The selected historical financial data set forth below have been derived from the audited consolidated financial statements of HealthPlan Services at December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997, and 1996, and have been derived from the audited financial statements of HealthPlan Services at December 31, 1996, 1995, and 1994 and for the years ended December 31, 1996 and 1995 and the three months ended December 31, 1994 and the Predecessor Company at September 30, 1994 and for the nine months ended September 30, 1994 not included herein. The report of PricewaterhouseCoopers LLP, independent accountants of HealthPlan Services, on the consolidated financial statements of HealthPlan Services at December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997, and 1996 appears elsewhere in this Form 10-K. Selected historical financial data of HealthPlan Services should be read in conjunction with the related financial statements and notes thereto appearing elsewhere in this Form 10-K. The pro forma selected financial data are not necessarily indicative of actual results of financial position that would have been achieved had the acquisition of the Predecessor Company from D&B ("the Acquisition") been completed as of January 1, 1994, nor are the statements necessarily indicative of HealthPlan Services' future results of operations or financial position.
(1) Represents the historical results of operations of the Predecessor Company. HealthPlan Services' historical financial statements reflect certain expenses, including expenses attributable to employee benefit programs, retirement and health plans, treasury, and insurance, which were incurred by the Predecessor Company and allocated to HealthPlan Services on a pro rata basis.
(2) Gives effect to the recapitalization of all 19,000,000 shares of Preferred Stock (plus the right to receive dividends accrued thereon), which were exchanged for 1,397,857 shares of Common Stock of HealthPlan Services contemporaneously with the consummation of the initial public offering on May 19, 1995 ("the Recapitalization"), for all periods presented.
The following table sets forth, for the periods indicated, the percentages which certain items of income and expense bear to HealthPlan Services' revenue for such periods.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Personnel expense for the year ended December 31, 1998 increased $10.2 million, or 9.0%, to $123.3 million from $113.1 million in 1997. This increase resulted primarily from $16.0 million of personnel expense associated with the consolidation of CENTRA and NPPN. This increase was offset by reduced salaries resulting from a reduction of approximately 435 employees in HealthPlan Services' workforce and the outsourcing of care management services to SHPS. These services are now included as general and administrative expense. HealthPlan Services' personnel expense as a percentage of total revenues was 42.6% for the year ended December 31, 1998 compared to 40.2% in 1997.
During the year ended December 31, 1998, HealthPlan Services sold 370,711 of its shares of Medirisk, Inc. stock and all 200,000 of its shares of Health Risk Management, Inc. stock, resulting in gains of $5.2 million and $0.2 million, respectively. On September 11, 1998, HealthPlan Services sold its 50% interest in SHPS to Sykes for $30.6 million and recognized a gain on the sale of SHPS of $27.9 million.
Depreciation and amortization expense for the year ended December 31, 1998 decreased $0.1 million, or 0.6%, to $15.8 million from $15.9 million in 1997. Some of HealthPlan Services' furniture and fixtures became fully amortized in 1997. Additionally, HealthPlan Services wrote off internally developed software related to HealthPlan Services' exiting the Kentucky alliance in 1997. These reductions were partially offset by amortization of goodwill on HealthPlan Services' CENTRA and NPPN acquisitions.
Net interest expense for the year ended December 31, 1998 increased to $5.6 million from $2.5 million in 1997. This increase resulted primarily from HealthPlan Services' acquisitions of CENTRA and NPPN, along with its share repurchase program, which began in 1998.
HealthPlan Services recorded its 50% share of the loss incurred by SHPS through the date of its disposition, which was $11.8 million on a pre-tax basis. This loss principally resulted from a charge for the write-off of purchased research and development associated with acquisitions by SHPS.
In 1997, HealthPlan Services renegotiated its contracts with the Florida Community Health Purchasing Alliances and exited the Kentucky alliance and Washington alliance businesses. HealthPlan Services closed its Lexington, Kentucky office at the end of the contract term. As a result of the Kentucky office closure, HealthPlan Services recognized a one-time, non-recurring charge to general and administrative expense of $0.2 million. No contract commitment expense for the alliance business was recognized by HealthPlan Services in 1997.
Integration expense for the year ended December 31, 1997 was $4.9 million. Of this expense, $3.2 million related to the integration of information systems used by the TMG, Consolidated Group, and Harrington businesses, while $1.7 million represented other costs associated with transferring functions from certain of HealthPlan Services' offices, the consolidation of treasury functions, and employee relocations.
HealthPlan Services recorded its 50% share of the $2.9 million loss incurred by SHPS for the period from inception to December 31, 1997, which was principally the result of a charge of $2.8 million for the write-off of purchased research and development associated with an acquisition by SHPS.
HealthPlan Services has conducted a review of its computer systems and capabilities and has created a three-pronged program for addressing issues related to the Year 2000. This program includes the purchase and implementation of software packages from vendors, an upgrade of vendor packages to Year 2000 compliant versions, and the internal development and implementation of new software applications to increase the capabilities of HealthPlan Services' systems for the future.
HealthPlan Services has requested Year 2000 compliance information from its significant customers and vendors, including landlords and other third parties that are responsible for non-information technology systems such as security and environmental controls. In particular, HealthPlan Services has asked each vendor and customer for information regarding (a) the status of the vendor's or customer's Year 2000 readiness initiative, and (b) information regarding any expected changes in the vendor's or customer's data interface with HealthPlan Services. A team of HealthPlan Services information system professionals is coordinating its Year 2000 compliance efforts and is testing any new interfaces with vendors and customers.
Between 1996 and 1998, HealthPlan Services spent $7.9 million for Year 2000 compliance system upgrades and expects to spend $2.4 million in both capital and modification costs to complete its Year 2000 program. These costs include the expense of replacing any existing systems with Year 2000 compliant systems, even in cases where the system would have been replaced or upgraded regardless of Year 2000 requirements.
HealthPlan Services can provide no assurance that such vendors and customers will complete their respective Year 2000 solutions in time for HealthPlan Services to fully test system interfaces with them. Although HealthPlan Services does not have a formal Year 2000 contingency plan, its Year 2000 compliance team will be responding to any disruption in service resulting from a Year 2000 compliance problem in HealthPlan Services systems and software or in a vendor's or customer's system. There is no assurance, however, that HealthPlan Services will be able to remedy any disruption in service, in particular any disruption from a vendor's or customer's failure to be Year 2000 compliant or to inform HealthPlan Services of a change in its data interface. HealthPlan Services cannot estimate the cost that would be associated with a disruption in service resulting from its own or a vendor's or customer's Year 2000 compliance failure.
On February 27, 1998, HealthPlan Services acquired 49% of the capital stock of Montgomery Management Corporation ("Montgomery Management") from Provident Indemnity Life Insurance Company ("PILIC") for $4.0 million. In connection with the purchase, HealthPlan Services obtained a warrant from PILIC to purchase an additional 31% of Montgomery Management for nominal consideration. On October 26, 1998, HealthPlan Services exercised this warrant for an additional 31% of Montgomery Management's capital stock at a cost of $8,060.
During the second quarter of 1997, the Board of Directors authorized HealthPlan Services to use up to $20.0 million to support a share repurchase program. HealthPlan Services began implementing this share repurchase program in the first quarter of 1998. On May 12, 1998, the Board increased to $30.0 million its authorization to repurchase shares under this program. Through March 15, 1999, HealthPlan Services had acquired 1,306,800 shares under this program at a cost of approximately $28.3 million.
On June 16, 1998 HealthPlan Services paid $0.2 million for a 1% interest in CENTRA and acquired an additional 49.1% interest from CENTRA Benefit Services ("CBS") in exchange for the payment of $7.4 million ($9.3 million purchase price net of the payoff of a CBS note), the issuance of $4.0 million in five-year 5.75% notes convertible into approximately 180,000 shares of HealthPlan Services' Common Stock, a purchase price holdback of up to $1.2 million, and additional contingent consideration. In additon to such contingent consideration, CBS has the right to put its remaining 49.9% interest in
During 1998, HealthPlan Services sold 370,711 of its shares of Medirisk common stock and all 200,000 of its shares of HRM common stock, resulting in gains of $5.2 million and $0.2 million, respectively.