HealthPlan Services conducts its operations from its headquarters in Tampa, Florida. HealthPlan Services' central data processing facilities are located in Tampa, Florida, Columbus, Ohio, and El Monte, California. HealthPlan Services leases these facilities, as well as substantially all of its other locations. HealthPlan Services believes that its facilities are adequate for its present and anticipated business requirements.
The following is a discussion of changes in the consolidated results of operations of HealthPlan Services for the years ended December 31, 1998, 1997, and 1996.
Total revenues ........................ 100.0 % 100.0 % 100.0 % ------- ------- ------- Expenses: Agent commissions ................... 23.7 % 23.3 % 25.3 % Personnel ........................... 42.6 % 40.2 % 37.7 % General and administrative .......... 24.8 % 19.5 % 21.7 % Contract commitments ................ -- -- 1.4 % Restructure charge .................. 0.7 % 0.5 % 0.8 % Integration ......................... 1.4 % 1.7 % 4.1 % Loss on impairment of goodwill ...... -- -- 7.2 % Other expense ....................... 0.6 % 0.1 % 0.4 % Gain on sale of investments, net .... (11.5)% -- -- Depreciation and amortization ....... 5.5 % 5.7 % 5.5 % Interest expense, net ............... 2.0 % 0.9 % 0.1 % Equity in loss of joint venture ..... 4.1 % 1.0 % -- ------- ------- -------
Total expenses ............... 93.9 % 92.9 % 104.2 % ------- ------- -------
Income (loss) before provision for income taxes and minority interest 6.1 % 7.1 % (4.2)%
Provision (benefit) for income taxes .. 3.0 % 3.3 % (0.7)% ------- ------- -------
Net income (loss) ..................... 3.4 % 3.8 % (3.5)% ======= ======= =======
Agent commission expense for the year ended December 31, 1998 increased $2.7 million, or 4.1%, to $68.4 million from $65.7 million in 1997. This increase is consistent with the increase in operating revenues for the period indicated.
General and administrative expense for the year ended December 31, 1998 increased $16.9 million, or 30.8%, to $71.8 million from $54.9 million in 1997. This increase was primarily attributable to $12.5 million of general and administrative expense associated with the consolidation of CENTRA's and NPPN's financial results along with $6.7 million of costs associated with HealthPlan Services' outsourcing of its care management services to SHPS. HealthPlan Services' general and administrative expense as a percentage of total revenue increased to 24.8% for the year ended December 31, 1998 from 19.5% in 1997 primarily due to the outsourcing of HealthPlan Services' care management services to SHPS.
HealthPlan Services recorded $2.1 million in restructuring costs during the year ended December 31, 1998. These costs reflect employee terminations, lease terminations, and the abandonment of property and equipment associated with closing HealthPlan Services' Framingham, Massachusetts, Chicago, Illinois, and Atlanta, Georgia offices. There were 47, 43, and 48 employees terminated in the Framingham, Chicago, and Atlanta offices, respectively. These employees worked in management, claims administration, and information systems. In 1997, HealthPlan Services 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. HealthPlan Services' 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 HealthPlan Services' Tampa, Florida and Merrimack, New Hampshire offices.
Other expense of $1.8 million for the year ended December 31, 1998 reflects costs of $1.4 million associated with the write-off of customer balances due to a billing system conversion and uncollectability of accounts among HealthPlan Services' self-funded customers, and costs of $0.4 million related to the start-up of the PILIC/PALHIC block of business.
Revenues for the year ended December 31, 1997 increased $90.1 million, or 47.0%, to $281.6 million from $191.5 million in 1996. This increase resulted primarily from the inclusion of an additional six months of revenues, $71.6 million, from HealthPlan Services' acquisition of Consolidated Group and Harrington (effective July 1, 1996). Revenues from HealthPlan Services' 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 HealthPlan Services' assumption of the TMG block of business.
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 HealthPlan Services' 1996 acquisitions. HealthPlan Services' personnel expense as a percentage of total revenues increased to 40.2% in 1997 from 37.7% 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.
HealthPlan Services 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 HealthPlan Services' 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 HealthPlan Services' acquisition of Consolidated Group and Harrington. Additionally, HealthPlan Services recognized a $0.4 million acceleration of amortization for internally developed software related to HealthPlan Services' exiting the Kentucky alliance in 1997.
The "Year 2000 Problem" arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. The problems created by using abbreviated dates appear in hardware (such as microchips), operating systems, and other software programs. HealthPlan Services' Year 2000 ("Y2K") compliance project is intended to prepare HealthPlan Services' business for the Year 2000. HealthPlan Services defines Y2K "compliance" to mean that the computer code will process all defined future dates properly and give accurate results.
The implementation of this plan commenced in 1996 with the upgrade of the mainframe operating system. HealthPlan Services has since purchased and replaced its accounting and financial system and workers compensation system and written and implemented a new system for the unemployment compensation business. HealthPlan Services has received from the vendor the latest version of its claim processing software, which is Year 2000 compliant, and is currently implementing this version for all current accounts. HealthPlan Services also is undertaking system enhancements to its billing and administration system.
Under HealthPlan Services' May 1, 1998 Amended and Restated Credit Agreement, as amended, the Company maintains a line of credit of $175.0 million (the "Line of Credit") with availability equal to a multiple of trailing earnings before interest expense, income taxes, and depreciation and amortization expense (with certain adjustments called for in the credit agreement). This multiple is set at 3.5 through June 30, 1999 and steps down thereafter to 2.75 during the remaining term of the facility. First Union National Bank of North Carolina serves as "agency bank," and NationsBank, N.A. serves as co-agent, with respect to this facility. The credit facility contains provisions which include the maintenance of certain minimum financial ratios, limitations on merger and acquisition activity, limitations on capital expenditures, limitations on dividends and distributions, and limitations on investment activity. HealthPlan Services' borrowing under the Line of Credit includes interest ranging from LIBOR plus 75 to 150 basis points to New York prime plus 0 to 50 basis points. Current rates on LIBOR and New York prime rate drawings on the Line of Credit at December 31, 1998 were 7.1875% and 7.75%, respectively. The Line of Credit carries a commitment fee ranging from 0.175% to 0.25% of the unused portion and is secured by the stock of HealthPlan Services' subsidiaries. The outstanding draw was $91.0 million at December 31, 1998, and the maximum amount available was $125.0 million.
HealthPlan Services' Line of Credit enables it to pay a quarterly dividend of up to $0.1375 per share of HealthPlan Services' capital stock (up to $0.55 per share on an annualized basis). In the second quarter of 1998, HealthPlan Services increased its dividend to $0.1375 per share. For 1998, HealthPlan Services declared dividends totaling $7.6 million. These dividends were paid on April 21, 1998, July 21, 1998, October 20, 1998, and January 19, 1999.
On May 18, 1998, HealthPlan Services acquired National Preferred Provider Network, Inc. ("NPPN") for $25.0 million cash and additional contingent consideration of up to $25.0 million if NPPN achieves certain financial performance objectives.
CENTRA at a contractual price not to exceed $6.0 million within two years of the acquisition date if CENTRA meets certain financial performance criteria. If CBS has not put its remaining interest to HealthPlan Services within two years, CBS will sell its remaining interest in CENTRA to HealthPlan Services at an appraised value not to exceed $6.0 million. In February 1999, CBS notified HealthPlan Services that it intends to exercise its put option. HealthPlan Services is evaluating whether or not CENTRA has met the necessary financial performance criteria for CBS to exercise this option.
Based upon current expectations, HealthPlan Services 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.
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. HealthPlan Services is not required to file any supplementary data under this item.