The Company conducts its operations from its headquarters in Tampa, Florida; its principal operating units, Small Group and Large Group, are headquartered in Framingham, Massachusetts and Columbus, Ohio, respectively. The Company's central data processing facilities are located in its Tampa, Florida, Framingham, Massachusetts, and Columbus, Ohio headquarters, and in El Monte, California. The Company leases these facilities, as well as substantially all of its other locations. The Company believes that its facilities are adequate for its present and anticipated business requirements. In connection with the integration of its newly acquired businesses, the Company has begun consolidating redundant facilities, including data centers, and expects to continue this consolidation in 1997.
The selected historical financial data set forth below have been derived from the audited consolidated financial statements of the Company at December 31, 1996 and 1995 and for the years ended December 31, 1996 and 1995 and the three months ended December 31, 1994 and the audited financial statements of the Predecessor Company at September 30, 1994 and for the nine months ended September 30, 1994, which appear elsewhere in this Annual Report on Form 10-K ("Form 10-K"), and have been derived from the audited financial statements of the Company at December 31, 1994 and the Predecessor Company at December 31, 1993 and the year ended December 31, 1993 and the unaudited financial statements of the Predecessor Company at December 31, 1992 and the year then ended not included herein. The report of Price Waterhouse LLP, independent accountants of the Company, on the consolidated financial statements of the Company at December 31, 1996 and 1995 and for the years ended December 31, 1996 and 1995 and the three months ended December 31, 1994 appears elsewhere in this Form 10-K. The report of Coopers & Lybrand L.L.P., independent accountants of the Predecessor Company, on the financial statements of the Predecessor Company at September 30, 1994 and the nine months ended September 30, 1994 appears elsewhere in this Form 10-K. Selected historical financial data of the Company and the Predecessor Company should be read in conjunction with the related financial statements and notes thereto appearing elsewhere in this Form 10-K. The pro forma selected financial data are not necessarily indicative of actual results of financial position that would have been achieved had the acquisition of HPSI ("the Acquisition") been completed as of January 1, 1994, nor are the statements necessarily indicative of the Company's future results of operations or financial position.
(2) Gives effect to the recapitalization of all 19,000,000 shares of Preferred Stock (plus the right to receive dividends accrued thereon), which were exchanged for 1,397,857 shares of Common Stock of the Company contemporaneously with the consummation of the initial public offering on May 19, 1995 ("the Recapitalization"), for all periods presented.
(3) The working capital deficit of the Predecessor Company reflects its participation in D&B's cash management system, which centrally pooled all D&B entities' cash balances and resulted in negative working capital for the Predecessor Company. The working capital deficit of the Company reflects its assumption in the Acquisition of a $17.0 million working capital deficit of the Predecessor Company.
The following unaudited pro forma statement of operations presents the pro forma statement of income of the Company for the year ended December 31, 1994 giving effect to: (i) the Acquisition; (ii) the Recapitalization; and (iii) the Company's initial public offering of common stock on May 19, 1995. The unaudited pro forma statements of income for the year ended December 31, 1994 assume that the foregoing transactions had been completed on January 1, 1994. The unaudited pro forma financial statements give effect only to the adjustments set forth in the accompanying notes thereto. These unaudited pro forma financial statements are provided only for comparison and are not necessarily indicative of actual results of operations.
HEALTHPLAN SERVICES CORPORATION UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
(b) To reflect the elimination of actual salaries and benefits for employees terminated at September 30, 1994 of $1,073 as a condition of the Acquisition (net of new executives' salaries and benefits of $602) and the elimination of D&B employee benefit and incentive compensation programs of $5,556 (net of newly implemented Company employee benefits programs of $2,941).
(d) To adjust depreciation and amortization expense to reflect the allocation of the purchase price for the Acquisition and asset revaluation of $12 and ($560), respectively, and the elimination of Predecessor Company amortization on acquisitions of carrier blocks of $1,248, which had been calculated on an accelerated basis over periods of up to seven years.
2. UNAUDITED PRO FORMA NET INCOME PER COMMON SHARE AND WEIGHTED AVERAGE SHARES OUTSTANDING
Unaudited pro forma net income per common share amounts and weighted average shares outstanding in the accompanying Pro Forma Statements of Income for the year ended December 31, 1994 are based on the weighted average number of shares during the year assuming that the following events occurred on January 1, 1994: (i) the three-for-two stock split with respect to the Common Stock of the Company, which was effected in the form of a stock dividend declared by the Board of Directors on March 8, 1995; and (ii) the Recapitalization.
The following is a discussion of material changes in the consolidated results of operations of the Company for the years ended December 31, 1996 and 1995 and Pro Forma Statements for the year ended December 31, 1994 (see Item 6, "Unaudited Pro Forma Financial Statements" and "Notes to Unaudited Pro Forma Financial Statements").
The Company provides marketing, administration, and risk management services and solutions for benefit programs. The Company's customers include managed care organizations, insurance companies, integrated health care delivery systems, self-funded benefit plans, and health care purchasing alliances.
In the small group business, the Company is usually compensated by way of a percentage of premium collected (sometimes referred to as "premium retention percentage"), and in some instances the Company charges the covered group a fixed monthly fee. Premium collected is a function of the premium charged by the payor on each life in the group. Thus, profitability can be a function of many factors, including the number of groups in force, the number of lives in force, the number of lives per group, the related premium retention percentage, and the overall volume of premium collected on a monthly basis. The Company's ability to increase lives or groups in force is influenced by new business generated and cases retained. The success of both is heavily influenced by the competitive nature of the pricing offered by the payor and its desire to maintain a presence in its geographic regions and the small group market in general. The Company believes that a higher percentage of future small group revenue will be derived from HMO versus traditional indemnity business, and premium retention percentages are typically lower from HMO business. In addition, it is possible that competitive pressures or regulatory reform could lower future premium retention percentages on the Company's indemnity products. The Company's premium retention percentage declined from almost 20% in January 1996 to approximately 17% in February 1997. Thus, the Company will have to increase sales volume in the future to maintain the same operating margins.
Starting in 1994, the Company pursued contracts with state-sponsored health care purchasing alliances, initially in Florida, and in 1995-1996, with additional contracts in North Carolina, Kentucky, and Washington. The Company has incurred substantial expenses in connection with the start up of these contracts, and, to date, the alliance business has been unprofitable.
1. Private enterprises will not accept the use of a government-sponsored program and will therefore fail to provide an adequate number of enrollees to support a revenue base (over which fixed costs may be spread).
2. The number of enrollees per group will be so low that margins are insufficient to cover the fixed costs of set up for the group.
3. The level of marketing, enrollment, and customer service required will be materially higher than expected, thereby increasing the variable costs required under the contract.
4. The independent agents on whom the Company relies to distribute the product will not be enthusiastic about the alliance program, resulting in lower than expected enrollment.
There can be no assurance that the Company will be able to recoup its investment in developing its alliance relationships or that these operations will ultimately be profitable.
The Company's growth is affected greatly by its acquisitions of other administrators. Growth through acquisition involves substantial risks, including the risk of improper valuation of the acquired business. In addition, the value of such an acquired business or block of business could be impaired if the Company is not successful in integrating the business into its existing operations. These risks are increased when the Company elects to make such acquisitions on a leveraged basis.
After performing a review for impairment of goodwill related to each of the Company's acquired businesses and applying the principles of measurement contained in FASB 121, the Company recorded a pre-tax charge against earnings of $13.7 million in the third quarter of 1996, representing approximately 7.6% of the Company's pre-charge goodwill. The pre-tax charge is attributable to impairment of goodwill recorded on the following acquisitions: DGB, $6.6 million; and TPCM, $7.1 million.
The Company anticipates reductions in revenue at TPCM and DGB of approximately 30% and 17%, respectively, in 1997. TPCM and DGB represented approximately 5% of the Company's consolidated revenue in the fourth quarter of 1996. The Company continually evaluates these operations for opportunities to reverse these revenue losses and adjust operating
There can be no assurance that the Company will successfully and profitably integrate the businesses of Harrington and Consolidated Group into its existing operations. In addition, certain costs will be incurred to successfully integrate these acquired companies. Although Harrington and Consolidated Group are significantly larger companies with a broader customer base over which to spread risk, more infrastructure, and longer histories of servicing customers, and management remains optimistic about the future, there can be no assurance that adverse renewals will not occur in the future. The Company will continue to evaluate on a regular basis whether events and circumstances have occurred that indicate that the carrying amount of goodwill may not be recoverable. Although the net unamortized balance of goodwill is not considered to be impaired, any such future determination requiring the write-off of a significant portion of unamortized goodwill could have a material adverse effect on the Company's financial results.
(1) See Unaudited Pro Forma Financial Statements and Notes to Unaudited Pro Forma Financial Statements.
Depreciation and amortization expense for the year ended December 31, 1996 increased $6.2 million, or 140.9%, to $10.6 million from $4.4 million in 1995. Of this increase, $5.2 million relates to depreciation and amortization on the Company's acquisitions of TPCM, DGB, Consolidated Group, and Harrington ($3.2 million of which is the amortization of goodwill on the acquisitions being calculated on a straight-line basis over 25 years). An additional increase of $0.9 million at HPSI is primarily attributable to the amortization of internally developed software for the Company's alliance administration.
acquisitions and an increase in interest income of $2 million primarily from earnings on the proceeds from the Company's May 19, 1995 initial public offering.
Depreciation and amortization expense for the year ended December 31, 1995 increased $0.9 million, or 25.7%, to $4.4 million from $3.5 million in 1994. This increase resulted principally from an increase in depreciation related to the purchase of new telephone and computer hardware equipment and an increase in the amortization of goodwill related to the Company's 1995 acquisitions.
On July 1, 1996, the Company utilized substantially all of the remaining funds originating from the public offering and borrowed against its line of credit under its May 17, 1996 credit facility with First Union National Bank of North Carolina ("First Union") and other lenders ("Line of Credit") to fund the acquisitions of Harrington and Consolidated Group.
On September 13, 1996, the Company increased its Line of Credit from $85 million to $175 million. First Union serves as "agency bank" with respect to this facility. Like the Company's previous credit facility with First Union, the new facility contains provisions which require the Company to maintain certain minimum financial ratios, impose limitations on acquisition activity and capital spending, and which prohibit the Company from declaring or paying any dividend upon any of its capital
Although only nine months have passed since the Company's acquisitions of Harrington and Consolidated Group, management does not foresee any immediate adverse circumstances similar to TPCM and DGB due to the significantly broader market base over which to spread risk and Consolidated Group's and Harrington's longer history of servicing customers. Although management remains optimistic about the future, there can be no assurance that adverse business conditions will not occur in the future.
The financial statements required by this item are listed in Item 14(a)(1) and are submitted at the end of this Annual Report on Form 10-K. The Company is not required to file any supplementary financial data under this Item.