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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD _____________ FROM TO _______________
COMMISSION FILE NO. 1-13772
HEALTHPLAN SERVICES CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-378901
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3501 FRONTAGE ROAD, TAMPA, FLORIDA 33607
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(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
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock, $0.1 par value,
held by non-affiliates of the registrant, computed by reference to the last
reported price at which the stock was sold on March 16, 1998, was $277,321,341.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 16, 1998 was 14,936,947.
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 1998 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,
1997.
PART I
THE STATEMENTS CONTAINED IN THIS REPORT OR INCORPORATED BY REFERENCE HEREIN THAT
ARE NOT PURELY HISTORICAL, INCLUDING STATEMENTS REGARDING HEALTHPLAN SERVICES
CORPORATION'S OBJECTIVES, EXPECTATIONS, HOPES, INTENTIONS, BELIEFS, OR
STRATEGIES, ARE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933. IN PARTICULAR, THE WORDS "EXPECT," "ESTIMATE,"
"PLAN," "ANTICIPATE," "PREDICT," "INTEND," "BELIEVE," AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE
THAT ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS, AND UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS. AMONG
THE FACTORS THAT COULD CAUSE SUCH ACTUAL RESULTS TO DIFFER MATERIALLY ARE:
CHANGES IN LEGISLATION; FLUCTUATIONS IN BUSINESS CONDITIONS AND THE ECONOMY;
HEALTHPLAN SERVICES CORPORATION'S ABILITY TO IDENTIFY AND IMPLEMENT STRATEGIC
ACQUISITIONS; CHANGES IN COMPETITION; AND HEALTHPLAN SERVICES CORPORATION'S
ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT PERSONNEL.
ITEM 1. BUSINESS
GENERAL
HealthPlan Services Corporation (together with its direct and indirect
wholly owned subsidiaries, the "Company") is an outsourcing company that
administers health and other benefit plans for large, self-funded companies and
for payors (insurance companies, health maintenance organizations ("HMO's"), and
other risk-takers) that have elected to outsource sales support, distribution,
and "back-office" administrative services. The Company provides these services
to approximately 120,000 small businesses, plan holders, and self-funded
organizations, covering approximately 3 million members in the United States.
The Company functions solely as a service provider generating fee-based income
and does not assume any underwriting risk.
STRATEGY
The Company's strategy is to grow revenue and increase earnings through
broader distribution of existing managed care products, the addition of new
payors, such as HMOs, integrated health care delivery systems, managed care
providers, and self-funded organizations, and the development of new technology
and information-based services. The Company desires to build economies of scale
by adding administrative services contracts with self-funded businesses and
other payors and by opportunistic expansion through acquisition of similar
businesses. The Company also has elected to pursue care management opportunities
through a recently formed joint venture with Sykes Enterprises, Incorporated
(Nasdaq: SYKE) ("Sykes"), a provider of call center services and other business
services to the information technology industry.
SYKES HEALTHPLAN SERVICES, INC.
In December 1997, the Company and Sykes formed Sykes HealthPlan Services,
Inc. ("SHPS"). SHPS offers care management services, technology solutions,
certain customer support services, and other outsourcing capabilities to the
health care and insurance industries. The Company and Sykes each have agreed to
invest up to $17 million in equity and to guarantee equally a line of credit of
$75 million that SHPS has established to fund its growth initiatives. The
shareholders agreement relating to this transaction contains noncompete
provisions that generally prevent the Company and Sykes from competing with each
other or with SHPS. Two executive officers of the Company, James K. Murray III
and Richard M. Bresee, became officers of SHPS in December 1997.
Through its technology solutions and call center operations, SHPS expects
to offer its managed care services to a large population of users interested in
controlling medical loss ratios. In particular, SHPS will seek to provide
utilization, demand, disease, and disability management to its target markets,
which include large, self-funded employers as well as traditional health
insurance carriers, HMO's, integrated provider systems, and third party
administrators. In the first quarter of 1998, the Company began outsourcing its
care management and utilization review services to SHPS.
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On December 31, 1997, SHPS purchased Optimed Medical Systems, Inc. ("OMS")
for $8.2 million in cash. OMS is a developer of clinical protocol systems that
allow managed care payors and providers to prospectively and concurrently
control health care and utilization costs while achieving optimal patient
outcomes.
On February 12, 1998, SHPS entered into an agreement to acquire Health
International, Inc. ("Health International"), a disease management company, for
approximately $22.6 million in cash. Health International provides a
comprehensive managed medical care program that helps improve the quality of
patient care and reduce unnecessary medical costs. On March 9, 1998, SHPS
entered into an agreement to acquire Prudential Services Bureau, Inc. ("PSBI")
of Louisville, Kentucky for $50 million in cash. PSBI provides call center-based
health and welfare benefits and administrative services. The closing of the
Health International and PSBI transactions is contingent upon completion of due
diligence, receipt of satisfactory regulatory approvals, and completion of
required documentation.
THE COMPANY'S SERVICES
The Company provides marketing, distribution, administration, and
information services and solutions for self-funded employee benefit plans,
managed care organizations, insurance companies, and other organizations.
MARKETING AND DISTRIBUTION
The Company provides managed care companies, insurance companies, and
other health care organizations with marketing services that target individuals
and small businesses. The Company helps design managed care products based on
market research, historical experience in the small business market, actuarial
analysis of claims adjudicated, and interaction with payor organizations. These
products often include features that address the particular needs of the small
business employer, including specialized medical, dental, life, and disability
coverage. On behalf of its payors, the Company prepares and implements
communications programs that are aimed at educating insurance agents about the
benefits offered under particular product offerings.
The Company's distribution activity includes sales support for insurance
agents through a field sales force, telephone sales representatives, and master
brokers. To support this front-end sales and marketing function, the Company has
invested in client-server technology that utilizes personal computer
workstations in a local-area and wide-area network to deliver information and
images to the desktop. Using the Company's automated proposal delivery system, a
Company sales representative can deliver a finished proposal from the computer
desktop to the agent immediately by fax server. The Company also has introduced
an interactive voice response system to provide agents with automatic premium
quotations for individual health products.
The Company maintains relationships with over 100,000 insurance agents,
including master brokers, independent brokers, and career agency groups. In the
case of a career agency relationship, the Company offers the agent group, which
generally works for one life or property and casualty parent company, an
opportunity to distribute products that compliment the products offered by the
group's sponsoring underwriter. These relationships with independent and career
agents provide the Company with a significant distribution conduit to the small
business market in the United States.
The Company continues to seek new distribution channels for its customers'
indemnity and managed care products. In 1996, the Company established a computer
"home page" on the Internet (www.healthplan.com) that provides information about
the Company. Although price quotations for products are not currently available
on the home page, the Company plans to seek opportunities to offer product
quotations through this channel during 1998.
PLAN ADMINISTRATION SERVICES
The Company provides enrollment, premium billing and collection, claims
administration, and customer support services for all types of health plans. As
a provider of enrollment services, the Company performs
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underwriting services, issues enrollment cards, and administers case renewals.
The Company's billing and collection services on behalf of payors include
sending monthly bills to insured parties, receiving premium payments from
insureds, and paying agent commissions. The Company also implements premium
adjustments due to rate changes, employee hiring or termination, and other group
changes. As a provider of claims administration services, the Company verifies
eligibility, calculates copayments, reprices and adjudicates claims, prepares
explanation of benefits forms, and issues checks to claimants and to health care
providers on payor accounts. Through its affiliation with SHPS, the Company also
offers its clients care management and utilization review services. The
Company's customer support representatives respond to plan member questions
regarding claims and other plan benefits.
Through its claims adjudication software and other technology solutions,
the Company streamlines plan administration for its customers. The Company's
claim scanning, optical character recognition, and image technologies allow the
Company's claims professionals to adjudicate claims electronically. To support
its customer service activities, the Company maintains approximately 500 WATS
telephone lines and a comprehensive customized call distribution system for
rating and tracking of calls. The Company also provides an interactive voice
response (IVR) system that allows insureds to check on the status of premium
payment and claims matters automatically.
In addition to enrollment, claims administration, and customer support
services, the Company offers specialized plan administration services tailored
for its self-funded customers. The Company's systems are organized to administer
a broad array of employee benefit plan components as an integrated one-stop
source. Due to the size of its customer base, the Company can offer its
self-funded customers access to regional and national preferred provider
networks and other service providers to control and reduce plan costs. The
Company also offers these customers administrative services for workers
compensation and unemployment compensation programs.
INFORMATION SERVICES
The Company has broad reporting and analytic capabilities relating to all
aspects of its core services. The Company's information services include
preparation of reports regarding agent production, enrollment, and frequency and
types of claims. The Company provides a comprehensive data resource of
financial, utilization, and benefit plan design information for its clients. The
Company also provides regulatory compliance services to its clients, helping
payors structure their employee benefit plans to comply with applicable state
and federal law. The Company intends to continue to enhance its data analysis
and statistical reporting capabilities using its database of administered claims
as well as publicly available data.
THE COMPANY'S CUSTOMERS
The Company provides services for a wide range of health care benefits
plans and employee benefit programs, including self-funded employee benefit
plans and fully insured health plans offered by managed care organizations,
insurance companies, and other health care organizations.
SELF-FUNDED HEALTH PLANS AND EMPLOYEE BENEFIT PROGRAMS (LARGE GROUP
CUSTOMERS)
The Company provides administrative and information services for
self-funded health benefit plans, workers compensation programs, and
unemployment compensation programs. In 1997, the Company provided these services
for approximately 3,000 customers, including large corporations, government
sector employers, associations, and Taft-Hartley benefit plans, which are
employee benefit plans managed jointly by union and management representatives.
The Company's self-funded customers include the health care programs for the
Oklahoma State and Education Employees Group Insurance Board (the "Oklahoma
Board"). The Oklahoma Board has awarded the Company a new three-year contract to
continue as administrator for the Oklahoma Board health care plans after the
current contract expires in June 1998.
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FULLY INSURED BENEFIT PLANS (SMALL GROUP CUSTOMERS)
For over 25 years, the Company has provided services to insurance
companies and other organizations that offer fully insured health benefit plans
for individuals and small businesses. Traditionally, the Company's primary
market was indemnity (fee-for-service) benefit plans, but in recent years the
Company has shifted its focus to "managed indemnity" plans and other managed
care plans that include mechanisms for controlling health care costs. The
Company now provides marketing and administrative services for several managed
care products through relationships with payors, including New England Life
Insurance Company, Kaiser Permanente Insurance Company, and Aetna 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 benefits business, with Connecticut General Life
Insurance Company, a CIGNA company, acting as the reinsurer. This business
accounted for approximately 12.5% of the Company's consolidated revenue in 1997.
In July 1997, the parties agreed to a transition of this business to Midwestern
United Life Insurance Company ("Midwestern United"). Midwestern United is
offering replacement coverage to TMG policyholders beginning in 1998. The
Company will continue to provide marketing and administrative services for this
business. During this transition, the business is experiencing higher than
normal lapse rates and lower than normal margins.
In July 1997, the Company formed an alliance with Seaboard Life Insurance
Company (USA) ("Seaboard Life") to develop and administer health benefit plans
for small businesses. Seaboard Life and the Company have launched the "Access"
products, fully insured, triple-option health benefits products issued by
Seaboard Life for employers with between two and ninety-nine employees. The
Company provides marketing, distribution, and other administrative services for
the Access products.
In 1997, approximately 12.7% of the Company's revenue was derived from a
block of indemnity/preferred provider organization ("PPO") business insured by
United HealthCare Corporation ("United HealthCare") and The Travelers Insurance
Company ("Travelers"). In July 1997, United HealthCare and Travelers agreed to
the transition of a majority of this business to the Seaboard Life Access
products. Beginning in October 1997, Seaboard Life began offering coverage under
its Access products to holders of these United HealthCare and Travelers
policies. As this transition continues, the business is experiencing higher than
normal lapse rates and lower than normal margins.
In October 1997, the Company and Provident American Corporation
("Provident") entered into an agreement under which the Company assumed all of
the policy issuance, billing, and claims services for the individual
indemnity/preferred provider organization ("PPO") health insurance policies of
Provident's life insurance subsidiaries. The Company began providing these
services in January 1998.
Typically, the Company's indemnity 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 also are cancelable
upon a significant change of ownership of the Company. The Company could
experience material adverse effects if the United HealthCare conversion to
Seaboard Life or the TMG conversion to Midwestern United is unsuccessful. A
decision by any one of the Company's major insurance company or managed care
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.
In the third quarter of 1996, Metropolitan Life Insurance Company
completed a merger with New England Life Insurance Company. The Company is
unable to predict what effect, if any, this merger will ultimately have on the
Company's relationship with New England Life Insurance Company.
The Company continues to experience higher lapses than originations in the
managed indemnity business written with some of its carrier payors and it is not
certain when, if ever, this trend will be reversed. Escalating medical costs
have rendered fee-for-service products less competitive, as evidenced by the
explosive growth during this decade of managed care products, which utilize a
higher degree of demand and disease management
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applications. Although the Company continues to work with its managed indemnity
payors to introduce additional care management and other cost-control mechanisms
for their benefit plans, the Company cannot predict whether these managed
indemnity payors will be able to manage their medical loss ratios successfully
and thus offer competitive pricing for their products. Such pricing could have a
direct effect on the Company's ability to maintain and grow managed indemnity
business in the future.
The Company is the administrator for the regional Florida Community Health
Purchasing Alliances ("CHPAs") established by the State of Florida. In 1997, the
Company renegotiated its CHPA contracts. The Company also is the statewide
administrator for North Carolina's State Health Plan Purchasing Alliance
program. Insurance carriers in North Carolina have not shown significant support
for this alliance. The Company's contract with the North Carolina alliance
expires in June 1998. The Company's contract to perform services for the State
of Kentucky health care purchasing alliance program expired on June 30, 1997.
The Company chose not to submit a bid to continue providing services for the
Kentucky alliance and closed its Lexington, Kentucky office at the end of the
contract term. The Company also chose not to renew its alliance contract with
the State of Washington, which terminated on December 31, 1997. Unless the
Company is successful in improving profitability in connection with its CHPA and
North Carolina programs, it may elect to exit the alliance business. In 1997,
approximately 2.7% of the Company's total revenue derived from the alliance
business.
COMPANY HISTORY
The Company's principal operating subsidiary, HealthPlan Services, Inc.,
was founded in 1970 by James K. Murray, Jr., the Company's current Chairman of
the Board and Chief Executive Officer, Charles H. Guy, Jr., and Trevor G. Smith,
who is currently a director of the Company (the "Founders"). The Dun &
Bradstreet Corporation (NYSE: DNB) ("D&B") purchased the business in 1978 and
operated it as a division. In 1994, the Founders, Noel Group, Inc., a
publicly-traded company based in New York (Nasdaq: NOEL) ("Noel") and other
investors formed the Company and purchased the HealthPlan Services business (the
"Predecessor Company") from D&B. On May 19, 1995, the Company completed an
initial public offering of 4,025,000 shares of its Common Stock. The Company is
a Delaware corporation.
INTEGRATION
During 1995, the Company acquired all of the outstanding stock of Third
Party Claims Management, Inc. ("TPCM"), a self-funded employee benefits
administrator with offices in Texas, Tennessee, and California, and
substantially all of the assets of Diversified Group Brokerage Corporation
("DGB"), a self-funded employee benefits administrator based in Connecticut. In
1996, the Company completed the acquisition of Consolidated Group, Inc.
("Consolidated Group"), a provider of administrative and related services for
health care plans designed for individuals and small businesses, and Harrington
Services Corporation ("Harrington"), a provider of administrative services to
large, self-funded benefit plans. The Company continues to integrate the
operations of these companies and of the blocks of business it assumed from TMG
and Provident. The Company's integration plan seeks to achieve economies of
scale by eliminating redundant facilities and operations. During 1997, the
Company began consolidation of personnel and administrative services to its
Tampa, Florida and Merrimack, New Hampshire facilities from the former
Consolidated Group facility in Framingham, Massachusetts and the Brookfield,
Wisconsin facility that the Company assumed in connection with the TMG block of
business. The Company also has consolidated accounting and data center
operations at its Tampa facility. In December 1997, the Company sold contract
rights and certain other assets of the former DGB business to DGB. Effective
December 31, 1997, Consolidated Group and Harrington, along with several other
operating subsidiaries of the Company, were merged into HealthPlan Services,
Inc. Robert R. Parker, formerly the Chief Operating Officer - Large Group
Business of the Company, became President and Chief Operating Officer of the
Company.
INFORMATION TECHNOLOGY
The Company's primary data processing facilities are located in Tampa,
Florida, 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. In
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1997, the Company consolidated one mainframe and three midrange computer systems
obtained in its recent acquisitions into its Tampa data center. The Company also
converted to a common technology platform for these business operations. The
Company intends to consolidate its remaining operations into a common technology
platform and to continue eliminating redundant computer facilities as part of
its ongoing integration of acquired businesses. The Company expects that this
integration will be completed in 1999.
In 1997, the Company began implementing its Year 2000 Compliance Plan.
Through upgrades and installation of new systems, the Company's
accounting/finance, workers compensation, unemployment compensation, and large
group billing systems are now compliant. The Company has begun the transition of
its billing and administrative systems for fully insured products and will
continue work on this project in 1998. The Company has received the new release
of its ERISCO ClaimsFacts claims management system, which is Year 2000
compliant, and intends to implement this release in 1998. The Company's Year
2000 Compliance Plan also provides for updating the Company's interfaces with
external vendors. The Company expects to complete implementation of its Year
2000 Compliance Plan in 1999.
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
also are 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 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 plan to the extent that such person
has discretionary authority in the administration of the plan or with respect to
the plan's assets. Each employer is a fiduciary of the plan it sponsors, but
there also can be other fiduciaries of a plan. ERISA imposes various express
obligations on fiduciaries. These obligations include barring a fiduciary from
permitting a plan to engage in certain prohibited transactions with parties in
interest or from acting under an impermissible conflict of interest with a plan.
Generally, a party in interest with respect to a plan includes a fiduciary of
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 (the "DOL") 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.
During 1996 and 1997, the Company's Consolidated Group subsidiary
underwent an audit by the DOL in which the DOL raised various questions about
the application of ERISA to the way that Consolidated Group did business. The
Company has responded to all outstanding concerns raised by the DOL in that
audit. Although the DOL has not objected to the Company's responses, there can
be no assurance that the DOL will not in the future
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take positions that could require changes to the way the Company operates or
result in the imposition of administrative fines and penalties.
STOCKHOLDERS
In December 1996, Noel, Automatic Data Processing, Inc (NYSE:AUD) ("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. Upon completion of this transaction on
February 7, 1997, Noel and ADP owned approximately 29% and 9%, respectively, of
the Company's Common Stock. The ADP Agreement provided among other things that:
(i) prior to December 31, 1997, ADP generally could not enter into an agreement
to acquire additional shares of the Company's Common Stock, unless such
acquisition was approved by the Company's Board of Directors, or unless the
Company entertained alternative offers; and (ii) the Company generally could not
take any action prior to December 31, 1997 that could interfere with
"pooling-of-interests" accounting. The Company also agreed to file a shelf
registration statement with respect to ADP's shares within 15 days after the
date of the ADP Agreement. In April 1997, the Company filed Form S-3
Registration Statements with the Securities and Exchange Commission registering
the shares held by Noel and ADP. In April 1997, in connection with a plan of
complete liquidation and dissolution, Noel began distribution of all of its
remaining shares of the Company's Common Stock to Noel stockholders. Beginning
in January 1998, the Company began implementing a share repurchase program under
which the Company is authorized to expend up to $20 million in connection with
the repurchase of its Common Stock. As of March 16, 1998, the Company had
repurchased 172,600 shares of its Common Stock pursuant to this program at a
cost of approximately $4.0 million.
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 (Nasdaq: HRMI) ("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, in
March 1997 the Company purchased 200,000 shares of HRM common stock,
representing approximately 4.5% of HRM shares outstanding at that time, at a
price of $12.50 per share. These shares are not registered under federal or
state securities laws 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, physician hospital organizations, hospitals, and governmental units in the
United States and Canada.
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 information 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 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
The Company had approximately 3,100 employees on March 19, 1998. Except
for some of the employees of American Benefit Plan Administrators, Inc., a
Company subsidiary that administers Taft-Hartley plans, the Company's labor
force is not unionized. The Company believes that its relationship with its
employees is good.
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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. The Company's central data processing facilities are located in Tampa,
Florida, Columbus, Ohio, and 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 1998.
ITEM 3. LEGAL PROCEEDINGS
During 1996 and 1997, the Company's Consolidated Group subsidiary
underwent a DOL audit in which the DOL raised various questions about the
application of ERISA to the way that Consolidated Group did business. The
Company has responded to all outstanding concerns raised by the DOL in that
audit. Although the DOL has not objected to the Company's responses, there can
be no assurance that the DOL will not in the future take positions that could
require changes to the way the Company 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 1997.
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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 for
each quarter during 1996 and 1997, as reported by the New York Stock Exchange
for the periods indicated.
1997 HIGH LOW
---- ---- ---
Fourth quarter ........................ $22.1875 $18.9375
Third quarter ......................... $22.125 $18.375
Second quarter ........................ $19.250 $13.625
First quarter ......................... $23.625 $15.375
1996 HIGH LOW
---- ---- ---
Fourth quarter ........................ $24.500 $16.375
Third quarter ......................... $26.875 $18.000
Second quarter ........................ $29.250 $20.250
First quarter ......................... $28.375 $22.625
The Company paid quarterly dividends on its Common Stock of 12.5 cents per
share (or 50 cents per share on an annualized basis) for the second, third, and
fourth quarters of 1997. Pursuant to the Company's May 17, 1996 credit agreement
with its lenders, as amended, in each year beginning in 1998 the Company may
increase the amount of dividend payments by up to five cents per share on an
annualized basis without the consent of the agent for its lenders. There were
447 holders of record of the Company's Common Stock as of March 16, 1998. The
Company believes that there is a significantly greater number of beneficial
owners that hold the Company's Common Stock in a street name.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data set forth below have been derived from
the audited consolidated financial statements of the Company at December 31,
1997 and 1996 and for the years ended December 31, 1997, 1996, and 1995, and
have been derived from the audited financial statements of the Company at
December 31, 1994 and the three months ended December 31, 1994 and the
Predecessor Company at September 30, 1994 and December 31, 1993 and for the nine
months ended September 30, 1994 and the year ended December 31, 1993 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, 1997 and 1996 and for the years ended December 31, 1997, 1996, and 1995
appears elsewhere in this Form 10-K. Selected historical financial data of the
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.
9
PREDECESSOR
THE COMPANY COMPANY (1)
-------------------------------------------------------------- ----------------------
PRO FORMA THREE NINE
YEAR YEAR YEAR YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, SEPT. 30, DEC. 31,
1997 1996 1995 1994(3) 1994 1994 1993
-------- ---------- --------- --------- -------- --------- ---------
STATEMENT OF INCOME DATA:
Revenues ................ $283,349 $ 193,839 $100,250 $107,178 $ 25,233 $81,945 $113,863
Expenses:
Agent commissions ....... 65,674 48,507 36,100 43,260 10,047 33,213 48,380
Other operating
expenses .............. 172,577 117,236 44,133 45,734 10,303 42,138 49,270
Contract
commitments ........... -- 2,685 -- 3,623 3,623 -- --
Restructure charge ...... 1,374 1,425 -- -- -- -- --
Integration
expense ............... 4,885 7,804 -- -- -- -- --
Loss on impairment
of goodwill ........... -- 13,710 -- -- -- -- --
Equity in loss of
joint venture ......... 2,850 -- -- -- -- -- --
Depreciation and
amortization .......... 15,917 10,548 4,386 3,517 870 3,347 4,053
Income (loss) from
operations ............ 20,072 (8,076) 15,631 11,044 390 3,247 12,160
Net income (loss) ...... $ 10,796 $ (6,716) $ 9,535 $ 6,467 $ 231 $ 1,747 $ 6,960
-------- --------- -------- -------- -------- ------- --------
Dividends on
redeemable
preferred
stock ................. -- -- 285 -- 285
Net income (loss)
attributable
to Common
Stock ................. $ 10,796 $ (6,716) $ 9,250 $ 6,467 $ (54)
-------- --------- -------- -------- --------
Basic net income
(loss)
per share ............. $ 0.72 $ (0.47) $ 0.82
Pro forma net
income
per share (2) ......... $ 0.71 $ 0.69 $ 0.03
Diluted net income
(loss)
per share ............. $ 0.71 $ (0.47) $ 0.84
Dividends declared
per share
of common stock ....... $ 0.38 -- --
Average common
shares
outstanding
Basic .............. 15,004 14,181 11,316
Pro forma (2) ...... 13,414 9,339 9,339
Diluted ............ 15,164 14,317 11,380
PRO FORMA
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, SEPT. 30, DEC. 31,
1997 1996 1995 1994(3) 1994 1994 1993
---------- ---------- --------- --------- --------- ---------- ----------
Working capital
(deficit) ............. $ (29,842) $ (26,929) $ 23,013 $(16,050) $(16,050) $ (17,742) $ (21,993)
Total assets ............ 243,324 244,701 112,667 53,189 53,189 27,884 31,851
Total debt .............. 43,694 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) .............. 116,566 108,783 80,966 20,292 1,007 2,170 634
(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.
10
(2) Gives effect to the recapitalization of all 19,000,000 shares of Preferred
Stock (plus the right to receive dividends accrued thereon), which were
exchanged for 1,397,857 shares of Common Stock of the Company
contemporaneously with the consummation of the initial public offering on
May 19, 1995 ("the Recapitalization"), for all periods presented.
(3) Gives effect to the Acquisition and the Recapitalization as if such
transactions had occurred on January 1, 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following is a discussion of changes in the consolidated results of
operations of the Company for the years ended December 31, 1997, 1996, and 1995.
The Company is an outsourcing company that administers health and other
benefit plans for large, self-funded companies and for payors (insurance
companies, HMOs, and other risk-takers) that have elected to outsource sales
support, distribution, and "back-office" administrative services.
11
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 revenue for such
periods.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------- ------- -------
Total revenues ....................... 100.0 % 100.0 % 100.0 %
------- ------- -------
Expenses:
Agent commissions .................. 23.2 % 25.0 % 36.0 %
Personnel .......................... 39.9 % 37.3 % 25.4 %
General and administrative ......... 19.4 % 21.5 % 16.8 %
Pre-operating and contract
start-up costs ................... 0.1 % 0.4 % 1.7 %
Contract commitments ............... - 1.4 % -
Restructure charge ................. 0.5 % 0.7 % -
Integration ........................ 1.7 % 4.0 % -
Loss on impairment of
goodwill ......................... - 7.1 % -
Depreciation and amortization ...... 5.6 % 5.4 % 4.4 %
------ ------- ------
Total expenses ................. 90.4 % 102.8 % 84.3 %
------ ------- ------
Income (loss) before interest
expense, equity in
loss of joint venture, and
income taxes ..................... 9.6 % (2.8)% 15.7 %
Interest expense ..................... 1.5 % 1.4 % 0.1 %
Equity in loss of
joint venture .................... 1.0 % - -
------ ------- ------
Income (loss) before
income taxes ..................... 7.1 % (4.2)% 15.6 %
Provision (benefit) for
income taxes ..................... 3.3 % (0.7)% 6.1 %
------ ------- ------
Net income (loss) .................... 3.8 % (3.5)% 9.5 %
====== ======= ======
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for the year ended December 31, 1997 increased $89.5 million, or
46.2%, to $283.3 million from $193.8 million in 1996. This increase resulted
primarily from the inclusion of an additional six months of revenues, $71.6
million, from the Company's acquisition of Consolidated Group and Harrington
(effective July 1, 1996). Revenues from the Company's base business (revenues
exclusive of above acquisitions) increased by $17.9 million compared to the same
period in 1996. This increase was primarily a result of the Company's assumption
of the TMG block of business.
Agent commission expense for the year ended December 31, 1997 increased
$17.2 million, or 35.4%, to $65.7 million from $48.5 million in 1996. This
increase resulted primarily from the inclusion of an additional six months of
commissions of $7.1 million related to the Company's 1996 acquisitions. The
Company's commissions as a percentage of operating revenues declined from 25.3%
in 1996 to 23.3% in 1997, as self-funded customer revenues represented a greater
percentage of the Company's total revenues. Traditionally, self-funded customer
commissions represent a lower percent of revenues than fully-insured customer
commissions.
Personnel expense for the year ended December 31, 1997 increased $40.9
million to $113.1 million, or 56.7%, from $72.2 million in 1996. Of this
increase, $34.5 million was attributable to a full year of personnel expenses
from the Company's 1996 acquisitions. The Company's personnel expense as a
percentage of total
12
revenues increased to 39.9% in 1997 from 37.3% in 1996. This was primarily due
to the full-year impact of the Harrington acquisition and the more
labor-intensive nature of the self-funded customers.
General and administrative expense for the year ended December 31, 1997
increased $13.4 million, or 32.2%, to $55.0 million from $41.6 million in 1996.
Of this increase, $14.3 million is attributable to a full year of expenses from
the Company's 1996 acquisitions being included in the Company's 1997 general and
administrative expenses. The Company's general and administrative expense as a
percentage of total revenue decreased to 19.4% in 1997 from 21.5% in 1996. This
decline is primarily attributable to savings realized in postage,
communications, professional services, and printing costs and the net recovery
of $1.5 million from DGB in 1997.
In 1997, the Company renegotiated its contracts with the Florida Community
Health Purchasing Alliances ("CHPAs") and exited the Kentucky alliance and
Washington alliance businesses. The Company closed its Lexington, Kentucky
office at the end of the contract term. As a result of the Kentucky office
closure, the Company recognized a one-time, non-recurring charge to general and
administrative expense of $0.2 million. No contract commitment expense for the
alliance business was recognized by the Company in 1997.
The Company incurred $1.4 million in restructuring costs for the year
ended December 31, 1997. These costs reflect employee terminations and the
abandonment of property and equipment associated with transferring functions
from the Company's Framingham, Massachusetts office.
Integration expense for the year ended December 31, 1997 was $4.9 million.
Of this expense, $3.2 million related to the integration of information systems
used by the TMG, Consolidated Group, and Harrington businesses, while $1.7
million represented other costs associated with transferring functions from
certain of the Company's offices, the consolidation of treasury functions, and
employee relocations.
Depreciation and amortization expense for the year ended December 31, 1997
increased $5.4 million, or 51.4%, to $15.9 million from $10.5 million in 1996.
Of this increase, $4.5 million related to a full year of depreciation and
amortization from the Company's acquisition of Consolidated Group and
Harrington. Additionally, the Company recognized a $0.4 million acceleration of
amortization for internally developed software related to the Company's exiting
the Kentucky alliance in 1997.
Interest expense for the year ended December 31, 1997 increased to $4.2
million from $2.6 million in 1996. This increase reflects the fact that the
Company's credit facility balance was outstanding for a full year in 1997, as
opposed to six months in 1996.
The Company recorded its 50% share of the $2.9 million loss incurred by
SHPS for the period from inception to December 31, 1997, which was principally
the result of a charge of $2.8 million for the write-off of purchased research
and development associated with the acquisition of OMS by SHPS.
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 September
1, 1995), DGB (effective October 1, 1995), Consolidated Group (effective July 1,
1996), and Harrington (effective July 1, 1996), respectively. Revenues from the
Company's self-funded and alliance customers increased $2.1 million and $5.7
million, respectively, over 1995.
Agent commission 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.
The Company's commissions as a percentage of operating revenues declined from
36.8% in 1995 to 25.3% in 1996, as self-funded customer revenues represented a
greater percentage of total revenues. Self-funded customer
13
commissions (11.9% of 1996 total revenues) represent a lower percentage of
revenues than fully-insured customer commissions (44.9% of 1996 total revenues).
Personnel expense for the year ended December 31, 1996 increased $46.8
million to $72.2 million, or 184.3%, from $25.4 million in 1995. Of this
increase, $41.3 million was attributable to the Company's acquisitions of TPCM,
DGB, Consolidated Group, and Harrington. Personnel expense for the Company
increased $5.5 million and was primarily related to additional salaries and
wages, overtime, and temporary services related to new activities from the
Company's alliance and self-funded customers, which are more labor-intensive
than fully-insured customers.
General and administrative expense 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 was attributable to costs associated with the
Company's acquisitions of TPCM, DGB, Consolidated Group, and Harrington. Costs
for the Company increased by $7.6 million and were primarily attributable to
telephone, postage, printing, and professional services related to the Company's
business activities from alliance and self-funded customers.
Contract commitment expense related 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 were 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. 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 resulted 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 reflected the write-down of the
carrying value of goodwill originally recorded upon the Company's acquisitions
of TPCM and DGB, which reflected their expected future discounted cash flows.
Depreciation and amortization expense for the year ended December 31, 1996
increased $6.1 million, or 138.6%, to $10.5 million from $4.4 million in 1995.
Of this increase, $5.2 million related 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 was primarily attributable to the amortization of internally
developed software for the Company's alliance administration.
LIQUIDITY AND CAPITAL RESOURCES
On May 19, 1995, the Company completed an initial public offering which
generated net proceeds of approximately $51.0 million. The proceeds from this
offering, in conjunction with borrowings against the Company's Line of Credit,
were used in the acquisitions of TPCM and DGB in 1995 and Consolidated Group and
Harrington in 1996.
The Company currently has a credit facility ("Line of Credit") with
availability equal to three times trailing earnings before interest expense,
income taxes, and depreciation and amortization expense (with certain
adjustments called for in the credit agreement). First Union National Bank of
North Carolina serves as "agency bank" with respect to this facility. The credit
facility contains provisions which require the Company to maintain certain
minimum financial ratios and impose limitations on acquisition activity and
capital spending. In 1997, the Company reduced its outstanding draw against the
Line of Credit by $15 million. The outstanding draw was $40.0 million at
December 31, 1997. The first principal payment under the Line of Credit is due
on November 30, 1998. The Company has both the intent and ability to refinance
its credit facility on a long-term basis.
14
In the second quarter of 1997, the Company entered into an amendment of
the terms of its Line of Credit to enable it to pay a quarterly dividend of up
to $0.125 per share of the Company's capital stock (up to $0.50 per share on an
annualized basis). The Company may increase this dividend by up to $0.05 per
share on an annualized basis for each calendar year after 1997, without the
consent of the agency bank. For 1997, the Company declared dividends totaling
$5.6 million. These dividends were paid on July 14, 1997, October 15, 1997, and
January 20, 1998.
During the second quarter of 1997, the Board of Directors authorized the
Company to use up to $20.0 million to support a share repurchase program,
subject to the terms and conditions of a previously announced agreement with
ADP. The Company began implementing this share repurchase program in 1998.
Through March 16, 1998, the Company had acquired 172,600 shares under this
program at a cost of approximately $4.0 million.
On March 5, 1997, the Company and Health Risk Management, Inc. ("HRM"), a
provider of integrated health care management services, 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 October 16, 1997, the Company and Provident announced that they had
entered into an administrative services agreement. In connection with this
agreement, the Company advanced Provident $5.0 million. In addition to service
fees that the Company will retain from collected Provident premium, the Company
will retain $85,000 of collected Provident premium per month during the first
sixty months of the agreement. Under this agreement, in January 1998 Provident
began outsourcing to the Company all of the policy issuance, billing, and claims
services for the individual indemnity/PPO health insurance policies of
Provident's life insurance subsidiaries.
In December 1997, the Company sold contract rights and certain other
assets of the former DGB business to DGB for cash totaling $4.3 million. The
cash consideration, net of the sale of certain property and equipment ($0.1
million), the write-off of interest receivable on the escrow account ($0.4
million), and the write-off of goodwill associated with the DGB acquisition
($2.3 million), resulted in a net recovery of $1.5 million.
In December 1997, the Company and Sykes Enterprises, Incorporated
("Sykes") formed Sykes HealthPlan Services, Inc. ("SHPS"). SHPS is owned 50
percent by each of the founding companies and will provide care management
services, technology solutions, certain customer support services, and other
outsourcing capabilities to the health care and insurance industries. The
Company has agreed to invest up to $17 million in equity in SHPS, of which $5.0
million was invested during 1997. In addition, the Company has agreed to
guarantee $37.5 million of SHPS' $75.0 million credit line.
The Company spent $9.8 million for capital expenditures in 1997.
Additionally, the Company incurred a cash outlay of $4.9 million in 1997 for
integration costs related primarily to systems integration and the transfer of
operations from the Company's Brookfield, Wisconsin and Framingham,
Massachusetts offices. In the first two quarters of 1998, the Company expects to
incur approximately $1.0 million of additional integration cost related to the
consolidation of operations from its Framingham office.
Based upon current expectations, the Company believes that all
consolidated operating and financing activities for the foreseeable future will
be met from internally generated cash flow from operations, available cash, or
its existing Line of Credit.
ITEM 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 data under this Item.
15
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 12, 1998, 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 12, 1998, under
"Compensation of Executive Officers" and "Additional Information Concerning
Directors," and is herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is included in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 12, 1998, under
"Security Ownership of Certain Beneficial Owners and Management," and is herein
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is included in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 12, 1998, 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:
Report of Independent Accountants
Consolidated Balance Sheets - December 31,1997 and 1996
Consolidated Statements of Operations - Years ended December 31,
1997, 1996, and 1995
Consolidated Statement of Changes in Stockholders' Equity - Years
ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows - Years ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
16
(2) All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
(3) Exhibits included or incorporated herein:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
2.1 Amended and Restated Acquisition Agreement, dated August 31, 1995,
by and among HealthPlan Services, Inc., Millennium HealthCare, Inc.,
and Third Party Claims Management, Inc. (incorporated by reference
to the Company's Form 8-K Current Report filed on September 15,
1995).
2.2 Asset Purchase Agreement, dated October 1, 1995, by and between
HealthPlan Services, Inc. and Diversified Group Brokerage
Corporation, and Amendment to the Asset Purchase Agreement, dated
October 11, 1995, by and between HealthPlan Services, Inc. and
Diversified Group Brokerage Corporation (incorporated by reference
to the Company's Form 8-K Current Report filed on October 27, 1995).
2.3 Securities Purchase Agreement, dated January 8, 1996 between
Medirisk, Inc. and HealthPlan Services Corporation (incorporated by
reference to Exhibit 10.18 to the Company's 1995 Annual Report on
Form 10-K filed on March 29,1996).
2.4 Acquisition Agreement dated May 17, 1996 between HealthPlan Services
Corporation, Consolidated Group, Inc., Consolidated Group Claims,
Inc., Consolidated Health Coalition, Inc., and Group Benefit
Administrators Insurance Agency, Inc., the named Shareholders, and
Holyoke L. Whitney as Shareholders' Representative (incorporated by
reference to Exhibit 2 to the Company's Form 8-K Current Report
filed on July 15, 1996).
2.5 Plan and Agreement of Merger dated May 28, 1996 between HealthPlan
Services Corporation, HealthPlan Services Alpha Corporation,
Harrington Services Corporation, and Robert Chefitz as Shareholders'
Representative (incorporated by reference to the Company's Form 8-K
Current Report filed on July 15, 1996).
2.6 Stock Purchase Agreement dated December 18, 1996 by and among Noel
Group, Inc., Automatic Data Processing, Inc., and the Company
(incorporated by reference to the Noel Group, Inc.'s Current Report
on Form 8-K dated February 7, 1997).
2.7 Shareholder Agreement by and among Sykes Enterprises, Incorporated
and the Company dated December 18, 1997, and Amendment to
Shareholder Agreement dated February 28, 1998.
3.1 Certificate of Incorporation, as amended (incorporated by reference
to Exhibit 4.1 to the Company's Form S-8 Registration Statement
#333-07631 filed with respect to the HealthPlan Services Corporation
1996 Employee Stock Option Plan on July 3, 1996).
3.2 By-laws, as amended (incorporated by reference to Exhibit 3.2 to the
Company's 1996 Annual Report on Form 10-K, filed on March 31, 1997).
4.1 Excerpts from the Certificate of Incorporation, as amended (included
in Exhibit 3.1).
4.2 Excerpts from the By-laws, as amended (included in Exhibit 3.2).
17
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) (incorporated by reference to
Exhibit 10.4 to the Company's 1996 Annual Report on Form 10-K, filed
on March 31, 1997):
(a) Administrative Services Agreement dated November 1, 1989
between The Travelers Insurance Company and Consolidated
Group, Inc.
(b) Claims Administration Agreement dated November 1, 1989 between
The Travelers Insurance Company and Consolidated Group Claims,
Inc.
10.5 HealthPlan Services Corporation 1996 Employee Stock Option
Plan (compensatory plan) (incorporated by reference to Exhibit 10.6
to the Company's 1996 Annual Report on Form 10-K, filed on March 31,
1997).
10.6 Amended and Restated HealthPlan Services Corporation 1996 Employee
Stock Option Plan (compensatory plan) (incorporated by reference to
Exhibit 4.3 to the Company's Form S-8 Registration Statement
#333-31913, filed on July 23, 1997).
10.7 HealthPlan Services Corporation 1995 Incentive Equity Plan
(compensatory plan) (incorporated by reference to Exhibit 10.7 to
the Company's Form S-1 Registration Statement #33-90472, filed on
May 18, 1995).
10.8 1995 HealthPlan Services Corporation Directors Stock Option Plan
(compensatory plan) (incorporated by reference to Exhibit 10.10 to
the Company's Form S-1 Registration Statement #33-90472, filed on
May 18, 1995).
10.9 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
18
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).
(b) Lease Agreement between the Company and Paragon Group, Inc. (as
agent for Airport Southeast Associates, Ltd.), dated January 26,
1982, as amended on October 13, 1983, April 3, 1984 by a Supplement
to Amendment of Lease, and as further amended on June 18, 1987 by
agreement between the Company and Concourse Associates Venture
(successor in interest to Airport Southeast Associates) (Concourse
Center II, Tampa, Florida) (incorporated by reference to Exhibit
10.14(b) to the Company's Form S-1 Registration Statement #33-90472,
filed on May 18, 1995).
(c) Second Amendment to Leases dated April 30, 1995 between
Concourse Center Associates Limited Partnership and the Company
(Concourse Centers I and II, Tampa, Florida) (incorporated by
reference to Exhibit 10.13(g) to the Company's Annual Report on Form
10-K, filed on March 29, 1996).
(d) Amended, Consolidated and Restated Lease dated January 1, 1987
between Consolidated Group, Inc. and Consolidated Group Service
Company Limited Partnership, as amended by First Amendment dated May
23, 1990, and by Second Amendment dated March 27, 1996 (incorporated
by reference to Exhibit 10.14(d) to the Company's 1996 Annual Report
on Form 10-K, filed on March 31, 1997).
(e) Third Amendment to Amended Consolidated and Restated Lease
between Consolidated Group Service Company Limited Partnership and
HealthPlan Services, Inc., dated February 26, 1998.
10.15 (a) 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 (incorporated by reference to Exhibit 10.15 to the
Company's 1996 Annual Report on Form 10-K filed on March 31, 1997).
(b) Letter Agreement regarding Credit Agreement, dated March 28,
1997.
19
(c) Third Amendment to Credit Agreement, dated May 6, 1997.
(d) Fourth Amendment to Credit Agreement, dated June 13, 1997.
(e) Fifth Amendment to Credit Agreement, dated October 30, 1997.
(f) Sixth Amendment to Credit Agreement, dated March 17, 1998.
10.16 Employment and Noncompetition Agreement, dated June 25, 1996 by and
between R.E. Harrington, Inc. and Robert R. Parker (management
contract) (incorporated by reference to Exhibit 10.19 to the
Company's 1996 Annual Report on Form 10-K filed on March 31, 1997).
10.17 Deferred Compensation Agreement between R. E. Harrington, Inc. and
Robert R. Parker, dated May 15, 1987 (compensatory plan).
10.18 Employment and Noncompetition Agreement dated July 1, 1996 by and
between Consolidated Group, Inc. and Timothy T. Clifford (management
contract) (incorporated by reference to Exhibit 10.20 to the
Company's 1996 Annual Report on Form 10-K filed on March 31, 1997).
10.19 Amended and Restated HealthPlan Services Corporation 1997 Directors
Equity Plan (compensatory plan) (incorporated by reference to
Exhibit 4.3 to the Company's Form S-8 Registration Statement
#333-31915, filed on July 23, 1997).
10.20 HealthPlan Services Corporation 1997 Officer Bonus Plan Summary
(compensatory plan).
10.21 Administrative Services and Business Transfer Agreement between the
Company and TMG Life Insurance Company, dated December 4, 1996.
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 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, 1997.
20
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 30th day of March, 1998.
HEALTHPLAN SERVICES CORPORATION
By: /s/ JAMES K. MURRAY, JR.
--------------------------------------
James K. Murray, Jr.,
Chief Executive Officer and
Chairman of the Board (Principal
Executive Officer)
By: /s/ DONALD W. GOULD, JR.
--------------------------------------
Donald W. Gould, Jr.,
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William L. Bennett, James K. Murray, Jr. and
Joseph S. DiMartino his or her true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
or her in his or her name, place, and stead, in any and all capacities, to sign
any or all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, and hereby
ratifies and confirms all that said attorneys-in-fact and agents, each acting
alone, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ JAMES K. MURRAY, JR. Chief Executive Officer; March 30, 1998
----------------------- and Chairman of the
James K. Murray, Jr. Board (Principal Executive
Officer)
/s/ WILLIAM L. BENNETT Vice Chairman of the March 30, 1998
----------------------- Board; Director
William L. Bennett
----------------------- Director
Joseph A. Califano, Jr.
/s/ JOSEPH S. DIMARTINO Director March 30, 1998
-----------------------
Joseph S. DiMartino
/s/ VINCENT D. FARRELL, JR. Director March 30, 1998
-----------------------
Vincent D. Farrell, Jr.
21
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ JOHN R. GUNN Director March 30, 1998
-----------------------
John R. Gunn
/s/ NANCY M. KANE Director March 30, 1998
-----------------------
Nancy M. Kane
/s/ DAVID NIERENBERG Director March 30, 1998
-----------------------
David Nierenberg
/s/ JAMES G. NIVEN Director March 30, 1998
-----------------------
James G. Niven
/s/ MARC I. PERKINS Director March 30, 1998
-----------------------
Marc I. Perkins
/s/ TREVOR G. SMITH Director March 30, 1998
-----------------------
Trevor G. Smith
/s/ JAMES F. CARLIN Director March 30, 1998
-----------------------
James F. Carlin
/s/ ARTHUR F. WEINBACH Director March 30, 1998
-----------------------
Arthur F. Weinbach
22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of
HealthPlan Services Corporation
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
HealthPlan Services Corporation and its Subsidiaries (the "Company") at December
31, 1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, 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 18, 1998
F-1
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------------------
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 1,545 $ 3,725
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . 11,256 10,062
Accounts receivable, net of allowance for doubtful
accounts of $150 and $99, respectively . . . . . . . . . . . . 28,900 17,899
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . . 1,843 6,083
Prepaid expenses and other current assets . . . . . . . . . . . . . 3,071 4,245
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,085 4,481
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . 49,700 46,495
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 23,235 21,102
Other assets, net of accumulated amortization
of $689 and $443, respectively . . . . . . . . . . . . . . . . . 2,908 2,182
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,008 8,327
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,334 6,389
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,595 3,685
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . 149,544 156,521
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 243,324 $ 244,701
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,502 $ 20,905
Premiums payable to carriers . . . . . . . . . . . . . . . . . . . . 39,601 19,018
Commissions payable. . . . . . . . . . . . . . . . . . . . . . . . . 5,484 4,880
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 2,015 1,560
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 18,555 24,344
Current portion of long-term notes payable . . . . . . . . . . . . . 385 2,717
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . 79,542 73,424
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,309 59,581
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982 -
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . 2,925 2,913
----------- -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . 126,758 135,918
----------- -----------
Commitments and contingencies (Notes 8, 11, and 12)
Stockholders' equity:
Common stock voting, $0.01 par value, 100,000,000 authorized,
15,038,033 issued and outstanding at December 31, 1997 and,
14,974,126 at December 31, 1996 150 150
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 107,325 106,153
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 7,671 2,480
Unrealized appreciation on investments available for sale . . . . . 1,420 -
----------- -----------
Total stockholders' equity. . . . . . . . . . . . . . . . . 116,566 108,783
----------- -----------
Total liabilities and stockholders' equity. . . . . . . . . $ 243,324 $ 244,701
=========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
----------- ----------- -------------
Operating revenues . . . . . . . . . . . . . . . . . . . . $ 281,644 $ 191,493 $ 98,187
Interest income . . . . . . . . . . . . . . . . . . . . . 1,705 2,346 2,063
----------- ----------- -------------
Total revenues . . . . . . . . . . . . . . . . . . 283,349 193,839 100,250
Expenses:
Agent commissions . . . . . . . . . . . . . . . . . . . 65,674 48,507 36,100
Personnel . . . . . . . . . . . . . . . . . . . . . . . 113,071 72,209 25,433
General and administrative . . . . . . . . . . . . . . 54,973 41,614 16,967
Pre-operating and contract start-up costs . . . . . . . 360 812 1,664
Contract commitments . . . . . . . . . . . . . . . . . - 2,685 -
Restructure charge . . . . . . . . . . . . . . . . . . 1,374 1,425 -
Integration . . . . . . . . . . . . . . . . . . . . . . 4,885 7,804 -
Loss on impairment of goodwill . . . . . . . . . . . . - 13,710 -
Depreciation and amortization . . . . . . . . . . . . 15,917 10,548 4,386
----------- ----------- -------------
Total expenses . . . . . . . . . . . . . . . . . . 256,254 199,314 84,550
----------- ----------- -------------
Income (loss) before interest expense, equity in
loss of joint venture, and income taxes . . . . . . . 27,095 (5,475) 15,700
Interest expense . . . . . . . . . . . . . . . . . . . 4,173 2,601 69
Equity in loss of joint venture . . . . . . . . . . . . 2,850 - -
----------- ----------- -------------
Income (loss) before income taxes . . . . . . . . . . . 20,072 (8,076) 15,631
Provision (benefit) for income taxes. . . . . . . . . . 9,276 (1,360) 6,096
----------- ----------- -------------
Net income (loss) . . . . . . . . . . . . . . . . $ 10,796 $ (6,716) $ 9,535
=========== =========== =============
Dividends on Redeemable
Preferred Stock . . . . . . . . . . . . . . . . . $ - $ - $ 285
=========== =========== =============
Net income (loss) attributable to
common stock . . . . . . . . . . . . . . . . . . . $ 10,796 $ (6,716) $ 9,250
=========== =========== =============
Basic net income (loss) per share . . . . . . . . . . . $ 0.72 $ (0.47) $ 0.82
=========== =========== =============
Basic weighted average
shares outstanding . . . . . . . . . . . . . . . . 15,004 14,181 11,316
=========== =========== =============
Basic pro forma net income per share . . . . . . . . . $ 0.71
=============
Basic pro forma weighted average
shares outstanding . . . . . . . . . . . . . . . . 13,414
=============
Diluted income (loss) per share . . . . . . . . . . . . $ 0.71 $ (0.47) $ 0.84
=========== =========== =============
Diluted weighted average
shares outstanding . . . . . . . . . . . . . . . . 15,164 14,317 11,380
=========== =========== =============
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
UNREALIZED
APPRECIATION
NON- ON
VOTING VOTING ADDITIONAL INVESTMENTS
COMMON COMMON PAID-IN RETAINED AVAILABLE
STOCK STOCK CAPITAL EARNINGS FOR SALE TOTAL
------ ------- ---------- --------- ------------- ---------
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
Vesting of management stock .. -- -- 235 -- -- 235
Issuance of 46,800
shares in connection
with stock option plans .... -- -- 655 -- -- 655
Issuance of 14,569 shares
in connection with
the employee stock
purchase plan .............. -- -- 237 -- -- 237
Issuance of 2,538 shares
in connection with the
directors compensation plan -- -- 45 -- -- 45
Cash dividends declared ..... -- -- -- (5,605) -- (5,605)
Change in unrealized
appreciation on investments
available for sale ......... -- -- -- -- 1,420 1,420
Net income ................... -- -- -- 10,796 -- 10,796
--- ---- --------- -------- ------ ---------
Balance at December 31, 1997 . $-- $150 $ 107,325 $ 7,671 $1,420 $ 116,566
=== ==== ========= ======== ====== =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
---------- ------------- -----------
Cash flows from operating activities:
Net income (loss) $ 10,796 $ (6,716) $ 9,535
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . 9,061 5,729 2,657
Amortization . . . . . . . . . . . . . . . . . . 6,856 4,819 1,729
Equity in loss of joint venture. . . . . . . . . 2,850 - -
Loss on impairment of goodwill . . . . . . . . . - 13,710 -
Issuance of Common Stock to management . . . . . 235 456 332
Deferred taxes . . . . . . . . . . . . . . . . . 6,697 (804) 935
Changes in assets and liabilities, net of effect
from acquisitions and dispositions:
Restricted cash. . . . . . . . . . . . . . . . . (1,194) (9,057) 1,807
Accounts receivable. . . . . . . . . . . . . . . (10,919) 1,415 (702)
Refundable income taxes . . . . . . . . . . . . 4,240 (5,043) (1,041)
Prepaid expenses and other current assets. . . . 960 (286) 136
Other assets . . . . . . . . . . . . . . . . . . (1,138) 565 (188)
Accounts payable . . . . . . . . . . . . . . . . (7,316) 13,049 643
Premiums payable to carriers . . . . . . . . . . 20,583 1,809 (1,262)
Commissions payable . . . . . . . . . . . . . . 604 338 (12)
Deferred revenue . . . . . . . . . . . . . . . . 455 (490) (1,018)
Accrued liabilities. . . . . . . . . . . . . . . (8,894) 1,229 (4,340)
Income taxes payable . . . . . . . . . . . . . . - (54) (135)
---------- ------------- -----------
Net cash provided by operating activities 33,876 20,669 9,076
---------- ------------- -----------
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . (9,837) (5,731) (5,286)
Sales (purchases) of short-term
investments, net. . . . . . . . . . . . . . . - 36,723 (36,723)
Cash paid for acquisitions, net of cash acquired - (89,484) (17,403)
Payment for purchase of The Mutual Group block
of business . . . . . . . . . . . . . . . . . (1,623) - -
Payment for Provident American contract rights . (707) - -
Proceeds from sale of assets . . . . . . . . . . 2,780 - -
Purchases of investments . . . . . . . . . . . . (5,341) (3,311) -
Proceeds from note receivable. . . . . . . . . . 6,388 - -
Purchases of notes receivable. . . . . . . . . . (6,334) (6,388) -
---------- ------------- -----------
Net cash used in investing activities . . (14,674) (68,191) (59,412)
---------- ------------- -----------
Cash flows from financing activities:
Net (payments) borrowings under line
of credit (15,000) 55,000 -
Payments on other debt . . . . . . . . . . . . . (3,593) (12,466) (35)
Cash dividends paid. . . . . . . . . . . . . . . (3,726) - -
Net proceeds from initial public offering of
Common Stock . . . . . . . . . . . . . . . . - - 50,806
Proceeds from exercise of stock options . . . . 655 160 -
Proceeds from Common Stock issued. . . . . . . . 282 3,815 -
---------- ------------- -----------
Net cash (used in) provided by
financing activities . . . . . . . . . (21,382) 46,509 50,771
---------- ------------- -----------
Net (decrease) increase in cash and cash
equivalents . . . . . . . . . . . . . . . . . . (2,180) (1,013) 435
Cash and cash equivalents at beginning of period . 3,725 4,738 4,303
---------- ------------- -----------
Cash and cash equivalents at end of period. . . . . $ 1,545 $ 3,725 $ 4,738
========== ============= ===========
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . . . $ 4,900 $ 1,573 $ 65
========== ============= ===========
Net (refunds received) cash paid for
income taxes . . . . . . . . . . . . . . . . . $ (838) $ 4,968 $ 6,321
========== ============= ===========
Supplemental disclosure of noncash activities:
Dividends declared but unpaid . . . . . . . . . $ 1,879 $ - $ -
========== ============= ===========
Exchange of Redeemable Preferred Stock
Series A and Series B for Common Stock . . . $ - $ - $ 19,570
========== ============= ===========
Common Stock issued for purchase of
Harrington Services Corporation. . . . . . . $ - $ 30,102 $ -
========== ============= ===========
Dividends on Redeemable Preferred Stock. . . . . $ - $ - $ 285
========== ============= ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
HealthPlan Services Corporation (together with its direct and indirect
wholly owned subsidiaries, the "Company") is an outsourcing company that
administers health and other benefit plans for large, self-funded companies
and for payors (insurance companies, health maintenance organizations
("HMOs"), and other risk-takers) that have elected to outsource sales
support, distribution, and "back-office" administrative services. The
Company provides these services to approximately 120,000 small businesses,
plan holders, and self-funded organizations, covering approximately 3.0
million members in the United States. The Company functions solely as a
service provider generating fee-based income and does not assume any
underwriting risk.
On May 19, 1995, the Company completed an initial public offering of
4,025,000 shares of its Common Stock, shares of which are presently traded
on the New York Stock Exchange. Concurrent with the initial public
offering, the Company also exchanged Redeemable Preferred Stock for
1,398,000 shares of Common Stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The Company prepares its financial statements in conformity with generally
accepted accounting principles. These principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of HealthPlan
Services Corporation and its wholly owned subsidiaries. The Company's 50%
owned joint venture investment is accounted for using the equity method.
All intercompany transactions and balances have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as highly liquid investments that
have original maturities of three months or less.
RESTRICTED CASH
The Company established a bank account for the sole purpose of
administering the contracts with the Florida Community Health Purchasing
Alliances. This cash may be withdrawn only to meet current obligations
connected with servicing these contracts.
F-6
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Costs of the assets acquired have
been recorded at their respective fair values at the date of acquisition.
Expenditures for maintenance and repairs are expensed as incurred. Major
improvements that increase the estimated useful life of an asset are
capitalized. Depreciation is computed using the straight-line method over
the following estimated useful lives of the related assets:
YEARS
----------
Building 30
Furniture and fixtures 3-10
Computers and equipment 2-5
Computer software 3
Leasehold improvements Lease term
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist primarily of prepaid
commissions (paid to certain agents at the initiation of a policy), rent,
insurance, postage, and repair and maintenance contracts.
INVESTMENTS
As of January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). The effect of SFAS 115 is dependent
upon classification of the investment. As the Company's investments in
Health Risk Management, Inc. ("HRM") and Medirisk, Inc. ("Medirisk") (see
Note 8) are classified as available for sale, they are measured at fair
market value. Any increase or decline in the value of investments is
recorded as unrealized appreciation in the equity section of the balance
sheet. The Company recognizes gains based on average costs.
Investments in common stock and joint ventures in which the Company
exercises significant influence but lacks control are accounted for on the
equity basis. Under the equity method, the Company records its
proportionate share of income and loss of each investment.
INTANGIBLES AND IMPAIRMENT OF LONG-LIVED ASSETS
The excess of cost over the fair value of net assets acquired is recorded
as goodwill and amortized on a straight-line basis over 25 years. The
Company reviews long-lived assets, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable. The Company compares the
expected future undiscounted cash flows to the carrying values of the
long-lived assets at the lowest level of identifiable cash flows. When the
expected future undiscounted cash flows are less than the carrying amount,
the asset is written down to its estimated fair value. The Company
calculates estimated fair value as the discounted future value of
anticipated cash flows (see Note 6).
Other intangibles, such as contract rights, are amortized over either the
term or expected life of the contracts, generally 5-7 years.
OTHER ASSETS
Other assets includes loan origination fees which are amortized over the
terms of the respective agreements.
PREMIUMS PAYABLE
The Company collects insurance premiums on behalf of its insurance carrier
and managed care customers and remits such amounts to the customers when
due.
F-7
REVENUE RECOGNITION
Revenues are recognized ratably over contractual periods or as claims
processing and administrative services are being performed. Revenue
collected in advance is recorded as deferred revenue until the related
services are performed.
ADVERSE CONTRACT COMMITMENTS
On an ongoing basis, the Company estimates the revenues to be derived over
the life of service contracts, as well as the costs to perform the services
connected therewith, in order to identify adverse commitments. This process
includes evaluating actual results during the period and analyzing other
factors, such as anticipated rates, volume, and costs. If the revised
estimates indicate that a net loss is expected over the remaining life of
the contract, the Company recognizes the loss immediately.
INTEGRATION EXPENSE
Certain costs amounting to $3.2 million incurred by the Company in 1997
relative to the post-acquisition integration of information systems at
Consolidated Group, Inc. and an affiliated company (collectively,
"Consolidated Group") and Harrington Services Corporation, together with
its direct and indirect wholly owned subsidiaries ("Harrington") as well as
the post-assumption integration of information systems for the group
operations of TMG Life Insurance Company's Employee Benefits division ("TMG
block of business") were recorded as integration expense. Other
non-information systems costs amounting to $1.7 million for items such as
the closing of certain of the Company's offices, consolidation of treasury
functions, and employee relocations have also been recorded as integration
expense.
Certain costs amounting to $6.9 million incurred by the Company in 1996 in
relation to the post-acquisition integration of information systems at
Consolidated Group and Harrington are recorded as integration expense.
Other non-information systems costs amounting to $0.9 million for items
such as travel, recruiting, and moving have also been recorded as
integration expense.
RESTRUCTURE CHARGES
In 1997, the Company recorded a charge of $1.4 million to reflect the cost
of exiting its Framingham, Massachusetts office. This charge reflected the
cost of terminating employees and abandoning property and equipment. The
Company's restructure plan included the elimination of approximately 150
jobs in management, administration, and information systems. The
administration and claims services historically performed in Framingham
were assumed in the Company's Tampa, Florida and Merrimack, New Hampshire
offices.
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 ($0.7 million) and
terminating employees ($0.7 million). 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.
F-8
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
During 1997, Statement on Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings per Share," was issued. SFAS 128 was effective for the
year ending December 31, 1997 and required a restatement of previously
reported earnings per share. Under SFAS 128, "basic" earnings per share
replaced the reporting of "primary" earnings per share. Basic earnings per
share is calculated by dividing the income available to common stockholders
by the weighted average number of common shares outstanding for the period,
without consideration for common stock equivalents. "Fully diluted"
earnings per share replaced "diluted" earnings per share under SFAS 128.
The calculation of diluted earnings per share is similar to that of fully
diluted earnings per share under previous accounting pronouncements.
Basic Pro Forma earnings per share was computed based on the weighted
average number of common shares outstanding during the period 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.
Primary earnings per share was not materially different from basic earnings
per share for the years ended December 31, 1996 and 1995.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year's presentation. These amounts do not have a material impact on
the financial statements taken as a whole.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method currently prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25") and discloses the pro
forma effects of the fair value based method, as prescribed by Statement of
Financial Accounting Standards No. 123 ("SFAS 123").
DERIVATIVE FINANCIAL INSTRUMENTS
As a matter of policy, the Company does not engage in derivatives trading
or market-making activities. Rather, derivative financial instruments
including interest rate swaps are used by the Company principally in the
management of its interest rate exposures. Amounts to be paid or received
under interest rate swap agreements are accrued as interest rates change
and are recognized over the life of the swap agreements as an adjustment to
interest expense. The fair values of the swap agreements are not recognized
in the consolidated financial statements since they are accounted for as
hedges.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires the disclosure of the fair value
of financial instruments, including assets and liabilities recognized and
not recognized in the consolidated statements of financial condition.
The Company's investments, which are readily marketable, are carried at
market value.
F-9
Management estimates that the aggregate net fair value of other financial
instruments recognized on the consolidated statements of financial
condition (including cash and cash equivalents, receivables and payables,
and short-term borrowings) approximates their carrying value, as such
financial instruments are short-term in nature, bear interest at current
market rates or are subject to repricing.
The Company's only financial instruments not reflected at estimated market
value are its two interest rate swaps (see Note 9). The unrecorded fair
value of these swaps as of December 31, 1997 was approximately $(675,000).
3. ACQUISITIONS
CONSOLIDATED GROUP
On July 1, 1996, the Company acquired all the issued and outstanding stock
of 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. 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 (17.5) million
---------------
$ 61.9 million
===============
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 administrative services to
self-funded benefit plans. 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, HealthPlan Services, Inc., a wholly owned subsidiary
of the Company ("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. The purchase price for the DGB business consisted of (i)
approximately $5.1 million paid at closing and (ii) for the seven-year
period following the closing date, semi-monthly payments based on the
number of enrollees in accounts that were DGB accounts as of the closing
date, to be reduced by any attrition of enrollees. HPSI placed $5.0 million
in escrow, as required by the agreement to fund those payments, and the
present value of those estimated payments was recorded as goodwill.
Additionally, HPSI assumed approximately $1.0 million in liabilities
related to this purchase. In December 1997, the Company sold the contracts
and certain other assets to DGB for cash totaling $4.3 million. The cash
consideration, net of the sale of certain property and equipment ($0.1
million), the write-off of interest receivable on the escrow account ($0.4
million), and the write-off of goodwill associated with the DGB acquisition
($2.3 million), resulted in a net recovery of $1.5 million.
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"). In
connection with this acquisition, the Company recorded (i) a cash
F-10
investment of approximately $7.5 million, (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.
UNAUDITED PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
The following unaudited pro forma consolidated results of operations of the
Company give effect to acquisitions, accounted for as purchases, as if they
occurred on January 1, 1996 (in thousands):
YEAR ENDED
DECEMBER 31,
1996
------------
Revenues $ 269,476
Net loss (7,839)
Net loss per common share (0.52)
The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisitions been
made as of January 1, 1996 or of the results which may occur in the future.
4. BLOCKS OF BUSINESS
PROVIDENT AMERICAN CORPORATION
In October 1997, the Company and Provident American Corporation
("Provident") entered into an agreement under which the Company assumed all
of the policy issuance, billing, and claims services for the individual
health insurance policies of Provident's life insurance subsidiaries. The
Company began providing these services in January 1998. In conjunction with
this agreement, the Company recorded contract rights (see Notes 6 and 8) of
$0.7 million.
TMG LIFE INSURANCE COMPANY'S EMPLOYEE BENEFITS BUSINESS
Effective January 1, 1997, HPSI assumed the administrative responsibilities
for the TMG block of business. As part of the administration and business
transfer agreement (the "Agreement"), the Company agreed to assume a lease
related to a field office located in Brookfield, Wisconsin and pay $1.6
million for certain tangible and intangible assets. In addition, the
Company agreed to employ approximately 220 former TMG employees for a
period of six months. The Company has recorded a liability for certain
obligations assumed in the Agreement, including the closure of the
Brookfield office, an event which the Company announced during the second
quarter and executed during the third quarter of 1997. TMG provides
marketing and administrative services for medical, dental, and group life
benefits to small businesses with approximately 185,000 members and over
$100 million in annual premiums. Connecticut General Life Insurance Company
has assumed financial responsibility for the business as the reinsurer of
new and existing policies. Consistent with the Company's historical policy
of accounting for the assumption of blocks of business (as opposed to the
acquisition of companies), the intangible asset, called "contract rights,"
is being amortized over seven years (see Note 6).
F-11
5. 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
self-funded customers located throughout the United States to provide third
party marketing, administration, and risk management services. For the year
ended December 31, 1997, the Company's two largest payors accounted for
approximately 12.7% and 12.5%, respectively, of total revenues.
The Company grants credit, without collateral, to some of its self-funded
clients under certain contracts.
6. INTANGIBLE ASSETS
Intangible assets resulting from the excess of cost over the fair value of
the respective net assets acquired was as follows (in thousands):
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
HealthPlan Services goodwill $ 32,841 $ 32,841
Consolidated Group goodwill 59,734 59,734
Harrington goodwill 66,705 66,705
Diversified Group Brokerage goodwill - 2,388
Third Party Claims Management goodwill 490 490
The Mutual Group contract rights 1,224 -
Provident American contract rights 707 -
----------- ----------
161,701 162,158
Accumulated amortization (12,157) (5,637)
----------- ----------
$ 149,544 $ 156,521
=========== ==========
In December 1997, the Company sold the rights for the administration of DGB
customers along with certain other assets back to DGB (see Note 3)
resulting in the recovery of the remaining goodwill balance.
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.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
-----------------------
1997 1996
--------- ---------
Land $ 438 $ 438
Building 1,133 1,133
Furniture and fixtures 8,126 7,531
Computers and equipment 13,952 10,192
Computer software 14,100 7,728
Leasehold improvements 3,214 2,949
--------- ---------
40,963 29,971
Less - accumulated depreciation (17,728) (8,869)
--------- ---------
$ 23,235 $ 21,102
========= =========
The Company capitalizes purchased software which is ready for service and
software development costs incurred from the time technological feasibility
of the software is established until the software is ready for use to
provide processing services to customers. Research and development costs
and other computer software maintenance costs related to software
development are expensed as incurred. Software development costs and costs
of purchased
F-12
software are amortized using the straight-line method over a maximum of
three years or the expected life of the product.
The carrying value of a software and development asset is regularly
reviewed by the Company, and a loss is recognized when the net realizable
value falls below the unamortized cost.
8. INVESTMENTS AND NOTES RECEIVABLE
Investments consists of the following (in thousands):
DECEMBER 31,
-------------------------
1997 1996
---------- -----------
Investments available for sale,
at market (cost of $5,965 and
$2,631) $ 7,385 $ 2,631
Equity method investments 210 1,054
---------- -----------
$ 7,595 $ 3,685
========== ===========
In December 1997, the Company and Sykes Enterprises, Incorporated ("Sykes")
formed Sykes HealthPlan Services ("SHPS"). The new company is owned 50% by
each of the founding companies and will provide care management services,
technology solutions, certain customer support services, and other
outsourcing capabilities to the health care and insurance industries. The
Company has agreed to invest up to $17.0 million in SHPS (of which $5.0
million was invested as of December 31, 1997) and guarantee a line of
credit of $37.5 million to fund the activities of SHPS.
As of December 31, 1997, SHPS completed the acquisition of Optimed Medical
Systems ("OMS"). OMS is a developer of clinical protocol systems that allow
managed care payors and providers to prospectively and concurrently control
health care utilization and costs, while achieving optimal patient
outcomes.
The Company accounts for its investment in SHPS under the equity method of
accounting. As of December 31, 1997, the Company had invested $5.0 million
in SHPS. Of this amount, $2.0 million represented an uncollateralized note
bearing interest at a rate of one percent in excess of the 30-day LIBOR
Rate, accruing daily, and an equity investment of $3.0 million. Effective
February 28, 1998, the note receivable from SHPS was converted to an equity
investment in SHPS. Additionally, the Company recorded its share in the
$2.9 million loss incurred by SHPS for the period from inception to
December 31, 1997, which was principally the result of a charge of $2.8
million for the write-off of purchased research and development associated
with the acquisition of OMS by SHPS. Included in accounts receivable at
December 31, 1997 is an amount of $155,000 due from SHPS.
Summary financial information for SHPS for the period from inception to
December 31, 1997 is as follows (in thousands):
Condensed Income Statement Information
Revenues $ -
Loss from operations (5,700)
Net loss $ (5,700)
Condensed Balance Sheet Information
Current assets $ 3,991
Non-current assets 3,198
Current liabilities 2,198
Non-current liabilities 4,773
Net worth $ 218
F-13
On February 12, 1998, SHPS announced the signing of a definitive agreement
to acquire Health International, Inc. ("HI"). SHPS expects to close the
transaction on or before March 31, 1998. In conjunction with the
acquisition of HI, SHPS expects to record a non-cash, non-recurring charge
of approximately $8.5 million relating to purchased research and
development. HI is a disease management company that provides a
comprehensive managed medical program for employers and plan administrators
to assist employees and their dependents in improving the quality of their
health care and reducing unnecessary medical costs.
On March 10, 1998, SHPS announced the signing of a definitive agreement to
acquire Prudential Service Bureau, Inc. ("PSBI") of Louisville, Kentucky.
The transaction is expected to be completed on or before March 31, 1998.
PSBI is an outsourcing company formed in 1986 whose core business provides
a wide range of call center-based health and welfare benefits and
administrative services to over 600 customers.
In November 1997, in conjunction with its agreement with Provident to
assume all of the policy issuance, billing, and claims services of
Provident's life insurance subsidiaries, the Company advanced Provident
$5.0 million. The Company will retain $85,000 per month during the first
sixty months of the agreement in addition to the regular service fees
collected. The Company recorded the present value of these payments at the
Company's incremental borrowing rate of 7%, $4.3 million, as a note
receivable and recorded the remaining $0.7 million as contract rights
included in intangible assets.
On March 5, 1997, the Company and 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 December 31, 1997, HRM's shares closed at $10.50 per
share of common stock. The unrealized holding loss has been reported in the
equity section of the balance sheet in accordance with SFAS 115. These
shares are 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. This investment is recorded as available for sale.
On January 8, 1996, the Company entered into an agreement with Medirisk, a
provider of health care information, to purchase $2.0 million of Medirisk
preferred stock representing a 9% ownership interest and, in addition, to
lend Medirisk up to $10.0 million over four years in the form of debt for
which the Company would receive detachable warrants to purchase up to
432,101 shares of Medirisk's common stock for $0.015 per share, based on
the amount of debt actually acquired.
On January 28, 1997, Medirisk completed an initial public offering and
satisfied the $6.9 million debt balance in accordance with the agreement.
The remaining value of the warrants of approximately $0.5 million was
accreted to income in the first quarter of 1997. Upon completion of the
public offering, Medirisk's preferred stock was converted to common stock.
The Company exercised these warrants in February of 1998 resulting in an
ownership of 480,442 shares of common stock, which represents an
approximate 11% ownership interest. The average cost was $5.48 per share.
On December 31, 1997, Medirisk's shares closed at $11.00 per share of
common stock. This investment is recorded as available for sale with the
unrealized holding gain reported in the equity section of the balance sheet
in accordance with SFAS 115. The investment was recorded at cost at
December 31, 1996.
9. NOTES PAYABLE AND CREDIT FACILITIES
In 1996, the Company expanded its credit facility (the "Line of Credit")
from $20 million to a new facility of $175 million with availability
limited by formula to three times trailing earnings before interest
expense, income taxes, and depreciation and amortization expense (with
certain adjustments called for in the credit agreement). The maximum amount
available through the Line of Credit as of December 31, 1997 was
approximately $128.4 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
F-14
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 $3.1 million of interest
expense on the Line of Credit for the year ended December 31, 1997. At
December 31, 1997, the Company classified $5.3 million of borrowings under
its Line of Credit due within one year as long-term debt. The Company has
both the intent and the ability, through its revolving Line of Credit, to
refinance these amounts on a long-term basis.
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, 1997, the Company recorded $0.3 million of interest
expense related to the swap agreements. The Company considers the fixed
rate and variable rate financial instruments to be representative of
current market interest rates and, accordingly, the recorded amounts
approximate their present fair market value.
In conjunction with the acquisition of the Company in 1994 by certain
Company officers and Noel Group, Inc. ("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 $57,000 to $80,000 through
November 2008. Interest expense relating to the note payable was
approximately $60,000 and $62,000 for the years ended December 31, 1997 and
1996, respectively.
On July 1, 1996, the Company assumed a mortgage outstanding from
Consolidated Group secured by a building with a net book value at December
31, 1997 of $1.0 million. The interest rate on the mortgage is fixed at
8.75%, with a final payment due in April 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 7.1% to 15.0%, with the final
payment due in July 2004.
The balances outstanding on the above debt instruments are as follows (in
thousands):
DECEMBER 31,
----------------------
1997 1996
-------- -------
Line of Credit $40,000 $55,000
Cal Group Note 1,160 1,214
Consolidated Group Mortgage 1,450 1,481
Harrington Equipment Notes 1,084 1,838
Consolidated Group Notes - 2,237
Consolidated Group Operating Note - 528
-------- -------
$43,694 $62,298
Less: Amounts due within one year (385) (2,717)
-------- --------
Long-term debt $43,309 $59,581
======== ========
F-15
Future minimum principal payments for all notes as of December 31, 1997 are
as follows (in thousands):
1998 385
1999 12,411
2000 15,015
2001 8,196
2002 211
Thereafter 7,476
-------
$43,694
=======
10. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
DECEMBER 31,
-----------------------
1997 1996
------- -------
Adverse lease commitments $ 4,351 $ 5,266
Salaries and wages 5,308 4,763
Office closure costs 820 462
Interest 178 906
Accrued legal and regulatory 300 500
State and local taxes 500 545
Severance 192 231
Contract commitments 90 1,089
Dividends declared 1,879 -
Sales conferences 596 103
Other 4,341 10,479
------- -------
$18,555 $24,344
======= =======
Adverse lease commitments relate to office and equipment leases assumed by
the Company upon its acquisitions of Consolidated Group and Harrington and
its assumption of the TMG block of business at prices in excess of market
rates or for property that will not be utilized for the full term of the
lease. Severance and office closure costs refer to costs connected with the
Company's acquisitions of Consolidated Group and Harrington and its
assumption of the TMG block of business.
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.
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, 1997 is approximately $0.9 million for North
Carolina. The balance at December 31, 1996 was approximately $0.6 million
for Florida and $0.5 million for North Carolina.
A director of the Company also serves as President and Chief Executive
Officer of Automatic Data Processing, Inc. ("ADP"). Beginning in the last
quarter of 1996, ADP and the Company began a market test under which the
Company distributed health insurance products to small business owners
through ADP's licensed sales force. In addition, ADP has provided payroll
and shareholder distribution services for the Company since 1995. During
the year ended December 31, 1997, the Company compensated ADP for these
services in the amount of approximately $110,000.
F-16
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 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, 1997, 1996, and 1995 was approximately $1.0
million, $0.9 million, and $0.3 million, respectively.
POST-RETIREMENT BENEFIT PLAN
Harrington, the Company's wholly owned subsidiary acquired on July 1, 1996,
provides medical and term life insurance benefits to certain retired
employees of two of its subsidiaries. The Company funds the benefit costs
on a current basis because there are no plan assets. The Company incurred
post-retirement benefit cost of $37,000 in 1997 and $38,000 in 1996. At
December 31, 1997 and 1996, an accrued post-retirement liability of $1.4
million is included in the balance in other long-term liabilities.
Actuarial assumptions used in calculating the obligation include a discount
rate of 7.5% and a health care cost trend rate of 6% in 1998, and 5% in
1999 and thereafter. A 1% increase in the health care cost trend rate would
result in an additional obligation of $88,000 and additional service cost
and interest cost of $12,000.
DEFERRED COMPENSATION PLAN
The Company has a deferred compensation plan with an officer and former
officer. The deferred compensation, which together with accumulated
interest is accrued but unfunded, is distributable in cash after retirement
or termination of employment, and at December 31, 1997 and 1996, amounted
to approximately $0.9 million. The participants will receive such deferred
amounts, together with interest at 12% annually beginning at retirement or
age 65, whichever comes first.
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
REPURCHASE OF COMMON STOCK
During the second quarter of 1997, the Company's Board of Directors
authorized the Company to use up to $20.0 million to support a share
repurchase program, subject to the terms and conditions of a previously
announced agreement with ADP. The Company did not repurchase any of its
shares of Common Stock through December 31, 1997.
F-17
LEASE COMMITMENTS
The Company rents office space and equipment under non-cancelable operating
leases. Rental expense under the leases approximated $11.2 million (net of
$1.5 million charged to adverse lease accruals), $7.7 million (net of $0.4
million charged to adverse lease accruals), and $4.0 million for the years
ended December 31, 1997, 1996, and 1995, respectively. Future minimum
rental payments under these leases are as follows (in thousands):
1998 $ 8,200
1999 7,615
2000 5,451
2001 4,400
2002 3,786
Thereafter 11,171
--------
$40,623
========
LITIGATION
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.
13. INCOME TAXES
The provision (benefit) for income taxes is as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------ -------- ------
Current
Federal $2,986 $ 429 $3,211
State 427 61 458
------ -------- ------
3,413 490 3,669
------ -------- ------
Deferred
Federal 5,130 (1,619) 2,116
State 733 (231) 311
------ -------- ------
5,863 (1,850) 2,427
------ -------- ------
Provision (benefit) for
income taxes $9,276 $(1,360) $6,096
====== ======== ======
F-18
The components of deferred taxes recognized in the accompanying financial
statements are as follows (in thousands):
DECEMBER 31,
-----------------
1997 1996
------- ------
Deferred tax asset - current
Accrued expenses not currently deductible $ 3,085 $4,617
Prepaid expenses currently deductible - (136)
------- ------
3,085 4,481
======= ======
Deferred tax asset (liability) - non-current
Deferred compensation 549 537
Post-retirement benefits 573 641
Depreciation (4,040) (657)
Intangibles 5,737 7,806
Equity in loss of joint venture 1,041 -
Unrealized gain on investments available for sale (834) -
------- ------
$ 3,026 $8,327
======= ======
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 6).
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, 1997 and 1996, based on
the Company's expectations of future taxable income.
The provision for income taxes varies from the federal statutory income tax
rate due to the following:
1997 1996 1995
------- ------- ------
Federal statutory rate applied to pre-tax income (loss) 34.0% (35.0)% 34.0 %
State income taxes net of federal tax benefit 5.0% (5.0)% 5.0 %
Goodwill amortization 5.3% 20.1 % 0.2 %
Tax exempt interest income - (2.6)% (1.3)%
Non-deductible items 1.9% 5.7 % 1.1 %
------- ------- ------
Effective tax rate 46.2% (16.8)% 39.0 %
======= ======= ======
14. EARNINGS PER COMMON SHARE
Earnings per share are calculated in accordance with the provisions of SFAS
128, effective for 1997. SFAS 128 requires the Company to report both basic
earnings per share, which is based on the weighted-average number of common
shares outstanding, and all dilutive potential common shares outstanding.
All prior years' earnings per share data have been restated in accordance
with SFAS 128.
F-19
NET INCOME
ATTRIBUTABLE TO PER SHARE
COMMON STOCK SHARES AMOUNT
--------------- ------ ---------
1997
Earnings per share of common stock-basic $10,796 15,004 $ 0.72
Effect of dilutive securities:
Stock options 160
------- ------ -------
Earnings per share of common stock--
assuming dilution $10,796 15,164 $ 0.71
======= ====== =======
1996
Earnings per share of common stock-basic $(6,716) 14,181 $ (0.47)
Effect of dilutive securities:
Stock options 136
------- ------ -------
Earnings per share of common stock--
assuming dilution $(6,716) 14,317 $ (0.47)
======= ====== =======
1995
Earnings per share of common stock-basic $ 9,250 11,316 $ 0.82
Preferred stock dividends 285
Effect of dilutive securities:
Stock options 64
------- ------ -------
Earnings per share of common stock--
assuming dilution $ 9,535 11,380 $ 0.84
======= ====== =======
15. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN
STOCK OPTION PLANS
The Company's stock option plans authorize the granting of both incentive
and non-incentive stock options for a total of 2,590,000 shares of Common
Stock to key executives, management, consultants, and, with respect to
240,000 shares, to directors. Under the plans, all options have been
granted at prices not less than market value on the date of grant. Certain
non-qualified incentive stock options may be granted at less than market
value. Options generally vest over a four-year period from the date of
grant, with 20% of the options becoming exercisable on the date of the
grant and 20% becoming exercisable on each of the next four anniversaries
of the date of the grant.
F-20
A summary of option transactions during each of the three years ended
December 31, 1997 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
Canceled (12,600) 19.35
---------
Under option, December 31, 1996
(278,200 exercisable) 1,443,500 18.54
Granted 613,000 20.37
Exercised (46,800) 14.00
Canceled (41,600) 20.32
---------
Under option, December 31, 1997
(711,200 exercisable) 1,968,100 19.17
=========
There were 621,900 and 378,100 shares available for the granting of options
at December 31, 1997 and 1996, respectively.
The following table summarizes the stock options outstanding at December
31, 1997:
RANGE NUMBER WEIGHTED AVERAGE WEIGHTED
OF OUTSTANDING AT REMAINING AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE
---------------- ----------------- ---------------- --------------
$14.00 - $18.50 969,900 8 years $16.22
19.25 - 25.50 998,200 9 years 22.03
F-21
MEASUREMENT OF FAIR VALUE
The Company applies APB 25 and related interpretations in accounting for
its stock option plans and employee stock purchase plan. Accordingly, no
compensation cost has been recognized related to these plans. Had
compensation cost for the Company's stock option and employee stock
purchase plans been determined based on the fair value at the grant dates,
as prescribed in SFAS 123, the Company's net income and net income per
share would have been as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------- -------- ------
Net income (loss) attributable to
common stock (in thousands):
As reported $10,796 $(6,716) $9,250
Pro forma 9,363 (8,596) 8,627
======= ======= ======
Net income (loss) per share:
Basic as reported $ 0.72 $ (0.47) $ 0.82
Basic pro forma 0.62 (0.61) 0.76
Diluted as reported $ 0.71 $ (0.47) $ 0.84
Diluted pro forma 0.62 (0.60) 0.78
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 2.38% for December
31, 1997 and 0.0% for the years ended December 31, 1996 and 1995; expected
volatility of 30% for each of the years ended December 31, 1997 and 1996;
risk-free interest rates of 5.49% to 6.54% for options granted during the
year ended December 31, 1997, 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 all three years.
EMPLOYEE STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan ("Employee Plan"), the Company
is authorized to issue up to 250,000 shares of Common Stock to its
employees who have completed one year of service. The Employee Plan is
intended to provide a method whereby employees have an opportunity to
acquire shares of Common Stock of the Company. The Employee Plan has been
implemented by consecutive quarterly offerings of the Company's Common
Stock commencing on July 1, 1996.
Under the terms of the Employee Plan, an employee may authorize a payroll
deduction of a specified dollar amount per pay period. The proceeds of that
deduction are used to acquire shares of the Company's Common Stock on the
offering date. The number of shares acquired is determined based on 85% of
the closing price of the Company's Common Stock on the New York Stock
Exchange on the offering date.
The Company sold 14,569 shares in 1997 and 6,302 shares in 1996 to
employees under the Employee Plan.
F-22
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED; IN THOUSANDS EXCEPT PER SHARE
DATA)
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- -------- -------- --------
Year ended December 31, 1997
Revenues $ 68,580 $ 69,113 $ 72,063 $ 73,593
Net income 2,001 3,588 2,408 2,799
Basic net income per common share $ 0.13 $ 0.24 $ 0.16 $ 0.19
Diluted net income per common share $ 0.13 $ 0.24 $ 0.16 $ 0.18
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- -------- -------- --------
Year ended December 31, 1996
Revenues $ 63,962 $ 67,006 $ 31,863 $ 31,008
Net income (5,529) (7,961) 3,440 3,334
Basic net income per common share $ (0.37) $ (0.53) $ 0.26 $ 0.25
Diluted net income per common share $ (0.37) $ (0.53) $ 0.25 $ 0.25
F-23
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
2.7 Shareholder Agreement by and among Sykes Enterprises, Incorporated
and the Company dated December 18, 1997, and Amendment to
Shareholder Agreement dated February 28, 1998.
10.14
(e) Third Amendment to Amended Consolidated and Restated Lease
between Consolidated Group Service Company Limited Partnership and
HealthPlan Services, Inc., dated February 26, 1998.
10.15
(b) Letter Agreement regarding Credit Agreement, dated March 28,
1997.
(c) Third Amendment to Credit Agreement, dated May 6, 1997.
(d) Fourth Amendment to Credit Agreement, dated June 13, 1997.
(e) Fifth Amendment to Credit Agreement, dated October 30, 1997.
(f) Sixth Amendment to Credit Agreement, dated March 17, 1998.
10.17 Deferred Compensation Agreement between R. E. Harrington, Inc. and
Robert R. Parker, dated May 15, 1987 (compensatory plan).
10.20 HealthPlan Services Corporation 1997 Officer Bonus Plan Summary
(compensatory plan).
10.21 Administrative Services and Business Transfer Agreement between the
Company and TMG Life Insurance Company, dated December 4, 1996.
21.1 Subsidiaries of the registrant.
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule (For SEC Use Only)