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.
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.
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.
Net income (loss) .................... 3.8 % (3.5)% 9.5 % ====== ======= ======
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
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.
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.
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
commissions (11.9% of 1996 total revenues) represent a lower percentage of revenues than fully-insured customer commissions (44.9% of 1996 total revenues).
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.
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.
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.
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 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.