 to the Company's
Form S-1 Registration Statement #33-90472, filed on May 18,
1995).
10.14 (a) Lease Agreement between the Company and Paragon Group,
Inc. (as agent for Airport Southeast Associates, Ltd.), dated
January 26, 1982, as amended on June 18, 1987 by agreement
between the Company and Concourse Associates Venture
(successor in interest to Airport Southeast Associates)
(Concourse Center I, Tampa, Florida) (incorporated by
reference to Exhibit 10.14(a) to the Company's Form S-1
Registration Statement #33-90472, filed on May 18, 1995).
(b) Lease Agreement between the Company and Paragon Group,
Inc. (as agent for Airport Southeast Associates, Ltd.), dated
January 26, 1982, as amended on October 13, 1983, April 3,
1984 by a Supplement to Amendment of Lease, and as further
amended on June 18, 1987 by agreement between the Company and
Concourse Associates Venture (successor in interest to Airport
Southeast Associates) (Concourse Center II, Tampa, Florida)
(incorporated by reference to Exhibit 10.14(b) to the
Company's Form S-1 Registration Statement #33-90472, filed on
May 18, 1995).
(c) Second Amendment to Leases dated April 30, 1995 between
Concourse Center Associates Limited Partnership and the
Company (Concourse Centers I and II, Tampa,
Florida)(incorporated by reference to Exhibit 10.13(g) to the
Company's Annual Report on Form 10-K filed on March 29, 1996).
(d) Amended, Consolidated and Restated Lease dated January 1,
1987 between Consolidated Group, Inc. and Consolidated Group
Service Company Limited Partnership, as amended by First
Amendment dated May 23, 1990, and by Second Amendment dated
March 27, 1996.
10.15 Credit Agreement dated as of May 17, 1996 by and between the
Company, First Union National Bank of North Carolina, and
other lenders named therein, as amended by the First Amendment
thereto dated July 1, 1996, and the Second Amendment thereto
dated September 26, 1996.
10.16 Administrative Services Agreement between the Company and the
Kentucky Health Purchasing Alliance dated July 1, 1995
(incorporated by reference to Exhibit 10.15 to the Company's
1995 Annual Report on Form 10-K filed on March 29, 1996).
10.17 Third Party Administrator Contract between the Company and
SCNC Health Alliance, Inc. dated June 26, 1995. Each of
Southeastern North Carolina Health Alliance, Inc., WNC Health
Alliance, Inc., and Eastern North Carolina Health Plan
Purchasing Alliance, Inc. is a party to a contract with the
Company in substantially the same form (incorporated by
reference to Exhibit 10.16 to the Company's 1995 Annual Report
on Form 10-K filed on March 29, 1996).
10.18 Administrative Services Agreement between the Company and the
State of Washington's Health Care Authority dated February 7,
1996 (incorporated by reference to Exhibit 10.7 to the
Company's 1995 Annual Report on Form 10-K filed on March 26,
1996).
10.19 Employment and Noncompetition Agreement dated June 25, 1996 by
and between R.E. Harrington, Inc. and Robert R. Parker.
10.20 Employment and Noncompetition Agreement dated July 1, 1996 by
and between Consolidated Group, Inc. and Timothy T. Clifford.
11.1 Statement regarding computation of per share earnings: not
required because the relevant computations can be clearly
determined from the material contained in the financial
statements included herein.
31
33
21.1 Subsidiaries of the registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule (For SEC use only)
32
34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of
HealthPlan Services Corporation
In our opinion, the accompanying consolidated balance sheet and related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
HealthPlan Services Corporation and its Subsidiaries (the "Company") at December
31, 1996 and 1995, and the results of their operations and their cash flows for
the years ended December 31, 1996 and 1995 and for the period from inception
(October 1, 1994) through December 31, 1994 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Tampa, Florida
March 14, 1997
F-1
35
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
1996 1995
--------- --------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $3,725 $4,738
Restricted cash ................................................... 10,062 1,005
Short-term investments ............................................ -- 36,723
Accounts receivable, net of allowance for doubtful
accounts of $99 and $23, respectively ......................... 17,899 6,411
Refundable income taxes ........................................... 6,083 1,041
Prepaid commissions ............................................... 223 748
Prepaid expenses and other current assets ......................... 4,022 1,485
Deferred taxes .................................................... 4,481 965
-------- --------
Total current assets ...................................... 46,495 53,116
Property and equipment, net ......................................... 21,102 9,241
Other assets, net ................................................... 2,182 1,463
Deferred taxes ...................................................... 8,327 --
Note receivable ..................................................... 6,389 --
Investments ......................................................... 3,685 --
Goodwill, net ....................................................... 156,521 48,847
-------- --------
Total assets .............................................. $244,701 $112,667
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $18,464 $3,407
Premiums payable to carriers ...................................... 29,536 17,209
Commissions payable ............................................... 4,691 2,897
Deferred revenue .................................................. 1,560 947
Accrued liabilities ............................................... 14,905 5,093
Accrued contract commitments ...................................... 1,089 482
Accrued restructure ............................................... 462 --
Current portion of long-term debt payable ......................... 2,717 68
-------- --------
Total current liabilities ................................. 73,424 30,103
Notes payable ........................................................ 59,581 1,214
Deferred taxes ...................................................... -- 354
Other long-term liabilities ......................................... 2,913 30
-------- --------
Total liabilities ......................................... 135,918 31,701
-------- --------
Commitments and contingencies (Note 12) .............................
Stockholders' equity:
Common stock voting, $0.01 par value, 100,000,000 authorized and 14,974,126
issued and outstanding at December 31, 1996; 25,000,000 authorized and
13,395,357 issued and outstanding at December 31, 1995 ......... 150 134
Additional paid-in capital ....................................... 106,153 71,636
Retained earnings ................................................ 2,480 9,196
-------- --------
Total stockholders' equity ................................ 108,783 80,966
-------- --------
Total liabilities and stockholders' equity ................ $244,701 $112,667
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
36
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 1, 1994)
FOR THE YEAR ENDED DECEMBER 31, THROUGH
1996 1995 DECEMBER 31, 1994
---- ---- -----------------
Operating revenues ...................................... $ 191,493 $ 98,187 $ 25,132
Interest income ......................................... 2,346 2,063 101
--------- --------- ---------
Total revenues .................................. 193,839 100,250 25,233
Expenses:
Agent commissions .................................... 48,507 36,100 10,047
Personnel ............................................ 72,209 25,433. 5,972
General and administrative ........................... 41,614 16,967 4,226
Pre-operating and contract start-up costs ............ 812 1,664 --
Contract commitment .................................. 2,685 -- 3,623
Restructure charge ................................... 1,425 -- --
Integration .......................................... 7,804 -- --
Loss on impairment of goodwill ....................... 13,710 -- --
Depreciation and amortization ........................ 10,548 4,386 870
--------- --------- ---------
Total expenses .................................. 199,314 84,550 24,738
--------- --------- ---------
(Loss) income before interest expense
and income taxes ................................ (5,475) 15,700 495
Interest expense ..................................... 2,601 69 105
--------- --------- ---------
(Loss) income before income taxes .................... (8,076) 15,631 390
(Benefit) provision for income taxes ................. (1,360) 6,096 159
--------- --------- ---------
Net (loss) income ............................... $ (6,716) $ 9,535 $ 231
========= ======== =========
Dividends on Redeemable
Preferred Stock ................................. $ - $ 285 $ 285
========= ======== =========
Net income (loss) attributable to
Common Stock .................................... $ (6,716) $ 9,250 $ (54)
========= ======== =========
Pro forma net income per share ....................... $ 0.71 $ 0.03
========= =========
Pro forma weighted average
shares outstanding .............................. 13,414 9,339
========= =========
Historical weighted average net
(loss) income per share ......................... $ (0.47) $ 0.82
========= ========
Historical weighted average
shares outstanding .............................. 14,266 11,336
========= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
37
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
------------ ------------ -------------- -------------- -----------
Non-voting Voting Additional
Common Common Paid-in Retained
Stock Stock Capital Earnings Total
------------ ------------ -------------- -------------- -----------
Initial issuance of
Common Stock (October 1, 1994) ............. $ 75 $ -- $ 925 $ -- $ 1,000
Issuance of management stock ................ 5 -- 1,226 -- 1,231
Unvested interest in management stock ....... -- -- (1,170) -- (1,170)
Dividends on Redeemable
Preferred Stock ............................ -- -- -- (285) (285)
Net Income .................................. -- -- -- 231 231
--------- ---------- --------- --------- ---------
Balance at December 31, 1994 ................ $ 80 $ -- $ 981 $ (54) $ 1,007
Issuance of management stock ................ -- -- 30 -- 30
Unvested interest in
management stock ........................... -- -- (27) -- (27)
Vesting of management stock ................. -- -- 330 -- 330
Net proceeds of initial public offering ..... -- 40 50,766 -- 50,806
Conversion of Non-Voting
Common Stock to Voting
Common Stock ............................... (80) 80 -- -- --
Exchange of Redeemable
Preferred Stock Series A
and Series B for Common Stock .............. -- 14 19,556 -- 19,570
Dividends on Redeemable
Preferred Stock ............................ -- -- -- (285) (285)
Net income .................................. -- -- -- 9,535 9,535
--------- ---------- --------- --------- ---------
Balance at December 31, 1995 ................ $ -- $ 134 $ 71,636 $ 9,196 $ 80,966
Vesting of management stock ................. -- -- 456 -- 456
Issuance of 11,400 shares in
connection with stock option plans ......... -- -- 160 -- 160
Issuance of 1,400,110 shares in
connection
with acquisition of Harrington
Services Corporation ........................ -- 14 30,088 -- 30,102
Issuance of 160,957 shares to former
affiliates of Consolidated
Group, Inc. ................................ -- 2 3,700 -- 3,702
Issuance of 6,302 shares in
connection
with the employee stock
purchase plan ............................. -- -- 113 -- 113
Net loss .................................... -- -- -- (6,716) (6,716)
--------- ---------- --------- --------- ---------
Balance at December 31, 1996 ................ $ -- $ 150 $ 106,153 $ 2,480 $ 108,783
========= ========== ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
38
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Page 1 of 2
FOR THE PERIOD FROM
INCEPTION (OCTOBER 1,
FOR THE YEAR ENDED DECEMBER 31, 1994) THROUGH
1996 1995 DECEMBER 31, 1994
--------------- -------------- ------------------------
Cash flows from operating activities:
Net (loss) income ......................................... $ (6,716) $ 9,535 $ 231
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation .............................................. 5,729 2,657 511
Amortization of goodwill .................................. 4,464 1,524 307
Amortization of other assets .............................. 355 205 51
Contract commitment, net .................................. 607 (2,633) 3,115
Charge for restructuring, net .............................. 462 -- --
Loss on impairment of goodwill ............................ 13,710 -- --
Issuance of Common Stock to managememt .................... 456 332 62
Deferred taxes ............................................ (804) 935 244
Changes in assets and liabilities, net of effect
from acquisitions:
Restricted cash ........................................... (9,057) 1,807 (2,150)
Accounts receivable ....................................... 1,415 (702) (975)
Refundable income taxes ................................... (5,043) (1,041) --
Prepaid commissions ....................................... 525 200 222
Prepaid expenses and other current assets ................. (811) (64) (56)
Other assets .............................................. 565 (188) --
Accounts payable .......................................... 10,608 643 1,425
Premiums payable to carriers .............................. 12,327 (1,262) 2,061
Commissions payable ....................................... 149 (12) 216
Deferred revenue .......................................... (490) (1,018) (256)
Accrued liabilities ....................................... (7,728) (1,707) (1,835)
Income taxes payable ...................................... (54) (135) 135
-------- -------- --------
Net cash provided by operating activities .............. 20,669 9,076 3,308
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ....................... (5,731) (5,286) (182)
Sales (purchases) of short-term investments, net .......... 36,723 (36,723) --
Payment for purchase of Predecessor Company,
net of cash acquired .................................... -- -- (18,406)
Payment for purchase of Diversified Group
Brokerage ............................................... -- (10,075) --
Payment for purchase of Third Party Claims
Management, net of cash acquired ........................ -- (7,328) --
Cash paid for purchase of Harrington Services
Corporation, net of cash acquired ....................... (29,274) -- --
Payment for purchase of Consolidated Group, Inc.,
net of cash acquired .................................... (60,210) -- --
Increase in investments ................................... (3,311) -- --
Increase in note receivable ............................... (6,388) -- --
-------- -------- --------
Net cash used in investing activities ................... (68,191) (59,412) (18,588)
-------- -------- --------
Cash flows from financing activities:
Net borrowings under line of credit ....................... 55,000 -- --
Payments on other debt .................................... (12,466) (35) (17)
Net proceeds from initial public offering of
Common Stock ............................................ -- 50,806 --
Payments of loan origination costs ........................ -- -- (400)
Issuance of Redeemable Preferred Stock .................... -- -- 19,000
Proceeds from exercise of stock options ................... 160 -- --
Proceeds from Common Stock issued ......................... 3,815 -- 1,000
-------- -------- --------
Net cash provided by financing activities ................ 46,509 50,771 19,583
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ......... (1,013) 435 4,303
Cash and cash equivalents at beginning of period ............. 4,738 4,303 --
-------- -------- --------
Cash and cash equivalents at end of period ................... $ 3,725 $ 4,738 $ 4,303
======== ======== ========
F-5
39
Page 2 of 2
Supplemental disclosure of cash flow information:
Cash paid for interest .................................... $ 1,573 $ 65 $ 122
======== ======== ========
Cash paid for income taxes ................................ $ 4,968 $ 6,321 $ --
======== ======== ========
Supplemental disclosure of non-cash activities:
Exchange of Redeemable Preferred Stock
Series A and Series B for Common Stock ................ $ -- $ 19,570 $ --
======== ======== ========
Issuance of Common Stock to management .................... $ 456 $ 332 $ 62
======== ======== ========
Common Stock issued for purchase of
Harrington Services Corporation .................... $ 30,102 $ -- $ --
======== ======== ========
Dividends on redeemable preferred stock ................... $ -- $ 285 $ 285
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
40
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
HealthPlan Services Corporation (together with its direct and indirect
wholly owned subsidiaries, the "Company") provides marketing,
administration, and risk management services and solutions for benefit
programs. The Company provides these services for over 125,000 small
businesses and large, self-funded organizations, covering approximately
2.6 million members in the United States. The Company's customers include
managed care organizations, insurance companies, integrated health care
delivery systems, self-funded benefit plans, and health care purchasing
alliances.
On May 19, 1995, the Company completed an initial public offering of
4,025,000 shares of its Common Stock, shares of which are presently traded
on the New York Stock Exchange. Concurrent with the initial public
offering, the Company also exchanged Redeemable Preferred Stock for
1,398,000 shares of Common Stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The Company prepares its financial statements in conformity with generally
accepted accounting principles. These principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, (i) HealthPlan Services, Inc., together
with its wholly owned subsidiaries ("HPSI"), (ii) Harrington Services
Corporation, together with its direct and indirect wholly owned
subsidiaries ("Harrington"), (iii) Consolidated Group, Inc., together with
its affiliates ("Consolidated Group"), and (iv) Healthcare Informatics
Corporation. All intercompany transactions and balances have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as highly liquid investments that
have original maturities of three months or less. Cash and cash equivalents
consist of bank deposits to meet anticipated short-term needs.
RESTRICTED CASH
The Company has established a bank account for the sole purpose of
administering the contracts with the Florida Community Health Purchasing
Alliances. This cash may be withdrawn only to meet current obligations
connected with servicing these contracts.
SHORT-TERM INVESTMENTS
Investments in marketable securities at December 31, 1995 consisted of a
professionally managed portfolio of short-term financial instruments
including short-term municipal bonds. As of January 1, 1995, the Company
adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities." The
effect of SFAS 115 is dependent upon classification of the investment.
Because the investments are classified as available for sale, they were
measured at fair market value, which approximated cost. There were no
investments with maturities of greater than one year. The remainder of the
Company's short-term investments were liquidated in July 1996 in order to
provide a portion of the cash needed for the Harrington and Consolidated
Group acquisitions.
F-7
41
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Costs of the assets acquired
have been recorded at their respective fair values at the date of
acquisition. Expenditures for maintenance and repairs are expensed as
incurred. Major improvements that increase the estimated useful life of
an asset are capitalized. Depreciation is computed using the straight-line
method over the following estimated useful lives of the related assets:
YEARS
-----------------
Building 19
Furniture and fixtures 3-10
Computers and equipment 2-5
Computer software 3
Leasehold improvements Lease term
PREPAID COMMISSIONS
Prepaid commissions consist primarily of commissions paid to certain
agents at the initiation of a policy. These commissions are expensed on a
straight-line basis as revenues related to the policy are earned.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist primarily of prepaid
rent, insurance, postage, and repair and maintenance contracts.
GOODWILL AND IMPAIRMENT OF LONG-LIVED ASSETS
The excess of cost over the fair value of net assets acquired is recorded
as goodwill and amortized on a straight-line basis over 25 years. The
Company reviews long-lived assets, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable. The Company compares the
expected future undiscounted cash flows to the carrying values of the
long-lived assets at the lowest level of identifiable cash flows. When the
expected future undiscounted cash flows are less than the carrying amount,
the asset is written down to its estimated fair value. The Company
calculates estimated fair value as the discounted future value of
anticipated cash flows (see Note 5).
OTHER ASSETS
Other assets consist primarily of loan origination fees and covenants not
to compete, which are amortized over the terms of the respective
agreements.
PREMIUMS PAYABLE
The Company collects insurance premiums on behalf of its insurance carrier
and managed care customers and remits such amounts to the customers when
due.
REVENUE RECOGNITION
Revenues are recognized ratably over contractual periods or as claims
processing and administrative services are being performed. Revenue
collected in advance is recorded as deferred revenue until the related
services are performed.
F-8
42
ADVERSE CONTRACT COMMITMENTS
On an ongoing basis, the Company estimates the revenues to be derived over
the life of service contracts, as well as the costs to perform the services
connected therewith, in order to identify adverse commitments. This process
includes evaluating actual results during the period and analyzing other
factors, such as anticipated rates, volume, and costs. If the revised
estimates indicate that a net loss is expected over the remaining life of
the contract, the Company recognizes the loss immediately.
PRE-OPERATING AND CONTRACT START-UP COSTS
The Company has elected to expense as incurred, and segregate from other
operating costs, those costs related to the preparation for and
implementation of new products and contracts for services to new customers
prior to the initiation of significant revenue activity from those new
revenue initiatives.
INTEGRATION EXPENSE
Certain costs amounting to $6.9 million incurred by the Company in relation
to the post-acquisition integration of information systems at Consolidated
Group, Inc. and Harrington Services Corporation are recorded as
integration expense. Other non-information systems costs amounting to
$883,000 for items such as travel, recruiting, and moving have also been
recorded as integration expense.
RESTRUCTURE CHARGES
The Company recognizes a liability for restructuring charges and a
corresponding charge to results of operations when the following
conditions exist: management approves and commits the Company to a plan of
termination of employees, or an exit plan, and establishes the benefits
that current employees will receive upon termination; the benefit
arrangement is communicated to employees; the plan of termination
identifies the number and type of employees; and the exit plan or plan of
termination will begin as soon as possible, and significant changes are not
likely.
In 1996, the Company recorded a restructure charge of $1.4 million to
reflect the cost of exiting certain excess office space ($650,000) and
terminating employees ($775,000). The Company's restructure plan was for
the elimination of an estimated 80 jobs in management, claims
administration, and information systems operations in its Tampa and
Memphis offices. Seventy-seven employees were actually terminated.
AGENT COMMISSIONS
The Company recognizes agent commissions expense in the same period that
the related revenues are recognized.
INCOME TAXES
The Company recognizes deferred assets and liabilities for the expected
future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. For federal income tax
purposes, the Company files a consolidated tax return with its wholly owned
subsidiaries.
EARNINGS PER SHARE
Earnings per share in 1996 and 1995 have been computed based on the
historical weighted average number of shares of Common Stock outstanding
during the period. Pro forma earnings per share was computed in 1995 and
1994 based on the weighted average number of common shares outstanding
during the periods, after giving retroactive effect for the mandatory
conversion of the Company's Redeemable Series A and Series B Preferred
Stock, which occurred upon completion of the Company's initial public
offering, as well as the shares issued at the time of that offering.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, all stock options and common shares issued have been included as
outstanding for the entire period using the treasury stock method.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method currently prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25") and discloses the
pro forma effects of the fair value based method, as prescribed by
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").
3. ACQUISITIONS
CONSOLIDATED GROUP
On July 1, 1996, the Company acquired all the issued and outstanding stock
of Consolidated Group, Inc. and three affiliated entities (collectively,
"Consolidated Group") for approximately $61.9 million in cash. Consolidated
Group, headquartered in Framingham, Massachusetts, specializes in providing
medical benefits administration and other related services for health care
plans. As of December 31, 1996, Consolidated Group provided these services
for over 23,000 small businesses in a variety of industries covering
approximately 250,000 members in 50 states. At December 31, 1996,
Consolidated Group employed approximately 500 people. The purchase price of
Consolidated Group was allocated to the fair value of the net assets
acquired as follows:
Tangible assets acquired $ 19.7 million
Goodwill 59.7 million
Liabilities assumed and accrued at purchase (17.5) million
=================
$ 61.9 million
=================
F-9
43
HARRINGTON SERVICES CORPORATION
On July 1, 1996, the Company also acquired all the issued and outstanding
stock of Harrington for approximately $32.5 million cash and 1,400,110
shares of the Company's Common Stock valued at $30.1 million. Harrington,
headquartered in Columbus, Ohio, provides administration services to
self-funded benefit plans. As of December 31, 1996, Harrington provided
these services to over 3,000 large, self-funded plans for employers in a
variety of industries covering approximately 960,000 members in 47 states.
At December 31, 1996, Harrington employed approximately 1,500 employees,
with principal offices in Columbus, Ohio, Chicago, Illinois, and El Monte,
California. The purchase price of Harrington, which totaled $62.6 million
in cash and stock, was allocated to the fair value of the net assets
acquired as follows:
Tangible assets acquired $ 27.7 million
Goodwill 66.7 million
Liabilities assumed (31.8) million
=================
$ 62.6 million
=================
DIVERSIFIED GROUP BROKERAGE
On October 12, 1995, HPSI acquired substantially all of the assets and
assumed certain liabilities of the third party administration business of
Diversified Group Brokerage Corporation ("DGB"), effective as of October
1, 1995. As of December 31, 1996, the DGB business served approximately
300 medium-sized businesses covering 45,000 members. The purchase price
for the DGB business consisted of (i) approximately $5.1 million paid at
closing and (ii) for the seven-year period following the closing date,
semi-monthly payments based on the number of enrollees in accounts that
were DGB accounts as of the closing date, to be reduced by any attrition
of enrollees. HPSI placed $5.0 million in escrow, as required by the
agreement to fund those payments, and the present value of those estimated
payments was recorded as goodwill. Additionally, HPSI assumed
approximately $1.0 million in liabilities related to this purchase. The
success of the DGB business is heavily dependent on its ability to
maintain and grow market share in a narrowly defined geographic market --
the self-funded health care plans of primarily medium-sized businesses
with an emphasis on the New England geographic market (see Note 5).
THIRD PARTY CLAIMS MANAGEMENT, INC.
On August 31, 1995, HPSI acquired all of the issued and outstanding shares
of capital stock of Third Party Claims Management, Inc. ("TPCM"). As of
December 31, 1996, TPCM served approximately 100 mid-to-large sized
organizations covering approximately 140,000 members. In connection with
this acquisition, the Company recorded (i) a cash investment of
approximately $7.5 million, subject to a post-closing adjustment based on
the balance sheet of TPCM as of August 31, 1995, (ii) liabilities of
approximately $2.7 million, representing an assumption of liabilities and
additional accruals related to the transaction, and (iii) an additional
payment equal to $2.00 multiplied by the number of employees enrolled in
any TPCM account as of the anniversary date of the contract which was
administered by the Company on the closing date and continued to be a
TPCM account administered by the Company on the anniversary date. This
payment was estimated at approximately $210,000 by the Company at the
time of the acquisition and was recorded as a liability and an increase
in goodwill resulting from the acquisition. TPCM is focused on providing
services to hospitals and other related health care institutions that
offer self-funded health care benefits. The development of integrated
delivery systems by the entities making up this target market is expected
to increase. The services provided by these customers' system may include
the ability to replace those provided by the Company and possibly result
in competition with the Company (see Note 5).
F-10
44
UNAUDITED PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
The following unaudited pro forma consolidated results of operations of the
Company give effect to all of the above acquisitions, accounted for as
purchases, as if they occurred on January 1, 1995 (in thousands):
YEAR ENDED YEAR Ended
DECEMBER 31, December 31,
1996 1995
----------------- -----------------
Revenues $ 269,476 $ 245,167
Net (loss) income (7,839) 6,897
Net (loss) income per common share (0.53) 0.46
The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisitions been
made as of January 1, 1995 or of the results which may occur in the future.
4. CONCENTRATION OF CUSTOMERS
The Company is party to a variety of contracts with insurance companies,
preferred provider organizations ("PPOs"), health maintenance organizations
("HMOs"), integrated delivery systems, health care alliances, and their
business customers located throughout the United States to provide third
party marketing, administration, and risk management services for the small
business market. For the year ended December 31, 1996, the Company's three
largest payors accounted for approximately 16%, 13%, and 13%, respectively,
of total revenues. For the year ended December 31, 1995, the Company's
three largest payors accounted for approximately 31%, 23%, and 11%,
respectively, of total revenues.
The Company grants credit, without collateral, to some of its self-funded
clients under certain contracts.
5 GOODWILL
At December 31, 1996 and 1995, goodwill resulting from the excess of cost
over the fair value of the respective net assets acquired was as follows
(in thousands):
1996 1995
---------------- ----------------
HealthPlan Services $ 32,841 $ 32,841
Consolidated Group 59,734 -
Harrington 66,705 -
Diversified Group Brokerage 2,388 9,750
Third Party Claims Management 490 8,087
---------------- ----------------
162,158 50,678
Accumulated Amortization (5,637) (1,831)
---------------- ----------------
$ 156,521 $ 48,847
================ ================
In the third quarter of 1996, the Company recorded a charge for impairment
of goodwill originally recorded upon the acquisitions of DGB and TPCM of
$6.6 million and $7.1 million, respectively. Other adjustments were
recorded to reduce the DGB and TPCM goodwill balances as a result of final
resolution of acquisition contingencies.
DGB, located in Marlborough, Connecticut, is a third party administrator
providing managed health care administrative services to self-funded
employers, typically having between 250 and 2,000 employees in the New
England market. At the time of this acquisition, the Company projected a
10% to 15% growth rate in net cash flows at DGB. Since this acquisition,
DGB has not achieved, and does not expect to achieve, the revenue and net
cash flow projections prepared at the time of the acquisition due to, among
other things, higher than originally expected attrition rates resulting in
F-11
45
ongoing decreases in net revenues (due in part to increased pricing
resulting from a reinsurance carrier's departure from DGB's market) and an
inadequate distribution system, as evidenced by an underperforming sales
force and greater than anticipated operating costs. The Company's efforts
to correct these deficiencies have not enabled it to meet its original
projections. Accordingly, the Company recorded an impairment charge of $6.6
million associated with the DGB acquisition. Any further significant
declines in the DGB's projected net cash flows may result in additional
write-downs of remaining goodwill.
TPCM is a third party administrator providing managed health care
administrative services to hospitals and other health care institutions
that offer self-funded health care benefits. At the time of this
acquisition, the Company projected a 10% to 15% growth rate in net cash
flows at TPCM. Since this acquisition, TPCM has not achieved, and does not
expect to achieve, the revenue and net cash flow projections prepared at
the time of the acquisition due to, among other things, higher than
originally expected attrition rates, significantly higher than expected
claims experience (claims filed per enrollee), and greater than anticipated
operating costs due to the inability to obtain economies of scale through
integration. The Company's efforts to correct these deficiencies have not
enabled it to meet its original projections. In 1996, TPCM lost one
customer that represented over $1.0 million in annualized revenues
resulting in a decision to close one of its operating facilities.
Accordingly, the Company has recorded an impairment charge of $7.1 million
associated with the TPCM acquisition. Any further significant declines in
TPCM's projected net cash flows may result in additional write-downs of
remaining goodwill.
The Company will continue to evaluate on a regular basis whether events and
circumstances have occurred that indicate the carrying amount of goodwill
may not be recoverable. Although the net unamortized balance of
goodwill at December 31, 1996 is not considered to be impaired, any such
future determination requiring the recognition of an impairment charge
could have a material adverse effect on the Company's results.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
1996 1995
-------- --------
Land $ 438 $ -
Building 1,133 -
Furniture and fixtures 14,478 3,433
Computers and equipment 14,961 4,747
Computer software 15,377 3,452
Leasehold improvements 4,076 1,117
------- -------
50,463 12,749
Less - accumulated depreciation (29,361) (3,508)
======= =======
$ 21,102 $ 9,241
======= =======
7. INVESTMENTS AND NOTES RECEIVABLE
On January 8, 1996, the Company entered into an agreement with Medirisk,
Inc., a provider of health care information, to purchase $2.0 million of
Medirisk preferred stock representing a 9% ownership interest and, in
addition, to lend Medirisk up to $10.0 million over four years in the form
of debt for which the Company would receive detachable warrants to purchase
up to 432,101 shares of Medirisk's common stock for $0.015 per share, based
on the amount of debt actually acquired. This investment is recorded at
cost.
On March 13, 1996, Medirisk borrowed $6.9 million from the Company. The
debt bears interest of 10% payable quarterly and is due upon the earliest
to occur of (i) an initial public offering by Medirisk; (ii) a change of
control of Medirisk; or (iii) at maturity on January 8, 2003. In accordance
with the agreement, warrants to purchase 298,150 shares of Medirisk's
common stock were issued to the Company.
The Company discounted the note receivable by the relative fair value of
the warrants, which was determined to be $573,000. The value of the
warrants is accreted to income over the life of the note based on the
maturity date.
On January 28, 1997, Medirisk completed an initial public offering and
satisfied the $6.9 million debt balance in accordance with the agreement.
The remaining value of the warrants will be accreted to income in the first
quarter of 1997. Upon completion of the public offering, Medirisk's
preferred stock was converted to common stock. The Company has agreed not
to sell its shares of Medirisk in the public market for 180 days after the
effective date of the initial public offering without the prior consent of
the offering's underwriters. After the 180 day period has lapsed, the
shares will be eligible for sale in the public market, subject to the
conditions and restrictions of Rule 144 under the Securities Act of 1933.
Assuming full conversion of the warrants issued to the Company, its
ownership amounts to 480,442 shares of common stock after the public
offering, which represents an approximate 11% ownership interest. On March
14, 1997, Medirisk's shares closed at $8.38 per share of common stock.
8. NOTE PAYABLE AND CREDIT FACILITIES
The Company expanded its credit facility (the "Line of Credit") from $20
million to the lesser of (i) three times earnings before interest expense,
income taxes, and depreciation and amortization expense (with certain
adjustments called for in the credit agreement) or (ii) $175 million during
1996. The maximum amount available through the Line of Credit as of
December 31, 1996 was approximately $109 million. The facility operates on
a revolving basis until May 18, 1998, on which date the outstanding balance
shall be paid over a three year period with the first principal payment due
November 30, 1998 and the final payment due April 30, 2001. The Company's
borrowing under the Line of Credit includes interest ranging from
LIBOR plus 125 to 175 basis points to New York prime plus 25 to 75 basis
points. The Line of Credit carries a commitment fee of 0.25% of the unused
portion and is secured by the stock of the Company's
subsidiaries. The agreement contains provisions which include (among other
covenants) maintenance of certain minimum financial ratios, limitations on
capital expenditures, limitations on acquisition activity, and limitations
on the payment of dividends. The Company incurred $2.1 million of interest
expense on the Line of Credit for year ended December 31, 1996.
F-12
46
Subsequent to obtaining the Line of Credit, the Company entered into two
separate interest rate swap agreements as a hedge against interest rate
exposure on the variable rate debt. The agreements, which expire in October
1999 and September 2001, effectively convert $40.0 million of variable debt
under the Line of Credit to fixed rate debt at a weighted average rate of
6.42% plus a margin ranging from 125 to 175 basis points. For the year
ended December 31, 1996, the Company recorded $110,000 of interest expense
related to the swap agreements. The Company considers the fixed rate and
variable rate financial instruments to be representative of current market
interest rates and, accordingly, the recorded amounts approximate their
present fair market value.
In conjunction with the acquisition of the Company in 1994 by certain
Company officers and Noel Group, Inc. ("Noel"), the Company assumed a note
payable to the Cal Group (the "Cal Group Note") of $1.3 million, which
bears interest at 5% per annum. The note payable requires semi-annual
principal payments in May and November of $18,000 to $78,000 through
November 2008. Interest expense relating to the note payable was
approximately $62,000 and $64,000 for the years ended December 31, 1996 and
1995, respectively.
On July 1, 1996, the Company assumed several notes payable previously
entered into by Consolidated Group (the "Consolidated Group Notes"), which
were secured primarily by computer equipment. The interest rates on those
notes are LIBOR plus 150 to 175 basis points. The Company also assumed an
operating note (the "Consolidated Operating Note"), which is also secured
by purchased equipment and has a fixed interest rate of 7.82%.
Consolidated Group also has a mortgage outstanding secured by a building
with a book value at December 31, 1996 of $1.1 million. The interest rate
on the mortgage is fixed at 8.75%, with the final payment due in May 2016.
On July 1, 1996, the Company assumed certain equipment notes as a result of
a prior agreement that had been executed by Harrington ("Harrington
Equipment Notes"). The notes, which are secured primarily by telephone
equipment, have interest rates ranging from 7.2% to 9.0% with the final
payment due in July 2004.
The balances outstanding on the above debt instruments at December 31, 1996
are as follows (in thousands):
Line of Credit $55,000
Cal Group Note 1,214
Consolidated Group Notes 2,237
Consolidated Operating Note 528
Consolidated Group Mortgage 1,481
Harrington Equipment Notes 1,838
-------
$62,298
Less: Amounts due within one year (2,717)
=======
Long-term debt $59,581
=======
F-13
47
Future minimum principal payments for all notes as of December 31, 1996 are as
follows (in thousands):
1997 $ 2,717
1998 8,737
1999 16,942
2000 20,455
2001 11,165
Thereafter 2,282
==========
$ 62,298
==========
As of March 14, 1997, the Company had liquidated approximately $7.5 million
of the above debt before its scheduled maturity, including a pay-off of the
Consolidated Group Notes.
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
DECEMBER 31,
1996 1995
------- -------
Adverse lease commitments $ 5,215 $ -
Salaries and wages 3,573 1,297
Office consolidation costs 919 325
Interest 906 10
Accrued legal and regulatory 555 683
State and local taxes 545 71
Severance 276 356
Other 2,916 2,351
======= =======
$14,905 $ 5,093
======= =======
Adverse lease commitments relate to office and equipment leases assumed by
the Company upon its acquisitions of Consolidated Group and Harrington at
prices in excess of market rates or for property that will not be utilized
for the full term of the lease. Severance and office closure costs at
December 31, 1996 refer to costs connected with the Company's acquisitions
of Consolidated Group and Harrington. Through December 31, 1996, $496,000
had been charged against these accruals. Other includes approximately $1.3
million and $1.1 million of other acquisition-related costs at December 31,
1996 and 1995, respectively.
10. ACCRUED CONTRACT COMMITMENTS
Starting in 1994, the Company pursued contracts with state-sponsored health
care purchasing alliances, initially in Florida, and in 1995-1996, in North
Carolina, Kentucky, and Washington. The Company has incurred substantial
expenses in connection with the start-up of these contracts, and, to date,
the alliance business in North Carolina and Florida has been unprofitable.
During the quarter ended December 31, 1994, the Company recorded a pre-tax
charge of approximately $3.6 million related to state-sponsored health care
purchasing alliances in Florida. The Company recorded a pre-tax charge
related to these contracts in the amount of $2.6 million in 1996 resulting
from increased costs and lower than anticipated revenues in Florida and
North Carolina.
The balance of the accrual at December 31, 1996 is approximately $608,000
for Florida and $481,000 for North Carolina. The balance at December 31,
1995 was approximately $482,000 for Florida.
11. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
The Company has a defined contribution employee benefit plan established
pursuant to Section 401(k) of the Internal Revenue Code covering
substantially all employees. Through December 31, 1996, the Company matched
up to 50% of the employee contribution limited to 6% of the employee's
salary for its HPSI and Harrington employees, and it matched 50% of the
employee contribution limited to 4% of the employee's salary for its
Consolidated Group employees. Effective January 1, 1997, the Company began
to match one-third of such
F-14
48
employee contributions limited to 6% of the employee's salary. Under the
provisions of the plan, participants' rights to employer contributions vest
40% after completion of three years of qualified service and increase by
20% for each additional year of qualified service completed thereafter.
Expense in connection with this plan for the years ended December 31, 1996
and 1995 was approximately $884,000 and $339,000, respectively, and for the
period from inception (October 1, 1994) through December 31, 1994 was
approximately $82,000.
POST-RETIREMENT BENEFIT PLAN
Harrington, the Company's wholly owned subsidiary acquired on July 1, 1996,
provides medical and term life insurance benefits to certain retired
employees of its subsidiary, American Benefit Plan Administrators, Inc. The
Company funds the benefit costs on a current basis, and there are no plan
assets. The post-retirement benefit cost incurred since the Company's
acquisition of Harrington is $38,000. At December 31, 1996, an accrued
post-retirement liability of $1.4 million is included in the balance of
other long-term liabilities. Actuarial assumptions used in calculating the
obligation include a discount rate of 7.5% and a health care cost trend
rate of 7% in 1997, 6% in 1998, and 5% in 1999 and thereafter.
MANAGEMENT STOCK
From the period 1994 through January 1995, certain members of management
received 473,000 shares of Common Stock, which carries limitations on
vesting over a four-year period and restrictions regarding the sale of
stock in a public market. Should the employee terminate employment prior to
the completion of the vesting period, the Company will be entitled to
purchase from the executive the number of shares that have not vested at a
purchase price equal to the lower of fair market value or the initial
issuance price. The Company recognizes compensation expense based on the
vesting period of the shares.
12. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company rents office space and equipment under non-cancelable operating
leases. Rental expense under the leases approximated $7.7 million (net of
$422,000 charged to adverse lease accruals) and $4.0 million for the years
ended December 31, 1996 and 1995, respectively, and $932,000 for the period
from inception (October 1, 1994) through December 31, 1994. Future minimum
rental payments under these leases are as follows (in thousands):
1997 $10,166
1998 9,107
1999 8,538
2000 6,373
2001 4,962
Thereafter 15,242
-------
$54,388
=======
LITIGATION
In 1995, a former provider of marketing services for the Company filed a
complaint against the Company claiming wrongful termination of an exclusive
marketing agreement and breach of contract. The parties to the dispute
agreed to binding arbitration, and the arbitration proceedings occurred
during the week of October 29, 1996. The arbitration panel's decision,
rendered in December 1996, is not expected to materially alter the amount
or timing of future payments that the Company is contractually obligated to
make to the plaintiff under the marketing agreement, and this is not
expected to materially affect the cash flows of the Company's business.
Pursuant to the Harrington acquisition agreement (the "Harrington
Agreement"), the Company agreed to use its best efforts to file a
registration statement sufficient to permit the public offering and sale of
the shares of the Company's Common Stock issued to the Harrington
stockholders in the acquisition, with such registration statement to become
effective on or before October 31, 1996. On October 30, 1996, the Company
received a letter from a representative of Harrington's shareholders
stating that the Company was in violation of the Harrington Agreement and
reserving all rights under such Agreement. It is not possible for the
Company to evaluate what, if any, damages might result from such notice. In
November 1996, the Company filed a Form S-3 registration statement with the
Securities and Exchange Commission registering the restricted shares of the
Company's Common Stock held by the former Harrington and Consolidated Group
shareholders. This registration statement became effective on February 14,
1997.
The Company's Consolidated Group subsidiary is undergoing a DOL audit in
which the DOL has raised various questions about the application of ERISA
to the way that subsidiary does business. This audit is ongoing, and there
can be no assurance that the DOL will not take positions that could require
changes to the way this subsidiary operates, or result in the imposition of
administrative fines and penalties.
The Company is involved in various litigation arising in the normal course
of business. In the opinion of the Company's management, although the
outcomes of these claims are uncertain, in the aggregate they are not
likely to have a material adverse effect of the Company's business,
financial condition, or results of operations.
REGULATORY COMPLIANCE
The Company's activities are highly regulated by state and federal
regulatory agencies under requirements that are subject to broad
interpretations. The Company cannot predict the position that may be taken
by these third parties that could require changes to the manner in which
the Company operates.
F-15
49
13. INCOME TAXES
The (benefit) provision for income taxes is as follows (in thousands):
PERIOD FROM INCEPTION
FOR THE YEAR ENDED FOR THE YEAR ENDED (OCTOBER 1, 1994) THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ------------------ ------------------------
Current
Federal $ 429 $ 3,211 $ 120
State 61 458 15
======= ======= =======
490 3,669 135
======= ======= =======
Deferred
Federal (1,619) 2,116 21
State (231) 311 3
------- ------- -------
(1,850) 2,427 24
======= ======= =======
(Benefit) provision for
income taxes $(1,360) $ 6,096 $ 159
======= ======= =======
The components of deferred taxes recognized in the accompanying financial
statements are as follows (in thousands):
DECEMBER 31,
1996 1995
--------- ---------
Deferred tax asset - current
Accrued expenses not currently deductible $ 4,617 $ 1,120
Prepaid expenses currently deductible (136) (155)
======= =======
$ 4,481 $ 965
======= =======
Deferred tax asset (liability) - non-current
Deferred compensation $ 537 $ -
Post retirement benefits 641 -
Depreciation (657) 80
Intangibles 7,806 (434)
------- -------
$ 8,327 $ (354)
======= =======
The deferred tax asset resulting from intangibles relates to certain
intangible assets acquired by the Company that are amortizable for tax
purposes and to the tax treatment of the goodwill impairment charge (see
Note 5). A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax asset will not be realized. No
valuation allowance is considered necessary at December 31, 1996 and 1995,
based on the Company's expectations of future taxable income.
F-16
50
The provision for income taxes varies from the federal statutory income tax
rate due to the following:
1996 1995 1994
-------- ------- -------
Federal statutory rate applied to pre-tax income (loss) (35.0)% 34.0% 35.0%
State income taxes net of federal tax benefit (5.0)% 5.0% 4.5%
Goodwill amortization 20.1% 0.2% 1.3%
Tax exempt interest income (2.6)% (1.3)% -
Other 5.7% 1.1% -
----- ---- ----
Effective tax rate (16.8)% 39.0% 40.8%
====== ==== ====
14. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN
STOCK OPTION PLANS
The Company's stock option plans authorize the granting of both incentive
and non-incentive stock options for a total of 1,840,000 shares of Common
Stock to key executives, management, consultants, and, with respect to
240,000 shares, to directors. Under the plans, all options have been
granted at prices not less than market value on the date of grant. Certain
non-qualified incentive stock options may be granted at less than market
value. Options generally vest over a four-year period from the date of
grant, with 20% of the options becoming exercisable on the date of the
grant and 20% becoming exercisable on each of the next four anniversaries
of the date of the grant.
A summary of option transactions during each of the two years ended
December 31, 1996 is shown below:
Number Weighted
of Average
Shares Option Price
----------- ----------------
Under option, December 31, 1994
Granted 545,000 $ 18.11
Exercised - -
-----------
Under option, December 31, 1995
(112,000 exercisable) 545,000 18.11
Granted 922,500 18.75
Exercised (11,400) 14.00
Cancelled (12,600) 19.35
-----------
Under option, December 31, 1996
(278,200 exercisable) 1,443,500 18.54
===========
There were 372,500 and 795,000 shares available for the granting of
options at December 31, 1996 and 1995, respectively.
The following table summarizes the stock options outstanding at December
31, 1996:
Range Number Weighted Average Weighted
of Outstanding at Remaining Average
Exercise Prices December 31, 1996 Contractual Life Exercise Price
--------------- ----------------- ---------------- --------------
$14.00 - $18.50 979,500 9 years $16.09
19.38 - 25.50 464,000 9 years 23.72
F-17
51
EMPLOYEE STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan ("Employee Plan"), the Company
is authorized to issue up to 250,000 shares of common stock to its
employees who have completed one year of service. The Employee Plan is
intended to provide a method whereby employees have an opportunity to
acquire shares of Common Stock of the Company. The Employee Plan was
implemented by consecutive quarterly offerings of the Company's Common
Stock commencing on July 1, 1996.
Under the terms of the Employee Plan, an employee may authorize a payroll
deduction of a specified dollar amount per pay period. The proceeds of that
deduction are used to acquire shares of the Company's Common Stock on the
offering date. The number of shares acquired is determined based on 85% of
the closing price of the Company's Common Stock on the New York Stock
Exchange on the offering date.
During 1996, the Company sold 6,302 shares to employees under the Employee
Plan.
F-18
52
MEASUREMENT OF FAIR VALUE
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans and employee stock purchase plan.
Accordingly, no compensation cost has been recognized related to these
plans. Had compensation cost for the Company's stock option and employee
stock purchase plans been determined based on the fair value at the grant
dates, as prescribed in SFAS 123, the Company's net income and net income
per share would have been as follows:
YEAR ENDED DECEMBER 31,
1996 1995
-------------- --------------
Net (loss) income attributable to
common stock (in thousands):
As reported $ (6,716) $ 9,250
Pro forma (8,596) 8,627
Net income per share:
As reported $ (0.47) $ 0.82
Pro forma (0.60) 0.76
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants during the applicable year: dividend yield of 0.0% for both
years; expected volatility of 30% for each of the years ended December
31, 1996 and 1995: risk-free interest rates of 6.30% to 6.69% for options
granted during the year ended December 31, 1996 and 5.51% to 7.05% for
options granted during the year ended December 31, 1995; and a weighted
average expected option term of four years for both years.
F-19
53
15. SUBSEQUENT EVENTS
On February 7, 1997, Noel, Automatic Data Processing, Inc. ("ADP"), and the
Company completed a transaction in which Noel sold to ADP 1,320,000 shares
of the Company's Common Stock at a purchase price of $20 per share. Upon
completion of the transaction, Noel and ADP owned approximately 29% and 9%,
respectively, of the Company's Common Stock. The agreement governing such
purchase generally requires that: (i) ADP may not agree to acquire
additional shares of the Company's Common Stock prior to December 31, 1997,
unless such acquisition is approved by the Company's Board of Directors, or
unless the Company entertains alternative offers; (ii) Noel may not dispose
of its remaining shares of the Company's Common Stock prior to September
30, 1997 other than through a direct distribution to Noel's shareholders,
subject to specified conditions; and (iii) the Company may not take any
action prior to December 31, 1997 that could interfere with
"pooling-of-interests" accounting. On March 19, 1997, Noel's shareholders
approved a plan of liquidation and dissolution. In connection with such
approval, the Company expects to file a Form S-3 Registration Statement
with the Securities and Exchange Commission to register the shares of the
Company's Common Stock held by Noel, after which Noel has announced it
intends to make a distribution of the Company's stock to Noel's
shareholders.
On March 5, 1997, the Company and Health Risk Management, Inc. ("HRM")
mutually agreed to terminate a merger agreement previously entered into on
September 12, 1996. In connection with the termination, the Company
purchased 200,000 shares of HRM common stock, representing approximately
4.5% of HRM shares outstanding, at a price of $12.50 per share. On March
14, 1997, HRM's shares closed at $10.25 per share of common stock. These
shares were not registered and are subject to restrictions on transfer. HRM
provides comprehensive, integrated health care management, information, and
health benefit administration services to employers, insurance companies,
unions, HMOs, PPOs, hospitals, and governmental units in the United States
and Canada.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED; IN THOUSANDS EXCEPT PER
SHARE DATA)
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Year ended December 31, 1996
Revenues $63,963 $67,006 $31,863 $31,007
Net income (5,530) (7,961) 3,441 3,334
Net income per common share $ (0.37) $ (0.53) $ 0.26 $ 0.25
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Year ended December 31, 1995
Revenues $29,361 $24,115 $23,198 $23,576
Net income 2,985 2,623 2,072 1,570
Net income per common share .22 .20 .20 N/A
Net income - pro forma basis 2,985 2,623 2,072 1,855
Pro forma net income per common share $ 0.22 $ 0.20 $ 0.15 $ 0.20
First quarter earnings per share in 1995 has not been provided, because it
preceded the Company's initial public offering.
F-20
54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors of
Healthcare Informatics Corporation
and
To The Dun & Bradstreet Corporation
We have audited the accompanying statement of financial position of
HealthPlan Services Division (formerly Plan Services Division, a wholly owned
division of The Dun & Bradstreet Corporation) as of September 30, 1994 and the
related statements of income and cash flows for the nine-month period then
ended. These financial statements are the responsibility of the companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HealthPlan Services Division
as of September 30, 1994 and the results of its operations and its cash flows
for the nine-month period then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, on September 30, 1994,
HealthPlan Services Division was sold to Healthcare Informatics Corporation,
pursuant to a purchase agreement dated September 2, 1994.
Coopers & Lybrand L.L.P.
Tampa, Florida
December 2, 1994
F-21
55
HEALTHPLAN SERVICES DIVISION
STATEMENT OF FINANCIAL POSITION
September 30, 1994
(in thousands)
ASSETS
Current assets:
Cash $ 1,255
Accounts receivable 3,252
Prepaid expenses 2,303
-------
Total current assets 6,810
Property and equipment, net 2,715
Computer software, net 1,327
Other intangible assets, net 5,483
Goodwill, net 11,436
Deferred taxes 85
Other assets 28
-------
Total assets $27,884
=======
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Current portion of note payable $ 92
Accounts payable 19,581
Accrued liabilities 3,585
Deferred revenue 1,294
-------
Total current liabilities 24,552
Note payable 1,162
Commitments and contingencies (Notes 9 and 13)
Divisional equity 2,170
-------
Total liabilities and divisional equity $27,884
=======
The accompanying notes are an integral part of these financial statements.
F-22
56
HEALTHPLAN SERVICES DIVISION
STATEMENT OF INCOME
Nine-month period ended September 30, 1994
(in thousands)
Revenues $81,945
Costs and expenses:
Agents' commissions 33,213
Personnel expenses 24,476
Rent and maintenance 4,106
Postage and communication 3,563
Depreciation and amortization 3,347
Staff reductions and office closings (Note 3) 4,671
Other operating expenses (Note 8) 5,322
-------
78,698
-------
Income before provision for income taxes 3,247
Provision for income taxes 1,500
-------
Net income $ 1,747
=======
The accompanying notes are an integral part of these financial statements.
F-23
57
HEALTHPLAN SERVICES DIVISION
STATEMENT OF CASH FLOWS
Nine-month period ended September 30, 1994
(in thousands)
Cash flows from operating activities:
Net income $ 1,747
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 3,347
Staff reductions and office closings provisions 4,671
Staff reductions and office closings payments (1,992)
Deferred taxes 2
Accounts receivable 484
Prepaid expenses (269)
Accounts payable (2,312)
Accrued liabilities (892)
Deferred revenue (512)
-------
Net cash provided by operating activities 4,274
-------
Cash flows for investing activities:
Purchase of property and equipment, net (931)
Purchases of and additions to computer software (534)
Acquisitions of other intangible assets
(net of deferred payments) (21)
Other assets 11
-------
Net cash used in investing activities (1,475)
-------
Cash flows for financing activities:
Net amount remitted to The Dun & Bradstreet
Corporation and affiliates (Note 7) (3,602)
Payments on note payable (46)
-------
Net cash used in financing activities (3,648)
-------
Net change in cash (849)
Cash, beginning of period 2,104
-------
Cash, end of period $ 1,255
=======
The accompanying notes are an integral part of these financial statements.
F-24
58
HEALTHPLAN SERVICES DIVISION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Organization--HealthPlan Services Division (HSI) (formerly Plan Services
Division, a wholly-owned division of The Dun & Bradstreet Corporation (D&B)), is
engaged in the business of providing distribution and administration services
for group-health-insurance programs throughout the United States.
Basis of Presentation--The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles. On
September 30, 1994, HSI was sold to Healthcare Informatics Corporation, pursuant
to a purchase agreement dated September 2, 1994.
These financial statements present the results of operations for the
nine-month period to September 30, 1994 and financial position at September 30,
1994. Purchase accounting by the acquirer has not been reflected in these
financial statements. Expenses and liabilities which were incurred by HSI in
connection with the sale, which would not otherwise have been incurred, are
reflected in the nine-month period ended September 30, 1994.
See Note 3.
Expense Allocations--D&B provides certain services to, and incurs certain
costs on behalf of its subsidiaries and divisions. These costs, which include
employee benefit and executive compensation programs, retirement savings and
health plans, treasury and business insurance, are allocated to D&B's
subsidiaries, including HSI, on a pro-rata basis. The costs of D&B's general
corporate overheads are not allocated as such costs related to HSI are deemed to
be immaterial. Liabilities related to the benefit plans described above are not
fully reflected in the Statement of Financial Position. As such, these financial
statements may not necessarily be indicative of the financial position or the
results of operations had HSI been operated as an unaffiliated company. However,
management believes that with respect to general and administrative expenses
(see Note 8), the amounts reflected in the Statement of Income are not less than
the amounts HSI would have incurred had HSI been an unaffiliated company in
those periods.
2. SIGNIFICANT ACCOUNTING POLICIES:
Cash--Substantially all of the net cash flow of HSI was remitted to D&B
pursuant to a centralized cash management system. The related interest income
which would otherwise have been earned by HSI is not reflected in these
statements. Cash held by D&B has historically resulted in negative working
capital for HSI.
Property and Equipment--Property and equipment are stated at cost, net of
accumulated depreciation computed using the straight-line method over estimated
useful lives of three to ten years. Additions and major renewals are
capitalized. Repairs and maintenance are charged to expense as incurred. Upon
disposal, the related cost and accumulated depreciation are removed from the
accounts, with the resulting gain or loss included in income.
Computer Software--HSI capitalizes the direct expenses of internally
produced software. As of September 30, 1994, capitalized software costs, net of
amortization was (in thousands) $627. Software is generally amortized over three
years. Amortization expense was (in thousands) $184 for the nine months ended
September 30, 1994.
Other Intangible Assets--Other intangible assets represent the costs of
acquiring new blocks of insurance administration business which are deferred and
amortized on an accelerated basis over periods of up to seven years. Amounts
included in the accompanying Statement of Financial Position are net of
accumulated amortization of (in thousands) $3,491 as of September 30, 1994.
Goodwill--Goodwill relates to D&B's original acquisition of HSI and is
being amortized on a straight-line basis over periods of expected benefit, not
exceeding 40 years. Goodwill represents the excess purchase price over the fair
value of identifiable net assets. Amounts included in the accompanying Statement
of Financial Position are net of accumulated amortization of $4,620 (in
thousands) as of September 30, 1994. At the balance sheet date, HSI reviews the
recoverability of goodwill and other intangible assets.
F-25
59
Revenue Recognition--Revenues consist primarily of fees for services
provided to insurance carriers as a third party administrator. Revenues are
recognized ratably over the applicable contract period, which is generally one
year, and represents the period such services are performed. HSI accounts for
revenues received in advance by deferring such amounts until the related
services are performed. During the nine months ended September 30, 1994, HSI had
three customers that accounted for approximately 27%, 26%, and 11%,
respectively, of revenues.
Agents' Commissions--Agents' commission expense is accrued in the same
period that the related revenues are recognized.
Income Taxes--HSI participates in the consolidated federal income tax
return of D&B. For financial reporting purposes, HSI computes a provision for
income taxes on a separate return basis based on statutory rates in effect.
HSI's current income taxes payable are included in divisional equity in the
accompanying Statement of Financial Position. Effective January 1, 1992 HSI
adopted SFAS No. 109, "Accounting for Income Taxes," applying the provisions of
this statement retroactively to prior years' financial statements.
Postemployment Benefits--Effective January 1, 1993, D&B and HSI adopted
SFAS No. 112, "Employers' Accounting for Postemployment Benefits." HSI accrues
for such costs at the time it is probable that a liability to employees has been
incurred and it can be reasonably estimated. The implementation of this
statement did not have a material impact upon HSI's financial position or
results of operations.
Postretirement Benefits--Effective January 1, 1993, D&B and HSI adopted
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions." As a member of D&B's Plan, HSI recognized as net postretirement
benefit cost the required contribution to the plan based upon an allocation and
formula used by D&B. As a participant in D&B's postretirement benefit plan,
amounts related to liabilities to HSI employees existing at the date of adoption
of SFAS No. 106 are not reflected in the accompanying Statement of Financial
Position.
3. STAFF REDUCTIONS AND OFFICE CLOSINGS:
HSI has recorded charges for certain staff reductions and office closings.
In March 1994, HSI closed its Fresno, California processing center and recorded
a charge totaling $1,050,000. Such charge consisted of the following: $355,000
of lease termination costs; $380,000 of severance costs; $175,000 of fixed asset
write-offs; and $140,000 of other office closing costs. On September 30, 1994,
immediately prior to the sale of HSI, as required pursuant to the terms of the
related purchase agreement, HSI terminated 125 employees throughout its Tampa
operations and recorded a severance charge totaling $1,860,000. In addition, HSI
recorded a $1,761,000 charge for severance of two former officers in 1994. All
severance and office closing costs were paid as of September 30, 1994 or assumed
by D&B as part of the sale of HSI.
Subsequent to September 30, 1994, HSI discontinued its contract with The
Centennial Life Insurance Company. The revenues related to Centennial were (in
thousands) $4,680 for the nine months ended September 30, 1994.
F-26
60
4. PROPERTY AND EQUIPMENT:
Property and equipment at September 30, 1994 consists of the following (in
thousands):
Computers and equipment $ 13,372
Furniture and fixtures 4,611
Leasehold improvements 3,791
--------
21,774
Accumulated depreciation and amortization (19,059)
--------
Net property and equipment $ 2,715
========
Depreciation expense for the nine months ended September 30, 1994
was (in thousands) $1,284.
5. ACCRUED LIABILITIES:
Accrued liabilities at September 30, 1994 consist of the following (in
thousands):
Accrued salaries and wages $2,315
Deferred payments--other intangible assets 657
Other 613
------
Total accrued liabilities $3,585
======
6. NOTE PAYABLE:
On May 27, 1993, HSI entered into an agreement with Cal/Group for the
purchase of its claims processing business at a price of $2,000,000. The
purchase price consisted of $500,000 cash paid at closing with the balance in
the form of a note payable of $1,500,000. On March 25, 1994 the original
agreement was modified and the purchase price was reduced by $150,000. This
purchase is collateralized by the claims business. The note payable requires
semi-annual payments of $50,000 to $80,000, including interest at 6%, through
November 2008. Interest paid by the Company was insignificant for the nine
months ended September 30, 1994.
Future minimum principal payments as of September 30, 1994 are as follows
(in thousands):
YEAR ENDING DECEMBER 31,
------------------------
1994 (3 months) $ 46
1995 90
1996 97
1997 92
1998 93
Thereafter 836
------
Total $1,254
======
F-27
61
7. DIVISIONAL EQUITY:
Divisional equity reflects the historical activity between D&B and HSI. An
analysis of the changes in divisional equity is as follows (in thousands):
Balance at beginning of period $ 634
Net income 1,747
Net remittances to D&B (211)
-------
Balance at end of period $ 2,170
=======
For the nine months ended September 30,1994, net remittances include (in
thousands) $3,391 of non-cash charges related to severance expenses to be paid
by D&B in connection with the purchase agreement. These amounts have been
excluded for purposes of the Statement of Cash Flows. Other non-cash charges and
allocations reflected in net remittances to D&B have not been separately
identified for purposes of the Statement of Cash Flows.
8. OTHER OPERATING EXPENSES:
Other operating expenses for the nine months ended September 30, 1994
consist of the following (in thousands):
General and administrative expenses $ 2,188
Professional services 1,488
Insurance, taxes and licenses 451
Travel and entertainment 597
Utilities 384
Advertising and promotion 217
Gain on property and equipment (3)
-------
$5,322
=======
9. LEASES:
HSI leases certain facilities and equipment under long-term leases which
are accounted for as operating leases.
Future minimum lease payments for long-term operating leases as of
September 30, 1994 are approximately as follows (in thousands):
YEAR ENDING DECEMBER 31,
------------------------
1994 (3 months) $ 930
1995 2,780
1996 880
------
Total $4,590
======
Rent expense for the nine months ended September 30, 1994 was (in
thousands) $3,331.
F-28
62
10. POSTRETIREMENT AND DEFERRED COMPENSATION PLANS:
HSI's participation in D&B's postretirement medical plan, defined benefit
pension plan and deferred compensation plan terminated as of September 30, 1994.
Prior to September 30, 1994, HSI recognized postretirement benefit costs
based upon an allocation and formula determined by D&B. The amount allocated to
HSI as its share of the total pension costs for the nine months ended September
30, 1994 was (in thousands) $611. The costs allocated to HSI and recognized as
net postretirement benefit costs were not material to HSI's results of
operations for the nine months ended September 30, 1994.
As a participant in D&B's postretirement and deferred compensation plans,
amounts related to liabilities to HSI employees existing at the date of adoption
of new accounting standards for pensions and other postretirement benefits are
not reflected in the accompanying Statement of Financial Position. Amounts due
to D&B relating to HSI's allocated costs under the above plans are included in
divisional equity in the accompanying Statement of Financial Position. The
following information relates to the D&B plans HSI participates in as of
December 31, 1993, the most recent valuation date. Such information is not
available on a separate company or divisional basis.
D&B has defined benefit pension plans covering substantially all associates
in the United States. The benefits to be paid to associates under these plans
are based on years of credited service and average final compensation. Pension
costs are determined actuarially and funded to the extent allowable under the
Internal Revenue Code. Supplemental plans in the United States are maintained to
provide retirement benefits in excess of levels allowed by ERISA.
The status of D&B's U.S. defined benefit pension plans at December 31, 1993
is as follows (millions of dollars):
FUNDED UNFUNDED(1)
------ -----------
1993 1993
---- ----
Fair value of plan assets $ 1,008.9 $ --
---------- --------
Actuarial present value of benefit obligations:
Vested benefits 708.0 69.1
Non-vested benefits 29.4 7.2
---------- --------
Accumulated benefit obligations 737.4 76.3
Effect of projected future
salary increases 128.1 37.4
---------- --------
Projected benefit obligations 865.5 113.7
---------- --------
Plan assets in excess of (less than)
projected benefit obligations 143.4 (113.7)
Unrecognized net (gain) loss 56.2 38.4
Unrecognized prior service cost 15.4 18.2
Unrecognized net transition (asset)
obligation (93.6) 2.9
Adjustment to recognize minimum
liability -- (22.1)
---------- --------
Prepaid (accrued) pension cost $ 121.4 $ (76.3)
========== ========
(1) Represents supplemental plans for which grantor trusts (with assets of
$60 million at December 31, 1993) have been established to pay plan
benefits.
The weighted average expected long-term rate of return on pension plan
assets was 9.75% for 1993. At December 31, 1993, the projected benefit
obligations were determined using a weighted average discount rate of 7.25% and
a weighted average rate of increase in future compensation levels of 5.7%. Plan
assets are invested in diversified portfolios that consist primarily of equity
and debt securities.
F-29
63
In addition to providing pension benefits, D&B provides various medical
benefits for retired associates. Substantially all of D&B's associates in the
United States become eligible for these benefits if they reach normal retirement
age while working for D&B.
Deferred Compensation Plans--HSI also participated in D&B's Profit
Participation Plan and Investment Plan for which substantially all of its
employees were eligible. D&B had also granted stock options to purchase shares
of D&B common stock to certain key employees of HSI. In addition, certain key
employees participated in incentive plans sponsored by D&B the cost of which to
HSI for such plans (in thousands) amounted to $589 for the nine months ended
September 30, 1994.
11. OTHER TRANSACTIONS WITH AFFILIATES:
D&B provides HSI with payroll processing and administration, general
treasury services and various business insurance coverages through policies
issued to D&B. Expenses allocated to HSI for these services, which are included
in the Statement of Income, were (in thousands) $326 for the nine months ended
September 30, 1994. Amounts due to D&B relating to the above activities are
included in divisional equity in the Statement of Financial Position.
HSI provides computer services to an affiliate totaling (in thousands)
$1,312 for the nine months ended September 30, 1994. These amounts are included
in revenues in the Statement of Income.
HSI provides health plan claims administration for D&B, totaling (in
thousands) $1,647 for the nine months ended September 30, 1994. HSI records as
revenues services provided to D&B.
12. FEDERAL INCOME TAXES:
HSI joins in filing a consolidated federal income tax return with D&B and
its affiliates. For financial reporting purposes, HSI computes a provision for
income taxes on a separate-return basis.
The reasons for the difference between HSI's effective income tax rate and
the statutory rate for the nine months ended September 30, 1994 are as
follows (thousands of dollars):
Federal income tax calculated at statutory rate
(35% for 1994) $1,136
State income tax, net of federal benefit 220
Goodwill 109
Other 35
------
Income tax provision $1,500
======
F-30
64
The income tax provision for the nine months ended September 30, 1994 is
summarized as follows (thousands of dollars):
Current:
Federal $1,160
State 338
------
1,498
------
Deferred:
Federal 2
State 0
------
2
------
Income tax provision $1,500
======
The primary sources of temporary differences that give rise to significant
portions of the deferred tax asset and liability at September 30, 1994 are as
follows (thousands of dollars):
Deferred tax assets:
Property and equipment $ 144
Deferred tax liabilities:
Other intangible assets (59)
------
Net deferred tax asset $ 85
======
13. COMMITMENTS AND CONTINGENCIES:
HSI is involved in litigation arising during the normal course of its
business. In the opinion of management, the resolution of these matters will not
have a material effect on the financial position or results of operations of
HSI.
F-31